<PAGE>
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 June 30, 1996
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 No. 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 Identification Number)
incorporation or organization)
341 MAIN STREET, CATSKILL, NY 12414
----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (518)943-3600
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 of outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Shares, $.01 par value 5,686,750
- ----------------------------- ----------------------------
(Title of class) (outstanding at July 31, 1996)
<PAGE>
CATSKILL FINANCIAL CORPORATION
FORM 10-Q
JUNE 30, 1996
INDEX
Part I FINANCIAL INFORMATION Page
- -----
Item 1. Financial Statements.............................................. 1
Consolidated Statements of Income for the Three
months ended June 30, 1996 and 1995 (Unaudited)................... 2
Consolidated Statements of Income for the Nine
months ended June 30, 1996 and 1995 (Unaudited)................... 3
Consolidated Statements of Financial Condition as
of June 30, 1996 (Unaudited) and September 30, 1995............... 4
Consolidated Statements of Changes in Shareholders' Equity
for the Nine months ended June 30, 1996 and 1995 (Unaudited)...... 5
Consolidated Statements of Cash Flows for the Nine
months ended June 30, 1996 and 1995 (Unaudited)................... 6
Notes to unaudited consolidated interim financial statements...... 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.................. 9
Part II OTHER INFORMATION
Item 1. Legal Proceedings................................................. 18
Signatures........................................................ 19
<PAGE>
CATSKILL FINANCIAL CORPORATION
FORM 10-Q
JUNE 30,1996
- --------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Catskill Financial Corporation (the "Company") was formed in December of 1995
for the purpose of acquiring all of the common stock of Catskill Savings Bank
(the "Bank"), concurrent with its conversion from mutual to stock form of
ownership. Catskill Financial Corporation completed its initial public stock
offering of 5,686,750 shares of $.01 par value common stock on April 18, 1996.
Net proceeds to the Company were $54.9 million. The Company utilized
approximately one half of the net stock sale proceeds to acquire all of the
common stock issued by the Bank. For additional discussion of the Company's
formation and intended operations, see the Form S-1 Registration Statement (No.
33-81019) filed with the Securities and Exchange Commission.
The financial statements presented in this form 10-Q reflect the consolidated
financial condition and results of operations of the Company and its subsidiary
for periods subsequent to April 18, 1996. Financial statements presented for
periods prior to April 18, 1996 are for the Bank prior to its acquisition by the
Company.
- 1 -
<PAGE>
CATSKILL FINANCIAL CORPORATION
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-----------------------------
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Interest and dividend income:
Loans $ 2,446 $ 2,418
Investment securities 1,027 1,228
Federal Funds sold 1,478 270
Stock in Federal Home Loan Bank of NY 23 -
------------- -------------
Total interest and dividend income 4,974 3,916
Interest expense
Deposits 2,459 2,063
------------- -------------
Net interest income 2,515 1,853
Provision for loan losses 45 45
------------- -------------
Net interest income after provision
for loan losses 2,470 1,808
------------- -------------
Noninterest income:
Recovery of Nationar loss contingency 560 -
Service fees on deposit accounts 55 35
Net securities gains (losses) 3 (47)
Other income 52 32
------------- -------------
Total noninterest income 670 20
------------- -------------
Noninterest expense:
Salaries and employee benefits 571 527
Advertising and business promotion 22 113
Net occupancy on premises 63 60
Federal deposit insurance premiums 1 114
Postage and supplies 33 54
Outside data processing fees 82 74
Professional fees 104 29
Other real estate expenses, net 150 8
Other 180 155
------------- -------------
Total noninterest expense 1,206 1,134
------------- -------------
Income before taxes 1,934 694
Income tax expense 795 275
------------- -------------
Net income $ 1,139 $ 419
============== ==============
Earnings per share $ .22 $ N/A
============== ==============
Weighted Average Common Shares 4,254,439 N/A
-------------- --------------
</TABLE>
See accompanying notes to unaudited consolidated interim
financial statements.
