UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For Quarter Ended: June 30, 1999
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Commission File Number: 0-19345
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ESB FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1659846
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
600 Lawrence Avenue, Ellwood City, PA 16117
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(Address of principal executive offices) (Zip Code)
(724) 758-5584
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [_] No
Number of shares of common stock outstanding as of July 31, 1999:
Common Stock, $0.01 par value 5,187,743 shares
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(Class) (Outstanding)
ESB FINANCIAL CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of June 30, 1999 (Unaudited) and December 31, 1998..... 1
Consolidated Statements of Operations for the three
and six months ended June 30, 1999 and 1998 (Unaudited)... 2
Consolidated Statement of Changes in Stockholders' Equity
For the six months ended June 30, 1999 (Unaudited)........ 3
Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and 1998 (Unaudited)........... 4
Notes to Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.......... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings......................................... 21
Item 2. Changes in Securities..................................... 21
Item 3. Defaults Upon Senior Securities........................... 21
Item 4. Submission of Matters to a Vote of Security Holders....... 21
Item 5. Other Information......................................... 21
Item 6. Exhibits and Reports on Form 8-K.......................... 21
Signatures................................................ 22
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
- -----------------------------
ESB Financial Corporation and Subsidiaries
Consolidated Statements of Financial Condition
As of June 30, 1999 (Unaudited) and December 31, 1998
(Dollar amounts in thousands, except share data)
June 30, December 31,
1999 1998
(Unaudited)
-------------- -------------
Assets
------
Cash on hand and in banks $ 2,322 $ 3,140
Interest-earning deposits 5,510 6,534
Federal funds sold 563 629
Securities available for sale; cost of $571,540 and $480,537 565,444 481,234
Securities held to maturity; market value of $64,033 at December 31, 1998 - 63,815
Loans receivable, net 369,661 360,280
Accrued interest receivable 6,834 6,792
Federal Home Loan Bank (FHLB) stock 18,435 18,435
Premises and equipment, net 6,659 6,193
Real estate acquired through foreclosure, net 47 21
Prepaid expenses and other assets 12,894 10,359
Bank owned life insurance 15,380 15,006
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Total assets $ 1,003,749 $ 972,438
============== =============
Liabilities and Stockholders' equity
------------------------------------
Liabilities:
Deposits $ 424,713 $ 423,051
Borrowed funds 486,451 456,355
Guaranteed preferred beneficial interest in subordinated debt, net 24,049 24,027
Advance payments by borrowers for taxes and insurance 4,370 3,171
Accrued expenses and other liabilities 6,682 4,751
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Total liabilities 946,265 911,355
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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;
6,337,755 and 6,337,755 shares issued;
5,215,800 and 5,265,886 shares outstanding 63 63
Additional paid-in capital 59,518 59,448
Treasury stock, at cost; 1,121,955 and 1,071,869 shares (17,719) (16,841)
Unearned Employee Stock Ownership Plan (ESOP) shares (2,667) (2,681)
Unvested shares held by Management Recognition Plan (237) (237)
Retained earnings, substantially restricted 22,549 20,870
Accumulated other comprehensive income (loss), net (4,023) 461
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Total stockholders' equity 57,484 61,083
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Total liabilities and stockholders' equity $ 1,003,749 $ 972,438
============== =============
See accompanying notes to consolidated financial statements.
1
ESB Financial Corporation and Subsidiaries
Consolidated Statements of Operations
For the three and six months ended June 30, 1999 and 1998 (Unaudited)
(Dollar amounts in thousands, except share data)
Three Months Ended Six Months Ended
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June 30, June 30,
--------------------------------------------------------------
1999 1998 1999 1998
------------ ------------ ----------- -----------
Interest income:
Loans receivable $ 6,970 $ 6,896 $ 13,925 $ 13,712
Securities available for sale 8,040 7,504 15,312 14,735
Securities held to maturity 540 1,206 1,386 2,552
FHLB stock 299 298 594 587
Deposits with banks and federal funds sold 65 69 127 138
-------- ------- ------- --------
Total interest income 15,914 15,973 31,344 31,724
-------- ------- ------- --------
Interest expense:
Deposits 4,285 4,367 8,682 8,654
Borrowed funds 7,019 6,857 13,681 13,375
Guaranteed preferred beneficial interest in subordinated debt 557 554 1,113 1,110
-------- ------- ------- --------
Total interest expense 11,861 11,778 23,476 23,139
-------- ------- ------- --------
Net interest income 4,053 4,195 7,868 8,585
Provision for loan losses 3 - 6 -
-------- ------- ------- --------
Net interest income after provision for loan losses 4,050 4,195 7,862 8,585
-------- ------- ------- --------
Noninterest income:
Fees and service charges 335 394 665 709
Net realized gain on sales of securities available for sale 205 79 421 72
Increase of cash surrender value of bank owned life insurance 196 - 374 -
Other 121 9 134 20
-------- ------- ------- --------
Total noninterest income 857 482 1,594 801
-------- ------- ------- --------
Noninterest expense:
Compensation and employee benefits 1,634 1,534 3,254 3,015
Premises and equipment 361 262 725 519
Federal deposit insurance premiums 56 69 125 131
Data processing 156 123 267 252
Other 771 670 1,578 1,395
-------- ------- ------- --------
Total noninterest expense 2,978 2,658 5,949 5,312
-------- ------- ------- --------
Income before provision for income taxes 1,929 2,019 3,507 4,074
Provision for income taxes 375 471 597 976
-------- ------- ------- --------
Net income $ 1,554 $ 1,548 $ 2,910 $ 3,098
======== ======= ======= ========
Net income per share:
Basic $0.31 $0.28 $0.58 $0.56
Diluted $0.30 $0.27 $0.56 $0.54
See accompanying notes to consolidated financial statements.
2
ESB Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the six months ended June 30, 1999 (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, 1998 $ 63 $ 59,448 $(16,841) $ (2,681) $ (237) $ 20,870 $ 461 $ 61,083
Comprehensive results:
Net income - - - - - 2,910 - 2,910
Other comprehensive results, net - - - - - - (4,471) (4,471)
Reclassification adjustment - - - - - - (13) (13)
------ -------- -------- -------- ------ -------- -------- --------
Total comprehensive results - - - - - 2,910 (4,484) (1,574)
------ -------- -------- -------- ------ -------- -------- --------
Cash dividends at $0.09 per share - - - - - (904) - (904)
Purchase of treasury stock, at
cost (83,845 shares) - - (1,316) - - - - (1,316)
Reissuance of treasury stock
for stock option exercises - - 438 - - (327) - 111
Principal payments on ESOP debt - 70 - 231 - - - 301
Additional ESOP shares purchased - - - (217) - - - (217)
- - - - - - - -
------ -------- -------- -------- ------ -------- -------- --------
Balance at June 30, 1999 $ 63 $ 59,518 $(17,719) $ (2,667) $ (237) $ 22,549 $ (4,023) $ 57,484
====== ======== ======== ======== ====== ======== ======== ========
See accompanying notes to consolidated financial statements.
