UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 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:
Common Shares, $.01 par value 4,360,334
- ----------------------------- ---------------
(Title of class) (outstanding at April 30, 1999)
CATSKILL FINANCIAL CORPORATION
FORM 10-Q
March 31, 1999
INDEX
PART I FINANCIAL INFORMATION Page
Item 1. Consolidated Interim Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 1999 (Unaudited) and September 30, 1998.............. 1
Consolidated Statements of Income for the three months and six
months ended March 31, 1999 and 1998 (Unaudited)............... 2
Consolidated Statements of Changes in Shareholders' Equity
for the six months ended March 31, 1999 and 1998
(Unaudited).................................................... 3
Consolidated Statements of Cash Flows for the six months
ended March 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...................................... 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 23
Item 2. Changes in Securities.......................................... 23
Item 3. Default on Senior Securities................................... 23
Item 4. Submission of Matters to a Vote of Security Holders............ 23
Item 5. Other Information.............................................. 24
Item 6. Exhibits and Reports on Form 8-K............................... 24
Signatures..................................................... 25
CATSKILL FINANCIAL CORPORATION
Consolidated Statements of Financial Condition
(In thousands, except share data)
Assets March 31, 1999 September 30, 1998
------ -------------- ------------------
(Unaudited)
Cash and due from banks $ 2,754 $ 2,795
Securities available for sale, at fair value 159,468 164,983
Investment securities, at amortized cost:
(Estimated fair value of $2,106 at
September 30, 1998) -- 2,060
Stock in Federal Home Loan Bank of NY, at cost 1,986 1,954
Loans receivable, net 143,236 137,785
Corporate owned life insurance 10,123 --
Accrued interest receivable 2,437 2,398
Premises and equipment, net 2,592 2,522
Real estate owned 45 53
Other assets 235 202
--------- ---------
Total Assets $ 322,876 $ 314,752
========= =========
Assets March 31, 1999 September 30, 1998
------ -------------- ------------------
(Unaudited)
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest bearing $ 7,722 $ 6,009
Interest bearing 209,388 203,968
--------- ---------
Total Deposits 217,110 209,977
Short-term borrowings 6,900 6,840
Long-term borrowings 25,000 25,000
Advance payments by borrowers for taxes and
insurance 1,489 673
Accrued interest payable 278 288
Official bank checks 1,472 1,986
Accrued expenses and other liabilities 2,012 2,157
--------- ---------
Total Liabilities $ 254,261 $ 246,921
--------- ---------
Shareholders' Equity
Preferred stock, $.01 par value; authorized
5,000,000 shares -- --
Common stock, $.01 par value; authorized
15,000,000 shares; 5,686,750 shares issued
at March 31, 1999 and September 30, 1998 57 57
Additional paid-in capital 55,022 54,974
Retained earnings, substantially restricted 38,656 37,374
Common stock acquired by ESOP (3,867) (3,981)
Unearned management recognition plan (MRP) (1,202) (1,433)
Treasury stock, at cost (1,326,416 shares at
March 31, 1999 and 1,328,416 shares at
September 30, 1998) (21,191) (21,223)
Accumulated other comprehensive income 1,140 2,063
--------- ---------
Total Shareholders' Equity 68,615 67,831
--------- ---------
Total Liabilities and Shareholders' Equity $ 322,876 $ 314,752
========= =========
See accompanying notes to unaudited consolidated interim financial statements.
CATSKILL FINANCIAL CORPORATION
Consolidated Statements of Income
(In thousands, except share and per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
March 31, March 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Interest and dividend income:
Loans $ 2,778 $ 2,541 $ 5,542 $ 5,099
Securities available for sale
Taxable 1,919 2,420 3,949 4,919
Non-taxable 537 169 1,028 229
Investment securities held to maturity 10 56 43 177
Federal funds sold and other 3 3 4 4
Stock in Federal Home Loan Bank of NY 32 34 67 65
----------- ----------- ----------- -----------
Total interest and dividend income 5,279 5,223 10,633 10,493
Interest expense:
Deposits 2,118 2,188 4,344 4,429
Short-term borrowings 108 144 180 328
Long-term borrowings 322 58 651 58
----------- ----------- ----------- -----------
Total interest expense 2,548 2,390 5,175 4,815
----------- ----------- ----------- -----------
Net interest income 2,731 2,833 5,458 5,678
Provision for loan losses 45 45 90 99
----------- ----------- ----------- -----------
Net interest income after provision for
loan losses 2,686 2,788 5,368 5,579
----------- ----------- ----------- -----------
THREE MONTHS ENDED SIX MONTHS ENDED
March 31, March 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Noninterest income:
Corporate-owned life insurance 120 --- 123 ---
Service fees on deposit accounts 89 66 178 134
Net securities gains --- 33 22 52
Other income 45 34 88 59
----------- ----------- ----------- -----------
Total noninterest income 254 133 411 245
----------- ----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 881 838 1,752 1,678
Advertising and business promotion 36 39 58 89
Net occupancy on premises 98 89 193 171
Federal deposit insurance premiums 6 7 13 14
Postage and supplies 91 82 159 146
Outside data processing fees 146 113 267 224
Equipment 35 43 75 83
Professional fees 82 67 141 104
Real estate operations, net 19 (43) 33 (59)
Other 148 159 316 292
----------- ----------- ----------- -----------
Total noninterest expense 1,542 1,394 3,007 2,742
----------- ----------- ----------- -----------
Income before taxes 1,398 1,527 2,772 3,082
Income tax expense 357 555 750 1,152
----------- ----------- ----------- -----------
Net income $ 1,041 $ 972 $ 2,022 $ 1,930
=========== =========== =========== ===========
Basic earnings per common share $ .27 $ .23 $ .53 $ .46
Diluted earnings per common share $ .27 $ .23 $ .52 $ .45
Weighted Average Common Shares-Basic 3,850,029 4,165,075 3,844,594 4,208,213
Weighted Average Common Shares-Diluted 3,916,756 4,294,100 3,898,120 4,336,377
See accompanying notes to unaudited consolidated interim financial statements.