- 2 -
<PAGE>
CATSKILL FINANCIAL CORPORATION
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
-----------------------------
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Interest and dividend income:
Loans $ 7,333 $ 7,266
Investment securities 2,963 3,549
Federal Funds sold 2,654 739
Stock in Federal Home Loan Bank of NY 23 -
------------- -------------
Total interest and dividend income 12,973 11,554
Interest expense
Deposits 6,860 5,824
------------- -------------
Net interest income 6,113 5,730
Provision for loan losses 120 210
------------- -------------
Net interest income after provision
for loan losses 5,993 5,520
------------- -------------
Noninterest income:
Recovery of Nationar loss contingency 560 -
Service fees on deposit accounts 163 90
Net securities gains (losses) 34 (47)
Other income 168 129
------------- -------------
Total noninterest income 925 172
------------- -------------
Noninterest expense:
Salaries and employee benefits 1,658 1,441
Advertising and business promotion 100 264
Net occupancy on premises 190 179
Federal deposit insurance premiums 22 344
Postage and supplies 116 136
Outside data processing fees 246 177
Professional fees 153 65
Other real estate expenses, net 205 8
Other 479 451
------------- -------------
Total noninterest expense 3,169 3,065
------------- -------------
Income before taxes 3,749 2,627
Income tax expense 1,496 1,049
------------- -------------
Net income $ 2,253 $ 1,578
=============== ==============
Earnings per share $ N/A $ N/A
=============== ==============
Weighted Average Common Shares N/A N/A
--------------- --------------
</TABLE>
See accompanying notes to unaudited consolidated interim
financial statements.
- 3 -
<PAGE>
CATSKILL FINANCIAL CORPORATION
Consolidated Statements of Financial Condition
(In Thousands)
<TABLE>
<CAPTION>
Assets June 30,1996 September 30, 1995
------ ------------ ------------------
(Unaudited)
<S> <C> <C>
Cash and due from banks $ 6,069 $ 3,364
Federal funds sold 60,800 34,700
-------------- --------------
Cash and cash equivalents 66,869 38,064
Securities available for sale, at fair value 68,549
Investment securities, at amortized cost:
(Approximate fair market value of $24,785 at June
30, 1996 and $67,128 at September 30, 1995) 24,072 67,090
Investment required by law, stock in Federal
Home Loan Bank of NY, at cost 1,159
Loans receivable, net 118,679 118,364
Accrued interest receivable 1,455 1,630
Premises and equipment, net 1,911 1,732
Real estate owned, net 344 484
Deposits held at Nationar, net 52 2,606
Prepaid expenses and other assets 168 132
-------------- --------------
Total Assets $ 283,258 $ 230,102
============== ==============
Liabilities and Shareholders' Equity
Liabilities:
Due to depositors:
Non-interest bearing 3,930 4,008
Interest bearing 194,671 193,222
-------------- --------------
Total Deposits 198,601 197,230
Advance payments by borrowers for
property taxes and insurance 2,383 1,027
Accrued expenses and other liabilities 1,583 3,178
-------------- --------------
Total Liabilities 202,567 201,435
-------------- --------------
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
and outstanding at June 30, 1996 57
Additional paid-in capital 54,852
Retained earnings, substantially restricted 30,920 28,667
Common stock acquired by ESOP (4,549)
Net unrealized loss on securities available for
sale, net of taxes (589)
-------------- --------------
Total Shareholders' Equity 80,691 28,667
-------------- --------------
Total Liabilities and Shareholders' Equity $ 283,258 $ 230,102
============= =============
</TABLE>
See accompanying notes to unaudited consolidated interim
financial statements.
- 4 -
<PAGE>
CATSKILL FINANCIAL CORPORATION
Consolidated Statements of Changes in Shareholders' Equity
(In Thousands) (Unaudited)
<TABLE>
<CAPTION>
Net Unrealized
Gain(Loss) on
Securities
Additional Retained Common Stock Available for
Common Stock Paid-in Capital Earnings Acquired by ESOP Sale Total
------------ --------------- -------- ---------------- --------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 $28,667 $28,667
Net income 2,253 2,253
Change in net unrealized
gain (loss) on securities
available for sale, net of
deferred taxes $ (589) (589)
Common stock issued, net $ 57 $54,852 54,909
Purchase of ESOP shares $(4,549) $(4,549)
-------- ------- ------- ------- ------- -------
Balance at June 30, 1996 $ 57 $54,852 $30,920 $(4,549) $ (589) $80,691
======== ======= ======= ======== ======== =======
Balance at September 30, 1994 $26,942 $26,942
Net income 1,578 1,578
------- -------
Balance at June 30, 1995 $28,520 $28,520
======= =======
</TABLE>
See accompanying notes to unaudited consolidated
interim financial statements.
