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 December 31, 1999
or
[X] 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
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
341 MAIN STREET, CATSKILL, NY 12414
-----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(518)943-3600
(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:
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 3,735,269
----------------------------- ---------------------------------
(Title of class) (outstanding at January 31, 2000)
CATSKILL FINANCIAL CORPORATION
FORM 10-Q
December 31, 1999
INDEX
- -----
PART I FINANCIAL INFORMATION Page
- ------ ---------------------
Item 1. Consolidated Interim Financial Statements
Consolidated Statements of Financial Condition as of
December 31, 1999 (Unaudited) and September 30, 1999 1
Consolidated Statements of Income for the three
months ended December 31, 1999 and 1998 (Unaudited) 2
Consolidated Statements of Changes in Shareholders'
Equity for the three months ended December 31, 1999
and 1998 (Unaudited) 3
Consolidated Statements of Cash Flows for the three
months ended December 31, 1999 and 1998 (Unaudited) 4
Notes to Unaudited Consolidated Interim Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Default on Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
CATSKILL FINANCIAL CORPORATION
Consolidated Statements of Financial Condition
(In thousands, except share and per share data)
December 31, September 30,
1999 1999
--------- ---------
Assets: (Unaudited)
Cash and due from banks $ 5,139 $ 3,025
Securities available for sale, at fair value 159,209 165,833
Federal Home Loan Bank of NY stock, at cost 3,298 2,634
Loans receivable, net 157,357 150,821
Corporate-owned life insurance 10,514 10,381
Accrued interest receivable 2,709 2,576
Premises and equipment, net 3,793 3,297
Other real estate owned 107 --
Other assets 4,411 3,014
--------- ---------
Total assets $ 346,537 $ 341,581
========= =========
Liabilities and Shareholders' Equity:
Liabilities
Deposits:
Non-interest bearing $ 8,583 $ 8,918
Interest bearing 210,454 210,146
--------- ---------
Total deposits 219,037 219,064
Short-term borrowings 45,350 31,100
Long-term borrowings 20,000 25,000
Mortgagors' escrow deposits 2,334 2,449
Other liabilities 3,704 4,756
--------- ---------
Total liabilities $ 290,425 $ 282,369
--------- ---------
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 December 31, 1999 and September 30, 1999 57 57
Additional paid-in capital 55,092 55,114
Retained earnings, substantially restricted 40,716 39,997
Unallocated common stock acquired by ESOP (3,753) (3,753)
Unearned management recognition plan (894) (1,011)
Treasury stock, at cost (1,901,481 shares at
December 31, 1999 and 1,778,342
shares at September 30, 1999) (30,294) (28,521)
Accumulated other comprehensive income (loss) (4,812) (2,671)
--------- ---------
Total shareholders' equity 56,112 59,212
--------- ---------
Total liabilities and shareholders' equity $ 346,537 $ 341,581
========= =========
See accompanying notes to unaudited consolidated interim financial statements.
-1-
CATSKILL FINANCIAL CORPORATION
Consolidated Statements of Income
(In thousands, except share and per share data)
THREE MONTHS ENDED
December 31,
1999 1998
----------- -----------
(Unaudited)
Interest and dividend income:
Loans $ 3,006 $ 2,764
Securities available for sale:
Taxable 1,999 2,030
Non-taxable 718 491
Investment securities held to maturity -- 33
Federal funds sold and other 1 1
Federal Home Loan Bank of NY stock 51 34
----------- -----------
Total interest and dividend income 5,775 5,353
Interest expense:
Deposits 2,084 2,226
Short-term borrowings 556 71
Long-term borrowings 295 329
----------- -----------
Total interest expense 2,935 2,626
----------- -----------
Net interest income 2,840 2,727
Provision for loan losses 50 45
----------- -----------
Net interest income after provision for
loan losses 2,790 2,682
----------- -----------
Non-interest income:
Corporate-owned life insurance 133 --
Service fees on deposit accounts 106 90
Net securities gains (losses) (93) 22
Other income 53 45
----------- -----------
Total non-interest income 199 157
----------- -----------
Non-interest expense:
Salaries and employee benefits 927 871
Advertising and business promotion 55 22
Net occupancy on premises 111 95
Federal deposit insurance premium 7 6
Postage and supplies 86 67
Data processing fees 132 122
Equipment 58 40
Professional fees 58 59
Other real estate expenses, net 1 14
Other 158 169
----------- -----------
Total non-interest expense 1,593 1,465
----------- -----------
Income before taxes 1,396 1,374
Income tax expense 294 393
----------- -----------
Net income $ 1,102 $ 981
=========== ===========
Basic earnings per common share $ .32 $ .26
Diluted earnings per common share $ .32 $ .25
Weighted Average Common Shares-Basic 3,408,380 3,839,278
Weighted Average Common Shares-Diluted 3,468,656 3,879,890
See accompanying notes to unaudited consolidated interim financial statements.
