FORM 10-Q.--QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the quarterly period ended
March 31, 1997
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period
from ________ to ________
Commission File Number 0-27650
CATSKILL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 14-1788465
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
341 MAIN STREET, CATSKILL, NY 12414
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(Address of principal executive offices) (Zip Code)
(518)943-3600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past
90 days. Yes x No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common Shares, $.01 par value 5,073,506
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(Title of class) (outstanding at April 30, 1997)
CATSKILL FINANCIAL CORPORATION
FORM 10-Q
MARCH 31, 1997
INDEX
PART I FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 1997 (Unaudited) and September 30, 1996 1
Consolidated Statements of Income for the Six months ended
March 31, 1997 and 1996 (Unaudited) 2
Consolidated Statements of Income for the Three months ended
March 31, 1997 and 1996 (Unaudited) 3
Consolidated Statements of Changes in Shareholders' Equity
for the Six months ended March 31, 1997 and 1996
(Unaudited) 4
Consolidated Statements of Cash Flows for the Six months
ended March 31, 1997 and 1996 (Unaudited) 5
Notes to Unaudited Consolidated Interim Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
CATSKILL FINANCIAL CORPORATION
Consolidated Statements of Financial Condition
(In Thousands, Except Per Share Data)
March 31, 1997
Assets (Unaudited) September 30, 1996
Cash and due from banks $ 2,471 $ 4,112
Federal funds sold --- 35,600
Cash and cash equivalents 2,471 39,712
Securities available for sale, at fair
value 132,033 97,041
Investment securities, at amortized
cost:
(Approximate fair value of $10,043 at March
31, 1997, and $19,090 at September 30,
1996) 10,056 19,077
Investment required by law, stock in Federal
Home Loan Bank of NY, at cost 1,159 1,159
Loans receivable, net 123,021 122,533
Accrued interest receivable 2,244 1,736
Premises and equipment, net 2,330 1,886
Real estate owned, net 428 357
Deposits held at Nationar, net --- 83
Prepaid expenses and other assets 198 175
Total Assets $273,940 $283,759
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest bearing $ 3,925 $ 3,714
Interest bearing 193,230 193,039
Total Deposits 197,155 196,753
Advance payments by borrowers for property
taxes and insurance 1,376 1,632
Accrued interest on deposits 59 58
Official bank checks 1,080 2,598
Accrued expenses and other liabilities 358 337
Total Liabilities $200,028 $201,378
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
at March 31, 1997 and September 30, 1996 57 57
Additional paid-in-capital 54,745 54,864
Treasury stock at cost, (481,268 shares) (7,115) ---
Retained earnings, substantially restricted 33,648 31,984
Common Stock acquired by ESOP (4,322) (4,436)
Unearned Management Recognition Plan (2,042) ---
Net unrealized loss on securities available
for sale, net of taxes (1,059) (88)
Total Shareholders' Equity 73,912 82,381
Total Liabilities and Shareholders' Equity $273,940 $283,759
See accompanying notes to unaudited consolidated interim financial
statements.
CATSKILL FINANCIAL CORPORATION
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
SIX MONTHS ENDED
March 31,
(Unaudited)
1997 1996
Interest and dividend income:
Loans $ 5,046 $ 4,887
Securities available for sale 3,919 419
Investment securities 400 1,516
Federal funds sold and other 538 1,193
Stock in Federal Home Loan Bank of NY 37 ---
Total interest and dividend income 9,940 8,015
Interest Expense
Deposits 4,236 4,404
Short term borrowings 2 ---
Total interest expense 4,238 4,404
Net interest income 5,702 3,611
Provision for loan losses 150 75
Net interest income after provision for
loan losses 5,552 3,536
Noninterest income:
Recovery of Nationar loss contingency 100 ---
Service fees on deposit accounts 115 108
Net securities gains 5 31
Other income 78 99
Total noninterest income 298 238
Noninterest expense:
Salaries and employee benefits 1,418 1,087
Advertising and business promotion 84 78
Net occupancy on premises 165 126
Federal deposit insurance assessments 7 21
Postage and supplies 132 83
Outside data processing fees 181 164
Equipment 91 70
Professional fees 132 48
Other real estate expenses, net (21) 55
Other 323 227
Total noninterest expense 2,512 1,959
Income before taxes 3,338 1,815
Income tax expense 1,329 701
Net income $ 2,009 $ 1,114
Earnings per common share $ 0.41 N/A
Weighted Average Common Shares 4,902,587 N/A
See accompanying notes to unaudited consolidated interim financial
statements.
