UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 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 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
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10K or any amendments to this Form 10K. [X]
As of December 22, 1997, the aggregate market value of the voting
stock held by non-affiliates (based on reported beneficial ownership
of all directors and executive officers of the registrant; this determination
does not, however, constitute an admission of affiliated status for
any of these individual stockholders) of the registrant, excluding
unallocated ESOP shares, was approximately $80.7 million.
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 4,822,331
(Title of class) (outstanding at December 22, 1997)
ANNUAL REPORT FOR 1997 ON FORM 10-K
<TABLE>
TABLE OF CONTENTS
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Page
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PART I
Item 1. Business 1
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a
Vote of Security Holders 20
PART II
Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters 20
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures
about Market Risks 20
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 20
PART III
Item 10. Directors and Executive Officers
of the Registrant 21
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial
Owners and Management 21
Item 13. Certain Relationships and Related Transactions 21
PART IV
Item 14. Exhibits and Financial Statement Schedules
and Reports on Form 8-K 21
SIGNATURES 23
</TABLE>
<TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
<CAPTION>
Documents Part of 10-K into which incorporated
<S> <C>
Portions of the Annual Report to Shareholders
for fiscal year ended September 30, 1997. Parts II and IV
Portions of the Proxy Statement for Annual Meeting
of Shareholders to be held February 17, 1998. Part III
</TABLE>
PART I
ITEM 1. BUSINESS
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") upon the conversion
of the Bank from the mutual to the stock form of ownership. The Company
is incorporated under the laws of the state of Delaware, is qualified
to do business in the state of New York, and generally is authorized
to engage in any activity that is permitted by the Delaware General
Corporation Law. On April 18, 1996, the Bank converted to the stock
form of ownership, the Company acquired all of the issued and outstanding
shares of stock of the Bank, and 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 and stock offering costs, and $50.4
million excluding the shares acquired by the Company's newly formed
Employee Stock Ownership Plan (the "ESOP").
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 and its financial data
prior to April 18, 1996, except where otherwise indicated, refer to
the Bank and its financial data.
The Bank was organized in 1868, as a state chartered mutual savings
bank. In January 1996, the Bank converted to a federally chartered
mutual savings bank. The Bank is a member of the Bank Insurance Fund
("BIF"), which is administered by the Federal Deposit Insurance Corporation
("FDIC"). Accordingly, its deposits are insured up to applicable limits
by the FDIC, which insurance is backed by the full faith and credit
of the United States. The Bank's primary market area is comprised
of Greene County and southern Albany County in New York, serviced
by the Bank's main office and three other banking offices. At September
30, 1997, the Bank had total assets of $286.1 million, deposits of
$207.8 million and equity of $59.9 million, or 20.9% of total assets.
The Bank has been and intends to continue to be a community-oriented
financial institution offering financial services to meet the needs
of the communities it serves. 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 the Bank's primary
market area. The Bank offers deposit accounts having a range of interest
rates and terms. The Bank only solicits deposits in its primary market
area and does not have brokered deposits. The Bank is a member of
the Federal Home Loan Bank of New York ("FHLBNY").
Regulation
The following is a summary of certain statutes and regulations affecting
the Company and the Bank. The Bank, as a federally chartered, FDIC
insured, savings bank, derives its powers principally from federal
law and is subject to comprehensive regulation of virtually every
aspect of its business operations. The following summary is selective
and should not be considered to be a complete discussion of all regulation
affecting the Company or the Bank.
General Bank Regulation. The Bank's primary federal bank regulator
is the Office of Thrift Supervision ("OTS"). The Bank is also subject
to regulation by the FDIC as the insurer of its deposits. The Bank
must file periodic reports with the OTS and is regularly examined
by the OTS and the FDIC. As a result of these examinations, the Bank
can be required to adjust its loan classifications or allowance for
loan losses, take other actions to correct deficiencies found during
the examinations, or cease engaging in certain activities. The Bank
is generally permitted to open deposit-taking branches throughout
the United States, regardless of local laws regarding branching.
The OTS may institute enforcement action against the Bank for violations
of law or for unsafe and unsound banking practices. Enforcement actions
can include the issuance of cease and desist orders, the commencement
of removal proceedings in which an employee, officer or director can
be removed from involvement with the Bank, the assessment of civil
monetary penalties, and injunctive relief. The FDIC may terminate
the insurance of deposits, after notice and hearing, upon a finding
that an institution has engaged in unsafe and unsound practices, cannot
continue operations because it is in an unsafe and unsound condition,
or has violated any applicable law, regulation, rule, order or condition
imposed by the OTS or FDIC. The FDIC may instead impose less severe
sanctions. Neither the OTS nor the FDIC (which was also the Bank's
primary federal regulator before the Bank became a federal savings
bank in January 1996) have ever instituted any enforcement action
against the Bank.
Federal law and OTS regulations limit the percentage of the Bank's
assets that can be invested in certain investments. For example, commercial,
corporate and business loans, other than those secured by real estate
collateral, are limited in the aggregate to 10% of assets. The purchase
of below investment grade debt securities is prohibited. Loans secured
by non-residential real property cannot, in the aggregate, exceed
400% of capital. Consumer loans not secured by residential real estate
are generally limited, in the aggregate, to 35% of total assets. Loans
secured by residential real property, and many other types of loans
and investments, are not subject to any percentage of asset limit.
Generally, the Bank may not lend more than 15% of unimpaired capital
and surplus to one borrower, representing a lending limit of $9.4
million per borrower, with an additional 10% of unimpaired capital
and surplus being permitted if secured by certain readily marketable
collateral. The Bank is in compliance with all these limits. The Bank's
largest loan to one borrower at September 30, 1997, was a $1.8 million
loan secured by a motel in Albany County.
The OTS also imposes a semi-annual assessment on all OTS regulated
institutions to defer the cost of OTS regulation. For the semi-annual
period ended December 31, 1997, the Bank's OTS assessment was $36,553.
The Company is a unitary savings and loan holding company, and its
sole FDIC-insured subsidiary, the Bank, is a qualified thrift lender
("QTL", discussed in more detail below). Therefore, the Company generally
has broad authority to engage in all types of business activities.
If the Company were to acquire another insured institution as a separate
subsidiary or if the Bank fails to remain a QTL, the Company's activities
will be limited to those permitted of multiple savings and loan holding
companies. In general, a multiple savings and loan holding company
(or subsidiary thereof that is not an insured institution) may, subject
to OTS approval in most cases, engage in activities comparable to
those permitted for bank holding companies, certain insurance activities,
and certain activities related to the operations of its FDIC-insured
subsidiaries.
Capital Requirements. The Bank is subject to minimum capital requirements
imposed by the OTS. The Bank must maintain (i) tangible capital of
1.5% of tangible assets, (ii) core capital of 3.0% of adjusted tangible
assets, and (iii) a risk-based capital requirement of 8.0% of risk-weighted
assets. Under current law and regulations, there are no capital requirements
directly applicable to the Company. The Bank substantially exceeds
all minimum capital standards imposed by the OTS. At September 30,
1997, the Bank had a tangible capital ratio of 20.70%, a core capital
ratio of 20.70% and a risk based capital ratio of 61.28%. OTS regulations
require that certain institutions with more than normal interest rate
risk must make a deduction from capital before determining compliance
with the minimum capital requirements. The Bank is currently exempt
from the deduction requirement because it has total assets less than
$300,000,000 and risk based capital in excess of 12%. However, the
Bank's capital ratios are high enough that even if the exemption is
withdrawn, the deduction would not have a material effect on the Bank's
compliance with OTS capital requirements.
The OTS has the authority to require that an institution take prompt
corrective action to solve problems if the institution is undercapitalized,
significantly undercapitalized or critically undercapitalized. Because
of the Bank's high capital ratios, the prompt corrective action regulations
are not expected to have an effect on the Bank.
Deposit Insurance Premiums. The FDIC's deposit insurance premiums
are assessed through a risk-based system under which all insured depository
institutions are placed into one of nine categories and assessed insurance
premiums based upon their level of capital and supervisory evaluation.
Under the system, institutions classified as well capitalized and
considered healthy pay the lowest premium. The Bank is in this category
and currently pays negligible deposit insurance premiums. If the Bank's
capital ratios substantially deteriorate or if the Bank is found to
be otherwise unhealthy, the deposit insurance premiums payable by
the Bank could increase.
In September 1996, The Economic Growth and Regulatory Paperwork Reduction
Act of 1996 (the "1996 Act") became law. Before the 1996 Act, SAIF
insured institutions paid deposit insurance premiums at a rate of
at least 0.23% of insured deposits (23 cents per $100). This gave
most BIF institutions, such as the Bank, a competitive advantage because
the BIF insurance premiums were lower. The 1996 Act imposed a one
time assessment on all SAIF institutions and then equalized the insurance
premiums for BIF and SAIF institutions. At the same time, the 1996
Act required BIF institutions to contribute to the costs of the "FICO"
bonds sold in the late 1980s to finance the savings and loan bailout.
BIF institutions pay only 20% of the FICO bond assessment paid by
SAIF institutions. SAIF institutions pay a FICO bond assessment of
.064% of insured deposits, while BIF institutions such as the Bank
pay approximately 0.013% of insured deposits. The FICO bond assessment
will equalize no later than January 1, 2000. As a result of the 1996
Act, the competitive advantage which the Bank enjoyed against SAIF
institutions has been reduced, but not yet eliminated.
The 1996 Act contemplates a merger of the SAIF and BIF funds, with
the elimination of the federal savings bank charter by January 1,
1999. The exact manner in which the elimination will be accomplished
has not yet been established, but commentators have suggested that
all federal thrift institutions, such as the Bank, will be required
to convert either to a national bank, state commercial bank or state
savings bank charter. A change in the charter of the Bank could also
affect the flexibility accorded to the Company as a unitary savings
and loan holding company. The effect that the forced conversion will
have on the Bank and the Company cannot be determined at this time
and there can be no assurance that a charter conversion will not have
an adverse impact on the Company or the Bank.
Dividend Restrictions. OTS regulations impose limits on dividends
or other capital distributions by savings institutions based on capital
levels and net income. An institution, such as the Bank, that meets
or exceeds all of its capital requirements (both before and after
giving effect to the distribution) and is not in need of more than
normal supervision, may make capital distributions during a calendar
year of up to the greater of (i) 100% of net income for the current
calendar year plus 50% of its capital surplus (capital in excess of
regulatory requirements) or (ii) 75% of its net income over the most
recent four quarters. Any additional capital distributions require
prior regulatory approval.
The Bank's capital levels exceed regulatory minimums to such an extent
that the substantive restrictions on dividends are not expected to
have a material effect on the Bank. However, OTS regulations also
impose procedural restrictions. The OTS must receive at least 30 days'
written notice before making any capital distributions. All such capital
distributions are subject to the OTS' right to object to a distribution
on safety and soundness grounds. The OTS has proposed regulations
that would eliminate the notice requirement for the highest rated
institutions so that advance notice would not be required for most
normal dividends. The Bank expects that it will not be required to
give notice under normal circumstances if the new proposal is adopted
in its current form.
Qualified Thrift Lenders. If the Bank fails to remain a QTL, as defined
below, it must either convert to a national bank charter or be subject
to restrictions on its activities specified by law and the OTS regulations,
which restrictions would generally limit activities to those permitted
for national banks. Also, three years after the savings institution
ceases to be a QTL, it would be prohibited from retaining any investment
or engaging in any activity not permissible for a national bank and
would be required to repay any outstanding borrowings from any Federal
Home Loan Bank.
A savings institution will be a QTL if its qualified thrift investments
equal or exceed 65% of its portfolio assets on a monthly average basis
in nine of every 12 months. Qualified thrift investments include,
among others, (i) certain housing-related loans and investments (notably
including residential one to four family mortgage loans), (ii) certain
federal government and agency obligations, (iii) loans to purchase
or construct churches, schools, nursing homes and hospitals (subject
to certain limitations), (iv) consumer loans (subject to certain limitations),
(v) shares of stock issued by any Federal Home Loan Bank, and (vi)
shares of stock issued by the FHLMC or the FNMA (subject to certain
limitations). The Bank satisfied the QTL test at September 30, 1997,
as well as for every month-end during fiscal 1997.
Community Reinvestment Act. Under the Community Reinvestment Act (the
"CRA"), as implemented by OTS regulations, the Bank has a continuing
and affirmative obligation consistent with its safe and sound operation
to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The Bank is periodically examined
by the OTS for compliance with the CRA. Subject to certain exceptions
and elections, under recently adopted rules the Bank's CRA performance
will be evaluated based upon the lending, investment and service activities
of the Bank. The Bank received an "outstanding" CRA rating from the
OTS under prior evaluation rules and has not yet been examined under
the new rules.
Federal Reserve Regulation. Under Federal Reserve Board regulations,
the Bank must maintain reserves against its transaction accounts (primarily
interest-bearing checking accounts) and non-personal time deposits.
The effect of the reserve requirements is to compel the Bank to maintain
certain low-yielding reserve deposits which are not available for
investment in higher yielding assets. However, at the present time,
in light of the Bank's high liquidity ratio, the reserve requirements
do not have a material adverse effect on the Bank. The balances maintained
to meet the reserve requirements may be used to satisfy liquidity
requirements imposed by the OTS. The Bank is in compliance with its
reserve requirements.
Taxation. The Company pays federal and New York State income taxes
on its income. The Bank, as a savings institution, was permitted a
deduction under former law for the creation of a reserve for bad debts.
In August 1996, the Internal Revenue Code (the "Code") was amended
to abolish the percentage method of calculating the tax bad debt deduction,
which, in general, had permitted savings institutions to deduct 8%
of their taxable income as a reserve for bad debts. The Bank had not
been eligible to use the percentage method because its retained earnings
and surplus exceeded 12% of deposits, so the abolition should not
have a material effect on current operations. Furthermore, the change
in the Code also requires savings institutions to recapture, over
a period of six to eight years, any additions to their tax bad debt
reserves since 1988. The Bank had already provided, as a provision
for deferred taxes in accordance with SFAS No. 109, for the tax consequences
of the Bank's post-1987 additions to the tax bad debt reserve. Therefore,
the recapture requirement should not have a material financial statement
impact.
Market Area
Catskill (population of 11,965 in the 1990 census) is located approximately
30 miles south of Albany on the western banks of the Hudson River
and is the largest municipality in Greene County. Greene County extends
from the Hudson River west into the northern Catskill Mountains. The
Bank's primary market area is heavily dependent on tourism, does not
have a substantial commercial or industrial base and has shown only
limited economic and demographic growth. The Bank's market is populated
by an older population.
Overall, the population of Albany County has remained relatively steady
in the last decade while the more rural Greene County benefited from
a population expansion. In 1995, Greene County registered a 48,000
population count, a 10.1% increase from 1985.
The business sectors in Greene County which account for the largest
percentage of earnings are state and local government, the service
industry and wholesale and retail trade. Manufacturing also accounts
for a noteworthy percentage of earnings in Greene County. The New
York State Thruway, which runs through Greene County, as well as the
county's lower cost of living, are attractive features to local employers,
especially distributors such as United Stationers and manufacturers
such as Dynabil Industries. Major sources of employment in Greene
County include a state prison, the county government and various health
care facilities, as well as various manufacturing companies.
Based on the latest available data, there are a total of 16 deposit
taking offices of commercial banks and thrift institutions in Greene
County and 109 in Albany County. The Bank's two Catskill offices hold
approximately 30% of all deposits in Greene County and 58% of thrift
institution deposits. In Albany County, with a much larger deposit
base, the Bank's share of all deposits was approximately 0.9%.
Lending Activities
General. The Bank's primary lending activity is the origination of
fixed- and adjustable rate, one- to four-family residential mortgage
loans for retention in its portfolio. The Bank also originates fixed-rate
consumer loans and adjustable-rate home equity line of credit consumer
loans. Adjustable rate mortgage ("ARM") and consumer loans increase
the percentage of the Bank's loans with more frequent terms to repricing
or shorter maturities than fixed-rate, one- to four-family mortgage
loans. See "--Loan Portfolio Composition" and "--One- to Four-Family
Residential Real Estate Lending." In addition, the Bank originates
multi-family and commercial real estate loans. Loan originations are
generated by the Bank's marketing efforts, which include print and
radio advertising, lobby displays and direct contact with local civic
organizations, as well as by the Bank's present customers, walk-in
customers and referrals from real estate agents and builders. At September
30, 1997, the Bank's gross loan portfolio totaled $126.7 million.
The approval of the Executive Committee of the Bank's Board of Directors
is required for all loans in excess of $100,000. Bank employees with
the authority to approve loans of $100,000 or less are designated,
and their lending authority is defined, by the Executive Committee.
The Executive Committee acts in accordance with policies established
not less frequently than annually by the Board of Directors.
The aggregate amount of loans that the Bank is permitted to make under
applicable federal regulations to any one borrower, including related
entities, is generally equal to 15% of unimpaired capital and surplus.
At September 30, 1997, the maximum amount which the Bank could have
loaned to any one borrower and the borrower's related entities was
approximately $9.4 million. At that date, the Bank's largest lending
relationship was a $1.8 million commercial real estate loan secured
by a motel located in Albany County, New York. This loan was performing
in accordance with its modified repayment terms as of September 30,
1997. See "Asset Quality--Other Loans of Concern." At September 30,
1997, there were only two other loans (or lending relationships) with
outstanding balances in excess of $250,000.
<TABLE>
<CAPTION>
September 30,
1997 1996 1995 1994 1993
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans
One- to
four-family $102,232 80.69% $100,383 80.34% $ 95,588 79.04% $ 96,570 79.37% $ 98,173 80.74%
Multi-family and
commercial 4,691 3.70 5,115 4.09 5,132 4.24 5,606 4.61 3,628 2.98
Construction 1,306 1.03 423 0.34 230 0.19 743 0.61 1,776 1.46
Total real
estate loans 108,229 85.42 105,921 84.77 100,950 83.47 102,919 84.59 103,577 85.18
Consumer Loans
Automobile 6,655 5.25 7,029 5.63 6,652 5.50 5,220 4.29 3,849 3.17
Home equity 3,709 2.93 4,368 3.50 5,393 4.46 6,021 4.95 6,616 5.44
Other secured 3,385 2.67 2,965 2.37 2,970 2.46 2,680 2.20 2,591 2.13
Student 2,658 2.10 2,450 1.96 2,373 1.96 2,195 1.80 1,941 1.60
Other unsecured 1,379 1.09 1,430 1.15 1,415 1.17 1,078 0.89 794 0.65
Mobile home 687 0.54 782 0.62 1,185 0.98 1,562 1.28 2,223 1.83
Total consumer
loans 18,473 14.58 19,024 15.23 19,988 16.53 18,756 15.41 18,014 14.82
Total loans 126,702 100.00% 124,945 100.00% 120,938 100.00% 121,675 100.00% 121,591 100.00%
Less
Deferred fees 476 579 624 696 712
Allowance for
loan losses 1,889 1,833 1,950 1,746 1,294
Total loans
receivable,
net $124,337 $122,533 $118,364 $119,233 $119,585
</TABLE>
The following table presents the composition of the Bank's loan portfolios
by fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
September 30,
1997 1996 1995 1994 1993
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans
Real estate:
One- to
four-family $ 67,782 53.50% $ 63,491 50.81% $ 53,993 44.65% $ 51,163 42.05% $ 45,746 37.62%
Multi-family and
commercial 1,850 1.46 2,142 1.71 1,743 1.44 2,295 1.88 1,501 1.23
Construction 1,306 1.03 423 0.34 230 0.19 743 0.61 1,776 1.46
Total real
estate
loans 70,938 55.99 66,056 52.86 55,966 46.28 54,201 44.54 49,023 40.31
Consumer 14,701 11.60 14,656 11.73 14,595 12.06 12,735 10.47 11,398 9.38
Total
fixed-rate
loans 85,639 67.59 80,712 64.59 70,561 58.34 66,936 55.01 60,421 49.69
Adjustable-Rate
Loans
Real estate:
One- to
four-family 34,450 27.19 36,892 29.53 41,595 34.40 45,407 37.32 52,427 43.12
Multi-family and
commercial 2,904 2.29 2,973 2.38 3,389 2.80 3,311 2.72 2,127 1.75
Total real
estate
loans 37,354 29.48 39,865 31.91 44,984 37.20 48,718 40.04 54,554 44.87
Consumer<F1> 3,709 2.93 4,368 3.50 5,393 4.46 6,021 4.95 6,616 5.44
Total
adjustable-
rate loans 41,063 32.41 44,233 35.41 50,377 41.66 54,739 44.99 61,170 50.31
Total loans 126,702 100.00% 124,945 100.00% 120,938 100.00% 121,675 100.00% 121,591 100.00%
Less
Deferred fees 476 579 624 696 712
Allowance for
loan losses 1,889 1,833 1,950 1,746 1,294
Total loans
receivable,
net $124,337 $122,533 $118,364 $119,233 $119,585
<FN>
<F1>Consists entirely of advances on home equity lines of credit.