-2-
CATSKILL FINANCIAL CORPORATION
Consolidated Statements of Changes in Shareholders' Equity
(In thousands, except share and per share data) (Unaudited)
Retained Common Unearned
Additional earnings, stock management
Common paid-in substantially acquired by recognition
stock capital restricted ESOP plan
----- ------- ---------- ---- ----
Balance at September 30, 1999 $ 57 $55,114 $39,997 $(3,753) $(1,011)
Comprehensive loss:
Net income 1,102
Other comprehensive income (loss), net of tax:
Unrealized net losses arising during the
period on AFS securities (Pre-tax $3,662)
Reclassification adjustment for losses
realized in net income (pre-tax $93) 56
Other comprehensive losses
Comprehensive loss
Dividends paid on common stock ($.11 per share) (383)
Purchase of common stock (150,000 shares)
Exercise of stock options
(26,861 shares issued, net)
(22)
Amortization of unearned MRP compensation 117
---- ------- ------- ------- -----
Balance at December 31, 1999 $ 57 $55,092 $40,716 $(3,753) $(894)
==== ======= ======= ======== ======
Balance at September 30, 1998 $ 57 $54,974 $37,374 $(3,981) $(1,433)
Comprehensive income :
Net income 981
Other comprehensive income (loss), net of tax:
Unrealized net losses arising during the period
on AFS securities (Pre-tax $811)
Reclassification adjustment for gains realized in
net income (pre-tax $22)
Other comprehensive losses
Comprehensive income
Dividends paid on common stock ($.0925 per share) (366)
Amortization of unearned MRP compensation 116
---- ------- ------- ------- -------
Balance at December 31, 1998 $ 57 $54,974 $37,989 $(3,981) $(1,317)
==== ======= ======= ======= =======
Accumulated
Treasury other
stock, comprehensive Comprehensive
at cost income (loss) income (loss) Total
------- ------------- ------------- -----
Balance at September 30, 1999 $(28,521) $(2,671) $59,212
Comprehensive loss:
Net income $ 1,102 1,102
Other comprehensive income (loss), net of tax:
Unrealized net losses arising during the
period on AFS securities (Pre-tax $3,662) (2,197)
Reclassification adjustment for losses
realized in net income (pre-tax $93) 56
--------
Other comprehensive losses (2,141) (2,141) (2,141)
--------
Comprehensive loss $ (1,039)
========
Dividends paid on common stock ($.11 per share) (383)
Purchase of common stock (150,000 shares) (2,203) (2,203)
Exercise of stock options
(26,861 shares issued, net) 430 408
Amortization of unearned MRP compensation 117
-------- ------- -------
Balance at December 31, 1999 $(30,294) $(4,812) $56,112
========= ======== =======
Balance at September 30, 1998 $(21,223) $ 2,063 $67,831
Comprehensive income :
Net income $ 981 981
Other comprehensive income (loss), net of tax:
Unrealized net losses arising during the period
on AFS securities (Pre-tax $811) (487)
Reclassification adjustment for gains realized in
net income (pre-tax $22) (13)
------
Other comprehensive losses (500) (500) (500)
------
Comprehensive income $ 481
======
Dividends paid on common stock ($.0925 per share) (366)
Amortization of unearned MRP compensation 116
-------- ------- -------
Balance at December 31, 1998 $(21,223) $ 1,563 $68,062
======== ======= =======
See accompanying notes to unaudited consolidated interim financial statements.
