SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 June 30, 1998
[ ] 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 333-43697
Adirondack Financial Services Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware 14-1801465
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
52 North Main Street, Gloversville, NY 12078
(Address of principal executive offices)
(518) 725-6331
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
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 NA No
---- ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each issuers classes of common equity,
as of the latest practicable date.
Class Outstanding as of August 13, 1998
Common Stock, $.01 par value 661,250 shares
TABLE OF CONTENTS
Number Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition 1
June 30, 1998 (unaudited) and September 30, 1997
Consolidated Statements of Income (unaudited) 2
Three Months Ended June 30, 1998 and 1997
Consolidated Statements of Income (unaudited) 3
Nine Months Ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows (unaudited) 4
Nine Months Ended June 30, 1998 and 1997
Notes to Consolidated Financial Information 5
Item 2. Management's Discussion and Analysis 6 - 9
Part II. Other Information 10
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits 12
Exhibit 1 - Financial Data Schedule
Signatures 11
Adirondack Financial Services Bancorp, Inc.
Consolidated Statements of Financial Condition
June 30, September 30,
1998 1997
------------- -------------
(unaudited)
Assets
Cash and due from banks $ 2,199,237 $ 1,922,386
Interest bearing time deposits 4,210,300 -
----------- -----------
Total cash and cash equivalents 6,409,537 1,922,386
Securities available for sale 7,787,503 7,017,111
Net loans receivable 49,698,399 49,526,290
Accrued interest receivable 275,893 322,122
Other real estate owned 146,525 312,892
Net premises and equipment 1,350,776 1,538,364
Prepaid expenses and other assets 359,821 382,642
----------- -----------
Total Assets $66,028,454 $61,021,807
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Demand and N.O.W. account $ 5,876,344 $ 5,147,684
Savings and money market accounts 23,022,379 22,954,408
Time deposit accounts 25,858,206 28,014,594
----------- -----------
Total deposits 54,756,929 56,116,686
Borrowings 2,000,000 1,300,000
Accrued expenses and other liabilities 347,389 325,152
----------- -----------
Total liabilities 57,104,318 57,741,838
----------- -----------
Shareholders' equity:
Preferred Stock, $.01 par value, 500,000
shares authorized, none outstanding
Common Stock, $.01 par value, 5,000,000
shares authorized, 661,250 outstanding
at June 30, 1998 and none at September 30,
1997 6,613 -
Additional Paid-In Capital 6,011,842 -
Retained earnings, substantially restricted 3,431,475 3,301,370
Unearned ESOP shares (529,000) -
Investment valuation allowance 3,206 (21,401)
----------- -----------
Total shareholders' equity 8,924,136 3,279,969
----------- -----------
Total liabilities and shareholders' equity $66,028,454 $61,021,807
=========== ===========
The accompanying notes are an integral part of these unaudited consolidated
interim financial statements.
Adirondack Financial Services Bancorp, Inc.
Consolidated Statements of Operations (Unaudited)
Three Months Ended
----------------------------------
June 30, 1998 June 30, 1997
------------- -------------
Interest and dividend income:
Interest and fees on loans $1,082,624 $1,097,156
Securities available for sale 117,465 112,260
Interest-bearing deposits 91,297 22,649
---------- ----------
Total interest and dividend income 1,291,386 1,232,065
---------- ----------
Interst expense:
N.O.W. accounts 30,111 16,070
Savings and money market accounts 213,301 216,692
Time deposit accounts 353,356 378,113
Borrowings 28,946 645
---------- ----------
Total interest expense 625,714 611,520
---------- ----------
Net interest income 665,672 620,545
Provision for loan losses 15,000 198,067
---------- ----------
Net interest income after provision for
loan losses 650,672 422,478
---------- ----------
Other income:
Fees and service charges 40,122 31,952
Other 667 953
---------- ----------
Total other income 40,789 32,905
---------- ----------
Operating expenses:
Compensation and employee benefits 232,771 223,587
Occupancy expense 53,269 53,784
Federal deposit insurance premiums 12,355 10,129
Advertising expenses 23,854 29,754
Directors' fees and expenses 20,715 22,599
Equipment and data processing expenses 74,701 80,513
Other real estate owned expenses 8,059 10,227
Other operating expenses 142,824 122,844
---------- ----------
Total operating expenses 568,548 553,437
---------- ----------
Income (loss) before income tax expense 122,913 (98,054)
Income tax expense 49,550 13,150
---------- ----------
Net income (loss) $ 73,363 $ (111,204)
========== ==========
Basic and diluted earnings per
common share $0.11 N/A
The accompanying notes are an integral part of these unaudited consolidated
interim financial statements.