- 5 -
<PAGE>
CATSKILL FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,253 $ 1,578
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Depreciation 101 106
Net accretion on investment securities (140) (288)
Provision for loan losses 120 210
Provision for losses on other real estate 234
Loss (gains) on sale of real estate owned 85 (17)
(Increase)decrease in other assets 2,692 (3,339)
Decrease in accrued expense and other liabilities (1,203) (54)
----------- ---------
Net cash provided (used) by operating activities 4,142 (1,804)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity/calls/paydown of investment securities 23,884 14,958
Purchases of investment securities (6,015) (9,969)
Purchases of mortgage-backed securities (20,081) (1,013)
Principal repayments on mortgage-backed securities 1,388 801
Purchase of Federal Home Loan Bank Stock (1,159)
Net(increase)decrease in loans receivable (670) 151
Capital expenditures (280) (335)
Purchase of securities available for sale (60,050)
Proceeds from maturing/paydown of securities available for sale 34,503
Proceeds from the sale of real estate owned 56 184
----------- ---------
Net cash provided (used) by investing activities (28,424) 4,777
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase(decrease)in deposits 1,371 (4,518)
Net increase in advance payments by borrowers for property
taxes and insurance 1,356 487
Net proceeds from sale of common stock 54,909
Common stock acquired by ESOP (4,549)
----------- ---------
Net cash provided (used) by financing activities $53,087 $(4,031)
Net increase(decrease) in cash and cash equivalents 28,805 (1,058)
Cash and cash equivalents at beginning of period 38,064 29,580
----------- ---------
Cash and cash equivalents at end of period $66,869 $28,522
=========== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $6,856 $5,827
Taxes 1,300 1,118
Transfer of loans to other real estate owned 235 95
Net unrealized loss on AFS net of deferred tax benefit of $392 589
</TABLE>
See accompanying notes to unaudited consolidated interim
financial statements.
- 6 -
<PAGE>
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"). 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 filed Form S-1. 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, 1996.
Note 2. Earnings per share
On April 18, 1996, Catskill Financial Corporation completed its
initial public stock offering of 5,686,750 common shares. Concurrent
with the public offering, approximately 8% of the shares offered
(454,940) were purchased by the Catskill Financial Corporation
Employee Stock Ownership Plan ("ESOP"). Since the Company has not
committed to release these shares as of June 30, 1996, under AICPA
Statement of Position 93-6, these shares are not considered to be
outstanding for purposes of calculating per share amounts. Weighted
average common shares for the quarter ending June 30, 1996 of
4,254,439 have been calculated based on the actual number of days the
shares were outstanding during the quarter. In addition, in
calculating earnings per share, reported net income of $1,139,000 has
been adjusted to $949,000, representing estimated operating results
since the shares were issued. If the common shares are not weighted
for the actual days outstanding during the quarter, average common
shares would be 5,231,810 and earnings per share for the post
conversion period would be $.18.
Note 3. Loss Contingency
On February 6, 1995, the New York Superintendent of Banks took
possession of Nationar, a New York chartered bank that provided
correspondent banking and related services for various banking
institutions, including the Bank. At the time Nationar was seized,
the Bank had approximately $3.3 million on deposit with Nationar. As
of September 30, 1995, the Bank set up a reserve for probable losses
of $660,000, representing approximately 20% of the Bank's deposit
claim. In June 1996, the Bank received a cash payment of $3.1 million
on account of its claim, and its remaining unresolved claim is
approximately $150,000. It is uncertain how much of the remaining
claim will be paid, but it is certain that some losses will occur on
portions of the remaining claim, so management has determined to
maintain $100,000 of the loss reserve and has included in "other
income" the recovery of $560,000 of the loss contingency reserve.
- 7 -
<PAGE>
CATSKILL FINANCIAL CORPORATION
Notes to Unaudited Consolidated
Interim Financial Statements
Note 4. Employee Stock Ownership Plan ("ESOP")
The Company approved the adoption of an ESOP for the benefit of full
time salaried employees. Employees are eligible to participate after
they attain age 21 and complete one year of service, during which
they work at least 1,000 hours.
Employees will be credited for years of service to the Bank prior to
the adoption of the ESOP for participation and vesting purposes. Each
participant's ESOP account will be credited with cash and shares of
the Company common stock based on compensation earned during the year
with respect to which an ESOP contribution is made.
On April 18, the ESOP borrowed $4.5 million from the Company, and
purchased approximately 8% of the common shares issued in the
Company's initial public offering. Since the Company has not
committed to release these shares, the 454,940 shares held by the
ESOP are not considered outstanding for earnings per share
computations.
