<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-23975
NIAGARA BANCORP, INC.
(exact name of registrant as specified in its charter)
Delaware 16-1545669
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6950 South Transit Road, P.O. Box 514, Lockport, NY 14095-0514
- --------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(716)625-7500
-------------
(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.
Yes X No
----- -----
The Registrant had 26,887,700 shares of common stock, $.01 par value,
outstanding as of November 12, 1999.
================================================================================
<PAGE>
NIAGARA BANCORP, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Number Page Number
- ----------- -----------
<S> <C>
PART I - FINANCIAL INFORMATION
1. Financial Statements
Condensed Consolidated Statements of Condition as of
September 30, 1999 (unaudited) and December 31, 1998 ................ 3
Condensed Consolidated Statements of Income for the
three and nine months ended September 30, 1999 and 1998 (unaudited) . 4
Condensed Consolidated Statements of Comprehensive Income for the
three and nine months ended September 30, 1999 and 1998 (unaudited) . 5
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 30, 1999 and 1998 (unaudited) ... 6
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998 (unaudited) ........... 7
Notes to Condensed Consolidated Financial Statements (unaudited) ...... 8
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................... 11
3. Quantitative and Qualitative Disclosures about Market Risk ............... 21
<CAPTION>
PART II - OTHER INFORMATION
<S> <C>
1. Legal Proceedings ........................................................ 22
2. Changes in Securities and Use of Proceeds ................................ 22
3. Defaults upon Senior Securities .......................................... 22
4. Submission of Matters to a Vote of Security Holders ...................... 22
5. Other Information ........................................................ 22
6. Exhibits and Reports on Form 8-K ......................................... 22
Signatures .................................................................... 22
Exhibit Index ................................................................. 23
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Niagara Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Condition
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
(Dollars in thousands)
Assets
------
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks ....................................... $ 24,167 $ 29,063
Federal funds sold and securities purchased
under resale agreements .................................... 1,400 82,200
--------------- -------------
Total cash and cash equivalents ........................ 25,567 111,263
Securities available for sale ..................................... 599,605 580,751
Loans, net ........................................................ 937,491 744,739
Premises and equipment, net ....................................... 25,114 25,247
Accrued interest receivable and other assets ...................... 92,310 46,734
--------------- -------------
$ 1,680,087 $ 1,508,734
=============== =============
<CAPTION>
Liabilities and Stockholders' Equity
------------------------------------
<S> <C> <C>
Liabilities:
Deposits ...................................................... $ 1,099,764 $ 1,060,897
Borrowings .................................................... 300,221 142,597
Other liabilities ............................................. 44,412 41,415
--------------- -------------
1,444,397 1,244,909
---------------- --------------
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued ................................... - -
Common stock, $.01 par value, 45,000,000 shares
authorized, 29,756,250 shares issued ...................... 298 298
Additional paid-in capital .................................... 135,999 136,114
Retained earnings, substantially restricted ................... 148,449 136,602
Accumulated other comprehensive income (loss) ................. (6,002) 4,587
Common stock held by ESOP ..................................... (13,240) (13,776)
Treasury stock, at cost, 2,802,550 shares ..................... (29,814) -
---------------- --------------
235,690 263,825
--------------- -------------
$ 1,680,087 $ 1,508,734
=============== =============
</TABLE>
3
<PAGE>
Niagara Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1999 1998 1999 1998
--------- -------- -------- --------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Interest income:
Loans............................................... $ 17,693 $ 14,042 $ 48,694 $ 40,772
Investment securities............................... 9,714 8,659 28,770 23,769
Federal funds sold and securities purchased
under resale agreements......................... 132 758 966 2,832
Other............................................... 353 168 982 460
--------- -------- -------- --------
Total interest income...................... 27,892 23,627 79,412 67,833
Interest expense:
Deposits............................................ 10,659 11,069 31,464 33,150
Borrowings.......................................... 4,213 1,147 10,137 2,290
--------- -------- -------- --------
Total interest expense..................... 14,872 12,216 41,601 35,440
--------- -------- -------- --------
Net interest income.................................... 13,020 11,411 37,811 32,393
Provision for credit losses............................ 554 486 1,922 1,089
--------- -------- -------- --------
Net interest income after provision
for credit losses...................... 12,466 10,925 35,889 31,304
--------- -------- -------- --------
Noninterest income:
Bank service charges and fees....................... 1,258 909 3,524 2,632
Loan fees........................................... 379 441 1,294 1,279
Insurance services and fees......................... 3,961 248 11,911 751
Bank-owned life insurance earnings.................. 419 337 1,083 432
Annuity and mutual fund commissions................. 354 200 1,051 482
Net gain on sales of investment securities.......... 1 - 183 100
Premiums from covered-call options.................. 428 - 1,225 -
Other............................................... 229 215 528 713
--------- -------- -------- --------
Total noninterest income................... 7,029 2,350 20,799 6,389
--------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits...................... 7,234 4,115 20,522 11,770
Occupancy and equipment............................. 1,105 864 3,348 2,477
Technology and communications....................... 1,132 912 3,276 2,609
Marketing and advertising........................... 462 549 1,480 1,357
Goodwill amortization............................... 374 - 1,121 -
Charitable contributions............................ 17 25 99 6,828
Other............................................... 1,805 1,167 5,274 3,081
--------- -------- -------- --------
Total noninterest expense.................. 12,129 7,632 35,120 28,122
--------- -------- -------- --------
Income before income taxes................ 7,366 5,643 21,568 9,571
Income tax expense..................................... 2,580 1,918 7,577 3,254
--------- -------- -------- --------
Net income................................ $ 4,786 $ 3,725 $ 13,991 $ 6,317
========= ======== ======== ========
Earnings per common share:
Basic..................................... 0.18 0.13 0.52 -
Diluted................................... 0.18 0.13 0.52 -
Cash dividends per common share........................ - 0.03 0.08 -
Weighted average common shares outstanding:
Basic..................................... 26,225 28,687 27,040 -
Diluted................................... 26,225 28,687 27,040 -
</TABLE>
4
<PAGE>
Niagara Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net income................................................ $ 4,786 $ 3,725 $ 13,991 $ 6,317
Other comprehensive income (loss), net of income taxes:
Net unrealized gains (losses) on securities
available for sale............................... (3,911) 1,738 (10,481) 2,459
Less: Reclassification adjustment for gains
included in net income........................... 1 - 108 59
--------- --------- --------- ---------
Total other comprehensive income (loss) (3,912) 1,738 (10,589) 2,400
--------- --------- --------- ---------
Total comprehensive income........ $ 874 $ 5,463 $ 3,402 $ 8,717
========= ========= ========= =========
</TABLE>
5
<PAGE>
Niagara Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
<TABLE>
<CAPTION>
Additional Other
Common paid-in Retained comprehensive ESOP Treasury
stock capital earnings income (loss) shares stock
-------- ------------ ---------- --------------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1998............ $ - $ - $ 127,941 $ 2,530 $ - $ -
Net income.......................... - - 6,317 - - -
Unrealized gain on securities
available for sale, net of
reclassification adjustment..... - - - 2,400 - -
Net proceeds of stock offering and
issuance of common stock
(29,351,204 shares)................ 298 132,092 - - - -
Charitable contribution of common
stock to the Lockport Savings Bank
Foundation (405,046 shares)..... - 4,051 - - - -
Common stock acquired by ESOP
(1,080,124 shares)............... - - - - (14,298) -
ESOP shares committed to be released
(25,227 shares).................. - 10 - - 334 -
Common stock dividend of $.03 per
share.............................. - - (893) - - -
-------- ------------ ---------- --------------- --------- ----------
Balances at September 30, 1998......... $ 298 $ 136,153 $ 133,365 $ 4,930 $ (13,964) $ -
======== ============ ========== =============== ========= ==========
Balances at January 1, 1999............ $ 298 $ 136,114 $ 136,602 $ 4,587 $ (13,776) $ -
Net income.......................... - - 13,991 - - -
Unrealized loss on securities
available for sale, net of
reclassification adjustment..... - - - (10,589) - -
ESOP shares committed to be released
(40,564 shares) ................. - (115) - - 536 -
Purchase of treasury stock
(2,802,550 shares)................ - - - - - (29,814)
Common stock dividend of $.08 per
share.............................. - - (2,144) - - -
-------- ------------ ---------- --------------- --------- ----------
Balances at September 30, 1999......... $ 298 $ 135,999 $ 148,449 $ (6,002) $ (13,240) $ (29,814)
======== ============ ========== =============== ========= ==========