Adirondack Financial Services Bancorp, Inc.
Consolidated Statements of Operations (Unaudited)
For Nine Months Ended
----------------------------------
June 30, 1998 June 30, 1997
------------- -------------
Interest and dividend income:
Interest and fees on loans $3,233,779 $3,332,955
Securities available for sale 329,873 348,389
Interest-bearing deposits 135,400 32,784
---------- ----------
Total interest and dividend income 3,699,052 3,714,128
---------- ----------
Interst expense:
N.O.W. accounts 79,610 48,692
Savings and money market accounts 644,857 626,789
Time deposit accounts 1,083,915 1,137,795
Borrowings 96,194 11,531
---------- ----------
Total interest expense 1,904,576 1,824,807
---------- ----------
Net interest income 1,794,476 1,889,321
Provision for loan losses 45,000 594,199
---------- ----------
Net interest income after provision for
loan losses 1,749,476 1,295,122
---------- ----------
Other income:
Fees and service charges 114,232 97,303
Other 14,800 13,991
---------- ----------
Total other income 129,032 111,294
---------- ----------
Operating expenses:
Compensation and employee benefits 697,549 665,696
Occupancy expense 162,105 170,206
Federal deposit insurance premiums 38,605 43,291
Advertising expenses 71,700 88,252
Directors' fees and expenses 65,012 75,283
Equipment and data processing expenses 225,518 239,596
Other real estate owned expenses 24,416 24,414
Other operating expenses 375,948 403,347
---------- ----------
Total operating expenses 1,660,853 1,710,085
---------- ----------
Income (loss) before income tax expense 217,655 (303,669)
Income tax expense 87,550 42,225
---------- ----------
Net income (loss) $ 130,105 $ (345,894)
========== ==========
Basic and diluted earnings per
common share $0.11 N/A
The accompanying notes are an integral part of these unaudited consolidated
interim financial statements.
Adirondack Financial Services Bancorp, Inc.
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended June 30,
-------------------------------
1998 1997
--------------- ---------------
Cash flows from operating activities:
Net income (loss) $ 130,105 $ (345,894)
Adjustments to reconcile net income (loss)
to net cash provided by (used by) operating activities
Depreciation expense 218,885 222,952
Provision for loan losses 45,000 549,199
Deferred tax expense - 108,000
Net gain on sale of other real estate owned (25,671) (38,881)
Gain on security called (2,036) -
Decrease (increase) in accrued interest receivable 46,229 (23,028)
Decrease (increase) in prepaid expenses and other assets 6,963 (32,073)
Increase (decrease) in accrued expenses
and other liabilities 22,237 (891,433)
--------------- ---------------
Net cash provided by (used by) operating
activities 441,712 (451,158)
--------------- ---------------
Cash flows from investing activities:
Proceeds from principal repayment of securities
available for sale 798,502 377,614
Proceeds from call of security available for sale 1,000,000 -
Purchase of securities available for sale (2,526,393) -
Net increase in loans receivable (423,084) (1,321,606)
Proceeds from sale of other real estate owned 398,013 273,397
Capital expenditures (31,297) (30,090)
--------------- ---------------
Net cash used by investing activities (784,259) (700,685)
--------------- ---------------
Cash flows from financing activities:
Net proceeds from stock offering 6,018,455 -
Employee Stock Ownership Plan stock purchases (529,000)
Net (decrease) increase in deposits (1,359,757) 2,554,894
Net increase (decrease) in borrowings 700,000 (300,000)
--------------- ---------------
Net cash provided by financing activities 4,829,698 2,254,894
--------------- ---------------
Net increase in cash and cash equivalents 4,487,151 1,103,051
Cash and cash equivalents at beginning of period 1,922,386 1,198,081
--------------- ---------------
Cash and cash equivalents at end of period $ 6,409,537 $ 2,301,132
=============== ===============
Cash paid during the period for:
Interest $ 1,808,381 $ 1,813,277
Taxes $ - 34,000
The accompanying notes are an integral part of these unaudited consolidated
interim financial statements.
