UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE 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 4,775,732
----------------------------- ---------------
(TITLE OF CLASS) (OUTSTANDING AT JANUARY 31, 1998)
CATSKILL FINANCIAL CORPORATION
FORM 10-Q
DECEMBER 31, 1997
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
December 31, 1997 (Unaudited) and September 30, 1997.......................... 1
Consolidated Statements of Income for the three months ended
December 31, 1997 and 1996 (Unaudited)........................................ 2
Consolidated Statements of Changes in Shareholders' Equity
for the three months ended December 31, 1997 and 1996 (Unaudited)............. 3
Consolidated Statements of Cash Flows for the three months ended December 31,
1997 and 1996 (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
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................. 18
Item 6. Exhibits and Reports on Form 8-K.............................................. 18
Signatures.................................................................... 19
CATSKILL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Assets December 31, 1997 September 30, 1997
------ ----------------- ------------------
(Unaudited)
Cash and due from banks $ 3,896 $ 2,274
Federal funds sold -- --
--------- ---------
Cash and cash equivalents 3,896 2,274
Securities available for sale, at fair value 153,535 148,114
Investment securities, at amortized cost:
(Estimated fair value of $5,114 at December 31,
1997, and $8,112 at September 30, 1997) 5,068 8,055
Investment required by law, stock in Federal Home
Loan Bank of NY, at cost 1,762 1,762
Loans receivable, net 125,095 124,337
Accrued interest receivable 2,484 2,303
Premises and equipment, net 2,395 2,367
Real estate owned, net 239 248
Other assets 182 159
--------- ---------
Total Assets $ 294,656 $ 289,619
========= =========
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
Deposits:
Non-interest bearing $ 4,681 $ 4,370
Interest bearing 197,462 196,542
--------- ---------
Total Deposits 202,143 200,912
Short-term borrowings 16,600 11,385
Advance payments by borrowers for property
taxes and insurance 2,126 533
Accrued interest payable 61 59
Official bank checks 933 3,861
Accrued expenses and other liabilities 1,128 1,092
--------- ---------
Total Liabilities $ 222,991 $ 217,842
--------- ---------
Shareholders' Equity
Preferred stock, $.01 par value; authorized
5,000,000 shares
Common stock, $.01 par value; authorized
15,000,000 shares; 5,686,750 shares issued at
December 31, 1997 and September 30, 1997 57 57
Additional paid-in capital 54,811 54,811
Retained earnings, substantially restricted 35,492 34,915
Common stock acquired by ESOP (4,209) (4,209)
Unearned management recognition plan (1,742) (1,856)
Treasury stock, at cost (911,018 shares at
December 31, 1997, and 848,244 shares at
September 30, 1997) (13,957) (12,862)
Net unrealized gain (loss) on securities
available for sale, net of taxes 1,213 921
--------- ---------
Total Shareholders' Equity 71,665 71,777
--------- ---------
Total Liabilities and Shareholders' Equity $ 294,656 $ 289,619
========= =========
See accompanying notes to unaudited consolidated interim financial statements.
1
CATSKILL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED
DECEMBER 31,
1997 1996
----------- -----------
(Unaudited)
Interest and dividend income:
Loans $ 2,551 $ 2,543
Securities available for sale 2,559 1,727
Investment securities 121 238
Federal funds sold and other 1 450
Stock in Federal Home Loan Bank of NY 31 19
----------- -----------
Total interest and dividend income 5,263 4,977
Interest expense:
Deposits 2,241 2,136
Short-term borrowings 184 --
----------- -----------
Total interest expense 2,425 2,136
----------- -----------
Net interest income 2,838 2,841
Provision for loan losses 54 75
----------- -----------
Net interest income after provision
for loan losses 2,784 2,766
----------- -----------
Noninterest income:
Recovery of Nationar loss contingency -- 84
Service fees on deposit accounts 68 59
Net securities gains 19 --
Other income 32 34
----------- -----------
Total noninterest income 119 177
----------- -----------
Noninterest expense:
Salaries and employee benefits 840 664
Advertising and business promotion 50 39
Net occupancy on premises 82 70
Federal deposit insurance premiums 7 1
Postage and supplies 64 46
Outside data processing fees 95 89
Equipment 40 36
Professional fees 37 62
Other real estate expenses, net (16) 3
Other 149 161
----------- -----------
Total noninterest expense 1,348 1,171
----------- -----------
Income before taxes 1,555 1,772
Income tax expense 597 706
----------- -----------
Net income $ 958 $ 1,066
=========== ===========
Basic earnings per common share $ .23 $ .21
Diluted earnings per common share $ .22 $ .21
Weighted Average Common Shares-Basic 4,250,413 5,090,814
Weighted Average Common Shares-Diluted 4,393,839 5,110,362
See accompanying notes to unaudited consolidated interim financial statements.
