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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: June 30, 1998
Commission File Number: 0-19345
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 or organization) (I.R.S. Employer 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)
PENNFIRST BANCORP, INC.
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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 July 31, 1998:
Common Stock, $0.01 par value 5,660,809 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 June 30, 1998 (Unaided) and December 31, 1997.......................................................1
Consolidated Statements of Operations for the three
and six months ended June 30, 1998 and 1997 (Unaudited)...................................................2
Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1997 (Unaudited)...........................................................3
Notes to Consolidated Financial Statements................................................................5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations..........................................................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk...............................................18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................................................19
Item 2. Changes in Securities....................................................................................19
Item 3. Defaults Upon Senior Securities..........................................................................19
Item 4. Submission of Matters to a Vote of Security Holders......................................................19
Item 5. Other Information........................................................................................20
Item 6. Exhibits and Reports on Form 8-K.........................................................................20
Signatures...............................................................................................21
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ESB Financial Corporation and Subsidiaries
Consolidated Statements of Financial Condition
As of June 30, 1998 (Unaudited) and December 31, 1997
(Dollar amounts in thousands, except share data)
June 30, December 31,
1998 1997
(Unaudited)
-------------- --------------
Assets
Cash on hand and in banks $ 2,767 $ 3,108
Interest-earning deposits 5,455 3,795
Federal funds sold 910 12,044
Securities available for sale; cost of $471,501 and $423,350 473,914 426,662
Securities held to maturity; market value of $78,196 and $90,585 78,535 91,359
Loans receivable, net 355,292 336,757
Accrued interest receivable 6,668 6,075
Federal Home Loan Bank (FHLB) stock 18,435 17,826
Premises and equipment, net 3,609 3,319
Real estate acquired through foreclosure, net 270 288
Prepaid expenses and other assets 10,291 9,537
---------- ----------
Total assets $ 956,146 $ 910,770
========== ==========
Liabilities and Stockholders' equity
Liabilities:
Deposits $ 408,534 $ 399,568
Advance payments by borrowers for taxes and insurance 4,425 3,298
Borrowed funds 444,712 411,024
Guaranteed preferred beneficial interest in subordinated debt, net 24,007 24,146
Accrued expenses and other liabilities 7,405 4,225
---------- ----------
Total liabilities 889,083 842,261
---------- ----------
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 6,346,863 shares issued;
5,665,206 and 5,797,608 shares outstanding 58 58
Additional paid-in capital 48,753 48,646
Treasury stock, at cost; 672,549 and 549,255 shares (9,939) (7,363)
Unearned Employee Stock Ownership Plan (ESOP) shares (2,874) (2,551)
Unvested shares held by Management Recognition Plan (237) (237)
Retained earnings, substantially restricted 29,709 27,747
Other comprehensive income, net 1,593 2,209
---------- ----------
Total stockholders' equity 67,063 68,509
---------- ----------
Total liabilities and stockholders' equity $ 956,146 $ 910,770
========== ==========
See accompanying notes to consolidated financial statements.
1
ESB Financial Corporation and Subsidiaries
Consolidated Statements of Operations
For the three and six months ended June 30, 1998 and 1997 (Unaudited)
(Dollar amounts in thousands, except share data)
Three Months Ended Six Months Ended
June 30, June 30,
--------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
Interest income:
Loans receivable $ 6,896 $ 6,417 $ 13,712 $ 10,727
Securities available for sale 7,504 5,983 14,735 11,910
Securities held to maturity 1,206 1,424 2,552 2,861
FHLB stock 298 268 587 505
Deposits with banks and federal funds sold 69 127 138 168
-------- -------- -------- --------
Total interest income 15,973 14,219 31,724 26,171
-------- -------- -------- --------
Interest expense:
Deposits 4,367 4,282 8,654 7,875
Borrowed funds 6,857 5,493 13,375 10,235
Guaranteed preferred beneficial interest in subordinated debt 554 - 1,110 -
-------- -------- -------- --------
Total interest expense 11,778 9,775 23,139 18,110
-------- -------- -------- --------
Net interest income 4,195 4,444 8,585 8,061
Provision for loan losses - 600 - 801
-------- -------- -------- --------
Net interest income after provision for loan losses 4,195 3,844 8,585 7,260
-------- -------- -------- --------
Noninterest income:
Fees and service charges 391 252 706 446
Net realized gain (loss) on sales of securities available for sale 79 (9) 72 (46)
Other 12 11 23 27
-------- -------- -------- --------
Total noninterest income 482 254 801 427
-------- -------- -------- --------
Noninterest expense:
Compensation and employee benefits 1,534 1,422 3,015 2,534
Premises and equipment 262 268 519 514
Federal deposit insurance premiums 69 64 131 74
Data processing 123 114 252 218
Other 670 443 1,395 1,004
-------- -------- -------- --------
Total noninterest expense 2,658 2,311 5,312 4,344
-------- -------- -------- --------
Net income before provision for income taxes 2,019 1,787 4,074 3,343
Provision for income taxes 471 333 976 744
-------- -------- -------- --------
Net income $ 1,548 $ 1,454 $ 3,098 $ 2,599
======== ======== ======== ========
Net income per share:
Basic $0.28 $0.26 $0.56 $0.51
Diluted $0.27 $0.25 $0.54 $0.49
See accompanying notes to consolidated financial statements.