</TABLE>
Total
---------
Balances at January 1, 1998............ $ 130,471
Net income.......................... 6,317
Unrealized gain on securities
available for sale, net of
reclassification adjustment..... 2,400
Net proceeds of stock offering and
issuance of common stock
(29,351,204 shares)............. 132,390
Charitable contribution of common
stock to the Lockport Savings Bank
Foundation (405,046 shares)..... 4,051
Common stock acquired by ESOP
(1,080,124 shares)............... (14,298)
ESOP shares committed to be released
(25,227 shares).................. 344
Common stock dividend of $.03 per
share.............................. (893)
---------
Balances at September 30, 1998......... $ 260,782
=========
Balances at January 1, 1999............ $ 263,825
Net income.......................... 13,991
Unrealized loss on securities
available for sale, net of
reclassification adjustment..... (10,589)
ESOP shares committed to be released
(40,564 shares) ................. 421
Purchase of treasury stock
(2,802,550 shares)................ (29,814)
Common stock dividend of $.08 per
share.............................. (2,144)
---------
Balances at September 30, 1999......... $ 235,690
=========
6
<PAGE>
Niagara Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
--------- ---------
(Dollars in thousands)
<S> <C> <C>
Net cash provided by operating activities ........................... $ 28,366 $ 23,905
Cash flows from investing activities:
Proceeds from sales of securities available for sale ............. 15,605 204
Proceeds from maturities of securities:
Available for sale ........................................... 15,040 21,212
Held to maturity ............................................. -- 17,000
Principal payments on securities available for sale .............. 152,200 104,199
Purchases of securities available for sale ....................... (233,948) (245,323)
Net increase in loans ............................................ (194,216) (70,776)
Purchase of bank-owned life insurance ............................. (10,000) (25,000)
Purchase of Warren-Hoffman & Associates, Inc., net of cash acquired (11,260) --
Other ............................................................. (11,156) (5,749)
--------- ---------
Net cash used by investing activities ................ (277,735) (204,233)
--------- ---------
Cash flows from financing activities:
Net increase in deposits .......................................... 38,867 24,501
Proceeds from issuance of common stock ............................ -- 132,390
Purchase of shares of common stock by ESOP ........................ -- (14,298)
Proceeds from (repayment of) short-term borrowings ................ 39,890 (8,251)
Proceeds from long-term borrowings ................................ 118,060 91,553
Repayments of long-term borrowings ................................ (326) (289)
Purchase of treasury stock ........................................ (29,814) --
Payment of dividends on common stock .............................. (3,004) --
--------- ---------
Net cash provided by financing activities ............ 163,673 225,606
--------- ---------
Net increase (decrease) in cash and cash equivalents . (85,696) 45,278
Cash and cash equivalents at beginning of period .................... 111,263 36,613
--------- ---------
Cash and cash equivalents at end of period .......................... $ 25,567 $ 81,891
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes .............................................. $ 8,588 $ 3,554
Interest expense .......................................... 40,637 35,132
========= =========
Noncash financing and investing activities:
Charitable contribution of Niagara Bancorp, Inc. common stock to
to the Lockport Savings Bank Foundation ................... $ -- $ 4,051
========= =========
Acquisition of Warren-Hoffman & Associates, Inc.:
Fair value of:
Assets acquired ...................................... $ 2,889 $ --
Liabilities assumed .................................. 3,655 --
Purchase price payable ............................... 2,919 --
========= =========
</TABLE>
7
<PAGE>
Niagara Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments necessary for a fair presentation have been
included. Results for the three and nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. Certain reclassification adjustments were made to the 1998
financial statements to conform them to the 1999 presentation.
(2) Business
Niagara Bancorp, Inc. (the "Company") is a Delaware corporation organized in
December 1997 by Lockport Savings Bank (the "Bank") in connection with the
conversion of the Bank from a New York chartered mutual savings bank to a New
York chartered stock savings bank and the reorganization to a two-tiered mutual
holding company. The business and management of the Company consist primarily
of the business and management of the Bank. The Company neither owns nor leases
any property, but instead uses the premises, equipment and furniture of the
Bank. At the present time, the Company does not have any employees but utilizes
certain officers and the support staff of the Bank from time to time. Employees
will be hired as appropriate to the extent the Company expands its business in
the future.
The Bank is a traditional, full-service, community-oriented savings bank engaged
primarily in the business of accepting deposits from customers through its
eighteen branch offices in the Western New York counties of Niagara, Orleans,
Erie and Genesee, and investing those deposits, together with funds generated
from operations and borrowings, in various loan and investment products.
In addition, through the acquisition of Warren-Hoffman and Associates, Inc.
("WHA") and three of its affiliated companies in the first quarter of 1999, the
Company offers insurance products including personal and business insurance,
surety bonds, risk management, life, disability and long-term care coverage, as
well as provides third-party administration of employee benefit plans.
(3) Other Assets
For the period ended September 30, 1999, accrued interest receivable and other
assets increased to $92.3 million from $46.7 million at December 31, 1998. This
increase is related primarily to the $13.8 million of goodwill recorded by the
Company in connection with the WHA acquisition, $10.0 million of bank-owned life
insurance purchased during the third quarter of 1999, as well as the purchase of
$8.2 million of Federal Home Loan Bank stock.
(4) Borrowings
In order to leverage its higher level of capital and better match interest rates
and maturities of certain assets and liabilities, the Company is continuing to
utilize Federal Home Loan Bank advances and reverse repurchase agreements. At
September 30, 1999, borrowings increased to $300.2 million from $142.6 million
at December 31, 1998. The borrowings, with varying maturities extending through
2015, have interest rates ranging from 5.25% to 6.53%.
(5) Treasury Stock
The Company has received authorization from the Board of Directors and bank
regulatory agencies to repurchase up to 2,901,235 shares of its common stock
outstanding. During the quarter ended September 30, 1999, the Company
repurchased 464,500 shares at an average cost of $10.49 per share. On a year-
to-date basis, the Company has purchased 2,802,550 shares at an average cost of
$10.64 per share.
8
<PAGE>
(6) Earnings Per Share
Earnings per share is based on the weighted average number of shares outstanding
during the periods presented. The Company's basic and diluted earnings per
share calculations are identical in the periods presented, as there is,
currently, no dilutive effect. The computation of basic and diluted earnings per
share for the three and nine months ended September 30, 1999 is as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, 1999 September 30, 1999
------------------ ------------------
<S> <C> <C>
Net income available to common stockholders.......... $ 4,786,000 $ 13,991,000
------------- --------------
Weighted average shares outstanding:
Total shares issued............................ 29,756,250 29,756,250
Unallocated ESOP shares........................ (1,040,718) (1,040,718)
ESOP shares committed to be released........... 27,034 13,686
Treasury shares................................ (2,517,420) (1,688,682)
------------- --------------
Total weighted average shares outstanding............ 26,225,146 27,040,355
------------- --------------
Basic/diluted earnings per share..................... $ 0.18 $ 0.52
============= ==============
</TABLE>
(7) Segment Information
Based on the "management approach" model, the Company has determined that it has
two primary business segments, its banking franchise and its insurance
activities conducted through WHA and the Savings Bank Life Insurance department
("SBLI"). Information about the Company's segments is presented in the following
table for the three and nine month periods ended September 30, 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
-------------------------------------- --------------------------------------
(Dollars in thousands)
Banking Insurance Banking Insurance
Activities Activities Total Activities Activities Total
------------ ------------ -------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Net interest income................. $ 13,012 $ 8 $ 13,020 $ 37,790 $ 21 $ 37,811
Provision for credit losses......... 554 - 554 1,922 - 1,922
------------ ------------ -------- ------------ ------------ --------
Net interest income after
provision for credit losses..... 12,458 8 12,466 35,868 21 35,889
Noninterest income.................. 3,067 3,961 7,028 8,705 11,911 20,616
Net securities gains................ 1 - 1 183 - 183
Noninterest expense................. 8,506 3,623 12,129 25,082 10,038 35,120
------------ ------------ -------- ------------ ------------ --------
Income before income taxes..... 7,020 346 7,366 19,674 1,894 21,568
Income tax expense.................. 2,307 273 2,580 6,427 1,150 7,577
------------ ------------ -------- ------------ ------------ --------
Net income..................... $ 4,713 $ 73 $ 4,786 $ 13,247 $ 744 $ 13,991
============ ============ ======== ============ ============ ========
</TABLE>
For the three and nine month periods ended September 30, 1998, the Company
determined that its business was comprised of a single operating segment and
that SFAS No. 131, therefore, had no impact on its financial statements prior to
the first quarter of 1999.
