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 March 31, 1999
[ ] 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 (IRS Employer Identification No.)
of 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
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APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding as of May 10, 1999
Common Stock, $.01 par value 684,348 shares
TABLE OF CONTENTS
Page
Part I. Financial Information
Item 1. Consolidated Interim Financial Statements
Consolidated Interim Statements of Financial Condition 1
March 31, 1999 (unaudited) and September 30, 1998
Consolidated Interim Statements of Income (unaudited) 2
Three Months Ended March 31, 1999 and 1998
Consolidated Interim Statements of Income (unaudited) 3
Six Months Ended March 31, 1999 and 1998
Consolidated Interim Statements of Cash Flows (unaudited) 4
Six Months Ended March 31, 1999 and 1998
Summarized Notes to Unaudited Interim Consolidated Financial Statements 5-7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16-17
Part II. Other Information
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
Exhibit 27 - Financial Data Schedule 20
Signatures 19
Part I. Financial Information
Item 1. Consolidated Interim Financial Statements
Adirondack Financial Services Bancorp, Inc.
Consolidated Interim Statements of Condition
March 31, 1999 September 30, 1998
-------------- ------------------
(unaudited)
Assets
Cash and due from banks $ 2,680,800 $ 2,635,158
Interest bearing deposits 962,111 2,109,873
------------ ------------
Total cash and cash equivalents 3,642,911 4,745,031
Securities available for sale 13,082,461 11,172,412
Net loans receivable 48,830,111 50,200,660
Accrued interest receivable 354,317 297,959
Other real estate owned 480,650 256,125
Net premises and equipment 1,147,918 1,278,383
Prepaid expenses and other assets 369,802 290,843
============ ============
Total Assets $ 67,908,170 $ 68,241,413
============ ============
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Demand and N.O.W. accounts $ 5,594,447 $ 5,741,821
Savings and money market accounts 24,393,093 23,860,849
Time deposit accounts 26,110,894 27,190,796
------------ ------------
Total deposits 56,098,434 56,793,466
Borrowings 2,385,484 2,000,000
Accrued expenses and other liabilities 332,290 292,982
------------ ------------
Total liabilities 58,816,208 59,086,448
------------ ------------
Shareholders' equity:
Preferred Stock, $.01 par value, 500,000
shares authorized, none outstanding -- --
Common Stock, $.01 par value, 5,000,000
shares authorized, 684,348 outstanding
at March 31, 1999 and 663,243
outstanding at September 30, 1998 6,843 6,632
Additional Paid-In Capital 6,326,937 6,049,293
Retained earnings, substantially restricted 3,558,318 3,535,134
Unearned ESOP shares (476,100) (476,100)
Unearned RRP shares (266,844) --
Accumulated other comprehensive (loss) income (57,192) 40,006
------------ ------------
Total shareholders' equity 9,091,962 9,154,965
============ ============
Total liabilities and shareholders' equity $ 67,908,170 $ 68,241,413
============ ============
1
Adirondack Financial Services Bancorp, Inc.
Consolidated Interim Statements of Income (Unaudited)
Three Months Ended
----------------------------------
March 31, 1999 March 31, 1998
-------------- ---------------
Interest and divident income:
Interest and fees on loans $ 1,044,944 $ 1,077,077
Securities available for sale 203,460 104,161
Interest-bearing deposits 21,787 42,374
----------- -----------
Total interest and dividend income 1,270,191 1,223,610
----------- -----------
Interest expense:
N.O.W. accounts 12,181 33,862
Savings and money market accounts 214,889 214,925
Time deposit accounts 342,362 358,753
Borrowings 47,954 44,081
----------- -----------
Total interest expense 617,386 651,620
----------- -----------
Net interest income 652,805 571,990
Provision for loan losses 0 15,000
----------- -----------
Net interest income after provision for loan losses 652,805 556,990
----------- -----------
Other income:
Fees and service charges 65,068 33,804
Other 566 677
----------- -----------
Total other income 65,634 34,481
----------- -----------
Operating expenses:
Compensation and employee benefits 263,096 230,363
Occupancy expense 54,324 53,931
Federal deposit insurance premiums 12,748 12,852
Advertising expenses 20,155 25,445
Directors' fees and expenses 18,111 19,812
Equipment and data processing expenses 49,391 75,509
Other real estate owned expenses/net 37,228 8,541
Other operating expenses 330,081 109,385
----------- -----------
Total operating expenses 785,134 535,839
----------- -----------
Income (loss) before income tax expense (66,695) 55,632
Income tax expense 14,600 22,200
=========== ===========
Net income (loss) $ (81,295) $ 33,432
=========== ===========
Basic earnings per common share $ (0.13) N/A
Diluted earnings per common share $ (0.13) N/A
2
The accompanying notes are an integral part of these unaudited
consolidated interim financial statements.
