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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: March 31, 2001
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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
incorporation or organization) Identification No.)
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 March 31, 2001:
Common Stock, $0.01 par value 5,943,347 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 March 31, 2001 (Unaudited) and December 31, 2000.... 1
Consolidated Statements of Operations for the three
months ended March 31, 2001 and 2000 (Unaudited).......... 2
Consolidated Statements of Changes in Stockholders' Equity
for the three months ended March 31, 2001 (Unaudited)..... 3
Consolidated Statements of Cash Flows for the three
months ended March 31, 2001 and 2000 (Unaudited).......... 4
Notes to Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.......... 11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk............................................... 17
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings......................................... 18
Item 2. Changes in Securities..................................... 18
Item 3. Defaults Upon Senior Securities........................... 18
Item 4. Submission of Matters to a Vote of Security Holders....... 18
Item 5. Other Information......................................... 18
Item 6. Exhibits and Reports on Form 8-K.......................... 18
Signatures................................................ 19
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
- -----------------------------
ESB Financial Corporation and Subsidiaries
Consolidated Statements of Financial Condition
As of March 31, 2001 (Unaudited) and December 31, 2000
(Dollar amounts in thousands)
March 31, December 31,
2001 2000
(Unaudited)
--------------- ---------------
Assets
------
Cash on hand and in banks $ 3,035 $ 4,428
Interest-earning deposits 8,374 8,262
Federal funds sold 2,499 636
Securities available for sale; amortized cost of $598,646 and $609,552 601,921 605,414
Loans receivable, net of allowance for loan losses of $4,989 and $4,981 522,925 512,228
Accrued interest receivable 8,155 8,220
Federal Home Loan Bank (FHLB) stock 19,944 19,899
Premises and equipment, net 8,836 8,978
Real estate acquired through foreclosure, net 1,509 1,817
Prepaid expenses and other assets 11,542 13,627
Bank owned life insurance 20,363 16,641
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Total assets $ 1,209,103 $ 1,200,150
=============== ===============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits $ 520,198 $ 508,913
Borrowed funds 397,575 396,817
Reverse repurchase agreements 181,640 191,272
Guaranteed preferred beneficial interest in subordinated debt, net 24,126 24,115
Advance payments by borrowers for taxes and insurance 4,460 4,640
Accrued expenses and other liabilities 7,279 6,130
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Total liabilities 1,135,278 1,131,887
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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 7,490,803 shares issued;
5,943,347 and 6,009,291 shares outstanding 75 75
Additional paid-in capital 73,660 73,669
Treasury stock, at cost; 1,547,456 and 1,481,512 shares (22,572) (21,915)
Unearned Employee Stock Ownership Plan (ESOP) shares (3,351) (3,456)
Unvested shares held by Management Recognition Plan (MRP) (237) (237)
Retained earnings 24,088 22,858
Accumulated other comprehensive income (loss), net 2,162 (2,731)
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Total stockholders' equity 73,825 68,263
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Total liabilities and stockholders' equity $ 1,209,103 $ 1,200,150
=============== ===============
See accompanying notes to consolidated financial statements.
1
ESB Financial Corporation and Subsidiaries
Consolidated Statements of Operations
For the three months ended March 31, 2001 and 2000 (Unaudited)
(Dollar amounts in thousands, except share data)
Three Months Ended
March 31,
--------------------------------
2001 2000
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Interest income:
Loans receivable $ 10,028 $ 8,395
Securities available for sale 9,969 9,590
FHLB stock 354 318
Deposits with banks and federal funds sold 81 84
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Total interest income 20,432 18,387
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Interest expense:
Deposits 5,882 4,976
Borrowed funds and reverse repurchase agreements 8,959 8,122
Guaranteed preferred beneficial interest in subordinated debt 557 557
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Total interest expense 15,398 13,655
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Net interest income 5,034 4,732
Provision for (recovery of) loan losses 6 (452)
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Net interest income after provision for (recovery of) loan losses 5,028 5,184
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Noninterest income:
Fees and service charges 423 334
Net realized gain on sales of securities available for sale 3 4
Increase of cash surrender value of bank owned life insurance 222 202
Other 125 125
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Total noninterest income 773 665
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Noninterest expense:
Compensation and employee benefits 2,057 1,950
Premises and equipment 564 452
Federal deposit insurance premiums 26 26
Data processing 120 162
Other 865 758
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Total noninterest expense 3,632 3,348
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Income before provision for income taxes 2,169 2,501
Provision for income taxes 343 578
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Net income $ 1,826 $ 1,923
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Net income per share:
Basic $0.27 $0.28
Diluted $0.27 $0.28
Net income per share has been restated to reflect a six-for-five stock split
See accompanying notes to consolidated financial statements.