2
CATSKILL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED)
Retained Common Unearned Net Unrealized
Additional Earnings, Stock Management Treasury Gain (Loss)
Common Paid-in Substantially Acquired by Recognition Stock, on Securities
Stock Capital Restricted ESOP Plan at Cost AFS, net of taxes Total
------ ---------- ------------- ----------- ----------- -------- ----------------- -----
Balance at September 30, 1997 $ 57 $54,811 $34,915 $(4,209) $(1,856) $(12,862) $ 921 $71,777
Net Income 958 958
Dividends paid on common stock (352) (352)
Change in net unrealized
gain (loss) on securities AFS,
net of taxes 292 292
Exercise of stock options
(4,401 shares issued, net) (29) 67 38
Amortization of unearned
MRP compensation 114 114
Purchase of common stock
(67,175 shares) (1,162) (1,162)
---- ------- ------- -------- -------- --------- ------- -------
Balance at December 31, 1997 $ 57 $54,811 $35,492 $(4,209) $(1,742) $(13,957) $ 1,213 $71,665
==== ======= ======= ======== ======== ========= ======= =======
Balance at September 30, 1996 $ 57 $54,864 $31,984 $(4,436) -- -- $ (88) $82,381
Net income 1,066 1,066
Grant of restricted shares
under MRP (178,732 shares) (167) (2,234) 2,401 --
Purchase of common stock (7,000) (7,000)
(504,000 shares)
Change in net unrealized
gain (loss) on securities AFS,
net of taxes 370 370
---- ------- ------- -------- -------- -------- ------- -------
Balance at December 31, 1996 $ 57 $54,697 $33,050 $(4,436) $(2,234) $(4,599) $ 282 $76,817
==== ======= ======= ======== ======== ======== ======= =======
See accompanying notes to unaudited consolidated interim financial statements.
3
CATSKILL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended
December 31,
1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited)
Net Income $ 958 $ 1,066
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Depreciation 51 40
Net amortization (accretion) on securities (9) (81)
Provision for loan losses 54 75
MRP compensation expense 114 80
ESOP compensation expense 100 75
Recovery of Nationar loss contingency -- (84)
Loss (gains) on sale of other real estate owned (24) (21)
Gains on sales and calls of securities (19) --
Increase in other assets (204) (347)
Collection of deposits held at Nationar -- 167
Decrease in accrued expense and other liabilities (3,185) (747)
-------- --------
Net cash provided (used) by operating activities (2,164) 223
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity/calls/paydown of investment securities 3,010 7,000
Net increase in loans receivable (895) (1,593)
Capital expenditures, net (79) (210)
Purchase of AFS securities (16,637) (69,359)
Proceeds from sale of securities available for sale 2,019 --
Proceeds from maturity/calls/paydown of AFS securities 9,689 49,588
Proceeds from sale of other real estate owned 116 159
-------- --------
Net cash provided (used) by investing activities (2,777) (14,415)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of stock options 38 --
Net increase (decrease) in deposits 1,231 (2,489)
Net increase in advance payments by borrowers for
property taxes and insurance 1,593 264
Increase in short-term borrowings 5,215 --
Cash dividends on common stock (352) --
Purchase of common stock for treasury (1,162) (7,000)
-------- --------
Net cash provided (used) by financing activities 6,563 (9,225)
-------- --------
Net increase (decrease) in cash and cash equivalents 1,622 (23,417)
Cash and cash equivalents at beginning of period 2,274 39,712
-------- --------
Cash and cash equivalents at end of period $ 3,896 $ 16,295
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,423 $ 2,135
Taxes 521 375
Transfer of loans to other real estate owned 83 248
Change in net unrealized gain (loss) on AFS securities, net of change in
deferred tax liability of $195 and $247 respectively 292 370
See accompanying notes to unaudited consolidated interim financial statements
4
CATSKILL FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The unaudited consolidated interim financial statements include the accounts of
Catskill Financial Corporation ("Company") and its wholly owned subsidiary,
Catskill Savings Bank ("Bank"). All intercompany accounts and transactions have
been eliminated in consolidation. Amounts in prior periods' unaudited
consolidated interim financial statements are reclassified whenever necessary to
conform to the current period's presentation. In management's opinion, the
unaudited consolidated interim financial statements reflect all adjustments of a
normal recurring nature, and disclosures which are necessary for a fair
presentation of the results for the interim periods presented and should be read
in conjunction with the consolidated financial statements and related notes
included in Catskill Financial's 1997 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, 1998.