3
ESB Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the six months ended June 30, 1999 and 1998 (Unaudited)
(Dollar amounts in thousands)
Six Months Ended
June 30,
---------------------------------
1999 1998
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Operating activities:
Net income $ 2,910 $ 3,098
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization for premises and equipment 305 185
Provision for losses 8 9
Amortization of premiums and accretion of discounts 910 997
Origination of loans available for sale (8,735) (5,502)
Proceeds from sale of loans 8,797 5,529
Gain on sales of securities available for sale (421) (72)
Amortization of intangible assets 301 301
Increase in accrued interest receivable (42) (593)
Increase in prepaid expenses and other assets (527) (707)
Increase in accrued expenses and other liabilities 1,931 3,180
Other 892 1,081
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Net cash provided by operating activities 6,329 7,506
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Investing activities:
Loan originations and purchases (70,511) (72,650)
Purchases of securities available for sale (143,820) (170,891)
Purchases of securities held to maturity - (993)
Purchases of FHLB stock - (609)
Addition to premises and equipment (776) (475)
Principal repayments of loans receivable 60,958 53,985
Principal repayments of securities available for sale 53,302 58,204
Principal repayments of securities held to maturity 8,324 13,643
Proceeds from the sale of securities available for sale 54,634 63,814
Proceeds from sale of REO 32 35
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Net cash used in investing activities (37,857) (55,937)
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Financing activities:
Net increase in deposits 1,662 8,966
Net increase in borrowed funds 30,096 33,688
Proceeds received from exercise of stock options 111 234
Dividends paid (947) (946)
Payments to acquire treasury stock (1,316) (3,003)
Stock purchased by ESOP (217) (553)
Principal repayment of ESOP loan 231 230
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Net cash provided by financing activities 29,620 38,616
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Net decrease in cash equivalents (1,908) (9,815)
Cash equivalents at beginning of period 10,303 18,947
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Cash equivalents at end of period $ 8,395 $ 9,132
======= =======
Continued.
4
ESB Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows, (Continued)
For the six months ended June 30, 1999 and 1998 (Unaudited)
(Dollar amounts in thousands)
Six Months Ended
June 30,
-----------------------------
1999 1998
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Supplemental information:
Interest paid $ 23,623 $ 26,012
Income taxes paid 455 979
Non-cash transactions:
Transfers from loans receivable to real estate acquired
through foreclosure 47 30
Transfers of securities from held to maturity to
available for sale 54,464 -
Dividends declared but not paid 469 510
See accompanying notes to consolidated financial statements.
5
ESB Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation
ESB Financial Corporation (the "Company") is a thrift holding company. The
consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary savings bank, ESB Bank, F.S.B. ("ESB" or "the
Bank"), and its other subsidiaries, PennFirst Financial Services, Inc.,
PennFirst Capital Trust I, THF, Inc. and AMSCO, Inc.
The accompanying unaudited consolidated financial statements for the
interim periods include all adjustments, consisting only of normal
recurring accruals, which are necessary, in the opinion of management, to
fairly reflect the Company's financial position and results of operations.
Additionally, these consolidated financial statements for the interim
periods have been prepared in accordance with instructions for the
Securities and Exchange Commission's Form 10-Q and therefore do not include
all information or footnotes necessary for a complete presentation of
financial condition, results of operations and cash flows in conformity
with generally accepted accounting principles. For further information,
refer to the audited consolidated financial statements and footnotes
thereto for the year ended December 31, 1998, as contained in the 1998
Annual Report to Stockholders.
The results of operations for the three and six months ended June 30, 1999
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. Securities
The Company's securities available for sale and held to maturity portfolios
are summarized as follows:
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(In thousands) Amortized Unrealized Unrealized Fair
cost gains losses value
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Available for sale:
As of June 30, 1999:
Trust Preferred securities $ 3,274 $ 12 $ (91) $ 3,195
U.S. Government securities 9,956 16 (155) 9,817
Municipal securities 96,835 1,359 (3,017) 95,177
Equity securities 2,654 312 (134) 2,832
Corporate Bonds 52,656 - (894) 51,762
Mortgage-backed securities 406,165 1,120 (4,624) 402,661
------------ ----------- ------------ ------------
$ 571,540 $ 2,819 $ (8,915) $ 565,444
============ =========== ============ ============
As of December 31, 1998:
Trust Preferred securities $ 3,275 $ 54 $ (29) $ 3,300
Municipal securities 99,035 2,258 (195) 101,098
Equity securities 2,101 348 (157) 2,292
Corporate Bonds 52,649 - (2,329) 50,320
Mortgage-backed securities 323,477 1,637 (890) 324,224
------------ ----------- ------------ ------------
$ 480,537 $ 4,297 $ (3,600) $ 481,234
============ =========== ============ ============
Held to maturity:
As of December 31, 1998:
U.S. Government securities $ 4,986 $ 41 $ - $ 5,027
Municipal securities 7,994 210 - 8,204
Mortgage-backed securities 50,835 105 (138) 50,802
------------ ----------- ------------ ------------
$ 63,815 $ 356 $ (138) $ 64,033
============ =========== ============ ============
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6
2. Securities (continued)
On June 30, 1999, the Company reclassified its held-to-maturity ("HTM")
portfolio to the available-for-sale ("AFS") portfolio. As of the
reclassification, the Company had $54.5 million of amortized cost in
securities classified as HTM of which $42.5 million were fixed rate
mortgage-backed securities ("MBS"), $8.0 million were municipal bonds and
$4.0 million were U.S. Government and agency bond securities. When the
securities were transferred to the AFS portfolio the following unrealized
gains/losses were booked: the fixed rate MBS had a related unrealized loss
of $534,000, the municipal bonds had a related unrealized gain of $327,000
and the U.S. Government and agency bond securities had a related unrealized
loss of $2,000 for a net unrealized loss of $209,000.
The yield on the fixed rate MBS HTM portfolio at March 31, 1999 was 5.68%
or 73 basis points lower than the yield on the MBS AFS portfolio which was
6.41%. The transfer of securities from the HTM portfolio to the AFS
portfolio will provide the Company with greater flexibility to restructure
the portfolio as needed, in order to attain the maximum overall yield on
the investment portfolio while maintaining acceptable levels of interest
rate risk.
