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: JUNE 30, 2002
Commission File Number: 0-19345
ESB FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1659846
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
600 LAWRENCE AVENUE, ELLWOOD CITY, PA 16117
(Address of principal executive offices) (Zip Code)
(724) 758-5584
(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 July 31, 2002:
COMMON STOCK, $0.01 PAR VALUE 7,322,058 SHARES
(Class) (Outstanding)
ESB FINANCIAL CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of June 30, 2002 (Unaudited) and December 31, 2001 ............. 1
Consolidated Statements of Operations for the three
and six months ended June 30, 2002 and 2001 (Unaudited) ........... 2
Consolidated Statement of Changes in Stockholders' Equity
for the six months ended June 30, 2002 (Unaudited) ................ 3
Consolidated Statements of Cash Flows for the six
months ended June 30, 2002 and 2001 (Unaudited) ................... 4
Notes to Consolidated Financial Statements ........................ 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations .................. 11
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 June 30, 2002 (Unaudited) and December 31, 2001
(Dollar amounts in thousands)
JUNE 30, DECEMBER 31,
2002 2001
(Unaudited)
----------- ------------
ASSETS
Cash on hand and in banks $ 3,398 $ 4,135
Interest-earning deposits 12,372 9,489
Federal funds sold 3,471 1,855
Securities available for sale; cost of $847,914 and $636,815 859,225 640,282
Loans receivable, net of allowance for loan losses of $4,170 and $5,147 333,806 523,132
Accrued interest receivable 8,633 8,219
Federal Home Loan Bank (FHLB) stock 25,004 21,889
Premises and equipment, net 9,627 9,883
Real estate acquired through foreclosure, net 1,112 1,590
Real estate held for investment 13,870 7,253
Goodwill 7,127 7,127
Intangible assets 1,983 897
Prepaid expenses and other assets 1,911 4,793
Bank owned life insurance 23,121 22,524
----------- -----------
TOTAL ASSETS $ 1,304,660 $ 1,263,068
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 614,324 $ 591,999
Borrowed funds 462,449 434,003
Repurchase agreements 99,640 119,640
Guaranteed preferred beneficial interest in subordinated debt, net 24,181 24,159
Advance payments by borrowers for taxes and insurance 2,507 4,058
Accrued expenses and other liabilities 13,281 9,306
----------- -----------
TOTAL LIABILITIES 1,216,382 1,183,165
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none issued -- --
Common stock, $.01 par value, 30,000,000 shares authorized;
7,706,580 and 7,706,580 shares issued;
7,323,019 and 7,320,388 shares outstanding 77 77
Additional paid-in capital 58,031 57,906
Treasury stock, at cost; 383,561 and 386,192 shares (4,274) (4,318)
Unearned Employee Stock Ownership Plan (ESOP) shares (2,627) (2,912)
Unvested shares held by Management Recognition Plan (MRP) (240) (255)
Retained earnings 29,846 27,117
Accumulated other comprehensive income, net 7,465 2,288
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 88,278 79,903
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,304,660 $ 1,263,068
=========== ===========
See accompanying notes to consolidated financial statements.
1
ESB FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the three and six months ended June 30, 2002 and 2001 (Unaudited)
(Dollar amounts in thousands, except share data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Interest income:
Loans receivable $ 8,460 $ 10,136 $ 17,926 $ 20,165
Securities available for sale 10,062 9,677 19,100 19,646
FHLB stock 197 328 440 682
Deposits with banks and federal funds sold 31 84 65 164
-------- -------- -------- --------
TOTAL INTEREST INCOME 18,750 20,225 37,531 40,657
-------- -------- -------- --------
INTEREST EXPENSE:
Deposits 4,656 5,747 9,645 11,628
Borrowed funds and repurchase agreements 7,903 8,964 15,625 17,924
Guaranteed preferred beneficial interest in subordinated debt 557 556 1,113 1,113
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 13,116 15,267 26,383 30,665
-------- -------- -------- --------
NET INTEREST INCOME 5,634 4,958 11,148 9,992
(Recovery of) provision for loan losses (489) 33 (477) 39
-------- -------- -------- --------
NET INTEREST INCOME AFTER (RECOVERY OF) PROVISION FOR LOAN LOSSES 6,123 4,925 11,625 9,953
-------- -------- -------- --------
NONINTEREST INCOME:
Fees and service charges 447 404 881 816
Net gain on sale of loans 546 25 634 36
Net realized (loss) gain on sales of securities available for sale -- (25) 125 (22)
Increase of cash surrender value of bank owned life insurance 300 281 597 502
Other 338 162 465 288
-------- -------- -------- --------
TOTAL NONINTEREST INCOME 1,631 847 2,702 1,620
-------- -------- -------- --------
NONINTEREST EXPENSE:
Compensation and employee benefits 2,423 2,245 4,756 4,301
Premises and equipment 568 540 1,158 1,105
Federal deposit insurance premiums 26 23 52 49
Data processing 190 136 377 256
Loss on real estate acquired through foreclosure 470 -- 470 --
Other 1,183 829 2,102 1,693
-------- -------- -------- --------
TOTAL NONINTEREST EXPENSE 4,860 3,773 8,915 7,404
-------- -------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,894 1,999 5,412 4,169
Provision for income taxes 546 282 953 626
-------- -------- -------- --------
NET INCOME $ 2,348 $ 1,717 $ 4,459 $ 3,543
======== ======== ======== ========
NET INCOME PER SHARE:
Basic $ 0.33 $ 0.25 $ 0.63 $ 0.52
Diluted $ 0.32 $ 0.25 $ 0.62 $ 0.51
See accompanying notes to consolidated financial statements.