2
ESB Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the three months ended March 31, 2001 (Unaudited)
(Dollar amounts in thousands)
Accumulated
other
Additional Unearned Unvested comprehensive Total
Common paid-in Treasury ESOP MRP Retained income (loss) stockholders'
stock capital stock shares shares earnings net of tax equity
------ ---------- ---------- --------- -------- --------- ------------- ------------
Balance at December 31, 2000 $ 75 $ 73,669 $ (21,915) $ (3,456) $ (237) $ 22,858 $ (2,731) $ 68,263
Comprehensive results:
Net income - - - - - 1,826 - 1,826
Other comprehensive results, net - - - - - - 4,924 4,924
Reclassification adjustment - - - - - - (31) (31)
------ ---------- ---------- --------- -------- --------- ------------- ------------
Total comprehensive results - - - - - 1,826 4,893 6,719
Cash dividends at $0.10 per share - - - - - (564) - (564)
Purchase of treasury stock, at
cost (73,399 shares) - - (754) - - - - (754)
Reissuance of treasury stock
for stock option exercises - - 97 - - (32) - 65
Principal payments on ESOP debt - (9) - 149 - - - 140
Additional ESOP shares purchased - - - (44) - - - (44)
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Balance at March 31, 2001 $ 75 $ 73,660 $ (22,572) $ (3,351) $ (237) $ 24,088 $ 2,162 $ 73,825
====== ========== ========== ========= ======== ========= ============= ============
See accompanying notes to consolidated financial statements.
3
ESB Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the three months ended March 31, 2001 and 2000 (Unaudited)
(Dollar amounts in thousands)
Three Months Ended
March 31,
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2001 2000
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Operating activities:
Net income $ 1,826 $ 1,923
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization for premises and equipment 210 175
Provision for (recovery of) losses 7 (451)
Amortization of premiums and accretion of discounts (253) 16
Origination of loans available for sale (3,525) (297)
Proceeds from sale of loans available for sale 3,536 302
Net gain on sale of securities available for sale (3) (4)
Amortization of intangible assets 186 174
Compensation expense on ESOP 140 153
Decrease in accrued interest receivable 65 131
(Increase) decrease in prepaid expenses and other assets (622) 961
Increase in accrued expenses and other liabilities 1,149 2,032
Other (371) (441)
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Net cash provided by operating activities 2,345 4,674
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Investing activities:
Loan originations and purchases (33,179) (35,622)
Purchases of securities available for sale (33,048) (48,673)
Purchases of FHLB stock (45) (246)
Additions to premises and equipment (71) (116)
Purchase of bank owned life insurance (3,500) -
Principal repayments of loans receivable 22,440 19,197
Principal repayments of securities available for sale 20,688 16,352
Proceeds from the sale of securities available for sale 23,558 31,076
Proceeds from sale of REO 317 -
Payment for purchase of SHS Bancorp, Inc. (SHS), net of cash acquired - (3,082)
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Net cash used in investing activities (2,840) (21,114)
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Financing activities:
Net increase (decrease) in deposits 11,285 (915)
Proceeds from long-term borrowings 24,522 51,600
Repayments of long-term borrowings (25,000) (75,617)
Net (decrease) increase in short-term borrowings (8,396) 46,459
Proceeds received from exercise of stock options 65 33
Dividends paid (601) (461)
Payments to acquire treasury stock (754) (1,523)
Stock purchased by ESOP (44) -
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Net cash provided by financing activities 1,077 19,576
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Net increase in cash equivalents 582 3,136
Cash equivalents at beginning of period 13,326 12,761
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Cash equivalents at end of period $ 13,908 $ 15,897
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Continued
4
ESB Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows, (Continued)
For the three months ended March 31, 2001 and 2000 (Unaudited)
(Dollar amounts in thousands)
Three Months Ended
March 31,
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2001 2000
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Supplemental information:
Interest paid $ 16,307 $ 14,830
Income taxes paid 375 385
Supplemental schedule of non-cash investing and financing activities:
Transfers from loans receivable to real estate acquired
through foreclosure - 19
Dividends declared but not paid 594 505
The Company purchased all of the common stock of SHS for $14.5
million. In conjunction 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
common stock - (8,071)
Cash paid for SHS common stock - (6,448)
Liabilities assumed - (79,116)
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Excess liabilities assumed over assets acquired $ - $ (2,085)
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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 Bank) (the
Bank), and its other subsidiaries, PennFirst Financial Services, Inc.,
PennFirst Capital Trust I, THF, Inc., ESB Financial Services, Inc. (EFS),
and AMSCO, Inc.