2
ESB Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the three and six months ended June 30, 1998 and 1997 (Unaudited)
(Dollar amounts in thousands, except share data)
Six Months Ended
June 30,
------------------
1998 1997
---- ----
Operating activities:
Net income $ 3,098 $ 2,599
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization for premises and equipment 185 142
Provision for losses - 801
Amortization of premiums and accretion of discounts 997 260
(Gain) loss on sales of securities available for sale (72) 46
Amortization of intangible assets 301 243
(Increase) decrease in accrued interest receivable (593) 305
(Increase) decrease in prepaid expenses and other assets (707) 158
Increase in accrued expenses and other liabilities 3,180 2,079
Other 1,292 (6)
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Net cash provided by operating activities 7,681 6,627
--------- ---------
Investing activities:
Loan originations and purchases (68,597) (54,179)
Purchases of securities available for sale (170,891) (65,002)
Purchases of securities held to maturity (993) (5,970)
(Purchases) redemption of FHLB stock (609) 236
Principal repayments of loans receivable 49,968 34,962
Principal repayments of securities available for sale 58,204 25,041
Principal repayments of securities held to maturity 13,643 10,880
Proceeds from the sale of securities available for sale 63,814 42,991
Payment for purchase of Troy Hill Bancorp, Inc. (THBC),
net of cash acquired - (2,734)
Other (475) (48)
--------- ---------
Net cash used in investing activities (55,936) (13,823)
--------- ---------
Financing activities:
Net increase in deposits 8,966 4,394
Net increase in borrowed funds 33,688 7,443
Proceeds received from exercise of stock options 234 61
Dividends paid (946) (703)
Payments to acquire treasury stock (3,003) (938)
Stock purchased by ESOP (553) (242)
Other 54 151
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Net cash provided by financing activities 38,440 10,166
--------- ---------
Net (decrease) increase in cash equivalents (9,815) 2,970
Cash equivalents at beginning of period 18,947 7,284
--------- ---------
Cash equivalents at end of period $ 9,132 $ 10,254
========= =========
Continued.
3
ESB Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows, (Continued)
For the six months ended June 30, 1998 and 1997 (Unaudited)
(Dollar amounts in thousands, except share data)
Six Months Ended
June 30,
------------------
1998 1997
---- ----
Supplemental information:
Interest paid $ 26,012 $ 16,598
Income taxes paid $ 979 $ 642
Non-cash transactions:
Transfers from loans receivable to real estate acquired
through foreclosure $ 26 $ 193
Dividends declared but not paid $ 510 $ 434
Supplemental schedule of non-cash investing and financing activities:
The Company purchased all of the common stock of THBC for $23.5
million. In conjunction with the acquisition, the assets acquired and
liabilities assumed were as follows:
Fair value of assets acquired $ 0 $ 109,296
Stock and stock options issued for the purchase of THBC
common stock - (14,173)
Cash paid for THBC common stock - (9,270)
Liabilities assumed - (89,393)
--------- ---------
Excess liabilities assumed over assets acquired $ 0 $ (3,540)
========= =========
See accompanying notes to consolidated financial statements.
4
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 and AMSCO, Inc.
The accompanying unaudited consolidated financial statements for the
interim periods include all adjustments, consisting only of normal
recurring accruals, which are necessary, in the opinion of management,
to fairly reflect the Company's financial position and results of
operations. Additionally, these consolidated financial statements for
the interim periods have been prepared in accordance with instructions
for the Securities and Exchange Commission's Form 10-Q and therefore do
not include all information or footnotes necessary for a complete
presentation of financial condition, results of operations and cash
flows in conformity with generally accepted accounting principles. For
further information, refer to the audited consolidated financial
statements and footnotes thereto for the year ended December 31, 1997,
as contained in the 1997 Annual Report to Stockholders.
The results of operations for the three and six months ended June 30,
1998 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 June 30, 1998:
Municipal securities $ 79,669 $ 1,708 $ (165) $ 81,212
Corporate bond and equity securities 58,034 229 (200) 58,063
Mortgage-backed securities 333,798 1,646 (805) 334,639
----------- ---------- ------------ -----------
$ 471,501 $ 3,583 $ (1,170) $ 473,914
=========== ========== ============ ===========
As of December 31, 1997:
U.S. Government securities $ 4,015 $ 39 $ - $ 4,054
Municipal securities 53,782 1,864 (4) 55,642
Corporate bond and equity securities 1,265 29 - 1,294
Mortgage-backed securities 364,288 2,204 (820) 365,672
----------- ---------- ------------ -----------
$ 423,350 $ 4,136 $ (824) $ 426,662
=========== ========== ============ ===========
Held to maturity:
As of June 30, 1998:
U.S. Government securities $ 10,483 $ 36 $ (21) $ 10,498
Municipal securities 7,992 133 - 8,125
Mortgage-backed securities 60,060 32 (519) 59,573
----------- ---------- ------------ -----------
$ 78,535 $ 201 $ (540) $ 78,196
=========== ========== ============ ===========
As of December 31, 1997:
U.S. Government securities $ 15,479 $ 57 $ (58) $ 15,478
Municipal securities 7,536 96 (1) 7,631
Mortgage-backed securities 68,344 26 (894) 67,476
----------- ---------- ------------ -----------
$ 91,359 $ 179 $ (953) $ 90,585
=========== ========== ============ ===========
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5
3. Loans Receivable
The Company's loans receivable as of the respective dates are
summarized as follows:
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June 30, December 31,
(In thousands) 1998 1997
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Mortgage loans:
Residential - single family $ 222,591 $ 222,994
Residential - multi family 10,793 8,685
Commercial real estate 32,309 31,489
Construction 35,120 29,710
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300,813 292,878
Other loans:
Consumer loans 54,497 51,718
Commercial business 18,149 8,359
------------- -------------
373,459 352,955
Less:
Allowance for loan losses 4,818 4,807
Deferred loan fees and net discounts 748 723
Loans in process 12,601 10,668
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$ 355,292 $ 336,757
============= =============
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4. Deposits
The Company's deposits as of the respective dates are summarized as
follows:
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(Dollar amounts in thousands) June 30, 1998 December 31, 1997
---------------------------------------- ----------------------------------------
Weighted Weighted
average average
Type of accounts rate Amount % rate Amount %
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Noninterest-bearing deposits - $ 6,567 1.6% - $ 4,675 1.2%
Interest-bearing demand deposits 2.38% 151,109 37.0% 2.47% 150,994 37.8%
Time deposits 5.69% 250,858 61.4% 5.81% 243,899 61.0%
---------- --------- ---------- ---------
4.37% $ 408,534 100.0% 4.48% $ 399,568 100.0%
========== ========= ========== =========
Time deposits mature as follows:
Within one year $ 147,658 36.1% $ 145,953 36.5%
After one year through two years 54,092 13.2% 46,005 11.5%
After two years through three years 27,158 6.6% 33,059 8.3%
Thereafter 21,950 5.4% 18,882 4.7%
---------- --------- ---------- ---------
$ 250,858 61.4% $ 243,899 61.0%
========== ========= ========== =========
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6
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) June 30, 1998 December 31, 1997
------------------------ -----------------------
Weighted Weighted
average rate Amount average rate Amount
------------------------------------------------------------------------------------------------------------------
FHLB advances:
Due within 12 months 5.66% $ 121,004 5.59% $ 175,272
Due beyond 12 months but within 5 years 6.25% 213,882 6.42% 179,065
Due beyond 5 years but within 10 years 7.79% 440 7.79% 440
Due beyond 10 years 5.97% 272 5.93% 274
--------- ---------
335,598 355,051
Reverse repurchase agreements:
Due within 90 days 5.65% $ 23,653 5.90% $ 13,400
Due beyond 90 days but within 5 years 5.78% 85,300 5.86% 42,400
-------- --------
108,953 55,800
Treasury tax and loan note payable 161 173
-------- --------
$ 444,712 $ 411,024
============ ===========
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6. Net Income Per Share
Net income per share is calculated by dividing net operating results
for the period by the weighted average number of common shares and
equivalents outstanding during the period. Net income per share and
weighted average shares and equivalents outstanding for all periods
reported have been restated to reflect stock dividends and splits,
including the Company's stock dividend declared on April 17, 1998.
