-----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, KStlTw+sr1OycMnilYsbhE581LX/X7ry7WXTkZYTqt4TdYS3q523qB+Txo/VDW/X AZEvFGnOWdwC2ZACCTRGfA== 0001024739-98-001044.txt : 19981201 0001024739-98-001044.hdr.sgml : 19981201 ACCESSION NUMBER: 0001024739-98-001044 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ESB FINANCIAL CORP CENTRAL INDEX KEY: 0000872835 STANDARD INDUSTRIAL CLASSIFICATION: 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: 98748257 BUSINESS ADDRESS: STREET 1: 600 LAWRENCE AVE CITY: ELLWOOD CITY STATE: PA ZIP: 16117 BUSINESS PHONE: 4127585584 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: September 30, 1998 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 incorporation or organization) Identification No.) 600 Lawrence Avenue, Ellwood City, PA 16117 --------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (724) 758-5584 --------------------------------------------------- (Registrant's telephone number, including area code) ------------------------------------------ (Former name, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No Number of shares of common stock outstanding as of October 31, 1998: Common Stock, $0.01 par value 5,385,397 shares - - ----------------------------- ---------------- (Class) (Outstanding) =============================================================================== ESB FINANCIAL CORPORATION TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition as of September 30, 1998 (Unaudited) and December 31, 1997................................................1 Consolidated Statements of Operations for the three and nine months ended September 30, 1998 and 1997 (Unaudited)......................................................2 Consolidated Statements of Cash Flows for the nine months ended September 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...............................................19 Item 6. Exhibits and Reports on Form 8-K................................19 Signatures......................................................20 PART I - FINANCIAL INFORMATION Item 1. Financial Statements ESB Financial Corporation and Subsidiaries Consolidated Statements of Financial Condition As of September 30, 1998 (Unaudited) and December 31, 1997 (Dollar amounts in thousands, except share data)
September 30, December 31, 1998 1997 (Unaudited) ------------ ----------- Assets Cash on hand and in banks $ 2,203 $ 3,108 Interest-earning deposits 6,726 3,795 Federal funds sold 1,043 12,044 Securities available for sale; cost of $488,624 and $423,350 489,800 426,662 Securities held to maturity; market value of $69,573 and $90,585 69,346 91,359 Loans receivable, net 356,594 336,757 Accrued interest receivable 6,629 6,075 Federal Home Loan Bank (FHLB) stock 18,435 17,826 Premises and equipment, net 3,823 3,319 Real estate acquired through foreclosure, net 33 288 Prepaid expenses and other assets 11,588 9,537 -------- ------- Total assets $ 966,220 $ 910,770 ========= ========= Liabilities and Stockholders' equity Liabilities: Deposits $ 412,073 $ 399,568 Advance payments by borrowers for taxes and insurance 1,788 3,298 Borrowed funds 458,948 411,024 Guaranteed preferred beneficial interest in subordinated debt, net 24,017 24,146 Accrued expenses and other liabilities 7,508 4,225 --------- --------- Total liabilities 904,334 842,261 ---------- --------- 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 6,346,103 shares issued; 5,385,397 and 5,796,848 shares outstanding 58 58 Additional paid-in capital 48,804 48,646 Treasury stock, at cost; 952,358 and 549,255 shares (14,880) (7,363) Unearned Employee Stock Ownership Plan (ESOP) shares (2,788) (2,551) Unvested shares held by Management Recognition Plan (237) (237) Retained earnings, substantially restricted 30,153 27,747 Other comprehensive income, net 776 2,209 -------- --------- Total stockholders' equity 61,886 68,509 -------- --------- Total liabilities and stockholders' equity $ 966,220 $ 910,770 ========= =========
See accompanying notes to consolidated financial statements. 1 ESB Financial Corporation and Subsidiaries Consolidated Statements of Operations For the three and nine months ended September 30, 1998 and 1997 (Unaudited) (Dollar amounts in thousands, except share data)
Three Months Ended Nine Months Ended September 30, September 30, --------------------- ----------------------- 1998 1997 1998 1997 --------- -------- --------- -------- Interest income: Loans receivable $ 7,042 $ 6,678 $ 20,754 $ 17,405 Securities available for sale 7,604 5,844 22,339 17,754 Securities held to maturity 1,053 1,339 3,605 4,201 FHLB stock 302 272 889 777 Deposits with banks and federal funds sold 76 116 214 283 ------- ------- -------- ------- Total interest income 16,077 14,249 47,801 40,420 ------- ------- -------- ------- Interest expense: Deposits 4,493 4,335 13,147 12,211 Borrowed funds 6,953 5,595 20,329 15,829 Guaranteed preferred beneficial interest in subordinated debt 556 - 1,665 - ------- ------ -------- ------- Total interest expense 12,002 9,930 35,141 28,040 ------- ------ -------- ------- Net interest income 4,075 4,319 12,660 12,380 Provision for (recovery of) loan losses 4 (4) 4 796 ------- ------ -------- ------- Net interest income after provision for (recovery of) loan losses 4,071 4,323 12,656 11,584 ------- ------ -------- ------- Noninterest income: Fees and service charges 384 294 1,090 740 Net realized gain (loss) on sales of securities available for sale 239 41 311 (4) Other 39 17 62 44 ------- ----- ------- ------- Total noninterest income 662 352 1,463 780 ------- ----- ------- ------- Noninterest expense: Compensation and employee benefits 1,592 1,370 4,607 3,904 Premises and equipment 288 281 807 796 Federal deposit insurance premiums 69 63 200 137 Data processing 117 181 369 399 Other 936 647 2,331 1,650 ------- ----- ------ ------- Total noninterest expense 3,002 2,542 8,314 6,886 ------- ----- ------ ------- Income before provision for income taxes 1,731 2,133 5,805 5,478 Provision for income taxes 234 701 1,210 1,446 ------- ------- ------- ------- Net income $ 1,497 $ 1,432 $ 4,595 $ 4,032 ======= ======= ======= ======= Net income per share: Basic $0.28 $0.26 $0.84 $0.76 Diluted $0.27 $0.25 $0.81 $0.73