-3-
CATSKILL FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(In Thousands)
Three Months Ended
December 31,
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited)
Net income $ 1,102 $ 981
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 66 49
Net accretion on securities (124) (23)
Provision for loan losses 50 45
MRP compensation expense 117 116
ESOP compensation expense 84 77
Increase in cash surrender value on COLI (133) --
Losses (gains) on sale of other real estate owned -- 13
Losses (gains) on sales and calls of securities 93 (22)
Net increase in other assets (102) (45)
Net decrease in other liabilities (1,136) (424)
-------- --------
Net cash provided by operating activities 17 767
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity/calls/paydown of investment securities -- 9
Net increase in loans (6,693) (4,836)
Capital expenditures, net (562) (88)
Purchase of corporate-owned life insurance -- (10,000)
Purchase of AFS securities (2,839) (12,699)
Purchase of Federal Home Loan Bank stock (664) --
Proceeds from sale of AFS securities 2,821 5,394
Proceeds from maturity/calls/paydown of AFS securities 3,104 13,702
Proceeds from sale of other real estate owned -- 10
-------- --------
Net cash used by investing activities (4,833) (8,508)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock options exercises 408 --
Net increase (decrease) in deposits (27) 5,156
Net increase (decrease) in mortgagors' escrow deposits (115) 1,347
Net increase in short-term borrowings 14,250 2,985
Repayment of long-term borrowings (5,000) --
Cash dividends paid on common stock (383) (366)
Purchase of common stock for treasury (2,203) --
-------- --------
Net cash provided by financing activities 6,930 9,122
-------- --------
Net increase in cash and cash equivalents 2,114 1,381
Cash and cash equivalents at beginning of period 3,025 2,795
-------- --------
Cash and cash equivalents at end of period $ 5,139 $ 4,176
======== ========
Supplemental cash flow information disclosure:
Interest paid $ 2,869 $ 2,630
Income taxes paid 290 370
Transfer of loans to other real estate owned 107 32
Change in net unrealized gain (loss) on AFS securities,
net of change in deferred tax benefit of $1,428 and
$333, respectively (2,141) (500)
See accompanying notes to unaudited consolidated interim financial statements
-4-
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. Amounts in prior periods' unaudited consolidated
interim financial statements are reclassified whenever necessary to
conform to the current period's presentation. 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 the Company's 1999 Annual Report to Stockholders.
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, 2000.
Note 2. Earnings Per Share
Basic earnings per share excludes dilution and is computed by
dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period.
Unvested restricted stock is not considered outstanding and only
included in the computation of basic earnings per share on the date
they are fully vested. Diluted earnings per share reflects the
potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then
shared in the earnings of the entity, such as the Company's stock
options and unvested restricted stock. Unallocated ESOP shares are
not included in the weighted average number of common shares
outstanding for either the basic or diluted earnings per share
calculations.
The following sets forth certain information regarding the
calculation of basic and diluted earnings per share for the three
month periods ended December 31:
(in thousands, except share and per share data)
1999 1998
---------- ----------
Net income $ 1,102 $ 981
========== ==========
Weighted average common shares 3,408,380 3,839,278
Dilutive effect of potential common shares
related to stock compensation plans 60,276 40,612
---------- ----------
Weighted average common shares including
potential dilution 3,468,656 3,879,890
========== ==========
Basic earnings per share $ .32 $ .26
Diluted earnings per share $ .32 $ .25
-5-
CATSKILL FINANCIAL CORPORATION
FORM 10-Q
December 31, 1999
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") is a
savings and loan holding company, which owns all of the outstanding common stock
of Catskill Savings Bank (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
area is comprised of Greene and Schoharie Counties and southern Albany County in
New York, which are serviced through six banking offices, the most recent having
opened in August 1999. 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 Company'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
and borrowings.
Results of operations are also affected by the Company'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.
General economic conditions, competition and the monetary and fiscal policies of
the federal government also significantly affect financial institutions in
general, including the Company. The demand for and supply of housing,
competition among lenders, interest rate conditions and funds availability all
impact lending activities, while prevailing market rates on competing
investments, customer preference and the levels of personal income and savings
in the Bank's primary market area affect deposit inflows and outflows.
-6-
FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q or future filings by the Company with
the Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project", "believe", or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigations Reform Act of 1995. In addition, certain disclosures and information
customarily provided by financial institutions, such as analysis of the adequacy
of the allowance for loan losses or an analysis of the interest rate sensitivity
of the Company's assets and liabilities, are inherently based upon predictions
of future events and circumstances. Furthermore, from time to time, the Company
may publish other forward-looking statements relating to such matters as
anticipated financial performance, business prospects, and similar matters.
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. Some of the risks and uncertainties that may affect
the operations, performance, development and results of the Company's business,
the interest rate sensitivity of its assets and liabilities, and the adequacy of
its allowance for loan losses, include but are not limited to the following:
o Deterioration in local, regional, national or global economic
conditions which could result, among other things, in an increase in
loan delinquencies, a decrease in property values, or a change in
the housing turnover rate;
o changes in market interest rates or changes in the speed at which
market interest rates change;
o changes in laws and regulations affecting the financial service
industry;
o changes in competition; and
o changes in consumer preferences.