NOTE 2. EARNINGS PER SHARE
On December 31, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standard No. 128, "Earnings per Share," (SFAS No. 128)
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 stockholders by the weighted
average number of common shares outstanding for the period. Unvested restricted
stock is considered outstanding common shares and included in the computation of
basic earnings per share as of 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 restricted stock and stock
options. SFAS No. 128 requires restatement of all prior period earnings per
share data presented. 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 adoption of SFAS No. 128 did not have a
material effect on the Company's financial position or results of operations.
5
NOTE 2. EARNINGS PER SHARE - CONTINUED
The following sets forth certain information regarding the calculation of basic
and diluted earnings per share (EPS) calculations for the periods indicated:
Three months ended December 31, 1997
------------------------------------
Weighted
Average Per-Share
Net Income Shares Amount
---------- -------- ---------
(In thousands, except share and per share data)
Basic EPS $ 958 4,250,413 $ .23
Dilutive effect of potential common shares
related to stock based compensation plans -- 143,426
--------- ---------
Diluted EPS $ 958 4,393,839 $ .22
========= =========
Three months ended December 31, 1996
------------------------------------
Weighted
Average Per-Share
Net Income Shares Amount
---------- -------- ---------
(In thousands, except share and per share data)
Basic EPS $ 1,066 5,090,814 $ .21
Dilutive effect of potential common shares
related to stock based compensation plans -- 19,548
--------- ---------
Diluted EPS $ 1,066 5,110,362 $ .21
========= =========
6
CATSKILL FINANCIAL CORPORATION
FORM 10-Q
DECEMBER 31, 1997
================================================================================
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 four banking offices, the most recent having opened in
December 1996. 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.
7
For the three months ended December 31, 1997, the Company recorded net income of
$958,000, a decrease of $108,000 or 10.1%, compared to the quarter ended
December 31, 1996. The decrease was principally caused by certain non-recurring
items which increased net income in the three months ended December 31, 1996, by
approximately $100,000 coupled with the impact of the Company's stock repurchase
program which resulted in a reduction in no cost funding sources. Basic and
diluted earnings per share were $.23 and $.22 respectively for the three months
ended December 31, 1997, compared to basic and diluted earnings per share of
$.21 for the three months ended December 31, 1996. Weighted average common
shares - basic for the three months ended December 31, 1997, were 4,250,413, a
decrease of 840,401 or 16.5% from the 5,090,814 for the comparable period ended
December 31, 1996. The decrease was principally attributable to the share
repurchase programs under which the Company, through December 31, 1997, had
purchased 1,096,651 shares or 19.3% of the shares issued in its initial public
offering. The aggregate cost to the Company was $16.5 million, or approximately
$15.02 per common share repurchased.
Annualized return on average assets for the three months ended December 31, 1997
and 1996, was 1.31% and 1.51%, respectively, and return on average equity was
5.32% and 5.23%, respectively.
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:
a. 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;
b. changes in market interest rates or changes in the speed at which
market interest rates change;
c. changes in laws and regulations affecting the financial service
industry;
d. changes in competition; and
8
e. 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 the result of any revisions which may be made 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 $294.7 million at December 31, 1997, an increase of $5.1
million, or 1.8% from the $289.6 million at September 30, 1997. The increase was
funded principally by an increase in short-term borrowings of $5.2 million, to
$16.6 million at December 31, 1997.
