================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For Quarter Ended: September 30, 2000
------------------
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 incorporation or organization) (I.R.S. Employer Identification No.)
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 October 31, 2000:
Common Stock, $0.01 par value 6,031,996 shares
----------------------------- ----------------
(Class) (Outstanding)
================================================================================
ESB FINANCIAL CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of September 30, 2000 (Unaudited) and December 31, 1999.................... 1
Consolidated Statements of Operations for the three
and nine months ended September 30, 2000 and 1999 (Unaudited)................. 2
Consolidated Statement of Changes in Stockholders' Equity
For the nine months ended September 30, 2000 (Unaudited)...................... 3
Consolidated Statements of Cash Flows for the nine
months ended September 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.................... 22
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings............................................................. 23
Item 2. Changes in Securities......................................................... 23
Item 3. Defaults Upon Senior Securities............................................... 23
Item 4. Submission of Matters to a Vote of Security Holders........................... 23
Item 5. Other Information............................................................. 23
Item 6. Exhibits and Reports on Form 8-K.............................................. 23
Signatures.................................................................... 24
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
- ----------------------------
ESB Financial Corporation and Subsidiaries
Consolidated Statements of Financial Condition
As of September 30, 2000 (Unaudited) and December 31, 1999
(Dollar amounts in thousands)
September 30, December 31,
2000 1999
(Unaudited)
----------------- -----------------
Assets
------
Cash on hand and in banks $ 3,531 $ 6,712
Interest-earning deposits 8,378 5,780
Federal funds sold 2,563 269
Securities available for sale; amortized cost of $607,164 and $579,046 592,979 561,125
Loans receivable, net of allowance for loan losses of $4,831 and $4,823 493,812 393,929
Accrued interest receivable 7,903 6,871
Federal Home Loan Bank (FHLB) stock 19,308 18,435
Premises and equipment, net 8,756 6,880
Real estate acquired through foreclosure, net 1,976 71
Prepaid expenses and other assets 16,887 16,589
Bank owned life insurance 16,423 15,784
----------------- -----------------
Total assets $ 1,172,516 $ 1,032,445
================= =================
Liabilities and Stockholders' equity
------------------------------------
Liabilities:
Deposits $ 506,530 $ 431,783
Borrowed funds 366,215 317,636
Reverse repurchase agreements 204,201 201,920
Guaranteed preferred beneficial interest in subordinated debt, net 24,104 24,071
Advance payments by borrowers for taxes and insurance 2,521 3,339
Accrued expenses and other liabilities 8,097 3,814
----------------- -----------------
Total liabilities 1,111,668 982,563
================= =================
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; 6,041,212 and 5,612,415 shares outstanding 75 63
Additional paid-in capital 73,642 59,686
Treasury stock, at cost; 1,449,591 and 1,235,100 shares (21,546) (19,214)
Unearned Employee Stock Ownership Plan (ESOP) shares (3,606) (3,076)
Unvested shares held by Management Recognition Plan (MRP) (237) (237)
Retained earnings, substantially restricted 21,882 24,488
Accumulated other comprehensive loss, net (9,362) (11,828)
----------------- -----------------
Total stockholders' equity 60,848 49,882
----------------- -----------------
Total liabilities and stockholders' equity $ 1,172,516 $ 1,032,445
================= =================
See accompanying notes to consolidated financial statements.
1
ESB Financial Corporation and Subsidiaries
Consolidated Statements of Operations
For the three and nine months ended September 30, 2000 and 1999 (Unaudited)
(Dollar amounts in thousands, except share data)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Interest income:
Loans receivable $ 9,489 $ 7,159 $ 27,162 $ 21,084
Securities available for sale 10,005 8,899 29,422 24,211
Securities held to maturity - - - 1,386
FHLB stock 352 314 1,006 908
Deposits with banks and federal funds sold 99 73 266 200
---------- ---------- ---------- ----------
Total interest income 19,945 16,445 57,856 47,789
---------- ---------- ---------- ----------
Interest expense:
Deposits 5,692 4,331 15,958 13,012
Borrowed funds 8,894 7,380 25,730 21,062
Guaranteed preferred beneficial interest in subordinated debt 557 557 1,670 1,670
---------- ---------- ---------- ----------
Total interest expense 15,143 12,268 43,358 35,744
---------- ---------- ---------- ----------
Net interest income 4,802 4,177 14,498 12,045
Provision for (recovery of) loan losses 11 3 (314) 9
---------- ---------- ---------- ----------
Net interest income after provision for (recovery of) loan losses 4,791 4,174 14,812 12,036
---------- ---------- ---------- ----------
Noninterest income:
Fees and service charges 395 335 1,127 1,000
Net realized (loss) gain on sale of securities available for sale (37) (19) (33) 401
Increase of cash surrender value of bank owned life insurance 227 197 640 571
Other 125 112 441 247
---------- ---------- ---------- ----------
Total noninterest income 710 625 2,175 2,219
---------- ---------- ---------- ----------
Noninterest expense:
Compensation and employee benefits 1,985 1,787 5,985 5,041
Premises and equipment 509 391 1,446 1,115
Federal deposit insurance premiums 23 69 74 194
Data processing 150 96 454 363
Other 1,013 747 2,702 2,327
---------- ---------- ---------- ----------
Total noninterest expense 3,680 3,090 10,661 9,040
---------- ---------- ---------- ----------
Income before provision for income taxes 1,821 1,709 6,326 5,215
Provision for income taxes 187 288 1,139 885
---------- ---------- ---------- ----------
Net income $ 1,634 $ 1,421 $ 5,187 $ 4,330
========== ========== ========== ==========
Net income per share:
Basic $ 0.28 $ 0.26 $ 0.91 $ 0.79
Diluted $ 0.28 $ 0.25 $ 0.89 $ 0.77
See accompanying notes to consolidated financial statements.