The Company wishes to caution readers not to place undue reliance on
any forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including those described above, could
affect the Company's financial performance and could cause the Company's actual
results or circumstances for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release any revisions to any forward-looking statements
to reflect the occurrence of anticipated or unanticipated events or
circumstances after the date of such statements.
-7-
FINANCIAL CONDITION
Total assets were $346.5 million at December 31, 1999, an increase of $4.9
million, or 1.4% from the $341.6 million at September 30, 1999. The increase was
primarily in loans, and to a lesser extent, cash and due from banks and was
funded principally by increases in short-term borrowings.
Cash and cash equivalents were $5.1 million, an increase of $2.1 million, or
70.0% from the $3.0 million at September 30, 1999. The increase was principally
from the Company's decision to temporarily build-up cash due to the uncertainty
of customer withdrawals related to Year 2000 concerns.
Securities available for sale ("AFS") were $159.2 million, down $6.6 million, or
4.0% from $165.8 million, due to sales, mortgage-backed securities ("MBS")
prepayments and the increase in unrealized losses on the AFS portfolio due to
rising interest rates. During the quarter, the Company sold lower yielding
securities and reinvested some of the proceeds at higher rates. In addition, the
Company invested some of its MBS prepayments in new MBS's backed by adjustable
rate mortgages ("ARM's") with teaser rates, with the remaining balance, along
with some of the sales proceeds used to fund loan growth. The unrealized losses
on the Company's AFS portfolio changed from $4.5 million or 2.6% of the
portfolio's book cost to $8.0 million or 4.8% of book cost due principally to
rising interest rates.
Loans receivable were $159.5 million as of December 31, 1999, an increase of
$6.6 million or 4.3% over the $152.9 million as of September 30, 1999. The
following table shows the loan portfolio composition as of the respective
balance sheet dates:
December 31, September 30,
1999 1999
---- ----
(In thousands) % of Loans (In thousands) % of Loans
Real Estate Loans
One-to-four family $123,551 77.5% $121,151 79.2%
Multi-family and commercial 8,291 5.2 7,940 5.2
Construction 3,629 2.3 3,176 2.1
-------- ----- -------- -----
Total real estate loans 135,471 85.0 132,267 86.5
Consumer Loans 22,980 14.4 19,729 12.9
Commercial Loans 1,036 .6 994 .6
-------- ----- -------- -----
Gross Loans 159,487 100.0% 152,990 100.0%
===== =====
Net deferred loan costs (fees) 10 (76)
-------- --------
Total loans receivable $159,497 $152,914
======== ========
One-to-four family real estate loans increased $2.4 million, or 2.0%, as the
Company has continued to promote a 15 year fixed rate mortgage product with a
preferred rate for borrowers who have their monthly payments automatically
deducted from a checking account with the Bank. Consumer loans increased $3.3
million or 16.8% from September 30, 1999, due principally to an increase in
indirect auto loans. The Company began its indirect auto program in June 1998,
and still originates only through a limited number of dealers in its contiguous
market area. At December 31, 1999, the Company had $5.8 million of indirect
loans representing 25.2% of the consumer loan portfolio, and less than 3.7% of
the Company's gross loan portfolio.
-8-
Non-performing assets at December 31, 1999 were $646,000, or .19% of total
assets, compared to the $544,000, or .16% of total assets at September 30, 1999.
The table below sets forth the amounts and categories of the Company's
non-performing assets.
December 31, September 30,
1999 1999
---- ----
Non-performing loans:
One-to-four family $350 $396
Multi-family and commercial -- --
Consumer 189 148
---- ----
Total non-performing loans 539 544
---- ----
Foreclosed assets, net:
One-to-four family 107 --
Multi-family and commercial -- --
---- ----
Total foreclosed assets, net 107 --
---- ----
Total non-performing assets $646 $544
==== ====
Total non-performing loans
as a % of total loans .34% .36%
The decrease in non-performing loans at December 31, 1999 as compared to
September 30, 1999 was principally due to the foreclosure of one loan which
resulted in the Company acquiring title to the mortgaged property. The net
realizable value of the property, totaling $107,000, was transferred to other
real estate, and since the net realizable value exceeded the Company's carrying
value, the Company recorded no loss. The following table summarizes the activity
in other real estate for the periods presented:
Three Months Ended
December 31,
-----------------------
1999 1998
Other real estate beginning of period $ --- $ 53
Transfer of loans to other real estate owned 107 32
-- (23)
Sales of other real estate, net ----- ----
$ 107 $ 62
Other real estate end of period ===== ====
Additionally, at December 31, 1999, the Company had identified approximately
$214,000 in loans having more than normal credit risk, principally all of which
were secured by real estate. The Company believes that if economic and/or
business conditions change in its lending area, some of these loans could become
non-performing in the future.