2
ESB FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the six months ended June 30, 2002 (Unaudited)
(Dollar amounts in thousands)
ACCUMULATED
OTHER
ADDITIONAL UNEARNED UNVESTED COMPREHENSIVE TOTAL
COMMON PAID-IN TREASURY ESOP MRP RETAINED INCOME (LOSS) STOCKHOLDERS'
STOCK CAPITAL STOCK SHARES SHARES EARNINGS NET OF TAX EQUITY
-------- ---------- -------- -------- -------- -------- -------------- -------------
BALANCE AT DECEMBER 31, 2001 $ 77 $ 57,906 $ (4,318) $ (2,912) $ (255) $ 27,117 $ 2,288 $ 79,903
Comprehensive income:
Net income -- -- -- -- -- 4,459 -- 4,459
Other comprehensive
income, net -- -- -- -- -- -- 5,372 5,372
Reclassification
adjustment -- -- -- -- -- -- (195) (195)
-------- -------- -------- -------- -------- -------- -------- --------
Total comprehensive income -- -- -- -- -- 4,459 5,177 9,636
Cash dividends at $0.20 per
share -- -- -- -- -- (1,403) -- (1,403)
Purchase of treasury stock,
at cost (43,531 shares) -- -- (511) -- -- -- -- (511)
Reissuance of treasury stock
for stock option
exercises -- 44 555 -- -- (327) -- 272
Principal payments on ESOP
debt -- 81 -- 285 -- -- -- 366
Accrued compensation expense
MRP -- -- -- -- 15 -- -- 15
-------- -------- -------- -------- -------- -------- -------- --------
BALANCE AT JUNE 30, 2002 $ 77 $ 58,031 $ (4,274) $ (2,627) $ (240) $ 29,846 $ 7,465 $ 88,278
======== ======== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
3
ESB FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six months ended June 30, 2002 and 2001 (Unaudited)
(Dollar amounts in thousands)
SIX MONTHS ENDED
JUNE 30,
-------------------------
2002 2001
--------- ---------
Operating activities:
Net income $ 4,459 $ 3,543
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Depreciation and amortization for premises and equipment 463 422
(Recovery of) provision for losses and loss on REO (7) 42
Amortization (accretion) of premiums/discounts 617 (438)
Origination of loans available for sale (8,120) (6,455)
Proceeds from sale of loans available for sale 42,724 6,490
Net (gain) loss on sales of securities available for sale (125) 22
Amortization of intangible assets 119 4
Amortization of goodwill -- 368
Compensation expense on ESOP and MRP 382 332
(Increase) decrease in accrued interest receivable (414) 5
Increase in prepaid expenses and other assets (46) (2,391)
Increase in accrued expenses and other liabilities 3,827 1,753
Other (2,509) (61)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 41,370 3,636
--------- ---------
INVESTING ACTIVITIES:
Loans originated and purchased (72,808) (77,917)
Purchases of:
Securities available for sale (189,782) (84,041)
FHLB stock (3,115) (1,244)
Fixed assets (212) (311)
Bank owned life insurance -- (3,500)
Principal repayments of:
Loans receivable 93,412 63,909
Securities available for sale 81,476 56,104
Proceeds from sale of:
Securities available for sale 31,060 33,552
REO -- 317
Additions to real estate held for investment (6,470) --
Net effect of securitization (249) --
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (66,688) (13,131)
--------- ---------
FINANCING ACTIVITIES:
Net increase in deposits 22,325 21,492
Proceeds from long-term borrowings 120,000 39,522
Repayments of long-term borrowings (62,935) (55,666)
Net (decrease) increase in short-term borrowings (48,619) 4,753
Proceeds received from exercise of stock options 282 137
Dividends paid (1,463) (1,195)
Payments to acquire treasury stock (510) (985)
Stock purchased by ESOP -- (44)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 29,080 8,014
--------- ---------
Net increase (decrease) in cash equivalents 3,762 (1,481)
Cash equivalents at beginning of period 15,479 13,326
--------- ---------
Cash equivalents at end of period $ 19,241 $ 11,845
========= =========
Continued.
4
ESB FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, (Continued)
For the six months ended June 30, 2002 and 2001 (Unaudited)
(Dollar amounts in thousands)
SIX MONTHS ENDED
JUNE 30,
-------------------------
2002 2001
--------- ---------
SUPPLEMENTAL INFORMATION:
Interest paid $ 26,041 $ 32,495
Income taxes paid 1,451 725
Non-cash transactions:
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfers from loans receivable to real estate acquired
through foreclosure 0 244
Dividends declared but not paid 732 713
Securitization of 1-4 family mortgage loans 135,310
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 publicly traded Pennsylvania
thrift holding company. The consolidated financial statements include the
accounts of the Company and its direct and indirect wholly-owned
subsidiaries, which are ESB Bank, F.S.B. (ESB or the Bank), PennFirst
Financial Services, Inc., PennFirst Capital Trust I, THF, Inc., ESB
Financial Services, Inc. (EFS), AMSCO, Inc. (AMSCO) and PennFirst
Financial Advisory Services, Inc.
AMSCO is engaged in real estate development and construction of 1-4 family
residential units independently or in conjunction with its joint ventures.
Three of the joint ventures are 51% owned by AMSCO and the Bank has
provided all development and construction financing. The three joint
ventures have been included in the consolidated financial statements and
reflected within the balance sheet as real estate held for investment and
related operating income and expenses reflected within other non interest
income or expense. The Bank loans to AMSCO and related interest have been
eliminated in consolidation.
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, 2001, as contained in the 2001
Annual Report to Shareholders.
The results of operations for the three and six month periods ended June
30, 2002, 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 period's reporting format.
2. OPERATING SEGMENTS
An operating segment is defined as a component of an enterprise that
engages in business activities that generate revenue and incur expense,
the operating results of which are reviewed by management and for which
discreet financial information is available. At June 30, 2002, the Company
was doing business through 17 full service banking branches, one loan
production office and its various other subsidiaries. Loans and deposits
are primarily generated from the areas where banking branches are located.
The Company derives its income predominantly from interest on loans and
securities and to a lesser extent, noninterest income. The Company's
principal expenses are interest paid on deposits and borrowed funds and
normal operating costs. The Company's operations are principally in the
savings and loan industry. Consistent with internal reporting, the
Company's operations are reported in one operating segment, which is
community banking.
3. WHOLE LOAN SALE AND SECURITIZATION
During the second quarter of 2002, the Company completed a whole loan sale
of a portion of the Bank's 1-4 family mortgage loan portfolio. The Company
recognized a gain on the sale of these loans which is classified as part
of the proceeds from loans available for sale. The Company retained
servicing on these loans, which resulted in the recording of a servicing
asset in the amount of $265,000. In addition to the whole loan sale, the
Company also securitized 1-4 family mortgages loans with Freddie Mac
totaling approximately $134.3 million, during the second quarter. The
Company retained the servicing rights in the securitized loans, all of
which were retained in the securities available for sale portfolio, and
recorded
6
a servicing asset of approximately $941,000. The servicing asset was
valued by a consulting firm using current industry standards for estimates
on prepayments and internal rate of return.
