11
THIS PAPER DOCUMENT IS BEING SUBMITTED PURSUANT TO RULE 901(d)
OF REGULATION S-T.
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1999
Commission File No. 0-14995
YORK FINANCIAL CORP.
(Exact name of Registrant as specified in its charter)
Pennsylvania
(State or other jurisdiction of incorporation or organization)
23-2427539
(I.R.S. employer identification number)
101 South George Street York, Pa. 17401
(Address of principal executive offices)(Zip code)
(717) 846-8777
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,
and (2) has been subject to such filing requirements for the past
90 days.
Yes X
No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common stock, par value $1.00 per share 10,024,806 shares
outstanding as of September 30, 1999.
YORK FINANCIAL CORP.
INDEX
Page
Number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets
September 30, 1999 and June 30, 1999 (unaudited) 3
Consolidated statements of income,
three months ended September 30, 1999
and 1998 (unaudited) 4
Consolidated statements of cash flows,
three months ended September 30, 1999
and 1998 (unaudited) 5
Notes to consolidated financial statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults upon Senior Securities 23
Item 4. Submission of Matters to a Vote of
Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
YORK FINANCIAL CORP. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30 June 30
1999 1999
ASSETS (In thousands, unaudited)
Cash and due from banks:
Noninterest-earning $26,250 $22,813
Interest-earning 5,116 8,958
31,366 31,771
Loans held for sale, net 3,950 30,631
Securities available for sale 351,096 295,691
Securities held to maturity (fair
value
at September 30, 1999 - $22,259
and June 30, 1999 - $22,635) 22,628 22,618
Loans receivable, net 1,054,361 909,193
Real estate, net 8,331 8,633
Premises and equipment 20,706 20,842
Federal Home Loan Bank stock, at
cost 14,960 7,976
Accrued interest receivable 11,108 8,581
Other assets 20,597 20,952
Investments in joint ventures 7,110 7,738
Total Assets $1,546,213 $1,364,626
LIABILITIES AND STOCKHOLDERS'
EQUITY
Liabilities:
Deposits $1,106,818 $1,115,253
Federal Home Loan Bank
advances and other borrowings 301,985 113,962
Advances from borrowers
for taxes and insurance 1,900 4,281
Other liabilities 26,116 20,720
Total Liabilities 1,436,819 1,254,216
Stockholders' Equity:
Preferred Stock: 10,000,000
shares authorized and unissued - -
Common Stock, $1.00 par value:
Authorized 20,000,000 shares;
issued
September 30, 1999 - 10,024,806
shares; June 30, 1999 -
9,565,467 shares 10,025 9,565
Additional capital 96,375 90,417
Retained earnings 9,312 15,028
Accumulated other comprehensive
income (5,656) (3,938)
Unearned ESOP shares (662) (662)
Total Stockholders' Equity 109,394 110,410
Total Liabilities
and Stockholders' Equity $1,546,213 $1,364,626
YORK FINANCIAL CORP. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
INCOME
Three Months Ended
September 30
1999 1998
(Dollars in thousands,
except per share data, unaudited)
Interest income:
Interest and fees on loans $18,402 $17,901
Interest on securities held
for trading 64 130
Interest on securities
available for sale 4,909 1,855
Interest and dividends on
securities held to 561 214
maturity 561 214
Other interest income 88 1,784
Total interest income 24,024 21,884
Interest expense:
Interest on deposits 12,301 12,891
Interest on borrowings 2,436 350
Total interest expense 14,737 13,241
Net interest income 9,287 8,643
Provision for loan losses 600 865
Net interest income after
provision for loan losses 8,687 7,778
Other income:
Mortgage banking 583 506
Gain on sale of securities
available for sale - 789
Gain on sales of real estate 39 90
Fees and service charges 974 803
Income (loss) from joint
ventures and partnerships (806) 573
Other operating income 564 322
Total other income 1,354 3,083
Other expenses:
Salaries and employee
benefits 3,613 3,403
Occupancy 966 917
Federal deposit insurance 164 163
Real estate 203 252
Data processing 387 295
Advertising 383 211
Other 1,692 1,563
Total other expenses 7,408 6,804
Income before income taxes 2,633 4,057
Provision for income taxes 304 1,504
Net income $2,329 $2,553
Per share data:
Net income $0.23 $0.26
Net income - assuming $0.23 $0.24
dilution
Cash dividends paid $0.12 $0.12
Weighted average shares 9,975,447 9,900,078
Weighted average shares -
assuming dilution 10,238,646 10,430,850
YORK FINANCIAL CORP. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
September 30
1999 1998
(In thousands, unaudited)
OPERATING ACTIVITIES
Net income $2,329 $2,553
Adjustments to reconcile net
income to net cash provided by
operating activities:
Amortization and accretion
on securities, net (34) (26)
Provision for loan losses 600 865
Provision for real estate losses - 50
Depreciation and amortization 576 481
Loans originated for sale - (26,794)
Proceeds from sales of
trading securities 26,527 38,717
Realized gains on trading (377) (401)
securities
Realized gains on sales of
securities available for sale - (789)
Increase in other assets (1,925) (41,021)
Increase (decrease) in
other liabilities 6,372 (4,317)
Other increase (decrease) 667 (784)
Net cash provided by (used in)
operating activities 34,735 (31,466)
INVESTING ACTIVITIES
Proceeds from sales of
securities available for sale - 40,576
Purchases of securities
available for sale (62,515) (15,151)
Purchases of FHLB stock (6,984) -
Principal repayments on 4,545 5,439
securities
Loans originated or acquired,
net of change in deferred loan (225,654) (74,259)
fees
Principal collected on loans 78,840 73,314
Purchases of real estate (111) (128)
Proceeds from sales of real 1,533 1,323
estate
Purchases of premises, equipment,