2
ESB Financial Corporation and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
For the nine months ended September 30, 2000 (Unaudited)
(Dollar amounts in thousands)
Accumulated
other
Additional Unearned Unvested comprehensive Total
Common paid-in Treasury ESOP MRP Retained income, net of stockholders'
stock capital stock shares shares earnings tax equity
--------- ---------- ---------- ---------- ---------- ---------- ---------------- --------------
Balance at December 31, 1999 $ 63 $ 59,686 $ (19,214) $ (3,076) $ (237) $ 24,488 $ (11,828) $ 49,882
Comprehensive results:
Net income - - - - - 5,187 - 5,187
Other comprehensive results, net - - - - - - 2,436 2,436
Reclassification adjustment - - - - - - 30 30
--------- ---------- ---------- ---------- ---------- ---------- ---------------- --------------
Total comprehensive results - - - - - 5,187 2,466 7,653
Common stock issued as a result
of the acquisition of SHS
Bancorp, Inc. (SHS) 6 8,065 - (888) - - - 7,183
Cash dividends at $0.28 per share - - - - - (1,594) - (1,594)
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 (243,399 shares) - - (2,765) - - - - (2,765)
Reissuance of treasury stock
for stock option exercises - - 433 - - (272) - 161
Principal payments on ESOP debt - (25) - 456 - - - 431
Additional ESOP shares purchased - - - (98) - - - (98)
--------- ---------- ---------- ---------- ---------- ---------- ---------------- --------------
Balance at September 30, 2000 $ 75 $ 73,642 $ (21,546) $ (3,606) $ (237) $ 21,882 $ (9,362) $ 60,848
========= ========== ========== ========== ========== ========== ================ ==============
See accompanying notes to consolidated financial statements.
3
ESB Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2000 and 1999 (Unaudited)
(Dollar amounts in thousands)
Nine Months Ended
September 30,
-------------------------------
2000 1999
------------ ------------
Operating activities:
Net income $ 5,187 $ 4,330
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization for premises and equipment 569 449
(Recovery of) provision for losses (209) 17
Amortization of premiums and accretion of discounts (211) 1,147
Origination of loans available for sale (1,700) (8,894)
Proceeds from sale of loans available for sale 1,711 8,966
Net loss (gain) on sale of securities available for sale 33 (401)
Amortization of intangible assets 546 452
Compensation expense on ESOP 431 350
Increase in accrued interest receivable (468) -
Decrease (increase) in prepaid expenses and other assets 987 (552)
Increase in accrued expenses and other liabilities 3,147 2,677
Other (2,914) (1,842)
------------ ------------
Net cash provided by operating activities 7,109 6,699
------------ ------------
Investing activities:
Loan originations and purchases (114,947) (111,867)
Purchases of securities available for sale (105,084) (195,079)
Purchases of FHLB stock (246) -
Additions to premises and equipment (1,530) (1,254)
Principal repayments of loans receivable 73,978 93,575
Principal repayments of securities available for sale 51,361 71,749
Principal repayments of securities held to maturity - 8,324
Proceeds from the sale of securities available for sale 49,260 73,548
Proceeds from the sale of REO 108 32
Payment for purchase of SHS, net of cash acquired (3,082) -
------------ ------------
Net cash used in investing activities (50,182) (60,972)
------------ ------------
Financing activities:
Net increase (decrease) in deposits 7,315 (947)
Proceeds from long-term borrowings 178,057 117,534
Repayments of long-term borrowings (162,076) (95,405)
Net increase in short-term borrowings 25,765 36,516
Proceeds received from exercise of stock options 161 124
Dividends paid (1,575) (1,417)
Payments to acquire treasury stock (2,765) (2,450)
Stock purchased by ESOP (98) (346)
------------ ------------
Net cash provided by financing activities 44,784 53,609
------------ ------------
Net increase (decrease) in cash equivalents 1,711 (664)
Cash equivalents at beginning of period 12,761 10,303
------------ ------------
Cash equivalents at end of period $ 14,472 $ 9,639
============ ============
Continued.
4
ESB Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows, (Continued)
For the nine months ended September 30, 2000 and 1999 (Unaudited)
(Dollar amounts in thousands)
Nine Months Ended
September 30,
-------------------------------
2000 1999
------------ ------------
Supplemental information:
Interest paid $ 46,693 $ 36,410
Income taxes paid 2,038 845
Non-cash transactions:
Transfers from loans receivable to real estate acquired
through foreclosure 2,050 361
Transfers of securities from held to maturity to
available for sale - 54,464
Dividends declared but not paid 605 462
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 other subsidiaries, PennFirst Financial Services, Inc.,
PennFirst Capital Trust I, THF, Inc., ESB Financial Services and AMSCO,
Inc.
The accompanying unaudited consolidated financial statements for the
interim periods include all adjustments, consisting only of normal
recurring accruals, which are necessary, in the opinion of management, to
fairly reflect the Company's financial position and results of operations.
Additionally, these consolidated financial statements for the interim
periods have been prepared in accordance with instructions for the
Securities and Exchange Commission's Form 10-Q and therefore do not include
all information or footnotes necessary for a complete presentation of
financial condition, results of operations and cash flows in conformity
with generally accepted accounting principles. For further information,
refer to the audited consolidated financial statements and footnotes
thereto for the year ended December 31, 1999, as contained in the 1999
Annual Report to Stockholders.