4. SECURITIES
The Company's securities available for sale portfolio is summarized as
follows:
(Dollar amounts in thousands) Amortized Unrealized Unrealized Fair
cost gains losses value
--------- ---------- ---------- ---------
AS OF JUNE 30, 2002:
Trust Preferred securities $ 1,967 $ 12 $ (90) $ 1,889
U.S. Government securities 5,976 234 -- 6,210
Municipal securities 91,186 1,998 (199) 92,985
Equity securities 1,600 180 (154) 1,626
Corporate Bonds 116,298 1,317 (4,894) 112,721
Mortgage-backed securities 630,887 13,154 (247) 643,794
--------- --------- --------- ---------
$ 847,914 $ 16,895 $ (5,584) $ 859,225
========= ========= ========= =========
AS OF DECEMBER 31, 2001:
Trust Preferred securities $ 1,967 $ -- $ (17) $ 1,950
U.S. Government securities 5,975 318 -- 6,293
Municipal securities 87,648 964 (680) 87,932
Equity securities 2,360 144 (253) 2,251
Corporate Bonds 116,325 1,974 (3,839) 114,460
Mortgage-backed securities 422,540 5,447 (591) 427,396
--------- --------- --------- ---------
$ 636,815 $ 8,847 $ (5,380) $ 640,282
========= ========= ========= =========
5. LOANS RECEIVABLE
The Company's loans receivable as of the respective dates are summarized
as follows:
JUNE 30, DECEMBER 31,
(Dollar amounts in thousands) 2002 2001
-------- ------------
MORTGAGE LOANS:
Residential - single family $153,263 $337,896
Residential - multi family 31,646 29,154
Commercial real estate 49,537 48,869
Construction 46,085 46,073
-------- --------
280,531 461,992
OTHER LOANS:
Consumer loans 61,233 65,815
Commercial business 12,508 15,264
-------- --------
354,272 543,071
LESS:
Allowance for loan losses 4,170 5,147
Deferred loan fees and net discounts 55 483
Loans in process 16,241 14,309
-------- --------
$333,806 $523,132
======== ========
7
6. DEPOSITS
The Company's deposits as of the respective dates are summarized as
follows:
(Dollar amounts in thousands) JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
Type of accounts Amount % Amount %
-------- ----- -------- -----
Noninterest-bearing deposits $ 20,297 3.3% $ 16,126 2.7%
NOW account deposits 46,080 7.5% 43,592 7.4%
Money Market deposits 77,109 12.5% 72,706 12.3%
Passbook account deposits 93,854 15.3% 85,765 14.5%
Time deposits 376,984 61.4% 373,810 63.1%
-------- ----- -------- -----
$614,324 100.0% $591,999 100.0%
======== ===== ======== =====
Time deposits mature as follows:
Within one year $248,771 40.5% $263,091 44.4%
After one year through two years 50,412 8.2% 80,348 13.6%
After two years through three years 50,266 8.2% 17,292 2.9%
Thereafter 27,535 4.5% 13,079 2.2%
-------- ----- -------- -----
$376,984 61.4% $373,810 63.1%
======== ===== ======== =====
7. BORROWED FUNDS
The Company's borrowed funds as of the respective dates are summarized as
follows:
(Dollar amounts in thousands) JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
Weighted Weighted
average rate Amount average rate Amount
------------ -------- ------------ --------
FHLB ADVANCES:
Due within 12 months 5.83% $155,700 5.14% $171,051
Due beyond 12 months but within 2 years 6.04% 111,699 6.36% 157,699
Due beyond 2 years but within 3 years 4.94% 77,055 5.25% 77,055
Due beyond 3 years but within 4 years 5.11% 74,907 5.47% 23,885
Due beyond 4 years but within 5 years 4.88% 42,725 6.07% 1,816
Due beyond 5 years 6.90% 192 6.69% 2,309
-------- --------
462,278 433,815
TREASURY TAX AND LOAN NOTE PAYABLE 1.57% 171 1.64% 188
-------- --------
$462,449 $434,003
======== ========
REVERSE REPURCHASE AGREEMENTS:
Due within 12 months 5.07% $ 88,640 5.19% $ 98,040
Due beyond 12 months but within 2 years 7.30% 11,000 6.96% 10,600
Due beyond 2 years but within 3 years -- -- 7.30% 11,000
-------- --------
$ 99,640 $119,640
======== ========
Included in the $462.3 million of FHLB advances, is approximately $65.5
million of convertible select advances. These advances are fixed to the
call date. The FHLB has the right to call any convertible select advance
on its call date or quarterly thereafter. At the call date the advances
may reset, at various
8
spreads, to the three month London Interbank Offer Rate Index (LIBOR).
Should the advance be called, the Company has the right to pay off the
advance without penalty. It has historically been the Company's position
to pay off the advance and replace it with fixed-rate funding.
8. NET INCOME PER SHARE
The following table summarizes the Company's net income per share.
(Amounts, except earnings per share, in thousands)
Three Months Three Months
Ended Ended
June 30, 2002 June 30, 2001
------------- -------------
Net income $2,348 $1,717
Weighted-average common shares outstanding 7,036 6,778
------ ------
BASIC EARNINGS PER SHARE $ 0.33 $ 0.25
====== ======
Weighted-average common shares outstanding 7,036 6,778
Common stock equivalents due to effect of stock options 206 221
------ ------
Total weighted-average common shares and equivalents 7,242 6,999
------ ------
DILUTED EARNINGS PER SHARE $ 0.32 $ 0.25
====== ======
Six Months Six Months
Ended Ended
June 30, 2002 June 30, 2001
------------- -------------
Net income $4,459 $3,543
Weighted-average common shares outstanding 7,024 6,792
------ ------
BASIC EARNINGS PER SHARE $ 0.63 $ 0.52
====== ======
Weighted-average common shares outstanding 7,024 6,792
Common stock equivalents due to effect of stock options 187 152
------ ------
Total weighted-average common shares and equivalents 7,211 6,944
------ ------
DILUTED EARNINGS PER SHARE $ 0.62 $ 0.51
====== ======
The shares controlled by the ESOP of 302,984 and 367,673 at June 30, 2002
and June 30, 2001, respectively, are not considered in the weighted
average shares outstanding until the shares are committed for allocation
to an employee's individual account. Options to purchase 80,220 shares of
common stock at $13.63 per share, were outstanding as of June 30, 2002 and
June 30, 2001, but were not included in the computation of diluted
earnings per share for the three and six month periods ended June 30, 2002
and June 30, 2001 because the options' exercise price was greater than the
average market price of common shares. The options expire on June 30,
2008.
