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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For Quarter Ended: MARCH 31, 2002
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Commission File Number: 0-19345
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ESB FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1659846
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
600 LAWRENCE AVENUE, ELLWOOD CITY, PA 16117
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(Address of principal executive offices) (Zip Code)
(724) 758-5584
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
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Number of shares of common stock outstanding as of April 30, 2002:
COMMON STOCK, $0.01 PAR VALUE 7,314,418 SHARES
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(Class) (Outstanding)
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ESB FINANCIAL CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of March 31, 2002 (Unaudited) and December 31, 2001.............1
Consolidated Statements of Operations for the three
months ended March 31, 2002 and 2001 (Unaudited)...................2
Consolidated Statements of Changes in Stockholders' Equity
for the three months ended March 31, 2002 (Unaudited)..............3
Consolidated Statements of Cash Flows for the three
months ended March 31, 2002 and 2001 (Unaudited)...................4
Notes to Consolidated Financial Statements.........................6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations..................11
Item 3. Quantitative and Qualitative Disclosures about Market Risk........17
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings.................................................18
Item 2. Changes in Securities.............................................18
Item 3. Defaults Upon Senior Securities...................................18
Item 4. Submission of Matters to a Vote of Security Holders...............18
Item 5. Other Information.................................................18
Item 6. Exhibits and Reports on Form 8-K..................................18
Signatures........................................................19
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
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ESB FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
As of March 31, 2002 (Unaudited) and December 31, 2001
(Dollar amounts in thousands)
MARCH 31,
2002 DECEMBER 31,
(Unaudited) 2001
----------- -----------
ASSETS
------
Cash on hand and in banks $ 3,084 $ 4,135
Interest-earning deposits 6,445 9,489
Federal funds sold 535 1,855
Securities available for sale; cost of $683,172 and $636,815 683,455 640,282
Loans receivable, net of allowance for loan losses of $5,152 and $5,147 506,986 523,132
Accrued interest receivable 7,827 8,219
Federal Home Loan Bank (FHLB) stock 24,095 21,889
Premises and equipment, net 9,814 9,883
Real estate acquired through foreclosure, net 1,582 1,590
Real estate held for investment 13,852 7,253
Prepaid expenses and other assets 13,390 12,817
Bank owned life insurance 22,821 22,524
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TOTAL ASSETS $ 1,293,886 $ 1,263,068
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Deposits $ 591,550 $ 591,999
Borrowed funds 480,125 434,003
Repurchase agreements 99,640 119,640
Guaranteed preferred beneficial interest in subordinated debt, net 24,170 24,159
Advance payments by borrowers for taxes and insurance 4,781 4,058
Accrued expenses and other liabilities 14,347 9,306
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TOTAL LIABILITIES 1,214,613 1,183,165
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STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized;none issued
Common stock, $.01 par value, 10,000,000 shares authorized;
7,706,580 and 7,706,580 shares issued;
7,312,499 and 7,320,388 shares outstanding 77 77
Additional paid-in capital 57,980 57,906
Treasury stock, at cost; 394,081 and 386,192 shares (4,389) (4,318)
Unearned Employee Stock Ownership Plan (ESOP) shares (2,769) (2,912)
Unvested shares held by Management Recognition Plan (MRP) (247) (255)
Retained earnings 28,434 27,117
Accumulated other comprehensive income, net 187 2,288
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TOTAL STOCKHOLDERS' EQUITY 79,273 79,903
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,293,886 $ 1,263,068
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See accompanying notes to consolidated financial statements.
1
ESB FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations For the three months
ended March 31, 2002 and 2001 (Unaudited)
(Dollar amounts in thousands, except share data)
THREE MONTHS ENDED
MARCH 31,
------------------
2002 2001
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INTEREST INCOME:
Loans receivable $ 9,466 $10,028
Securities available for sale 9,038 9,969
FHLB stock 244 354
Deposits with banks and federal funds sold 34 81
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TOTAL INTEREST INCOME 18,782 20,432
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INTEREST EXPENSE:
Deposits 4,989 5,882
Borrowed funds and repurchase agreements 7,722 8,959
Guaranteed preferred beneficial interest in subordinated debt 557 557
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TOTAL INTEREST EXPENSE 13,268 15,398
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NET INTEREST INCOME 5,514 5,034
Provision for loan losses 13 6
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,501 5,028
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NONINTEREST INCOME:
Fees and service charges 522 423
Net realized gain on sales of securities available for sale 125 3
Increase of cash surrender value of bank owned life insurance 297 222
Other 126 125
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TOTAL NONINTEREST INCOME 1,070 773
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NONINTEREST EXPENSE:
Compensation and employee benefits 2,333 2,057
Premises and equipment 591 564
Federal deposit insurance premiums 26 26
Data processing 186 120
Other 917 865
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TOTAL NONINTEREST EXPENSE 4,053 3,632
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INCOME BEFORE PROVISION FOR INCOME TAXES 2,518 2,169
Provision for income taxes 407 343
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NET INCOME $ 2,111 $ 1,826
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NET INCOME PER SHARE:
Basic $ 0.30 $ 0.27
Diluted $ 0.29 $ 0.27
Net income per share, for the quarter ended March 31, 2001, has been restated to
reflect a six-for-five stock split.
See accompanying notes to consolidated financial statements.