CATSKILL FINANCIAL CORPORATION
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
THREE MONTHS ENDED
March 31,
(Unaudited)
1997 1996
Interest and dividend income:
Loans $ 2,503 $ 2,426
Securities available for sale 2,191 419
Investment securities 163 510
Federal funds sold and other 88 651
Stock in Federal Home Loan Bank of NY 18 ---
Total interest and dividend income 4,963 4,006
Interest Expense
Deposits 2,100 2,187
Short term borrowings 2 ---
Total interest expense 2,102 2,187
Net interest income 2,861 1,819
Provision for loan losses 75 30
Net interest income after provision for
loan losses 2,786 1,789
Noninterest income:
Recovery of Nationar loss contingency 16 ---
Service fees on deposit accounts 56 53
Net securities gains 5 11
Other income 44 63
Total noninterest income 121 127
Noninterest expense:
Salaries and employee benefits 754 519
Advertising and business promotion 45 38
Net occupancy on premises 95 66
Federal deposit insurance assessments 6 1
Postage and supplies 86 40
Outside data processing fees 92 60
Equipment 55 36
Professional fees 70 27
Other real estate expenses, net (24) 26
Other 162 124
Total noninterest expense 1,341 937
Income before taxes 1,566 979
Income tax expense 623 402
Net income $ 943 $ 577
Earnings per common share $ 0.20 N/A
Weighted Average Common Shares 4,710,177 N/A
See accompanying notes to unaudited consolidated interim financial
statements.
CATSKILL FINANCIAL CORPORATION
Consolidated Statements of Changes in Shareholders' Equity
(In Thousands except per share amounts) (Unaudited)
Common Unearned Net Unrealized
Additional Stock Management Treasury Gain (Loss)
Common Paid-in Retained Acquired by Recognition Shares, on Securities
Stock Capital Earnings ESOP Plan at Cost AFS Total
Balance at September 30, 1996 $ 57 $54,864 $31,984 $(4,436) $ (88) $82,381
Net Income 2,009 2,009
Dividends paid on common
shares (345) (345)
Change in net unrealized
gain (loss) on securities
available for sale, net of
taxes (971) (971)
Allocation of ESOP shares
(11,355 shares) 48 114 162
Grant of restricted shares
under MRP (178,732 shares) (167) (2,234) 2,401 ---
Amortization of MRP
shares 192 192
Purchase of common
shares (660,000 shares) (9,516) (9,516)
Balance at March 31, 1997 $ 57 $54,745 $33,648 $(4,322) $(2,042) $(7,115) $(1,059) $73,912
Balance at September 30, 1995 $28,667 $28,667
Net income 1,114 1,114
Change in net unrealized
gain (loss) on securities
available for sale, net of
taxes 103 103
Balance at March 31, 1996 $29,781 $ 103 $29,884
See accompanying notes to unaudited consolidated interim financial
statements.
CATSKILL FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(In Thousands)
Six Months Ended
March 31,
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1996
Net Income $ 2,009 $ 1,114
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Depreciation 84 67
Net accretion on securities (107) (37)
Provision for loan losses 150 75
MRP compensation expense 192 -
ESOP compensation expense 162 -
Recovery of Nationar loss contingency (100) -
Loss (gains) on sale of real estate owned (69) 53
Writedown on other real estate - 15
Gain on sales and redemption of securities (5) (31)
Increase in other assets (531) (387)
Collection of deposits held at Nationar 183 -
Decrease in accrued expense and other liabilities (849) (1,879)
Net cash provided (used) by operating activities 1,119 (1,010)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity/calls/paydown of investment securities 9,015 18,130
Purchases of investment securities - (5,000)
Net (increase) decrease in loans receivable (940) 284
Capital expenditures (528) (17)
Purchase of AFS securities (92,404) (1,997)
Purchase of Federal Home Loan Bank Stock - (1,159)
Proceeds from maturity/calls/paydown of AFS securities 52,871 742
Proceeds from sales of AFS securities 3,041 -
Proceeds from the sale of real estate owned 300 35
Net cash provided (used) by investing activities (28,645) 11,018
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock subscriptions - 128,681
Net increase in deposits 402 9,429
Net increase (decrease) in advance payments by borrowers for
property taxes and insurance (256) 817
Cash dividends on common stock (345) -
Purchase of common stock for treasury (9,516) -
Net cash provided (used) by financing activities (9,715) 138,927
Net increase (decrease) in cash and cash equivalents (37,241) 148,935
Cash and cash equivalents at beginning of period 39,712 38,064
Cash and cash equivalents at end of period $ 2,471 $186,999
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 4,235 $ 4,396
Taxes 815 638
Transfer of loans to other real estate owned 302 56
Change in net unrealized gain (loss) on AFS net of tax
liability (benefit) of $(647) and $68, respectively (971) 103
See accompanying notes to unaudited consolidated interim financial
statements.
CATSKILL FINANCIAL CORPORATION
Notes to Unaudited Consolidated
Interim Financial Statements
Note 1. Basis of Presentation
The unaudited consolidated interim financial statements include the
accounts of Catskill Financial Corporation ("Company") and its wholly
owned subsidiary, Catskill Savings Bank ("Bank"). All intercompany
accounts and transactions have been eliminated in consolidation.
