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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: September 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 incorporation (I.R.S. Employer
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)
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(Former name, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
--- ---
Number of shares of common stock outstanding as of October 29, 1999:
Common Stock, $0.01 par value 5,129,670 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 September 30, 1999 (Unaudited) and December 31, 1998...................................... 1
Consolidated Statements of Operations for the three
and nine months ended September 30, 1999 and 1998 (Unaudited)................................... 2
Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 30, 1999 (Unaudited)........................................ 3
Consolidated Statements of Cash Flows for the nine
months ended September 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
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ESB Financial Corporation and Subsidiaries
Consolidated Statements of Financial Condition
As of September 30, 1999 (Unaudited) and December 31, 1998
(Dollar amounts in thousands, except share data)
September 30, December 31,
1999 1998
(Unaudited)
------------- ------------
Assets
------
Cash on hand and in banks $ 3,747 $ 3,140
Interest-earning deposits 5,862 6,534
Federal funds sold 30 629
Securities available for sale; cost of $585,218 and $480,537 572,433 481,234
Securities held to maturity; market value of $64,033 at December 31, 1998 - 63,815
Loans receivable, net 378,040 360,280
Accrued interest receivable 6,792 6,792
Federal Home Loan Bank (FHLB) stock 18,435 18,435
Premises and equipment, net 6,990 6,193
Real estate acquired through foreclosure, net 361 21
Prepaid expenses and other assets 15,043 10,359
Bank owned life insurance 15,577 15,006
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Total assets $ 1,023,310 $ 972,438
============= ===========
Liabilities and Stockholders' equity
------------------------------------
Liabilities:
Deposits $ 422,104 $ 423,051
Borrowed funds 515,000 456,355
Guaranteed preferred beneficial interest in subordinated debt, net 24,060 24,027
Advance payments by borrowers for taxes and insurance 1,780 3,171
Accrued expenses and other liabilities 7,428 4,751
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Total liabilities 970,372 911,355
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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;
5,129,670 and 5,265,886 shares outstanding 63 63
Additional paid-in capital 59,535 59,448
Treasury stock, at cost; 1,208,085 and 1,071,869 shares (18,825) (16,841)
Unearned Employee Stock Ownership Plan (ESOP) shares (2,677) (2,681)
Unvested shares held by Management Recognition Plan (237) (237)
Retained earnings, substantially restricted 23,516 20,870
Accumulated other comprehensive (loss) income, net (8,437) 461
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Total stockholders' equity 52,938 61,083
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Total liabilities and stockholders' equity $ 1,023,310 $ 972,438
============= ===========
See accompanying notes to consolidated financial statements.
1
ESB Financial Corporation and Subsidiaries
Consolidated Statements of Operations
For the three and nine months ended September 30, 1999 and 1998 (Unaudited)
(Dollar amounts in thousands, except share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
1999 1998 1999 1998
-------- -------- -------- --------
Interest income:
Loans receivable $ 7,159 $ 7,042 $21,084 $ 20,754
Securities available for sale 8,899 7,604 24,211 22,339
Securities held to maturity - 1,053 1,386 3,605
FHLB stock 314 302 908 889
Deposits with banks and federal funds sold 73 76 200 214
-------- -------- -------- --------
Total interest income 16,445 16,077 47,789 47,801
-------- -------- -------- --------
Interest expense:
Deposits 4,331 4,493 13,012 13,147
Borrowed funds 7,380 6,953 21,062 20,329
Guaranteed preferred beneficial interest in subordinated debt 557 556 1,670 1,665
-------- -------- -------- --------
Total interest expense 12,268 12,002 35,744 35,141
-------- -------- -------- --------
Net interest income 4,177 4,075 12,045 12,660
Provision for loan losses 3 4 9 4
-------- -------- -------- --------
Net interest income after provision for loan losses 4,174 4,071 12,036 12,656
-------- -------- -------- --------
Noninterest income:
Fees and service charges 335 387 1,000 1,097
Net realized gain (loss) on sale of securities available for sale (19) 239 401 311
Increase of cash surrender value of bank owned life insurance 197 - 571 -
Other 112 36 247 55
-------- -------- -------- --------
Total noninterest income 625 662 2,219 1,463
-------- -------- -------- --------
Noninterest expense:
Compensation and employee benefits 1,787 1,592 5,041 4,607
Premises and equipment 391 288 1,115 807
Federal deposit insurance premiums 69 69 194 200
Data processing 96 117 363 369
Other 747 936 2,327 2,331
-------- -------- -------- --------
Total noninterest expense 3,090 3,002 9,040 8,314
-------- -------- -------- --------
Income before provision for income taxes 1,709 1,731 5,215 5,805
Provision for income taxes 288 234 885 1,210
-------- -------- -------- --------
Net income $ 1,421 $ 1,497 $ 4,330 $ 4,595
======== ======== ======== ========
Net income per share:
Basic $ 0.29 $ 0.28 $ 0.87 $ 0.84
Diluted $ 0.28 $ 0.27 $ 0.84 $ 0.81
See accompanying notes to consolidated financial statements.