Cash and cash equivalents were $3.9 million, an increase of $1.6 million, or
69.6% from the $2.3 million at September 30, 1997. The change was principally
due to an increase in checks in process of collection, as well as the funding,
in advance, of a pending cash order for vault cash.
Total securities, which include securities held to maturity ("HTM") and
securities available for sale ("AFS"), excluding Federal Home Loan Bank stock,
were $158.6 million, an increase of $2.4 million, or 1.5% over the $156.2
million as of September 30, 1997. The change in securities consisted of a $5.4
million increase in AFS securities, primarily due to the Company's purchase of
one-year adjustable rate mortgage backed securities and municipal securities
with longer call protection, and a $3.0 million decrease in HTM securities from
scheduled maturities and calls. Consequently as of December 31, 1997, 96.8% of
the Company's investment portfolio excluding the Federal Home Loan Bank Stock
was classified as AFS, compared to 94.8% as of September 30, 1997.
9
Loans receivable were $127.0 million as of December 31, 1997, an increase of $.8
million or .6% over the $126.2 million as of September 30, 1997. The following
table shows the loan portfolio composition as of the respective balance sheet
dates:
December 31, September 30,
1997 1997
------------ -------------
(In thousands)
Real Estate Loans
One-to-four family $ 103,052 $ 102,232
Multi-family and commercial 5,416 4,691
Construction 442 1,306
--------- ---------
Total real estate loans 108,910 108,229
Consumer Loans 18,498 18,473
--------- ---------
Gross Loans 127,408 126,702
Less: Net deferred loan fees (423) (476)
--------- ---------
Total loans receivable $ 126,985 $ 126,226
========= =========
The increase in multi-family and commercial loans was principally represented by
loans originated at its new branch, while the decrease in construction loans
principally resulted from the reclassification of construction loans as
one-to-four family loans once construction was completed and the loan converted
to an amortizing mortgage.
Non-performing assets at December 31, 1997 were $1.0 million, or .35% of total
assets, compared to the $1.2 million or .40% of total assets at September 30,
1997. The table below sets forth the amounts and categories of the Company's
non-performing assets.
December 31, September 30,
1997 1997
------------ -------------
(In thousands)
Non-performing loans:
One-to-four family $ 640 $ 780
Multi-family and commercial -- --
Consumer 144 137
------ ------
Total non-performing loans 784 917
------ ------
Foreclosed assets, net:
One-to-four family 201 225
Multi-family and commercial 38 23
------ ------
Total foreclosed assets, net 239 248
------ ------
Total non-performing assets $1,023 $1,165
====== ======
Total non-performing
loans as a % of total loans .62% .73%
Total non-performing assets
as a % of total assets .35% .40%
10
The decrease in non-performing loans at December 31, 1997 as compared to
September 30, 1997 was attributable principally to the foreclosure of one loan
and the resulting acquisition of title to the mortgaged property by the Company.