Adirondack Financial Services Bancorp, Inc.
Notes to Consolidated Financial Information
June 30, 1998
Note 1 - Basis of presentation:
Adirondack Financial Services Bancorp, Inc. (the "Holding Company") was
incorporated under Delaware law in December 1997 as a holding company to
purchase 100% of the common stock of Gloversville Federal Savings and Loan
Association (the "Association"). The Association converted from a mutual form
to a stock institution in April 1996, and the Holding Company completed its
initial public offering on April 6, 1998, at which time the Holding Company
purchased all of the outstanding stock of the Association. To date, the
principal operations of Adirondack Financial Services Bancorp, Inc. and
subsidiary (the "Company") have been those of the Association.
The unaudited consolidated interim financial statements include the accounts of
Holding Company and the Association. All intercompany accounts and transactions
have been eliminated in consolidation. The financial information has been
prepared in accordance with the Summary of Significant Accounting Policies as
outlined in the Association's audited consolidated financial statements as of
and for the year ended September 30, 1997, and in the opinion of management,
contains all adjustments necessary to present fairly, in all material respects,
the financial position as of June 30, 1998 and September 30, 1997, and its
results of operations for the three and nine periods ended June 30, 1998 and
1997 and cash flows for the nine month periods ended June 30, 1998 and 1997. All
adjustments made to the unaudited interim financial information were of a
recurring nature. 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, 1998.
Note 2 - Earnings Per Share
On June 30, 1998, the Company adopted the provisions of Statement of Financial
Accounting Standard ("SFAS") No. 128, "Earnings per Share", which establishes
standards for computing and presenting earnings per share. SFAS No. 128
supersedes Accounting Principles Board Opinion No. 15, "Earnings per Share" and
related interpretations. SFAS No. 128 requires dual presentation of basic and
diluted earnings per share on the face of the income statement for all entities
with a complex capital structure and specifies additional disclosure
requirements. 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. Diluted earnings per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock that then shared in the earnings of the entity, such as
restricted stock and stock options. 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.
Earnings per share are compiled on estimated earnings from the date of
conversion, Apirl 6, 1998, through June 30, 1998, and are based on the weighted
average number of shares outstanding during this period, less unallocated
employee stock ownership plan shares. Earnings per share are not presented for
periods prior to the intial stock offering as the Association was a mutual
savings and loan at the time and no stock was outstanding. For the three month
and nine month periods ended June 30, 1998, the weighted average number of
shares outstanding was 608,350. There were no restricted stock plans or stock
options that would have had a dilutive effect on the earnings per share
calculation for the three and nine month periods ended June 30, 1998. The basic
and diluted earnings per common share was $.11 for the three months and nine
months ended June 30, 1998, based on post conversion net income of $68,525 for
the three months ended June 30, 1998 and $121,527 for the nine months ended June
30, 1998.
Note 3 - Impact of New Accounting Standards
In February 1998, the Financial Accounting Standards Board (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 practical and recommends a parallel format for
presenting information about pensions and other postretirement benefits. This
Statement is applicable to all entities and addresses disclosure only. 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.
In June, 1998, the 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.
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
JUNE 30, 1998
When used in this document, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project," or
similar expressions are intended to identify "forward looking statements." Such
statements are subject to certain risks and uncertainties-including, changes in
economic conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area, and competition that could cause actual results to differ
materially from historical results and those presently anticipated or projected.
The Company wishes to caution the reader not to place undue reliance on any such
forward looking statements, which speak only as of the date made. The Company
wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to materially differ from any opinions or statements expressed
with respect to future periods in any current statements.