The accompanying unaudited consolidated financial statements for the
interim periods include all adjustments, consisting only of normal
recurring accruals, which are necessary, in the opinion of management, to
fairly reflect the Company's financial position and results of operations.
Additionally, these consolidated financial statements for the interim
periods have been prepared in accordance with instructions for the
Securities and Exchange Commission's Form 10-Q and therefore do not include
all information or footnotes necessary for a complete presentation of
financial condition, results of operations and cash flows in conformity
with generally accepted accounting principles. For further information,
refer to the audited consolidated financial statements and footnotes
thereto for the year ended December 31, 2000, as contained in the 2000
Annual Report to Stockholders.
The results of operations for the three month period ended March 31, 2001
are not necessarily indicative of the results that may be expected for the
entire year. Certain amounts previously reported have been reclassified to
conform to the current year's reporting format.
2. Subsequent Event
On April 17, 2001, the Board of Directors declared a six-for-five stock
split to stockholders of record on May 18, 2001 and payable on May 30,
2001. All share and related price and dividend amounts discussed herein
have been adjusted to reflect this stock split where applicable.
3. Operating Segments
An operating segment is defined as a component of an enterprise that
engages in business activities that generate revenue and incur expense, and
the operating results of which are reviewed by management. ESB's business
activities are currently confined to one operating segment which is
community banking.
4. Derivative Instruments and Hedging Activities.
In June 1998, the Financial Accounting Standards Board (FASB) issued 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 the 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
on or after 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 delayed the effective date of SFAS No. 133 to the
first quarter of fiscal years beginning after June 15, 2000. The Company
adopted this statement during the quarter with no material affect on the
Company's financial position or results of operations.
6
5. 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
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Available for sale:
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As of March 31, 2001:
Trust Preferred securities $ 2,000 $ - $ (153) $ 1,847
U.S. Government securities 16,994 422 - 17,416
Municipal securities 88,339 1,631 (217) 89,753
Equity securities 3,112 165 (353) 2,924
Corporate Bonds 91,347 1,345 (3,745) 88,947
Mortgage-backed securities 396,854 4,615 (435) 401,034
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$ 598,646 $ 8,178 $ (4,903) $ 601,921
============ ============ =========== ============
As of December 31, 2000:
Trust Preferred securities $ 2,000 $ - $ (287) $ 1,713
U.S. Government securities 19,983 175 (28) 20,130
Municipal securities 93,577 1,132 (844) 93,865
Equity securities 2,878 236 (580) 2,534
Corporate Bonds 77,931 771 (4,144) 74,558
Mortgage-backed securities 413,183 2,272 (2,841) 412,614
------------ ------------ ----------- ------------
$ 609,552 $ 4,586 $ (8,724) $ 605,414
============ ============ =========== ============
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6. Loans Receivable
The Company's loans receivable as of the respective dates are summarized as
follows:
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March 31, December 31,
(In thousands) 2001 2000
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Mortgage loans:
Residential - single family $ 336,938 $ 334,201
Residential - multi family 27,444 26,998
Commercial real estate 50,033 48,633
Construction 52,074 51,523
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466,489 461,355
Other loans:
Consumer loans 67,764 68,099
Commercial business 14,984 10,692
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549,237 540,146
Less:
Allowance for loan losses 4,989 4,981
Deferred loan fees and net discounts 1,350 1,380
Loans in process 19,973 21,557
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$ 522,925 $ 512,228
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7
7. Deposits
The Company's deposits as of the respective dates are summarized as
follows:
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(Dollar amounts in thousands) March 31, 2001 December 31, 2000
-------------------------- --------------------------
Type of accounts Amount % Amount %
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Noninterest-bearing deposits $ 11,542 2.2% $ 9,620 1.9%
NOW account deposits 41,012 7.9% 41,549 8.2%
Money Market deposits 64,576 12.4% 65,467 12.8%
Passbook account deposits 73,171 14.1% 72,248 14.2%
Time deposits 329,897 63.4% 320,029 62.9%
------------ ------------ ------------ ------------
$ 520,198 100.0% $ 508,913 100.0%
============ ============ ============ ============
Time deposits mature as follows:
Within one year $ 180,860 34.8% $ 177,471 34.9%
After one year through two years 97,471 18.7% 80,647 15.8%
After two years through three years 39,695 7.6% 48,210 9.5%
Thereafter 11,871 2.3% 13,701 2.7%
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$ 329,897 63.4% $ 320,029 62.9%
============ ============ ============ ============
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8
8. Borrowed Funds
The Company's borrowed funds as of the respective dates are summarized as
follows:
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(Dollar amounts in thousands) March 31, 2001 December 31, 2000
----------------------- -----------------------
Weighted Weighted
average rate Amount average rate Amount
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FHLB advances:
Due within 12 months 5.58% $ 87,972 6.00% $ 105,207
Due beyond 12 months but within 2 years 6.28% 146,537 6.65% 93,883
Due beyond 2 years but within 3 years 6.64% 117,699 6.62% 152,699
Due beyond 3 years but within 4 years 6.39% 27,055 6.48% 27,055
Due beyond 4 years but within 5 years 6.30% 14,407 6.42% 13,885
Due beyond 5 years 6.57% 3,842 6.66% 3,917
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397,512 396,646
Treasury tax and loan note payable 5.13% 63 6.25% 171
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$ 397,575 $ 396,817
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Reverse repurchase agreements:
Due within 12 months 5.86% $ 106,000 6.02% $ 95,632
Due beyond 12 months but within 2 years 6.17% 64,640 6.17% 74,040
Due beyond 2 years but within 3 years 7.30% 11,000 6.96% 10,600
Due beyond 3 years but within 4 years - - 7.30% 11,000
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$ 181,640 $ 191,272
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9. Net Income Per Share
The following table summarizes the Company's net income per share.