-9-
The allowance for loan losses was $2.1 million, or 1.34% of period end loans at
December 31, 1999, and provided coverage of non-performing loans of 397.0%,
compared to coverage of 384.7% as of September 30, 1999. The following
summarizes the activity in the allowance for loan losses:
Three Months Ended December 31,
1999 1998
------- ------
Allowance at beginning of the period $ 2,093 $ 1,950
Charge-offs (11) (13)
Recoveries 8 2
------- -------
Net charge-offs (3) (11)
Provision for loan losses 50 45
------- -------
Allowance at end of the period $ 2,140 $ 1,984
======= =======
Total deposits were $219.0 million at December 31, 1999, down slightly from the
$219.1 million at September 30, 1999. The following table shows the deposit
composition as of the two dates:
December 31, 1999 September 30, 1999
--------------------------------- ---------------------------------
(In thousands) % of Deposits (In thousands) % of Deposits
Savings $ 81,355 37.1% $ 81,894 37.4%
Money market 5,904 2.7 6,435 2.9
NOW 15,973 7.3 14,833 6.8
Non-interest demand 8,583 3.9 8,918 4.1
Certificates of deposits 107,222 49.0 106,984 48.8
------- ----- ------- -----
$219,037 100.0% $219,064 100.0%
======= ===== ======= =====
Deposits were essentially flat despite the fact that the Company generated
new deposits of $1.3 million during the quarter at its new branch in
Middleburgh. The Company attributes the decline in deposits at the other
branches to seasonal outflows in its business checking accounts as well as
some withdrawals due to Year 2000 concerns.
The Company increased its borrowings with the Federal Home Loan Bank of
New York ("FHLB"), to $65.4 million at December 31, 1999, an increase of
$9.3 million from the $56.1 million at September 30, 1999. The additional
borrowings were used to fund the Company's stock repurchases, loan growth
and the temporary increase in cash and due from banks. At December 31,
1999, the Company still has additional available credit of $2.8 million
under its overnight line and $3.2 million under its one-month advance
program with the FHLB.
-10-
Shareholders' equity at December 31, 1999 was $56.1 million, a decrease of
$3.1 million or 5.2% from the $59.2 million at September 30, 1999. The
decrease was principally caused by the Company's repurchase of 150,000
shares of its stock at a cost of $2.2 million and the $2.1 million adverse
change in the Company's net unrealized gain (loss) on AFS securities net
of taxes, due to recent increases in market interest rates. Offsetting the
decreases were the $.7 million of net income retained after cash dividends
and the $.5 million increase in shareholders' equity due to the
amortization of restricted stock awards and the proceeds from the exercise
of stock options.
Shareholders' equity as a percentage of total assets was 16.2% at December
31, 1999 compared to 17.3% at September 30, 1999. Book value per common
share was $14.82.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED
- ----------------------------------------------------------
DECEMBER 31, 1999 AND 1998
- ---------------------------
General
- -------
For the three months ended December 31, 1999, the Company recorded net income of
$1,102,000, an increase of $121,000, or 12.3%, compared to the three month
period ended December 31, 1998. Diluted earnings per share were $.32, an
increase of 28.0% compared to diluted earnings per share of $.25 for the three
months ended December 31, 1998. Basic earnings per share were $.32 for the three
month period, an increase of 23.1% compared to $.26 for the comparable quarter.
For the three months ended December 31, 1999, weighted average common shares -
basic were 3,408,380, down 430,898, or 11.2%, due to the Company's share
repurchase programs.
Annualized return on average assets for the three months ended December 31, 1999
and 1998, was 1.29% and 1.24%, respectively, and the annualized return on
average equity was 7.64% and 5.79%, respectively.
Net Interest Income
- -------------------
Net interest income on a tax equivalent basis for the three months ended
December 31, 1999, was $3.2 million, an increase of $224,000, or 7.6%, when
compared to the three months ended December 31, 1998. The increase was
principally volume related as the Company increased its average earning assets
$23.1 million, or 7.5%, more than offsetting the increase in interest expense
from the Company's funding of its stock repurchase program. The Company funded
the share repurchases, along with its growth in earning assets, principally with
borrowings and, to a lesser extent, deposit growth.