9
<PAGE>
(8) 1999 Stock Option Plan and Recognition and Retention Plan
The Company's Stock Option Plan (the "Stock Option Plan") and Recognition and
Retention Plan (the "Restricted Stock Plan") were approved during the second
quarter of 1999. Under the Stock Option Plan, 1,390,660 shares of the Company's
common stock have been reserved for issuance to officers, directors, key
employees and other persons providing services to the Company. The Company
accounts for the Stock Option Plan using the intrinsic value based method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no compensation expense was recognized by the Company since the
stock options granted under the Stock Option Plan were at an exercise price
equal to the fair market value of the Company's common stock on the date the
options were granted. Under the Restricted Stock Plan, 556,264 shares of the
Company's common stock have been reserved for issuance as restricted stock for
any director, officer or key employee of the Company to encourage such
individuals to remain with the Company and provide further incentive to achieve
established corporate objectives. During the three and nine months ended
September 30, 1999, the Company recognized $106,000 and $142,000, respectively,
in expense related to this plan.
(9) Recent Developments
In an effort to increase market share, the Company announced during the third
quarter of 1999 that it is expanding into the neighboring Rochester, New York
market. A definitive merger agreement was signed to acquire all of the
outstanding common stock of Albion Banc Corp. ("Albion"), the holding company
for Albion Federal Savings and Loan Association. As a result, the savings and
loan association, with assets of $78.0 million, will merge the operation of its
two branch locations into the Bank's branch network. Under the terms of the
agreement, the Company will pay $15.75 per share in cash for each of the 753,058
outstanding shares of Albion common stock. The aggregate purchase price is
approximately $12.4 million, which includes exercising all outstanding stock
options. The transaction, which will be accounted for under the purchase method
and is subject to approval by Albion's shareholders and various regulatory
agencies, is expected to close in the first quarter of 2000.
Also during the third quarter of 1999, the Company announced an agreement to
acquire Empire National Leasing, Inc. and its affiliate, Empire National Auto
Leasing, Inc., nationwide providers of equipment lease financing. The
transaction, which is expected to close in the first quarter of 2000, will
further enhance the Company's commercial lending client base, as well as provide
additional fee-based revenue. The acquired companies will operate as wholly
owned subsidiaries of the Bank.
During the third quarter, the Company revised the timing of its dividend
declaration to coincide with the Company's Board of Directors review of
quarterly results. Therefore, on October 19, 1999, the Board of Directors
approved and declared a regular quarterly dividend of six cents ($.06) per
common share, which represented an increase from four cents ($.04) per common
share paid in previous quarters. The dividend will be paid on November 16, 1999
to shareholders of record as of November 2, 1999.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
- -------
This Quarterly Report on Form 10-Q may contain certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1993, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), that involve substantial risks and
uncertainties. When used in this report, or in the documents incorporated by
reference herein, the words "anticipate", "believe", "estimate", "expect",
"intend", "may", and similar expressions identify such forward-looking
statements. Actual results, performance or achievements could differ materially
from those contemplated, expressed or implied by the forward-looking statements
contained herein. These forward-looking statements are based largely on the
expectations of the Company or the Company's management and are subject to a
number of risks and uncertainties, including but not limited to, economic,
competitive, regulatory, and other factors affecting the Company's operations,
markets, products and services, as well as expansion strategies and other
factors discussed elsewhere in this report filed by the Company with the
Securities and Exchange Commission. Many of these factors are beyond the
Company's control.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on loans and
securities and the Company's cost of funds, consisting of the interest paid on
deposits and borrowings. Results of operations are also affected by the
provision for credit losses; investment activities; loan origination, sale and
servicing activities; service charges and fees collected on deposit accounts;
and insurance services and fees. Noninterest expense primarily consists of
salaries and employee benefits, occupancy and equipment expense, marketing
expenses, and other expenses.
11
<PAGE>
Analysis of Financial Condition
- -------------------------------
Average Balance Sheet. The following tables present, for the periods indicated,
the total dollar amount of interest income from average interest-earning assets
and the resultant yields, as well as interest expense on average interest-
bearing liabilities and the rates paid. All average balances are average daily
balances with no tax equivalent adjustments. In addition, non-accruing loans
have been excluded from the yield calculations in these tables.
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------------------------------------------------------
1999 1998
--------------------------------------- ---------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Expensed Rate Balance Expensed Rate
---------------- ---------- ------ ------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and securities
purchased under resale agreements....... $ 10,092 $ 132 5.19% $ 52,611 $ 758 5.72%
Investment securities (1).................. 201,356 2,882 5.73 212,107 3,168 5.97
Mortgage related securities (1)............ 425,903 6,832 6.42 332,790 5,491 6.60
Loans (2).................................. 915,656 17,693 7.73 692,508 14,042 8.11
Other interest-earning assets (3).......... 27,675 353 5.06 12,266 168 5.43
---------------- ---------- ------------- ----------
Total interest-earning assets........ 1,580,682 27,892 7.06% 1,302,282 23,627 7.26%
---------------- ---------- ------------- ----------
Allowance for credit losses................... (9,457) (7,490)
Other noninterest-earning assets (4).......... 99,840 89,554
---------------- -------------
Total assets......................... $ 1,671,065 $ 1,384,346
================ =============
Interest-bearing liabilities:
Savings accounts........................... $ 308,467 $ 2,338 3.01% $ 296,049 $ 2,394 3.21%
Interest-bearing checking accounts......... 320,868 2,955 3.65 214,357 1,855 3.43
Certificates of deposit.................... 423,590 5,297 4.96 466,410 6,761 5.75
Mortgagors' payments held in escrow........ 15,191 69 1.80 13,577 59 1.72
Other borrowed funds....................... 296,739 4,213 5.63 80,818 1,147 5.63
---------------- ---------- ------------- ----------
Total interest-bearing liabilities... 1,364,855 14,872 4.32% 1,071,211 12,216 4.52%
---------------- ---------- ------------- ----------
Noninterest-bearing demand deposits........... 31,839 27,651
Other noninterest-bearing liabilities......... 36,189 26,715
---------------- -------------
Total liabilities.................... 1,432,883 1,125,577
Stockholders' equity (4)...................... 238,182 258,769
---------------- -------------
Total liabilities and stockholders'
equity.............................. $ 1,671,065 $ 1,384,346
================ =============
Net interest income........................... $ 13,020 $ 11,411
========== ==========
Net interest rate spread...................... 2.74% 2.74%
------ -------
Net interest-earning assets................... $ 215,827 $ 231,071
================ =============
Net interest income as a percentage of
average interest-earning assets............ 3.27% 3.48%
========== ==========
Ratio of average interest-earning assets
to average interest-bearing liabilities.... 115.81% 121.57%
========== ==========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------------------------------------------------------
1999 1998
----------------------------------------- ---------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Expensed Rate Balance Expensed Rate
---------------- ---------- ---------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and securities
purchased under resale agreements....... $ 25,857 $ 966 4.99% $ 66,989 $ 2,832 5.65%
Investment securities (1).................. 194,013 8,325 5.72 197,710 8,736 5.89
Mortgage related securities (1)............ 428,407 20,445 6.36 300,962 15,033 6.66
Loans (2).................................. 836,564 48,694 7.76 664,818 40,772 8.18
Other interest-earning assets (3).......... 22,043 982 5.96 10,426 460 5.90
---------------- ---------- ------------- ----------
Total interest-earning assets........ 1,506,884 79,412 7.03% 1,240,905 67,833 7.29%
---------------- ---------- ------------- ----------
Allowance for credit losses................... (8,947) (7,292)
Other noninterest-earning assets (4).......... 106,312 73,110
---------------- -------------
Total assets......................... $ 1,604,249 $ 1,306,723
================ =============
Interest-bearing liabilities:
Savings accounts........................... $ 304,255 $ 6,843 3.01% $ 306,162 $ 7,370 3.22%
Interest-bearing checking accounts......... 297,075 7,745 3.49 193,480 4,771 3.30
Certificates of deposit.................... 434,028 16,730 5.15 481,731 20,882 5.80
Mortgagors' payments held in escrow........ 11,323 146 1.72 10,135 127 1.68
Other borrowed funds....................... 243,717 10,137 5.56 53,297 2,290 5.74
---------------- ---------- ------------- ----------
Total interest-bearing liabilities... 1,290,398 41,601 4.31% 1,044,805 35,440 4.54%
---------------- ---------- ------------- ----------
Noninterest-bearing demand deposits........... 31,314 27,529
Other noninterest-bearing liabilities......... 34,500 24,639
---------------- -------------
Total liabilities.................... 1,356,212 1,096,973
Stockholders' equity (4)...................... 248,037 209,750
---------------- -------------
Total liabilities and stockholders'
equity.............................. $ 1,604,249 $ 1,306,723
================ =============
Net interest income........................... $ 37,811 $ 32,393
========== ==========
Net interest rate spread...................... 2.72% 2.75%
------- --------
Net interest-earning assets................... $ 216,486 $ 196,100
================ =============
Net interest income as a percentage of
average interest-earning assets............ 3.35% 3.49%
---------- ----------
Ratio of average interest-earning assets
to average interest-bearing liabilities.... 116.78% 118.77%
---------- ----------
</TABLE>
(1) Amounts shown are at amortized cost.
