-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S8mW7mbkwGSb+5mnxiVkH2Vt1bQJgVbOkSVam2B95PpWFmu5d3aG0pIY++ImhGM5 /opK02NvMQ27o3PKkTe3Ow== 0000950132-99-000511.txt : 19990514 0000950132-99-000511.hdr.sgml : 19990514 ACCESSION NUMBER: 0000950132-99-000511 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ESB FINANCIAL CORP CENTRAL INDEX KEY: 0000872835 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 251659846 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19345 FILM NUMBER: 99620366 BUSINESS ADDRESS: STREET 1: 600 LAWRENCE AVE CITY: ELLWOOD CITY STATE: PA ZIP: 16117 BUSINESS PHONE: 7247585584 MAIL ADDRESS: STREET 1: 600 LAWRENCE AVENUE CITY: ELLWOOD CITY STATE: PA ZIP: 16117 FORMER COMPANY: FORMER CONFORMED NAME: PENNFIRST BANCORP INC DATE OF NAME CHANGE: 19960126 10-Q 1 FORM 10-Q ================================================================================ 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, 1999 -------------- Commission File Number: 0-19345 ------- ESB FINANCIAL CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 25-1659846 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 600 Lawrence Avenue, Ellwood City, PA 16117 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (724) 758-5584 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No --- --- Number of shares of common stock outstanding as of April 30, 1999: Common Stock, $0.01 par value 5,225,564 shares ----------------------------- ---------------- (Class) (Outstanding) ESB FINANCIAL CORPORATION TABLE OF CONTENTS PART I - FINANCIAL INFORMATION ------------------------------
Item 1. Financial Statements Consolidated Statements of Financial Condition as of March 31, 1999 (Unaudited) and December 31, 1998.... 1 Consolidated Statements of Operations for the three months ended March 31, 1999 and 1998 (Unaudited).......... 2 Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998 (Unaudited).......... 3 Notes to Consolidated Financial Statements................ 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk 15 PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings......................................... 16 Item 2. Changes in Securities..................................... 16 Item 3. Defaults Upon Senior Securities........................... 16 Item 4. Submission of Matters to a Vote of Security Holders....... 16 Item 5. Other Information......................................... 16 Item 6. Exhibits and Reports on Form 8-K.......................... 16 Signatures................................................ 17
PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements - ----------------------------- ESB Financial Corporation and Subsidiaries Consolidated Statements of Financial Condition As of March 31, 1999 (Unaudited) and December 31, 1998 (Dollar amounts in thousands, except share data)
March 31, December 31, 1999 1998 (Unaudited) ------------- ------------- Assets ------ Cash on hand and in banks $ 2,591 $ 3,140 Interest-earning deposits 5,313 6,534 Federal funds sold 2,470 629 Securities available for sale; cost of $492,586 and $480,537 495,955 481,234 Securities held to maturity; market value of $58,353 and $64,033 58,278 63,815 Loans receivable, net 359,891 360,280 Accrued interest receivable 6,409 6,792 Federal Home Loan Bank (FHLB) stock 18,435 18,435 Premises and equipment, net 6,557 6,193 Real estate acquired through foreclosure, net 13 21 Prepaid expenses and other assets 9,847 10,359 Bank owned life insurance 15,183 15,006 ------------- ------------- Total assets $ 980,942 $ 972,438 ============= ============= Liabilities and Stockholders' equity ------------------------------------ Liabilities: Deposits $ 423,016 $ 423,051 Borrowed funds 461,786 456,355 Guaranteed preferred beneficial interest in subordinated debt, net 24,038 24,027 Advance payments by borrowers for taxes and insurance 3,326 3,171 Accrued expenses and other liabilities 5,450 4,751 ------------- ------------- Total liabilities 917,616 911,355 ------------- ------------- Stockholders' equity: Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued - - Common stock, $.01 par value, 10,000,000 shares authorized; 6,337,755 and 6,337,755 shares issued; 5,251,472 and 5,265,886 shares outstanding 63 63 Additional paid-in capital 59,490 59,448 Treasury stock, at cost; 1,086,283 and 1,071,869 shares (17,062) (16,841) Unearned Employee Stock Ownership Plan (ESOP) shares (2,604) (2,681) Unvested shares held by Management Recognition Plan (MRP) (237) (237) Retained earnings, substantially restricted 21,452 20,870 Accumulated other comprehensive income, net 2,224 461 ------------- ------------- Total stockholders' equity 63,326 61,083 ------------- ------------- Total liabilities and stockholders' equity $ 980,942 $ 972,438 ============= =============
See accompanying notes to consolidated financial statements. 1 ESB Financial Corporation and Subsidiaries Consolidated Statements of Operations For the three months ended March 31, 1999 and 1998 (Unaudited) (Dollar amounts in thousands, except share data)