The results of operations for the three and nine months ended September 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
nine months ended September 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 nine months ended September 30,
2000, which include Spring Hill's results of operations from February 10,
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
nine month periods ended September 30, 2000 and 1999 are as follows:
-----------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data) Pro Forma Pro Forma
combined for the combined for the
nine months ended nine months ended
September 30, 2000 September 30, 1999
-----------------------------------------------------------------------------------------------------------------------
Interest income $ 58,402 $ 52,793
Interest expense 43,665 38,490
-------------------- --------------------
Net interest income before (recovery of)
provision for loan losses 14,737 14,303
(Recovery of) provision for loan losses (264) 64
-------------------- --------------------
Net interest income after (recovery of)
provision for loan losses 15,001 14,239
Other operating income 2,181 2,282
Other operating expenses 10,825 10,803
-------------------- --------------------
Income before provision
for income taxes 6,357 5,718
Provision for income taxes 1,164 1,159
-------------------- --------------------
Net income $ 5,193 $ 4,559
==================== ====================
Earnings per share
Basic $ 0.91 $ 0.74
Diluted $ 0.90 $ 0.72
-----------------------------------------------------------------------------------------------------------------------
7
3. Securities
The Company's securities available for sale portfolio is summarized as
follows:
- -------------------------------------------------------------------------------------------------------------------
(In thousands) Amortized Unrealized Unrealized Fair
cost gains losses value
- -------------------------------------------------------------------------------------------------------------------
Available for sale:
- -------------------
As of September 30, 2000
Trust Preferred securities $ 2,000 $ -- $ (347) $ 1,653
U.S. Government securities 19,983 -- (357) 19,626
Municipal securities 91,094 529 (3,279) 88,344
Equity securities 2,592 38 (474) 2,156
Corporate Bonds 73,564 100 (2,867) 70,797
Mortgage-backed securities 417,931 964 (8,492) 410,403
--------- --------- --------- ---------
$ 607,164 $ 1,631 $ (15,816) $ 592,979
========= ========= ========= =========
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
========= ========= ========= =========
- -------------------------------------------------------------------------------------------------------------------
4. Loans Receivable
The Company's loans receivable as of the respective dates are summarized as
follows:
- ----------------------------------------------------------------------------------------------
September 30, December 31,
(In thousands) 2000 1999
- ----------------------------------------------------------------------------------------------
Mortgage loans:
Residential - single family $ 328,603 $ 249,966
Residential - multi family 15,783 15,035
Commercial real estate 47,735 39,171
Construction 48,394 42,935
------------- -------------
440,515 347,107
Other loans:
Consumer loans 67,584 59,351
Commercial business 11,487 8,884
------------- -------------
519,586 415,342
Less:
Allowance for loan losses 4,831 4,823
Deferred loan fees and net discounts 1,293 858
Loans in process 19,650 15,732
------------- -------------
$ 493,812 $ 393,929
============= =============
- ----------------------------------------------------------------------------------------------
8
5. Deposits
The Company's deposits as of the respective dates are summarized as
follows:
----------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) September 30, 2000 December 31, 1999
------------------------------------- -------------------------------------
Weighted Weighted
average average
Type of accounts rate Amount % rate Amount %
----------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits - $ 11,172 2.2% - $ 8,094 1.9%
Interest-bearing demand deposits 2.43% 179,982 35.5% 2.47% 166,448 38.5%
Time deposits 5.93% 315,376 62.3% 5.37% 257,241 59.6%
----------- ----------- ------------ -----------
4.65% $ 506,530 100.0% 4.23% $ 431,783 100.0%
=========== =========== ============ ===========
Time deposits mature as follows:
Within one year $ 192,539 38.0% $ 178,944 41.4%
After one year through two years 50,833 10.0% 40,709 9.4%
After two years through three years 56,529 11.2% 15,213 3.5%
Thereafter 15,475 3.1% 22,375 5.2%
----------- ----------- ------------ -----------
$ 315,376 62.3% $ 257,241 59.6%
=========== =========== ============ ===========
----------------------------------------------------------------------------------------------------------------
6. Borrowed Funds
The Company's borrowed funds as of the respective dates are summarized as
follows:
-------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) September 30, 2000 December 31, 1999
---------------------- -----------------------
Weighted Weighted
average average
rate Amount rate Amount
-------------------------------------------------------------------------------------------------------------
FHLB advances:
Due within 12 months 6.19% $ 118,361 6.17% $ 179,044
Due beyond 12 months but within 2 years 6.89% 53,801 5.46% 48,707
Due beyond 2 years but within 3 years 6.48% 147,780 6.09% 53,435
Due beyond 3 years but within 4 years 6.75% 41,655 5.89% 35,655
Due beyond 4 years but within 5 years 7.06% 468 8.31% 55
Due beyond 5 years 6.66% 3,990 7.05% 571
----------- ------------
366,055 317,467
Treasury tax and loan note payable 6.34% 160 5.20% 169
----------- ------------
$ 366,215 $ 317,636
=========== ============
Reverse repurchase agreements:
Due within 12 months 5.99% $ 98,561 5.55% $ 65,880
Due beyond 12 months but within 2 years 6.38% 54,040 5.82% 72,000
Due beyond 2 years but within 3 years 6.11% 40,600 6.05% 64,040
Due beyond 3 years but within 4 years 7.30% 11,000 -
----------- ------------
$ 204,201 $ 201,920
=========== ============
-------------------------------------------------------------------------------------------------------------
9
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.
The following table summarizes the Company's net income per share.