2
ESB Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the nine months ended September 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 - - - - - 4,330 - 4,330
Other comprehensive
results, net - - - - - - (8,613) (8,613)
Reclassification
adjustment - - - - - - (285) (285)
-------- ---------- -------- -------- -------- -------- -------------- -------------
Total comprehensive results - - - - - 4,330 (8,898) (4,568)
-------- ---------- -------- -------- -------- -------- -------------- -------------
Cash dividends at $0.09 per
share - - - - - (1,342) - (1,342)
Purchase of treasury stock, at
cost (167,147 shares) - - (2,450) - - - - (2,450)
Reissuance of treasury stock
for stock option exercises - - 466 - - (342) - 124
Principal payments on ESOP debt - 87 - 350 - - - 437
Additional ESOP shares
purchased - - - (346) - - - (346)
-------- ---------- -------- -------- -------- -------- -------------- -------------
Balance at September 30, 1999 $ 63 $ 59,535 $(18,825) $ (2,677) $ (237) $ 23,516 $ (8,437) $ 52,938
======== ========== ======== ======== ======== ======== ============== =============
See accompanying notes to consolidated financial statements.
3
ESB Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the nine months ended September 30, 1999 and 1998 (unaudited)
(Dollar amounts in thousands)
Nine Months Ended
September 30,
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1999 1998
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Operating activities:
Net income $ 4,330 $ 4,595
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization for premises and equipment 449 271
Provision for (recovery of) losses 17 (20)
Amortization of premiums and accretion of discounts 1,147 1,480
Origination of loans available for sale (8,894) (8,544)
Proceeds from sale of loans available for sale 8,966 8,599
Gain on sale of securities available for sale (401) (311)
Amortization of intangible assets 452 452
Increase in accrued interest receivable - (554)
Increase in prepaid expenses and other assets (552) (1,735)
Increase in accrued expenses and other liabilities 2,677 3,283
Other (1,842) (1,450)
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Net cash provided by operating activities 6,349 6,066
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Investing activities:
Loan originations and purchases (111,867) (109,376)
Purchases of securities available for sale (195,079) (243,889)
Purchases of securities held to maturity - (993)
Purchases of FHLB stock - (609)
Additions to premises and equipment (1,254) (783)
Principal repayments of loans receivable 93,575 89,341
Principal repayments of securities available for sale 71,749 85,350
Principal repayments of securities held to maturity 8,324 22,733
Proceeds from the sale of securities available for sale 73,548 92,446
Proceeds from sale of REO 32 303
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Net cash used in investing activities (60,972) (65,477)
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Financing activities:
Net (decrease) increase in deposits (947) 12,505
Net increase in borrowed funds 58,645 47,924
Proceeds received from exercise of stock options 124 703
Dividends paid (1,417) (1,456)
Payments to acquire treasury stock (2,450) (9,003)
Stock purchased by ESOP (346) (589)
Principal repayments of ESOP loan 350 352
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Net cash provided by financing activities 53,959 50,436
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Net decrease in cash equivalents (664) (8,975)
Cash equivalents at beginning of period 10,303 18,947
--------- ---------
Cash equivalents at end of period $ 9,639 $ 9,972
========= =========
Continued.
4
ESB Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows, (Continued)
For the nine months ended September 30, 1999 and 1998 (Unaudited)
(Dollar amounts in thousands)
Nine Months Ended
September 30,
-------------------------
1999 1998
--------- ---------
Supplemental information:
Interest paid $ 36,410 $ 36,034
Income taxes paid 845 1,429
Non-cash transactions:
Transfers from loans receivable to real estate acquired
through foreclosure 361 40
Transfers of securities from held to maturity to
available for sale 54,464 -
Dividends declared but not paid 462 485
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. (the "Bank"),
and its other subsidiaries, PennFirst Financial Services, Inc., PennFirst
Capital Trust I, AMSCO, Inc. and T.H.F., 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 nine months ended September 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 year's 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 September 30, 1999:
Trust Preferred securities $ 3,274 $ - $ (185) $ 3,089
U.S. Government securities 22,978 18 (325) 22,671
Municipal securities 89,577 1,361 (3,160) 87,778
Equity securities 2,654 144 (368) 2,430
Corporate Bonds 52,660 - (2,215) 50,445
Mortgage-backed securities 414,075 617 (8,672) 406,020
----------- ----------- --------- -----------
$ 585,218 $ 2,140 $ (14,925) $ 572,433
=========== =========== ========= ===========
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 recorded: 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 has provided 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:
---------------------------------------------------------------------------
September 30, December 31,
(In thousands) 1999 1998
---------------------------------------------------------------------------
Mortgage loans:
Residential - single family $ 242,116 $ 225,054
Residential - multi family 11,625 11,206
Commercial real estate 35,550 32,300
Construction 46,071 41,215
---------- ----------
335,362 309,775
Other loans:
Consumer loans 58,043 56,897
Commercial business 9,703 14,216
---------- ----------
403,108 380,888
Less:
Allowance for loan losses 4,784 4,815
Deferred loan fees and net discounts 812 785
Loans in process 19,472 15,008
---------- ----------
$ 378,040 $ 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) September 30, 1999 December 31, 1998
------------------------------------ ------------------------------------
Weighted Weighted
average average