Compensation expense for the plan will be determined as shares held
by the ESOP are released to plan participants. It is expected that
the ESOP will repay the loan through periodic tax-deductible
contributions from the Company over a period of not less than 10
years.
For the three month and nine month periods ended June 30, 1996,
salaries and employee benefits included $78,000, representing the
expected release of shares held by the ESOP over an estimated period
of 15 years.
- 8 -
<PAGE>
CATSKILL FINANCIAL CORPORATION
FORM 10-Q
JUNE 30, 1996
- --------------------------------------------------------------------------------
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 for the purpose of acquiring all of the common stock of
Catskill Savings Bank (the "Bank"), concurrent with its conversion from the
mutual to the stock form of ownership. The Company completed its initial public
stock offering of 5,686,750 shares of $.01 par value common stock on April 18,
1996. Net proceeds to the Company were $54.9 million.
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 is
comprised of Greene County and portions of Southern Albany County in New York,
which are serviced through three banking offices. The Bank's deposit accounts
are insured by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation ("FDIC"), and the Bank is subject to regulation by the Office of
Thrift Supervision ("OTS").
The Bank's profitability, like that of 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.
Results of operations are also affected by the Bank's provision for loan losses,
net expenses on real estate owned and by general economic and competitive
conditions, particularly changes in interest rates, government policies and
actions of regulatory authorities.
For the three months ended June 30, 1996, the Company recorded net income of
$1,139,000, an increase of $720,000, or 171.8% over the comparable quarter of
the previous year. Net income for the nine months ended June 30, 1996 was
$2,253,000, an increase of $675,000, or 42.8% over the nine months ended June
30, 1995. Annualized return on average assets for the nine months ended June 30,
1996 and 1995 was 1.16% and .94%, respectively. Return on annualized average
equity for the nine months ended June 30, 1996 and 1995 was 7.39% and 7.70%,
respectively. For the three months ended June 30, 1996 and June 30, 1995,
annualized return on average assets was 1.48% and .75%, respectively, and return
on average equity was 7.14% and 6.01%, respectively.
- 9 -
<PAGE>
For both the three and nine month periods ended June 30, 1996, $335,000 of the
increase in net income represents the after tax recovery of a significant
portion of the reserve for probable losses previously established in connection
with the takeover of Nationar by the New York Superintendent of Banks. On
February 6, 1995, the Superintendent took possession of Nationar, a New York
chartered bank that provided correspondent banking and related services for
various banking institutions, including the Bank. At the time Nationar was
seized, the Bank had $3.3 million on deposit with Nationar. As a result of
uncertainty related to collectibility, as of September 30, 1995, the Bank
established a reserve of $660,000, or 20% of the deposit. In June 1996, the Bank
received payment of approximately $3.1 million of its claim and estimated that
only $100,000 of the reserve was still necessary.
On April 18, 1996, Catskill Financial completed its initial public offering of
5,686,750 shares of common stock. Net proceeds to the Company were $54.9
million. Based on the weighted average number of shares outstanding, and
excluding the Company's ESOP shares, earnings per share for the post offering
period were $.22, after an estimated allocation of income between the pre- and
post-offering periods. Since no shares were outstanding prior to the offering,
earnings per share for the comparable quarter of last year and the respective
nine month periods, are not shown.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND
JUNE 30, 1995
Net Interest Income
Net interest income for the nine months ended June 30, 1996 was $6.1 million, an
increase of $383,000, or 6.7% higher than the comparable period in 1995. The
increase was principally due to a $32.3 million, or 14.8% increase in average
earning assets partially offset by a lower net interest margin. The yield on
average earning assets was 6.93% for the nine months ended June 30, 1996, a
decrease of 17 basis points from the nine months ended June 30, 1995. The
decrease is principally the result of the investment of the net proceeds from
the public offering into federal funds sold. Average federal funds sold during
the nine months ended June 30, 1996 were $65.6 million, an increase of $48.2
million over the same period last year. The increase in federal funds sold
resulted from a combination of three factors: (a) the maturities in the
investment portfolios, the average balance of which decreased by $14.8 million,
(b) the investment of the net proceeds received from the Company's public
offering and (c) stock subscriptions invested on a short term basis until the
public offering was consummated.