Three Months Ended March 31, --------------------------- 1999 1998 ------- -------- Interest income: Loans receivable $ 6,955 $ 6,816 Securities available for sale 7,272 7,232 Securities held to maturity 846 1,346 FHLB stock 296 289 Deposits with banks and federal funds sold 62 69 ------- ------- Total interest income 15,431 15,752 ------- ------- Interest expense: Deposits 4,397 4,288 Borrowed funds 6,662 6,518 Guaranteed preferred beneficial interest in subordinated debt 557 556 ------- ------- Total interest expense 11,616 11,362 ------- ------- Net interest income 3,815 4,390 Provision for loan losses 3 - ------- ------- Net interest income after provision for loan losses 3,812 4,390 ------- ------- Noninterest income: Fees and service charges 330 315 Net realized gain (loss) on sales of securities available for sale 215 (7) Other 192 10 ------- ------- Total noninterest income 737 318 ------- ------- Noninterest expense: Compensation and employee benefits 1,620 1,481 Premises and equipment 363 257 Federal deposit insurance premiums 69 62 Data processing 112 128 Other 808 725 ------- ------- Total noninterest expense 2,972 2,653 ------- ------- Net income before provision for income taxes 1,577 2,055 Provision for income taxes 222 505 ------- ------- Net income $ 1,355 $ 1,550 ======= ======= Net income per share: Basic $0.27 $0.28 Diluted $0.26 $0.27
See accompanying notes to consolidated financial statements. 2 ESB Financial Corporation and Subsidiaries Consolidated Statements of Cash Flows For the three months ended March 31, 1999 and 1998 (Unaudited) (Dollar amounts in thousands)
Three Months Ended March 31, ---------------------------- 1999 1998 ----------- ---------- Operating activities: Net income $ 1,355 $ 1,550 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization for premises and equipment 140 86 Provision for losses 7 14 Amortization of premiums and accretion of discounts 558 440 Origination of loans available for sale (5,585) (2,447) Proceeds from sale of loans available for sale 4,918 1,521 (Gain) loss on sale of securities available for sale (215) 7 Amortization of intangible assets 150 150 Decrease (increase) in accrued interest receivable 383 (472) (Increase) decrease in prepaid expenses and other assets (546) 349 Increase in accrued expenses and other liabilities 699 1,973 Other 6 238 ----------- ---------- Net cash provided by operating activities 1,870 3,409 ----------- ---------- Investing activities: Loan originations and purchases (28,296) (32,322) Purchases of securities available for sale (64,754) (83,808) Purchases of securities held to maturity - (993) Purchases of FHLB stock - (462) Additions to premises and equipment (504) (63) Principal repayments of loans receivable 29,299 23,636 Principal repayments of securities available for sale 30,929 26,216 Principal repayments of securities held to maturity 5,443 4,234 Proceeds from the sale of securities available for sale 21,611 19,459 Proceeds from sale of REO 15 - ----------- ---------- Net cash used in investing activities (6,257) (44,103) ----------- ---------- Financing activities: Net (decrease) increase in deposits (35) 2,019 Net increase in borrowed funds 5,431 31,159 Proceeds received from exercise of stock options 105 226 Dividends paid (474) (474) Payments to acquire treasury stock (646) (1,426) Stock purchased by ESOP (39) (449) Principal repayment of ESOP loan 116 108 ----------- ---------- Net cash provided by financing activities 4,458 31,163 ----------- ---------- Net increase (decrease) in cash equivalents 71 (9,531) Cash equivalents at beginning of period 10,303 18,947 ----------- ---------- Cash equivalents at end of period $ 10,374 $ 9,416 =========== ==========
Continued. 3 ESB Financial Corporation and Subsidiaries Consolidated Statements of Cash Flows, (Continued) For the three months ended March 31, 1999 and 1998 (Unaudited) (Dollar amounts in thousands)
Three Months Ended March 31, ------------------------------ 1999 1998 ----------- ----------- Supplemental information: Interest paid $ 11,593 $ 12,118 Income taxes paid 90 45 Non-cash transactions: Transfers from loans receivable to real estate acquired through foreclosure - 48 Dividends declared but not paid 473 471
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. ("ESB" or "the Bank"), and its other subsidiaries, PennFirst Financial Services, Inc., PennFirst Capital Trust I, THF, Inc. and AMSCO, Inc. The accompanying unaudited consolidated financial statements for the interim periods include all adjustments, consisting only of normal recurring accruals, which are necessary, in the opinion of management, to fairly reflect the Company's financial position and results of operations. Additionally, these consolidated financial statements for the interim periods have been prepared in accordance with instructions for the Securities and Exchange Commission's Form 10-Q and therefore do not include all information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with generally accepted accounting principles. For further information, refer to the audited consolidated financial statements and footnotes thereto for the year ended December 31, 1998, as contained in the 1998 Annual Report to Stockholders. The results of operations for the three month period ended March 31, 1999 are not necessarily indicative of the results that may be expected for the entire year. Certain amounts previously reported have been reclassified to conform with the current year's reporting format. 