2
ESB FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the three months ended March 31, 2002 (Unaudited)
(Dollar amounts in thousands)
ACCUMULATED
OTHER
ADDITIONAL UNEARNED UNVESTED COMPREHENSIVE TOTAL
COMMON PAID-IN TREASURY ESOP MRP RETAINED INCOME (LOSS) STOCKHOLDERS'
STOCK CAPITAL STOCK SHARES SHARES EARNINGS NET OF TAX EQUITY
------- ----------- ----------- ----------- --------- --------- ------------- ---------------
BALANCE AT DECEMBER 31, 2001 $ 77 $ 57,906 $ (4,318) $ (2,912) $ (255) $ 27,117 $ 2,288 $ 79,903
Comprehensive results:
Net income - - - - - 2,111 - 2,111
Other comprehensive results, net - - - - - - (2,296) (2,296)
Reclassification adjustment - - - - - - 195 195
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Total comprehensive results - - - - - 2,111 (2,101) 10
Cash dividends at $0.10 per share - - - - - (701) - (701)
Purchase of treasury stock, at
cost (21,552 shares) - - (236) - - - - (236)
Reissuance of treasury stock
for stock option exercises - 44 165 - - (93) - 116
Principal payments on ESOP debt - 30 - 143 - - - 173
Additional ESOP shares purchased - - - - - - - -
Accrued compensation expense MRP - - - - 8 - - 8
------- ----------- ----------- ----------- --------- --------- ------------- ---------------
BALANCE AT MARCH 31, 2002 $ 77 $ 57,980 $ (4,389) $ (2,769) $ (247) $ 28,434 $ 187 $ 79,273
======= =========== =========== =========== ========= ========= ============= ===============
See accompanying notes to consolidated financial statements.
3
ESB FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three months ended March 31, 2002 and 2001 (Unaudited)
(Dollar amounts in thousands)
THREE MONTHS ENDED
MARCH 31,
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2002 2001
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Operating activities:
Net income $ 2,111 $ 1,826
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Depreciation and amortization for premises and equipment 225 210
Provision for losses 15 7
Amortization of premiums and accretion of discounts 341 (253)
Origination of loans available for sale (6,759) (3,525)
Proceeds from sale of loans available for sale 6,846 3,536
Gain on sale of securities available for sale (125) (3)
Amortization of intangible assets 56 2
Amortization of goodwill - 184
Compensation expense on ESOP 173 140
Compensation expense on MRP 8 -
Decrease in accrued interest receivable 392 65
(Decrease) increase in prepaid expenses and other assets 454 (622)
Increase in accrued expenses and other liabilities 5,041 1,149
Other 384 (371)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 9,162 2,345
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INVESTING ACTIVITIES:
Loan originations and purchases (36,674) (33,179)
Purchases of securities available for sale (122,587) (33,048)
Purchases of FHLB stock (2,206) (45)
Additions to premises and equipment (159) (71)
Additions to real estate held for investment (6,599) -
Purchase of bank owned life insurance - (3,500)
Principal repayments of loans receivable 52,772 22,440
Principal repayments of securities available for sale 44,995 20,688
Proceeds from the sale of securities available for sale 31,060 23,558
Proceeds from sale of REO - 317
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NET CASH USED IN INVESTING ACTIVITIES (39,398) (2,840)
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FINANCING ACTIVITIES:
Net (decrease) increase in deposits (449) 11,285
Proceeds from long-term borrowings 70,000 24,522
Repayments of long-term borrowings (25,898) (25,000)
Net decrease in short-term borrowings (17,980) (8,396)
Proceeds received from exercise of stock options 116 65
Dividends paid (732) (601)
Payments to acquire treasury stock (236) (754)
Stock purchased by ESOP - (44)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 24,821 1,077
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Net (decrease) increase in cash equivalents (5,415) 582
Cash equivalents at beginning of period 15,479 13,326
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Cash equivalents at end of period $10,064 $ 13,908
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Continued
4
ESB FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, (Continued)
For the three months ended March 31, 2002 and 2001 (Unaudited)
(Dollar amounts in thousands)
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2002 2001
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SUPPLEMENTAL INFORMATION:
Interest paid $ 13,688 $ 16,307
Income taxes paid 572 375
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfers from loans receivable to real estate acquired
through foreclosure - -
Dividends declared but not paid 731 594
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 publicly traded
Pennsylvania thrift holding company. The consolidated financial
statements include the accounts of the Company and its direct and
indirect wholly-owned subsidiaries, which are ESB Bank, F.S.B. (ESB or
the Bank), PennFirst Financial Services, Inc., PennFirst Capital Trust
I, THF, Inc., ESB Financial Services, Inc. (EFS), AMSCO, Inc. (AMSCO)
and PennFirst Financial Advisory Services, Inc.
AMSCO is engaged in real estate development, property management and
condominium projects independently or in conjunction with its joint
ventures. Three of the joint ventures are 51% owned by AMSCO and the
Bank has provided all development and construction financing. The three
joint ventures have been included in the consolidated financial
statements and reflected within the balance sheet as real estate held
for investment and related operating income and expenses reflected
within other non interest income or expense. The Bank loans to AMSCO
and related interest have been eliminated in consolidation.
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, 2001,
as contained in the 2001 Annual Report to Shareholders.
The results of operations for the three month period ended March 31,
2002 are not necessarily indicative of the results that may be expected
for the entire year. Certain amounts previously reported have been
reclassified to conform to the current year's reporting format.
2. OPERATING SEGMENTS
An operating segment is defined as a component of an enterprise that
engages in business activities that generate revenue and incur expense,
and the operating results of which are reviewed by management. At March
31, 2002, the Company was doing business through 17 full service
banking branches, one loan production office and its various other
subsidiaries. Loans and deposits are primarily generated from the areas
where banking branches are located. The Company derives its income
predominantly from interest on loans and securities and to a lesser
extent, noninterest income. The Company's principal expenses are
interest paid on deposits and borrowed funds and normal operating
costs. The Company's operations are principally in the savings and loan
industry. Consistent with internal reporting, the Company's operations
are reported in one operating segment, which is community banking.
