UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number: 000-21628
HAVEN BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
11-3153802
(I.R.S. Employer Identification No.)
615 MERRICK AVENUE, WESTBURY, NEW YORK 11590
(Address of principal executive offices) (Zip Code)
(516) 683-4100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. X Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
There were 8,960,357 shares of the Registrant's common stock
outstanding as of August 13, 1999.
HAVEN BANCORP, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
as of June 30, 1999 and December 31, 1998 3
Consolidated Statements of Income for the
Three Months and Six Months ended
June 30, 1999 and 1998 4
Consolidated Statement of Changes in
Stockholders' Equity for the Six Months
ended June 30, 1999 5
Consolidated Statements of Cash Flows for the
Six months ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-30
Item 3. Quantitative and Qualitative Disclosure
about Market Risk 30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 30-31
Item 2. Changes in Securities and Use of Proceeds 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security
Holders 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
Signature Page
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
HAVEN BANCORP, INC.
Consolidated Statements of Financial Condition
(Dollars in thousands, except for share data)
(Unaudited)
June 30, December 31,
1999 1998
-------- ------------
ASSETS
Cash and due from banks $ 39,802 $ 43,088
Money market investments 24,232 1,720
Securities available for sale (note 2) 1,000,636 889,251
Loans held for sale 84,924 54,188
Federal Home Loan Bank of NY stock, at cost 23,260 21,990
Loans receivable:
First mortgage loans 1,515,911 1,271,784
Cooperative apartment loans 3,113 3,970
Other loans 30,285 34,926
--------- ---------
Total loans receivable 1,549,309 1,310,680
Less allowance for loan losses (15,016) (13,978)
--------- ---------
Loans receivable, net 1,534,293 1,296,702
Premises and equipment, net 36,746 39,209
Accrued interest receivable 15,369 12,108
Other assets 37,178 37,267
--------- ---------
Total assets $2,796,440 $2,395,523
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $1,944,791 $1,722,710
Borrowed funds 696,253 440,346
Due to broker - 97,458
Other liabilities 41,487 15,142
--------- ---------
Total liabilities 2,682,531 2,275,656
--------- ---------
Stockholders' Equity:
Preferred stock, $.01 par value, 2,000,000
shares authorized, none issued - -
Common stock, $.01 par value, 30,000,000 shares authorized,
9,918,750 shares issued; 8,955,859 and 8,859,692 shares
outstanding at June 30, 1999 and December 31, 1998, respectively 100 100
Additional paid-in capital 52,070 51,383
Retained earnings, substantially restricted 83,672 79,085
Accumulated other comprehensive (loss) income:
Unrealized (loss) gain on securities available for sale,
net of tax effect (10,690) 945
Treasury stock, at cost (962,891 and 1,059,058 shares at June
30, 1999 and December 31, 1998, respectively) (9,226) (9,800)
Unallocated common stock held by Bank's ESOP (1,076) (1,222)
Unearned common stock held by Bank's Recognition Plans and Trusts (255) (263)
Unearned compensation (686) (361)
--------- ---------
Total stockholders' equity 113,909 119,867
--------- ---------
Total liabilities and stockholders' equity $2,796,440 $2,395,523
========= =========
See accompanying notes to consolidated financial statements.
3
HAVEN BANCORP, INC.
Consolidated Statements of Income
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
Interest income:
Mortgage loans $27,630 $23,591 $52,515 $45,330
Other loans 786 823 1,636 1,610
Mortgage-backed securities 12,686 9,573 25,336 18,504
Money market investments 39 42 69 146
Debt and equity securities 3,095 2,703 5,160 6,105
------ ------ ------ ------
Total interest income 44,236 36,732 84,716 71,695
------ ------ ------ ------
Interest expense:
Deposits:
Savings accounts 5,015 2,700 9,684 5,116
NOW accounts 419 341 743 602
Money market accounts 440 514 859 937
Certificate accounts 12,071 12,615 23,824 24,478
Borrowed funds 8,371 6,412 15,480 12,918
------ ------ ------ ------
Total interest expense 26,316 22,582 50,590 44,051
------ ------ ------ ------
Net interest income before provision for loan losses 17,920 14,150 34,126 27,644
Provision for loan losses 880 650 1,555 1,320
------ ------ ------ ------
Net interest income after provision for loan losses 17,040 13,500 32,571 26,324
------ ------ ------ ------
Non-interest income:
Loan fees and servicing income 422 326 927 844
Mortgage banking income (loss) 677 (270) 2,945 (270)
Savings/checking fees 3,839 2,319 6,964 4,130
Net gain on sales of interest-earning assets 1,234 54 1,569 406
Insurance annuity and mutual fund fees 2,168 1,314 4,143 2,501
Other 688 663 1,278 1,254
------ ------ ------ ------
Total non-interest income 9,028 4,406 17,826 8,865
------ ------ ------ ------
Non-interest expense:
Compensation and benefits 10,927 9,357 21,967 16,934
Occupancy and equipment 3,439 2,381 6,783 4,600
Real estate owned operations, net (33) (88) (184) (39)
Federal deposit insurance premiums 254 222 508 429
Other 6,142 4,332 11,781 8,347
------ ------ ------ ------
Total non-interest expense 20,729 16,204 40,855 30,271
------ ------ ------ ------
Income before income tax expense 5,339 1,702 9,542 4,918
Income tax expense 2,011 471 3,614 1,538
------ ------ ------ ------
Net income $3,328 $1,231 $5,928 $3,380
====== ====== ====== ======
Net income per common share: Basic $ 0.38 $ 0.14 $ 0.68 $ 0.40
====== ====== ====== ======
Diluted $ 0.37 $ 0.13 $ 0.66 $ 0.37
====== ====== ====== ======
See accompanying notes to consolidated financial statements.
4
HAVEN BANCORP, INC.
Consolidated Statements of Changes in Stockholders' Equity
Six Months Ended June 30, 1999 (Unaudited)
Accumulated
Other Unallocated Unearned
Additional Comprehen- Common Common
Common Paid-In Retained sive Treasury Stock Held Stock Held Unearned
Total Stock Capital Earnings Income Stock by ESOP by RRP Compensation
(Dollars in thousands) ----- ------ ---------- -------- ---------- -------- ----------- ---------- ------------
Balance at December 31, 1998 $119,867 100 51,383 79,085 945 (9,800) (1,222) (263) (361)
Comprehensive Income:
Net income 5,928 - - 5,928 - - - - -
Other comprehensive income, net of tax
Net unrealized depreciation on
certain securities, net of
reclassification adjustment (1) (11,635) - - - (11,635) - - - -
-------
Comprehensive Loss (5,707) - - - - - - - -
Dividends declared (note 5) (1,341) - - (1,341) - - - - -
Treasury stock issued for RRP and deferred
compensation plan (40,177 shares) - - 304 - - 249 - (20) (533)
Stock options exercised, net of tax
effect (55,990 shares) (note 4) 364 - 39 - - 325 - - -
Allocation of ESOP stock and
amortization of award of RRP stock
and related tax benefits 518 - 344 - - - 146 28 -
Amortization of deferred compensation plan 208 - - - - - - - 208
------- --- ------ ------ ------ ------ ------ ----- -----
Balance at June 30, 1999 $113,909 100 52,070 83,672 (10,690) (9,226) (1,076) (255) (686)
======= === ====== ====== ====== ====== ====== ===== =====
(1) Disclosure of Reclassification Adjustment:
(in thousands) Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
------------------ ----------------
Net unrealized holding loss arising during period $(9,043) $(12,302)
Less: reclassification adjustment for net gains included in net income 460 667
----- ------
Net unrealized loss on securities available for sale $(8,583) $(11,635)
===== ======
See accompanying notes to consolidated financial statements.
