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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: June 30, 2000
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Commission File Number: 0-19345
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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
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Number of shares of common stock outstanding as of July 31, 2000:
Common Stock, $0.01 par value 6,078,347 shares
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(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 June 30, 2000 (Unaudited) and December 31, 1999.................1
Consolidated Statements of Operations for the three
and six months ended June 30, 2000 and 1999 (Unaudited)...............2
Consolidated Statement of Changes in Stockholders' Equity
For the six months ended June 30, 2000 (Unaudited)....................3
Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and 1999 (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...........21
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings....................................................22
Item 2. Changes in Securities................................................22
Item 3. Defaults Upon Senior Securities......................................22
Item 4. Submission of Matters to a Vote of Security Holders..................22
Item 5. Other Information....................................................22
Item 6. Exhibits and Reports on Form 8-K.....................................22
Signatures...........................................................23
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
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ESB Financial Corporation and Subsidiaries
Consolidated Statements of Financial Condition
As of June 30, 2000 (Unaudited) and December 31, 1999
(Dollar amounts in thousands)
June 30, December 31,
2000 1999
(Unaudited)
-------------- --------------
Assets
------
Cash on hand and in banks $ 3,464 $ 6,712
Interest-earning deposits 7,803 5,780
Federal funds sold 2,427 269
Securities available for sale; amortized cost of $611,639 and $579,046 590,799 561,125
Loans receivable, net of allowance for loan losses of $4,770 and $4,823 484,356 393,929
Accrued interest receivable 7,655 6,871
Federal Home Loan Bank (FHLB) stock 19,308 18,435
Premises and equipment, net 8,255 6,880
Real estate acquired through foreclosure, net 1,900 71
Prepaid expenses and other assets 19,150 16,589
Bank owned life insurance 16,196 15,784
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Total assets $1,161,313 $1,032,445
============== ==============
Liabilities and Stockholders' equity
------------------------------------
Liabilities:
Deposits $ 500,408 $ 431,783
Borrowed funds 332,047 317,636
Reverse repurchase agreements 235,440 201,920
Guaranteed preferred beneficial interest in subordinated debt, net 24,093 24,071
Advance payments by borrowers for taxes and insurance 5,851 3,339
Accrued expenses and other liabilities 7,800 3,814
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Total liabilities 1,105,639 982,563
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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
6,847,515 shares issued; 6,078,601 and 5,612,415 shares outstanding 75 63
Additional paid-in capital 73,654 59,686
Treasury stock, at cost; 1,412,202 and 1,235,100 shares (21,172) (19,214)
Unearned Employee Stock Ownership Plan (ESOP) shares (3,719) (3,076)
Unvested shares held by Management Recognition Plan (237) (237)
Retained earnings, substantially restricted 20,826 24,488
Accumulated other comprehensive loss, net (13,753) (11,828)
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Total stockholders' equity 55,674 49,882
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Total liabilities and stockholders' equity $1,161,313 $1,032,445
============== ==============
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, 2000 and 1999 (Unaudited)
(Dollar amounts in thousands, except share data)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
Interest income:
Loans receivable $ 9,278 $ 6,970 $17,673 $13,925
Securities available for sale 9,827 8,040 19,417 15,312
Securities held to maturity - 540 - 1,386
FHLB stock 336 299 654 594
Deposits with banks and federal funds sold 83 65 167 127
------- ------- ------- -------
Total interest income 19,524 15,914 37,911 31,344
------- ------- ------- -------
Interest expense:
Deposits 5,290 4,285 10,266 8,682
Borrowed funds and reverse repurchase agreements 8,714 7,019 16,836 13,681
Guaranteed preferred beneficial interest in subordinated debt 556 557 1,113 1,113
------- ------- ------- -------
Total interest expense 14,560 11,861 28,215 23,476
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Net interest income 4,964 4,053 9,696 7,868
Provision for (recovery of) loan losses 127 3 (325) 6
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Net interest income after provision for (recovery of) loan losses 4,837 4,050 10,021 7,862
------- ------- ------- -------
Noninterest income:
Fees and service charges 398 335 732 665
Net realized gain on sales of securities available for sale - 205 4 421
Increase of cash surrender value of bank owned life insurance 211 196 413 374
Other 191 121 316 134
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Total noninterest income 800 857 1,465 1,594
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Noninterest expense:
Compensation and employee benefits 2,050 1,634 4,000 3,254
Premises and equipment 485 361 937 725
Federal deposit insurance premiums 25 56 51 125
Data processing 142 156 304 267
Other 931 771 1,689 1,578
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Total noninterest expense 3,633 2,978 6,981 5,949
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Income before provision for income taxes 2,004 1,929 4,505 3,507
Provision for income taxes 374 375 952 597
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Net income $ 1,630 $ 1,554 $ 3,553 $ 2,910
======= ======= ======= =======
Net income per share:
Basic $0.28 $0.28 $0.62 $0.53
Diluted $0.28 $0.27 $0.61 $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, 2000 (Unaudited)
(Dollar amounts in thousands)
Accumulated
other
Additional Unearned Unvested comprehensive Total
Common paid-in Treasury ESOP MRP Retained income, net stockholders'
stock capital stock shares shares earnings of tax equity
--------- -------- --------- --------- ------- -------- -------------- -----------
Balance at December 31, 1999 $ 63 $ 59,686 $ (19,214) $ (3,076) $ (237) $ 24,488 $ (11,828) $ 49,882
Comprehensive results:
Net income - - - - - 3,553 - 3,553
Other comprehensive results, net - - - - - - (1,859) (1,859)
