UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
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 No. 0-27650
CATSKILL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 14-1788465
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) (Identification Number)
341 MAIN STREET, CATSKILL, NY 12414
(Address of principal executive offices)
Registrant's telephone number, including area code: (518)943-3600
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes __x__ No_____
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10K or any amendments to this Form 10K. [X]
As of December 23, 1996, the aggregate market value of the voting
stock held by non-affiliates (based on reported beneficial ownership of all
directors and executive officers of the registrant; this determination does
not, however, constitute an admission of affiliated status for any of these
individual stockholders) of the registrant excluding unallocated ESOP shares,
was approximately $64.6 million.
Indicate the number of shares of outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common Shares, $.01 par value 5,361,482
(Title of class) (outstanding at
December 23, 1996)
Annual Report for 1996 on Form 10-K
TABLE OF CONTENTS
PART I Page
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of
Security Holders
PART II
Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial
Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
SIGNATURES
DOCUMENTS INCORPORATED BY REFERENCE
Documents Part of 10-K into which incorporated
Portions of the Annual Report to
Shareholders for fiscal year
ended September 30, 1996. Parts II and IV
Portions of the Proxy Statement
for Annual Meeting of Shareholders
to be held February 11, 1997. Part III
PART I
ITEM 1. BUSINESS
General
Catskill Financial Corporation (the "Company" or "Catskill Financial")
was formed in December 1995 for the purpose of acquiring all of the
common stock of Catskill Savings Bank (the "Bank"), upon the conversion
of the Bank from the mutual to the stock form of ownership. The Company
is incorporated under the laws of the state of Delaware, is qualified
to do business in the state of New York, and generally is authorized
to engage in any activity that is permitted by the Delaware General
Corporation Law. On April 18, 1996, the Bank converted to the stock
form of ownership, the Company acquired all of the issued and outstanding
shares of stock of the Bank, and the Company completed its initial
public stock offering, issuing 5,686,750 shares of $.01 par value
common stock at $10.00 per share. Net proceeds to the Company were
$54.9 million after conversion and stock offering costs, and $50.4
million excluding the shares acquired by the Company's newly formed
Employee Stock Ownership Plan (the "ESOP").
The consolidated financial condition and operating results of the
Company are primarily dependent upon its wholly owned subsidiary,
the Bank, and all references to the Company and its financial data
prior to April 18, 1996, except where otherwise indicated, refer to
the Bank and its financial data.
The Bank was organized in 1868, as a state chartered mutual savings
bank. In January 1996, the Bank converted to a federally chartered
mutual savings bank. The Bank is a member of the Bank Insurance Fund
("BIF"), which is administered by the Federal Deposit Insurance Corporation
("FDIC"). Accordingly, its deposits are insured up to applicable
limits by the FDIC, which insurance is backed by the full faith and
credit of the United States. The Bank's primary market area is comprised
of Greene County and southern Albany County in New York, serviced
by the Bank's main office and two other banking offices, with a fourth
banking office opening in December 1996. At September 30, 1996, the
Bank had total assets of $262.2 million, deposits of $196.8 million
and equity of $54.8 million, or 20.9% of total assets.
The Bank has been and intends to continue to be a community-oriented
financial institution offering financial services to meet the needs
of the communities it serves. The Bank attracts deposits from the
general public and uses such deposits, together with other funds,
to originate one- to four-family residential mortgage and, to a lesser
extent, consumer (including home equity lines of credit), commercial
and multi-family real estate and other loans in the Bank's primary
market area. The Bank offers deposit accounts having a range of interest
rates and terms. The Bank only solicits deposits in its primary market
area and does not have brokered deposits. The Bank is a member of
the Federal Home Loan Bank of New York ("FHLBNY").
Forward-Looking Statements
When used in this Form 10-K or future filings by the Company with
the Securities and Exchange Commission, in the Company's press releases
or other public or shareholder communications, or in oral statements
made with the approval of an authorized executive officer, the words
or phrases "will likely result", "are expected to", "will continue",
"is anticipated", "estimate", "project", "believe", or similar expressions
are intended to identify "forward-looking statements" within the meaning
of the Private Securities Litigations Reform Act of 1995. In addition,
certain disclosures and information customarily provided by financial
institutions, such as analysis of the adequacy of the loan loss allowance
or an analysis of the interest rate sensitivity of the Company's assets
and liabilities, are inherently based upon predictions of future events
and circumstances. Furthermore, from time to time, the Company may
publish other forward-looking statements relating to such matters
as anticipated financial performance, business prospects, and similar
matters.
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the
terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company's
forward-looking statements. Some of the risks and uncertainties that
may affect the operations, performance, development and results of
the Company's business, the interest rate sensitivity of its assets
and liabilities, and the adequacy of its loan loss allowance, include
but are not limited to the following:
a. Deterioration in local, regional, national or global economic
conditions which could result, among other things, in an increase
in loan delinquencies, a decrease in property values, or a change
in the housing turnover rate;
b. changes in market interest rates or changes in the speed at which
market interest rates change;
c. changes in laws and regulations affecting the financial service
industry;
d. changes in competition; and
e. changes in consumer preferences.
The Company wishes to caution readers not to place undue reliance
on any forward-looking statements, which speak only as of the date
made, and to advise readers that various factors, including those
described above, could affect the Company's financial performance
and could cause the Company's actual results or circumstances for
future periods to differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
Regulation
The following is a summary of certain statutes and regulations
affecting the Company and the Bank. The Bank, as a federally chartered, FDIC
insured, savings bank, derives its powers principally from federal
law and is subject to comprehensive regulation of virtually every
aspect of its business operations. The following summary is selective
and should not be considered to be a complete discussion of all regulation
affecting the Company or the Bank.
General Bank Regulation. The Bank's primary federal bank regulator
is the OTS. The Bank is also subject to regulation by the FDIC as
the insurer of its deposits. The Bank must file periodic reports
with the OTS and is regularly examined by the OTS and the FDIC. As
a result of these examinations, the Bank can be required to adjust
its loan classifications or allowance for loan losses, take other
actions to correct deficiencies found during the examinations, or
cease engaging in certain activities.
The OTS may institute enforcement action against the Bank for violations
of law or for unsafe and unsound banking practices. Enforcement actions
can include the issuance of cease and desist orders, the commencement
of removal proceedings in which an employee, officer or director can
be removed from involvement with the Bank, the assessment of civil
monetary penalties, and injunctive relief. The FDIC may terminate
the insurance of deposits, after notice and hearing, upon a finding
that an institution has engaged in unsafe and unsound practices, cannot
continue operations because it is in an unsafe and unsound condition,
or has violated any applicable law, regulation, rule, order or condition
imposed by the OTS or FDIC. The FDIC may instead impose less severe
sanctions. Neither the OTS nor the FDIC (which was also the Bank's
primary federal regulator before the Bank became a federal savings
bank in January 1996) have ever instituted any enforcement action
against the Bank.
Federal law and OTS regulations limit the percentage of the Bank's
assets that can be invested in certain investments. For example,
commercial, corporate and business loans, other than those secured
by real estate collateral, are limited in the aggregate to 10% of
assets. The purchase of below investment grade debt securities is
prohibited. Loans secured by non-residential real property cannot
exceed 400% of capital. Consumer loans not secured by residential
real estate are generally limited to 35% of total assets. Loans secured
by residential real property, and many other types of loans and investments,
are not subject to any percentage of assets limit. The Bank is in
compliance with all these limits.
The OTS also imposes a semi-annual assessment on all OTS regulated
institutions to defer the cost of OTS regulation. For the semi-annual
period ended December 31, 1996, the Bank's OTS assessment was $45,300.
The Company is a unitary savings and loan holding company, and its
sole FDIC-insured subsidiary, the Bank, is a qualified thrift lender
("QTL", discussed in more detail below). Therefore, the Company generally
has broad authority to engage in all types of business activities
in which business can engage. If the Company were to acquire another
insured institution as a separate subsidiary or if the Bank fails
to remain a QTL, the Company's activities will be limited to those
permitted of multiple savings and loan holding companies. In general,
a multiple savings and loan holding company (or subsidiary thereof
that is not an insured institution) may, subject to OTS approval in
most cases, engage in activities comparable to those permitted for
bank holding companies, certain insurance activities, and certain
activities related to the operations of its FDIC-insured subsidiaries.
Capital Requirements. The Bank is subject to minimum capital
requirements imposed by the OTS. The Bank must maintain (i) tangible capital
of 1.5% of tangible assets, (ii) core capital of 3.0% of adjusted tangible
assets, and (iii) a risk-based capital requirement of 8.0% of risk-weighted
assets. Under current law and regulations, there are no capital requirements
directly applicable to the Company. There are no capital regulations
directly applicable to the Company. The Bank substantially exceeds
all minimum capital standards and imposed by the OTS. At September
30, 1996, the Bank had a tangible capital ratio of 20.93%, a core
capital ratio of 20.93% and a risk based capital ratio of 61.08%.
OTS regulations (the implementation of which have been delayed) require
that certain institutions with more than normal interest rate risk
must make a deduction from capital before determining compliance with
the minimum capital requirements. The Bank is currently exempt from
the deduction requirement because it has total assets less than $300,000,000
and risk based capital in excess of 12%. However, the Bank's capital
ratios are high enough that even if the rules are implemented and
the exemption is withdrawn, the deduction would not have a material
effect on the Bank's compliance with OTS capital requirements.
The OTS has the authority to require that an institution take prompt
corrective action to solve problems if the institution is undercapitalized,
significantly undercapitalized or critically undercapitalized. Because
of the Bank's high capital ratios, the prompt corrective action regulations
are not expected to have an effect on the Bank.
Deposit Insurance Premiums. The FDIC's deposit insurance premiums
are assessed through a risk-based system under which all insured depository
institutions are placed into one of nine categories and assessed insurance
premiums based upon their level of capital and supervisory evaluation.
Under the system, institutions classified as well capitalized and
considered healthy pay the lowest premium. The Bank is in this category
and currently pays negligible deposit insurance premiums. If the
Bank's capital ratios substantially deteriorate or if the Bank is
found to be otherwise unhealthy, the deposit insurance premiums payable
by the Bank could increase.
In September 1996, The Economic Growth and Regulatory Paperwork
Reduction Act of 1996 (the "1996 Act") became law. Before the 1996 Act, SAIF
insured institutions were paying deposit insurance premiums at a rate
of at least 0.23% of insured deposits (23 cents per $100). This gave
most BIF institutions, such as the Bank, a competitive advantage because
the BIF insurance premiums were lower. The 1996 Act imposed a one
time assessment on all SAIF institutions and then equalized the insurance
premiums for BIF and SAIF institutions. At the same time, the 1996
Act required BIF institutions to contribute to the costs of the "FICO"
bonds sold in the late 1980s to finance the savings and loan bailout.
BIF institutions will pay only 20% of the FICO bond assessment paid
by SAIF institutions. It has been estimated that SAIF institutions
will pay a FICO bond assessment of .065% of insured deposits, while
BIF institutions such as the Bank will pay approximately 0.013% of
insured deposits. The FICO bond assessment will equalize no later
than January 1, 2000. As a result of the 1996 Act, the competitive
advantage which the Bank may have enjoyed against SAIF institutions
has been reduced, but not yet eliminated.
The 1996 Act contemplates a merger of the SAIF and BIF funds, with
the elimination of the federal savings bank charter by January 1,
1999. The exact manner in which the elimination will be accomplished
has not yet been established, but commentators have suggested that
all federal thrift institutions, such as the Bank, will be required
to convert either to a national bank, state commercial bank or state
savings bank charter. A change in the charter of the Bank could also
affect the flexibility accorded to the Company as a unitary savings
and loan holding company. The effect that the forced conversion will
have on the Bank and the Company cannot be determined at this time
and there can be no assurance that a charter conversion will not have
an adverse impact on the Company or the Bank.
Dividend Restrictions. OTS regulations impose limits on dividends
or other capital distributions by savings institutions based on capital
levels and net income. An institution, such as the Bank, that meets
or exceeds all of its capital requirements (both before and after
giving effect to the distribution) and is not in need of more than
normal supervision, may make capital distributions during a calendar
year of up to the greater of (i) 100% of net income for the current
calendar year plus 50% of its capital surplus (capital in excess of
regulatory requirements) or (ii) 75% of its net income over the most
recent four quarters. Any additional capital distributions require
prior regulatory approval.
The Bank's capital levels exceed regulatory minimums to such an
extent that the substantive restrictions on dividends are not expected to
have a material effect on the Bank. However, OTS regulations also
impose procedural restrictions. The OTS must receive at least 30
days' written notice before making any capital distributions. All
such capital distributions are subject to the OTS' right to object
to a distribution on safety and soundness grounds. The OTS has proposed
regulations that would eliminate the notice requirement for the highest
rated institutions so that advance notice would not be required for
most normal dividends. The Bank expects that it will not be required
to give notice under normal circumstances if the new proposal is adopted
in its current form.
Qualified Thrift Lenders. If the Bank fails to remain a QTL, as
defined below, it must either convert to a national bank charter or
be subject to restrictions on its activities specified by law and
the OTS regulations, which restrictions would generally limit activities
to those permitted for national banks. Also, three years after the
savings institution ceases to be a QTL, it would be prohibited from
retaining any investment or engaging in any activity not permissible
for a national bank and would be required to repay any outstanding
borrowings from any Federal Home Loan Bank.
A savings institution will be a QTL if its qualified thrift
investments equal or exceed 65% of its portfolio assets on a monthly average
basis in nine of every 12 months. Qualified thrift investments include,
among others, (i) certain housing-related loans and investments (notably
including residential one to four family mortgage loans), (ii) certain
federal government and agency obligations, (iii) loans to purchase
or construct churches, schools, nursing homes and hospitals (subject
to certain limitations), (iv) consumer loans (subject to certain limitations),
(v) shares of stock issued by any Federal Home Loan Bank, and (vi)
shares of stock issued by the FHLMC or the FNMA (subject to certain
limitations). At September 30, 1996, the Bank satisfied the QTL test.
Community Reinvestment Act. Under the Community Reinvestment Act
(the "CRA"), as implemented by OTS regulations, the Bank has a continuing
and affirmative obligation consistent with its safe and sound operation
to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The Bank is periodically examined
by the OTS for compliance with the CRA. Subject to certain exceptions
and elections, under recently adopted rules the Bank's CRA performance
will be evaluated based upon the lending, investment and service activities
of the Bank. The Bank received a "satisfactory" CRA rating from the
OTS under prior evaluation rules and has not yet been examined under
the new rules.
Federal Reserve Regulation. Under Federal Reserve Board regulations,
the Bank must maintain reserves against its transaction accounts (primarily
interest-bearing checking accounts) and non-personal time deposits.
The effect of the reserve requirements is to compel the Bank to maintain
certain low-yielding reserve deposits which are not available for
investment in higher yielding assets. However, at the present time,
in light of the Bank's high liquidity ratio, the reserve requirements
do not have a material adverse effect on the Bank. The balances maintained
to meet the reserve requirements may be used to satisfy liquidity
requirements imposed by the OTS. The Bank is in compliance with its
reserve requirements.
Taxation. The Company pays federal and New York State income taxes
on its income. The Bank, as a savings institution, was permitted
a deduction under former law for the creation of a reserve for bad
debts. In August 1996, the Internal Revenue Code (the "Code") was
amended to abolish the percentage method of calculating the tax bad
debt deduction, which, in general, had permitted savings institutions
to deduct 8% of their taxable income as a reserve for bad debts.
The Bank had not been eligible to use the percentage method because
its retained earnings and surplus exceeded 12% of deposits, so the
abolition should not have a material effect on current operations.
Furthermore, the change in the Code also requires savings institutions
to recapture, over a period of from six to eight years, any additions
to their tax bad debt reserves since 1988. The Bank had already provided,
as a provision for deferred taxes in accordance with SFAS No. 109,
for the tax consequences of the Bank's post-1987 additions to the
tax bad debt reserve. Therefore, the recapture requirement should
not have a material financial statement impact.
Market Area
Catskill (population of 11,965, in the 1990 census) is located
approximately 30 miles south of Albany on the western banks of the Hudson River
and is the largest municipality in Greene County. Greene County extends
from the Hudson River west into the northern Catskill Mountains.
The Bank's primary market area is heavily dependent on tourism and
does not have a substantial commercial or industrial base and has
shown only limited economic and demographic growth. The Bank's market
is supported by an older population base.
Overall, the population of Albany County has remained relatively
flat in the last decade while the more rural Greene County benefited
from a population expansion. In 1995, Greene County registered a
48,000 population count, a 10.1% increase from 1985.
The business sectors in Greene County which account for the largest
percentage of earnings are state and local government, the service
industry and wholesale and retail trade. Manufacturing also accounts
for a noteworthy percentage of earnings in Greene County. The New
York State Thruway, which runs through Greene County, as well as the
county's lower cost of living, are attractive features to local employers,
especially distributors such as United Stationers and manufacturers
such as Dynabil Industries. Major sources of employment in Greene
County include a state prison, the county government and various health
care facilities, as well as various manufacturing companies.
Based on the latest available data, there are a total of 16 deposit
taking offices of commercial banks and thrift institutions in Greene
County and 109 in Albany County. The Bank's two Catskill offices
hold approximately 30% of all deposits in Greene County and 58% of
thrift institution deposits. In Albany County, with a much larger
deposit base, the Bank's share of all deposits was approximately 0.9%.
Lending Activities
General. The Bank's primary lending activity is the origination of
fixed- and adjustable rate, one- to four-family residential mortgage
loans for retention in its portfolio. The Bank also originates fixed-rate
consumer loans and adjustable-rate home equity line of credit consumer
loans. Adjustable rate mortgage ("ARM") and consumer loans increase
the percentage of the Bank's loans with more frequent terms to repricing
or shorter maturities than fixed-rate, one- to four-family mortgage
loans. See "- Loan Portfolio Composition" and "- One- to Four-Family
Residential Real Estate Lending." In addition, the Bank originates
multi-family and commercial real estate loans. Loan originations
are generated by the Bank's marketing efforts, which include print
and radio advertising, lobby displays and direct contact with local
civic organizations, as well as by the Bank's present customers, walk-in
customers and referrals from real estate agents and builders. At
September 30, 1996, the Bank's gross loan portfolio totaled $124.9
million.
The approval of the Finance Committee of the Bank's Board of Directors
is required for all loans other than non-real estate secured consumer
loans of $50,000 or less. Bank employees with the authority to approve
such consumer loans of $50,000 or less are designated, and their
lending authority is defined, by the Finance Committee. The Finance
Committee acts in accordance with policies established not less frequently
than annually by the Board of Directors.
The aggregate amount of loans that the Bank is permitted to make
under applicable federal regulations to any one borrower, including
related entities, is generally equal to 15% of unimpaired capital
and surplus. At September 30, 1996, the maximum amount which the
Bank could have loaned to any one borrower and the borrower's related
entities was approximately $8.2 million. At that date, the Bank's
largest lending relationship was a $1.8 million commercial real estate
loan secured by a motel located in Albany County, New York. This
loan was performing in accordance with its modified repayment terms
as of September 30, 1996. See "Asset Quality - Other Loans of Concern."
At September 30, 1996, there were no other loans (or lending relationships)
with outstanding balances in excess of $250,000.
Loan Portfolio Composition. The following table presents information concerning the composition of the Bank's loan portfolio
in dollar amounts and in percentages as of the dates indicated.
September 30,
1996 1995 1994 1993 1992
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
Real Estate Loans:
One- to four-family $100,383 80.34% $ 95,588 79.04% $ 96,570 79.37% $ 98,173 80.74% $105,467 83.09%
Multi-family and commercial 5,115 4.09 5,132 4.24 5,606 4.61 3,628 2.98 4,325 3.41
Construction 423 .34 230 .19 743 .61 1,776 1.46 851 .67
Total real estate loans 105,921 84.77 100,950 83.47 102,919 84.59 103,577 85.18 110,643 87.17
Consumer Loans:
Automobile 7,029 5.63 6,652 5.50 5,220 4.29 3,849 3.17 3,228 2.54
Home equity 4,368 3.50 5,393 4.46 6,021 4.95 6,616 5.44 6,817 5.37
Other secured 2,965 2.37 2,970 2.46 2,680 2.20 2,591 2.13 2,758 2.17
Student 2,450 1.96 2,373 1.96 2,195 1.80 1,941 1.60 1,998 1.58
Other unsecured 1,430 1.15 1,415 1.17 1,078 .89 794 .65 789 .62
Mobile home 782 .62 1,185 .98 1,562 1.28 2,223 1.83 700 .55
Total consumer loans 19,024 15.23 19,988 16.53 18,756 15.41 18,014 14.82 16,290 12.83
Total loans 124,945 100.00% 120,938 100.00% 121,675 100.00% 121,591 100.00% 126,933 100.00%
Less:
Deferred fees 579 624 696 712 798
Allowance for loan losses 1,833 1,950 1,746 1,294 857
Total loans receivable, net $122,533 $118,364 $119,233 $119,585 $125,278
The following table presents the composition of the Bank's loan portfolios
by fixed- ale-rate at the dates indicated.
September 30,
1996 1995 1994 1993 1992
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Fixed-Rate Loans:
Real estate:
One- to four-family $ 63,491 50.81% $ 53,993 44.65% $ 51,163 42.05% $45,746 37.62% $ 47,258 37.23%
Multi-family and commercial 2,142 1.71 1,743 1.44 2,295 1.88 1,501 1.23 1,953 1.54
Construction 423 0.34 230 .19 743 .61 1,776 1.46 851 .67
Total real estate loans 66,056 52.86 55,966 46.28 54,201 44.54 49,023 40.31 50,062 39.44
Consumer 14,656 11.73 14,595 12.06 12,735 10.47 11,398 9.38 9,473 7.46
Total fixed-rate loans 80,712 64.59 70,561 58.34 66,936 55.01 60,421 49.69 59,535 46.90
Adjustable-Rate Loans:
Real estate:
One- to four-family 36,892 29.53 41,595 34.40 45,407 37.32 52,427 43.12 58,209 45.86
Multi-family and commercial 2,973 2.38 3,389 2.80 3,311 2.72 2,127 1.75 2,372 1.87
Total real estate loans 39,865 31.91 44,984 37.20 48,718 40.04 54,554 44.87 60,581 47.73
Consumer(<F1>) 4,368 3.50 5,393 4.46 6,021 4.95 6,616 5.44 6,817 5.37
Total adjustable-rate loans 44,233 35.41 50,377 41.66 54,739 44.99 61,170 50.31 67,398 53.10
Total loans 124,945 100.00% 120,938 100.00% 121,675 100.00% 121,591 100.00% 126,933 100.00%
Less:
Deferred fees 579 624 696 712 798
Allowance for loan losses 1,833 1,950 1,746 1,294 857
Total loans receivable, net $122,533 $118,364 $119,233 $119,585 $125,278
<FN>
<F1> Consists entirely of advances on home equity lines of credit.
The following table sets forth the contractual maturities of the Bank's loan portfolio at September 30, 1996.
Loans which have adjustable or renegotiable interest rates are shown as maturing in the period during which
the final loan payment is due without regard to rate adjustments. The table does not reflect the effects of
loan amortization, possible prepayments or enforcement of due-on-sale clauses.