5
HAVEN BANCORP, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Six months ended
June 30,
------------------
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 5,928 $ 3,380
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of cost of stock benefit plans 726 1,049
Amortization of net deferred loan origination fees (351) (19)
Amortization of premiums and accretion of discounts on loans,
mortgage-backed and debt securities 96 (994)
Provision for loan losses 1,555 1,320
Provision for losses on real estate owned 20 30
Deferred income taxes (243) (465)
Net gain on sales of interest-earning assets (835) (406)
Loans originated and purchased for sale, net of proceeds from sales (30,736) (69,585)
Depreciation and amortization 2,224 1,896
(Increase) decrease in accrued interest receivable (3,261) 346
(Decrease) increase in due to broker (97,458) 20,000
Increase in other liabilities 26,339 8,772
Decrease (increase) in other assets 7,843 (10,682)
------ ------
Net cash used in operating activities (88,153) (45,358)
------ ------
Cash flows from investing activities:
Net increase in loans (239,256) (149,918)
Proceeds from disposition of assets (including REO) 59 440
Purchases of securities available for sale (377,740) (337,436)
Principal repayments and maturities on securities available for sale 118,649 78,607
Proceeds from sales of securities available for sale 129,678 182,263
Principal repayments, maturities and calls on debt securities
held to maturity - 21,020
Principal repayments on mortgage-backed securities held to maturity - 24,834
Purchases of FHLB stock, net (1,270) (5,255)
Net decrease (increase) in premises and equipment 239 (9,277)
------- -------
Net cash used in investing activities (369,641) (194,722)
------- -------
Cash flows from financing activities:
Net increase in deposits 222,081 197,903
Net increase (decrease) in short term borrowed funds 227,762 (12,295)
Increase in long term borrowed funds 28,145 70,845
Payment of common stock dividends (1,334) (1,228)
Stock options exercised 366 425
------- -------
Net cash provided by financing activities 477,020 255,650
------- -------
Net increase in cash and cash equivalents 19,226 15,570
Cash and cash equivalents at beginning of period 44,808 40,306
------ -------
Cash and cash equivalents at end of period $64,034 $55,876
====== =======
Supplemental information:
Cash paid during the period for:
Interest $50,286 $43,175
Income taxes 2,203 1,631
Additions to real estate owned 622 434
Securities purchased, not yet received - 30,000
Mortgage-backed securities and debt securities held to
maturity transferred to securities available for sale - 183,639
======= =======
See accompanying notes to consolidated financial statements.
6
HAVEN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION. The accompanying unaudited
consolidated financial statements include the accounts of Haven
Bancorp, Inc. ("Haven Bancorp" or the "Company") and its wholly-
owned subsidiary, CFS Bank ("CFS" or the "Bank") and subsidiaries,
as of June 30, 1999 and December 31, 1998 and for the three-month
and six-month periods ended June 30, 1999 and 1998, respectively.
Material intercompany accounts and transactions have been
eliminated in consolidation. Certain reclassifications have been
made to prior period amounts to conform to the current period
presentation.
The accompanying unaudited 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. In the opinion of management, all
necessary adjustments, consisting only of normal recurring accruals
necessary for a fair presentation, have been included. The results
of operations for the three-month and six-month periods ended June
30, 1999 are not necessarily indicative of the results that may be
expected for the entire fiscal year.
These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and
notes thereto included in the Company's Annual Report to
Stockholders for the fiscal year ended December 31, 1998.
7
NOTE 2 - SECURITIES AVAILABLE FOR SALE.
The amortized cost and estimated fair values of securities
available for sale at June 30, 1999 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In thousands)
Debt and equity securities available for sale:
U.S. Government and Agency obligations $ 111,285 190 (2,275) 109,200
Corporate debt securities 86,020 - (10) 86,010
Preferred Stock 10,650 - (285) 10,365
------- ----- ------ -------
207,955 190 (2,570) 205,575
------- ----- ------ -------
MBSs available for sale:
GNMA Certificates 370 5 - 375
FNMA Certificates 133,868 394 (2,930) 131,332
FHLMC Certificates 40,170 411 (123) 40,458
CMOs and REMICS 635,515 826 (13,445) 622,896
------- ----- ------ -------
809,923 1,636 (16,498) 795,061
--------- ----- ------ ---------
Total $1,017,878 1,826 (19,068) 1,000,636
======= ===== ====== =======
The net unrealized loss on securities available for sale at June
30, 1999, was reported as a separate component of stockholders'
equity in the amount of $10.7 million, which is net of a tax effect
of $6.5 million.
NOTE 3 - HAVEN CAPITAL TRUST II. On May 26, 1999, Haven Capital
Trust II, a Delaware business trust (the "Trust"), completed the
offering of $22.0 million of 10.25% Capital Securities (the
"Capital Securities"). On June 18, 1999, an additional $3.3
million of Capital Securities were issued in connection with the
exercise of the over-allotment option by the underwriters. The
Capital Securities are included in borrowed funds in the
consolidated statement of financial condition. The Company is the
owner of all of the beneficial interests represented by the common
securities of the Trust (the "Common Securities" and together with
the Capital Securities, the "Trust Securities"). The Trust exists
for the sole purpose of issuing the Trust Securities and investing
the proceeds thereof in the 10.25% Junior Subordinated Deferrable
Interest Debentures (the "Junior Subordinated Debentures"), issued
by the Company pursuant to an indenture, which Junior Subordinated
Debentures are scheduled to mature on June 30, 2029. The Capital
Securities have a mandatory redemption provision which is triggered
by optional prepayment of the Junior Subordinated Debentures.
Chase Manhattan Bank is the Property Trustee of the Trust. During
the quarter, $21.5 million of the proceeds from the Capital
Securities was contributed to the Bank to support the Bank's in-
store supermarket banking expansion. The remainder of the proceeds
will be used for general corporate purposes.
8
NOTE 4 - STOCK PLANS. Changes in outstanding options for the
benefit of directors, officers and other key employees of the Bank
for the six months ended June 30, 1999 are as follows:
Weighted Average
Options Exercise Price
------- ----------------
Balance at December 31, 1998 1,305,268 9.44
Granted 181,500 13.78
Forfeited (10,000) 25.70
Exercised (55,990) 6.53
--------- -----
Balance at June 30, 1999 1,420,778 9.99
========= =====
Shares exercisable at June 30, 1999 1,115,376 8.25
========= =====
NOTE 5 - DIVIDENDS PAYABLE. On June 23, 1999, the Company's Board
of Directors approved a quarterly cash dividend of $0.075 per
share, payable on July 23, 1999, to shareholders of record as of
July 2, 1999.
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the
Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at
fair value. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use
of the derivative and the resulting designation. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000 and does
not require restatement of prior periods. Management of the
Company currently believes the implementation of SFAS No. 133 will
not have a material impact on the Company's financial condition or
results of operations.
NOTE 7 - NET INCOME PER SHARE OF COMMON STOCK. There were
8,723,706 basic shares outstanding and 9,076,119 diluted shares
outstanding for the three months ended June 30, 1999. There were
8,686,380 basic shares outstanding and 9,047,780 diluted shares
outstanding for the six months ended June 30, 1999. The weighted
average number of shares outstanding does not include 215,300
unallocated shares which are owned by the Employee Stock Ownership
Plan ("ESOP") as of June 30, 1999 in accordance with American
Institute of CPAs ("AICPA") Statement of Position ("SOP") 93-6,
9
"Employers' Accounting for ESOPs". Basic EPS excludes dilution and
is computed by dividing income available to common stockholders by
the weighted average number of shares outstanding for the relevant
period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
entity.