CATSKILL FINANCIAL CORPORATION
Consolidated Statements of Changes in Shareholders' Equity
(In thousands, except share and per share data) (Unaudited)
Retained Common
Additional Earnings, Stock
Common Paid-in Substantially Acquired by
Stock Capital Restricted ESOP
----- ------- ---------- ----
Balance at September 30, 1998 $ 57 $54,974 $37,374 $(3,981)
Comprehensive income:
Net income 2,022
Other comprehensive income, net of tax:
Unrealized net losses arising during the
period on AFS securities (Pre-tax $1,516)
Reclassification adjustment for gains
realized in net income (pre-tax $22)
Other comprehensive income
Comprehensive income
Allocation of ESOP stock (11,386 shares) 48 114
Dividends paid on common stock ($.185 per share) (733)
Exercise of stock options (2,000 shares issued) (7)
Amortization of unearned MRP compensation
---- ------- ------- --------
Balance at March 31, 1999 $ 57 $55,022 $38,656 $(3,867)
==== ======= ======= ========
Balance at September 30, 1997 $ 57 $54,811 $34,915 $(4,209)
Comprehensive income:
Net income 1,930
Other comprehensive income, net of tax:
Unrealized net gains arising during the
period on AFS securities (Pre-tax $188)
Reclassification adjustment for gains
realized in net income (pre-tax $52)
Other comprehensive income
Comprehensive income
Allocation of ESOP stock (11,363 shares) 89 114
Dividends paid on common stock ($.16 per share) (699)
Purchase of common stock (236,675 shares)
Exercise of stock options
(4,401 shares issued, net) (29)
Amortization of unearned MRP compensation
---- ------- ------- --------
Balance at March 31, 1998 $ 57 $54,900 $36,117 $(4,095)
==== ======= ======= ========
See accompanying notes to unaudited consolidated interim financial statements.
Unearned Accumulated
Management Treasury Other
Recognition Stock, Comprehensive Comprehensive
Plan at Cost Income Income Total
---- ------- ------ ------ -----
Balance at September 30, 1998 $(1,433) $(21,223) $ 2,063 $67,831
Comprehensive income:
Net income $ 2,022 2,022
Other comprehensive income, net of tax:
Unrealized net losses arising during the
period on AFS securities (Pre-tax $1,516) (910)
Reclassification adjustment for gains
realized in net income (pre-tax $22) (13)
-----------
Other comprehensive income (923) (923) (923)
----------
Comprehensive income $ 1,099
==========
Allocation of ESOP stock (11,386 shares) 162
Dividends paid on common stock ($.185 per share) (733)
Exercise of stock options (2,000 shares issued) 32 25
Amortization of unearned MRP compensation 231 231
-------- --------- ------- -------
Balance at March 31, 1999 $(1,202) $(21,191) $ 1,140 $68,615
======== ========= ======= =======
Balance at September 30, 1997 $(1,856) $(12,862) $ 921 $71,777
Comprehensive income:
Net income $ 1,930 1,930
Other comprehensive income, net of tax:
Unrealized net gains arising during the
period on AFS securities (Pre-tax $188 113
Reclassification adjustment for gains
realized in net income (pre-tax $52) (31)
----------
Other comprehensive income 82 82 82
----------
Comprehensive income $ 2,012
=========
Allocation of ESOP stock (11,363 shares) 203
Dividends paid on common stock ($.16 per share) (699)
Purchase of common stock (236,675 shares) (4,242) (4,242)
Exercise of stock options
(4,401 shares issued, net) 67 38
Amortization of unearned MRP compensation 228 228
-------- --------- ------- -------
Balance at March 31, 1998 $(1,628) $(17,037) $ 1,003 $69,317
======== ========= ========== =======
See accompanying notes to unaudited consolidated interim financial statements.
CATSKILL FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(In Thousands)
Six Months Ended
March 31,
1999 1998
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited)
Net Income $ 2,022 $ 1,930
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 103 105
Net accretion on securities (55) (22)
Provision for loan losses 90 99
MRP compensation expense 231 228
ESOP compensation expense 162 203
Increase in cash surrender values on COLI (123) -
Losses (gains) on sale of real estate owned 13 (68)
Write-down on real estate owned 17 -
Gains on sales and calls of securities (22) (52)
Net increase (decrease) in other assets (72) 17
Net decrease in accrued expense and other liabilities (54) (1,963)
------- -------
Net cash provided by operating activities 2,312 477
------- -------
Six Months Ended
March 31,
1999 1998
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity/calls/paydown of investment securities 2,065 5,007
Net increase in loans (5,573) (1,658)
Capital expenditures, net (173) (143)
Purchase of corporate-owned life insurance (10,000) -
Purchase of Federal Home Loan Bank stock (32) (192)
Purchase of AFS securities (25,645) (42,530)
Proceeds from sale of securities available for sale 5,394 12,160
Proceeds from maturity/calls/paydown of AFS securities 24,300 21,110
Proceeds from sale of real estate owned 10 340
------- -------
Net cash used by investing activities (9,654) (5,906)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the exercise of stock options 25 38
Net increase in deposits 7,133 2,903
Net increase in advances from borrowers for
taxes and insurance 816 1,243
Net increase in short-term borrowings 60 1,535
Increase in long-term borrowings - 5,000
Cash dividends on common stock (733) (699)
Purchase of common stock for treasury - (4,242)
------- -------
Net cash provided by financing activities 7,301 5,778
------- -------
Net (decrease) increase in cash and cash equivalents (41) 349
Cash and cash equivalents at beginning of period 2,795 2,274
------- -------
Cash and cash equivalents at end of period $ 2,754 $ 2,623
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 5,185 $ 4,748
Taxes 489 661
Transfer of loans to real estate owned 32 252
Change in net unrealized gain (loss) on AFS securities, net of deferred
tax expense (benefit) of $(615) and $55, respectively (923) 82
See accompanying notes to unaudited consolidated interim financial statements
CATSKILL FINANCIAL CORPORATION
Notes to Unaudited Consolidated
Interim Financial Statements
Note 1. Basis of Presentation
The unaudited consolidated interim financial statements include the
accounts of Catskill Financial Corporation (the "Company") and its wholly
owned subsidiary, Catskill Savings Bank (the "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 1998 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,
1999.