The net realizable value of the property, totalling $83,000, was transferred to
other real estate, and $33,000, representing the excess of the carrying value of
the related loan over the net realizable value of the property, was charged
against the allowance for loan losses. In addition, during the quarter ended
December 31, 1997, the Company completed the sale of two parcels of other real
estate which reduced real estate owned by $92,000. The following table
summarizes the activity in other real estate for the periods presented:
Three Months Ended December 31,
-------------------------------
1997 1996
---- ----
(In thousands)
Other real estate beginning of
period $ 248 $ 357
Transfer of loans to other
real estate owned 83 248
Sales of other real estate, net (92) (138)
----- -----
Other real estate end of period $ 239 $ 467
===== =====
The allowance for loan losses was $1.9 million, or 1.49% of period end loans at
December 31, 1997, and provided coverage of non-performing loans of 241.1%,
compared to coverage of 206.0% as of September 30, 1997. The following
summarizes the activity in the allowance for loan losses:
Three Months Ended December 31,
-------------------------------
1997 1996
------- -------
(In thousands)
Allowance at beginning of period $ 1,889 $ 1,833
Charge-offs (57) (87)
Recoveries 4 5
------- -------
Net charge-offs (53) (82)
Provision for loan losses 54 75
------- -------
Allowance at end of period $ 1,890 $ 1,826
======= =======
Total deposits were $202.1 million at December 31, 1997, an increase of $1.2
million, or .6% from the $200.9 million at September 30, 1997. The following
table shows the deposit composition as of the respective balance sheet dates:
December 31, 1997 September 30, 1997
----------------------------- ----------------------------
(In thousands) % of Deposits (In thousands) % of Deposits
Savings $ 78,534 38.9% $ 79,448 39.6%
Money market 6,565 3.2 7,115 3.5
NOW 11,116 5.5 10,438 5.2
Non-interest demand 4,681 2.3 4,370 2.2
Certificates of deposits 101,247 50.1 99,541 49.5
-------- ----- -------- -----
$202,143 100.0% $200,912 100.0%
======== ===== ======== =====
11
The growth in deposits was principally related to the opening of our fourth full
service branch in late December 1996, and deposits at other offices decreased
$.6 million, or .3%, during the quarter. Although the Company experienced
deposit growth, savings deposits decreased $.9 million or 1.2%, and now
represent 38.9% of deposits compared to 39.6% as of September 30, 1997. The
composition of deposits continues to shift to higher costing certificates of
deposits ("CD's") as the decrease in savings deposits was more than offset by a
$1.7 million increase in certificates of deposit which now represent 50.1% of
deposits compared to 49.5% as of September 30, 1997. The increase in CD's is
principally from the Company's promotion of a 15-month product to retain
maturing longer-term CD's and satisfy demand in the Company's market for higher
yields. Management believes that this change in mix is consistent with what
other financial institutions are experiencing, as customers seek to maximize
their returns and the Company has to compete with other investment products such
as mutual funds.
Short-term borrowings were $16.6 million at December 31, 1997, an increase of
$5.2 million or 45.6% from the $11.4 million at September 30, 1997. The increase
was principally to fund an increase in earning assets, primarily the purchase of
securities, as the Company continues to leverage its capital. The Company had
outstanding borrowings from the Federal Home Loan Bank of New York ("FHLB") of
$11.6 million under its overnight line, and $5.0 million under its one month
advance program, with additional credit available of $1.5 million and $8.1
million, respectively, from those facilities as of December 31, 1997. In
addition, the Company anticipates converting a portion of its short-term
borrowings to longer-term borrowings under the FHLB's convertible advance
product to reduce its interest rate risk.
Shareholders' equity at December 31, 1997 was $71.7 million, a decrease of $.1
million, or .1% from the $71.8 million at September 30, 1997. The decrease was
principally caused by the Company's repurchase of 67,175 common shares at a cost
of $1.2 million, somewhat offset by the $.6 million of net income retained after
cash dividends and a $.3 million change in the Company's net unrealized gain
(loss) on securities available for sale, net of taxes. The Company also recorded
a $.2 million increase in shareholders= equity on account of the gradual vesting
of restricted stock awards and the exercise of stock options.
Shareholders' equity as a percent of total assets was 24.3% at December 31, 1997
compared to 24.8% at September 30, 1997. Book value per common share was $15.48
excluding unvested shares of the Company's restricted stock plan ("MRP"), and
was $17.02 excluding unallocated ESOP shares and unvested MRP shares.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND
1996
Net Interest Income
- -------------------
Net interest income on a full tax equivalent basis for the three months ended
December 31, 1997, was $2.9 million, an increase of $16,000, or 0.6%, when
compared to the three months ended December 31, 1996. The Company's stock
repurchase program, which reduced average equity by $9.4 million, caused
downward pressure on net interest income. This was substantially offset by two
factors. Average earning assets increased by $7.4 million, funded principally by
borrowings and increased deposits, and net interest rate spread increased by
eight basis points principally caused by a deliberate shift in the mix of the
Company's investments.