Due During Years Ending September 30,
1997(<F1>) 1998 1999 2000-2001 2002-2006
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
(Dollars in Thousands)
Real Estate
One- to Four-Family $ 5,497 7.73% $5,947 7.74% $ 6,139 7.72% $12,935 7.68% $34,045 7.66%
Multi-family and
Commercial 431 8.70 562 9.24 2,219 8.43 602 9.14 844 9.06
Construction 342 7.21 0 0.00 0 0.00 0 0.00 0 0.00
Consumer
Consumer 5,161 8.62 4,205 8.05 2,647 6.25 2,524 14.54 1,432 10.11
Total Loans $11,431 8.15% $10,714 7.94 $11,005 7.51 $16,061 8.82 $36,321 7.79
2012 and following Total
Weighted Weighted
Average Average
Amount Rate Amount Rate
(Dollars in Thousands)
Real Estate
One- to Four-Family $14,053 7.78% $100,383 7.69%
Multi-family and
Commercial 123 9.33 5,115 8.80
Construction 81 7.90 423 7.34
Consumer
Consumer 1,001 8.26 19,024 9.06
Total Loans $15,258 7.78 $124,945 7.94
<FN>
<FN1> Includes demand loans, loans having no stated maturity and overdraft loans.
One- to Four-Family Residential Real Estate Lending
The Bank's residential first mortgage loans consist of loans to
purchase or refinance one- to four-family, owner-occupied residences and,
to a lesser extent, secondary residences. At September 30, 1996, $100.4
million, or 80.3% of the Bank's gross loans, consisted of one- to
four-family residential first mortgage loans. Approximately 63.2%
of the Bank's one-to four-family residential first mortgage loans
provide for fixed rates of interest. The Bank's one- to four-family
mortgage loans typically provide for repayment of principal over a
period not to exceed 25 years. The Bank's one- to four-family residential
mortgage loans are priced competitively with the market. Accordingly,
the Bank attempts to distinguish itself from its competitors based
on quality of service.
The Bank underwrites its one- to four-family residential first mortgage
loans using Federal National Mortgage Association ("FNMA") secondary
market standards. The Bank holds in its portfolio all one- to four-family
residential first mortgage loans it originates. While the Bank currently
does not sell loans, and presently has no intention to do so, management
may consider selling loans in the future depending on market conditions
and the asset/liability management of the Bank. In underwriting one-
to four-family residential first mortgage loans, the Bank evaluates
both the borrower's credit history and ability to make monthly payments,
and the value of the property securing the loan. Properties securing
ARM loans exceeding $100,000 and all fixed-rate loans are appraised
by independent fee appraisers approved by the Board of Directors.
Property securing ARM loans less than $100,000 are appraised by both
a director and a designated loan officer, vice president or the Bank's
president. The Bank requires borrowers to obtain title insurance,
hazard insurance (including flood insurance, where appropriate) naming
the Bank as lienholder in an amount not less than the amount of the
loan, or the maximum insurable value of the property.
The Bank currently offers residential ARM loans with interest rates
that adjust either annually, or every three years with adjustments
based on the change in the comparable Treasury Bill index. ARM loans
originated prior to 1990 were adjusted based upon a Federal Home Loan
Bank Board index, which has been converted to a Federal Housing Finance
Board index. All recent ARM loans provide for a 2.0% periodic cap
and a lifetime cap of 6.0% over the initial rate. As a consequence
of using caps, the interest rates on these loans may not be as rate
sensitive as is the Bank's cost of funds. Borrowers of residential
ARM loans are generally qualified at the maximum increase in rate
which could occur at the first adjustment period, which may be lower
than the fully indexed rate. The Bank's residential ARM loans are
not convertible into fixed-rate loans. ARM loans generally pose
greater credit risks than fixed-rate loans, primarily because as interest
rates rise, the required periodic payment by the borrower rises, increasing
the potential for default. As of September 30, 1996, however, the
Bank had not experienced default rates on these loans materially higher
than on similar fixed rate loans.
The Bank's one- to four-family mortgage loans do not contain prepayment
penalties and do not permit negative amortization of principal. Real
estate loans originated by the Bank generally contain a "due on sale"
clause allowing the Bank to declare the unpaid principal balance due
and payable upon the sale of the mortgaged property. The Bank may
waive the due on sale clause on loans held in its portfolio to permit
assumptions of loans by qualified borrowers.
The Bank does not currently originate residential mortgage loans
if the ratio of the loan amount to the lower of appraised value, or
the purchase price of the property securing the loan (i.e., the "loan-to-value"
ratio) exceeds 95%. If the loan-to-value ratio exceeds 80%, the Bank
requires that borrowers obtain private mortgage insurance in amounts
intended to reduce the Bank's exposure to 80% or less of the lower
of the appraised value or the purchase price of the real estate security.
The Bank also offers construction loans to individuals for the
construction of their residences. The Bank has occasionally made loans to
builders for the construction of homes including a limited amount of housing
construction loans to builders where the home has not been pre-sold.
Generally, no construction loan is approved unless there is evidence
of a commitment for permanent financing upon completion of the residence,
whether through the Bank or another financial institution. Construction
loans generally require construction stage inspections before funds
may be released to the borrower. At September 30, 1996, the Bank's
construction loan portfolio totaled $423,000, or 0.34% of its gross
loan portfolio. Although no construction loans were classified as
non-performing as of September 30, 1996, these loans do involve a
higher level of risk than conventional one- to four-family residential
mortgage loans. For example, if construction is not completed and
the borrower defaults, the Bank may have to hire another contractor
to complete the project at a higher cost, or completion could be delayed.
Multi-Family and Commercial Real Estate Lending
The Company has engaged in multi-family and commercial real estate
lending secured primarily by small offices, retail establishments
and apartment buildings located in the Bank's primary market area.
At September 30, 1996, the Company had multi-family and commercial
real estate loans totaling $5.1 million, which represented 4.1% of
the Bank's gross loan portfolio. Included in commercial real estate
loans is a $1.8 million loan secured by a motel located in northern
Albany County, New York. See "Asset Quality - Other Loans of Concern."
Multi-family and commercial real estate loans originated by the Bank
generally have a variety of rate adjustment features and other terms.
The Bank's multi-family and commercial real estate loans typically
are for amounts less than $250,000, and generally do not exceed 70%
of the appraised value of the property securing the loan. The term
of such loans does not generally exceed 20 years. The Bank analyzes
the financial condition of the borrower, the borrower's credit history,
the sufficiency and reliability of the net income generated by the
property securing the loan and the value of the property itself.
The Bank generally requires personal guarantees of the borrowers in
addition to the security property as collateral for such loans. Appraisals
on properties securing multi-family and commercial real estate loans
are performed by independent fee appraisers approved by the Board
of Directors. See "- Loan Originations."
Multi-family and commercial real estate loans generally present a
higher level of risk than loans secured by one- to four-family residences.
This greater risk is due to several factors, including the concentration
of principal in a limited number of loans and borrowers, the effect
of general economic conditions on income producing properties and
the increased difficulty of evaluating and monitoring these types
of loans. Furthermore, the repayment of loans secured by multi-family
and commercial real estate is typically dependent upon the successful
operation of the related real estate project. If the cash flow from
the project is reduced (for example, if leases are not obtained or
renewed, or a bankruptcy court modifies a lease term, or a major tenant
is unable to fulfill its lease obligations), the borrower's ability
to repay the loan may be impaired and the value of the property may
be reduced.
Consumer Lending
The Bank currently originates substantially all of its consumer loans
in its primary market area. Management believes that offering consumer
loan products helps expand the Bank's customer base and creates stronger
ties to its existing customer base. In addition, because consumer
loans generally have shorter terms to maturity or adjustable rates
and may carry higher rates of interest than do residential mortgage
loans, they can be useful asset/liability and interest rate spread
management tools. The Bank originates consumer loans on a direct
basis, in which the Bank extends credit directly to the borrower.
At September 30, 1996, the Bank's consumer loan portfolio totaled
$19.0 million, or 15.2% of the gross loan portfolio. Of consumer
loans at September 30, 1996, 77.0% were fixed-rate loans and 23.0%
were adjustable-rate loans. At that date, all of the Bank's adjustable-rate
consumer loans were advances on home equity lines of credit.
The Bank offers consumer loans for a variety of purposes. Consumer
loan terms vary according to the type and value of collateral, contractual
maturity and creditworthiness of the borrower. Terms to maturity
range up to 15 years with respect to home equity lines of credit and
5 years with respect to all other types of consumer loans. Unsecured
consumer lines of credit are extended to borrowers through their checking
account maintained at the Bank. These credit lines currently bear
interest at 18.0% and are generally limited to $50,000.
Underwriting standards for consumer loans include a determination
of the applicant's payment history on other debts and an assessment
of ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is a primary consideration,
the underwriting process also includes a comparison of the value of
the security, if any, in relation to the proposed loan amount.
At September 30, 1996, automobile loans, the largest component of
the Bank's consumer loan portfolio, totalled $7.0 million, or 36.9%
of the Bank's total consumer loan portfolio and 5.6% of the Bank's
gross loan portfolio. The Bank originates loans to purchase both
new and used automobiles at fixed rates of interest and terms of up
to five years. The Bank's maximum loan-to-value ratio on new automobile
loans is 95% of the borrower's cost, which includes such items as
dealer options.
Advances on home equity lines of credit represent the second largest
component of the Bank's consumer loan portfolio. The Bank's home
equity lines of credit are secured by a lien on the borrower's residence
and are generally originated in amounts which, together with all
prior liens on such residence, do not exceed 70.0% of the appraised
value of the property securing the loan. The interest rates for home
equity lines of credit float at a stated margin over the prime rate.
Home equity lines of credit generally require interest only payments
on the outstanding balance for the first five years of the loan, after
which the outstanding balance may be converted into a fully amortizing,
adjustable-rate loan with a term not in excess of 15 years. As of
September 30, 1996, the Bank had $4.4 million in outstanding advances
on home equity lines of credit, with an additional $1.4 million of
unused home equity lines of credit.
Consumer loans may entail greater credit risk than do residential
first mortgage loans, particularly in the case of consumer loans which
are unsecured or are secured by rapidly depreciable assets, such as
automobiles. In such cases, any repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of high initial loan-to-value
ratios, repossession, rehabilitation and carrying costs, and the greater
likelihood of damage, loss or depreciation of the underlying collateral.
Home equity line of credit loans are generally secured by subordinate
mortgages which present greater risks than first mortgage liens. At
September 30, 1996, $283,000, or 1.5% of the Bank's consumer loan
portfolio was non-performing. There can be no assurances that additional
delinquencies will not occur in the future.
Commercial Business Lending
Federal regulations authorize federally-chartered savings banks,
such as the Bank, to make non-real estate secured or unsecured loans for
commercial, corporate, business and agricultural purposes, up to a
maximum of 10% of total assets. The Bank engages in such commercial
business lending only to a very limited extent and primarily through
the New York Business Development Corporation (the "NYBDC"), a privately
owned corporation which provides loans, management assistance, counseling
and a variety of other financial programs to small and medium sized
businesses located in New York. Loans made through the NYBDC may
be to businesses located within or outside the Bank's primary market
area. The Bank is one of 119 participating commercial and savings
banks. At September 30, 1996, the Bank had approximately $26,000
in commercial business loans outstanding, representing an insignificant
part of its loan portfolio, with an additional $109,000 committed
for loans through NYBDC. At September 30, 1996, all of the Bank's
commercial business loans were performing in accordance with their terms.
Loan Originations
Loan originations are developed from continuing business with depositors
and borrowers, referrals from real estate agents and walk-in customers.
All of the Bank's loans are originated by its salaried employees.
The Bank's ability to originate loans is dependent upon demand
for loans in its market. Demand is affected by the local economy and
interest rate environment. The Bank retains all new fixed-rate and
adjustable-rate real estate loans in its portfolio. The Bank does
not sell loans and has not purchased any loans since fiscal 1993.
During the year ended September 30, 1996, the Bank originated $26.8
million of loans, compared to $16.7 million and $27.8 million in
1995 and 1994, respectively. Management attributes the increase in
originations during 1996 to the low interest rate environment after
the Federal Reserve lowered the discount rate in January 1996, which
caused many individuals to refinance their loans. Similarly, management
attributes the decrease in or the "leveling off" of loan originations
for the year ended September 30, 1995 as compared to the same period
in 1994 to the sharp decline in refinancing as a result of a generally
rising interest rate environment since mid-1994 and local market conditions.
In periods of economic uncertainty, the Bank's ability to originate
sufficient real estate loans with acceptable underwriting characteristics
may be substantially reduced or restricted with a resultant decrease
in operating earnings as assets may have to be invested in lower-yielding
securities or similar investments. While the Bank currently does
not sell loans, and presently has no intention to do so, management
may consider selling loans in the future depending on market conditions
and the asset/liability management requirements of the Bank.
The following table shows the loan originations, purchases, sales, and repayment activities
of the Bank for the periods indicated. The Bank did not sell any loans during the periods presented.
Year Ended September 30,
1996 1995 1994
(In Thousands)
Originations by type:
One- to four-family and construction $ 19,760 $ 9,114 $20,467
Multi-family and commercial 150 --- 400
Consumer 6,938 7,584 6,919
Total loans originated 26,848 16,698 27,786
Purchases:
Total --- --- ---
Sales:
Total --- --- ---
Repayments:
Principal repayments (22,312) (17,098) (27,345)
Increase (decrease) in other items, net (529) (337) (357)
Net increase (decrease) $ 4,007 $ (737) $ 84
Asset Quality
Generally, when a borrower fails to make a required payment on a loan
secured by residential real estate, the Bank initiates collection
procedures by mailing a delinquency notice after the account is 15
days delinquent. At 30 days delinquent, the Bank attempts to contact
the customer by telephone to investigate the delinquency and a personal
letter is sent to the customer requesting him or her to make arrangements
to bring the loan current. If the delinquency is not cured by the
45th day, the Bank again attempts to contact the customer by telephone
and another personal letter is sent. After 60 days delinquent, the
Bank may commence foreclosure proceedings.
With respect to consumer loans, when a borrower fails to make a
required payment, the Bank initiates collection procedures by mailing a
delinquency notice after the account is 10-15 days delinquent, and again at
20 days delinquent. At 25 days delinquent, the Bank attempts to contact
the customer by telephone to investigate the delinquency. At 30 days
delinquent, a personal letter is sent to the customer requesting him
or her to make arrangements to bring the loan current. At 40 days
delinquent, the Bank again attempts to contact the customer by telephone
to secure payment. If the delinquency is not cured by the 45th day,
the Bank refers the loan to its attorney, who sends another personal
letter notifying the customer that no further payments will be accepted
by the Bank absent a meeting between the customer and a Bank loan
officer. If no satisfactory arrangements have been made by the 75th
day, repossession of collateral, if possible, is undertaken and, if
necessary, legal proceedings are commenced to collect the loan.
The following table sets forth the Bank's loan delinquencies by type,
by amount and by percentage of type at September 30, 1996.
Loans Delinquent For:
60-89 Days 90 Days and Over Total Delinquent Loans
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
(Dollars in Thousands)
One- to four-family
real estate 10 $ 540 .54% 20 $ 1,008 1.00% 30 $1,548 1.54%
Multi-family
and commercial
real estate -- --- --- 1 78 1.52 1 78 1.52
Consumer 10 56 .29 11 283 1.49 21 339 1.78
Total 20 $ 596 .48 32 $1,369 1.10 52 $1,965 1.58
Non-Performing Assets.
The table below sets forth the amounts and categories of the Bank's non-performing assets. Loans are placed on non-accrual
status when the loan is more than 90 days delinquent(except for FHA insured and VA guaranteed loans) or when the collection
of principal and/or interest in full becomes doubtful. When loans are designated as non-accrual, all accrued but unpaid
interest is reversed against current period income and subsequent cash receipts generally are applied to reduce the unpaid
principal balance. Foreclosed assets include assets acquired in settlement of loans.
September 30,
1996 1995 1994 1993 1992
(Dollars in Thousands)
Non-accruing loans:
One- to four-family real estate $ 1,008 $ 784 $ 650 $ 409 $ 578
Multi-family and commercial real estate 78 --- --- --- 1,351
Consumer 283 251 --- 15 4
Total 1,369 1,035 650 424 1,933
Troubled debt restructured loans:
Multi-family and commercial real estate --- --- --- 1,427 ---
Total --- --- --- 1,427 ---
Foreclosed assets, net:
One- to four-family real estate 334 326 220 56 ---
Multi-family and commercial real estate 23 158 158 --- ---
Total 357 484 378 56 ---
Total non-performing assets $ 1,726 $1,519 $1,028 $1,907 $1,933
Total as a percentage of total assets .61% .66% .45% .84% .93%
For the year ended September 30, 1996, gross interest income which
would have been recorded had the non-accruing loans been current in
accordance with their original terms amounted to $77,000. The amount
included in interest income on such loans during the year ended September
30, 1996 was not significant.
Non-Accruing Assets. At September 30, 1996, the Bank had $1.4 million
in non-accruing loans, which constituted 1.10% of the Bank's gross
loan portfolio. At September 30, 1996, the Bank's non-accruing loans
consisted of 20 one- to four-family residential mortgage loans totaling
$1,008,000, one commercial real estate loan totaling $78,000 and eleven
consumer loans totaling $283,000.
Foreclosed Assets. As of September 30, 1996, the Bank had $357,000
in carrying value of foreclosed assets consisting of eight one- to
four-family properties aggregating $334,000 and one commercial real
estate property aggregating $23,000.
Other Loans of Concern. As of September 30, 1996, there were $2.0
million of other loans (consisting of a restaurant/personal residence
aggregating $200,000, and one commercial real estate loan totalling
$1.8 million) not included in the table or discussed above where known
information about the possible credit problems of borrowers caused
management to have doubts as to the ability of the borrower to comply
with present loan repayment terms. These loans have been considered
by management in conjunction with the analysis of the adequacy of
the allowance for loan losses.
The largest other loan of concern is a commercial real estate loan
secured by a motel located in Albany County, New York. The Bank
originated the loan in July 1984 in the amount of $147,000 secured
by a 50 room motel. The property was appraised at that time for $1.4
million. In 1986, the Bank made an additional loan of $845,000 to
finance motel renovations. The current borrower assumed the loan
in October 1987. The Bank made two additional loans totaling $130,000
to the borrower for the purchase of adjacent land and additional renovations.
After delinquencies due to problems with motel operations, the Bank
in May 1993 consolidated the outstanding loans by extending the loan
term, obtaining additional collateral and lending an additional $400,000
for renovations. The modified terms included an effective interest
rate consistent with the market at the time of the modification.
Total loans outstanding in May 1993 were approximately $1.5 million.
In October 1993, the Bank advanced an additional $400,000 for further
renovations necessary to allow the motel to become a franchise of
a major motel chain. In August 1994, the renovation of the motel was
completed and the motel became a franchise of a major motel chain.
The loan has been amortizing based on a 25-year repayment term and
a balloon payment is due at maturity in September 1998. The loan
has been performing in accordance with its repayment terms since May
1993. In August 1996, the motel business and property were appraised
at approximately $3.4 million. At September 30, 1996, the outstanding
balance on the loan was $1.8 million.
Classified Assets. Federal regulations provide for the
classification of loans and other assets, such as debt and equity
securities considered to be of lesser quality, as "substandard," "doubtful"
or "loss." An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or
of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the insured institution
will sustain "some loss" if the deficiencies are not corrected. Assets
classified as "doubtful" have all of the weaknesses inherent in those
classified "substandard," with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable
and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as
assets without the establishment of a specific loss reserve is not
warranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it may increase general allowances for loan losses
in an amount deemed prudent by management to address the increased risk
of loss on such assets. General allowances represent loss allowances
which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have
not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either
to establish a specific allowance for losses equal to 100% of that
portion of the asset so classified or to charge off such amount.
An institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review and
adjustment by the OTS and the FDIC, which may order increases in general
or specific loss allowances.
In accordance with its classification of assets policy, the Bank
regularly reviews the problem assets in its portfolio to determine whether
any assets require classification in accordance with applicable regulations.
On the basis of management's review of its assets, at September 30,
1996, the Bank had classified $1.5 million as substandard and none
as doubtful or loss.
Allowance for Loan Losses. At September 30, 1996, the Bank had a
total allowance for loan losses of $1.8 million, representing 134%
of total non-performing loans. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation
of the risk inherent in its loan portfolio and changes in the nature
and volume of its loan activity, including those loans which are being
specifically monitored by management. Such evaluation, which includes
a review of loans for which full collectibility may not be reasonably
assured, considers among other matters, the loan classifications discussed
above, the estimated fair value of the underlying collateral, economic
conditions, historical loan loss experience, and other factors that
warrant recognition in providing for an adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded
at fair value, less selling costs. If fair value, less selling costs,
at the date of foreclosure is lower than the book balance of the related
loan, the difference will be charged to the allowance for loan losses
at the time of transfer. Valuations of the property are periodically
updated by management and if the value declines, a specific provision
for losses on such property is established by a charge to operations.
The determination of the adequacy of the allowance is necessarily
speculative, based upon future loan performance outside the control
of the Bank. Adverse local, regional or national economic conditions,
changes in interest rates, population, products and other factors
can all adversely affect future loan delinquency rates. Unforeseen
conditions could require adjustments to the allowance through additional
loan loss provisions. Net earnings could be significantly affected
if circumstances differ substantially from the assumptions used in
determining the level of the allowance. In addition, federal regulatory
agencies, as an integral part of the examination process, periodically
review the Bank's allowance for loan losses. Such agencies may require
the Bank to increase the allowance based upon their judgment of the
information available to them at the time of their examination.
The following table sets forth an analysis of the Bank's allowance for loan losses.
Year Ended September 30,
1996 1995 1994 1993 1992
(Dollars in Thousands)
Balance at beginning of period $1,950 $1,746 $1,294 $ 857 $ 464
Charge-offs:
One- to four-family real estate (237) (12) (3) --- (9)
Multi-family and commercial real estate --- --- --- (20) ---
Consumer (86) (50) (29) (45) (5)
Total charge-offs (323) (62) (32) (65) (14)
Recoveries:
One- to four-family real estate --- 1 14 10 12
Consumer 11 10 5 22 5
Total recoveries 11 11 19 32 17
Net charge-offs (312) (51) (13) (33) 3
Additions charged to operations 195 255 465 470 390
Balance at end of period $1,833 $1,950 $1,746 $1,294 $ 857
Ratio of net charge-offs during the period to
average loans outstanding during the period .26% .04% .02% .03% .01%
Ratio of net charge-offs during the period to
average non-performing assets 18.60% 4.46% 1.01% 1.83% .25%
The distribution of the Bank's allowance for losses on loans at the dates indicated is summarized as follows:
September 30,
1996 1995 1994
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
(Dollars in Thousands)
One- to four-family
real estate $ 496 $100,383 80.34% $ 737 $ 95,588 79.04% $ 670 $ 96,570 79.37%
Multi-family and
commercial real
estate 128 5,115 4.09 443 5,132 4.24 419 5,606 4.61
Construction --- 423 .34 --- 230 .19 --- 743 .61
Consumer 250 19,024 15.23 220 19,988 16.53 134 18,756 15.41
Unallocated 959 --- -- 550 --- -- 523 -- --
Total $1,833 $124,945 100.00% $1,950 $120,938 100.00% $1,746 $121,675 100.00%
1993 1992
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
One- to four-family
real estate $ 505 $98,173 80.74% $516 $105,467 83.09%
Multi-family and
commercial real
estate 317 3,628 2.98 36 4,325 3.41
Construction 19 1,776 1.46 --- 851 .67
Consumer 83 18,014 14.82 48 16,290 12.83
Unallocated 370 --- --- 257 --- ---
Total $1,294 $121,591 100.00% $857 $126,933 100.00%
Investment Activities
General. The Bank must maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. Liquidity may increase
or decrease depending upon the availability of funds and comparative
yields on investments in relation to the return on loans. Historically,
the Bank has maintained liquid assets at levels above the minimum
requirements imposed by the OTS regulations and above levels believed
adequate to meet the requirements of normal operations, including
potential deposit outflows. For September 1996, the Bank's average
regulatory liquidity ratio (liquid assets as a percentage of net withdrawable
savings deposits and current borrowings) was 52.9%.