</TABLE>
The following table sets forth the contractual maturities of the Bank's
loan portfolio at September 30, 1997. Loans which have adjustable
or renegotiable interest rates are shown as maturing in the period
during which the final loan payment is due without regard to rate
adjustments. The table does not reflect the effects of loan amortization,
possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Due During Years Ending September 30,
1998<F1> 1999 2000 2001-2002
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate
One- to
Four-Family $ 5,985 7.82% $ 6,162 7.76% $6,512 7.76% $13,880 7.77%
Multi-family and
Commercial 583 9.25 2,031 8.57 174 9.17 977 9.30
Construction 1,306 7.99 0 -- -- -- -- --
Consumer
Consumer 5,045 8.80 3,662 8.20 2,518 7.23 2,129 13.17
Total Loans $12,919 8.29% $11,855 8.03 $9,204 7.64 $16,986 8.54
2013 and
2003-2007 2008-2012 following Total
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate
One- to
Four-Family $35,151 7.72% $20,856 7.74% $13,686 7.67% $102,232 7.73%
Multi-family and
Commercial 491 8.77 289 9.16 146 8.42 4,691 8.88
Construction -- -- -- -- -- -- 1,306 7.99
Consumer
Consumer 1,392 10.02 2,205 8.70 1,522 8.49 18,473 9.03
Total Loans $37,034 7.82 $23,350 7.86 $15,354 7.76 $126,702 7.97
<FN>
<F1> Includes demand loans, loans having no stated maturity and overdraft loans.
</TABLE>
One- to Four-Family Residential Real Estate Lending
The Bank's residential mortgage loans consist of loans to purchase
or refinance one- to four-family, owner-occupied residences and, to
a lesser extent, secondary residences. At September 30, 1997, $102.2
million, or 80.7% of the Bank's gross loans, consisted of one- to
four-family residential mortgage loans. Approximately 66.3% of the
Bank's one-to four-family residential mortgage loans provide for fixed
rates of interest. The Bank's one- to four-family mortgage loans typically
provide for repayment of principal over a period not to exceed 25
years. The Bank's one- to four-family residential mortgage loans are
priced competitively with the market. Accordingly, the Bank attempts
to distinguish itself from its competitors based on quality of service.
The Bank underwrites its one- to four-family residential mortgage
loans using Federal National Mortgage Association ("FNMA") secondary
market standards. The Bank holds in its portfolio all one- to four-
family residential mortgage loans it originates. While the Bank currently
does not sell loans, and presently has no intention to do so, management
may consider selling loans in the future depending on market conditions
and the asset/liability management of the Bank. In underwriting one-
to four-family residential mortgage loans, the Bank evaluates both
the borrower's credit history and ability to make monthly payments,
and the value of the property securing the loan. Properties securing
ARM and all fixed-rate loans are appraised by independent fee appraisers
approved by the Board of Directors. The Bank requires borrowers to
obtain title insurance and hazard insurance (including flood insurance,
where appropriate) naming the Bank as lienholder in an amount not
less than the amount of the loan, or the maximum insurable value of
the property.
The Bank currently offers residential ARM loans with interest rates
that adjust either annually, or every three years with adjustments
based on the change in the comparable Treasury index. ARM loans originated
prior to 1990 were adjusted based upon a Federal Home Loan Bank Board
index, which has been converted to a Federal Housing Finance Board
index. One year ARM loans provide for a 1.5% periodic cap and three
year ARM loans provide for a 2.0% periodic cap and both have lifetime
caps of 6.0% over the initial rate. As a consequence of using caps,
the interest rates on these loans may not be as rate sensitive as
is the Bank's cost of funds. Borrowers of residential ARM loans are
generally qualified at the maximum increase in rate which could occur
at the first adjustment period, which may be lower than the fully
indexed rate. The Bank's residential ARM loans are not convertible
into fixed-rate loans. ARM loans generally pose greater credit risks
than fixed-rate loans, primarily because as interest rates rise, the
required periodic payment by the borrower rises, increasing the potential
for default. As of September 30, 1997, however, the Bank had not experienced
default rates on these loans materially higher than on similar fixed
rate loans.
The Bank's one- to four-family mortgage loans do not contain prepayment
penalties and do not permit negative amortization of principal. Real
estate loans originated by the Bank generally contain a "due on sale"
clause allowing the Bank to declare the unpaid principal balance due
and payable upon the sale of the mortgaged property. The Bank may
waive the due on sale clause on loans held in its portfolio to permit
assumptions of loans by qualified borrowers.
The Bank does not currently originate residential mortgage loans if
the ratio of the loan amount to the lower of appraised value, or the
purchase price of the property securing the loan (i.e., the "loan-to-
value" ratio) exceeds 95%. If the loan-to-value ratio exceeds 80%, the Bank
requires that borrowers obtain private mortgage insurance in amounts
intended to reduce the Bank's exposure to 80% or less of the lower
of the appraised value or the purchase price of the real estate security.
The Bank also offers construction loans to individuals for the construction
of their residences. The Bank has occasionally made loans to builders
for the construction of homes including a limited amount of housing
construction loans to builders where the home has not been pre-sold.
Generally, no construction loan is approved unless there is evidence
of a commitment for permanent financing upon completion of the residence,
whether through the Bank or another financial institution. Construction
loans generally require construction stage inspections before funds
may be released to the borrower. At September 30, 1997, the Bank's
construction loan portfolio totaled $1,306,000, or 1.0% of its gross
loan portfolio. Although no construction loans were classified as
non-performing as of September 30, 1997, these loans do involve a
higher level of risk than conventional one- to four-family residential
mortgage loans. For example, if construction is not completed and
the borrower defaults, the Bank may have to hire another contractor
to complete the project at a higher cost, or completion could be delayed.
Multi-Family and Commercial Real Estate Lending
The Company has engaged in multi-family and commercial real estate
lending secured primarily by small offices, retail establishments
and apartment buildings located in the Bank's primary market area.
At September 30, 1997, the Company had multi-family and commercial
real estate loans totaling $4.7 million, which represented 3.7% of
the Bank's gross loan portfolio. Included in commercial real estate
loans is a $1.8 million loan secured by a motel located in Albany
County, New York. See "Asset Quality--Other Loans of Concern."
Multi-family and commercial real estate loans originated by the Bank
generally have a variety of rate adjustment features and other terms.
The Bank's multi-family and commercial real estate loans typically
are for amounts less than $250,000, and generally do not exceed 70%
of the appraised value of the property securing the loan. The term
of such loans does not generally exceed 20 years. The Bank analyzes
the financial condition of the borrower, the borrower's credit history,
the sufficiency and reliability of the net income generated by the
property securing the loan and the value of the property itself. The
Bank generally requires personal guarantees of the borrowers in addition
to the security property as collateral for such loans. Appraisals
on properties securing multi-family and commercial real estate loans
are performed by independent fee appraisers approved by the Board
of Directors. See "--Loan Originations."
Multi-family and commercial real estate loans generally present a
higher level of risk than loans secured by one- to four-family residences.
This greater risk is due to several factors, including the concentration
of principal in a limited number of loans and borrowers, the effect
of general economic conditions on income producing properties and
the increased difficulty of evaluating and monitoring these types
of loans. Furthermore, the repayment of loans secured by multi-
family and commercial real estate is typically dependent upon the successful
operation of the related real estate project. If the cash flow from
the project is reduced (for example, if leases are not obtained or
renewed, or a bankruptcy court modifies a lease term, or a major tenant
is unable to fulfill its lease obligations), the borrower's ability
to repay the loan may be impaired and the value of the property may
be reduced.
Consumer Lending
The Bank currently originates substantially all of its consumer loans
in its primary market area. Management believes that offering consumer
loan products helps expand the Bank's customer base and creates stronger
ties to its existing customer base. In addition, because consumer
loans generally have shorter terms to maturity or adjustable rates
and may carry higher rates of interest than do residential mortgage
loans, they can be useful asset/liability and interest rate spread
management tools. The Bank originates consumer loans on a direct basis,
in which the Bank extends credit directly to the borrower. At September
30, 1997, the Bank's consumer loan portfolio totaled $18.5 million,
or 14.6% of the gross loan portfolio. Of consumer loans at September
30, 1997, 79.6% were fixed-rate loans and 20.4% were adjustable-
rate loans. At that date, all of the Bank's adjustable-rate consumer loans
were advances on home equity lines of credit.
The Bank offers consumer loans for a variety of purposes. Consumer
loan terms vary according to the type and value of collateral, contractual
maturity and creditworthiness of the borrower. Terms to maturity range
up to 15 years with respect to home equity lines of credit and 6 years
with respect to all other types of consumer loans. Unsecured consumer
lines of credit are extended to borrowers through their checking account
maintained at the Bank. These credit lines currently bear interest
at 18.0% and are generally limited to $50,000.
Underwriting standards for consumer loans include a determination
of the applicant's payment history on other debts and an assessment
of ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is a primary consideration,
the underwriting process also includes a comparison of the value of
the security, if any, in relation to the proposed loan amount.
At September 30, 1997, automobile loans, the largest component of
the Bank's consumer loan portfolio, totalled $6.7 million, or 36.0%
of the Bank's total consumer loan portfolio and 5.3% of the Bank's
gross loan portfolio. The Bank originates loans to purchase both new
and used automobiles at fixed rates of interest and terms of up to
six years. The Bank's maximum loan-to-value ratio on new automobile
loans is 100% of the borrower's cost, which includes such items as
dealer options.
Advances on home equity lines of credit represent the second largest
component of the Bank's consumer loan portfolio. The Bank's home equity
lines of credit are secured by a lien on the borrower's residence
and are generally originated in amounts which, together with all prior
liens on such residence, do not exceed 70.0% of the appraised value
of the property securing the loan. The interest rates for home equity
lines of credit float at a stated margin over the prime rate. Home
equity lines of credit generally require interest only payments on
the outstanding balance for the first five years of the loan, after
which the outstanding balance may be converted into a fully amortizing,
adjustable-rate loan with a term not in excess of 15 years. As of
September 30, 1997, the Bank had $3.7 million in outstanding advances
on home equity lines of credit, with an additional $1.6 million of
unused home equity lines of credit.
Consumer loans may entail greater credit risk than do residential
first mortgage loans, particularly in the case of consumer loans which
are unsecured or are secured by rapidly depreciable assets, such as
automobiles. In such cases, any repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of high initial loan-to-value
ratios, repossession, rehabilitation and carrying costs, and the greater
likelihood of damage, loss or depreciation of the underlying collateral.
Home equity line of credit loans are generally secured by subordinate
mortgages which present greater risks than first mortgage liens. At
September 30, 1997, $137,000, or .74% of the Bank's consumer loan
portfolio was non-performing. There can be no assurances that additional
delinquencies will not occur in the future.
Commercial Business Lending
Federal regulations authorize federally-chartered savings banks, such
as the Bank, to make non-real estate secured or unsecured loans for
commercial, corporate, business and agricultural purposes, up to a
maximum of 10% of total assets. The Bank engages in such commercial
business lending only to a very limited extent and primarily through
the New York Business Development Corporation (the "NYBDC"), a privately
owned corporation which provides loans, management assistance, counseling
and a variety of other financial programs to small and medium sized
businesses located in New York. Loans made through the NYBDC may be
to businesses located within or outside the Bank's primary market
area. The Bank is one of 119 participating commercial and savings
banks. At September 30, 1997, the Bank had approximately $63,000 in
commercial business loans outstanding, representing an insignificant
part of its loan portfolio, with an additional $109,000 committed
for loans through NYBDC. At September 30, 1997, all of the Bank's
commercial business loans were performing in accordance with their
terms.
Loan Originations
Loan originations are developed from continuing business with depositors
and borrowers, referrals from real estate agents and walk-in customers.
All of the Bank's loans are originated by its salaried employees.
The Bank's ability to originate loans is dependent upon demand for
loans in its market. Demand is affected by the local economy and interest
rate environment. The Bank retains all new fixed-rate and adjustable-rate
real estate loans in its portfolio. The Bank does not sell loans and
has not purchased any loans since fiscal 1993.
During the year ended September 30, 1997, the Bank originated $21.3
million of loans, compared to $26.8 million and $16.7 million in fiscal
1996 and 1995, respectively. Management attributes the decline in
originations during fiscal 1997 due to the increase in federal funds
rate in March 1997, which slowed down originations from a favorable
refinancing market in fiscal 1996. Management attributes the increase
in originations during 1996 to the low interest rate environment after
the Federal Reserve lowered the discount rate in January 1996, which
caused many individuals to refinance their loans. Similarly, management
attributes the decrease in or the "leveling off" of loan originations
for the year ended September 30, 1995 to the sharp decline in refinancing
as a result of a generally rising interest rate environment since
mid-1994 and local market conditions.
In periods of economic uncertainty, the Bank's ability to originate
sufficient real estate loans with acceptable underwriting characteristics
may be substantially reduced or restricted with a resultant decrease
in operating earnings as assets may have to be invested in lower-
yielding securities or similar investments. While the Bank currently does not
sell loans, and presently has no intention to do so, management may
consider selling loans in the future depending on market conditions
and the asset/liability management requirements of the Bank.
The following table shows the loan originations, purchases, sales,
and repayment activities of the Bank for the periods indicated. The
Bank did not sell any loans during the periods presented.
<TABLE>
<CAPTION>
Year Ended September 30,
1997 1996 1995
(In Thousands)
<S> <C> <C> <C>
Originations by Type
One- to four-family and construction $ 12,588 $ 19,760 $ 9,114
Multi-family and commercial 110 150 --
Consumer 8,584 6,938 7,584
Total loans originated 21,282 26,848 16,698
Purchases
Total -- -- --
Sales
Total -- -- --
Repayments
Principal repayments (18,705) (22,312) (17,098)
Increase (decrease) in other items, net (820) (529) (337)
Net increase (decrease) $ 1,757 $ 4,007 $ (737)
</TABLE>
Asset Quality
Generally, when a borrower fails to make a required payment on a loan
secured by residential real estate, the Bank initiates collection
procedures by mailing a delinquency notice after the account is 15
days delinquent. At 30 days delinquent, the Bank attempts to contact
the customer by telephone to investigate the delinquency and a personal
letter is sent to the customer requesting him or her to make arrangements
to bring the loan current. If the delinquency is not cured by the
45th day, the Bank again attempts to contact the customer by telephone
and another personal letter is sent. After 60 days delinquent, the
Bank may commence foreclosure proceedings.
With respect to consumer loans, when a borrower fails to make a required
payment, the Bank initiates collection procedures by mailing a delinquency
notice after the account is 10-15 days delinquent, and again at 20
days delinquent. At 25 days delinquent, the Bank attempts to contact
the customer by telephone to investigate the delinquency. At 30 days
delinquent, a personal letter is sent to the customer requesting him
or her to make arrangements to bring the loan current. At 40 days
delinquent, the Bank again attempts to contact the customer by telephone
to secure payment. If the delinquency is not cured by the 60th day,
the Bank refers the loan to its attorney, who sends another personal
letter notifying the customer that no further payments will be accepted
by the Bank absent a meeting between the customer and a Bank loan
officer. If no satisfactory arrangements have been made by the last
business day of the third month, repossession of collateral, if possible,
is undertaken and, if necessary, legal proceedings are commenced to
collect the loan.
The following table sets forth the Bank's loan delinquencies by type,
by amount and by percentage of type at September 30, 1997.
<TABLE>
<CAPTION>
Loans Delinquent For
60-89 Days 90 Days and Over Total Delinquent Loans
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family
real estate 6 $235 .23% 11 $780 .76% 17 $1,015 .99%
Multi-family and
commercial real estate -- -- -- -- -- -- -- -- --
Consumer 15 146 .79 18 137 .74 33 283 1.53
Total 21 $381 .30 29 $917 .72 50 $1,298 1.02
</TABLE>
Non-Performing Assets. The table below sets forth the amounts and
categories of the Bank's non-performing assets. Loans are placed on
non-accrual status when the loan is more than 90 days delinquent (except
for student, FHA insured and VA guaranteed loans) or when the collection
of principal and/or interest in full becomes doubtful. When loans
are designated as non-accrual, all accrued but unpaid interest is
reversed against current period income and subsequent cash receipts
generally are applied to reduce the unpaid principal balance. Foreclosed
assets include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
September 30,
1997 1996 1995 1994 1993
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-Performing Loans
One- to four-family real estate $ 780 $1,008 $ 784 $ 650 $ 409
Multi-family and commercial real estate -- 78 -- -- --
Consumer 137 283 251 -- 15
Total 917 1,369 1,035 650 424
Troubled Debt Restructured Loans
Multi-family and commercial real estate -- -- -- -- 1,427
Total -- -- -- -- 1,427
Foreclosed Assets, Net
One- to four-family real estate 225 334 326 220 56
Multi-family and commercial real estate 23 23 158 158 --
Total 248 357 484 378 56
Total non-performing assets $1,165 $1,726 $1,519 $1,028 $1,907
Total as a percentage of total assets .40% .61% .66% .45% .84%
</TABLE>
For the year ended September 30, 1997, gross interest income which
would have been recorded had the non-accruing loans been current in
accordance with their original terms amounted to $50,000.
Non-Accruing Assets. At September 30, 1997, the Bank had $780,000
in non-accruing loans, which constituted .62% of the Bank's gross
loan portfolio. At September 30, 1997, the Bank's non-accruing loans
consisted of 11 one- to four-family residential mortgage loans.
Foreclosed Assets. As of September 30, 1997, the Bank had $248,000
in carrying value of foreclosed assets consisting of six one- to four-
family properties aggregating $225,000 and one commercial real estate property
aggregating $23,000.
Other Loans of Concern. As of September 30, 1997, there were $2.0
million of other loans (consisting of a restaurant/personal residence
aggregating $198,000, and one commercial real estate loan totalling
$1.8 million) not included in the table or discussed above where known
information about the possible credit problems of borrowers caused
management to have doubts as to the ability of the borrower to comply
with present loan repayment terms. These loans have been considered
by management in conjunction with the analysis of the adequacy of
the allowance for loan losses.
The largest other loan of concern is a commercial real estate loan
secured by a motel located in Albany County, New York. The Bank originated
the loan in July 1984 in the amount of $147,000 secured by a 50 room
motel. The property was appraised at that time for $1.4 million. In
1986, the Bank made an additional loan of $845,000 to finance motel
renovations. The current borrower assumed the loan in October 1987.
The Bank made two additional loans totaling $130,000 to the borrower
for the purchase of adjacent land and additional renovations. After
delinquencies due to problems with motel operations, the Bank in May
1993 consolidated the outstanding loans by extending the loan term,
obtaining additional collateral and lending an additional $400,000
for renovations. The modified terms included an effective interest
rate consistent with the market at the time of the modification. Total
loans outstanding in May 1993 were approximately $1.5 million. In
October 1993, the Bank advanced an additional $400,000 for further
renovations necessary to allow the motel to become a franchise of
a major motel chain. In August 1994, the renovation of the motel was
completed and the motel became a franchise of a major motel chain.
The loan has been amortizing based on a 25-year repayment term and
a balloon payment is due at maturity in September 1998. The loan has
been performing in accordance with its repayment terms since May 1993.
In August 1996, the motel business and property were appraised at
approximately $3.4 million. At September 30, 1997, the outstanding
balance on the loan was $1.8 million.