Financial Condition
The Holding Company was formed in December 1997 to acquire all of the common
stock of the Association upon its conversion from a mutual savings institution
to a stock institution. On April 6, 1998, the Holding Company completed its
initial public stock offering, issuing 661,250 shares of $.01 par value common
stock at $10.00 per share. Net proceeds to the Holding Company were $6.0 million
after conversion costs, and $5.5 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 Holding Company.
The consolidated financial condition and operating results of the Company are
primarily dependent upon its wholly owned subsidiary, the Association, and all
references to the Company prior to April 6, 1998, except where otherwise
indicated, are to the Association.
Total assets were $66.0 million at June 30, 1998, an increase of $5.0 million or
8.21% over total assets as of September 30, 1997. The increase was primarily
attributable to net proceeds of $5.5 million received from the Holding Company's
initial public offering and by a $700,000 increase in borrowings partially
offset by a $1.4 million decline in deposits.
Cash and cash equivalents increased $4.5 million from $1.9 million at September
30, 1997 to $6.4 million at June 30, 1998. The increase represented a portion of
the funds obtained through the Holding Company's initial public offering which
were temporarily invested in interest-bearing time deposits.
Investments available for sale were $7.8 million at June 30, 1998, $771,000 or
10.99% more than the $7.0 million balance at September 30, 1997. The increase is
primarily attributable to the purchase of $2.5 million in securities offset by
$1.8 million received from a security called and principal paydowns.
Gross loans increased $56,000 and were $51.3 million at June 30, 1998 and at
September 30, 1997. Multi-family and commercial real estate loans increased
$612,000 or 7.70% from $8.0 million at September 30, 1997 to $8.6 million at
June 30, 1998. Commercial business loans grew $1.2 million or 82.28% during the
same period. The increase in multi-family and commercial loan balances is the
result of the Board placing more emphasis in diversifying the loan portfolio
with an emphasis on commercial lending. One-to-four family real estate loans
declined from $36.9 million at September 30, 1997 to $35.6 million at June 30,
1998, a decline of $1.3 million or 3.57%. In addition, one-to-four family
construction loans declined $152,000 or 28.20% from $539,000 at September 30,
1997 to $387,000 at June 30, 1998. Home equity loan balances also declined
during this period by $274,000 or 8.11%. The decline in one-to-four family real
estate loans and home equity loans is the result of heightened competition in
the market place and was experienced despite the Association improving its
overall market share of residential mortgage originations from the prior year.
The Allowance for loan loss decreased by $89,000 or 5.52% from September 30,
1997 to June 30, 1998. The decline was the result of net charge-offs of $134,000
exceeding the provision of $45,000 made during the nine month period ended June
30, 1998. Charge-offs taken during this period were primarily on loans secured
by residential properties either foreclosed upon or deemed uncollectible. At
June 30, 1998, the allowance for loan losses was 3.12% of gross loans receivable
as compared to 3.14% at September 30, 1997.
Non-performing assets decreased $2.5 million or 59.84% from $4.1 million at
September 30, 1997 to $1.6 million at June 30, 1998. The decrease is
attributable to nonperforming loans decreasing $2.3 million or 60.40% from $3.8
million at September 30, 1997 to $1.5 million at June 30, 1998 and by a decline
in OREO of $166,000 during the same period. Nonperforming loans at September 30,
1997 consisted of one-to-four family mortgages of $3.7 million and home equity
loans of $63,000. Nonperforming loans at June 30, 1998 consisted of one-to-four
family mortgages of $1.5 million and home equity loans of $19,000. OREO at both
June 30, 1998 and 1997 consisted entirely of one-to-four family residences.