For purposes of computing basic net income per share for the three and
six months ended June 30, 1998 and 1997, the weighted average shares
outstanding were 5,463,000 and 5,502,000, respectively, and 5,656,000
and 5,130,000, respectively.
For purposes of computing diluted net income per share for the three
and six months ended June 30, 1998 and 1997, the weighted average
shares and equivalents outstanding were 5,719,000 and 5,760,000,
respectively, and 5,815,000 and 5,258,000, respectively. For all
periods, the difference between average basic and average diluted
shares represented the dilutive impact of stock options.
7
7. Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income", which establishes standards for
reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. Comprehensive income
is defined as "the change in equity of a business enterprise during a
period from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity during a period
except those resulting from investments by owners and distributions to
owners". The comprehensive income and related cumulative equity impact
of comprehensive income items will be required to be disclosed
prominently as part of the financial statements and related notes
thereto. Only the impact of unrealized gains or losses on securities
available for sale is necessary and applicable to be disclosed as an
additional component of the Company's total comprehensive income under
the requirements of SFAS No. 130.
On January 1, 1998, the Company adopted SFAS No. 130. For the three
months ended June 30, 1998 and 1997, total comprehensive income was
$1.0 million and $2.5 million, respectively, including other
comprehensive income which represented a decrease of $541,000 and an
increase of $1.1 million, respectively, in unrealized gains/losses on
securities available for sale, net of income taxes.
For the six months ended June 30, 1998 and 1997, total comprehensive
income was $2.5 million and $3.5 million, respectively, including other
comprehensive income which represented a decrease of $573,000 and an
increase of $923,000, respectively, in unrealized gains/losses on
securities available for sale, net of income taxes.
8
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 $45.4 million or 5.0% to $956.1
million at June 30, 1998 from $910.8 million at December 31, 1997. This net
increase was primarily the result of increases in securities and net loans
receivable of $34.4 million and $18.5 million, respectively, partially offset by
a decrease in cash equivalents of $9.8 million. The increase in total assets
reflects a corresponding increase in total liabilities of $46.8 million or 5.6%,
partially offset by a slight decrease in stockholders' equity of $1.4 million or
2.1%. The increase in total liabilities was primarily the result of increases in
deposits, borrowed funds and accrued expenses and other liabilities of $9.0
million, $33.7 million and $3.2 million, respectively. The decrease in
stockholders' equity was the result of increases in treasury stock and unearned
employee stock ownership plan ("ESOP") shares of $2.6 million and $323,000,
respectively, partially offset by an increase in retained earnings of $2.0
million.
Cash on hand, Interest-earning deposits and Federal funds sold. Cash on hand,
interest-earning deposits and federal funds sold represent cash equivalents and
decreased a combined $9.8 million or 51.8% to $9.1 million at June 30, 1998 from
$18.9 million at December 31, 1997. The net decrease between June 30, 1998 and
December 31, 1997 can be attributed primarily to security purchases and loan
fundings during the period.
Securities. The Company's securities portfolios increased by $34.4 million or
6.6% to $552.4 million at June 30, 1998 from $518.0 million at December 31,
1997. This net increase was primarily the result of purchases of securities of
$171.9 million, consisting of purchases of municipal securities of $31.7
million, corporate bond and equity securities of $58.0 million and
mortgage-backed securities of $82.3 million, during the six months ended June
30, 1998. Partially offsetting the purchases of securities were sales of
securities of $63.8 million, consisting of sales of municipal securities of $6.4
million, corporate bond and equity securities of $1.0 million, U.S. government
securities of $2.0 million and mortgage-backed securities of $54.4 million, and
repayments and maturities of securities of $71.8 million, during the six months
ended June 30, 1998.
Loans receivable. Net loans receivable increased $18.5 million or 5.5% to $355.3
million at June 30, 1998 from $336.8 million at December 31, 1997. Included in
this increase was an increase in mortgage loans of $7.9 million or 2.7% and
other loans of $12.6 million or 20.9%, partially offset by an increase in
deferred loan fees and loans in process of $2.0 million or 17.2%, during the six
months ended June 30, 1998.