9
9. 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. Other comprehensive
income consists of net unrealized gain on securities available for sale.
Other comprehensive loss and related tax effects for the six months ended
June 30, 2002 consists of:
(Dollar amounts in thousands) 2002 2001
----------------------------------- -----------------------------------
Unrealized Reclassification Unrealized Reclassification
Gain Adjustment Gain Adjustment
---------- ---------------- ---------- ----------------
Before tax amount $ 8,139 $ (295) $ 6,418 $ (47)
Tax (expense) benefit (2,767) 100 (2,182) 16
------- ------- ------- -------
After tax amount $ 5,372 $ (195) $ 4,236 $ (31)
======= ======= ======= =======
For the six months ended June 30, 2002, total comprehensive income was
$9.6 million and for the six months ended June 30, 2001, total
comprehensive income was $7.7 million.
10. EFFECT OF RECENT ACCOUNTING AND REGULATORY PRONOUNCEMENTS
On January 1, 2002, the Company adopted Financial Accounting Standards
No.142 (FAS 142) "Goodwill and Other Intangible Assets". FAS 142 requires
that goodwill and other indefinite lived intangible assets will no longer
be amortized but will be subject to annual impairment tests. The Company
has determined that if FAS 142 had been in effect for the quarter and six
months ended June 30, 2001, the comparative results would have been:
(Dollar amounts in thousands, except share data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Reported net income $ 2,348 $ 1,717 $ 4,459 $ 3,543
Add back: Goodwill amortization -- 184 -- 368
--------- --------- --------- ---------
Adjusted net income $ 2,348 $ 1,901 $ 4,459 $ 3,911
========= ========= ========= =========
Basic earnings per share:
Reported earnings per share $ 0.33 $ 0.25 $ 0.63 $ 0.52
Goodwill amortization -- 0.03 -- 0.06
--------- --------- --------- ---------
Adjusted earnings per share $ 0.33 $ 0.28 $ 0.63 $ 0.58
========= ========= ========= =========
Diluted earnings per share:
Reported earnings per share $ 0.32 $ 0.25 $ 0.62 $ 0.51
Goodwill amortization -- 0.03 -- 0.05
--------- --------- --------- ---------
Adjusted earnings per share $ 0.32 $ 0.28 $ 0.62 $ 0.56
========= ========= ========= =========
FAS 142 requires a transitional impairment test to be applied to all
goodwill within the first six months after adoption. The Company has
performed its transitional impairment test on its goodwill asset and has
concluded that the recorded value of the Company's goodwill is not
impaired as of June 30, 2002.
10
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 $41.6 million or 3.3% to $1.3
billion at June 30, 2002 from $1.3 billion at December 31, 2001. This net
increase was primarily the result of increases to cash and cash equivalents,
securities, accrued interest receivable, Federal Home Loan Bank (FHLB) stock,
real estate held for investment, intangible assets and bank owned life insurance
of $3.8 million, $218.9 million, $414,000, $3.1 million, $6.6 million, $1.1
million and $597,000, respectively. Partially offsetting these increases were
decreases in loans receivable, premises and equipment, real estate acquired
through foreclosure and prepaid expenses and other assets of $189.3 million,
$256,000, $478,000 and $2.9 million, respectively. The increase in total assets
reflects a corresponding increase in total liabilities of $33.2 million or 2.8%
and an increase in stockholders' equity of $8.4 million or 10.5%. The increase
in total liabilities was the result of increases in deposits, borrowed funds and
repurchase agreements and accrued expenses and other liabilities of $22.3
million, $8.4 million and $4.0 million, respectively. The increase in total
liabilities was offset partially by a decrease in advance payments by borrowers
for taxes and insurance of $1.6 million. The increase in stockholders' equity
was the result of increases in additional paid in capital, retained earnings and
accumulated other comprehensive income of $125,000, $2.7 million and $5.2
million, respectively. Also contributing to the increase in stockholders' equity
were decreases to treasury stock, unearned employee stock ownership plan (ESOP)
shares and unvested shares held by the management recognition plan (MRP) of
$44,000, $285,000 and $15,000, respectively.
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 $3.8 million or 24.3% to $19.2 million at June 30, 2002
from $15.5 million at December 31, 2001. Deposits from customers into savings
and checking accounts, loan and security repayments and proceeds from borrowed
funds typically increase these accounts.
SECURITIES. The Company's securities portfolio increased by $218.9 million or
34.2% to $859.2 million at June 30, 2002 from $640.3 million at December 31,
2001. During the six months ended June 30, 2002, the Company completed a
securitization of a portion of the 1-4 family mortgage loan portfolio and
retained the resulting securities in the available for sale portfolio. The
securitization increased the available for sale mortgage-backed security
portfolio by approximately $134.3 million. The Company also recorded purchases
of available for sale securities of $189.8 million, consisting of purchases of
mortgage-backed securities of $168.1 million, municipal bonds of $12.5 million
and corporate bonds of $9.2 million. Partially offsetting the securitization and
purchases of securities were sales of available for sale securities of $30.1
million, consisting of mortgage backed securities of $13.0 million, corporate
bonds of $9.2 million, municipal bonds of $8.0 million and equity securities of
$602,000 and repayments and maturities of securities of $81.5 million, during
the six months ended June 30, 2002.
REAL ESTATE HELD FOR INVESTMENT. The Company's real estate held for investment
increased $6.6 million or 91.2% to $13.9 million during the six months ended
June 30, 2002 as a result of increased activity in the joint ventures in which
the Company has a 51% ownership.
LOANS RECEIVABLE. Net loans receivable decreased $189.3 million or 36.2% to
$333.8 million at June 30, 2002 from $523.1 million at December 31, 2001.
Included in this decrease were decreases in mortgage loans of $181.5 million or
39.3% and other loans of $7.3 million or 9.1% and a decrease in deferred loan
fees and allowance for loan losses of $428,000 or 88.6% and $977,000 or 19.0%,
respectively, partially offset by an increase to loans in process of $1.9
million or 13.5%, during the six months ended June 30, 2002. The decreases to
the loan portfolio resulted primarily from the completion of a whole loan sale
and securitization during the quarter in which the Company sold approximately
$33.1 million of fixed rate and adjustable rate 1-4 family mortgages and
securitized an additional $134.3 million of fixed rate and adjustable rate 1-4
family mortgage loans.
NON-PERFORMING ASSETS. Non-performing assets include non-accrual loans and real
estate acquired through foreclosure. Non-performing assets amounted to $2.9
million or 0.22% and $4.1 million or 0.32% of total assets at June 30, 2002 and
December 31, 2001, respectively.