NOTE 8 - COMPREHENSIVE (LOSS) INCOME - Comprehensive loss was $5.3
million and $5.7 million for the three month and six month periods
ended June 30, 1999, respectively, and comprehsensive income was
$4.0 million and $4.9 million for the three month and six month
periods ended June 30, 1998, respectively.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Haven Bancorp, Inc. ("Haven Bancorp" or the "Company") is the
holding company for CFS Insurance Agency, Inc. and CFS Bank ("CFS"
or the "Bank"), a federally chartered stock savings bank. CFS
converted from a mutual to a stock savings bank on September 23,
1993 in conjunction with the issuance of the Bank's capital stock
to Haven Bancorp.
Haven Bancorp's business currently consists primarily of the
business of the Bank. The Bank's principal business has been and
continues to be attracting retail deposits from the general public
and investing those deposits, together with funds generated from
operations primarily in one- to four-family, owner occupied
residential mortgage loans. In addition, the Bank will invest in
debt, equity and mortgage-backed securities ("MBSs") to supplement
its lending portfolio. The Bank also invests, to a lesser extent,
in multi-family residential mortgage loans, commercial real estate
loans and other marketable securities. The Bank's results of
operations are dependent primarily on its net interest income,
which is the difference between the interest income earned on its
loan and securities portfolios and its cost of funds, which
primarily consist of the interest paid on its deposits and borrowed
funds. The Bank's net income also is affected by its non-interest
income, including mortgage banking income, its provision for loan
losses and operating expenses consisting primarily of compensation
and benefits, occupancy and equipment, real estate owned
operations, net, federal deposit insurance premiums and other
general and administrative expenses. The earnings of the Bank are
significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, and to
a lesser extent, by government policies and actions of regulatory
authorities.
ANALYSIS OF CHANGES IN FINANCIAL CONDITION FROM DECEMBER 31, 1998
TO JUNE 30, 1999
ASSETS
Total assets increased by $400.9 million, or 16.7% to $2.80 billion
at June 30, 1999 from $2.40 billion at December 31, 1998.
Securities available for sale ("AFS") increased by $111.4 million,
or 12.5% to $1.0 billion at June 30, 1999 from $889.3 million at
December 31, 1998 primarily due to purchases for the AFS portfolio
under a leverage program using the additional capital provided by
the proceeds of the $25.3 million Capital Securities issued by
Haven Capital Trust II in the second quarter of 1999. During the
six months ended June 30, 1999, the Bank purchased $248.0 million
11
of MBSs and $129.8 million of debt and equity securities. The
emphasis on MBS securities was due to the availability of more
favorable rates and shorter durations. These increases were
partially offset by sales and principal payments of $129.7 million
and $118.6 million, respectively. During the quarter ended June
30, 1999, the Bank purchased $111.1 million of MBSs and $74.7
million of debt and equity securities for its AFS portfolio, of
which $78.0 million related to investments made with the proceeds
of Haven Capital Trust II and for the related leverage strategy.
These increases were partially offset by sales and principal
repayments of $58.5 million and $54.2 million, respectively, for
the quarter.
Net loans increased by $237.6 million, or 18.3% to $1.53 billion at
June 30, 1999 from $1.30 billion at December 31, 1998. Loan
originations during the six month period ended June 30, 1999
totaled $676.2 million (comprised of $587.3 million of residential
one- to four-family mortgage loans, $5.5 million of equity loans
and lines of credit, $54.8 million of multi-family loans, $26.6
million of commercial real estate loans and $2.1 million of
construction loans). Originations of residential one- to four-
family mortgage loans included purchases of $277.9 million of
residential loans in the period. Residential loans originated or
purchased for sale in the secondary market for the six months ended
June 30, 1999 totaled $309.1 million. During the first half of
1999, the Bank sold $278.3 million of residential loans on a
servicing released basis to third party investors. During the
first half of 1999, principal repayments totaled $106.7 million.
Loan originations during the quarter ended June 30, 1999, totaled
$346.3 million (comprised of $294.5 million of residential one- to
four-family mortgage loans, $2.4 million of equity loans and lines
of credit, $28.0 million of multi-family loans and $21.4 million of
commercial real estate loans). Residential loans originated or
purchased for sale in the secondary market for the quarter ended
June 30, 1999, totaled $148.5 million. During the quarter ended
June 30, 1999, principal repayments totaled $53.4 million.
LIABILITIES
Deposits increased by $222.1 million, or 12.9% to $1.94 billion at
June 30, 1999 from $1.72 billion at December 31, 1998 primarily due
to deposit inflows in the Bank's supermarket branches. Over the
past three years, the Bank's efforts have focused on establishing
a supermarket branch structure by opening sixty supermarket
branches in New York, New Jersey and Connecticut. An additional
branch was opened in July 1999 and two additional branches are
scheduled to open in the fourth quarter of 1999. Deposits in the
supermarket branches totaled $700.4 million at June 30, 1999
compared to $504.0 million at December 31, 1998. The Bank had
sixty supermarket bank branches as of June 30, 1999 compared to
fifty-seven supermarket branches at December 31, 1998. Core
12
deposits (comprised of checking, savings and money market accounts)
were equal to 54.8% of total in-store branch deposits at June 30,
1999 compared to 45.6% in the Bank's eight traditional branches.
Core deposits for the supermarket branches included $239.6 million
of "Liquid Asset" account balances at June 30, 1999. This account
was introduced at the supermarket branches in the second quarter of
1998 and currently pays an initial rate of 4.25% for balances over
$2,500. Overall, core deposits represented 50.6% of total deposits
at June 30, 1999 compared to 47.7% at December 31, 1998. Borrowed
funds increased by $255.9 million, or 58.1% to $696.3 million at
June 30, 1999 from $440.3 million at December 31, 1998 primarily
due to the funding requirements for loan origination volume and
wholesale purchases of CFS Mortgage, the Bank's residential lending
division. In addition, during the second quarter, the Bank
completed a leverage program requiring additional borrowings of
$78.0 million to fund purchases for the AFS portfolio to offset the
additional interest expense resulting from the $25.3 million of
Haven Capital Trust II preferred securities.
STOCKHOLDERS' EQUITY
Haven Bancorp's stockholders' equity decreased to $113.9 million at
June 30, 1999 from $119.9 million at December 31, 1998. The
decrease in stockholders' equity was due to a reduction of $11.6
million in the unrealized gain on securities available for sale and
dividends declared totaling $1.3 million. The decrease in the
unrealized gain on AFS securities is the result of an increase in
interest rates during the six months ended June 30, 1999 as
evidenced by the five year treasury note which increased 111 basis
points from December 31, 1998. These decreases were partially
offset by net income of $5.9 million for the six months ended June
30, 1999, and by $1.1 million in amortization of awards of shares
of stock by the Bank's RRPs, the amortization of the deferred
compensation plan, and stock options exercised.
13
NON-PERFORMING ASSETS
The following table sets forth information regarding all non-
accrual loans (which consist of loans 90 days or more past due and
restructured loans that have not yet performed in accordance with
their modified terms for the required six-month seasoning period),
restructured loans and real estate owned.