Adirondack Financial Services Bancorp, Inc.
Consolidated Interim Statements of Income (Unaudited)
For the Six Months Ended
March 31, 1999 March 31, 1998
-------------- --------------
Interest and divident income:
Interest and fees on loans $2,147,746 $2,151,154
Securities available for sale 387,517 212,408
Interest-bearing deposits 53,705 44,104
---------- ----------
Total interest and dividend income 2,588,968 2,407,665
---------- ----------
Interest expense:
N.O.W. accounts 27,852 49,499
Savings and money market accounts 435,704 431,556
Time deposit accounts 705,869 730,559
Borrowings 93,446 67,248
---------- ----------
Total interest expense 1,262,871 1,278,863
---------- ----------
Net interest income 1,326,097 1,128,802
Provision for loan losses 4,000 30,000
---------- ----------
Net interest income after provision for loan losses 1,322,097 1,098,802
---------- ----------
Other income:
Fees and service charges 109,522 74,111
Other 14,146 14,132
---------- ----------
Total other income 123,668 88,243
---------- ----------
Operating expenses:
Compensation and employee benefits 524,918 464,778
Occupancy expense 103,217 108,836
Federal deposit insurance premiums 29,198 26,249
Advertising expenses 59,371 47,846
Directors' fees and expenses 42,557 44,297
Equipment and data processing expenses 119,882 150,817
Other real estate owned expense/net 7,881 16,357
Other operating expenses 450,058 233,122
---------- ----------
Total operating expenses 1,337,082 1,092,303
---------- ----------
Income (loss) before income tax expense 108,683 94,743
Income tax expense 85,500 38,000
========== ==========
Net income (loss) $ 23,183 $ 56,743
========== ==========
Basic earnings per common share $ 0.04 N/A
Diluted earnings per common share $ 0.04 N/A
3
The accompanying notes are an integral part of these unaudited
consolidated interim financial statements.
Adirondack Financial Services Bancorp, Inc.
Consolidated Interim Statements of Cash Flow (Unaudited)
Six Months Ended March 31,
--------------------------------
1999 1998
--------------------------------
Cash flows from operating activities:
Net income $ 23,183 $ 56,743
Adjustments to reconcile net income (loss)
to net cash used by operating activities
Depreciation expense 129,943 145,852
Provision for loan losses 4,000 30,000
Net gain on sale of other real estate owned (36,000) (27,321)
Writedowns on OREO 28,175 --
Rents received on OREO 3,300 --
Loss on disposal of equipment 4,687 --
(Increase) decrease in accrued interest receivable (56,358) 28,742
(Decrease) increase in prepaid expenses and other assets 2,766 (473,457)
Increase (decrease) in accrued expenses
and other liabilities 39,308 44,755
------------ ------------
Net cash provided by (used) by operating
activities 143,004 (194,686)
------------ ------------
Cash flows from investing activities:
Proceeds from principal repayment of securities
available for sale 1,050,738 359,107
Purchase of securities available for sale (5,539,708) --
Proceeds from maturity of securities available for sale 2,400,000 --
Net decrease in loans receivable 991,549 817,358
Proceeds from sale of other real estate owned 155,000 398,013
Capital expenditures (4,165) (16,024)
------------ ------------
Net cash (used by) provided by investing
activities (946,586) 1,558,454
------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of stock 11,010 --
Net (decrease) increase in deposits (695,032) 17,065,876
Net increase in borrowings 385,484 2,200,000
------------ ------------
Net cash (used by) provided by financing
activities (298,538) 19,265,876
------------ ------------
Net (decrease) increase in cash and cash equivalents (1,102,120) 20,629,644
Cash and cash equivalents at beginning of period
4,745,031 1,922,386
------------ ------------
Cash and cash equivalents at end of period $ 3,642,911 $ 22,552,030
============ ============
Cash paid during the period for:
Interest $ 1,262,257 $ 1,220,399
Taxes $ 24,595 $ --
Transfers to OREO $ 375,000 $ 87,800
The accompanying notes are an integral part of these unaudited consolidated
interim financial statements.