DEPOSITS. Total deposits increased $22.3 million or 3.8% to $614.3 million at
June 30, 2002 from $592.0 million at December 31, 2001. Noninterest-bearing
deposits, interest-bearing deposits and time deposits increased $4.2 million,
$15.0 million and $3.2 million, respectively, during the six months ended June
30, 2002.
11
BORROWED FUNDS AND REPURCHASE AGREEMENTS. Borrowed funds and repurchase
agreements increased $8.4 million or 1.5% to $562.1 million at June 30, 2002
from $553.6 million at December 31, 2001. FHLB advances increased $28.4 million
or 6.6%, while repurchase agreement borrowings decreased $20.0 million or 16.7%
during the six months ended June 30, 2002.
STOCKHOLDERS' EQUITY. Stockholders' equity increased $8.4 million or 10.5% to
$88.3 million at June 30, 2002 from $79.9 million at December 31, 2001. The
increase was primarily the result of increases in additional paid in capital,
retained earnings and accumulated other comprehensive income of $125,000, $2.7
million and $5.2 million, respectively and decreases in treasury stock, unearned
ESOP shares and unvested MRP shares of $44,000, $285,000 and $15,000,
respectively.
RESULTS OF OPERATIONS
GENERAL. The Company recorded net income of $2.3 million and $4.5 million for
the three and six months ended June 30, 2002, respectively, as compared to net
income of $1.7 million and $3.5 million, respectively, for the same periods in
the prior year.
For the three months ended June 30, 2002, net income increased $631,000 or
36.8%. The increase can be attributable to increases in net interest income and
noninterest income of $676,000 and $784,000, respectively and recoveries of loan
losses of $522,000, partially offset by increases in non-interest expense and
provision for income taxes of $1.1 million and $264,000, respectively.
Net income for the quarter ended June 30, 2002 included several one-time
recoveries, including a net gain of $510,000 in connection with the whole loan
sale, $265,000 of which relates to servicing rights retained by the Company on
the loans. The whole loan sale and securitization of 1-4 family residential
mortgage loans also resulted in the reduction in allowance for loan losses of
approximately $150,000. The Company also reached final settlement and recovered
$375,000 from the bankruptcy trustee on certain previously reserved non
performing lease loans associated with the Company's Bennett lease pools. These
recoveries were substantially offset by a write down in connection with a real
estate acquired through foreclosure (REO) property of $470,000 and costs of
approximately $256,000 incurred in connection with ongoing litigation. Without
these recoveries, net income would have been $2.1 million for the quarter ended
June 30, 2002 as compared to $1.7 million for the same period in the prior year.
Net income increased $916,000 or 25.9% for the six month period ended June 30,
2002, as compared to the six months ended June 30, 2001. This increase was
primarily attributable to increases in net interest income and non interest
income of $1.2 million and $1.1 million, respectively, recoveries of loan losses
of $477,000, which includes a recovery from the bankruptcy trustee on certain
previously reserved non performing lease loans associated with the Company's
Bennett lease pools of $375,000 and a reduction to the provision for loan losses
of approximately $150,000, resulting from the whole loan sale and securitization
of a portion of the Company's 1-4 family residential mortgage loans. Partially
offsetting these increases were increases to non-interest expense and provision
for income taxes of $1.5 million and $327,000, respectively.
Net income for the year to date ended June 30, 2002, excluding the one-time
recoveries detailed above would have been $4.3 million as compared to $3.5
million for the period ended June 30, 2001.
NET INTEREST INCOME. Net interest income increased $676,000 or 13.6% to $5.6
million for the three months ended June 30, 2002, compared to $5.0 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 $2.2 million, partially offset
by a decrease in interest income of $1.5 million.
Net interest income increased $1.2 million or 11.6% to $11.1 million for the six
months ended June 30, 2002, compared to $10.0 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 $4.3 million, partially offset by a decrease in interest
income of $3.1 million.
12
INTEREST INCOME. Interest income decreased $1.5 million or 7.3% to $18.8 million
for the three months ended June 30, 2002, compared to $20.2 million for the same
period in the prior year. This decrease can primarily be attributed to decreases
in interest earned on loans receivable, FHLB stock and interest earning deposits
of $1.7 million, $131,000 and $53,000, respectively, partially offset by an
increase in interest earned on securities available for sale of $385,000.
Interest earned on loans receivable decreased $1.7 million or 16.5% to $8.5
million for the three months ended June 30, 2002, compared to $10.1 million for
the same period in the prior year. This decrease was primarily attributable to a
decrease in the average yield on the loans to 6.93% for the three months ended
June 30, 2002, compared to 7.66% for the same period in the prior year. In
addition to the decrease in yield, the average balance of loans outstanding
decreased $41.1 million or 7.8% to $488.3 million for the three months ended
June 30, 2002, compared to $529.4 million for the same period in the prior year.
Interest earned on securities increased $385,000 or 4.0% to $10.1 million for
the three months ended June 30, 2002, compared to $9.7 million for the same
period in the prior year. This increase was primarily attributable to an
increase in the average balance of securities held of $100.2 million or 16.6%.
Partially offsetting this increase was a decrease in the tax equivalent yield on
securities to 6.06% for the three months ended June 30, 2002 from 6.82% for the
same period in the prior year.
Interest income decreased $3.1 million or 7.7% to $37.5 million for the six
months ended June 30, 2002, compared to $40.7 million for the same period in the
prior year. This decrease can be attributed to decreases in interest earned on
loans receivable, securities available for sale, FHLB stock and interest earning
deposits of $2.2 million, $546,000, $242,000 and $99,000, respectively.
Interest earned on loans receivable decreased $2.2 million or 11.1% to $17.9
million for the six months ended June 30, 2002, compared to $20.2 million for
the same period in the prior year. This decrease was attributable to a decrease
in the yield on loans receivable to 7.11% for the six months ended June 30, 2002
compared to 7.69% for the six months ended June 30, 2001, as well as a decrease
in the average balance of loans outstanding of $20.1 million or 3.8% to $504.8
million for the six months ended June 30, 2002, compared to $524.9 million for
the same period in the prior year.
Interest earned on securities decreased $546,000 or 2.8% to $19.1 million for
the six months ended June 30, 2002, compared to $19.6 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 5.99% for the six months ended June
30, 2002 from 6.94% for the same period in the prior year. Partially offsetting
the decline in yield was an increase in the average balance of securities held
of $75.5 million or 12.5% to $677.5 million for the six months ended June 30,
2002 compared to $602.0 million for the same period in the prior year.
