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 SEPTEMBER 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 8,967,237 shares of the Registrant's common stock
outstanding as of November 12, 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 September 30, 1999 and December 31, 1998 3
Consolidated Statements of Income for the
Three months and Nine months ended
September 30, 1999 and 1998 4
Consolidated Statement of Changes in
Stockholders' Equity for the Nine months
ended September 30, 1999 5
Consolidated Statements of Cash Flows for the
Nine months ended September 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 11-32
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 32
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 32-33
Item 2. Changes in Securities and Use of Proceeds 33
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission of Matters to a Vote of Security
Holders 33
Item 5. Other Information 33
Item 6. Exhibits and Reports on Form 8-K 33
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)
September 30, December 31,
1999 1998
-------- ------------
ASSETS
Cash and due from banks $ 54,928 $ 43,088
Money market investments 1,237 1,720
Securities available for sale (note 2) 992,768 889,251
Loans held for sale 53,976 54,188
Federal Home Loan Bank of NY stock, at cost 25,735 21,990
Loans receivable:
First mortgage loans 1,705,422 1,271,784
Cooperative apartment loans 3,275 3,970
Other loans 28,133 34,926
--------- ---------
Total loans receivable 1,736,830 1,310,680
Less allowance for loan losses (15,828) (13,978)
--------- ---------
Loans receivable, net 1,721,002 1,296,702
Premises and equipment, net 36,290 39,209
Accrued interest receivable 15,877 12,108
Other assets 40,027 37,267
--------- ---------
Total assets $2,941,840 $2,395,523
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $2,015,509 $1,722,710
Borrowed funds 776,970 440,346
Due to broker - 97,458
Other liabilities 38,397 15,142
--------- ---------
Total liabilities 2,830,876 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; 8,966,537 and 8,859,692 shares
outstanding at September 30, 1999 and December 31, 1998, respectively 100 100
Additional paid-in capital 52,233 51,383
Retained earnings, substantially restricted 86,010 79,085
Accumulated other comprehensive (loss) income:
Unrealized (loss) gain on securities available for sale,
net of tax effect (16,525) 945
Treasury stock, at cost (952,213 and 1,059,058 shares at September
30, 1999 and December 31, 1998, respectively) (9,158) (9,800)
Unallocated common stock held by Bank's ESOP (1,005) (1,222)
Unearned common stock held by Bank's Recognition Plans and Trusts (242) (263)
Unearned compensation (449) (361)
--------- ---------
Total stockholders' equity 110,964 119,867
--------- ---------
Total liabilities and stockholders' equity $2,941,840 $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 Nine months Ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
Interest income:
Mortgage loans $30,615 $25,299 $83,130 $70,629
Other loans 724 821 2,360 2,431
Mortgage-backed securities 12,952 11,610 38,288 30,114
Money market investments 53 23 122 169
Debt and equity securities 4,134 2,226 9,294 8,331
------ ------ ------ ------
Total interest income 48,478 39,979 133,194 111,674
------ ------ ------ ------
Interest expense:
Deposits:
Savings accounts 5,114 3,366 14,798 8,482
NOW accounts 428 344 1,171 946
Money market accounts 430 525 1,289 1,462
Certificate accounts 13,554 12,791 37,378 37,269
Borrowed funds 10,400 8,015 25,880 20,933
------ ------ ------ ------
Total interest expense 29,926 25,041 80,516 69,092
------ ------ ------ ------
Net interest income before provision for loan losses 18,552 14,938 52,678 42,582
Provision for loan losses 1,035 670 2,590 1,990
------ ------ ------ ------
Net interest income after provision for loan losses 17,517 14,268 50,088 40,592
------ ------ ------ ------
Non-interest income:
Loan fees and servicing income 528 428 1,455 1,272
Mortgage banking income 97 1,394 3,042 1,124
Savings/checking fees 4,327 2,650 11,291 6,780
Net gain on sales of interest-earning assets 111 1,185 1,680 1,591
Insurance annuity and mutual fund fees 2,231 1,472 6,374 3,973
Other 821 634 2,099 1,888
------ ------ ------ ------
Total non-interest income 8,115 7,763 25,941 16,628
------ ------ ------ ------
Non-interest expense:
Compensation and benefits 10,917 10,412 32,884 27,346
Occupancy and equipment 3,482 2,947 10,265 7,547
Real estate owned operations, net 112 67 (72) 28
Federal deposit insurance premiums 255 231 763 660
Other 6,026 5,732 17,807 14,079
------ ------ ------ ------
Total non-interest expense 20,792 19,389 61,647 49,660
------ ------ ------ ------
Income before income tax expense 4,840 2,642 14,382 7,560
Income tax expense 1,890 402 5,504 1,940
------ ------ ------ ------
Net income $2,950 $2,240 $8,878 $5,620
====== ====== ====== ======
Net income per common share: Basic $ 0.34 $ 0.26 $ 1.02 $ 0.66
====== ====== ====== ======
Diluted $ 0.32 $ 0.24 $ 0.97 $ 0.61
====== ====== ====== ======
See accompanying notes to consolidated financial statements.
4
HAVEN BANCORP, INC.