and tenant improvements, net (312) (853)
Other (2,394) (3,137)
Net cash provided by (used in)
investing activities (213,052) 27,124
FINANCING ACTIVITIES
Net increase (decrease) in
noninterest-bearing demand
deposits,interest-bearing
transaction accounts, savings
accounts, and 31-day
certificates of deposit (9,446) 6,598
Net increase in certificates of
deposit 1,011 3,561
Net increase in short-term
advances received from FHLB 10,600 -
Net increase in FHLB advances
and other borrowings 177,424 103
Issuance of common stock :
Dividend reinvestment plan 554 603
Stock option plans 44 700
Cash dividends paid (1,241) (1,179)
Retirement of stock (1,034) -
Net cash provided by
financing activities 177,912 10,386
Increase (decrease) in cash and
cash equivalents (405) 6,044
Cash and cash equivalents at
beginning of period 31,771 144,547
Cash and cash equivalents at
end of period $31,366 $150,591
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
Note A -- Basis Of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. Such
preparation requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Although the interim amounts are unaudited, they do reflect all
adjustments (consisting of normal recurring accruals) that, in
the opinion of management, are considered necessary for a fair
presentation of the results of operations for the interim
periods. Operating results for the three month period ended
September 30, 1999 are not necessarily indicative of the results
that may be expected for the year ended June 30, 2000. For
further information, refer to the consolidated financial
statements and footnotes thereto included in the Corporation's
annual report on Form 10-K for the year ended June 30, 1999.
Cash Flow Information: For purposes of the statements of cash
flows, cash equivalents include cash and amounts due from banks.
During the three months ended September 30, 1999 and 1998, the
Association exchanged loans for mortgage-backed securities in the
amounts of $26.4 million and $96.7 million, respectively. During
the three months ended September 30, 1999 and 1998, the
Association transferred unpaid loan balances from loans to real
estate acquired due to foreclosures of $1.2 million and $1.7
million, respectively. During the three months ended September
30, 1999 and 1998, there was a noncash capital distribution from
an investment in joint venture of $0 and $2,205,000,
respectively.
Reclassifications: Certain reclassifications have been made to
the fiscal 1999 consolidated financial statements to conform with
the fiscal 2000 presentation.
Note B -- Per Share Data
On October 20, 1999, the Corporation declared a 5% stock
dividend, to shareholders of record on November 5, 1999, to be
distributed November 15, 1999. Net income per share is computed
based on the weighted average number of common shares outstanding
and dilutive common stock equivalents, adjusted for stock
splits/dividends. Cash dividends paid per share are based on the
number of common shares outstanding at each record date, adjusted
for stock splits/dividends.
The Corporation computes earnings per share in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share". Earnings per common share ("basic") is
computed using net income applicable to common stock and weighted
average common shares outstanding during the period. Earnings per
common share - assuming dilution ("diluted") is computed using
net income applicable to common stock and weighted average common
shares outstanding during the period after consideration of the
potential dilutive effect of common stock equivalents based on
the treasury stock method using an average market price for the
period. The Corporation's common stock equivalents are solely
related to stock options.
The following table sets forth the computation of basic and
diluted earnings per share:
Three Months Ended
September 30
1999 1998
(Dollars in thousands,
Except Per Share Data)
Numerator:
Net Income $2,329 $2,553
Numerator for basic and
diluted earnings per share $2,329 $2,553
Denominator:
Denominator for basic
earnings per share-
weighted-average shares 9,975,447 9,900,078
Effect of dilutive
securities:
Employee Stock Options 263,199 530,772
Denominator for diluted
earnings per share-adjusted
weighted-average shares and
assumed conversion 10,238,646 10,430,850
Basic earnings per share $0.23 $0.26
Diluted earnings per share $0.23 $0.24
Note C - Federal Home Loan Bank (FHLB) Advances and Other
Borrowings
Borrowings consist of the following:
Three Months Fiscal Year
Ended Ended
September 30 June 30
1999 1999
(In Thousands)
FHLB advances payable to FHLB
Pittsburgh, secured by all
FHLB stock and certain first
mortgage loans:
Short-term advances:
Due August 27, 1999, 5.12% $- $70,000
Due July 1, 1999, 5.57% - 14,400
Due October 1, 1999, 5.62% 95,000 -
95,000 84,400
Convertible advance:
Due 2002, 5.46% 25,000 25,000
Due 2004, 5.75% 25,000 -
Due 2006, 5.32% 25,000 -
Due 2009, 5.09% 100,000 -
Due 2009, 5.75% 25,000 -
Other advances:
Due 2008, 2.00% 282 285
Due 2024, 4.25% 722 727
296,004 110,412
Other borrowings:
Advance to ESOP
Due 2004, prime plus .75% 662 662
Repurchase agreements:
Due July 1, 1999, 3.60% - 2,888
Due October 1, 1999, 4.12% 5,319 -
$301,985 $113,962
Maturities of FHLB advances and other borrowings are as follows:
2000-$250,481,000; 2001-$164,000; 2002-$25,165,000; 2003-
$166,000; 2004-$25,167,000; thereafter-$842,000. The FHLB has the
option of converting the fixed rate convertible select advances
to a LIBOR adjustable rate advance quarterly after the conversion
date. Upon conversion, management has the right to exercise a
return option to the FHLB with no prepayment penalty.