Securities. Federally chartered savings institutions have the
authority to invest in various types of liquid assets, including United
States Treasury obligations, securities of various federal agencies, certain
certificates of deposit of insured banks and savings institutions,
certain bankers' acceptances, repurchase agreements and federal funds.
Subject to various restrictions, federally chartered savings institutions
also may invest their assets in investment grade commercial paper
and corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution
is otherwise authorized to make directly. At September 30, 1996,
the Company's securities totaled $81.1 million, or 28.6% of total
assets, $62.1 million of which are classified as "available for sale"
and the balance of $19 million as "held to maturity."
Generally, the investment policy of the Bank is to invest funds
among various categories of investments and maturities based upon the
Bank's need for liquidity, to achieve the proper balance between its desire
to minimize risk and maximize yield, to provide collateral for borrowings
and to fulfill the Bank's asset/liability management policies. To
date, the Bank's investment strategy has been directed toward high-quality
assets (primarily U.S. Government securities and federal agency obligations
and high grade corporate debt securities) with short and intermediate
terms (five years or less) to maturity. Corporate debt securities
generally are considered of higher risk than U.S. Government securities
and federal agency obligations. At September 30, 1996, the weighted
average term to maturity or repricing of the security portfolio, excluding
other marketable equity securities, was 1.14 years. See Note 4 of
the Notes to Consolidated Financial Statements for information regarding
the maturities of the Bank's securities available for sale portfolio
and Note 5 for information on the Company's securities held to maturity
portfolio.
Mortgage-Backed Securities. In order to supplement loan production,
meet its QTL requirement and achieve its asset/liability management goals, the
Bank invests in mortgage-backed securities. All of the mortgage-backed
securities owned by the Bank are issued, insured or guaranteed either
directly or indirectly by a federal agency. At September 30, 1996, the
Company had $35.0 million of mortgage-backed securities, or 12.3% of total
assets, the majority of which, are classified as available for sale.
See Note 4 of the Notes to Consolidated Financial Statements for
information regarding the maturities of the Bank's mortgage-backed
securities portfolio.
The following table sets forth the composition of the Company's securities, mortgage-backed securities
and other interest-earning assets at the dates indicated.
September 30,
1996 1995 1994
Amortized % of Amortized % of Amortized % of
Cost Total Cost Total Cost Total
(Dollars in Thousands)
Securities:
U.S. government securities $19,829 24.52% $24,035 44.97% $37,287 58.12%
Corporate bonds 9,999 12.34 16,152 30.22 15,250 23.77
Federal agency obligations 50,978 62.89 13,053 24.43 11,067 17.25
Municipal bonds 206 .25 203 .38 499 .78
Other 3 --- --- --- 48 .08
Total securities $81,015 100.00% $53,443 100.00% $64,151 100.00%
Average remaining contractual
life of securities 1.14 years 1.98 years 2.22 years
Federal Home Loan Bank Stock
of New York, required by law $ 1,159 100.00% --- --- --- ---
Other interest-earning assets:
Federal funds sold $35,600 100.00% $34,700 100.00% $24,600 100.00%
Mortgage-backed securities:
GNMA $17,169 48.71% $13,550 99.29% $13,849 99.48%
FNMA 13,971 39.63 --- --- --- ---
FHLMC 4,011 11.38 46 .34 55 .40
Other 98 .28 51 .37 18 .12
Total mortgage-backed
securities $35,249 100.00% $13,647 100.00% $13,922 100.00%
In December 1995, the Company transferred certain securities with
amortized costs totaling $24.8 million and fair values totaling $25.3
million from the "held to maturity" classification to the "available
for sale" classification. In addition, since the transfer, all new
securities purchased have been designated as "available for sale."
For further detail on the "Available for Sale" and "Held to Maturity"
portfolio see Notes 4 and 5, respectively, of the Company's Notes
to Consolidated Financial Statements."
The composition and maturities of the securities portfolio by contractual maturity are indicated in the following table.
September 30, 1996
Less Than 1 to 5 5 to 10 Over Total Securities
1 Year Years Years 10 Years
Amortized Amortized Amortized Amortized Amortized Fair
Cost Cost Cost Cost Cost Value
(Dollars in Thousands)
U.S. government securities
and federal agency obligations $46,964 $23,893 $ --- $ --- $70,807 $71,282
Corporate bonds and other 6,014 2,998 392 804 10,208 10,260
Total investment securities $52,978 $26,891 $ 392 $ 804 $81,015 $81,542
Weighted average yield 5.95% 6.37% 7.09% 6.66% 6.10%
The Bank's securities portfolio at September 30, 1996, did not contain
securities of any issuer with an aggregate book value in excess of
10% of the Bank's equity, excluding those issued by the United States
Government or its agencies.
The following table sets forth the final contractual maturities of the Bank's mortgage-backed securities at September 30, 1996.
Due in September 30,
3 Years 3 to 5 5 to 10 10 to 20 Over 20 1996
or Less Years Years Years Years Amortized Cost
(In Thousands)
GNMA $ --- $ --- $ 75 $3,524 $13,570 $17,169
FNMA --- 13,971 --- --- --- 13,971
FHLMC --- --- --- 4,011 --- 4,011
Other 51 --- --- --- 47 98
Total $ 51 $13,971 $ 75 $7,535 $13,617 $35,249
Sources of Funds
General. The Bank's primary sources of funds are deposits,
amortization and prepayment of loans and mortgage-backed securities,
maturities of securities, short-term investments, and funds provided from
operations.
Deposits. The Bank offers deposit accounts having a range of
interest rates and terms. The Bank offers passbook and statement savings
accounts, money market savings accounts, transaction accounts, and
certificate of deposit accounts currently ranging in terms from six months
to six years. The Bank only solicits deposits from its primary market
area and does not have brokered deposits. The Bank relies primarily
on competitive pricing policies, advertising and customer service
to attract and retain these deposits. The Bank generally does not
utilize premiums or promotional gifts for new accounts, although one
existing program for senior citizens does provide certain enumerated
benefits, such as discounts on loans and safe deposit boxes, free
travelers checks, money orders and a variety of other services.
The flow of deposits is influenced significantly by general
economic conditions, changes in money market and prevailing interest
rates, and competition. The variety of deposit accounts offered by the
Bank has allowed it to be competitive in obtaining funds and to respond
with flexibility to changes in consumer demand. In recent years,
the Bank has become more susceptible to short-term fluctuations in
deposit flows, as customers have become more interest rate conscious.
The Bank manages the pricing of its deposits in keeping with its
asset/liability management, liquidity and profitability objectives.
Based on its experience, the Bank believes that its passbook, statement
savings accounts, money market savings accounts and transaction accounts
are relatively stable sources of deposits. However, the ability of the
Bank to attract and maintain certificates of deposit and the rates paid on
those deposits has been and will continue to be significantly affected by
market conditions.
The following table sets forth the deposit flows at the Bank during the periods indicated.
Year Ended September 30,
1996 1995 1994
(Dollars in Thousands)
Opening balance $197,230 $200,825 $199,812
Deposits 235,800 235,872 198,323
Withdrawals 244,962 247,438 204,735
Interest credited 8,685 7,971 7,425
Ending balance $196,753 $197,230 $200,825
Net increase
(decrease) $ (477) $ (3,595) $ 1,013
Percent increase
(decrease) (.24)% (1.79)% .51%
The following table sets forth the dollar amount of deposits in the various types of deposit programs offered by the Bank
for the periods indicated.
Year Ended September 30,
1996 1995 1994
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
(Dollars in Thousands)
Non-Certificate Deposits(<F1>):
Statement savings accounts 3.50% $ 7,881 4.01% $ 7,019 3.56% $ 9,954 4.96%
Demand accounts 3,714 1.89 4,008 2.03 3,685 1.83
Passbook savings accounts 3.50% 75,477 38.36 78,292 39.70 107,892 53.72
NOW accounts 2.50% 9,070 4.61 7,799 3.96 8,052 4.01
Money market accounts 3.45% 7,752 3.94 8,589 4.35 9,531 4.75
Total non-certificates 103,894 52.81 105,707 53.60 139,114 69.27
Certificates of Deposit:
2.00 - 3.99% 30 .01 776 .39 20,888 10.40
4.00 - 5.99% 75,293 38.27 55,435 28.10 38,357 19.10
6.00 - 7.99% 17,536 8.91 34,546 17.52 445 .22
8.00 - 9.99% --- --- 766 .39 2,021 1.01
Total certificates 92,859 47.19 91,523 46.40 61,711 30.73
Total deposits $196,753 100.00% $197,230 100.00% $200,825 100.00%
<FN>
<FN1> Interest rates shown are as of September 30, 1996.
The following table shows rate and maturity information for the Bank's certificates of deposit as of September 30, 1996.
Percent
2.00-3.99% 4.00-5.99% 6.00-7.99% Total of Total
(Dollars in Thousands)
Certificate accounts maturing
in quarter ending:
December 31, 1996 $ 1 $17,547 $ 1,622 $19,170 20.64%
March 31, 1997 9 19,585 2,381 21,975 23.67
June 30, 1997 -- 10,048 2,318 12,366 13.32
September 30, 1997 -- 9,786 1,187 10,973 11.82
December 31, 1997 -- 2,007 2,305 4,312 4.64
March 31, 1998 -- 2,367 2,859 5,226 5.63
June 30, 1998 -- 1,738 3,187 4,925 5.30
September 30, 1998 20 1,919 1,644 3,583 3.86
December 31, 1998 -- 3,096 --- 3,096 3.33
March 31, 1999 -- 1,399 33 1,432 1.54
June 30, 1999 -- 2,050 --- 2,050 2.21
September 30, 1999 -- 1,411 --- 1,411 1.52
Thereafter -- 2,340 --- 2,340 2.52
Total $30 $75,293 $17,536 $92,859 100.00%
Percent of total .03% 81.08% 18.89%
The following table indicates the amount of the Bank's certificates of deposit by time remaining until
maturity as of September 30, 1996.
Maturity
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
(In Thousands)
Certificates of deposit less than $100,000 $18,147 $19,307 $21,753 $26,398 $85,605
Certificates of deposit of $100,000 or more 1,023 2,668 1,586 1,977 7,254
Total certificates of deposit $19,170 $21,975 $23,339 $28,375 $92,859
Borrowings. Although deposits are the Bank's primary source of
funds, the Bank may utilize borrowings as a funding source. As a member
of the FHLBNY, the Bank has access to FHLBNY advances.
At September 30, 1996, the Bank had no borrowings and has had no
borrowings for the past five years.
Subsidiary and Other Activities
As a federally chartered savings association, the Bank is permitted
by OTS regulations to invest up to 2% of its assets, or $5.2 million
at September 30, 1996, in the stock of, or loans to, service corporation
subsidiaries. The Bank may invest an additional 1% of its assets
in service corporations where such additional funds are used for inner-city
or community development purposes and up to 50% of its total capital
in conforming loans to service corporations in which it owns more
than 10% of the capital stock. Federal associations also are permitted
to invest an unlimited amount in operating subsidiaries engaged solely
in activities which a federal association may engage in directly.
As of September 30, 1996, the Bank had no subsidiaries.
Competition
The Bank faces strong competition, both in originating real estate
and other loans and in attracting deposits. Competition in originating
real estate loans comes primarily from other savings institutions,
commercial banks, credit unions and mortgage bankers making loans
secured by real estate located in the Bank's primary market area.
Other savings institutions, commercial banks, credit unions and finance
companies provide vigorous competition in consumer lending.
The Bank attracts all of its deposits through its branch offices,
primarily from the communities in which those branch offices are located;
therefore, competition for those deposits is principally from mutual
funds and other savings institutions, commercial banks and credit
unions located in the same communities. The Bank competes for these
deposits by offering a variety of deposit accounts at competitive
rates, convenient business hours, and convenient branch locations
with interbranch deposit and withdrawal privileges. Automated teller
machine facilities are also available at three of the Bank's offices.
At September 30, 1996, the Bank held approximately 30% of total financial
institution deposits and 58% of total thrift deposits in Greene County,
New York, and approximately .09% of total financial institution deposits
in Albany County, New York.
Employees
At September 30, 1996, the Bank had a total of 58 employees,
including four part-time employees. The Bank's employees are not
represented by any collective bargaining group. Management considers
its employee relations to be good.
ITEM 2. PROPERTIES
The Bank conducts its business at its main office and two other banking
offices in its primary market area, and has scheduled to open a new
branch in December 1996, in Windham, New York. The following table
sets forth information relating to each of the Bank's offices as of
September 30, 1996. The Bank also owns a parking lot located at 313-317
Main Street, Catskill, New York, which is used to service the main
office. The net book value of the Bank's premises and equipment (including
land, building and leasehold improvements and furniture, fixtures
and equipment) at September 30, 1996 was $1.9 million. See Note 8
of Notes to Consolidated Financial Statements. The Bank believes
that its current facilities are adequate to meet the present and foreseeable
needs of the Bank and the Holding Company, subject to possible future
expansion.
Total
Owned Approximate
Date or Square Net Book
Location Acquired Leased Footage Value
Main Office:
341 Main Street
Catskill, New York Prior to 1950 Owned 11,750 $ 553,585
Branch Offices:
Route 9-W
Ravena, New York 1972 Owned 2,822 215,910
Route 9-W
Corner Boulevard Avenue
Catskill, New York 1978 Owned 2,900 679,875
Route 296(<F1>)
Windham, New York 1996 Owned 3,620 246,693
$1,696,063
<FN>
<FN1> Branch opened December 1996
The Bank maintains an on-line data base with a service bureau
servicing financial institutions. The net book value of the data processing
and computer equipment utilized by the Bank at September 30, 1996 was
$128,000.
ITEM 3. LEGAL PROCEEDINGS
Prior to February 6, 1995, the Bank was a shareholder, debenture holder
and depositor of Nationar, a New York chartered trust company owned
by a large group of New York savings banks, including the Bank. Nationar
provided correspondent, check clearing, custodial, research and related
services to such savings banks and other financial institutions.
On February 6, 1995, the Superintendent seized Nationar, freezing
all of its assets. As of such date, the Bank had a demand account
balance with Nationar of approximately $3.3 million, a Nationar debenture
of approximately $40,000 collateralized by a $100,000 investment security
and Nationar capital stock of approximately $7,200.
The Bank established a $660,000 reserve with respect to its Nationar
claims and charged off its $40,000 debenture and its $7,200 in capital
stock during fiscal 1995. This year, the Bank received payment of
$3.1 million of its claims against Nationar, and retains a $100,000
reserve against its remaining claim. Therefore, $560,000 of the reserve
established in 1995 was recovered and recorded as income in 1996.
The Bank is involved as plaintiff or defendant in various other legal
actions arising in the normal course of its business. While the ultimate
outcome of these proceedings cannot be predicted with certainty, it
is the opinion of management, after consultation with counsel representing
Catskill Savings in the proceedings, that the resolution of these
proceedings should not have a material effect on the Bank's financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 1996, there were no matters
submitted to vote of shareholders of Catskill Financial Corporation.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The following information included in the Annual Report to Shareholders
for the fiscal year ended September 30, 1996, (the "Annual Report"),
is incorporated herein by reference: "SHAREHOLDER INFORMATION - Common
Stock", which appears on page 44 of the Annual Report.
ITEM 6. SELECTED FINANCIAL DATA
The following information included in the Annual Report is incorporated
herein by reference: "SELECTED CONSOLIDATED FINANCIAL INFORMATION"
which appears on page 2 of the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following information included in the Annual Report is
incorporated herein by reference: "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS", which appears on pages 4
through 16 of the Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following information included in the Annual Report is incorporated
herein by reference: The consolidated statements of financial condition
of Catskill Financial Corporation and Subsidiary as of September 30,
1996 and 1995, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended September 30, 1996, together with the related notes and
the independent auditors' report thereon, all of which appears on
pages 17 through 43 of the Annual Report and "Summary of Unaudited
Consolidated Quarterly Financial Information" which appears on page 3 of the
Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information included in the Proxy Statement is
incorporated herein by reference: "ELECTION OF DIRECTORS" and "INFORMATION
CONCERNING THE BOARD OF DIRECTORS AND EXECUTIVE OFFICERS", which appears on
pages 2 through 4 of the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information included on pages 5 and 6 of the Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information included in the Proxy Statement is
incorporated herein by reference: "INFORMATION CONCERNING THE BOARD OF
DIRECTORS AND EXECUTIVE OFFICERS--Voting Securities and Certain Holders
Thereof", which appears on pages 4 and 5 of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included on page 10 of the Proxy Statement is
incorporated herein by reference: "THE BOARD OF DIRECTORS AND EXECUTIVE
OFFICERS - Transactions With Directors and officers."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Listed below are all financial statements and exhibits filed
as part of this report:
(1) The consolidated statements of financial condition of
Catskill Financial Corporation and subsidiary as of
September 30, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended
September 30, 1996, together with the related notes and
the independent auditors' report thereon, appearing in the
Annual Report on pages 17 through 43 are incorporated
herein by reference.
(2) Schedules omitted as they are not applicable
(3) Exhibits
The following exhibits are either filed as part of this report or are incorporated herein by reference:
Regulation S-K Exhibit
Reference Number Description
3.1 Certificate of Incorporation of Catskill Financial Corporation (incorporated by reference to
Exhibit 3.1 to the Registration Statement on Form S-1 No. #33-81019, of Catskill Financial
Corporation, filed on February 5, 1996, (hereinafter "Form S-1")
3.2 By laws of Catskill Financial Corporation (incorporated by reference to Exhibit 3.2 to Form S-1
4 Specimen Stock Certificate (incorporated by reference to Exhibit 4 to Form S-1.)
10.1 Catskill Financial Corporation 1995 Stock Option and Incentive Compensation Plan (incorporated by
reference to Proxy Statement for Special Meeting of Stockholders of Catskill Financial Corporation
held on October 24, 1996.)
10.2 Employment agreement dated April 1, 1996, by and between Catskill Savings Bank and Wilbur J. Cross.
10.3 Catskill Financial Corporation Employee Stock Ownership Plan (incorporated by reference to Exhibit
10.3 to Form S-1.)
10.4 Catskill Financial Corporation Management Recognition Plan (incorporated by reference to Proxy
Statement for Special Meeting of Stockholders of Catskill Financial Corporation held on
October 24, 1996.)
10.7 Trustees Deferred Compensation Plan of Catskill Savings Bank (incorporated by reference to
Exhibit 10.7 to Form S-1.)
13 1996 Annual Report to security holders
21 Subsidiaries of the registrant
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
CATSKILL FINANCIAL CORPORATION
(Registrant)
By: _________________________
Wilbur J. Cross
Director & Chairman of the Board,
President & Chief Executive Officer
Date: December 23, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature Title Date
_________________________ Director & Chairman of the Board, December 23, 1996
Wilbur J. Cross President and Chief
Executive Officer
_________________________ Chief Financial Officer December 23, 1996
David J. DeLuca (Principal Financial Officer &
Principal Accounting Officer)
_________________________ Director December 23, 1996
George P. Jones
_________________________ Director December 23, 1996
Richard A. Marshall
_________________________ Director December 23, 1996
Allan D. Oren
_________________________ Director December 23, 1996
Hugh J. Quigley
_________________________ Director December 23, 1996
Edward P. Steifel, Esq.
Exhibit 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into
as of this 1st day of April, 1996, by and between Catskill Savings
Bank (hereinafter referred to as the "Bank" whether in mutual or stock
form), and Wilbur J. Cross (the "Employee").
WHEREAS, the Employee is currently serving as President and CEO of
the Bank; and
WHEREAS, the Bank has adopted a plan of conversion whereby the Bank
will convert to capital stock form as the subsidiary of Catskill Financial
Corporation (the "Holding Company"), subject to the approval of the
Bank's members and the Office of Thrift Supervision (the "Conversion");
and
WHEREAS, the board of directors of the Bank ("Board of Directors")
recognizes that, as is the case with publicly held corporations generally,
the possibility of a change in control of the Holding Company and/or
the Bank may exist and that such possibility, and the uncertainty
and questions which it may raise among management, may result in the
departure or distraction of key management personnel to the detriment
of the Bank, the Holding Company and their respective stockholders;
and
WHEREAS, the Board of Directors believes it is in the best interests
of the Bank to enter into this Agreement with the Employee in order
to assure continuity of management of the Bank and to reinforce and
encourage the continued attention and dedication of the Employee to
the Employee's assigned duties without distraction in the face of
potentially disruptive circumstances arising from the possibility
of a change in control of the Holding Company or the Bank, although
no such change is now contemplated; and
WHEREAS, the Board of Directors has approved and authorized the
execution of this Agreement with the Employee to take effect as stated
in Section 2 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. Definitions.
(a) The term "Change in Control" means (1) an event of a nature that
(i) results in a change in control of the Bank or the Holding Company
within the meaning of the Home Owners' Loan Act of 1933 and 12 C.
F. R. Part 574 as in effect on the date hereof; or (ii) would be required
to be reported in response to Item 1 of the current report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 (the "Exchange Act"); (2) any
person (as the term is used in Sections 13(d) and 14(d) of the Exchange
Act) is or becomes the beneficial owner (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly of securities of the
Bank or the Holding Company representing 20% or more of the Bank's
or the Holding Company's outstanding securities; (3) individuals who
are members of the board of directors of the Bank or the Holding Company
on the date hereof (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided that any person becoming
a director subsequent to the date hereof whose election was approved
by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Holding Company's
stockholders was approved by the nominating committee serving under
an Incumbent Board, shall be considered a member of the Incumbent
Board; or (4) a reorganization, merger, consolidation, sale of all
or substantially all of the assets of the Bank or the Holding Company
or a similar transaction in which the Bank or the Holding Company
is not the resulting entity. The term "Change in Control" shall not
include an acquisition of securities by an employee benefit plan of
the Bank or the Holding Company or the acquisition of securities of
the Bank by the Holding Company in connection with the Conversion.
In the application of 12 C.F.R. Part 574 to a determination of a
Change in Control, determinations to be made by the OTS or its Director
under such regulations shall be made by the Board of Directors.
(b) The term "Commencement Date" means the date of completion of
Conversion.
(c) The term "Date of Termination" means the date upon which the
Employee ceases to serve as an employee of the Bank.
(d) The term "Involuntarily Termination" means termination of the
employment of Employee without the Employee's express written consent,
and shall include a material diminution of or interference with the
Employee's duties, responsibilities and benefits as President and
CEO of the Bank, including (without limitation) any of the following
actions unless consented to in writing by the Employee: (1) a change
in the principal workplace of the Employee to a location outside of
a 30 mile radius from the Bank's headquarters office as of the date
hereof; (2) a material demotion of the Employee; (3) a material reduction
in the number or seniority of other Bank personnel reporting to the
Employee or a material reduction in the frequency with which, or in
the nature of the matters with respect to which, such personnel are
to report to the Employee, other than as part of a Bank- or Holding
Company-wide reduction in staff; (4) a material adverse change in
the Employee's salary, perquisites, benefits, contingent benefits
or vacation, other than as part of an overall program applied uniformly
and with equitable effect to all members of the senior management
of the Bank or the Holding Company; and (5) a material permanent increase
in the required hours of work or the workload of the Employee. The
term "Involuntary Termination" does not include Termination for Cause
or termination of employment due to retirement, death, disability
or suspension or temporary or permanent prohibition from participation
in the conduct of the Bank's affairs under Section 8 of the Federal
Deposit Insurance Act ("FDIA").