2. Securities The Company's securities available for sale and held to maturity portfolios are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------- (In thousands) Amortized Unrealized Unrealized Fair cost gains losses value - ------------------------------------------------------------------------------------------------------------------- Available for sale: - ------------------ As of March 31, 1999: Trust Preferred securities $ 3,274 $ 9 $ (29) $ 3,254 Municipal securities 96,671 2,254 (239) 98,686 Equity securities 2,271 286 (126) 2,431 Corporate Bonds 52,653 27 (724) 51,956 Mortgage-backed securities 337,717 2,365 (454) 339,628 ------------ ----------- ------------ ------------ $ 492,586 $ 4,941 $ (1,572) $ 495,955 ============ =========== ============ ============ As of December 31, 1998: Trust Preferred securities $ 3,275 $ 54 $ (29) $ 3,300 Municipal securities 99,035 2,258 (195) 101,098 Equity securities 2,101 348 (157) 2,292 Corporate Bonds 52,649 - (2,329) 50,320 Mortgage-backed securities 323,477 1,637 (890) 324,224 ------------ ----------- ------------ ------------ $ 480,537 $ 4,297 $ (3,600) $ 481,234 ============ =========== ============ ============ Held to maturity: - ---------------- As of March 31, 1999: U.S. Government securities $ 3,989 $ 36 $ - $ 4,025 Municipal securities 7,995 196 - 8,191 Mortgage-backed securities 46,294 42 (199) 46,137 ------------ ----------- ------------ ------------ $ 58,278 $ 274 $ (199) $ 58,353 ============ =========== ============ ============ As of December 31, 1998: U.S. Government securities $ 4,986 $ 41 $ - $ 5,027 Municipal securities 7,994 210 - 8,204 Mortgage-backed securities 50,835 105 (138) 50,802 ------------ ----------- ------------ ------------ $ 63,815 $ 356 $ (138) $ 64,033 ============ =========== ============ ============ - -------------------------------------------------------------------------------------------------------------------
5 3. Loans Receivable The Company's loans receivable as of the respective dates are summarized as follows:
- -------------------------------------------------------------------------------------------------------------------- March 31, December 31, (In thousands) 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Mortgage loans: Residential - single family $ 229,406 $ 225,054 Residential - multi family 11,644 11,206 Commercial real estate 31,672 32,300 Construction 33,275 41,215 ------------- ------------- 305,997 309,775 Other loans: Consumer loans 55,739 56,897 Commercial business 13,623 14,216 ------------- ------------- 375,359 380,888 Less: Allowance for loan losses 4,820 4,815 Deferred loan fees and net discounts 741 785 Loans in process 9,907 15,008 ------------- ------------- $ 359,891 $ 360,280 ============= ============= - --------------------------------------------------------------------------------------------------------------------
4. Deposits The Company's deposits as of the respective dates are summarized as follows:
- --------------------------------------------------------------------------------------------------------------------- (Dollar amounts in thousands) March 31, 1999 December 31, 1998 ---------------------------------------- --------------------------------------- Weighted Weighted average average Type of accounts rate Amount % rate Amount % - --------------------------------------------------------------------------------------------------------------------- Noninterest-bearing deposits - $ 7,825 1.9% - $ 6,002 1.4% Interest-bearing demand deposits 2.38% 160,415 37.9% 2.34% 156,994 37.1% Time deposits 5.38% 254,776 60.2% 5.54% 260,055 61.5% ------------ ------------ ----------- ----------- 4.22% $ 423,016 100.0% 4.27% $ 423,051 100.0% ============ ============ =========== =========== Time deposits mature as follows: Within one year $ 153,704 36.3% $ 145,231 34.3% After one year through two years 66,330 15.7% 72,845 17.2% After two years through three years 10,452 2.5% 18,438 4.4% Thereafter 24,290 5.7% 23,541 5.6% ------------ ------------ ----------- ----------- $ 254,776 60.2% $ 260,055 61.5% ============ ============ =========== =========== - ---------------------------------------------------------------------------------------------------------------------
6 5. Borrowed Funds The Company's borrowed funds as of the respective dates are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------ (Dollar amounts in thousands) March 31, 1999 December 31, 1998 ----------------------- ------------------------ Weighted Weighted average rate Amount average rate Amount - ------------------------------------------------------------------------------------------------------------------ FHLB advances: Due within 12 months 6.12% $ 73,095 5.99% $ 98,595 Due beyond 12 months but within 5 years 6.11% 205,539 6.04% 206,660 Due beyond 5 years but within 10 years 5.33% 45,440 7.79% 440 Due beyond 10 years 6.03% 269 6.01% 270 ------------ ------------ 324,343 305,965 Reverse repurchase agreements: Due within 90 days 5.53% $ 10,000 5.29% $ 44,860 Due beyond 90 days but within 5 years 5.54% 127,390 5.59% 105,500 ------------ ------------ 137,390 150,360 Treasury tax and loan note payable 53 30 ------------ ------------ $ 461,786 $ 456,355 ============ ============ - ------------------------------------------------------------------------------------------------------------------
6. Net Income Per Share Net income per share is calculated by dividing net operating results for the period by the weighted average number of shares of common shares and equivalents outstanding during the period. Net income per share and weighted average shares and equivalents outstanding for all periods reported reflect the stock dividend declared on April 17, 1998. For purposes of computing basic net income per share for the three month periods ended March 31, 1999 and 1998, the weighted average shares outstanding were 5,034,000 and 5,542,000, respectively. For purposes of computing diluted net income per share for the three month periods ended March 31, 1999 and 1998, the weighted average shares and equivalents outstanding were 5,191,000 and 5,802,000, respectively. For all periods, the difference between average basic and average diluted shares represented the dilutive impact of stock options. Options to purchase 63,735 shares of common stock at $18.00 per share were outstanding as of March 31, 1999 but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of common shares. The options expire on June 30, 2008. 