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 and six month
periods ended March 31:
(in thousands, except share and per share data)
Three Months Ended Six Months Ended
March 31 March 31
------------- -------------
1999 1998 1999 1998
------------- ------------- ------------- ------------
Net income $ 1,041 $ 972 $ 2,022 $ 1,930
============= ============= ============= ============
Weighted average common shares 3,850,029 4,165,075 3,844,594 4,208,213
Dilutive effect of potential common shares
related to stock compensation plans 66,727 129,025 53,526 128,124
------------- ------------- ------------- ------------
Weighted average common shares including
potential dilution 3,916,756 4,294,100 3,898,120 4,336,337
============= ============= ============= ============
Basic earnings per share $ .27 $ .23 $ .53 $ .46
Diluted earnings per share $ .27 $ .23 $ .52 $ .45
Note 3. Comprehensive Income
On October 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for the reporting and display
of comprehensive income and its components. Comprehensive income includes
the reported net income of the Company adjusted for items that are
currently accounted for as direct entries to equity, such as the mark to
market adjustment on securities available for sale, foreign currency items
and minimum pension liability adjustments. At the Company, comprehensive
income represents net income plus other comprehensive income, which
consists of the net change in unrealized gains or losses on securities
available for sale for the period. Accumulated other comprehensive income
represents the net unrealized gains or losses on securities available for
sale as of the balance sheet dates. Comprehensive income for the six month
period ended March 31, 1999 and 1998 was $1,099,000 and $2,012,000,
respectively.
Note 4. Impact of New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 131, "Disclosure about
Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS
No. 131 establishes standards for reporting by public companies about
operating segments of their business. SFAS No. 131 also establishes
standards for related disclosures about products and services, geographic
areas and major customers. The Company's operations are solely in the
financial services industry and include traditional banking services. The
Company operates solely in the geographical region of upstate New York.
Management makes operating decisions and assesses performance based on an
ongoing review of its traditional banking operations, which constitute the
Company's only reportable segment under SFAS No. 131. Based on these
factors, no additional disclosures are expected to be required.
In February 1998, FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which amends the disclosure
requirements of SFAS No. 87, "Employers' Accounting for Pensions," SFAS No.
88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits," and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
SFAS No. 132 standardizes the disclosure requirements of SFAS No. 87 and
No. 106 to the extent practicable and recommends a parallel format for
presenting information about pensions and other postretirements benefits.
The Statement does not change any of the measurement or recognition
provisions provided for in SFAS No. 87, No. 88, or No. 106. The Statement
is effective for fiscal years beginning after December 15, 1997. Management
anticipates providing the required disclosures in the September 30, 1999,
consolidated financial statements. This Statement imposes disclosure
requirements only and is not expected to have a material effect on the
financial condition or results of operations of the Company.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Management is currently evaluating the
impact of this Statement on the Company's consolidated financial
statements.
CATSKILL FINANCIAL CORPORATION
FORM 10-Q
March 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") was
formed in December 1995 to acquire all of the common stock of Catskill Savings
Bank (the "Bank") upon its conversion from a mutual savings bank to a stock
savings bank. On April 18, 1996, the Company completed its initial public stock
offering, issuing 5,686,750 shares of $.01 par value common stock at $10.00 per
share. Net proceeds to the Company were $54.9 million after conversion costs,
and $50.4 million excluding the shares acquired by the Company's Employee Stock
Ownership Plan (the "ESOP"), which were purchased with the proceeds of a loan
from the Company.
The consolidated financial condition and operating results of the Company are
primarily dependent upon its wholly owned subsidiary, the Bank, and all
references to the Company prior to April 18, 1996, except where otherwise
indicated, are to the Bank.
The Bank has been and continues to be a community oriented financial institution
offering a variety of financial services. The Bank attracts deposits from the
general public and uses such deposits, together with other funds, to originate
one to four family residential mortgages, and, to a lesser extent, consumer
(including home equity lines of credit), commercial, and multi-family real
estate and other loans in its primary market area. The Bank's primary market
area is comprised of Greene County and southern Albany County in New York, which
are serviced through five banking offices, the most recent having opened in
April 1998. The Bank's deposit accounts are insured by the Bank Insurance Fund
("BIF") of the Federal Deposit Insurance Corporation ("FDIC"), and, as a federal
savings bank, the Bank is subject to regulation by the Office of Thrift
Supervision ("OTS").
The Bank's profitability, like many financial institutions, is dependent to a
large extent upon its net interest income, which is the difference between the
interest it receives on interest earning assets, such as loans and investments,
and the interest it pays on interest bearing liabilities, principally deposits.
Results of operations are also affected by the Bank's provision for loan losses,
non-interest expenses such as salaries and employee benefits, occupancy and
other operating expenses and to a lesser extent, non-interest income such as
service charges on deposit accounts.
Financial institutions in general, including the Company, are significantly
affected by economic conditions, competition and the monetary and fiscal
policies of the federal government. Lending activities are influenced by the
demand for and supply of housing, competition among lenders, interest rate
conditions and funds availability. Deposit balances and cost of funds are
influenced by prevailing market rates on competing investments, customer
preference and the levels of personal income and savings in the Bank's primary
market area.
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 the effect of certain customers and vendors of critical systems or
services failing to adequately address issues relating to becoming Year
2000 compliant;
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.
FINANCIAL CONDITION
Total assets were $322.9 million at March 31, 1999, an increase of $8.1 million,
or 2.6% from the $314.8 million at September 30, 1998. The increase in assets
was primarily in corporate owned life insurance, and to a lesser extent, loans
and was funded principally by increases in deposits and prepayments and
maturities from the Company's security portfolio.
Cash and cash equivalents were $2.8 million at March 31, 1999, unchanged from
September 30, 1998.
Total securities, which include securities held to maturity ("HTM") and
securities available for sale ("AFS"), excluding Federal Home Loan Bank stock,
were $159.5 million, a decrease of $7.5 million, or 4.5% from the $167.0 million
as of September 30, 1998. The decrease in securities was principally in the
Company's mortgage-backed securities ("MBS") portfolio, as the lower interest
rate environment accelerated the rate of prepayments on the Company's existing
MBS portfolio. The Company used most of the proceeds to fund a $10 million
purchase of corporate owned life insurance ("COLI") as a financing vehicle for
pre- and post retirement employee benefits. The COLI's investment returns and
death benefits are not taxable to the Company, and the insurance premiums are
non-deductible. The insurance policy provides that the initial lump sum premium,
after certain deductions, is maintained in a separate account, which minimizes
the Company's exposure to the insurance carrier credit risk and allows the
Company to select both the investment manager and the investment portfolio
strategy.
