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, 1997
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 Identification Number)
incorporation or organization)
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 22, 1997, 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 $80.7 million.
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 4,822,331
(Title of class) (outstanding at December 22, 1997)
ANNUAL REPORT FOR 1997 ON FORM 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business 1
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a
Vote of Security Holders 20
PART II
Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters 20
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures
about Market Risks 20
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 20
PART III
Item 10. Directors and Executive Officers
of the Registrant 21
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial
Owners and Management 21
Item 13. Certain Relationships and Related Transactions 21
PART IV
Item 14. Exhibits and Financial Statement Schedules
and Reports on Form 8-K 21
SIGNATURES 23
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, 1997. Parts II and IV
Portions of the Proxy Statement for Annual Meeting
of Shareholders to be held February 17, 1998. 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 three other banking offices. At September
30, 1997, the Bank had total assets of $286.1 million, deposits of
$207.8 million and equity of $59.9 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 mortgages 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").
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 Office of Thrift Supervision ("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 Bank
is generally permitted to open deposit-taking branches throughout
the United States, regardless of local laws regarding branching.
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, in the aggregate, exceed
400% of capital. Consumer loans not secured by residential real estate
are generally limited, in the aggregate, 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 asset limit.
Generally, the Bank may not lend more than 15% of unimpaired capital
and surplus to one borrower, representing a lending limit of $9.4
million per borrower, with an additional 10% of unimpaired capital
and surplus being permitted if secured by certain readily marketable
collateral. The Bank is in compliance with all these limits. The Bank's
largest loan to one borrower at September 30, 1997, was a $1.8 million
loan secured by a motel in Albany County.
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, 1997, the Bank's OTS assessment was $36,553.
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.
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. The Bank substantially exceeds
all minimum capital standards imposed by the OTS. At September 30,
1997, the Bank had a tangible capital ratio of 20.70%, a core capital
ratio of 20.70% and a risk based capital ratio of 61.28%. OTS regulations
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 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 paid 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 pay only 20% of the FICO bond assessment paid by
SAIF institutions. SAIF institutions pay a FICO bond assessment of
.064% of insured deposits, while BIF institutions such as the Bank
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 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). The Bank satisfied the QTL test at September 30, 1997,
as well as for every month-end during fiscal 1997.
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 an "outstanding" 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 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, does not
have a substantial commercial or industrial base and has shown only
limited economic and demographic growth. The Bank's market is populated
by an older population.
Overall, the population of Albany County has remained relatively steady
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, 1997, the Bank's gross loan portfolio totaled $126.7 million.
The approval of the Executive Committee of the Bank's Board of Directors
is required for all loans in excess of $100,000. Bank employees with
the authority to approve loans of $100,000 or less are designated,
and their lending authority is defined, by the Executive Committee.
The Executive 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, 1997, the maximum amount which the Bank could have
loaned to any one borrower and the borrower's related entities was
approximately $9.4 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,
1997. See "Asset Quality--Other Loans of Concern." At September 30,
1997, there were only two other loans (or lending relationships) with
outstanding balances in excess of $250,000.
September 30,
1997 1996 1995 1994 1993
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
Real Estate Loans
One- to
four-family $102,232 80.69% $100,383 80.34% $ 95,588 79.04% $ 96,570 79.37% $ 98,173 80.74%
Multi-family and
commercial 4,691 3.70 5,115 4.09 5,132 4.24 5,606 4.61 3,628 2.98
Construction 1,306 1.03 423 0.34 230 0.19 743 0.61 1,776 1.46
Total real
estate loans 108,229 85.42 105,921 84.77 100,950 83.47 102,919 84.59 103,577 85.18
Consumer Loans
Automobile 6,655 5.25 7,029 5.63 6,652 5.50 5,220 4.29 3,849 3.17
Home equity 3,709 2.93 4,368 3.50 5,393 4.46 6,021 4.95 6,616 5.44
Other secured 3,385 2.67 2,965 2.37 2,970 2.46 2,680 2.20 2,591 2.13
Student 2,658 2.10 2,450 1.96 2,373 1.96 2,195 1.80 1,941 1.60
Other unsecured 1,379 1.09 1,430 1.15 1,415 1.17 1,078 0.89 794 0.65
Mobile home 687 0.54 782 0.62 1,185 0.98 1,562 1.28 2,223 1.83
Total consumer
loans 18,473 14.58 19,024 15.23 19,988 16.53 18,756 15.41 18,014 14.82
Total loans 126,702 100.00% 124,945 100.00% 120,938 100.00% 121,675 100.00% 121,591 100.00%
Less
Deferred fees 476 579 624 696 712
Allowance for
loan losses 1,889 1,833 1,950 1,746 1,294
Total loans
receivable,
net $124,337 $122,533 $118,364 $119,233 $119,585
The following table presents the composition of the Bank's loan portfolios
by fixed- and adjustable-rate at the dates indicated.