INTEREST EXPENSE. Interest expense decreased $2.2 million or 14.1% to $13.1
million for the three months ended June 30, 2002, compared to $15.3 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
repurchase agreements of $1.1 million and $1.1 million, respectively.
Interest incurred on deposits decreased $1.1 million or 19.0% to $4.7 million
for the three months ended June 30, 2002, compared to $5.7 million for the same
period in the prior year. This decrease was primarily attributable to a decrease
in the cost of interest-bearing deposits between the periods to 3.20% for the
quarter ended June 30, 2002 from 4.48% for the quarter ended June 30, 2001.
Partially offsetting the decrease to the cost of interest bearing deposits was
an increase in the average balance of interest-bearing deposits of $69.6 million
or 13.5% to $584.0 million for the three months ended June 30, 2002, compared to
$514.4 million for the same period in the prior year.
Interest incurred on borrowed funds and repurchase agreements decreased $1.1
million or 11.8% to $7.9 million for the three months ended June 30, 2002,
compared to $9.0 million for the same period in the prior year. This decrease
was primarily attributable to a decline in the cost of these funds to 5.57% for
the three months ended June 30, 2002, compared to 6.23% for the same period in
the prior year. In addition to the decline in the cost of
13
these funds was a decrease in the average balance of borrowed funds of $8.5
million or 1.5% to $570.4 million for the three months ended June 30, 2002,
compared to $578.9 million for the same period in the prior year.
Interest expense decreased $4.3 million or 14.0% to $26.4 million for the six
months ended June 30, 2002, compared to $30.7 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 repurchase agreements of
$2.0 million and $2.3 million, respectively.
Interest incurred on deposits decreased $2.0 million or 17.1% to $9.6 million
for the six months ended June 30, 2002, compared to $11.6 million for the same
period in the prior year. This decrease was primarily attributable to a decrease
in the cost of interest-bearing deposits to 3.36% for the six months ended June
30, 2002 from 4.60% for the six months ended June 30, 2001. Partially offsetting
the decline in the cost of interest-bearing deposits was an increase in the
average balance of interest-bearing deposits of $68.6 million or 13.5% to $578.1
million for the six months ended June 30, 2002, compared to $509.5 million for
the same period in the prior year.
Interest incurred on borrowed funds and repurchase agreements decreased $2.3
million or 12.8% to $15.6 million for the six months ended June 30, 2002,
compared to $17.9 million for the same period in the prior year. This decrease
was primarily attributable to a decrease in the cost of these funds to 5.48% for
the six months ended June 30, 2002, compared to 6.24% for the six months ended
June 30, 2001. Additionally, the average balance of borrowed funds decreased
$13.4 million or 2.3% to $563.9 million for the six months ended June 30, 2002,
compared to $577.3 million for the same period in the prior year.
(RECOVERY OF) PROVISION FOR LOAN LOSSES. The provision for loan losses decreased
$522,000, reflecting a recovery of loan losses of $489,000 for the three months
ended June 30, 2002 compared to a provision for loan losses of $33,000 for the
same period in the prior year. The provision for loan losses decreased $516,000,
reflecting a recovery of loan losses of $477,000 for the six months ended June
30, 2002, compared to a provision of $39,000 for the same period in the prior
year. The recoveries for the three and six months ended June 30, 2002 include a
final recovery of $375,000 on the Company's Bennett Lease pools, which was
received from the bankruptcy trustee and a reduction to the provision for loan
losses of approximately $150,000, which resulted from the whole loan sale and
securitization of a portion of the Company's 1-4 family residential mortgage
loans. These recoveries were partially offset by provisions recorded in the
first and second quarters of 2002 resulting from the normal operations of the
Company. 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 June 30, 2002 amounted to $4.2 million or 1.2% of the Company's
total loan portfolio, as compared to $5.1 million or 0.95% at December 31, 2001.
The Company's allowance for losses on loans as a percentage of non-performing
loans was 230.77% and 205.72% at June 30, 2002 and December 31, 2001,
respectively.
NONINTEREST INCOME. Noninterest income increased $784,000 or 92.6% to $1.6
million for the three months ended June 30, 2002, compared to $847,000 for the
same period in the prior year. This increase can be attributed to increases in
fees and service charges, net gain on sale of loans, net realized gain on sale
of securities, the cash surrender value of bank owned life insurance and other
income of $43,000, $521,000, $25,000, $19,000 and $176,000, respectively.
Noninterest income increased $1.1 million or 66.8% to $2.7 million for the six
months ended June 30, 2002, compared to $1.6 million for the same period in the
prior year. This increase can be attributed to an increase in fees and service
charges, net gain on sale of loans, net realized gain on sale of securities, the
cash surrender value of bank owned life insurance and other income of $65,000,
$598,000, $147,000, $95,000 and $177,000, respectively.
NONINTEREST EXPENSE. Noninterest expense increased $1.1 million or 28.8% to $4.9
million for the three months ended June 30, 2002, from $3.8 million for the same
period in the prior year. This increase was primarily the result of increases in
compensation and employee benefits, premises and equipment, federal deposit
insurance premiums, data processing, loss on REO and other expenses of $178,000,
$28,000, $3,000, $54,000, $470,000 and $354,000, respectively. Noninterest
expense increased $1.5 million or 20.4% to $8.9 million for the six
14
months ended June 30, 2002, from $7.4 million for the same period in the prior
year. This increase was primarily due to increases in compensation and employee
benefits, premises and equipment, federal deposit insurance premiums, data
processing, loss on REO and other expenses of $455,000, $53,000, $3,000,
$121,000, $470,000 and $409,000, respectively. For the quarter and the year to
date ended June 30, 2002 other non-interest expense was increased by
approximately $256,000 due to costs incurred in connection with ongoing
litigation.
PROVISION FOR INCOME TAXES. The provision for income taxes increased $264,000 or
93.6% to $546,000 for the three months ended June 30, 2002 and $327,000 or 52.2%
to $953,000 for the six months ended June 30, 2002, compared to $282,000 and
$626,000, respectively, for the prior year periods. The increase in the
provision for income taxes is primarily attributable to the increases to net
income for the quarter and year to date as compared to the same periods in the
prior year.