Deposits decreased from the September 30, 1997 balance of $56.1 million by $1.4
million or 2.43% to $54.8 million at June 30, 1998. The following table shows
the deposit composition as of the respective balance sheet dates (in thousands):
June 30, 1998 September 30, 1997
-------------------------- --------------------------
In 000's % of Deposits In 000's % of Deposits
Passbook and statement savings $11,682 21.33 $12,004 21.40
Demand and NOW accounts 5,876 10.73 5,148 9.17
Money market Accounts 11,341 20.71 10,950 19.51
Time deposits 25,858 47.23 28,015 49.92
========== ========== ========= =========
$54,757 100.00% $56,117 100.00%
========== ========== ========= =========
Demand and N.O.W. accounts increased $728,000 from $5.1 million at September 30,
1997 to $5.9 million at June 30, 1998. Savings accounts decreased from $12.0
million at September 30, 1997 to a June 30, 1998 balance of $11.7 million or
$322,000, a 2.68% decline. In addition, money market account balances at June
30, 1998 were $11.3 million as compared to the September 30, 1997 balance of
$11.0 million, an increase of $390,000 or 3.56%. Demand and N.O.W. accounts
included $445,000 held in a commercial loan closing account, and the remaining
increase in Demand and N.O.W. accounts is primarily attributable to an increase
in business account relationships. The savings balance decline is in line with
the trend experienced over the past three years which is the result of
individuals investing in other savings alternatives such as money markets and
mutual funds. The money market balances increasing during the nine month period
is the result of the Association maintaining a competitive pricing structure.
Time deposits declined $2.2 million or 7.70% from $28.0 million at September 30,
1997 to $25.9 million at June 30, 1998. The decline was due to the continued
maturity of time deposits.
Borrowings increased from $1.3 million at September 30, 1997 by $700,000 to $2.0
million at June 30, 1998. The Company replaced matured time deposits that were
not maintained with shorter term FHLB borrowings.
Total equity increased by $5.6 million during the nine month period ended June
30, 1998 from $3.3 million at September 30, 1997 to $8.9 million at June 30,
1998. The increase was attributable to $5.5 million added to equity from the net
proceeds obtained from the Holding Company's initial public offering, net income
of $130,000 recognized for the nine month period ended June 30, 1998 and a
$25,000 decline in the after-tax net unrealized loss on available for sale
securities.
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 primary sources of
funds for operations are deposits, borrowings, and principal and interest
payments on loans, mortgage backed securities and other securities available for
sale.
Net cash provided by operating activities was $442,000 for the nine months ended
June 30, 1998, an increase of $893,000 from the comparable nine month period
last year. Accrued expenses and other liabilities declined $891,000 during the
nine months ended June 30, 1997. Approximately $415,000 of the decrease in
accrued expenses and other liabilities was the special one-time assessment
levied by the FDIC to recapitalize the Savings Association Insurance Fund
("SAIF") which was paid during the period ended June 30, 1997. In addition,
$210,000 of the decline in accrued expenses and other liabilities represented
the cost of the Association's computer conversion and newly constructed
Gloversville office drive-thru that was paid in the nine months ended June 30,
1997. Lastly, $249,000, accrued during fiscal 1996, was paid in the nine months
ended June 30, 1997 for past due property taxes on collateral securing certain
one- to four-family residential nonperforming loans.
Investing activities used $784,000 in the nine months ended June 30, 1998.
Additional investment securities were purchased during the nine months ended
June 30, 1998, re-investing proceeds received from principal paydowns and
securities called. The net change in loans receivable for the nine months ended
June 30, 1998 was $423,000 as compared to $1.3 million for the same period in
the prior fiscal year. The decline reflects the slower growth experienced in the
loan portfolio due to increased competition in the Company's market. The Company
also successfully obtained $398,000 from the sale of other real estate owned
during the nine month period ended June 30, 1998.
Financing activities provided $4.8 million, primarily reflecting the proceeds of
$5.5 million obtained from the initial public offering. Deposits declined $1.4
million, and borrowings increased $700,000. For more details concerning the
Company's deposits and borrowings, see "Financial Condition."
The Association 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 June 1998, the Association's average
liquidity ratio was 23.32%.
The Company anticipates that it will have sufficient funds to meet its current
commitments. At June 30, 1998, the Company had commitments to originate loans of
$2.5 million. In addition, the Company had undrawn commitments of $1.5 million
on home equity and other lines of credit. Certificate of deposits which are
scheduled to mature in one year or less at June 30, 1998, totaled $21.4 million,
and management believes that a significant portion of such deposits will remain
with the Company as the rates offered on time deposits are competitively priced.