(e) The terms "Termination for Cause" and "Terminated For Cause"
mean termination of the employment of the Employee because of the
Employee's personal dishonesty, incompetence, willful misconduct,
breach of a fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule,
or regulation (other than traffic violations or similar offenses)
or final cease-and-desist order, or material breach of any provision
of this Agreement. The Employee shall not be deemed to have been
Terminated for Cause unless and until there shall have been delivered
to the Employee a copy of a resolution, duly adopted by the affirmative
vote of not less than a majority of the entire membership of the Board
of Directors of the Bank at a meeting of the Board called and held
for such purpose (after reasonable notice to the Employee and an opportunity
for the Employee, together with the Employee's counsel, to be heard
before the Board), stating that in the good faith opinion of the Board
the Employee has engaged in conduct described in the preceding sentence
and specifying the particulars thereof in detail.
2. Term. The term of this Agreement shall be a period of three
years commencing on the Commencement Date, subject to earlier termination
as provided herein. Beginning on the first anniversary of the Commencement
Date, and on each anniversary thereafter, the term of this Agreement
shall be extended for a period of one year in addition to the then-remaining
term, provided that (1) the Bank has not given notice to the Employee
in writing at least 90 days prior to such anniversary that the term
of this Agreement shall not be,extended further; and (2) prior to
such anniversary, the Board of Directors of the Bank explicitly reviews
and approves the extension. Reference herein to the term of this
Agreement shall refer to both such initial term and such extended
terms.
3. Employment. The Employee is employed as President and CEO of
the Bank. As such, the Employee shall render administrative and management
services as are customarily performed by persons situated in similar
executive capacities, and shall have such other powers and duties
of an officer of the Bank as the Board of Directors may prescribe
from time to time.
4. Compensation.
(a) Salary. The Bank agrees to pay the Employee during the term
of this Agreement, not less frequently than monthly, the salary established
by the Board of Directors, which shall be at least the Employee's
salary in effect as of the Commencement Date. The amount of the Employee's
salary shall be reviewed by the Board of Directors, beginning not
later than the first anniversary of the Commencement Date. Adjustments
in salary or other compensation shall not limit or reduce any other
obligation of the Bank under this Agreement. The Employee's salary
in effect from time to time during the term of this Agreement shall
not thereafter be reduced.
(b) Discretionary Bonuses. The Employee shall be entitled to
participate in an equitable manner with all other executive officers of the
Bank in discretionary bonuses as authorized and declared by the Board of
Directors to its executive employees. No other compensation provided
for in this Agreement shall be deemed a substitute for the Employee's
right to participate in such bonuses when and as declared by the Board
of Directors.
(c) Expenses. The Employee shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Employee in
performing services under this Agreement in accordance with the policies and
procedures applicable to the executive officers of the Bank, provided
that the Employee accounts for such expenses as required under such
policies and procedures.
5. Benefits.
(a) Participation in Retirement and Employee Benefit Plans.
The Employee shall be entitled to participate in all plans relating to
pension, thrift, profit-sharing, group life and disability insurance,
medical and dental coverage, education, cash bonuses, and other retirement
or employee benefits or combinations thereof, in which the Bank's
executive officers participate.
(b) Fringe Benefits. The Employee shall be eligible to participate
in, and receive benefits under, any fringe benefit plans which are
or may become applicable to the Bank's executive officers.
6. Vacations, Leave. The Employee shall be entitled to annual
paid vacation in accordance with the policies established by the Bank's
Board of Directors for executive employees and to voluntary leave
of absence, with or without pay, from time to time at such times and
upon such conditions as the Board of Directors of the Bank may determine
in its discretion.
7. Termination of Employment.
(a) Involuntary Termination. The Board of Directors may terminate
the Employee's employment at any time, but, except in the case of
Termination for Cause, termination of employment shall not prejudice
the Employee's right to compensation or other benefits under this
Agreement. In the event of Involuntary Termination other than in
connection with or within twelve (12) months after a Change in Control,
(1) the Bank shall pay to the Employee during the remaining term of
this Agreement, the Employee's salary at the rate in effect immediately
prior to the Date of Termination, payable in such manner and at such
times as such salary would have been payable to the Employee under
Section 4 if the Employee had continued to be employed by the Bank,
and (2) the Bank shall provide to the Employee during the remaining
term of this Agreement substantially the same health benefits as the
Bank maintained for its executive officers immediately prior to the
Date of Termination.
(b) Termination for Cause. In the event of Termination for Cause,
the Bank shall pay the Employee the Employee's salary through the
Date of Termination, and the Bank shall have no further obligation
to the Employee under this Agreement.
(c) Voluntary Termination. The Employee's employment may be
voluntarily terminated by the Employee at any time upon 90 days written notice
to the Bank or upon such shorter period as may be agreed upon between
the Employee and the Board of Directors of the Bank. In the event
of such voluntary termination, the Bank shall be obligated to continue
to pay to the Employee the Employee's salary and benefits only through
the Date of Termination, at the time such payments are due, and the
Bank shall have no further obligation to the Employee under this Agreement.
(d) Change in Control. In the event of Involuntary Termination
in connection with or within 12 months after a Change in Control which
occurs at any time while the Employee is employed under this Agreement,
the Bank shall, subject to Section 8 of this Agreement, (1) pay to
the Employee in a lump sum cash within 25 business days after the
Date of Termination an amount equal to 299% of the Employee's "base
amount" as defined in Section 28OG of the Internal Revenue Code of
1986, as amended (the "Code"); and (2) provide to the Employee during
the remaining term of this Agreement substantially the same health
benefits as the Bank maintained for its executive officers immediately
prior to the Change in Control.
(e) Death; Disability. In the event of the death of the Employee
while employed under this Agreement and prior to any termination of
employment, the Employee's estate, or such person as the Employee
may have previously designated in writing, shall be entitled to receive
from the Bank the salary of the Employee through the last day of the
calendar month in which the Employee died. If the Employee becomes
disabled as defined in the Bank's then current disability plan, if
any, or if the employee is otherwise unable to serve as President
and CEO, this Agreement shall continue in full force and effect, except
that the salary paid to the Employee shall be reduced by any disability
insurance payments made to Employee on policies of insurance maintained
by the Bank at its expense.
(f) Temporary Suspension or Prohibition. If the Employee is
suspended and/or temporarily prohibited from participating in the conduct
of the Bank's affairs by a notice served under Section 8(e)(3) or (g)(1)
of the FDIA, 12 U.S.C. 1818(e)(3) and (g)(1), the Bank's obligations
under this Agreement shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may in its discretion (1) pay the Employee
all or part of the compensation withheld while its obligations under
this Agreement were suspended and (11) reinstate in whole or in part
any of its obligations which were suspended.
(g) Permanent Suspension or Prohibition. If the Employee is
removed and/or permanently prohibited from participating in the conduct of
the Bank's affairs by an order issued under Section 8(e)(4) or (g)(1)
of the FDIA, 12 U.S.C. 1818(e)(4) and (g)(1), all obligations of
the Bank under this Agreement shall terminate as of the effective
date of the order, but vested rights of the contracting parties shall
not be affected.
(h) Default of the Bank. If the Bank is in default (as defined in
Section 3(x)(1) of the FDIA), all obligations under this Agreement
shall terminate as of the date of default, but this provision shall
not affect any vested rights of the contracting parties.
(i) Termination by Regulators. All obligations under this Agreement
shall be terminated, except to the extent determined that continuation
of this Agreement is necessary for the continued operation of the
Bank: (1) by the Director of the Office of Thrift Supervision (the
"Director") or his or her designee, at the time the Federal Deposit
Insurance Corporation enters into an agreement to provide assistance
to or on behalf of the Bank under the authority contained in Section
13(c) of the FDIA; or (2) by the Director or his or her designee,
at the time the Director or his or her designee approves a supervisory
merger to resolve problems related to operation of the Bank or when
the Bank is determined by the Director to be in an unsafe or unsound
condition. Any rights of the parties that have already vested, however,
shall not be affected by any such action.
8. Certain Reduction of Payments by the Bank.
(a) Notwithstanding any other provision of this Agreement, if
payments under this Agreement, together with any other payments received or
to be received by the Employee in connection with a Change in Control
WOULD cause any amount to be nondeductible by the Bank or the Holding
Company for federal income tax purposes pursuant to Section 28OG of
the Code, then benefits under this Agreement shall be reduced (not
less than zero) to the extent necessary so as to maximize payments
to the Employee without causing any amount to become nondeductible
by the Bank or the Holding Company. The Employee shall determine
the allocation of such reduction among payments to the Employee.
(b) Any payments made to the Employee pursuant to this Agreement,
or otherwise, are subject to and conditioned upon their compliance
with 12 U.S.C. 1828(k) and any regulations promulgated thereunder.
9. No Mitigation. The Employee shall not be required to mitigate
the amount of any salary or other payment or benefit provided for
in this Agreement by seeking other employment or otherwise, nor shall
the amount of any payment or benefit provided for in this Agreement
be reduced by any compensation earned by the Employee as the result
of employment by another employer, by retirement benefits after the
Date of Termination or otherwise.
10. Attorneys Fees. In the event the Bank exercises its right of
Termination for Cause, but it is determined by a court of competent
jurisdiction or by an arbitrator pursuant to Section 17 that cause
did not exist for such termination, or if in any event it is determined
by any such court or arbitrator that the Bank has failed to make timely
payment of any amounts owed to the Employee under this Agreement,
the Employee shall be entitled to reimbursement for all reasonable
costs, including attorneys' fees, incurred in challenging such termination
or collecting such amounts. Such reimbursement shall be in addition
to all rights to which the Employee is otherwise entitled under this
Agreement.
11. No Assignments.
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations
hereunder without first obtaining the written consent of the other
party; provided, however, that the Bank shall require any successor
or assign (whether direct or indirect, by purchase, merger, consolidation
or otherwise) to all or substantially all of the business and/or assets
of the Bank, by an assumption agreement in form and substance satisfactory
to the Employee, to expressly assume and agree to perform this Agreement
in the same manner and to the same extent that the Bank would be required
to perform it if no such succession or assignment had taken place.
Failure of the Bank to obtain such an assumption agreement prior
to the effectiveness of any such succession or assignment shall be
a breach of this Agreement and shall entitle the Employee to compensation
from the Bank in the same amount and on the same terms as the compensation
pursuant to Section 7(d) hereof. For purposes of implementing the
provisions of this Section I 1(a), the date on which any such succession
becomes effective shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder shall
inure to the benefit of and be enforceable by the Employee's personal
and legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If the Employee should
die while any amounts would still be payable to the Employee hereunder
if the Employee had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this
Agreement to the Employee's devisee, legatee or other designee or
if there is no such designee, to the Employee's estate.
12. Notice. For the purposes of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing
and shall be deemed to have been duly given when personally delivered
or sent by certified mail, return receipt requested, postage prepaid,
to the Bank at its home office, to the attention of the Board of Directors
with a copy to the Secretary of the Bank, or, if to the Employee,
to such home or other address as the Employee has most recently provided
in writing to the Bank.
13. Amendments. No amendments or additions to this Agreement shall
be binding unless in writing and signed by both parties, except as
herein otherwise provided.
14. Headings. The headings used in this Agreement are included
solely for convenience and shall not affect, or be used in connection with,
the interpretation of this Agreement.
15. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision
shall not affect the validity or enforceability of the other provisions
hereof.
16. Governing Law. This Agreement shall be governed by the laws
of the United States to the extent applicable and otherwise by the
laws of the State of New York.
17. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration
in accordance with the rules of the American Arbitration Association
then in effect. Judgment may be entered on the arbitrator's award
in any court having jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY
BE ENFORCED BY THE PARTIES.
Attest: CATSKILL SAVINGS BANK
/s/ David L. Guldenstern /s/ Allan Oren
________________________________ ________________________________
DIRECTOR
/s/ Wilbur J. Cross
________________________________
EMPLOYEE
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
State of
Percentage of Incorporation
Parent Subsidiary Ownership or Organization
Catskill Financial Catskill Savings Bank 100% New York
Corporation
SELECTED CONSOLIDATED FINANCIAL INFORMATION
September 30,
1996 1995 1994 1993 1992
(In Thousands)
Selected Consolidated Financial Condition Data:
Total assets $283,759 $230,102 $230,518 $226,610 $208,373
Cash and cash equivalents 39,712 38,064 29,580 35,457 18,528
Loans receivable, net 122,533 118,364 119,233 119,585 125,278
Mortgage-backed securities 34,902 13,647 13,922 12,973 10,061
Other securities 82,375 53,443 64,151 55,094 50,904
Deposits 196,753 197,230 200,825 199,812 184,028
Total equity 82,381 28,667 26,943 24,852 22,754
Year Ended September 30,
1996 1995 1994 1993 1992
(In Thousands)
Selected Consolidated Operations Data:
Total interest income $17,932 $15,592 $15,022 $15,419 $16,974
Total interest expense 9,022 8,009 7,529 8,051 10,379
Net interest income 8,910 7,583 7,493 7,368 6,595
Provision for loan losses 195 255 465 470 390
Net interest income after provision for loan losses 8,715 7,328 7,028 6,898 6,205
Total non-interest income 996 262 339 367 332
Total non-interest expense 4,258 4,665 3,814 3,489 3,371
Income before taxes 5,453 2,925 3,553 3,776 3,166
Income tax expense 2,136 1,201 1,463 1,678 1,384
Net income $ 3,317 $ 1,724 $ 2,090 $ 2,098 $ 1,782
Year Ended September 30,
1996 1995 1994 1993 1992
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average total assets) 1.25% .76% .90% .97% .86%
Return on equity (ratio of net income to average equity) 6.33 6.15 8.06 8.79 7.96
Average net interest rate spread 2.54 2.99 3.03 3.16 2.79
Net interest margin(1) 3.44 3.47 3.36 3.56 3.30
Ratio of operating expense to average total assets 1.60 1.77(2) 1.65 1.62 1.62
Efficiency ratio(3) 45.56 51.05 48.47 45.11 48.66
Ratio of average interest-earning assets to average interest-
bearing liabilities 125.79 112.97 109.92 110.34 109.88
Quality Ratios:
Non-performing assets to total assets at end of period .61 .66 .45 .84 .93
Allowance for loan losses to non-performing loans 133.89 188.41 268.62 69.91 44.34
Allowance for loan losses to loans receivable 1.47 1.61 1.43 1.06 .68
Capital Ratios:
Equity to total assets at end of period 29.03 12.46 11.69 10.97 10.92
Average equity to average assets 19.73 12.44 11.23 11.09 10.51
Other Data:
Number of full-service offices 3 3 3 3 3
<FN>
<F1> Net interest income divided by average interest earning assets.
<F2> Excludes $660,000 provision for Nationar loss contingency. See Note 15
to the Notes to Consolidated Financial Statements.
<F3> Efficiency ratio is recurring non-interest expense/(recurring
non-interest income plus net interest income). For 1996, excludes
$560,000 Nationar recovery and for 1995 excludes $660,000 provision for
Nationar loss contingency.
SUMMARY OF UNAUDITED CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
Year Ended September 30, 1996 Year Ended September 30, 1995
First Second Third Fourth Year First Second Third Fourth Year
(In Thousands, except per share amounts)
Total interest income $ 4,009 $ 4,006 $ 4,985 $ 4,932 $17,932 $ 3,833 $ 3,809 $ 3,913 $ 4,037 $15,592
Total interest expense 2,217 2,187 2,461 2,157 9,022 1,866 1,895 2,063 2,185 8,009
Net interest income 1,792 1,819 2,524 2,775 8,910 1,967 1,914 1,850 1,852 7,583
Provision for loan losses 45 30 45 75 195 120 45 45 45 255
Net interest income after
provision for loan losses 1,747 1,789 2,479 2,700 8,715 1,847 1,869 1,805 1,807 7,328
Total non-interest income 111 127 660 98 996 72 79 23 88 262
Total non-interest expense 1,022 937 1,205 1,094 4,258 973 960 1,134 1,598 4,665
Income before taxes $ 836 $ 979 $ 1,934 $ 1,704 $ 5,453 $ 946 $ 988 $ 694 $ 297 $ 2,925
Income tax expense 299 402 795 640 2,136 373 402 275 151 1,201
Net income $ 537 $ 577 $ 1,139 $ 1,064 $ 3,317 $ 573 $ 586 $ 419 $ 146 $ 1,724
Net income per common share* $ .18 $ .20 $ .38
<FN>
<F1>* Company completed its initial public offering on April 18, 1996, so net
income per common share is not applicable to all periods prior to that date,
and is based on weighted average common shares outstanding excluding
unallocated ESOP shares. In calculating 1996 fiscal year's earnings per
share, post conversion net income and weighted average shares outstanding were
used. See Note 1 to Notes to Consolidated Financial Statements.
Certain reclassifications have been made to prior quarters' amounts to
conform with current quarter's presentation.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Catskill Financial Corporation (the "Company" or "Catskill Financial") was
formed in December 1995 to acquire all of the common stock of Catskill Savings
Bank (the "Bank") upon its conversion from a mutual savings bank to a stock
savings bank. On April 18, 1996, the Company completed its initial public
stock offering, issuing 5,686,750 shares of $.01 par value common stock at
$10.00 per share. Net proceeds to the Company were $54.9 million after
conversion costs, and $50.4 million excluding the shares acquired by the
Company's Employee Stock Ownership Plan (the "ESOP"), which were purchased
with the proceeds of a loan from the Company.
The consolidated financial condition and operating results of the Company are
primarily dependent upon its wholly owned subsidiary, the Bank, and all
references to the Company prior to April 18, 1996, except where otherwise
indicated, are to the Bank.
The Bank has been and continues to be a community oriented financial
institution offering a variety of financial services. The Bank attracts
deposits from the general public and uses such deposits, together with other
funds, to originate one to four family residential mortgages, and, to a lesser
extent, consumer (including home equity lines of credit), commercial, and
multi-family real estate and other loans in its primary market area. The
Bank's primary market is comprised of Greene County and southern Albany County
in New York, which are serviced through four banking offices, the most recent
having opened in December 1996. The Bank's deposit accounts are insured by the
Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation
("FDIC"), and, as a federal savings bank, the Bank is subject to regulation by
the Office of Thrift Supervision ("OTS").
The Bank's profitability, like many financial institutions, is dependent to a
large extent upon its net interest income, which is the difference between the
interest it receives on interest earning assets, such as loans and
investments, and the interest it pays on interest bearing liabilities,
principally deposits.
Results of operations are also affected by the Bank's provision for loan
losses, non-interest expenses such as salaries and employee benefits,
occupancy and other operating expenses and to a lesser extent, non-interest
income such as service charges on deposit accounts.
Financial institutions in general, including the Company, are significantly
affected by economic conditions, competition and the monetary and fiscal
policies of the federal government. Lending activities are influenced by the
demand for and supply of housing, competition among lenders, the interest rate
conditions and funds availability. Deposit balances and cost of funds are
influenced by prevailing market rates on competing investments, customer
preference and the levels of personal income and savings in the Bank's primary
market area.
FINANCIAL CONDITION
Total assets were $283.8 million at September 30, 1996, an increase of $53.7
million, or 23.3% over the $230.1 million at September 30, 1995. The asset
increase resulted principally from the receipt of net investable proceeds of
$50.4 million from the Company's stock offering consummated April 18, 1996,
with the balance funded by the retention of Company's net income of $3.3
million for the fiscal year ended September 30, 1996. Cash and cash
equivalents increased to $39.7 million, at September 30, 1996, an increase of
$1.6 million, or 4.3%. However, cash and cash equivalents had been much
higher during the year, first as the Company held the proceeds of stock
subscriptions prior to consummation of the stock offering and later as the
Company gradually deployed the offering proceeds. The Company has
historically maintained high levels of liquidity with cash and cash
equivalents representing 14.0% of total assets at September 30, 1996, compared
to 16.5% of total assets at September 30, 1995.
Total securities, which include securities available for sale ("AFS"),
securities held to maturity ("HTM") and Federal Home Loan Bank Stock, were
$117.3 million at September 30, 1996, an increase of $50.2 million, or 74.8%
over the $67.1 million as of September 30, 1995. Total securities now
represent 41.3% of total assets compared to 29.2% as of September 30, 1995.
The net increase in total securities represents the investment of the net
public offering proceeds principally in mortgage backed securities, which
totalled $35.0 million at September 30, 1996, or $21.4 million more than last
year; short-term U.S. agency securities of $22.0 million; and various callable
agency notes. The increase in securities consists of a $97.0 million increase
in securities classified as available for sale and a required $1.2 million
investment in Federal Home Loan Bank stock, partially offset by a $48.0
million decrease in securities classified as held to maturity. In December
1995, the Company reclassified certain investment securities and mortgage
backed securities from held to maturity to available for sale in response to
the one-time opportunity to reassess classifications under Statement of
Financial Accounting Standards ("SFAS") #115. Securities with an aggregate
amortized cost of $24.8 million and an aggregate fair market value of $25.3
million were transferred to available for sale.
Net loans receivable were $122.5 million as of September 30, 1996, an increase
of $4.1 million, or 3.5% over the $118.4 million as of September 30, 1995.
Residential real estate loans increased $4.8 million or 5.0%, as a generally
lower rate environment which followed the Federal Reserve decrease in the
discount rate in January 1996 encouraged borrowers to refinance. The
Company's consumer loan portfolio, at September 30, 1996, was $19.0 million,
or 15.2% of total loans, a decrease of $1.0 million from September 30, 1995,
when they represented 16.5% of total loans. The decrease in consumer loans
was principally a decrease in home equity loans outstanding, as the lower
mortgage rates encouraged customers to refinance their underlying first
mortgages and repay their home equity loans.
Deposits held at Nationar, net, decreased from $2.6 million at September 30,
1995 to $88,000 at September 30, 1996. The decrease reflects the Bank
receiving $3.1 million of its $3.3 million claim against Nationar, and the
Bank reducing its reserve established in fiscal 1995 at $660,000 to $100,000,
as $560,000 was shown as a recovery in non-interest income in fiscal 1996.
See Note 15 of Notes to the Consolidated Financial Statements.
Total deposits were $196.7 million, a decrease of $.5 million, or .2% from the
$197.2 million at September 30, 1995. Savings deposits were $83.4 million, at
September 30, 1996, or 42.4% of total deposits, a decrease of $2.0 million, or
2.3% from 1995, which represented 43.3% of total deposits. The decrease in
savings deposits, was somewhat offset by increases in certificate of deposits
of $1.3 million. The decrease in savings is a continuing of a trend which
commenced in fiscal 1994, as the general level of interest rates increased,
and depositors switched into higher yield certificates of deposits.
Certificates of deposits now total $92.9 million, or 47.2% of total deposits,
compared to $91.5 million or 46.4% of total deposits at September 30, 1995.