June 30, December 31,
(Dollars in Thousands) 1999 1998
-------- ------------
Non-accrual loans
One- to four-family $ 5,567 3,779
Cooperative 217 367
Multi-family 617 308
Non-residential and other 1,919 2,074
------ ------
Total non-accrual loans 8,320 6,528
------ ------
Restructured loans
One- to four-family 319 544
Cooperative 180 183
Multi-family 244 1,130
------ ------
Total restructured loans 743 1,857
------ ------
Total non-performing loans 9,063 8,385
------ ------
REO, net
One- to four-family 370 66
Cooperative 133 38
Non-residential and other 98 121
------ ------
Total REO 601 225
Less allowance for REO (20) (25)
------ ------
REO, net 581 200
------ ------
Total non-performing assets $ 9,644 8,585
====== ======
Non-performing loans to total loans 0.59% 0.64%
Non-performing assets to total assets 0.34 0.36
Non-performing loans to total assets 0.32 0.35
14
The increase in non-performing assets was primarily due to an
increase of $678,000 in non-performing loans from December 31, 1998
to June 30, 1999 primarily due to the growth in the mortgage
portfolio. The ratio of non-performing loans to total loans
decreased primarily due to the increase of $238.6 million in total
loans. The decrease in the ratio of non-performing assets to total
assets was primarily due to the increase of $400.9 million in total
assets. The ratio of non-performing loans to total assets
decreased primarily due to the increase of $400.9 million in total
assets which offset an increase of $678,000 in non-performing
loans.
The Bank maintains an allowance for loan losses and an allowance
for REO, which it believes are adequate for possible losses at each
period end. Management's judgment as to possible losses is based
on its review of the loan and REO portfolios and its judgment
regarding prevailing and anticipated economic conditions and a
variety of other factors which have an impact on those portfolios.
Although management believes that the allowances are adequate as of
the period end, additional provisions may be required in the
future.
15
ALLOWANCE FOR LOAN LOSSES
The following table sets forth the changes in the allowance for
loan losses for the six months ended June 30, 1999 and 1998:
June 30, June 30,
(Dollars in Thousands) 1999 1998
-------- --------
Balance at beginning of period $13,978 12,528
Charge-offs:
Residential (835) (218)
Cooperative - (256)
Multi-family - (708)
Non-residential and other - (285)
------ ------
Total charge-offs (835) (1,467)
------ ------
Recoveries 318 934
------ ------
Net charge-offs (517) (533)
Provision for loan losses 1,555 1,320
------ ------
Balance at end of period $15,016 13,315
====== ======
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.07% 0.09%
Ratio of allowance for loan losses to
total loans at the end of the period 0.97 1.02
Ratio of allowance for loan losses to non-
performing loans at the end of the period 165.68 137.04
The ratio of net charge-offs to average loans outstanding during
the first half of 1999 decreased compared to the same period in
1998 due to the reduction in net charge-offs for the first half of
1999 compared to the first half of 1998. In addition to the
reduction in net charge-offs, average loans outstanding increased
$241.6 million, or 19.7% to $1.47 billion for the first half of
1999 from $1.23 billion for the same period in 1998. The ratio of
allowance for loan losses to total loans decreased for the period
due to the increase in average loans outstanding for the six months
ended June 30, 1999. The ratio of allowance for loan losses to
non-performing loans increased between the periods due to an
increase of $1.7 million in the allowance for loan losses and a
decrease of $600,000 in non-performing loans. The Bank's allowance
for loan losses was $15.0 million and $13.3 million at June 30,
1999 and June 30, 1998, respectively, while non-performing loans
totaled $9.1 million and $9.7 million, respectively, on those
dates.
16
ASSET/LIABILITY MANAGEMENT
The Company has attempted to reduce its exposure to interest rate
risk through the origination and purchase of ARM loans, debt
securities and MBSs and maintaining an AFS portfolio. During the
first half of 1999, the Bank originated or purchased for its
portfolio $204.2 million of residential adjustable-rate mortgage
loans and $83.4 million of adjustable-rate multi-family, commercial
real estate and construction loans. The Company expects to continue
its adjustable-rate mortgage loan originations through its CFS
Mortgage division. During the six month period, the Bank purchased
$427.4 million of fixed rate debt securities and MBSs to take
advantage of higher yields and shorter durations when compared to
rates offered on adjustable-rate securities. At June 30, 1999,
$236.7 million, or 23.7% of the Company's AFS portfolio were
adjustable-rate securities and $764.0 million or 76.3% of the
portfolio were fixed-rate securities.
Historically, the Company has been able to maintain a substantial
level of core deposits (comprised of checking, savings and money
market accounts) which the Company believes helps to limit interest
rate risk by providing a relatively stable, low cost, long-term
funding base. At June 30, 1999, core deposits represented 50.6% of
deposits compared to 47.7% of deposits at December 31, 1998. Core
deposits included $239.6 million of "Liquid Asset" account balances
at June 30, 1999. This account was introduced at the supermarket
branches in the second quarter of 1998 and currently pays an
initial rate of 4.25% for balances over $2,500. During the first
half of 1999, savings accounts increased by $99.5 million, net of
interest, and certificates of deposit increased by $60.7 million,
net of interest. The number of checking accounts increased by
23,487, or 15.5% to 174,926 at June 30, 1999 from 151,439 at
December 31, 1998. Most of the increase, 22,917 accounts, is
attributable to the Bank's supermarket bank branches. The Company
expects to attract a higher percentage of core deposits from its
supermarket branch locations as the supermarket branching program
continues to grow and mature.
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required to maintain minimum levels of liquid assets as
defined by regulations of the Office of Thrift Supervision ("OTS").
This requirement, which may be varied by the OTS depending upon
economic conditions and deposit flows, is based upon a percentage
of withdrawable deposits and short-term borrowings. The required
ratio is currently 4%. The Bank's ratio was 5.38% at June 30, 1999
compared to 4.24% at December 31, 1998.
The Company's primary sources of funds are deposits, advances from
the Federal Home Loan Bank of New York ("FHLB-NY"), principal and
interest payments on loans and MBSs and retained earnings.
17
Proceeds from the sale of AFS securities and loans held for sale
are also a source of funding, as are, to a lesser extent, the sales
of insurance, annuities and securities brokerage activities
conducted by the Company's subsidiary, CFS Insurance Agency, Inc.
and the Bank's subsidiary, CFS Investments, Inc. ("CFSI"). While
maturities and scheduled amortization of loans and MBSs are
somewhat predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates,
economic conditions, competition and regulatory changes.
The Company's most liquid assets are cash and short term
investments. The levels of these assets are dependent on the
Company's operating, financing, lending and investing activities
during any given period. At June 30, 1999 and December 31, 1998,
cash and short-term investments totaled $64.0 million and $44.8
million, respectively.
The Company and the Bank have other sources of liquidity which
include debt securities maturing within one year, loans held for
sale and AFS securities. Other sources of funds include FHLB
advances, which at June 30, 1999 totaled $444.6 million. An
additional source of funds are sales of securities under repurchase
agreements, which totaled $200.1 million at June 30, 1999.
As of June 30, 1999, the Bank exceeded all regulatory capital
requirements as detailed in the following table:
Tangible Capital Core Capital Risk-Based Capital (3)
-------------------- -------------------- -----------------------
Amount Ratio (1) Amount Ratio (1) Amount Ratio (1)
------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
Capital for regulatory purposes $160,475 5.71% $160,475 5.71% $174,291 12.20%
Minimum regulatory requirement 56,238 2.00 112,476 4.00(2) 114,304 8.00
------- ---- ------- ---- ------- ----
Excess $104,237 3.71% $ 47,999 1.71% $ 59,987 4.20%
======= ==== ======= ==== ======= ====
(1) For tangible and core capital, the ratio is to adjusted total
assets. For risk-based capital, the ratio is to total risk-
weighted assets.
(2) Under the OTS's prompt corrective action regulations, the core
capital requirement was effectively increased to 4.00% since OTS
regulations stipulate that an institution with less than 4.00% core
capital will be deemed to be classified as "undercapitalized".