See accompanying notes to consolidated financial statements. 2 ESB Financial Corporation and Subsidiaries Consolidated Statements of Cash Flows For the nine months ended September 30, 1998 and 1997 (Unaudited) (Dollar amounts in thousands, except share data)
Nine Months Ended September 30, ----------------------------- 1998 1997 --------- -------- Operating activities: Net income $ 4,595 $ 4,032 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization for premises and equipment 271 233 Provision for (recovery of) losses (40) 845 Amortization of premiums and accretion of discounts 1,480 474 (Gain) loss on sales of securities available for sale (311) 4 Amortization of intangible assets 452 392 (Increase) decrease in accrued interest receivable (554) 459 (Increase) decrease in prepaid expenses and other assets (2,473) 491 Increase in accrued expenses and other liabilities 3,283 450 Other (288) 31 --------- -------- Net cash provided by operating activities 6,415 7,411 --------- -------- Investing activities: Loan originations and purchases (101,204) (84,041) Purchases of securities available for sale (243,889) (100,065) Purchases of securities held to maturity (993) (5,970) Purchases of FHLB stock (609) (9) Principal repayments of loans receivable 81,244 59,343 Principal repayments of securities available for sale 85,350 41,233 Principal repayments of securities held to maturity 22,733 14,191 Proceeds from the sale of securities available for sale 92,446 57,227 Payment for purchase of Troy Hill Bancorp, Inc. (THBC), net of cash acquired - (2,734) Other (775) (247) --------- -------- Net cash used in investing activities (65,697) (21,072) --------- -------- Financing activities: Net increase in deposits 12,505 7,458 Net increase in borrowed funds 47,924 7,632 Proceeds received from exercise of stock options 703 121 Dividends paid (1,456) (1,137) Payments to acquire treasury stock (9,003) (938) Stock purchased by ESOP (589) (500) Other 223 254 --------- -------- Net cash provided by financing activities 50,307 12,890 --------- -------- Net decrease in cash and cash equivalents (8,975) (771) Cash and cash equivalents at beginning of period 18,947 7,284 --------- -------- Cash and cash equivalents at end of period $ 9,972 $ 6,513 ========= ========
Continued. 3 ESB Financial Corporation and Subsidiaries Consolidated Statements of Cash Flows, (Continued) For the nine months ended September 30, 1998 and 1997 (Unaudited) (Dollar amounts in thousands, except share data)
Nine Months Ended September 30, ----------------------------- 1998 1997 ---------- ----------- Supplemental information: Interest paid $ 36,034 $ 25,654 Income taxes paid 1,429 1,101 Non-cash transactions: Transfers from loans receivable to real estate acquired through foreclosure 40 201 Dividends declared but not paid 485 478 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 $ - $ 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 $ - $ (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, AMSCO, Inc. and T.H.F., Inc. The accompanying unaudited consolidated financial statements for the interim periods include all adjustments, consisting only of normal recurring accruals, which are necessary, in the opinion of management, to fairly reflect the Company's financial position and results of operations. Additionally, these consolidated financial statements for the interim periods have been prepared in accordance with instructions for the Securities and Exchange Commission's Form 10-Q and therefore do not include all information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with generally accepted accounting principles. For further information, refer to the audited consolidated financial statements and footnotes thereto for the year ended December 31, 1997, as contained in the 1997 Annual Report to Stockholders. The results of operations for the three and nine months ended September 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:
- - ------------------------------------------------------------------------------------------------------------------- (In thousands) Amortized Unrealized Unrealized Fair cost gains losses value - - ------------------------------------------------------------------------------------------------------------------- Available for sale: As of September 30, 1998: Municipal securities $ 93,134 $ 2,587 $ (1) $ 95,720 Corporate bond and equity securities 58,348 256 (3,202) 55,402 Mortgage-backed securities 337,142 2,334 (798) 338,678 --------- -------- -------- --------- $ 488,624 $ 5,177 $ (4,001) $ 489,800 ========= ======== ======== ========= 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 September 30, 1998: U.S. Government securities $ 5,985 $ 66 $ - $ 6,051 Municipal securities 7,993 236 - 8,229 Mortgage-backed securities 55,368 97 (172) 55,293 -------- -------- -------- -------- $ 69,346 $ 399 $ (172) $ 69,573 ======== ======== ======== ======== 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 ======== ======== ======= ======== - - -------------------------------------------------------------------------------------------------------------------
5 3. Loans Receivable The Company's loans receivable as of the respective dates are summarized as follows:
- - --------------------------------------------------------------------------------------------------------------- September 30, December 31, (In thousands) 1998 1997 - - --------------------------------------------------------------------------------------------------------------- Mortgage loans: Residential - single family $ 227,322 $ 222,994 Residential - multi family 10,682 8,685 Commercial real estate 30,470 31,489 Construction 39,494 29,710 --------- --------- 307,968 292,878 Other loans: Consumer loans 55,960 51,718 Commercial business 12,984 8,359 --------- --------- 376,912 352,955 Less: Allowance for loan losses 4,823 4,807 Deferred loan fees and net discounts 754 723 Loans in process 14,741 10,668 --------- --------- $ 356,594 $ 336,757 ========= ========= - - ---------------------------------------------------------------------------------------------------------------
4. Deposits The Company's deposits as of the respective dates are summarized as follows:
- - ---------------------------------------------------------------------------------------------------------------------- (Dollar amounts in thousands) September 30, 1998 December 31, 1997 ---------------------------------------- ---------------------------------------- Weighted Weighted average average Type of accounts rate Amount % rate Amount % - - ---------------------------------------------------------------------------------------------------------------------- Noninterest-bearing deposits - $ 6,146 1.5% - $ 4,675 1.2% Interest-bearing demand deposits 2.40% 150,616 36.6% 2.47% 150,994 37.8% Time deposits 5.65% 255,311 62.0% 5.81% 243,899 61.0% --------- --------- --------- --------- 4.38% $ 412,073 100.0% 4.48% $ 399,568 100.0% ========= ========= ========= ========= Time deposits mature as follows: Within one year $ 146,824 35.6% $ 145,953 36.5% After one year through two years 62,134 15.1% 46,005 11.5% After two years through three years 24,942 6.1% 33,059 8.3% Thereafter 21,411 5.2% 18,882 4.7% --------- --------- --------- --------- $ 255,311 62.0% $ 243,899 61.0% ========= ========= ========= ========= - - ----------------------------------------------------------------------------------------------------------------------
6 5. Borrowed Funds The Company's borrowed funds as of the respective dates are summarized as follows:
- - ------------------------------------------------------------------------------------------------------------------- (Dollar amounts in thousands) September 30, 1998 December 31, 1997 ------------------------ ------------------------ Weighted Weighted average rate Amount average rate Amount - - ------------------------------------------------------------------------------------------------------------------- FHLB advances: Due within 12 months 5.95% $ 113,395 5.59% $ 175,272 Due beyond 12 months but within 5 years 6.17% 195,020 6.42% 179,065 Due beyond 5 years but within 10 years 8.93% 1,040 7.79% 440 Due beyond 10 years 5.66% 271 5.93% 274 --------- --------- 309,726 355,051 Reverse repurchase agreements: Due within 90 days 5.49% $ 22,254 5.90% $ 13,400 Due beyond 90 days but within 5 years 5.64% 126,800 5.86% 42,400 --------- --------- 149,054 55,800 Treasury tax and loan note payable 168 173 --------- ---------- $ 458,948 $ 411,024 ========== ========= - - -------------------------------------------------------------------------------------------------------------------
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 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 nine months ended September 30, 1998 and 1997, the weighted average shares outstanding were 5,315,000 and 5,439,000, respectively, and 5,607,000 and 5,290,000, respectively. For purposes of computing diluted net income per share for the three and nine months ended September 30, 1998 and 1997, the weighted average shares and equivalents outstanding were 5,552,000 and 5,687,000, respectively, and 5,833,000 and 5,500,000, 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. Total comprehensive income was $680,000 and total comprehensive loss was $421,000 for the three months ended September 30, 1998 and 1997, respectively, including other comprehensive income which represented a decrease of $817,000 and $1.8 million, respectively, in unrealized gains/losses on securities available for sale, net of income taxes. For the nine months ended September 30, 1998 and 1997, total comprehensive income was $3.2 million and $1.3 million, respectively, including other comprehensive income which represented a decrease of $1.4 million and $2.8 million, 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 $55.4 million or 6.1% to $966.2 million at September 30, 1998 from $910.8 million at December 31, 1997. This net increase was primarily the result of increases in securities and loans receivable of $41.1 million and $19.8 million, respectively. The increase in total assets reflects a corresponding increase in total liabilities of $62.1 million or 7.4%, partially offset by a decrease in stockholders' equity of $6.6 million or 9.7%. The increase in total liabilities was primarily the result of increases in deposits, borrowed funds and accrued expenses and other liabilities of $12.5 million, $47.9 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 $7.5 million and $237,000, respectively, partially offset by an increase in retained earnings of $2.4 million. Cash on hand, Interest-earning deposits and Federal funds sold. Cash on hand, interest-earning deposits and federal funds sold represent cash equivalents. Cash equivalents decreased a combined $9.0 million or 47.4% to $10.0 million at September 30, 1998 from $18.9 million at December 31, 1997. The net decrease between September 30, 1998 and December 31, 1997 can be attributed primarily to security purchases and loan funding during the period. Securities. The Company's securities portfolios increased by $41.1 million or 7.9% to $559.1 million at September 30, 1998 from $518.0 million at December 31, 1997. This net increase was primarily the result of purchases of securities of $244.9 million, consisting of purchases of municipal securities of $48.7 million, corporate bond and equity securities of $67.6 million, mortgage-backed securities of $128.4 million and common stock of thrifts of $460,000, during the nine months ended September 30, 