------------------------------------------------------------------------------------------------------------------
(Amounts, except earnings per share, in thousands)
------------------------------------------------------------------------------------------------------------------
Three Months Three Months
Ended Ended
September 30, 2000 September 30, 1999
----------------------- ------------------------
Net income $ 1,634 $ 1,421
Weighted-average common shares outstanding 5,739 5,451
----------------------- ------------------------
Basic earnings per share $ 0.28 $ 0.26
======================= ========================
Weighted-average common shares outstanding 5,739 5,451
Common stock equivalents due to effect of stock options 64 120
----------------------- ------------------------
Total weighted-average common shares and equivalents 5,803 5,571
Diluted earnings per share $ 0.28 $ 0.25
======================= ========================
Nine Months Nine Months
Ended Ended
September 30, 2000 September 30, 1999
----------------------- ------------------------
Net income $ 5,187 $ 4,330
Weighted-average common shares outstanding 5,722 5,496
----------------------- ------------------------
Basic earnings per share $ 0.91 $ 0.79
======================= ========================
Weighted-average common shares outstanding 5,722 5,496
Common stock equivalents due to effect of stock options 78 144
----------------------- ------------------------
Total weighted-average common shares and equivalents 5,800 5,640
Diluted earnings per share $ 0.89 $ 0.77
======================= ========================
--------------------------------------------------------------------------------------------------------------------
Options to purchase 73,729 shares of common stock at $10.61 per share,
66,966 shares of common stock at $16.36 per share, 85,198 shares of common
stock at $12.73 per share and 121,954 shares of common stock at $10.38 per
share were outstanding as of September 30, 2000 but were not included in
the computation of diluted earnings per share for the three and nine month
periods ended September 30, 2000 because the options' exercise price was
greater than the average market price of common shares. The options expire
on June 30, 2007, June 30, 2008, June 30, 2009 and June 30, 2010. Options
to purchase 68,293 shares of common stock at $16.36 per share and 86,465
shares of common stock at $12.73 per share were outstanding as of September
30, 1999 but were not included in the computation of diluted earnings per
share for the three and nine month periods ended September 30, 1999 because
the options' exercise price was greater than the average market price of
common shares. The options expire on June 30, 2008 and June 30, 2009,
respectively.
10
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 gain (loss) and related tax effects for the nine
months ended September 30 consists of:
----------------------------------------------------------------------------------------
(In thousands) 2000 1999
----------------------------------------------------------------------------------------
Unrealized Reclassification Unrealized Reclassification
Gain Adjustment Loss Adjustment
---------- ---------------- ---------- ----------------
Before tax amount $ 3,691 $ 45 $ (6,775) $ (20)
Tax (expense) benefit (1,255) (15) 2,304 7
---------- --------------- ---------- ----------------
After tax amount $ 2,436 $ 30 $ (4,471) $ (13)
========== =============== ========== ================
----------------------------------------------------------------------------------------
For the nine months ended September 30, 2000, total comprehensive income
was $7.7 million and for the nine months ended September 30, 1999, total
comprehensive loss was $4.6 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 $140.1 million or 13.6% to
$1.2 billion at September 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. See note 2 to consolidated financial
statements. 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 $1.7 million, $31.9 million, $99.9 million, $1.0
million, $873,000, $1.9 million, $1.9 million, $298,000 and $639,000,
respectively. The increase in total assets reflects a corresponding increase in
total liabilities of $129.1 million or 13.1% and an increase in stockholders'
equity of $11.0 million or 22.0%. The increase in total liabilities was the
result of increases in deposits, borrowed funds and accrued expenses and other
liabilities of $74.7 million, $50.9 million, and $4.3 million, respectively.
Partially offsetting the increase was a decrease in advance payments by
borrowers for taxes and insurance of $818,000. 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, and a decrease in
accumulated other comprehensive loss of $2.5 million, offset by an increase in
treasury stock, unearned employee stock ownership plan ("ESOP") shares and a
decrease in retained earnings of $2.3 million, $530,000 and $2.6 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 $1.7 million or 13.4% to $14.5 million at September 30,
2000 from $12.8 million at December 31, 1999. The net increase between
September 30, 2000 and December 31, 1999 can be attributed primarily to the
acquisition.
Securities. The Company's securities portfolio increased by $31.9 million or
5.7% to $593.0 million at September 30, 2000 from $561.1 million at December 31,
1999. This net increase was primarily the result of the acquisition. During
the nine months ended September 30, 2000, the Company recorded purchases of
available for sale securities of $105.1 million, consisting of purchases of
mortgage-backed securities of $74.4 million, corporate bonds of $20.9 million,
municipal bonds of $9.6 million and equity securities of $200,000. Offsetting
the purchases of securities were sales of available for sale securities of $49.3
million, consisting of sales of municipal bonds of $5.8 million, corporate bonds
of $2.4 million, mortgage-backed securities of $40.7 million and equity
securities of $325,000, and repayments and maturities of securities of $51.3
million, during the nine months ended September 30, 2000.
Loans receivable. Net loans receivable increased $99.9 million or 25.4% to
$493.8 million at September 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 $93.4 million or 26.9% and other loans of $10.8 million or
15.9%, partially offset by increases in allowance for loan losses, deferred loan
fees and loans in process of $8,000, $435,000 and $3.9 million, respectively,
during the nine months ended September 30, 2000.
Non-performing assets. Non-performing assets include non-accrual loans and real
estate acquired through foreclosure. Non-performing assets amounted to $4.2
million or 0.35% and $4.4 million or 0.43% of total assets at September 30, 2000
and December 31, 1999, respectively.
Deposits. Total deposits increased $74.7 million or 17.3% to $506.5 million at
September 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 $3.1 million, $13.5 million and
$51.4 million, respectively, during the nine months ended September 30, 2000.
Borrowed funds. Borrowed funds increased $50.9 million or 9.8% to $570.4
million at September 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 $48.6 million or 15.3% and $2.3
million or 1.1%, respectively, during the nine months ended September 30, 2000.
12
Stockholders' equity. Stockholders' equity increased $11.0 million or 22.0% to
$60.8 million at September 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, and a decrease in
accumulated other comprehensive loss of $2.5 million. Offsetting the increases
was a decrease in retained earnings of $2.6 million and increases in treasury
stock and ESOP shares of $2.3 million and $530,000, respectively.
RESULTS OF OPERATIONS
General. The Company recorded net income of $1.6 million and $5.2 million for
the three and nine months ended September 30, 2000, respectively, as compared to
net income of $1.4 million and $4.3 million, respectively, for the same periods
in the prior year.