3. Loans Receivable
The Company's loans receivable as of the respective dates are summarized as
follows:
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June 30, December 31,
(In thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------------------
Mortgage loans:
Residential - single family $ 232,348 $ 225,054
Residential - multi family 12,519 11,206
Commercial real estate 35,944 32,300
Construction 42,115 41,215
------------- --------------
322,926 309,775
Other loans:
Consumer loans 56,362 56,897
Commercial business 12,250 14,216
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391,538 380,888
Less:
Allowance for loan losses 4,823 4,815
Deferred loan fees and net discounts 799 785
Loans in process 16,255 15,008
------------- --------------
$ 369,661 $ 360,280
============= ==============
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7
4. Deposits
The Company's deposits as of the respective dates are summarized as
follows:
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(Dollar amounts in thousands) June 30, 1999 December 31, 1998
---------------------------------------- ----------------------------------------
Weighted Weighted
average average
Type of accounts rate Amount % rate Amount %
- ----------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits - $ 8,168 2.0% - $ 6,002 1.4%
Interest-bearing demand deposits 2.38% 163,209 38.4% 2.34% 156,994 37.1%
Time deposits 5.25% 253,336 59.6% 5.54% 260,055 61.5%
----------- -------- ------------ ------------
4.12% $ 424,713 100.0% 4.27% $ 423,051 100.0%
=========== ======== ============ ============
Time deposits mature as follows:
Within one year $ 156,077 36.7% $ 145,231 34.3%
After one year through two years 62,711 14.8% 72,845 17.2%
After two years through three years 10,273 2.4% 18,438 4.4%
Thereafter 24,275 5.7% 23,541 5.6%
----------- -------- ------------ ------------
$ 253,336 59.6% $ 260,055 61.5%
=========== ======== ============ ============
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5. Borrowed Funds
The Company's borrowed funds as of the respective dates are summarized as
follows:
- ------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) June 30, 1999 December 31, 1998
------------------------ -----------------------
Weighted Weighted
average rate Amount average rate Amount
- ------------------------------------------------------------------------------------------------------------------
FHLB advances:
Due within 12 months 6.09% $ 119,616 5.99% $ 98,595
Due beyond 12 months but within 5 years 6.00% 165,528 6.04% 206,660
Due beyond 5 years but within 10 years 5.33% 45,440 7.79% 440
Due beyond 10 years 6.06% 267 6.01% 270
------------ -----------
330,851 305,965
Reverse repurchase agreements:
Due within 90 days 5.08% $ 32,540 5.29% $ 44,860
Due beyond 90 days but within 5 years 5.57% 122,900 5.59% 105,500
------------ -----------
155,440 150,360
Treasury tax and loan note payable 160 30
------------ -----------
$ 486,451 $ 456,355
============ ===========
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6. Net Income Per Share
Net income per share is calculated by dividing net operating results for
the period by the weighted average number of shares of common shares and
equivalents outstanding during the period. For purposes of computing basic
net income per share for the three and six month period ended June 30, 1999
and 1998, the weighted average shares outstanding were 5,003,000 and
5,463,000, respectively, and 5,018,000 and 5,502,000, respectively. For
purposes of computing diluted net income per share for the three and six
months ended June 30, 1999 and 1998, the weighted average shares and
equivalents outstanding were 5,130,000 and 5,719,000, respectively, and
5,159,000 and 5,760,000, respectively. For all periods, the difference
between average basic and average diluted shares represented the dilutive
impact of stock options.
8
6. Net Income Per Share (continued)
Options to purchase 62,085 shares of common stock at $18.00 per share were
outstanding as of June 30, 1999 but were not included in the computation of
diluted earnings per share for the three and six month periods ended June
30, 1999 because the options' exercise price was greater than the average
market price of common shares. The options expire on June 30, 2008.
7. Comprehensive Income
Comprehensive income is defined as "the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources. It includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners". Only the impact of unrealized gains or losses on
securities available for sale is necessary and applicable to be disclosed
as an additional component of the Company's total comprehensive income
under the requirements of Statement of Financial Accounting Standards No.
130.
For the three months ended June 30, 1999, the total comprehensive loss was
$4.7 million and for the three months ended June 30, 1998, total
comprehensive income was $1.0 million, including other comprehensive income
which represented a decrease of $6.2 million and $541,000, respectively, in
unrealized gains/losses on securities available for sale, net of income
taxes.
For the six months ended June 30, 1999, the total comprehensive loss was
$1.6 million and for the six months ended June 30, 1998, the total
comprehensive income was $2.5 million, including other comprehensive income
which represented a decrease of $4.5 million and $573,000, respectively, in
unrealized gains/losses on securities available for sale, net of income
taxes.
8. Business Combination
On July 21, 1999, the Company entered into an Agreement and Plan of
Reorganization with SHS Bancorp, Inc. ("SHS"), pursuant to which SHS shall
be merged with and into the Company, with the Company as the surviving
corporation. Under the terms of the agreement, each shareholder of SHS
will have the right to elect to receive $17.80 in cash or 1.30 shares of
the Company (subject to adjustment) for each share of SHS. The final form
of consideration is subject to adjustment so that at least but no more than
40% of the total outstanding SHS shares be exchanged for cash. There are
currently 757,962 shares (51,988 in Treasury) of SHS common stock issued
and outstanding.
9
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 $31.3 million or 3.2% to $1.0
billion at June 30, 1999 from $972.4 million at December 31, 1998. This net
increase was primarily the result of increases in securities, net loans
receivable and prepaid expenses and other assets of $20.4 million, $9.4 million
and $2.5 million, respectively, partially offset by a decrease in cash
equivalents of $1.9 million. The increase in total assets reflects a
corresponding increase in total liabilities of $34.9 million or 3.8%, partially
offset by a decrease in stockholders' equity of $3.6 million or 5.9%. The
increase in total liabilities was primarily the result of increases in deposits,
borrowed funds, advance payments by borrowers for taxes and insurance, and
accrued expenses and other liabilities of $1.7 million, $30.1 million, $1.2
million and $1.9 million, respectively. The decrease in stockholders' equity
was the result of an increase in treasury stock and a decrease in accumulated
other comprehensive income of $878,000 and $4.5 million, respectively, partially
offset by increases in additional paid-in capital and retained earnings of
$70,000 and $1.7 million, respectively, and a decrease in unearned employee
stock ownership plan ("ESOP") shares of $14,000.
Cash on hand, Interest-earning deposits and Federal funds sold. Cash on hand,
interest-earning deposits and federal funds sold represent cash equivalents and
decreased a combined $1.9 million or 18.5% to $8.4 million at June 30, 1999 from
$10.3 million at December 31, 1998. The net decrease between June 30, 1999 and
December 31, 1998 can be attributed primarily to security purchases and loan
fundings during the period.
Securities. The Company's securities portfolio increased by $20.4 million or
3.7% to $565.4 million at June 30, 1999 from $545.0 million at December 31,
1998. This net increase was primarily the result of purchases of available for
sale securities of $143.8 million, consisting of purchases of agency bonds and
equity securities of $7.1 million and mortgage-backed securities of $136.7
million, during the six months ended June 30, 1999. Partially offsetting the
purchases of securities were sales of available for sale securities of $54.6
million, consisting of sales of municipal securities of $10.4 million, equity
securities of $780,000 and mortgage-backed securities of $43.5 million, and
repayments and maturities of securities of $61.6 million, during the six months
ended June 30, 1999.
On June 30, 1999, the Company transferred its HTM portfolio to the AFS
portfolio. Since implementation of Statement of Financial Accounting Standards
No. 115 Accounting for Certain Investment in Debt and Equity Securities in
January 1994, the Company has never sold a security out of the HTM portfolio.