12
Interest income for the three months ended December 31, 1997 was $5.3 million on
a tax equivalent basis, an increase of $305,000, or 6.1%, over the comparable
period last year. The $7.4 million increase in the average volume of earning
assets had a direct positive effect on interest income as the Company sought to
leverage its excess capital. The increase in average earning assets principally
consisted of increases in mortgage-backed and other securities.
Also positively affecting interest income was the effort to change the Company's
asset mix by investing more of its assets in higher yielding mortgage-backed
securities and less in lower yielding federal funds sold. Average
mortgage-backed securities represented 30.5% of average earning assets for the
three months ended December 31, 1997, compared to 19.1% for the comparable
quarter the prior year, while federal funds sold and other declined from 12.2%
to less than 1% of average earning assets between the same periods. The average
yield on mortgage-backed securities during the three months ended December 31,
1997 was 7.03%, compared to 5.33% as the average yield on federal funds sold and
miscellaneous earning assets for the quarter ended December 31, 1996. The shift
in mix was the primary cause of a 25 basis point increase in the average yield
on earning assets between the periods. The average yield was also positively
affected by the purchase of tax advantaged securities bearing higher yields.
Interest expense for the three months ended December 31, 1997, was $2.4 million,
an increase of $289,000, or 13.5%. The increase was principally due to an
increase in the average volume of interest bearing liabilities. The Company also
experienced an increase of 17 basis points in its cost of funds. Average
interest bearing liabilities were $210.4 million, an increase of $17.6 million,
or 9.1%, as the Company borrowed funds to substitute for no-cost capital as a
funding source necessitated by the Company's stock repurchase program and also
to fund earning asset growth. Average short-term borrowings were $12.7 million
for the three months ended December 31, 1997, while there were no such
borrowings in the comparable three month period the prior year. In addition, the
Company's average CD's increased $7.9 million, or 8.6%, as the Company's
customers continue to move toward higher costing CD's and away from lower
costing savings deposits. The 17 basis point increase in the cost of funds was
caused by the increase in the level of borrowings, which represent the Company's
highest cost, and CD's, which are the next highest cost funding source. The
average rate paid on CD's also increased by 15 basis points due to competitive
pressures and a special 15 month CD program which offered premium rates.
The Company's net yield on average earning assets was 4.02% for the three months
ended December 31, 1997, compared to 4.10% for the comparable quarter 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
hence reduced the excess of interest earning assets over interest bearing
liabilities. In the three months ended December 31, 1997, the Company had $71.9
million of average earning assets with no related funding costs, a decrease of
$10.2 million from the $82.1 million for the three months ended December 31,
1996. Partially offsetting the effect of this decrease on the Company's net
yield, the Company increased its net interest spread 8 basis points, by changing
its asset mix as described previously.
For more information on average balances, interest, yield and rate, please refer
to Table #1, included in this report.
13
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 $54,000 for the three months ended December
31, 1997, a decrease of $21,000 from the comparable period of the prior year.
The decrease is principally the result of a $29,000, or 35.4%, reduction in net
charge-offs to $53,000 for the three months ended December 31, 1997 compared to
the comparable quarter of the prior year. In addition, the Company has reduced
its non-performing loans so the allowance represents 241.1% of non-performing
loans at December 31, 1997, as compared to 220.3% as of December 31, 1996.
Non-Interest Income
- -------------------
Non-interest income was $119,000 for the three months ended December 31, 1997, a
decrease of $58,000 or 32.7% from the three months ended December 31, 1996. The
decrease was principally a consequence of the Company's recovery of $84,000 of
its Nationar loss reserve during the quarter ended December 31, 1996; there was
no Nationar recovery in the quarter ended December 31, 1997. In addition,
somewhat offsetting the impact of the Nationar recovery was an increase in net
securities gains of $19,000 and an increase of $9,000, or 15.3%, in service
charge income principally due to the Company's growth in checking accounts.
Non-Interest Expense
- --------------------
Non-interest expense for the three months ended December 31, 1997 was
$1,348,000, an increase of $177,000, or 15.1%, over the comparable period last
year. Increases in personnel costs, advertising and net occupancy were partially
offset by reductions in professional fees.