Non-performing assets. Non-performing assets include non-accrual loans and real
estate acquired through foreclosure. Non-performing assets amounted to $5.8
million or 0.60% and $4.1 million or 0.45% of total assets at June 30, 1998 and
December 31, 1997, respectively.
Deposits. Total deposits increased $9.0 million or 2.2% to $408.5 million at
June 30, 1998 from $399.6 million at December 31, 1997. This increase was
primarily the result of increases in noninterest bearing, interest bearing and
time deposits of $1.9 million, $115,000 and $7.0 million, respectively.
Borrowed funds. Borrowed funds increased $33.7 million or 8.2% to $444.7 million
at June 30, 1998 from $411.0 million at December 31, 1997. This increase is
primarily the result of the Company utilizing reverse repurchase agreement
borrowings to fund the increase in loans receivable and securities. FHLB
advances decreased $19.5 million or 5.5% and reverse repurchase agreement
borrowings increased $53.2 million or 95.3% during the six months ended June 30,
1998.
Stockholders' equity. Stockholders' equity decreased $1.4 million or 2.1% to
$67.1 million at June 30, 1998 from $68.5 million at December 31, 1997. This
decrease was principally the result of net treasury stock purchases of $2.6
million, ESOP stock purchases of $323,000, partially offset by an increase in
retained earnings of $2.0 million, comprised of net income of $3.1 million
offset by dividends declared of $942,000 and the impact of stock options
exercised of $194,000, during the six months ended June 30, 1998.
9
RESULTS OF OPERATIONS
General. The Company recorded net income of $1.5 million and $3.1 million for
the three and six months ended June 30, 1998, respectively, as compared to net
income of $1.5 million and $2.6 million, respectively, for the same periods in
the prior year.
The $94,000 or 6.5% increase in net income for the three months ended June 30,
1998, as compared to the three months ended June 30, 1997, was attributable to a
decrease in the provision for loan losses of $600,000 and an increase in
noninterest income of $228,000. Partially offsetting these favorable variances
between quarters were increases in noninterest expense and the provision for
income taxes of $347,000 and $138,000, respectively, and a decrease in net
interest income of $249,000.
The $499,000 or 19.2% increase in net income for the six months ended June 30,
1998, as compared to the six months ended June 30, 1997, was attributable to
increases in net interest income and noninterest income of $524,000 and
$374,000, respectively, and a decrease in the provision for loan losses of
$801,000. Partially offsetting these favorable variances between periods were
increases in noninterest expense and the provision for income taxes of $968,000
and $232,000, respectively.
Net interest income. Net interest income decreased $249,000 or 5.6% to $4.2
million for the three months ended June 30, 1998, compared to $4.4 million for
the same period in the prior year. This increase in net interest income can be
attributed to an increase in interest expense of $2.0 million, partially offset
by an increase in interest income of $1.8 million.
Net interest income increased $524,000 or 6.5% to $8.6 million for the six
months ended June 30, 1998, compared to $8.1 million for the same period in the
prior year. This decrease in net interest income can be attributed to an
increase in interest income of $5.6 million, partially offset by an increase in
interest expense of $5.0 million.
Interest income. Interest income increased $1.8 million or 12.3% to $16.0
million for the three months ended June 30, 1998, compared to $14.2 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
$479,000, $1.3 million and $30,000, respectively, partially offset by a decrease
in interest earned on interest-earning deposits of $58,000.
Interest earned on loans receivable increased $479,000 or 7.5% to $6.9 million
for the three months ended June 30, 1998, compared to $6.4 million for the same
period in the prior year. This increase was primarily attributable to an
increase in the average balance of loans outstanding of $30.4 million or 9.4% to
$353.3 million for the three months ended June 30, 1998, compared to $322.9
million for the same period in the prior year. Partially offsetting the increase
in interest income between the periods was a decrease in the yield of loans
receivable to 7.81% for the three months ended June 30, 1998, compared to 7.95%
for the same period in the prior year.
Interest earned on securities increased $1.3 million or 17.6% to $8.7 million
for the three months ended June 30, 1998, compared to $7.4 million for the same
period in the prior year. This increase was primarily attributable to an
increase in the average balance of securities held of $102.0 million or 22.5% to
$554.5 million for the three months ended June 30, 1998, compared to $452.5
million for the same period in the prior year. The increase in the average
balance of securities between periods was primarily the result of net security
purchases during the last two quarters of 1997 and the first two quarters of
1998. Partially offsetting this volume increase, was a decline in the tax
equivalent yield on securities to 6.72% for the three months ended June 30,
1998, compared to 6.89% for the same period in the prior year.
Interest income increased $5.6 million or 21.2% to $31.7 million for the six
months ended June 30, 1998, compared to $26.2 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 $3.0 million, $2.5
million and $82,000, respectively, partially offset by a decrease in interest
earned on interest-earning deposits of $30,000.
10
Interest earned on loans receivable increased $3.0 million or 27.8% to $13.7
million for the six months ended June 30, 1998, compared to $10.7 million for
the same period in the prior year. This increase was primarily attributable to
an increase in the average balance of loans outstanding of $77.9 million or
28.6% to $349.9 million for the six months ended June 30, 1998, compared to
$272.0 million for the same period in the prior year. The significant increase
in the average balance of loans outstanding between periods is primarily the
result of the Company's acquisition of Troy Hill Bancorp, Inc. during the second
quarter of 1997. Partially offsetting the increase in interest income between
the periods was a decrease in the yield of loans receivable to 7.84% for the six
months ended June 30, 1998, compared to 7.89% for the same period in the prior
year.
Interest earned on securities increased $2.5 million or 17.0% to $17.3 million
for the six months ended June 30, 1998, compared to $14.8 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 $94.5 million or 21.0% to
$544.0 million for the six months ended June 30, 1998, compared to $449.4
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 two quarters of 1997 and the first two quarters of
1998. Partially offsetting this volume increase, was a decline in the tax
equivalent yield on securities to 6.78% for the six months ended June 30, 1998,
compared to 6.93% for the same period in the prior year.