Loans receivable were $145.3 million as of March 31, 1999, an increase of $5.6
million or 4.0% over the $139.7 million at September 30, 1998. The following
table shows the loan portfolio composition as of the respective balance sheet
dates:
March 31, September 30,
1999 1998
---------------------------------- ----------------------------------
(In thousands) % of Loans (In thousands) % of Loans
Real Estate Loans
One-to-four family $ 117,361 80.7% $ 113,423 81.0%
Multi-family and commercial 7,134 4.9 6,389 4.6
Construction 2,385 1.6 1,182 0.8
------------ ------ ----------- ------
Total real estate loans 126,880 87.2 120,994 86.4
Consumer Loans 17,877 12.3 18,399 13.2
Commercial Loans 686 0.5 602 0.4
----------- ------ ----------- ------
Gross Loans 145,443 100.0% 139,995 100.0%
===== =====
Less: Net deferred loan fees (177) (260)
----------- -----------
Total loans receivable $ 145,266 $ 139,735
========= =========
One-to-four family real estate loans increased $3.9 million, or 3.5%, 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. The increase in multi-family and
commercial real estate loans was principally represented by a loan to finance a
mobile home park in the Company's primary market area. Construction loans are up
due to several commercial projects under development as well as seasonal one to
four family residential construction, with the Company providing both
construction and permanent financing.
Non-performing assets at March 31, 1999 were $797,000, or .25% of total assets,
compared to the $644,000, or .20% of total assets at September 30, 1998. The
table below sets forth the amounts and categories of the Company's
non-performing assets.
March 31, September 30,
1999 1998
(In thousands)
Non-performing loans:
One-to-four family $ 594 $ 520
Multi-family and commercial --- ---
Consumer 158 71
-------- --------
Total non-performing loans 752 591
-------- -------
Foreclosed assets, net:
One-to-four family 45 53
Multi-family and commercial --- ---
-------- -------
Total foreclosed assets, net 45 53
-------- -------
Total non-performing assets $ 797 $ 644
======= ========
Total non-performing loans
as a % of total loans .52% .42%
The increase in non-performing loans at March 31, 1999 as compared to September
30, 1998 was principally due to the death of four borrowers, which caused
payment delays pending the settlement of their estates, offset somewhat by the
foreclosure of one loan which resulted in the Company acquiring title to the
mortgaged property. The net realizable value of the property, totaling $32,000,
was transferred to other real estate, and since the net realizable value
approximated the Company's carrying value, the Company recorded no loss. In
addition, during the six months ended March 31, 1999, the Company sold one
parcel of other real estate which reduced real estate owned by $23,000, and
wrote down another based on existing offers from prospective buyers. The
following table summarizes the activity in other real estate for the periods
presented:
Six Months Ended March 31,
1999 1998
------- --------
(In thousands)
Other real estate beginning of
period $ 53 $ 248
Transfer of loans to other real
estate owned 32 252
Writedown of other real estate (17) ---
Sales of other real estate, net (23) (272)
------- --------
Other real estate end of period $ 45 $ 228
======= ========
The allowance for loan losses was $2.0 million, or 1.40% of period end loans at
March 31, 1999, and provided coverage of non-performing loans of 270.0%,
compared to coverage of 330.0% as of September 30, 1998. The following
summarizes the activity in the allowance for loan losses:
Six Months Ended March 31,
1999 1998
------- --------
(In thousands)
Allowance at beginning of the period $ 1,950 $ 1,889
Charge-offs (36) (89)
Recoveries 26 7
-------- ----------
Net charge-offs (10) (82)
Provision for loan losses 90 99
-------- ---------
Allowance at end of the period $ 2,030 $ 1,906
======= =======
Total deposits were $217.1 million at March 31, 1999, an increase of $7.1
million, or 3.4% from the $210.0 million at September 30, 1998. The following
table shows the deposit composition as of the respective balance sheet dates:
March 31, 1999 September 30, 1998
----------------------------------- ---------------------------------
(In thousands) % of Deposits (In thousands) % of Deposits
Savings $ 81,444 37.5% $ 78,075 37.2%
Money market 6,748 3.1 5,949 2.8
NOW 13,479 6.2 12,396 5.9
Non-interest demand 7,722 3.6 6,009 2.9
Certificates of deposits 107,717 49.6 107,548 51.2
------- ----- ------- -----
$217,110 100.0% $209,977 100.0%
======= ===== ======= =====
The growth in deposits was principally generated by the Company's two newest
offices. In addition, the Company continues its strategy of growing its core
deposits, principally checking related products. Core deposits now represent
over 50% of total deposits, and checking products represent almost 10% of
deposits.
The Company's borrowings, which are principally with the Federal Home Loan Bank
of New York ("FHLB"), were $31.9 million at March 31, 1999, an increase of $.1
million from the $31.8 million at September 30, 1998. As of March 31, 1999, the
Company still has additional available credit of $7.4 million under its
overnight line and $14.3 million under its one month advance program with the
FHLB.
Shareholders' equity at March 31, 1999 was $68.6 million, an increase of $.8
million or 1.2% from the $67.8 million at September 30, 1998. The increase was
principally caused by the Company's $1.3 million of net income retained after
cash dividends offset by a $.9 million decline in the Company's net unrealized
gain (loss) on securities available for sale, net of taxes. The Company also
recorded a $.4 million increase in shareholders' equity due to the amortization
of restricted stock awards, exercise of stock options and the release of shares
under the Company's ESOP.
Shareholders' equity as a percentage of total assets was 21.3% at March 31, 1999
compared to 21.6% at September 30, 1998. Book value per common share was $15.74,
or $16.15 excluding unvested shares of the Company's restricted stock plan
("MRP"), and was $17.76 excluding unallocated ESOP shares and unvested MRP
shares.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31,
1999 AND 1998
General
For the three months ended March 31, 1999, the Company recorded net income of
$1,041,000, an increase of $69,000, or 7.1%, compared to the three month period
ended March 31, 1998. Basic and diluted earnings per share were $.27, an
increase of 17.4% compared to basic and diluted earnings per share of $.23 for
the three months ended March 31, 1998. For the three months ended March 31,
1999, weighted average common shares - basic were 3,850,029, down 315,046, or
7.6%, due to the Company's share repurchase programs.