September 30,
1997 1996 1995 1994 1993
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
Fixed-Rate Loans
Real estate:
One- to
four-family $ 67,782 53.50% $ 63,491 50.81% $ 53,993 44.65% $ 51,163 42.05% $ 45,746 37.62%
Multi-family and
commercial 1,850 1.46 2,142 1.71 1,743 1.44 2,295 1.88 1,501 1.23
Construction 1,306 1.03 423 0.34 230 0.19 743 0.61 1,776 1.46
Total real
estate
loans 70,938 55.99 66,056 52.86 55,966 46.28 54,201 44.54 49,023 40.31
Consumer 14,701 11.60 14,656 11.73 14,595 12.06 12,735 10.47 11,398 9.38
Total
fixed-rate
loans 85,639 67.59 80,712 64.59 70,561 58.34 66,936 55.01 60,421 49.69
Adjustable-Rate
Loans
Real estate:
One- to
four-family 34,450 27.19 36,892 29.53 41,595 34.40 45,407 37.32 52,427 43.12
Multi-family and
commercial 2,904 2.29 2,973 2.38 3,389 2.80 3,311 2.72 2,127 1.75
Total real
estate
loans 37,354 29.48 39,865 31.91 44,984 37.20 48,718 40.04 54,554 44.87
Consumer<F1> 3,709 2.93 4,368 3.50 5,393 4.46 6,021 4.95 6,616 5.44
Total
adjustable-
rate loans 41,063 32.41 44,233 35.41 50,377 41.66 54,739 44.99 61,170 50.31
Total loans 126,702 100.00% 124,945 100.00% 120,938 100.00% 121,675 100.00% 121,591 100.00%
Less
Deferred fees 476 579 624 696 712
Allowance for
loan losses 1,889 1,833 1,950 1,746 1,294
Total loans
receivable,
net $124,337 $122,533 $118,364 $119,233 $119,585
<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, 1997. 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,
1998<F1> 1999 2000 2001-2002
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
(Dollars in Thousands)
Real Estate
One- to
Four-Family $ 5,985 7.82% $ 6,162 7.76% $6,512 7.76% $13,880 7.77%
Multi-family and
Commercial 583 9.25 2,031 8.57 174 9.17 977 9.30
Construction 1,306 7.99 0 -- -- -- -- --
Consumer
Consumer 5,045 8.80 3,662 8.20 2,518 7.23 2,129 13.17
Total Loans $12,919 8.29% $11,855 8.03 $9,204 7.64 $16,986 8.54
2013 and
2003-2007 2008-2012 following Total
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
(Dollars in Thousands)
Real Estate
One- to
Four-Family $35,151 7.72% $20,856 7.74% $13,686 7.67% $102,232 7.73%
Multi-family and
Commercial 491 8.77 289 9.16 146 8.42 4,691 8.88
Construction -- -- -- -- -- -- 1,306 7.99
Consumer
Consumer 1,392 10.02 2,205 8.70 1,522 8.49 18,473 9.03
Total Loans $37,034 7.82 $23,350 7.86 $15,354 7.76 $126,702 7.97
<FN>
<F1> Includes demand loans, loans having no stated maturity and overdraft loans.