Consolidated Statement of Changes in Stockholders' Equity
Nine months Ended September 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 8,878 - - 8,878 - - - - -
Other comprehensive income, net of tax
Net unrealized depreciation on
securities available for sale, net
of reclassification adjustment (1) (17,470) - - - (17,470) - - - -
-------
Comprehensive Loss (8,592) - - - - - - - -
Dividends declared (note 5) (1,953) - - (1,953) - - - - -
Treasury stock issued for RRP and deferred
compensation plan (34,357 shares) - - 338 - - 272 - (20) (590)
Stock options exercised, net of tax
effect (72,488 shares) (note 4) 368 - (2) - - 370 - - -
Allocation of ESOP stock and
amortization of award of RRP stock
and related tax benefits 772 - 514 - - - 217 41 -
Amortization of deferred compensation plan 502 - - - - - - - 502
------- --- ------ ------ ------ ------ ------ ----- -----
Balance at September 30, 1999 $110,964 100 52,233 86,010 (16,525) (9,158) (1,005) (242) (449)
======= === ====== ====== ====== ====== ====== ===== =====
(1) Disclosure of Reclassification Adjustment:
(in thousands) Nine months Ended
September 30, 1999
------------------
Net unrealized holding loss arising during period $(18,207)
Less: reclassification adjustment for net gains included in net income 737
------
Net unrealized loss on securities available for sale $(17,470)
======
See accompanying notes to consolidated financial statements.
5
HAVEN BANCORP, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Nine months ended
September 30,
-----------------
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 8,878 $ 5,620
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of cost of stock benefit plans 1,094 1,174
Amortization of net deferred loan origination fees (522) (779)
Amortization of premiums and accretion of discounts on loans,
mortgage-backed and debt securities 90 (1,401)
Provision for loan losses 2,590 1,990
Provision for losses on real estate owned 36 35
Deferred income taxes 644 1,702
Net gain on sales of interest-earning assets (1,680) (1,591)
Loans originated and purchased for sale, net of proceeds from sales 212 (58,236)
Depreciation and amortization 3,307 2,186
Increase in accrued interest receivable (3,769) (670)
(Decrease) increase in due to broker (97,458) 30,000
Increase in other liabilities 23,248 24,663
Decrease (increase) in other assets 8,097 (7,002)
------ ------
Net cash used in operating activities (55,233) (2,309)
------ ------
Cash flows from investing activities:
Net increase in loans (426,582) (266,903)
Proceeds from disposition of assets (including REO) 111 565
Purchases of securities available for sale (437,103) (486,666)
Principal repayments and maturities on securities available for sale 160,310 120,025
Proceeds from sales of securities available for sale 145,961 323,002
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 (3,745) (6,785)
Net increase in premises and equipment (388) (12,134)
------- -------
Net cash used in investing activities (561,436) (283,042)
------- -------
Cash flows from financing activities:
Net increase in deposits 292,799 262,820
Net increase (decrease) in short term borrowed funds 328,556 (180,350)
Increase in long term borrowed funds 8,068 200,767
Payment of common stock dividends (1,945) (1,781)
Stock options exercised 548 441
------- -------
Net cash provided by financing activities 628,026 281,897
------- -------
Net increase (decrease) in cash and cash equivalents 11,357 (3,454)
Cash and cash equivalents at beginning of period 44,808 40,306
------ -------
Cash and cash equivalents at end of period $56,165 $36,852
====== =======
Supplemental information:
Cash paid during the period for:
Interest $79,938 $67,749
Income taxes 2,203 1,664
Additions to real estate owned 622 558
Securities purchased, not yet received - 40,000
Loan securitized - 105,691
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
September 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 September 30, 1999 and December 31, 1998 and for the three-
month and nine-month periods ended September 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 nine-month periods ended
September 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 September 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 $ 111,118 1 (2,845) 108,274
Corporate debt securities 94,723 79 (21) 94,781
Preferred Stock 10,650 - (785) 9,865
------- ----- ------ -------
216,491 80 (3,651) 212,920
------- ----- ------ -------
MBSs available for sale:
GNMA Certificates 238 2 - 240
FNMA Certificates 128,280 317 (3,340) 125,257
FHLMC Certificates 34,968 316 (138) 35,146
CMOs and REMICS 639,443 1,006 (21,244) 619,205
------- ----- ------ -------
802,929 1,641 (24,722) 779,848
--------- ----- ------ -------
Total $1,019,420 1,721 (28,373) 992,768
========= ===== ====== =======
The net unrealized loss on securities available for sale at
September 30, 1999, was reported as a separate component of
stockholders' equity in the amount of $16.5 million, which is net
of a tax effect of $10.1 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 September 30, 2029. The
Capital Securities have a mandatory redemption provision which is
triggered by optional prepayment of the Junior Subordinated
Debentures. The Chase Manhattan Bank is the Property Trustee of
the Trust. During the second quarter, $21.5 million of the
proceeds from the sale of 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 nine months ended September 30, 1999 are as follows:
Weighted Average
Options Exercise Price
------- ----------------
Balance at December 31, 1998 1,305,268 9.44
Granted 206,500 13.80
Forfeited (10,000) 25.70
Exercised (72,488) 7.59
--------- -----
Balance at September 30, 1999 1,429,280 10.05
========= =====
Options exercisable at September 30, 1999 1,098,878 8.21
========= =====
NOTE 5 - DIVIDENDS PAYABLE. On September 22, 1999, the Company's
Board of Directors approved a quarterly cash dividend of $0.075 per
share, payable on October 22, 1999, to shareholders of record as of
October 4, 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. In July 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133". SFAS No. 137 delays the effective date of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities", for one year, to all fiscal quarters of all fiscal
years beginning after June 15, 2000. The delay applies to
quarterly and annual financial statements. SFAS No. 137 is
effective upon issuance 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.