6
3. SECURITIES
The Company's securities available for sale portfolio is summarized as
follows:
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(Dollar amounts in thousands) Amortized Unrealized Unrealized Fair
cost gains losses value
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AVAILABLE FOR SALE:
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AS OF MARCH 31, 2002:
Trust preferred securities $ 1,967 $ 13 $ (83) $ 1,897
U.S. Government securities 5,975 130 - 6,105
Municipal securities 88,116 1,410 (516) 89,010
Equity securities 1,600 124 (60) 1,664
Corporate bonds 116,320 1,325 (5,621) 112,024
Mortgage-backed securities 469,194 5,255 (1,694) 472,755
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$ 683,172 $ 8,257 $ (7,974) $ 683,455
============ ============ =========== ============
AS OF DECEMBER 31, 2001:
Trust preferred securities $ 1,967 $ - $ (17) $ 1,950
U.S. Government securities 5,975 318 - 6,293
Municipal securities 87,648 964 (680) 87,932
Equity securities 2,360 144 (253) 2,251
Corporate bonds 116,325 1,974 (3,839) 114,460
Mortgage-backed securities 422,540 5,447 (591) 427,396
------------ ------------ ----------- ------------
$ 636,815 $ 8,847 $ (5,380) $ 640,282
============ ============ =========== ============
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4. LOANS RECEIVABLE
The Company's loans receivable as of the respective dates are
summarized as follows:
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MARCH 31, DECEMBER 31,
(Dollar amounts in thousands) 2002 2001
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MORTGAGE LOANS:
Residential - single family $ 323,505 $ 337,896
Residential - multi family 29,102 29,154
Commercial real estate 54,264 48,869
Construction 43,222 46,073
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450,093 461,992
OTHER LOANS:
Consumer loans 63,180 65,815
Commercial business 13,927 15,264
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527,200 543,071
LESS:
Allowance for loan losses 5,152 5,147
Deferred loan fees and net discounts 467 483
Loans in process 14,595 14,309
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$ 506,986 $ 523,132
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5. DEPOSITS
7
The Company's deposits as of the respective dates are summarized as
follows:
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(Dollar amounts in thousands) MARCH 31, 2002 DECEMBER 31, 2001
---------------------------- ------------------------
Type of accounts Amount % Amount %
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Noninterest-bearing deposits $ 16,319 2.8% $ 16,126 2.7%
NOW account deposits 44,440 7.5% 43,592 7.4%
Money Market deposits 74,834 12.7% 72,706 12.3%
Passbook account deposits 91,330 15.4% 85,765 14.5%
Time deposits 364,627 61.6% 373,810 63.1%
----------- ----------- ------------ -----------
$ 591,550 100.0% $ 591,999 100.0%
=========== =========== ============ ===========
Time deposits mature as follows:
Within one year $ 247,287 41.8% $ 263,091 44.4%
After one year through two years 58,587 9.9% 80,348 13.6%
After two years through three years 30,295 5.1% 17,292 2.9%
Thereafter 28,458 4.8% 13,079 2.2%
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$ 364,627 61.6% $ 373,810 63.1%
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6. BORROWED FUNDS
The Company's borrowed funds as of the respective dates are summarized
as follows:
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(Dollar amounts in thousands) MARCH 31, 2002 DECEMBER 31, 2001
----------------------- -----------------------
Weighted Weighted
average rate Amount average rate Amount
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FHLB ADVANCES:
Due within 12 months 5.33% $ 192,287 5.14% $ 171,051
Due beyond 12 months but within 2 years 6.26% 132,699 6.36% 157,699
Due beyond 2 years but within 3 years 5.05% 77,055 5.25% 77,055
Due beyond 3 years but within 4 years 4.95% 64,407 5.47% 23,885
Due beyond 4 years but within 5 years 5.43% 13,336 6.07% 1,816
Due beyond 5 years 6.89% 180 6.69% 2,309
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479,964 433,815
TREASURY TAX AND LOAN NOTE PAYABLE 1.54% 161 1.64% 188
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$ 480,125 $ 434,003
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REPURCHASE AGREEMENTS:
Due within 12 months 5.09% $ 88,640 5.19% $ 98,040
Due beyond 12 months but within 2 years 7.30% 11,000 6.96% 10,600
Due beyond 2 years but within 3 years - - 7.30% 11,000
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$ 99,640 $ 119,640
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Included in the $480.0 million of FHLB advances, is approximately $65.5
million of convertible select advances. These advances are fixed to the
call date. The FHLB has the right to call any convertible select
advance on its call date or quarterly thereafter. At the call date the
advances may reset, at various spreads, to the three month London
Interbank Offer Rate Index (LIBOR). Should the advance be called, the
Company has the right to pay off the advance without penalty. It has
historically been the Company's position to pay off the advance and
replace it with fixed-rate funding.
7. NET INCOME PER SHARE
8
The following table summarizes the Company's net income per share.