In addition, over the past three years, the Company's unwritten policy was to
place the majority of securities purchased into the AFS portfolio. The Company
only placed $22.4 million or 3.3% of all purchases over the last three years
into the HTM portfolio prior to reclassifying them to the AFS portfolio.
Loans receivable. Net loans receivable increased $9.4 million or 2.6% to $369.7
million at June 30, 1999 from $360.3 million at December 31, 1998. Included in
this increase was an increase in mortgage loans of $13.1 million or 4.2% and a
decrease in other loans of $2.5 million or 3.5%, partially offset by an increase
in the allowance for loan losses, deferred loan fees and loans in process of
$1.3 million or 6.2%, during the six months ended June 30, 1999.
Non-performing assets. Non-performing assets include non-accrual loans and real
estate acquired through foreclosure. Non-performing assets amounted to $4.4
million or 0.44% and $5.0 million or 0.51% of total assets at June 30, 1999 and
December 31, 1998, respectively.
Deposits. Total deposits increased $1.7 million or 0.4% to $424.7 million at
June 30, 1999 from $423.1 million at December 31, 1998. This increase was
primarily the result of increases in noninterest bearing and interest bearing
deposits of $2.2 million and $6.2 million, respectively, offset by a decrease in
time deposits of $6.7 million.
Borrowed funds. Borrowed funds increased $30.1 million or 6.3% to $486.5
million at June 30, 1999 from $456.4 million at December 31, 1998. This
increase is primarily the result of the Company utilizing reverse repurchase
agreement borrowings and FHLB advances to fund the increases in loans receivable
and securities. FHLB advances and reverse repurchase agreement borrowings
increased $24.9 million or 8.1% and $5.1 million or 3.4%, respectively, during
the six months ended June 30, 1999.
10
Stockholders' equity. Stockholders' equity decreased $3.6 million or 5.9% to
$57.5 million at June 30, 1999 from $61.1 million at December 31, 1998. This
decrease was principally the result of an increase in net treasury stock
purchases of $878,000 and a decrease in accumulated other comprehensive income
of $4.5 million, offset by increases in additional paid-in capital of $70,000,
retained earnings of $1.7 million and a decrease in unearned ESOP shares of
$14,000.
RESULTS OF OPERATIONS
General. The Company recorded net income of $1.6 million and $2.9 million for
the three and six months ended June 30, 1999, respectively, as compared to net
income of $1.5 million and $3.1 million, respectively, for the same periods in
the prior year.
The $6,000 or 0.4% increase in net income for the three months ended June 30,
1999, as compared to the three months ended June 30, 1998, was attributable to
an increase in noninterest income of $375,000 and a decrease in the provision
for income taxes of $96,000. Partially offsetting these favorable variances
between quarters was a decrease in net interest income of $142,000 and increases
in the provision for loan losses and noninterest expense of $3,000 and $320,000,
respectively.
The $188,000 or 6.1% decrease in net income for the six months ended June 30,
1999, as compared to the six months ended June 30, 1998, was attributable to a
decrease in net interest income of $717,000 and increases in the provision for
loan losses and noninterest expense of $6,000 and $637,000, respectively.
Partially offsetting this decrease was an increase in noninterest income of
$793,000 and a decrease in the provision for income taxes of $379,000.
Net interest income. Net interest income decreased $142,000 or 3.4% to $4.1
million for the three months ended June 30, 1999, compared to $4.2 million for
the same period in the prior year. This decrease in net interest income can be
attributed to an increase in interest expense of $83,000 and a decrease in
interest income of $59,000.
Net interest income decreased $717,000 or 8.4% to $7.9 million for the six
months ended June 30, 1999, compared to $8.6 million for the same period in the
prior year. This decrease in net interest income can be attributed to an
increase in interest expense of $337,000 and a decrease in interest income of
$380,000.
Interest income. Interest income decreased $59,000 or 0.4% to $15.9 million for
the three months ended June 30, 1999, compared to $16.0 million for the same
period in the prior year. This decrease can be attributed primarily to a
decrease in interest earned on securities and interest-earning deposits of
$130,000 and $4,000, respectively, offset by increases in interest earned on
loans receivable and FHLB stock of $74,000 and $1,000, respectively.
Interest earned on loans receivable increased $74,000 or 1.1% to $7.0 million
for the three months ended June 30, 1999, compared to $6.9 million for the same
period in the prior year. This increase was primarily attributable to an
increase in the average balance of loans outstanding of $16.1 million or 4.6% to
$369.4 million for the three months ended June 30, 1999, compared to $353.3
million for the same period in the prior year. Partially offsetting the
increase in interest income between the periods was a decrease in the yield of
loans receivable to 7.55% for the three months ended June 30, 1999, compared to
7.81% for the same period in the prior year.
Interest earned on securities decreased $130,000 or 1.5% to $8.6 million for the
three months ended June 30, 1999, compared to $8.7 million for the same period
in the prior year. This decrease was primarily attributable to a decline in the
tax equivalent yield on securities to 6.59% for the three months ended June 30,
1999, compared to 6.72% for the same period in the prior year. Partially
offsetting this yield decrease was an increase in the average balance of
securities held of $7.8 million or 1.4% to $562.3 million for the three months
ended June 30, 1999, compared to $554.5 million for the same period in the prior
year. The increase in the average balance of securities between periods was
primarily the result of net security purchases during the last two quarters of
1998 and the first two quarters of 1999.
11
Interest income decreased $380,000 or 1.2% to $31.3 million for the six months
ended June 30, 1999, compared to $31.7 million for the same period in the prior
year. This decrease can be attributed primarily to a decrease in interest
earned on securities and interest-earning deposits of $589,000 and $11,000,
respectively, offset by increases in interest earned on loans receivable and
FHLB stock of $213,000 and $7,000, respectively.
Interest earned on loans receivable increased $213,000 or 1.6% to $13.9 million
for the six months ended June 30, 1999, compared to $13.7 million for the same
period in the prior year. This increase was primarily attributable to an
increase in the average balance of loans outstanding of $16.4 million or 4.7% to
$366.3 million for the six months ended June 30, 1999, compared to $349.9
million for the same period in the prior year. Partially offsetting the
increase in interest income between the periods was a decrease in the yield of
loans receivable to 7.60% for the six months ended June 30, 1999, compared to
7.84% for the same period in the prior year.
Interest earned on securities decreased $589,000 or 3.4% to $16.7 million for
the six months ended June 30, 1999, compared to $17.3 million for the same
period in the prior year. This decrease was primarily attributable to a decline
in the tax equivalent yield on securities to 6.53% for the six months ended June
30, 1999, compared to 6.78% for the same period in the prior year. Partially
offsetting this decrease was an increase in the average balance of securities
held of $10.9 million or 2.0% to $554.9 million for the six months ended June
30, 1999, compared to $544.0 million for the same period in the prior year. The
increase in the average balance of securities between periods was primarily the
result of net security purchases during the last two quarters of 1998 and the
first two quarters of 1999.