Reclassification adjustment - - - - - - (66) (66)
-------- -------- ---------- --------- ------- -------- --------- ---------
Total comprehensive results - - - - - 3,553 (1,925) 1,628
Common stock issued as a result
of the acquisition of SHS
Bancorp, Inc. (SHS) 6 8,065 - (888) - - - 7,183
Cash dividends at $0.18 per share - - - - - (1,026) - (1,026)
Common stock dividend of 10% 6 5,921 - - - (5,927) - -
Payment of cash in lieu of fractional
shares for 10% stock dividend - (5) - - - - - (5)
Purchase of treasury stock, at
cost (204,713 shares) - - (2,374) - - - - (2,374)
Reissuance of treasury stock
for stock option exercises - - 416 - - (262) - 154
Principal payments on ESOP debt - (13) - 305 - - - 292
Additional ESOP shares purchased - - - (60) - - - (60)
------- -------- --------- --------- ------ -------- --------- ---------
Balance at June 30, 2000 $ 75 $ 73,654 $ (21,172) $ (3,719) $ (237) $ 20,826 $ (13,753) $ 55,674
======= ======== ========= ========= ====== ======== ========= =========
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, 2000 and 1999 (Unaudited)
(Dollar amounts in thousands)
Six Months Ended
June 30,
-----------------------------
2000 1999
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Operating activities:
Net income $ 3,553 $ 2,910
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization for premises and equipment 357 305
(Recovery of) provision for losses (251) 8
Amortization of premiums and accretion of discounts (40) 910
Origination of loans available for sale (562) (8,735)
Proceeds from sale of loans available for sale 568 8,797
Net gain on sales of securities available for sale (4) (421)
Amortization of intangible assets 360 301
Compensation expense on ESOP 292 231
Increase in accrued interest receivable (220) (42)
Decrease (increase) in prepaid expenses and other assets 1,173 (527)
Increase in accrued expenses and other liabilities 2,850 1,931
Other 679 892
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Net cash provided by operating activities 8,755 6,560
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Investing activities:
Loan originations and purchases (79,614) (70,511)
Purchases of securities available for sale (73,183) (143,820)
Purchases of FHLB stock (246) -
Addition to premises and equipment (814) (776)
Principal repayments of loans receivable 48,313 60,958
Principal repayments of securities available for sale 32,940 53,302
Principal repayments of securities held to maturity - 8,324
Proceeds from the sale of securities available for sale 31,076 54,634
Proceeds from sale of REO 24 32
Payment for purchase of SHS, net of cash acquired (3,082) -
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Net cash used in investing activities (44,586) (37,857)
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Financing activities:
Net increase in deposits 1,193 1,662
Proceeds from long-term borrowings 107,600 38,900
Repayments of long-term borrowings (116,697) (45,320)
Net increase in short-term borrowings 47,914 36,516
Proceeds received from exercise of stock options 154 111
Dividends paid (966) (947)
Payments to acquire treasury stock (2,374) (1,316)
Stock purchased by ESOP (60) (217)
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Net cash provided by financing activities 36,764 29,389
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Net increase (decrease) in cash equivalents 933 (1,908)
Cash equivalents at beginning of period 12,761 10,303
--------- ---------
Cash equivalents at end of period $ 13,694 $ 8,395
========= =========
Continued.
4
ESB Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows, (Continued)
For the six months ended June 30, 2000 and 1999 (Unaudited)
(Dollar amounts in thousands)
Six Months Ended
June 30,
----------------------------
2000 1999
-------- --------
Supplemental information:
Interest paid $ 30,746 $ 23,623
Income taxes paid 1,445 455
Non-cash transactions:
Transfers from loans receivable to real estate acquired
through foreclosure 1,903 47
Dividends declared but not paid 609 469
Supplemental schedule of non-cash investing and finance activities:
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 its other subsidiaries, PennFirst Financial
Services, Inc., PennFirst Capital Trust I, THF, Inc. 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, 1999,
as contained in the 1999 Annual Report to Stockholders.
The results of operations for the three and six months ended June 30,
2000 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 February 10, 2000, the Company completed its acquisition of SHS
Bancorp, Inc. ("SHS") and its subsidiary, Spring Hill Savings Bank,
F.S.B. ("Spring Hill"), based in Pittsburgh, Pennsylvania. Spring Hill
was merged with and into ESB Bank at the close of business on May 5,
2000.
The acquisition was accounted for under the purchase method of
accounting. Under the terms of the merger agreement, SHS merged with
and into the Company. The consideration paid by the Company in
connection with the acquisition consisted of $6.4 million in cash and
599,000 shares of the Company's common stock. In addition, options to
purchase shares of SHS were converted into options to acquire 43,000
shares of the Company's common stock.
Goodwill arising from this transaction was $2.1 million. Goodwill is
amortized on a straight-line basis over 15 years.
Pro forma combined historical results of operations for the current
year up to the most recent interim statement of financial condition
date as though the Company and Spring Hill had been combined at the
beginning of the year are presented below. These unaudited condensed
pro forma combined statements of operations are presented as if the
acquisition had been effective on January 1, 2000 and 1999,
respectively.
The unaudited condensed pro forma combined statements of operations for
the six months ended June 30, 2000 combines Spring Hill's results of
operations for the period January 1, 2000 through February 10, 2000,
and the Company's results of operations for the six months ended June
30, 2000, which include Spring Hill's results of operations from
February 10, 2000 to May 5, 2000. The unaudited condensed pro forma
combined statements of operations include the estimated effect of a pro
forma adjustment for the amortization of goodwill attributed to the
merger that would have been realized had the acquisition actually
occurred at the beginning of the respective periods.
6
2. Acquisition and Merger (continued)
The unaudited condensed pro forma combined statement of operations
information is intended for informational purposes only and is not
necessarily indicative of the future results of operations of the
Company, or results of operations that would have actually occurred had
the acquisition been in effect for the periods presented.