In addition, certain reclassifications have been made to prior period
amounts to conform with current presentations. In Management's
opinion, the unaudited consolidated interim financial statements
reflect all adjustments of a normal recurring nature, and disclosures
which are necessary for a fair presentation of the results for the
interim periods presented and should be read in conjunction with the
consolidated financial statements and related notes included in
Catskill Financial's 1996 Annual Report to Shareholders. The results
of operations for the interim periods are not necessarily indicative
of the results of operations to be expected for the full fiscal year ended
September 30, 1997.
Note 2. Earnings per share
On April 18, 1996, Catskill Financial Corporation completed its initial
stock offering of 5,686,750 shares of common stock. Concurrent with
the offering, approximately 8% of the shares sold (454,940) were
purchased by the Catskill Financial Corporation Employee Stock
Ownership Plan ("ESOP"). On March 31, 1997, and September 30, 1996,
the Company released 11,355 and 11,374 shares to plan participants,
consequently the remaining 432,211 shares have not been committed
to be released and under AICPA Statement of Position 93-6, these shares
will not be considered outstanding for purposes of calculating per
share amounts. The effect of outstanding stock option awards and
restricted shares issued under the MRP plan are not material to the
calculation of earnings per share. Earnings per share are not presented
for periods prior to the initial public offering as the Bank was a
mutual savings bank, and had no stock outstanding.
Note 3. Employee Benefits
Management Recognition Plan
On October 24, 1996, the shareholders approved a Management
Recognition Plan ("MRP") for the benefit of employees, officers
and directors of the Company. Under the MRP, 4% of the Company's
common stock, or 227,470 shares, are available for award in a manner
designed to encourage recipients to remain with the Company.
Concurrent with the approval of the plan, 178,732 common shares were
awarded and will vest at an annual rate of 20% over 5 years. The
fair market value of the shares awarded on the date of grant of $2.2
million, is being amortized to compensation expense as the plan's
participants become vested in those shares. For the six months
ended March 31, 1997, the Company recognized MRP compensation expense
of approximately $192,000.
Stock Option and Incentive Plan
On October 24, 1996, the shareholders approved a Stock Option and
Incentive Plan ("Stock Option Plan"). Under the stock option plan,
options to purchase a number of shares equal to 10% of the
Company's common shares issued in its initial public offering, or
568,675 shares, became available for award to employees, officers
and directors of the Company. Concurrent with the approval of the
plan, 416,333 stock options were granted at an exercise price of
$12.50 per share, representing the average of the high and low sales
price on the grant date. The options vest over a five year period,
at an annual rate of 20% on the anniversary of the grant date.
CATSKILL FINANCIAL CORPORATION
FORM 10-Q
March 31, 1997
PART I - FINANCIAL INFORMATION (continued)
Item 2. 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.
For the six months ended March 31, 1997, the Company recorded net
income of $2,009,000, an increase of $895,000, or 80.3% over the
comparable period of 1996. Earnings per common share for the six
months ended March 31, 1997, were $.41, based on weighted average
common shares outstanding of 4,902,587. No shares were outstanding
during the comparable period of last year as the Company completed
its initial public offering on April 18, 1996. Annualized return on
average assets for the six months ended March 31, 1997 and 1996 was
1.45% and .95%, respectively, and return on average equity was 5.14%
and 7.69%, respectively.
FINANCIAL CONDITION
Total assets were $273.9 million at March 31, 1997, a decrease of
$9.8 million, or 3.5% from the $283.8 million at September 30, 1996.
The asset decrease was principally caused by the Company's repurchase
of its common shares, which likewise reduced the Company's
earning assets.
Cash and cash equivalents were $2.5 million, a decrease of $37.2
million, or 93.8% from the $39.7 million at September 30, 1996. The
decrease was principally a reduction in federal funds as the Company
used available cash to purchase 660,000 shares of its common stock at
a total cost of approximately $9.5 million, and continued to invest
the net proceeds of its initial public offering in securities
available for sale and, to a lesser extent, loans.
Total securities, which include securities held to maturity ("HTM")
and securities available for sale ("AFS"), excluding Federal Home
Loan Bank stock, were $142.1 million, an increase of $26.0 million,
or 22.4% over the $116.1 million as of September 30, 1996. The
change in securities consisted of a $35.0 million increase in AFS
securities, primarily the Company's purchase of mortgage backed
securities, and a $9.0 million decrease in HTM securities from
scheduled maturities. Consequently as of March 31, 1997, 92.9% of
the Company's investment portfolio excluding the Federal Home Loan
Bank Stock was classified as AFS, compared to 83.6% as of September
30, 1996.