4
Summarized Notes to Unaudited Interim Consolidated Financial Statements
Note 1
In management's opinion, the financial information, which is unaudited as of and
for the three month and six months ended March 31, 1999 and 1998, reflects all
adjustments, consisting solely of normal recurring adjustments, necessary for a
fair presentation of the financial information for the three month and six month
periods ended March 31, 1999 and March 31, 1998 in conformity with generally
accepted accounting principles. These consolidated financial statements should
be read in conjunction with Adirondack Financial Services Bancorp, Inc.'s ( the
"Company") 1998 Annual Report on Form 10-K. 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 that ends September 30, 1999.
Note 2
Amounts in the prior periods' consolidated interim financial statements are
reclassified whenever necessary to conform to the current period presentation.
Note 3 - Common Stock Shares Outstanding
As of March 31, 1999, common stock shares outstanding totaled 684,348, which
included 20,331 shares granted to directors, officers, and non-officer employees
of the Company and the Association on October 9, 1998 under the Company's 1998
Recognition and Retention Plan ("RRP"). The 1998 RRP was approved by the
Company's shareholders at a Special Meeting of Stockholders held on October 7,
1998.
Note 4 - 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
supercedes 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 shareholders by the weighted average number
of common shares outstanding during the period. Unvested restricted stock awards
are considered outstanding common shares and included in the computation of
basic EPS as of the date that 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 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.
5
For the three month period ended March 31, 1999, the basic and diluted earnings
per share were $(0.13), calculated using 649,451 and 644,298 weighted average
common shares outstanding, respectively.
For the six month period ended March 31, 1999, the basic earnings per share and
diluted earnings per share were both $0.04, calculated using 616,127 and 644,298
weighted average common shares outstanding, respectively.
Earnings per share are not presented for periods prior to the Company's April 6
initial stock offering since the Company was a mutual savings association and no
stock was outstanding.
Note 5 - Comprehensive Income
On October 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components. Comprehensive
income includes the reported net income of a 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, net of tax, for the
period. Accumulated other comprehensive income represents the net unrealized
gains or losses on securities available for sale as of the consolidated balance
sheet dates.
The following summarizes the components of comprehensive income for the interim
periods ended March 31, 1999 and 1998:
For the Three Months Ended March 31,
------------------------------------
1999 1998
------------- ------------
Net (loss) income $ (81,295) $ 33,432
Unrealized holding (losses) gains arising during period (105,075) 10,331
Net income tax benefit (expense) effect 45,492 (4,442)
============= ============
Comprehensive (loss) income, net of tax $ 140,878) $ 39,321
============= ============
For the Six Months Ended March 31,
-------------------------------------
1999 1998
-------------- -----------
Net income $ 23,183 $ 56,743
Unrealized holding gains (losses) arising during period (171,065) 42,714
Net income tax benefit (expense) effect 73,867 (18,367)
============= ============
Comprehensive (loss) income, net of tax $ (74,014) $ 81,090
============= ============
Note 6 - SFAS 131
In June 1998, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting by public companies of operating segments within the company,
disclosures about products and services, geographic areas and major customers.
This statement is effective for periods beginning after December 15, 1998.
Management believes that the adoption of SFAS No. 131 will not have a material
impact on the Company's consolidated financial statements.
6
Note 7 - SFAS 132
In February 1998, the 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 disclosures 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, 1998.
Management anticipates providing the required disclosures in the September 30,
1999 consolidated financial statements.
Note 8 - SFAS 133
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.
Note 9 - Acquisition
On January 23, 1999, the Company entered into a merger agreement with CNB
Bancorp, Inc. ("CNB"), Gloversville, New York. CNB is the parent company of City
National Bank and Trust Co. Under the terms of the agreement, the acquisition of
the company will provide the company's shareholders with a cash payment of
approximately $15 million and will be accounted for as a purchase transaction.
The transaction is expected to close on or about June 30, 1999, subject to the
Company's shareholders' and regulatory approvals.
7
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
unaudited consolidated interim financial statements and related notes and with
the statistical information and consolidated financial data appearing in this
report as well as the Company's 1998 Annual Report on Form 10-K.
Forward Looking Statements
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" within
the meaning of the Private Securities Litigation Reform Act of 1995. 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.
The company does not undertake -- and specifically disclaims any obligation --
to publicly release the results of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Acquisition
On January 23, 1999, the Company entered into a merger agreement with CNB
Bancorp, Inc. ("CNB"), Gloversville, New York. CNB is the parent company of City
National Bank and Trust Co. Under the terms of the agreement, the acquisition of
AFSB and its subsidiary savings association will provide AFSB shareholders with
a cash payment of approximately $15 million and will be accounted for as a
purchase transaction. The transaction is expected to close on or about June 30,
1999, subject to the Company's shareholders' and regulatory approvals.