Accordingly, amounts are included in maturities based on the next
conversion date.
The FHLB of Pittsburgh has an established credit policy which
permits the Association to borrow amounts up to twenty times the
amount of the Association's holding of FHLB stock at negotiated
interest rates. The Association may increase its borrowing over
amounts currently available by purchasing additional FHLB stock.
During 1994, the Corporation on behalf of the Employee Stock
Ownership Trust arranged for a loan in the amount of $1,325,000
payable in equal annual installments of $132,500 plus interest at
prime plus .75% for a period of 10 years. The final maturity will
be March 31, 2004. The proceeds were used to acquire shares of
the Corporation's stock for the benefit of the corporate
sponsored employee stock ownership plan.
Note D -- Comprehensive Income
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general-purpose financial
statements that are displayed with the same prominence as other
financial statements, and also provides for footnote disclosure
of total comprehensive income in interim financial statements.
Total comprehensive income for the three months ended September
30, 1999 and 1998, was $0.6 million and $2.7 million,
respectively. Comprehensive income was lower for the three months
ended September 30, 1999 as compared to the same period in 1998
due to lower net income and unrealized holding losses on
securities.
Note E - Income Taxes
Income tax expense for the Corporation is different than the
amounts computed by applying the statutory federal income tax
rate to income before income taxes because of the following:
Percentage of Income
Before Income Taxes
Three Months Fiscal Year
Ended Ended
September 30 June 30
1999 1999
Income tax expense at
federal
statutory rate 35.0 % 35.0 %
Tax-exempt income (0.7) (0.3)
State income taxes, net of
federal benefit (4.5) 1.0
Federal tax credits (17.6) (1.3)
Other (0.6) (0.2)
Effective tax rate 11.6 % 34.2 %
Note F -- Recently Issued Accounting Guidance
In June 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging
activities. The effective date of the Statement was deferred in
June 1999 under SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133". This Statement is effective for
financial statements issued for all quarters of all fiscal years
beginning after June 15, 2000. The adoption of SFAS No. 137 is
not expected to have a material impact on the Corporation's
consolidated financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
YORK FINANCIAL CORP.
Financial Review
The purpose of this discussion is to provide additional
information about York Financial Corp. ("York Financial" or
"Corporation"), its financial condition and results of
operations. Readers of this report should refer to the
consolidated financial statements and other financial data
presented throughout this report to fully understand the
following discussion and analysis.
York Financial is a unitary savings and loan holding company
incorporated in Pennsylvania in September 1985 and in August 1986
became the sole stockholder of York Federal Savings and Loan
Association ("York Federal" or "Association"), a federally
chartered stock savings and loan association. Presently, the
primary business of York Financial is the business of York
Federal. At September 30, 1999, the Corporation had consolidated
assets of $1.5 billion, total deposits of $1.1 billion and
stockholders' equity of $109.4 million. The Association is a
member of the Federal Home Loan Bank ("FHLB") of Pittsburgh and
is subject to supervision, examination and regulation by the
Office of Thrift Supervision ("OTS") and the Federal Deposit
Insurance Corporation ("FDIC"). The Association is primarily
engaged in the business of attracting deposits and investing
these deposits into loans secured by residential and commercial
real property, commercial business loans, consumer loans and
investment securities. York Federal conducts its business
through twenty-four offices located in south central Pennsylvania
and Maryland. In addition, York Federal maintains a commissioned
mortgage origination staff as well as mortgage correspondent
relationships which originate residential mortgage loans for the
Association primarily in Pennsylvania, Maryland and Virginia,
although loans are originated in 11 states within the Mid-
Atlantic region. The Association's deposits are insured up to
applicable limits by the Savings Association Insurance Fund
("SAIF") of the FDIC.
The Corporation's net income is highly dependent on the interest
rate spread between the average rate earned on loans and
securities and the average rate paid on deposits and borrowings
as well as the amount of the respective assets and liabilities
outstanding. Other operating income is an important supplement to
York Federal's interest income and is primarily the result of
mortgage banking activities including gains on sales of mortgage-
backed securities and related value attributed to mortgage
servicing rights created from loan originations and service fee
income derived from the portfolio of loans serviced for others.