The unaudited condensed pro forma combined statements of operations for
the six month periods ended June 30, 2000 and 1999 are as follows:
(Dollar amounts in thousands, except share data) Pro Forma Pro Forma
combined for the combined for the
six months ended six months ended
June 30, 2000 June 30, 1999
- ---------------------------------------------------------------------------------------------------------------------------
Interest income $ 38,457 $ 34,653
Interest expense 28,522 25,304
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Net interest income before (recovery of)
provision for loan losses 9,935 9,349
(Recovery of) provision for loan losses (275) 33
----------- ------------
Net interest income after (recovery of)
provision for loan losses 10,210 9,316
Other operating income 1,471 1,641
Other operating expenses 7,145 7,092
----------- ------------
Income before provision
for income taxes 4,536 3,865
Provision for income taxes 977 763
----------- ------------
Net income $ 3,559 $ 3,102
=========== ============
Earnings per share
Basic $ 0.62 $ 0.50
Diluted $ 0.61 $ 0.49
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7
3. 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
- ---------------------------------------------------------------------------------------------------------------------------
Available for sale:
As of June 30, 2000:
Trust Preferred securities $ 2,768 $ (415) $ - $ 2,353
U.S. Government securities 19,982 25 (634) 19,373
Municipal securities 93,139 397 (4,786) 88,750
Equity securities 2,717 69 (703) 2,083
Corporate Bonds 61,502 36 (2,351) 59,187
Mortgage-backed securities 431,531 484 (12,962) 419,053
--------- ------- --------- ---------
$ 611,639 $ 596 $ (21,436) $ 590,799
========= ====== ========= =========
As of December 31, 1999:
Trust Preferred securities $ 3,274 $ - $ (443) $ 2,831
U.S. Government securities 22,980 - (641) 22,339
Municipal securities 89,597 741 (4,871) 85,467
Equity securities 2,682 75 (450) 2,307
Corporate Bonds 52,664 - (1,351) 51,313
Mortgage-backed securities 407,849 666 (11,647) 396,868
--------- ------ --------- ---------
$ 579,046 $1,482 $ (19,403) $ 561,125
========= ====== ========= =========
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4. Loans Receivable
The Company's loans receivable as of the respective dates are
summarized as follows:
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June 30, December 31,
(In thousands) 2000 1999
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Mortgage loans:
Residential - single family $319,553 $249,966
Residential - multi family 16,408 15,035
Commercial real estate 45,101 39,171
Construction 52,447 42,935
-------- --------
433,509 347,107
Other loans:
Consumer loans 66,079 59,351
Commercial business 11,809 8,884
-------- --------
511,397 415,342
Less:
Allowance for loan losses 4,770 4,823
Deferred loan fees and net discounts 1,246 858
Loans in process 21,025 15,732
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$484,356 $393,929
======== ========
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8
5. Deposits
The Company's deposits as of the respective dates are summarized as
follows:
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(Dollar amounts in thousands) June 30, 2000 December 31, 1999
------------------------------------- ----------------------------------------
Weighted Weighted
average average
Type of accounts rate Amount % rate Amount %
- ----------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits - $ 11,290 2.3% - $ 8,094 1.9%
Interest-bearing demand deposits 2.46% 186,256 37.2% 2.47% 166,448 38.5%
Time deposits 5.71% 302,862 60.5% 5.37% 257,241 59.6%
--------- ------ --------- ------
4.47% $ 500,408 100.0% 4.23% $ 431,783 100.0%
========= ====== ========= ======
Time deposits mature as follows:
Within one year $ 194,829 38.9% $ 178,944 41.4%
After one year through two years 45,375 9.1% 40,709 9.4%
After two years through three years 45,787 9.1% 15,213 3.5%
Thereafter 16,871 3.4% 22,375 5.2%
--------- ------ --------- ------
$ 302,862 60.5% $ 257,241 59.6%
========= ====== ========= ======
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6. Borrowed Funds
The Company's borrowed funds as of the respective dates are summarized
as follows:
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(Dollar amounts in thousands) June 30, 2000 December 31, 1999
------------------- --------------------
Weighted Weighted
average Amount average Amount
rate rate
- ----------------------------------------------------------------------------------------------------------------------------
FHLB advances:
Due within 12 months 6.38% $137,685 6.17% $179,044
Due beyond 12 months but within 2 years 6.53% 69,482 5.46% 48,707
Due beyond 2 years but within 3 years 6.28% 118,500 6.09% 53,435
Due beyond 3 years but within 4 years 6.87% 1,655 5.89% 35,655
Due beyond 4 years but within 5 years 8.31% 55 8.31% 55
Due beyond 5 years 6.61% 4,499 7.05% 571
-------- --------
331,876 317,467
Treasury tax and loan note payable 6.23% 171 5.20% 169
-------- --------
$332,047 $317,636
======== ========
Reverse repurchase agreements:
Due within 12 months 5.84% $ 96,700 5.55% $ 65,880
Due beyond 12 months but within 2 years 6.19% 63,100 5.82% 72,000
Due beyond 2 years but within 3 years 6.17% 64,640 6.05% 64,040
Due beyond 3 years but within 4 years 7.30% 11,000 -
-------- --------
$235,440 $201,920
======== ========
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7. 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 stock dividend
declared on April 18, 2000.
9
7. Net Income Per Share (continued)
The following table summarizes the Company's net income per share.
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(Amounts, except earnings per share, in thousands)
- --------------------------------------------------------------------------------------------------------
Three Months Three Months
Ended Ended
June 30, 2000 June 30, 1999
--------------- ---------------
Net income $ 1,630 $ 1,554
Weighted-average common shares outstanding 5,757 5,504
--------------- ---------------
Basic earnings per share $ 0.28 $ 0.28
=============== ===============
Weighted-average common shares outstanding 5,757 5,504
Common stock equivalents due to effect of stock options 70 139
--------------- ---------------
Total weighted-average common shares and equivalents 5,827 5,643
--------------- ---------------
Diluted earnings per share $ 0.28 $ 0.27
=============== ===============
Six Months Six Months
Ended Ended
June 30, 2000 June 30, 1999
--------------- ---------------
Net income $ 3,553 $ 2,910
Weighted-average common shares outstanding 5,714 5,519
--------------- ---------------
Basic earnings per share $ 0.62 $ 0.53
================ ================
Weighted-average common shares outstanding 5,714 5,519
--------------- ---------------
Common stock equivalents due to effect of stock options 84 156
--------------- ---------------
Total weighted-average common shares and equivalents 5,798 5,675
--------------- ---------------
Diluted earnings per share $ 0.61 $ 0.51
================ ================
- -----------------------------------------------------------------------------------------------------------
Options to purchase 75,059 shares of common stock at $10.61 per share,
68,176 shares of common stock at $16.36 per share and 86,463 shares of
common stock at $16.36 per share were outstanding as of June 30, 2000
but were not included in the computation of diluted earnings per share
for the three and six month periods ended June 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 and
June 30, 2009. Options to purchase 68,176 shares of common stock at
$16.36 per share were outstanding as of June 30, 1999 but were not
included in the computation of diluted earnings per share for the three
and six month periods ended June 30, 1999 because the options' exercise
price was greater than the average market price of common shares. The
options expire on June 30, 2008.