Interest expense. Interest expense increased $2.0 million or 20.5% to $11.8
million for the three months ended June 30, 1998, compared to $9.8 million for
the same period in the prior year. This increase in interest expense can be
attributed to increases in interest incurred on deposits and borrowed funds of
$85,000 and $1.4 million, respectively. Also contributing to the increase in
total interest expense was interest incurred on subordinated debt of $554,000
during the three months ended June 30, 1998 associated with the December 1997
$25.3 million trust preferred security offering.
Interest incurred on deposits increased $85,000 or 2.0% to $4.4 million for the
three months ended June 30, 1998, compared to $4.3 million for the same period
in the prior year. This increase was primarily attributable to an increase in
the average balance of interest-bearing deposits of $10.6 million or 2.7% to
$400.1 million for the three months ended June 30, 1998, compared to $389.5
million for the same period in the prior year. This significant increase in the
average balance of deposits was principally associated with the acquisition of
Troy Hill Bancorp, Inc. during the second quarter of 1997. The cost of
interest-bearing deposits remained relatively consistent between periods at
4.37% and 4.40% for the quarters ended June 30, 1998 and 1997, respectively.
Interest incurred on borrowed funds increased $1.4 million or 24.8% to $6.9
million for the three months ended June 30, 1998, compared to $5.5 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 $94.2 million or 26.8%
to $445.3 million for the three months ended June 30, 1998, compared to $351.1
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 6.16% for the three months ended June 30, 1998,
compared to 6.26% for the same period in the prior year.
Interest expense increased $5.0 million or 27.8% to $23.1 million for the six
months ended June 30, 1998, compared to $18.1 million for the same period in the
prior year. This increase in interest expense can be attributed to increases in
interest incurred on deposits and borrowed funds of $779,000 and $3.1 million,
respectively. Also contributing to the increase in total interest expense was
interest incurred on subordinated debt of $1.1 million during the six months
ended June 30, 1998 associated with the December 1997 $25.3 million trust
preferred security offering.
Interest incurred on deposits increased $779,000 or 9.9% to $8.7 million for the
six months ended June 30, 1998, compared to $7.9 million for the same period in
the prior year. This increase was primarily attributable to an increase in the
average balance of interest-bearing deposits of $36.6 million or 10.1% to $397.4
million for the six months ended June 30, 1998, compared to $360.8 million for
the same period in the prior year. This significant increase in the average
balance of deposits was principally associated with the acquisition of Troy Hill
Bancorp, Inc. during the second quarter of 1997. The cost of interest-bearing
deposits remained relatively consistent between periods at 4.36% and 4.37% for
the six months ended June 30, 1998 and 1997, respectively.
11
Interest incurred on borrowed funds increased $3.1 million or 30.7% to $13.4
million for the six months ended June 30, 1998, compared to $10.2 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 $102.7 million or 31.0%
to $433.8 million for the six months ended June 30, 1998, compared to $331.1
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. The cost of
borrowed funds remained relatively consistent between periods at 6.17% and 6.18%
for the six months ended June 30, 1998 and 1997, respectively.
Provision for loan losses. The decrease in the provision for loan losses between
the three and six months ended June 30, 1998 and the same periods in the prior
year, reflects the adequacy of the Company's allowance for loan losses as of
June 30, 1998. In addition, during the six months ended June 30, 1997, the
Company recorded significant provisions for loan losses associated with the
previously disclosed Bennett Funding lease loans. 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 June 30, 1998 amounted to $4.8 million or 1.29%
of the Company's total loan portfolio, as compared to $4.8 million or 1.36% at
December 31, 1997. The Company's allowance for losses on loans as a percentage
of non-performing loans was 87.5% and 126.5% at June 30, 1998 and December 31,
1997, respectively.
Noninterest income. Noninterest income increased $228,000 or 89.8% to $482,000
for the three months ended June 30, 1998, compared to $254,000 for the same
period in the prior year. This increase can be attributed to an increase in loan
fees and service charges and net gains on security sales of $139,000 and
$88,000, respectively, between periods. Noninterest income increased $374,000 or
87.6% to $801,000 for the six months ended June 30, 1998, compared to $427,000
for the same period in the prior year. This increase can be attributed to an
increase in loan fees and service charges and net gains on security sales of
$260,000 and $118,000, respectively, between periods.
Noninterest expense. Noninterest expense increased $347,000 or 15.0% to $2.7
million for the three months ended June 30, 1998, from $2.3 million for the same
period in the prior year. This increase was primarily the result of increases in
compensation and employee benefits, federal deposit insurance premiums, data
processing and other expenses of $112,000, $5,000, $9,000 and $227,000,
respectively. The increase in compensation and employee benefits expenses were
primarily the result of an increase in the Company's ESOP expense and to a
lesser extent normal salary increases and staffing changes. The increase in
federal deposit and insurance premiums and data processing costs were the result
of the increase in the average balance of deposits and the overall number of
deposit accounts. The increase in other expenses were primarily the result of an
increase in audit and accounting services fees and regulatory and public
reporting fees. Noninterest expense increased $968,000 or 22.3% to $5.3 million
for the six months ended June 30, 1998, from $4.3 million for the same period in
the prior year. This increase was primarily the result of increases in
compensation and employee benefits, premises and equipment, federal deposit
insurance premiums, data processing and other expenses of $481,000, $5,000,
$57,000, $34,000 and $391,000, respectively. These increases were primarily the
result of the inclusion of Troy Hill's noninterest expense in the consolidated
results of the Company for the six months ended June 30, 1998.
Provision for income taxes. The provision for income taxes increased $138,000 or
41.4% and $232,000 or 31.2% to $471,000 and $976,000, respectively, for the
three and six months ended June 30, 1998, from $333,000 and $744,000,
respectively, for the same periods in the prior year. These increases were
primarily attributable to an increase in pre-tax income.
12
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
this table, 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. Yields
and rates have been calculated on an annualized basis utilizing monthly interest
amounts.