Loans receivable were $124.9 million as of March 31, 1997, an
increase of $.5 million or .4% over the $124.4 million as of
September 30, 1996. The following table shows the loan portfolio
composition as of the respective balance sheet dates:
March 31, September 30,
1997 1996
(In thousands)
Real Estate Loans
One-to-four family $101,578 $100,383
Multi-family and commercial 5,135 5,115
Construction 443 423
Total real estate loans 107,156 105,921
Consumer Loans 18,261 19,024
Gross Loans 125,417 124,945
Less: Net deferred loan fees (559) (579)
Total loans receivable $124,858 $124,366
The decrease in consumer loans was principally a decrease in home
equity loans, as lower mortgage rates have encouraged customers to
refinance their underlying first mortgages and repay their home
equity loans.
Non-performing assets at March 31, 1997 were $1.4 million, or .50% of
total assets, compared to the $1.7 million or .61% of total assets at
September 30, 1996. The table below sets forth the amounts and
categories of the Company's non-performing assets.
March 31, September 30,
1997 1996
(In thousands)
Non-accruing loans:
One-to-four family $ 883 $ 1,008
Multi-family and commercial
real estate --- 78
Consumer 62 283
Total non-accruing loans 945 1,369
Foreclosed assets, net:
One-to-four family 358 334
Multi-family and commercial
real estate 70 23
Total foreclosed assets, net 428 357
Total non-performing assets $ 1,373 $ 1,726
Total non-performing loans as a
% of total loans .76% 1.10%
Total non-performing assets as a
% of total assets .50% .61%
Approximately 98%, or $414,000 of the decrease in non-accruing loans
at March 31, 1997 as compared to September 30, 1996 was attributed
to the Company foreclosing on three properties, with $302,000,
representing the net realizable value of the property acquired
in foreclosure, being transferred to other real estate, with the
balance of $112,000 charged against the allowance for loan losses.
In addition, during the six months ended March 31, 1997, the Company
sold five parcels of other real estate realizing gains of $69,000.
The following table summarizes the activity in other real estate:
Six Months Ended March 31,
1997 1996
(In thousands)
Other real estate beginning of
period $ 357 $ 484
Transfer of loans to other real
estate 302 56
Sales of other real estate (231) (88)
Write-downs - (15)
Other real estate end of
period $ 428 $ 437
The allowance for loan losses was $1.8 million, or 1.47% of
period end loans at March 31, 1997, and provided coverage of
non-performing loans of 194.4% compared to coverage of 133.9%
as of September 30, 1996. The following summarizes the activity
in the allowance for loan losses:
Six Months Ended March 31,
1997 1996
(In thousands)
Allowance at beginning of period $ 1,833 $ 1,950
Charge-offs (153) (86)
Recoveries 7 7
Net charge-offs (146) (79)
Provision for loan losses 150 75
Allowance at end of period $ 1,837 $ 1,946
Total deposits were $197.2 million, at March 31, 1997, an increase
of $.4 million, or .2% from the $196.8 million at September 30, 1996.
The following table shows the deposit composition as of the respective
balance sheet dates:
March 31, September 30,
1997 1996
(In thousands)
Savings $ 80,168 $ 83,358
Money market 7,327 7,752
NOW 9,209 9,070
Non-interest demand 3,925 3,714
Certificates of deposits 96,526 92,859
$197,155 $196,753
The growth in deposits was principally related to the opening of our
fourth full service branch in late December 1996, and had the Company
not opened the branch, deposits would have decreased $1.9 million, or
1.0%. Although the Company experienced deposit growth, savings
deposits decreased $3.2 million or 3.8%, and now represent 40.7% of
deposits compared to 42.4% as of September 30, 1996. The composition
of deposits continues to shift to higher costing certificates of
deposits as the decrease in savings deposits was more than offset
by a $3.7 million increase in certificates of deposits which now
represent 49.0% of deposits compared to 47.2% as of September 30,
1996. Management believes that this change in mix, which is
consistent with what other financial institutions are experiencing,
will continue to occur as customers seek to maximize their returns
and the Company has to compete with other investment vehicles such
as mutual funds.
Shareholders' equity at March 31, 1997 was $73.9 million, a decrease
of $8.5 million, or 10.3% from the $82.4 million at September 30,
1996. The decrease was principally caused by the Company's repurchase
of common shares and a $1.0 million adverse change in the Company's
net unrealized loss on securities available for sale, net of taxes,
due to an increase in interest rates after the Federal Reserve raised
the discount rate on March 25, 1997, somewhat offset by net income
for the six months ended March 31, 1997.
Shareholders' equity as a percent of total assets was 27.0% at March
31, 1997 compared to 29.0% at September 30, 1996. Book value per
common share was $14.70 excluding unvested shares of the Company's
MRP, and was $16.09 excluding unallocated ESOP shares and unvested
MRP shares.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED MARCH 31,
1997 AND 1996
Net Interest Income
Net interest income for the six months ended March 31, 1997 was $5.7
million, an increase of $2.1 million, or 57.9% over the comparable
period of 1996. The change was primarily volume related as average
earning assets were $43.9 million, or 19.2% higher than the
comparable period in the prior year.