Year 2000 ("Y2K") Issues
Year 2000 issues are the result of computer programs having been written using
two digits rather than four to define the applicable year. Any of the Company's
programs that have time sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations. The Company is also aware of these risks to third
parties, including vendors (and to the extent appropriate, depositors and
borrowers), and the potential adverse impact on the Company that could result
from failures by these parties to adequately address the Year 2000 issues.
8
The Company processes all customer information on an in-house data processing
system utilizing computer programs from several vendors. Most of the ancillary
programs have a direct interface to the core processing system. To mitigate the
Y2K risk, the Company has developed a Y2K Action Plan that was approved by the
Board in July 1998. As a part of the Plan, a Y2K Committee was formed to conduct
a review of the Company's core computer system and the ancillary software to
identify the mission critical applications that could be affected by the Y2K
problem. The Y2K committee reports on a quarterly basis to the Board of
Directors as to the Company's status in resolving any Y2K issues. In order to
complete the final phases of the Y2K Plan, it will be necessary to document
contingency and disaster recovery plans, which will be completed by the
Association's employees in 1999.
To date, the Y2K Committee has received Y2K compliance certifications/progress
forms from all of the Company's vendors. Of the responses received, 85% of the
vendors have certified that they are Y2K compliant, with the remaining 15%
informing the Company of their progress and anticipated compliance dates;
however, no assurance can be given as to the adequacy of such plans or to the
timeliness of their implementation.
Final versions of the Company's Y2K customer evaluation forms and the associated
risk analysis have been completed and the Y2K questionnaires have been sent to
customers. A spreadsheet has been developed that identifies significant
borrowers and their level of risk and will be monitored by the Company's Asset
Review Committee. To date, the majority of significant borrowers contacted have
indicated that they are not heavily reliant on computer systems and are,
therefore, evaluated as a low risk to Y2K.
Based on the Company's current knowledge and investigations, the expense of the
Year 2000 problem, as well as the related potential effect on the Company's
earnings, is not expected to have a material effect on the Company's
consolidated financial position or results of operation. Furthermore, the
Company expects corrective measures required to be prepared for the Year 2000
problem to be implemented on a timely basis.
FINANCIAL CONDITION
Total assets were $67.9 million at March 31, 1999, an decrease of $333,000 or,
.49%, from total assets of $68.2 million as of September 30, 1998. The decrease
in total assets was primarily the result of cash and cash equivalents decreasing
$1.1 million and net loans decreasing $1.4 million during the period, offset by
a $1.9 million increase in investments available for sale.
Investments available for sale were $13.1 million at March 31, 1999, $1.9
million or 17.10% more than the $11.2 million balance at September 30, 1998. The
increase is primarily attributable to the purchase of $5.5 million in securities
partially offset by $3.4 million received from maturities and principal
paydowns.
9
Total gross loans decreased by $1.6 million, or 3.17%, to $50.2 million at March
31, 1999 as compared to $51.8 million at September 30, 1998. Multi-family and
commercial real estate loans decreased by $813,000, or 9.44%, from $8.6 million
at September 30, 1998 to $7.8 million at March 31, 1999. Commercial loans
declined $980,000, or 37.35%, during the same period. The decline in the
multi-family and commercial real estate and commercial loan portfolios is
primarily the result of several significant loans prepaying their balances. In
addition, the Company foreclosed on a commercial real estate property
collateralizing a significant loan. The Board is also placing less emphasis on
originating these types of portfolios, which are generally subject to higher
credit risks than other types of lending. One-to-four family real estate loans
increased from $35.7 million at September 30, 1998 to $36.4 million at March 31,
1999, an increase of $660,000 or 1.85%. One-to-four family construction loans
increased $27,000, or 4.46%, from $606,000 at September 30, 1998 to $633,000 at
March 31, 1999. Home equity loan balances declined during the same period by
$358,000 or 11.39%. The high level of competition for loans secured by
residential properties, which are primarily driven by the rates offered on the
loans, continues to be a significant factor in the changes in the Company's
one-to-four family, construction and home equity loan balances.
The Allowance for loan loss decreased by $252,000, or 16.84%, from September 30,
1998 to March 31, 1999. The decline was the result of net charge-offs of
$256,000 exceeding the provision of $4,000 recorded during the six months ended
March 31, 1999. Charge-offs taken during this period were primarily on loans
secured by commercial properties, either foreclosed upon or deemed partially
uncollectible. At March 31, 1999, the allowance for loan losses was 2.48% of
gross loans receivable as compared to 2.89% at September 30, 1998.