7. Comprehensive Income Comprehensive income is defined as "the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners". Only the impact of unrealized gains or losses on securities available for sale is necessary and applicable to be disclosed as an additional component of the Company's total comprehensive income under the requirements of Statement of Financial Accounting Standards No. 130. For the three months ended March 31, 1999 and 1998, total comprehensive income was $3.1 million and $1.6 million, respectively, including other comprehensive income which represented an increase of $1.7 million and a decrease of $76,000, respectively, in unrealized gains/losses on securities available for sale, net of income taxes. 7 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 $8.5 million or 0.9% to $980.9 million at March 31, 1999 from $972.4 million at December 31, 1998. This net increase was primarily the result of increases in securities, cash and cash equivalents, premises and equipment, and bank owned life insurance of $9.2 million, $71,000, $364,000 and $177,000, respectively, partially offset by decreases in loans receivable, accrued interest receivable, real estate acquired through foreclosure and prepaid expenses and other assets of $389,000, $383,000, $8,000 and $512,000, respectively. The increase in total assets reflects a corresponding increase in total liabilities and stockholders' equity of $6.3 million or 0.7% and $2.2 million or 3.7%, respectively. 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 $5.4 million, $155,000 and $699,000, respectively. The increase in stockholders' equity was the result of increases in additional paid in capital, retained earnings and accumulated other comprehensive income of $42,000, $582,000 and $1.8 million, respectively, and a decrease in unearned employee stock ownership plan ("ESOP") shares of $77,000, offset by an increase in treasury stock of $221,000. Cash on hand, Interest-earning deposits and Federal funds sold. Cash on hand, interest-earning deposits and federal funds sold represent cash equivalents. Cash equivalents increased a combined $71,000 or 0.7% to $10.4 million at March 31, 1999 from $10.3 million at December 31, 1998. 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. The net increase between March 31, 1999 and December 31, 1998 can be attributed primarily to increases in money market investments. Securities. The Company's securities portfolios increased by $9.2 million or 1.7% to $554.2 million at March 31, 1999 from $545.0 million at December 31, 1998. This net increase was primarily the result of purchases of available for sale securities of $64.8 million, consisting of purchases of mortgage-backed securities of $64.4 million and common stock of banks and thrifts of $401,000, during the three months ended March 31, 1999. Partially offsetting the purchases of securities were sales of available for sale securities of $21.6 million, consisting of sales of municipal securities of $2.5 million, equity securities of $316,000 and mortgage-backed securities of $18.8 million, and repayments and maturities of securities of $36.4 million, during the three months ended March 31, 1999. Loans receivable. Net loans receivable decreased $389,000 or 0.1% to $359.9 million at March 31, 1999 from $360.3 million at December 31, 1998 due to refinancing and repayments. Included in this decrease were decreases in mortgage loans of $3.8 million or 1.2% and other loans of $1.8 million or 2.5%, partially offset by a decrease in loans in process and deferred loan fees of $5.1 million or 32.6%, during the three months ended March 31, 1999. Non-performing assets. Non-performing assets include non-accrual loans and real estate acquired through foreclosure. Non-performing assets amounted to $4.1 million or 0.44% and $4.1 million or 0.45% of total assets at March 31, 1999 and December 31, 1998, respectively. Deposits. Total deposits decreased $35,000 to $423.0 million at March 31, 1999 from $423.1 million at December 31, 1998. This decrease was primarily the result of a decrease of $5.3 million in time deposits offset by increases of $1.8 million and $3.4 million in noninterest-bearing deposits and interest- bearing demand deposit accounts during the three months ended March 31, 1999. 8 Borrowed funds. Borrowed funds increased $5.4 million or 1.2% to $461.8 million at March 31, 1999 from $456.4 million at December 31, 1998. This increase is primarily the result of the Company utilizing FHLB advances to fund the increase in securities. FHLB advances increased $18.4 million or 6.0% while reverse repurchase agreement borrowings decreased $13.0 million or 8.6% during the three months ended March 31, 1999. Stockholders' equity. Stockholders' equity increased $2.2 million to $63.3 million at March 31, 1999 from $61.1 million at December 31, 1998. This increase was principally the result of increases in additional paid in capital, retained earnings and accumulated other comprehensive income of $42,000, $582,000 and $1.8 million, respectively, with a decrease in unearned ESOP shares of $77,000, offset by an increase in treasury stock of $221,000 during the three months ended March 31, 1999. RESULTS OF OPERATIONS General. The Company recorded net income of $1.4 million for the three months ended March 31, 