Type of accounts rate Amount % rate Amount %
- ------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits - $ 7,894 1.8% - $ 6,002 1.4%
Interest-bearing demand deposits 2.39% 160,682 38.1% 2.34% 156,994 37.1%
Time deposits 5.24% 253,528 60.1% 5.54% 260,055 61.5%
--------- ------- --------- --------
4.06% $ 422,104 100.0% 4.27% $ 423,051 100.0%
========= ======= ========= ========
Time deposits mature as follows:
Within one year $ 170,987 40.5% $ 145,231 34.3%
After one year through two years 47,962 11.4% 72,845 17.2%
After two years through three years 11,360 2.7% 18,438 4.4%
Thereafter 23,219 5.5% 23,541 5.6%
--------- ------- --------- --------
$ 253,528 60.1% $ 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:
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(Dollar amounts in thousands) September 30, 1999 December 31, 1998
------------------------ -----------------------
Weighted Weighted
average rate Amount average rate Amount
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FHLB advances:
Due within 12 months 6.44% $ 96,121 5.99% $ 98,595
Due beyond 12 months but within 5 years 5.93% 161,256 6.04% 206,660
Due beyond 5 years but within 10 years 5.34% 45,565 7.79% 440
Due beyond 10 years 1.00% 86 6.01% 270
--------- ---------
303,028 305,965
Reverse repurchase agreements:
Due within 90 days 5.53% $ 33,370 5.29% $ 44,860
Due beyond 90 days but within 5 years 5.78% 178,440 5.59% 105,500
-------- --------
211,810 150,360
Treasury tax and loan note payable 162 30
--------- ---------
$ 515,000 $ 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 weighted average number of Common shares and equivalents
outstanding during the period. For purposes of computing basic net income
per share for the three and nine months ended September 30, 1999 and 1998,
the weighted average shares outstanding were 4,956,000 and 4,997,000,
respectively, and 5,315,000 and 5,439,000, respectively. For purposes of
computing diluted net income per share for the three and nine months ended
September 30, 1999 and 1998, the weighted average shares and equivalents
outstanding were 5,065,000 and 5,128,000, respectively, and 5,552,000 and
5,687,000, 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 and
78,605 shares of common stock at $14.00 per share were outstanding as of
September 30, 1999 but were not included in the computation of diluted
earnings per share for the three and nine month periods ended September 30,
1999 because the options' exercise price was greater than the average
market price of common shares. The options expire on June 30, 2008 and June
30, 2009, respectively. Options to purchase 63,735 shares of common stock
at $18.00 per share were outstanding as of September 30, 1998 but were not
included in the computation of diluted earnings per share for the three and
nine month periods ended September 30, 1998 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
In complying with SFAS No. 130, "Reporting Comprehensive Income", the
Company has developed the following tables which include the quarterly and
year-to-date changes in the balances of the accumulated other comprehensive
gains (losses), net of tax as of September 30, 1999 and 1998:
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(In thousands) 1999 1998
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Beginning balance $ (4,022) $ 1,593
Quarterly change (4,415) (817)
-------- -------
Ending balance $ (8,437) $ 776
======== =======
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(In thousands) 1999 1998
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Beginning balance $ 461 $ 2,209
Year-to-date change (8,898) (1,433)
-------- ------
Ending balance $ (8,437) $ 776
======== ======
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8. Business Combination
On July 21, 1999, the Company entered into an Agreement and Plan of
Reorganization with SHS Bancorp, Inc. ("SHS"), parent company of Spring
Hill Savings Bank, 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
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of Operations
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CHANGES IN FINANCIAL CONDITION
General. The Company's total assets increased by $50.9 million or 5.2% to $1.0
billion at September 30, 1999 from $972.4 million at December 31, 1998. This net
increase was primarily the result of increases in securities and loans
receivable of $27.4 million and $17.8 million, respectively. The increase in
total assets reflects a corresponding increase in total liabilities of $59.0
million or 6.5%, partially offset by a decrease in stockholders' equity of $8.1
million or 13.3%. The increase in total liabilities was primarily the result of
increases in borrowed funds and accrued expenses and other liabilities of $58.6
million and $2.7 million, respectively. The decrease in stockholders' equity was
the result of an accumulated other comprehensive loss and an increase in
treasury stock of $8.9 million and $2.0 million, respectively, partially offset
by an increase in retained earnings of $2.6 million.
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 decreased a combined $664,000 or 6.4% to $9.6 million at
September 30, 1999 from $10.3 million at December 31, 1998. The net decrease
between September 30, 1999 and December 31, 1998 can be attributed primarily to
security purchases and loan funding during the period.
Securities. The Company's securities portfolio increased by $27.4 million or
5.0% to $572.4 million at September 30, 1999 from $545.0 million at December 31,
1998. This net increase was primarily the result of purchases of securities of
$195.1 million, consisting of agency bonds and equity securities of $20.0
million and mortgage-backed securities of $175.1 million, during the nine months
ended September 30, 1999. Partially offsetting the purchases of securities were
sales of securities of $73.5 million, consisting of sales of municipal
securities of $17.7 million, equity securities of $780,000 and mortgage-backed
securities of $55.1 million, and repayments and maturities of securities of
$80.1 million, during the nine months ended September 30, 1999.