- --------------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Three months ended June 30,
1998 1997
-------------------------------------- ---------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Taxable securities available for sale $ 391,955 $ 6,438 6.57% $ 305,958 $ 5,230 6.84%
Tax-exempt securities available for sale 78,929 1,614 8.18% 52,982 1,140 8.61%
Taxable securities held to maturity 75,325 1,093 5.80% 92,942 1,416 6.09%
Tax-exempt securities held to maturity 8,268 170 8.22% 570 12 8.42%
---------- -------- ------ ---------- -------- ------
554,477 9,315 6.72% 452,452 7,798 6.89%
---------- -------- ------ ---------- -------- ------
Mortgage loans 286,425 5,506 7.69% 264,313 5,263 7.96%
Other loans 66,875 1,390 8.31% 58,589 1,154 7.88%
---------- -------- ------ ---------- -------- ------
353,300 6,896 7.81% 322,902 6,417 7.95%
---------- -------- ------ ---------- -------- ------
Cash equivalents 8,868 69 3.11% 7,346 127 6.92%
FHLB stock 18,394 298 6.48% 17,023 268 6.30%
---------- -------- ------ ---------- -------- ------
27,262 367 5.38% 24,369 395 6.48%
---------- -------- ------ ---------- -------- ------
Total interest-earning assets 935,039 16,578 7.09% 799,723 14,610 7.31%
Other noninterest-earning assets 18,498 - - 18,681 - -
---------- -------- ------ ---------- -------- ------
Total assets $ 953,537 $ 16,578 6.95% $ 818,404 $ 14,610 7.14%
========== ======== ======= ========== ======== ======
Interest-bearing liabilities:
Interest-bearing demand deposits $ 151,994 $ 901 2.37% $ 159,345 $ 1,050 2.64%
Time deposits 248,126 3,466 5.59% 230,138 3,232 5.62%
---------- -------- ------ ---------- -------- ------
400,120 4,367 4.37% 389,483 4,282 4.40%
---------- -------- ------ ---------- -------- ------
FHLB advances 342,267 5,364 6.27% 336,171 5,276 6.28%
Reverse repo's & other borrowings 103,075 1,493 5.79% 14,948 217 5.81%
---------- -------- ------ ---------- -------- ------
445,342 6,857 6.16% 351,119 5,493 6.26%
---------- -------- ------ ---------- -------- ------
Preferred securities 24,001 554 9.23% - - -
---------- -------- ------ ---------- -------- ------
Total interest-bearing liabilities 869,463 11,778 5.42% 740,602 9,775 5.28%
Noninterest-bearing demand deposits 9,362 - - 4,734 - -
Other noninterest-bearing liabilities 6,909 - - 8,288 - -
---------- -------- ------ ---------- -------- ------
Total liabilities 885,734 11,778 5.32% 753,624 9,775 5.19%
Stockholders' equity 67,803 - - 64,780 - -
---------- -------- ------ ---------- -------- ------
Total liabilities and equity $ 953,537 $ 11,778 4.94% $ 818,404 $ 9,775 4.78%
========== ======== ====== ========== ======== ======
Net interest income $ 4,800 $ 4,835
========= ========
Interest rate spread (difference between 1.67% 2.03%
====== ======
weighted average rate on interest-earning
assets and interest-bearing liabilities)
Net interest margin (net interest 2.05% 2.42%
====== ======
income as a percentage of average
interest-earning assets)
- --------------------------------------------------------------------------------------------------------------------------------
13
- ------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Six months ended June 30,
1998 1997
-------------------------------------- ---------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Taxable securities available for sale $ 384,191 $ 12,749 6.64% $ 300,813 $ 10,370 6.89%
Tax-exempt securities available for sale 73,115 3,009 8.23% 53,564 2,333 8.71%
Taxable securities held to maturity 78,363 2,318 5.92% 94,495 2,846 6.02%
Tax-exempt securities held to maturity 8,318 355 8.54% 575 23 8.00%
---------- --------- ------ ---------- --------- -------
543,987 18,431 6.78% 449,447 15,572 6.93%
---------- --------- ------ ---------- --------- -------
Mortgage loans 285,581 11,116 7.78% 215,223 8,572 7.97%
Other loans 64,278 2,596 8.08% 56,766 2,155 7.59%
---------- --------- ------ ---------- --------- -------
349,859 13,712 7.84% 271,989 10,727 7.89%
---------- --------- ------ ---------- --------- -------
Cash equivalents 8,665 138 3.19% 6,367 168 5.28%
FHLB stock 18,223 587 6.44% 16,072 505 6.28%
---------- --------- ------ ---------- --------- -------
26,888 725 5.39% 22,439 673 6.00%
---------- --------- ------ ---------- --------- -------
Total interest-earning assets 920,734 32,868 7.14% 743,875 26,972 7.25%
Other noninterest-earning assets 17,933 - - 16,456 - -
---------- --------- ------ ---------- --------- -------
Total assets $ 938,667 $ 32,868 7.00% $ 760,331 $ 26,972 7.09%
========== ========= ====== ========== ========= =======
Interest-bearing liabilities:
Interest-bearing demand deposits $ 151,313 $ 1,781 2.35% $ 149,247 $ 1,966 2.63%
Time deposits 246,061 6,873 5.59% 211,568 5,909 5.59%
---------- --------- ------ ---------- --------- -------
397,374 8,654 4.36% 360,815 7,875 4.37%
---------- --------- ------ ---------- --------- -------
FHLB advances 340,291 10,702 6.29% 316,682 9,829 6.21%
Reverse repo's & other borrowings 93,479 2,673 5.72% 14,373 406 5.65%
---------- --------- ------ ---------- --------- -------
433,770 13,375 6.17% 331,055 10,235 6.18%
---------- --------- ------ ---------- --------- -------
Preferred securities 24,043 1,110 9.23% - - -
---------- --------- ------ ---------- --------- -------
Total interest-bearing liabilities 855,187 23,139 5.41% 691,870 18,110 5.24%
Noninterest-bearing demand deposits 8,968 - - 4,447 - -
Other noninterest-bearing liabilities 6,260 - - 5,947 - -
---------- --------- ------ ---------- --------- -------
Total liabilities 870,415 23,139 5.32% 702,264 18,110 5.16%
Stockholders' equity 68,252 - - 58,067 - -
---------- --------- ------ ---------- --------- -------
Total liabilities and equity $ 938,667 $ 23,139 4.93% $ 760,331 $ 18,110 4.76%
========== ========= ======= ========== ========= =======
Net interest income $ 9,729 $ 8,862
========= =========
Interest rate spread (difference between 1.73% 2.01%
======= ========
weighted average rate on interest-earning
assets and interest-bearing liabilities)
Net interest margin (net interest 2.11% 2.38%
========== ========
income as a percentage of average
interest-earning assets)
- --------------------------------------------------------------------------------------------------------------------------------
Analysis of Changes in Net Interest Income. The following tables analyzes the
changes in interest income and interest expense, between the three and six
months ended June 30, 1998 and 1997, 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.