9
NOTE 7 - NET INCOME PER SHARE OF COMMON STOCK. There were
8,760,665 basic weighted average shares outstanding and 9,211,027
diluted weighted average shares outstanding for the three months
ended September 30, 1999. There were 8,720,916 basic weighted
average shares outstanding and 9,113,691 diluted weighted average
shares outstanding for the nine months ended September 30, 1998.
The weighted average number of shares outstanding does not include
200,968 unallocated shares which are owned by the Employee Stock
Ownership Plan ("ESOP") as of September 30, 1999 in accordance with
American Institute of CPAs ("AICPA") Statement of Position ("SOP")
93-6, "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 $2.9
million and $8.6 million for the three-month and nine-month periods
ended September 30, 1999, respectively, and comprehensive income
was $4.9 million and $9.8 million for the three-month and nine-
month periods ended September 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 SEPTEMBER 30, 1999
ASSETS
Total assets increased by $546.3 million, or 22.8% to $2.94 billion
at September 30, 1999 from $2.40 billion at December 31, 1998.
Securities available for sale ("AFS") increased by $103.5 million,
or 11.6% to $992.8 million at September 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 during the second quarter of 1999.
During the nine-months ended September 30, 1999, the Bank purchased
11
$298.2 million of MBSs and $138.9 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
$146.0 million and $160.3 million, respectively. During the
quarter ended September 30, 1999, the Bank purchased $50.3 million
of MBSs and $9.1 million of debt and equity securities for its AFS
portfolio. These increases were partially offset by sales and
principal repayments of $16.3 million and $41.7 million,
respectively, for the quarter.
Net loans increased by $424.3 million, or 32.7% to $1.72 billion at
September 30, 1999 from $1.30 billion at December 31, 1998. Loan
originations and purchases during the nine-month period ended
September 30, 1999 totaled $1.09 billion (comprised of $943.8
million of residential one- to four-family mortgage loans, $7.3
million of home equity loans and lines of credit, $89.0 million of
multi-family loans, $51.6 million of commercial real estate loans
and $2.1 million of construction loans). Residential loans
originated or purchased for sale in the secondary market for the
nine months ended September 30, 1999 totaled $462.3 million. The
Bank also sold $20.5 million in loans previously held in the Bank's
portfolio, in a bulk sale on June 30, 1999. The Bank retained the
right to service these loans. During the first nine months of
1999, the Bank sold $435.7 million of residential loans on a
servicing released basis to third party investors. During the
first nine months of 1999, principal repayments totaled $212.0
million. Loan originations and purchases during the quarter ended
September 30, 1999, totaled $417.5 million (comprised of $356.5
million of residential one- to four-family mortgage loans, $1.8
million of home equity loans and lines of credit, $34.2 million of
multi-family loans and $25.0 million of commercial real estate
loans). Residential loans originated or purchased for sale in the
secondary market for the quarter ended September 30, 1999, totaled
$153.3 million. During the quarter ended September 30, 1999,
principal repayments totaled $105.3 million.
LIABILITIES
Deposits increased by $292.8 million, or 17.0% to $2.02 billion at
September 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-one supermarket branches in New York, New Jersey and
Connecticut. Two additional supermarket branches are scheduled to
open in the fourth quarter of 1999. Deposits in the supermarket
branches totaled $778.1 million at September 30, 1999 compared to
$504.0 million at December 31, 1998. The Bank had sixty-one
supermarket bank branches as of September 30, 1999 compared to
12
fifty-seven supermarket branches at December 31, 1998. Core
deposits (comprised of checking, savings and money market accounts)
were equal to 49.6% of total supermarket branch deposits at
September 30, 1999 compared to 44.8% in the Bank's eight
traditional branches. Core deposits for the supermarket branches
included $236.8 million of "Liquid Asset" account balances at
September 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 48.9% of total deposits at September 30, 1999
compared to 47.7% at December 31, 1998. Borrowed funds increased
by $336.6 million, or 76.4% to $777.0 million at September 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 capital securities.
STOCKHOLDERS' EQUITY
Haven Bancorp's stockholders' equity decreased to $111.0 million at
September 30, 1999 from $119.9 million at December 31, 1998. The
decrease in stockholders' equity was due to unrealized depreciation
of $17.5 million in the value of securities available for sale and
dividends declared totaling $2.0 million. The unrealized
depreciation on AFS securities is the result of an increase in
interest rates during the nine months ended September 30, 1999 as
evidenced by the five year treasury note which increased 121 basis
points from December 31, 1998. These decreases were partially
offset by net income of $8.9 million for the nine months ended
September 30, 1999, and by $1.6 million in amortization of awards
of shares of stock by the Bank's ESOP and 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 nine-month seasoning period),
restructured loans and real estate owned ("REO").
September 30, December 31,
1999 1998
------------ ------------
(Dollars in Thousands)
Non-accrual loans
One- to four-family $ 4,955 3,779
Cooperative 203 367
Multi-family 297 308
Non-residential and other 2,023 2,074
------ ------
Total non-accrual loans 7,478 6,528
------ ------
Restructured loans
One- to four-family 317 544
Cooperative 179 183
Multi-family 239 1,130
------ ------
Total restructured loans 735 1,857
------ ------
Total non-performing loans 8,213 8,385
------ ------
REO, net
One- to four-family 333 66
Cooperative 111 38
Non-residential and other 98 121
------ ------
Total REO 542 225
Less allowance for REO (20) (25)
------ ------
REO, net 522 200
------ ------
Total non-performing assets $ 8,735 8,585
====== ======
Non-performing loans to total loans 0.47% 0.64%
Non-performing assets to total assets 0.30 0.36
Non-performing loans to total assets 0.28 0.35
14
The increase in non-performing assets was primarily due to
increases of $1.0 million in non-accrual loans and $322,000 in REO
from December 31, 1998 to September 30, 1999, respectively,
substantially offset by a decline in restructured loans of $1.1
million. The ratios of non-performing loans to total loans, non-
performing assets to total assets, and non-performing loans to
total assets each declined significantly from December 31, 1998 to
September 30, 1999, primarily due to the growth in the mortgage
loan portfolio.