Shareholders' equity at September 30, 1996 was $82.4 million, an increase of
$53.7 million from the Bank's net worth at September 30, 1995. The increase
represents the receipt of net proceeds of $54.9 million from the Company's
initial public offering, plus retained earnings of $3.3 million for the fiscal
year ended September 30, 1996, reduced by $4.4 million, representing the
shares of the Company's ESOP which have not yet been released from the lien of
the Company's loan to the ESOP. In addition, the Company had a decrease of
$.1 million in shareholders' equity resulting from a decrease in the fair
value of securities available for sale, net of taxes.
Shareholder's equity as a percent of total assets was 29.03% at September 30,
1996 compared to 12.46% at September 30, 1995. Book value per common share at
September 30, 1996, was $14.49, or $15.71 excluding the remaining unallocated
ESOP shares.
Asset/Liability Management
The Company, like other financial institutions, is subject to interest rate
risk to the extent that its interest-bearing liabilities reprice on a
different basis or at a different pace from its interest-earning assets.
Interest rate risk may be assessed by analyzing the extent to which assets and
liabilities are "interest rate sensitive" and the resultant interest rate
sensitivity "gap". An asset or liability is said to be interest rate
sensitive within a defined time period if it matures or reprices within that
period. The difference between the amount of interest-earning assets and
interest-bearing liabilities maturing or repricing within a given period is
defined as the interest rate sensitivity gap. Gap is negative if more
interest-bearing liabilities than interest earning assets mature or reprice
within a specified time period. If the reverse is true, then the institution
is considered to have a positive gap.
In an attempt to manage its exposure to changes in interest rates, the Company
monitors the sensitivity of its interest earning assets and liabilities on a
quarterly basis, and formulates the Company's interest rate risk management
strategy. In managing its asset/liability mix, and depending on the
relationship between long- and short-term interest rates, market conditions
and consumer preference, the Company may place more emphasis on limiting
interest rate risk than on enhancing its net interest income. Management
believes that the stability which can be obtained by limiting interest rate
risk can more than offset the benefits which can be derived from seeking to
enhance the net interest margin on a short-term basis.
The following table sets forth the estimated interest rate sensitivity of the
Company's interest-earning assets and interest-bearing liabilities at
September 30, 1996. Except for scheduled loan principal amortization which
may occur earlier, interest-earning assets and interest-bearing liabilities
are shown as repricing during the period in which either such assets and
liabilities mature or have a scheduled interest rate adjustment, whichever
occurs first.
The Company also assumes that $57.9 million or 70% of savings accounts at
September 30, 1996, are core deposits and therefore are expected to mature or
reprice beyond five years. The remaining savings accounts are assumed to
mature or reprice ratably in the first five years. Certificates of deposit
are included based upon their respective contractual maturities. The Company
based the preceding assumptions on its historical experience.
In evaluating the Company's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing
table must be considered. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may
react in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other
types may lag behind changes in market rates. Additionally, certain assets,
such as adjustable rate mortgages, have features which restrict changes in
interest rates in the short term and over the life of the asset. Further, in
the event of a change in interest rates, prepayments and early withdrawal
levels would likely deviate significantly from those assumed in calculating
the table. Any change in projected repayments could materially affect the
rate at which assets reprice. Finally, the ability of many borrowers to
service their debt may decrease in the event of an interest rate increase. As
a result, the actual effect of changing interest rates may differ from that
presented in the foregoing table.
At September 30, 1996
Maturing or Repricing
Over 6
6 Months Months to Over 1-3 Over 3-5 Over
or Less One Year Years Years 5 Years Total
Amount Amount Amount Amount Amount Amount
(Dollars in Thousands)
Fixed rate one- to four-family, multi-family and
commercial real estate and construction loans $ 2,258 $ 1,985 $ 8,463 $ 8,505 $ 44,845 $ 66,056
Adjustable rate one- to four-family, multi-family
and commercial real estate and construction loans 14,865 13,098 11,035 831 36 39,865
Consumer loans 6,601 2,290 5,480 1,889 2,764 19,024
Mortgage-backed securities 1,808 1,758 7,030 7,030 17,623 35,249
Other securities(1) 46,012 6,966 24,923 1,968 2,355 82,224
Federal funds 35,600 --- --- --- --- 35,600
Total interest-earning assets 107,144 26,097 56,931 20,223 67,623 278,018
Savings deposits 3,033 2,495 9,979 9,980 57,871 83,358
Money market and NOW deposits 7,752 --- --- --- 9,070 16,822
Certificate accounts 41,145 23,339 26,035 2,084 256 92,859
Total interest-bearing liabilities 51,930 25,834 36,014 12,064 67,197 193,039
Interest-earning assets less interest-bearing
liabilities $ 55,214 $ 263 $ 20,917 $ 8,159 $ 426 $ 84,979
Non-interest bearing deposit liabilities 3,714 --- --- --- --- 3,714
Interest-rate sensitivity gap $ 51,500 $ 263 $ 20,917 $ 8,159 $ 426 $ 81,265
Cumulative interest-rate sensitivity gap $ 51,500 $ 51,763 $ 72,680 $ 80,839 $ 81,265 $ 81,265
Cumulative interest-rate gap as a percentage of
assets at September 30, 1996 18.15% 18.24% 25.61% 28.49% 28.64%
Cumulative interest-rate gap as a percentage of
interest-earning assets at September 30, 1996 18.52% 18.62% 26.14% 29.08% 29.23%
<FN>
<F1>(1) Includes all securities available for sale and investment securities held
to maturity except mortgage backed securities. Also includes Federal Home
Loan Bank Stock.
The Company monitors its one year interest rate sensitivity gap, and as of
September 30, 1996, the Company had a positive gap of 18.24%. The Company
became more asset sensitive during fiscal 1996, principally from the
investment of the $50.4 million in net proceeds from the Company's initial
public offering in shorter term securities. This has the effect of providing
the Company with substantial investable funds for which there is no interest
cost. As interest rates rise, the earnings on such capital can be expected to
increase, with no corresponding increase in interest expense, resulting in an
increase in net interest income. Likewise, in periods of declining interest
rates, earnings on assets funded with capital will decrease, while there will
be no corresponding decrease in the cost of funds. Managing gap can reduce
this effect.
The Company will continue to pursue strategies to reduce its asset
sensitivity, such as purchasing investments and mortgage backed securities
with intermediate and longer term durations. The Company may also pursue
shortening the maturities of its certificates of deposit, as shorter term
certificates of deposit generally have lower rates than longer term
certificates of deposit.
RESULTS OF OPERATIONS
Comparison of operating results for the years ended September 30, 1996 and
1995.
General
Net income for the year ended September 30, 1996 was $3.3 million, an increase
of $1.6 million or 92.4% over the $1.7 million for the year ended September
30, 1995. The Company showed improvement throughout its consolidated
statement of operations as net interest income increased $1.3 million,
non-interest income increased $.7 million, non-interest expenses decreased $.4
million and the provision for loan losses decreased $.1 million. The Company
experienced an increase in income taxes of $.9 million, primarily due to
higher pre-tax income of $2.5 million.
On a comparative basis, net income for fiscal years 1996 and 1995, were
impacted by the closure liquidation of Nationar, the Bank's principal
correspondent bank. During fiscal 1995, the Company established a reserve of
$660,000 for possible Nationar losses, resulting in a $396,000 after tax
reduction in net income for the year. In June 1996, the Company was paid more
than 90% of its claim and since $100,000 of the reserve is estimated to be
necessary to cover the remaining claim, the Company included $560,000 in
non-interest income as a recovery in the year ended September 30, 1996,
increasing net income by approximately $336,000 after tax. See Note 15 of
Notes to Consolidated Financial Statements.
Net Interest Income
The Company's net income is primarily dependent upon net interest income. Net
interest income is a function of the relative amounts of the Company's
interest earning assets versus interest bearing liabilities, as well as the
difference ("spread") between the average yield earned on loans, securities,
interest-earning deposits, and federal funds sold and the average rate paid on
deposits. The interest rate spread is affected by economic and competitive
factors that influence interest rates, loan demand and deposit flows. The
Company, like other financial institutions, is subject to interest rate risk
to the degree that its interest-bearing liabilities mature or reprice at
different times, or on a different basis, than its interest-earning assets.
Net interest income was $8.9 million for the year ended September 30, 1996, an
increase of $1.3 million or 17.5% over fiscal 1995. The increase was
principally caused by the higher level of average earning assets, related to
the Company's initial public offering which provided net investable proceeds
of $50.4 million, somewhat offset by a lower net yield on average earning
assets as those proceeds could not immediately be invested prudently in loans,
the Company's highest yielding asset category. Average earning assets were
$259.1 million, an increase of $40.3 million, or 18.4% over fiscal 1995. In
addition, net interest income and average earning assets were favorably
impacted by the approximately $128.0 million of common stock subscriptions
held by the Bank pending consummation of the Company's stock offering. For
fiscal 1996, common stock subscriptions were included in "other" interest
bearing liabilities and averaged approximately $9.1 million. The Bank paid
interest on those subscriptions at its savings deposit rate of 3.5%.
The net yield on average earning assets was 3.44% for the year ended September
30, 1996, down slightly from the 3.47% in 1995. The decrease was principally
due to the high percentage of assets invested in federal funds sold and the
change in the composition of interest bearing liabilities. Federal funds sold
represented approximately 25.4% of average earning assets in 1996, as compared
to only 9.5% in 1995. In addition, the Company had experienced in fiscal 1995
and early 1996, similar to many financial institutions, a customer preference
in a then rising rate environment, for higher costing certificates of
deposits, rather than savings accounts. Average savings balances represented
41.1% of average interest bearing liabilities in 1996, compared to 50.6% in
1995. Average certificates of deposits were 45.0% of average interest bearing
liabilities in fiscal 1996, as compared to 39.5% in 1995. As necessary,
management of the Company will continue to increase or decrease the Company's
deposit rates and terms in order to manage interest rate risk and liquidity,
and to maintain market share.
Analysis of Net Interest Income
The following table presents for the periods indicated the total dollar amount
of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates. No tax equivalent
adjustments were made. Non-accruing loans have been included in the table as
loans receivable with interest earned recognized on a cash basis only.
Securities include both the securities available for sale portfolio and the
held to maturity portfolio excluding mortgage backed securities and Federal
Home Loan Bank Stock. Mortgage backed securities are primarily classified as
available for sale. Securities available for sale are included at amortized
cost.
Year Ended September 30,
1996 1995 1994
Average Average Average
Outstanding Interest Outstanding Interest Outstanding Interest
Balance Earned/ Balance Earned/ Balance Earned/
Paid Yield/Rate Paid Yield/Rate Paid Yield/Rate
(Dollars in Thousands)
Interest-Earning Assets:
Loans receivable $121,105 $ 9,783 8.08% $121,389 $ 9,733 8.02% $117,958 $ 9,431 8.00%
Mortgage-backed securities 20,541 1,462 7.12 14,331 1,065 7.43 13,529 1,051 7.77
Securities 50,182 3,062 6.10 62,326 3,598 5.77 61,072 3,339 5.47
Federal funds sold and other 67,245 3,625 5.39 20,740 1,196 5.77 30,646 1,201 3.92
Total interest-earning assets $259,073 17,932 6.92 $218,786 15,592 7.13 $223,205 15,022 6.73
Interest-Bearing Liabilities:
Savings deposits $ 84,607 $ 2,962 3.50 $ 98,064 3,434 3.50 $118,234 4,186 3.54
Certificate accounts 92,699 5,218 5.63 76,457 4,026 5.27 63,659 2,808 4.41
Money market 8,431 289 3.43 9,004 310 3.44 11,203 299 2.67
NOW deposits 8,764 216 2.46 7,790 195 2.50 7,483 191 2.55
Other<F1> 11,451 337 2.94 2,346 44 1.88 2,487 45 1.81
Total interest-bearing
liabilities $205,952 9,022 4.38 $193,661 8,009 4.14 $203,066 7,529 3.70
Net interest income $ 8,910 $ 7,583 $ 7,493
Net interest rate spread 2.54% 2.99% 3.03%
Net earning assets $ 53,121 $ 25,125 $ 20,139
Net yield on average
interest-earning assets 3.44% 3.47% 3.36%
Average interest-earning assets to
average interest-bearing
liabilities 125.79x 112.97x 109.92x
<FN>
<F1> Other includes principally escrow balances on mortgages for taxes and
insurance, except for 1996 which includes approximately $9.1 million,
representing the average of common stock subscriptions held in escrow until
the Company's public offering was consummated. The Bank paid its savings
deposit rate, of 3.5% on those subscriptions.
Rate/Volume Analysis of Net Interest Income
The following table presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and that due to the changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(i.e., changes in volume multiplied by old rate) and (ii) changes in rate
(i.e., changes in rate multiplied by old volume). For purposes of this table,
changes attributable to both rate and volume, which cannot be segregated, have
been allocated where management considers most appropriate to the change due
to volume and the change due to rate.
Year Ended September 30,
1996 vs. 1995 1995 vs. 1994
Increase Increase
(Decrease) Total (Decrease) Total
Due to Increase Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
(In Thousands)
Interest-earning assets:
Loans receivable $ (23) $ 73 $ 50 $ 274 $ 28 $ 302
Mortgage-backed securities 461 (64) 397 61 (47) 14
Securities (701) 165 (536) 70 189 259
Federal funds 2,508 (79) 2,429 (463) 458 (5)
Total interest-earning assets $2,245 $ 95 $2,340 $ (58) $ 628 $ 570
Interest-bearing liabilities:
Savings deposits $ (472) $ 0 $ (472) $ (708) $ (44) $ (752)
Certificate accounts 856 336 1,192 621 597 1,218
Money market (20) (1) (21) (66) 77 11
NOW deposits 24 (3) 21 8 (4) 4
Other<F1> 171 122 293 (3) 2 (1)
Total interest-bearing liabilities $ 559 $ 454 $1,013 $ (148) $ 628 $ 480
Net change in net interest income $1,327 $ 90
<FN>
<F1> Other includes principally escrow balances on mortgages for taxes and
insurance, except for 1996 which includes approximately $9.1 million,
representing the average of common stock subscriptions held in escrow until
the Company's public offering was consummated. The Bank paid its savings
deposit rate, of 3.5% on those subscriptions.
Provision for Loan Losses
The Company establishes an allowance for loan losses based on an analysis of
risk factors in the loan portfolio. This analysis includes evaluation of
concentrations of credit, past loss experience, current economic conditions,
amount and composition of the loan portfolio (including loans being
specifically monitored by management), estimated fair value of underlying
collateral, loan commitments outstanding, delinquencies, and other factors.
Accordingly, the calculation of the adequacy of the allowance for loan losses
is not based solely on the level of non-performing assets.
The provision for loan losses is based upon management's periodic analysis of
the allowance for loan losses. For the year ended September 30, 1996, the
provision for loan losses was $195,000, a decrease of $60,000 from the
$255,000 in 1995. The decrease is based on management's assessment of the
adequacy of the allowance, which is based on a number of factors including
review of non-performing and other classified loans, the value of collateral
for such loans, historical net charge-offs, and current and prospective
economic conditions. The Company has experienced an increase in
non-performing loans, which were $1,369,000 as of September 30, 1996, an
increase of $334,000 or 32.3% over the $1,035,000 as of September 30, 1995.
The increase is principally due to a higher number of residential borrowers
filing for bankruptcy protection. Management believes that since most of
the loans with bankruptcy filings are secured by real estate, losses will be
limited and that the $1.8 million allowance for loan losses at September 30,
1996, which provides 133.9% coverage of non-performing loans, is adequate.
The following table sets forth an analysis of the Bank's allowance for loan
losses.
1996 1995 1994 1993 1992
Balance at beginning of period $1,950 $1,746 $1,294 $ 857 $ 464
Charge-offs:
One- to four-family real estate (237) (12) (3) --- (9)
Multi-family and commercial real estate --- --- --- (20) ---
Consumer (86) (50) (29) (45) (5)
Total charge-offs (323) (62) (32) (65) (14)
Recoveries:
One- to four-family real estate --- 1 14 10 12
Consumer 11 10 5 22 5
Total recoveries 11 11 19 32 17
Net charge-offs (312) (51) (13) (33) 3
Additions charged to operations 195 255 465 470 390
Balance at end of period $1,833 $1,950 $1,746 $1,294 $ 857
Ratio of net charge-offs during the
period to average loans outstanding
during the period .26% .04% .02% .03% .01%
Ratio of net charge-offs during the
period to average non-performing
assets 18.60% 4.46% 1.01% 1.83% .25%
The Company will continue to monitor its allowance for loan losses and make
future additions to the allowance through the provision for loan losses as
conditions dictate. Although the Company maintains its allowance for loan
losses at a level which it considers to be adequate to provide for the
inherent risk of loss in its loan portfolio, there can be no assurance that
future losses will not exceed estimated amounts or that additional provisions
for loan losses will not be required in future periods. In addition, the
Company's determination as to the amount of its allowance for loan losses is
subject to review by the OTS and the FDIC, as part of their examination
process, which may result in the establishment of an additional allowance
based upon their judgment of the information available to them at the time of
their examination.
Non-Interest Income
Non-interest income was $996,000 for the year ended September 30, 1996, an
increase of $734,000 over 1995. The increase principally represented the
recovery of $560,000 from the Nationar loss contingency reserve established in
1995. In addition, service fees on deposit accounts increased $90,000 or
70.3% due to the implementation of new fees on existing products. Lastly, the
Company realized net security gains of $33,000 in 1996, an improvement of
$80,000 over the $47,000 of net security losses in the year ended September
30, 1995. The gains realized in 1996 related to securities acquired at a
discount that were called by the issuer prior to contractual maturity, and the
loss in 1995 related to the Bank's write-off of both its stock and debenture
investments in Nationar. See Note 15 to Notes to Consolidated Financial
Statements.
Non-Interest Expense
Non-interest expense for the year ended September 30, 1996 was $4,258,000, a
decrease of $407,000 from fiscal 1995 when the Company recorded the $660,000
provision for losses on Nationar. Excluding the Nationar provision,
non-interest expense in 1996 was up $253,000 or 6.3%. Increases in personnel
costs, outside data processing, other professional fees, costs related to real
estate acquired in foreclosure, and all other expenses were partially offset
by reductions in FDIC insurance premiums and advertising expenses.
Salaries and employee benefits were $2,173,000, an increase of $232,000, or
11.9% over 1995, principally due to ESOP and postretirement benefit costs
other than pensions. In April, as part of the Bank's conversion to the stock
form of ownership, the Company established an ESOP which purchased 8% of the
initial public offering with funds borrowed from the Company. Compensation
expense related to the ESOP's initial stock purchase will be recognized over a
period estimated not to exceed 20 years as the loan is repaid. Shares of
stock will be released from the lien of the loan on a pro rata basis as the
loan is repaid and expense will be calculated based upon the average market
value during the respective service period on the shares released. In fiscal
1996, the Company recognized ESOP expense of $119,000, representing the
expense since April 18, 1996, a period of less than six months. It is
expected that 1997 ESOP expense will be approximately twice the 1996 expense,
if the average market price of the Company's common stock is the same, as in
1996, or even more if the average price of the Company's stock increases. In
addition, on October 1, 1995, the Company implemented Statement of Financial
Accounting Standard No. 106 (SFAS #106), which increased the expense of
postretirement benefits other than pensions by approximately $150,000.
Partially offsetting the increases were lower medical benefit costs as the
Company changed insurance carriers and received premium reductions due to its
favorable claims experience. Management also expects additional personnel
costs in fiscal 1997 of $480,000 related to the implementation of the
shareholder approved Management Recognition Program ("MRP"). See Note 18 to
Notes to Consolidated Financial Statements.
Outside data processing costs were $337,000 in 1996, an increase of $102,000
or 43.4% over 1996. The increase is principally due to a change from paying
for services by maintaining compensating balances for which no interest was
received, to instead paying direct service fees only, with no required
compensating balances. Management believes that the increase in servicing
fees is offset by an increase in interest earned on the amounts no longer
required to be held as compensating balances. Professional fees increased
$88,000, principally from higher legal and accounting costs relating to
operating a public company. Other real estate costs were higher as the
Company, as part of its regular valuations of real estate owned, recorded
write-downs on certain properties acquired in foreclosure and increased its
estimated cost of disposition. All other expenses were $594,000, an increase
of $143,000 or 31.7%. The increases were principally $55,000 in OTS
assessments due to the Bank's change to a federal thrift charter, higher
directors' fees of $46,000 and increased insurance costs of operating a
"public" company.
Advertising and business promotion expense was $137,000 in 1996, a decrease of
$187,000. The decrease was principally because 1995 included more special
promotional campaigns. FDIC insurance premiums were lower in 1996, since the
Bank is BIF insured and paid only the regulatory minimum of $500 in each of
the last three quarters of fiscal 1996, and $.04 for the first fiscal quarter
of 1996, compared to last year's $.23 per $100 of assessed deposits for the
first fiscal quarter, and $.04 for the remaining three quarters.
In fiscal 1997, although FDIC insurance premiums are not expected to increase,
the Bank expects that, along with all other BIF institutions, it will be
required to pay a part of the cost of the bonds issued to fund the savings and
loan bailout in the late 1980s. Although the cost cannot be determined at
this time, it is estimated that the assessment will equal approximately 0.013%
of deposits (or 1.3 cents per $100 of deposits).
Income Taxes
Income tax expense for the year ended September 30, 1996 was $2,136,000, an
increase of $935,000, or 77.9% higher than the same period of 1995. The
increase was principally the 86.4% improvement in income before income taxes.
The Company's effective tax rate for the years ended September 30, 1996 and
1995, were 39.17% and 41.06%, respectively. The decrease in the Company's
effective rate in 1996 was principally the $131,000 reduction in the Company's
deferred tax valuation reserve as certain deferred tax uncertainties were
resolved.
Comparison of Operating Results for the Years Ended September 30, 1995 and
1994
General
Net income for the year ended September 30, 1995 decreased $366,000 or 17.5%
to $1.7 million from $2.1 million for the year ended September 30, 1994. The
decrease in net income was due primarily to a $851,000 or 22.3% increase in
noninterest expenses during fiscal 1995 as compared to fiscal 1994, partially
offset by a $210,000 decrease in the provision for loan losses. Net interest
income for the year ended September 30, 1995 increased $90,000 to $7.6 million
compared to $7.5 million for year ended September 30, 1994.
Interest Income
Interest income was $15.6 million for the year ended September 30, 1995, an
increase of $570,000 or 3.8%. The Company's average interest-earning assets
for the year ended September 30, 1995 decreased $4.4 million or 2.0% to $218.8
million compared to $223.2 million during the year ended September 30, 1994.
The decline was primarily a result of a reduction in the average balance of
federal funds sold of $9.9 million offset in part by an increase in the
average balance of loans receivable of $3.4 million. The yield earned on the
Company's interest-earning assets, however, increased 40 basis points to 7.13%
for the year ended September 30, 1995 from 6.73% for the year ended September
30, 1994 due to increased market interest rates. Interest income increased
primarily due to increases in the average loan balance to $121.4 million from
$118.0 million and a 30 basis point increase in the yield earned on
securities, resulting in increases in interest income of $274,000 and
$189,000, respectively.
Interest Expense
Interest expense increased $480,000 or 6.4% to $8.0 million for the year ended
September 30, 1995. The increase was primarily the result of an 86 basis
point increase in the average rate paid on certificate accounts in response to
higher market rates and a $12.8 million increase in the average balance of
certificates outstanding. These two factors combined to cause a $1.2 million
increase in interest expense on certificate accounts. Partially offsetting
this increase was a $20.2 million decrease in the average outstanding balance
of savings deposits, from $118.2 million to $98.1 million, resulting in a
$752,000 decrease in the Company's cost of funds. The Company's average cost
of interest-bearing liabilities was 4.14% during the year ended September 30,
1995 as compared to 3.70% during the year ended September 30, 1994.