Interest income for the six months ended March 31, 1997 was $9.9
million, an increase of $1.9 million, or 24.0%. The increase was
principally volume related as the Company invested the net proceeds
of its initial public offering in mortgage backed securities, other
securities and loans. The yield on average earning assets was
7.30%, an increase of 28 basis points over 1996. The increase was
principally in the securities portfolio as the Company reduced its
average federal funds sold, and purchased investments with longer
durations to increase yield and reduce its asset sensitivity.
Interest expense for the six months ended March 31, 1997 was $4.2
million, a decrease of $166,000, or 3.8%. Approximately 57% was
attributed to a decrease in interest rates with the remainder
attributable to a decline in average volume. The rate change was
principally caused by a reduction in the cost of certificate of
deposits which decreased from 5.72% to 5.54%, or 18 basis points,
primarily from the decrease in market rates since the Federal Reserve
lowered the discount rate in January 1996. Average interest bearing
liabilities were $192.6 million, a decrease of $3.6 million or 1.8%
from the comparable period of 1996. The decrease in volume was
principally in savings deposits, one of the Company's lowest costing
funding sources.
The Company's net yield on average earning assets was 4.20%, compared
to 3.16% for the comparable period of 1996. The improvement was
primarily the investment of the company's net offering proceeds which
caused an increase in average earning assets with no corresponding
funding costs, although the Company has improved its net interest
spread to 2.89%, a 36 basis point improvement over the comparable
period of 1996.
For more information on average balances, interest, yield and rate,
please refer to Table #1.
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 concentrations of credit, past loan loss experience, current
economic conditions, amount and composition of loan portfolio,
estimated fair market value of underlying collateral, 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 loans. The provision for loan losses was $150,000 for
the six months ended March 31, 1997, an increase of $75,000 from the
comparable period of 1996. The increase is principally to cover the
higher level of net charge-offs of $146,000 for the six month period
ended March 31, 1997, compared to only $79,000 for the comparable
period of 1996. The allowance for loan losses at March 31, 1997
was $1.8 million, or 1.47% of total loans and provided coverage of
non-performing loans of 194.4%.
Non-Interest Income
Non-interest income was $298,000 for the six months ended March 31,
1997, an increase of $60,000, or 25.2% over the comparable period of
1996. The increase was principally the recovery of the remaining
$100,000 of the Nationar loss reserve, as the company received
substantially all of its claims, offset somewhat by a reduction in
net securities gains of $26,000. The gains realized in the six months
ended March 31, 1996 represent securities acquired at a discount that
were called by the issuer prior to their contractual maturity; there
were no such gains in 1997.
Non-Interest Expense
Non-interest expense for the six months ended March 31, 1997 was
$2,512,000 an increase of $553,000, or 28.2% over 1996. Increases in
personnel costs, net occupancy, supplies, professional fees and other
expenses, were offset somewhat by reductions in other real estate
expenses.
Salaries and employee benefits increased $331,000, or 30.5% over
1996, principally from ESOP and MRP compensation expenses, both new
plans since the Company went public. ESOP and MRP expenses for
the six months ended March 31, 1997, were $162,000 and $192,000,
respectively. In addition, the Company experienced increased
personnel costs of approximately $45,000 due to opening its fourth
full service branch in late December 1996. The impact of the
combined increases were somewhat offset by lower medical insurance
costs, as the Company changed insurance carriers and received refunds
of excess reserves due to favorable claims experience. Net occupancy
costs were $165,000, an increase of $39,000, or 31.0% over 1996, as
the Company experienced increased costs relating to its new branch,
as well as amortization of renovations at another branch office.
Postage and supplies increased $49,000, or 59.0% over 1996,
principally from the new branch and shareholder related costs such
as annual reports and special and annual meeting proxy costs.
Professional fees were $132,000, an increase of $84,000, or 175.0%,
as the Company experienced increased legal and accounting costs of
operating a public company. Other expenses increased $96,000, or
42.3% over the comparable period of 1996. The increases included
$41,000 in OTS assessments due to the Bank's change to a federal
charter, higher director and officer insurance costs, transfer agent,
franchise tax and other costs relating to operating a public company.
Other real estate expenses decreased $76,000, as the Company realized
$69,000 in gains on the sale of real estate during the six months
ended March 31, 1997; there were no gains during the comparable
period of 1996.