Interest income for the three months ended December 31, 1999 was $6.1 million on
a tax equivalent basis, an increase of $533,000, or 9.5%, over the comparable
period last year. The $23.1 million increase in the average volume of earning
assets had a direct positive effect on interest income as the Company sought to
leverage its excess capital. The Company also benefited from a 13 basis point
increase in the yield on its average earning assets caused primarily by
increases in the yield earned on its securities and MBS portfolios due to higher
market interest rates.
-11-
Average earning assets increased principally in the loan and securities
portfolios, which on average grew 10.6% and 4.9%, respectively. Loan growth was
principally due to the promotion of a 15 year fixed rate mortgage product, which
increased volume, but had an adverse impact on the loan portfolio yield since
the loans originated during the past fiscal year were at rates below the average
portfolio yield. In addition, the Company, due to lower market interest rates in
late 1998 and early 1999, experienced higher loan prepayments, and refinancing
of its existing portfolio, which together with the loan promotion caused the
yield on the loan portfolio to decrease 13 basis points to 7.68%.
Average MBS were $71.6 million for the three months ended December 31, 1999,
down $13.7 million or 16.1% from the comparable period due to prepayments. The
Company used some of the proceeds to fund higher yielding loans rather than
purchase MBS. The average yield on MBS was 6.66%, up 34 basis points from the
comparable period, as the interest rates on the Company's MBS's with underlying
teaser rate ARM's purchased in prior periods continue to reset to higher rates.
Management expects the average yield of these ARM's to increase as they adjust
to their fully indexed rate; however, the actual increase will depend upon the
level of the one-year constant maturity treasury index when the rates adjust.
Average securities increased $21.8 million, or 14.1%, as the Company purchased
longer call protected bank qualified municipals and non-callable corporate
securities to increase yields and reduce reinvestment risk. The average yield on
the securities portfolio for the three months ended December 31, 1999, was
7.59%, an increase of 16 basis points from the comparable period, as the Company
replaced securities called and/or matured with higher yielding municipals and
corporates. Municipal securities now represent 52.0% of average securities,
compared to 46.2% in the comparable period.
Interest expense for the three months ended December 31, 1999, was $2.9 million,
an increase of $309,000, or 11.8%. The increase was principally due to the
higher volume of average interest-bearing liabilities offset somewhat by a
decrease in the Company's cost of funds. Average interest-bearing liabilities
were $274.2 million, an increase of $36.9 million, or 15.5%, as the Company
borrowed in order to fund its earning asset growth and the stock repurchase
program. Average short-term borrowings were $39.3 million for the three months
ended December 31, 1999, up $33.9 million from the comparable three-month
period. Although the Company experienced a decline in the balance of savings
accounts during the quarter ended December 31, 1999, the Company believes this
decline was a result of temporary seasonal and Year 2000 issues, as evidenced by
the fact that the year end savings account balance of $81.4 million was higher
than the average balance for the quarter of $81.2 million. The cost of funds
decreased 13 basis points to 4.26% as the Company had lowered its deposit rates
in late 1998 and early 1999. Consequently, the cost of its average
interest-bearing deposits has dropped 37 basis points to 3.92%, more than
offsetting the 45 basis point increase in the Company's short-term borrowing
costs.
The Company's net yield on average earning assets was 3.85% for the three months
ended December 31, 1999, up 1 basis point compared to the comparable period of
the prior year. The increase was principally caused by the 26 basis point
increase in the Company's net interest spread, offset by the reduced level of no
cost funding sources as the Company funded its stock repurchase program with
short-term borrowings, which increased the amount of average earning assets
funded by interest bearing liabilities. For the three months ended December 31,
1999, the Company had $55.2 million of average earning assets with no funding
costs, a decrease of $13.8 million, or 20.0%, from the $69.1 million for the
three months ended December 31, 1998.
-12-
For more information on average balances, interest, yield and rate, please refer
to Table #1, included in this report.
Provision for Loan Losses
- -------------------------
The Company establishes an allowance for loan losses based on an analysis of
risk factors in its 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 $50,000, or .13% of average loans for the
three months ended December 31, 1999, up $5,000 or 11.1% from the comparable
period of the prior year. The increase was principally based on loan growth as
the provision represented .13% of average loans in both periods. The Company had
net charge-offs of $3,000 or .01% of average loans for the quarter, compared to
net charge-offs of $11,000 or .03% of average loans in the comparable period.