Annualized return on average assets for the three months ended March 31, 1999
and 1998, was 1.31% and 1.35%, respectively, and return on average equity was
6.23% and 5.57%, respectively.
Net Interest Income
Net interest income on a full tax equivalent basis for the three months ended
March 31, 1999, was $3.0 million, an increase of $83,000, or 2.9%, when compared
to the three months ended March 31, 1998. The increase was principally volume
related as the Company increased its average earning assets $19.2 million, or
6.7%, more than offsetting the increase in interest expense from the Company's
funding of its stock repurchase and corporate owned life insurance ("COLI")
purchases. The Company funded the share repurchases and COLI, along with its
growth in earning assets, principally with borrowings and, to a lesser extent,
deposit growth.
Interest income for the three months ended March 31, 1999 was $5.5 million on a
tax equivalent basis, an increase of $241,000, or 4.5%, over the comparable
period last year. The $19.2 million increase in the average volume of earning
assets had a positive effect on interest income as the Company sought to
leverage its excess capital, offset somewhat by a 15 basis point drop in the
yield on its average earning assets.
Average earning assets increased principally in the loan portfolio, which on
average grew $18.1 million, or 14.2%. 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 were
originated at rates below the average portfolio yield. In addition, the Company,
due to lower market interest rates, 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 35 basis points to 7.66%.
Average mortgage backed securities ("MBS") were $76.0 million for the three
months ended March 31, 1999, down $13.2 million, or 14.8% from the comparable
period. The average yield on MBS was 6.39%, down 47 basis points from the
comparable period, as the Company has been purchasing one year Treasury indexed
teaser rate adjustable rate mortgages ("ARM's") to balance its portfolio mix
since most loan originations have been at fixed rates. Consequently, 28.2% of
the average MBS portfolio represented teaser rate ARM's compared to only 15.8%
in the comparable period. The teaser ARM's were purchased during the initial
teaser rate period; therefore, the initial interest rate and yields will be less
than the fully indexed rate and yield. 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 other securities increased $14.4 million, or 20.9%, as the Company
purchased longer call protected bank qualified municipals and non-callable
corporate securities to increase yields and reduce reinvestment risk if rates
decline. The average yield on the other securities portfolio for the three
months ended March 31, 1999, was 7.43%, an increase of 31 basis points from the
comparable period, as the Company replaced securities called and/or matured with
higher yielding municipals. Municipal securities represented 46.6% of average
other securities during the three month period ended March 31, 1999, compared to
less than 14.3% in the comparable period.
Interest expense for the three months ended March 31, 1999, was $2.5 million, an
increase of $158,000, or 6.6%. The change was principally due to an increase in
the average volume of interest bearing liabilities offset somewhat by a decrease
in the Company's cost of funds. Average interest bearing liabilities were $243.4
million, an increase of $29.4 million, or 13.7%, as the Company borrowed in
order to fund the Company's stock repurchases, its COLI purchase and earning
asset growth. Average long-term borrowings were up $20.4 million, as the Company
funded its stock repurchases and earning asset growth, as well as converted a
portion of its short-term borrowings to long-term borrowings, principally
through convertible (callable) advances. Average short-term borrowings were $8.9
million for the three months ended March 31, 1999, down $1.2 million from the
comparable three month period due to the change to long-term borrowings. In
addition, the Company's average certificates of deposit ("CD's") increased $6.0
million, or 5.9%, as the Company in fiscal 1998 promoted a 15 month CD program
at a premium rate due to competitive pressures. The cost of funds decreased 38
basis points to 4.15% as the Company has generally lowered its deposit rates,
and benefitted from a reduction in the rate on short-term borrowings after the
Fed's Open Market Committee reduced the overnight bank rate 75 basis points.
The Company's net yield on average earning assets was 3.99% for the three months
ended March 31, 1999, down 15 basis points compared to 4.14% for the comparable
period of the prior year. The decrease was principally caused by the Company's
stock repurchase program, which reduced the level of no-cost funding sources,
and increased the amount of average earning assets funded by interest bearing
liabilities, and the funding of the COLI purchase which increased interest
expense without a corresponding increase in interest income. For the three
months ended March 31, 1999, the Company had $60.8 million of average earning
assets with no funding costs, a decrease of $10.2 million, or 14.5%, from the
$71.0 million for the three months ended March 31, 1998.
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 $45,000, or .13% of average loans for the
three months ended March 31, 1999, the same as the comparable quarter, which
represented .14% of average loans. The Company had net recoveries of $1,000 for
the quarter ended March 31, 1999, as compared to net chargeoffs of $29,000, or
.09% of average loans in the comparable period. Non-performing loans were
$752,000 at March 31, 1999, or .52% of total loans, an increase of $110,000 from
March 31,
1998, when they were .50% of total loans. At March 31, 1999, the allowance for
loan losses was $2,030,000, or 1.40% of period end loans, and provided coverage
of non-performing loans of 270.0% compared to 1.49% and 296.9%, respectively, as
of March 31, 1998.
Non-Interest Income
Non-interest income was $254,000 for the three months ended March 31, 1999, an
increase of $121,000 or 91.0% from the three months ended March 31, 1998. The
increase was principally due to the investment performance on the Company's
corporate owned life insurance which increased its cash surrender value by
$120,000. In addition, service fees on deposit accounts increased $23,000, or
34.8%, as the Company continues to promote checking related products to increase
core deposits and diversify its revenues.
Non-Interest Expense
Non-interest expense for the three months ended March 31, 1999 was $1,542,000,
an increase of $148,000, or 10.6%, over the comparable period last year. The
increase was principally the cost attributable to our new supermarket branch,
which opened in April 1998, as well as higher real estate operations net, other
professional fees, and a contract termination charge to switch ATM service
providers.
Salaries and employee benefits were up $43,000, principally from staffing the
supermarket branch which opened in April 1998, as well as the cost associated
with an Executive Supplemental Retirement Plan implemented in the third quarter
of fiscal 1998. Real estate operations net, increased $62,000, as the Company
had writedowns on real estate in the 1999 quarter compared to gains on sales in
the comparable quarter. Other professional fees were $82,000, an increase of
$15,000 as the Company incurred higher costs due to higher tax research,
actuarial and investment advisory services. The Company also recorded a contract
termination charge of $29,000 during the quarter to switch ATM service
providers. Management expects the change to improve customer service, reduce
operating costs, and increase service fee income by implementing surcharging on
non-customer ATM transactions.