1998. Partially offsetting the purchases of securities were sales of securities of $92.4 million, consisting of sales of municipal securities of $9.9 million, corporate bond and equity securities of $10.8 million, U.S. government securities of $2.0 million and mortgage-backed securities of $67.7 million, and repayments and maturities of securities of $108.1 million, during the nine months ended September 30, 1998. Loans receivable. Net loans receivable increased $19.8 million or 5.9% to $356.6 million at September 30, 1998 from $336.8 million at December 31, 1997. Included in this increase was an increase in mortgage loans of $15.1 million or 5.2% and other loans of $8.9 million or 14.8%, partially offset by an increase in allowance for loan losses, deferred loan fees and loans in process of $4.1 million or 25.4%, during the nine months ended September 30, 1998. Non-performing assets. Non-performing assets include non-accrual loans and real estate acquired through foreclosure. Non-performing assets amounted to $5.3 million or 0.55% and $4.1 million or 0.45% of total assets at September 30, 1998 and December 31, 1997, respectively. Deposits. Total deposits increased $12.5 million or 3.1% to $412.1 million at September 30, 1998 from $399.6 million at December 31, 1997. This increase was primarily the result of increases in noninterest bearing and time deposits of $1.5 million and $11.4 million, respectively, partially offset by a decrease in interest bearing deposits of $378,000. Borrowed funds. Borrowed funds increased $47.9 million or 11.7% to $458.9 million at September 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 $45.3 million or 12.8% and reverse repurchase agreement borrowings increased $93.3 million or 167.1% during the nine months ended September 30, 1998. Stockholders' equity. Stockholders' equity decreased $6.6 million or 9.7% to $61.9 million at September 30, 1998 from $68.5 million at December 31, 1997. This decrease was principally the result of net treasury stock purchases of $7.5 million, ESOP stock purchases of $237,000, partially offset by an increase in retained earnings of $2.4 million, comprised of net income of $4.6 million offset by dividends declared of $1.4 million and the impact of stock options exercised of $783,000, during the nine months ended September 30, 1998. 9 RESULTS OF OPERATIONS General. The Company recorded net income of $1.5 million and $4.6 million for the three and nine months ended September 30, 1998, respectively, as compared to net income of $1.4 million and $4.0 million, respectively, for the same periods in the prior year. The $65,000 or 4.5% increase in net income for the three months ended September 30, 1998, as compared to the three months ended September 30, 1997, was attributable to an increase in noninterest income of $310,000 and a decrease in the provision for income taxes of $467,000. Partially offsetting these favorable variances between quarters were increases in noninterest expense and the provision for loan losses of $460,000 and $8,000, respectively, and a decrease in net interest income of $244,000. The $563,000 or 14.0% increase in net income for the nine months ended September 30, 1998, as compared to the nine months ended September 30, 1997, was attributable to increases in net interest income and noninterest income of $280,000 and $683,000, respectively, and a decrease in the provision for loan losses and the provision for income taxes of $792,000 and $236,000, respectively. Offsetting these favorable variances between periods was an increase in noninterest expense of $1.4 million. Net interest income. Net interest income decreased $244,000 or 5.7% to $4.1 million for the three months ended September 30, 1998, compared to $4.3 million for the same period in the prior year. This decrease in net interest income can be attributed to an increase in interest expense of $2.1 million, partially offset by an increase in interest income of $1.8 million. Net interest income increased $280,000 or 2.3% to $12.7 million for the nine months ended September 30, 1998, compared to $12.4 million for the same period in the prior year. This increase in net interest income can be attributed to an increase in interest income of $7.4 million, partially offset by an increase in interest expense of $7.1 million. Interest income. Interest income increased $1.8 million or 12.8% to $16.1 million for the three months ended September 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 $364,000, $1.5 million and $30,000, respectively, partially offset by a decrease in interest earned on interest-earning deposits of $40,000. Interest earned on loans receivable increased $364,000 or 5.4% to $7.0 million for the three months ended September 30, 1998, compared to $6.7 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 $28.0 million or 8.4% to $359.5 million for the three months ended September 30, 1998, compared to $331.5 million for the same period in the prior year. Partially offsetting the increase in interest income between the periods was a decrease in the yield of loans receivable to 7.83% for the three months ended September 30, 1998, compared to 8.06% for the same period in the prior year. Interest earned on securities increased $1.5 million or 20.5% to $8.7 million for the three months ended September 30, 1998, compared to $7.2 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 $111.7 million or 25.2% to $555.4 million for the three months ended September 30, 1998, compared to $443.7 million for the same period in the prior year. The increase in the average balance of securities between periods was primarily the result of net security purchases during the last quarter of 1997 and the first three 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 September 30, 1998, compared to 6.81% for the same period in the prior year. Interest income increased $7.4 million or 18.3% to $47.8 million for the nine months ended September 30, 1998, compared to $40.4 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 $3.3 million, $4.0 million and $112,000, respectively, partially offset by a decrease in interest earned on interest-earning deposits of $69,000. 