Income Tax Expense
Income tax expense for the six months ended March 31, 1997 was
$1,329,000 an increase of $628,000, or 89.6% over the comparable
period of 1996. The change was principally the 83.9% improvement
in income before income taxes. The Company's effective tax rates for
the six months ended March 31, 1997 and 1996, were 39.81% and 38.62%,
respectively.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH
31, 1997 AND 1996
Net Interest Income
Net interest income for the three months ended March 31, 1997
was $2.9 million, an increase of $1.0 million, or 57.3% over the
comparable quarter of 1996. The change was primarily volume related
as average earning assets were $36.8 million, or 15.8% higher than
the comparable period of 1996.
Interest income for the three months ended March 31, 1997 was $5.0
million, an increase of $957,000, or 23.9%. The increase was
principally volume related as the Company invested the net proceeds
of its initial public offering in mortgage backed securities, other
securities and loans. The yield on average earning assets was
7.36%, an increase of 48 basis points over 1996. The increase was
principally in the securities portfolio, as the Company purchased
investments with longer term durations to increase yields.
Interest expense for the three months ended March 31, 1997 was $2.1
million, a decrease of $85,000, or 3.9%. The decrease in expense was
approximately half volume, with the remainder attributed to rate.
Average interest bearing deposits were $192.4, a decrease of $4.5
million or 2.3% from the comparable period of 1996. The decrease in
volume was principally in savings deposits, one of the Company's
lowest costing funding sources. The rate change was principally
caused by the average rate paid on certificates of deposit which
decreased from 5.67% to 5.56%, or 11 basis points, primarily from
the decrease in market rates since the Federal Reserve lowered the
discount rate in January 1996.
The Company's net yield on average earning assets was 4.30%, compared
to 3.14% for the comparable period of 1996. The improvement was
primarily the investment of the Company's net offering proceeds which
caused an increase in average earning assets with no corresponding
funding costs, although the Company has improved its net interest
spread to 2.93% from 2.41% in the comparable period of 1996.
For more information on average balances, interest, yield and rate,
please refer to Table #2, included in this report.
Provision for Loan Losses
The provision for loan losses was $75,000 for the three months ended
March 31, 1997, an increase of $45,000 from the comparable period of
1996. The increase is principally to cover the higher level of net
charge-offs of $64,000 for the three month period ended March 31,
1997, compared to only $59,000 for the comparable period of 1996.
Non-Interest Income
Non-interest income was $121,000 for the three months ended March 31,
1997, a decrease of $6,000 over the comparable period of 1996. The
decrease was principally a reduction in net securities gains. The
Company recovered the remaining $16,000 of its Nationar loss reserve
during the quarter; however, the comparable quarter of last year had
a similar but unrelated recovery of approximately the same amount in
other income.
Non-Interest Expense
Non-interest expense for the three months ended March 31, 1997 was
$1,341,000, an increase of $404,000 or 43.1% over 1996. Increases
in personnel costs, net occupancy, supplies, data processing,
professional fees and other expenses were partially offset by
reductions in other real estate expenses.
Salaries and employee benefits increased $235,000, or 45.3% over
1996, principally from ESOP and MRP compensation expenses both new
plans since the Company went public. ESOP and MRP expenses for the
three months ended March 31, 1997 were $87,000 and $112,000,
respectively. The balance of the increase in personnel costs was
staffing for our new full service branch office. Net occupancy was
$95,000, an increase of $29,000, or 43.9% over 1996, as the Company
experienced increased costs relating to opening its new branch, as
well as the amortization of renovations at another branch office.
Postage and supplies increased $46,000, or 115.0% over 1996,
principally from the new branch and shareholder related costs such
as annual reports, and annual meeting proxy costs. Data processing
costs were $92,000, an increase of $32,000 or 53.3% over 1996,
principally from costs associated with start-up and an on-going
operation of the Company's new branch. Professional fees increased
$43,000, principally from the higher legal and accounting costs
related to operating a public company. All other expenses were
$162,000, an increase of $38,000, or 30.6% over 1996. The increases
were principally $18,000 in OTS assessments due to the Bank's change
to a federal charter, higher director and officer insurance, transfer
agent, franchise tax and other costs relating to operating a public
company.
Other real estate expenses decreased $50,000 as the Company realized
$48,000 in gains on other real estate sales during the three months
ended March 31, 1997; there were no gains during the comparable
period of 1996.
Income Tax Expense
Income tax expense for the three months ended March 31, 1997, was
$623,000 an increase of $221,000, or 55.0% over the comparable period
of 1996. The change was principally the 60.0% increase in income
before taxes. The Company's effective tax rates for the three months
ended March 31, 1997 and 1996, were 39.78% and 41.06%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
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 and
short-term borrowings, 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 primary sources of funds for operations are deposits, principal
and interest payments on loans, mortgage backed securities, and other
securities available for sale.