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered
to be of lesser quality, as "substandard," "doubtful" or "loss." An
asset is considered "substandard" if it is inadequately protected
by the current net worth and paying capacity of the obligor or of
the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the insured institution
will sustain "some loss" if the deficiencies are not corrected. Assets
classified as "doubtful" have all of the weaknesses inherent in those
classified "substandard," with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable
and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as
assets without the establishment of a specific loss reserve is not
warranted.
When an insured institution classifies problem assets as either substandard
or doubtful, it may increase general allowances for loan losses in
an amount deemed prudent by management to address the increased risk
of loss on such assets. General allowances represent loss allowances
which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have
not been allocated to particular problem assets. When an insured institution
classifies problem assets as "loss," it is required either to establish
a specific allowance for losses equal to 100% of that portion of the
asset so classified or to charge off such amount. An institution's
determination as to the classification of its assets and the amount
of its valuation allowances is subject to review and adjustment by
the OTS and the FDIC, which may order increases in general or specific
loss allowances.
In accordance with its classification of assets policy, the Bank regularly
reviews the problem assets in its portfolio to determine whether any
assets require classification in accordance with applicable regulations.
On the basis of management's review of its assets, at September 30,
1997, the Bank had classified $1.0 million as substandard and none
as doubtful or loss.
Allowance for Loan Losses. At September 30, 1997, the Bank had a total
allowance for loan losses of $1.9 million, representing 206.0% of
total non-performing loans. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation
of the risk inherent in its loan portfolio and changes in the nature
and volume of its loan activity, including those loans which are being
specifically monitored by management. Such evaluation, which includes
a review of loans for which full collectibility may not be reasonably
assured, considers among other matters, the loan classifications discussed
above, the estimated fair value of the underlying collateral, economic
conditions, historical loan loss experience, and other factors that
warrant recognition in providing for an adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded at
fair value, less estimated selling costs. If fair value, less selling
costs, at the date of foreclosure is lower than the book balance of
the related loan, the difference will be charged to the allowance
for loan losses at the time of transfer. Valuations of the property
are periodically updated by management and if the value declines,
a specific provision for losses on such property is established by
a charge to operations.
The determination of the adequacy of the allowance is necessarily
speculative, based upon future loan performance outside the control
of the Bank. Adverse local, regional or national economic conditions,
changes in interest rates, population, products and other factors
can all adversely affect future loan delinquency rates. Unforeseen
conditions could require adjustments to the allowance through additional
loan loss provisions. Net earnings could be significantly affected
if circumstances differ substantially from the assumptions used in
determining the level of the allowance. In addition, federal regulatory
agencies, as an integral part of the examination process, periodically
review the Bank's allowance for loan losses. Such agencies may require
the Bank to increase the allowance based upon their judgment of the
information available to them at the time of their examination.
The following table sets forth an analysis of the Bank's allowance
for loan losses.
<TABLE>
<CAPTION>
Year Ended September 30,
1997 1996 1995 1994 1993
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,833 $1,950 $1,746 $1,294 $ 857
Charge-Offs
One- to four-family real estate (162) (237) (12) (3) --
Multi-family and commercial real estate (30) -- -- -- (20)
Consumer (90) (86) (50) (29) (45)
Total charge-offs (282) (323) (62) (32) (65)
Recoveries
One- to four-family real estate 4 -- 1 14 10
Consumer 34 11 10 5 22
Total recoveries 38 11 11 19 32
Net charge-offs (244) (312) (51) (13) (33)
Additions charged to operations 300 195 255 465 470
Balance at end of period $1,889 $1,833 $1,950 $1,746 $1,294
Ratio of net charge-offs during the period to
average loans outstanding during the period .19% .26% .04% .02% .03%
Ratio of net charge-offs during the period to
average non-performing assets 17.73% 18.60% 4.46% 1.01% 1.83%
</TABLE>
The distribution of the Bank's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
September 30,
1997 1996 1995
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to
four-family
real estate $ 573 $102,232 80.69% $ 496 $100,383 80.34% $ 737 $ 95,588 79.04%
Multi-family
and commercial
real estate 470 4,691 3.70 528 5,115 4.09 443 5,132 4.24
Construction -- 1,306 1.03 -- 423 0.34 -- 230 0.19
Consumer 288 18,473 14.58 250 19,024 15.23 220 19,988 16.53
Unallocated 558 -- -- 559 -- -- 550 -- --
Total $1,889 $126,702 100.00% $1,833 $124,945 100.00% $1,950 $120,938 100.00%
1994 1993
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to
four-family
real estate $ 670 $ 96,570 79.37% $ 505 $ 98,173 80.74%
Multi-family
and commercial
real estate 419 5,606 4.61 317 3,628 2.98
Construction -- 743 0.61 19 1,776 1.46
Consumer 134 18,756 15.41 83 18,014 14.82
Unallocated 523 -- -- 370 -- --
Total $1,746 $121,675 100.00% $1,294 $121,591 100.00
</TABLE>
Investment Activities
General. The Bank must maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. Liquidity may increase
or decrease depending upon the availability of funds and comparative
yields on investments in relation to the return on loans. Historically,
the Bank has maintained liquid assets at levels above the minimum
requirements imposed by the OTS regulations and above levels believed
adequate to meet the requirements of normal operations, including
potential deposit outflows. For September 1997, the Bank's average
regulatory liquidity ratio (liquid assets as a percentage of net withdrawable
savings deposits and current borrowings) was 20.1%.
Securities. Federally chartered savings institutions have the authority
to invest in various types of liquid assets, including United States
Treasury obligations, securities of various federal agencies, certain
certificates of deposit of insured banks and savings institutions,
certain bankers' acceptances, repurchase agreements and federal funds.
Subject to various restrictions, federally chartered savings institutions
also may invest their assets in investment grade commercial paper
and corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution
is otherwise authorized to make directly. At September 30, 1997, the
Company's securities excluding mortgage-backed securities and FHLB
stock, totaled $70.8 million, or 24.4% of total assets, $62.7 million
of which are classified as "available for sale" and the balance of
$8.1 million as "held to maturity."
Generally, the investment policy of the Company is to invest funds
among various categories of investments and maturities based upon
the Company's need for liquidity, to achieve the proper balance between
its desire to minimize risk and maximize yield, to provide collateral
for borrowings and to fulfill the Company's asset/liability management
policies. Prior to the Company's initial public offering and the Bank's
conversion to a stock form institution, the Bank's investment strategy
had been directed toward high-quality assets (primarily U.S. Government
securities and federal agency obligations and high grade corporate
debt securities) with short and intermediate terms (five years or
less) to maturity. After the conversion, the Company has extended
its portfolio life by purchasing longer term securities principally
with ten year maturities to decrease its asset sensitivity and increase
interest income. Corporate debt securities generally are considered
of higher risk than U.S. Government securities and federal agency
obligations. At September 30, 1997, the weighted average term to maturity
or repricing of the security portfolio, excluding other marketable
equity securities, was 5.80 years. See Note 4 of the Notes to Consolidated
Financial Statements for information regarding the maturities of the
Company's securities available for sale portfolio and Note 5 for information
on the Company's securities held to maturity portfolio.
Mortgage-Backed Securities. In order to supplement loan production
and achieve its asset/liability management goals, the Company invests
in mortgage-backed securities. All of the mortgage-backed securities
owned by the Company are issued, insured or guaranteed either directly
or indirectly by a federal agency. At September 30, 1997, the Company
had $83.9 million in mortgage-backed securities, or 29.0% of total
assets, the majority of which, are classified as available for sale.
See Note 4 of the Notes to Consolidated Financial Statements for information
regarding the maturities of the Company's mortgage-backed securities
portfolio.
The following table sets forth the composition of the Company's securities,
mortgage-backed securities and other interest-earning assets at the
dates indicated.
<TABLE>
<CAPTION>
September 30,
1997 1996 1995
Amortized % of Amortized % of Amortized % of
Cost Total Cost Total Cost Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities
U.S. government securities $12,906 18.24% $19,829 24.52% $24,035 44.97%
Corporate bonds 6,042 8.54 9,999 12.34 16,152 30.22
Federal agency obligations 48,927 69.15 50,978 62.89 13,053 24.43
Municipal bonds 194 0.28 206 0.25 203 0.38
Other 2,682 3.79 3 -- -- --
Total securities $70,751 100.00% $81,015 100.00% $53,443 100.00%
Average remaining contractual life
of securities 5.80 years 3.83 years 1.98 years
Federal Home Loan Bank of New York
stock, required by law $ 1,762 100.00% $ 1,159 100.00% -- --
Other Interest-Earning Assets
Federal funds sold -- -- $35,600 100.00% $34,700 100.00%
Mortgage-Backed Securities
GNMA $41,450 49.41% $17,169 48.71% $13,550 99.29%
FNMA 29,920 35.67 13,971 39.63 -- --
FHLMC 12,416 14.80 4,011 11.38 46 0.34
Other 97 0.12 98 0.28 51 0.37
Total mortgage-backed
securities $83,883 100.00% $35,249 100.00% $13,647 100.00%
In December 1995, the Company transferred certain securities with
amortized costs totaling $24.8 million and fair values totaling $25.3
million from the "held to maturity" classification to the "available
for sale" classification. In addition, since the transfer, all new
securities purchased have been designated as "available for sale."
For further detail on the "Available for Sale" and "Held to Maturity"
portfolio see Notes 4 and 5, respectively, of the Company's Notes
to Consolidated Financial Statements."
The composition and maturities of the securities portfolio by contractual
maturity are indicated in the following table.
</TABLE>
<TABLE>
<CAPTION>
September 30, 1997
Less Than 1 to 5 5 to 10 Over 10
1 Year Years Years Years Total Securities
Amortized Amortized Amortized Amortized Amortized Fair
Cost Cost Cost Cost Cost Value
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government securities
and federal agency obligations $12,992 $15,971 $32,870 $ -- $61,833 $62,247
Corporate bonds and other 2,000 1,000 2,937 2,981 8,918 9,088
Total investment securities $14,992 $16,971 $35,807 $2,981 $70,751 $71,335
Weighted average yield 5.80% 6.41% 7.39% 6.14% 6.76%
</TABLE>
The Company's securities portfolio at September 30, 1997, did not
contain securities of any issuer with an aggregate book value in excess
of 10% of the Company's equity, excluding those issued by the United
States Government or its agencies.
The following table sets forth the final contractual maturities of
the Bank's mortgage-backed securities at September 30, 1997.
<TABLE>
<CAPTION>
September 30,
Due in 1998
Amorized
3 Years 3 to 5 5 to 10 10 to 20 Over 20 Cost
or Less Years Years Years Years
<S> <C> <C> <C> <C> <C> <C>
(In Thousands)
GNMA $ -- $17 $ 213 $ 4,866 $36,354 $41,450
FNMA 6,054 -- 1,716 6,040 16,110 29,920
FHLMC -- -- 30 8,452 3,934 12,416
Other -- -- -- -- 97 97
Total $6,054 $17 $1,959 $19,358 $56,495 $83,883
</TABLE>
Sources of Funds
General. The Bank's primary sources of funds are deposits, amortization
and prepayment of loan principal, maturities of investment securities,
short-term investments, and funds provided from operations.
Deposits. The Bank offers deposit accounts having a range of interest
rates and terms. The Bank offers passbook and statement savings accounts,
money market savings accounts, transaction accounts, and certificate
of deposit accounts currently ranging in terms from six months to
six years. The Bank only solicits deposits from its primary market
area and does not have brokered deposits. The Bank relies primarily
on competitive pricing policies, advertising and customer service
to attract and retain these deposits. The Bank generally does not
utilize premiums or promotional gifts for new accounts, although one
existing program for senior citizens does provide certain enumerated
benefits, such as discounts on loans and safe deposit boxes, free
travelers checks, money orders and a variety of other services.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates,
and competition. The variety of deposit accounts offered by the Bank
has allowed it to be competitive in obtaining funds and to respond
with flexibility to changes in consumer demand. In recent years, the
Bank has become more susceptible to short-term fluctuations in deposit
flows, as customers have become more interest rate conscious. The
Bank manages the pricing of its deposits in keeping with its asset/liability
management, liquidity and profitability objectives. Based on its experience,
the Bank believes that its passbook, statement savings accounts, money
market savings accounts and transaction accounts are relatively stable
sources of deposits. However, the ability of the Bank to attract and
maintain certificates of deposit and the rates paid on those deposits
has been and will continue to be significantly affected by market
conditions.
The following table sets forth the deposit flows at the Bank during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
1997 1996 1995
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance $196,753 $197,230 $200,825
Deposits 254,977 235,800 235,872
Withdrawals 259,424 244,962 247,438
Interest credited 8,606 8,685 7,971
Ending balance $200,912 $196,753 $197,230
Net increase (decrease) $ 4,159 $ (477) $ (3,595)
Percent increase (decrease) 2.11% (.24)% (1.79)%
</TABLE>
The following table sets forth the dollar amount of deposits in the
various types of deposit programs offered by the Bank for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
1997 1996 1995
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
<S> <C> <C> <C> <C> <C> <C>
Non-Certificate Deposits<F1>
Statement savings accounts 3.50% $ 8,388 4.17% $ 7,881 4.01% $ 7,019 3.56%
Demand accounts 4,370 2.18 3,714 1.89 4,008 2.03
Passbook savings accounts 3.50% 71,060 35.37 75,477 38.36 78,292 39.70
NOW accounts 2.50% 10,438 5.20 9,070 4.61 7,799 3.96
Money market accounts 3.20% 7,115 3.54 7,752 3.94 8,589 4.35
Total non-certificates 101,371 50.46 103,894 52.81 105,707 53.60
Certificates of Deposit
2.00-3.99% 20 0.01 30 0.01 776 0.39
4.00-5.99% 88,415 44.00 75,293 38.27 55,435 28.10
6.00-7.99% 11,106 5.53 17,536 8.91 34,546 17.52
8.00-9.99% -- -- -- -- 766 0.39
Total certificates 99,541 49.54 92,859 47.19 91,523 46.40
Total deposits $200,912 100.00% $196,753 100.00% $197,230 100.00%
<FN>
<F1>Interest rates shown are as of September 30, 1997.
</TABLE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of September 30, 1997.
<TABLE>
<CAPTION>
2.00- 4.00- 6.00- Percent
3.99% 5.99% 7.99% Total of Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificate Accounts Maturing in Quarter Ending
December 31, 1997 $ -- $18,296 $ 2,620 $20,916 21.01%
March 31, 1998 -- 18,235 3,028 21,263 21.36
June 30, 1998 -- 8,770 3,312 12,082 12.14
September 30, 1998 20 7,210 1,718 8,948 8.99
December 31, 1998 -- 15,969 -- 15,969 16.04
March 31, 1999 -- 2,798 34 2,832 2.85
June 30, 1999 -- 3,534 -- 3,534 3.55
September 30, 1999 -- 2,283 -- 2,283 2.29
December 31, 1999 -- 1,946 -- 1,946 1.95
March 31, 2000 -- 2,894 -- 2,894 2.91
June 30, 2000 -- 2,572 52 2,624 2.64
September 30, 2000 -- 1,018 -- 1,018 1.02
Thereafter -- 2,890 342 3,232 3.25
Total $ 20 $88,415 $11,106 $99,541 100.00%
Percent of total .02% 88.82% 11.16%
</TABLE>
The following table indicates the amount of the Bank's certificates
of deposit by time remaining until maturity as of September 30, 1997.
<TABLE>
<CAPTION>
Maturity
Over Over Over
3 Months 3 to 6 6 to 12 12
or Less Months Months Months Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000 $ 19,282 $19,450 $19,580 $32,988 $91,300
Certificates of deposit of $100,000 or more 1,634 1,813 1,450 3,344 8,241
Total certificates of deposit $ 20,916 $21,263 $21,030 $36,332 $99,541
</TABLE>
Borrowings. Although deposits are the Bank's primary source of funds,
the Bank may utilize borrowings as a funding source. As a member of
the FHLBNY, the Bank has access to overnight funds of approximately
$13.1 million, along with an additional line of $13.1 million for
one month advances.
At September 30, 1997, the Bank had borrowings of $11.4 million under
its overnight line. The Bank had no borrowings prior to March 1997.
Subsidiary and Other Activities
As a federally chartered savings association, the Bank is permitted
by OTS regulations to invest up to 2% of its assets, or $5.7 million
at September 30, 1997, in the stock of, or loans to, service corporation
subsidiaries. The Bank may invest an additional 1% of its assets in
service corporations where such additional funds are used for inner-
city or community development purposes and up to 50% of its total capital
in conforming loans to service corporations in which it owns more
than 10% of the capital stock. Federal associations also are permitted
to invest an unlimited amount in operating subsidiaries engaged solely
in activities which a federal association may engage in directly.
As of September 30, 1997, the Bank had no subsidiaries.
The Company, as a unitary savings and loan holding company, is generally
permitted under federal law to engage, through non-banking subsidiaries,
in whatever business activities it may choose to pursue. The Company
currently has no such subsidiaries.
Competition
The Company faces strong competition, both in originating real estate
and other loans and in attracting deposits. Competition in originating
real estate loans comes primarily from other savings institutions,
commercial banks, credit unions and mortgage bankers making loans
secured by real estate located in the Company's primary market area.
Other savings institutions, commercial banks, credit unions and finance
companies provide vigorous competition in consumer lending.
The Bank attracts all of its deposits through its branch offices,
primarily from the communities in which those branch offices are located;
therefore, competition for those deposits is principally from mutual
funds and other savings institutions, commercial banks and credit
unions located in the same communities. The Bank competes for these
deposits by offering a variety of deposit accounts at competitive
rates, convenient business hours, and convenient branch locations
with interbranch deposit and withdrawal privileges. Automated teller
machine facilities are also available at three of the Bank's offices.
At September 30, 1997, the Bank held approximately 30% of total financial
institution deposits and 58% of total thrift deposits in Greene County,
New York, and approximately .09% of total financial institution deposits
in Albany County, New York.
Employees
At September 30, 1997, the Company had a total of 66 employees, including
four part-time employees. The Company's employees are not represented
by any collective bargaining group. Management considers its employee
relations to be good.
ITEM 2. PROPERTIES
The Bank conducts its business at its main office and three other
banking offices in its primary market area. The Company does not own
or lease any other premises and operates from the Bank's main office.
The following table sets forth information relating to each of the
Bank's offices as of September 30, 1997. The Bank also owns a parking
lot located at 313-317 Main Street, Catskill, New York, which is used
to service the main office. The net book value of the Bank's premises
and equipment (including land, building and leasehold improvements
and furniture, fixtures and equipment) at September 30, 1997 was $2.4
million. See Note 8 of Notes to Consolidated Financial Statements.
The Bank believes that its current facilities are adequate to meet
the present and foreseeable needs of the Bank and the Company, subject
to possible future expansion.
<TABLE>
<CAPTION>
Total
Owned Approximate
Date or Square Net Book
Location Acquired Leased Footage Value
<S> <C> <C> <C> <C>
Main Office
341 Main Street
Catskill, New York Prior to 1950 Owned 11,750 $ 535,282
Branch Offices
Route 9-W
Ravena, New York 1972 Owned 2,822 202,519
Route 9-W
Corner Boulevard Avenue
Catskill, New York 1978 Owned 2,900 668,285
Route 296(F1)
Windham, New York 1996 Owned 3,620 605,781
$2,011,867
<FN>
<F1>Branch opened December 1996.
</TABLE>
The Bank maintains an on-line data base with a service bureau servicing
financial institutions. The net book value of the data processing
and computer equipment utilized by the Bank at September 30, 1997
was $128,000.
ITEM 3. LEGAL PROCEEDINGS
Prior to February 6, 1995, the Bank was a shareholder, debenture holder
and depositor of Nationar, a New York chartered trust company owned
by a large group of New York savings banks, including the Bank. Nationar
provided correspondent, check clearing, custodial, research and related
services to such savings banks and other financial institutions. On
February 6, 1995, the Superintendent seized Nationar, freezing all
of its assets. As of such date, the Bank had a demand account balance
with Nationar of approximately $3.3 million, a Nationar debenture
of approximately $40,000 collateralized by a $100,000 investment security
and Nationar capital stock of approximately $7,200.
The Bank established a $660,000 reserve with respect to its Nationar
claims and charged off its $40,000 debenture and its $7,200 in capital
stock during fiscal 1995. In fiscal 1996, the Bank received payment
of $3.1 million of its claims against Nationar, and received the remaining
$.2 million in fiscal 1997. Therefore, $560,000 and $100,000 of the
reserve established in 1995 was recovered and recorded as income in
1996 and 1997, respectively.