15
AVERAGE BALANCE SHEET AND YIELD/RATE ANALYSIS. The following tables set 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 JUNE 30,
2002 2001
------------------------------------ ------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- ---------- ------ ---------- ---------- ------
INTEREST-EARNING ASSETS:
Taxable securities available for sale $ 558,444 $ 8,514 6.10% $ 456,044 $ 7,676 6.73%
Taxable corporate bonds available for sale 55,255 384 2.75% 56,697 788 5.50%
Tax-exempt securities available for sale 89,840 1,764 7.85% 90,604 1,838 8.11%
---------- ---------- ---- ---------- ---------- ----
703,539 10,662 6.06% 603,345 10,302 6.82%
---------- ---------- ---- ---------- ---------- ----
Mortgage loans 413,275 7,145 6.92% 446,563 8,522 7.63%
Other loans 75,021 1,315 7.03% 82,797 1,614 7.82%
---------- ---------- ---- ---------- ---------- ----
488,296 8,460 6.93% 529,360 10,136 7.66%
---------- ---------- ---- ---------- ---------- ----
Cash equivalents 10,284 31 1.21% 9,403 84 3.57%
FHLB stock 24,341 197 3.25% 20,775 328 6.32%
---------- ---------- ---- ---------- ---------- ----
34,625 228 2.64% 30,178 412 5.46%
---------- ---------- ---- ---------- ---------- ----
TOTAL INTEREST-EARNING ASSETS 1,226,460 19,350 6.31% 1,162,883 20,850 7.17%
Other noninterest-earning assets 73,095 -- -- 52,365 -- --
---------- ---------- ---- ---------- ---------- ----
Total assets $1,299,555 $ 19,350 5.96% $1,215,248 $ 20,850 6.86%
========== ========== ==== ========== ========== ====
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits $ 213,168 $ 828 1.56% $ 180,318 $ 1,002 2.23%
Time deposits 370,813 3,827 4.14% 334,099 4,745 5.70%
---------- ---------- ---- ---------- ---------- ----
583,981 4,655 3.20% 514,417 5,747 4.48%
---------- ---------- ---- ---------- ---------- ----
FHLB advances 470,600 6,562 5.52% 409,627 6,380 6.25%
Repurchase agreements & other borrowings 99,782 1,341 5.32% 169,238 2,584 6.12%
---------- ---------- ---- ---------- ---------- ----
570,382 7,903 5.48% 578,865 8,964 6.23%
---------- ---------- ---- ---------- ---------- ----
Preferred securities 24,175 557 9.22% 24,131 557 9.26%
---------- ---------- ---- ---------- ---------- ----
TOTAL INTEREST-BEARING LIABILITIES 1,178,538 13,115 4.43% 1,117,413 15,268 5.48%
Noninterest-bearing demand deposits 20,959 -- -- 15,696 -- --
Other noninterest-bearing liabilities 15,417 -- -- 8,399 -- --
---------- ---------- ---- ---------- ---------- ----
Total liabilities 1,214,914 13,115 4.29% 1,141,508 15,268 5.36%
Stockholders' equity 84,641 -- -- 73,740 -- --
---------- ---------- ---- ---------- ---------- ----
Total liabilities and equity $1,299,555 $ 13,115 4.01% $1,215,248 $ 15,268 5.04%
========== ========== ==== ========== ========== ====
NET INTEREST INCOME $ 6,235 $ 5,582
========== ==========
INTEREST RATE SPREAD (difference between 1.88% 1.69%
weighted average rate on interest-earning ==== ====
assets and interest-bearing liabilities)
NET INTEREST MARGIN (net interest 2.03% 1.92%
income as a percentage of average ==== ====
interest-earning assets)
16
(Dollar amounts in thousands) SIX MONTHS ENDED JUNE 30,
2002 2001
------------------------------------ ------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- ---------- ------ ---------- ---------- ------
INTEREST-EARNING ASSETS:
Taxable securities available for sale $ 532,227 $ 16,001 6.01% $ 456,704 $ 15,521 6.80%
Taxable corporate bonds available for sale 56,247 785 2.78% 55,023 1,700 6.15%
Tax-exempt securities available for sale 88,991 3,505 7.88% 90,246 3,673 8.14%
---------- ---------- ---- ---------- ---------- ----
677,465 20,291 5.99% 601,973 20,894 6.94%
---------- ---------- ---- ---------- ---------- ----
Mortgage loans 428,076 15,232 7.12% 443,657 16,933 7.63%
Other loans 76,711 2,694 7.08% 81,270 3,232 8.02%
---------- ---------- ---- ---------- ---------- ----
504,787 17,926 7.11% 524,927 20,165 7.69%
---------- ---------- ---- ---------- ---------- ----
Cash equivalents 9,768 66 1.36% 8,653 164 3.79%
FHLB stock 23,229 440 3.82% 20,348 682 6.70%
---------- ---------- ---- ---------- ---------- ----
32,997 506 3.09% 29,001 846 5.83%
---------- ---------- ---- ---------- ---------- ----
TOTAL INTEREST-EARNING ASSETS 1,215,249 38,723 6.38% 1,155,901 41,905 7.25%
Other noninterest-earning assets 67,199 -- -- 50,612 -- --
---------- ---------- ---- ---------- ---------- ----
Total assets $1,282,448 $ 38,723 6.04% $1,206,513 $ 41,905 6.95%
========== ========== ==== ========== ========== ====
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits $ 208,738 $ 1,625 1.57% $ 178,283 $ 2,031 2.30%
Time deposits 369,410 8,020 4.38% 331,255 9,597 5.84%
---------- ---------- ---- ---------- ---------- ----
578,148 9,645 3.36% 509,538 11,628 4.60%
---------- ---------- ---- ---------- ---------- ----
FHLB advances 455,750 12,702 5.54% 399,395 12,477 6.30%
Repurchase agreements & other borrowings 108,126 2,923 5.38% 177,906 5,447 6.17%
---------- ---------- ---- ---------- ---------- ----
563,876 15,625 5.51% 577,301 17,924 6.24%
---------- ---------- ---- ---------- ---------- ----
Preferred securities 24,170 1,113 9.21% 24,126 1,113 9.30%
---------- ---------- ---- ---------- ---------- ----
TOTAL INTEREST-BEARING LIABILITIES 1,166,194 26,383 4.52% 1,110,965 30,665 5.57%
Noninterest-bearing demand deposits 20,630 -- -- 15,089 -- --
Other noninterest-bearing liabilities 12,780 -- -- 7,741 -- --
---------- ---------- ---- ---------- ---------- ----
Total liabilities 1,199,604 26,383 4.40% 1,133,795 30,665 5.45%
Stockholders' equity 82,844 -- -- 72,718 -- --
---------- ---------- ---- ---------- ---------- ----
Total liabilities and equity $1,282,448 $ 26,383 4.11% $1,206,513 $ 30,665 5.13%
========== ========== ==== ========== ========== ====
NET INTEREST INCOME $ 12,340 $ 11,240
========== ==========
INTEREST RATE SPREAD (difference between 1.86% 1.68%
weighted average rate on interest-earning ==== ====
assets and interest-bearing liabilities)
NET INTEREST MARGIN (net interest 2.03% 1.94%
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 six month
periods ended June 30, 2002 and 2001, 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
(change 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
June 30, 2002 and 2001 is presented as follows:
(Dollar amounts in thousands) 2002 VERSUS 2001
INCREASE (DECREASE) DUE TO
---------------------------------
VOLUME RATE TOTAL