Loans receivable. Net loans receivable increased $17.8 million or 4.9% to $378.0
million at September 30, 1999 from $360.3 million at December 31, 1998. The
increase was caused by an increase in mortgage loans of $25.6 million or 8.3%
partially offset by a decrease in other loans of $3.4 million or 4.7% and an
increase in allowance for loan losses, deferred loan fees and loans in process
of $4.5 million or 21.6%, during the nine months ended September 30, 1999.
Non-performing assets. Non-performing assets include non-accrual loans and real
estate acquired through foreclosure. Non-performing assets amounted to $4.5
million or 0.44% and $5.0 million or 0.51% of total assets at September 30, 1999
and December 31, 1998, respectively.
Deposits. Total deposits decreased $947,000 or 0.2% to $422.1 million at
September 30, 1999 from $423.1 million at December 31, 1998. This decrease was
primarily the result of a decrease in time deposits of $6.5 million partially
offset by an increase in noninterest bearing and interest bearing deposits of
$1.9 million and $3.7 million, respectively.
Borrowed funds. Borrowed funds increased $58.6 million or 12.9% to $515.0
million at September 30, 1999 from $456.4 million at December 31, 1998. This
increase is primarily the result of the Company utilizing reverse repurchase
agreement borrowings to fund the increase in loans receivable and securities.
Reverse repurchase agreement borrowings increased $61.5 million or 40.9% while
FHLB advances decreased $2.9 million or 1.0% during the nine months ended
September 30, 1999.
Stockholders' equity. Stockholders' equity decreased $8.1 million or 13.3% to
$52.9 million at September 30, 1999 from $61.1 million at December 31, 1998.
This decrease was principally the result of an increase in accumulated other
comprehensive loss and treasury stock of $8.9 million and $2.0 million,
respectively, partially offset by increases in retained earnings and additional
paid-in capital of $2.6 million and $87,000, respectively.
10
RESULTS OF OPERATIONS
General. The Company recorded net income of $1.4 million and $4.3 million for
the three and nine months ended September 30, 1999, respectively, as compared to
net income of $1.5 million and $4.6 million, respectively, for the same periods
in the prior year.
The $76,000 or 5.1% decrease in net income for the three months ended September
30, 1999, as compared to the three months ended September 30, 1998, was
attributable to an increase in noninterest expense and the provision for income
taxes of $88,000 and $54,000, respectively, and a decrease in noninterest income
of $37,000. Partially offsetting these variances between quarters was an
increase in net interest income of $102,000 and a decrease in the provision for
loan losses of $1,000.
The $265,000 or 5.8% decrease in net income for the nine months ended September
30, 1999, as compared to the nine months ended September 30, 1998, was
attributable to a decrease in net interest income of $615,000 and increases in
the provision for loan losses and noninterest expense of $5,000 and $726,000,
respectively. Offsetting this decrease between periods was an increase in
noninterest income of $756,000 and a decrease in the provision for income taxes
of $325,000.
Net interest income. Net interest income increased $102,000 or 2.5% to $4.2
million for the three months ended September 30, 1999, compared to $4.1 million
for the same period in the prior year. The increase in net interest income can
be attributed to an increase in interest income of $368,000, partially offset by
an increase in interest expense of $266,000.
Net interest income decreased $615,000 or 4.9% to $12.0 million for the nine
months ended September 30, 1999, compared to $12.7 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 $603,000 and a decrease in interest income of
$12,000.
Interest income. Interest income increased $368,000 or 2.3% to $16.4 million for
the three months ended September 30, 1999, compared to $16.1 million for the
same period in the prior year. This increase can be attributed primarily to
increases in interest earned on loans receivable, securities and FHLB stock of
$117,000, $242,000 and $12,000, respectively, partially offset by a decrease in
interest earned on interest-earning deposits of $3,000.
Interest earned on loans receivable increased $117,000 or 1.7% to $7.2 million
for the three months ended September 30, 1999, compared to $7.0 million for the
same period in the prior year. This increase was primarily attributable to an
increase in the average balance of loans outstanding of $19.0 million or 5.3% to
$378.5 million for the three months ended September 30, 1999, compared to $359.5
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 7.57% for the three months ended September 30, 1999, compared to
7.84% for the same period in the prior year.
Interest earned on securities increased $242,000 or 2.8% to $8.9 million for the
three months ended September 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 securities held of $8.3 million or 1.5% to
$563.7 million for the three months ended September 30, 1999, compared to $555.4
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 quarter of 1998 and the first three quarters of 1999.
In addition to this volume increase, there was an increase in the tax equivalent
yield on securities to 6.77% for the three months ended September 30, 1999,
compared to 6.72% for the same period in the prior year.
Interest income decreased $12,000 for the nine months ended September 30, 1999,
compared to the same period in the prior year. This decrease can be attributed
primarily to decreases in interest earned on securities and interest-earning
deposits of $347,000 and $14,000, respectively, partially offset by a increases
in interest earned on loans receivable and FHLB stock of $330,000 and $19,000,
respectively.