Total interest expense for the nine months ended June 30, 1996 was $6.9 million,
or $1.0 million higher than the same period last year, as a result of both
increases in volume and rates. The increase due to volume was principally the
interest expense on stock subscriptions until the public offering, as the
Company was obligated to pay 3.5% per annum on such funds until the conversion
was consummated. In addition, during the period, the Company has experienced,
similar to most financial institutions, a customer preference for higher costing
certificates of deposit rather than savings accounts.
For more information on average balances, interest rates and yields, please
refer to Table #1 included in this report.
-10-
<PAGE>
Provision for Loan Losses
The provision for loan losses is a result of management's periodic analysis of
the allowance for loan losses. The provision for loan losses was $120,000 for
the nine months ended June 30, 1996, a decrease of $90,000 from the comparable
period of 1995. The decrease is based on management's assessment of the adequacy
of the allowance which provides 153.7% coverage of non-performing loans.
However, any analysis of the adequacy of the allowance is necessarily
speculative based upon future events outside the control of the Company.
Therefore, there can be no assurance that additional material provisions will
not be required in the future.
Non-Interest Income
Non-interest income for the nine months ended June 30, 1996 was $925,000, an
increase of $753,000 over the same period in 1995. The increase is principally
the recovery of $560,000 from the Nationar loss contingency. In addition,
service charges on deposit products increased $73,000, or 81%, as the Company
increased fees on existing products. Net securities gains (losses) increased
$81,000, as the nine months ended June 30, 1996 had net gains of $34,000,
compared to last year's $47,000 in securities losses related to the Bank's
write-off of both its stock and debenture investments in Nationar.
Non-Interest Expense
Non-interest expense for the nine months ended June 30, 1996 was $3.2 million,
an increase of $104,000, or 3.4% over 1995. Increases in personnel costs,
professional fees and other real estate expenses were partially offset by lower
advertising and FDIC insurance expenses. Salaries and employee benefits
increased $217,000, or 15.1%. During the nine months ended June 30, 1996, the
Company implemented its ESOP, which increased salary and employee benefits
expense by $78,000. In addition, on October 1, 1995, the Company implemented
Statement of Financial Accounting Standard No. 106 (SFAS No. 106), which
increased such expenses by approximately $150,000. Professional fees increased
$88,000, principally from the higher legal and accounting costs relating to
operating a public company. Other real estate costs were higher, as the Company,
as part of its periodic valuations of real estate owned, recorded write-downs on
certain properties and increased its estimated cost of disposition. Advertising
expense was lower principally because the nine month period ended June 30, 1995
included a special mortgage loan promotion. FDIC insurance premiums are lower in
1996, since the Bank is "BIF" insured and is now paying only $2,000 per year,
compared to last year's $.23 per $100 of assessed deposits.
Income Taxes
Income tax expense for the nine months ended June 30, 1996 was $1.5 million, an
increase of $447,000, or 42.6% higher than the same period of 1995,
corresponding to the 42.7% increase in income before taxes. The Company's
effective tax rate for the nine month periods ended June 30, 1996 and June 30,
1995 was 39.90% and 39.93%, respectively.
-11-
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE THREE
MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1995
Net Interest Income
Net interest income for the three months ended June 30, 1996 was $2.5 million,
an increase of $662,000, or 35.7% over the comparable period of 1995. The
increase was principally caused by a $79.4 million or $35.5% increase in average
earning assets, partially offset by a two basis point reduction in net interest
margin.
The yield on average earning assets was 6.74% for the three months ended June
30, 1996, a decrease of 48 basis points from the three month period ended June
30, 1995. The decrease is primarily related to the investment of the proceeds of
the Company's public offering in lower yielding short term investments. Average
federal funds sold during the three months ended June 30, 1996 was $108.2
million, an increase of $88.9 million over the comparable period of 1995. The
increase was principally caused by the receipt of the net proceeds from the
public offering, the temporary investment of stock subscriptions until the
public offering was consummated and a decrease in the average investment
portfolios.
Total interest expense for the three months ended June 30, 1996 was $2.5
million, an increase of $396,000, or 19.2% over the same period last year. The
increase was principally volume related, as average interest bearing liabilities
increased $40.0 million, or 20.9%, over the same period of 1995. The increase in
volume was principally the holding of stock subscriptions until the public
offering was consummated. The Company paid 3.5% per annum to all subscribers
during the holding period. In addition, the Company has experienced, similar to
many financial institutions, a customer preference for higher costing
certificates of deposits rather than savings accounts. Overall, the Company
experienced a net reduction of its cost of funds to 4.26% or 5 basis points
below the cost of funds during the same period last year. The reduction was
directly related to the temporary low cost stock subscriptions, and without
those funds, the cost of funds would have increased.