8. 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 loss and related tax
effects for the six months ended June 30 consists of:
- ----------------------------------------------------------------------------------------------------------------------------
(In thousands) 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
Unrealized Reclassification Unrealized Reclassification
Loss Adjustment Loss Adjustment
- ----------------------------------------------------------------------------------------------------------------------------
Before tax amount $ (2,817) $ (100) $ (6,775) $ (20)
Tax benefit 958 34 2,304 7
----------- ----------- ---------- -----------
After tax amount $ (1,859) $ (66) $ (4,471) $ (13)
=========== =========== ========== ===========
- ----------------------------------------------------------------------------------------------------------------------------
10
8. Comprehensive Income (continued)
For the six months ended June 30, 2000, total comprehensive income was
$1.6 million and for the six months ended June 30, 1999, total
comprehensive loss was $1.6 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 $128.9 million or 12.5% to $1.2
billion at June 30, 2000 from $1.0 billion at December 31, 1999. This net
increase was primarily the result of the acquisition of SHS Bancorp, Inc. ("the
acquisition") on February 10, 2000. Cash and cash equivalents, securities, loans
receivable, accrued interest receivable, Federal Home Loan Bank stock, premises
and equipment, real estate acquired through foreclosure, prepaid expenses and
other assets, and bank owned life insurance increased $933,000, $29.7 million,
$90.4 million, $784,000, $873,000, $1.4 million, $1.8 million, $2.6 million and
$412,000, respectively. The increase in total assets reflects a corresponding
increase in total liabilities of $123.1 million or 12.5% and an increase in
stockholders' equity of $5.8 million or 11.6%. The increase in total liabilities
was the result of increases in deposits, borrowed funds, advance payments by
borrowers for taxes and insurance, and accrued expenses and other liabilities of
$68.6 million, $47.9 million, $2.5 million and $4.0 million, respectively. The
increase in stockholders' equity was the result of an increase in common stock
and additional paid-in capital of $12,000 and $14.0 million, respectively,
offset by an increase in treasury stock, unearned employee stock ownership plan
("ESOP") shares, accumulated other comprehensive loss and a decrease in retained
earnings of $2.0 million, $643,000, $1.9 million and $3.7 million, 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 $933,000 or 7.3% to $13.7 million at June 30, 2000 from
$12.8 million at December 31, 1999. The net increase between June 30, 2000 and
December 31, 1999 can be attributed primarily to the acquisition.
Securities. The Company's securities portfolio increased by $29.7 million or
5.3% to $590.8 million at June 30, 2000 from $561.1 million at December 31,
1999. This net increase was primarily the result of the acquisition. During the
six months ended June 30, 2000, the Company recorded purchases of available for
sale securities of $73.2 million, consisting of purchases of mortgage-backed
securities of $58.7 million, corporate bonds of $8.8 million and municipal bonds
of $5.7 million. Offsetting the purchases of securities were sales of available
for sale securities of $31.1 million, consisting of sales of municipal bonds of
$1.7 million, corporate bonds of $441,000 and mortgage-backed securities of
$29.0 million, and repayments and maturities of securities of $32.9 million,
during the six months ended June 30, 2000.
Loans receivable. Net loans receivable increased $90.4 million or 23.0% to
$484.4 million at June 30, 2000 from $393.9 million at December 31, 1999
primarily due to the acquisition. Included in this increase were increases in
mortgage loans of $86.4 million or 24.9% and other loans of $9.7 million or
14.1%, partially offset by an increase in deferred loan fees and loans in
process of $5.7 million or 34.2% and a decrease in the allowance for loan losses
of $53,000 or 1.1%, during the six months ended June 30, 2000.
Non-performing assets. Non-performing assets include non-accrual loans and real
estate acquired through foreclosure. Non-performing assets amounted to $4.1
million or 0.36% and $4.4 million or 0.43% of total assets at June 30, 2000 and
December 31, 1999, respectively.
Deposits. Total deposits increased $68.6 million or 15.9% to $500.4 million at
June 30, 2000 from $431.8 million at December 31, 1999. This increase was
primarily the result of the acquisition. Noninterest bearing deposits, interest
bearing deposits and time deposits increased $3.2 million, $19.8 million and
$45.6 million, respectively, during the six months ended June 30, 2000.
Borrowed funds and reverse repurchase agreements. Borrowed funds increased $47.9
million or 9.2% to $567.5 million at June 30, 2000 from $519.6 million at
December 31, 1999. This increase is primarily the result of the acquisition.
FHLB advances and reverse repurchase agreement borrowings increased $14.4
million or 4.5% and $33.5 million or 16.6%, respectively, during the six months
ended June 30, 2000.
Stockholders' equity. Stockholders' equity increased $5.8 million or 11.6% to
$55.7 million at June 30, 2000 from $49.9 million at December 31, 1999. This
increase was principally the result of the acquisition and the 10% stock
dividend which generated increases in common stock and additional paid-in
capital of $12,000 and $14.0 million, respectively. Offsetting the increases was
a decrease in retained earnings of $3.7 million and
12
increases in treasury stock, ESOP shares and accumulated other comprehensive
loss of $2.0 million, $643,000 and $1.9 million, respectively.