One- to Four-Family Residential Real Estate Lending
The Bank's residential 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, 1997, $102.2
million, or 80.7% of the Bank's gross loans, consisted of one- to
four-family residential mortgage loans. Approximately 66.3% of the
Bank's one-to four-family residential 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 mortgage
loans using Federal National Mortgage Association ("FNMA") secondary
market standards. The Bank holds in its portfolio all one- to four-
family residential 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 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 and all fixed-rate loans are appraised by independent fee appraisers
approved by the Board of Directors. The Bank requires borrowers to
obtain title insurance and 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 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. One year ARM loans provide for a 1.5% periodic cap and three
year ARM loans provide for a 2.0% periodic cap and both have lifetime
caps 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, 1997, 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, 1997, the Bank's
construction loan portfolio totaled $1,306,000, or 1.0% of its gross
loan portfolio. Although no construction loans were classified as
non-performing as of September 30, 1997, 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, 1997, the Company had multi-family and commercial
real estate loans totaling $4.7 million, which represented 3.7% 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 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, 1997, the Bank's consumer loan portfolio totaled $18.5 million,
or 14.6% of the gross loan portfolio. Of consumer loans at September
30, 1997, 79.6% were fixed-rate loans and 20.4% 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 6 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, 1997, automobile loans, the largest component of
the Bank's consumer loan portfolio, totalled $6.7 million, or 36.0%
of the Bank's total consumer loan portfolio and 5.3% 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
six years. The Bank's maximum loan-to-value ratio on new automobile
loans is 100% 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, 1997, the Bank had $3.7 million in outstanding advances
on home equity lines of credit, with an additional $1.6 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, 1997, $137,000, or .74% 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, 1997, the Bank had approximately $63,000 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, 1997, 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, 1997, the Bank originated $21.3
million of loans, compared to $26.8 million and $16.7 million in fiscal
1996 and 1995, respectively. Management attributes the decline in
originations during fiscal 1997 due to the increase in federal funds
rate in March 1997, which slowed down originations from a favorable
refinancing market in fiscal 1996. 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 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,
1997 1996 1995
(In Thousands)
Originations by Type
One- to four-family and construction $ 12,588 $ 19,760 $ 9,114
Multi-family and commercial 110 150 --
Consumer 8,584 6,938 7,584
Total loans originated 21,282 26,848 16,698
Purchases
Total -- -- --
Sales
Total -- -- --
Repayments
Principal repayments (18,705) (22,312) (17,098)
Increase (decrease) in other items, net (820) (529) (337)
Net increase (decrease) $ 1,757 $ 4,007 $ (737)
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 60th 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 last
business day of the third month, 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, 1997.
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 6 $235 .23% 11 $780 .76% 17 $1,015 .99%
Multi-family and
commercial real estate -- -- -- -- -- -- -- -- --
Consumer 15 146 .79 18 137 .74 33 283 1.53
Total 21 $381 .30 29 $917 .72 50 $1,298 1.02
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 student, 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,
1997 1996 1995 1994 1993
(Dollars in Thousands)
Non-Performing Loans
One- to four-family real estate $ 780 $1,008 $ 784 $ 650 $ 409
Multi-family and commercial real estate -- 78 -- -- --
Consumer 137 283 251 -- 15
Total 917 1,369 1,035 650 424
Troubled Debt Restructured Loans
Multi-family and commercial real estate -- -- -- -- 1,427
Total -- -- -- -- 1,427
Foreclosed Assets, Net
One- to four-family real estate 225 334 326 220 56
Multi-family and commercial real estate 23 23 158 158 --
Total 248 357 484 378 56
Total non-performing assets $1,165 $1,726 $1,519 $1,028 $1,907
Total as a percentage of total assets .40% .61% .66% .45% .84%
For the year ended September 30, 1997, gross interest income which
would have been recorded had the non-accruing loans been current in
accordance with their original terms amounted to $50,000.
Non-Accruing Assets. At September 30, 1997, the Bank had $780,000
in non-accruing loans, which constituted .62% of the Bank's gross
loan portfolio. At September 30, 1997, the Bank's non-accruing loans
consisted of 11 one- to four-family residential mortgage loans.
Foreclosed Assets. As of September 30, 1997, the Bank had $248,000
in carrying value of foreclosed assets consisting of six one- to four-
family properties aggregating $225,000 and one commercial real estate property
aggregating $23,000.
Other Loans of Concern. As of September 30, 1997, there were $2.0
million of other loans (consisting of a restaurant/personal residence
aggregating $198,000, 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, 1997, 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,
1997, the Bank had classified $1.0 million as substandard and none
as doubtful or loss.