Income Tax Expense
Income tax expense for the three months ended March 31, 1999, was $357,000, a
decrease of $198,000, or 35.7%, from the comparable period last year. The
Company's effective tax rates for the three months ended March 31, 1999 and
1998, were 25.54% and 36.35%, 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 cash surrender value of the COLI.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED MARCH 31, 1999
AND 1998
General
For the six months ended March 31, 1999, the Company recorded net income of
$2,022,000, an increase of $92,000, or 4.8%, compared to the six month period
ended March 31, 1998. Diluted earnings per share were $.52, an increase of 15.6%
compared to diluted earnings per share of $.45 for the six months ended March
31, 1998. Basic earnings per share were $.53 for the six month period, an
increase of 15.2% compared to $.46 for the comparable six month period. For the
six months ended March 31, 1999, weighted average common shares - basic were
3,844,594, down 363,619, or 8.6%, due to the Company's share repurchase
programs.
Annualized return on average assets for the six months ended March 31, 1999 and
1998, was 1.27% and 1.33%, respectively, and return on average equity was 6.01%
and 5.44%, respectively.
Net Interest Income
Net interest income for the six months ended March 31, 1999, was $6.0 million on
a full tax equivalent basis, an increase of $181,000, or 3.1%, when compared to
the six months ended March 31, 1998. The increase was principally volume related
as the Company increased its average earning assets $21.6 million, or 7.6%, more
than offsetting the increase in interest expense from the borrowings used to
fund its share repurchases and corporate owned life insurance ("COLI"). The
Company funded the share repurchases, the COLI purchase and its earning asset
growth, principally with borrowings and, to a lesser extent, deposit growth.
Interest income for the six months ended March 31, 1999 was $11.1 million on a
tax equivalent basis, an increase of $541,000, or 5.1%, over the comparable
period. The $21.6 million, or 7.6%, increase in the average volume of earning
assets had a positive effect on interest income as the Company sought to
leverage its excess capital, offset somewhat by a 17 basis point drop in the
yield on its average earning assets.
Average earning assets increased principally in the loan and securities
portfolios, which on average grew 13.1% and 3.2%, 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 were originated at rates below the average portfolio yield. In
addition, the Company, due to lower market interest rates, 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 31 basis
points to 7.74%.
Average MBS were $80.7 million for the six months ended March 31, 1999, down
$7.1 million, or 8.0%, from the comparable period. The average yield on MBS was
6.35%, down 59 basis points from the comparable period, as the Company has been
purchasing one year Treasury indexed teaser rate ARM's as previously described
in the three month comparison. Consequently, 29.1% of the average MBS portfolio
represented teaser rate ARM's compared to only 10.1% in the comparable period.
Average other securities increased $12.1 million, or 17.5%, as the Company
purchased longer call protected bank qualified municipals and non-callable
corporate securities to increase yields and reduce reinvestment risk if rates
decline. The average yield on the other securities portfolio for the six months
ended March 31, 1999, was 7.43%, an increase of 37 basis points from the
comparable period, as the Company replaced securities called or matured with
higher yielding municipals. Municipal securities now represent 45.9% of average
other securities, compared to less than 7.8% in the comparable period.
Interest expense for the six months ended March 31, 1999, was $5.2 million, an
increase of $360,000, or 7.5%. The change was principally due to an increase in
the average volume of interest bearing liabilities offset somewhat by a decrease
in the Company's cost of funds. Average interest bearing liabilities were $240.4
million, an increase of $28.2 million, or 13.3%, as the Company borrowed in
order to fund the Company's stock repurchases, its COLI purchase and earning
asset growth. Average long-term borrowings were up $22.7 million, as the Company
funded its stock repurchases and its earning asset growth, as well as converted
a portion of its short-term borrowings to long-term borrowings, principally
through convertible (callable) advances. Average short-term borrowings were $7.2
million for the six months ended March 31, 1999, down $4.2 million from the
comparable six month period due to the change to long-term borrowings. In
addition, the Company's average CD's increased $7.0 million, or 7.0%, as the
Company in fiscal 1998 promoted a special 15 month CD program at a premium rate
due to competitive pressures. The cost of funds decreased 23 basis points to
4.32% as the Company has generally lowered its deposit rates.
The Company's net yield on average earning assets was 3.91% for the six months
ended March 31, 1999, down 17 basis points compared to 4.08% for the comparable
period of the prior year. The decrease was principally caused by the Company's
stock repurchase program, and the funding of the COLI purchase. For the six
months ended March 31, 1999, the Company had $64.9 million of average earning
assets with no funding costs, a decrease of $6.5 million, or 9.2%, from the
$71.4 million for the six months ended March 31, 1998.
For more information on average balances, interest, yield and rate, please refer
to Table #2, included in this report.
Provision for Loan Losses
The provision for loan losses was $90,000, or .13% of average loans for the six
months ended March 31, 1999, down from $99,000, or .16% of average loans in the
comparable period of the prior year. The decrease is principally attributable to
a reduction in net charge-offs to $10,000, or .01% of average loans for the six
months ended March 31, 1999, as compared to $82,000, or .13% of average loans in
the comparable period. Despite the decrease in net charge-offs, the Company's
provisions have remained relatively constant due to the 13.4% growth in average
loans outstanding. Nonperforming loans were $752,000 at March 31, 1999, or .52%
of total loans, an increase of $110,000 from March 31, 1998, when they were .50%
of total loans. At March 31, 1999, the allowance for loan losses was $2,030,000,
or 1.40% of period end loans, and provided coverage of non-performing loans of
270.0% compared to 1.49% and 296.9%, respectively, as of March 31, 1998.
Non-Interest Income
Non-interest income was $411,000 for the six months ended March 31, 1999, an
increase of $166,000, or 67.8% from the six months ended March 31, 1998. The
increase was principally due to the investment performance on the Company's
corporate owned life insurance which increased its cash surrender value by
$123,000. In addition, service fees on deposit accounts increased $44,000, or
32.8%, as the Company continues to promote checking related products to increase
core deposits and diversify its revenues.