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(Amounts, except earnings per share, in thousands)
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Three Months Three Months
Ended Ended
March 31, 2001 March 31, 2000
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Net income $ 1,826 $ 1,923
Weighted-average common shares outstanding 6,807 6,805
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Basic earnings per share $ 0.27 $ 0.28
================= ================
Weighted-average common shares outstanding 6,807 6,805
Common stock equivalents due to effect of stock options 83 118
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Total weighted-average common shares and equivalents 6,890 6,923
Diluted earnings per share $ 0.27 $ 0.28
================= ================
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Options to purchase 88,475 shares of common stock at $8.84 per share, 80,227
shares of common stock at $13.63 per share and 101,842 shares of common stock at
$10.61 per share were outstanding as of March 31, 2001 but were not included in
the computation of diluted earnings per share because the options' exercise
price was greater than the average market price of common shares. The options
expire on June 17, 2007, June 16, 2008 and June 15, 2009, respectively. Options
to purchase 81,952 shares of common stock at $13.63 per share and 103,759 shares
of common stock at $10.61 per share were outstanding as of March 31, 2000 but
were not included in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price of common
shares. The options expire on June 16, 2008 and June 15, 2009, respectively.
9
10. Other 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 income and related tax effects for
the three months ended March 31 consists of:
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(In thousands) 2001 2000
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Unrealized Reclassification Unrealized Reclassification
Gain Adjustment Gain Adjustment
-------------- ------------------ -------------- -----------------
Before tax amount $ 7,460 $ (47) $ 3,834 $ (99)
Tax (expense) benefit (2,536) 16 (1,304) 34
-------------- ------------------ -------------- -----------------
After tax amount $ 4,924 $ (31) $ 2,530 $ (65)
============== ================== ============== =================
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Total comprehensive income for the three months ended March 31, 2001 and
2000 was $6.7 million and $4.4 million, respectively.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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CHANGES IN FINANCIAL CONDITION
General. The Company's total assets increased by $9.0 million or 0.8% to $1.2
billion at March 31, 2001 from $1.2 billion at December 31, 2000. Cash and cash
equivalents, loans receivable, Federal Home Loan Bank stock and bank owned life
insurance increased $582,000, $10.7 million, $45,000 and $3.7 million,
respectively. These increases were partially offset by decreases in securities,
accrued interest receivable, premises and equipment, prepaid expenses and other
assets, and real estate acquired through foreclosure of $3.5 million, $65,000,
$142,000, $2.1 million and $308,000, respectively. The increase in total assets
reflects a corresponding increase in total liabilities and stockholders' equity
of $3.4 million or 0.3% and $5.6 million or 8.2%, respectively. The increase in
total liabilities was primarily the result of increases in deposits and accrued
expenses and other liabilities of $11.3 million and $1.1 million, respectively,
partially offset by decreases in borrowed funds and reverse repurchase
agreements and advance payments by borrowers for taxes and insurance of $8.9
million and $180,000, respectively. The increase in stockholders' equity was
the result of increases in retained earnings and accumulated other comprehensive
income of $1.2 million and $4.9 million, respectively, and a decrease in
unearned Employee Stock Ownership Plan (ESOP) shares of $105,000, offset by an
increase in treasury stock of $657,000.
Cash on hand, Interest-earning deposits and Federal funds sold. Cash on hand,
interest-earning deposits and federal funds sold represent cash equivalents.
Cash equivalents increased a combined $582,000 or 4.4% to $13.9 million at March
31, 2001 from $13.3 million at December 31, 2000. These accounts are typically
increased by deposits from customers into savings and checking accounts, loan
and security repayments and proceeds from borrowed funds. Decreases result from
customer withdrawals, new loan originations, security purchases and repayments
of borrowed funds.