Non-performing assets ("NPAs") decreased by $742,000, or 35.64%, to $1.3 at
March 31, 1999 from $2.1 million at September 30, 1998. The improvement in NPAs
is attributable to nonperforming loans declining by $967,000, or 52.96%, to
$859,000 at March 31, 1999 from $1.8 million at September 30, 1998, partially
offset by an increase in OREO of $225,000 during the same period. Nonperforming
loans at March 31, 1999 consisted of one-to-four family mortgages of $650,000
and multi-family and commercial real estate loans of $209,000. OREO at March 31,
1999 consisted of $106,000 in one-to-four family residences and a $375,000
commercial building.
Total deposits decreased by $695,000, or 1.22%, to $56.1 million at March 31,
1999 from $56.8 million at September 30, 1998. The following table shows the
deposit composition as of the respective balance sheet dates (in thousands):
March 31, 1999 September 30, 1998
--------------------------- ---------------------------
In 000's % of In 000's % of
Deposits Deposits
----------- ------------ ---------- -------------
Passbook and statement savings $11,836 21.10 $11,297 19.89
Demand and NOW accounts 5,594 9.97 5,742 10.11
Money market Accounts 12,557 22.38 12,563 22.12
Time deposits 26,111 46.55 27,191 47.88
============ =========== ============ ============
$56,098 100.00 $56,793 100.00
============ =========== ============ ============
Management attributes the increases in passbook and statement savings and the
stability of money market accounts primarily to customers choosing to invest
their funds in short-term interest-bearing products due to the relatively low
level of interest rates on time deposits during the six months ended March 31,
1999. The decline in time deposits is consistent with the Company's efforts to
reduce its reliance on higher rate time deposits for funding.
10
Borrowings increased from $2.0 million at September 30, 1998 by $385,000 to $2.4
million at March 31, 1999. The increase is attributable to the Company's
implementation of a leveraging strategy to increase the return on equity,
whereby securities were purchased with funds borrowed from the Federal Home Loan
Bank ("FHLB"). During the six months ended March 31, 1999, the Company used $2.5
million in amortizing and fixed balance borrowings from the FHLB to purchase
pools of mortgage-backed securities and one callable agency note.
Total equity decreased by $63,000 during the six month period ended March 31,
1999 and was $9.1 million at March 31, 1999 as compared to $9.2 million at
September 30, 1998. The decrease was attributable to the net income of $23,000
recognized for the six months ended March 31, 1999 and a $97,000 decline in the
net after-tax unrealized gain on available for sale securities, offset by
$11,000 obtained through the issuance of common stock to 401-K accounts.
RESULTS OF OPERATIONS
Comparison of Operating Results for the Three-Month Periods Ended
March 31, 1999 and 1998
General. The results of operations of the Company's subsidiary savings
association are dependent primarily on net interest income, which is the
difference between the income earned on its loans and securities and its cost of
funds, consisting of the interest paid on deposits and borrowings. Results of
operations are also affected by the Association's provision for loan losses, net
expenses on foreclosed assets and by general economic and competitive
conditions, particularly changes in interest rates, government policies and
actions of regulatory authorities. Future changes in applicable law, regulations
or government policies may materially impact the consolidated financial
condition and results of operations of the Company and the Association.
Unless otherwise noted, discussion of operating results for the three months
ended March 31, 1999, is based on a comparison with the corresponding period in
1998.
Net loss for the three months ended March 31, 1999 was $81,000, compared to net
income of $33,000 in 1998. The $114,000 decrease was primarily attributable to
an increase of $81,000 in net interest income, a decrease of $15,000 in the
provision for loan losses, and an increase in other income of $31,000, offset by
an increase in operating expenses of $249,000.
Net interest income. Net interest income for the three months ended March 31,
1999 increased by $81,000, or 14.13%, to $653,000 from $572,000 in 1998. The
improvement in net interest income was primarily attributable to an increase in
the average volume of net interest-earning assets, which increased by $5.9
million, the result of an increase in total average interest-earning assets of
$5.7 million, or 9.44%. This compares to an increase in total average
interest-bearing liabilities of $248,000, or .42%. The positive effect derived
from the increase in the average volume of net interest-earning assets was
partially offset by a decline of 17 basis points in the Company's average net
interest rate spread to 3.60% from 3.77% in 1998. The average yield earned on
interest-earning assets during the three month period ended March 31, 1999 was
7.73%, a decrease of 42 basis points as compared to 8.15% in 1998 and the
average rate paid on interest-bearing liabilities was 4.13%, down 25 basis
points from 4.38% in 1998.