Net Interest Income
Net interest income increased $90,000 or 1.2% to $7.6 million for the year
ended September 30, 1995 from $7.5 million for the year ended September 30,
1994. The Company's net interest rate spread dropped to 2.99% from 3.03% as
the cost of interest bearing liabilities increased more than interest earning
assets. The Company's net yield on average interest-earning assets increased
to 3.47% for the year ended September 30, 1995 from 3.36% for the year ended
September 30, 1994, as the Company funded more earning assets with
non-interest bearing liabilities.
As discussed above under "Interest Expense," the average balance in
certificate
of deposit accounts increased $12.8 million during fiscal 1995, which was
partially offset by a decrease of $20.2 million in the average balance of
lower rate savings deposits during that same period. These changes resulted
in approximately $466,000 of the $480,000 increase in interest expense for the
year ended September 30, 1995 as compared to the year ended September 30,
1994, and likewise reduced net interest income in fiscal 1995 as compared to
fiscal 1994. The movement from savings deposits to certificate accounts
experienced in fiscal 1995, is consistant with the general trends in the
banking industry, as depositors sought to benefit from the higher rates
offered on certificate accounts.
Provision for Loan Losses
The provision for loan losses decreased $210,000 or 45.2% to $255,000 for the
year ended September 30, 1995 as compared to $465,000 for the year ended
September 30, 1994. This decrease was primarily the result of the Company's
continued low charge-off levels and management's assessment of the adequacy of
the allowance for loan losses. At September 30, 1995, the Company's allowance
for loan losses totaled $2.0 million or 1.6% of loans and 188.4% of total
non-performing loans.
Non-Interest Income
Total noninterest income decreased $77,000 or 22.7% to $262,000 for the year
ended September 30, 1995 from $339,000 for the year ended September 30, 1994.
The decrease was principally a $105,000 decrease in net securities gains
(losses) of which $58,000 related to the reduction in net gains recorded on
the redemption of securities with the balance attributed to the Company's
write-off of its stock and debenture investments in Nationar, partially
offset by a $22,000 increase in service charges on deposit accounts.
Non-Interest Expense
Total noninterest expense increased $851,000 or 22.3% to $4.7 million for the
year ended September 30, 1995 from $3.8 million for the year ended September
30, 1994. Salaries, and employee benefits increased $161,000 or 9.0% to
$1,941,000 for the year ended September 30, 1995 as compared to $1,780,000 for
the year ended September 30, 1994, primarily as a result of salary increases
and increases in costs of health insurance benefits and pensions. Advertising
expenses increased $182,000 during the year ended September 30, 1995,
reflecting the Company's intensified marketing campaign designed to increase
loan originations. Federal deposit insurance premiums decreased $125,000 to
$332,000 for the year ended September 30, 1995, as compared to $457,000 for
the year ended September 30, 1994. During 1995, the BIF reached its required
funding levels and the FDIC lowered the deposit insurance premiums. As a
result, in September 1995, the Company received a $123,000 refund from the
FDIC thereby reducing deposit insurance premiums. Also contributing to the
increase in noninterest expense was a $660,000 provision for a loss
contingency associated with amounts due from Nationar. See Note 15 of Notes
to Consolidated Financial Statements.
Income Tax Expense
Income tax expense decreased by $262,000 to $1.2 million for the year ended
September 30, 1995 versus $1.5 million for the year ended September 30, 1994.
This decrease was caused primarily by the reduction in income before taxes.
The Company's effective tax rate for the years ended September 30, 1995 and
1994 was 41.06% and 41.18%. respectively.
ASSET QUALITY
Non-performing assets include non-accrual loans, troubled debt restructurings,
loans greater than 90 days past due and still accruing interest and other real
estate properties. Loans are placed on non-accrual status when the loan is
more than 90 days delinquent (except for FHA insured and VA guaranteed loans)
or when the collection of principal and/or interest in full becomes doubtful.
When loans are designated as non-accrual, all accrued but unpaid interest is
reversed against current period income and subsequent cash receipts generally
are applied to reduce the unpaid principal balance. Foreclosed assets include
assets acquired in settlement of loans.
Non-Performing Assets. The table below sets forth the amounts and
categories of the Bank's non-performing assets.
September 30,
1996 1995 1994 1993 1992
(Dollars in Thousands)
Non-accruing loans:
One- to four-family real estate $1,008 $ 784 $ 650 $ 409 $ 578
Multi-family and commercial real
estate 78 --- --- --- 1,351
Consumer 283 251 --- 15 4
Total 1,369 1,035 650 424 1,933
Troubled debt restructured loans:
Multi-family and commercial real
estate --- --- --- 1,427 ---
Total --- --- --- 1,427 ---
Foreclosed assets, net:
One- to four-family real estate 334 326 220 56 ---
Multi-family and commercial real
estate 23 158 158 --- ---
Total 357 484 378 56 ---
Total non-performing assets $1,726 $1,519 $1,028 $1,907 $1,933
Total as a percentage of total assets .61% .66% .45% .84% .93%
Non-performing assets at September 30, 1996, were $1.7 million or .61% of
total assets, compared to the $1.5 million or .66% of total assets at
September 30, 1995. Non-performing loans were $1.4 million or 1.10% of total
loans at September 30, 1996, an increase of $334,000 over the $1.0 million, or
.86% of total loans at September 30, 1995. The increase in non-performing
loans was principally a $224,000 increase in loans secured by one to four
family residential real estate, as the Company experienced, similar to many
financial institutions, an increase in the number of borrowers who have filed
for bankruptcy protection. If this trend continues, the level of
non-performing loans could increase. Additionally, at September 30, 1996, the
Company has identified approximately $2.0 million in loans having more than
its normal credit risk. The Company believes that if economic and/or business
conditions change in its lending area, some of these loans could become
non-performing in the future.
LIQUIDITY
Liquidity is the ability to generate cash flows to meet present, as well as
expected, future funding commitments. Management monitors the Company's
liquidity position, principally its federal funds, on a daily basis and
evaluates its ability to meet expected and unexpected depositor withdrawals
and to make new loans and or investments. The Company has historically
maintained high levels of liquidity, and manages its balance sheet so there
has been no need for unanticipated sales of assets.
The Company's primary sources of funds for operations are deposits from its
primary market area, principal and interest payments on loans, mortgage backed
securities, securities available for sale and securities held for investment.
Net cash provided by operating activities was $5.9 million in 1996, an
increase of $4.0 million over 1995. The increase was primarily the receipt of
$3.1 million of the Bank's Nationar claim, and improved operating
performance. Financing activities provided $50.5 million, principally
representing the net proceeds of the Company's initial public offering, net of
common shares acquired by the Company's ESOP. The cash flow provided by the
operating and financing activities was invested principally in securities
available for sale, including mortgage backed securities, and loans. For
details concerning the Company's cash flows, see "Consolidated Statements of
Cash Flows".
An important source of the Company's funds is the Bank's core deposits.
Management believes that a substantial portion of the Bank's $196.7 million of
deposits are core deposits. Core deposits are generally considered to be a
dependable source of funds due to long term customer relationships. The
Company does not currently use brokered deposits as a source of funds, and
deposit accounts having balances in excess of $100,000 total only $16.9
million or less than 8.6% of total deposits. The Bank is required to maintain
minimum levels of liquid assets as defined by OTS regulations. The
requirement, which may be varied by OTS depending upon economic conditions and
deposit flows, is based upon a percentage of deposits and short term
borrowings. The OTS required minimum liquidity ratio is currently 5% and for
the month of September 1996 the Bank substantially exceeded that minimum
reporting an average liquidity ratio of 52.9% as the Bank initially invested
the additional capital contributed to it by the Company in liquid investments
pending the availability of loan opportunities.
The Bank opened a new branch in December 1996, which will provide new sources
of funding and additional opportunities to generate loan growth, although
experience in the banking industry indicates that new branches are rarely
profitable in the first year of operations. In addition, the Bank is a member
of the Federal Home Loan Bank of New York ("FHLBNY") and as of September 30,
1996, had immediate access to additional liquidity in the form of borrowings
from the FHLBNY in the amount of $23.2 million, although the Bank has not, in
the past five years, used borrowed funds and it does not anticipate a need to
do so. The Company anticipates that it will have sufficient funds to meet its
current commitments. At September 30, 1996, the company had commitments to
originate loans and purchase mortgage backed securities of $3.3 million, and
$2.0 million, respectively. In addition, the Company had undrawn commitments
of $2.7 million on home equity and other lines of credit. Certificates of
deposits which are scheduled to mature in one year or less at September 30,
1996 totaled $64.5 million, and management believes that a significant portion
of such deposits will remain with the Company.
CAPITAL
Catskill Financial is a unitary savings and loan holding company which is
regulated by the OTS, and although there are no minimum capital requirements
for the holding company itself, the Bank is required to maintain a minimum
level of regulatory capital. The following is a summary of the Bank's actual
capital amounts and ratios as of September 30, 1996, compared to the OTS
minimum capital requirements.
Actual Minimum Excess
Amount % Amount % Amount %
(Dollars in Thousands)
Tangible Capital $54,879 20.93% $ 3,934 1.50% $50,945 19.43%
Core Capital 54,879 20.93 7,867 3.00 47,012 17.93
Risk Based Capital 56,034 61.08 7,339 8.00 48,695 53.08
In October 1996, the Board authorized the Company to repurchase 4% of its
outstanding shares to fund its Management Recognition Plan which was approved
at a special meeting of shareholders on October 24, 1996. See Note 18 of
Notes to Consolidated Financial Statements. In addition, after Board
approval, the Company received OTS approval on November 26, 1996, to
repurchase up to 10% of its shares over the period ending April 18, 1997.
Such shares could be used for general corporate purposes including funding the
Company's stock options plans which were also approved at the special meeting
of shareholders. Under the stock options plans 568,675 stock options, or 10%
of the number of shares outstanding will be available for award to employees,
officers and directors of the Company. See Note 18 of Notes to Consolidated
Financial Statements. By December 4, 1996, the Company had completed the
repurchase of 227,470 shares of its common stock to fund the MRP program at a
cost of $3.1 million, or $13.59 per share. In addition, by December 20, 1996,
the Company had repurchased 276,000 of the shares under the 10% program at a
cost of $3.9 million or $14.15 per share. The Holding Company itself has
adequate resources to repurchase the shares without dividends from the Bank.
In addition, at September 30, 1996, the Bank could after notifying the OTS in
writing, pay to the holding company dividends of approximately $13.8 million.
Impact of Inflation and Changing Prices
The Company's consolidated financial statements are prepared in accordance
with generally accepted accounting principles which require the measurement of
financial position and operating results in terms of historical dollars
without considering the changes in the relative purchasing power of money
over time due to inflation. The impact of inflation is reflected in the
increasing costs of operations. Unlike most industrial companies, nearly all
assets and liabilities of the Company are monetary. As a result, changes in
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation, since interest rates do not
necessarily move in the direction, or to the same extent as the price of
goods and services.
Impact of New Accounting Standards
In December 1990, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." Under SFAS No. 106, the cost of postretirement benefits other than
pensions must be recognized on an accrual basis as employees perform services
to earn the benefits. The provisions of SFAS No. 106 were first effective for
the Company for the fiscal 1996 year. The Company's accumulated
postretirement obligation at the date of adoption (the transition obligation)
is being amortized over twenty years as a component of net postretirement
benefit cost. The Company's transition obligation is approximately $1.1
million. The postretirement non-pension expense in fiscal 1996, the first
year of adoption, was $150,000 more than the expense which would have been
recorded using pre-SFAS No. 106 method of recording expense only when payments
are made.
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as amended
by SFAS No. 118, requires that an "impaired loan" (as defined in the
statement) be valued based on the present value of expected future cash flows
or, for a loan whose repayment is collateral dependent, based on the
collateral's fair value, or at an observable market price. SFAS No. 114 also
narrows the concept of in-substance foreclosure to situations where the
creditor has received physical possession of the collateral regardless of
whether formal foreclosure proceedings have taken place. The Company adopted
these statements on October 1, 1995. Adoption did not have a material impact
on the Company's financial condition or results of operations.
The Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" effective for fiscal 1995. See Notes 1(c), 4 and 5 of
Notes to Consolidated Financial Statements. When the Company adopted SFAS No.
115, it classified all securities as held to maturity. The adoption of SFAS
No. 115 did not have a material impact on the Company's financial condition or
results of operations. On December 29, 1995, in accordance with a one-time
authorization contained in a FASB release of November 1995, securities with
amortized costs totaling $24.8 million and fair values totaling $25.3 million
were transferred from "held to maturity" to "available for sale."
In November 1993, the AICPA Accounting Standards Executive Committee issued
Statement of Position 93-6, "Employers' Accounting for Employee Stock
Ownership Plan" ("SOP 93-6"). SOP 93-6 addresses the accounting for shares of
stock issued to employees by an employee stock ownership plan. SOP 93-6
requires that the employer record compensation expense in an amount equal to
the fair value of shares committed to be released from the ESOP to employees.
The shares purchased by the Company's ESOP with the proceeds of the loan from
the Company are treated as being committed to be released when they are
released from the lien of the ESOP loan, which occurs ratably as the loan is
repaid. Therefore, ESOP expense is based upon the future average market value
of those shares, not the purchase price. If the Common Stock appreciates over
time, the adoption of SOP 93-6 will increase ESOP compensation expense
compared with prior rules which required the recognition of expense based on
the cost of shares acquired by the ESOP.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which establishes a fair value based method of accounting for
employee stock options or similar equity instruments such as the Company's
Stock Option and Incentive Plan. Under SFAS No. 123, entities can recognize
stock-based compensation expense in the using of either (i) the intrinsic
valued approach or (ii) the fair value based method. Entities electing to use
the intrinsic value approach must make pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting had been
applied. Under the intrinsic value approach, compensation expense is
determined based upon the option's intrinsic value, or the excess (if any) of
the market price of the underlying stock at the measurement date over the
amount the employee is required to pay. Under the fair value based method,
compensation expense is based on the option's estimated fair value at the
grant date and is generally recognized over the vesting period. Management
has not determined which method the Company will use to measure stock-based
compensation expense.
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
125 provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities, such as the sales of
loans with full or partial recourse. SFAS No. 125 applies an approach that
focuses on financial and servicing assets it controls and the liabilities it
has incurred, derecognize financial assets when control has been surrendered,
and derecognize liabilities when extinguished. SFAS No. 125 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and is to be applied prospectively.
Management believes that since the Company is not engaged in the purchase and
sale of loans, does not service loans for others, and is not engaged in
material other transactions covered by SFAS No. 125, its adoption will not
have a material effect on the Company.
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Financial Statements
Use other title sheet
Independent Auditors' Report
The Board of Directors
Catskill Financial Corporation:
We have audited the accompanying consolidated statements of financial
condition of Catskill Financial Corporation and subsidiary (the Company)
as of September 30, 1996 and 1995, and the related statements of
operations, changes in shareholders' equity and cash flows for each of the
years in the three-year period ended September 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Catskill Financial Corporation and subsidiary at September 30, 1996 and
1995, and the results of its operations and its cash flows for each of the
years in the three-year period ended September 30, 1996, in conformity
with generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, as of
October 1, 1994 the Company adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" which changed its method of accounting for investment
securities.
November 1, 1996
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
(in thousands, except for share amounts)
September 30,
Assets 1996 1995
Cash and due from banks $ 4,112 $ 3,364
Federal funds sold 35,600 34,700
Cash and cash equivalents 39,712 38,064
Securities available for sale, at fair value (note 4) 97,041 --
Investment securities (estimated fair value of $19,090 in
1996 and $67,148 in 1995) (note 5) 19,077 67,090
Investment required by law, stock in Federal Home Loan
Bank of NY, at cost 1,159 --
Loans receivable, net (note 6) 122,533 118,364
Accrued interest receivable (note 7) 1,736 1,630
Premises and equipment, net (note 8) 1,886 1,732
Real estate owned, net 357 484
Deposits held at Nationar, net (note 15) 83 2,606
Other assets 175 132
Total assets $283,759 $230,102
Liabilities and Shareholders' Equity
Liabilities:
Due to depositors (note 9):
Non-interest bearing $ 3,714 $ 4,008
Interest bearing 193,039 193,222
Total deposits 196,753 197,230
Advance payments by borrowers for taxes and insurance 1,632 1,027
Accrued interest on depositors' accounts 58 54
Official bank checks 2,557 2,837
Accrued expenses and other liabilities 378 287
Total liabilities 201,378 201,435
Commitments and contingent liabilities (notes 11, 12 and 13)
Shareholders' Equity:
Preferred stock, $.01 par value; authorized 5,000,000
shares -- --
Common stock, $.01 par value; authorized 15,000,000 shares;
5,686,750 shares issued and outstanding at
September 30, 1996 57 --
Additional paid-in capital 54,864 --
Retained earnings, substantially restricted 31,984 28,667
Common stock acquired by ESOP (note 11) (4,436) --
Net unrealized loss on securities available for sale,
net of taxes (88) --
Total shareholders' equity 82,381 28,667
Total liabilities and shareholders' equity $283,759 230,102
See accompanying notes to consolidated financial statements.
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
Years ended September 30, 1996, 1995 and 1994
(in thousands, except for share amounts)
1996 1995 1994
Interest and dividend income:
Loans $ 9,783 9,733 9,431
Securities available for sale 2,201 -- --
Investment securities 2,282 4,663 4,390
Federal funds sold and other 3,625 1,196 1,201
Stock in Federal Home Loan Bank of NY 41 -- --
Total interest and dividend income 17,932 15,592 15,022
Interest expense (note 9) 9,022 8,009 7,529
Net interest income 8,910 7,583 7,493
Provision for loan losses (note 6) 195 255 465
Net interest income after provision for loan losses 8,715 7,328 7,028
Noninterest income:
Recovery of Nationar loss contingency (note 15) 560 -- --
Service fees on deposit accounts 218 128 106
Net securities gains (losses) 33 (47) 58
Other income 185 181 175
Total noninterest income 996 262 339
Noninterest expenses:
Salaries and employee benefits 2,173 1,941 1,780
Advertising and business promotion 137 324 142
Net occupancy on premises 251 241 259
Federal deposit insurance premium 21 332 457
Postage and supplies 171 185 167
Provision for Nationar loss contingency (note 15) -- 660 --
Outside data processing fees 337 235 202
Equipment 153 155 171
Professional fees 210 122 145
Other real estate expenses, net 211 19 9
Other 594 451 482
Total noninterest expense 4,258 4,665 3,814
Income before taxes 5,453 2,925 3,553
Income tax expense (note 10) 2,136 1,201 1,463
Net income $ 3,317 1,724 2,090
Earnings per share (for 1996, calculated using post
conversion net income)(see note 1) $ .38 N/A N/A
See accompanying notes to consolidated financial statements.
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
Years ended September 30, 1996, 1995 and 1994
Net unrealized
Retained Common loss on
Additional earnings, stock securities
Shares Common paid-in substantially acquired available
Issued stock capital restricted by ESOP for sale Total
(dollars in thousands, except for share amounts)
Balance at October 1, 1993 -- $ -- -- 24,853 -- -- 24,853
Net income -- -- -- 2,090 -- -- 2,090
Balance at September 30, 1994 -- -- -- 26,943 -- -- 26,943
Net income -- -- -- 1,724 -- -- 1,724
Balance at September 30, 1995 -- -- -- 28,667 -- -- 28,667
Net income -- -- -- 3,317 -- -- 3,317
Common stock issued 5,686,750 57 54,858 -- -- -- 54,915
Acquisition of common stock by ESOP
(454,940 shares) -- -- -- -- (4,549) -- (4,549)
Allocation of ESOP stock
(11,374 shares) -- -- 6 -- 113 -- 119
Net unrealized loss on securities
available for sale, net of tax -- -- -- -- -- (88) (88)
Balance at September 30, 1996 5,686,750 $ 57 54,864 31,984 (4,436) (88) 82,381
See accompanying notes to consolidated financial statements.
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended September 30, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 3,317 1,724 2,090
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 136 139 166
Provision for loan losses 195 255 465
Provision (recovery) for Nationar loss
contingency (560) 660 -
ESOP compensation expense 119 - -
Writedown on real estate owned 134 - 3
Writedown of Nationar debenture and
capital stock - 47 -
Loss (gain) on sale of other real estate
owned 85 (17) -
Gain on redemption of investment securities (33) (2) (58)
Net accretion on securities (308) (337) (252)
Deferred tax expense (benefit) (151) (321) 19
(Transfer to other assets) partial collection
of deposits held at Nationar 3,083 (3,266) -
(Increase) decrease in other assets (149) (11) 84
Increase (decrease) in accrued expenses and
other liabilities 25 3,010 (134)
Net cash provided by operating
activities 5,893 1,881 2,383
Cash flows from investing activities:
Proceeds from maturity, paydowns, and
redemption of investment securities 28,884 24,203 20,857
Proceeds from maturity, paydowns, and
redemption of securities available for sale 126,656 - -
Purchases of investment securities (6,015) (12,930) (30,553)
Purchase of Federal Home Loan Bank Stock (1,159) - -
Purchases of securities available for sale (198,359) - -
Net (increase) decrease in loans (4,570) 340 (437)
Capital expenditures (290) (365) (61)
Proceeds from sale of other real estate owned 114 185 -
Net cash (used) provided by investing
activities (54,739) 11,433 (10,194)
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
Years ended September 30, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
Cash flows from financing activities:
Net increase (decrease) in demand, statement,
passbook, money market and NOW deposit
accounts (1,814) (33,407) 3,225
Net increase (decrease) in certificates of deposit 1,337 29,812 (2,212)
Increase (decrease) in advances from borrowers
for taxes and insurance 605 (1,235) 920
Net proceeds from sale of common stock 54,915 - -
Common stock acquired by ESOP (4,549) - -
Net cash (used) provided by financing
activities 50,494 (4,830) 1,933
Net (decrease) increase in cash and cash equivalents 1,648 8,484 (5,878)
Cash and cash equivalents at beginning of year 38,064 29,580 35,458
Cash and cash equivalents at end of year $ 39,712 38,064 29,580
Supplemental disclosures of cash flow information -
cash paid during the year for:
Interest $ 9,018 8,014 7,470
Income taxes $ 2,274 1,416 1,310
Noncash investing activities:
Reduction in loans receivable resulting from the
transfer to real estate owned $ 206 273 325
Investments securities transferred to securities
available for sale in accordance with the
Financial Accounting Standards Board's
"Special Reports," fair value of securities
transferred was $25.3 million (note 4) $ 24,800 - -
Net unrealized loss on securities available for sale,
net of deferred tax benefit of $59 thousand $ 88 - -
See accompanying notes to consolidated financial statements.
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1996, 1995 and 1994
(1) Summary of Significant Accounting Policies
Catskill Financial Corporation (the Holding Company) was incorporated
under Delaware law in December 1995 as a holding company to purchase 100%
of the common stock of Catskill Savings Bank (the Bank). The Bank
converted from a mutual form to a stock institution in January 1996, and
the Holding Company completed its initial public offering on April 18,
1996, at which time the Holding Company purchased all of the outstanding
stock of the Bank. To date, the principal operations of Catskill
Financial Corporation and subsidiary (the Company) have been those of the
Bank.