The Bank is involved as plaintiff or defendant in various other legal
actions arising in the normal course of its business. While the ultimate
outcome of these proceedings cannot be predicted with certainty, it
is the opinion of management, after consultation with counsel representing
Catskill Savings in the proceedings, that the resolution of these
proceedings should not have a material effect on the Bank's financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 1997, there were no matters submitted
to a vote of shareholders of Catskill Financial Corporation.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The following information included in the Annual Report to Shareholders
for the fiscal year ended September 30, 1997, (the "Annual Report"),
is incorporated herein by reference: "SHAREHOLDER INFORMATION", which
appears on page 52 of the Annual Report.
ITEM 6. SELECTED FINANCIAL DATA
The following information included in the Annual Report is incorporated
herein by reference: "SELECTED CONSOLIDATED FINANCIAL INFORMATION"
which appears on page 2 of the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following information included in the Annual Report is incorporated
herein by reference: "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS", which appears on pages 4 through 22
of the Annual Report
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The following information included in the Annual Report is incorporated
herein by reference: "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-Asset/Liability Management", which
appears on pages 7 through 10 of the Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following information included in the Annual Report is incorporated
herein by reference: The consolidated statements of financial condition
of Catskill Financial Corporation and Subsidiary as of September 30,
1997 and 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended September 30, 1997, together with the related notes and
the independent auditors' report thereon, all of which appears on
pages 23 through 51 of the Annual Report and "SUMMARY OF UNAUDITED CONSOLIDATED
QUARTERLY FINANCIAL INFORMATION" which appears on page 3 of the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information included in the Proxy Statement is incorporated
herein by reference: "ELECTION OF DIRECTORS", and "INFORMATION CONCERNING
THE BOARD OF DIRECTORS AND EXECUTIVE OFFICERS", which appears on pages 3
through 5 of the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information included on pages 6 through 10 of the Proxy Statement
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information included in the Proxy Statement is incorporated
herein by reference: "VOTING SECURITIES AND CERTAIN HOLDERS THEREOF", which
appears on pages 5 and 6 of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included on page 11 of the Proxy Statement is incorporated
herein by reference: "INFORMATION CONCERNING THE BOARD OF DIRECTORS
AND EXECUTIVE OFFICERS--Transactions With Directors and Officers."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) Listed below are all financial statements and exhibits filed as
part of this report:
(1) The consolidated statements of financial condition of Catskill
Financial Corporation and subsidiary as of September 30, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period
ended September 30, 1997, together with the related notes and the
independent auditors' report thereon, appearing in the Annual Report
on pages 23 through 51 are incorporated herein by reference.
(2) Schedules omitted as they are not applicable
(3) Exhibits
The following exhibits are either filed as part of this report or
are incorporated herein by reference:
<TABLE>
<CAPTION>
Regulation S-K Exhibit
Reference Number Description
<S> <C>
3.1 Certificate of Incorporation of Catskill Financial
Corporation (incorporated by reference to Exhibit 3.1 to
the Registration Statement on Form S-1 No. #33-81019,
of Catskill Financial Corporation, filed on February 5,
1996, (hereinafter "Form S-1")
3.2 By laws of Catskill Financial Corporation (incorporated
by reference to Exhibit 3.2 to Form S-1
4 Specimen Stock Certificate (incorporated by reference
to Exhibit 4 to Form S-1.)
10.1 Catskill Financial Corporation 1996 Stock Option
and Incentive Compensation Plan (incorporated by
reference to Proxy Statement for Special Meeting of
Stockholders of Catskill Financial Corporation held
on October 24, 1996.)
10.2 Employment agreement dated April 1, 1996, by and
between Catskill Savings Bank and Wilbur J. Cross.
(incorporated by reference to Exhibit 10.3 to Form 10K
for the fiscal year ended September 30, 1996.)
10.3 Catskill Financial Corporation Employee Stock
ownership Plan (incorporated by reference to Exhibit
10.3 to Form S-1.)
10.4 Catskill Financial Corporation Management Recognition
Plan (incorporated by reference to Proxy Statement for
Special Meeting of Stockholders of Catskill Financial
Corporation held on October 24, 1996.)
10.7 Trustees Deferred Compensation Plan of Catskill
Savings Bank (incorporated by reference to
Exhibit 10.7 to Form S-1.
11 Computation of Net Income per Common Share
13 1997 Annual Report to security holders
21 Subsidiaries of the registrant
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule (included only
with EDGAR filing)
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and 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
(Registrant)
By:
Wilbur J. Cross
Director & Chairman of the Board,
President & Chief Executive Officer
Date: December 22, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Wilbur J. Cross Director & Chairman of the Board,
President and Chief
Executive Officer December 22, 1997
David J. DeLuca Chief Financial Officer
(Principal Financial Officer &
Principal Accounting Officer) December 22, 1997
George P. Jones Director December 22, 1997
Richard A. Marshall Director December 22, 1997
Allan D. Oren Director December 22, 1997
Hugh J. Quigley Director December 22, 1997
Edward P. Stiefel, Esq. Director December 22, 1997
</TABLE>
EXHIBIT 11
<TABLE>
CATSKILL FINANCIAL CORPORATION
COMPUTATION OF NET INCOME PER COMMON SHARE
<CAPTION>
Year Ended September 30,
1997 1996
(dollars in thousands, except per share amounts)
<S> <C> <C>
Net income applicable to common shares $ 3,907 $3,317
Weighted average common shares outstanding 4,629,697 N/A<F1>
Net income per common share $ .84
Net income per common share--primary
Weighted average common shares outstanding 4,629,697
Dilutive common stock options(F2) 93,418
Weighted average common shares and common
shares equivalents outstanding 4,723,115
Net income per common share--primary $ .83
Net income per common share--fully diluted
Weighted ave rage common shares outstanding 4,629,697
Dilutive common stock options(F2) 140,857
Weighted average common shares and common
shares equivalents outstanding 4,770,554
Net income per common share--fully diluted $ .82
<FN>
<F1>Earnings per share is only meaningful for the year ended September
30, 1997, since the Company completed its initial public offering
on April 18, 1996
<F2>Dilutive common stock options (includes restricted stock under
the Company's MRP plan and options under its stock option plan) are
based on the treasury stock method using average market price in computing
net income per share--primary, and the higher of period-end market
price or average market price in computing net income per common share--fully
diluted
</TABLE>
EXHIBIT 21
<TABLE>
SUBSIDIARIES OF THE REGISTRANT
<CAPTION>
Parent Subsidiary Percentage of Ownership State of Incorporation or Organization
<S> <C> <C> <C>
Catskill Financial Corporation Catskill Savings Bank 100% New York
</TABLE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Catskill Financial Corporation:
We consent to incorporation by reference in Registration Statement
No. 333-41987 on Form S-8, of our report dated October 24, 1997, relating
to the consolidated statements of financial condition of Catskill
Financial Corporation and subsidiary as of September 30, 1997 and
1996, and the related consolidated statements of operations, changes
in shareholders' equity and cash flows for each of the years in the
three-year period ended September 30, 1997, which report appears in
the annual report on Form 10-K of Catskill Financial Corporation for
the fiscal year ended September 30, 1997.
KPMG Peat Marwick LLP
Albany, New York
December 24, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,274
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 148,114
<INVESTMENTS-CARRYING> 8,055
<INVESTMENTS-MARKET> 8,112
<LOANS> 126,226
<ALLOWANCE> 1,889
<TOTAL-ASSETS> 289,619
<DEPOSITS> 200,912
<SHORT-TERM> 11,385
<LIABILITIES-OTHER> 5,545
<LONG-TERM> 0
0
0
<COMMON> 57
<OTHER-SE> 71,720
<TOTAL-LIABILITIES-AND-EQUITY> 289,619
<INTEREST-LOAN> 10,083
<INTEREST-INVEST> 9,588
<INTEREST-OTHER> 546
<INTEREST-TOTAL> 20,217
<INTEREST-DEPOSIT> 8,652
<INTEREST-EXPENSE> 8,801
<INTEREST-INCOME-NET> 11,416
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 19
<EXPENSE-OTHER> 5,187
<INCOME-PRETAX> 6,441
<INCOME-PRE-EXTRAORDINARY> 6,441
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,907
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.82
<YIELD-ACTUAL> 4.17
<LOANS-NON> 780
<LOANS-PAST> 137
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,988
<ALLOWANCE-OPEN> 1,833
<CHARGE-OFFS> 282
<RECOVERIES> 38
<ALLOWANCE-CLOSE> 1,889
<ALLOWANCE-DOMESTIC> 1,331
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 558
</TABLE>
<TABLE>
Exhibit 13 1997 Annual Report to Security Holders
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<CAPTION>
September 30,
(in thousands) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Selected Consolidated Financial Condition Data:
Total assets $289,619 $283,759 $230,102 $230,518 $226,610
Cash and cash equivalents 2,274 39,712 38,064 29,580 35,457
Loans receivable, net 124,337 122,533 118,364 119,233 119,585
Mortgage backed securities 84,794 34,902 13,647 13,922 12,973
Other securities 73,137 82,375 53,443 64,151 55,094
Deposits 200,912 196,753 197,230 200,825 199,812
Short-term borrowings 11,385 -- -- -- --
Total equity 71,777 82,381 28,667 26,943 24,852
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
(in thousands) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Selected Consolidated Operations Data:
Total interest income $20,217 $17,932 $15,592 $15,022 $15,419
Total interest expense 8,801 9,022 8,009 7,529 8,051
Net interest income 11,416 8,910 7,583 7,493 7,368
Provision for loan losses 300 195 255 465 470
Net interest income after provision for loan losses 11,116 8,715 7,328 7,028 6,898
Total non-interest income 512 996 262 339 367
Total non-interest expense 5,187 4,258 4,665 3,814 3,489
Income before taxes 6,441 5,453 2,925 3,553 3,776
Income tax expense 2,534 2,136 1,201 1,463 1,678
Net income $ 3,907 $ 3,317 $ 1,724 $ 2,090 $ 2,098
Earnings per common share<F1> $ .84 $ .38 N/A N/A N/A
<FN>
<F1> The company completed its initial public offering on April 18, 1996,
so net income per common share is not applicable to all periods prior
to that date. Net income per share is based on weighted average common
shares outstanding excluding unallocated ESOP shares. In calculating
1996 fiscal year's earnings per share, post conversion net income
and weighted average shares outstanding were used. See Note 1 to
Notes to Consolidated Financial Statements. Certain reclassifications
have been made to prior years' amounts to conform with current year's
presentation.
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets 1.40% 1.25% .76% .90% .97%
Return on average equity 5.22 6.33 6.15 8.06 8.79
Average net interest rate spread 2.93 2.54 2.99 3.03 3.16
Net interest margin<F1> 4.17 3.44 3.47 3.36 3.56
Ratio of operating expense to average total assets 1.86 1.60 1.77<F2> 1.65 1.62
Efficiency ratio<F3> 43.43 45.56 51.05 48.47 45.11
Ratio of average interest-earning assets to average
interest- bearing liabilities 138.60 125.79 112.97 109.92 110.34
Quality Ratios:
Non-performing loans to total loans at
end of period .73 1.10 .86 .54 1.53
Non-performing assets to total assets
at end of period .40 .61 .66 .45 .84
Allowance for loan losses to
non-performing loans 206.00 133.89 188.41 268.62 69.91
Allowance for loan losses to loans receivable 1.50 1.47 1.61 1.43 1.06
Capital Ratios:
Equity to total assets at end of period 24.78 29.03 12.46 11.69 10.97
Average equity to average assets 26.86 19.73 12.44 11.23 11.09
Other Data:
Number of full-service offices 4 3 3 3 3
<FN>
<F1> Net interest income divided by average interest-earning assets.
<F2> Excludes $660,000 provision for Nationar loss contingency. See
Note 14 to Notes to Consolidated Financial Statements.
<F3> Efficiency ratio is non-interest expense/(non-interest income
+ net interest income on a tax equivalent basis). For 1996, excludes
$560,000 Nationar recovery included in non-interest income and for
1995 excludes $660,000 provision for Nationar loss contingency included
in non-interest expense.
</TABLE>
<TABLE>
SUMMARY OF UNAUDITED CONSOLIDATED
QUARTERLY FINANCIAL INFORMATION
<CAPTION>
Year Ended September 30, 1997
(in thousands, except per share amounts) First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
Total interest income $4,977 $4,963 $5,090 $5,187 $20,217
Total interest expense 2,136 2,102 2,244 2,319 8,801
Net interest income 2,841 2,861 2,846 2,868 11,416
Provision for loan losses 75 75 75 75 300
Net interest income after provision for
loan losses 2,766 2,786 2,771 2,793 11,116
Total non-interest income 177 121 108 106 512
Total non-interest expense 1,171 1,341 1,324 1,351 5,187
Income before taxes $1,772 $1,566 $1,555 $1,548 $ 6,441
Income tax expense 706 623 606 599 2,534
Net income $1,066 $ 943 $ 949 $ 949 $ 3,907
Net income per common share $ .21 $ .20 $ .21 $ .22 $ .84
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30, 1996
(in thousands, except per share amounts) First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
Total interest income $4,009 $4,006 $4,985 $4,932 $17,932
Total interest expense 2,217 2,187 2,461 2,157 9,022
Net interest income 1,792 1,819 2,524 2,775 8,910
Provision for loan losses 45 30 45 75 195
Net interest income after provision for
loan losses 1,747 1,789 2,479 2,700 8,715
Total non-interest income 111 127 660 98 996
Total non-interest expense 1,022 937 1,205 1,094 4,258
Income before taxes $ 836 $ 979 $1,934 $1,704 $ 5,453
Income tax expense 299 402 795 640 2,136
Net income $ 537 $ 577 $1,139 $1,064 $ 3,317
Net income per common share<F1> $ .18 $ .20 $ .38
<FN>
<F1> The company completed its initial public offering on April 18, 1996,
so net income per common share is not applicable to all periods prior
to that date. Net income per share is based on weighted average common
shares outstanding excluding unallocated ESOP shares. In calculating
1996 fiscal year's earnings per share, post conversion net income
and weighted average shares outstanding were used. See Note 1 to Notes
to Consolidated Financial Statements. Certain reclassifications have
been made to prior quarters' amounts to conform with current quarter's
presentation.
</TABLE>
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 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 Company's profitability, like many financial institutions and
their holding companies, 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 Company'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,
the 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.
For comparative purposes, net income for the year ended September
30, 1996, was favorably impacted by the Company's recovery of $560,000
of the reserve for probable losses in connection with the takeover
of Nationar. 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
$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. During the
fiscal year ended September 30, 1997, the Bank received payment of
the remainder of the claim for which the reserve had been established,
and the $100,000 remaining in the reserve was recovered.
For the year ended September 30, 1997, the Company recorded net income
of $3,907,000, an increase of $590,000, or 17.8% over the comparable
period of 1996. Earnings per common share for the year ended September
30, 1997, were $.84, based on weighted average common shares outstanding
of 4,629,697. The Company completed its initial public offering on
April 18, 1996, so shares were only outstanding for part of fiscal
1996 and, therefore, are not comparable to fiscal 1997. Return on
average assets for the year ended September 30, 1997 and 1996 was
1.40% and 1.25%, respectively, and return on average equity was 5.22%
and 6.33%, respectively.
Forward Looking-Statements
When used in Form 10-K 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 loan loss allowance 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 loan loss allowance,
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
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 $289.6 million at September 30, 1997, an increase
of $5.8 million, or 2.0% from the $283.8 million at September 30,
1996.
Cash and cash equivalents were $2.3 million, a decrease of $37.4 million,
or 94.2% from the $39.7 million at September 30, 1996. The decrease
was principally a reduction in federal funds as the Company used available
cash to purchase 1,029,476 shares of its common stock at a total cost of
approximately $15.3 million, and continued to invest the net proceeds of
its initial public offering in securities available for sale and, to a
lesser extent, loans.
Total securities, which include securities held to maturity ("HTM")
and securities available for sale ("AFS"), excluding Federal Home
Loan Bank stock, were $156.2 million, an increase of $40.1 million,
or 34.5% over the $116.1 million as of September 30, 1996. The change
in securities consisted of a $51.1 million increase in AFS securities,
primarily due to the Company's purchase of mortgage backed securities,
and a $11.0 million decrease in HTM securities from scheduled maturities.
Consequently as of September 30, 1997, 94.8% of the Company's investment
portfolio excluding the Federal Home Loan Bank stock was classified as AFS,
compared to 83.6% as of September 30, 1996.
Loans receivable were $126.2 million as of September 30, 1997, an
increase of $1.8 million or 1.4% over the $124.4 million as of September
30, 1996. The following table shows the loan portfolio composition
as of the respective balance sheet dates:
<TABLE>
<CAPTION>
At September 30
1997 1996
<S> <C> <C>
(In thousands)
Real Estate Loans
One-to-four family $102,232 $100,383
Multi-family and commercial 4,691 5,115
Construction 1,306 423
Total real estate loans 108,229 105,921
Consumer Loans 18,473 19,024
Gross Loans 126,702 124,945
Less: Net deferred loan fees (476) (579)
Total loans receivable $126,226 $124,366
</TABLE>
The decrease in consumer loans was principally a decrease in home
equity loans, as lower mortgage rates have encouraged customers to refinance
their underlying first mortgages and repay their home equity loans.
During fiscal 1997, the Company originated $21.3 million in loans,
a decrease of $5.5 million from the $26.8 million originated in 1996.
The decrease was principally rate related as 1996 was a favorable
financing market after Federal Reserve lowered the discount rate in
January 1996. Conversely, 1997 was somewhat impacted by the increase
in the federal funds rate in March 1997. The Bank's primary market
has not fully participated in the national economic recovery, so the
real estate market has remained soft.
Total deposits were $200.9 million, at September 30, 1997, an increase
of $4.1 million, or 2.1% from the $196.8 million at September 30,
1996. The following table shows the deposit composition as of the
respective balance sheet dates:
<TABLE>
<CAPTION>
At September 30
1997 1996
(In thousands) % of Deposits (In thousands) % of Deposits
<S> <C> <C> <C> <C>
Savings $ 79,448 39.6% $ 83,358 42.4%
Money market 7,115 3.5 7,752 3.9
NOW 10,438 5.2 9,070 4.6
Non-interest demand 4,370 2.2 3,714 1.9
Certificates of deposits 99,541 49.5 92,859 47.2
$200,912 100.0% $196,753 100.0%
</TABLE>
The growth in deposits was principally related to the opening of our
fourth full service branch in late December 1996, and had the Company
not opened the branch, deposits would have decreased $1.1 million,
or .6%. Although the Company experienced deposit growth, savings deposits
decreased $3.9 million or 4.7%, and now represent 39.6% of deposits
compared to 42.4% as of September 30, 1996. The composition of deposits
continues to shift to higher costing certificates of deposits as the
decrease in savings deposits was more than offset by a $6.7 million
increase in certificates of deposits which now represent 49.5% of
deposits compared to 47.2% as of September 30, 1996. During fiscal
1997, the Company ran two promotional campaigns to increase
the balance of certificates of deposit ("CDs"), the first in early
February was to attract six-month money in anticipation of lower rates
as well as mitigate run-off in its longer term CDs. In addition, the
Company also promoted a 15-month CD to meet a demand in our market for
a longer term product, and so far the program has generated approximately
$2.6 million in new money. Management believes that this change in mix,
which is consistent with what other financial institutions are experiencing,
will continue to occur as customers seek to maximize their returns and the
Company has to compete with other investment vehicles such as mutual funds.
The Company anticipates opening at least one branch in fiscal 1998,
which should generate additional deposit growth. In addition, the
Company will continue to promote lower costing transactional accounts
(NOW and non-interest bearing demand), which have grown 15.1% and
17.7%, respectively, over the balance at September 30, 1996.
In March 1997, the Company activated its line of credit program with
the Federal Home Loan Bank of New York ("FHLB"). Under the program,
the Company has access to overnight funds of approximately $13.1 million,
along with a companion line for the same amount available for one
month advances. The Company has only used its overnight line and had
borrowings outstanding of $11.4 million as of September 30, 1997.