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 nine months ended September 30, 1999 and 1998:
September 30, September 30,
1999 1998
------------ -------------
(Dollars in Thousands)
Balance at beginning of period $ 13,978 12,528
Charge-offs:
Residential (244) (415)
Cooperative - (248)
Multi-family - (708)
Non-residential and other (848) (396)
------ ------
Total charge-offs (1,092) (1,767)
Recoveries 352 1,040
------ ------
Net charge-offs (740) (727)
Provision for loan losses 2,590 1,990
------ ------
Balance at end of period 15,828 13,791
====== ======
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.05 0.08%
Ratio of allowance for loan losses to
total loans at the end of the period 0.91 1.05
Ratio of allowance for loan losses to non-
performing loans at the end of the period 192.72 151.85
The ratio of net charge-offs to average loans outstanding during
the first nine months of 1999 decreased compared to the same period
in 1998 primarily due to an increase of $279.1 million in average
loans outstanding for the first nine months of 1999 compared to the
first nine months of 1998. The ratio of the allowance for loan
losses to total loans decreased for the period due to the increase
in average loans outstanding for the nine months ended September
30, 1999. The ratio of the allowance for loan losses to non-
performing loans increased between the periods due primarily to an
increase of $2.0 million in the allowance for loan losses, as well
as an $869,000 decline in non-performing loans. The Bank's
allowance for loan losses was $15.8 million and $13.8 million at
September 30, 1999 and September 30, 1998, respectively, while non-
performing loans totaled $8.2 million and $9.1 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 nine months of 1999, the Bank originated or purchased for its
portfolio $367.9 million of residential ARM loans and $142.6
million of adjustable-rate multi-family, commercial real estate and
construction loans. The Company expects to continue its ARM loan
originations through its CFS Mortgage division. During the nine-
month period, the Bank purchased $348.6 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 September 30, 1999, $232.9 million, or 23.5% of the
Company's AFS portfolio were adjustable-rate securities and $759.9
million or 76.5% 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 September 30, 1999, core deposits represented
48.9% of deposits compared to 47.7% of deposits at December 31,
1998. During the first nine months of 1999, savings accounts
increased by $87.7 million, net of interest, and certificates of
deposit increased by $128.7 million, net of interest. The number
of checking accounts increased by 36,271, or 24.0% to 187,710 at
September 30, 1999 from 151,439 at December 31, 1998. Most of the
increase, 35,061 accounts, is attributable to the Bank's
supermarket 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 4.34% at September 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 September 30, 1999 and December 31,
1998, cash and short-term investments totaled $56.2 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 September 30, 1999 totaled $497.4 million. An
additional source of funds are sales of securities under repurchase
agreements, which totaled $228.0 million at September 30, 1999.
As of September 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 $164,136 5.54% $164,136 5.54% $178,764 11.61%
Minimum regulatory requirement 59,302 2.00 118,603 4.00(2) 123,206 8.00
------- ---- ------- ---- ------- ----
Excess $104,834 3.54% $ 45,533 1.54% $ 55,558 3.61%
======= ==== ======= ==== ======= ====
(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
implementation of the interest rate risk component in the
computation of an institution'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 provision for loan losses, 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 nine
months ended September 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 September 30,
1999 1998
------------------------ ------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- -------
(Dollars in thousands)
Assets:
Interest-earning assets:
Mortgage loans $1,688,701 $30,615 7.25% $1,340,030 $25,299 7.55%
Other loans 39,093 724 7.41 33,654 821 9.76
Mortgage-backed securities 800,778 12,952 6.47 691,703 11,610 6.71
Money market investments 2,717 53 7.80 1,337 23 6.88
Debt and equity securities 236,259 4,134 7.00 134,477 2,226 6.62
--------- ------ --------- ------
Total interest-earning assets 2,767,548 48,478 7.01 2,201,201 39,979 7.26
Non-interest earning assets 138,167 ------ 119,468 ------
--------- ---------
Total assets 2,905,715 2,320,669
========= =========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings accounts 654,038 5,114 3.13 456,977 3,366 2.95
Certificate accounts 1,027,514 13,554 5.28 896,836 12,791 5.70
NOW accounts 243,768 428 0.70 182,409 344 0.75
Money market accounts 55,249 430 3.11 58,371 525 3.60
Borrowed funds 743,586 10,400 5.59 535,299 8,015 5.99
--------- ------ --------- ------
Total interest-bearing liabilities 2,724,155 29,926 4.39 2,129,892 25,041 4.70
Other liabilities 70,176 ------ 70,695 ------
--------- ---------
Total liabilities 2,794,331 2,200,587
Stockholders' equity 111,384 120,082
--------- ---------
Total liabilities and stockholders' equity $2,905,715 $2,230,669
========= =========
Net interest income/net interest rate spread $18,552 2.62% $14,938 2.56%
====== ==== ====== ====
Net interest earning assets/net interest margin $43,393 2.68% $71,309 2.71%
====== ==== ====== ====
Ratio of interest-earning assets to
interest-bearing liabilities 101.59% 103.35%
====== ======
20