Securities. The Company's securities portfolio decreased by $3.5 million or
0.6% to $601.9 million at March 31, 2001 from $605.4 million at December 31,
2000. During the quarter ended March 31, 2001, the Company recorded purchases
of available for sale securities of $33.0 million, consisting of purchases of
mortgage-backed securities of $17.2 million, corporate bonds of $13.4 million,
municipal bonds of $2.2 million and equity securities of $234,000. Offsetting
the purchases of securities were sales of available for sale securities of $23.6
million, consisting of sales of municipal bonds of $5.3 million, mortgage-backed
securities of $15.3 million, and agency bonds of $3.0 million and repayments and
maturities of securities of $20.7 million, during the three months ended March
31, 2001.
Loans receivable. Net loans receivable increased $10.7 million or 2.1% to
$522.9 million at March 31, 2001 from $512.2 million at December 31, 2000.
Included in this increase were increases in mortgage loans of $5.1 million or
1.1% and other loans of $4.0 million or 5.0%, and a decrease in loans in process
and deferred loan fees $1.6 million or 5.8%, during the three months ended
March 31, 2001.
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 0.34% and $4.4 million or 0.37% of total assets at March 31, 2001 and
December 31, 2000, respectively.
Deposits. Total deposits increased $11.3 million or 2.2% to $520.2 million at
March 31, 2001 from $508.9 million at December 31, 2000. Time deposits and
noninterest-bearing deposit accounts increased $9.9 million and $1.9 million,
respectively, during the three months ended March 31, 2001, while interest-
bearing demand deposit accounts decreased by $505,000 during the three months
ended March 31, 2001.
Borrowed funds and reverse repurchase agreements. Borrowed funds and reverse
repurchase agreements decreased $8.9 million or 1.5% to $579.2 million at March
31, 2001 from $588.1 million at December 31, 2000. FHLB advances increased
$758,000 or 0.2% while reverse repurchase agreement borrowings decreased $9.6
million or 5.0% during the three months ended March 31, 2001.
11
Stockholders' equity. Stockholders' equity increased $5.6 million to $73.8
million at March 31, 2001 from $68.3 million at December 31, 2000. The increase
in stockholders' equity was the result of increases in retained earnings and
accumulated other comprehensive income of $1.2 million and $4.9 million,
respectively, and a decrease in unearned ESOP shares of $105,000, offset by an
increase in treasury stock of $657,000.
RESULTS OF OPERATIONS
General. The Company recorded net income of $1.8 million for the three months
ended March 31, 2001, as compared to net income of $1.9 million for the same
period in the prior year. The $97,000 or 5.0% decrease in net income for the
three months ended March 31, 2001, as compared to the three months ended March
31, 2000, was primarily attributable to increases in the provision for loan
losses and noninterest expense of $458,000 and $284,000, respectively, partially
offset by increases in net interest income and noninterest income of $302,000
and $108,000, respectively, and a decrease in the provision for income taxes of
$235,000. The quarter ended March 31, 2000 includes a one-time recovery of
$605,000 associated with the Company's Bennett Lease Pools. Without the
recovery, operating earnings would have been $1.6 million.
Net interest income. Net interest income increased $302,000 or 6.4% to $5.0
million for the three months ended March 31, 2001, compared to $4.7 million for
the same period in the prior year. This increase in net interest income can be
attributed to an increase in interest income of $2.0 million offset by an
increase in interest expense of $1.7 million.
Interest income. Interest income increased $2.0 million or 11.1% to $20.4
million for the three months ended March 31, 2001, compared to $18.4 million for
the same period in the prior year. This increase can be attributed to an
increase in interest earned on loans receivable, interest earned on securities
and FHLB stock of $1.6 million, $379,000 and $36,000, respectively. Slightly
offset by a decrease in cash equivalents of $3,000.
Interest earned on loans receivable increased $1.6 million or 19.5% to $10.0
million for the quarter ended March 31, 2001, compared to $8.4 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 $85.7 million or 19.7%
to $520.5 million for the three months ended March 31, 2001, compared to $434.8
million for the same period in the prior year, offset by a slight decrease in
the yield on loans receivable to 7.71% for the three months ended March 31,
2001, compared to 7.72% for the same period in the prior year.
Interest earned on securities increased $379,000 or 4.0% to $10.0 million for
the three months ended March 31, 2001, compared to $9.6 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 $27.5 million or 4.8% to
$600.9 million for the three months ended March 31, 2001, compared to $573.4
million for the same period in the prior year, offset slightly by a decrease in
the tax equivalent yield on securities to 7.05% for the three months ended March
31, 2001, compared to 7.12% for the same period in the prior year.