Borrowings for the year ended September 30, 1997, averaged $2.6 million,
and management expects to use its borrowing lines to leverage the Company's
capital by increasing earning assets.
Shareholders' equity at September 30, 1997 was $71.8 million, a decrease
of $10.6 million, or 12.9% from the $82.4 million at September 30,
1996. The decrease was principally caused by the Company's repurchase of
1,029,476 common shares at a cost of $15.3 million, somewhat offset by the
$2.9 million of net income retained after payment of cash dividends for the
year ended September 30, 1997, and a $1.0 million change in the Company's
net unrealized gain (loss) on securities available for sale, net of taxes.
The Company also recorded a $.7 million increase in shareholder's equity as
a result of amortization and/or release of shares under its stock based
compensation plans.
Shareholders' equity as a percent of total assets was 24.8% at September
30, 1997 compared to 29.0% at September 30, 1996. Book value per common
share was $15.41 excluding unvested shares of the Company's MRP, and
was $16.94 excluding unallocated ESOP shares and unvested MRP shares.
Asset/Liability Management
The Company, like other financial institutions, is subject to interest
rate risk to the extent that its interest-bearing liabilities reprice
on a different basis or at different time periods from its interest-earning
assets. Interest rate risk may be assessed by analyzing the extent
to which assets and liabilities are "interest rate sensitive" and
the resultant interest rate sensitivity "gap". An asset or liability
is said to be interest rate sensitive within a defined time period
if it matures or reprices within that period. The difference between
the amount of interest-earning assets and interest-bearing liabilities
maturing or repricing within a given period is defined as the interest
rate sensitivity gap. Gap is negative if more interest-bearing liabilities
than interest earning assets mature or reprice within a specified
time period. If the reverse is true, then the institution is considered
to have a positive gap. Accordingly, during a period of rising interest
rates, an institution with a negative gap position would not be in
as favorable a position, as compared with an institution with a positive
gap, to invest in higher yielding assets. This may result in the yield
on the institution's assets increasing at a slower rate than the increase
in its cost of interest-bearing liabilities. Conversely, during a
period of falling interest rates, an institution with a negative gap
would experience a repricing of its assets at a slower rate than its
interest-bearing liabilities, which, consequently, may result in its
net interest income growing at a faster rate than an institution with
a positive gap position.
The principal objective of the Company's interest rate risk management
function is to evaluate the interest rate risk included in certain
balance sheet accounts, determine the level of risk appropriate given
the Company's business strategy, operating environment, capital and
liquidity requirements, and manage the risk consistent with Board
of Directors' approved guidelines. Through such management, the Company
seeks to reduce the vulnerability of its operations to changes in interest
rates, however, the Company has not entered into any derivatives such as
futures, forwards, interest rate swaps or other financial instruments with
similar characteristics. The extent of the movement of interest rates
is an uncertainty that could have a negative impact on the earnings of
the Company. The Company monitors its interest rate risk as such risk
relates to its operating strategies. The Company's Board of Directors has
established a management Asset Liability Committee which is responsible for
reviewing the Company's asset/liability policies and interest rate risk
position. The Committee meets at least monthly and reports trends and
interest rate risk position to the Board of Directors on a quarterly basis.
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at September 30, 1997,
which are anticipated by the Company, based upon certain assumptions,
to reprice or mature in each future time period shown. Except as stated,
the amount of assets and liabilities shown which reprice or mature
during a particular period were determined in accordance with the
earlier of the term to repricing or the contractual maturity. The
table is intended to provide an approximation of the repricing as
of September 30, 1997, within a six-month period and subsequent selected
time intervals. Annual prepayments for one to four family mortgage loans
and mortgage-backed securities were assumed to be 9%. Callable securities,
principally U.S. Government agencies, are shown by their respective
contractual maturities. Savings deposit accounts are shown with a decay
rate of 9% annually. Money market deposits are assumed to be immediately
rate sensitive, and NOW accounts assume that 20% are immediately repricable
with the balance, repricing in the over five year period. Prepayment and
decay rates can have a significant impact on the Company's sensitivity gap,
and there are no assurances that the Company's prepayment and decay rate
assumptions will be realized.
<TABLE>
At September 30, 1997
Maturing or Repricing
<CAPTION>
Over 6
6 Months Months to Over 1-3 Over 3-5 Over
or Less One Year Years Years 5 Years Total
(dollars in thousands) Amount Amount Amount Amount Amount Amount
<S> <C> <C> <C> <C> <C> <C>
Fixed rate one- to four-family,
multi-family and commercial real
estate and construction loans $ 5,972 $ 4,218 $14,777 $13,116 $ 32,855 $ 70,938
Adjustable rate one- to four-family,
multi-family and commercial real
estate and construction loans 14,566 13,700 8,906 133 49 37,354
Consumer loans 8,543 1,893 5,029 1,464 1,481 18,410
Mortgage-backed securities 12,760 4,936 14,767 9,390 42,030 83,883
Other securities<F1> 5,999 8,992 5,989 10,982 40,550 72,512
Federal funds and other 88 --- --- --- 30 118
Total interest-earning assets 47,928 33,739 49,468 35,085 116,995 283,215
Savings deposits 4,016 3,347 11,915 9,946 50,224 79,448
Money market 7,115 --- --- --- --- 7,115
Certificate accounts 42,178 21,030 33,101 2,896 336 99,541
NOW deposits 2,088 --- --- --- 8,350 10,438
Other deposits --- --- --- --- 766 766
Short-term borrowings 11,385 --- --- --- --- 11,385
Total interest-bearing liabilities 66,782 24,377 45,016 12,842 59,676 208,693
Interest-earning assets less
interest-bearing liabilities ($18,854) $ 9,362 $ 4,452 $22,243 $ 57,319 $ 74,522
Cumulative interest-rate sensitivity gap ($ 18,854) ($ 9,492) ($ 5,040) $17,203 $ 74,522
Cumulative interest-rate gap as a
percentage of total assets at
September 30, 1997 (6.51%) (3.28%) (1.74%) 5.94% 26.28%
Cumulative interest-rate gap as a
percentage of interest-earning
assets at September 30, 1997 (6.66%) (3.35%) (1.78%) 6.07% 26.31%
<FN>
<F1> Includes all securities available for sale and investment securities
held to maturity except mortgage backed securities. Also includes
Federal Home Loan Bank Stock, which is included in the over five years
category since the stock has no contractual maturity.
</TABLE>
Based on these assumptions, the Company, as of September 30, 1997,
had a cumulative one year negative gap of $9.5 million, or 3.3% of
total assets. However, Management has estimated based on the current
level of interest rates as of September 30, 1997, that $15.0 million
of the Company's securities could be called in the next fiscal year,
which would reduce the Company's cumulative one-year sensitivity gap
from a negative $9.5 million to an estimated positive gap of $5.5
million or 1.9% of total assets. Consequently, if interest rates were
to increase or decrease, the Company's net interest income could be
adversely impacted. Management expects to maintain a relatively balanced
gap position in order to limit the Company's exposure to interest rate risk,
including reducing the amount of securities with call risk.
In evaluating the Company's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing
table must be considered. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may
react in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other
types may lag behind changes in market rates. Additionally, certain assets,
such as adjustable rate mortgages, have features which restrict changes
in interest rates in the short term and over the life of the asset.
Further, in the event of a change in interest rates, prepayments and
early withdrawal levels would likely deviate significantly from those
assumed in calculating the table. Any change in projected repayments
could materially affect the rate at which assets reprice. Finally,
the ability of many borrowers to service their debt may decrease in
the event of an interest rate increase. As a result, the actual effect
of changing interest rates may differ from that presented in the foregoing
table.
The Bank's interest rate sensitivity is also monitored quarterly through
use of an OTS model which generates estimates of the change in net
portfolio value ("NPV") over a range of interest rate change scenarios.
NPV represents the estimated market value of portfolio equity, and
is equal to the market value of assets minus the market value of liabilities,
with adjustments made for off-balance sheet items. The NPV ratio is defined
as NPV, in that interest rate scenario, divided by the market value of assets
in the same scenario. The following are the estimated impacts of immediate
changes "rate shocks" in interest rates at September 30, 1997, as calculated
by the OTS model for the Bank:
<TABLE>
<CAPTION>
Rates
In Basis Net Portfolio Value NPV as a % Assets
Points Dollars in Thousands % NPV %
(Rate Shock) Amount Change Change Ratio Change
<S> <C> <C> <C> <C> <C> <C>
400 $45,894 $(24,286) (34.6)% 17.16% (27.6)%
300 52,021 (18,159) (25.9) 18.94 (20.0)
200 58,335 (11,844) (16.9) 20.68 (12.7)
100 64,564 (5,616) (8.0) 22.31 (5.8)
static 70,180<F1> --- --- 23.69 ---
(100) 74,112 3,932 5.6 24.58 3.8
(200) 77,371 7,192 9.3 25.27 6.7
(300) 80,874 10,649 13.2 25.98 9.7
(400) 85,335 15,155 21.6 26.88 13.5
<FN>
<F1> Represents Bank only, Holding Company has additional portfolio equity
of $7.6 million not shown in analysis, which if included, would reduce
% changes.
</TABLE>
As is the case with the gap table, certain shortcomings are inherent
in the methodology used in NPV measurements. Modeling changes in NPV
require the making of assumptions which may tend to oversimplify the
manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV model assumes that the composition
of the interest sensitive assets and liabilities repricing at the
beginning of the period remain constant, in addition, it assumes
hanges in interest rates change uniformly across the yield curve
regardless of duration. Accordingly, although the NPV model provides
an indication of market value risk at a particular point in time, actual
results may differ from those projected.
As is the case with the gap table, certain shortcomings are inherent
in the methodology used in NPV measurements. Modeling changes in NPV
require the making of assumptions which may tend to oversimplify the
manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV model assumes that the composition
of the interest sensitive assets and liabilities repricing at the
beginning of the period remain constant, in addition, it assumes changes
in interest rates change uniformly across the yield curve regardless of
duration. Accordingly, although the NPV model provides an indication of
market value risk at a particular point in time, actual results may differ
from those projected.
The following table shows the Company's financial instruments that
are sensitive to changes in interest rates, categorized by expected
maturity along with the weighted average yield, and estimated fair
market values as of September 30, 1997. The Company's assets and liabilities
that do not have a stated maturity date, such as savings, NOW and
money market deposits are considered long-term in nature, and are
reported in the thereafter column. The Company does not consider these
financial instruments materially sensitive to interest rate fluctuations,
and historically, they have remained fairly constant. The weighted
average interest rates for the various assets and liabilities presented
are actual as of September 30, 1997.
<TABLE>
Expected Maturity Dates
as of September 30,
<CAPTION>
Estimated
(dollars in thousands) 1998 1999 2000 2001 2002 Thereafter Total Fair Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Sensitive Assets:
Loans $12,919 $11,855 $ 9,204 $ 8,426 $ 8,560 $75,738 $126,702 $128,623
8.29% 8.03% 7.64% 6.94% 10.11% 7.82% 7.97%
Securities, at
amortized cost 18,023 8,132 6,013 11,973 3,104 109,151 156,396 157,988
6.11% 6.39% 6.65% 6.78% 7.04% 7.24% 7.00%
Interest-Sensitive
Liabilities:
Certificates of Deposit 63,209 24,619 8,482 1,944 951 336 99,541 99,701
5.58% 5.70% 5.76% 5.84% 5.94% 5.93% 5.64%
Savings --- --- --- --- --- 79,448 79,448 79,448
3.50% 3.50%
NOW Deposits --- --- --- --- --- 10,438 10,438 10,438
2.46% 2.46%
Money Market --- --- --- --- --- 7,115 7,115 7,115
3.19% 3.19%
Other Deposits --- --- --- --- --- 766 766 766
2.92% 2.92%
FHLB Borrowing 11,385 --- --- --- --- --- 11,385 11,385
6.25% 6.25%
</TABLE>
Asset Quality
Non-performing assets include non-accrual loans, troubled debt restructurings,
loans greater than 90 days past due and still accruing interest and
other real estate properties. Loans are placed on non-accrual status
when the loan is more than 90 days delinquent (except for student,
FHA insured and VA guaranteed loans) or when the collection of principal
and/or interest in full becomes doubtful. When loans are designated
as non-accrual, all accrued but unpaid interest is reversed against
current period income and subsequent cash receipts generally are applied
to reduce the unpaid principal balance. Foreclosed assets include
assets acquired in settlement of loans.
Non-performing assets at September 30, 1997 were $1.2 million, or .40%
of total assets, compared to the $1.7 million or .61% of total assets at
September 30, 1996. The table below sets forth the amounts and categories
of the Company's non-performing assets.
<TABLE>
<CAPTION>
Year Ended September 30,
(dollars in thousands) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Non-performing loans:
One- to four-family real estate $ 780 $1,008 $ 784 $ 650 $ 409
Multi-family and commercial
real estate --- 78 --- --- ---
Consumer<F1> 137 283 251 --- 15
Total 917 1,369 1,035 650 424
Troubled debt restructured loans:
Multi-family and commercial
real estate --- --- --- --- 1,427
Foreclosed assets, net:
One- to four-family real estate 225 334 326 220 56
Multi-family and commercial
real estate 23 23 158 158 ---
Total 248 357 484 378 56
Total non-performing assets $1,165 $1,726 $1,519 $1,028 $1,907
Total non-performing loans
as a % of total loans .73% 1.10% .86% .54% 1.53%
Total as a percentage of
total assets .40% .61% .66% .45% .84%
<FN>
<F1> Loans greater than 90 days past due and still accruing, principally
student loans.
</TABLE>
Principally all of the decrease in non-performing loans at September
30, 1997 as compared to September 30, 1996 was attributed to the Company
foreclosing on nine properties. The net realizable value of the properties
totalling $538,000, was transferred to other real estate, and $160,000
representing the excess of the carrying value of the related loans over the
net realizable value of the properties, was charged against the allowance
for loan losses. These reductions were partially offset by an increase of
$246,000 in non-performing loans. In addition, during the year ended
September 30, 1997, the Company sold eleven parcels of other real estate
realizing gains of $140,000. The following table summarizes the activity in
other real estate:
<TABLE>
<CAPTION>
Years Ended September 30,
1997 1996
<S> <C> <C>
(In thousands)
Other real estate beginning of period $ 357 $ 484
Transfer of loans to other real estate owned 538 206
Sales of other real estate (647) (199)
Write-downs --- (134)
Other real estate end of period $ 248 $ 357
</TABLE>
Additionally, at September 30, 1997, the Company has identified approximately
$2.0 million in loans having more than normal credit risk. The Company
believes that if economic and/or business conditions change in its lending
area, some of these loans could become non-performing in the future.
The allowance for loan losses was $1.9 million, or 1.50% of period
end loans at September 30, 1997, and provided coverage of non-performing
loans of 206.0% compared to coverage of 133.9% as of September 30,
1996. For more detail on the allowance, see "Provision for Loan
Losses."
Results of Operations
Comparision of Operating Results for the Years Ended September 30, 1997 and 1996
Net Interest Income
The Company's net income is primarily dependent upon net interest
income. Net interest income is a function of the relative
amounts of the Company's interest earning assets versus interest bearing
liabilities, as well as the difference ("spread") between
the average yield earned on loans, securities, interest-earning deposits,
and federal funds sold and the average rate paid on
deposits and borrowings. The interest rate spread is affected by economic
and competitive factors that influence interest rates,
loan demand and deposit flows. The Company, like other financial institutions,
is subject to interest rate risk to the degree that
its interest-bearing liabilities mature or reprice at different times,
or on a different basis, than its interest-earning assets.
Net interest income for the year ended September 30, 1997 was $11.4
million, an increase of $2.5 million, or 28.1% over the
comparable period of 1996. The improvement was principally an increase
in average earning assets, a shift in asset mix and the
funding benefit from the full year impact of the Company's public
offering.
Interest income for the year ended September 30, 1997 was $20.2 million,
an increase of $2.3 million, or 12.8%, over the
comparable period in fiscal 1996. Average earning assets were $273.9
million, an increase of $14.9 million or 5.7% over fiscal
1996, although the primary cause of the improvement was a deliberate
shift in the mix of the Company's investments away from lower
yielding federal funds sold and towards higher yielding mortgage-backed
securities in order to improve average yields and increase
interest income. The average balance of federal funds sold decreased
$57.0 million from $67.2 million for the year ended September
30, 1996 to $10.2 million for the year ended September 30, 1997. In
contrast, the average balance of mortgage-backed securities
increased by $55.5 million from $19.5 million to $75.0 million between
the periods. Although the average yield on mortgage-backed
securities declined from 7.48% for the year ended September 30, 1996
to 7.09% for the year ended September 30, 1997, the yield
still far exceeded the average yield on federal funds sold, which
was 5.39% for the 1996 period and 5.35% for the 1997 period. In
addition to increasing yields, the shift in the asset mix also had
the effect of decreasing the sensitivity of the Company's
assets to interest rate changes.
Interest expense for the year ended September 30, 1997 was $8.8 million,
a decrease of $221,000, or 2.4%. Approximately 77% was
attributed to a decrease in volume with the remainder attributable
to a decline in rates paid on certain types of deposits. Average interest
bearing liabilitieswere $197.7 million, a decrease of $8.3 million or 4.0%
from the comparable period of 1996. The decrease in volume was principally
in common stock subscriptions as the Company in the year
ended September 30, 1996, held stock subscription deposits averaging
approximately $9.1 million for its initial public offering.
There were no such subscriptions in 1997. The decline in certain rates
paid was principally caused by a reduction in the cost of
certificates of deposits which decreased from 5.63% to 5.58%, or 5
basis points, primarily from the decrease in market rates since
the Federal Reserve lowered the discount rate in January 1996.
The Company's net yield on average earning assets was 4.17%, compared
to 3.44% for the comparable period of 1996. The improvement
was primarily the result of the investment of the Company's net offering
proceeds which caused an increase in average earning
assets with no corresponding funding costs, although the Company also
improved its net interest spread to 2.93%, a 39 basis point
improvement over the comparable period of 1996, due to the change
in asset mix discussed previously.
As necessary, management of the Company will continue to increase
or decrease the Company's deposit rates and terms in order to
manage interest rate risk and liquidity, and to maintain market share.
For more information on average balances, interest rates
and yields, please refer to the "Analysis of Net Interest Income"
and "Rate/Volume Analysis of Net Interest Income" tables.
Analysis of Net Interest Income
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 totaled
$14 thousand in 1997; there were no tax equivalent adjustments in
the other periods. 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 excluding mortgage
backed securities. Mortgage backed securities are
primarily classified as available for sale. Securities available for
sale are included at amortized cost.