(3) The OTS regulations require certain institutions with more
than a "normal level" of interest rate risk to maintain capital in
addition to the 8.0% risk-based capital requirement. The Bank
currently is not, and does not anticipate that its risk-based
18
capital requirement will be materially affected as a result of this
OTS requirement. The OTS has indefinitely deferred the
implementiation of the interest rate risk component in the
computation of an insitution's risk-based capital requirement.
ANALYSIS OF CORE EARNINGS
The Company's profitability is primarily dependent upon net inter-
est income, which represents the difference between income on
interest-earning assets and expenses on interest-bearing
liabilities. Net interest income is dependent on the average
balances and rates received on interest-earning assets and the
average balances and rates paid on interest-bearing liabilities.
Net income is further affected by non-interest income, non-interest
expense and income taxes.
19
The following tables set forth certain information relating to the
Company's average consolidated statements of financial condition
and consolidated statements of income for the three months and six
months ended June 30, 1999 and 1998, respectively, and reflects the
average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived by dividing
income or expense annualized by the average balance of assets or
liabilities, respectively, for the periods shown. Average balances
were derived from average daily balances. The average balance of
loans includes loans on which the Company has discontinued accruing
interest. The yields and costs include fees which are considered
adjustments to yields.
Three months ended June 30,
1999 1998
------------------------ ------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- -------
(Dollars in thousands)
Assets:
Interest-earning assets:
Mortgage loans $1,487,501 $27,630 7.43% $1,250,170 $23,591 7.55%
Other loans 34,045 786 9.23 32,841 823 10.02
Mortgage-backed securities 789,405 12,686 6.43 565,144 9,573 6.78
Money market investments 2,214 39 7.05 2,683 42 6.26
Debt and equity securities 184,011 3,095 6.73 161,806 2,703 6.68
--------- ------ --------- ------
Total interest-earning assets 2,497,176 44,236 7.09 2,012,644 36,732 7.30
Non-interest earning assets 166,919 ------ 147,818 ------
--------- ---------
Total assets 2,664,095 2,160,462
========= =========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings accounts 637,276 5,015 3.15 411,048 2,700 2.63
Certificate accounts 932,977 12,071 5.18 880,308 12,615 5.73
NOW accounts 238,726 419 0.70 184,101 341 0.74
Money market accounts 56,364 440 3.12 57,454 514 3.58
Borrowed funds 607,135 8,371 5.52 430,229 6,412 5.96
--------- ------ --------- ------
Total interest-bearing liabilities 2,472,478 26,316 4.26 1,963,140 22,582 4.60
Other liabilities 74,651 ------ 80,298 ------
--------- ---------
Total liabilities 2,547,129 2,043,438
Stockholders' equity 116,966 117,024
--------- ---------
Total liabilities and stockholders' equity $2,664,095 $2,160,462
========= =========
Net interest income/net interest rate spread $17,920 2.83% $14,150 2.70%
====== ==== ====== ====
Net interest earning assets/net interest margin $24,698 2.87% $49,504 2.81%
====== ==== ====== ====
Ratio of interest-earning assets to
interest-bearing liabilities 101.00% 102.52%
====== ======
20
Six months ended June 30,
1999 1998
------------------------ ------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- -------
(Dollars in thousands)
Assets:
Interest-earning assets:
Mortgage loans $1,432,368 $52,515 7.33% $1,193,544 $45,330 7.60%
Other loans 35,607 1,636 9.19 32,837 1,610 9.81
Mortgage-backed securities 775,820 25,336 6.53 551,130 18,504 6.71
Money market investments 1,865 69 7.40 5,429 146 5.38
Debt and equity securities 158,539 5,160 6.51 181,110 6,105 6.74
--------- ------ --------- ------
Total interest-earning assets 2,404,199 84,716 7.05 1,964,050 71,695 7.30
Non-interest earning assets 157,266 ------ 120,654 ------
--------- ---------
Total assets 2,561,465 2,084,704
========= =========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings accounts 606,660 9,684 3.19 397,875 5,116 2.57
Certificate accounts 912,513 23,824 5.22 852,541 24,478 5.74
NOW accounts 230,613 743 0.64 171,595 602 0.70
Money market accounts 57,175 859 3.00 56,357 937 3.33
Borrowed funds 568,617 15,480 5.44 431,489 12,918 5.99
--------- ------ --------- ------
Total interest-bearing liabilities 2,375,578 50,590 4.26 1,909,857 44,051 4.61
Other liabilities 67,392 ------ 59,185 ------
--------- ---------
Total liabilities 2,442,970 1,969,042
Stockholders' equity 118,495 115,662
--------- ---------
Total liabilities and stockholders' equity $2,561,465 $2,084,704
========= =========
Net interest income/net interest rate spread $34,126 2.79% $27,644 2.69%
====== ==== ====== ====
Net interest earning assets/net interest margin $28,621 2.84% $54,193 2.82%
====== ==== ====== ====
Ratio of interest-earning assets to
interest-bearing liabilities 101.20% 102.84%
====== ======
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS
ENDED JUNE 30, 1999 AND 1998
GENERAL. The Company reported net income of $3.3 million for the
three months ended June 30, 1999 compared to net income of $1.2
million for the three months ended June 30, 1998. The increase in
net income was primarily attributable to an increase of $3.8
million in net interest income and an increase of $4.6 million in
non-interest income. These increases were partially offset by an
increase of $4.5 million in non-interest expense from the prior
year period. Income tax expense increased $1.5 million due to an
increase of $3.6 million in pre-tax income.
INTEREST INCOME. Interest income increased by $7.5 million, or
20.4% to $44.2 million for the three months ended June 30, 1999
from $36.7 million for the three months ended June 30, 1998. The
increase was primarily the result of a $4.0 million increase in
interest income on mortgage loans, an increase of $3.1 million in
21
interest income on MBSs and an increase of $392,000 in interest
income on debt and equity securities.
Interest income on mortgage loans increased by $4.0 million, or
17.1% to $27.6 million for the three months ended June 30, 1999,
from $23.6 million for the comparable three-month period in 1998,
primarily as a result of an increase in average balances of
mortgage loans of $237.3 million partially offset by a decrease in
the average yield on mortgage loans of 12 basis points.
The increase in average balance of mortgage loans between the
periods was primarily due to mortgage originations, including
purchases, which totaled $1.20 billion for the year of 1998 and
$670.7 for the first half of 1999. The increased originations
reflect the addition of the loan production franchise of CFS
Mortgage. The decline in the average yield from the prior year was
primarily due to the general decline in market interest rates in
1998.
Interest income on MBSs increased by $3.1 million, or 32.5% to
$12.7 million for the three months ended June 30, 1999 from $9.6
million for the comparable three-month period in 1998, primarily
due to an increase in average balances of MBSs of $224.3 million
which was partially offset by a decrease in the average yield of 35
basis points.
Interest income on debt and equity securities increased by
$392,000, or 14.5% to $3.1 million for the three months ended June
30, 1999 from $2.7 million for the comparable three-month period in
1998, primarily as a result of an increase in the average balance
outstanding of $22.2 million and an increase in yield of 5 basis
points.
INTEREST EXPENSE. Interest expense increased by $3.7 million, or
16.5% to $26.3 million for the three months ended June 30, 1999
from $22.6 million for the three months ended June 30, 1998. The
increase was the result of an $1.8 million increase in interest
expense on deposits and an increase of $2.0 million in interest
expense on borrowings.