Allowance for Loan Losses. At September 30, 1997, the Bank had a total
allowance for loan losses of $1.9 million, representing 206.0% 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 estimated 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,
1997 1996 1995 1994 1993
(Dollars in Thousands)
Balance at beginning of period $1,833 $1,950 $1,746 $1,294 $ 857
Charge-Offs
One- to four-family real estate (162) (237) (12) (3) --
Multi-family and commercial real estate (30) -- -- -- (20)
Consumer (90) (86) (50) (29) (45)
Total charge-offs (282) (323) (62) (32) (65)
Recoveries
One- to four-family real estate 4 -- 1 14 10
Consumer 34 11 10 5 22
Total recoveries 38 11 11 19 32
Net charge-offs (244) (312) (51) (13) (33)
Additions charged to operations 300 195 255 465 470
Balance at end of period $1,889 $1,833 $1,950 $1,746 $1,294
Ratio of net charge-offs during the period to
average loans outstanding during the period .19% .26% .04% .02% .03%
Ratio of net charge-offs during the period to
average non-performing assets 17.73% 18.60% 4.46% 1.01% 1.83%
The distribution of the Bank's allowance for losses on loans at the
dates indicated is summarized as follows:
September 30,
1997 1996 1995
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 $ 573 $102,232 80.69% $ 496 $100,383 80.34% $ 737 $ 95,588 79.04%
Multi-family
and commercial
real estate 470 4,691 3.70 528 5,115 4.09 443 5,132 4.24
Construction -- 1,306 1.03 -- 423 0.34 -- 230 0.19
Consumer 288 18,473 14.58 250 19,024 15.23 220 19,988 16.53
Unallocated 558 -- -- 559 -- -- 550 -- --
Total $1,889 $126,702 100.00% $1,833 $124,945 100.00% $1,950 $120,938 100.00%
1994 1993
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
(Dollars in Thousands)
One- to
four-family
real estate $ 670 $ 96,570 79.37% $ 505 $ 98,173 80.74%
Multi-family
and commercial
real estate 419 5,606 4.61 317 3,628 2.98
Construction -- 743 0.61 19 1,776 1.46
Consumer 134 18,756 15.41 83 18,014 14.82
Unallocated 523 -- -- 370 -- --
Total $1,746 $121,675 100.00% $1,294 $121,591 100.00
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 1997, the Bank's average
regulatory liquidity ratio (liquid assets as a percentage of net withdrawable
savings deposits and current borrowings) was 20.1%.
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, 1997, the
Company's securities excluding mortgage-backed securities and FHLB
stock, totaled $70.8 million, or 24.4% of total assets, $62.7 million
of which are classified as "available for sale" and the balance of
$8.1 million as "held to maturity."
Generally, the investment policy of the Company is to invest funds
among various categories of investments and maturities based upon
the Company'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 Company's asset/liability management
policies. Prior to the Company's initial public offering and the Bank's
conversion to a stock form institution, the Bank's investment strategy
had 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. After the conversion, the Company has extended
its portfolio life by purchasing longer term securities principally
with ten year maturities to decrease its asset sensitivity and increase
interest income. Corporate debt securities generally are considered
of higher risk than U.S. Government securities and federal agency
obligations. At September 30, 1997, the weighted average term to maturity
or repricing of the security portfolio, excluding other marketable
equity securities, was 5.80 years. See Note 4 of the Notes to Consolidated
Financial Statements for information regarding the maturities of the
Company'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
and achieve its asset/liability management goals, the Company invests
in mortgage-backed securities. All of the mortgage-backed securities
owned by the Company are issued, insured or guaranteed either directly