Salaries and employee benefits for the quarter ended December 31, 1997 increased
$176,000, or 26.5%, compared to the three months ended December 31, 1996,
principally from personnel costs related to a new full service branch and the
increased cost of the Company's stock based compensation plans. Furthermore,
results for the quarter ended December 31, 1996, had benefitted from an
insurance refund, which reduced that quarter's medical insurance costs. In that
quarter, the Company changed insurance carriers and received a refund of
approximately $80,000 due to favorable claims experience. There were no such
refunds in the quarter ended December 31, 1997. Stock based compensation costs
(ESOP and MRP plans) increased $59,000, or 38.1%. ESOP compensation increased
$25,000, or 33.3%, due to an increase in the average market price of the
Company's common stock. The cost of its MRP plan increased $34,000, principally
because the plan was outstanding for only a portion of the quarter ended
December 31, 1996, as the plan was approved at a Special Meeting of Stockholders
on October 24, 1996, and became effective thereafter. Advertising was $50,000,
an increase of 28.2%, as the Company ran several promotional campaigns to
increase its non-interest bearing deposits, and to promote its new branch. Net
occupancy was $82,000, an increase of 17.1%, as the Company experienced
increased costs relating to the new branch, as well as depreciation of
renovations at another branch office.
14
Professional fees were $37,000, a decrease of $25,000, or 40.3%, from the
comparable quarter last year. The decrease was due principally to costs
associated with the Special Meeting of Stockholders held during the three months
ended December 31, 1996; there was no such meeting in the three months ended
December 31, 1997.
Income Tax Expense
- ------------------
Income tax expense for the three months ended December 31, 1997, was $597,000, a
decrease of $109,000, or 15.4%, from the comparable period last year. The change
was principally due to the 12.2% decrease in income before taxes. The Company's
effective tax rates for the three months ended December 31, 1997 and 1996, were
38.39% and 39.84%, respectively. The decrease in rate was principally the
Company's purchase of tax advantaged securities, primarily bank qualified
municipal securities and preferred stock.
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 manages its balance sheet
so there has been no need for unanticipated sales of assets.
The primary sources of funds for operations are deposits, short-term borrowings,
and principal and interest payments on loans, mortgage backed securities and
other securities available for sale.
Net cash used by operating activities was $2.2 million for the three months
ended December 31, 1997, a decrease of $2.4 million from the comparable quarter
last year. The change was principally the reduction in accrued expenses and
other liabilities caused by a decrease in official bank checks outstanding.
Official bank checks decreased principally as a result of the Company's payment
of real estate taxes for mortgage borrowers using escrowed funds at September
30, 1997, and is somewhat offset by an increase in cash flows from financing
activities, as the Company experienced a net increase in advance payments by
borrowers for taxes and insurance of $1.3 million due to a change in school tax
due dates.
Investing activities used $2.8 million in the three months ended December 31,
1997, as the Company continued to leverage its balance sheet by increasing
earning assets, principally $1.8 million in securities, and $.9 million in
loans. Financing activities provided $6.5 million, as the Company experienced
increases in deposits, short-term borrowings and advances by borrowers for
taxes, somewhat offset by the purchase of treasury stock and payment of cash
dividends 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 $202.1 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 at December 31, 1997, deposit accounts having balances in excess
of $100,000 totaled only $21.6 million or less than 10.7% of total deposits. The
Bank is required to maintain
15
minimum levels of liquid assets as defined by the OTS regulations. The
requirement, which maybe 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 December 1997, the Bank exceeded that, maintaining an average liquidity
ratio of 16.0%.
The Company anticipates that it will have sufficient funds to meet its current
commitments. At December 31, 1997, the Company had commitments to originate
loans of $2.1 million. In addition, the Company had undrawn commitments of $2.3
million on home equity and other lines of credit. Certificates of deposits which
are scheduled to mature in one year or less at December 31, 1997, totaled $69.6
million, and management believes that a significant portion of such deposits
will remain with the Company.