(2) Net of deferred loan fees and expenses, loan discounts, loans-in-process
and non-accruing loans.
(3) Includes Federal Home Loan Bank stock and interest-bearing demand accounts.
(4) Includes unrealized gains/losses on securities available for sale.
13
<PAGE>
Lending Activities
The Company continued to demonstrate solid loan growth as the total lending
portfolio increased 26% to $941.4 million at September 30, 1999 from $748.2
million at December 31, 1998. The increase was reflective of growth in all
portfolios during the nine month period. As a result of the Company's continued
focus on indirect lending products, total consumer and other loans increased 30%
to $102.5 million for the period ended September 30, 1999, primarily in the
recreational vehicle and automobile portfolios, which represented 57% of the
total consumer loans originated for the same period. As the Company expanded
its presence in the commercial lending market, by offering a variety of
commercial-based products and services, the commercial real estate lending
portfolio increased 19% while the commercial business portfolio increased 190%.
In addition, the Company's asset/liability management team continued to focus on
the origination of commercial real estate loans that generally reprice every
one, three, or five years, as well as one-to four-family adjustable rate and
biweekly real estate loans, which represented 69% of the year-to-date
residential loan originations. The one-to four-family residential loan
portfolio grew $134.0 million, or 29% to $590.2 million, representing 35% of
total assets for the period ended September 30, 1999. Partially contributing to
this loan growth was the repurchase of approximately $51.6 million of mortgages
from the Savings Bank Life Insurance Fund ("Fund"). These mortgages were
previously underwritten by the Company and were repurchased in conjunction with
the reorganization of the Fund in order to retain the servicing function on
these loans.
Loan Portfolio Composition. Set forth below is selected information concerning
the composition of the Company's loan portfolio in dollar amounts and in
percentages (before deductions for deferred fees and costs, unearned discounts
and allowances for credit losses) as of the dates indicated.
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
Amount Percent Amount Percent
---------------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Real estate loans:
One-to four-family......................... $ 590,184 62.69% $ 456,197 60.97%
Home equity................................ 20,124 2.14 15,520 2.07
Multi-family............................... 71,703 7.62 72,672 9.71
Commercial real estate..................... 117,230 12.45 98,693 13.19
Construction............................... 20,453 2.17 19,476 2.60
---------------- ---------- --------------- ---------
Total real estate loans................. 819,694 87.07 662,558 88.54
---------------- ---------- --------------- ---------
Consumer and other loans:
Mobile home............................. 25,991 2.76 24,983 3.34
Recreational vehicle.................... 19,304 2.05 8,906 1.19
Automobile.............................. 20,419 2.17 8,741 1.17
Personal................................ 15,841 1.68 15,642 2.09
Home improvement........................ 8,292 0.88 8,131 1.09
Guaranteed student...................... 12,275 1.31 12,314 1.65
Other consumer.......................... 384 0.04 342 0.05
---------------- ---------- --------------- ---------
Total consumer and other loans....... 102,506 10.89 79,059 10.58
Commercial business loans.................. 19,209 2.04 6,616 0.88
---------------- ---------- --------------- ---------
Total loans.......................... 941,409 100.00% 748,233 100.00%
================ ========== =============== =========
Net deferred costs and
unearned discounts.................. 5,608 4,516
Allowance for credit losses............. (9,526) (8,010)
---------------- ---------------
Total loans, net.................... $ 937,491 $ 744,739
================ ===============
</TABLE>
There was a 47% decrease in total non-performing loans, when comparing the
period ended September 30, 1999 to the same period in 1998. This decrease in
total non-performing loans was achieved despite the growth sustained in the
lending portfolio over the past year. As a result, the Company's allowance for
credit losses as a percentage of total non-performing loans was 477.3% at
September 30, 1999, compared to 201.1% at September 30, 1998. The allowance for
credit losses as a percentage of total loans decreased to 1.01% for the first
nine months of 1999 compared to 1.06% for the period ended September 30, 1998.
The Company increased its allowance for credit losses by providing $1.9 million.
Management deemed it prudent to increase the provision in light of the continued
increase in the Company's loan portfolio, specifically in higher risk categories
such as commercial real estate, commercial loans and indirect consumer loans.
While management uses available information to recognize losses on loans, future
provisions may be necessary based on changes in economic conditions and/or other
conditions.
14
<PAGE>
Non-Accruing Loans and Non-Performing Assets. The following table sets forth
information regarding non-accruing loans and non-performing assets.
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
----------------------- --------------------
(Dollars in thousands)
<S> <C> <C>
Non-accruing loans:
One-to four-family............................................... $ 926 $ 1,459
Home equity...................................................... 132 13
Commercial real estate and multi-family.......................... 641 1,706
Consumer and other............................................... 145 62
Commercial business.............................................. 152 56
------------- ------------
Total....................................................... 1,996 3,296
Non-performing assets............................................... 1,017 589
------------- ------------
Total non-accruing loans and non-performing assets.................. $ 3,013 $ 3,885
============= ============
Total non-accruing loans and non-performing assets
as a percentage of total assets.................................. 0.18% 0.26%
------------- ------------
Total non-accruing loans to total loans............................. 0.21% 0.43%
------------- ------------
</TABLE>
Analysis of the Allowance For Credit Losses. The following table sets forth the
analysis of the allowance for credit losses for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------
1999 1998
-------------- -----------
<S> <C> <C>
(Dollars in thousands)
Balance at beginning of period......................................... $ 9,118 $ 7,350
Net charge-offs:
Charge-offs......................................................... (159) (298)
Recoveries.......................................................... 13 21
------------ -----------
Total net charge-offs.................................................. (146) (277)
Provision for credit losses............................................ 554 486
------------ -----------
Balance at end of period............................................... $ 9,526 $ 7,559
============ ===========
Ratio of net charge-offs during the period to
average loans outstanding during the period......................... 0.02% 0.04%
------------ -----------
Allowance for credit losses to total loans at end of period............ 1.01% 1.06%
------------ -----------
Allowance for credit losses to non-accruing loans at end of period..... 477.26% 201.10%
------------ -----------
</TABLE>
15
<PAGE>
Investing Activities
During the first nine months of 1999, the Company redeployed its significant
December 31, 1998 federal funds sold position primarily into higher yielding
loan portfolios and other investment vehicles. The Company's securities
available for sales portfolio increased 3% from $580.8 million at December 31,
1998 to $599.6 million at September 30, 1999. The Company purchased $220.0
million of investment and mortgage-related securities during the first nine
months of 1999. Approximately $139.2 million of collarterized mortgage
obligations with three-to-ten year weighted average lives were purchased as part
of the Company's leveraging strategy utilizing Federal Home Loan Bank advances
with comparable maturities. Approximately $80.8 million in securities,
primarily one-to-three weighted average life asset-backed securities backed by
home equity loans, U.S. agency bonds and equity securities were purchased with
$152.2 million in mortgage-related securities prepayments which were accelerated
by the lower interest rate environment during the first half of the year. The
remaining prepayments were utilized to fund the expanding loan portfolios.