Other operating income also includes gains and losses on sales of
securities available for sale, gains and losses on sales of real
estate, equity in earnings of limited partnership interests, and
fees and service charges assessed on loan and deposit
transactions.
Interest Rate Sensitivity Management
Market risk is the risk of loss from adverse changes in market
prices and rates. The Association's market risk arises
principally from interest rate risk. In an effort to maintain
control over such risks, management of York Federal focuses its
attention on managing the interest rate sensitivity of assets and
liabilities and controlling the volume of lending, securities,
deposit and borrowing activities. By managing the ratio of
interest sensitive assets to interest sensitive liabilities
repricing in the same periods, the Corporation seeks to control
the adverse effect of interest rate fluctuations. The
Corporation's assets and liabilities are not directly exposed to
foreign currency or commodity price risk. At September 30, 1999
and June 30, 1999, the Corporation had no off-balance sheet
derivative financial instruments.
Management utilizes an Asset/Liability Committee (ALCO), which
meets at least once a month, to review the Association's interest
sensitivity position on an ongoing basis and prepare strategies
that outline the overall acquisition and allocation of funds to
maximize earnings and maintain the interest rate sensitivity
position at acceptable levels. The Corporation originates for
portfolio principally short and intermediate term and adjustable
rate loans and sells most fixed rate loan originations.
Additionally, investment securities were acquired for portfolio.
The funding sources for these portfolio loans and securities are
deposits and borrowings with various maturities.
The ALCO monitors the Corporation's interest rate risk position
utilizing simulation analysis. Net interest income fluctuations
and the net portfolio value ratio are determined in various
interest rate scenarios and monitored against acceptable
limitations established by management and approved by the Board
of Directors. Such rate scenarios include immediate rate shocks
adjusting rates in +/- 100 basis point (bp) increments resulting
in projected changes to net interest income over the next 12
months and projected net portfolio value ratios as indicated in
the following table.
An analysis of hypothetical changes in interest rates as of
September 30, 1999 compared to June 30, 1999 is as
follows:
September 30, 1999 June 30, 1999
Percentage Percentage
change in Net change in Net
Basis point Net Portfolio Net portfolio
change in interest value interest value
interest rates income (1) ratio (2) income (1) ratio (2)
Increase ( decrease)
300 (23.00%) 3.04% (14.00%) 4.70%
200 (15.00%) 4.25% (9.00%) 5.75%
100 (8.00%) 5.40% (4.00%) 6.69%
0 0.00% 7.25% 0.00% 7.49%
(100) (1.00%) 7.34% 4.00% 8.15%
(200) (1.00%) 6.89% 6.00% 8.41%
(1) The percentage change in this column represents net interest
income for 12 months in a stable interest rate environment versus net
interest income for 12 months in the various rate scenarios.
(2)The net portfolio value in this column represents net
portfolio value of the Association in various rate scenarios,
divided by the present value of expected net cash flows from
existing assets in those same scenarios. Net portfolio value is
defined as the present value of expected net cash flows from
existing assets, minus the present value of expected net cash
flows from existing liabilities, plus or minus the present value
of expected net cash flows from existing off-balance-sheet
contracts.
Simulation results are influenced by a number of estimates and
assumptions with regard to embedded options, prepayment
behaviors, pricing strategies and cashflows. The risk profile of
the Association has increased as indicated in the preceding
table. This increase is due to the continuation of portfolio
lending and investment leverage strategies which were funded with
convertible advances and overnight borrowings resulting in
inherently more interest rate risk than previous periods.
Assumptions and estimates used in simulation analysis are
inherently subjective and, as a consequence, results will neither
precisely estimate net interest income or net portfolio value nor
precisely measure the impact of higher or lower interest rates on
net interest income or net portfolio value ratio. The results of
these simulations are reported to the Corporation's Board of
Directors on a quarterly basis. Management has determined that
the level of interest rate risk is within acceptable limits at
September 30, 1999.
Asset Quality
Management is aware of the risks inherent in lending and
continually monitors risk characteristics of the loan portfolio.
The Association has developed a Business Banking Group to offer
financial products and services to small and mid-sized businesses
in the Association's branch market area. The nature of these
products and services and the financial characteristics of the
target client group may have the effect of increasing the
Association's credit risk exposure. The Association has employed
management expertise and has adopted credit management policies
to control the credit risk exposure inherent in this activity.
The Association's policy is to maintain the allowance for loan
losses at a level believed adequate by management to absorb
losses in the existing loan portfolio. The allowance for loan
loss is an estimate, however, these estimates are reviewed
periodically and, any adjustments necessary, are recognized in
operations in the period adjustments become known. Management's
determination of the adequacy of the allowance is performed by an
internal loan review committee and is based on known and inherent
risk characteristics in the portfolio, past loss experience,
adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral, current
economic conditions, and such other relevant factors which in
management's judgment deserve recognition. The allowance for loan
losses related to impaired loans was determined in accordance
with SFAS No. 114, as amended by SFAS No. 118. Actual losses or
recoveries are charged or credited directly to the allowance.