14
The table analyzing changes in interest income between the three months ended
June 30, 1998 and 1997 is presented as follows:
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands) 1998 versus 1997
Increase (decrease) due to
-----------------------------------------------
Volume Rate Total
- -----------------------------------------------------------------------------------------------------------------------------
Interest income:
Securities $ 1,718 $ (201) $ 1,517
Loans 595 (116) 479
Cash equivalents 22 (80) (58)
FHLB stock 22 8 30
---------- --------- ---------
Total interest-earning assets 2,357 (389) 1,968
---------- --------- ---------
Interest expense:
Deposits 116 (31) 85
FHLB advances 96 (8) 88
Reverse repurchases & other borrowings 1,276 - 1,276
Preferred securities 554 - 554
---------- --------- ---------
Total interest-bearing liabilities 2,042 (39) 2,003
---------- --------- ---------
Net interest income $ 315 $ (350) $ (35)
========== ========= =========
- -----------------------------------------------------------------------------------------------------------------------------
The table analyzing changes in interest income between the six months ended
June 30, 1998 and 1997 is presented as follows:
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands) 1998 versus 1997
Increase (decrease) due to
-----------------------------------------------
Volume Rate Total
- -----------------------------------------------------------------------------------------------------------------------------
Interest income:
Securities $ 3,210 $ (351) $ 2,859
Loans 3,052 (67) 2,985
Cash equivalents 49 (79) (30)
FHLB stock 69 13 82
---------- --------- ---------
Total interest-earning assets 6,380 (484) 5,896
---------- --------- ---------
Interest expense:
Deposits 796 (17) 779
FHLB advances 741 132 873
Reverse repurchases & other borrowings 2,262 5 2,267
Preferred securities 1,110 - 1,110
---------- --------- ---------
Total interest-bearing liabilities 4,909 120 5,029
---------- --------- ---------
Net interest income $ 1,471 $ (604) $ 867
========== ========= =========
- ----------------------------------------------------------------------------------------------------------------------------
ASSET AND LIABILITY MANAGMENT
The primary objective of the Company's asset and liability management function
is to maximize the Company's net interest income while simultaneously
maintaining an acceptable level of interest rate risk given the Company's
operating environment, capital and liquidity requirements, performance
objectives and overall business focus. The principal determinant of the exposure
of the Company's earnings to interest rate risk is the timing difference between
the repricing or maturity of interest-earning assets and the repricing or
maturity of its interest-bearing liabilities. The Company's asset and liability
management policies have decreased interest rate sensitivity primarily by
shortening the maturities of interest-earning assets while at the same time
extending the maturities of interest-bearing liabilities. The Board of Directors
of the Company continues to believe in strong asset/liability management in
order to insulate the Company from material and prolonged increases in interest
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
15
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.
As of June 30, 1998, the implementation of these asset and liability initiatives
resulted in the following: (i) $190.0 million or 50.9% of the Company's total
loan portfolio had adjustable interest rates or maturities of 12 months or less;
(ii) $126.0 million or 48.9% of the Company's portfolio of single-family
residential mortgage loans (including residential construction loans) consisted
of ARMs and (iii) $132.7 million or 33.6% of the Company's portfolio of
mortgage-backed securities (including mortgage-backed securities available for
sale) 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 June 30, 1998, the
Company's interest-earning assets maturing or repricing within one year totaled
$341.1 million while the Company's interest-bearing liabilities maturing or
repricing within one-year totaled $372.3 million, providing a deficiency of
interest-earning assets over interest-bearing liabilities of $31.2 million or a
negative 3.3% of total assets. At June 30, 1998, the percentage of the Company's
assets to liabilities maturing or repricing within one year was 91.6%. The
Company does not presently anticipate that its one-year interest rate
sensitivity gap will fluctuate beyond a range of a positive 5.0% of total assets
to a negative 15.0% of total assets.
The one year interest rate sensitivity gap has been the most common industry
standard used to measure an institution's interest rate risk position. The
Company also utilizes income simulation modeling in measuring its interest rate
risk and managing its interest rate sensitivity. The Asset and Liability
Management Committee of the Company believes that simulation modeling enables
the Company to more accurately evaluate and manage the possible effects on net
interest income due to the exposure to changing market interest rates, the slope
of the yield curve and different prepayment and decay assumptions under various
interest rate scenarios. At June 30, 1998, the Company's simulation model
indicated that the Company's statement of financial condition is liability
sensitive. Within the past 19 months, the Company has purchased interest rate
cap contracts with notional amounts totaling $120.0. million in order to
insulate against a rising interest rate environment. As such, in a 300 basis
point gradually rising rate environment over 24 months, with minor changes in
the statement of condition and limited reinvestment changes, net interest income
is projected to increase by approximately 5.5% over such 24 month period.