11
Interest earned on loans receivable increased $330,000 or 1.6% to $21.1 million
for the nine months ended September 30, 1999, compared to $20.8 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 $17.3 million or 4.9% to
$370.4 million for the nine months ended September 30, 1999, compared to $353.1
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 on loans
receivable to 7.59% for the nine months ended September 30, 1999, compared to
7.84% for the same period in the prior year.
Interest earned on securities decreased $347,000 or 1.3% to $25.6 million for
the nine months ended September 30, 1999, compared to $25.9 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 6.61% for the nine months ended
September 30, 1999, compared to 6.76% for the same period in the prior year.
Partially offsetting this decline in the tax equivalent yield was an increase in
the average balance of securities held of $10.0 million or 1.8% to $557.8
million for the nine months ended September 30, 1999, compared to $547.8 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 quarter of 1998 and the first three quarters of 1999.
Interest expense. Interest expense increased $266,000 or 2.2% to $12.3 million
for the three months ended September 30, 1999, compared to $12.0 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 $427,000 and $1,000, respectively. Partially offsetting this increase
was a decrease in interest incurred on deposits of $162,000.
Interest incurred on deposits decreased $162,000 or 3.6% to $4.3 million for the
three months ended September 30, 1999, compared to $4.5 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 4.12% for the
quarter ended September 30, 1999, compared to 4.38% for the same period in the
prior year. Offsetting this decrease in the cost of interest-bearing deposits
was an increase in the average balance of interest-bearing deposits of $10.2
million or 2.5% to $416.8 million for the three months ended September 30, 1999,
compared to $406.6 million for the same period in the prior year.
Interest incurred on borrowed funds increased $427,000 or 6.1% to $7.4 million
for the three months ended September 30, 1999, compared to $7.0 million for the
same period in the prior year. This increase was primarily attributable to an
increase in the average balance of borrowed funds of $48.8 million or 11.0% to
$494.3 million for the three months ended September 30, 1999, compared to $445.4
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 three months ended September 30, 1999,
compared to 6.19% for the same period in the prior year.
Interest expense increased $603,000 or 1.7% to $35.7 million for the nine months
ended September 30, 1999, compared to $35.1 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 $733,000 and
$5,000, respectively. Partially offsetting this increase was a decrease in
interest incurred on deposits of $135,000.
Interest incurred on deposits decreased $135,000 or 1.0% to $13.0 million for
the nine months ended September 30, 1999, compared to $13.1 million for the same
period in the prior year. This decrease was primarily attributable to a decrease
in the cost of interest-bearing deposits to 4.18% for the nine months ended
September 30, 1999, compared to 4.39% for the same period in the prior year.
Partially offsetting this decrease in the cost of interest-bearing deposits was
an increase in the average balance of interest-bearing deposits of $15.9 million
or 4.0% to $416.4 million for the nine months ended September 30, 1999, compared
to $400.5 million for the same period in the prior year.
Interest incurred on borrowed funds increased $733,000 or 3.6% to $21.1 million
for the nine months ended September 30, 1999, compared to $20.3 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 $37.6 million or 8.6% to
$475.3 million for the nine months ended September 30, 1999, compared to $437.7
million for the same period in the
12
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 5.93% for the
nine months ended September 30, 1999, compared to 6.21% for the same period in
the prior year.
Provision for loan losses. Provision for loan losses decreased $1,000 or 25.0%
to $3,000 and increased $5,000 or 125.0% to $9,000 for the three and nine months
ended September 30, 1999, respectively, compared to the same periods in the
prior year. This reflects the adequacy of the Company's allowance for loan
losses as of September 30, 1999. In determining the appropriate level of
allowance for loan losses, management considers historical loss experience, the
present and prospective financial condition of borrowers, current and
prospective economic conditions (particularly as they relate to markets where
the Company originates loans), the status of non-performing assets, the
estimated underlying value of the collateral and other factors related to the
collectability of the loan portfolio. The Company's total allowance for losses
on loans at September 30, 1999 amounted to $4.8 million or 1.19% 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 September 30, 1999 and December 31,
1998, respectively.
Noninterest income. Noninterest income decreased $37,000 or 5.6% to $625,000 for
the three months ended September 30, 1999, compared to $662,000 for the same
period in the prior year. This decrease can be attributed to a decrease in loan
fees and service charges and a net loss on security sales of $52,000 and
$258,000, respectively, between periods, partially offset by increases in the
cash surrender value of the bank owned life insurance ("BOLI") and other income
of $197,000 and $76,000, respectively. Noninterest income increased $756,000 or
51.7% to $2.2 million for the nine months ended September 30, 1999, compared to
$1.5 million for the same period in the prior year. This increase can be
attributed to increases in net gains on security sales, cash surrender value of
the BOLI and other income of $90,000, $571,000 and $192,000, respectively,
between periods, partially offset by a decrease in loan fees and service charges
of $97,000. The increase in other income was attributable to title fee income of
$185,000 which was generated by the Company's subsidiary, THF, Inc.