Interest expense. Interest expense increased $83,000 or 0.7% to $11.9 million
for the three months ended June 30, 1999, compared to $11.8 million for the same
period in the prior year. This increase in interest expense can be attributed
to increases in interest incurred on borrowed funds and subordinated debt of
$162,000 and $3,000, respectively, offset by a decrease in interest incurred on
deposits of $82,000.
Interest incurred on deposits decreased $82,000 or 1.9% to $4.3 million for the
three months ended June 30, 1999, compared to $4.4 million for the same period
in the prior year. This decrease was primarily attributable to a decrease in
the cost of interest-bearing deposits between the periods to 4.14% from 4.38%
for the quarters ended June 30, 1999 and 1998, respectively. Offsetting the
decrease in the cost was an increase in the average balance of interest-bearing
deposits of $15.1 million or 3.8% to $415.2 million for the three months ended
June 30, 1999, compared to $400.1 million for the same period in the prior year.
Interest incurred on borrowed funds increased $162,000 or 2.4% to $7.0 million
for the three months ended June 30, 1999, compared to $6.9 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 $32.2 million or 7.2% to
$477.6 million for the three months ended June 30, 1999, compared to $445.3
million for the same period in the prior year. The increase in borrowed funds
were utilized to acquire securities and loans receivables. Partially offsetting
the increase in interest incurred on borrowed funds was a decrease in the cost
of these funds to 5.89% for the three months ended June 30, 1999, compared to
6.18% for the same period in the prior year.
Interest expense increased $337,000 or 1.5% to $23.5 million for the six months
ended June 30, 1999, compared to $23.1 million for the same period in the prior
year. This increase in interest expense can be attributed to increases in
interest incurred on deposits, borrowed funds and subordinated debt of $28,000,
$306,000 and $3,000, respectively.
Interest incurred on deposits increased $28,000 or 0.3% to $8.7 million for the
six months ended June 30, 1999, compared to $8.7 million for the same period in
the prior year. This increase was primarily attributable to an increase in the
average balance of interest-bearing deposits of $18.8 million or 4.7% to $416.1
million for the six months ended June 30, 1999, compared to $397.4 million for
the same period in the prior year. The cost of interest-bearing deposits
decreased between the periods to 4.21% from 4.39% for the six months ended June
30, 1999 and 1998, respectively.
12
Interest incurred on borrowed funds increased $306,000 or 2.3% to $13.7 million
for the six months ended June 30, 1999, compared to $13.4 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 $32.0 million or 7.4% to
$465.8 million for the six months ended June 30, 1999, compared to $433.8
million for the same period in the prior year. This increase in borrowed funds
is a reflection of the increase in securities and loans receivables, as such
funds were utilized to provide for security and loan growth. Partially
offsetting the increase in interest incurred on borrowed funds was a decrease in
the cost of these funds to 5.92% for the six months ended June 30, 1999,
compared to 6.22% for the same period in the prior year.
Provision for loan losses. The slight increase in the provision for loan losses
between the three and six months ended June 30, 1999 and the same periods in the
prior year, reflects the adequacy of the Company's allowance for loan losses as
of June 30, 1999. In determining the appropriate level of allowance for loan
losses, management considers historical loss experience, the financial condition
of borrowers, economic conditions (particularly as they relate to markets where
the Company originates loans), the status of non-performing assets, the
estimated underlying value of the collateral and other factors related to the
collectability of the loan portfolio. The Company's total allowance for losses
on loans at June 30, 1999 amounted to $4.8 million or 1.23% of the Company's
total loan portfolio, as compared to $4.8 million or 1.26% at December 31, 1998.
The Company's allowance for losses on loans as a percentage of non-performing
loans was 109.8% and 96.7% at June 30, 1999 and December 31, 1998, respectively.
Noninterest income. Noninterest income increased $375,000 or 77.8% to $857,000
for the three months ended June 30, 1999, compared to $482,000 for the same
period in the prior year. This increase can be attributed to an increase in net
gains on security sales, income from bank owned life insurance ("BOLI") and
title fee income of $126,000, $196,000 and $87,000, respectively, between
periods, offset by a decrease in fees and service charges of $59,000.
Noninterest income increased $793,000 or 99.0% to $1.6 million for the six
months ended June 30, 1999, compared to $801,000 for the same period in the
prior year. This increase can be attributed to an increase in net gains on
security sales, income from BOLI and title fee income of $349,000, $374,000 and
$92,000, respectively, between periods, offset by a decrease in fees and service
charges of $44,000.
Noninterest expense. Noninterest expense increased $320,000 or 12.0% to $3.0
million for the three months ended June 30, 1999, from $2.7 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 $100,000, $99,000, $33,000 and $101,000, respectively,
offset by a decrease in federal deposit insurance premiums of $13,000. The
increase in compensation and employee benefits were primarily the result of
staffing increases between the periods and normal salary and benefit increases.
The increase in premises and equipment was primarily the result of increases in
depreciation of $67,000, due to the new Franklin Township branch office and the
Wexford building. The increase in data processing is due to the Company's new
data provider the Company converted to in February 1999. The increase in other
expenses were primarily the result of: (1) an increase of $21,000 in
professional fees; (2) an increase of $28,000 in loan expense; and (3) an
increase of $28,000 in advisory service fees associated with BOLI. Noninterest
expense increased $637,000 or 12.0% to $5.9 million for the six months ended
June 30, 1999, from $5.3 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
$239,000, $206,000, $15,000 and $183,000, respectively, offset by a decrease in
federal deposit insurance premiums of $6,000. The increase in compensation and
employee benefits were primarily the result of staffing increases between the
periods and normal salary and benefit increases. The increase in premises and
equipment was primarily the result of increases in depreciation and real estate
taxes of $121,000 and $25,000, respectively, due to the new Franklin Township
branch office and the Wexford building. The increase in other expenses were
primarily the result of an increase in advertising, advisory service fees
associated with BOLI and a write-off of fraudulently withdrawn deposits of
$59,000, $38,000 and $43,000, respectively.
Provision for income taxes. The provision for income taxes decreased $96,000 or
20.4% and $379,000 or 38.8% to $375,000 and $597,000, respectively, for the
three and six months ended June 30, 1999, from $471,000 and $976,000,
respectively, for the same periods in the prior year. These decreases were
primarily attributable to decreases in pre-tax income.
13
Average Balance Sheet and Yield/Rate Analysis. The following tables sets forth,
for periods indicated, information concerning the total dollar amounts of
interest income from interest-earning assets and the resultant average yields,
the total dollar amounts of interest expense on interest-bearing liabilities and
the resultant average costs, net interest income, interest rate spread and the
net interest margin earned on average interest-earning assets. For purposes of
these tables, average balances are calculated using monthly averages and the
average loan balances include non-accrual loans and exclude the allowance for
loan losses, and interest income includes accretion of net deferred loan fees.
Interest and yields on tax-exempt securities (tax-exempt for federal income tax
purposes) are shown on a fully tax equivalent basis utilizing a federal tax rate
of 34%. Yields and rates have been calculated on an annualized basis utilizing
monthly interest amounts.