During the nine months ended September 30, 1999, the Company entered into two
$10 million notional amount interest-rate swap agreements with a third party.
Under these agreements, the Company pays an annual fixed rate of 5.97% and 6.23%
and receives a floating three month U.S. dollar LIBOR rate. The Company entered
into these transactions to match more closely the repricing of its money market
demand product and also to provide greater flexibility in achieving a desired
interest rate risk profile.
Funding Activities
The Company has continued utilizing Federal Home Loan Bank advances and reverse
repurchase agreements in order to leverage its higher level of capital and to
lock-in lower long-term funding rates. This is evidenced by an increase in
borrowings to $300.2 million at September 30, 1999 from $142.6 million at
December 31, 1998 reflecting the continuation of the program. The rates paid on
these borrowings range from 5.25% to 6.53% with varying maturities extending
through 2015.
Equity Activities
Stockholders' equity decreased to $235.7 million for the period ended September
30, 1999 as compared to $263.8 million at December 31, 1998. The decrease was
primarily attributable to the repurchase of 2,802,550 shares of the Company's
common stock as part of two stock repurchase programs during the first nine
months of 1999. The purchases were made at an average cost of $10.64 per share.
The Company has received regulatory approval to repurchase up to 2,901,235
shares. In addition, as a result of the increase in the overall interest rate
environment during the first nine months of 1999, the market value of the
Company's available for sale investment portfolio decreased $10.6 million, net
of applicable taxes, during the period.
Results of Operations for the Three Months Ended September 30, 1999
- -------------------------------------------------------------------
Overview
The Company recorded earnings of $4.8 million for the quarter ended September
30, 1999, an increase of 28% from $3.7 million for the third quarter of 1998.
Additionally, earnings per share for the third quarter of 1999 increased 38% to
$.18 per share from $.13 per share for the third quarter of 1998. This increase
primarily reflects the Company's efforts to increase fee-based sources of
revenue. Net interest income increased 14% during the quarter ended September
30, 1999, primarily related to a 21% increase in average interest-earning
assets. The return on average assets was 1.14% for the quarter ended September
30, 1999 compared to 1.08% for the same period in 1998. The return on average
equity for the third quarter of 1999 was 7.97% compared to 5.76% for the third
quarter of 1998.
Net Interest Income
Net interest income, reflecting the growth in the Company's higher yielding loan
portfolio, increased 14% to $13.0 million for the quarter ended September 30,
1999, compared to $11.4 million for the same period in 1998. Interest income on
loans increased 26% to $17.7 million for the 1999 quarter from $14.0 million for
the same period in 1998. The increase resulted from a $223.2 million increase
in average loans outstanding during the third quarter of 1999 compared to the
third quarter of 1998, the benefits of which were partially offset by a 38 basis
point decrease in the average yield on loans over the same periods. Interest
income on investment and mortgage related securities in the available for sale
portfolio increased $1.0 million to $9.7 million for the quarter ending
September 30, 1999 compared to $8.7 million for the same quarter in 1998,
resulting from an $82.4 million increase in the average balance of these
securities, partially offset by a 16 basis point decrease in the average yield
earned on these investments.
16
<PAGE>
Interest expense on deposits continued to reflect the lower market rates paid on
deposits, decreasing $410,000 to $10.7 million for the period ending September
30,1999 from $11.1 million for the same period in 1998. This decrease resulted
from a 47 basis point decrease in the average rate paid on interest-bearing
deposits, partially offset by a $77.7 million increase in the average balance of
interest-bearing deposits. The interest expense on borrowed funds increased to
$4.2 million for the period ended September 30,1999 compared to $1.1 million for
the same period in 1998, resulting primarily from the increase in average
borrowed funds outstanding. While the net interest rate spread remained the same
for both periods, the net interest margin declined to 3.27% for the three months
ended September 30, 1999 compared to 3.48% for the same quarter in 1998. This
decline primarily reflects the decrease in the Company's net interest-earning
assets when comparing the two periods. Funds previously available for investment
in interest-earning assets during the 1998 period were utilized to fund the
Company's stock buy-back programs and to purchase bank-owned life insurance,
earnings on which are recognized as noninterest income.
Provision for Credit Losses
The provision for credit losses totaled $554,000 for the three months ended
September 30, 1999 compared to $486,000 for the same period in 1998 reflecting
the growth in the loan portfolio, in particular, the commercial real estate,
commercial business and indirect consumer lending portfolios, which generally
carry a higher degree of risk. The adequacy of the Company's allowance for
credit losses is reviewed quarterly with consideration given to potential risk
inherent within the loan portfolio, the status of particular loans, historical
loan loss experience, as well as current and anticipated economic and market
conditions.
Noninterest Income
Reflecting the Company's efforts to place less reliance on net interest income
as its primary source of revenue, noninterest income increased to $7.0 million
for the three months ended September 30, 1999 from $2.4 million for the same
period in 1998. Approximately $4.0 million of noninterest income was recognized
during the third quarter of 1999 relating to insurance subsidiary activities. In
addition, noninterest income was generated through various investment
initiatives, including premium income generated by a newly implemented equity
covered call option program, tax-exempt earnings on additional bank-owned life
insurance purchased during the third quarter of 1999, and increased commissions
received on the sale of third-party annuities and mutual funds. Also
contributing to the increase was fee revenue associated with the Company's
relationship checking account product, as well as continued growth in the usage
of the debit card product.
Noninterest Expense
Noninterest expense totaled $12.1 million for the third quarter of 1999
reflecting a $4.5 million increase over the third quarter of 1998 total of $7.6
million. Approximately $3.6 million of this increase, primarily in salaries
and benefits, occupancy and equipment costs and goodwill amortization, is due to
the operation of the insurance subsidiaries, which were acquired during the
first quarter of 1999. Also contributing to the increase were compensation
expenses related to various incentive plans, newly developed sales commission
programs, the growing loan origination and telephone banking sales forces, legal
and professional fees, as well as costs connected to the implementation of a new
home banking and electronic bill payment service.
Income Taxes
Income tax expense totaled $2.6 million for the quarter ended September 30,
1999, which resulted in an effective tax rate of 35% compared to income tax
expense of $1.9 million for the same period in 1998, reflecting an effective tax
rate of 34%. The increase in tax expense is largely related to the increase in
net income, while the increase in the effective rate resulted primarily from the
amortization of nondeductible goodwill related to the insurance subsidiary
acquisition.
17
<PAGE>
Results of Operations for the Nine Months Ended September 30, 1999
- ------------------------------------------------------------------
Overview
Net income increased 36% to $14.0 million, or $.52 per share, for the nine month
period ended September 30, 1999 compared to $10.3 million for the same period in
1998. The 1998 earnings are exclusive of a one-time contribution of $4.0
million, net of applicable income taxes, to fund the establishment of the
Lockport Savings Bank Foundation. This increase was driven by growth in the
securities and loan portfolios, as well as an emphasis on developing additional
sources of noninterest income. The return on average assets was 1.17% for the
nine months ended September 30, 1999 compared to 1.05% for the same period in
1998. The return on average equity for the first nine months of 1999 was 7.54%
compared to 6.55% for the same period of 1998.
Net Interest Income
Net interest income increased 17% to $37.8 million for the nine months ended
September 30, 1999, compared to $32.4 million for the same period in 1998,
reflecting an increase in net interest-earning assets, primarily as a result of
the Company's stock offering during the second quarter of 1998. Interest income
on loans increased 19% to $48.7 million for the 1999 period from $40.8 million
for the same period in 1998. The increase resulted from a $171.7 million
increase in average loans outstanding during the first nine months of 1999
compared to the same period in 1998, the benefits of which were partially offset
by a 42 basis point decrease in the average yield on loans over the same time
periods. Interest income on investment and mortgage related securities in the
available for sale portfolio increased $5.0 million to $28.8 million for the
nine months ending September 30, 1999 compared to $23.8 million for the same
period in 1998, resulting from a $123.7 million increase in the average balance
of these securities, partially offset by a 19 basis point decrease in the
average yield earned on these investments.