Noninterest expense. Noninterest expense increased $88,000 or 2.9% to $3.1
million for the three months ended September 30, 1999, from $3.0 million for the
same period in the prior year. This increase was primarily the result of
increases in compensation and employee benefits, and premises and equipment of
$195,000 and $103,000, respectively, which was partially offset by a decrease in
data processing costs and other expenses of $21,000 and $189,000, respectively.
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 $58,000 and equipment repairs and maintenance of $46,000, due to
the new Franklin Township branch office and the Wexford office building. The
decrease in other expenses is the result of a decrease in prepayment fees on
FHLB advances of $227,000, partially offset by increases in year 2000 expenses
and advisory service fees associated with the BOLI of $23,000 and $19,000,
respectively. Noninterest expense increased $726,000 or 8.7% to $9.0 million for
the nine months ended September 30, 1999, from $8.3 million for the same period
in the prior year. This increase was primarily the result of increases in
compensation and employee benefits and premises and equipment of $434,000 and
$308,000, respectively, which was partially offset by decreases in federal
deposit insurance premiums, data processing costs and other expenses of $6,000,
$6,000 and $4,000, respectively. 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, utilities, equipment repairs
and maintenance, real estate taxes and building repairs and maintenance of
$178,000, $25,000, $56,000, $18,000 and $29,000, respectively, due to the new
Franklin Township branch office and the Wexford office building.
Provision for income taxes. The provision for income taxes increased $54,000 or
23.1% to $288,000 for the three months ended September 30, 1999, from $234,000
for the same period in the prior year. The provision for income taxes decreased
$325,000 or 26.9% to $885,000 for the nine months ended September 30, 1999, from
$1.2 million for the same period in the prior year. The decrease for the nine
month period was primarily attributable to an increase in nontaxable income.
13
Average Balance Sheet and Yield/Rate Analysis. The following tables set forth,
for periods indicated, information concerning the total dollar amounts of
interest income from interest-earning assets and the resultant average yields,
the total dollar amounts of interest expense on interest-bearing liabilities and
the resultant average costs, net interest income, interest rate spread and the
net interest margin earned on average interest-earning assets. For purposes of
these tables, average balances are calculated using monthly averages and the
average loan balances include non-accrual loans and exclude the allowance for
loan losses, and interest income includes accretion of net deferred loan fees.
Interest and yields on tax-exempt securities (tax-exempt for federal income tax
purposes) are shown on a fully tax equivalent basis utilizing a federal tax rate
of 34%. Yields and rates have been calculated on an annualized basis utilizing
monthly interest amounts.
- ----------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Three months ended September 30,
1999 1998
-------------------------------------- -------------------------------------
Average Yield / Average Yield /
Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
- -----------------------
Taxable securities available for sale $ 472,563 $ 7,648 6.47% $ 391,419 $ 6,394 6.53%
Tax-exempt securities available for sale 91,094 1,895 8.32% 90,178 1,834 8.14%
Taxable securities held to maturity - - 0.00% 65,776 948 5.77%
Tax-exempt securities held to maturity - - 0.00% 7,993 159 7.96%
-------------- ----------- --------- ---------- ----------- ----------
563,657 9,543 6.77% 555,366 9,335 6.72%
-------------- ----------- --------- ---------- ----------- ----------
Mortgage loans 310,069 5,832 7.52% 290,279 5,660 7.80%
Other loans 68,405 1,327 7.76% 69,201 1,382 7.99%
-------------- ----------- --------- ---------- ----------- ----------
378,474 7,159 7.57% 359,480 7,042 7.84%
-------------- ----------- --------- ---------- ----------- ----------
Cash equivalents 8,658 73 3.37% 7,192 76 4.23%
FHLB stock 18,435 314 6.81% 18,435 302 6.55%
-------------- ----------- --------- ---------- ----------- ----------
27,093 387 5.71% 25,627 378 5.90%
-------------- ----------- --------- ---------- ----------- ----------
Total interest-earning assets 969,224 17,089 7.05% 940,473 16,755 7.13%
Other noninterest-earning assets 41,298 - - 18,994 - -
-------------- ----------- --------- ---------- ----------- ----------
Total assets $1,010,522 $ 17,089 6.76% $ 959,467 $ 16,755 6.99%
============== =========== ========= ========== =========== ==========
Interest-bearing liabilities:
- -----------------------------
Interest-bearing demand deposits $ 163,200 $ 981 2.38% $ 152,454 $ 916 2.38%
Time deposits 253,615 3,350 5.24% 254,171 3,577 5.58%
-------------- ----------- --------- ---------- ----------- ----------
416,815 4,331 4.12% 406,625 4,493 4.38%
-------------- ----------- --------- ---------- ----------- ----------
FHLB advances 312,294 4,873 6.19% 326,298 5,220 6.35%
Reverse repo's & other borrowings 181,966 2,507 5.47% 119,118 1,733 5.77%
-------------- ----------- --------- ---------- ----------- ----------
494,260 7,380 5.92% 445,416 6,953 6.19%
-------------- ----------- --------- ---------- ----------- ----------
Trust preferred securities 24,055 557 9.19% 24,012 556 9.19%
-------------- ----------- --------- ---------- ----------- ----------
Total interest-bearing liabilities 935,130 12,268 5.20% 876,053 12,002 5.44%