1999, as compared to net income of $1.6 million for the same period in the prior year. The $195,000 or 12.6% decrease in net income for the three months ended March 31, 1999, as compared to the three months ended March 31, 1998, was primarily attributable to a decrease in net interest income of $575,000 and an increase in the provision for loan losses and noninterest expense of $3,000 and $319,000, respectively, partially offset by an increase in noninterest income of $419,000 and a decrease in the provision for income taxes of $283,000. Net interest income. Net interest income decreased $575,000 or 13.1% to $3.8 million for the three months ended March 31, 1999, compared to $4.4 million for the same period in the prior year. This decrease in net interest income can be attributed to a decrease in interest income of $321,000 and an increase in interest expense of $254,000. Interest income. Interest income decreased $321,000 or 2.0% to $15.4 million for the three months ended March 31, 1999, compared to $15.8 million for the same period in the prior year. This decrease can be attributed primarily to a decrease in interest earned on securities and interest-earning deposits of $460,000 and $7,000, respectively, partially offset by increases in interest earned on loans receivable and FHLB stock of $139,000 and $7,000, respectively. Interest earned on loans receivable increased $139,000 or 2.0% to $7.0 million for the quarter ended March 31, 1999, compared to $6.8 million for the same period in the prior year. This increase was primarily attributable to an increase in the average balance of loans outstanding of $16.8 million or 4.8% to $363.2 million for the three months ended March 31, 1999, compared to $346.4 million for the same period in the prior year, partially offset by a decrease in the yield of loans receivable to 7.66% for the three months ended March 31, 1999, compared to 7.87% for the same period in the prior year. Interest earned on securities decreased $460,000 or 5.4% to $8.1 million for the three months ended March 31, 1999, compared to $8.6 million for the same period in the prior year. This decrease was primarily attributable to a decline in the tax equivalent yield on securities to 6.47% for the three months ended March 31, 1999, compared to 6.83% for the same period in the prior year. Partially offsetting this yield decrease was an increase in the average balance of securities held of $13.9 million or 2.6% to $547.4 million for the three months ended March 31, 1999, compared to $533.5 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 three quarters of 1998 and the first quarter of 1999. Interest expense. Interest expense increased $254,000 or 2.2% to $11.6 million for the three months ended March 31, 1999, compared to $11.4 million for the same period in the prior year. This increase in interest expense can be primarily attributed to increases in interest incurred on deposits and borrowed funds of $109,000 and $144,000, respectively. 9 Interest incurred on deposits increased $109,000 or 2.5% to $4.4 million for the three months ended March 31, 1999, 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 $22.5 million or 5.7% to $417.1 million for the three months ended March 31, 1999, compared to $394.6 million for the same period in the prior year. The cost of interest-bearing deposits decreased to 4.28% for the quarter ended March 31, 1999 compared to 4.41% for the same period in the prior year. Interest incurred on borrowed funds increased $144,000 or 2.2% to $6.7 million for the three months ended March 31, 1999, compared to $6.5 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 $31.7 million or 7.5% to $453.9 million for the three months ended March 31, 1999, compared to $422.2 million for the same period in the prior year. This increase in borrowed funds is a reflection of the increase in securities, as such funds were utilized to provide for security growth. Partially offsetting the increase in interest incurred on borrowed funds was a decrease in the cost of these funds to 5.95% for the three months ended March 31, 1999, compared to 6.26% for the same period in the prior year. Provision for loan losses. The provision for loan losses was $3,000 at March 31, 1999. This reflects the adequacy of the Company's allowance for loan losses as of March 31, 1999. In determining the appropriate level of allowance for loan losses, management considers historical loss experience, the financial condition of borrowers, economic conditions (particularly as they relate to markets where the Company originates loans), the status of non-performing assets, the estimated underlying value of the collateral and other factors related to the collectability of the loan portfolio. The Company's total allowance for losses on loans at March 31, 1999 and at December 31, 1998 amounted to $4.8 million or 1.32% of the Company's total loan portfolio. The Company's allowance for losses on loans as a percentage of non-performing loans was 102.3% and 103.4% at March 31, 1999 and December 31, 1998, respectively. Noninterest income. Noninterest income increased $419,000 or 131.8% to $737,000 for the three months ended March 31, 1999, compared to $318,000 for the same period in the prior year. This increase can be attributed primarily to an increase in the net realized gains on sales of securities available for sale and income from bank owned life insurance of $222,000 and $177,000, respectively. Noninterest expense. Noninterest expense increased $319,000 or 12.0% to $3.0 million for the three months ended March 31, 1999, from $2.7 