or indirectly by a federal agency. At September 30, 1997, the Company
had $83.9 million in mortgage-backed securities, or 29.0% 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 Company'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,
1997 1996 1995
Amortized % of Amortized % of Amortized % of
Cost Total Cost Total Cost Total
(Dollars in Thousands)
Securities
U.S. government securities $12,906 18.24% $19,829 24.52% $24,035 44.97%
Corporate bonds 6,042 8.54 9,999 12.34 16,152 30.22
Federal agency obligations 48,927 69.15 50,978 62.89 13,053 24.43
Municipal bonds 194 0.28 206 0.25 203 0.38
Other 2,682 3.79 3 -- -- --
Total securities $70,751 100.00% $81,015 100.00% $53,443 100.00%
Average remaining contractual life
of securities 5.80 years 3.83 years 1.98 years
Federal Home Loan Bank of New York
stock, required by law $ 1,762 100.00% $ 1,159 100.00% -- --
Other Interest-Earning Assets
Federal funds sold -- -- $35,600 100.00% $34,700 100.00%
Mortgage-Backed Securities
GNMA $41,450 49.41% $17,169 48.71% $13,550 99.29%
FNMA 29,920 35.67 13,971 39.63 -- --
FHLMC 12,416 14.80 4,011 11.38 46 0.34
Other 97 0.12 98 0.28 51 0.37
Total mortgage-backed
securities $83,883 100.00% $35,249 100.00% $13,647 100.00%
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, 1997
Less Than 1 to 5 5 to 10 Over 10
1 Year Years Years Years Total Securities
Amortized Amortized Amortized Amortized Amortized Fair
Cost Cost Cost Cost Cost Value
(Dollars in Thousands)
U.S. government securities
and federal agency obligations $12,992 $15,971 $32,870 $ -- $61,833 $62,247
Corporate bonds and other 2,000 1,000 2,937 2,981 8,918 9,088
Total investment securities $14,992 $16,971 $35,807 $2,981 $70,751 $71,335
Weighted average yield 5.80% 6.41% 7.39% 6.14% 6.76%
The Company's securities portfolio at September 30, 1997, did not
contain securities of any issuer with an aggregate book value in excess
of 10% of the Company'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, 1997.
September 30,
Due in 1998
Amorized
3 Years 3 to 5 5 to 10 10 to 20 Over 20 Cost
or Less Years Years Years Years
(In Thousands)
GNMA $ -- $17 $ 213 $ 4,866 $36,354 $41,450
FNMA 6,054 -- 1,716 6,040 16,110 29,920
FHLMC -- -- 30 8,452 3,934 12,416
Other -- -- -- -- 97 97
Total $6,054 $17 $1,959 $19,358 $56,495 $83,883
Sources of Funds
General. The Bank's primary sources of funds are deposits, amortization
and prepayment of loan principal, maturities of investment 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,
1997 1996 1995
(Dollars in Thousands)
Opening balance $196,753 $197,230 $200,825
Deposits 254,977 235,800 235,872
Withdrawals 259,424 244,962 247,438
Interest credited 8,606 8,685 7,971
Ending balance $200,912 $196,753 $197,230
Net increase (decrease) $ 4,159 $ (477) $ (3,595)
Percent increase (decrease) 2.11% (.24)% (1.79)%
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,
1997 1996 1995
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
Non-Certificate Deposits<F1>
Statement savings accounts 3.50% $ 8,388 4.17% $ 7,881 4.01% $ 7,019 3.56%
Demand accounts 4,370 2.18 3,714 1.89 4,008 2.03
Passbook savings accounts 3.50% 71,060 35.37 75,477 38.36 78,292 39.70
NOW accounts 2.50% 10,438 5.20 9,070 4.61 7,799 3.96
Money market accounts 3.20% 7,115 3.54 7,752 3.94 8,589 4.35
Total non-certificates 101,371 50.46 103,894 52.81 105,707 53.60
Certificates of Deposit
2.00-3.99% 20 0.01 30 0.01 776 0.39
4.00-5.99% 88,415 44.00 75,293 38.27 55,435 28.10
6.00-7.99% 11,106 5.53 17,536 8.91 34,546 17.52
8.00-9.99% -- -- -- -- 766 0.39
Total certificates 99,541 49.54 92,859 47.19 91,523 46.40
Total deposits $200,912 100.00% $196,753 100.00% $197,230 100.00%
<FN>
<F1>Interest rates shown are as of September 30, 1997.
The following table shows rate and maturity information for the Bank's
certificates of deposit as of September 30, 1997.