Non-Interest Expense
Non-interest expense for the six months ended March 31, 1999 was $3,007,000, an
increase of $265,000, or 9.7%, over the comparable period last year. The
increase was principally the cost attributable to our new supermarket branch,
which opened in April 1998, as well as higher real estate operations net, other
professional fees, and a contract termination charge to switch ATM service
providers.
Salaries and employee benefits were up $74,000, principally from staffing the
supermarket branch which opened in April 1998, as well as the cost associated
with an Executive Supplemental Retirement Plan implemented in the third quarter
of fiscal 1998. Real estate operations net, increased $92,000, as the Company
had losses due to sales and write-downs of other real estate during the six
months ended March 31, 1999, compared to gains on sales in the comparable
period. Other professional fees were $141,000, an increase of $37,000 as the
Company incurred higher costs due to tax research, actuarial and investment
advisory services. The Company also recorded a contract termination charge of
$29,000 during the period to switch ATM service providers. Management expects
the change to improve customer service, reduce operating costs, and increase
service fee income by implementing surcharging on non-customer ATM transactions.
Income Tax Expense
Income tax expense for the six months ended March 31, 1999, was $750,000, a
decrease of $402,000, or 34.9%, from the comparable period last year. The
Company's effective tax rates for the six months ended March 31, 1999 and 1998,
were 27.06% and 37.38%, 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 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 is seeking to
reduce 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.
Net cash provided by operating activities was $2.3 million for the six months
ended March 31, 1999, an increase of $1.8 million from the comparable six month
period. The increase was principally the change in accrued expenses and other
liabilities caused by a decrease in official bank checks outstanding in the
prior year. 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 1998 than in September 1997.
Investing activities used $9.7 million in the six months ended March 31, 1999,
as the Company increased its assets principally from the $10.0 million purchase
of COLI, and $5.6 million in loans, offset somewhat by a $6.1 million reduction
in the Company's securities portfolio. Financing activities provided $7.3
million, as the Company experienced a $7.1 million increase in deposits, and a
$.8 million increase in advances by borrowers for taxes, somewhat offset by the
payment of cash dividends of $.7 million on its common stock. 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 $217.1 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 March 31, 1999, deposit accounts having balances in excess
of $100,000 totaled $23.2 million, or 10.7%, 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% and for the month of March 1999, the Bank exceeded that, maintaining an
average liquidity ratio of 49.48%.
The Company anticipates that it will have sufficient funds to meet its current
commitments. At March 31, 1999, the Company had commitments to originate loans
of $3.7 million. In addition, the Company had undrawn commitments of $3.3
million on home equity and other lines of credit. Certificates of deposits which
are scheduled to mature in one year or less at March 31, 1999, totaled $74.9
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 March 31, 1999,
compared to the OTS minimum capital requirements:
Actual Minimum
Amount % Amount %
------ --- ------ ---
(Dollars in Thousands)
Tangible Capital $57,495 18.06% $ 4,776 1.5%
Core Capital 57,495 18.06 12,735 4.0
Risk Based Capital 59,416 38.70 12,283 8.0
On April 18, 1999, the Company is no longer subject to stock repurchase
restrictions of the OTS. The Company expects, subject to market conditions, to
continue to use stock repurchase programs as part of its capital management
strategies. At March 31, 1999, the Holding Company had
approximately $5.7 million in available resources to pursue stock repurchases.
Furthermore, the Bank could pay $22.8 million of dividends to the Holding
Company after notifying the OTS in writing. However, the Company has made no
commitments to use a specific amount to repurchase stock and there is no
guaranty that the Company will actually repurchase any of its stock.
Year 2000 Readiness Disclosure
The Year 2000 ("Y2K") issue confronting the Company and its suppliers,
customers, customers' suppliers and competitors centers on the inability of
computer systems to recognize the year 2000. Many existing computer programs and
systems originally were programmed with six digit dates that provided only two
digits to identify the calendar year in the date field. With the impending new
millennium, these programs and computers will recognize "00" as the year 1900
rather than the year 2000.
Substantially, all of the Company's mission critical systems are outsourced or
are purchased software packages. As a result, much of the remediation and
testing process is dependent on the accuracy of work performed by, and the Year
2000 compliance of software, hardware and equipment provided by, vendors.
The Company's total Y2K project cost is estimated to be $100,000, of which
$50,000 is expected to be hardware and software upgrades. So far, the Company
has expensed $30,000 of the project cost, and expects to amortize the hardware
and software upgrades over their estimated useful lives of three to five years.
The Company's progress on its Year 2000 readiness is continuing as scheduled.
During the quarter, the Company completed the testing of all of its mission
critical systems, and processed transactions with dates up through and including
March 1, 2000. The results of the Company's tests, as well as other customers of
the Company's data processing service provider, disclosed no Year 2000 issues.
Dates remaining to be tested are year-end 2000, as well as three dates within
year 2001.
The Company expects its mission critical systems to be compliant by June 1999,
and all others by September 1999.
The Company expects that when the century changes, disruption in service will
come not from a failure of its systems or the systems of the providers with whom
it interfaces, but rather from outside agencies (i.e. electric and telephone
companies) beyond its control. Therefore, contingency planning and business
resumption planning will be based on the Company's formal Disaster Recovery
Program, which includes using such things as spreadsheet software or reverting
to manual systems until problems can be corrected.
The Company has written a Disaster Recovery and Year 2000 Contingency Plan, and
management expects to test the plan before June 30, 1999. The Company is also
undertaking various customer awareness programs, such as posted statements,
mailing of FDIC brochures and publishing information on its website.
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, 1998. 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 reflected
principally on municipal securities totaled $260,000 and $75,000 for the three
month periods ended March 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. Mortgage backed securities are primarily classified as available for
sale. Securities available for sale are shown at amortized cost.