16
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 ratios fluctuate depending primarily upon deposit
flows but have been consistently maintained at levels in excess of the required
percentage. At June 30, 1998, the Bank's liquidity ratio was 21.6%
The Company's primary sources of funds generally have been deposits obtained
through the offices of the Bank, borrowings from the FHLB, reverse repurchase
agreement borrowings and amortization and prepayments of outstanding loans and
maturing investment securities. During the six months ended June 30, 1998, the
Company used its sources of funds primarily to purchase securities, and to a
lesser extent, the funding of loan commitments. As of such date, the Company had
outstanding loan commitments totaling $18.7 million, unused lines of credit
totaling $24.3 million and $12.6 million of undisbursed loans in process.
At June 30, 1998, certificates of deposits amounted to $250.9 million or 61.4%
of the Company's total consolidated deposits, including $147.7 million which
were scheduled to mature by June 30, 1999. At the same date, the total amount of
FHLB advances which were scheduled to mature by June 30, 1999 was $121.0
million. Management of the Company believes that it has adequate resources to
fund all of its commitments, that all of its commitments will be funded by June
30, 1999 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 3% of adjusted total assets and risk-based capital equal to 8%
of risk-weighted assets. The Office of the Comptroller of the Currency and the
FDIC have adopted more stringent core capital requirements which require that
the most highly rated banks have a minimum core capital ratio of 3%, with an
additional 100 to 200 basis point cushion required for all other banks as
established by the regulator on a case-by-case basis. Both the FDIC and the OTS
reserve the right to apply this higher standard to any insured financial
institution when considering an institution's capital adequacy. At June 30,
1998, the Bank was in compliance with all regulatory capital requirements with
tangible, core and risk-based capital ratios of 6.7%, 6.7% and 17.9%,
respectively.
RECENT ACCOUNTING, REGULATORY AND OTHER MATTERS
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.
The OTS and other federal banking regulators have issued guidelines to assure
that insured depository institutions appropriately address Year 2000 issues,
which primarily center on the ability of computer systems to recognize the year
2000.
The Company has instituted an Action Plan for the Year 2000 that consists of
five phases: Awareness, Assessment, Renovation, Validation and Implementation.
The Plan includes the assessment of all internal programs, systems and data
processing applications as well as those provided by third-party vendors. The
Company is currently in the Renovation phase and anticipates completion of this
phase by December 31, 1998. Validation and testing will begin in the third
quarter of 1998 with an anticipated completion date of March 31, 1999.
17
The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test systems for Year 2000 compliance. A significant
portion of the Company's data processing is provided by a third-party vendor
which the Company anticipates will be compliant with Year 2000 issues on a
timely basis. The Company will be developing contingency plans that would be
implemented should any applications or systems fail to be Year 2000 compliant.
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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative financial instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Management has not yet determined the impact of this statement on the
consolidated financial statements of the Company. This statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. Earlier
application of all of the provisions of the statement is permitted only as of
the beginning of any fiscal quarter that begins after the statement's issue
date.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Quantitative and qualitative disclosures about market risk are presented at
December 31, 1997 in Item 7A of the Company's Annual Report on Form 10-K, filed
with the SEC on March 30, 1998. Management believes there have been no material
changes in the Company's market risk since December 31, 1997.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are involved in various legal proceedings
occurring in the ordinary course of business. It is the opinion of management,
after consultation with legal counsel, that these matters will not materially
effect the Company's consolidated financial position or results of operations.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On April 21, 1998, the Company held its Annual Meeting of Stockholders. Nominees
for three director positions were elected. All other matters submitted to a vote
of stockholders were also approved, and the stockholder votes thereon are
summarized as follows:
Election of Directors (Proposal One)
Director For Withheld Term/Expiration
-------- --- -------- ---------------
George William Blank, Jr. 4,354,942 106,122 Three Years/2001
Lloyd L. Kildoo 4,357,061 104,003 Three Years/2001
Edwin A. Thaner 4,336,693 124,371 Three Years/2001
Amendment of the Company's Amended and Restated Articles of Incorporation to
change the corporate name to ESB Financial Corporation (Proposal Two)
For Against Abstain
--- ------- -------
4,303,707 110,090 47,267
Ratification of Appointment of KPMG Peat Marwick LLP as Independent Public
Accountants for the Company for 1998 (Proposal Three)
For Against Abstain
--- ------- -------
4,377,610 76,266 7,188
No other proposals were considered at the annual meeting.
19
Item 5. Other Information
Deadlines for Shareholder Proposals
Pursuant to Rule 14a-5(e) under the Securities Exchange Act of 1934, as amended
effective June 29, 1998:
(1) The deadline for submitting shareholder proposals for
inclusion in the Company's proxy statement and form of proxy
for the Company's 1999 Annual Meeting of Stockholders pursuant
to Rule 14a-8 is November 20, 1998.
(2) The date after which notice of a shareholder proposal
submitted outside the processes of Rule 14a-8 is considered
untimely is February 20, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Form 8-K - The Company filed a Form 8-K dated April 22, 1998 to report
earnings for the three months ended March 31, 1998 and to report a 10%
stock dividend payable May 29, 1998 to stockholders of record at the
close of business on May 15, 1998.
Form 8-K - The Company filed a Form 8-K dated June 12, 1998 to report the
merger of its two wholly-owned subsidiaries. Troy Hill Federal savings
Bank was merged with and into ESB Bank, F.S.B. with ESB Bank, F.S.B. as
the surviving institution.
Form 8-K - The Company filed a Form 8-K dated June 17, 1998 to report a
$0.09 per common share cash dividend payable July 24, 1998 to
stockholders of record at the close of business on June 30, 1998.
20
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ESB FINANCIAL CORPORATION
Date: August 7, 1998 By: /s/ Charlotte A. Zuschlag
--------------------------------
Charlotte A. Zuschlag
President and Chief Executive Officer
Date: August 7, 1998 By: /s/ Charles P. Evanoski
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Charles P. Evanoski
Senior Vice President and
Chief Financial Officer