Interest on deposits increased by $1.8 million, or 11.0% to $17.9
million for the three months ended June 30, 1999 from $16.2 million
for the comparable three-month period in 1998. The increase in
interest on deposits was primarily due to the average balance which
increased by $332.4 million, or 21.7% to $1.86 billion for the
three months ended June 30, 1999 from $1.53 billion for the
comparable three-month period in 1998. The increase in deposits is
primarily attributable to the Bank's continuing supermarket banking
expansion. At June 30, 1999, the Bank had sixty supermarket bank
branches operating with combined deposits totaling $700.4 million
compared to forty-five supermarket bank branches at June 30, 1998
22
with deposits totaling $322.7 million. The increase in average
balance was primarily due to savings account balances which
increased by $226.2 million, or 55.0% to $637.3 million for the
three months ended June 30, 1999 from $411.0 million for the
comparable three-month period in 1998. Interest expense on savings
accounts increased by $2.3 million, or 85.7% to $5.0 million for
the three months ended June 30, 1999 from $2.7 million in the same
period in 1998. The average cost of savings accounts was 3.15% for
the second quarter of 1999 compared to 2.63% for the second quarter
of 1998. The increase in the average cost of savings accounts was
due to the "Liquid Asset" account which was introduced at the
supermarket bank branches during the second quarter of 1998. This
account currently pays an initial rate of 4.25% for balances over
$2,500. The Bank's supermarket branches had $303.2 million in
savings balances as of June 30, 1999, including $239.6 million in
liquid asset accounts, compared to $87.6 million as of June 30,
1998, including $38.4 million in liquid asset accounts. Interest
expense on certificate accounts decreased by $544,000, or 4.3% to
$12.1 million for the three months ended June 30, 1999 from $12.6
million in the same period in 1998. This was primarily due to the
decline in the average cost of these deposits to 5.18% for the
period ended June 30, 1999 from 5.73% for the same period last
year. The average cost of all deposits was 3.85% for the three
months ended June 30, 1999 compared to 4.22% for the second quarter
of 1998 reflecting the general decline in market interest rates.
Interest on borrowed funds increased by $2.0 million, or 30.6% to
$8.4 million for the three months ended June 30, 1999 from $6.4
million for the comparable three-month period in 1998. Borrowed
funds on an average basis increased by $176.9 million between the
periods due primarily to the addition of short-term FHLB advances
and securities sold under agreements to repurchase during 1999 in
order to fund loans originated and held for sale by CFS Mortgage
and to complement deposit growth as a funding mechanism for
mortgage loan originations. Approximately $78.0 million of the
increase in borrowed funds was to fund the purchase of securities
for the AFS portfolio for the leverage program using the additional
capital provided by the proceeds from the Haven Capital Trust II
capital securities. The average rate paid on borrowings decreased
to 5.52% for the three months ended June 30, 1999 from 5.96% for
the prior year period due to a decline in market rates in 1998.
NET INTEREST INCOME. Net interest income increased by $3.8
million, or 26.6% to $17.9 million for the three months ended June
30, 1999 from $14.2 million for the three months ended June 30,
1998. The increase is primarily due to the total average balance
of interest-earning assets which increased by $484.5 million, or
24.1% to $2.50 billion for the three months ended June 30, 1999
from $2.01 billion for the same period last year. This growth is
mainly due to growth in the Bank's residential mortgage loan and
mortgage-backed securities portfolios. This increase was partially
23
offset by the average yield on interest-earning assets which
decreased to 7.09% for the three month period ended June 30, 1999
from 7.30% for the three-month period in 1998 caused by the general
decline in market interest rates in 1998. The average cost of
interest-bearing liabilities decreased to 4.26% from 4.60% for the
three months ended June 30, 1999 and 1998, respectively. The net
interest spread was 2.83% for the three months ended June 30, 1999
compared to 2.70% for the comparable period in 1998.
PROVISION FOR LOAN LOSSES. The Bank provided $880,000 for loan
losses for the three months ended June 30, 1999 compared to
$650,000 for the comparable three-month period in 1998. The
provision for loan losses is established based on management's
periodic review and evaluation of the loan portfolio and reflects
the overall growth in the Bank's loan portfolio.
NON-INTEREST INCOME. Non-interest income increased by $4.6
million, or 104.9% for the three months ended June 30, 1999 to $9.0
million from $4.4 million for the comparable three-month period in
1998. Non-interest income for the second quarter of 1999 included
$677,000 of mortgage banking income compared to a mortgage banking
loss of $270,000 in the second quarter of 1998, which included the
first two months of operations of CFS Mortgage. Savings and
checking fees increased by $1.5 million, or 65.5% to $3.8 million
for the second quarter of 1999 compared to $2.3 million for the
same period last year. The significant increase in savings and
checking fees is primarily due to the number of checking accounts
which increased by 49,622, or 39.6% to 174,926 accounts at June 30,
1999 from 125,304 accounts at June 30, 1998. A significant portion
of this growth is attributable to the Bank's supermarket banking
program. The supermarket branches generated savings and checking
fees of $2.9 million for the second quarter of 1999 compared to
$1.5 million for the second quarter of last year. Insurance,
annuity and mutual fund fees for the second quarter of 1999
increased by $854,000, or 65.0% to $2.2 million from $1.3 million
for the same period last year which included $1.2 million in
revenue from sales originating from supermarket branches compared
to $390,000 for the same period last year. The 1999 second quarter
also included $285,000 in revenues from CFS Insurance, Inc. which
was acquired in November 1998. The net gain realized on the sale
of interest earning assets was $1.2 million for the three months
ended June 30, 1999 compared to $54,000 for the same period last
year. The 1999 net gain included approximately $0.5 million in
gains on the sale of $20.5 million of adjustable rate mortgage
loans which were sold servicing retained and $0.7 million in gains
on the sale of AFS securities.
NON-INTEREST EXPENSE. Non-interest expense increased by $4.5
million, or 27.9% for the three months ended June 30, 1999 to $20.7
million from $16.2 million for the comparable three-month period in
1998. The increase was due primarily to the addition of the
24
expenses of the loan production franchise of CFS Mortgage and the
Bank's expansion of its supermarket banking program from forty-five
branches at June 30, 1998 to sixty branches at June 30, 1999. As
a result of the increased headcount, compensation and benefits
costs increased by $1.6 million, or 16.8% to $10.9 million for the
three months ended June 30, 1999 from $9.4 million for the same
period last year. Occupancy and equipment costs increased by $1.1
million, or 44.4% to $3.4 million for the second quarter of 1999
from $2.4 million for the same period last year primarily due to
the addition of fifteen supermarket branches as well as the
expansion of the Bank's residential lending function through CFS
Mortgage. Occupancy and equipment expense also increased as a
result of the purchase of the Company's new headquarters, which was
completed in the third quarter of 1998. Other operating costs
increased by $1.8 million, or 41.8% to $6.1 million for the three
months ended June 30, 1999 from $4.3 million for the same period
last year also due to the addition of CFS Mortgage and the
additional supermarket branches.
INCOME TAX EXPENSE. Income tax expense was $2.0 million for an
effective tax rate of 37.7% for the three months ended June 30,
1999 compared to income tax expense of $471,000 for an effective
tax rate of 27.7% for the comparable period in 1998. The 1998
quarter included a reversal of previously provided income taxes.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS
ENDED JUNE 30, 1999 AND 1998
GENERAL. The Company reported net income of $5.9 million for the
six months ended June 30, 1999 compared to net income of $3.4
million for the six months ended June 30, 1998. The increase in
net income was primarily attributable to an increase of $6.5
million in net interest income and an increase of $9.0 million in
non-interest income. These increases were partially offset by an
increase of $10.6 million in non-interest expense and the provision
for loan losses which increased $235,000. Income tax expense
increased $2.1 million from the same period last year due to an
increase of $4.6 million in pre-tax income.