10 Interest earned on loans receivable increased $3.3 million or 19.2% to $20.7 million for the nine months ended September 30, 1998, compared to $17.4 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 $61.2 million or 21.0% to $353.1 million for the nine months ended September 30, 1998, compared to $291.8 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 on loans receivable to 7.84% for the nine months ended September 30, 1998, compared to 7.95% for the same period in the prior year. Interest earned on securities increased $4.0 million or 18.2% to $25.9 million for the nine months ended September 30, 1998, compared to $21.9 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 $100.3 million or 22.4% to $547.8 million for the nine months ended September 30, 1998, compared to $447.5 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 quarter of 1997 and the first three quarters of 1998. Partially offsetting this volume increase, was a decline in the tax equivalent yield on securities to 6.76% for the nine months ended September 30, 1998, compared to 6.89% for the same period in the prior year. Interest expense. Interest expense increased $2.1 million or 20.9% to $12.0 million for the three months ended September 30, 1998, compared to $9.9 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 $158,000 and $1.4 million, respectively. Also contributing to the increase in total interest expense was interest incurred on subordinated debt of $556,000 during the three months ended September 30, 1998 associated with the December 1997 $25.3 million trust preferred security offering. Interest incurred on deposits increased $158,000 or 3.6% to $4.5 million for the three months ended September 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 $17.7 million or 4.5% to $406.6 million for the three months ended September 30, 1998, compared to $388.9 million for the same period in the prior year. This significant increase in the average balance of deposits was principally associated with the offering of promotional certificate of deposit products. The cost of interest-bearing deposits remained relatively consistent between periods at 4.38% and 4.42% for the quarters ended September 30, 1998 and 1997, respectively. Interest incurred on borrowed funds increased $1.4 million or 24.3% to $7.0 million for the three months ended September 30, 1998, compared to $5.6 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 $95.2 million or 27.2% to $445.4 million for the three months ended September 30, 1998, compared to $350.2 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 6.19% for the three months ended September 30, 1998, compared to 6.34% for the same period in the prior year. Interest expense increased $7.1 million or 25.3% to $35.1 million for the nine months ended September 30, 1998, compared to $28.0 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 $936,000 and $4.5 million, respectively. Also contributing to the increase in total interest expense was interest incurred on subordinated debt of $1.7 million during the nine months ended September 30, 1998 associated with the trust preferred security offering. Interest incurred on deposits increased $936,000 or 7.7% to $13.1 million for the nine months ended September 30, 1998, compared to $12.2 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 $30.3 million or 8.2% to $400.5 million for the nine months ended September 30, 1998, compared to $370.2 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 4.39% and 4.41% for the nine months ended September 30, 1998 and 1997, respectively. 11 Interest incurred on borrowed funds increased $4.5 million or 28.4% to $20.3 million for the nine months ended September 30, 1998, compared to $15.8 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 $100.2 million or 29.7% to $437.7 million for the nine months ended September 30, 1998, compared to $337.5 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 6.21% for the nine months ended September 30, 1998, compared to 6.27% for the same period in the prior year. Provision for loan losses. Provision for loan losses increased $8,000 or 200.0% to $4,000 and decreased $792,000 or 99.5% to $4,000 for the three and nine months ended September 30, 1998, respectively, compared to the same periods in the prior year. This reflects the adequacy of the Company's allowance for loan losses as of September 30, 1998. In determining the appropriate level of allowance for loan losses, management considers historical loss experience, the present and prospective financial condition of borrowers, current and prospective economic conditions (particularly as they relate to markets where the Company originates loans), the status of non-performing assets, the estimated underlying value of the collateral and other factors related to the collectability of the loan portfolio. The Company's total allowance for losses on loans at September 30, 1998 amounted to $4.8 million or 1.28% 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 91.9% and 126.4% at September 30, 1998 and December 31, 1997, respectively. Noninterest income. Noninterest income increased $310,000 or 88.1% to $662,000 for the three months ended September 30, 1998, compared to $352,000 for the same period in the prior year. This increase can be attributed to an increase in loan fees and service charges, net gains on security sales and other income of $90,000, $198,000 and $22,000, respectively, between periods. Noninterest income increased $683,000 or 87.6% to $1.5 million for the nine months ended September 30, 1998, compared to $780,000 for the same period in the prior year. This increase can be attributed to an increase