<TABLE>
<CAPTION>
Year Ended September 30,
1997 1996
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
<S> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Interest-Earning Assets:
Loans receivable $125,146 $10,083 8.06% $121,105 $ 9,783 8.08%
Mortgage backed securities 75,069 5,319 7.09 19,541 1,462 7.48
Securities 63,521 4,283 6.74 51,182 3,062 5.98
Federal funds sold and other 10,214 546 5.35 67,245 3,625 5.39
Total interest-earning assets $273,950 20,231 7.38 $259,073 17,932 6.92
Non-interest-bearing assets 4,982 6,440
Total Assets $278,932 $265,513
Interest-Bearing Liabilities:
Savings deposits $ 80,697 $ 2,821 3.50% $ 84,607 $ 2,962 3.50%
Certificate accounts 95,215 5,309 5.58 92,699 5,218 5.63
Money market 7,418 242 3.26 8,431 289 3.43
NOW deposits 9,667 237 2.45 8,764 216 2.46
Other<F1> 2,065 43 2.08 11,451 337 2.94
Short-term borrowings 2,590 149 5.75 -- --
Total interest-bearing
liabilities $197,652 8,801 4.45 $205,952 9,022 4.38
Non-interest bearing
liabilities 6,372 7,186
Shareholders' equity 74,908 52,375
Total liabilities and equity $278,932 $265,513
Net interest income $11,430 $ 8,910
Net interest rate spread 2.93% 2.54%
Net earning assets $ 76,298 $ 53,121
Net yield on average interest-
earning assets 4.17% 3.44%
Average interest-earning
assets to average interest-
bearing liabilities 138.60x 125.79x
<FN>
<F1> Other includes principally escrow balances on mortgages for taxes
and insurance, except for 1996 which also includes approximately
$9.1 million, representing the average of common stock subscriptions
held until the Company's public offering was consummated. The Bank
paid its savings deposit rate of 3.5% on those subscriptions
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
1995
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
<S> <C> <C> <C>
(dollars in thousands)
Interest-Earning Assets:
Loans receivable $121,389 $ 9,733 8.02%
Mortgage backed securities 14,331 1,065 7.43
Securities 62,326 3,598 5.77
Federal funds sold and other 20,740 1,196 5.77
Total interest-earning assets $218,786 15,592 7.13
Non-interest-bearing assets 7,678
Total Assets $226,464
Interest-Bearing Liabilities:
Savings deposits $ 98,064 3,434 3.50%
Certificate accounts 76,457 4,026 5.27
Money market 9,004 310 3.44
NOW deposits 7,790 195 2.50
Other<F1> 2,346 44 1.88
Short-term borrowings -- --
Total interest-bearing
liabilities $193,661 8,009 4.14
Non-interest bearing
liabilities 4,785
Shareholders' equity 28,018
Total liabilities and equity $226,464
Net interest income $ 7,583
Net interest rate spread 2.99%
Net earning assets $ 25,125
Net yield on average interest-
earning assets 3.47%
Average interest-earning
assets to average interest-
bearing liabilities 112.97x
<FN>
<F1> Other includes principally escrow balances on mortgages for taxes
and insurance, except for 1996 which also includes approximately
$9.1 million, representing the average of common stock subscriptions
held until the Company's public offering was consummated. The Bank
paid its savings deposit rate of 3.5% on those subscriptions
</TABLE>
Rate/Volume Analysis of Net Interest Income
The following table presents the dollar amount of changes in interest
income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. It distinguishes
between the changes related to outstanding balances and
that due to the changes in interest rates. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (i.e., changes
in volume multiplied by old rate) and (ii) changes in rate (i.e., changes
in rate multiplied by old volume).For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
Year Ended September 30,
1997 vs. 1996 1996 vs. 1995
Increase Increase
(Decrease) Total (Decrease) Total
Due to Increase Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Interest-earning assets:
Loans receivable $ 315 $ (15) $ 300 $ (23) $ 73 $ 50
Mortgage-backed securities 3,929 (72) 3,857 404 (7) 397
Securities 800 421 1,221 (673) 137 (536)
Federal funds (3,052) (27) (3,079) 2,508 (79) 2,429
Total interest-earning assets $1,992 $307 $2,299 $2,216 $124 $2,340
Interest-bearing liabilities:
Savings deposits $ (141) $ -- $ (141) $ (472) $ -- $ (472)
Certificate accounts 135 (44) 91 856 336 1,192
Money market (33) (14) (47) (20) (1) (21)
NOW deposits 22 (1) 21 24 (3) 21
Other<F1> (301) 7 (294) 171 122 293
Short-term borrowings 149 -- 149 -- -- --
Total interest-bearing liabilities $ (169) $(52) $(221) $ 559 $454 $1,013
Net change in net interest income $2,520 $1,327
<FN>
<F1> Other includes principally escrow balances on mortgages for taxes
and insurance, except for 1996 which also includes interest
expense on approximately $9.1 million, representing the average of
common stock subscriptions held in escrow until the Company's
public offering was consummated. The Bank paid its savings deposit
rate, of 3.5% on those subscriptions
</TABLE>
Provision For Loan Losses
The Company establishes an allowance for loan losses based on an analysis
of risk factors in the 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 $300,000 for the year ended September 30, 1997, an increase
of $105,000 from the comparable period of 1996. The
increase in the provision over 1996 was principally to cover net charge-offs
in 1997, as well as to provide for loan growth so
that the allowance as a percentage of loans remained relatively stable.
The allowance for loan losses at September 30, 1997 was
$1.9 million, or 1.50% of total loans and provided coverage of non-performing
loans of 206.0%.
The following table sets forth an analysis of the Company's allowance
for loan losses.
<TABLE>
<CAPTION>
Year Ended September 30,
(dollars in thousands) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,833 $1,950 $1,746 $1,294 $ 857
Charge-offs:
One- to four-family real estate (162) (237) (12) (3) ---
Multi-family and commercial real estate (30) --- --- --- (20)
Consumer (90) (86) (50) (29) (45)
Total charge-offs (282) (323) (62) (32) (65)
Recoveries:
One- to four-family real estate 4 --- 1 14 10
Consumer 34 11 10 5 22
Total recoveries 38 11 11 19 32
Net charge-offs (244) (312) (51) (13) (33)
Provision charged to operations 300 195 255 465 470
Balance at end of period $1,889 $1,833 $1,950 $1,746 $1,294
Ratio of net charge-offs during the period to average
loans outstanding during the period .19% .26% .04% .02% .03%
Allowance for loan losses as a % of period-end loans 1.50% 1.47% 1.61% 1.43% 1.06%
</TABLE>
The Company will continue to monitor its allowance for loan losses
and make future additions to the allowance through the
provision for loan losses as conditions dictate. Although the Company
maintains its allowance for loan losses at a level which it
considers to be adequate to provide for the inherent risk of loss
in its loan portfolio, there can be no assurance that future
losses will not exceed estimated amounts or that additional provisions
for loan losses will not be required in future periods. In
addition, the Company's determination as to the amount of its allowance
for loan losses is subject to review by the OTS, as part
of their examination process, which may result in the establishment
of an additional allowance based upon their judgment of the
information available to them at the time of their examination.
Non-Interest Income
Non-interest income was $512,000 for the year ended September 30,
1997, a decrease of $484,000 or 48.6% over the comparable period
of 1996. The decrease was principally due to the $460,000 net change
in the Company's recovery of its Nationar loss reserve. In
the year ended September 30, 1996, the Company recovered $560,000
of its original loss reserve of $660,000, and recovered the
remaining $100,000 in fiscal 1997.
Non-Interest Expense
Non-interest expense for the year ended September 30, 1997 was $5,187,000
an increase of $929,000, or 21.8% over
1996. Increases in personnel costs, net occupancy, supplies, professional
fees and other expenses, were offset somewhat by
reductions in other real estate expenses.
Salaries and employee benefits increased $823,000, or 37.9% over 1996,
principally from ESOP and MRP compensation expenses, both
new plans since the Company went public. ESOP and MRP expenses for
the year ended September 30, 1997, were $342,000 and $419,000,
respectively, compared to ESOP expense of only $119,000 and no MRP
expense during the comparable period in 1996. In addition, the
Company experienced increased personnel costs of approximately $135,000
due to opening its fourth full service branch in late
December 1996.
Net occupancy costs were $329,000, an increase of $78,000, or 31.1%
over 1996, as the Company experienced increased costs relating
to its new branch, as well as depreciation of renovations at another
branch office. Postage and supplies increased $68,000, or
39.8% over 1996, principally from the new branch and shareholder related
costs such as annual reports as well as special and
annual meeting proxy costs. Professional fees were $262,000, an increase
of $52,000, or 24.8%, as the Company experienced
increased legal and accounting costs of operating a public company.
Other expenses increased $67,000, or 11.3% over the comparable
period of 1996. The increases included higher OTS assessments because
1996 included only assessments for the two quarters after
the January conversion of the Bank from a state mutual to a federal
stock savings bank. In addition, the Company incurred higher
director and officer insurance costs, transfer agent, franchise tax
and other costs relating to operating a public company.
Other real estate expenses decreased $265,000, as the Company realized
$140,000 in gains on the sale of other real estate during
the year ended September 30, 1997;
there were no gains during fiscal 1996. In addition, in the year ended
September 30, 1996, the Company, as part of its
periodic valuations of real estate owned, recorded write-downs on
certain properties and increased its estimated cost of
the future disposition of property owned by approximately $134,000.
There were no write-downs in the comparable period of 1997.
Income Tax Expense
Income tax expense for the year ended September 30, 1997 was $2,534,000
an increase of $398,000, or 18.6% over the comparable
period of 1996. The change was principally the 18.1% improvement in
income before income taxes. The Company's effective tax rates
for the year ended September 30, 1997 and 1996, were 39.34% and 39.17%,
respectively.
Comparison of Operating Results for the Years Ended September 30, 1996 and 1995
General
Net income for the year ended September 30, 1996 was
$3.3 million, an increase of $1.6 million or 92.4% over the $1.7 million
for the year ended September 30, 1995. The Company showed
improvement throughout its consolidated statement of operations as
net interest income increased $1.3 million, non-interest income
increased $.7 million, non-interest expenses decreased $.4 million
and the provision for loan losses decreased $.1 million. The
Company experienced an increase in income taxes of $.9 million, primarily
due to higher pre-tax income of $2.5 million.
On a comparative basis, net income for fiscal years 1996 and 1995,
were impacted by the closure liquidation of Nationar, the
Bank's principal correspondent bank. During fiscal 1995, the Company
established a reserve of $660,000 for possible Nationar
losses, resulting in a $396,000 after
tax reduction in net income for the year. In June 1996, the Company
was paid more than 90% of its claim and since $100,000 of the
reserve is estimated to be necessary to cover the remaining claim,
the Company included $560,000 in non-interest income as a
recovery in the year ended September 30, 1996, increasing net income
by approximately $336,000 after tax. See Note 14 of Notes to
Consolidated Financial Statements.
Net-interest Income
Net interest income was $8.9 million for the year ended September
30, 1996, an increase of $1.3 million or 17.5% over fiscal 1995.
The increase was principally caused by the higher level of average
earning assets, related to the Company's initial public
offering which provided net investable proceeds of $50.4 million,
somewhat offset by a lower net yield on average earning assets
as those proceeds could not immediately be invested prudently in loans,
the Company's highest yielding asset category. Average
earning assets were $259.1 million, an increase of $40.3 million,
or 18.4% over fiscal 1995. In addition, net interest income and
average earning assets were favorably impacted by the approximately
$128.0 million of common stock subscriptions held by the Bank
pending consummation of the Company's stock offering. For fiscal 1996,
common stock subscriptions were included in "other"
interest bearing liabilities and averaged approximately $9.1 million.
The Bank paid interest on those subscriptions at its savings
deposit rate of 3.5%.
The net yield on average earning assets was 3.44% for the year ended
September 30, 1996, down slightly from the 3.47% in 1995. The
decrease was principally due to the high percentage of assets invested
in federal funds sold and the change in the composition of
interest bearing liabilities. Federal funds sold represented approximately
25.4% of average earning assets in 1996, as compared to
only 9.5% in 1995. In addition, the Company had experienced in fiscal
1995 and early 1996, similar to many financial institutions,
a customer preference in a then rising rate environment, for higher
costing certificates of deposits, rather than savings
accounts. Average savings account balances represented 41.1% of average
interest bearing liabilities in 1996, compared to 50.6% in
1995. Average certificates of deposits were 45.0% of average interest
bearing liabilities in fiscal 1996, as
compared to 39.5% in 1995.
Provision for loan losses
The provision for loan losses is based upon management's periodic
analysis of the allowance for loan losses. For the year ended
September 30, 1996, the provision for loan losses was $195,000, a
decrease of $60,000 from the $255,000 in 1995. The decrease is
based on management's assessment of the adequacy of the allowance,
which is based on a number of factors including review of non-
performing and other classified loans, the value of collateral for
such loans, historical net charge-offs, and current and
prospective economic conditions. During fiscal 1996, the Company experienced
an increase in non-performing loans, which were $1,369,000 as of
September 30, 1996, an increase of $334,000 or 32.3% over the $1,035,000
as of September 30, 1995. The increase was principally
due to a higher number of residential borrowers filing for bankruptcy
protection. Management believes that since most of loans
with bankruptcy filings are secured by real estate, losses will be
limited and that the $1.8 million allowance for loan losses at
September 30, 1996, which provided 133.9% coverage of non-performing
loans, was adequate.
Non-interest income
Non-interest income was $996,000 for the year ended September 30,
1996, an increase of $734,000 over 1995. The increase
principally represented the recovery of $560,000 from the Nationar
loss contingency reserve established in 1995. In addition,
service fees on deposit accounts increased $90,000 or 70.3% due to
the implementation of new fees on existing products. Lastly, the Company
realized net security gains of $33,000 in 1996, an improvement of $78,000
over the $45,000 of net security losses in the year ended September 30, 1995.
The gains realized in 1996 related to securities acquired at
a discount that were called by the issuer prior to contractual maturity,
and the loss in 1995 related to the Bank's write-off of both its stock and
debenture investments in Nationar. See Note 14 to Notes to
Consolidated Financial Statements.
Non-interest expense
Non-interest expense for the year ended September 30, 1996 was $4,258,000,
a decrease of $407,000 from fiscal 1995 when the
Company recorded the $660,000 provision for losses on Nationar. Excluding
the Nationar provision, non-interest expense in 1996 was
up $253,000 or 6.3%. Increases in
personnel costs, outside data processing, other professional fees,
costs related to real estate acquired in foreclosure,
and all other expenses were partially offset by reductions in FDIC
insurance premiums and advertising expenses.
Salaries and employee benefits were $2,173,000, an increase of $232,000,
or 11.9% over 1995, principally due to ESOP and
postretirement benefit costs other than pensions. In fiscal 1996,
the Company recognized ESOP expense of $119,000, representing
the expense since April 18, 1996, a period of less than six months.
In addition, on October 1, 1995, the Company implemented
Statement of Financial Accounting Standard No. 106 (SFAS #106), which
increased the expense of postretirement benefits other than
pensions by approximately $150,000. Partially offsetting the increases
were lower medical benefit costs as the Company changed
insurance carriers and received premium reductions due to its favorable
claims experience.
Outside data processing costs were $337,000 in 1996, an increase of
$102,000 or 43.4% over 1996. The increase is principally due
to a change from paying for services by maintaining compensating balances
for which no interest was received, to instead paying
direct service fees, only with no required compensating balances.
Management believes that the increase in servicing fees is
offset by an increase in interest earned on the amounts no longer
required to be held as compensating balances. Professional fees
increased $88,000, principally from higher legal and accounting
costs relating to operating a public company. Other real estate costs
were higher as the Company, as part of its regular
valuations of real estate owned, recorded write-downs on certain properties
acquired in foreclosure and increased its estimated
cost of disposition. All other expenses were $594,000, an increase
of $143,000 or 31.7%. The increases were principally $55,000 in
OTS assessments due to the Bank's change to a federal thrift charter,
higher directors' fees of $46,000 and increased insurance
costs of operating
a "public" company.
Advertising and business promotion expense was $137,000 in 1996, a
decrease of $187,000. The decrease was principally because 1995
included more special promotional campaigns. FDIC insurance premiums
were lower in 1996, since the Bank is BIF insured and paid
only the regulatory minimum of $500 in each of the last three quarters
of fiscal 1996, and $.04 for the first fiscal quarter of
1996, compared to last year's $.23 per $100 of assessed deposits for
the first fiscal quarter, and $.04 for the remaining three
quarters.
Income taxes
Income tax expense for the year ended September 30, 1996 was $2,136,000,
an increase of $935,000, or 77.9% higher than the same
period of 1995. The increase was principally the 86.4% improvement
in income before income taxes. The Company's effective tax rate
for the years ended September 30, 1996 and 1995, were 39.17% and 41.06%,
respectively. The decrease in the Company's effective
rate in 1996 was principally the $131,000 reduction in the Company's
deferred tax valuation reserve as certain deferred tax
uncertainties were resolved.
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, principally its federal funds and short-term
borrowings, on a daily basis and evaluates its ability
to meet expected and unexpected depositor withdrawals and to make
new loans and or investments.
The Company has historically maintained high levels of
liquidity, and 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, principal and interest payments on loans,
mortgage backed securities, and other securities available for sale.
Net cash provided by operating activities was $5.7 million for the
year ended September 30, 1997, a decrease of $.2 million over
the comparable period of 1996. The decrease from 1996, was principally
the collection of the Company's claim against Nationar,
partially offset by an increase in net income, an increase in accrued
expenses and other liabilities, and non cash compensation
accruals such as MRP and ESOP compensation expense. In June 1996,
the Company received approximately $3.1 million of its claim
against Nationar with the remaining balance of $183,000 collected
in the year ended September 30, 1997, or a net change of $2.9
million. The increase in accrued expenses and other liabilities was
principally caused by an increase in outstanding official bank
checks, resulting from a change in school tax due dates. Investing
activities used $41.3 million in 1997, as the Company invested
more of its initial net offering
proceeds in securities available for sale, principally mortgage backed
securities and, to a lesser extent, loans and capital
expenditures related to its new branch office. Financing activities
used $1.8 million, as the Company repurchased 1,029,476 shares
of its common stock at a cost of approximately $15.3 million, and
paid cash dividends of approximately $1.0 million, offset
somewhat by an $11.4 million increase in the Company's short-term
borrowings and a $4.2 million increase in deposits. 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 $200.9 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 deposit
accounts having balances in excess of $100,000 total only $20.0
million or less than 10.0% of total deposits. The Bank is required
to maintain minimum levels of liquid assets as defined by the
OTS regulations. The requirement, which may be varied by the OTS depending
upon economic conditions and deposit flows, is based
upon a percentage of deposits and short-term borrowings. The OTS required
minimum liquidity ratio is currently 5% and for the
month of September 1997, the Bank exceeded that, maintaining an average
liquidity ratio of 20.1%. On November 24, 1997, the OTS
issued an updated rule, which simplifies and streamlines its liquidity
regulation. Under the new rule, the minimum liquidity ratio
has been reduced to 4%, and the definition of liquid assets, as well
as net withdrawable accounts were revised. Since the Bank was
in substantial compliance before the regulation, the new rule should
not have a material effect on its operations.
The Company anticipates that it will have sufficient funds to meet
its current commitments. At September 30, 1997, the Company had
commitments to originate loans of $1.3 million. In addition, the Company
had undrawn commitments of $2.5 million on home equity
and other lines of credit. Certificates of deposits which are scheduled
to mature in one year or less at September 30, 1997,
totaled $63.2 million, and management believes that a significant
portion of such deposits will remain with the Company.
Catskill Financial is regulated by the OTS and although there are
no minimum capital requirements for the holding company itself,
the Bank is required to maintain minimum regulatory capital ratios.
The following is a summary of the Bank's actual capital
amounts and ratios as of September 30, 1997, compared to the OTS minimum
capital requirements:
<TABLE>
<CAPTION>
Actual Minimum
(dollars in thousands) Amount % Amount %
<S> <C> <C> <C> <C>
Tangible Capital $59,031 20.7% $4,278 1.5%
Core Capital 59,031 20.7 8,556 3.0
Risk Based Capital 60,159 61.3 7,854 8.0
</TABLE>
Liquidity and Capital Resources (continued)
In October 1996, the Board of Directors authorized the Company to
repurchase 4% of its issued and outstanding shares to fund its
Management Recognition Plan which was approved at a special meeting
of shareholders on October 24, 1996. By December 4, 1996, the
Company had completed the repurchase of 227,470 shares of its common
stock to fund the MRP at a cost of $3.1 million, or an
average of $13.59 per share. In addition, after Board approval, the
Company received OTS approval on November 26, 1996, to
repurchase up to 10% of its shares over the period ending April 18,
1997. Such shares are available for general corporate purposes
including funding the Company's stock option plan which was also approved
at the special meeting of shareholders. By April 17,
1997, the Company had completed the repurchase of 564,506 shares under
the 10% repurchase program at a cost of $8.5 million or
$15.06 per share. On May 15, 1997, the Company filed notice with the
OTS of its intention to repurchase up to 5% of its
outstanding stock, or 253,675 shares. The OTS had no objection to
the proposal, provided the purchases are completed by April 18,
1998, and by September 30, 1997, the Company had already repurchased
237,500 shares at a cost of $3.7 million or $15.73 per share.
The Holding Company itself has adequate resources to repurchase the
remaining 16,175 shares without dividends from the Bank. In
addition, at September 30, 1997, the Bank could, after notifying the
OTS in writing, pay to the holding company dividends of
approximately $26.5 million.
Impact of Year 2000
The Company has conducted a comprehensive review of its computer systems
to identify applications that could be affected by the
"Year 2000" issue, and has developed an implementation plan to resolve
the issue. The Company's data processing is performed
exclusively by third party vendors, consequently, the Company is primarily
dependent
on those vendors to conduct its business. The Company has already
contacted each vendor to request time tables for year 2000
compliance and expected costs, if any, to be passed along to the Company.