INTEREST INCOME. Interest income increased by $13.0 million, or
18.2% to $84.7 million for the six months ended June 30, 1999 from
$71.7 million for the six months ended June 30, 1998. The increase
was primarily the result of a $7.2 million increase in interest
income on mortgage loans and an increase of $6.8 million in
interest income on MBS securities. These increases were partially
offset by decreases in interest income on debt and equity
securities and money market investments of $945,000 and $77,000,
respectively.
Interest income on mortgage loans increased by $7.2 million, or
15.9% to $52.5 million for the six months ended June 30, 1999, from
25
$45.3 million for the comparable six-month period in 1998. The
increase was primarily the result of an increase in the average
balance of mortgage loans of $238.8 million, partially offset by a
decline in the average yield on mortgage loans of 27 basis points
from the first six months of 1998. The increase in the average
balance of mortgage loans between the periods was primarily due to
mortgage originations, including purchases, for the entire year of
1998 and the first six months of 1999 which totaled $1.20 billion
and $670.7 million, respectively. The increased originations
reflect the addition of the loan production franchise of CFS
Mortgage during the second quarter of 1998. The originations for
both periods were partially offset by principal payments of $279.7
million and $96.6 million, respectively. The decline in the
average yield from the prior year was primarily due to the general
decline in market interest rates in 1998.
Interest income on MBSs increased by $6.8 million, or 36.9% to
$25.3 million for the six months ended June 30, 1999 from $18.5
million for the comparable six-month period in 1998 primarily due
to an increase of $224.7 million in the average balance of MBSs for
the 1999 period compared to the 1998 period. During the first six
months of 1999, the Bank purchased $248.0 million of MBSs for its
AFS portfolio which were partially offset by sales of MBSs totaling
$112.5 million.
Interest income on debt and equity securities decreased by
$945,000, or 15.5% to $5.2 million for the six months ended June
30, 1999 from $6.1 million for the comparable six-month period in
1998 primarily as a result of a decrease in average balances of
$22.6 million and a 23 basis point decrease in the average yield.
During the first six months of 1999, the Bank purchased $129.8
million of debt and equity securities for the AFS portfolio, which
was partially offset by sales totaling $17.2 million. The emphasis
on purchases of MBS securities over debt and equity securities for
the AFS portfolio was due to the availability of competitive rates
along with shorter durations.
INTEREST EXPENSE. Interest expense increased by $6.5 million, or
14.8% to $50.6 million for the six months ended June 30, 1999 from
$44.1 million for the six months ended June 30, 1998. The increase
was the result of a $3.9 million increase in interest expense on
deposits and an increase of $2.6 million in interest expense on
borrowed funds.
Interest on deposits increased by $3.9 million, or 12.8% to $35.1
million for the six months ended June 30, 1999 from $31.1 million
for the comparable six-month period in 1998. The increase in
interest on deposits was primarily due to the increase in the
average balance of deposits by $328.6 million from $1.48 billion
for the six months ended June 30, 1998 to $1.81 billion for the six
months ended June 30, 1999. The deposit growth is primarily attri-
26
butable to the Bank's supermarket banking program. The increase in
average balance was primarily due to savings account balances which
increased by $208.8 million, or 52.5% to $606.7 million for the six
months ended June 30, 1999 from $397.9 million for the comparable
six-month period in 1998. Interest expense on savings accounts
increased by $4.6 million, or 89.3% to $9.7 million for the six
months ended June 30, 1999 from $5.1 million in the same period in
1998. The average cost of savings accounts was 3.19% for the first
six months of 1999 compared to 2.57% for the same period in 1998.
The increase in the average cost of savings accounts was due to the
"Liquid Asset" account which was introduced at the supermarket bank
branches during the second quarter of 1998. Interest expense on
certificate accounts decreased by $654,000, or 2.7% to $23.8
million for the six months ended June 30, 1999 from $24.5 million
in the same period in 1998. This was primarily due to the decline
in the average cost of these deposits to 5.22% for the period ended
June 30, 1999 from 5.74% for the same period last year. The
average cost of all deposits was 3.89% for the six months ended
June 30, 1999 compared to 4.21% for the six months ended June 30,
1998 reflecting the general decline in market interest rates.
Interest on borrowed funds increased by $2.6 million, or 19.8% to
$15.5 million for the six months ended June 30, 1999 from $12.9
million for the comparable six-month period in 1998. Borrowed
funds on an average basis increased by $137.1 million between the
periods primarily due to the addition of short-term FHLB advances
and securities sold under agreements to repurchase during 1999 in
order to complement deposit growth as a funding mechanism for
mortgage loan originations. In addition, approximately $78.0
million of the increase was to fund the purchase of securities for
the leverage program using the additional capital provided by the
proceeds from the Haven Capital Trust II capital securities. The
average rate paid on borrowings decreased to 5.44% for the six
months ended June 30, 1999 from 5.99% for the comparable prior-year
period primarily due to a decline in market rates in 1998.
NET INTEREST INCOME. Net interest income increased by $6.5
million, or 23.4% to $34.1 million for the six months ended June
30, 1999 from $27.6 million for the six months ended June 30, 1998.
The increase is primarily due to the total average balance of
interest-earning assets which increased by $440.1 million, or 22.4%
to $2.40 billion for the six months ended June 30, 1999 from $1.96
billion for the same period last year. This growth is mainly due
to growth in the Bank's residential mortgage loan and mortgage-
backed securities portfolios. This increase was partially offset
by the average yield on interest-earning assets which decreased to
7.05% for the six-month period ended June 30, 1999 from 7.30% for
the six-month period in 1998. The average cost of interest-bearing
liabilities decreased to 4.26% from 4.61% for the six months ended
June 30, 1999 and 1998, respectively, reflecting the general
decline in market interest rates in 1998. The net interest spread
27
decline in market interest rates in 1998. The net interest spread
was 2.79% for the six months ended June 30, 1999 compared to 2.69%
for the comparable period in 1998.
PROVISION FOR LOAN LOSSES. The Bank provided $1.6 million for loan
losses for the six months ended June 30, 1999 compared to $1.3
million for the comparable six-month period in 1998. The provision
for loan losses is established based on management's periodic
review and evaluation of the loan portfolio and reflects the
continued overall growth in the Bank's loan portfolio.
NON-INTEREST INCOME. Non-interest income increased by $9.0
million, or 101.1% for the six months ended June 30, 1999 to $17.8
million from $8.9 million for the comparable six-month period in
1998. Non-interest income for the first six months of 1999
included $2.9 million in mortgage banking income compared to a
mortgage banking loss of $270,000 for the same period last year
related to loans sold in the secondary market during the period.
Savings and checking fees increased by $2.8 million, or 68.6% to
$7.0 million for the first six months of 1999 compared to $4.1
million for the same period last year. The significant increase in
savings and checking fees is primarily due to the number of
checking accounts which increased as a result of the Bank's
supermarket banking program. The supermarket branches generated
savings and checking fees of $5.1 million for the first six months
of 1999 compared to $2.6 million for the comparable period last
year. Insurance, annuity and mutual fund fees for the first six
months of 1999 increased by $1.6 million, or 65.7% to $4.1 million
from $2.5 million for the same period last year which included $2.1
million in revenue from sales originating from supermarket branches
compared to $720,000 for the six months ended June 30, 1998. The
1999 results included $549,000 in revenues generated by CFS
Insurance Agency, Inc. The Bank realized net gains of $1.6 million
on the sale of interest earning assets for the six months ended
June 30, 1999 compared to $406,000 for the comparable period last
year.