The following is a description of the more significant policies which the
Company follows in preparing and presenting its consolidated financial
statements:
(a) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Holding Company and its wholly owned subsidiary, the Bank. All
significant intercompany transactions and balances are eliminated in
consolidation. The accounting and reporting policies of the Company
conform in all material respects to generally accepted accounting
principles and to general practice within the thrift industry.
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for loan
losses and the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with the
determination of the allowance for loan losses and the valuation of real
estate owned, management obtained appraisals for significant properties.
(b) Business
Approximately 43% of the Company's assets are loans secured by real estate
in Greene County and southern Albany County in New York. In addition, a
substantial portion of the real estate owned is located in those same
markets. Accordingly, the ultimate collectibility of a substantial
portion of the Company's loan portfolio and the recovery of a substantial
portion of the carrying amount of real estate owned are dependent upon
market conditions in the upstate New York region.
Management believes that the allowance for loan losses is adequate and
that real estate owned is properly valued. While management uses
available information to recognize losses on loans and real estate owned,
future additions to the allowance or writedowns on real estate owned may
be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses. Such
agencies may require the Bank to recognize additions to the allowance or
writedowns on real estate owned based on their judgments about information
available to them at the time of their examination which may not be
currently available to management.
(c) Securities Available for Sale and Investment Securities
As of October 1, 1994, the Bank had adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" (SFAS No. 115). Management determines the
appropriate classification of securities at the time of purchase. If
management has the positive intent and ability to hold debt securities to
maturity, they are classified as investment securities and are stated at
amortized cost. All other debt and marketable equity securities are
classified as securities available-for-sale and are reported at fair
value, with net unrealized gains or losses reported as a separate
component of shareholders' equity, net of estimated income taxes. The
Company does not maintain a trading portfolio.
Realized gains and losses on the sale of securities are based on the net
proceeds and the amortized cost of the securities sold, using the specific
identification method. The cost of securities is adjusted for
amortization of premium and accretion of discount, which is calculated on
an effective interest method.
Mortgage-backed securities, which are guaranteed by the Government
National Mortgage Association ("GNMA"), the Federal Home Loan Mortgage
Corporation ("FHLMC"), or the Federal National Mortgage Association
("FNMA"), represent participating interests in direct pass-through pools
of long-term first mortgage loans originated and serviced by the issuers
of the securities.
Unrealized losses on securities are charged to earnings when the decline
in fair value of a security is judged to be other than temporary.
Non-marketable equity securities, such as Federal Home Loan Bank of New
York stock, is stated at cost. The investment in Federal Home Bank of New
York stock is required for membership.
(d) Loans Receivable
Loans receivable are stated at unpaid principal amount, net of deferred
loan fees and allowance for loan losses. Loan origination fees net of
certain related costs are amortized into income over the estimated term of
the loan using the interest method of amortization. Interest income on
loans is not recognized when considered doubtful of collection by
management.
Loans considered doubtful of collection by management are placed on a
nonaccrual status for the recording of interest. Generally loans past due
90 days or more as to principal or interest are placed on nonaccrual
status except for certain loans which, in management's judgment, are
adequately secured and for which collection is probable. Previously
accrued income that has not been collected is reversed from current
income. Thereafter, the application of payments received (principal or
interest) is dependent on the expectation of ultimate repayment of the
loan. If ultimate repayment of the loan is expected, any payments
received are applied in accordance with contractual terms. If ultimate
repayment of principal is not expected or management judges it to be
prudent, any payment received on a non-accrual loan is applied to
principal until ultimate repayment becomes expected. Loans are removed
from non-accrual status when they are estimated to be fully collectible as
to principal and interest. Amortization of related deferred fees is
suspended when a loan is placed on non-accrual status.
The allowance for loan losses is maintained at a level deemed appropriate
by management based on an evaluation of the known and inherent risks in
the present portfolio, the level of non-performing loans, past loan loss
experience, estimated value of underlying collateral, and current and
prospective economic conditions. The allowance is increased by provisions
for loan losses charged to operations.
Impaired loans are identified and measured in accordance with Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors
for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures." These
Statements were adopted by the Company on October 1, 1995. A loan is
considered impaired when it is probable that the borrower will be unable
to repay the loan according to the original contractual terms of the loan
agreement, or the loan is restructured in a troubled debt restructuring
subsequent to October 1, 1995. These standards are applicable principally
to commercial and commercial real estate loans, however, certain
provisions related to restructured loans are applicable to all loan types.
The adoption of these Statements did not have a material effect on the
Company's consolidated financial statements.
Under these Statements the allowance for loan losses related to impaired
loans is based on discounted cash flows using the loan's initial effective
interest rate or the fair value of the collateral for certain loans where
repayment of the loan is expected to be provided solely by the underlying
collateral (collateral dependent loans). The Company's impaired loans are
generally collateral dependent. The Company considers estimated costs to
sell on a discounted basis, when determining the fair value of collateral
in the measurement of impairment if these costs are expected to reduce the
cash flows available to repay or otherwise satisfy the loans.
(e) Real Estate Owned
Real estate owned includes assets received from foreclosure and in-
substance foreclosures. In accordance with SFAS No. 114, a loan is
classified as an insubstance foreclosure when the Company has taken
possession of the collateral regardless of whether formal foreclosure
proceedings have taken place. Prior to the adoption of SFAS No. 114 and
SFAS No. 118, insubstance foreclosed properties included those properties
where the borrower had little or no remaining equity in the property
considering its fair value; where repayment was only expected to come from
the operation or sale of the property; and where the borrower had
effectively abandoned control of the property or it was doubtful that the
borrower would be able to rebuild equity in the property.
Foreclosed assets, including in-substance foreclosures, are recorded on an
individual asset basis at net realizable value which is the lower of fair
value minus estimated costs to sell or "cost" (defined as the fair value
at initial foreclosure). When a property is acquired or identified as in-
substance foreclosure, the excess of the loan balance over fair value is
charged to the allowance for loan losses. Subsequent write-downs to carry
the property at fair value less costs to sell are included in noninterest
expense. Costs incurred to develop or improve properties are capitalized,
while holding costs are charged to expense.
At September 30, 1996 and 1995, real estate owned consisted of primarily
residential one to four family properties. The Company had no in-
substance foreclosures at September 30, 1996 and 1995.
(f) Premises and Equipment, Net
Premises and equipment are carried at cost, less accumulated depreciation
applied on a straight-line basis over the estimated useful lives of the
assets. Useful lives are 10 to 40 years for banking house and 5 to 7
years for furniture, fixtures and office equipment.
(g) Income Taxes
Income taxes are provided on income reported in the consolidated
statements of income regardless of when such taxes are payable. The
Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS No. 109). SFAS No. 109 requires the asset and liability method of
accounting for income taxes. Under the asset and liability method of SFAS
No. 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective
tax basis. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under SFAS
No. 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date. The Company's policy is that deferred tax assets are
reduced by a valuation reserve if, based on the weight of available
evidence, it is more likely than not that some or all of the deferred tax
assets will not be realized.
(h) Pension Plan
The Company has a defined benefit pension plan covering all full time
employees meeting age and service requirements. The projected unit credit
method is utilized for measuring net periodic pension cost over the
employee's service life. The Company's annual contribution, calculated
under the entry age normal cost method, meets or exceeds the minimum
funding requirements set forth in the Employees Retirement Income Security
Act.
(i) Borrowings
Beginning in 1996, the Bank has a line of credit available with Federal
Home Loan Bank of New York and, as of September 30, 1996, the Bank could
borrow up to $23.2 million. There were no amounts outstanding under this
line of credit at September 30, 1996.
(j) Off-Balance-Sheet Risk
The Company is a party to certain financial instruments with off-balance-
sheet risk such as commitments to extend credit. The Company's policy is
to record such instruments when funded.
(k) Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all cash and due from banks and federal funds sold to be cash
equivalents.
(l) Official Bank Checks
The Company's official checks (including teller's checks, loan
disbursement checks, interest checks, expense checks, money orders, and
payroll checks) are drawn upon deposit accounts at the Bank and are
ultimately paid through the Bank's Federal Reserve correspondent account.
(m) Earnings per Share
Earnings per share are compiled on estimated earnings from the date of
conversion, April 18, 1996, through September 30, 1996, and are based on
the weighted average number of shares outstanding during this period, less
unallocated employee stock ownership plan shares, during the period.
Earnings per share are not presented for periods prior to the initial
stock offering as the Bank was a mutual savings bank at the time and no
stock was outstanding. The weighted average number of shares outstanding
was 5,231,879 for the period ending September 30, 1996.
In addition, in calculating earnings per share, post conversion net income
of $2,013,000 was used.
(n) Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 (SFAS No. 125), which provides
accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities based on consistent
application of a financial-components approach that focuses on control.
In addition, SFAS No. 125 amends SFAS No. 115 to prevent a security from
being classified as held to maturity if the security can be prepaid or
settled in such a manner that the holder of the security would not recover
substantially all of its recorded investment. The extension of the SFAS
No. 115 approach to certain non-security financial assets and the
amendment to SFAS No. 115 are effective for financial assets held on or
acquired after January 1, 1997. Effective January 1, 1997, SFAS No. 125
will supersede SFAS No. 122. SFAS No. 125 is effective for transfers and
servicing of financial assets and extinguishment of liabilities occurring
after December 31, 1996. Management believes the adoption of SFAS No. 125
will not have a material impact on the Company's consolidated financial
statements.
(o) Reclassifications
Amounts in the prior years' consolidated financial statements are
reclassified whenever necessary to conform to the current year's
presentations.
(2) Conversion to Stock Ownership
On April 18, 1996, the Holding Company sold 5,686,750 shares of common
stock at $10.00 per share to depositors and employees of the Bank. Net
proceeds from the sale of stock of the Holding Company, after deducting
conversion expenses of approximately $1.9 million, were $54.9 million and
are reflected as common stock and additional paid-in capital in the
accompanying September 30, 1996 consolidated statement of financial
condition. The Company utilized $27.5 million of the net proceeds to
acquire all of the capital stock of the Bank.
As part of the conversion, the Bank established a liquidation account for
the benefit of eligible depositors who continue to maintain their deposit
accounts in the Bank after conversion. In the unlikely event of a
complete liquidation of the Bank, each eligible depositor will be entitled
to receive a liquidation distribution from the liquidation account, in the
proportionate amount of the then current adjusted balance for deposit
accounts held, before distribution may be made with respect to the Bank's
capital stock. The Bank may not declare or pay a cash dividend to the
Holding Company on, or repurchase any of, its capital stock if the effect
thereof would cause the retained earnings of the Bank to be reduced below
the amount required for the liquidation account. Except for such
restrictions, the existence of the liquidation account does not restrict
the use or application of retained earnings.
The Bank's capital exceeds all of the fully phased-in capital regulatory
requirements. The Office of Thrift Supervision ("OTS") regulations
provide that an institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution could, after
prior notice but without the approval by the OTS, make capital
distributions during the calendar year of up to 100% of its net income to
date during the calendar year plus the amount that would reduce by one-
half its "surplus capital ratio" (the excess capital over its fully
phased-in capital requirements) at the beginning of the calendar year.
Any additional capital distributions would require prior regulatory
approval. At September 30, 1996, the maximum amount that could have been
paid by the Bank to the Holding Company was approximately $13.8 million.
Unlike the Bank, the Holding Company is not subject to these regulatory
restrictions on the payment of dividends to its stockholders.
(3) Reserve Requirements
The Bank is required to maintain certain reserves of cash and/or deposits
with the Federal Reserve Bank. The amount of this reserve requirement,
included in cash and due from banks, was approximately $335,000 and
$120,000 at September 30, 1996 and 1995, respectively.
The Bank is also required to maintain certain levels of stock in the
Federal Home Loan Bank of New York.
(4) Securities Available for Sale
In November 1995, the Financial Accounting Standards Board released its
Special Report, "A Guide to Implementation of Statement 115 on Accounting
for Certain Investments in Debt and Equity Securities." The Special
Report contained, among other things, a unique provision that allowed
entities to, as of one date either concurrent with the initial adoption of
the Special Report (November 15, 1995), but no later than December 31,
1995, reassess the appropriateness of the classifications of all
securities held at that time. On December 29, 1995, the Company
transferred certain securities with amortized costs totaling $24.8 million
and fair value totaling $25.3 million from the "held to maturity"
classification to the "available for sale" classification.
The amortized cost and estimated fair values of securities available for sale at September 30, 1996 are as follows:
1996
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(in thousands)
U.S. Treasury and other U.S. Government
agencies $ 56,842 157 (78) 56,921
Mortgage backed securities 35,151 580 (829) 34,902
Obligations of states and political
subdivisions 191 2 -- 193
Corporate bonds 5,000 28 (36) 4,992
Other 3 30 -- 33
Total securities available for sale $ 97,187 797 (943) 97,041
There were no sales of securities available for sale during the year ended
September 30, 1996.
Prior to December 31, 1995, the Company did not maintain a securities
available for sale portfolio.
The amortized cost and approximate fair value of securities available for
sale at September 30, 1996, by contractual maturity, are shown below
(mortgage backed securities are included by final contractual maturity).
Expected maturities will differ from contractual maturities because
certain issuers may have the right to call or prepay obligations with or
without call or prepayment penalties.
September 30, 1996
Amortized Estimated
Cost Fair Value
(in thousands)
Due within one year $ 35,020 35,019
Due one year to five years 39,842 39,820
Due five years to ten years 1,189 1,200
Due after ten years 21,136 21,002
Total securities available for sale $ 97,187 97,041
(5) Investment Securities
The amortized cost and estimated fair value of investment securities at
September 30, 1996 and 1995 are as follows:
1996
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(in thousands)
U.S. Treasury and other U.S. Government agencies $ 13,965 66 (58) 13,973
Corporate bonds 4,999 7 (2) 5,004
Obligations of states and political subdivisions 15 -- -- 15
Mortgage backed securities 98 -- -- 98
Total investment securities $ 19,077 73 (60) 19,090
1995
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(in thousands)
U.S. Treasury and other U.S. Government agencies $ 37,088 105 (178) 37,015
Corporate bonds 16,152 144 (86) 16,210
Mortgage backed securities 13,647 219 (152) 13,714
Obligations of states and political subdivisions 203 6 -- 209
Total investment securities $ 67,090 474 (416) 67,148
The amortized cost and estimated fair value of investment securities at
September 30, 1996, by contractual maturity, are shown below (mortgage-
backed securities are included by final contractual maturity). Expected
maturities will differ from contractual maturities because certain issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Amortized Estimated
cost fair value
(in thousands)
Due within one year $ 12,012 12,082
Due one year to five years 7,018 6,961
Due after five years to ten years -- --
Due after ten years 47 47
Totals $ 19,077 19,090
There were no sales of investment securities during the years ended
September 30, 1996, 1995 or 1994.
(6) Loans Receivable, Net
Loans receivable consist of the following at September 30, 1996 and 1995:
September 30,
1996 1995
(in thousands)
Loans secured by real estate:
Conventional one- to four-family $100,254 95,416
Commercial and multi-family 5,115 5,132
FHA and VA insured loans 129 172
Construction 423 230
Total loans secured by real estate 105,921 100,950
Other loans:
Student loans 2,450 2,373
Automobile loans 7,029 6,652
Consumer 2,516 2,447
Mobile home 782 1,185
Passbook loans 856 998
Home improvement 923 828
Home equity 4,368 5,393
Other 100 112
Total other loans 19,024 19,988
Less:
Net deferred loan fees 579 624
Allowance for loan losses 1,833 1,950
2,412 2,574
$122,533 118,364
Activity in the allowance for loan losses is summarized as follows for the years ended:
September 30,
1996 1995 1994
(in thousands)
Balance at beginning of period $1,950 1,746 1,294
Provision charged to operations 195 255 465
Charge offs (323) (62) (32)
Recoveries 11 11 19
Balance at end of period $1,833 1,950 1,746
The following table sets forth the information with regard to non-performing loans:
September 30,
1996 1995 1994
(in thousands)
Loans in a non-accrual status $1,369 $1,035 $ 650
Loans past due 90 days and still accruing -- -- --
Restructured loans -- -- --
Total non-performing loans $1,369 $1,035 $ 650
For the year ended September 30, 1996, interest income that would have
been recorded on non-performing loans had they remained performing
amounted to approximately $77,000.
Certain executive officers of the Company were customers of and had other
transactions with the Company in the ordinary course of business. Loans
to these parties were made in the ordinary course of business at the
Bank's normal credit terms, including interest rate and collateralization.
The aggregate of such loans totaled less than 5% of total equity at
September 30, 1996 and 1995.
As of September 30, 1996, the recorded investment in loans that are
considered to be impaired under SFAS No. 114 totalled approximately
$78,000, for which the related allowance for loan loss is approximately
16,000. As of September 30, 1996, there were no impaired loans which did
not have an allowance for loan losses determined in accordance with SFAS
No. 114. During 1996, the average balance of impaired loans was
approximately $78,000. Interest income collected on impaired loans during
fiscal 1996 was approximately $2,000.
(7) Accrued Interest Receivable
Accrued interest receivable consists of the following:
September 30,
1996 1995
(in thousands)
Investment securities $ 323 874
Securities available for sale 657 --
Loans 756 756
$1,736 1,630
(8) Premises and Equipment, Net
A summary of premises and equipment is as follows:
September 30,
1996 1995
(in thousands)
Banking house and land $2,051 1,417
Furniture, fixtures and equipment 646 627
Construction in progress -- 363
2,697 2,407
Less accumulated depreciation 811 675
Premises and equipment, net $1,886 1,732
Amounts charged to depreciation expense were approximately $136 thousand,
$139 thousand and $166 thousand and for the years ended September 30,
1996, 1995 and 1994, respectively.
(9) Due to Depositors
Due to depositors are summarized as follows as of September 30, 1996 and 1995:
Approximate
Stated September 30,
Rates 1996 1995
(in thousands)
Passbook savings accounts 1995 - 3.50% $ 75,477 78,292
1996 - 3.50%
Statement savings accounts 1995 - 3.50% 7,881 7,019
1996 - 3.50%
Certificates of deposit:
3.00 - 3.99% 30 776
4.00 - 4.99% 10,503 9,289
5.00 - 5.99% 64,790 46,146
6.00 - 6.99% 15,264 32,368
7.00 - 7.99% 2,272 2,178
8.00 - 8.99% -- 766
92,859 91,523
Money market accounts 1995 - 2.85-3.95% 7,752 8,589
1996 - 2.50-3.45%
NOW accounts 1995 - 2.50% 9,070 7,799
1996 - 2.50%
Demand accounts -- 3,714 4,008
Total deposits $196,753 197,230
The approximate amount of contractual maturities of certificates of deposit for the years subsequent to September 30, 1996
are as follows:
(in thousands)
Years ended September 30,
1997 $64,484
1998 18,046
1999 7,989
2000 2,084
Thereafter 256
$92,859
The aggregate amount of time deposit accounts with a balance of $100,000
or more (not federally-insured beyond $100,000) were approximately $7.3
million and $7.4 million at September 30, 1996 and 1995, respectively.
Interest expense on deposits and advances from borrowers for property taxes and insurance (escrow balances) for the years
ended September 30, 1996, 1995 and 1994, is summarized as follows:
September 30,
1996 1995 1994
(in thousands)
Passbook savings accounts $2,702 3,149 3,846
Statement savings accounts 260 285 340
Certificates of deposit 5,218 4,026 2,808
Money market accounts 289 310 299
NOW accounts 216 195 191
Escrow balances (including common stock subscriptions) 337 44 45
Total interest expense $9,022 8,009 7,529
Escrow balances expense for the year ended September 30, 1996 includes
interest expense on common stock subscriptions held in connection with the
Company's initial public offering.
(10) Income Taxes
The components of income tax expense are as follows for the years ended September 30, 1996, 1995 and 1994:
September 30,
1996 1995 1994
(in thousands)
Current tax expense:
Federal $1,605 1,197 1,114
State 682 325 330
2,287 1,522 1,444
Deferred tax expense (benefit) (151) (321) 19
Total income tax expense $2,136 1,201 1,463
Actual tax expense for the years ended September 30, 1996, 1995 and 1994 differs from expected tax expense, computed by
applying the Federal corporate tax rate of 34% to income before taxes as follows:
September 30,
1996 1995 1994
% Pretax % Pretax % Pretax
Amount Income Amount Income Amount Income
(in thousands)
Expected tax expense $1,854 34.0% $ 995 34.0% $1,208 34.0%
State taxes, net of Federal income tax benefit 333 6.1 174 6.0 218 6.2
Reduction in valuation allowance for deferred
tax assets (131) (2.4) -- -- -- --
Other items 80 1.5 32 1.0 37 1.0
$2,136 39.2% $1,201 41.0% $1,463 41.2%
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred
tax liabilities at September 30, 1996 are presented below:
Temporary Temporary
Deductible Taxable
Differences Differences
(in thousands)
Postretirement benefits $ 99 --
Reserve for Nationar loss contingency 43 --
Allowance for loan losses 328 --
Nonqualified deferred compensation 70 --
Loan accounting differences 122 --
Property and equipment 15 --
Bond accretion -- 110
Other items 82 76
759 186
Valuation reserve (150)
Deferred tax asset net of valuation reserve 609
Deferred tax liability (186)
Net deferred tax asset at September 30, 1996 423
Net deferred tax asset at October 1, 1995 272
Deferred tax benefit for the year ended
September 30, 1996 $151
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred
tax liabilities at September 30, 1995 are presented below:
Temporary Temporary
Deductible Taxable
Differences Differences
(in thousands)
Reserve for Nationar loss contingency $264
Allowance for loan losses 143
Nonqualified deferred compensation 43
Loan accounting differences 168
Property and equipment 22
Bond accretion 106
Other items 39 20
679 126
Valuation reserve (281)
Deferred tax asset net of valuation reserve 398
Deferred tax liability (126)
Net deferred tax asset at September 30, 1995 272
Net deferred tax liability at October 1, 1994 (49)
Deferred tax benefit for the year ended
September 30, 1995 $321
In addition to the deferred tax amounts described above, the Company also
had a deferred tax asset of approximately $59 thousand at September 30,
1996 related to the net unrealized loss on securities available for sale.
The valuation allowance for deferred tax assets as of September 30, 1996
was $150 thousand, a reduction of $131 thousand from September 30, 1995.
This reduction was primarily the result of the realization of certain
deferred items which were previously considered to be uncertain. In
evaluating the valuation allowance the Company takes into consideration
the nature and timing of the deferred tax asset items as well as the
amount of available open tax carrybacks. The Company has fully reserved
its New York State deferred tax asset, which is a significant component of
deferred tax assets, due to the lack of carryback and carryforward
provisions available in New York State. Any changes in the deferred tax
asset valuation allowance is based upon the Company's continuing
evaluation of the level of such allowance and the realizability of the
temporary differences creating the deferred tax asset.
As a qualifying thrift institution under IRS guidelines, the Bank is
allowed a special bad debt deduction which has not been subject to
deferred taxes through December 31, 1987 in accordance with SFAS No. 109.
Accordingly, no deferred tax liability has been recorded for the tax bad
debt reserve at December 31, 1987. This reserve, which was approximately
$3.6 million at December 31, 1987, will not be subject to tax as long as
the Bank does not (i) redeem stock or have excess distributions to
shareholders or (ii) fail to maintain a specified qualifying assets ratio
or meet other thrift definition tests for New York State tax purposes.
(11) Employee Benefit Plans
(a) Pension Plan
The Company maintains a non-contributory defined benefit pension plan with
RSI Retirement Trust, covering substantially all employees aged 21 and
over with 1 year of service with the exception of hourly paid employees.