Non-performing loans were $539,000 as of December 31, 1999, or .34% of total
loans, an increase of $33,000 from December 31, 1998, when they were .35% of
total loans. At December 31, 1999, the allowance for loan losses was $2,140,000,
or 1.34% of period end loans, and provided coverage of non-performing loans of
397.0% compared to 1.37% and 392.1%, respectively, as of December 31, 1998.
Non-Interest Income
- -------------------
Non-interest income was $199,000 for the three months ended December 31, 1999,
an increase of $42,000 or 26.8% from the three months ended December 31, 1998.
The increase was principally due to the investment performance on the Company's
corporate-owned life insurance ("COLI"), which increased its cash surrender
value by $133,000. In addition, the Company's service fees on deposit accounts
increased $16,000, or 18.0% as the Company continues to promote checking
accounts to increase its core deposits. The Company also earned $16,000 in fees
due to the implementation of ATM surcharges during the quarter on non-customer
transactions. Somewhat offsetting these increases was the $115,000 adverse
change in net securities transactions as the Company sold securities at a net
loss of $93,000 in this quarter compared to net security gains of $22,000 in the
comparable period.
-13-
Non-Interest Expense
- --------------------
Non-interest expense for the three months ended December 31, 1999 was
$1,593,000, an increase of $128,000, or 8.7%, over the comparable period last
year. The increase was principally the cost attributable to our new branch in
Middleburgh, which opened in August 1999, including certain promotional and
start-up costs.
Salaries and employee benefits for the three months ended December 31, 1999,
were $927,000, an increase of $56,000, or 6.4%, principally from staffing our
new branch. Advertising, as well as occupancy, equipment and supplies were all
higher due to the new branch.
Income Tax Expense
- ------------------
Income tax expense for the three months ended December 31, 1999, was $294,000, a
decrease of $99,000, or 25.2%, from the comparable period last year. The
Company's effective tax rates for the three months ended December 31, 1999 and
1998, were 21.06% and 28.60%, respectively. The decrease in both the effective
tax rate and income tax expense is principally the impact of the Company's
purchase of tax-exempt securities, primarily bank qualified municipals, as well
as the non-taxable increase in the cash surrender value of the COLI.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Liquidity is the ability to generate cash flows to meet present and expected
future funding needs. Management monitors the Company's liquidity position on a
daily basis to evaluate its ability to meet expected and unexpected depositor
withdrawals and to make new loans and or investments. The Company has reduced
its high level of liquidity, but continues to manage its balance sheet so there
has been no need for unanticipated sales of assets.
The Company's primary sources of funds for operations are deposits, borrowings,
principal and interest payments on loans, mortgage-backed securities and other
securities available for sale.
-14-
Net cash provided by operating activities was $17,000 for the three months ended
December 31, 1999, a decrease of $750,000 from the comparable three month
period. The decrease was principally the change in other liabilities caused by a
decrease in official bank checks outstanding. Official bank checks decreased
principally as a result of the Company's payment of real estate taxes for
mortgage borrowers using escrowed funds earlier in September 1999 than in
September 1998.
Investing activities used $4.8 million in the three months ended December 31,
1999, as the Company increased its assets principally from the $6.7 million
increase in loans, $.7 million purchase of FHLB stock and $.6 million in capital
expenditures principally for the construction of a new full service branch,
offset somewhat by a $3.1 million reduction in securities. Financing activities
provided $6.9 million, as the Company experienced a $14.3 million increase in
short-term borrowings, somewhat offset by a $5.0 million payoff of long-term
borrowings and the $2.2 million cost related to its stock repurchase program.
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 $219.0 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 as of December 31, 1999, deposit accounts having balances in
excess of $100,000 totaled $23.8 million, or 10.9%, of total deposits. The Bank
is required to maintain minimum levels of liquid assets as defined by the OTS
regulations. The requirement, which may be 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
4% measured on a monthly basis and for the month of December 1999, the Bank
exceeded that, maintaining an average liquidity ratio of 33.9%, primarily due to
the large percentage of its assets represented by AFS securities.
The Company anticipates that it will have sufficient funds to meet its current
commitments. At December 31, 1999, the Company had commitments to originate
loans of $3.0 million. In addition, the Company had undrawn commitments of $3.8
million on home equity and other lines of credit. Certificates of deposits which
are scheduled to mature in one year or less at December 31, 1999, totaled $81.0
million, and management believes that a significant portion of such deposits
will remain with the Company.