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(Amounts, except earnings per share, in thousands)
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Three Months Three Months
Ended Ended
March 31, 2002 March 31, 2001
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Net income $ 2,111 $ 1,826
Weighted-average common shares outstanding 7,011 6,807
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BASIC EARNINGS PER SHARE $ 0.30 $ 0.27
================= ================
Weighted-average common shares outstanding 7,011 6,807
Common stock equivalents due to effect of stock options 168 83
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Total weighted-average common shares and equivalents 7,179 6,890
DILUTED EARNINGS PER SHARE $ 0.29 $ 0.27
================= ================
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The shares controlled by the ESOP 302,984 and 306,398 at March 31, 2002
and March 31, 2001 are not considered in the weighted average shares
outstanding until the shares are committed for allocation to an
employee's individual account. Options to purchase 80,220 shares of
common stock at $13.63 per share were outstanding as of March 31, 2002
but were not included in the computation of diluted earnings per share
because the options' exercise price was greater than the average market
price of the common shares. The options expire on June 16, 2008.
Options to purchase 88,475 shares of common stock at $8.84 per share,
80,220 shares of common stock at $13.63 per share and 101,842 shares of
common stock at $10.61 per share were outstanding as of March 31, 2001
but were not included in the computation of diluted earnings per share
because the options' exercise price was greater than the average market
price of the common shares. The options expire on June 17, 2007, June
16, 2008 and June 15, 2009, respectively.
8. OTHER COMPREHENSIVE INCOME
Pursuant to Financial Accounting Standards (FAS) 130, "Reporting
Comprehensive Income", is provided the following table, which includes
the tax effects of the components of other comprehensive income (loss).
Other comprehensive income (loss) consists of net unrealized gain on
securities available for sale. Other comprehensive income and related
tax effects for the three months ended March 31 consists of:
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(Dollar amounts in thousands) 2002 2001
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Unrealized Reclassification Unrealized Reclassification
Loss Adjustment Gain Adjustment
------------- ----------------- -------------- ------------------
Before tax amount $ (3,479) $ 295 $ 7,460 $ (47)
Tax (expense) benefit 1,183 (100) (2,536) 16
------------- ----------------- -------------- ------------------
After tax amount $ (2,296) $ 195 $ 4,924 $ (31)
============= ================= ============== ==================
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Total comprehensive income for the three months ended March 31, 2002
and 2001 was $10,000 and $6.7 million, respectively.
9. EFFECT OF RECENT ACCOUNTING AND REGULATORY PRONOUNCEMENTS
9
On January 1, 2002, the Company adopted FAS 142 "Goodwill and Other
Intangible Assets". FAS 142 requires that goodwill and other indefinite
lived intangible assets will no longer be amortized but will be subject
to annual impairment tests. The Company has determined that if FAS 142
had been in effect for the quarter ended March 31, 2001, the
comparative results would have been:
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(Dollar amounts in thousands,except share data)
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Three Months Three Months
Ended Ended
March 31,2002 March 31,2001
---------------- ----------------
Reported net income $ 2,111 $ 1,826
Add back: Goodwill amortization - 184
---------------- ----------------
Adjusted net income $ 2,111 $ 2,010
================ ================
Basic earnings per share:
Reported earnings per share $ 0.30 $ 0.27
Goodwill amortization - 0.03
---------------- ----------------
Adjusted earnings per share $ 0.30 $ 0.30
================ ================
Diluted earnings per share:
Reported earnings per share $ 0.29 $ 0.27
Goodwill amortization - 0.02
---------------- ----------------
Adjusted earnings per share $ 0.29 $ 0.29
================ ================
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10
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 $31.0 million or 2.5% to $1.3
billion at March 31, 2002. Securities, Federal Home Loan Bank (FHLB) stock, real
estate held for investment, prepaid expenses and other assets and bank owned
life insurance increased $43.2 million, $2.2 million, $6.6 million, $573,000 and
$297,000, respectively. These increases were partially offset by decreases in
cash and cash equivalents, net loans receivable, accrued interest receivable and
premises and equipment of $5.4 million, $16.1 million, $392,000, and $69,000,
respectively. The increase in total assets reflects a corresponding increase in
total liabilities of $31.6 million or 2.7% and a decrease in stockholders'
equity of $630,000 or 0.8%. The increase in total liabilities was primarily the
result of increases in borrowed funds, advance payments by borrowers for taxes
and insurance and accrued expenses and other liabilities of $46.1 million,
$723,000 and $5.0 million, respectively. These increases were partially offset
by decreases in deposits and repurchase agreements of $449,000 and $20.0
million, respectively. The decrease in stockholders' equity was the result of a
decrease in accumulated other comprehensive income of $2.1 million and an
increase in treasury stock of $71,000, partially offset by increases in retained
earnings of $1.3 million and a decrease in unearned Employee Stock Ownership
Plan (ESOP) shares of $143,000.
CASH ON HAND, INTEREST-EARNING DEPOSITS AND FEDERAL FUNDS SOLD. Cash on hand,
interest-earning deposits and federal funds sold represent cash equivalents.
Cash equivalents decreased a combined $5.4 million or 35.0% to $10.1 million at
March 31, 2002 from $15.5 million at December 31, 2001. These accounts are
typically increased by deposits from customers into savings and checking
accounts, loan and security repayments and proceeds from borrowed funds.
Decreases result from customer withdrawals, new loan originations, security
purchases and repayments of borrowed funds.
SECURITIES. The Company's securities portfolio increased by $43.2 million or
6.7% to $683.5 million at March 31, 2002 from $640.3 million at December 31,
2001. During the quarter ended March 31, 2002, the Company recorded purchases of
available for sale securities of $122.6 million, consisting of purchases of
mortgage-backed securities of $103.9 million, corporate bonds of $9.2 million
and municipal bonds of $9.5 million. Partially offsetting the purchases of
securities were sales of available for sale securities of $31.1 million,
consisting of sales of municipal bonds of $8.0 million, mortgage-backed
securities of $13.0 million, corporate bonds of $9.2 million and equity
securities of $602,000 and repayments and maturities of securities of $45.0
million, during the three months ended March 31, 2002.