Interest expense. Interest expense increased $1.7 million or 12.8% to $15.4
million for the three months ended March 31, 2001, compared to $13.7 million for
the same period in the prior year. This increase in interest expense can be
primarily attributed to increases in interest incurred on deposits and borrowed
funds and reverse repurchase agreements of $906,000 and $837,000, respectively.
Interest incurred on deposits increased $906,000 or 18.2% to $5.9 million for
the three months ended March 31, 2001, compared to $5.0 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 $46.2 million or
10.1% to $504.7 million for the three months ended March 31, 2001, compared to
$458.4 million for the same period in the prior year. The cost of interest-
bearing deposits increased by 36 basis points to 4.73% for the quarter ended
March 31, 2001 compared to 4.37% for the same period in the prior year.
12
Interest incurred on borrowed funds and reverse repurchase agreements increased
$837,000 or 10.3% to $9.0 million for the three months ended March 31, 2001,
compared to $8.1 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 $43.3 million or 8.1% to $575.7 million for the three months ended
March 31, 2001, compared to $532.4 million for the same period in the prior
year. This increase in borrowed funds is a reflection of the increase in the
average balance of loans receivable and securities; as such funds were utilized
to provide for growth. Adding to the increase in interest incurred on borrowed
funds was an increase in the cost of these funds of 17 basis points to 6.31% for
the three months ended March 31, 2001, compared to 6.14% for the same period in
the prior year.
Provision for (recovery of) loan losses. The provision for loan losses
increased $458,000 to $6,000 at March 31, 2001, compared to a recovery of
$452,000 for the same period in the prior year. The March 31, 2000 quarter
reflects a $605,000 one-time recovery recorded in January 2000 associated with
the Company's Bennett Lease Pools which was received from the bankruptcy
trustee. 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 March 31, 2001 and December 31, 2000 amounted to $5.0 million or
0.91% and $5.0 million or 0.92%, respectively, of the Company's total loan
portfolio. The Company's allowance for losses on loans as a percentage of non-
performing loans was 195.11% and 188.96% at March 31, 2001 and December 31,
2000, respectively.
Noninterest income. Noninterest income increased $108,000 or 16.2% to $773,000
for the three months ended March 31, 2001, compared to $665,000 for the same
period in the prior year. This increase can be attributed primarily to
increases in fees and service charges and an increase in the cash surrender
value of the bank owned life insurance of $89,000 and $20,000, respectively.
Noninterest expense. Noninterest expense increased $284,000 or 8.5% to $3.6
million for the three months ended March 31, 2001, from $3.3 million for the
same period in the prior year. This increase was the result of increases in
compensation and employee benefits, premises and equipment and other expenses of
$107,000, $112,000 and $107,000, respectively, partially offset by a decrease in
data processing costs of $42,000.
Provision for income taxes. The provision for income taxes decreased $235,000
or 40.7% to $343,000 for the three months ended March 31, 2001, from $578,000
for the same period in the prior year. This decrease was attributable to a
decrease in pre-tax income of $332,000 or 13.3% for the three months ended March
31, 2001, compared to the same period in the prior year, and to the tax savings
created by the EFS subsidiary.