RESULTS OF OPERATIONS
General. The Company recorded net income of $1.6 million and $3.6 million for
the three and six months ended June 30, 2000, respectively, as compared to net
income of $1.6 million and $2.9 million, respectively, for the same periods in
the prior year.
For the three months ended June 30, 2000, net income increased $76,000 or 4.9%.
The increase can be attributable to an increase in net interest income and a
decrease in the provision for income taxes of $911,000 and $1,000, respectively,
offset by an increase in the provision for loan losses and noninterest expense
of $124,000 and $655,000, respectively, and a decrease in noninterest income of
$57,000.
The $643,000 or 22.1% increase in net income for the six months ended June 30,
2000, as compared to the six months ended June 30, 1999, was attributable to an
increase in net interest income of $1.8 million and a decrease in the provision
for loan losses of $331,000. Partially offsetting this increase was an increase
in noninterest expense and the provision for income taxes of $1.0 million and
$355,000, respectively, and a decrease in noninterest income of $129,000.
Net interest income. Net interest income increased $911,000 or 22.5% to $5.0
million for the three months ended June 30, 2000, compared to $4.1 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 $3.6 million offset by an
increase in interest expense of $2.7 million.
Net interest income increased $1.8 million or 23.2% to $9.7 million for the six
months ended June 30, 2000, compared to $7.9 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 $6.6 million offset by an increase in interest
expense of $4.7 million.
Interest income. Interest income increased $3.6 million or 22.7% to $19.5
million for the three months ended June 30, 2000, compared to $15.9 million for
the same period in the prior year. This increase can be attributed to increases
in interest earned on loans receivable, securities, FHLB stock and
interest-earning deposits of $2.3 million, $1.2 million, $37,000 and $18,000,
respectively.
Interest earned on loans receivable increased $2.3 million or 33.1% to $9.3
million for the three months ended June 30, 2000, compared to $7.0 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 $110.6 million or
29.9% to $480.0 million for the three months ended June 30, 2000, compared to
$369.4 million for the same period in the prior year. Additionally, the yield on
loans receivable increased to 7.73% for the three months ended June 30, 2000,
compared to 7.55% for the same period in the prior year.
Interest earned on securities (on a fully tax equivalent basis utilizing a
federal tax rate of 34%) increased $1.2 million or 12.8% to $10.4 million for
the three months ended June 30, 2000, compared to $9.3 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 $23.0 million or 4.1% to
$585.3 million for the three months ended June 30, 2000, compared to $562.3
million for the same period in the prior year. Additionally, the tax equivalent
yield on securities increased to 7.14% for the three months ended June 30, 2000,
compared to 6.59% for the same period in the prior year.
Interest income increased $6.6 million or 21.0% to $37.9 million for the six
months ended June 30, 2000, compared to $31.3 million for the same period in the
prior year. This increase can be attributed to increases in interest earned on
loans receivable, securities, FHLB stock and interest-earning deposits of $3.7
million, $2.7 million, $60,000 and $40,000, respectively.
13
Interest earned on loans receivable increased $3.7 million or 26.9% to $17.7
million for the six months ended June 30, 2000, compared to $13.9 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 $91.1 million or
24.9% to $457.4 million for the six months ended June 30, 2000, compared to
$366.3 million for the same period in the prior year. Additionally, the yield on
loans receivable increased to 7.73% for the six months ended June 30, 2000,
compared to 7.60% for the same period in the prior year.
Interest earned on securities (on a fully tax equivalent basis utilizing a
federal tax rate of 34%) increased $2.7 million or 16.3% to $20.7 million for
the six months ended June 30, 2000, compared to $18.1 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 $24.5 million or 4.4% to
$579.4 million for the six months ended June 30, 2000, compared to $554.9
million for the same period in the prior year. Additionally, the tax equivalent
yield on securities increased to 7.13% for the six months ended June 30, 2000,
compared to 6.53% for the same period in the prior year.
Interest expense. Interest expense increased $2.7 million or 22.8% to $14.6
million for the three months ended June 30, 2000, compared to $11.9 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 of
$1.0 million and $1.7 million, respectively.
Interest incurred on deposits increased $1.0 million or 23.5% to $5.3 million
for the three months ended June 30, 2000, compared to $4.3 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 $73.3 million or
17.7% to $488.5 million for the three months ended June 30, 2000, compared to
$415.2 million for the same period in the prior year. Additionally, the cost of
interest-bearing deposits between the periods increased to 4.36% from 4.14% for
the quarters ended June 30, 2000 and 1999, respectively.
Interest incurred on borrowed funds increased $1.7 million or 24.3% to $8.7
million for the three months ended June 30, 2000, compared to $7.0 million for
the same period in the prior year. This increase was primarily attributable to
an increase in the average balance of borrowed funds of $77.8 million or 16.3%
to $555.4 million for the three months ended June 30, 2000, compared to $477.6
million for the same period in the prior year. Additionally, the cost of these
funds increased to 6.31% for the three months ended June 30, 2000, compared to
5.89% for the same period in the prior year.
Interest expense increased $4.7 million or 20.2% to $28.2 million for the six
months ended June 30, 2000, compared to $23.5 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 of $1.6 million and $3.2
million, respectively.
Interest incurred on deposits increased $1.6 million or 18.2% to $10.3 million
for the six months ended June 30, 2000, compared to $8.7 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 $57.3 million or
13.8% to $473.4 million for the six months ended June 30, 2000, compared to
$416.1 million for the same period in the prior year. The cost of
interest-bearing deposits increased between the periods to 4.36% from 4.21% for
the six months ended June 30, 2000 and 1999, respectively.