2.00- 4.00- 6.00- Percent
3.99% 5.99% 7.99% Total of Total
(Dollars in Thousands)
Certificate Accounts Maturing in Quarter Ending
December 31, 1997 $ -- $18,296 $ 2,620 $20,916 21.01%
March 31, 1998 -- 18,235 3,028 21,263 21.36
June 30, 1998 -- 8,770 3,312 12,082 12.14
September 30, 1998 20 7,210 1,718 8,948 8.99
December 31, 1998 -- 15,969 -- 15,969 16.04
March 31, 1999 -- 2,798 34 2,832 2.85
June 30, 1999 -- 3,534 -- 3,534 3.55
September 30, 1999 -- 2,283 -- 2,283 2.29
December 31, 1999 -- 1,946 -- 1,946 1.95
March 31, 2000 -- 2,894 -- 2,894 2.91
June 30, 2000 -- 2,572 52 2,624 2.64
September 30, 2000 -- 1,018 -- 1,018 1.02
Thereafter -- 2,890 342 3,232 3.25
Total $ 20 $88,415 $11,106 $99,541 100.00%
Percent of total .02% 88.82% 11.16%
The following table indicates the amount of the Bank's certificates
of deposit by time remaining until maturity as of September 30, 1997.
Maturity
Over Over Over
3 Months 3 to 6 6 to 12 12
or Less Months Months Months Total
(Dollars in Thousands)
Certificates of deposit less than $100,000 $ 19,282 $19,450 $19,580 $32,988 $91,300
Certificates of deposit of $100,000 or more 1,634 1,813 1,450 3,344 8,241
Total certificates of deposit $ 20,916 $21,263 $21,030 $36,332 $99,541
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 overnight funds of approximately
$13.1 million, along with an additional line of $13.1 million for
one month advances.
At September 30, 1997, the Bank had borrowings of $11.4 million under
its overnight line. The Bank had no borrowings prior to March 1997.
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 $5.7 million
at September 30, 1997, 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, 1997, the Bank had no subsidiaries.
The Company, as a unitary savings and loan holding company, is generally
permitted under federal law to engage, through non-banking subsidiaries,
in whatever business activities it may choose to pursue. The Company
currently has no such subsidiaries.
Competition
The Company 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 Company'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, 1997, 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, 1997, the Company had a total of 66 employees, including
four part-time employees. The Company'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 three other
banking offices in its primary market area. The Company does not own
or lease any other premises and operates from the Bank's main office.
The following table sets forth information relating to each of the
Bank's offices as of September 30, 1997. 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, 1997 was $2.4
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 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 $ 535,282
Branch Offices
Route 9-W
Ravena, New York 1972 Owned 2,822 202,519
Route 9-W
Corner Boulevard Avenue
Catskill, New York 1978 Owned 2,900 668,285
Route 296(F1)
Windham, New York 1996 Owned 3,620 605,781
$2,011,867
<FN>
<F1>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, 1997
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. In fiscal 1996, the Bank received payment
of $3.1 million of its claims against Nationar, and received the remaining
$.2 million in fiscal 1997. Therefore, $560,000 and $100,000 of the
reserve established in 1995 was recovered and recorded as income in
1996 and 1997, respectively.
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 1997, there were no matters submitted
to a 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, 1997, (the "Annual Report"),
is incorporated herein by reference: "SHAREHOLDER INFORMATION", which
appears on page 52 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 22
of the Annual Report
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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-Asset/Liability Management", which
appears on pages 7 through 10 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,
1997 and 1996, 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, 1997, together with the related notes and
the independent auditors' report thereon, all of which appears on
pages 23 through 51 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 3
through 5 of the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information included on pages 6 through 10 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: "VOTING SECURITIES AND CERTAIN HOLDERS THEREOF", which
appears on pages 5 and 6 of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included on page 11 of the Proxy Statement is incorporated
herein by reference: "INFORMATION CONCERNING 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, 1997 and
1996, 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, 1997, together with the related notes and the
independent auditors' report thereon, appearing in the Annual Report
on pages 23 through 51 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 1996 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.
(incorporated by reference to Exhibit 10.3 to Form 10K
for the fiscal year ended September 30, 1996.)
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.
11 Computation of Net Income per Common Share
13 1997 Annual Report to security holders
21 Subsidiaries of the registrant
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule (included only
with EDGAR filing)
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 22, 1997
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
Wilbur J. Cross Director & Chairman of the Board,
President and Chief
Executive Officer December 22, 1997
David J. DeLuca Chief Financial Officer
(Principal Financial Officer &
Principal Accounting Officer) December 22, 1997
George P. Jones Director December 22, 1997
Richard A. Marshall Director December 22, 1997
Allan D. Oren Director December 22, 1997
Hugh J. Quigley Director December 22, 1997
Edward P. Stiefel, Esq. Director December 22, 1997