An analysis of the allowance for loan losses, for the periods
indicated is as follows:
Three Months Fiscal Year
Ended Ended
September 30 June 30
1999 1999
(Dollars in thousands)
Total allowance for loan losses
at beginning of period $10,803 $8,810
Loans charged-off:
Real estate - mortgage:
Residential 150 1,581
Commercial - 16
Consumer 97 397
Total charged-offs 247 1,994
Recoveries:
Real estate - mortgage:
Residential - 325
Commercial 2 24
Consumer 7 6
Total recoveries 9 355
Net loans charged-off 238 1,639
Provision for loan losses 600 3,632
Total allowance for loan losses
at end of period $11,165 $10,803
Percentage of net charge-offs
to average loans outstanding
during the period 0.02% 0.18%
Percentage of allowance for loan
losses to adjusted total loans 1.05% 1.17%
The allowance for loan losses totaled $11.1 million or 1.05% of
adjusted total loans of $1.1 billion at September 30, 1999.
Management believes the allowance for loan loss is adequate
relative to its assessment of existing risk characteristics
within the loan portfolio. While management uses available
information to recognize losses on loans, future additions to the
allowance may be necessary based on specific circumstances
related to future problem loans, increased risk due to a change
in mix within the portfolio as well as changes in economic
conditions.
An analysis of nonperforming assets is summarized as follows:
September 30 June 30
1999 1999
(Dollars in thousands)
Loans accounted for on a
nonaccrual basis:
Real Estate-mortgage:
Residential $624 $870
Commercial - -
Land - -
Consumer - 49
Total nonaccrual loans 624 919
Accruing loans which are
contractually past due
90 days or more:
Real estate-mortgage:
Residential 8,070 8,311
Consumer 892 823
Total of 90 days past due loans 8,962 9,134
Total of nonaccrual and 90 days
past due loans $9,586 $10,053
As a percent of total loans 0.91% 1.07%
Real estate owned:
Real estate acquired through
foreclosure or repossession
by loan type:
Real estate:
Residential $4,644 $4,571
Commercial 967 1,055
Land 1,021 1,319
Allowance for real estate losses (16) (45)
Total real estate owned $6,616 $6,900
As a percent of total assets 0.43% 0.51%
Total nonperforming assets $16,202 $16,953
As a percent of total assets 1.05% 1.24%
The Association's nonaccrual policy generally covers loans which
are 90 or more days past due, dependent upon type of loan and
related collateral. All commercial real estate loans are placed
on nonaccrual status when the collectibility of interest is
uncertain based on specific circumstances evaluated on a loan by
loan basis or when interest is more than 90 days past due. In
the case of residential real estate and consumer loans, the
Association implemented the Uniform Retail Credit Classification
Policy effective June 30, 1999 and follows this policy for
placing loans on nonaccrual status.
Management recognizes the risk of potential reduction in value of
real estate owned during the holding period and provides for such
risk by maintaining an allowance for real estate losses (such
allowance is separate from and in addition to the allowance for
loan losses). For the three months ended September 30, 1999, net
charge-offs were $29,000 with no additions to the allowance
resulting in a decrease in the allowance to $16,000 at September
30, 1999. Management continually monitors the risk profile of
real estate owned and maintains an allowance for real estate
losses at a level believed adequate to absorb potential losses
within the real estate portfolio.
Liquidity
The primary purpose of asset/liability management is to maintain
adequate liquidity and a desired balance between interest-
sensitive assets and liabilities. Liquidity management focuses on
the ability to meet the cash flow requirements of customers
wanting to withdraw or borrow funds for their personal or
business needs. Interest rate sensitivity management focuses on
consistent growth of net interest income in times of fluctuating
interest rates. The management of liquidity and interest rate
sensitivity must be coordinated since decisions involving one may
influence the other.
Liquidity needs can be met by either reducing assets or
increasing liabilities. Sources of asset liquidity include short
term investments, securities available for sale, maturing and
repaying loans and monthly cash flows from mortgage-backed
securities. The loan portfolio provides an additional source of
liquidity due to York Federal's participation in the secondary
mortgage market. Liquidity needs can be met by attracting
deposits and utilizing borrowing arrangements with the FHLB of
Pittsburgh and the Federal Reserve Bank of Philadelphia for short
and long term advances as well as other short-term borrowings.
Deposits represent the Association's primary source of funds. The
Association does not rely on brokered deposits as a source of
funds. During the three months ended September 30, 1999, the
Association's deposits decreased $8.4 million. In addition, York
Federal has supplemented its deposit gathering efforts through
borrowings from the FHLB of Pittsburgh.
At September 30, 1999, York Federal had $296.0 million in FHLB
advances outstanding at a weighted average interest rate of
5.41%, an increase of $185.6 million for the first three months
of fiscal 2000. The Association was required to purchase
additional FHLB stock due to increased borrowings. For additional
details of FHLB advances and other borrowings, refer to Note C of
the Notes to Consolidated Financial Statements.