For more information on average balances, interest rates and yields, please
refer to Table #2 included in this report.
Provision for loan losses
The provision for loan losses is a result of management's periodic analysis of
the allowance for loan losses. The provision for loan losses was $45,000 for
both the three month periods ended June 30, 1996 and 1995.
Non-interest income
Non-interest income for the quarter ended June 30, 1996 was $670,000, an
increase of $650,000 over the same quarter of last year. The increase is
principally the recovery of $560,000 from the Nationar loss reserve. In
addition, service fees on deposit accounts increased due to implementation of
new fees on existing products. Finally, last year's non-interest income was
adversely impacted by $47,000 in securities losses, related to the Company's
write-off of its stock and debenture investments in Nationar.
-12-
<PAGE>
Non-Interest Expense
Non-interest expense for the three months ended June 30, 1996 was $1,206,000, an
increase of $72,000, or 6.3% over the same period of 1995. Increases in
personnel costs, professional fees and other real estate expenses were partially
offset by lower advertising and FDIC insurance premiums. Salaries and employee
benefits increased primarily from ESOP compensation expense. Professional fees
were higher principally from increased accounting and legal fees relating to
operating a public company. Other real estate costs were higher, as the Company
increased its estimated costs to dispose of properties and recorded write-downs
on certain other real estate properties. Advertising expense was lower
principally because 1995 included a special mortgage loan promotion. FDIC
insurance premiums are lower, since the Bank is "BIF" insured and is now paying
only $2,000 per year, compared to last year's $.23 per $100 of assessed
deposits.
Income Taxes
Income tax expense for the three months ended June 30, 1996 was $795,000, an
increase of $520,000, or 189.1% higher than 1995. The increase corresponds to
the higher pre-tax income. The Company's effective tax rate for the three months
ended June 30, 1996 was 41.1%, compared to 39.6% for 1995. The increase in the
effective tax rate occurred because the Company's non-taxable income is a
smaller percentage of pre-tax income in 1996 compared to 1995.
FINANCIAL CONDITION
Total assets were $283.3 million at June 30, 1996, an increase of $53.2 million,
or 23.1% over the $230.1 million at September 30, 1995. The increase is
principally a result of the receipt of net proceeds from the Company's public
offering, which were initially invested in federal funds sold, and near the end
of the quarter ended June 30, 1996 principally in short term securities
available for sale.
Cash and cash equivalents, including federal funds sold, were $66.9 million at
June 30, 1996, an increase of $28.8 million over the $38.1 million at September
30, 1995. The increase primarily represented the portion of the public offering
proceeds which have not been invested in securities and the receipt in June of
$3.1 million of the Nationar claim.
The following summarizes the Company's investment portfolio as of June 30, 1996,
and September 30, 1995:
June 30 September 30
1996 1995
---- ----
(In Millions)
Securities available for sale at fair value $68.5 -
Investment securities at amortized cost 24.1 67.1
----- -----
Total securities $92.6 $67.1
===== =====
Total securities of $92.6 million increased $25.5 million, or 38% over the $67.1
million at September 30, 1995. The increase represents the investment, as of
June 30, 1996, of a portion of the public offering net proceeds into short term
securities classified as available for sale.
-13-
<PAGE>
In addition, in December 1995, the Company reclassified certain investment and
mortgage backed securities from the "held to maturity" to available for sale, in
response to the one-time opportunity to reassess classification under Statement
of Financial Accounting Standards ("SFAS") #115. Investment securities with an
aggregate amortized cost of $11.6 million and an aggregate fair value of $11.7
million were reclassified to "available for sale" and mortgage-backed securities
with an aggregate cost of $13.2 million and an aggregate fair value of $13.6
were transferred to available for sale.
Loans receivable were $120.5 million at June 30, 1996, an increase of $.2
million over the $120.3 million at September 30, 1995. The following table shows
the loan portfolio composition as of the respective balance sheets dates:
June 30 September 30
1996 1995
---- ----
(In Thousands)
Real Estate Loans
One-to-four family $96,670 $95,588
Multi-family and commercial 5,013 5,132
Construction 358 230
-------- --------
Total real estate loans $102,041 $100,950
Consumer Loans 19,076 19,988
-------- --------
Total loans $121,117 $120,938
Less: Net deferred loan fees (597) (624)
-------- --------
Total loans receivable, net $120,520 $120,314
======== ========
The decrease in consumer loans was principally a decrease in home equity loans,
as lower mortgage rates have caused some customers to refinance their underlying
first mortgages and repay their home equity loans.