Although there are no minimum capital ratio requirements for the Company, the
Association is required to maintain minimum regulatory capital ratios. The
following is a summary of the Association's actual capital amounts and ratios
at June 30, 1998, compared to the OTS minimum capital requirements:
Actual Minimum
-------------------------- ------------------------
In 000's % In 000's %
---------- ------------ ----------- ---------
Tangible Capital $8,921 13.51 $ 990 1.50
Core Capital 8,921 13.51 2,641 4.00
Risk Based Capital 9,416 23.05 3,097 8.00
Impact of Year 2000
Management has developed and presented to the Board of Directors a Year 2000
Action Plan which addresses those concerns identified in Federal Financial
Institutions Examination Council guidance, particularly focusing on the testing
of mission critical systems for year 2000 compliance. The Company has identified
those areas which are of a critical importance and testing has begun of these
systems. It is anticipated that testing will be completed no later than December
31, 1998. Contingency plans are currently being developed which will outline the
procedures in the event of system failure with year 2000. In addition,
significant vendors and customers have been contacted by the Company to
determine whether sufficient progress has been made with respect to Year 2000
issues that may affect their operations. While the Year 2000 issue is of
significant concern, it is not anticipated that the costs incurred in connection
with the Year 2000 Action Plan will have a material impact on the Company's
consolidated financial condition or results of operations.
Comparison of Operating Results for the Nine-Month Periods Ended June 30, 1998
and 1997
General. Net income for the nine months ended June 30, 1998 was $130,000,
compared to a net loss of $346,000 for the same period in fiscal 1997. The
$476,000 increase was primarily attributable to a decline of $95,000 in net
interest income, a $549,000 decrease in the provision for loan losses, an
increase of $18,000 in non-interest income and a decline of $49,000 in
non-interest expense.
Net interest income. Net interest income, or the difference between interest and
dividend income and interest expense, declined $95,000 or 5.02% comparing the
nine month period ended June 30, 1997 to the nine month period ended June 30,
1998. The yield earned on average interest-earning assets during the period
ended June 30, 1998 was 8.09% as compared to 8.33% for the same period in fiscal
1997. The decline in the average yield earned on interest-earning assets was
mostly attributable to a decline in average loan balances from $51.2 million for
the nine months ended June 30, 1997 to $50.5 million for the nine months ended
June 30, 1998 and in average loan yields from 8.68% for the nine month period
ended June 30, 1997 to 8.54% for the nine month period ended June 30, 1998,
resulting in a decline in interest income earned on loans of $100,000 between
the two periods. Interest earned from interest-bearing time deposits increased
from $102,000 for the nine months ended June 30, 1997 to $135,000 for the nine
months ended June 30, 1998. The increase was primarily attributable to the
interest earned on proceeds received from the Holding Company's initial public
offering and the related stock subscription proceeds which were primarily
invested in interest-bearing time deposits. The cost of interest-bearing
liabilities increased from 4.24% for the nine months ended June 30, 1997 to
4.37% for the nine months ended June 30, 1998. The cost of N.O.W accounts
increased by 36 basis points from 1.27% for the nine months ended June 30, 1997
to 1.63% for the nine months ended June 30, 1998 as the interest paid on stock
subscription deposits was determined using the savings interest rate of 3.00%
which is 150 basis points more than the stated rate for N.O.W. accounts. The
cost of money market accounts for the nine months ended June 30, 1998 was 4.16%,
11 basis points higher than the 4.05% average cost for the nine months ended
June 30, 1997. The increase was attributable to higher balances being maintained
in the individual accounts. Money market accounts are paid higher interest rates
as the account balance increases. Time deposit average rates paid increased from
5.27% for the nine months ended June 30, 1997 to 5.57% for the nine months ended
June 30, 1998 caused by lower yielding time deposits maturing and having been
renewed at higher rates. The average cost of borrowings increased 7 basis points
from 5.63% at for the nine months ended June 30, 1997 to 5.70% for the nine
months ended June 30, 1998. The average cost of savings accounts did not change
significantly between the two periods.