Interest incurred on borrowed funds increased $3.2 million or 23.1% to $16.8
million for the six months ended June 30, 2000, compared to $13.7 million for
the same period in the prior year. This increase was primarily attributable to
an increase in the average balance of borrowed funds of $78.2 million or 16.8%
to $543.9 million for the six months ended June 30, 2000, compared to $465.8
million for the same period in the prior year. Additionally, the cost of these
funds increased to 6.22% for the six months ended June 30, 2000, compared to
5.92% for the same period in the prior year.
Provision for loan losses. The provision for loan losses increased $124,000 to
$127,000 for the three months ended June 30, 2000, compared to $3,000 for the
same period in the prior year. The provision for loan losses
14
decreased $331,000, reflecting a recovery of loan losses of $325,000 for the six
months ended June 30, 2000, compared to a provision of $6,000 for the same
period in the prior year. The $331,000 decrease in the provision for loan losses
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 and $127,000 provisions recorded for the first and second
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 June 30, 2000 amounted to $4.8 million or 0.93%
of the Company's total loan portfolio, as compared to $4.8 million or 1.16% at
December 31, 1999. The Company's allowance for losses on loans as a percentage
of non-performing loans was 212.49% and 111.29% at June 30, 2000 and December
31, 1999, respectively.
Noninterest income. Noninterest income decreased $57,000 or 6.7% to $800,000 for
the three months ended June 30, 2000, compared to $857,000 for the same period
in the prior year. This decrease can be attributed to a decrease in net gains on
the sale of securities available for sale of $205,000, offset by increases in
fees and service charges, an increase in the cash surrender value of the bank
owned life insurance ("BOLI") and other income of $63,000, $15,000 and $70,000,
respectively, between periods. Noninterest income decreased $129,000 or 8.1% to
$1.5 million for the six months ended June 30, 2000, compared to $1.6 million
for the same period in the prior year. This decrease can be attributed to a
decrease in net gains on security sales of $417,000, offset by increases in fees
and service charges, an increase in the cash surrender value of the BOLI and
other income of $67,000, $39,000 and $182,000, respectively, between periods.
Noninterest expense. Noninterest expense increased $655,000 or 22.0% to $3.6
million for the three months ended June 30, 2000, from $3.0 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, and other expenses
of $416,000, $124,000 and $160,000, respectively, offset by a decrease in
federal deposit insurance premiums and data processing of $31,000 and $14,000,
respectively. The increase in compensation and employee benefits, premises and
equipment, and other expenses were primarily the costs of operations of Spring
Hill included in the operations of the Company for the three months ended June
30, 2000 as compared to the same period last year. Noninterest expense increased
$1.0 million or 17.4% to $7.0 million for the six months ended June 30, 2000,
from $6.0 million for the same period in the prior year. The increase in
compensation and employee benefits, premises and equipment, data processing and
other expenses were primarily the costs of operations of Spring Hill included in
the operations of the Company for five of the six months ended June 30, 2000, as
compared to the same period last year.
Provision for income taxes. The provision for income taxes decreased $1,000 or
0.3% for the three months ended June 30, 2000 and increased $355,000 or 59.5% to
$952,000 for the six months ended June 30, 2000, compared to $375,000 and
$597,000, respectively, for the prior year periods. The increase in the
provision for income taxes for the six months ended June 30, 2000 is
attributable to an increase in pre-tax income of $998,000.
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 June 30,
2000 1999
------------------------------------ -----------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
- ------------------------
Taxable securities available for sale $ 499,938 $ 8,624 6.90% $ 422,574 $ 6,785 6.42%
Tax-exempt securities available for sale 85,386 1,824 8.54% 92,545 1,901 8.22%
Taxable securities held to maturity - - 0.00% 40,549 470 4.64%
Tax-exempt securities held to maturity - - 0.00% 6,663 106 6.36%
----------- --------- ----- --------- --------- -----
585,324 10,448 7.14% 562,331 9,262 6.59%
----------- --------- ----- --------- --------- -----
Mortgage loans 403,941 7,873 7.80% 299,964 5,676 7.57%
Other loans 76,028 1,405 7.39% 69,447 1,294 7.45%
----------- --------- ----- --------- --------- -----
479,969 9,278 7.73% 369,411 6,970 7.55%
----------- --------- ----- --------- --------- -----
Cash equivalents 9,935 82 3.30% 8,615 65 3.02%
FHLB stock 19,308 336 6.96% 18,435 299 6.49%
----------- --------- ----- --------- --------- -----
29,243 418 5.72% 27,050 364 5.38%
----------- --------- ----- --------- --------- -----
Total interest-earning assets 1,094,536 20,144 7.36% 958,792 16,596 6.92%
Other noninterest-earning assets 51,514 - - 37,170 - -
----------- --------- ----- --------- --------- -----
Total assets $ 1,146,050 $ 20,144 7.03% $ 995,962 $ 16,596 6.67%
=========== ========= ===== ========= ========= =====
Interest-bearing liabilities:
- -----------------------------
Interest-bearing demand deposits $ 188,657 $ 1,149 2.45% $ 163,081 $ 962 2.37%
Time deposits 299,804 4,141 5.56% 252,088 3,323 5.29%
----------- --------- ----- --------- --------- -----
488,461 5,290 4.36% 415,169 4,285 4.14%
----------- --------- ----- --------- --------- -----
FHLB advances 319,788 5,267 6.62% 334,931 5,061 6.06%
Reverse repo's & other borrowings 235,595 3,447 5.88% 142,656 1,958 5.51%
----------- --------- ----- --------- --------- -----
555,383 8,714 6.31% 477,587 7,019 5.89%
----------- --------- ----- --------- --------- -----
Preferred securities 24,088 556 9.28% 24,044 557 9.29%
----------- --------- ----- --------- --------- -----
Total interest-bearing liabilities 1,067,932 14,560 5.48% 916,800 11,861 5.19%
Noninterest-bearing demand deposits 14,414 - - 11,455 - -
Other noninterest-bearing liabilities 8,478 - - 6,691 - -
----------- --------- ----- --------- --------- -----
Total liabilities 1,090,824 14,560 5.37% 934,946 11,861 5.09%
Stockholders' equity 55,226 - - 61,016 - -
----------- --------- ----- --------- --------- -----
Total liabilities and equity $ 1,146,050 $ 14,560 5.11% $ 995,962 $ 11,861 4.78%
=========== ========= ===== ========= ========= =====
Net interest income $ 5,584 $ 4,735
========= =========
Interest rate spread (difference between 1.88% 1.73%
weighted average rate on interest-earning ===== =====
assets and interest-bearing liabilities)
Net interest margin (net interest 2.04% 1.98%