Net cash provided by operating activities was $1,119,000 for the six
months ended March 31, 1997, an increase of $2,129,000 over the
comparable period of 1996. The increase over 1996 was principally a
reduction in official bank checks outstanding caused by the timing of
escrow related tax payments on mortgages which were paid in the month
of September in 1995, compared to October in 1996, with the balance
attributed to improved operating performance. Investing activities
used $28.6 million in 1997, as the Company invested more of its
initial net offering proceeds in securities available for sale,
principally mortgage backed securities and, to a lesser extent, loans
and capital expenditures related to its new branch office. Financing
activities used $9.7 million, the majority of which related to the
Company's repurchase of 660,000 shares of its common stock at a cost
of approximately $9.5 million. The balance of the funds used in
financing activities represented the Company's payment of its first
quarterly common stock cash dividend. For more 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 $197.2 million of deposits are 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 $16.7
million or less than 8.5% of total deposits. The Bank is required
to maintain minimum levels of liquid assets as defined by OTS
regulations. The requirement, which maybe varied by the 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 March
1997, the Bank exceeded that, maintaining an average liquidity ratio
of 28.7%.
The Company anticipates that it will have sufficient funds to
meet its current commitments. At March 31, 1997, the Company had
commitments to originate loans of $1.0 million. In addition, the
Company had undrawn commitments of $2.1 million on home equity and
other lines of credit. Certificates of deposits which are scheduled
to mature in one year or less at March 31, 1997, totaled $67.7
million, and management believes that a significant portion of such
deposits will remain with the Company.
Catskill Financial is regulated by the OTS and although there are
no minimum capital requirements for the holding company itself,
the Bank is required to maintain minimum regulatory capital ratios.
The following is a summary of the Bank's actual capital amounts and
ratios as of March 31, 1997, compared to the OTS minimum capital
requirements:
Actual Minimum
Amount % Amount %
(Dollars in Thousands)
Tangible Capital $57,155 20.9% $ 4,095 1.5%
Core Capital 57,155 20.9 8,190 3.0
Risk Based Capital 58,354 61.3 7,618 8.0
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. 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 are available for
general corporate purposes including funding the Company's stock
option plan which was also approved at the special meeting of
shareholders. By December 4, 1996, the Company had completed the
repurchase of 227,470 shares of its common stock to fund the MRP
at a cost of $3.1 million, or an average of $13.59 per share. In
addition, by March 31, 1997, the Company had repurchased 432,530 of
the shares under the 10% repurchase program at a cost of $6.4 million
or an average of $14.80 per share. The Holding Company itself has
adequate resources to repurchase the remaining 131,976 shares under
the existing repurchase program without dividends from the Bank. In
addition, at March 31, 1997, the Bank could, after notifying the OTS
in writing, pay to the holding company dividends of approximately
$24.8 million.
TABLE #1 AVERAGE BALANCES, INTEREST, YIELD AND RATE
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. All average balances are
daily average balances. 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, other than
mortgage backed securities which are shown separately. Mortgage
backed securities are primarily classified as available for sale.
Securities available for sale are shown at amortized cost.
SIX MONTH PERIODS ENDED
March 31, 1997 March 31, 1996
Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
(Dollars in Thousands)
Interest-Earning Assets
Loans receivable, net $125,346 $ 5,046 8.05% $120,985 $ 4,887 8.08%
Mortgage-backed securities 65,860 2,321 7.05% 13,438 498 7.41%
Other securities 60,880 2,035 6.69% 47,774 1,437 6.02%
Federal funds sold and other 20,181 538 5.35% 46,205 1,193 5.16%
Total interest-earning assets 272,267 9,940 7.30% 228,402 8,015 7.02%
Allowance for loan losses (1,829) (1,960)
Other assets, net 6,736 8,526
Total Assets $277,174 $234,968
Interest-Bearing Liabilities
Savings deposits $ 81,454 $ 1,420 3.50% $ 84,451 $ 1,479 3.50%
Money market 7,641 127 3.33% 8,609 148 3.44%
Now deposits 9,167 112 2.45% 8,291 102 2.46%
Certificates of deposit 92,743 2,562 5.54% 92,907 2,656 5.72%
Other borrowings 61 2 6.58%
Escrow and other 1,494 15 2.01% 1,856 19 2.05%
Total interest-bearing
liabilities 192,560 4,238 4.41% 196,114 4,404 4.49%
Non-interest bearing 3,612 3,586
Other liabilities 2,600 1,709
Common stock subscriptions - 4,592
Shareholders' equity 78,402 28,967
Total Equity and Liabilities $277,174 $234,968
Net interest income $ 5,702 $ 3,611
Net interest rate spread 2.89% 2.53%
Net yield on average
interest-earning assets 4.20% 3.16%
Average interest earning
assets to average interest
bearing liabilities 141.39% 116.46%
Earning Assets/Total Assets 98.23% 97.21%
TABLE #2 AVERAGE BALANCES, INTEREST, YIELD AND RATE
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. All average balances are daily
average balances. 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, other than mortgage
backed securities which are shown separately. Mortgage backed
securities are primarily classified as available for sale.