Benefits are computed as two percent of the highest three year average
annual earnings multiplied by credited service up to a maximum of 30 years
and are paid as a life annuity or actuarially equivalent alternative form
of payment. Full retirement benefits are available at age 65 with at
least 5 years of participation or after age 60 with at least 30 years of
service. Reduced retirement benefits are available prior to age 60.
Employees are fully vested at 5 years of service. The Plan also provides
death and disability benefits to eligible employees.
The amounts contributed to the plan are determined annually on the basis
of (a) the maximum amount that can be deducted for Federal income tax
purposes or (b) the amount certified by a consulting actuary as necessary
to avoid an accumulated funding deficiency as defined by the Employee
Retirement Income Security Act of 1974. Contributions are intended to
provide not only for benefits attributed to service to date but also for
those expected to be earned in the future. Assets of the plan are
primarily invested in common and preferred stock, investment grade
corporate bonds, and U.S. government obligations.
The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated statements of
financial condition at September 30, 1996 and 1995:
1996 1995
(in thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $2,094 in 1996 and $2,025
in 1995 $(2,227) (2,170)
Projected benefit obligation for service
rendered to date (3,029) (2,957)
Plan assets at fair value 3,581 3,162
Plan assets in excess of projected benefit
obligation 552 205
Unrecognized net gain from past experience
different from that assumed and effects of
changes in assumptions (398) (104)
Unrecognized prior service cost 83 99
Unrecognized net asset being recognized over
12.5 years (78) (99)
Prepaid pension cost $ 159 101
Components of net periodic pension cost for the years ended September 30, 1996, 1995 and 1994 are as follows:
1996 1995 1994
(in thousands)
Service cost-benefits earned during the period $ 91 81 91
Interest cost on estimated projected benefit
obligation 215 199 178
Actual return on plan assets (452) (452) (46)
Net amortization and deferral 198 244 (161)
Net periodic pension cost $ 52 72 62
Significant assumptions used in determining the actuarial present value of the projected benefit obligation at September
30, 1996, 1995 and 1994 are as follows:
1996 1995 1994
Weighted average discount rate 7.75% 7.50% 8.25%
Increase in future compensation 5.50% 5.50% 6.00%
Expected long-term rate of return 8.00% 8.00% 8.00%
(b) 401(k) Savings Plan
The Company also maintains a defined contribution 401(k) savings plan,
covering all full time employees who have attained age 21 and have
completed one year of employment. The Company matches 50% of employee
contributions that are less than or equal to 6% of the employee's salary.
Total expense recorded during 1996, 1995, 1994 was $34 thousand, $31
thousand, and $30 thousand, respectively.
(c) Postretirement Benefits
The Company accounts for postretirement benefits under Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (SFAS No. 106). Under SFAS
No. 106, the cost of postretirement benefits other than pensions must be
recognized on an accrual basis as employees perform services to earn the
benefits. Many of the provisions and concepts of SFAS No. 106 are
similar to current standards on accounting for pensions. Based on the
transition provisions of SFAS No. 106, the accumulated postretirement
benefit obligation at the date of adoption (the transition obligation) may
be recognized in income as the cumulative effect of an accounting change
in the period of adoption or delayed and amortized over a period of twenty
years, as a component of net periodic postretirement benefit cost. The
Company adopted SFAS No. 106 as of October 1, 1995 and opted to amortize
the transition obligation into expense over the allowed time period. The
adoption of SFAS No. 106 did not have a material effect on the Company's
consolidated financial statements.
The Company provides postretirement medical and life insurance benefits to
eligible retirees. The plans are noncontributory except that the retiree
must pay the full cost of spouse medical coverage. Both of the plans are
unfunded.
Life insurance is provided in the amount of $5,000 (50% of final year
compensation as an active employee if compensation is less than $10,000).
The following table presents the plan's funded status reconciled with amounts recognized in the Company's consolidated
balance sheets at September 30, 1996:
(in thousands):
Accumulated postretirement benefit obligation (APBO):
Retirees $ (642)
Fully-eligible active plan participants (59)
Other active plan participants (630)
Total APBO (1,331)
Unrecognized transition obligation 1,011
Unrecognized (gain) loss 90
Accrued postretirement benefit cost included in
other liabilities $ (230)
</TABLE
Net periodic postretirement benefit cost for 1996 include the following components:
(in thousands):
Service cost $ 42
Interest cost 90
Net amortization and deferral 54
Net periodic postretirement benefit cost $186
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.75% at September 30, 1996. For measurement
purposes at September 30, 1996, a 10% annual rate of increase in the per
capital cost of covered health care benefits was assumed for medical
coverage for 1997; the rate was assumed to decrease gradually to 6% by
2000 and to remain at that level thereafter. The health care cost trend
rate assumption has a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated
postretirement benefit obligation as of September 30, 1996 by
approximately 15.4% and the aggregate of the service and interest cost
components of the net periodic postretirement benefit cost by
approximately 17.4%.
(d) Employee Stock Ownership Plan
As part of the conversion discussed in note 2, an employee stock ownership
plan (ESOP) was established to provide substantially all employees of the
Company the opportunity to also become shareholders. The ESOP borrowed
$4.5 million from the Company and used the funds to purchase 454,940
shares of the common stock of the Company issued in the conversion. The
loan will be repaid principally from the Company's discretionary
contributions to the ESOP over a period of twenty years. At September 30,
1996, the loan had an outstanding balance of $4.5 million and an interest
rate of 6.41%. Both the loan obligation and the unearned compensation are
reduced by the amount of loan repayments made by the ESOP. Shares
purchased with the loan proceeds are held in a suspense account for
allocation among participants as the loan is repaid. Contributions to the
ESOP and shares released from the suspense account are allocated among
participants on the basis of compensation in the year of allocation.
The Company accounts for the ESOP in accordance with the American
Institute of Certified Public Accountants' Statement of Position No. 93-6
"Employees' Accounting For Stock Ownership Plans" (SOP 93-6).
Accordingly, the shares pledged as collateral are reported as unallocated
ESOP shares in shareholders' equity. As shares are released from
collateral, the Company reports compensation expense equal to the average
market price of the shares (during the applicable service period), and the
shares become outstanding for earnings per share computations.
Unallocated ESOP shares are not included in the earnings per share
computations. The Company recorded approximately $119 thousand of
compensation expense under the ESOP during the year ended September 30,
1996.
The ESOP shares as of September 30, 1996 were as follows:
Allocated shares --
Shares released for allocation 11,374
Unallocated shares 443,566
454,940
Market value of unallocated shares at
September 30, 1996 $5,322,792
</TABLE
(12) Retained Earnings
As a qualifying mutual thrift institution, the Bank has been eligible to
claim special Federal tax deductions substantially in excess of actual
loss experience as a tax bad debt reserve. Such reserve, aggregating
approximately $5.2 million at September 30, 1996, is included within
equity in the accompanying consolidated statement of financial condition.
Federal tax law restricts the use of such reserves to charges for bad
debts. If this reserve is charged for amounts other than bad debts,
taxable income of an identical amount is created. Since ineligible
charges to the reserve are not anticipated, no provision has been made for
Federal income taxes thereon.
(13) Commitments and Contingent Liabilities
(a) Legal Proceedings
The Company may, from time to time, be a defendant in legal proceedings
relating to the conduct of its business. In the best judgment of
management, the consolidated financial position of the Company will not be
affected materially by the outcome of any pending legal proceedings.
(b) Lease Commitments
The Company leases equipment under noncancelable operating leases. Minimum
rental commitments under these leases are not significant. In addition,
the Company has a data processing agreement with minimum annual payments
of approximately $100 thousand through June 30, 1999.
(c) Off-Balance-Sheet Financing and Concentrations of Credit
The Company is a party to certain financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to extend
credit. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized on the consolidated statement of
financial condition. The contract amounts of these instruments reflect
the extent of involvement the Company has in particular classes of
financial instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the commitments to extend credit is represented by the
contractual notional amount of these instruments. The Company uses the
same credit policies in making commitments as it does for on-balance-sheet
instruments.
Unless otherwise noted, the Company does not require collateral or other
security to support off-balance-sheet financial instruments with credit
risk.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being fully drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
The Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral, if any, required by the Company upon the
extension of credit is based on management's credit evaluation of the
customer. Mortgage commitments are secured by a first lien on real
estate. Collateral on extensions of credit for commercial loans varies
but may include property, plant and equipment, and income producing
commercial property.
Contract amounts of financial instruments that represent the future
extension of credit as of September 30, 1996 and 1995 at fixed and
variable interest rates are as follows:
Financial instruments whose contract amounts represent Credit risk:
1996
Fixed Variable Total
(in thousands)
Mortgages $2,901 369 3,270
Consumer 18 -- 18
Lines of credit 834 531 1,365
Home Equity 41 1,341 1,382
$3,794 2,241 6,035
Financial instruments whose contract amounts represent Credit risk:
1995
Fixed Variable Total
(in thousands)
Mortgages $1,295 -- 1,295
Consumer 6 -- 6
Lines of credit 430 775 1,205
Home Equity -- 1,427 1,427
$1,731 2,202 3,933
The range of interest on fixed rate commitments was 7.625% to 18.00% at
September 30, 1996 and 7.25% to 18.00% at September 30, 1995.
The range of interest on adjustable rate commitments was 6.75% to 10.25%
at September 30, 1996 and 10.25% at September 30, 1995, respectively.
In addition to the above, the Company had a commitment at September 30,
1996 to purchase approximately $2.0 million of mortgage-backed securities.
The mortgage-backed securities pay interest at the rate of 7.50% and
mature on October 1, 2011.
(14) Fair Values
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments" (SFAS No. 107), which requires that the Bank disclose
estimated fair values for certain financial instruments. SFAS No. 107
defines fair value of financial instruments as the amount at which the
instrument could be exchanged in a current transaction between willing
parties other than in a forced or liquidation sale. SFAS No. 107 defines
a financial instrument as cash, evidence of ownership interest in an
entity, or a contract that imposes on one entity a contractual obligation
to deliver cash or another financial instrument to a second entity or to
exchange other financial instruments on potentially unfavorable terms with
a second entity and conveys to that second entity a contractual right to
receive cash or another financial instrument from the first entity or to
exchange other financial instruments on potentially favorable terms with
the first entity.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected net cash
flows, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Significant assets and
liabilities that are not considered financial assets or liabilities
include the deferred tax asset and bank premises and equipment. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates of fair value
under SFAS No. 107.
In addition, there are significant intangible assets that SFAS No. 107
does not recognize, such as the value of "core deposits," the Bank's
branch network and other items generally referred to as "goodwill."
The specific estimation methods and assumptions used can have a
substantial impact on the resulting fair values ascribed to financial
instruments. Following is a brief summary of the significant methods and
assumptions used:
Securities
The carrying amounts for short-term investments approximate fair value
because they mature in 90 days or less and do not present unanticipated
credit concerns. The fair value of longer-term investments and mortgage-
backed securities, except certain state and municipal securities, is
estimated based on bid prices published in financial newspapers or bid
quotations received from securities dealers. The fair value of certain
state and municipal securities is not readily available through market
sources other than dealer quotations, so fair value estimates are based on
quoted market prices of similar instruments, adjusted for differences
between the quoted instruments and the instruments being valued. See
notes 4 and 5 for detail disclosure of securities available for sale and
investment securities, respectively. The estimated fair value of stock in
the Federal Home Loan Bank of New York is assumed to be its cost given the
lack of a public market available for this investment.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as single family
loans, consumer loans and commercial loans. Each loan category is further
segmented into fixed and adjustable rate interest terms and by performing
and nonperforming categories.
The fair value of performing loans is calculated by discounting scheduled
cash flows through the estimated maturity using estimated market discount
rates that reflect the credit and interest rate risk inherent in the loan.
The estimate of maturity is based on the contractual term of the loans to
maturity taking into consideration certain prepayment assumptions.
Fair value for significant non-performing loans is based on recent
external appraisals and discounting of cash flows. Estimated cash flows
are discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows, and
discount rates are judgmentally determined using available market
information and specific borrower information.
Deposit Liabilities
Under SFAS No. 107, the fair value of deposits with no stated maturity,
such as non-interest bearing demand deposit, passbook savings accounts,
statement savings accounts, NOW accounts, and money market accounts, must
be stated at the amount payable on demand as of September 30, 1996 and
1995. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar
remaining maturities. These fair value estimates do not include the
benefit that results from the low-cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the market.
Other Items
The following items are considered to have a fair value equal to carrying
value due to the nature of the financial instrument and the period within
which it will be settled: cash and due from banks, federal funds sold,
accrued interest receivable, advances from borrowers for taxes and
insurance, and accrued interest payable.
Table of Financial Instruments
The carrying values and estimated fair values of financial instruments as of September 30, 1996 and September 30, 1995
were as follows:
September 30, 1996 September 30, 1995
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
(in thousands)
Financial assets:
Cash and cash equivalents $ 39,712 39,712 38,064 38,064
Securities available for sale 97,041 97,041 -- --
Investment securities 19,077 19,090 67,090 67,148
Federal Home Loan Bank Stock 1,159 1,159 -- --
Loans 124,945 124,870 120,938 122,640
Less: Allowance for loan losses 1,833 -- 1,950 --
Net deferred loan fees 579 -- 624 --
Net loans 122,533 124,870 118,364 122,640
Accrued interest receivable 1,736 1,736 1,630 1,630
Total financial assets $281,258 283,608 225,148 229,482
Financial liabilities:
Deposits:
Demand, statement, passbook, money market,
and NOW accounts 103,894 103,894 105,708 105,708
Certificates of deposit 92,859 92,877 91,523 91,970
Accrued interest on depositors accounts 58 58 54 54
Advances from borrowers for taxes and
insurance 1,632 1,632 1,027 1,027
Total financial liabilities $198,443 198,461 198,312 198,759
Commitments to Extend Credit and Financial Guarantees Written
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the present credit worthiness of
the counterparties. For fixed rate loan commitments, fair value also
considers the difference between current levels of interest rates and the
committed rates. The fair value of financial guarantees written is based
on fees currently charged for similar agreements or on the estimated cost
to terminate them or otherwise settle the obligations with the
counterparties. Fees, such as these are not a major part of the Bank's
business and in the Bank's business territory are not a "normal business
practice." Therefore, based upon the above facts the Company believes
that book value equals fair value and the amounts are not significant.
(15) Other Assets - Nationar Related Receivables
On February 6, 1995, the New York Superintendent of Banks (the
"Superintendent") took possession of Nationar, a New York chartered bank
that provided correspondent banking and related services for various
banking institutions, including the Bank. At the time that Nationar was
seized by the Superintendent, the Bank had a total of approximately $3.3
million on deposit with Nationar in an account which was used primarily to
fund checks written by the Bank's customers and drafts drawn by the Bank,
as well as Nationar capital stock of approximately $7,200, and a Nationar
debenture of approximately $40 thousand collateralized by a $100 thousand
investment security.
As of September 30, 1995, the Bank had charged off the $40 thousand
Nationar debenture and the $7,200 Nationar capital stock. The Bank also
reclassified the demand account balance to other assets and, based upon
uncertainties of collecting the demand account balance, management, as
advised by legal counsel, set up a reserve for probable losses as of
September 30, 1995 of $660 thousand, representing approximately 20% of the
Bank's deposit claim. In June 1996, the Bank received a cash payment of
$3.1 million from the Superintendent relating to its Nationar claim. The
remaining unresolved Nationar claim is approximately $183 thousand. It is
uncertain how much of the remaining claim will be collected, but it is
certain that some losses will occur on portions of the remaining claim.
Management estimates that $100 thousand reserve is necessary and has
included in other income on the 1996 consolidated statement of operations
the recovery of $560 thousand of the Nationar loss contingency reserve.
(16) Parent Company Financial Information
The Holding Company began operations on April 18, 1996 in conjunction with the Bank's mutual-to-stock conversion and the
Company's initial public offering of its common stock. The Holding Company's statement of financial condition as of
September 30, 1996 and related statements of operations and cash flows for the period from April 18, 1996 to September 30,
1996 are as follows:
Statement of Financial Condition
as of September 30, 1996 (in thousands,
except share data)
Assets
Cash and cash equivalents $ 1,138
Securities available for sale<F1> 22,002
Loan receivable from subsidiary 4,479
Equity in net assets of subsidiary 54,791
Other assets 24
Total assets $82,434
Liabilities and Shareholders' Equity
Liabilities:
Accrued taxes $ 53
Shareholders' Equity:
Preferred stock, $.01 par value; authorized
5,000,000 shares --
Common stock, $.01 par value; authorized 15,000,000
shares; 5,686,750 shares issued and outstanding at
September 30, 1996 57
Additional paid-in capital 54,864
Retained earnings, substantially restricted 31,984
Common stock acquired by ESOP (4,436)
Net unrealized loss on securities available for sale,
net of taxes (88)
Total shareholders' equity 82,381
Total liabilities and shareholders' equity $82,434
<FN>
<F1> The Holding Company's securities available for sale consist of U.S. Agency securities with a weighted average
maturity of less than six months.
Statement of Operations
For the Period From Inception (April 18, 1996)
Through September 30, 1996
(in thousands)
Interest income $ 296
Interest expense --
Net interest income 296
Non interest expense 70
Income before income taxes and equity in undistributed
earnings of subsidiary 226
Income tax expense 91
Income before equity in undistributed earnings
of subsidiary 135
Equity in undistributed earnings of subsidiary (for the
year ended September 30, 1996) 3,182
Net income $3,317
Statement of Cash Flows
For the Period From Inception (April 18, 1996)
Through September 30, 1996
(in thousands)
Cash flows from operating activities:
Net income $ 3,317
Adjustment to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of subsidiary (3,182)
Increase in other assets (24)
Increase in liabilities 53
Net cash provided by operating activities 164
Cash flows from investing activities:
Purchase of securities available for sale (122,347)
Proceeds from the maturity of securities available
for sale 100,345
Investment in common stock of subsidiary (27,460)
Net increase in loans from subsidiary (4,479)
Net cash used in investing activities (53,941)
Cash flows from financing activities:
Proceeds from issuance of common stock, net 54,915
Net increase in cash and cash equivalents 1,138
Cash and cash equivalents:
Beginning of period --
End of period $ 1,138
Noncash investing activities:
Recording of subsidiary's equity, including retained earnings, common stock
acquired by ESOP, and net unrealized loss on securities available for sale,
net of taxes, on date of investment in common stock of subsidiary 24,149
These financial statements should be read in conjunction with the
Company's consolidated financial statements and notes thereto.
(17) Regulatory Capital Requirements
OTS capital regulations require savings institutions to maintain minimum
levels of regulatory capital. Under the regulations in effect at
September 30, 1996, the Bank was required to maintain a minimum ratio of
tangible capital to total tangible assets of 1.5%; a minimum leverage
ratio of core (Tier 1) capital to total adjusted tangible assets of 3.0%;
and a minimum ratio of total capital (core capital and supplementary
capital) to risk-weighted assets of 8.0%, of which 4.0% must be core (Tier
1) capital.
Under the prompt corrective action regulations, the OTS is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized institution. Such actions
could have a direct material effect on an institution's financial
statements. The regulations establish a framework for the classification
of savings institutions into five categories: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized,
and critically undercapitalized. Generally, an institution is considered
well capitalized if it has a core (Tier 1) capital ratio of at least 5.0%
(based on average total assets); a core (Tier 1) risk-based capital ratio
of at least 6.0%; and a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the OTS about
capital components, risk weightings and other factors.
Management believes that, as a September 30, 1996, the Bank meets all
capital adequacy requirements to which it is subject. Further, the most
recent OTS notification categorized the Bank as a well-capitalized
institution under the prompt corrective action regulations. There have
been no conditions or events since that notification that management
believes have changed the Bank's capital classification.
The following is a summary of the Bank's actual capital amounts and ratios as of September 30, 1996, compared to the OTS
minimum capital adequacy requirements and the OTS requirements for classification as a well-capitalized institution.
Although the OTS capital regulations apply at the Bank level only, the Company's consolidated capital amounts and ratios
are also presented. The OTS does not have a holding company capital requirement.
Minimum Capital For Classification
Actual Adequacy as Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
Bank
Tangible capital $54,879 20.93% $3,934 1.50% $ -- --
Tier 1 (core) capital 54,879 20.93 7,867 3.00 13,112 5.00%
Risk-based capital:
Tier 1 54,879 60.59 -- -- 5,435 6.00
Total 56,034 61.08 7,339 8.00 9,173 10.00
Actual
Amount Ratio
Consolidated
Tangible capital $82,469 29.05%
Tier 1 (core) capital 82,469 29.05
Risk-based capital:
Tier 1 82,469 91.05
Total 83,624 91.16
(18) Subsequent Event
On October 24, 1996, at a special meeting of shareholders, the
shareholders approved a management recognition and retention plan ("MRP")
and a stock option plan for the benefit of employees, officers and
directors of the Company.
Under the MRP 227,470 shares (4%) of the Company's common stock will be
available for award to employees, officers and directors of the Company in
a manner designed to encourage such persons to remain with the Company.
With the approval of the plan, 178,732 common shares were awarded and will
vest on the anniversary of the date of shareholder approval at an annual
rate of 20%. The common stock required for the MRP has been purchased in
the market by the Company.
Under the stock option plan, 568,675 stock options (10% of the number of
shares outstanding) will be available for award to employees, officers and
directors of the Company. With the approval of the plan, 416,333 stock
options were granted and will vest on the anniversary of the date of
shareholder approval at an annual rate of 20%. The Company has not made a
final determination whether the common stock required by the stock option
plan will be purchased in the market or issued from authorized and
unissued.
On October 24, 1996, the Company's Board of Directors authorized the
Company to apply to the OTS for permission to repurchase an additional 10%
of its outstanding shares.
SHAREHOLDER INFORMATION
Corporate Offices
Catskill Financial Corporation
341 Main Street
Catskill, New York 12414-1450
(518) 943-3600
Annual Meeting
The annual meeting of Catskill Financial Corporation will be held 7:00 p.m.,
Tuesday, February 11, 1997 at the Bank's offices at 341 Main Street,
Catskill, New York
Form 10-K
For the 1996 fiscal year, Catskill Financial Corporation will file an Annual
Report on Form 10-K. Shareholders wishing a copy may obtain one free of
charge by writing:
David L. Guldenstern
Corporate Secretary
Catskill Financial Corporation
341 Main Street
Catskill, New York 12414-1450
Transfer Agent and Registrar
Registrar & Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
Counsel
Serchuk & Zelermyer, L.L.P.
81 Main Street
White Plains, New York 10601
Independent Auditors
KPMG Peat Marwick, LLP
74 North Pearl Street
Albany, New York 12207
Common Stock
The common stock of Catskill Financial Corporation trades on the Nasdaq stock
market under symbol CATB.
At August 26, 1996, there were approximately 1,013 holders of record and
approximately 1,400 beneficial shareholders.
Catskill Financial Corporation common
stock was issued at $10.00 per share in connection with the Company's initial
public offering completed on April 18, 1996. The following table shows the
range of high and low sale prices for each quarterly period since the Company
began trading in April.
1996 High Low
Third Quarter $11.00 $10.00
Fourth Quarter $12.38 $ 9.88
The Company as of September 30, 1996, had
not declared any dividends on its Common Stock. Dividend payment decisions
are made with consideration of a variety of factors including earnings,
financial condition, market considerations and regulatory restrictions.
Restrictions on dividend payments are described in Note 2 of the Notes to
Consolidated Financial Statements included in this Annual Report.