- --------------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Three months ended June 30,
1999 1998
-------------------------------------- ---------------------------------------
Average Yield / Average Yield /
Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Taxable securities available for sale $ 422,574 $ 6,785 6.42% $ 391,955 $ 6,438 6.57%
Tax-exempt securities available for sale 92,545 1,901 8.22% 78,929 1,614 8.18%
Taxable securities held to maturity 40,549 470 4.64% 75,325 1,093 5.80%
Tax-exempt securities held to maturity 6,663 106 6.36% 8,268 170 8.22%
------------- ------------- ---------- ------------- ------------- -----------
562,331 9,262 6.59% 554,477 9,315 6.72%
------------- ------------- ---------- ------------- ------------- -----------
Mortgage loans 299,964 5,676 7.57% 286,425 5,506 7.69%
Other loans 69,447 1,294 7.45% 66,875 1,390 8.31%
------------- ------------- ---------- ------------- ------------- -----------
369,411 6,970 7.55% 353,300 6,896 7.81%
------------- ------------- ---------- ------------- ------------- -----------
Cash equivalents 8,615 65 3.02% 8,868 69 3.11%
FHLB stock 18,435 299 6.49% 18,394 298 6.48%
------------- ------------- ---------- ------------- ------------- -----------
27,050 364 5.38% 27,262 367 5.38%
------------- ------------- ---------- ------------- ------------- -----------
Total interest-earning assets 958,792 16,596 6.92% 935,039 16,578 7.09%
Other noninterest-earning assets 37,170 - - 18,498 - -
------------- ------------- ---------- ------------- ------------- -----------
Total assets $ 995,962 $ 16,596 6.67% $ 953,537 $ 16,578 6.95%
============= ============= ========== ============= ============= ===========
Interest-bearing liabilities:
Interest-bearing demand deposits $ 163,081 $ 962 2.37% $ 151,994 $ 901 2.38%
Time deposits 252,088 3,323 5.29% 248,126 3,466 5.60%
------------- ------------- ---------- ------------- ------------- -----------
415,169 4,285 4.14% 400,120 4,367 4.38%
------------- ------------- ---------- ------------- ------------- -----------
FHLB advances 334,931 5,061 6.06% 342,267 5,364 6.29%
Reverse repo's & other borrowings 142,656 1,958 5.51% 103,075 1,493 5.81%
------------- ------------- ---------- ------------- ------------- -----------
477,587 7,019 5.89% 445,342 6,857 6.18%
------------- ------------- ---------- ------------- ------------- -----------
Trust preferred securities 24,044 557 9.29% 24,001 554 9.26%
------------- ------------- ---------- ------------- ------------- -----------
Total interest-bearing liabilities 916,800 11,861 5.19% 869,463 11,778 5.43%
Noninterest-bearing demand deposits 11,455 - - 9,362 - -
Other noninterest-bearing liabilities 6,691 - - 6,909 - -
------------- ------------- ---------- ------------- ------------- -----------
Total liabilities 934,946 11,861 5.09% 885,734 11,778 5.33%
Stockholders' equity 61,016 - - 67,803 - -
------------- ------------- ---------- ------------- ------------- -----------
Total liabilities and equity $ 995,962 $ 11,861 4.78% $ 953,537 $ 11,778 4.95%
============= ============= ========== ============= ============= ===========
Net interest income $ 4,735 $ 4,800
============= =============
Interest rate spread (difference between 1.73% 1.66%
========== ===========
weighted average rate on interest-earning
assets and interest-bearing liabilities)
Net interest margin (net interest 1.98% 2.05%
========== ===========
income as a percentage of average
interest-earning assets)
- --------------------------------------------------------------------------------------------------------------------------------
14
- --------------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Six months ended June 30,
1999 1998
-------------------------------------- ---------------------------------------
Average Yield / Average Yield /
Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Taxable securities available for sale $ 404,165 $ 12,727 6.30% $ 384,191 $ 12,749 6.64%
Tax-exempt securities available for sale 96,694 3,917 8.10% 73,115 3,009 8.23%
Taxable securities held to maturity 46,696 1,210 5.18% 78,363 2,318 5.92%
Tax-exempt securities held to maturity 7,329 266 7.26% 8,318 355 8.54%
----------- ----------- --------- ------------ ---------- --------
554,884 18,120 6.53% 543,987 18,431 6.78%
----------- ----------- --------- ------------ ---------- --------
Mortgage loans 296,507 11,291 7.62% 285,581 11,116 7.78%
Other loans 69,797 2,634 7.55% 64,278 2,596 8.08%
----------- ----------- --------- ------------ ---------- --------
366,304 13,925 7.60% 349,859 13,712 7.84%
----------- ----------- --------- ------------ ---------- --------
Cash equivalents 8,501 127 2.99% 8,665 138 3.19%
FHLB stock 18,435 594 6.44% 18,223 587 6.44%
----------- ----------- --------- ------------ ---------- --------
26,936 721 5.35% 26,888 725 5.39%
----------- ----------- --------- ------------ ---------- --------
Total interest-earning assets 948,124 32,766 6.91% 920,734 32,868 7.14%
Other noninterest-earning assets 36,893 - - 17,933 - -
----------- ----------- --------- ------------ ---------- --------
Total assets $ 985,017 $ 32,766 6.65% $ 938,667 $ 32,868 7.00%
=========== =========== ========= ============ ========== ========
Interest-bearing liabilities:
Interest-bearing demand deposits $ 160,341 $ 1,877 2.36% $ 151,313 $ 1,781 2.37%
Time deposits 255,799 6,805 5.36% 246,061 6,873 5.63%
----------- ----------- --------- ------------ ---------- --------
416,140 8,682 4.21% 397,374 8,654 4.39%
----------- ----------- --------- ------------ ---------- --------
FHLB advances 326,001 9,817 6.07% 340,291 10,702 6.34%
Reverse repo's & other borrowings 139,752 3,864 5.58% 93,479 2,673 5.77%
----------- ----------- --------- ------------ ---------- --------
465,753 13,681 5.92% 433,770 13,375 6.22%
----------- ----------- --------- ------------ ---------- --------
Trust preferred securities 24,038 1,113 9.34% 24,043 1,110 9.31%
----------- ----------- --------- ------------ ---------- --------
Total interest-bearing liabilities 905,931 23,476 5.23% 855,187 23,139 5.46%
Noninterest-bearing demand deposits 10,942 - - 8,968 - -
Other noninterest-bearing liabilities 6,400 - - 6,260 - -
----------- ----------- --------- ------------ ---------- --------
Total liabilities 923,273 23,476 5.13% 870,415 23,139 5.36%
Stockholders' equity 61,744 - - 68,252 - -
----------- ----------- --------- ------------ ---------- --------
Total liabilities and equity $ 985,017 $ 23,476 4.81% $ 938,667 $ 23,139 4.97%
=========== =========== ========= ============ ========== ========
Net interest income $ 9,290 $ 9,729
=========== ==========
Interest rate spread (difference between 1.69% 1.68%
========= ========
weighted average rate on interest-earning
assets and interest-bearing liabilities)
Net interest margin (net interest 1.96% 2.11%
========== ========
income as a percentage of average
interest-earning assets)
- --------------------------------------------------------------------------------------------------------------------------------
Analysis of Changes in Net Interest Income. The following tables analyze the
changes in interest income and interest expense, between the three and six month
period ended June 30, 1999 and 1998, in terms of: (1) changes in volume of
interest-earning assets and interest-bearing liabilities and (2) changes in
yields and rates. The tables reflect the extent to which changes in the
Company's interest income and interest expense are attributable to changes in
rate (change in rate multiplied by prior period volume), changes in volume
(changes in volume multiplied by prior period rate) and changes attributable to
the combined impact of volume/rate (change in rate multiplied by change in
volume). The changes attributable to the combined impact of volume/rate are
allocated on a consistent basis between the volume and rate variances. Changes
in interest income on securities reflects the changes in interest income on a
fully tax equivalent basis.