income as a percentage of average ===== =====
interest-earning assets)
- ---------------------------------------------------------------------------------------------------------------------------------
16
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Six months ended June 30,
2000 1999
------------------------------------ -----------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
- ------------------------
Taxable securities available for sale $ 493,972 $ 17,007 6.89% $ 404,165 $ 12,727 6.30%
Tax-exempt securities available for sale 85,401 3,653 8.55% 96,694 3,917 8.10%
Taxable securities held to maturity - - 0.00% 46,696 1,210 5.18%
Tax-exempt securities held to maturity - - 0.00% 7,329 266 7.26%
----------- --------- ----- --------- --------- -----
579,373 20,660 7.13% 554,884 18,120 6.53%
----------- --------- ----- --------- --------- -----
Mortgage loans 384,893 14,944 7.77% 296,507 11,291 7.62%
Other loans 72,503 2,729 7.53% 69,797 2,634 7.55%
----------- --------- ----- --------- --------- -----
457,396 17,673 7.73% 366,304 13,925 7.60%
----------- --------- ----- --------- --------- -----
Cash equivalents 10,720 166 3.10% 8,501 127 2.99%
FHLB stock 19,090 654 6.85% 18,435 594 6.44%
----------- --------- ----- --------- --------- -----
29,810 820 5.50% 26,936 721 5.35%
----------- --------- ----- --------- --------- -----
Total interest-earning assets 1,066,579 39,153 7.34% 948,124 32,766 6.91%
Other noninterest-earning assets 49,555 - - 36,893 - -
----------- --------- ----- --------- --------- -----
Total assets $ 1,116,134 $ 39,153 7.02% $ 985,017 $ 32,766 6.65%
=========== ========= ===== ========= ========= =====
Interest-bearing liabilities:
- -----------------------------
Interest-bearing demand deposits $ 182,957 $ 2,253 2.48% $ 160,341 $ 1,877 2.36%
Time deposits 290,490 8,013 5.55% 255,799 6,805 5.36%
----------- --------- ----- --------- --------- -----
473,447 10,266 4.36% 416,140 8,682 4.21%
----------- --------- ----- --------- --------- -----
FHLB advances 316,724 10,127 6.43% 326,001 9,817 6.07%
Reverse repo's & other borrowings 227,182 6,709 5.94% 139,752 3,864 5.58%
----------- --------- ----- --------- --------- -----
543,906 16,836 6.22% 465,753 13,681 5.92%
----------- --------- ----- --------- --------- -----
Preferred securities 24,082 1,113 9.29% 24,038 1,113 9.34%
----------- --------- ----- --------- --------- -----
Total interest-bearing liabilities 1,041,435 28,215 5.45% 905,931 23,476 5.23%
Noninterest-bearing demand deposits 12,884 - - 10,942 - -
Other noninterest-bearing liabilities 7,480 - - 6,400 - -
----------- --------- ----- --------- --------- -----
Total liabilities 1,061,799 28,215 5.34% 923,273 23,476 5.13%
Stockholders' equity 54,335 - - 61,744 - -
----------- --------- ----- --------- --------- -----
Total liabilities and equity $ 1,116,134 $ 28,215 5.08% $ 985,017 $ 23,476 4.81%
=========== ========= ===== ========= ========= =====
Net interest income $ 10,938 $ 9,290
========= =========
Interest rate spread (difference between 1.89% 1.69%
weighted average rate on interest-earning ===== =====
assets and interest-bearing liabilities)
Net interest margin (net interest 2.05% 1.96%
income as a percentage of average ===== =====
interest-earning assets)
- ---------------------------------------------------------------------------------------------------------------------------------
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
period ended June 30, 2000 and 1999, 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.
17
The table analyzing changes in interest income between the three months ended
June 30, 2000 and 1999 is presented as follows:
- -------------------------------------------------------------------------------------------------------------------------------
(In thousands) 2000 versus 1999
Increase (decrease) due to
----------------------------------------------
Volume Rate Total
- -------------------------------------------------------------------------------------------------------------------------------
Interest income:
Securities $ 389 $ 797 $ 1,186
Loans 2,133 175 2,308
Cash equivalents 11 6 17
FHLB stock 15 22 37
------ ------ -------
Total interest-earning assets 2,548 1,000 3,548
------ ------ -------
Interest expense:
Deposits 786 219 1,005
FHLB advances (236) 442 206
Reverse repurchases & other borrowings 1,352 137 1,489
Preferred securities 1 (2) (1)
------ ------ -------
Total interest-bearing liabilities 1,903 796 2,699
------ ------ -------
Net interest income $ 645 $ 204 $ 849
====== ====== =======
- -------------------------------------------------------------------------------------------------------------------------------
The table analyzing changes in interest income between the six months ended June
30, 2000 and 1999 is presented as follows:
- -------------------------------------------------------------------------------------------------------------------------------
(In thousands) 2000 versus 1999
Increase (decrease) due to
----------------------------------------------
Volume Rate Total
- -------------------------------------------------------------------------------------------------------------------------------
Interest income:
Securities $ 824 $ 1,716 $ 2,540
Loans 3,516 232 3,748
Cash equivalents 34 5 39
FHLB stock 22 38 60
------ ------- -------
Total interest-earning assets 4,396 1,991 6,387
------ ------- -------
Interest expense:
Deposits 1,232 352 1,584
FHLB advances (285) 595 310
Reverse repurchases & other borrowings 2,566 279 2,845
Preferred securities 2 (2) -
------ ------- -------
Total interest-bearing liabilities 3,515 1,224 4,739
------ ------- -------
Net interest income $ 881 $ 767 $ 1,648
====== ======= =======
- -------------------------------------------------------------------------------------------------------------------------------
ASSET AND LIABILITY MANAGMENT
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
18
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 and the Group Senior Vice
President/Lending. 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 and (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) the
purchase of off-balance sheet interest rate caps which help to insulate the
Bank's interest rate risk position from increases in interest rates and (iv)
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 June 30, 2000, the implementation of these asset and liability initiatives
resulted in the following: (i) $210.5 million or 41.2% of the Company's total
loan portfolio had adjustable interest rates or maturities of 12 months or less;
(ii) $146.8 million or 40.6% of the Company's portfolio of single-family
residential mortgage loans (including residential construction loans) consisted
of ARMs; (iii) $134.8 million or 32.2% of the Company's portfolio of
mortgage-backed securities were secured by ARMs and (iv) the Company had $50.0
million in notional amount of interest rate caps.