For the three months ended September 30, 2000, net income increased $213,000 or
15.0%. The increase can be attributable to increases in net interest income and
non interest income and a decrease in the provision for income taxes of
$625,000, $85,000 and $101,000, respectively, offset by an increase in the
provision for loan losses and noninterest expense of $8,000 and $590,000,
respectively.
The $857,000 or 19.8% increase in net income for the nine months ended September
30, 2000, as compared to the nine months ended September 30, 1999, was
attributable to an increase in net interest income of $2.5 million and a
decrease in the provision for loan losses of $323,000. Partially offsetting
this increase was an increase in noninterest expense and the provision for
income taxes of $1.6 million and $254,000, respectively, and a decrease in
noninterest income of $44,000.
Net interest income. Net interest income increased $625,000 or 15.0% to $4.8
million for the three months ended September 30, 2000, compared to $4.2 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 $3.5 million offset by an
increase in interest expense of $2.9 million.
Net interest income increased $2.5 million or 20.4% to $14.5 million for the
nine months ended September 30, 2000, compared to $12.0 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 $10.1 million offset by an
increase in interest expense of $7.6 million.
Interest income. Interest income increased $3.5 million or 21.3% to $19.9
million for the three months ended September 30, 2000, compared to $16.4 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, $1.1 million, $38,000 and $26,000,
respectively.
Interest earned on loans receivable increased $2.3 million or 32.6% to $9.5
million for the three months ended September 30, 2000, compared to $7.2 million
for the same period in the prior year. This increase was primarily attributable
to an increase in the average balance of loans outstanding of $116.1 million or
30.7% to $494.6 million for the three months ended September 30, 2000, compared
to $378.5 million for the same period in the prior year. Additionally, the
yield on loans receivable increased to 7.67% for the three months ended
September 30, 2000, compared to 7.57% 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 $1.1 million or 11.5% to $10.6 million for
the three months ended September 30, 2000, compared to $8.9 million for the same
period in the prior year. This increase was primarily attributable to an
increase in the tax equivalent yield on securities from 7.27% for the three
months ended September 30, 2000 from 6.77% for the same period in the prior
year. Additionally, the average balance of securities held increased $22.1
million or 3.9% to $585.8 million for the three months ended September 30, 2000,
compared to $563.7 million for the same period in the prior year.
13
Interest income increased $10.1 million or 21.1% to $57.9 million for the nine
months ended September 30, 2000, compared to $47.8 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 $6.1 million, $3.6 million, $98,000 and $66,000, respectively.
Interest earned on loans receivable increased $6.1 million or 28.8% to $27.2
million for the nine months ended September 30, 2000, compared to $21.1 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 $99.4 million or
26.9% to $469.8 million for the nine months ended September 30, 2000, compared
to $370.4 million for the same period in the prior year. Additionally, the
yield on loans receivable increased to 7.71% for the nine months ended September
30, 2000, compared to 7.59% 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 $3.6 million or 13.2% to $31.3 million for
the nine months ended September 30, 2000, compared to $27.7 million for the same
period in the prior year. This increase was primarily attributable to an
increase in the tax equivalent yield on securities from 7.18% for the nine
months ended September 30, 2000 from 6.61% for the same period in the prior
year. Additionally, the average balance of securities held increased $23.7
million or 4.2% to $581.5 million for the nine months ended September 30, 2000,
compared to $557.8 million for the same period in the prior year.
Interest expense. Interest expense increased $2.9 million or 23.4% to $15.1
million for the three months ended September 30, 2000, compared to $12.3 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
$1.4 million and $1.5 million, respectively.
Interest incurred on deposits increased $1.4 million or 31.4% to $5.7 million
for the three months ended September 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 $77.4 million or
18.6% to $494.2 million for the three months ended September 30, 2000, compared
to $416.8 million for the same period in the prior year. Additionally, the cost
of interest-bearing deposits between the periods increased to 4.58% from 4.12%
for the quarters ended September 30, 2000 and 1999, respectively.
Interest incurred on borrowed funds increased $1.5 million or 20.5% to $8.9
million for the three months ended September 30, 2000, compared to $7.4 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 $66.5 million or
13.4% to $560.7 million for the three months ended September 30, 2000, compared
to $494.3 million for the same period in the prior year. Additionally, the cost
of these funds increased to 6.31% for the three months ended September 30, 2000,
compared to 5.92% for the same period in the prior year.
Interest expense increased $7.6 million or 21.3% to $43.3 million for the nine
months ended September 30, 2000, compared to $35.7 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 $2.9 million
and $4.7 million, respectively.
Interest incurred on deposits increased $2.9 million or 22.6% to $15.9 million
for the nine months ended September 30, 2000, compared to $13.0 million for the
same period in the prior year. This increase was primarily attributable to an
increase in the average balance of interest-bearing deposits of $64.0 million or
15.4% to $480.4 million for the nine months ended September 30, 2000, compared
to $416.4 million for the same period in the prior year. The cost of interest-
bearing deposits increased between the periods to 4.44% from 4.18% for the nine
months ended September 30, 2000 and 1999, respectively.
Interest incurred on borrowed funds increased $4.7 million or 22.2% to $25.7
million for the nine months ended September 30, 2000, compared to $21.1 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 $74.2 million or
15.6% to $549.5 million for the nine months ended September 30, 2000, compared
to $475.3 million for the same period in the prior year. Additionally, the cost
of these funds increased to 6.25% for the nine months ended September 30, 2000,
compared to 5.93% for the same period in the prior year.