Nine months ended September 30,
1999 1998
------------------------ ------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- -------
(Dollars in thousands)
Assets:
Interest-earning assets:
Mortgage loans $1,517,812 $83,130 7.30% $1,242,373 $70,629 7.58%
Other loans 36,769 2,360 8.56 33,109 2,431 9.79
Mortgage-backed securities 784,139 38,288 6.51 597,988 30,114 6.71
Money market investments 2,149 122 7.57 4,065 169 5.54
Debt and equity securities 184,446 9,294 6.72 165,566 8,331 6.71
--------- ------ --------- ------
Total interest-earning assets 2,525,315 133,194 7.03 2,043,101 111,674 7.29
Non-interest earning assets 150,900 ------ 120,258 ------
--------- ---------
Total assets 2,676,215 2,163,359
========= =========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings accounts 622,453 14,798 3.17 417,576 8,482 2.71
Certificate accounts 950,846 37,378 5.24 867,306 37,269 5.73
NOW accounts 234,998 1,171 0.66 175,199 946 0.72
Money market accounts 56,533 1,289 3.04 57,028 1,462 3.42
Borrowed funds 629,823 25,880 5.48 466,093 20,933 5.99
--------- ------ --------- ------
Total interest-bearing liabilities 2,494,653 80,516 4.30 1,983,202 69,092 4.65
Other liabilities 65,437 ------ 63,022 ------
--------- ---------
Total liabilities 2,560,090 2,046,224
Stockholders' equity 116,125 117,135
--------- ---------
Total liabilities and stockholders' equity $2,676,215 $2,163,359
========= =========
Net interest income/net interest rate spread $52,678 2.73% $42,582 2.64%
====== ==== ====== ====
Net interest earning assets/net interest margin $30,662 2.78% $59,899 2.78%
====== ==== ====== ====
Ratio of interest-earning assets to
interest-bearing liabilities 101.23% 103.02%
====== ======
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1999 AND 1998
GENERAL. The Company reported net income of $3.0 million for the
three months ended September 30, 1999 compared to net income of
$2.2 million for the three months ended September 30, 1998. The
increase in net income was primarily attributable to an increase of
$3.6 million in net interest income and an increase of $352,000 in
non-interest income. These increases were partially offset by an
increase of $1.4 million in non-interest expense from the prior
year period. Income tax expense increased $1.5 million due to an
increase of $2.2 million in pre-tax income.
INTEREST INCOME. Interest income increased by $8.5 million, or
21.3% to $48.5 million for the three months ended September 30,
1999 from $40.0 million for the three months ended September 30,
1998. The increase was primarily the result of a $5.2 million
increase in interest income on mortgage and other loans, an
21
increase of $1.3 million in interest income on MBSs and an increase
of $1.9 million in interest income on debt and equity securities.
Interest income on mortgage and other loans increased by $5.2
million, or 20.0% to $31.3 million for the three months ended
September 30, 1999, from $26.1 million for the comparable three-
month period in 1998, primarily as a result of an increase in
average balances of mortgage loans of $348.7 million partially
offset by a decrease in the average yield on mortgage loans of 30
basis points.
The increase in average balance of mortgage loans between the
periods was primarily due to mortgage originations, including
purchases, which totaled $1.22 billion for the year of 1998 and
$1.09 billion for the first nine months of 1999. The increased
originations reflect the addition of the loan production franchise
of CFS Mortgage on May 1, 1998. 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 $1.3 million, or 11.6% to
$13.0 million for the three months ended September 30, 1999 from
$11.6 million for the comparable three-month period in 1998,
primarily due to an increase in average balances of MBSs of $109.1
million which was partially offset by a decrease in the average
yield of 24 basis points.
Interest income on debt and equity securities increased by $1.9
million, or 85.7% to $4.1 million for the three months ended
September 30, 1999 from $2.2 million for the comparable three-month
period in 1998, primarily as a result of an increase in the average
balance outstanding of $101.8 million and an increase in yield of
38 basis points.
INTEREST EXPENSE. Interest expense increased by $4.9 million, or
19.5% to $29.9 million for the three months ended September 30,
1999 from $25.0 million for the three months ended September 30,
1998. The increase was the result of an $2.5 million increase in
interest expense on deposits and an increase of $2.4 million in
interest expense on borrowings.
Interest on deposits increased by $2.5 million, or 14.7% to $19.5
million for the three months ended September 30, 1999 from $17.0
million for the comparable three-month period in 1998. The
increase in interest expense on deposits was primarily due to the
average balance which increased by $386.0 million, or 24.2% to
$1.98 billion for the three months ended September 30, 1999 from
$1.59 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 September 30, 1999,
the Bank had sixty-one supermarket branches operating with
22
deposits totaling $778.1 million compared to fifty-two supermarket
branches at September 30, 1998 with deposits totaling $424.9
million. The increase in average balance was primarily due to
savings account balances which increased by $197.1 million, or
43.1% to $654.0 million for the three months ended September 30,
1999 from $457.0 million for the comparable three-month period in
1998. Interest expense on savings accounts increased by $1.7
million, or 51.9% to $5.1 million for the three months ended
September 30, 1999 from $3.4 million in the same period in 1998.