The Company's primary service provider anticipates that
all reprogramming efforts will be completed by December 31, 1998,
allowing the Company adequate time for testing. Certain other
vendors have not yet responded, however, the Company will pursue other
options if it appears that these vendors will be unable to
comply. Management does not expect these costs to have a significant
impact on its financial position or results of operations,
however, there can be no assurance that the vendors systems will be
2000 compliant, consequently the Company could incur
incremental costs to convert to another vendor.
Impact of Inflation and Changing Prices
The Company's consolidated financial statements are prepared in accordance
with generally accepted accounting principles which
require the measurement of financial position and operating results
in terms of historical dollars without considering the changes
in the relative purchasing power of money over time due to inflation.
The impact of inflation is reflected in the increasing cost
of the Company's operations. Unlike most industrial companies, nearly
all assets and liabilities of the Company are monetary. As a
result, interest rates have a greater impact on the Company's performance
than do the effects of general levels of inflation. In
addition, interest rates do not necessarily move in the direction,
or to the same extent as the
price of goods and services.
Impact of New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings
per Share" (SFAS No. 128). SFAS No. 128 establishes standards for
computing and presenting earnings per share (EPS). This
Statement simplifies the standards for computing EPS making them comparable
to international EPS standards and supersedes
Accounting Principles Board Opinion No. 15, "Earnings per Share" and
related interpretations. SFAS No. 128 replaces the
presentation of primary EPS with the presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and
denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that
then shared in the earnings of the entity (such as the Company's stock
options). This Statement is effective for financial
statements issued for periods ending after December 15, 1997, including
interim periods. Earlier adoption is not permitted. This
Statement requires restatement of all prior-period EPS data presented.
Management does not anticipate the effect of the adoption
of SFAS No. 128 to be material.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 129, "Disclosure
of Information about Capital Structure" (SFAS No. 129), which establishes
standards
for disclosure about a company's capital structure. In accordance
with SFAS No. 129, companies will be required to provide in the
financial statements a complete description of all aspects of their
capital structure, including call and put features, redemption
requirements and conversion options. The disclosures required by SFAS
No. 129 are for financial statements for periods ending
after December 15, 1997. Management anticipates providing the required
information in the 1998 annual consolidated financial
statements.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income" (SFAS No. 130).
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income. SFAS No. 130 states that comprehensive
income includes the reported net income of a company adjusted for
items that are currently accounted for as direct entries to
equity, such as the mark to market adjustment on securities available
for sale, foreign currency items and minimum pension
liability adjustments. This statement is effective for fiscal years
beginning after December 15, 1997. Management anticipates
developing the required information for inclusion in the 1998 annual
consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 131, "Disclosure
about Segments of an Enterprise and Related Information" (SFAS No.
131). SFAS No. 131 establishes standards for reporting by
public companies about operating segments of their business. SFAS
No. 131 also establishes standards for related disclosures about
products and services, geographic areas and major customers. This
statement is effective for periods beginning after December 15,
1997. Management anticipates developing the required information for
inclusion in the 1998 annual consolidated financial
statements of Catskill Financial Corporation.
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Catskill Financial Corporation:
We have audited the accompanying consolidated statements of financial
condition of Catskill Financial Corporation and subsidiary (the Company)
as of September 30, 1997 and 1996, and the related statements of operations,
changes in shareholders' equity and cash flows for each of the years
in the three-year period ended September 30, 1997. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Catskill Financial Corporation and subsidiary at September 30,
1997 and 1996, and the results of its operations and its cash flows
for each of the years in the three-year period ended September 30,
1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
October 24, 1997
Albany, New York
<TABLE>
Consolidated Statements of Financial Condition
<CAPTION>
September 30,
(in thousands, except for share amounts) 1997 1996
<S> <C> <C>
Assets
Cash and due from banks $ 2,274 $ 4,112
Federal funds sold -- 35,600
Cash and cash equivalents 2,274 39,712
Securities available for sale, at fair value (note 4) 148,114 97,041
Investment securities (estimated fair value of $8,112 in 1997
and $19,090 in 1996) (note 5) 8,055 19,077
Investment required by law, stock in Federal Home Loan Bank of NY,at cost 1,762 1,159
Loans receivable, net (note 6) 124,337 122,533
Accrued interest receivable (note 7) 2,303 1,736
Premises and equipment, net (note 8) 2,367 1,886
Real estate owned, net 248 357
Deposits held at Nationar, net (note 14) -- 83
Other assets 159 175
Total assets $289,619 $283,759
Liabilities and Shareholders' Equity
Liabilities:
Due to depositors (note 9):
Non-interest bearing $ 4,370 $ 3,714
Interest bearing 196,542 193,039
Total deposits 200,912 196,753
Short-term borrowings (note 15) 11,385 --
Advance payments by borrowers for taxes and insurance 533 1,632
Accrued interest payable 59 58
Official bank checks 3,861 2,557
Accrued expenses and other liabilities 1,092 378
Total liabilities 217,842 201,378
Commitments and contingent liabilities (notes 10, 11, 12 and 13)
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 September 30, 1997 and 1996 57 57
Additional paid-in capital 54,811 54,864
Retained earnings, substantially restricted (note 2) 34,915 31,984
Common stock acquired by ESOP (note 12) (4,209) (4,436)
Unearned management recognition plan (MRP) (note 12) (1,856) --
Treasury stock, at cost (848,244 shares at September 30, 1997) (12,862) --
Net unrealized gain (loss) on securities available for sale, net of taxes 921 (88)
Total shareholders' equity 71,777 82,381
Total liabilities and shareholders' equity $289,619 $283,759
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
Consolidated Statements of operations
<CAPTION>
Years ended September 30,
(in thousands, except for share amounts) 1997 1996 1995
<S> <C> <C> <C>
Interest and dividend income:
Loans $ 10,083 $ 9,783 $ 9,733
Securities available for sale 8,805 2,201 --
Investment securities 688 2,282 4,663
Federal funds sold and other 546 3,625 1,196
Stock in Federal Home Loan Bank of NY 95 41 --
Total interest and dividend income 20,217 17,932 15,592
Interest expense:
Deposits (note 9) 8,652 9,022 8,009
Short-term borrowings (note 15) 149 -- --
Total interest expense 8,801 9,022 8,009
Net interest income 11,416 8,910 7,583
Provision for loan losses (note 6) 300 195 255
Net interest income after provision for loan losses 11,116 8,715 7,328
Noninterest income:
Recovery of Nationar loss contingency (note 14) 100 560 --
Service fees on deposit accounts 243 218 128
Net securities gains (losses) 19 33 (45)
Other income 150 185 179
Total noninterest income 512 996 262
Noninterest expenses:
Salaries and employee benefits 2,996 2,173 1,941
Advertising and business promotion 200 137 324
Net occupancy on premises 329 251 241
Federal deposit insurance premium 20 21 332
Postage and supplies 239 171 185
Provision for Nationar loss contingency (note 14) -- -- 660
Outside data processing fees 357 337 235
Equipment 177 153 155
Professional fees 262 210 122
Other real estate expenses, net (54) 211 19
Other 661 594 451
Total noninterest expense 5,187 4,258 4,665
Income before taxes 6,441 5,453 2,925
Income tax expense (note 10) 2,534 2,136 1,201
Net income $ 3,907 $ 3,317 $1,724
Earnings per share (for 1996, calculated using post conversion
net income)(see note 1) $ .84 $ .38 N/A
Weighted average common shares 4,629,697 5,231,810 N/A
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
Consolidated Statements of Changes in Shareholders' Equity
<CAPTION>
Years ended September 30, 1997, 1996 and 1995
Net unrealized
gain (loss)
Retained Common Unearned on securities
Additional earnings, stock management Treasury available
(dollars in thousands, Shares Common paid-in substantially acquired recognition stock, for sale
except for share amounts) issued stock capital restricted by ESOP plan at cost net of taxes Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994 -- $ -- $ -- $ 26,943 $ -- $ -- $ -- $ -- $26,943
Net income -- -- -- 1,724 -- -- -- -- 1,724
Balance at September 30, 1995 -- -- -- 28,667 -- -- -- -- 28,667
Net income -- -- -- 3,317 -- -- -- -- 3,317
Common stock issued 5,686,750 57 54,858 -- -- -- -- -- 54,915
Acquisition of common stock
by ESOP (454,940 shares) -- -- -- -- (4,549) -- (4,549)
Allocation of ESOP stock
(11,374 shares) -- -- 6 -- 113 -- 119
Change in net unrealized gain
(loss) on securities available
for sale, net of taxes -- -- -- -- -- -- -- (88) (88)
Balance at September 30, 1996 5,686,750 57 54,864 31,984 (4,436) -- -- (88) 82,381
Net income -- -- -- 3,907 -- -- -- -- 3,907
Dividends paid on
common stock -- -- -- (976) -- -- -- -- (976)
Purchases of common stock
(1,029,476 shares) -- -- -- -- -- -- (15,305) -- (15,305)
Allocation of ESOP stock
(22,722 shares) -- -- 115 -- 227 -- -- -- 342
Change in net unrealized gain
(loss) on securities available
for sale, net of taxes -- -- -- -- -- -- -- 1,009 1,009
Grant of restricted stock under
MRP (181,232 shares) -- -- (168) -- -- (2,275) 2,443 -- --
Amortization of unearned
MRP compensation -- -- -- -- -- 419 -- -- 419
Balance at September 30, 1997 5,686,750 $ 57 $ 54,811 $ 34,915 $ (4,209) $ (1,856) $(12,862) $ 921 $71,777
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
Consolidated Statements of Cash Flows
<CAPTION>
Years ended September 30,
(in thousands, except for share amounts) 1997 1996 1995
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 3,907 $ 3,317 $ 1,724
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 183 136 139
Provision for loan losses 300 195 255
Provision for (recovery of) Nationar loss contingency (100) (560) 660
MRP compensation expense 419 -- --
ESOP compensation expense 342 119 --
Writedown on real estate owned -- 134 --
Writedown of Nationar debenture and capital stock -- -- 47
Loss (gain) on sale of other real estate owned (140) 85 (17)
Gain on sales and calls of securities (19) (33) (2)
Net accretion on securities (157) (308) (337)
Deferred tax benefit (156) (151) (321)
(Transfer to other assets) collection of deposits held at Nationar 183 3,083 (3,266)
(Increase) decrease in other assets (551) (149) (11)
Increase (decrease) in accrued expenses and other liabilities 1,502 25 3,010
Net cash provided by operating activities 5,713 5,893 1,881
Cash flows from investing activities:
Proceeds from maturity, paydowns, and calls of investment securities 11,023 28,884 24,203
Proceeds from maturity, paydowns, and calls of securities
available for sale 64,415 126,656 --
Proceeds from sales of securities available for sale 5,959 -- --
Purchases of investment securities -- (6,015) (12,930)
Purchase of Federal Home Loan Bank Stock (603) (1,159) --
Purchases of securities available for sale (119,590) (198,359) --
Net (increase) decrease in loans (2,642) (4,570) 340
Capital expenditures, net (664) (290) (365)
Proceeds from sale of other real estate owned 787 114 185
Net cash (used) provided by investing activities (41,315) (54,739) 11,433
Cash flows from financing activities:
Net increase (decrease) in demand, statement, passbook, money market
and NOW deposit accounts (2,523) (1,814) (33,407)
Net increase in certificates of deposit 6,682 1,337 29,812
Increase (decrease) in advances from borrowers for taxes and insurance (1,099) 605 (1,235)
Net proceeds from sale of common stock -- 54,915 --
Common stock acquired by ESOP -- (4,549) --
Cash dividends on common stock (976) -- --
Purchase of common stock for treasury (15,305) -- --
Increase in short-term borrowings 11,385 -- --
Net cash (used) provided by financing activities (1,836) 50,494 (4,830)
Net (decrease) increase in cash and cash equivalents (37,438) 1,648 8,484
Cash and cash equivalents at beginning of year 39,712 38,064 29,580
Cash and cash equivalents at end of year $ 2,274 $ 39,712 $ 38,064
Supplemental disclosures of cash flow information --
cash paid during the year for:
Interest $ 8,800 $ 9,018 $ 8,014
Income taxes $ 2,770 $ 2,274 $ 1,416
Noncash investing activities:
Reduction in loans receivable resulting from the transfer to real estate owned $ 538 $ 206 $ 273
Investments securities transferred to securities available for sale in accordance
with the Financial Accounting Standards Board's "Special Reports," fair value
of securities transferred was $25.3 million (note 4) -- $ 24,800 --
Change in net unrealized gain (loss) on securities available for sale,
net of deferred tax liability (benefit) of $673 and ($59) respectively $ 1,009 $ 88 --
</TABLE>
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Catskill Financial Corporation (the Holding Company) was incorporated
under Delaware law in December 1995 as a holding company to purchase
100% of the common stock of Catskill Savings Bank (the Bank). The
Bank converted from a mutual form to a stock institution in January
1996, and the Holding Company completed its initial public offering
on April 18, 1996, at which time the Holding Company purchased all
of the outstanding stock of the Bank. To date, the principal operations
of Catskill Financial Corporation and subsidiary (the Company) have
been those of the Bank.
The following is a description of the more significant policies which
the Company follows in preparing and presenting its consolidated financial
statements:
(a) Basis of Presentation
The accompanying consolidated financial statements include the accounts
of the Holding Company and its wholly owned subsidiary, the Bank.
All significant intercompany transactions and balances are eliminated
in consolidation. The accounting and reporting policies of the Company
conform in all material respects to generally accepted accounting
principles and to general practice within the thrift industry.
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance
for loan losses and the valuation of real estate acquired in connection
with foreclosures or in satisfaction of loans. In connection with
the determination of the allowance for loan losses and the valuation
of real estate owned, management obtained appraisals for significant
properties.
(b) Business
A significant portion of the Company's loans are secured by real estate
in Greene County and southern Albany County in New York. In addition,
a substantial portion of the real estate owned is located in those
same markets. Accordingly, the ultimate collectibility of a substantial
portion of the Company's loan portfolio and the recovery of a substantial
portion of the carrying amount of real estate owned are dependent
upon market conditions in the upstate New York region.
Management believes that the allowance for loan losses is adequate
and that real estate owned is properly valued. While management uses
available information to recognize losses on loans and real estate
owned, future additions to the allowance or writedowns on real estate
owned may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for
loan losses. Such agencies may require the Bank to recognize additions
to the allowance or writedowns on real estate owned based on their
judgments about information available to them at the time of their
examination which may not be currently available to management.
(c) Securities Available for Sale,
Investment Securities and Federal
Home Loan Bank of New York Stock
Management determines the appropriate classification of securities
at the time of purchase. If management has the positive intent and
ability to hold debt securities to maturity, they are classified as
investment securities and are stated at amortized cost. All other
debt and marketable equity securities are classified as securities
available for sale and are reported at fair value, with net unrealized
gains or losses reported as a separate component of shareholders'
equity, net of estimated income taxes. The Company does not maintain
a trading portfolio.
Realized gains and losses on the sale of securities are based on the
net proceeds and the amortized cost of the securities sold, using
the specific identification method. The cost of securities is adjusted
for amortization of premium and accretion of discount, which is calculated
on an effective interest method.
Mortgage backed securities, which are guaranteed by the Government
National Mortgage Association ("GNMA"), the Federal Home Loan Mortgage
Corporation ("FHLMC"), or the Federal National Mortgage Association
("FNMA"), represent participating interests in direct pass-through
pools of long-term first mortgage loans originated and serviced by
the issuers of the securities.
Unrealized losses on securities are charged to earnings when the decline
in fair value of a security is judged to be other than temporary.
Non-marketable equity securities, such as Federal Home Loan Bank of
New York stock, is stated at cost. The investment in Federal Home
Bank of New York stock is required for membership.
(d) Loans Receivable
Loans receivable are stated at unpaid principal amount, net of deferred
loan fees and allowance for loan losses. Loan origination fees net
of certain related costs are amortized into income over the estimated
term of the loan using the interest method of amortization. Interest
income on loans is not recognized when considered doubtful of collection
by management.
Loans considered doubtful of collection by management are placed on
a nonaccrual status for the recording of interest. Generally loans
past due 90 days or more as to principal or interest are placed on
nonaccrual status except for certain loans which, in management's
judgment, are adequately secured and for which collection is probable.
Previously accrued income that has not been collected is reversed
from current income. Thereafter, the application of payments received
(principal or interest) is dependent on the expectation of ultimate
repayment of the loan. If ultimate repayment of the loan is expected,
any payments received are applied in accordance with contractual terms.
If ultimate repayment of principal is not expected or management judges
it to be prudent, any payment received on a non-accrual loan is applied
to principal until ultimate repayment becomes expected. Loans are
removed from non-accrual status when they are estimated to be fully
collectible as to principal and interest. Amortization of related
deferred fees or costs is suspended when a loan is placed on non-accrual
status.
The allowance for loan losses is maintained at a level deemed appropriate
by management based on an evaluation of the known and inherent risks
in the present portfolio, the level of non-performing loans, past
loan loss experience, estimated value of underlying collateral, and
current and prospective economic conditions. The allowance is increased
by provisions for loan losses charged to operations.
Impaired loans are identified and measured in accordance with Statement
of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors
for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." These
Statements were adopted by the Company on October 1, 1995. A loan
is considered impaired when it is probable that the borrower will
be unable to repay the loan according to the original contractual
terms of the loan agreement, or the loan is restructured in a troubled
debt restructuring subsequent to October 1, 1995. These standards
are applicable principally to commercial and commercial real estate
loans, however, certain provisions related to restructured loans are
applicable to all loan types. The adoption of these Statements did
not have a material effect on the Company's consolidated financial
statements.
Under these Statements the allowance for loan losses related to impaired
loans is based on discounted cash flows using the loan's initial effective
interest rate or the fair value of the collateral for certain loans
where repayment of the loan is expected to be provided solely by the
underlying collateral (collateral dependent loans). The Company's impaired loans
are generally collateral dependent. The Company considers estimated
costs to sell on a discounted basis, when determining the fair value
of collateral in the measurement of impairment if these costs are
expected to reduce the cash flows available to repay or otherwise
satisfy the loans.
(e) Real Estate Owned
Real estate owned includes assets received from foreclosure and in-substance
foreclosures. In accordance with SFAS No. 114, a loan is classified
as an insubstance foreclosure when the Company has taken possession
of the collateral regardless of whether formal foreclosure proceedings
have taken place.
Foreclosed assets, including in-substance foreclosures, are recorded
on an individual asset basis at net realizable value which is the
lower of fair value minus estimated costs to sell or "cost" (defined
as the fair value at initial foreclosure). When a property is acquired
or identified as in-substance foreclosure, the excess of the loan
balance over fair value is charged to the allowance for loan losses.
Subsequent write-downs to carry the property at fair value less costs
to sell are included in noninterest expense. Costs incurred to develop
or improve properties are capitalized, while holding costs are charged
to expense.
At September 30, 1997 and 1996, real estate owned
consisted primarily of residential one to four family properties.
The Company had no in-substance foreclosures at September 30, 1997
and 1996.
(f) Premises and Equipment, Net
Premises and equipment are carried at cost, less accumulated depreciation
applied on a straight-line basis over the estimated useful lives of
the assets. Useful lives are 10 to
40 years for banking house and 5 to 7 years for furniture, fixtures
and office equipment.
(g) Income Taxes
Income taxes are provided on income reported in the
consolidated statements of income regardless of when such taxes are
payable. The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires
the asset and liability method of accounting for income taxes. Under
the asset and liability method of SFAS No. 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable
to differences between financial statement carrying amounts of existing
assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences
are expected
to be recovered or settled. Under SFAS No. 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. The Company's
policy is that deferred tax assets are reduced by a valuation reserve
if, based on the weight of available evidence, it is more likely than
not that some or all of the deferred tax assets will not be realized.
(h) Pension Plan
The Company has a defined benefit pension plan covering all full time
employees meeting age and service requirements. This plan is accounted
for in accordance with SFAS No. 87, "Employers' Accounting for Pensions."
(i) Off-Balance-Sheet Risk
The Company is a party to certain financial instruments with off-balance-sheet
risk such as commitments to extend credit. The Company's policy is
to record such instruments when funded.