14
Provision for loan losses. The provision for loan losses increased $8,000 to
$11,000 for the three months ended September 30, 2000, compared to $3,000 for
the same period in the prior year. The provision for loan losses decreased
$323,000, reflecting a recovery of loan losses of $314,000 for the nine months
ended September 30, 2000, compared to a provision of $9,000 for the same period
in the prior year. The $323,000 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, $128,000 and $10,000 provisions recorded for the first,
second and third quarters, respectively. In determining the appropriate level
of allowance for loan losses, management considers historical loss experience,
the financial condition of borrowers, economic conditions (particularly as they
relate to markets where the Company originates loans), the status of non-
performing assets, the estimated underlying value of the collateral and other
factors related to the collectability of the loan portfolio. The Company's
total allowance for losses on loans at September 30, 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 221.5% and 111.3% at September
30, 2000 and December 31, 1999, respectively.
Noninterest income. Noninterest income increased $85,000 or 13.6% to $710,000
for the three months ended September 30, 2000, compared to $625,000 for the same
period in the prior year. This increase can be attributed to an increase in
fees and service charges, the cash surrender value of the bank owned life
insurance ("BOLI") and other income of $60,000, $30,000 and $13,000,
respectively, offset by an increase in the loss on sale of securities of
$18,000. Noninterest income decreased $44,000 or 2.0% to $2.2 million for the
nine months ended September 30, 2000, compared to $2.2 million for the same
period in the prior year. This decrease can be attributed to a decrease in net
gains on security sales of $434,000, offset by increases in fees and service
charges, the cash surrender value of the BOLI and other income of $127,000,
$69,000 and $194,000, respectively, between periods.
Noninterest expense. Noninterest expense increased $590,000 or 19.1% to $3.7
million for the three months ended September 30, 2000, from $3.1 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, data
processing and other expenses of $198,000, $118,000, $54,000 and $266,000,
respectively, offset by a decrease in federal deposit insurance premiums of
$46,000. 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
September 30, 2000 as compared to the same period last year. Noninterest
expense increased $1.6 million or 17.9% to $10.7 million for the nine months
ended September 30, 2000, from $9.0 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, data processing and other expenses of
$944,000, $331,000, $91,000 and $375,000, respectively, offset by a decrease in
federal deposit insurance premiums of $120,000. 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 eight of the nine months ended September 30, 2000,
as compared to the same period last year.
Provision for income taxes. The provision for income taxes decreased $101,000
or 35.1% for the three months ended September 30, 2000 and increased $254,000 or
28.7% to $1.1 million for the nine months ended September 30, 2000, compared to
$288,000 and $885,000, respectively, for the prior year periods. The increase
in the provision for income taxes for the nine months ended September 30, 2000
is attributable to an increase in pre-tax income of $1.1 million.
15
Average Balance Sheet and Yield/Rate Analysis. The following tables sets forth,
for periods indicated, information concerning the total dollar amounts of
interest income from interest-earning assets and the resultant average yields,
the total dollar amounts of interest expense on interest-bearing liabilities and
the resultant average costs, net interest income, interest rate spread and the
net interest margin earned on average interest-earning assets. For purposes of
these tables, average balances are calculated using monthly averages and the
average loan balances include non-accrual loans and exclude the allowance for
loan losses, and interest income includes accretion of net deferred loan fees.
Interest and yields on tax-exempt securities (tax-exempt for federal income tax
purposes) are shown on a fully tax equivalent basis utilizing a federal tax rate
of 34%. Yields and rates have been calculated on an annualized basis utilizing
monthly interest amounts.
- ---------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Three months ended September 30,
2000 1999
------------------------------------ -------------------------------------
Average Yield / Average Yield /
Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
- -----------------------
Taxable securities available for sale $ 497,443 $ 8,771 7.05% $ 472,563 $ 7,648 6.47%
Tax-exempt securities available for sale 88,320 1,870 8.47% 91,094 1,895 8.32%
----------- --------- ------ ----------- -------- ------
585,763 10,641 7.27% 563,657 9,543 6.77%
----------- --------- ------ ----------- -------- ------
Mortgage loans 415,396 8,017 7.72% 310,069 5,832 7.52%
Other loans 79,233 1,472 7.43% 68,405 1,327 7.76%
----------- --------- ------ ----------- -------- ------
494,629 9,489 7.67% 378,474 7,159 7.57%
----------- --------- ------ ----------- -------- ------
Cash equivalents 9,224 99 4.29% 8,658 73 3.37%
FHLB stock 19,308 352 7.29% 18,435 314 6.81%
----------- --------- ------ ----------- -------- ------
28,532 451 6.32% 27,093 387 5.71%
----------- --------- ------ ----------- -------- ------
Total interest-earning assets 1,108,924 20,581 7.42% 969,224 17,089 7.05%
Other noninterest-earning assets 51,939 - - 41,298 - -
----------- --------- ------ ----------- -------- ------
Total assets $ 1,160,863 $ 20,581 7.09% $ 1,010,522 $ 17,089 6.76%
=========== ========= ====== =========== ======== ======
Interest-bearing liabilities:
- ----------------------------
Interest-bearing demand deposits $ 182,481 $ 1,123 2.45% $ 163,200 $ 981 2.38%
Time deposits 311,728 4,569 5.83% 253,615 3,350 5.24%
----------- --------- ------ ----------- -------- ------
494,209 5,692 4.58% 416,815 4,331 4.12%
----------- --------- ------ ----------- -------- ------
FHLB advances 334,090 5,216 6.21% 312,294 4,873 6.19%
Reverse repo's & other borrowings 226,629 3,678 6.46% 181,966 2,507 5.47%
----------- --------- ------ ----------- -------- ------
560,719 8,894 6.31% 494,260 7,380 5.92%
----------- --------- ------ ----------- -------- ------
Trust preferred securities 24,099 557 9.19% 24,055 557 9.19%
----------- --------- ------ ----------- -------- ------
Total interest-bearing liabilities 1,079,027 15,143 5.58% 935,130 12,268 5.20%
Noninterest-bearing demand deposits 14,640 - - 12,494 - -
Other noninterest-bearing liabilities 9,036 - - 7,588 - -
----------- --------- ------ ----------- -------- ------
Total liabilities 1,102,703 15,143 5.46% 955,212 12,268 5.10%
Stockholders' equity 58,160 - - 55,310 - -
----------- --------- ------ ----------- -------- ------
Total liabilities and equity $ 1,160,863 $ 15,143 5.19% $ 1,010,522 $ 12,268 4.82%