The average cost of savings accounts was 3.13% for the third
quarter of 1999 compared to 2.95% for the third 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
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 $299.8 million in savings balances as of
September 30, 1999, including $236.8 million in liquid asset
accounts, compared to $144.3 million as of September 30, 1998,
including $96.3 million in liquid asset accounts. Certificate
account balances increased by $130.7 million, or 14.6% to $1.03
billion for the three months ended September 30, 1999 from $896.8
million for the comparable three-month period in 1998. Interest
expense on certificate accounts increased by $763,000, or 6.0% to
$13.6 million for the three months ended September 30, 1999 from
$12.8 million in the same period in 1998. This was primarily due
to the increase in certificate account balances. The average cost
of all deposits was 3.94% for the three months ended September 30,
1999 compared to 4.27% for the third quarter of 1998 reflecting the
general decline in market interest rates.
Interest on borrowed funds increased by $2.4 million, or 29.8% to
$10.4 million for the three months ended September 30, 1999 from
$8.0 million for the comparable three-month period in 1998.
Borrowed funds on an average basis increased by $208.3 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 5.59% for the three months ended September
30, 1999 from 5.99% for the prior year period due to a decline in
market rates in 1998.
NET INTEREST INCOME. Net interest income increased by $3.6
million, or 24.2% to $18.6 million for the three months ended
September 30, 1999 from $14.9 million for the three months ended
September 30, 1998. The increase is primarily due to the total
23
average balance of interest-earning assets which increased by
$566.3 million, or 25.7% to $2.77 billion for the three months
ended September 30, 1999 from $2.20 billion for the same period
last year. This growth is mainly due to growth in the Bank's
residential mortgage loan and MBS portfolios. This increase was
partially offset by the average yield on interest-earning assets
which decreased to 7.01% for the three-month period ended September
30, 1999 from 7.26% 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 4.39% from 4.70%
for the three months ended September 30, 1999 and 1998,
respectively. The net interest spread was 2.62% for the three
months ended September 30, 1999 compared to 2.56% for the
comparable period in 1998.
PROVISION FOR LOAN LOSSES. The Bank provided $1.0 million for loan
losses for the three months ended September 30, 1999 compared to
$670,000 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 $352,000, or
4.5% for the three months ended September 30, 1999 to $8.1 million
from $7.8 million for the comparable three-month period in 1998.
Non-interest income for the third quarter of 1999 included $97,000
of mortgage banking income compared to mortgage banking income of
$1.4 million in the third quarter of 1998. The decrease in
mortgage banking income is due to a decrease in the Bank's loans
held for sale volume and the gross margin achieved on secondary
market sales. Savings and checking fees increased by $1.7 million,
or 63.3% to $4.3 million for the third quarter of 1999 compared to
$2.7 million for the same period last year. The increase in
savings and checking fees is primarily due to the number of
checking accounts which increased by 48,777, or 35.1% to 187,710
accounts at September 30, 1999 from 138,933 accounts at September
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 $3.5 million for the third
quarter of 1999 compared to $1.8 million for the third quarter of
last year. Insurance, annuity and mutual fund fees for the third
quarter of 1999 increased by $759,000, or 51.6% to $2.2 million
from $1.5 million for the same period last year which included $1.1
million in revenue from sales originating from supermarket branches
compared to $664,000 for the same period last year. The 1999 third
quarter also included $313,000 in revenues from CFS Insurance, Inc.
which was acquired in November 1998. The net gain realized on the
sale of interest-earning assets was $111,000 for the three months
ended September 30, 1999 compared to $1.2 million for the same
period last year. This decline was due to an increase in market
rates during the second quarter of 1999 which minimized profit
24
opportunities during the third quarter.
NON-INTEREST EXPENSE. Non-interest expense increased by $1.4
million, or 7.2% for the three months ended September 30, 1999 to
$20.8 million from $19.4 million for the comparable three-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 fifty-
two branches at September 30, 1998 to sixty-one branches at
September 30, 1999. The Bank is planning to open two supermarket
branches in the fourth quarter of 1999, which will result in an
additional increase in non-interest expense. Compensation and
benefits costs increased by $505,000, or 4.9% to $10.9 million for
the three months ended September 30, 1999 from $10.4 million for
the same period last year primarily as a result of increased
headcount required by the supermarket banking expansion. Occupancy
and equipment costs increased by $535,000, or 18.2% to $3.5 million
for the third quarter of 1999 from $2.9 million for the same period
last year primarily due to the addition of nine supermarket
branches. Other operating costs increased by $294,000, or 5.1% to
$6.0 million for the three months ended September 30, 1999 from
$5.7 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 $1.9 million for an
effective tax rate of 39.0% for the three months ended September
30, 1999 compared to income tax expense of $402,000 for an effect-
ive tax rate of 15.2% for the comparable period in 1998. The 1998
quarter included a reversal of previously provided income taxes.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 1998
GENERAL. The Company reported net income of $8.9 million for the
nine months ended September 30, 1999 compared to net income of $5.6
million for the nine months ended September 30, 1998. The increase
in net income was primarily attributable to an increase of $10.1
million in net interest income and an increase of $9.3 million in
non-interest income. These increases were partially offset by an
increase of $12.0 million in non-interest expense and the provision
for loan losses which increased $600,000. Income tax expense
increased $3.6 million from the same period last year due to an
increase of $6.8 million in pre-tax income.
INTEREST INCOME. Interest income increased by $21.5 million, or
19.3% to $133.2 million for the nine months ended September 30,
1999 from $111.7 million for the nine months ended September 30,
1998. The increase was primarily the result of a $12.4 million
increase in interest income on mortgage and other loans and an
increase of $8.2 million in interest income on MBS securities. In
addition, interest income on debt and equity securities increased
25
by $963,000, whereas, interest on money market investments
decreased $47,000 from the same period last year.