Interest expense on deposits decreased $1.7 million to $31.5 million for the
nine months ending September 30,1999 from $33.2 million for the same period in
1998, resulting from a 45 basis point decrease in the average rate paid on
interest-bearing deposits, partially offset by a $55.2 million increase in the
average balance of interest-bearing deposits. The interest expense on borrowed
funds increased to $10.1 million for the nine months ended September 30,1999
compared to $2.3 million for the same period in 1998, resulting primarily from
the increase in average borrowed funds outstanding. This increase was partially
offset by a 18 basis point decline in the average rate paid for these borrowings
during the comparable periods.
The net interest margin was 3.35% for the nine months ended September 30, 1999
compared to 3.49% for the same period in 1998. The narrowing of the net interest
margin resulted primarily from a 3 basis point decrease in the interest rate
spread to 2.72% for the nine months ended September 30, 1999 from 2.75% for the
same period in 1999. The decrease in the interest rate spread reflects the
general decline in market yields on interest-earning assets and the additional
funding costs of borrowed funds, as well as interest-bearing checking accounts,
primarily money market demand accounts, which carry a market-based cost of funds
that is slightly higher than the other interest-bearing liabilities of the
Company. The decline in the interest rate spread was partially offset by a 10%
increase in net interest-earning assets when comparing the two periods. Net
interest-earning assets increased primarily due to the proceeds generated by the
Company's stock offering, but was offset by decreases in interest-earning assets
resulting from the utilization of funds for the Company's two stock-buy back
programs, the purchase of the WHA insurance subsidiaries and investments in
bank-owned life insurance, earnings on which are recognized as noninterest
income.
Provision for Credit Losses
Reflecting growth in the loan portfolio, the provision for credit losses
increased to $1.9 million for the nine months ended September 30, 1999 compared
to the $1.1 million for the same period in 1998. The growth experienced in the
lending portfolio is primarily concentrated in the commercial real estate,
commercial business and consumer lending portfolios, which generally carry a
higher degree of risk. The provision for credit losses is based on management's
quarterly assessment of the adequacy of the allowance for credit losses with
consideration given on such interrelated factors as the composition and inherent
risk within the loan portfolio, the level of non-performing loans and charge-
offs, both current and historic economic conditions, as well as current trends
related to regulatory supervision.
Noninterest Income
Noninterest income increased to $20.8 million for the nine months ended
September 30, 1999 from $6.4 million for the same period in 1998. Approximately
$11.1 million of noninterest income was recognized during the first nine months
of 1999 relating to the insurance subsidiary activities. In addition, premium
income generated by a newly implemented equity covered call option program,
18
<PAGE>
tax-exempt earnings on bank-owned life insurance, as well as increased
commissions received from the sales of third-party annuity and mutual fund
products had a positive impact on year-to-date noninterest income. Fees
generated from a revised relationship checking account product and continued
growth in the usage of the debit card product also contributed to the increase
in noninterest income during the nine-month period ended September 30, 1999.
Noninterest Expense
Noninterest expense totaled $35.1 million for the nine months ended September
30, 1999 reflecting a $13.7 million increase over the nine months ended
September 30, 1998 total of $21.4 million, exclusive of the one-time charitable
contribution made in 1998. Approximately $10.0 million of the noninterest
expense for the nine months ended 1999 was related to the operation and
acquisition of the insurance subsidiaries, primarily in salaries and benefits,
occupancy and equipment costs and $1.1 million of goodwill amortization. Also
contributing to the increase were costs associated with the recognition of
compensation expenses related to new stock incentive and benefit plans, newly
developed sales commission programs, the growing residential and commercial loan
origination and telephone banking sales forces, various expenses relating to the
Company's operation as a publicly traded entity and maintenance and depreciation
costs connected to the Company's ongoing upgrade of technology and
communications equipment.
Income Taxes
Income tax expense totaled $7.6 million for the first nine months of 1999
compared to $3.3 million for the same period in 1998. The Company's effective
tax rate increased to 35% for the nine months ending September 30, 1999 compared
to 34% for the same period in 1998 resulting primarily from the nondeductible
goodwill related to the insurance subsidiary acquisition.
Liquidity and Capital Resources
In addition to the Company's primary funding sources of deposits and borrowings,
additional funding is provided from the principal and interest payments on
loans, mortgage related and debt and equity securities, as well as proceeds from
the sale of fixed rate mortgage loans in the secondary market. While maturities
and scheduled amortization of loans and securities are predictable sources of
funds, deposit outflows, mortgage prepayments, mortgage loan sales, and
borrowings are greatly influenced by market interest rates, economic conditions
and competition.
Accelerated principal repayments on mortgage related and other available-for-
sale securities provided an additional source of liquidity, totaling $152.2
million for the nine months ended September 30, 1999 compared to $104.2 million
for the nine months ended September 30, 1998. Other borrowings, as a result of
the leveraging strategy, increased $157.6 million during the first nine months
of 1999.
The primary investing activities of the Company are the origination of
residential one-to four-family mortgages, commercial real estate loans, consumer
loans, as well as the purchase of mortgage related and debt and equity
securities. During the first nine months of 1999 and 1998, loan originations
totaled $282.2 million and $218.3 million, respectively. Purchases of mortgage
related securities, primarily CMOs, totaled $144.3 million for the nine months
ended September 30, 1999 compared to $149.9 million for the nine months ended
September 30, 1998. Purchases of other available for sale securities, primarily
short-term asset-backed securities and equity securities, during the first nine
months of 1999 totaled $75.7 million compared to $95.5 million for the same
period in 1998. Also during the first nine months of 1999, the Company closed
on the acquisition of WHA utilizing existing liquid assets and purchased $51.6
million of one-to four-family residential mortgages funded by FHLB advances.
At September 30, 1999, outstanding loan commitments totaled $83.8 million. These
commitments do not necessarily represent future cash requirements since certain
of these instruments may expire without being funded and others may not be fully
drawn upon. It is anticipated that there will be sufficient funds available to
meet the current loan commitments and other obligations.
Cash, interest-bearing demand accounts at correspondent banks, federal funds
sold and securities purchased under resale agreements are the Company's most
liquid assets. The levels of these assets are monitored daily and are dependent
on operating, financing, lending and investing activities during any given
period. Excess short-term liquidity is usually invested in overnight federal
funds sold. In the event that funds beyond those generated internally are
required, additional sources of funds are available through the use of reverse
repurchase agreements, short-term advances from the Federal Reserve Bank and
FHLB advances. As of September 30, 1999, the total of cash, demand accounts at
correspondent banks, federal funds sold and securities purchased under resale
agreements was $25.6 million, or 1.5% of total assets.
19
<PAGE>
At September 30, 1999, the Company exceeded all regulatory capital requirements.
The current requirements and the actual levels for the Company are detailed in
the following table.
<TABLE>
<CAPTION>
As of September 30, 1999
---------------------------------------------------------------------------
Required It To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Action
---------------------- ------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ------- ---------- ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Total Capital (to risk-weighted assets)... $ 239,051 24.00% $ 79,687 8.00% $ 99,608 10.00%
Tier 1 Capital (to risk-weighted assets).. 227,913 22.88 39,843 4.00 59,765 6.00
Leverage Capital (to average assets)...... 227,9131 13.71 49,861 3.00 83,102 5.00
</TABLE>
Year 2000 "Y2K" Compliance
Changing from the year 1999 to 2000 has the potential to cause problems in data
processing and other date-sensitive systems, a problem commonly referred to as
the Year 2000 or Y2K dilemma. The year 2000 date change can affect any system
that uses computer software programs or computer chips, including automated
equipment and machinery. For example, many software programs or computer chips
store calendar dates as two-digit numbers rather than four-digit numbers. This
coding presents a potential problem when the year begins with "20", instead of
"19". Computer systems may interpret the year as 1900 instead of 2000, thus
creating possible system failure or miscalculation of financial data.