=========== ========= ====== =========== ======== ======
Net interest income $ 5,438 $ 4,821
========= ========
Interest rate spread (difference between 1.84% 1.85%
====== ======
weighted average rate on interest-earning
assets and interest-bearing
liabilities)
Net interest margin (net interest 1.96% 1.99%
====== ======
income as a percentage of average
interest-earning assets)
- ---------------------------------------------------------------------------------------------------------------------------
16
- ----------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Nine months ended September 30,
2000 1999
-------------------------------------- -------------------------------------
Average Yield / Average Yield /
Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
- ------------------------
Taxable securities available for sale $ 495,129 $ 25,778 6.94% $ 426,964 $ 20,374 6.36%
Tax exempt securities available for sale 86,374 5,523 8.53% 94,828 5,812 8.17%
Taxable securities held to maturity - - - 31,131 1,210 5.18%
Tax-exempt securities held to maturity - - - 4,886 266 7.26%
------------ ------------ ------- --------- --------- ------
581,503 31,301 7.18% 557,809 27,662 6.61%
------------ ------------ ------- --------- --------- ------
Mortgage loans 395,060 22,961 7.75% 301,028 17,123 7.58%
Other loans 74,746 4,201 7.49% 69,333 3,961 7.62%
------------ ------------ ------- --------- --------- ------
469,806 27,162 7.71% 370,361 21,084 7.59%
------------ ------------ ------- --------- --------- ------
Cash equivalents 10,221 266 3.47% 8,553 200 3.12%
FHLB stock 19,163 1,006 7.00% 18,435 908 6.57%
------------ ------------ ------- --------- --------- ------
29,384 1,272 5.77% 26,988 1,108 5.47%
------------ ------------ ------- --------- --------- ------
Total interest-earning assets 1,080,693 59,735 7.37% 955,158 49,854 6.96%
Other noninterest-earning 50,349 - - 38,361 - -
------------ ------------ ------- --------- --------- ------
Total assets $ 1,131,042 $ 59,735 7.04% $ 993,519 $ 49,854 6.69%
============ ============ ======= ========= ========= ======
Interest-bearing liabilities:
- -----------------------------
Interest-bearing demand deposits $ 182,798 $ 3,376 2.47% $ 161,294 $ 2,857 2.37%
Time deposits 297,569 12,582 5.65% 255,071 10,155 5.32%
------------ ------------ ------- --------- --------- ------
480,367 15,958 4.44% 416,365 13,012 4.18%
------------ ------------ ------- --------- --------- ------
FHLB advances 322,513 15,343 6.34% 321,432 14,690 6.11%
Reverse repo's & other borrowings 226,997 10,387 6.10% 153,823 6,372 5.54%
------------ ------------ ------- --------- --------- ------
549,510 25,730 6.25% 475,255 21,062 5.93%
------------ ------------ ------- --------- --------- ------
Trust preferred securities 24,088 1,670 9.26% 24,044 1,670 9.29%
------------ ------------ ------- --------- --------- ------
Total interest-bearing liabilities 1,053,965 43,358 5.50% 915,664 35,744 5.22%
Noninterest-bearing demand deposits 13,469 - - 11,459 - -
Other noninterest-bearing liabilities 7,998 - - 6,797 - -
------------ ------------ ------- --------- --------- ------
Total liabilities 1,075,432 43,358 5.39% 933,920 35,744 5.12%
Stockholders' equity 55,610 - - 59,599 - -
------------ ------------ ------- --------- --------- ------
Total liabilities and equity $ 1,131,042 $ 43,358 5.12% $ 993,519 $ 35,744 4.81%
============ ============ ======= ========= ========= ======
Net interest income $ 16,377 $ 14,110
============ =========
Interest rate spread (difference between
weighted average rate on interest-earning
assets and interest-bearing liabilities) 1.87% 1.74%
====== ======
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 2.02% 1.97%
======= ======
- --------------------------------------------------------------------------------
Analysis of Changes in Net Interest Income. The following tables analyze the
changes in interest income and interest expense, between the three and nine
month period ended September 30, 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
17
allocated on a consistent basis between the volume and rate variances. Changes
in interest income on securities reflects the changes in interest income on a
fully tax equivalent basis.
The table analyzing changes in interest income between the three months ended
September 30, 2000 and 1999 is presented as follows:
- ------------------------------------------------------------------------
(In thousands) 2000 versus 1999
Increase (decrease) due to
--------------------------
Volume Rate Total
- -------------------------------------------------------------------------
Interest income:
Securities $ 384 $ 741 $ 1,098
Loans 2,227 103 2,330
Cash equivalents 5 21 26
FHLB stock 15 23 38
-------- ------- -------
Total interest-earning assets 2,631 861 3,492
-------- ------- -------
Interest expense:
Deposits 859 502 1,361
FHLB advances 340 3 343
Reverse repurchases & other borrowings 679 492 1,171
Trust preferred securities 1 (1) -
-------- ------- -------
Total interest-bearing liabilities 1,879 996 2,875
-------- ------- -------
Net interest income $ 752 $ (135) $ 617
======== ======= =======
- -------------------------------------------------------------------------
The table analyzing changes in interest income between the nine months ended
September 30, 2000 and 1999 is presented as follows:
- -------------------------------------------------------------------------
(In thousands) 2000 versus 1999
Increase (decrease) due to
--------------------------
Volume Rate Total
- -------------------------------------------------------------------------
Interest income:
Securities $ 1,208 $ 2,431 $ 3,639
Loans 5,745 333 6,078
Cash equivalents 42 24 66
FHLB stock 37 61 98
-------- ------- -------
Total interest-earning assets 7,032 2,849 9,881
-------- ------- -------
Interest expense:
Deposits 2,090 856 2,946
FHLB advances 50 603 653
Reverse repurchases & other borrowings 3,291 724 4,015
Trust preferred securities 3 (3) -
-------- ------- -------
Total interest-bearing liabilities 5,434 2,180 7,614
-------- ------- -------
Net interest income $ 1,598 $ 669 $ 2,267
======== ======= =======
- -------------------------------------------------------------------------
18
ASSET AND LIABILITY MANAGEMENT
The primary objective of the Company's asset and liability management function
is to maximize the Company's net interest income while simultaneously
maintaining an acceptable level of interest rate risk given the Company's
operating environment, capital and liquidity requirements, performance
objectives and overall business focus. The principal determinant of the
exposure of the Company's earnings to interest rate risk is the timing
difference between the repricing or maturity of interest-earning assets and the
repricing or maturity of its interest-bearing liabilities. The Company's asset
and liability management policies are designed to decrease interest rate
sensitivity primarily by shortening the maturities of interest-earning assets
while at the same time extending the maturities of interest-bearing liabilities.