in loan fees and service charges, net gains on security sales and other income of $350,000, $315,000 and $18,000, respectively, between periods. Noninterest expense. Noninterest expense increased $460,000 or 18.1% to $3.0 million for the three months ended September 30, 1998, from $2.5 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 and other expenses of $222,000, $7,000, $6,000 and $289,000, respectively, which was partially offset by a $64,000 decrease in data processing costs. The increase in premises and equipment and federal deposit insurance premiums were the results of the opening of the Company's new Franklin Township branch office during the quarter and an increase in the average balance of deposits for the three months ended September 30, 1998. The increase in other expenses was primarily due to the result of a fee which was payable as a result of the prepayment of a Federal Home Loan Bank ("FHLB") advance. Noninterest expense increased $1.4 million or 20.7% to $8.3 million for the nine months ended September 30, 1998, from $6.9 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 and other expenses of $703,000, $11,000, $63,000 and $681,000, respectively, which was partially offset by a $30,000 decrease in data processing costs. These increases were primarily the result of the inclusion of Troy Hill's noninterest expense in the consolidated results of the Company for the nine months ended September 30, 1998, along with the fee associated with the prepayment of the FHLB advance. Provision for income taxes. The provision for income taxes decreased $467,000 or 66.6% and $236,000 or 16.3% to $234,000 and $1.2 million, respectively, for the three and nine months ended September 30, 1998, from $701,000 and $1.4 million, respectively, for the same periods in the prior year. These decreases were primarily attributable to a decrease in pre-tax income for the three months ended September 30, 1998, and the purchase of $65.7 million in tax-exempt municipal obligations between the periods. 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 September 30, 1998 1997 -------------------------------------- -------------------------------------- Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate - - -------------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Taxable securities available for sale $ 391,419 $ 6,394 6.53% $ 303,598 $ 5,137 6.77% Tax-exempt securities available for sale 90,178 1,834 8.14% 50,664 1,071 8.46% Taxable securities held to maturity 65,776 947 5.76% 88,844 1,332 6.00% Tax-exempt securities held to maturity 7,993 159 7.96% 571 12 8.41% --------- -------- ----- --------- -------- ----- 555,366 9,334 6.72% 443,677 7,552 6.81% --------- -------- ----- --------- -------- ----- Mortgage loans 290,279 5,660 7.80% 272,624 5,532 8.12% Other loans 69,201 1,382 7.99% 58,878 1,146 7.79% --------- -------- ----- --------- -------- ----- 359,480 7,042 7.84% 331,502 6,678 8.06% --------- -------- ----- --------- -------- ----- Cash equivalents 7,192 76 4.23% 7,835 116 5.92% FHLB stock 18,435 302 6.55% 17,024 272 6.39% --------- -------- ----- --------- -------- ----- 25,627 378 5.90% 24,859 388 6.24% --------- -------- ----- --------- -------- ----- Total interest-earning assets 940,473 16,754 7.13% 800,038 14,618 7.31% Other noninterest-earning assets 18,994 - - 17,465 - - --------- -------- ----- --------- -------- ----- Total assets $ 959,467 $ 16,754 6.98% $ 817,503 $ 14,618 7.15% ========= ======== ===== ========= ======== ===== Interest-bearing liabilities: - - ----------------------------- Interest-bearing demand deposits $ 152,454 $ 916 2.38% $ 156,173 $ 991 2.52% Time deposits 254,171 3,577 5.58% 232,788 3,344 5.70% --------- -------- ----- --------- -------- ----- 406,625 4,493 4.38% 388,961 4,335 4.42% --------- -------- ----- --------- -------- ----- FHLB advances 326,298 5,220 6.35% 335,427 5,373 6.36% Reverse repo's & other borrowings 119,118 1,733 5.77% 14,828 222 5.94% --------- -------- ----- --------- -------- ----- 445,416 6,953 6.19% 350,255 5,595 6.34% --------- -------- ----- --------- -------- ----- Preferred securities 24,012 556 9.19% - - - --------- -------- ----- --------- -------- ----- Total interest-bearing liabilities 876,053 12,002 5.44% 739,216 9,930 5.33% Noninterest-bearing demand deposits 9,286 - - 4,984 - - Other noninterest-bearing liabilities 7,722 - - 5,876 - - --------- -------- ----- --------- -------- ----- Total liabilities 893,061 12,002 5.33% 750,076 9,930 5.25% Stockholders' equity 66,406 - - 67,427 - - --------- -------- ----- --------- -------- ----- Total liabilities and equity $ 959,467 $ 12,002 4.96% $ 817,503 $ 9,930 4.82% ========= ======== ===== ========= ======== ===== Net interest income $ 4,752 $ 4,688 ======== ======== Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities) 1.69% 1.98% ===== ===== Net interest margin (net interest income as a percentage of average interest-earning assets) 2.02% 2.34% ===== ====== - - --------------------------------------------------------------------------------------------------------------------------------
13