Amortization and prepayments of loans and proceeds from loan and
securities sales represent a substantial source of funds to York
Federal. These sources amounted to $109.5 million for the first
three months of fiscal 2000.
Generally, the principal use of funds is the origination of
mortgage and other loans. In addition, during the three months
ended September 30, 1999, the continuation of leverage strategies
to effectively utilize available capital, resulted in expansion
of the investment portfolio through the purchase of available for
sale securities. The carrying value of securities available for
sale increased $55.4 million for the first three months of fiscal
2000 from $295.7 million at June 30, 1999 to $351.1 million at
September 30, 1999.
Loan demand resulted in total originations of $227.3 million for
the period ended September 30, 1999. Loan originations were
obtained through various channels including the retail branch
system, commissioned mortgage origination staff, tele-mortgage
activity, expanded mortgage correspondent relationships and
Business Banking relationship managers. The volume of
originations was favorably impacted by the Association's pricing
strategies and a relatively low-rate interest rate environment.
A significant component of loan origination volume was
intermediate term mortgage products, i.e. seven year balloon
loans and 5/1 CMT adjustable rate loans (fixed rate for the first
five years with annual adjustments thereafter). During the three
months ended September 30, 1999, the loan portfolio increased
$145.2 million to $1.1 billion at September 30, 1999.
Under current regulations, York Federal is required to maintain
liquid assets at 4.0% or more of its net withdrawable deposits
plus short-term borrowings. For the quarter ended September 30,
1999, the Association's liquidity level was 6.54%.
Capital
The management of capital provides the foundation for future
asset and profitability growth and is a major strategy in the
management of York Financial Corp. Stockholders' equity at
September 30, 1999, totaled $109.4 million compared to $112.3
million at September 30, 1998, a decrease of $2.9 million or
2.6%. This decrease was primarily a result of the impact of
unrealized losses on "available for sale" securities, retirement
of shares related to a stock repurchase program and cash
dividends paid, partially offset by a combination of factors
including current earnings and issuance of shares in connection
with various benefit and dividend reinvestment plans.
An additional stock repurchase program to replace the previous
expired stock repurchase program was announced in August 1999.
The Board of Directors authorized the repurchase of 478,000
shares of common stock on the open market. Under the repurchase
plan, share purchases may be made from time to time depending on
market and business conditions for the following six month
period.
OTS regulated thrifts must comply with various capital standards:
Tangible Capital. Generally, common stock plus retained earnings
must equal at least 1.5% of adjusted total assets.
Tier 1 (Core) Capital to total assets. Tangible capital plus
qualifying supervisory goodwill (arising from the purchase of a
troubled savings association) and other qualifying intangible
assets must equal at least 3.0% of adjusted total assets; 5.0% to
be deemed well capitalized.
Risk-Based Capital. Risk-based capital must equal at least 8.0%
of risk-weighted assets, as defined in the regulations; 10% to be
deemed well capitalized. The tier 1 (core) capital component of
risk-based capital, as defined above, must equal at least 6.0% of
risk weighted assets to be deemed well capitalized.
At September 30, 1999, York Federal's tangible and core capital
both equaled 6.4% ($98.5 million), substantially in excess of the
minimum regulatory requirements of 1.5% and 3.0%/5.0%,
respectively. York Federal's total assets do not include any
goodwill. York Federal's core capital to risk-weighted assets
equaled 10.8% ($98.5 million) at September 30, 1999, which
exceeds the required level of 6.0%. Finally, York Federal's risk-
based capital ratio equaled 11.9% ($108.6 million) at September
30, 1999 which exceeds the required level of 8.0% by $35.8
million, and exceeds the required level to be deemed well
capitalized of 10.0% by $17.6 million.
Transactions with Affiliates
Transactions with affiliates are limited to 10% of capital and
surplus per affiliate with an aggregate limit on all such
transactions with affiliates to 20% of capital and surplus. At
September 30, 1999 such transactions are within these regulatory
limits.
Results of Operations
Three months ended September 30, 1999 compared to September 30,
1998
Net Interest Income
York Financial's earnings are affected by the level of York
Federal's net interest income, the difference between the income
it receives on its loan portfolio and other investments, and its
cost of funds, consisting primarily of interest paid on deposits
and borrowings. Net interest income is affected by the average
yield on interest-earning assets, the average rate paid on
interest-bearing liabilities, and the ratio of interest-earning
assets to interest-bearing liabilities.
Net interest income for the three months ended September 30, 1999
was $9.3 million compared to $8.6 million for the same period
last year, which represents a 8.1% increase. The increase in net
interest income was primarily due to increase in volumes which
more than offset the lower earning asset yield as well as lower
cost of funds rate. The margin on interest-earning assets
decreased to 2.79% from 3.00% for the three months ended
September 30, 1999 and 1998, respectively.