million for the same period in the prior year. This increase was the result of increases in compensation and employee benefits, premises and equipment, federal deposit insurance premiums and other expenses of $139,000, $106,000, $7,000 and $83,000, respectively, partially offset by a decrease in data processing costs of $16,000. The increase in compensation and employee benefits is due primarily to staffing increases between periods and normal salary and benefit increases. The increase in premises and equipment and federal deposit insurance premimums were the result of the opening of the Company's new Wexford branch office during the quarter and an increase in the average balance of deposits for the three months ended March 31, 1999. The increase in other operating expenses is primarily attributable to a $43,000 write-off of fraudulently withdrawn deposits. Provision for income taxes. The provision for income taxes decreased $283,000 or 56.0% to $222,000 for the three months ended March 31, 1999, from $505,000 for the same period in the prior year. This decrease was attributable to a decrease in pre-tax net income and a reduction in the Company's effective tax rate as a result of an increase in the average balance of tax exempt securities between the periods. 10 Average Balance Sheet and Yield/Rate Analysis. The following table sets forth, for periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resultant average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the resultant average costs, net interest income, interest rate spread and the net interest margin earned on average interest-earning assets. For purposes of 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 March 31, 1999 1998 --------------------------------------- --------------------------------------- Average Yield / Average Yield / Balance Interest Rate Balance Interest Rate - ----------------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: - ----------------------- Taxable securities available for sale $ 385,756 $ 5,942 6.16% $ 376,426 $ 6,311 6.71% Tax-exempt securities available for sale 100,843 2,016 8.00% 67,302 1,395 8.29% Taxable securities held to maturity 52,843 740 5.60% 81,401 1,224 6.01% Tax-exempt securities held to maturity 7,995 160 8.01% 8,368 185 8.84% ------------- ----------- --------- --------- -------- -------- 547,437 8,858 6.47% 533,497 9,115 6.83% ------------- ----------- --------- --------- -------- -------- Mortgage loans 293,050 5,615 7.66% 284,737 5,610 7.88% Other loans 70,147 1,340 7.64% 61,681 1,206 7.82% ------------- ----------- --------- --------- -------- -------- 363,197 6,955 7.66% 346,418 6,816 7.87% ------------- ----------- --------- --------- -------- -------- Cash equivalents 8,387 63 3.00% 8,462 69 3.26% FHLB stock 18,435 296 6.42% 18,053 289 6.40% ------------- ----------- --------- --------- -------- -------- 26,822 359 5.35% 26,515 358 5.40% ------------- ----------- --------- --------- -------- -------- Total interest-earning assets 937,456 16,172 6.90% 906,430 16,289 7.19% Other noninterest-earning assets 36,615 - - 17,367 - - ------------- ----------- --------- --------- -------- -------- Total assets $ 974,071 $ 16,172 6.64% $ 923,797 $ 16,289 7.05% ============= =========== ========= ========= ========= ======== Interest-bearing liabilities: - ---------------------------- Interest-bearing demand deposits $ 157,602 $ 915 2.35% $ 150,633 $ 880 2.37% Time deposits 259,510 3,482 5.44% 243,996 3,408 5.66% ------------- ----------- --------- --------- -------- -------- 417,112 4,397 4.28% 394,629 4,288 4.41% ------------- ----------- --------- --------- -------- -------- FHLB advances 317,071 4,757 6.08% 338,315 5,338 6.40% Reverse repo's & other borrowings 136,848 1,906 5.65% 83,883 1,180 5.71% ------------- ----------- --------- --------- -------- -------- 453,919 6,663 5.95% 422,198 6,518 6.26% ------------- ----------- --------- --------- -------- -------- Preferred securities 24,033 558 9.42% 24,085 556 9.36% ------------- ----------- --------- --------- -------- -------- Total interest-bearing liabilities 895,064 11,618 5.26% 840,912 11,362 5.48% Noninterest-bearing demand deposits 10,428 - - 8,573 - - Other noninterest-bearing liabilities 6,109 - - 5,612 - - ------------- ----------- --------- --------- -------- -------- Total liabilities 911,601 11,618 5.17% 855,097 11,362 5.39% Stockholders' equity 62,470 - - 68,700 - - ------------- ----------- --------- --------- -------- -------- Total liabilities and equity $ 974,071 $ 11,618 4.84% $ 923,797 $ 11,362 4.99% ============= =========== ========= ========= ========= ======== Net interest income $ 4,554 $ 4,927 ============ ========= Interest rate spread (difference between 1.64% 1.71% ======== ======== weighted average rate on interest-earning assets and interest-bearing liabilities) Net interest margin (net interest 1.94% 2.17% ======== ======== income as a percentage of average interest-earning assets) - -----------------------------------------------------------------------------------------------------------------------------------
11 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, 1999 and 1998, in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Company's interest income and interest expense are attributable to changes in rate (change in rate multiplied by prior period volume), changes in volume (changes in volume multiplied by prior period rate) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances. Changes in interest income on securities reflects the changes in interest income on a fully tax equivalent basis.