The Company utilizes computers for the daily conduct of its business and for
information systems processing. Due to the reliance on such systems, the
Company has followed a comprehensive process modeled from that suggested by
federal bank regulatory agencies. A description of each of the steps and the
status of the Company's efforts to date are detailed as follows:
Assessment, Validation, Testing and Implementation.
The Assessment Phase had two primary components. The first component defined
the scope of the year 2000 problem within the Company, as well as established a
formal committee responsible for monitoring Y2K progress on a regular basis.
The second component assessed the size and complexity of the problem by
performing an inventory of both internally developed and externally purchased
computer applications. Both components of the Assessment Phase are complete.
The Validation Phase, compiled the results of vendor confirmations and internal
research regarding Y2K readiness. It was during this stage that hardware and
software updates, code enhancements, system replacements, vendor certifications,
and other associated changes were made. This component was completed during the
second quarter of 1999.
The Testing Phase certified that systems are Year 2000 compliant and had end-
user acceptance. The Testing Phase was completed during the second quarter of
1999. During this phase, the Company addressed both information technology (IT)
and non-IT systems. With respect to IT systems, the testing of applications was
completed during the second quarter of 1999. To ensure compliance of non-IT
systems where testing is not possible, the Company has obtained a certification
from the vendor attesting to Y2K compliance. The Company does not anticipate
incurring any material expenses as a result of unpreparedness of its non-IT
systems.
The Implementation Phase included the repair or replacement of systems and
computer equipment, as well as the development of contingency plans. The repair
and replacement stage is complete. The Company has developed a business
resumption contingency plan to help ensure continued operations in the event of
Year 2000 system failures. This contingency plan is consistent with the
Company's disaster recovery plan with modifications for Year 2000 risks. The
business resumption contingency plan was finalized during the second quarter of
1999. In addition, the Company has recognized the importance of customer
awareness and has developed a series of statement inserts and notifications to
further educate customers on the Y2K issue, as well as the Company's progress in
addressing the related potential risks.
20
<PAGE>
The Company could also be adversely affected if its vendors and customers that
rely on data processing systems are not Y2K compliant prior to the end of 1999.
The Company, therefore, has worked with both its vendors and commercial lending
customers regarding Y2K issues. Specifically, commercial lending clients have
provided designated information that allows the Company to evaluate the status
of each relationship relating to their Y2K readiness. Additionally, new or
renewing commercial lending customers meeting certain outstanding balance
thresholds are required to certify as to their Y2K readiness as part of the loan
underwriting and closing process. While management believes the exposure to the
Company for customers referred to above is not significant there remains some
risk that the Company's future business operations, financial position and
results of operations could be adversely impacted by the failure of such
customers' operating systems resulting from Y2K issues.
The Company has incurred approximately $182,000 in expenses directly related to
the Year 2000 issue. These expenses include the additional hardware and
software, some of which would have been purchased in the normal course of the
Company's business. Due to the uniqueness of the Year 2000 issue, it is
difficult to quantify the potential loss in revenue in the event of
non-compliance. Based upon efforts to ensure systems will function properly, the
Company presently believes that the Year 2000 issue will not result in a
material loss in revenue. The Company believes that its most likely worst case
Year 2000 scenario is an increase in credit losses due to Year 2000 problems of
the Company's borrowers, as well as the potential disruption in financial
markets causing liquidity concerns. The Company has attempted to mitigate this
risk by identifying both material borrowers and funds providers, as well as
assessing their respective compliance towards Year 2000 readiness.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Market risk is the risk of loss from adverse changes in market prices and/or
interest rates of the Company's financial instruments. The primary market risk
the Company is exposed to is interest rate risk. Interest rate risk occurs when
assets and liabilities reprice at different times as interest rates change. The
company monitors this interest rate sensitivity partially through the use of a
net income model, which generates estimates of changes in net income over a
range of interest rate scenarios.
The Asset-Liability Committee, which includes members of senior management,
monitors the Company's interest rate sensitivity. When deemed prudent,
management has taken actions, and intends to do so in the future, to mitigate
exposure to interest rate risk through the use of on- or off-balance sheet
financial instruments. Possible actions include, but are not limited to, changes
in the pricing of loan and deposit products, modifying the composition of
interest-earning assets and interest-bearing liabilities, and the use of
interest rate swap agreements.
The accompanying table as of September 30, 1999 sets forth the estimated impact
on the Company's net income resulting from changes in the interest rates during
the next twelve months. These estimates require making certain assumptions
including loan and mortgage-related investment prepayment speeds, reinvestment
rates, and deposit maturities and decay rates. These assumptions are inherently
uncertain and, as a result, the Company cannot precisely predict the impact of
changes in interest rates on net income. Actual results may differ significantly
due to timing, magnitude and frequency of interest rate changes and changes in
market condition.
Changes in Calculated increase (decrease) at September 30, 1999
interest rates Net Income Net Portfolio Value
------------------ ---------------- -------------------------
+200 basis points (1,790) (27,412)
+100 basis points (881) (13,615)
-100 basis points 805 9,010
-200 basis points 1,561 14,196
21
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company or its
subsidiaries are a party other than ordinary routine litigation incidental
to their respective businesses.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith or are incorporated by
reference to other filings:
Exhibit No.
-----------
99.1 Summary of Quarterly Financial Data
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Niagara Bancorp, Inc. filed a Current Report on Form 8-K dated August 30,
1999 disclosing under Item 5 that Lockport Savings Bank had reached an
agreement to acquire Albion Banc Corp. Such Current Report, as an Item 7
exhibit also included the Agreement and Plan of Merger dated August 30,
1999.
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.
NIAGARA BANCORP, INC.
Date: November 12, 1999 By: /s/ William E. Swan
-------------------------------------------
William E. Swan
President and Chief Executive Officer
Date: November 12, 1999 By: /s/ Paul J. Kolkmeyer
-------------------------------------------
Paul J. Kolkmeyer
Executive Vice President and
Chief Financial Officer
22
<PAGE>
EXHIBIT INDEX
Exhibit
Number
- ----------
27.1 Financial Data Schedule. Filed herewith.
99.1 Summary of Quarterly Financial Data. Filed herewith.
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,021
<INT-BEARING-DEPOSITS> 1,067,133
<FED-FUNDS-SOLD> 1,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 599,605
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 941,409
<ALLOWANCE> 9,526
<TOTAL-ASSETS> 1,680,087
<DEPOSITS> 1,099,764
<SHORT-TERM> 45,461
<LIABILITIES-OTHER> 44,412
<LONG-TERM> 254,760
0
0
<COMMON> 298
<OTHER-SE> 235,392
<TOTAL-LIABILITIES-AND-EQUITY> 1,680,032
<INTEREST-LOAN> 48,694
<INTEREST-INVEST> 28,770
<INTEREST-OTHER> 1,948
<INTEREST-TOTAL> 79,412
<INTEREST-DEPOSIT> 31,464
<INTEREST-EXPENSE> 41,601
<INTEREST-INCOME-NET> 37,811
<LOAN-LOSSES> 1,922
<SECURITIES-GAINS> 183
<EXPENSE-OTHER> 35,120
<INCOME-PRETAX> 21,568
<INCOME-PRE-EXTRAORDINARY> 21,568
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,991
<EPS-BASIC> 0.52
<EPS-DILUTED> 0.52
<YIELD-ACTUAL> 7.05
<LOANS-NON> 1,996
<LOANS-PAST> 1,015
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,505
<ALLOWANCE-OPEN> 8,010
<CHARGE-OFFS> 461
<RECOVERIES> 55
<ALLOWANCE-CLOSE> 9,526
<ALLOWANCE-DOMESTIC> 6,863
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,663
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Niagara Bancorp, Inc.