Non performing loans at June 30, 1996 were $1.2 million, an increase of $163,000
from September 30, 1995, but a decrease of $272,000 from March 31, 1996. Non
performing loans as a percentage of total loans were .99% at June 30, 1996
compared to .86% at September 30, 1995. At June 30, 1996, the allowance for loan
losses was $1.8 million, or 1.53% of period end loans and 153.7% of non
performing loans. The following summarizes the activity in the allowance for
loan losses:
Nine months ended June 30,
1996 1995
---- ----
(In Thousands)
Allowance at beginning of period $1,950 $1,746
Charge-offs 237 54
Recoveries (8) (9)
------ ------
Net Charge-offs 229 45
Provision for loan losses 120 210
------ ------
Allowance at end of period $1,841 $1,911
====== ======
-14-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds for operations are deposits from its
primary market area, and principal and interest payments on its loan and
securities portfolios. While maturities and scheduled amortization of loans and
securities are, in general, a predictable source of funds, deposit flows and
loan prepayments are greatly influenced by general interest rates, economic
conditions and competition.
The primary financing activity of the Bank is the attraction of deposits and at
June 30, 1996, the Bank experienced a net increase in deposits of $1.4 million
from September 30, 1995. In addition, on April 18, 1996, the Company completed
its initial public offering of common stock. Net proceeds to the Company were
$54.9 million, of which $4.5 million was loaned to the Company's ESOP trustee to
purchase 8% of the shares issued and $27.3 million was used to purchase the
stock of the Bank upon its initial issuance.
The Bank is required to maintain minimum levels of liquid assets as defined by
OTS regulations. This requirement, which may be varied by the OTS depending on
economic conditions and deposit flows, is expressed as a percentage of deposits
and short term borrowings. The required minimum liquidity ratio is currently 5%.
The Bank's average liquidity ratio for the month of June was 83.8%.
The Bank anticipates that it will have sufficient funds available to meet its
current commitments. At June 30, 1996, the Bank had commitments to originate
loans of $2.8 million, as well as undrawn lines of credit of $1.8 million on
home equity and other lines of credit. Certificates of deposit which are
scheduled to mature in one year or less at June 30, 1996, totaled $40.3 million.
Management believes that a significant portion of such deposits will remain with
the Bank.
At June 30, 1996, the Bank's capital exceeded each of the capital requirements
of the OTS, and is classified as well capitalized.
-15-
<PAGE>
TABLE #1 AVERAGE BALANCES, INTEREST RATES AND YIELDS
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. No
tax equivalent adjustments were made. All average balances are monthly
average balances. Total investments include both the securities
available for sale portfolio and investment security portfolio.
Securities available for sale are reflected at fair value. Non-accruing
loans have been included in the table as loans receivable with interest
earned recognized on a cash basis only.
<TABLE>
<CAPTION>
NINE MONTH PERIODS ENDED
---------------------------------------------------------------------------------
June 30, 1996 June 30, 1995
-------------------------------------- ----------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Loans receivable, net $120,573 $ 7,333 8.11% $121,679 $7,266 7.96%
Total investments 63,761 2,986 6.26% 78,578 3,549 6.04%
Federal Funds sold 65,575 2,654 5.41% 17,392 739 5.68%
-------- -------- -------- ------
Total interest-earning assets 249,909 12,973 6.93% 217,649 11,554 7.10%
-------- ------
Allowance for loan losses (1,931) (1,854)
Other assets, net 11,950 9,113
-------- --------
Total Assets $259,928 $224,908
======== ========
Interest-bearing liabilities
Savings deposits $84,728 $2,221 3.50% $101,728 $2,665 3.50%
Money Market 8,563 220 3.43% 9,060 234 3.45%
Now Accounts 8,747 158 2.41% 7,719 145 2.51%
Certificates of Deposit 92,691 3,939 5.68% 72,302 2,752 5.09%
Due to Subscribers/Escrow 16,443 322 2.62% 2,034 28 1.84%
-------- -------- -------- ------
Total interest bearing
liabilities 211,172 6,860 4.34% 192,843 5,824 4.04%
-------- ------
Non-interest bearing 3,740 3,758
Other liabilities 4,275 915
Shareholders' equity 40,741 27,392
-------- --------
Total Equity and Liabilities $259,928 $224,908
======== ========
Net interest income $6,113 $5,730
Interest rate spread 2.59% 3.06%
Net yield on average
interest earning assets 3.27% 3.52%
Earning Assets/Total Assets 96.15% 96.77%
Average interest earning
assets to average interest
bearing liabilities 118.34% 112.86%
</TABLE>
-16-
<PAGE>
TABLE #2 AVERAGE BALANCES, INTEREST RATES AND YIELDS
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. No
tax equivalent adjustments were made. All average balances are monthly
average balances. Total investments include both the securities
available for sale portfolio and investment security portfolio.