Interest income on mortgage and other loans increased by $12.4
million, or 17.0% to $85.5 million for the nine months ended
September 30, 1999, from $73.1 million for the comparable nine-
month period in 1998. The increase was primarily the result of an
increase in the average balance of mortgage loans of $275.4
million, partially offset by a decline in the average yield on
mortgage loans of 28 basis points from the first nine 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 nine
months of 1999 which totaled $1.22 billion and $1.09 billion,
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 $212.0 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. This decline has been partially offset by increases in
market interest rates.
Interest income on MBSs increased by $8.2 million, or 27.1% to
$38.3 million for the nine months ended September 30, 1999 from
$30.1 million for the comparable nine-month period in 1998
primarily due to an increase of $186.2 million in the average
balance of MBSs for the 1999 period compared to the 1998 period.
During the first nine months of 1999, the Bank purchased $298.3
million of MBSs for its AFS portfolio which were partially offset
by sales of MBSs totaling $128.8 million. The average yield
declined by 20 basis points to 6.51% for the 1999 period.
Interest income on debt and equity securities increased by
$963,000, or 11.6% to $9.3 million for the nine months ended
September 30, 1999 from $8.3 million for the comparable nine-month
period in 1998 primarily as a result of an increase in average
balances of $18.9 million. During the first nine months of 1999,
the Bank purchased $138.8 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 more competitive rates along with shorter durations
for MBSs.
INTEREST EXPENSE. Interest expense increased by $11.4 million, or
16.5% to $80.5 million for the nine months ended September 30, 1999
from $69.1 million for the nine months ended September 30, 1998.
The increase was the result of a $6.5 million increase in interest
expense on deposits and an increase of $4.9 million in interest
expense on borrowed funds.
26
Interest on deposits increased by $6.5 million, or 13.4% to $54.6
million for the nine months ended September 30, 1999 from $48.2
million for the comparable nine-month period in 1998. The increase
in interest on deposits was primarily due to the increase in the
average balance of deposits by $347.7 million from $1.52 billion
for the nine months ended September 30, 1998 to $1.86 billion for
the nine months ended September 30, 1999. The deposit growth is
primarily attributable to the Bank's supermarket banking program.
The increase in average balance was primarily due to savings
account balances which increased by $204.9 million, or 49.1% to
$622.5 million for the nine months ended September 30, 1999 from
$417.6 million for the comparable nine-month period in 1998.
Interest expense on savings accounts increased by $6.3 million, or
74.5% to $14.8 million for the nine months ended September 30, 1999
from $8.5 million in the same period in 1998. The average cost of
savings accounts was 3.17% for the first nine months of 1999
compared to 2.71% for the same period in 1998. The increase in the
average cost of savings accounts was due to the "Liquid Asset"
account. Certificate account balances increased by $83.5 million,
or 9.6% to $950.8 million for the nine months ended September 30,
1999 from $867.3 million for the comparable nine-month period in
1998. The average cost of certificate accounts declined by 49
basis points to 5.24%. Interest expense on certificate accounts
increased by $109,000, or 0.3% to $37.4 million for the nine months
ended September 30, 1999 from $37.3 million in the same period in
1998. This was primarily due to the increase in average balances.
The average cost of all deposits was 3.91% for the nine months
ended September 30, 1999 compared to 4.23% for the nine months
ended September 30, 1998 reflecting the general decline in market
interest rates.
Interest on borrowed funds increased by $4.9 million, or 23.6% to
$25.9 million for the nine months ended September 30, 1999 from
$20.9 million for the comparable nine-month period in 1998.
Borrowed funds on an average basis increased by $163.7 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 5.48% for the nine months ended September 30, 1999
from 5.99% for the comparable prior-year period primarily due to a
decline in market interest rates in 1998.
NET INTEREST INCOME. Net interest income increased by $10.1
million, or 23.7 % to $52.7 million for the nine months ended
September 30, 1999 from $42.6 million for the nine months ended
September 30, 1998. The increase is primarily due to the total
27
average balance of interest-earning assets which increased by
$482.2 million, or 23.6% to $2.53 billion for the nine months ended
September 30, 1999 from $2.04 billion for the same period last
year. This growth is mainly due to growth in the Bank's
residential mortgage loan and MBS portfolios. This increase was
partially offset by the average yield on interest-earning assets
which decreased to 7.03% for the nine-month period ended September
30, 1999 from 7.29% for the nine-month period in 1998. The average
cost of interest-bearing liabilities decreased to 4.30% from 4.65%
for the nine months ended September 30, 1999 and 1998,
respectively, reflecting the general decline in market interest
rates in 1998. The net interest spread was 2.73% for the nine
months ended September 30, 1999 compared to 2.64% for the
comparable period in 1998.