Noninterest-bearing demand deposits 12,494 - - 9,286 - -
Other noninterest-bearing liabilities 7,588 - - 7,722 - -
-------------- ----------- --------- ---------- ----------- ----------
Total liabilities 955,212 12,268 5.10% 893,061 12,002 5.33%
Stockholders' equity 55,310 - - 66,406 - -
-------------- ----------- --------- ---------- ----------- ----------
Total liabilities and equity $1,010,522 $ 12,268 4.82% $ 959,467 $ 12,002 4.96%
============== =========== ========= ========== =========== ==========
Net interest income $ 4,821 $ 4,753
=========== ===========
Interest rate spread (difference between 1.85% 1.69%
========= ==========
weighted average rate on interest-earning
assets and interest-bearing
liabilities)
Net interest margin (net interest 1.99% 2.02%
========= ==========
income as a percentage of average
interest-earning assets)
- ----------------------------------------------------------------------------------------------------------------------------
14
- ----------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Nine months ended September 30,
1999 1998
------------------------------------- -------------------------------------
Average Yield / Average Yield /
Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
- ------------------------
Taxable securities available for sale $ 426,964 $ 20,374 6.36% $ 386,600 $ 19,143 6.60%
Tax-exempt securities available for sale 94,828 5,812 8.17% 78,803 4,843 8.19%
Taxable securities held to maturity 31,131 1,210 5.18% 74,167 3,265 5.87%
Tax-exempt securities held to maturity 4,886 266 7.26% 8,210 514 8.35%
--------- --------- ---- --------- --------- ----
557,809 27,662 6.61% 547,780 27,765 6.76%
--------- --------- ---- --------- --------- ----
Mortgage loans 301,028 17,123 7.58% 287,147 16,776 7.79%
Other loans 69,333 3,961 7.62% 65,919 3,978 8.05%
--------- --------- ---- --------- --------- ----
370,361 21,084 7.59% 353,066 20,754 7.84%
--------- --------- ---- --------- --------- ----
Cash equivalents 8,553 200 3.12% 8,174 214 3.49%
FHLB stock 18,435 908 6.57% 18,294 889 6.48%
--------- --------- ---- --------- --------- ----
26,988 1,108 5.47% 26,468 1,103 5.56%
--------- --------- ---- --------- --------- ----
Total interest-earning assets 955,158 49,854 6.96% 927,314 49,622 7.13%
Other noninterest-earning assets 38,361 - - 18,287 - -
--------- --------- ---- --------- --------- ----
Total assets $ 993,519 $ 49,854 6.69% $ 945,601 $ 49,622 7.00%
========= ========= ==== ========= ========= ====
Interest-bearing liabilities:
- -----------------------------
Interest-bearing demand deposits $ 161,294 $ 2,857 2.37% $ 151,693 $ 2,719 2.40%
Time deposits 255,071 10,155 5.32% 248,764 10,428 5.60%
--------- --------- ---- --------- --------- ----
416,365 13,012 4.18% 400,457 13,147 4.39%
--------- --------- ---- --------- --------- ----
FHLB advances 321,432 14,690 6.11% 335,627 15,922 6.34%
Reverse repo's & other borrowings 153,823 6,372 5.54% 102,025 4,407 5.78%
--------- --------- ---- --------- --------- ----
475,255 21,062 5.93% 437,652 20,329 6.21%
--------- --------- ---- --------- --------- ----
Trust preferred securities 24,044 1,670 9.29% 24,033 1,665 9.26%
--------- --------- ---- --------- --------- ----
Total interest-bearing liabilities 915,664 35,744 5.22% 862,142 35,141 5.45%
Noninterest-bearing demand deposits 11,459 - - 9,074 - -
Other noninterest-bearing liabilities 6,797 - - 6,749 - -
--------- --------- ---- --------- --------- ----
Total liabilities 933,920 35,744 5.12% 877,965 35,141 5.35%
Stockholders' equity 59,599 - - 67,636 - -
--------- --------- ---- --------- --------- ----
Total liabilities and equity $ 993,519 $ 35,744 4.81% $ 945,601 $ 35,141 4.97%
========= ========= ==== ========= ========= ====
Net interest income $ 14,110 $ 14,481
========= =========
Interest rate spread (difference between 1.74% 1.69%
==== ====
weighted average rate on interest-earning
assets and interest-bearing liabilities)
Net interest margin (net interest 1.97% 2.08%
==== ====
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 nine
month periods ended September 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
September 30, 1999 and 1998 is presented as follows:
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands) 1999 versus 1998
Increase (decrease) due to
----------------------------------------------
Volume Rate Total
- -----------------------------------------------------------------------------------------------------------------------------
Interest income:
Securities $ 140 $ 68 $ 208
Loans 364 (247) 117
Cash equivalents 14 (17) (3)
FHLB stock - 12 12
--------- -------- ---------
Total interest-earning assets 518 (184) 334
--------- -------- ---------
Interest expense:
Deposits 111 (273) (162)
FHLB advances (221) (126) (347)
Reverse repurchases & other borrowings 870 (96) 774
Trust preferred securities 1 - 1
--------- -------- ---------
Total interest-bearing liabilities 761 (495) 266
--------- -------- ---------
Net interest income $ (243) $ 311 $ 68
========= ======== =========
- -----------------------------------------------------------------------------------------------------------------------------
The table analyzing changes in interest income between the nine months ended
September 30, 1999 and 1998 is presented as follows:
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands) 1999 versus 1998
Increase (decrease) due to
----------------------------------------------
Volume Rate Total
- -----------------------------------------------------------------------------------------------------------------------------
Interest income:
Securities $ 503 $ (606) $ (103)
Loans 997 (667) 330
Cash equivalents 10 (24) (14)
FHLB stock 7 12 19