REAL ESTATE HELD FOR INVESTMENT. The Company's real estate held for investment
increased $6.6 million or 93.0% to $14.0 million at March 31, 2002, as a result
of increased activity in the joint ventures in which the Company has a 51%
ownership.
LOANS RECEIVABLE. Net loans receivable decreased $16.1 million or 3.1% to $507.0
million at March 31, 2002 from $523.1 million at December 31, 2001. This
decrease was the result of decreases in mortgage loans of $11.9 million or 2.6%
and other loans of $4.0 million or 4.9%, partially offset by an increase in
allowance for loan losses, deferred loan fees and loans in process of $275,000
or 1.4%, during the three months ended March 31, 2002.
NON-PERFORMING ASSETS. Non-performing assets include non-accrual loans and real
estate acquired through foreclosure. Non-performing assets amounted to $3.9
million or 0.30% and $4.1 million or 0.32% of total assets at March 31, 2002 and
December 31, 2001, respectively.
DEPOSITS. Total deposits decreased $449,000 or 0.1% to $591.6 million at March
31, 2002 from $592.0 million at December 31, 2001. Non-interest bearing deposits
and interest-bearing demand deposit accounts increased $193,000 and $8.5
million, respectively, while time deposits decreased $9.2 million, during the
three months ended March 31, 2002.
11
BORROWED FUNDS AND REPURCHASE AGREEMENTS. Borrowed funds and repurchase
agreements increased a combined $26.1 million or 4.7% to $579.8 million at March
31, 2002 from $553.6 million at December 31, 2001. FHLB advances increased $46.1
million or 10.6% while repurchase agreement borrowings decreased $20.0 million
or 16.7% during the three months ended March 31, 2002.
STOCKHOLDERS' EQUITY. Stockholders' equity decreased $630,000 to $79.3 million
at March 31, 2002 from $79.9 million at December 31, 2001. The decrease in
stockholders' equity was the result of a decrease in accumulated other
comprehensive income of $2.1 million and an increase in treasury stock of
$71,000, partially offset by increases in retained earnings of $1.3 million and
a decrease in unearned ESOP shares of $143,000. The decrease to accumulated
other comprehensive income is a result of the market value adjustment to the
Company's securities available for sale portfolio.
RESULTS OF OPERATIONS
GENERAL. The Company recorded net income of $2.1 million for the three months
ended March 31, 2002, as compared to net income of $1.8 million for the same
period in the prior year. The $285,000 or 15.6% increase in net income for the
three months ended March 31, 2002, as compared to the three months ended March
31, 2001, was primarily attributable to increases in net interest income and non
interest income of $480,000 and $297,000, respectively, partially offset by
increases in non interest expense and provision for income taxes of $421,000 and
$64,000, respectively. The quarter ended March 31, 2002 reflects the adoption of
FAS 142 on January 1, 2002, whereby goodwill is no longer amortized but will be
subject to annual impairment tests. Net income for the quarter ended March 31,
2001 would have been $2.0 million, excluding the goodwill amortization of
$184,000. On a fully comparative basis without goodwill amortization, the
current period net income increased 5.0%.
NET INTEREST INCOME. Net interest income increased $480,000 or 9.5% to $5.5
million for the three months ended March 31, 2002, compared to $5.0 million for
the same period in the prior year. This increase in net interest income can be
attributed to a decrease in interest expense of $2.1 million, partially offset
by a decrease in interest income of $1.7 million.
INTEREST INCOME. Interest income decreased $1.7 million or 8.1% to $18.8 million
for the three months ended March 31, 2002, compared to $20.4 million for the
same period in the prior year. This decrease can be attributed to decreases in
interest earned on loans receivable, securities, FHLB stock and cash equivalents
of $562,000, $931,000, $110,000 and $47,000, respectively.
Interest earned on loans receivable decreased $562,000 or 5.6% to $9.5 million
for the quarter ended March 31, 2002, compared to $10.0 million for the same
period in the prior year. This decrease was primarily attributable to a decrease
in the yield on loans receivable to 7.28%, compared to 7.72% for the same period
in the prior year. Partially offsetting the decline in yield was an increase in
the average balance of loans receivable of $785,000 or 0.2% to $521.3 million
for the three months ended March 31, 2002, as compared to $520.5 million for the
same period in the prior year.
Interest earned on securities decreased $931,000 or 9.3% to $9.0 million for the
three months ended March 31, 2002, compared to $10.0 million for the same period
in the prior year. This decrease was primarily attributable to a decrease in the
tax equivalent yield on securities to 5.91% for the three months ended March 31,
2002, compared to 7.05% for the same period in the prior year. This decrease was
partially offset by an increase in the average balance of securities held of
$50.8 million or 8.5% to $651.4 million for the three months ended March 31,
2002, compared to $600.6 million for the same period in the prior year.
INTEREST EXPENSE. Interest expense decreased $2.1 million or 13.8% to $13.3
million for the three months ended March 31, 2002, compared to $15.4 million for
the same period in the prior year. This decrease in interest expense was
primarily attributed to decreases in interest incurred on deposits and FHLB
advances and repurchase agreements of $893,000 and $1.2 million, respectively.