Exhibit 99.1: Summary of Quarterly Financial Data
1999
------------------------------------------------------------------------
As of Third Second First
September 30, Quarter Quarter Quarter
---------------- --------------- --------------- ----------------
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SELECTED FINANCIAL DATA
(Amounts in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,680,087 1,680,087 1,633,018 1,591,000
Total interest-earning assets $ 1,577,171 1,577,171 1,535,963 1,491,837
Securities, at amortized cost $ 609,778 609,778 646,155 673,521
Loans:
Real estate loans:
One-to four-family $ 590,184 590,184 533,915 477,363
Home equity $ 20,124 20,124 17,873 16,255
Multi-family $ 71,703 71,703 72,886 73,142
Commercial real-estate $ 117,230 117,230 113,248 105,009
Construction $ 20,453 20,453 17,425 22,486
---------------- --------------- --------------- ----------------
Total real estate loans $ 819,694 819,694 755,347 694,255
---------------- --------------- --------------- ----------------
Consumer and other loans:
Mobile home $ 25,991 25,991 25,559 25,309
Recreational vehicle $ 19,304 19,304 16,457 12,981
Automobile $ 20,419 20,419 16,358 11,633
Personal $ 15,841 15,841 15,802 15,349
Home improvement $ 8,292 8,292 7,928 7,518
Guaranteed student $ 12,275 12,275 13,522 13,967
Other consumer $ 384 384 296 324
---------------- --------------- --------------- ----------------
Total consumer and other loans $ 102,506 102,506 95,922 87,081
---------------- --------------- --------------- ----------------
Commercial business loans $ 19,209 19,209 13,784 7,503
Net deferred fees $ 5,608 5,608 4,938 4,786
---------------- --------------- --------------- ----------------
Total loans $ 947,017 947,017 869,991 793,625
Memo items:
Total loans originated 282,123 98,692 99,707 83,724
Total loans serviced 121,026 121,026 142,137 167,116
Total interest-bearing liabilities $ 1,367,354 1,367,354 1,327,100 1,279,641
Deposits:
Interest-bearing deposits $ 1,067,133 1,067,133 1,055,568 1,034,001
Noninterest-bearing deposits $ 32,631 32,631 32,750 30,993
---------------- --------------- --------------- ----------------
Total deposits $ 1,099,764 1,099,764 1,088,318 1,064,994
Short-term borrowings $ 45,461 45,461 45,453 45,446
Long-term borrowings $ 254,760 254,760 226,078 200,194
Stockholders' equity $ 235,690 235,690 239,509 249,256
Fair value adjustment included in
stockholders' equity $ (6,002) (6,002) (2,090) 2,494
Common shares outstanding:
Basic 25,954 25,954 26,404 27,241
Diluted 25,954 25,954 26,404 27,241
Equity to assets 14.03% 14.03% 14.67% 15.67%
<CAPTION>
1999
------------------------------------------------------------------------
Year-to-Date Third Second First
September 30, Quarter Quarter Quarter
---------------- --------------- --------------- ----------------
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SELECTED AVERAGE BALANCES
(Amounts in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,604,249 1,671,065 1,618,039 1,522,004
Total interest-earning assets $ 1,506,884 1,580,682 1,518,391 1,419,779
Securities, at amortized cost $ 622,420 627,259 654,224 585,317
Loans (1) $ 838,909 917,658 826,239 711,219
Interest-bearing liabilities:
Savings accounts $ 304,255 308,467 307,312 296,859
Interest-bearing checking $ 297,075 320,868 299,028 270,779
Certificates of deposits $ 434,028 423,590 430,283 448,487
Mortgagors' payments held in escrow $ 11,323 15,191 10,528 8,173
Other borrowed funds $ 243,717 296,739 257,693 175,386
---------------- --------------- --------------- ----------------
Total interest-bearing liabilities $ 1,290,398 1,364,855 1,304,844 1,199,684
Interest-bearing deposits $ 1,046,681 1,068,116 1,047,151 1,024,298
Noninterest-bearing deposits $ 31,314 31,839 31,511 30,574
---------------- --------------- --------------- ----------------
Total deposits $ 1,077,995 1,099,955 1,078,662 1,054,872
Short-term borrowings $ 32,692 45,454 45,461 6,737
Long-term borrowings $ 211,025 251,285 212,232 168,649
Stockholders' equity $ 248,037 238,182 248,892 257,247
Common shares outstanding:
Basic 27,040 26,225 27,026 27,888
Diluted 27,040 26,225 27,026 27,888
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------------------
As of Fourth Third Second
December 31, Quarter Quarter Quarter
---------------- --------------- --------------- ---------------
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SELECTED FINANCIAL DATA
(Amounts in thousands)
- --------------------------------------------------------------------------------------------------------------------------
Total assets 1,508,734 1,508,734 1,430,884 1,345,187
Total interest-earning assets 1,408,097 1,408,097 1,348,889 1,267,128
Securities, at amortized cost 572,976 572,976 564,569 509,293
Loans:
Real estate loans:
One-to four-family 456,197 456,197 440,182 424,826
Home equity 15,520 15,520 14,394 14,332
Multi-family 72,672 72,672 73,677 75,015
Commercial real-estate 98,693 98,693 87,467 82,572
Construction 19,476 19,476 12,334 11,325
---------------- ---------------- ---------------- ----------------
Total real estate loans 662,558 662,558 628,054 608,070
---------------- ---------------- ---------------- ----------------
Consumer and other loans:
Mobile home 24,983 24,983 23,896 23,169
Recreational vehicle 8,906 8,906 5,638 2,466
Automobile 8,741 8,741 8,575 8,209
Personal 15,642 15,642 15,686 15,524
Home improvement 8,131 8,131 8,294 8,056
Guaranteed student 12,314 12,314 12,551 12,485
Other consumer 342 342 478 412
---------------- ---------------- ---------------- ----------------
Total consumer and other loans 79,059 79,059 75,118 70,321
---------------- ---------------- ---------------- ----------------
Commercial business loans 6,616 6,616 6,043 5,530
Net deferred fees 4,516 4,516 4,000 3,540
---------------- ---------------- ---------------- ----------------
Total loans 752,749 752,749 713,215 687,461
Memo items:
Total loans originated 310,257 91,476 83,235 91,881
Total loans serviced 170,105 170,105 166,192 155,887
Total interest-bearing liabilities 1,170,580 1,170,580 1,108,093 1,035,264
Deposits:
Interest-bearing deposits 1,027,983 1,027,983 991,363 977,522
Noninterest-bearing deposits 32,914 32,914 28,759 29,228
---------------- ---------------- ---------------- ----------------
Total deposits 1,060,897 1,060,897 1,020,122 1,006,750
Short-term borrowings 5,549 5,549 10,532 18,471
Long-term borrowings 137,048 137,048 106,198 39,272
Stockholders' equity 263,825 263,825 260,782 256,042
Fair value adjustment included in
stockholders' equity 4,587 4,587 4,930 3,192
Common shares outstanding:
Basic 28,716 28,716 28,701 28,687
Diluted 28,716 28,716 28,701 28,687
Equity to assets 17.49% 17.49% 18.23% 19.03%
<CAPTION>
1998
------------------------------------------------------------------------
Year-to-Date Fourth Third Second
September 30, Quarter Quarter Quarter
--------------- ------------- ------------- -------------
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SELECTED AVERAGE BALANCES
(Amounts in thousands)
- --------------------------------------------------------------------------------------------------------------------------
Total assets 1,306,723 1,440,938 1,384,346 1,328,491
Total interest-earning assets 1,240,905 1,353,495 1,302,282 1,267,959
Securities, at amortized cost 498,672 566,285 544,897 486,610
Loans (1) 668,265 733,561 696,343 664,351
Interest-bearing liabilities:
Savings accounts 306,162 290,894 296,049 313,663
Interest-bearing checking 193,480 240,475 214,357 193,987
Certificates of deposits 481,731 461,536 466,410 481,609
Mortgagors' payments held in escrow 10,135 8,849 13,577 9,539
Other borrowed funds 53,297 117,522 80,818 41,278
---------------- ---------------- ---------------- ----------------
Total interest-bearing liabilities 1,044,805 1,119,276 1,071,211 1,040,076
Interest-bearing deposits 991,508 1,001,754 990,393 998,798
Noninterest-bearing deposits 27,529 29,060 27,651 29,059
---------------- ---------------- ---------------- ----------------
Total deposits 1,019,037 1,030,814 1,018,044 1,027,857
Short-term borrowings 14,491 8,022 24,732 18,469
Long-term borrowings 38,306 109,500 56,086 22,809
Stockholders' equity 209,750 263,448 258,769 235,840
Common shares outstanding:
Basic 28,734 28,701 28,687 28,792
Diluted 28,734 28,701 28,687 28,792
</TABLE>