11
The decline in the average yield earned on total interest-earning assets was
primarily attributable to a shift in the composition of total average
interest-earning assets to lower yielding securities from higher yielding loans.
The average volume of securities increased by $6.4 million to $13.2 million or
20.15% of total average interest-earning assets from 11.33% in 1998. In
addition, the yield earned on loans declined 31 basis points from 8.59% in 1998
to 8.28% in 1999 with the average loan balances for the three months ended March
31, 1999, as compared to the same period in 1998, increasing $272,000, or .54%,
to $50.5 million. However, as a percentage of total average interest-earning
assets, average loan volume declined to 76.8% from 83.56% in 1998.
As mentioned above, the average cost of interest-bearing liabilities decreased
from 4.38% for the three months ended March 31, 1998 to 4.13% for the three
months ended March 31, 1999, with all of the component categories of average
total interest-bearing liabilities experiencing declines in average rates paid.
The declines in interest rates on interest-bearing liabilities resulted
primarily from the general decline in market interest rates since March 31,
1998.
Provision for loan losses. The was no provision for loans losses for the three
months ended March 31, 1999, compared to $15,000 in 1998. The decrease in the
provision expense was attributable to declining balance of nonperforming loans,
reduced loan growth and reduced charge-offs taken during 1999 as compared to
1998.
Operating expenses. Total operating expenses increased by $249,000, or 46.52%,
to $785,000 for the three months ended March 31, 1999, from $536,000 in 1998.
The primary reason operating expenses increased was that the Company incurred
$107,000 in costs directly associated with the pending merger with CNB Bancorp,
Inc. and in legal costs of $107,000 incurred by the Company related to
threatened shareholder litigation. These amounts are included in other operating
expenses which increased $330,000 or 201.76% in 1999 as compared to 1998.
Compensation and benefits expenses increased by $33,000, or 14.21%, mainly the
result of ESOP expenses and the initial expenses related to the Company's
Recognition and Retention Plan ("RRP"). Expenses related to other real estate
owned increased $29,000 or 335.89% due to a property being written down $28,000
during the three months ended March 31, 1999. Equipment expenses declined
$26,000 or 34.59% from 1999 to 1998 as much of the equipment purchased during
the Company's computer upgrade in 1996 has been fully depreciated.
Income tax expense. Income tax expense decreased by $8,000 to $15,000 from
$22,000 in 1998. A net tax benefit was not recognized on the loss sustained in
the quarter ended March 31, 1999 as the costs incurred directly related to the
merger are not tax deductible.
12
Comparison of Operating Results for the Six-Month Periods
Ended March 31, 1999 and 1998
General. Net income for the six months ended March 31, 1999 was $23,000,
compared to a net income of $57,000 for the same period in fiscal 1998. The
$34,000 decrease was attributable an increase of $197,000 in net interest
income, a decline in the provision of $26,000 and an increase of $35,000 in
noninterest income, offset partially by an increase in operating expenses of
$245,000.
Net interest income. Net interest income, or the difference between interest and
dividend income and interest expense, increased $197,000 or 17.48% comparing the
six month period ended March 31, 1998 to the six month period ended March 31,
1999. The improvement in net interest income was primarily attributable to an
increase in the average volume of net interest-earning assets, which increased
by $7.0 million, or 559.59%, the result of an increase in total average
interest-earning assets of $7.0 million, or 11.78%. This compares to an increase
in total average interest-bearing liabilities of $1.5 million, or 2.54%. The
positive effect derived from the increase in the average volume of net
interest-earning assets was partially offset by a decline of 14 basis points in
the Company's average net interest rate spread to 3.60% from 3.74% in 1998. The
average yield earned on interest-earning assets during the six month period
ended March 31, 1999 was 7.84%, a decrease of 31 basis points as compared to
8.15% in 1998 and the average rate paid on interest-bearing liabilities was
4.24%, down 16 basis points from 4.40% in 1998.
The decline in the average yield earned on total interest-earning assets was
primarily attributable to a shift in the composition of total average
interest-earning assets to lower yielding securities from higher yielding loans.