- - -------------------------------------------------------------------------------------------------------------------------------- (Dollar amounts in thousands) Nine months ended September 30, 1998 1997 -------------------------------------- -------------------------------------- Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate - - -------------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Taxable securities available for sale $ 386,600 $ 19,143 6.60% $ 301,741 $ 15,507 6.85% Tax-exempt securities available for sale 78,803 4,843 8.19% 52,597 3,404 8.63% Taxable securities held to maturity 74,167 3,265 5.87% 92,612 4,178 6.02% Tax-exempt securities held to maturity 8,210 514 8.35% 574 35 8.13% --------- -------- ---- --------- -------- ------ 547,780 27,765 6.76% 447,524 23,124 6.89% --------- -------- ----- --------- -------- ------ Mortgage loans 287,147 16,776 7.79% 234,357 14,104 8.02% Other loans 65,919 3,978 8.05% 57,470 3,301 7.66% --------- -------- ---- --------- -------- ------ 353,066 20,754 7.84% 291,827 17,405 7.95% ---------- -------- ---- --------- --------- ----- Cash equivalents 8,174 214 3.49% 6,856 283 5.50% FHLB stock 18,294 889 6.48% 16,389 777 6.32% --------- -------- ---- --------- -------- ----- 26,468 1,103 5.56% 23,245 1,060 6.08% --------- -------- ---- --------- -------- ----- Total interest-earning assets 927,314 49,622 7.13% 762,596 41,589 7.27% Other noninterest-earning assets 18,287 - - 16,792 - - --------- -------- ----- --------- -------- ----- Total assets $ 945,601 $ 49,622 7.00% $ 779,388 $ 41,589 7.11% ========= ======== ===== ========= ======== ===== Interest-bearing liabilities: - - ----------------------------- Interest-bearing demand deposits $ 151,693 $ 2,719 2.40% $ 151,556 $ 2,957 2.61% Time deposits 248,764 10,428 5.60% 218,641 9,254 5.66% --------- ------- ---- --------- ------- ---- 400,457 13,147 4.39% 370,197 12,211 4.41% --------- ------- ---- --------- ------- ---- FHLB advances 335,627 15,922 6.34% 322,930 15,201 6.29% Reverse repo's & other borrowings 102,025 4,407 5.78% 14,524 628 5.78% --------- ------- ---- -------- ------ ---- 437,652 20,329 6.21% 337,454 15,829 6.27% --------- ------- ---- -------- ------ ---- Preferred securities 24,033 1,665 9.26% - - - --------- ------- ---- -------- ------ ---- Total interest-bearing liabilities 862,142 35,141 5.45% 707,651 28,040 5.30% Noninterest-bearing demand deposits 9,074 - - 4,626 - - Other noninterest-bearing liabilities 6,749 - - 5,924 - - --------- ------- ---- -------- ------ ---- Total liabilities 877,965 35,141 5.35% 718,201 28,040 5.22% Stockholders' equity 67,636 - - 61,187 - - --------- ------- ---- -------- ------ ---- Total liabilities and equity $ 945,601 $ 35,141 4.97% $ 779,388 $ 28,040 4.81% ========= ======== ==== ========= ======== ==== Net interest income $ 14,481 $ 13,549 ======== ======== Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities) 1.69% 1.97% ==== ==== Net interest margin (net interest income as a percentage of average interest-earning assets) 2.08% 2.37% ==== ==== - - --------------------------------------------------------------------------------------------------------------------------------
14 Analysis of Changes in Net Interest Income. The following tables analyze the changes in interest income and interest expense, between the three and nine months ended September 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. The table analyzing changes in interest income between the three months ended September 30, 1998 and 1997 is presented as follows: - - ------------------------------------------------------------------------------- (In thousands) 1998 versus 1997 Increase (decrease) due to ------------------------------------- Volume Rate Total - - ------------------------------------------------------------------------------- Interest income: Securities $1,878 $ (96) $ 1,782 Loans 552 (188) 364 Cash equivalents (9) (31) (40) FHLB stock 23 7 30 ------ ------- ------- Total interest-earning assets 2,444 (308) 2,136 ------ ------- ------- Interest expense: Deposits 195 (37) 158 FHLB advances (146) (7) (153) Reverse repurchases & other borrowings 1,517 (6) 1,511 Preferred securities 556 - 556 ------ ------- ------- Total interest-bearing liailities 2,122 (50) 2,072 ------ ------- ------- Net interest income $ 322 $ (258) $ 64 ====== ======= ======= - - ------------------------------------------------------------------------------- The table analyzing changes in interest income between the nine months ended September 30, 1998 and 1997 is presented as follows: - - ------------------------------------------------------------------------------- (In thousands) 1998 versus 1997 Increase (decrease) due to ------------------------------------- Volume Rate Total - - ------------------------------------------------------------------------------- Interest income: Securities $ 5,089 $ (448) $ 4,641 Loans 3,603 (254) 3,349 Cash equivalents 48 (117) (69) FHLB stock 92 20 112 ------- ------- ------- Total interest-earning assets 8,832 (799) 8,033 ------- ------- ------- Interest expense: Deposits 994 (58) 936 FHLB advances 602 119 721 Reverse repurchases & other borrowings 3,780 (1) 3,779 Preferred securities 1,665 - 1,665 ------- ------- ------- Total interest-bearing liailities 7,041 60 7,101 ------- ------- ------- Net interest income $ 1,791 $ (859) $ 932 ======= ======= ======= - - ------------------------------------------------------------------------------- 15 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 higher interest rates than mortgage loans. As of September 30, 1998, the implementation of these asset and liability initiatives resulted in the following: (i) $186.8 million or 49.6% of the Company's total loan portfolio had adjustable interest rates or maturities of 12 months or less; (ii) $125.1 million or 48.8% of the Company's portfolio of single-family residential mortgage loans (including residential construction loans) consisted of ARMs and (iii) $105.5 million or 26.8% 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 September 30, 1998, the Company's interest-earning assets maturing or repricing within one year totaled $344.2 million while the Company's interest-bearing liabilities maturing or repricing within one-year totaled $385.2 million, providing a deficiency of interest-earning assets over interest-bearing liabilities of $41.0 million or a negative 4.37% of total assets. At September 30, 1998, the percentage of the Company's assets to liabilities maturing or repricing within one year was 89.3%. The Company does not presently anticipate that its one-year interest rate sensitivity gap will fluctuate beyond a range of a positive 5.0% of total assets to a negative 15.0% of total assets. The one year