The Association realized lower average yields on its loans, primarily as a
result of loan originations at rates less than those currently held by the
Association coupled with the continued amortization and prepayment of higher
yielding loans. In addition, the cost of interest bearing liabilities have
increased primarily due to the continued upward pricing of time deposits and the
increased cost of borrowings, coupled with higher average balances outstanding
in demand and N.O.W. and money market accounts.
Provision for loan losses. The provision for loan losses was $45,000 for the
nine months ended June 30, 1998 compared to $594,000 for the same period in
fiscal 1997. Management charges earnings for an amount necessary to maintain the
allowance for loan losses at a level considered adequate to absorb losses in the
loan portfolio. Although the Company maintains its allowance for loan losses at
a level it considers adequate to provide for losses, there can be no assurance
that such losses will not exceed the estimated amounts or that additional
substantial provisions for loan losses will not be required in future periods.
The provision in fiscal 1997 was primarily based on a $1.3 million or 59.3%
increase in non-performing loans to $3.5 million at June 30, 1997 as compared to
$2.2 million at September 30, 1996. The allowance for loan losses totaled $1.5
million (3.12% of total loans and 101.46% of nonperforming loans) at June 30,
1998 compared with $1.6 million (3.14% of total loans and 42.53% of
nonperforming loans) at September 30, 1997.
Other income. Other income for the nine months ended June 30, 1998 increased
$18,000 or 15.94% from $111,000 during the same period in 1997 to $129,000. This
increase was primarily attributable to a $14,000 increase in service charges and
fees, reflecting newly implemented fees being collected from customers and a
$2,000 gain on a security called during the period.
Other expense. Other expenses decreased $49,000 or 2.88% to $1.7 million for the
nine month period ended June 30, 1998. Decreased operating expenses included:
occupancy expenses of $8,000 or 4.76%; deposit insurance premiums of $5,000 or
10.83%; advertising expenses of $17,000 or 18.76%; directors fees and expenses
of $10,000 or 13.64%; equipment expenses of $14,000 or 5.88%; and other
operating expenses of $27,000 or 6.79%. These decreases are generally the result
of improved operations related to the conversion to our in-house data processing
system, reduced premiums being assessed for deposit insurance due to the
recapitalization of the Savings Association Insurance Fund, reduction in
discretionary expenses such as advertising and a reduction in the number of
Board members. Compensation and benefits increased $32,000 or 4.79% from
$666,000 for the nine months ended June 30, 1997 to $698,000 for the nine months
ended June 30, 1998. The increase was attributable to higher benefits costs and
to cost-of-living increases given employees.
Income tax expense. Income tax expense was $88,000 for the nine months ended
June 30, 1998, or 40.22% of pre-tax income compared to $42,000 on a pre-tax loss
of $304,000 for the nine months ended June 30, 1997. A benefit was not
recognized for the net loss incurred during the nine months ended June 30, 1997
because there was not sufficient support to increase the deferred tax asset. As
a result of the 1997 nine month loss, reduced expectations for future earnings
and the significant reduction in the amount of historical taxes available for
carry back, the deferred tax asset valuation allowance was increased.
Comparison of Operating Results for the Three-Month Periods Ended June 30, 1998
and 1997
General. Net income for the three months ended June 30, 1998 was $73,000,
compared to a net loss of $111,000 for the same period in fiscal 1997. The
$184,000 increase was primarily attributable to an increase of $45,000 in net
interest income, a $183,000 decrease in the provision for loan losses, an $8,000
increase in non-interest income, an increase of $15,000 in non-interest expense
and an increase in tax expense of $36,000.
Net interest income. Net interest income increased $45,000 or 7.27% comparing
the three month period ended June 30, 1997 to the three month period ended June
30, 1998. The yield earned on average interest-earning assets during the three
month period ended June 30, 1998 was 7.98% as compared to 8.24% for the same
period in fiscal 1997. The decline in the average yield earned on
interest-earning assets was mostly attributable to a $4.9 million increase in
the average balance of interest-earning deposits which yielded over 300 basis
points less than the average yield earned on average loans which declined
$467,000.