The average volume of securities increased by $5.8 million to $12.7 million or
19.16% of total average interest-earning assets from 11.67% in 1998. In
addition, the yield earned on loans declined 7 basis points from 8.51% in 1998
to 8.44% in 1999 with the average loan balances for the three months ended March
31, 1999, as compared to the same period in 1998, increasing $345,000, or .68%,
to $50.9 million. However, as a percentage of total average interest-earning
assets, average loan volume declined to 77.08% from 85.58% in 1998.
As mentioned above, the average cost of interest-bearing liabilities decreased
from 4.40% for the six months ended March 31, 1998 to 4.24% for the six months
ended March 31, 1999, with all of the component categories of average total
interest-bearing liabilities experiencing declines in average rates paid. The
declines in interest rates on interest-bearing liabilities resulted primarily
from the general decline in market interest rates since March 31, 1998.
Provision for loan losses. The provision for loan losses was $4,000 for the six
months ended March 31, 1999 compared to $30,000 for the same period in fiscal
1998. The decrease in the provision expense was based on management's
evaluation of the adequacy of the Company's allowance for loan losses as of
March 31, 1999 considering a decline in the Association's non-performing loans
and net charge offs. As of March 31, 1999, non-performing loans were $859,000, a
decrease of $2.5 million, or 74.63%, from $3.4 million at March 31,1998.
Other income. Other income for the six months ended March 31, 1999 increased
$35,000 or 40.15% from $88,000 during the same period in 1998 to $124,000. This
increase was primarily attributable to a $35,000 increase in service charges and
fees, reflecting newly implemented fees being collected from customers.
13
Operating expenses. Other expenses increased $245,000 or 22.41% to $1.3 million
for the six month period ended March 31, 1999 from $1.1 million for the six
month period ended March 31, 1998.
The primary reason operating expenses increased was that the Company incurred
$107,000 in costs directly associated with the pending merger with CNB Bancorp,
Inc. and legal costs of $107,000 related to threatened shareholder litigation.
These amounts are included in other operating expenses which increased $245,000
or 93.06% in 1999 as compared to 1998.
Compensation and benefits expenses increased by $60,000, or 12.94%, mainly the
result of ESOP expenses and the initial expenses related to the Company's
Recognition and Retention Plan ("RRP"). Equipment expenses declined $31,000 or
20.51% from 1999 to 1998 as much of the equipment purchased during the Company's
computer upgrade in 1996 has been fully depreciated.
Income tax expense. Income tax expense was $86,000 for the six months ended
March 31, 1999 compared to $38,000 for the six months ended March 31, 1998. A
tax benefit was not recognized for the merger costs incurred during the six
months ended March 31, 1999 because these costs are not tax deductible expenses.
Liquidity and Funding
Liquidity is the ability to generate cash flows to meet present and expected
future funding needs. Management monitors the Association'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 Association's primary sources of funds for operations are deposits from its
market area, principal and interest payments on loans and securities, proceeds
from the maturity and sale of securities available for sale, advances from the
Federal Home Loan Bank of New York ("FHLB"), and securities sold under
agreements to repurchase ("repos"). While maturities and scheduled amortization
of loans and securities are generally predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions, and competition.
The primary investing activities of the Association are the origination of loans
and the purchase of securities. During the six months ended March 31, 1999, the
Association's net loan originations totaled $1.3 million. The Association
purchased $5.5 million of securities available for sale during the same period
and received $3.5 million in securities available for sale maturities and
principal repayments.
The primary financing activity of the Association is the attraction of deposits.
However, during the six months ended March 31, 1999, the Association's deposits
decreased by $695,000 from September 30, 1998, primarily time deposits ("CDs"),
which decreased by $1.1 million. Management believes that the decrease in CDs
during the six months ended March 31, 1999 resulted primarily from the holders
of maturing CDs pursuing alternative investments to obtain better returns.
14
In the event the attraction of deposits is not sufficient to fund an expansion
in interest-earning assets or when the level of market interest rates for CDs is
higher than the cost of borrowed funds, the Association may utilize advances
from the FHLB and other types of borrowed funds to fund interest-earning asset
growth. During the six months ended March 31, 1999, the Association increased
its borrowed funds by $385,000 to $2.4 million through FHLB advances. The FHLB
advances were used to purchase securities available for sale.
The Association is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This 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 required minimum liquidity ratio is
currently 4%. The Association's average daily liquidity ratio for the month of
March 1999 was 7.46%.
The Association's most liquid assets are cash and cash equivalents, which
include federal funds sold and bank deposits. The level of these assets is
dependent on the Association's operating, financing, and investing activities
during any given period. At March 31, 1999, cash and cash equivalents totaled
$3.6 million, compared to $4.7 million at September 30, 1998.