THREE MONTH PERIODS ENDED
March 31, 1999 March 31, 1998
------------------------------ ----------------------------
Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-Earning Assets
Loans receivable, net $145,027 $ 2,778 7.66% $126,961 $ 2,542 8.01%
Mortgage-backed securities 76,017 1,215 6.39% 89,256 1,530 6.86%
Securities 83,069 1,543 7.43% 68,710 1,223 7.12%
Federal funds sold and other 96 3 12.67% 129 3 9.43%
------- -------- -------- -------
Total interest-earning assets 304,209 5,539 7.28% 285,056 5,298 7.43%
------- -------- -------- -------
Allowance for loan losses (1,995) (1,900)
Other assets, net 19,852 9,621
------- --------
Total Assets $322,066 $292,777
Interest-Bearing Liabilities
Savings deposits $ 79,863 $585 2.97% $ 78,657 $644 3.32%
Money market 6,192 46 3.01% 6,412 51 3.23%
Now deposits 13,812 66 1.94% 11,043 66 2.42%
Certificates of deposit 107,680 1,406 5.30% 101,637 1,417 5.65%
Short-term borrowings 8,888 108 4.93% 10,065 144 5.80%
Long-term borrowings 25,000 322 5.22% 4,624 59 5.17%
Escrow and other 1,996 15 3.05% 1,587 9 2.30%
------- -------- -------- -------
Total interest-bearing
liabilities 243,431 2,548 4.15% 214,025 2,390 4.53%
------- -------- -------- -------
Non-interest bearing 7,247 4,886
Other liabilities 3,611 3,114
Shareholders' equity 67,777 70,752
------- --------
Total Equity and Liabilities $322,066 $292,777
======== ========
Net interest income $2,991 $2,908
======== ========
Net interest rate spread 3.13% 2.90%
======== ========
Net yield on average
interest-earning assets 3.99% 4.14%
======== ========
Average interest earning
assets to average interest
bearing liabilities 124.97% 133.19%
======= =======
Earning Assets/Total Assets 94.46% 97.36%
======= =======
TABLE #2 AVERAGE BALANCES, INTEREST, YIELD AND RATE
The following table presents, for the periods indicated, the total dollar amount
of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. Tax equivalent adjustments reflected
principally on municipal securities totaled $495,000 and $94,000 for the six
month periods ended March 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. Mortgage backed securities are primarily classified as available for
sale. Securities available for sale are shown at amortized cost.
SIX MONTH PERIODS ENDED
March 31, 1999 March 31, 1998
---------------------------------------- ------------------------------------------
Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-Earning Assets
Loans receivable, net $143,273 $ 5,542 7.74% $126,692 $ 5,099 8.05%
Mortgage-backed securities 80,673 2,563 6.35% 87,723 3,044 6.94%
Securities 81,245 3,019 7.43% 69,143 2,440 7.06%
Federal funds sold and other 78 4 10.26% 86 4 9.33%
-------- -------- -------- ---------
Total interest-earning assets 305,269 11,128 7.29% 283,644 10,587 7.46%
-------- ---------
Allowance for loan losses (1,980) (1,888)
Other assets, net 15,024 9,195
-------- --------
Total Assets $318,313 $290,951
======== ========
Interest-Bearing Liabilities
Savings deposits $ 78,831 $1,192 3.03% $ 78,446 $1,326 3.39%
Money market 6,145 91 2.97% 6,669 106 3.19%
Now deposits 13,457 131 1.95% 11,015 135 2.46%
Certificates of deposit 107,798 2,904 5.40% 100,789 2,841 5.65%
Short-term borrowings 7,194 180 5.02% 11,384 328 5.78%
Long-term borrowings 25,000 651 5.22% 2,312 59 5.12%
Escrow and other 1,938 26 2.69% 1,579 20 2.54%
-------- -------- -------- --------
Total interest-bearing
liabilities 240,363 5,175 4.32% 212,194 4,815 4.55%
------- ------
Non-interest bearing 6,888 4,731
Other liabilities 3,584 2,932
Shareholders' equity 67,478 71,094
------- --------
Total Equity and Liabilities $318,313 $290,951
======== ========
Net interest income $5,953 $5,772
====== ======
Net interest rate spread 2.97% 2.91%
==== ====
Net yield on average
interest-earning assets 3.91% 4.08%
==== ====
Average interest earning
assets to average interest
bearing liabilities 127.00% 133.67%
====== ======
Earning Assets/Total Assets 95.90% 97.49%
===== =====
CATSKILL FINANCIAL CORPORATION
FORM 10-Q
MARCH 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. Change in Securities
None
Item 3. Defaults on Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders held on February 16, 1999, there were
3,838,222 voting shares present in person or by proxy, which represented 90.37%
of the Company's outstanding shares eligible to vote of 4,247,088. Votes were
taken on the following shareholder proposals:
Proposal #1 "Election of one director to serve for a two year term and
until his successor has been duly elected and qualified."
Votes
For Withheld
Edward P. Stiefel 3,809,892 28,330
"Election of two directors to serve for three year terms
and until their successors have been duly elected and
qualified."
Votes
For Withheld
Wilbur J. Cross 3,808,766 29,456
Allan D. Oren 3,789,221 49,001
The Board of Directors of the Company currently consists of six
members. In addition to the directors named above, continuing directors
are George P. Jones, Richard A. Marshall, and Hugh J. Quigley.
Proposal #2 "Approval of an amendment to the Catskill Financial
Corporation 1996 Stock Option and Incentive Plan to
provide that awards under the Plan shall fully vest in
the event of a change in control of the Company or
Catskill Savings Bank."
Votes Votes
For Against Abstain Non-Vote
--- ------- ------- --------
3,464,441 252,130 28,341 93,310
Proposal #3 "Approval of an amendment to the Catskill Financial
Management Recognition Plan to provide that awards under the
Plan shall fully vest in the event of a change in control of
the Company or Catskill Savings Bank."
Votes Votes
For Against Abstain Non-Vote
--- ------- ------- --------
3,464,144 256,758 24,010 93,310
Proposal #4 "Ratification of the appointment of KPMG LLP as auditors
for the Company for the fiscal year ending September 30,
1999."
Votes Votes
For Against Abstain
--- ------- -------
3,811,347 19,490 7,385
There were no broker non-votes for either proposal #1 or proposal #4.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10.1) Employment agreement dated February 1, 1999, by and between
Catskill Savings Bank and Deborah S. Henderson.
(11) Computation of Net Income per Common Share
(27) Financial Data Schedule (included only in EDGAR filing)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CATSKILL FINANCIAL CORPORATION
Date: May 13, 1999 /s/ Wilbur J. Cross
--------------------------------
Wilbur J. Cross
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 1999 /s/ David J. DeLuca
--------------------------------
David J. DeLuca
Chief Financial Officer
(Principal Financial and
Accounting Officer)