13
Average Balance Sheet and Yield/Rate Analysis. The following table sets forth,
for the 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
this table, 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 March 31,
2001 2000
--------------------------------------- ---------------------------------------
Average Yield / Average Yield /
Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
- ------------------------
Taxable securities available for sale $ 510,042 $ 8,757 6.87% $ 488,006 $ 8,383 6.87%
Tax-exempt securities available for sale 90,885 1,836 8.08% 85,416 1,829 8.57%
------------- ------------- ----------- ------------- ------------- -----------
600,927 10,593 7.05% 573,422 10,212 7.12%
------------- ------------- ----------- ------------- ------------- -----------
Mortgage loans 440,750 8,410 7.63% 365,844 7,071 7.73%
Other loans 79,744 1,618 8.12% 68,978 1,324 7.68%
------------- ------------- ----------- ------------- ------------- -----------
520,494 10,028 7.71% 434,822 8,395 7.72%
------------- ------------- ----------- ------------- ------------- -----------
Cash equivalents 7,902 81 4.10% 11,505 84 2.92%
FHLB stock 19,921 354 7.11% 18,871 318 6.74%
------------- ------------- ----------- ------------- ------------- -----------
27,823 435 6.25% 30,376 402 5.29%
------------- ------------- ----------- ------------- ------------- -----------
Total interest-earning assets 1,149,244 21,056 7.33% 1,038,620 19,009 7.32%
Other noninterest-earning assets 48,533 - - 47,595 - -
------------- ------------- ----------- ------------- ------------- -----------
Total assets $ 1,197,777 $ 21,056 7.03% $ 1,086,215 $ 19,009 7.00%
============= ============= =========== ============= ============= ===========
Interest-bearing liabilities:
- -----------------------------
Interest-bearing demand deposits $ 176,245 $ 1,029 2.37% $ 177,259 $ 1,104 2.50%
Time deposits 328,411 4,853 5.99% 281,175 3,872 5.54%
------------- ------------- ----------- ------------- ------------- -----------
504,656 5,882 4.73% 458,434 4,976 4.37%
------------- ------------- ----------- ------------- ------------- -----------
FHLB advances 389,162 6,097 6.35% 313,660 4,860 6.23%
Reverse repo's & other borrowings 186,574 2,862 6.22% 218,768 3,262 6.00%
------------- ------------- ----------- ------------- ------------- -----------
575,736 8,959 6.31% 532,428 8,122 6.14%
------------- ------------- ----------- ------------- ------------- -----------
Preferred securities 24,121 557 9.37% 24,077 557 9.30%
------------- ------------- ----------- ------------- ------------- -----------
Total interest-bearing liabilities 1,104,513 15,398 5.65% 1,014,939 13,655 5.41%
Noninterest-bearing demand deposits 14,483 - - 11,354 - -
Other noninterest-bearing liabilities 7,085 - - 6,478 - -
------------- ------------- ----------- ------------- ------------- -----------
Total liabilities 1,126,081 15,398 5.55% 1,032,771 13,655 5.32%
Stockholders' equity 71,696 - - 53,444 - -
------------- ------------- ----------- ------------- ------------- -----------
Total liabilities and equity $ 1,197,777 $ 15,398 5.21% $ 1,086,215 $ 13,655 5.06%
============= ============= =========== ============= ============= ===========
Net interest income $ 5,658 $ 5,354
============= =============
Interest rate spread (difference between 1.68% 1.91%
weighted average rate on interest-earning =========== ===========
assets and interest-bearing liabilities)
Net interest margin (net interest 1.97% 2.06%
income as a percentage of average =========== ===========
interest-earning assets)
- -----------------------------------------------------------------------------------------------------------------------------------
14
Analysis of Changes in Net Interest Income. The following table analyzes the
changes in interest income and interest expense, between the quarters ended
March 31, 2001 and 2000, in terms of: (1) changes in volume of interest-earning
assets and interest-bearing liabilities and (2) changes in yields and rates.
The table reflects 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.
- --------------------------------------------------------------------------------------------
(In thousands) 2001 versus 2000
Increase (decrease) due to
-----------------------------------------
Volume Rate Total
- --------------------------------------------------------------------------------------------
Interest income:
Securities $ 486 $ (105) $ 381
Loans 1,651 (18) 1,633
Cash equivalents (31) 28 (3)
FHLB stock 18 18 36
----------- ---------- -----------
Total interest-earning assets 2,124 (77) 2,047
----------- ---------- -----------
Interest expense:
Deposits 523 383 906
FHLB advances 1,182 55 1,237
Reverse repurchases & other borrowings (492) 92 (400)
Trust Preferred securities 1 (1) -
----------- ---------- -----------
Total interest-bearing liabilities 1,214 529 1,743
----------- ---------- -----------
Net interest income $ 910 $ (606) $ 304
=========== ========== ===========
- --------------------------------------------------------------------------------------------
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 increases in interest rates. As a result of this policy, the Company
emphasizes a larger, more diversified portfolio of residential mortgage loans in
the form of mortgage-backed securities. Mortgage-backed securities generally
increase the quality of the Company's assets by virtue of the insurance or
guarantees that back them, are more liquid than individual mortgage loans and
may be used to collateralize borrowings or other obligations of the Company.
The Company's Board of Directors has established an Asset and Liability
Management Committee consisting of four outside directors, the President and
Chief Executive Officer, Group Senior Vice President/Chief Financial Officer,
Group Senior Vice President/Operations, Group Senior Vice President/Lending and
the Group Senior Vice President/Administration. This committee, which meets
quarterly, generally monitors various asset and liability management policies
and strategies, which were implemented by the Company over the past few years.
These strategies have included: (i) an emphasis on the investment in adjustable-
rate and shorter duration mortgage-backed securities; (ii) an emphasis on the
origination of single-family residential adjustable-rate mortgages (ARMs),
residential construction loans and commercial real estate loans, which generally
have
15
adjustable or floating interest rates and/or shorter maturities than traditional
single-family residential loans, and consumer loans, which generally have
shorter terms and higher interest rates than mortgage loans; and (iii) increase
the duration of the liability base of the Company by extending the maturities of
savings deposits, borrowed funds and reverse repurchase agreements.