During the three months ended September 30, 1999, York Federal
originated $227.3 million of loans including loans refinanced
from the Association's portfolio. The result of these
originations, when combined with mortgage securitizations and
sales totaling $26.4 million and loan repayment activity, was a
9.2% increase in average loans outstanding during the first
quarter of fiscal 2000 as compared to the same period in the
prior year. The average balance of securities and other interest
earning assets increased $102.8 million over the same period last
year and results from the above mentioned secondary market
activity and the Corporation's leveraging strategy which was
supported by an increase in deposits of $37.5 million and
increased borrowings of $155.9 million over the same period in
the prior year. The resulting composition shift of the
Association's assets had a positive effect on interest income
although the yield on earning assets decreased 39 basis points to
7.13%. The average rate on interest-bearing liabilities decreased
to 4.61% as compared to 4.89% in the same period last year. The
lower rate on interest-bearing liabilities was as a result of the
ability to reprice our deposit products lower in a low-rate
interest rate environment partially offset by an increase in the
cost of funds for borrowings. The average rate on borrowings
increased to 5.25% as compared to 4.90% in the same period of
last year. The net effect caused the interest rate spread for the
current period to decrease to 2.51% from 2.63% in the same period
last year.
Provision for Loan Losses
Management is aware of the risks inherent in lending and
continually monitors risk characteristics of the loan portfolio.
See "Asset Quality".
Other Income
Other income was $1.4 million for the three months ended
September 30, 1999, a decrease of $1.7 million from the three
months ended September 30, 1998. Mortgage banking income for the
three months ended September 30, 1999 increased $77,000 to
$583,000 or 15.2% as compared to the same period in 1998 and
included gain on sales of loans and trading securities of
$377,000. Mortgage-backed securities created in conjunction with
the Association's mortgage banking activities are deemed trading
securities and are carried at fair value with unrealized gains
and losses reported in the income statement. At September 30,
1999, there were no securities held for trading.
The portfolio of loans serviced for others totaled $502.5 million
at September 30, 1999 with a net average servicing rate of
approximately 15.0 basis points as compared to $553.7 million at
September 30, 1998 with a net average servicing rate of
approximately 7.6 basis points. The increase in net servicing
rate is primarily attributable to the change in impairment
adjustments recorded as a result of changes in prepayment speeds
from year to year. Amortization of capitalized mortgage servicing
rights for the three months ended September 30, 1999 was $146,000
compared to $148,000 in the prior year and is recognized as a
reduction of gross servicing fee income. The combination of these
volume and rate changes caused net loan servicing fees for the
first quarter of fiscal 2000 to increase to $191,000 from
$105,000 as compared to the same period for fiscal 1999.
Gain on the sale of available for sale securities totaled $0 at
September 30, 1999 as compared to $789,000 at September 30, 1998.
During 1998, FannieMae (FNMA) introduced a program which provided
for the securitization of high loan-to-value seven year balloon
loans. Management, recognizing the default risk associated with
this loan type, securitized $58.0 million of portfolio loans
qualifying under the FNMA program. Furthermore, in consideration
of the interest rate risk associated with this asset, $40.6
million of these securities were sold resulting in the
aforementioned gain for the three months ended September 30,
1998.
Fees and service charges for the three months ended September 30,
1999 increased $171,000 or 21.3% to $974,000 as compared to
$803,000 in the same period in 1998. The increase in fees and
service charges is primarily a result of growth in loan and
deposit volume. Loan volume was higher due to increased
originations of $118.4 million for the first quarter of 2000 as
compared to the same period in the prior year. The increase in
deposit account servicing fees is related to increased volume of
electronic transactions initiated by deposit customers including
inter-account sweeps, ATM transactions and VISA debit card
utilization. In addition, increased commercial checking account
relationships initiated through Business Banking activities and
related fee structure associated with such accounts contributed
to the increase in fees and service charges.
The Corporation is a partner in various joint ventures and
partnerships. For the first three months of fiscal 2000, a loss
from these investments totaled $806,000 as compared to income of
$573,000 for the same period in fiscal 1999. For the first
quarter of fiscal 2000, losses of $374,000 on the venture capital
partnership resulted from the decreased market value of
underlying portfolio investments compared to gains of $566,000 in
the same period of fiscal 1999. In connection with certain
partnership investments and as permitted by EITF 94-1, investors
who renovate, operate and lease qualified low income housing and
historic properties may utilize the effective yield method to
recognize tax credits as they are allocated and amortize the
investment to provide a constant yield. During the three months
ended September 30, 1999, historic and low-income housing tax
credits and tax benefits which totaled $623,000 offset the
amortization of a limited partnership investment and other
limited partnerships losses which totaled $456,000. There was no
income or loss related to limited partnerships for the same
period in 1998. For additional details of Income Taxes, refer to
Note E of the Notes to Consolidated Financial Statements.
Other operating income was $564,000 in the first three months of
fiscal 2000 as compared to $322,000 in the first three months of
fiscal 1999. As products and services become more fully
integrated within the retail branch system, related income
derived from discount brokerage and insurance units resulted in
an increase in other operating income. Other effects on other
operating income were income on corporate-owned life insurance
policies related to a supplemental executive retirement plan.
Other Expenses
Other expenses of $7.4 million increased $604,000 or 8.9% for the
three months ended September 30, 1999 as compared to the same
period in 1998.