12
Interest incurred on deposits decreased $893,000 or 15.2% to $5.0 million for
the three months ended March 31, 2002, compared to $5.9 million for the same
period in the prior year. This decrease was primarily attributable to a decrease
in the cost of interest-bearing deposits of 119 basis points to 3.54% for the
quarter ended March 31, 2002, compared to 4.73% for the same period in the prior
year. The decrease in the cost of interest-bearing deposits was partially offset
by an increase in the average balance of interest-bearing deposits of $67.7
million to $572.3 million for the three months ended March 31, 2002, compared to
$504.7 million for the same period in the prior year.
Interest incurred on borrowed funds and repurchase agreements decreased $1.2
million or 13.8% to $7.7 million for the three months ended March 31, 2002,
compared to $9.0 million for the same period in the prior year. This decrease
was primarily attributable to a decrease in the cost of these funds of 68 basis
points to 5.54% for the three months ended March 31, 2002, compared to 6.22% for
the same period in the prior year. In addition to the decrease in the cost of
funds was a decrease in the average balance of borrowed funds of $18.4 million
or 3.2% to $557.4 million for the three months ended March 31, 2002, compared to
$575.7 million for the same period in the prior year.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased $7,000 to
$13,000 at March 31, 2002, compared to $6,000 for the same period in the prior
year. In determining the appropriate level of allowance for loan losses,
management considers historical loss experience, the financial condition of
borrowers, economic conditions (particularly as they relate to markets where the
Company originates loans), the status of non-performing assets, the estimated
underlying value of the collateral and other factors related to the
collectability of the loan portfolio. The Company's total allowance for losses
on loans at March 31, 2002 and December 31, 2001 amounted to $5.2 million or
0.98% and $5.1 million or 0.95%, respectively, of the Company's total loan
portfolio. The Company's allowance for losses on loans as a percentage of
non-performing loans was 221.59% and 205.72% at March 31, 2002 and December 31,
2001, respectively.
NONINTEREST INCOME. Noninterest income increased $297,000 or 38.4% to $1.1
million for the three months ended March 31, 2002 compared to $773,000 for the
same period in the prior year. This increase can be attributed primarily to
increases in fees and service charges, net realized gain on sale of securities
available for sale and an increase in the cash surrender value of the bank owned
life insurance of $99,000, $122,000 and $75,000, respectively.
NONINTEREST EXPENSE. Noninterest expense increased $421,000 or 11.6% to $4.1
million for the three months ended March 31, 2002 from $3.6 million for the same
period in the prior year. This increase was the result of increases in
compensation and employee benefits, premises and equipment, data processing and
other expenses of $276,000, $27,000, $66,000 and $52,000, respectively.
PROVISION FOR INCOME TAXES. The provision for income taxes increased $64,000 or
18.7% to $407,000 for the three months ended March 31, 2002, from $343,000 for
the same period in the prior year. This increase was attributable to an increase
in pre-tax income of $349,000 or 16.1% for the three months ended March 31, 2002
compared to the same period in the prior year.
13
AVERAGE BALANCE SHEET AND YIELD/RATE ANALYSIS. The following table sets forth,
for the periods indicated, information concerning the total dollar amounts of
interest income from interest-earning assets and the resultant average yields,
the total dollar amounts of interest expense on interest-bearing liabilities and
the resultant average costs, net interest income, interest rate spread and the
net interest margin earned on average interest-earning assets. For purposes of
this table, average balances are calculated using monthly averages and the
average loan balances include non-accrual loans and exclude the allowance for
loan losses, and interest income includes accretion of net deferred loan fees.
Interest and yields on tax-exempt securities (tax-exempt for federal income tax
purposes) are shown on a fully tax equivalent basis utilizing a federal tax rate
of 34%. Yields and rates have been calculated on an annualized basis utilizing
monthly interest amounts.
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) THREE MONTHS ENDED MARCH 31,
2002 2001
--------------------------------------- ---------------------------------------
AVERAGE YIELD / AVERAGE YIELD /
BALANCE INTEREST RATE BALANCE INTEREST RATE
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Taxable securities available for sale $ 506,010 $ 7,491 5.92% $ 457,365 $ 7,845 6.86%
Taxable corporate bonds available for sale 57,239 401 2.80% $ 53,349 $ 912 6.84%
Tax-exempt securities available for sale 88,142 1,737 7.88% 89,888 1,836 8.17%
------------- ------------- ----------- ------------- ------------- -----------
651,391 9,629 5.91% 600,602 10,593 7.05%
------------- ------------- ----------- ------------- ------------- -----------
Mortgage loans 442,877 8,088 7.30% 440,750 8,410 7.63%
Other loans 78,402 1,378 7.13% 79,744 1,618 8.23%
------------- ------------- ----------- ------------- ------------- -----------
521,279 9,466 7.28% 520,494 10,028 7.72%
------------- ------------- ----------- ------------- ------------- -----------
Cash equivalents 9,251 34 1.47% 7,902 81 4.10%
FHLB stock 22,118 244 4.41% 19,921 354 7.11%
------------- ------------- ----------- ------------- ------------- -----------
31,369 278 3.54% 27,823 435 6.25%
------------- ------------- ----------- ------------- ------------- -----------
TOTAL INTEREST-EARNING ASSETS 1,204,039 19,373 6.44% 1,148,919 21,056 7.34%
Other noninterest-earning assets 61,301 - - 48,858 - -
------------- ------------- ----------- ------------- ------------- -----------
Total assets $ 1,265,340 $ 19,373 6.13% $ 1,197,777 $ 21,056 7.04%
============= ============= =========== ============= ============= ===========
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits $ 204,307 $ 797 1.58% $ 176,245 $ 1,029 2.37%
Time deposits 368,006 4,192 4.62% 328,411 4,853 5.99%