As of March 31, 2001, the implementation of these asset and liability
initiatives resulted in the following: (i) $221.7 million or 40.4% of the
Company's total loan portfolio had adjustable interest rates or maturities of 12
months or less; (ii) $146.8 million or 39.2% of the Company's portfolio of
single-family residential mortgage loans (including residential construction
loans) consisted of ARMs; and (iii) $137.3 million or 34.2% of the Company's
portfolio of mortgage-backed securities were secured by ARMs.
The implementation of the foregoing asset and liability initiatives and
strategies, combined with other external factors such as demand for the
Company's products and economic and interest rate environments in general, has
resulted in the Company being able to maintain a one-year interest rate
sensitivity gap ranging between a positive 5.0% of total assets to a negative
15.0% of total assets. The one-year interest rate sensitivity gap is defined as
the difference between the Company's interest-earning assets which are scheduled
to mature or reprice within one year and its interest-bearing liabilities which
are scheduled to mature or reprice within one year. At March 31, 2001, the
Company's interest-earning assets maturing or repricing within one year totaled
$446.5 million while the Company's interest-bearing liabilities maturing or
repricing within one-year totaled $453.0 million, providing a deficiency of
interest-earning assets over interest-bearing liabilities of $6.5 million or a
negative .5% of total assets. At March 31, 2001, the percentage of the
Company's assets to liabilities maturing or repricing within one year was 98.6%.
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 deposit decay assumptions under
various interest rate scenarios. At March 31, 2001, the Company's simulation
model indicated that the Company's statement of financial condition is liability
sensitive. As such, in a 300 basis point gradually rising rate environment over
24 months, with minor changes in the statement of condition and limited
reinvestment changes, net interest income is projected to increase by
approximately 1.54% over such 24-month period. At March 31, 2000, 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 was projected to decrease by approximately 4.3% over such 24-month
period.
LIQUIDITY
The Bank's liquidity is calculated as a percentage of deposits and short-term
borrowings. The liquidity ratio fluctuates depending primarily upon deposit
flows. At March 31, 2001, ESB 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 three months ended March 31, 2001, the
Company used its sources of funds primarily to fund the loan commitments, and to
a lesser extent, to purchase securities. As of such date, the Company had
outstanding loan commitments totaling $19.7 million, unused lines of credit
totaling $33.8 million and $18.8 million of undisbursed loans in process.
At March 31, 2001, certificates of deposit amounted to $329.9 million or 63.4%
of the Company's total consolidated deposits, including $180.9 million which
were scheduled to mature by March 31, 2002. At the
16
same date, the total amount of FHLB advances and Reverse Repurchase Agreements
which were scheduled to mature by March 31, 2002 was $194.0 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 March 31, 2002 and
that, based upon past experience and current pricing policies, it can adjust the
rates of savings certificates to retain a substantial portion of its maturing
certificates and also, to the extent deemed necessary, refinance the maturing
FHLB advances.
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 March 31, 2001, ESB Bank was in compliance
with all regulatory capital requirements with tangible, core and risk-based
capital ratios of 6.5%, 6.5% and 14.8%, respectively.
The Management Discussion and Analysis section of this Form 10-Q contains
certain forward-looking statements (as defined in the Private Securities
Litigation Reform Act of 1995). These forward-looking statements may involve
significant risks and uncertainties. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, actual
results may differ materially from the results in these forward-looking
statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
Quantitative and qualitative disclosures about market risk are presented at
December 31, 2000 in Item 7A of the Company's Annual Report on Form 10-K, filed
with the SEC on March 28, 2001. Management believes there have been no material
changes in the Company's market risk since December 31, 2000.
17
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
- --------------------------
The Company and its subsidiaries are involved in various legal proceedings
occurring in the ordinary course of business. It is the opinion of management,
after consultation with legal counsel, that these matters will not materially
affect the Company's consolidated financial position or results of operations.
Item 2. Changes in Securities
- ------------------------------
None.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
Item 5. Other Information
- --------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) None
(b) Form 8-K - The Company filed a Form 8-K dated March 21, 2001 to report a
$0.10 per share quarterly cash dividend payable on April 25, 2001 to
stockholders of record at the close of business on March 30, 2001.
18
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: May 10, 2001 By: /s/ Charlotte A. Zuschlag
------------------------------
Charlotte A. Zuschlag
President and Chief Executive Officer
Date: May 10, 2001 By: /s/ Charles P. Evanoski
----------------------------
Charles P. Evanoski
Group Senior Vice President and
Chief Financial Officer
19