The Association anticipates that it will have sufficient funds available to meet
its current commitments. At March 31, 1999, the Association had commitments to
originate loans of $2.0 million as well as undrawn commitments of $874,000 on
home equity and other lines of credit. Time deposits that are scheduled to
mature in one year or less at March 31, 1999, totaled $19.5 million. Management
believes that a significant portion of such deposits will remain with the
Association.
The Company also has a need for, and sources of, liquidity. Liquidity is
required to fund its operating expenses, as well as for the payment of any
dividends to shareholders. The primary source of the Company's liquidity on an
ongoing basis is dividends from the Association. To date no dividends have been
made by the Association to the Company.
15
Capital
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
March 31, 1999, compared to the OTS minimum capital requirements:
Actual Minimum
------------------------ ------------------------
In 000's % In 000's %
------------ --------- ------------- ---------
Tangible Capital $ 7,268 10.92 $ 999 1.50
Core Capital 7,268 10.92 2,663 4.00
Risk Based Capital 7,740 20.87 2,968 8.00
Item 3.
Quantitative And Qualitative Disclosures About Market Risk
The composition of the Association's balance sheet results in maturity
mis-matches between interest-earning assets and interest-bearing liabilities.
The scheduled maturities of the Association's fixed rate interest-earning assets
are generally longer than the maturities of the Association's fixed rate
interest-bearing liabilities. This mis-match exposes the Association to interest
rate risk. In a rising rate scenario, as measured by the Office of Thrift
Supervision ("OTS") interest rate risk exposure simulation model, the estimated
market or portfolio value ("PV") of the Association's assets would decline in
value to a greater degree than the change in the PV of the Association's
liabilities, thereby reducing net portfolio value ("NPV") or equity.
Based on quarterly data provided to the OTS by the Association, as of December
31, 1998 (the most recent OTS report available) under a rate shock scenario of
plus 200 basis points ("bp"), the Association's pre-shock NPV ratio (NPV as a
percentage of the PV of assets) was calculated by the OTS model to be 13.22% and
pre-shock NPV was estimated at $9.4 million. The post-shock NPV ratio was
estimated to decrease to 11.74%, a decline of 148 bp, and the NPV amount
decreased by $1.3 million, or 13.74%, to $8.1 million.
Certain assumptions are utilized by the OTS in assessing the interest rate risk
exposure of savings associations and are employed in preparing the interest rate
risk exposure report. These assumptions are related to interest rates, loan
prepayment rates, deposit decay rates, and the market values of certain assets
and liabilities under the various interest rate scenarios. The model also
assumes that delinquency rates will not change as a result of changes in
interest rates although there can be no assurance that this will be the case.
Even if interest rates change in the designated amounts, there can be no
assurance that the Association's assets and liabilities would perform as set
forth above.
Furthermore, the Association's net interest income is sensitive to changes in
interest rates, as the rates paid on its interest-bearing liabilities generally
change faster than the rates earned on its interest-earning assets. As a result,
net interest income will frequently decline in periods of rising interest rates.
16
In managing its asset/liability mix, the Association, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, often places more emphasis on managing short-term net
interest margin than on better matching the interest rate sensitivity of its
assets and liabilities. Management believes that the increased net interest
income resulting from a mis-match in the maturity of its asset and liability
portfolios can, during periods of declining or stable interest rates, provide
high enough returns to justify the increased exposure to sudden and unexpected
increases in interest rates.
Other types of market risk, such as foreign exchange rate risk and commodity
price risk, do not arise in the normal course of the Association's business
activities.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, the Company and the Association are
subject to legal actions which involve claims for monetary relief.
Management, based on the 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits as required by Item 601 of Regulation S-K
Financial data schedule, Exhibit #27
(b) Reports on Form 8-K
Current reports on Form 8-K were filed on April 30, 1999:
(i) April 30, 1999, press release regarding Adirondack
Financial Services Bancorp, Inc.'s earnings for quarter
ended March 31, 1999.
(ii) January 20, 1999, press release regarding Adirondack
Financial Services Bancorp, Inc.'s earnings for the
quarter ended December 31, 1998.
(iii) January 21, 1999, press release regarding resignation of
Executive VP + COO
(iv) January 28, 1999, press release regarding agreement to
be acquired by CNB Bancorp, Inc.
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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: May 13, 1999 /s/ Lewis E. Kolar
-------------------
Lewis E. Kolar
President, CEO
and Acting CFO
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