Salaries and employee benefits for the three months ended
September 30, 1999 increased $210,000 or 6.2% over the same
period in 1998 and is attributable to a combination of the
following factors: annual adjustments through the salary
administration program, increased staffing within the Retail
Banking Group in connection with new branches, increased
commissions related to affiliate brokerage and insurance units
and expenses related to a supplemental executive retirement plan.
The number of full time equivalent personnel at September 30,
1999 was 403 compared to 395 at September 30, 1998. Data
processing increased $92,000 or 31.2% in fiscal 2000 compared to
fiscal 1999 due to costs related to technology purchases to
enhance efficiency. Advertising cost increased $172,000 or 81.5%
for the three months ended September 30, 1999 as compared to the
same period in 1998, and is primarily attributable to ongoing
efforts to enhance customer and product awareness through various
media campaigns. Other expenses for the three months ended
September 30, 1999 increased $129,000 or 8.3% compared to the
same period in 1998, as a result of increased cost of services
and the effects of increased loan and deposit volume.
Provision for Income Taxes
The provision for income taxes of $304,000 for the three months
ended September 30, 1999 represents an effective tax rate of
11.6% as compared to 37.1% for the same period last year. For
additional details of Income Taxes, refer to Note E of the Notes
to Consolidated Financial Statements and Results of Operations -
Other Income discussion.
Other Matters
Impact of Year 2000
We are less than three months from the turn of the century. This
milestone has generated widespread concern over its potential
impact on business continuity. Historically, most computer
programs were written using two digits rather than four to
designate the applicable year. As a result, it is anticipated
that computer systems may recognize a date using "00" as the year
1900 rather than the year 2000. This situation along with certain
other date issues is commonly referred to as the "Year 2000
Issue." Such situations could cause a system failure or
miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business
activities.
The Year 2000 Issue is recognized by the Corporation as a
significant business issue and is receiving intense management
focus. The majority of the Corporation's transaction processing
is provided by a third party processor. A Year 2000 project team
has been organized and a comprehensive action plan designed to
achieve Year 2000 readiness. The project is addressing not only
computer and technology areas but all areas of our business. Many
non-computer systems include embedded technology and may be
affected by the Year 2000 Issue if not appropriately addressed.
The action plan has five key project phases: awareness,
assessment, remediation, validation, and implementation
addressing systems for both the Corporation and its third party
processor. The five phases of the project are substantially
complete and we have completed the interface/integration testing
between all key vendors and systems. This timeline provides an
opportunity to resolve any issues that may arise prior to the
turn of the century.
As part of the Year 2000 action plan, the Corporation has
initiated formal communications with all of its significant
vendors and large customers to determine the extent to which its
systems will need to be modified or replaced or are vulnerable to
those third parties' failure to remediate their own Year 2000
issues. While the Corporation has taken and will continue to take
appropriate actions to mitigate the risk of adverse consequences
associated with the failure of a third party to address these
issues, there can be no guarantee that the systems of third
parties will be timely converted and will not have an adverse
effect on York Financial. As a precaution the Corporation has
developed a comprehensive Year 2000 contingency plan and has
tested the plan for accuracy and consistency between all mission
critical applications and systems. The testing of the plan was
completed by September 30, 1999 as mandated by all of the
regulatory agencies.
To assist customers in understanding Year 2000 issues and to
inform them of the Corporation's actions to prepare, brochures
regarding Year 2000 preparedness have been distributed to all
customers. Additional mailings and other communications are
anticipated prior to the turn of the century.
It is difficult to isolate the incremental cost of the Year 2000
effort given that it impacts technical personnel already in place
in operational areas across our business as well as possibly
accelerating already planned technology investments. However,
such costs and related investments are presently estimated to
total $320,000 and the timing of recognizing such costs is not
considered to be material to any one fiscal period.
The costs of the project and the date on which the Corporation
believes it will complete the Year 2000 project are based on
management's best estimates. However, there can be no guarantee
that these estimates will be achieved and actual results could
differ materially from those anticipated.
Effects of Inflation and Changing Prices
The consolidated financial statements and related financial data
presented herein have been prepared in accordance with generally
accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical
dollars, without considering changes in relative purchasing power
over time due to inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As
a result, interest rates generally have a more significant impact
on a financial institution's performance than does the effect of
inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and
services since such prices are affected by inflation. In the
current interest rate environment, the liquidity and maturity
structures of York Federal's assets and liabilities are critical
to the maintenance of acceptable performance levels.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Annual meeting of Stockholders of York Financial Corp.
was held October 21, 1999. Business transacted at the
meeting was as outlined in the Notice of Annual Meeting
and Proxy Statement dated September 21, 1999.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The company filed Form 8-K on August 12, 1999 relating
to the announcement of a stock repurchase program for
up to 478,000 outstanding shares of common stock.
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.
York Financial Corp.
(Registrant)
Date November 15, 1999
/s/ Robert W. Pullo
Robert W. Pullo, President - Chief Executive Officer
Date November 15, 1999
/s/ James H. Moss
James H. Moss, Senior Vice President -
Chief Financial Officer/Treasurer