interest rate sensitivity gap has been the most common industry standard used to measure an institution's interest rate risk position. The Company also utilizes income simulation modeling in measuring its interest rate risk and managing its interest rate sensitivity. The Asset and Liability Management Committee of the Company believes that simulation modeling enables the Company to more accurately evaluate and manage the possible effects on net interest income due to the exposure to changing market interest rates, the slope of the yield curve and different prepayment and decay assumptions under various interest rate scenarios. At September 16 30, 1998, the Company's simulation model indicated that the Company's statement of financial condition is liability sensitive. Within the past 22 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 5.6% over such 24 month period. LIQUIDITY The Bank is required by the Office of Thrift Supervision ("OTS") to maintain minimum levels of liquidity to assure their 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 September 30, 1998, the Bank's liquidity ratio was 18.7%. The Company's primary sources of funds generally have been deposits obtained through the offices of the Bank, borrowings from the FHLB, reverse repurchase agreement borrowings and amortization and prepayments of outstanding loans and maturing investment securities. During the nine months ended September 30, 1998, the Company used its sources of funds primarily to purchase securities, and to a lesser extent, fund loan commitments. As of such date, the Company had outstanding loan commitments totaling $15.8 million, unused lines of credit totaling $25.1 million and $14.7 million of undisbursed loans in process. At September 30, 1998, certificates of deposit amounted to $255.3 million or 62.0% of the Company's total consolidated deposits, including $146.8 million which were scheduled to mature by September 30, 1999. At the same date, the total amount of FHLB advances which were scheduled to mature by September 30, 1999 was $113.4 million. Management of the Company believes that it has adequate resources to fund all of its commitments, that all of its commitments will be funded by September 30, 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 September 30, 1998, the Bank was in compliance with all regulatory capital requirements with tangible, core and risk-based capital ratios of 6.8%, 6.8% and 18.1%, 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. 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 17 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. Year 2000 The "Year 2000 problem" exists because in the past many computer programs were developed to recognize only the last two digits of a year (e.g. "98" for "1998"). Without updating or replacing existing systems it is possible that these programs will recognize the year 2000 as 1900 because they will key on the digits "00". If not corrected, many computer programs could fail or create erroneous results. The Securities and Exchange Commission ("SEC") and 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. In this regard, the Company has instituted an Action Plan 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 Awareness and Assessment phases are completed and the Company anticipates the Renovation phase will be completed by December 31, 1998. Testing and validation has begun with an anticipated completion date of June 30, 1999. The Company is formulating contingency plans for its major functions in the event systems fail. 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. Testing has been completed on a substantial number of these vendors and indications at this time are that all of the Company's major vendors will be Year 2000 compliant. The Company has committed to the conversion of its third party provided legacy computer system to another third party provided client server, relational database system in February 1999. The decision to change third-party providers centered on technology issues and was not based on Year 2000 issues. The new system will be tested and verified compliant within the timeframe of the Company's Year 2000 Action Plan. 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 material 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. However, if renovations, modifications and conversions are not completed on a timely basis when 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 Company is aware of the issues associated with the programming code in certain existing computer systems as the year 2000 approaches. The "Year 2000" problem is pervasive and complex as many computer operations will 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 information could generate erroneous data or cause a system failure. 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 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 September 16, 1998 to report a $0.09 per common share cash dividend payable October 23, 1998 to stockholders of record at the close of business on September 30, 1998. 19 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ESB FINANCIAL CORPORATION Date: November 10, 1998 By: /s/ Charlotte A. Zuschlag ------------------------- Charlotte A. Zuschlag President and Chief Executive Officer Date: November 10, 1998 By: /s/ Charles P. Evanoski ------------------------- Charles P. Evanoski Senior Vice President and Chief Financial Officer 20 EX-27 2 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the 3rd Quarter 1998 10-Q. 0000872835 ESB FINANCIAL CORPORATION 1,000 U.S. Dollars 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 2,203 6,726 1,043 0 489,800 69,346 69,573 356,594 4,823 966,220 412,073 173,449 7,508 285,499 0 0 58 61,828 966,220 20,754 25,944 1,103 47,801 13,147 35,141 12,660 4 311 8,314 5,805 5,805 0 0 4,595 0.84 0.81 7.13 5,246 0 0 0 4,807 12 3 4,823 4,823 0 0
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