------- ------- -------
INTEREST INCOME:
Securities $ 1,596 $(1,236) $ 360
Loans (753) (923) (1,676)
Cash equivalents 7 (60) (53)
FHLB stock 49 (180) (131)
------- ------- -------
Total interest-earning assets 899 (2,399) (1,500)
------- ------- -------
INTEREST EXPENSE:
Deposits 706 (1,798) (1,092)
FHLB advances 891 (709) 182
Reverse repurchases & other borrowings (962) (281) (1,243)
Preferred securities 1 (1) --
------- ------- -------
Total interest-bearing liabilities 636 (2,789) (2,153)
------- ------- -------
NET INTEREST INCOME $ 263 $ 390 $ 653
======= ======= =======
The table analyzing changes in interest income between the six months ended June
30, 2002 and 2001 is presented as follows:
(Dollar amounts in thousands) 2002 VERSUS 2001
INCREASE (DECREASE) DUE TO
---------------------------------
VOLUME RATE TOTAL
------- ------- -------
INTEREST INCOME:
Securities $ 2,449 $(3,052) $ (603)
Loans (754) (1,485) (2,239)
Cash equivalents 19 (117) (98)
FHLB stock 86 (328) (242)
------- ------- -------
Total interest-earning assets 1,800 (4,982) (3,182)
------- ------- -------
INTEREST EXPENSE:
Deposits 1,425 (3,408) (1,983)
FHLB advances 1,653 (1,428) 225
Reverse repurchases & other borrowings (1,944) (580) (2,524)
Preferred securities 2 (2) --
------- ------- -------
Total interest-bearing liabilities 1,136 (5,418) (4,282)
------- ------- -------
NET INTEREST INCOME $ 664 $ 436 $ 1,100
======= ======= =======
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 four outside directors, the President and
Chief Executive Officer, Group Senior Vice President/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 repurchase
agreements.
As of June 30, 2002, the implementation of these asset and liability initiatives
resulted in the following: (i) $153.4 million or 43.3% of the Company's total
loan portfolio had adjustable interest rates or maturities of 12 months or less;
(ii) $65.3 million or 37.2% of the Company's portfolio of single-family
residential mortgage loans (including residential construction loans) consisted
of ARMs; and (iii) $257.1 million or 39.9% 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 June
30, 2002, the Company's interest-earning assets maturing or repricing within one
year totaled $511.8 million while the Company's interest-bearing liabilities
maturing or repricing within one year totaled $500.0 million, providing an
excess of interest-earning assets over interest-bearing liabilities of $11.8
million or a positive 0.9% of total assets. At June 30, 2002, the percentage of
the Company's assets to liabilities maturing or repricing within one year was
102.4%. 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
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the Company believes that simulation modeling enables the Company to more
accurately evaluate and manage the 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 June 30, 2002, 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 0.1% 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, repurchase agreement
borrowings and amortization and prepayments of outstanding loans and maturing
investment securities. During the six months ended June 30, 2002, the Company
used its sources of funds primarily to purchase securities and to a lesser
extent, fund loan commitments. As of such date, the Company had outstanding loan
commitments totaling $8.3 million, unused lines of credit totaling $41.0 million
and $14.6 million of undisbursed loans in process.
At June 30, 2002 certificates of deposit amounted to $377.0 million or 61.4% of
the Company's total consolidated deposits, including $248.8 million, which were
scheduled to mature by June 30, 2003. At the same date, the total amount of FHLB
advances and repurchase agreements, which were scheduled to mature by June 30,
2003, was $244.3 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 June 30, 2003 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 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 June 30, 2002, the Bank was in compliance with all
regulatory capital requirements with tangible, core and risk-based capital
ratios of 6.3%, 6.3% and 14.8%, 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, 2001 in Item 7A of the Company's Annual Report on Form 10-K, filed
with the SEC on March 28, 2002. Management believes there have been no material
changes in the Company's market risk since December 31, 2001.
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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
On April 17, 2002, the Company held its Annual Meeting of Stockholders. Nominees
for three director positions were elected. All other matters submitted to a vote
of stockholders were also approved, and the stockholder votes thereon are
summarized as follows:
Election of Directors
Director For Withheld Not Voted Term/Expiration
-------- --- -------- --------- ---------------
Herbert S. Skuba 5,833,464 326,544 1,152,620 Three years/2005
Charlotte A. Zuschlag 5,866,614 293,394 1,152,620 Three years/2005
William B. Salsgiver 5,868,478 291,530 1,152,620 Three years/2005
Proposal to amend the Company's Articles of Incorporation to increase the number
of authorized shares of Common Stock from 10,000,000 to 30,000,000
For Against Abstain Not Voted
--- ------- ------- ---------
5,757,054 357,790 45,164 1,152,620
Proposal to ratify the appointment of Ernst & Young, LLP as the Company's
independent auditors for the year ended December 31, 2002
For Against Abstain Not Voted
--- ------- ------- ---------
6,113,078 20,209 26,721 1,152,620
No other proposals were considered at the annual meeting.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
99.2 Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C.1350)
(b) Form 8-K - The Company filed a Form 8-K dated June 19, 2002 to report a
$0.10 per share quarterly cash dividend payable on July 25, 2002 to
stockholders of record at the close of business on June 28, 2002.
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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: August 14, 2002 By: /s/ Charlotte A. Zuschlag
----------------------------------------
Charlotte A. Zuschlag
President and Chief Executive Officer
Date: August 14, 2002 By: /s/ Charles P. Evanoski
----------------------------------------
Charles P. Evanoski
Group Senior Vice President and
Chief Financial Officer
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