--------- -------- --------
Total interest-earning assets 1,517 (1,285) 232
--------- -------- --------
Interest expense:
Deposits 511 (646) (135)
FHLB advances (660) (572) (1,232)
Reverse repurchases & other borrowings 2,153 (188) 1,965
Trust preferred securities 1 4 5
--------- -------- --------
Total interest-bearing liabilities 2,005 (1,402) 603
--------- -------- --------
Net interest income $ (488) $ 117 $ (371)
========= ======== ========
- -----------------------------------------------------------------------------------------------------------------------------
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
16
asset/liability management in order to insulate the Company from material and
prolonged increases in interest rates. As a result of this policy, the Company
emphasizes a larger, more diversified portfolio of residential mortgage loans in
the form of mortgage-backed securities. Mortgage-backed securities generally
increase the quality of the Company's assets by virtue of the insurance or
guarantees that back them, are more liquid than individual mortgage loans and
may be used to collateralize borrowings or other obligations of the Company.
The Company's Board of Directors has established an Asset and Liability
Management Committee consisting of two outside directors, the President and
Chief Executive Officer, 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 September 30, 1999, the implementation of these asset and liability
initiatives resulted in the following: (i) $182.8 million or 45.4% of the
Company's total loan portfolio had adjustable interest rates or maturities of 12
months or less; (ii) $126.9 million or 45.0% of the Company's portfolio of
single-family residential mortgage loans (including residential construction
loans) consisted of ARMs, (iii) $83.2 million or 20.5% 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 September 30, 1999, the
Company's interest-earning assets maturing or repricing within one year totaled
$392.0 million while the Company's interest-bearing liabilities maturing or
repricing within one-year totaled $482.9 million, providing a deficiency of
interest-earning assets over interest-bearing liabilities of $90.9 million or a
negative 8.89% of total assets. At September 30, 1999, the percentage of the
Company's assets to liabilities maturing or repricing within one year was 81.2%.
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 September 30, 1999, 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 2.9% 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 customers'
withdrawals and the repayment of short term borrowings. The liquidity
requirement is calculated as a percentage of deposits and short-term borrowings,
as defined by the OTS, and currently must be maintained at amounts not less than
4.0%. The Bank's liquidity ratio fluctuates depending primarily upon deposit
flows but has been consistently maintained at levels in excess of the required
percentage. At September 30, 1999, the Bank's liquidity ratio was 13.5%.
The Company's primary sources of funds generally have been deposits obtained
through the offices of the Bank, borrowings from the FHLB, reverse repurchase
agreement borrowings and amortization and prepayments of outstanding loans and
maturing investment securities. During the nine months ended September 30, 1999,
the Company used its sources of funds primarily to purchase securities, and to a
lesser extent, fund loan commitments. As of such date, the Company had
outstanding loan commitments totaling $16.4 million, unused lines of credit
totaling $21.5 million and $19.4 million of undisbursed loans in process.
At September 30, 1999, certificates of deposit amounted to $253.5 million or
60.1% of the Company's total consolidated deposits, including $171.0 million
which were scheduled to mature by September 30, 2000. At the same date, the
total amount of FHLB advances which were scheduled to mature by September 30,
2000 was $96.1 million. Management of the Company believes that it has adequate
resources to fund all of its commitments, that all of its commitments will be
funded by September 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 September 30, 1999, the Bank was in compliance with all
regulatory capital requirements with tangible, core and risk-based capital
ratios of 6.5%, 6.5% and 17.4%, 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 was to be
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 all vendors and indications at this time are that all of the
Company's major vendors will be Year 2000 compliant. The Company has formulated
and tested 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
- ------------------------------------------------------------
None.
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 July 23, 1999 to report
that the Company and SHS Bancorp, Inc. entered into an Agreement and Plan
of Reorganization (including an Agreement of Merger) which sets forth the
terms and conditions under which SHS will merge with and into the
Company. For additional information herein, see Note 8 to the
Consolidated Financial Statements.
The Company filed a Form 8-K dated September 21, 1999 to report a $0.09
per common share cash dividend payable October 25, 1999 to stockholders
of record at the close of business on September 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: November 12, 1999 By: /s/ Charlotte A. Zuschlag
---------------------------------------
Charlotte A. Zuschlag
President and Chief Executive Officer
Date: November 12, 1999 By: /s/ Charles P. Evanoski
--------------------------------------
Charles P. Evanoski
Senior Vice President and
Chief Financial Officer
22