- ---------------------------------------------------------------------------------------------------------------------------- (In thousands) 1999 versus 1998 Increase (decrease) due to ----------------------------------------------- Volume Rate Total - ---------------------------------------------------------------------------------------------------------------------------- Interest income: Securities $ 234 $ (491) $ (257) Loans 324 (185) 139 Cash equivalents (1) (5) (6) FHLB stock 6 1 7 ---------- ----------- ----------- Total interest-earning assets 563 (680) (117) ---------- ----------- ----------- Interest expense: Deposits 240 (131) 109 FHLB advances (326) (255) (581) Reverse repurchases & other borrowings 738 (12) 726 Preferred securities (1) 3 2 ---------- ----------- ----------- Total interest-bearing liabilities 651 (395) 256 ---------- ----------- ----------- Net interest income $ (88) $ (285) $ (373) ========== =========== =========== - ----------------------------------------------------------------------------------------------------------------------------
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 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 12 higher interest rates than mortgage loans and (iii) the purchase of off-balance sheet interest rate caps which help to insulate the Bank's interest rate risk position from increases in interest rates. As of March 31, 1999, the implementation of these asset and liability initiatives resulted in the following: (i) $168.9 million or 45.0% of the Company's total loan portfolio had adjustable interest rates or maturities of 12 months or less; (ii) $108.7 million or 42.4% of the Company's portfolio of single-family residential mortgage loans (including residential construction loans) consisted of ARMs and (iii) $76.5 million or 19.8% of the Company's portfolio of mortgage-backed securities (including mortgage-backed securities available for sale) were secured by ARMs and (iv) the Company had $120.0 million in notional amount of interest rate caps. The implementation of the foregoing asset and liability initiatives and strategies, combined with other external factors such as demand for the Company's products and economic and interest rate environments in general, has resulted in the Company being able to maintain a one-year interest rate sensitivity gap ranging between a positive 5.0% of total assets to a negative 15.0% of total assets. The one-year interest rate sensitivity gap is defined as the difference between the Company's interest-earning assets which are scheduled to mature or reprice within one year and its interest-bearing liabilities which are scheduled to mature or reprice within one year. At March 31, 1999, the Company's interest-earning assets maturing or repricing within one year totaled $386.7 million while the Company's interest-bearing liabilities maturing or repricing within one-year totaled $418.5 million, providing a deficiency of interest-earning assets over interest-bearing liabilities of $31.8 million or a negative 3.2% of total assets. At March 31, 1999, the percentage of the Company's assets to liabilities maturing or repricing within one year was 92.4%. 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 March 31, 1999, the Company's simulation model indicated that the Company's statement of financial condition is liability sensitive. Within the past 28 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 decrease by approximately 1.0% over such 24 month period. LIQUIDITY The Bank is required by the Office of Thrift Supervision ("OTS") to maintain a minimum level of liquidity to assure their ability to meet demands for customer's withdrawals and the repayment of short term borrowings. The liquidity requirement is calculated as a percentage of deposits and short-term borrowings, as defined by the OTS, and currently must be maintained at amounts not less than 4.0%. The Bank's liquidity ratio fluctuates depending primarily upon deposit flows but has been consistently maintained at levels in excess of the required percentage. At March 31, 1999, the Bank's liquidity ratio was 14.5%. The Company's primary sources of funds generally have been deposits obtained through the offices of the Bank, borrowings from the FHLB, reverse repurchase agreement borrowings and amortization and prepayments of outstanding loans and maturing investment securities. During the three months ended March 31, 1999, the Company used its sources of funds primarily to purchase securities, and to a lesser extent, the funding of loan commitments. As of such date, the Company had outstanding loan commitments totaling $21.0 million, unused lines of credit totaling $18.8 million and $9.9 million of undisbursed loans in process. 13 At March 31, 1999, certificates of deposits amounted to $254.8 million or 60.2% of the Company's total consolidated deposits, including $153.7 million which were scheduled to mature by March 31, 2000. At the same date, the total amount of FHLB advances which were scheduled to mature by March 31, 2000 was $73.1 million. Management of the Company believes that it has adequate resources to fund all of its commitments, that all of its commitments will be funded by March 31, 2000 and that, based upon past experience and current pricing policies, it can adjust the rates of savings certificates to retain a substantial portion of its maturing certificates and also, to the extent deemed necessary, refinance the maturing FHLB advances. REGULATORY CAPITAL REQUIREMENTS Current regulatory requirements specify that the Bank and similar institutions must maintain tangible capital equal to 1.5% of adjusted total assets, core capital equal to 4% of adjusted total assets and risk-based capital equal to 8% of risk-weighted assets. The OTS may require higher core capital ratios if warranted, and institutions are to maintain capital levels consistent with their risk exposures. Both the FDIC and the OTS reserve the right to apply this higher standard to any insured financial institution when considering an institution's capital adequacy. At March 31, 1999, the Bank was in compliance with all regulatory capital requirements with tangible, core and risk-based capital ratios of 7.0%, 7.0% and 18.6%, respectively. RECENT ACCOUNTING, REGULATORY AND OTHER MATTERS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure the instruments at their fair value. A derivative may be designated as a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, a hedge of the exposure to a variable cash flows of a forecasted transaction, or a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. This statement is effective for fiscal years beginning June 15, 1999. The Company has not determined the impact of the adoption of the standard at this time. 