NON-INTEREST EXPENSE. Non-interest expense increased by $10.6
million, or 35.0% for the six months ended June 30, 1999 to $40.9
million from $30.3 million for the comparable six-month period in
1998. The increase was due primarily to the addition of the
expenses of the loan production franchise of CFS Mortgage and the
Bank's expansion of its supermarket banking program from forty-five
branches at June 30, 1998 to sixty branches at June 30, 1999. As
a result of the increased headcount, compensation and benefits
costs increased by $5.0 million, or 29.7% to $22.0 million for the
six months ended June 30, 1999 from $16.9 million for the same
period last year. Occupancy and equipment costs increased by $2.2
million, or 47.4% to $6.8 million for the first six months of 1999
from $4.6 million for the same period last year primarily due to
the addition of fifteen supermakret branches as well as the
28
expansion of the Bank's residential lending function through CFS
Mortgage. Occupancy and equipment expense also increased as a
result of the purchase of the Company's new headquarters, which was
completed in the third quarter 1998. Other operating costs
increased by $3.4 million, or 41.1% to $11.8 million for the six
months ended June 30, 1999 from $8.3 million for the same period
last year also due to the addition of CFS Mortgage and the
additional supermarket branches.
INCOME TAX EXPENSE. Income tax expense was $3.6 million for an
effective tax rate of 37.9% for the six months ended June 30, 1999
compared to income tax expense of $1.5 million for an effective tax
rate of 31.3% for the comparable period in 1998.
COMPUTER ISSUES FOR THE YEAR 2000. Many of the Company's existing
computer systems use two digits to identify the year in the date
fields. As a result, these systems may not be able to distinguish
the year 2000 from the year 1900. Software, hardware and equipment
both within and outside the Company's direct control and with which
the Company electronically or operationally interfaces (e.g. third
party vendors providing data processing, information system
management, maintenance of computer systems, and credit bureau
information) are likely to be affected. Further, if computer
systems are not adequately changed to identify the year 2000, many
computer applications could fail or create erroneous results. As a
result, many calculations which rely on the date field information,
such as interest, payment or due dates and other operating
functions, could generate results which could be significantly
misstated, and the Company could experience a temporary inability
to process transactions, send invoices or engage in similar normal
business activities. If not corrected, these computer systems
could fail by or at the year 2000.
In addition, under certain circumstances, failure to adequately
address the year 2000 date issue could adversely affect the
viability of the Company's suppliers and creditors and the
creditworthiness of its borrowers. Thus, if not adequately
addressed, the year 2000 date issue could result in a material
adverse impact on the Company's services and competitive condition
and, therefore, its results of operations.
The Company primarily uses a third party vendor to process its
electronic data. This vendor has made modifications to or
replacements of its computer applications and systems necessary to
correct the year 2000 date issue. Management has substantially
completed the testing of the modifications to these systems and
applications. The Company also utilizes a combination of purchased
and contract-based software as well as other third party vendors
for a variety of data processing needs. The Company's assessment
of potential computer issues for the year 2000 has been
substantially completed. Where potential computer issues have been
29
identified, the vendors have committed to definitive dates to
resolve such issues. The Bank and the Company have substantially
completed testing of both internally and externally supplied
systems and all renovations to these systems. In the event that
the Company's significant vendors do not achieve year 2000
compliance, the Company's operations could be adversely affected.
The Company has established contingency plans for those systems for
which year 2000 issues will not be corrected. The OTS, the
Company's primary federal bank regulatory agency, along with the
other federal bank regulatory agencies has published guidance on
the year 2000 compliance and has identified the year 2000 issue as
a substantive area of examination for both regularly scheduled and
special bank examinations. These publications, in addition to
providing guidance as to examination criteria, have outlined
requirements for creation and implementation of a compliance plan
and target dates for testing and implementation of corrective
action, as discussed above. As a result of the oversight by and
authority vested in the federal bank regulatory agencies, a
financial institution that does not become year 2000 compliant
could become subject to administrative remedies similar to those
imposed on financial institutions otherwise found not to be
operating in a safe and sound manner, including remedies available
under prompt corrective action regulations.
There has been limited litigation filed against corporations
regarding the year 2000 problem and such corporations' compliance
efforts. To date, no such litigation has resulted in a decided
case imposing liability on the corporate entity. Nonetheless, the
law in this area will likely continue to develop well into the new
millennium. Should the Company experience a year 2000 failure,
exposure of the Company could be significant and material, unless
there is legislative action to limit such liability. Legislation
has been introduced in several jurisdictions regarding the year
2000 problem. However, no assurance can be given that legislation
will be enacted in jurisdictions where the Company does business
that will have the effect of limiting any potential liability.
For the six months ended June 30, 1999, the Company incurred costs
totaling $55,000 to achieve year 2000 compliance. The Company
expects to incur approximately $150,000 in additional costs to
achieve year 2000 compliance during the remainder of 1999.
Forward Looking Statements. Statements made herein that are
forward-looking in nature within the meaning of the Private
Securities Litigation Reform Act of 1995, are subject to risks and
uncertainties that could cause actual results to differ materially.
Such risks and uncertainties include, but are not limited to, those
related to overall business conditions, particularly in the consumer
financial services, mortgage and insurance markets in which Haven
operates, fiscal and monetary policy, competitive products and
30
pricing, credit risk management, changes in regulations affecting
financial institutions and other risks and uncertainties discussed
in Haven's SEC filings, including its 1998 Form 10-K. Haven
disclaims any obligation to publicly announce future events or
developments, which may affect the forward-looking statements
contained herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In management's opinion, there has not been a material change in
market risk from December 31, 1998 as reported in item 7A of the
Company's Form 10-K.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February, 1983, a burglary of the contents of safe deposit
boxes occurred at a branch office of the Bank. At June 30, 1999,
the Bank has a class action lawsuit related thereto pending,
whereby
the plaintiffs are seeking recovery of approximately $12.9 million
in actual damages and an additional $12.9 million of unspecified
damages. The Bank's ultimate liability, if any, which might arise
from the disposition of these claims cannot presently be
determined. Management believes it has meritorious defenses
against these actions and has and will continue to defend its
position. Accordingly, no provision for any liability that may
result upon adjudication has been recognized in the accompanying
consolidated financial statements.
On May 18, 1999, the Bank was served with a complaint naming it as
a defendant in a lawsuit. The lawsuit was commenced by the former
president of the Bank's residential mortgage lending division in
the Superior Court of New Jersey, Law Division, Middlesex County.
The plaintiff alleges in this complaint that the Bank terminated
his employment without "cause" as defined in his employment
agreement and further alleges that the Bank breached the
employment agreement and its obligation of good faith and fair
dealing. The plaintiff seeks, among other things, unspecified
money damages, including severance benefits, as well as bonus
compensation in accordance with the employment agreement. The
plaintiff also seeks a declaratory judgment that certain post-
employment non-compete and non-solicitation covenants should no
longer be effective. The Company denies these allegations and
intends to vigorously defend this action. Although the Company
cannot assure the outcome of this action, it does not believe it
will have a material effect on our financial condition.
The Company is involved in various other legal actions arising in
the ordinary course of business, which in the aggregate, are
believed by management to be immaterial to the financial position
of the Company.
31
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None.
(b) 27.1 Financial Data Schedule.
(c) None.
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.
HAVEN BANCORP INC.
(Registrant)
Date: August 13, 1999 By: /s/ Philip S. Messina
---------------------------
Philip S. Messina
President and Chief Executive
Officer
Date: August 13, 1999 By: /s/ Catherine Califano
---------------------------
Catherine Califano
Senior Vice President
and Chief Financial Officer
32