15
The table analyzing changes in interest income between the three months ended
June 30, 1999 and 1998 is presented as follows:
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands) 1999 versus 1998
Increase (decrease) due to
-----------------------------------------------
Volume Rate Total
- ------------------------------------------------------------------------------------------------------------------------------
Interest income:
Securities $ 131 $ (184) $ (53)
Loans 308 (234) 74
Cash equivalents (2) (2) (4)
FHLB stock 1 - 1
----------- ----------- ----------
Total interest-earning assets 438 (420) 18
----------- ----------- ----------
Interest expense:
Deposits 161 (243) (82)
FHLB advances (113) (190) (303)
Reverse repurchases & other borrowings 547 (82) 465
Preferred securities 1 2 3
----------- ----------- ----------
Total interest-bearing liabilities 596 (513) 83
----------- ----------- ----------
Net interest income $ (158) $ 93 $ (65)
=========== =========== ==========
- ------------------------------------------------------------------------------------------------------------------------------
The table analyzing changes in interest income between the six months ended June
30, 1999 and 1998 is presented as follows:
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands) 1999 versus 1998
Increase (decrease) due to
-----------------------------------------------
Volume Rate Total
- ------------------------------------------------------------------------------------------------------------------------------
Interest income:
Securities $ 364 $ (675) $ (311)
Loans 633 (420) 213
Cash equivalents (3) (8) (11)
FHLB stock 7 - 7
----------- ----------- ----------
Total interest-earning assets 1,001 (1,103) (102)
----------- ----------- ----------
Interest expense:
Deposits 400 (372) 28
FHLB advances (440) (445) (885)
Reverse repurchases & other borrowings 1,282 (91) 1,191
Preferred securities - 3 3
----------- ----------- ----------
Total interest-bearing liabilities 1,242 (905) 337
----------- ----------- ----------
Net interest income $ (241) $ (198) $ (439)
=========== =========== ==========
- ------------------------------------------------------------------------------------------------------------------------------
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 have decreased 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
16
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, Senior Vice President and Chief Financial Officer,
Senior Vice President of Operations and the Senior Vice President of Lending of
the Company. This committee, which meets quarterly, generally monitors various
asset and liability management policies 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 the
Bank's interest rate risk position from increases in interest rates.
As of June 30, 1999, the implementation of these asset and liability initiatives
resulted in the following: (i) $179.2 million or 45.8% of the Company's total
loan portfolio had adjustable interest rates or maturities of 12 months or less;
(ii) $118.2 million or 44.2% of the Company's portfolio of single-family
residential mortgage loans (including residential construction loans) consisted
of ARMs; (iii) $65.3 million or 16.2% of the Company's portfolio of mortgage-
backed securities were secured by ARMs and (iv) the Company had $120.0 million
in notional amount of interest rate caps.
The implementation of the foregoing asset and liability initiatives and
strategies, combined with other external factors such as demand for the
Company's products and economic and interest rate environments in general, has
resulted in the Company being able to maintain a one-year interest rate
sensitivity gap ranging between a positive 5.0% of total assets to a negative
15.0% of total assets. The one-year interest rate sensitivity gap is defined as
the difference between the Company's interest-earning assets which are scheduled
to mature or reprice within one year and its interest-bearing liabilities which
are scheduled to mature or reprice within one year. At June 30, 1999, the
Company's interest-earning assets maturing or repricing within one year totaled
$403.7 million while the Company's interest-bearing liabilities maturing or
repricing within one-year totaled $473.4 million, providing a deficiency of
interest-earning assets over interest-bearing liabilities of $69.7 million or a
negative 3.4% of total assets. At June 30, 1999, the percentage of the
Company's assets to liabilities maturing or repricing within one year was 85.3%.
The Company does not presently anticipate that its one-year interest rate
sensitivity gap will fluctuate beyond a range of a positive 5.0% of total assets
to a negative 15.0% of total assets.
The one year interest rate sensitivity gap has been the most common industry
standard used to measure an institution's interest rate risk position. The
Company also utilizes income simulation modeling in measuring its interest rate
risk and managing its interest rate sensitivity. The Asset and Liability
Management Committee of the Company believes that simulation modeling enables
the Company to more accurately evaluate and manage the possible effects on net
interest income due to the exposure to changing market interest rates, the slope
of the yield curve and different prepayment and decay assumptions under various
interest rate scenarios. At June 30, 1999, the Company's simulation model
indicated that the Company's statement of financial condition is liability
sensitive. Within the past 31 months, the Company has purchased interest rate
cap contracts with notional amounts totaling $120.0 million in order to insulate
against a rising interest rate environment. 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 7.5% over such 24 month period.
17
LIQUIDITY
The Bank is required by the Office of Thrift Supervision ("OTS") to maintain
minimum levels of liquidity to assure its ability to meet demands for customer's
withdrawals and the repayment of short term borrowings. The liquidity
requirement is calculated as a percentage of deposits and short-term borrowings,
as defined by the OTS, and currently must be maintained at amounts not less than
4.0%. The Bank's liquidity ratio fluctuates depending primarily upon deposit
flows but has been consistently maintained at levels in excess of the required
percentage. At June 30, 1999, the Bank's liquidity ratio was 14.0%.
The Company's primary sources of funds generally have been deposits obtained
through the offices of the Bank, borrowings from the FHLB, reverse repurchase
agreement borrowings and amortization and prepayments of outstanding loans and
maturing investment securities. During the six months ended June 30, 1999, the
Company used its sources of funds primarily to purchase securities, and to a
lesser extent, the funding of loan commitments. As of such date, the Company had
outstanding loan commitments totaling $23.8 million, unused lines of credit
totaling $20.3 million and $16.3 million of undisbursed loans in process.