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. YEAR 2000 The Year 2000 ("Y2K") issue exists because in the past many computer programs were developed to recognize only the last two digits of a year (e.g. "99" for "1999"). Without updating or replacing existing systems it is possible that certain computer programs will recognize the year 2000 as 1900 because they will key on the digits "00". The Company is aware of the issues associated with the programming code in certain existing computer systems as the year 2000 approaches. The Y2K problem is pervasive and complex as many computer operations may be affected in some way by the rollover of the two-digit year value to 00. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such date could generate erroneous data or cause a system failure. The Securities and Exchange Commission ("SEC"), the Federal Financial Institution's Examination Council ("FFIEC") and other federal banking regulators have issued guidelines to assure that insured depository institutions appropriately address Y2K issues, which primarily center on the ability of computer systems to 14 recognize the year 2000. The FFIEC has established that the Y2K management process should consist of five phases (Awareness, Assessment, Renovation, Validation and Implementation) and has established a timeline for the completion of each phase. The Company outsources substantially all of its data processing needs and it is to a large extent dependent upon vendor cooperation for systems used in its day- to-day business. The Company is working closely with its vendors to ensure that Y2K issues will not adversely affect its operational and financial systems. The Company has developed a Year 2000 Action Plan ("Plan") within the FFIEC guidelines that addresses all systems, hardware and data processing applications provided by third-party vendors and internal programs. The Awareness and Assessment phases are completed and related to the understanding of the Y2K problem, the establishment of a Y2K Steering Committee to oversee the overall strategies and Plan, and identifying all hardware, software, networks, processing platforms, vendor interdependencies and budget needs that are affected by the Y2K date change. The Renovation phase entails assessing the need for hardware and software upgrades, system replacements, and other associated changes. The Company has completed the Renovation phase. The Validation and Implementation phases entail determining the Y2K status of the Company's mission-critical vendors through testing and certification. Testing has been completed on a substantial number of these vendors and indications at this time are that all of the Company's major vendors will be Year 2000 compliant. It is anticipated that the Validation and Implementation phases will be completed by June 30, 1999. The Company is formulating contingency plans for its major functions in the event the Company experiences system interruptions or failures due to Y2K problems that are beyond the Company's control. The Company has completed a conversion of its third party provided legacy computer system to another third party provided client server, relational database system. The decision to change third-party providers centered on technology issues and was not based on year 2000 issues. The new system has been tested and verified Year 2000 compliant. Management has budgeted approximately $65,000 for the year 1999 to cover various Year 2000 costs. The 1999 budget covers costs such as testing the Company's largest third-party provider's data processing system, possible renovation of other third-party provided systems, and customer awareness communications. Direct and indirect costs associated with Year 2000 issues have not had a significant impact on the Company's consolidated financial statements to date and management does not anticipate that any such future costs will be of a material nature. Success in achieving Year 2000 readiness depends on many factors, some of which are outside the Company's control. Despite reasonable efforts, the Company cannot assure that it will not experience any disruptions or otherwise be adversely affected by Year 2000 problems. If renovations, modifications and conversions are not completed on a timely basis where required, the year 2000 problem could result in additional expenses or business disruption that may have a material impact on the operations of the Company. The above Year 2000 readiness disclosures are made for the sole purpose of communicating or disclosing information aimed at correcting and/or avoiding Year 2000 failures. These statements are made with the intention to comply fully with the Year 2000 Information and Readiness Disclosure Act as signed into law October 19, 1998. All statements made herein shall be construed within the confines of that Act. Item 3. Quantitative and Qualitative Disclosures about Market Risk - ------------------------------------------------------------------- Quantitative and qualitative disclosures about market risk are presented at December 31, 1998 in Item 7A of the Company's Annual Report on Form 10-K, filed with the SEC on March 31, 1999. Management believes there have been no material changes in the Company's market risk since December 31, 1998. 15 PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings - -------------------------- The Company and its subsidiaries are involved in various legal proceedings occurring in the ordinary course of business. It is the opinion of management, after consultation with legal counsel, that these matters will not materially effect the Company's consolidated financial position or results of operations. Item 2. Changes in Securities - ------------------------------ None. Item 3. Defaults Upon Senior Securities - ---------------------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ None. Item 5. Other Information - -------------------------- None. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibit 27 Financial Data Schedule (b) Form 8-K The Company filed a Form 8-K dated March 17, 1999 to report a $0.09 per share quarterly cash dividend payable April 23, 1999 to stockholders of record at the close of business on March 31, 1999. 16 Signatures - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ESB FINANCIAL CORPORATION Date: May 10, 1999 By: /s/ Charlotte A. Zuschlag ------------------------------------- Charlotte A. Zuschlag President and Chief Executive Officer Date: May 10, 1999 By: /s/ Charles P. Evanoski ------------------------------------- Charles P. Evanoski Senior Vice President and Chief Financial Officer 17 EX-27 2 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 2,591 5,313 2,470 0 495,955 58,278 58,353 359,891 4,820 980,942 423,016 147,095 5,450 314,691 0 0 63 63,263 980,942 6,955 8,118 358 15,431 4,397 11,616 3,815 3 215 522 1,577 1,577 0 0 1,355 0.27 0.26 6.90 6,050 0 0 0 4,815 2 4 4,820 4,820 0 0
-----END PRIVACY-ENHANCED MESSAGE-----