Average loan balances declined from $50.7 million for the three months ended
June 30, 1997 to $50.2 million for the three months ended June 30, 1998,
resulting in a decline in interest income earned on loans of $14,000 between the
two periods. The average yield earned on loans did not change significantly
between the two three month periods ended June 30, 1997 and 1998. Interest
earned from interest-earning time deposits increased from $23,000 for the three
months ended June 30, 1997 to $91,000 for the three months ended June 30, 1998.
During the same period, the average yield earned on interest-earning deposits
increased from 5.22% in 1997 to 5.45% in 1998. The increase was primarily
attributable to the interest earned on proceeds received from the Holding
Companys initial public offering and the related stock subscription proceeds
invested primarily in interest-earning time deposits.
The cost of interest-bearing liabilities increased from 4.25% for the three
months ended June 30, 1997 to 4.29% for the three months ended June 30, 1998.
The average cost of N.O.W. accounts increased from 1.23% for the three months
ended June 30, 1997 to 1.69% for the three months ended June 30, 1998. This
increase was attributable to the Association paying interest on funds held in
escrow obtained from the Holding Company's stock subscription proceeds at a
higher rate than the rate paid on N.O.W. accounts. The cost of time deposits and
borrowings also increased from an average combined cost of 5.31% for the three
months ended June 30, 1997 to 5.50% on average for the three months ended June
30, 1998 which is the result of lower cost time deposits maturing and being
renewed at higher rates or being replaced with borrowings with rates in excess
of the rates paid on the maturing time deposits.
Provision for loan losses. The provision for loans losses was $15,000 for the
three months ended June 30, 1998 compared to $198,000 for the same period in
fiscal 1997. The provision for the three months ended June 30, 1997 was
primarily based on the high level of nonperforming loans. For the three months
ended June 30, 1998 as compared to the same period last fiscal year, the level
of nonperforming loans and net loan charge-offs has declined significantly.
Other expense. Other expenses increased $15,000 or 2.89% to $569,000 for the
three month period ended June 30, 1998 from $553,000 for the three month period
ended June 30, 1997. Compensation and benefits increased from $224,000 by $9,000
or 4.01% to $233,000 between the three month period ended June 30, 1997 and the
same period in fiscal 1998. The increase reflects the increased cost of employee
benefits and cost of living increases given employees. Advertising expenses
declined $6,000 or 20.00% to $24,000 for the three months ended June 30, 1998 as
compared to $30,000 for the three months ended June 30, 1997. Costs for new
brochure production were incurred during the three months ended June 30, 1997
which were not incurred during fiscal 1998. Equipment and data processing
expenses were $75,000 for the three months ended June 30, 1998 as compared to
$81,000 for the three months ended June 30, 1997, a decline of $6,000 or 7.22%.
The decline is primarily attributable to lower computer costs. Other operating
expenses increased $20,000 or 16.26% from $123,000 for the three months ended
June 30, 1997 to $143,000 for the three months ended June 30, 1998. The increase
in other operating expenses is primarily attributable to higher professional
fees incurred as a public company.
Income tax expense. Income tax expense was $50,000 for the three months ended
June 30, 1998, or 40.31% of pre-tax income compared to $13,000 on a pre-tax loss
of $98,000 for the three months ended June 30, 1997. A benefit was not
recognized for the net loss incurred during the three months ended June 30, 1997
because there was not sufficient support to increase the deferred tax asset. As
a result of the 1997 three month loss, reduced expectations for future earnings
and the significant reduction in the amount of historical taxes available for
carry back, the deferred tax asset valuation allowance was increased.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Periodically, there have been various claims and lawsuits involving the
Company, mainly as a defendant, such as claims to enforce liens,
condemnation proceedings on properties in which the Company holds
security interests, claims involving the making and servicing of real
property loans and other issues incident to the Company's business. The
Company is not a party to any pending legal proceedings that it
believes would have a material adverse effect on the financial
condition or operation of the Company.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
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
Exhibit 1 - Financial Data Schedule
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Adirondack Financial Services Bancorp, Inc.
(Registrant)
Dated: August 1, 1998 \s\Lewis E. Kolar
--------------------
Lewis E. Kolar
President and CEO
Dated: August 1, 1998 \s\Menzo D. Case
--------------------
Menzo D. Case
Executive VP and CFO