Although there are no minimum capital ratio requirements for the Company, the
Bank is required to maintain minimum regulatory capital ratios. The following is
a summary of the Bank's actual capital amounts and ratios at December 31, 1997,
compared to the OTS minimum capital requirements:
Actual Minimum
------------------- --------------------
Amount % Amount %
------- ------ ------- ----
(Dollars in Thousands)
Tangible Capital $59,969 20.6% $4,356 1.5%
Core Capital 59,969 20.6 8,713 3.0
Risk Based Capital 61,112 61.0 8,014 8.0
In November 1997, the Company received a regulatory waiver from the OTS to
repurchase up to 5% or 241,117 shares of its common stock outstanding. The
Company, as of December 31, 1997, had repurchased 51,000 shares under the
current program, which expires April 18, 1998. The Company itself has adequate
resources to repurchase the remaining 190,117 shares without dividends from the
Bank. In addition, as of December 31, 1997, the Bank could, after notifying the
OTS in writing, pay dividends to the Company of approximately $27.4 million.
Impact of Year 2000
- -------------------
The Company's progress on its Year 2000 issue is continuing. The Company
received additional guidance from its primary service provider, including a cost
estimate to be passed along to the Company as a "validation" fee. The testing
program appears to be quite extensive and will involve end-to-end testing. In
addition, the Company has now determined that some of its modules will not be
supported for Year 2000 compliance and will require migrating to upgraded
versions. Upgraded programs are available, but management has not negotiated
what these costs will be, however, it does not expect these costs to have a
significant impact on its financial condition or results of operations.
16
TABLE #1 AVERAGE BALANCES, INTEREST, YIELD AND RATE
The following table presents, for the periods indicated, the total dollar
amount of interest income from average interest-earning assets and the
resultant yields, as well as the interest expense on average
interest-bearing liabilities, expressed both in dollars and rates. Tax
equivalent adjustments principally on municipal securities totalled $19,000
in the three month period ended December 31, 1997; there were no tax
equivalent adjustments in the comparable period. 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
------------------------------------------------------------------------------------
December 31, 1997 December 31, 1996
-------------------------------------- --------------------------------------
Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-Earning Assets
Loans receivable, net $126,423 $ 2,551 8.07% $125,623 $2,543 8.10%
Mortgage-backed securities 86,176 1,514 7.03% 52,629 931 7.08%
Other securities 69,588 1,216 6.99% 63,109 1,053 6.67%
Federal funds sold and other 44 1 9.02% 33,483 450 5.33%
-------- -------- -------- ------
Total interest-earning assets 282,231 5,282 7.49% 274,844 4,977 7.24%
-------- ------
Allowance for loan losses (1,876) (1,813)
Other assets, net 8,755 6,489
-------- --------
Total Assets $289,110 $279,520
======== ========
Interest-Bearing Liabilities
Savings deposits $ 78,230 $ 682 3.46% $ 82,102 $724 3.50%
Money market 6,925 56 3.21% 7,829 67 3.40%
Now deposits 10,984 68 2.46% 9,215 57 2.45%
Certificates of deposit 99,940 1,425 5.66% 92,058 1,279 5.51%
Short-term borrowings 12,705 184 5.75% --
Escrow and other 1,570 10 2.53% 1,550 9 2.30%
-------- -------- -------- ------
Total interest-bearing liabilities 210,354 2,425 4.57% 192,754 2,136 4.40%
-------- ------
Non-interest bearing 4,571 3,578
Other liabilities 2,751 2,374
Shareholders' equity 71,434 80,814
------ --------
Total Equity and Liabilities $289,110 $279,520
======== ========
Net interest income $ 2,857 $2,841
======== ======
Net interest rate spread 2.92% 2.84%
==== ====
Net yield on average
interest-earning assets 4.02% 4.10%
==== ====
Average interest earning
assets to average interest
bearing liabilities 134.17% 142.59%
======= ========
Earning Assets/Total Assets 97.62% 98.33%
======= ========
17
CATSKILL FINANCIAL CORPORATION
FORM 10-Q
DECEMBER 31, 1997
================================================================================
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Computation of Net Income per Common Share
(27) Financial Data Schedule (included only in EDGAR filing)
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CATSKILL FINANCIAL CORPORATION
Date: February 13, 1998 /s/ Wilbur J. Cross
------------------------------------
Wilbur J. Cross
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
Date: February 13, 1998 /s/ David J. DeLuca
------------------------------------
David J. DeLuca
Chief Financial Officer
(Principal Financial and
Accounting Officer)
19