The Board of Directors of the Company continues to believe in strong
asset/liability management in order to insulate the Company from material and
prolonged increases in interest rates. As a result of this policy, the Company
emphasizes a larger, more diversified portfolio of residential mortgage loans in
the form of mortgage-backed securities. Mortgage-backed securities generally
increase the quality of the Company's assets by virtue of the insurance or
guarantees that back them, are more liquid than individual mortgage loans and
may be used to collateralize borrowings or other obligations of the Company.
The Company's Board of Directors has established an Asset and Liability
Management Committee consisting of two outside directors, the President and
Chief Executive Officer, Group Senior Vice President and Chief Financial
Officer, Group Senior Vice President/Operations 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 September 30, 2000, the implementation of these asset and liability
initiatives resulted in the following: (i) $214.2 million or 41.2% of the
Company's total loan portfolio had adjustable interest rates or maturities of 12
months or less; (ii) $148.1 million or 40.3% of the Company's portfolio of
single-family residential mortgage loans (including residential construction
loans) consisted of ARMs; (iii) $144.2 million or 35.2% of the Company's
portfolio of mortgage-backed securities were secured by ARMs and (iv) the
Company had $20.0 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 September 30, 2000, the
Company's interest-earning assets maturing or repricing within one year totaled
$446.7 million while the Company's interest-bearing liabilities maturing or
repricing within one-year totaled $481.6 million, providing a deficiency of
interest-earning assets over interest-bearing liabilities of $34.9 million or a
negative 3.0% of total assets. At September 30, 2000, the percentage of the
Company's assets to liabilities maturing or repricing within one year was 92.8%.
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.
19
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 September 30, 2000, the Company's simulation model
indicated that the Company's statement of financial condition is liability
sensitive. The Company's $20.0 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 5.5% over such 24 month period.
20
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 September 30, 2000, the Bank's liquidity ratio was 15.9%.
The Company's primary sources of funds generally have been deposits obtained
through the offices of the Bank, borrowings from the FHLB, reverse repurchase
agreement borrowings and amortization and prepayments of outstanding loans and
maturing investment securities. During the nine months ended September 30,
2000, the Company used its sources of funds primarily for the funding of loan
commitments, and to a lesser extent to purchase securities. As of such date, the
Company had outstanding loan commitments totaling $14.6 million, unused lines of
credit totaling $25.0 million and $15.0 million of undisbursed loans in process.
At September 30, 2000, certificates of deposit amounted to $315.4 million or
62.3% of the Company's total consolidated deposits, including $192.5 million
which were scheduled to mature by September 30, 2001. At the same date, the
total amount of borrowed funds which were scheduled to mature by September 30,
2001 was $216.9 million. Management of the Company believes that it has
adequate resources to fund all of its commitments, that all of its commitments
will be funded by September 30, 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 and reverse
repurchase agreements.
REGULATORY CAPITAL REQUIREMENTS
Current regulatory requirements specify that the Bank and similar institutions
must maintain tangible capital equal to 1.5% of adjusted total assets, core
capital equal to 4% of adjusted total assets and risk-based capital equal to 8%
of risk-weighted assets. The OTS may require higher core capital ratios if
warranted, and institutions are to maintain capital levels consistent with their
risk exposures. Both the FDIC and the OTS reserve the right to apply this
higher standard to any insured financial institution when considering an
institution's capital adequacy. At September 30, 2000, the Bank was in
compliance with all regulatory capital requirements with tangible, core and
risk-based capital ratios of 6.9%, 6.9% and 16.6%, 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
adoption of the statement is not expected to have a material impact on the
Company's consolidated financial statements.
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.
21
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.
22
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
- --------------------------
The Company and its subsidiaries are involved in various legal proceedings
occurring in the ordinary course of business. It is the opinion of management,
after consultation with legal counsel, that these matters will not materially
affect the Company's consolidated financial position or results of operations.
Item 2. Changes in Securities
- ------------------------------
None.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
Item 5. Other Information
- --------------------------
None
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibit 27 - Financial Data Schedule
(b) Form 8-K - The Company filed a Form 8-K dated September 20, 2000 to report
a quarterly cash dividend of $.10 payable on October 25, 2000 to the
stockholders of record at the close of business on September 29, 2000.
23
Signatures
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ESB FINANCIAL CORPORATION
Date: November 13, 2000 By: /s/ Charlotte A. Zuschlag
------------------------------------
Charlotte A. Zuschlag
President and Chief Executive Officer
Date: November 13, 2000 By: /s/ Charles P. Evanoski
------------------------------------
Charles P. Evanoski
Group Senior Vice President and
Chief Financial Officer
24