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, 2000, the
Company's interest-earning assets maturing or repricing within one year totaled
$448.4 million while the Company's interest-bearing liabilities maturing or
repricing within one-year totaled $507.0 million, providing a deficiency of
interest-earning assets over interest-bearing liabilities of $58.6 million or a
negative 5.0% of total assets. At June 30, 2000, the percentage of the Company's
assets to liabilities maturing or repricing within one year was 88.4%. 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 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, 2000, the Company's simulation model
indicated that the Company's statement of financial condition is liability
sensitive. The Company's $50.0 million in notional amounts of interest rate caps
insulates against rising interest rates. 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 10.1% over such 24 month period.
19
LIQUIDITY
The Bank is required by the Office of Thrift Supervision ("OTS") to maintain a
minimum level of liquidity to assure its ability to meet demands for customers'
withdrawals and the repayment of short term borrowings. The liquidity
requirement is calculated as a percentage of deposits and short-term borrowings,
as defined by the OTS, and currently must be maintained at amounts not less than
4.0%. The Bank's liquidity ratio fluctuates depending primarily upon deposit
flows but has been consistently maintained at levels in excess of the required
percentage. At June 30, 2000, the Bank's liquidity ratio was 15.7%.
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 six months ended June 30, 2000, the
Company used its sources of funds primarily to purchase securities, and to a
lesser extent, the funding of loan commitments. As of such date, the Company had
outstanding loan commitments totaling $14.2 million, unused lines of credit
totaling $24.3 million and $13.6 million of undisbursed loans in process.
At June 30, 2000, certificates of deposit amounted to $302.9 million or 60.5% of
the Company's total consolidated deposits, including $194.8 million which were
scheduled to mature by June 30, 2001. At the same date, the total amount of FHLB
advances which were scheduled to mature by June 30, 2001 was $138.1 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, 2001 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.
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, 2000, the Bank was in compliance with all
regulatory capital requirements with tangible, core and risk-based capital
ratios of 6.8%, 6.8% and 16.2%, respectively.
RECENT ACCOUNTING, REGULATORY AND OTHER MATTERS
In June 1998, the FASB issued 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 their 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 firm commitment, a hedge of the
exposure to a variable cash flows of a forecasted transaction, or a hedge of the
foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. This statement was to be
effective for fiscal years beginning June 15, 1999. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133 - an
amendment of FASB Statement No.133", which delays the effective date of SFAS No.
133 to the first quarter of fiscal years beginning after June 15, 2000. The
Company has not determined the impact of the adoption of the standard at this
time.
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.
20
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- ------------------------------------------------------------------
Quantitative and qualitative disclosures about market risk are presented at
December 31, 1999 in Item 7A of the Company's Annual Report on Form 10-K, filed
with the SEC on March 30, 2000. Management believes there have been no material
changes in the Company's market risk since December 31, 1999.
21
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 18, 2000, the Company held its Annual Meeting of Stockholders. Nominees
for two 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 (Proposal One)
- ---------------------
Director For Withheld Not Voted Term/Expiration
-------- --- --------- --------- ---------------
Charles Delman 4,611,108 132,902 915,114 Three Years/2003
Edmund C. Smith 4,609,478 134,532 915,114 Three Years/2003
Ratification of Appointment of KPMG LLP as Independent Public Accountants for
- -----------------------------------------------------------------------------
the Company for 2000 (Proposal Two)
- --------------------
For Against Abstain Not Voted
--- ------- ------- ---------
4,678,787 51,715 13,508 915,115
No other proposals were considered at the annual meeting.
Item 5. Other Information
- --------------------------
None
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibit 11 -- Statement re: computation of per share earnings
(b) Exhibit 27 -- Financial Data Schedule
(c) Form 8-K - The Company filed a Form 8-K dated April 18, 2000 to report a
10% stock dividend payable May 31, 2000 to stockholders of record at the
close of business on May 17, 2000.
Form 8-K - The Company filed a Form 8-K dated May 8, 2000 to report the
merger of its two subsidiary savings institutions.
Form 8-K - The Company filed a Form 8-K dated May 23, 2000 to report the
change in the Company's certifying accountant.
Form 8-K/A - The Company filed a Form 8-K/A dated May 31, 2000 to report
the change in the Company's certifying accountant.
Form 8-K - The Company filed a Form 8-K dated June 21, 2000 to report a
$0.10 cash dividend payable on July 25, 2000 to stockholders of record at
the close of business on June 30, 2000.
22
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, 2000 By: /s/ Charlotte A. Zuschlag
----------------------------------
Charlotte A. Zuschlag
President and Chief Executive Officer
Date: August 14, 2000 By: /s/ Charles P. Evanoski
----------------------------------
Charles P. Evanoski
Senior Vice President and
Chief Financial Officer
23