------------- ------------- ----------- ------------- ------------- -----------
572,313 4,989 3.54% 504,656 5,882 4.73%
------------- ------------- ----------- ------------- ------------- -----------
Borrowed Funds 440,900 6,141 5.57% 389,162 6,097 6.37%
Repurchase agreements 116,470 1,581 5.43% 186,574 2,862 6.14%
------------- ------------- ----------- ------------- ------------- -----------
557,370 7,722 5.54% 575,736 8,959 6.22%
------------- ------------- ----------- ------------- ------------- -----------
Preferred securities 24,164 557 9.22% 24,121 557 9.24%
------------- ------------- ----------- ------------- ------------- -----------
TOTAL INTEREST-BEARING LIABILITIES 1,153,847 13,268 4.62% 1,104,513 15,398 5.61%
Noninterest-bearing demand deposits 20,302 - - 14,483 - -
Other noninterest-bearing liabilities 10,145 - - 7,085 - -
------------- ------------- ----------- ------------- ------------- -----------
Total liabilities 1,184,294 13,268 4.50% 1,126,081 15,398 5.50%
Stockholders' equity 81,046 - - 71,696 - -
------------- ------------- ----------- ------------- ------------- -----------
Total liabilities and equity $ 1,265,340 $ 13,268 4.22% $ 1,197,777 $ 15,398 5.17%
============= ============= =========== ============= ============= ===========
NET INTEREST INCOME $ 6,105 $ 5,658
============= =============
INTEREST RATE SPREAD (difference between
weighted average rate on interest-earning
assets and interest-bearing liabilities) 1.82% 1.73%
=========== ===========
NET INTEREST MARGIN (net interest
income as a percentage of average
interest-earning assets) 2.03% 1.97%
=========== ===========
- -----------------------------------------------------------------------------------------------------------------------------------
14
ANALYSIS OF CHANGES IN NET INTEREST INCOME. The following table analyzes the
changes in interest income and interest expense, between the quarters ended
March 31, 2002 and 2001, in terms of: (1) changes in volume of interest-earning
assets and interest-bearing liabilities and (2) changes in yields and rates. The
table reflects the extent to which changes in the Company's interest income and
interest expense are attributable to changes in rate (change in rate multiplied
by prior period volume), changes in volume (changes in volume multiplied by
prior period rate) and changes attributable to the combined impact of
volume/rate (change in rate multiplied by change in volume). The changes
attributable to the combined impact of volume/rate are allocated on a consistent
basis between the volume and rate variances. Changes in interest income on
securities reflects the changes in interest income on a fully tax equivalent
basis.
- -----------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 2002 VERSUS 2001
INCREASE (DECREASE) DUE TO
------------------------------------------------
VOLUME RATE TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
Interest income:
Securities $ 846 $ (1,810) $ (964)
Loans 15 (577) (562)
Cash equivalents 12 (59) (47)
FHLB stock 36 (146) (110)
----------- ---------- -----------
Total interest-earning assets 909 (2,592) (1,683)
----------- ---------- -----------
INTEREST EXPENSE:
Deposits 720 (1,613) (893)
FHLB advances 762 (718) 44
Repurchase agreements (981) (300) (1,281)
Preferred securities 1 (1) -
----------- ---------- -----------
Total interest-bearing liabilities 502 (2,632) (2,130)
----------- ---------- -----------
NET INTEREST INCOME $ 407 $ 40 $ 447
=========== ========== ===========
- -----------------------------------------------------------------------------------------------------------------------------
ASSET AND LIABILITY MANAGEMENT
The primary objective of the Company's asset and liability management function
is to maximize the Company's net interest income while simultaneously
maintaining an acceptable level of interest rate risk given the Company's
operating environment, capital and liquidity requirements, performance
objectives and overall business focus. The principal determinant of the exposure
of the Company's earnings to interest rate risk is the timing difference between
the repricing or maturity of interest-earning assets and the repricing or
maturity of its interest-bearing liabilities. The Company's asset and liability
management policies are designed to decrease interest rate sensitivity primarily
by shortening the maturities of interest-earning assets while at the same time
extending the maturities of interest-bearing liabilities. The Board of Directors
of the Company continues to believe in strong asset/liability management in
order to insulate the Company from material and prolonged increases in interest
rates. As a result of this policy, the Company emphasizes a larger, more
diversified portfolio of residential mortgage loans in the form of
mortgage-backed securities. Mortgage-backed securities generally increase the
quality of the Company's assets by virtue of the insurance or guarantees that
back them, are more liquid than individual mortgage loans and may be used to
collateralize borrowings or other obligations of the Company.
The Company's Board of Directors has established an Asset and Liability
Management Committee consisting of four outside directors, the President and
Chief Executive Officer, Group Senior Vice President/Chief Financial Officer,
Group Senior Vice President/Operations, Group Senior Vice President/Lending and
the Group Senior Vice President/Administration. This committee, which meets
quarterly, generally monitors various asset and liability management policies
and strategies, which were implemented by the Company over the past few years.
These strategies have included: (i) an emphasis on the investment in
adjustable-rate and shorter duration mortgage-backed securities; (ii) an
emphasis on the origination of single-family residential adjustable-rate
mortgages (ARMs), residential construction loans and commercial real estate
loans, which generally have adjustable or floating interest rates and/or shorter
maturities than traditional single-family residential loans, and
15
consumer loans, which generally have shorter terms and higher interest rates
than mortgage loans; and (iii) increase the duration of the liability base of
the Company by extending the maturities of savings deposits, borrowed funds and
repurchase agreements.