Securities available for sale are reflected at fair value. Non-accruing
loans have been included in the table as loans receivable with interest
earned recognized on a cash basis only.
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED
---------------------------------------------------------------------------------
June 30, 1996 June 30, 1995
-------------------------------------- ----------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing assets
Loans receivable, net $119,815 $ 2,446 8.17% $121,081 $2,418 7.99%
Total investments 68,929 1,050 6.13% 77,148 1,228 6.38%
Federal Funds Sold 108,231 1,478 5.49% 19,300 270 5.61%
-------- -------- -------- ------
Total interest bearing assets 296,975 4,974 6.74% 217,529 3,916 7.22%
-------- ------
Allowance for loan losses (1,873) (1,900)
Other assets, net 13,776 9,173
-------- --------
Total Assets $308,878 $224,802
======== ========
Interest-bearing liabilities
Savings deposits $85,269 $742 3.50% $ 91,132 $796 3.50%
Money Market 8,473 72 3.42% 8,793 85 3.88%
Now Accounts 9,164 56 2.46% 7,791 49 2.52%
Certificates of Deposit 92,745 1,283 5.56% 81,835 1,122 5.50%
Due to Subscribers/Escrow 36,405 306 3.38% 2,468 11 1.79%
-------- -------- -------- ------
Total interest bearing
liabilities 232,056 2,459 4.26% 192,019 2,063 4.31%
Non-interest bearing 4,057 3,950
Other liabilities 8,649 890
Shareholders' equity 64,116 27,943
-------- --------
Total Equity and Liabilities $308,878 $224,802
======== ========
Net interest income $2,515 $1,853
Interest rate spread 2.48% 2.91%
Net yield on average
earning assets 3.41% 3.42%
Earning Assets/Total Assets 96.15% 96.76%
Average interest earning
assets to average interest
bearing liabilities 127.98% 113.29%
</TABLE>
-17-
<PAGE>
CATSKILL FINANCIAL CORPORATION
FORM 10-Q
JUNE 30,1996
- --------------------------------------------------------------------------------
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.
-18-
<PAGE>
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: /a/ Wilbur J. Cross
-------------------------------------
Wilbur J. Cross
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
Date: /a/ David J. DeLuca
-------------------------------------
David J. DeLuca
Chief Financial Officer
(Principal Financial and
Accounting Officer)
-19-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 6,069
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 60,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 68,549
<INVESTMENTS-CARRYING> 24,072
<INVESTMENTS-MARKET> 24,785
<LOANS> 120,520
<ALLOWANCE> 1,841
<TOTAL-ASSETS> 283,258
<DEPOSITS> 198,601
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,966
<LONG-TERM> 0
0
0
<COMMON> 54,909
<OTHER-SE> 25,782
<TOTAL-LIABILITIES-AND-EQUITY> 283,258
<INTEREST-LOAN> 7,333
<INTEREST-INVEST> 5,617
<INTEREST-OTHER> 23
<INTEREST-TOTAL> 12,973
<INTEREST-DEPOSIT> 6,860
<INTEREST-EXPENSE> 6,860
<INTEREST-INCOME-NET> 6,113
<LOAN-LOSSES> 120
<SECURITIES-GAINS> 34
<EXPENSE-OTHER> 3,169
<INCOME-PRETAX> 3,749
<INCOME-PRE-EXTRAORDINARY> 3,749
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,253
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
<YIELD-ACTUAL> 3.27
<LOANS-NON> 1,198
<LOANS-PAST> 1,487
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,198
<ALLOWANCE-OPEN> 1,950
<CHARGE-OFFS> 237
<RECOVERIES> 8
<ALLOWANCE-CLOSE> 1,841
<ALLOWANCE-DOMESTIC> 1,841
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 440
</TABLE>