At June 30, 1999, certificates of deposit amounted to $253.3 million or 59.6% of
the Company's total consolidated deposits, including $156.1 million which were
scheduled to mature by June 30, 2000. At the same date, the total amount of
FHLB advances which were scheduled to mature by June 30, 2000 was $119.6
million. Management of the Company believes that it has adequate resources to
fund all of its commitments, that all of its commitments will be funded by June
30, 2000 and that, based upon past experience and current pricing policies, it
can adjust the rates of savings certificates to retain a substantial portion of
its maturing certificates and also, to the extent deemed necessary, refinance
the maturing FHLB advances.
REGULATORY CAPITAL REQUIREMENTS
Current regulatory requirements specify that the Bank and similar institutions
must maintain tangible capital equal to 1.5% of adjusted total assets, core
capital equal to 4% of adjusted total assets and risk-based capital equal to 8%
of risk-weighted assets. The OTS may require higher core capital ratios if
warranted, and institutions are to maintain capital levels consistent with their
risk exposures. Both the FDIC and the OTS reserve the right to apply this
higher standard to any insured financial institution when considering an
institution's capital adequacy. At June 30, 1999, the Bank was in compliance
with all regulatory capital requirements with tangible, core and risk-based
capital ratios of 6.7%, 6.7% and 17.6%, respectively.
RECENT ACCOUNTING, REGULATORY AND OTHER MATTERS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires an entity
to recognize all derivatives as either assets or liabilities in the statement of
financial position and measure the instruments at 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 is
effective for fiscal years beginning June 15, 1999. In June 1999, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (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 adoption of FASB Statement
No. 133 until June 30, 2000.
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.
18
YEAR 2000
The Year 2000 ("Y2K") issue exists because in the past many computer programs
were developed to recognize only the last two digits of a year (e.g. "99" for
"1999"). Without updating or replacing existing systems it is possible that
certain computer programs will recognize the year 2000 as 1900 because they will
key on the digits "00". The Company is aware of the issues associated with the
programming code in certain existing computer systems as the year 2000
approaches. The Y2K problem is pervasive and complex as many computer
operations may be affected in some way by the rollover of the two-digit year
value to 00. The issue is whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such date could generate erroneous data or cause a system
failure.
The Securities and Exchange Commission ("SEC"), the Federal Financial
Institution's Examination Council ("FFIEC") and other federal banking regulators
have issued guidelines to assure that insured depository institutions
appropriately address Y2K issues, which primarily center on the ability of
computer systems to recognize the year 2000. The FFIEC has established that the
Y2K management process should consist of five phases (Awareness, Assessment,
Renovation, Validation and Implementation) and has established a timeline for
the completion of each phase.
The Company outsources substantially all of its data processing needs and it is
to a large extent dependent upon vendor cooperation for systems used in its day-
to-day business. The Company is working closely with its vendors to ensure that
Y2K issues will not adversely affect its operational and financial systems.
The Company has developed a Year 2000 Action Plan ("Plan") within the FFIEC
guidelines that addresses all systems, hardware and data processing applications
provided by third-party vendors and internal programs. The Awareness and
Assessment phases are completed. These two phases related to the understanding
of the Y2K problem, the establishment of a Y2K Steering Committee to oversee the
overall strategies and Plan, and identifying all hardware, software, networks,
processing platforms, vendor interdependencies and budget needs that are
affected by the Y2K date change. The Renovation phase entails assessing the
need for hardware and software upgrades, system replacements, and other
associated changes. The Company has completed the Renovation phase. The
Validation and Implementation phases entail determining the Y2K status of the
Company's mission-critical vendors through testing and certification. Testing
has been completed on a substantial number of these vendors and indications at
this time are that all of the Company's major vendors will be Year 2000
compliant. The Company has formulated business resumption contingency plans for
its major functions in the event the Company experiences system interruptions or
failures due to Y2K problems that are beyond the Company's control.
The Company has completed a conversion of its third party provided legacy
computer system to another third party provided client server, relational
database system. The decision to change third-party providers centered on
technology issues and was not based on year 2000 issues. The new system has
been tested and verified Year 2000 compliant.
Management has budgeted approximately $65,000 for the year 1999 to cover various
Year 2000 costs. The 1999 budget covers costs such as testing the Company's
largest third-party provider's data processing system, possible renovation of
other third-party provided systems, and customer awareness communications.
Direct and indirect costs associated with Year 2000 issues have not had a
significant impact on the Company's consolidated financial statements to date
and management does not anticipate that any such future costs will be of a
material nature. Success in achieving Year 2000 readiness depends on many
factors, some of which are outside the Company's control. Despite reasonable
efforts, the Company cannot assure that it will not experience any disruptions
or otherwise be adversely affected by Year 2000 problems. If renovations,
modifications and conversions are not completed on a timely basis where
required, the year 2000 problem could result in additional expenses or business
disruption that may have a material impact on the operations of the Company.
The above Year 2000 readiness disclosures are made for the sole purpose of
communicating or disclosing information aimed at correcting and/or avoiding Year
2000 failures. These statements are made with the intention to comply fully
with the Year 2000 Information and Readiness Disclosure Act as signed into law
October 19, 1998. All statements made herein shall be construed within the
confines of that Act.
19
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
Quantitative and qualitative disclosures about market risk are presented at
December 31, 1998 in Item 7A of the Company's Annual Report on Form 10-K, filed
with the SEC on March 31, 1999. Management believes there have been no material
changes in the Company's market risk since December 31, 1998.
20
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
effect the Company's consolidated financial position or results of operations.
Item 2. Changes in Securities
- ------------------------------
None.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
On April 20, 1999, the Company held its Annual Meeting of Stockholders.
Nominees for three director positions were elected. All other matters submitted
to a vote of stockholders were also approved, and the stockholder votes thereon
are summarized as follows:
Election of Directors (Proposal One)
- ---------------------
Director For Withheld Not Voted Term/Expiration
- ----------------------------------------------- --------- -------- --------- ----------------
Herbert S. Skuba 4,345,128 63,911 855,021 Three Years/2002
Charlotte A. Zuschlag 4,357,807 51,232 855,021 Three Years/2002
William B. Salsgiver 4,343,827 65,212 855,021 Three Years/2002
Ratification of Appointment of KPMG LLP as Independent Public Accountants
for the Company for 1999
- -------------------------------------------------------------------------
(Proposal Two)
For Against Abstain Not Voted
- ---------- --------- -------- ---------
4,396,830 6,728 5,481 855,021
No other proposals were considered at the annual meeting.
Item 5. Other Information
- --------------------------
None
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibit 11 Statement re: computation of per share earnings
(b) Exhibit 27 Financial Data Schedule
(c) Form 8-K The Company filed a Form 8-K dated June 16, 1999 to report a $0.09
per common share cash dividend payable July 23, 1999 to stockholders of
record at the close of business on June 30, 1999.
21
Signatures
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ESB FINANCIAL CORPORATION
Date: August 16, 1999 By: /s/ Charlotte A. Zuschlag
--------------------------------------
Charlotte A. Zuschlag
President and Chief Executive Officer
Date: August 16, 1999 By: /s/ Charles P. Evanoski
--------------------------------------
Charles P. Evanoski
Senior Vice President and
Chief Financial Officer
22