Although there are no minimum capital ratio requirements for the Company, the
Bank is required to maintain minimum regulatory capital ratios. The following is
a summary of the Bank's actual capital amounts and ratios at December 31, 1999,
compared to the OTS minimum capital requirements:
Actual Minimum
Amount % Amount %
------ --- ------ --
(Dollars in thousands)
Tangible Capital $51,971 14.84% $ 5,252 1.5%
Core Capital 51,971 14.84 14,005 4.0
Risk Based Capital 54,111 30.74 14,080 8.0
-15-
At December 31, 1999, the Company had $4.6 million of available resources at the
holding company level on an unconsolidated basis to use for direct activities of
the Company. Furthermore, the Company has the ability to obtain dividends from
the Bank to provide additional funds. However, OTS regulations require advance
OTS approval before the Bank can declare a dividend if dividends paid during the
two prior years plus the current period exceed dividends paid during that same
period. The Bank has already paid dividends to the Company in the past two years
in excess of that amount. Therefore, OTS approval for additional dividends from
the Bank to the Company would be required unless and until the passage of time
and new net income from the Bank cause cumulative dividends on a rolling basis
to fall below that threshold.
Year 2000
The Company did not experience any material adverse effects as a result of the
rollover to January 1, 2000. Some customers withdrew a portion of their deposits
in anticipation of problems, but the Company believes that these withdrawals
were temporary and that the customers will be gradually redepositing the funds.
-16-
PART I - FINANCIAL INFORMATION (continued)
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company believes there have been no material changes in the Company's
interest rate risk position since September 30, 1999. Other types of market
risk, such as foreign exchange rate risk and commodity price risk, do not arise
in the normal course of the Company's business activities.
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. Tax equivalent adjustments,
principally on municipal securities totaled $347,000 and $235,000 for the
three-month periods ended December 31, 1999 and 1998, respectively. 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. Securities available for sale are shown
at amortized cost.
-17-
THREE MONTH PERIODS ENDED
-------------------------------------------------------------------------------
December 31, 1999 December 31, 1998
------------------------------------- ----------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in thousands)
Interest-Earning Assets
Loans receivable, net $156,552 $ 3,006 7.68% $141,515 $ 2,764 7.81%
Mortgage-backed securities 71,611 1,193 6.66% 85,331 1,348 6.32%
Securities 101,201 1,921 7.59% 79,410 1,475 7.43%
Federal funds sold and other 64 1 6.22% 62 1 6.40%
-------- ------- -------- -------
Total interest-earning assets 329,428 6,121 7.43% 306,318 5,588 7.30%
------- -------
Allowance for loan losses (2,115) (1,965)
Other assets, net 13,165 10,185
-------- --------
Total Assets $340,478 $314,538
======== ========
Interest-Bearing Liabilities
Savings deposits $ 81,167 $609 2.98% $ 77,797 $607 3.10%
Money market 6,255 48 3.05% 6,106 45 2.92%
Now deposits 15,519 76 1.95% 13,109 64 1.94%
Certificates of deposit 107,028 1,334 4.96% 107,921 1,499 5.51%
Short-term borrowings 39,297 556 5.63% 5,436 71 5.18%
Long-term borrowings 22,500 295 5.22% 25,000 329 5.22%
Escrow and other 2,451 17 2.76% 1,897 11 2.30%
-------- ------- -------- -------
Total interest-bearing liabilities
274,217 2,935 4.26% 237,266 2,626 4.39%
------- -------
Non-interest bearing 8,718 6,541
Other liabilities 149 3,558
Shareholders' equity 57,394 67,173
-------- --------
Total Equity and Liabilities $340,478 $314,538
======== ========
Net interest income $3,186 $2,962
====== ======
Net interest rate spread 3.17% 2.91%
==== ====
Net yield on average
interest-earning assets 3.85% 3.84%
==== ====
Average interest earning assets to
average interest bearing liabilities
120.13% 129.10%
====== ======
Earning Assets/Total Assets 96.75% 97.39%
====== =====
-18-
CATSKILL FINANCIAL CORPORATION
FORM 10-Q
DECEMBER 31, 1999
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 2. Changes in Securities
None
Item 3. Defaults on Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Computation of Net Income per Common Share
(27) Financial Data Schedule
-19-
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: February 14, 2000 /s/ Wilbur J. Cross
--------------------
Wilbur J. Cross
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
Date: February 14, 2000 /s/ David J. DeLuca
--------------------
David J. DeLuca
Chief Financial Officer
(Principal Financial and
Accounting Officer)
-19-