As of March 31, 2002, the implementation of these asset and liability
initiatives resulted in the following: (i) $215.7 million or 40.9% of the
Company's total loan portfolio had adjustable interest rates or maturities of 12
months or less; (ii) $124.7 million or 36.3% of the Company's portfolio of
single-family residential mortgage loans (including residential construction
loans) consisted of ARMs; and (iii) $186.1 million or 39.4% of the Company's
portfolio of mortgage-backed securities were secured by ARMs.
The implementation of the foregoing asset and liability initiatives and
strategies, combined with other external factors such as demand for the
Company's products and economic and interest rate environments in general, has
resulted in the Company being able to maintain a one-year interest rate
sensitivity gap ranging between a positive 5.0% of total assets to a negative
15.0% of total assets. The one-year interest rate sensitivity gap is defined as
the difference between the Company's interest-earning assets which are scheduled
to mature or reprice within one year and its interest-bearing liabilities which
are scheduled to mature or reprice within one year. At March 31, 2002, the
Company's interest-earning assets maturing or repricing within one year totaled
$462.1 million while the Company's interest-bearing liabilities maturing or
repricing within one-year totaled $521.9 million, providing a deficiency of
interest-earning assets over interest-bearing liabilities of $59.8 million or a
negative 4.7% of total assets. At March 31, 2002, the percentage of the
Company's assets to liabilities maturing or repricing within one year was 88.5%.
The Company does not presently anticipate that its one-year interest rate
sensitivity gap will fluctuate beyond a range of a positive 5.0% of total assets
to a negative 15.0% of total assets.
The one year interest rate sensitivity gap has been the most common industry
standard used to measure an institution's interest rate risk position. The
Company also utilizes income simulation modeling in measuring its interest rate
risk and managing its interest rate sensitivity. The Asset and Liability
Management Committee of the Company believes that simulation modeling enables
the Company to more accurately evaluate and manage the possible effects on net
interest income due to the exposure to changing market interest rates, the slope
of the yield curve and different prepayment and deposit decay assumptions under
various interest rate scenarios. At March 31, 2002, the Company's simulation
model indicated that the Company's statement of financial condition is liability
sensitive. As such, in a 300 basis point gradually rising rate environment over
24 months, with minor changes in the statement of condition and limited
reinvestment changes, net interest income is projected to increase by
approximately 1.54% over such 24-month period. At March 31, 2001, in a 300 basis
point gradually rising rate environment over 24 months, with minor changes in
the statement of condition and limited reinvestment changes, net interest income
was projected to increase by approximately 1.5% over such 24-month period.
LIQUIDITY
The Company's primary sources of funds generally have been deposits obtained
through the offices of the Bank, borrowings from the FHLB, repurchase agreement
borrowings and amortization and prepayments of outstanding loans and maturing
investment securities. During the three months ended March 31, 2002, the Company
used its sources of funds primarily to purchase securities and to a lesser
extent, fund the loan commitments. As of such date, the Company had outstanding
loan commitments totaling $25.4 million, unused lines of credit totaling $41.0
million and $14.6 million of undisbursed loans in process.
At March 31, 2002, certificates of deposit amounted to $364.6 million or 61.6%
of the Company's total consolidated deposits, including $247.3 million which
were scheduled to mature by March 31, 2003. At the same date, the total amount
of FHLB advances and repurchase agreements, which were scheduled to mature by
March 31, 2003, was $280.9 million. Management of the Company believes that it
has adequate resources to fund all of its commitments, that all of its
commitments will be funded by March 31, 2003 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.
16
REGULATORY CAPITAL REQUIREMENTS
Current regulatory requirements specify that the Bank and similar institutions
must maintain tangible capital equal to 1.5% of adjusted total assets, core
capital equal to 4% of adjusted total assets and risk-based capital equal to 8%
of risk-weighted assets. The OTS may require higher core capital ratios if
warranted, and institutions are to maintain capital levels consistent with their
risk exposures. Both the FDIC and the OTS reserve the right to apply this higher
standard to any insured financial institution when considering an institution's
capital adequacy. At March 31, 2002, the Bank was in compliance with all
regulatory capital requirements with tangible, core and risk-based capital
ratios of 6.2%, 6.2%and 12.7% respectively.
The Management Discussion and Analysis section of this Form 10-Q contains
certain forward-looking statements (as defined in the Private Securities
Litigation Reform Act of 1995). These forward-looking statements may involve
significant risks and uncertainties. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, actual
results may differ materially from the results in these forward-looking
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk are presented at
December 31, 2001 in Item 7A of the Company's Annual Report on Form 10-K, filed
with the SEC on March 28, 2002. Management believes there have been no material
changes in the Company's market risk since December 31, 2001.
17
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
- -------------------------
The Company and its subsidiaries are involved in various legal proceedings
occurring in the ordinary course of business. It is the opinion of management,
after consultation with legal counsel, that these matters will not materially
affect the Company's consolidated financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES
- -----------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ---------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
- -------------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
(a) None
(b) Form 8-K - The Company filed a Form 8-K dated March 20, 2002 to report a
$0.10 per share quarterly cash dividend payable on April 25, 2002 to
stockholders of record at the close of business on March 29, 2002.
18
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ESB FINANCIAL CORPORATION
Date: May 15, 2002 By: /s/ Charlotte A. Zuschlag
--------------------------------------------
Charlotte A. Zuschlag
President and Chief Executive Officer
Date: May 15, 2002 By: /s/ Charles P. Evanoski
--------------------------------------------
Charles P. Evanoski
Group Senior Vice President and
Chief Financial Officer
19