PROVISION FOR LOAN LOSSES. The Bank provided $2.6 million for loan
losses for the nine months ended September 30, 1999 compared to
$2.0 million for the comparable nine-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 $9.3
million, or 56.0% for the nine months ended September 30, 1999 to
$25.9 million from $16.6 million for the comparable nine-month
period in 1998. Non-interest income for the first nine months of
1999 included $3.0 million in mortgage banking income compared to
mortgage banking income of $1.1 million for the same period last
year related to loans sold in the secondary market during the
period. Mortgage banking income has decreased in the last two
quarters of 1999, due primarily to a decrease in the Bank's loans
held for sale volume and gross margin achieved on secondary market
sales. (See "Comparison of Results for the Three Months Ended
September 30, 1999 and 1998.") Savings and checking fees increased
by $4.5 million, or 66.5% to $11.3 million for the first nine
months of 1999 compared to $6.8 million for the same period last
year. The 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 $8.6 million for the first
nine months of 1999 compared to $4.4 million for the comparable
period last year. Insurance, annuity and mutual fund fees for the
first nine months of 1999 increased by $2.4 million, or 60.4% to
$6.4 million from $4.0 million for the same period last year which
included $3.3 million in revenue from sales originating from
supermarket branches compared to $1.4 million for the nine months
ended September 30, 1998. The 1999 results included $863,000 in
revenues generated by CFS Insurance Agency, Inc. The Bank realized
net gains of $1.7 million on the sale of interest-earning assets
for the nine months ended September 30, 1999 compared to $1.6
million for the comparable period last year.
28
NON-INTEREST EXPENSE. Non-interest expense increased by $12.0
million, or 24.1% for the nine months ended September 30, 1999 to
$61.6 million from $49.7 million for the comparable nine-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 fifty-
two branches at September 30, 1998 to sixty-one branches at
September 30, 1999. The Bank is planning to open two supermarket
branches in the fourth quarter of 1999, which will result in an
additional increase in non-interest expense. As a result of the
increased headcount, compensation and benefits costs increased by
$5.5 million, or 20.3% to $32.9 million for the nine months ended
September 30, 1999 from $27.3 million for the same period last
year. Occupancy and equipment costs increased by $2.7 million, or
36.0% to $10.3 million for the first nine months of 1999 from $7.5
million for the same period last year primarily due to the addition
of nine 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 $3.7 million,
or 26.5% to $17.8 million for the nine months ended September 30,
1999 from $14.1 million for the same period last year also due to
the addition of CFS Mortgage and the additional supermarket
branches. Other non-interest expenses include: data processing
expenses, stationery and supplies expense, advertising expenses,
and telephone expenses, which, for the nine months ended September
30, 1999 totaled $2.6 million, $1.5 million, $1.3 million, and $1.2
million, respectively.
INCOME TAX EXPENSE. Income tax expense was $5.5 million for an
effective tax rate of 38.3% for the nine months ended September 30,
1999 compared to income tax expense of $1.9 million for an
effective tax rate of 25.7% for the comparable period in 1998. The
nine-month period ended September 30, 1998 included a reversal of
previously provided income taxes.
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
29
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
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
30
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 nine months ended September 30, 1999, the Company incurred
costs totaling $298,000 to achieve year 2000 compliance. The
Company expects to incur approximately $25,000 in additional costs
to achieve year 2000 compliance during the remainder of 1999.
IMPACT OF NEW BANKING LEGISLATION
New legislation intended to modernize the financial services
industry by establishing a comprehensive framework to permit
affiliations among commercial banks, insurance companies and other
financial service providers was signed into law on November 12,
1999. Generally, this legislation (i) repeals the historical
restrictions and eliminates many federal and state law barriers to
affiliations among banks, securities firms, insurance companies and
other financial service providers, (ii) provides a uniform
framework for the activities of banks, savings institutions and
their holding companies, (iii) broadens the activities that may be
conducted by national banks and banking subsidiaries of bank
holding companies, (iv) provides an enhanced framework for
protecting the privacy of consumer information, (v) adopts a number
of provisions related to the capitalization, membership, corporate
governance and other measures designed to modernize the Federal
Home Loan Bank System, (vi) modifies the laws governing the
implementation of the Community Reinvestment Act and (vii)
addresses a variety of other legal and regulatory issues affecting
both day-to-day operations and long-term activities of financial
institutions, including the functional regulation of bank
securities activities.
In particular, this legislation limits the activities that new
unitary savings and loan association holding companies may engage
in. Unitary savings and loan holding companies that are
"grandfathered," i.e., became unitary savings and loan holding
companies pursuant to applications filed with the OTS before May 4,
1999, will retain their authority under current law to engage in
non-financial activities. All other savings and loan holding
companies will be limited to financially related activities
permissible for bank holding companies, as defined under the new
law. In addition, this legislation prohibits non-financial
companies from acquiring savings and loan association holding
companies.
31
Bank holding companies will be permitted to engage in a wider
variety of financial activities that are permitted under current
law, particularly with respect to insurance and securities
activities. In addition, in a change from current law, bank
holding companies will be in a position to be owned, controlled or
acquired by any company engaged in financially related activities.
We do not believe that this legislation will have a material
adverse affect on our operations in the near term. However, to the
extent that the legislation permits banks, securities firms and
insurance companies to affiliate, the financial services industry
may experience further consolidation. This could result in a
growing number of larger financial institutions that offer a wider
variety of financial services than the Company currently offers and
that can aggressively compete in the markets the Company currently
serves.
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 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 DISCLOSURES 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 September 30, 1999, the
Bank has a lawsuit related thereto pending, whereby the plaintiffs
are seeking recovery of approximately $12.4 million in actual
damages and an additional $12.4 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.
32
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - 27.1 Financial Data Schedule.
(b) Reports on Form 8-K - The Company filed a Form 8-K on
September 7, 1999, which reported information under
Item 5 - "Other Events."
33
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: November 15, 1999 By: /s/ Philip S. Messina
---------------------------
Philip S. Messina
President and Chief Executive
Officer
Date: November 15, 1999 By: /s/ Catherine Califano
---------------------------
Catherine Califano
Senior Vice President
and Chief Financial Officer
34