Securities available for sale are shown at amortized cost.
THREE MONTH PERIODS ENDED
March 31, 1997 March 31, 1996
Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
(Dollars in Thousands)
Interest-Earning Assets
Loans receivable, net $125,069 $ 2,503 8.01% $120,684 $ 2,426 8.04%
Mortgage-backed securities 79,091 1,390 7.03% 13,408 247 7.37%
Other securities 58,652 982 6.70% 45,515 682 5.99%
Federal funds sold and other 6,878 88 5.19% 53,278 651 4.91%
Total interest-earning assets 269,690 4,963 7.36% 232,885 4,006 6.88%
Allowance for loan losses (1,845) (1,955)
Other assets, net 6,983 9,705
Total Assets $274,828 $240,635
Interest-Bearing Liabilities
Savings deposits $ 80,807 $ 697 3.50% $ 84,757 $ 737 3.50%
Money market 7,454 59 3.21% 8,620 74 3.45%
Now deposits 9,119 55 2.45% 8,503 52 2.46%
Certificates of deposit 93,428 1,282 5.56% 93,242 1,315 5.67%
Other borrowings 122 2 6.65%
Escrow and other 1,439 7 1.97% 1,787 9 2.03%
Total interest-bearing
liabilities 192,369 2,102 4.43% 196,909 2,187 4.47%
Non-interest bearing 3,646 3,398
Other liabilities 2,822 1,792
Common stock subscriptions - 9,184
Shareholders' equity 75,991 29,352
Total Equity and Liabilities $274,828 $240,635
Net interest income $ 2,861 $ 1,819
Net interest rate spread 2.93% 2.41%
Net yield on average
interest-earning assets 4.30% 3.14%
Average interest earning
assets to average interest
bearing liabilities 140.19% 118.27%
Earning Assets/Total Assets 98.13% 96.78%
CATSKILL FINANCIAL CORPORATION
FORM 10-Q
MARCH 31, 1997
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, the Company and the Bank are
subject to legal actions which involve claims for monetary relief.
Management, based on advice of counsel, does not believe that any
currently known legal actions, individually or in the aggregate will
have a material effect on its consolidated financial condition or
results of operation.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders held on February 11, 1997,
there were 4,393,166 voting shares present in person or by proxy,
which represented 84.77% of the Company's outstanding shares of
5,182,750. Votes were taken on the following shareholder proposals:
Proposal #1 "Election of two directors, each to serve for a three
year term and until his or her successor has been duly elected and
qualified."
Votes
For Withheld
George P. Jones 4,372,200 20,966
Hugh J. Quigley 4,369,200 23,966
The Board of Directors of the Company currently consists of six
members. In addition to the two directors named above, continuing
directors are Wilbur J. Cross, Richard A. Marshall, Allan D. Oren and
Edward P. Stiefel.
Proposal #2 "Ratification of the appointment of KPMG Peat Marwick
LLP as auditors for the Company for the fiscal year ending
September 30, 1997."
Votes Votes
For Against Withheld
4,377,103 7,563 8,500
There were no broker non-votes for either proposal #1 or proposal #2.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Computation of Net Income per Common Share
(27) Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CATSKILL FINANCIAL CORPORATION
Date: May 14, 1997 /s/ Wilbur J. Cross
Wilbur J. Cross
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1997 /s/ David J. DeLuca
David J. DeLuca
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Exhibit 11
CATSKILL FINANCIAL CORPORATION
COMPUTATION OF NET INCOME PER COMMON SHARE
(dollars in thousands, except per share amounts)
Three Months Ended March 31, Six Months Ended March 31,
1997 1996 1997 1996
Net income applicable to common shares $ 943 $ 577 $ 2,009 $ 1,114
Weighted average common shares outstanding 4,710,177 N/A<F1> 4,902,587 N/A<F1>
Net income per common share $ .20 $ .41
Net income per common share - primary
Weighted average common shares
outstanding 4,710,177 4,902,587
Dilutive common stock options<F2> 100,594 79,553
Weighted average common shares and
common share equivalents outstanding 4,810,771 4,982,140
Net income per common share - primary $ .20 $ .40
Net income per common share - fully diluted
Weighted average common shares
outstanding 4,710,177 4,902,587
Dilutive common stock options<F2> 135,610 118,472
Weighted average common shares and
common share equivalents outstanding 4,845,787 5,021,059
Net income per common share - fully diluted $ .19 $ .40
<FN>
<F1> Company completed its initial public offering on April 18, 1996.
<F2> Dilutive common stock options (includes restricted stock under
the Company's MRP plan and options under its stock option plan) are
based on the treasury stock method using average market price in
computing net income per share - primary, and the higher of
period-end market price or average market price in computing net
income per common share - fully diluted.