(j) Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all cash and due from banks and federal funds sold to be
cash equivalents.
(k) Official Bank Checks
The Company's official checks (including teller's checks, loan disbursement
checks, interest checks, expense checks and money orders) are drawn
upon deposit accounts at the Bank and are ultimately paid through
the Bank's Federal Reserve correspondent account.
(l) Stock Based Compensation Plans
Compensation expense in connection with the Company's Employee Stock
Ownership Plan ("ESOP") is recorded in accordance with the American
Institute of Certified Public Accountants' Statement of Position No.
93-6, "Employers' Accounting for Employee Stock Ownership Plans."
The Company accounts for its stock option plans in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." Accordingly, compensation
expense is recognized only if the exercise price of the option is
less than the fair value of the underlying stock at the grant date.
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages
entities to recognize the fair value of all stock-based awards on
the date of grant as compensation expense over the vesting period.
Alternatively, SFAS No. 123 allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma disclosures
of net income and earnings per share as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected
to continue to apply the provisions of APB Opinion No. 25 and provide
the pro forma disclosures required by SFAS No. 123.
The Company's Management Recognition Plan ("MRP") is also accounted
for in accordance with APB Opinion No. 25. The fair value of the shares
awarded, measured as of
the grant date, is recognized as unearned compensation
(a deduction from shareholders' equity) and amortized to compensation
expense as the shares become vested. Any excess of the cost to fund
purchases of MRP shares over the grant-date fair value is charged
to shareholders' equity.
(m) Earnings per Share
For the year ending September 30, 1997, earnings per share is computed
by dividing net income by the weighted average common shares outstanding,
which excludes the unallocated employee stock ownership plan shares
during the period. The effect of the outstanding stock option awards
and unvested management recognition plan shares is not material to
the calculation of net income per share.
For 1996, earnings per share are compiled on estimated post conversion
earnings of approximately $2.0 million,
and are based on the weighted average number of shares outstanding
during this period, less unallocated employee stock ownership plan
shares, during the period. Earnings per share are not presented for
periods prior to the initial stock offering as the Bank was a mutual
savings bank at the time and no stock was outstanding.
(n) Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities
In June 1996, the Financial Accounting Standards Board issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," which provides accounting and
reporting standards for transfers and servicing of financial assets
and extinguishment of liabilities based on consistent application
of a financial-components approach that focuses on control. The Company
adopted SFAS No. 125 as of January 1, 1997. The adoption of SFAS No.
125 did not have a material impact on the Company's consolidated financial
statements.
(o) Reclassifications
Amounts in the prior years' consolidated financial statements are
reclassified whenever necessary to conform to the current year's presentations.
(2) Conversion to Stock Ownership
On April 18, 1996, the Holding Company sold 5,686,750 shares of common
stock at $10.00 per share to depositors and employees of the Bank.
Net proceeds from the sale of stock of the Holding Company, after
deducting conversion expenses of approximately $1.9 million, were
$54.9 million and are reflected as common stock and additional paid-in
capital in the accompanying September 30, 1997 and 1996 consolidated
statements of financial condition. The Company utilized $27.5 million
of the net proceeds to acquire all of the capital stock of the Bank.
As part of the conversion, the Bank established a liquidation account
for the benefit of eligible depositors who continue to maintain their
deposit accounts in the Bank after conversion. In the unlikely event
of a complete liquidation of the Bank, each eligible depositor will
be entitled to receive a liquidation distribution from the liquidation
account, in the proportionate amount of the then current adjusted
balance for deposit accounts held, before distribution may be made
with respect to the Bank's capital stock. The Bank may not declare
or pay a cash dividend to the Holding Company on, or repurchase any
of, its capital stock if the effect thereof would cause the retained
earnings of the Bank to be reduced below the amount required for the
liquidation account. Except for such restrictions, the existence of
the liquidation account does not restrict the use or application of
retained earnings.
The Bank's capital exceeds all of the fully phased-in capital regulatory
requirements. The Office of Thrift Supervision ("OTS") regulations
provide that an institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution could,
after prior notice but without the approval by the OTS, make capital
distributions during the calendar year of up to 100% of its net income
to date during the calendar year plus the amount that would reduce
by one-half its "surplus capital ratio" (the excess
capital over its fully phased-in capital requirements) at the beginning
of the calendar year. Any additional capital
distributions would require prior regulatory approval. At September
30, 1997, the maximum amount that could have been paid by the Bank
to the Holding Company was approximately $26.5 million.
Unlike the Bank, the Holding Company is not subject to these regulatory
restrictions on the payment of dividends to its stockholders.
(3) Reserve Requirements
The Bank is required to maintain certain reserves of cash and/or deposits
with the Federal Reserve Bank. The amount of this reserve requirement,
which was covered by the Bank's vault cash included in cash and due
from banks, was approximately $386,000 and $335,000 at September 30,
1997 and 1996, respectively.
The Bank as a member of the FHLB of New York, is required to maintain
a minimum investment in the capital stock of the FHLB, at cost, in
an amount not less than 1%
of its outstanding home loans or 1/20 of its outstanding borrowings
with the FHLB, whichever is greater, as determined at December 31
of each year. Any excess may be redeemed by the Bank or called by
the FHLB at par.
(4) Securities Available for Sale
In November 1995, the staff of the Financial Accounting Standards
Board released its Special Report, "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities."
The Special Report contained, among other things, a unique provision
that allowed entities to, as of one date either concurrent with the
initial adoption of the Special Report (November 15, 1995), but no
later than December 31, 1995, reassess the appropriateness of the
classifications of all securities held at that time. On December 29,
1995, the Company transferred certain securities with amortized costs
totaling $24.8 million and fair value totaling $25.3 million from
the "held to maturity" classification to the "available for sale"
classification.
The amortized cost and estimated fair values of
securities available for sale at September 30, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997
Gross Gross
Amortized Unrealized Unrealized Estimated
(in thousands) Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S. Government agencies $ 54,875 $ 417 $ (59) $ 55,233
Mortgage backed securities 83,786 1,069 (61) 84,794
Obligations of states and political subdivisions 194 9 -- 203
Corporate bonds 5,042 40 (12) 5,070
Other 2,682 132 -- 2,814
Total securities available for sale $ 146,579 $ 1,667 $ (132) $ 148,114
</TABLE>
<TABLE>
<CAPTION>
1996
<S> <C> <C> <C> <C>
Gross Gross
Amortized Unrealized Unrealized Estimated
(in thousands) Cost Gains Losses Fair Value
U.S. Treasury and other U.S. Government agencies $ 56,842 $ 157 $ (78) $ 56,921
Mortgage backed securities 35,151 580 (829) 34,902
Obligations of states and political subdivisions 191 2 -- 193
Corporate bonds 5,000 28 (36) 4,992
Other 3 30 -- 33
Total securities available for sale $ 97,187 $ 797 $ (943) $ 97,041
</TABLE>
During the year ended September 30, 1997, proceeds from sales of securities
available for sale were $6.0 million. Gross gains realized on these
transactions were approximately $19 thousand. There were no gross
realized losses. There were no sales of securities available for sale
during the year ended September 30, 1996. Prior to December 31, 1995,
the Company did not maintain a securities available for sale portfolio.
The amortized cost and approximate fair value of securities available
for sale at September 30, 1997, by contractual maturity, are shown
below (mortgage backed securities are included by final contractual
maturity). Expected maturities will differ from contractual maturities because
certain issuers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
September 30, 1997
Amortized Estimated
(in thousands) Cost Fair Value
<S> <C> <C>
Due within one year $ 12,991 $ 13,012
Due one year to five years 10,963 11,050
Due five years to ten years 43,888 44,207
Due after ten years 78,737 79,845
Total securities available for sale $ 146,579 $ 148,114
</TABLE>
(5) Investment Securities
The amortized cost and estimated fair value of investment securities
at September 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997
Gross Gross
Amortized Unrealized Unrealized Estimated
(in thousands) Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S. Government agencies $ 6,958 58 (2) 7,014
Corporate bonds 1,000 1 -- 1,001
Mortgage backed securities 97 -- -- 97
Total investment securities $ 8,055 $ 59 $ (2) $ 8,112
</TABLE>
<TABLE>
<CAPTION>
1996
Gross Gross
Amortized Unrealized Unrealized Estimated
(in thousands) Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S. Government agencies $ 13,965 66 (58) 13,973
Corporate bonds 4,999 7 (2) 5,004
Obligations of states and political subdivisions 15 -- -- 15
Mortgage backed securities 98 -- -- 98
Total investment securities $ 19,077 $ 73 $ (60) $ 19,090
</TABLE>
The amortized cost and estimated fair value of investment securities
at September 30, 1997, by contractual maturity, are shown below (mortgage
backed securities are included by final contractual maturity). Expected
maturities will differ from contractual maturities because certain
issuers may have the right to call or prepay obligations with or without
call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
(in thousands) Cost Fair Value
<S> <C> <C>
Due within one year $ 1,999 $ 2,001
Due one year to five years 6,009 6,014
Due after five years to ten years -- --
Due after ten years 47 97
Totals $ 8,055 $ 8,112
</TABLE>
There were no sales of investment securities during the years ended
September 30, 1997, 1996 or 1995.
(6) Loans Receivable, Net
Loans receivable consist of the following at September 30, 1997 and
1996:
<TABLE>
<CAPTION>
September 30,
(in thousands) 1997 1996
<S> <C> <C>
Loans secured by real estate:
Conventional one-to four-family $102,145 $100,254
Commercial and multi-family 4,691 5,115
FHA and VA insured loans 87 129
Construction 1,306 423
Total loans secured by real estate 108,229 105,921
Other loans:
Student loans 2,658 2,450
Automobile loans 6,655 7,029
Consumer 2,698 2,516
Mobile home 687 782
Passbook loans 952 856
Home improvement 935 923
Home equity 3,709 4,368
Other 179 100
Total other loans 18,473 19,024
Less:
Net deferred loan fees 476 579
Allowance for loan losses 1,889 1,833
2,365 2,412
$124,337 $122,533
</TABLE>
Activity in the allowance for loan losses is summarized as follows
for the years ended:
<TABLE>
<CAPTION>
September 30,
(in thousands) 1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of period $1,833 $1,950 $1,746
Provision charged to operations 300 195 255
Charge offs (282) (323) (62)
Recoveries 38 11 11
Balance at end of period $1,889 $1,833 $1,950
</TABLE>
(6) Loans Receivable, Net (continued)
The following table sets forth the information with regard to non-performing
loans:
<TABLE>
<CAPTION>
September 30,
(in thousands) 1997 1996 1995
<S> <C> <C> <C>
Loans in a non-accrual status $780 $1,086 $ 784
Loans past due 90 days and still accruing 137 283 251
Restructured loans -- -- --
Total non-performing loans $917 $1,369 $1,035
</TABLE>
For the years ended September 30, 1997 and 1996, interest income that
would have been recorded on non-performing loans had they remained
performing amounted to approximately $50 thousand and $77 thousand,
respectively.
Certain executive officers of the Company were customers of and had
other transactions with the Company
in the ordinary course of business. Loans to these parties were made
in the ordinary course of business at the Bank's normal credit terms,
including interest rate and collateralization. The aggregate of such
loans totaled less than 5% of total equity at September 30, 1997 and
1996.
As of September 30, 1997, there was no recorded investment in loans
that are considered to be impaired under SFAS No. 114. As of September
30, 1996, the recorded investment in loans that are considered to
be impaired under SFAS No. 114 totalled approximately $78,000, for
which the related allowance for loan loss was approximately $16,000.
As of September 30, 1997 and 1996, there were no impaired loans which
did not have an allowance for loan losses determined in accordance
with SFAS No. 114. During 1997 and 1996, the average balance of impaired
loans was approximately $3,000 and $78,000, respectively. Interest
income collected on impaired loans during fiscal 1997 and 1996 was
approximately $0 and $2,000, respectively.
(7) Accrued Interest Receivable
<TABLE>
Accrued interest receivable consists of the following:
<CAPTION>
September 30,
(in thousands) 1997 1996
<S> <C> <C>
Investment securities $ 111 $ 323
Securities available for sale 1,374 657
Loans 818 756
$2,303 $1,736
</TABLE>
(8) Premises and Equipment, Net
A summary of premises and equipment is as follows:
<TABLE>
<CAPTION>
September 30,
(in thousands) 1997 1996
<S> <C> <C>
Banking house and land $2,357 $2,051
Furniture, fixtures and equipment 785 646
3,142 2,697
Less accumulated depreciation 775 811
Premises and equipment, net $2,367 $1,886
</TABLE>
Amounts charged to depreciation expense were approximately $183 thousand,
$136 thousand and $139 thousand for the years ended September 30,
1997, 1996 and 1995, respectively.
(9) Due to Depositors
Due to depositors are summarized as follows as of September 30, 1997
and 1996:
<TABLE>
<CAPTION>
Approximate September 30,
(in thousands) Stated Rates 1997 1996
<S> <C> <C> <C>
Passbook savings accounts 1997 -- 3.50% $ 71,060 $ 75,477
1996 -- 3.50%
Statement savings accounts 1997 -- 3.50% 8,388 7,881
1996 -- 3.50%
Certificates of deposit:
3.00 -- 3.99% 20 30
4.00 -- 4.99% -- 10,503
5.00 -- 5.99% 88,416 64,790
6.00 -- 6.99% 8,737 15,264
7.00 -- 7.99% 2,368 2,272
99,541 92,859
Money market accounts 1997 -- 2.50-3.20% 7,115 7,752
1996 -- 2.50-3.45%
NOW accounts 1997 -- 2.50% 10,438 9,070
1996 -- 2.50%
Demand accounts -- 4,370 3,714
Total deposits $200,912 $196,753
</TABLE>
(9) Due to Depositors (continued)
The approximate amount of contractual maturities of certificates of
deposit for the years subsequent to September 30, 1997 are as follows:
<TABLE>
<CAPTION>
(in thousands)
Years ended September 30,
<S> <C>
1998 $63,208
1999 24,619
2000 8,482
2001 1,944
2002 952
Thereafter 336
$99,541
</TABLE>
The aggregate amount of time deposit accounts with a balance of $100,000
or more (not federally-insured beyond $100,000) were approximately
$8.2 million and $7.3 million at September 30, 1997 and 1996, respectively.
Interest expense on deposits and advances from borrowers for property
taxes and insurance (escrow balances) for the years ended September
30, 1997, 1996 and 1995, is summarized as follows:
<TABLE>
<CAPTION>
September 30,
(in thousands) 1997 1996 1995
<S> <C> <C> <C>
Passbook savings accounts $2,544 $2,702 $3,149
Statement savings accounts 277 260 285
Certificates of deposit 5,309 5,218 4,026
Money market accounts 242 289 310
NOW accounts 237 216 195
Escrow balances (including common stock subscriptions) 43 337 44
Total interest expense $8,652 $9,022 $8,009
</TABLE>
Escrow balances expense for the year ended September 30, 1996 includes
interest expense on common stock subscriptions held in connection
with the Company's initial public offering.
(10) Income Taxes
The components of income tax expense are as follows for the years
ended September 30, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
September 30,
(in thousands) 1997 1996 1995
<S> <C> <C> <C>
Current tax expense:
Federal $2,111 $1,605 $1,197
State 579 682 325
2,690 2,287 1,522
Deferred tax expense (benefit) (156) (151) (321)
Total income tax expense $2,534 $2,136 $1,201
</TABLE>
(10) Income Taxes (continued)
Actual tax expense for the years ended September 30, 1997, 1996 and
1995 differs from expected tax expense, computed
by applying the Federal corporate tax rate of 34% to income before
taxes as follows:
<TABLE>
<CAPTION>
September 30,
1997 1996 1995
% Pretax % Pretax % Pretax
(in thousands) Amount Income Amount Income Amount Income
<S> <C> <C> <C> <C> <C> <C>
Expected tax expense $2,190 34.0% $1,854 34.0% $ 995 34.0%
State taxes, net of Federal income tax benefit 380 5.9 333 6.1 174 6.0
Reduction in valuation allowance for deferred
tax assets -- -- (131) (2.4) --
Other items (36) (.6) 80 1.5 32 1.0
$2,534 39.3% $2,136 39.2% $1,201 41.0%
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax
liabilities at September 30, 1997 are presented below:
<TABLE>
<CAPTION>
Temporary Temporary
Deductible Taxable
(in thousands) Differences Differences
<S> <C> <C>
Postretirement benefits $ 175 --
Allowance for loan losses 329 --
Nonqualified deferred compensation 100 --
Loan accounting differences 103 --
MRP compensation expense 180 --
Bond accretion -- 86
Other items 48 120
935 $ 206
Valuation reserve (150)
Deferred tax asset net of valuation reserve 785
Deferred tax liability (206)
Net deferred tax asset at September 30, 1997 579
Net deferred tax asset at October 1, 1996 423
Deferred tax benefit for the year ended September 30, 1997 $ 156
</TABLE>
(10) Income Taxes (continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax
liabilities at September 30, 1996 are presented below:
<TABLE>
<CAPTION>
Temporary Temporary
Deductible Taxable
(in thousands) Differences Differences
<S> <C> <C>
Postretirement benefits $ 99 --
Reserve for Nationar loss contingency 43 --
Allowance for loan losses 328 --
Nonqualified deferred compensation 70 --
Loan accounting differences 122 --
Bond accretion -- 110
Other items 97 76
759 $ 186
Valuation reserve (150)
Deferred tax asset net of valuation reserve 609
Deferred tax liability (186)
Net deferred tax asset at September 30, 1996 423
Net deferred tax liability at October 1, 1995 272
Deferred tax benefit for the year ended September 30, 1996 $ 151
</TABLE>
In addition to the deferred tax amounts described above, the Company
also had a deferred tax liability of approximately $614 thousand at
September 30, 1997 and a deferred tax asset of $59 thousand at September
30, 1996 related to the net unrealized gains and losses on securities
available for sale.
The valuation allowance for deferred tax assets as of September 30,
1997 and 1996 was $150 thousand. During the year ended September 30,
1996, the valuation allowance was reduced by $131 thousand. This reduction
was primarily the result of the realization of certain deferred items
which were previously considered to be uncertain. In evaluating the
valuation allowance the Company takes into consideration the nature
and timing of the deferred tax asset items as well as the amount of
available open tax carrybacks. The Company has fully reserved its
New York State deferred tax asset, which is a significant component
of deferred tax assets, due to the lack of carryback and carryforward
provisions available in New York State. Any changes in the deferred
tax asset valuation allowance is based upon the Company's continuing
evaluation of the level of such allowance, the amount of New York
State deferred tax assets, and the realizability of the temporary
differences creating the deferred tax asset. Based on recent historical
and anticipated future pre-tax earnings, management believes it is
more likely than not that the Company will realize its net deferred
tax assets.
As a thrift institution, the Bank is subject to special provisions
in the Federal and New York State tax laws regarding its allowable
tax bad debt deductions and related tax bad debt reserves. These deductions
historically have been determined using methods based on loss experience
or a percentage of taxable income. Tax bad debt reserves are maintained
equal to the excess of allowable deductions over actual bad debt losses
and other reserve reductions. These reserves consist of a defined
base-year amount, plus additional amounts ("excess reserves") accumulated
after the base year. SFAS No. 109 requires recognition of deferred
tax liabilities with respect to such excess reserves, as well as any portion
of the base-year amount which is expected to become taxable (or "recaptured")
in the foreseeable future.
Certain amendments to the Federal and New York State tax laws regarding
bad debt deductions were enacted in
July and August 1996. The Federal amendments include elimination of
the percentage of taxable income method for tax years beginning after
December 31, 1995, and imposition of a requirement to recapture into
taxable income (over a period of approximately six years) the bad
debt reserves in excess of the base-year amounts. The Bank previously
established, and will continue to maintain, a deferred tax liability
with respect to such excess Federal reserves. The New York State amendments
redesignate the Bank's state bad debt reserves at December 31, 1995
as the base-year amount and also provide for future additions to the
base-year reserve using the percentage of taxable income method.
In accordance with SFAS No. 109, deferred tax liabilities have not
been recognized at September 30, 1997 with respect to the Federal
and State base-year reserves of $3.6 million and $7.5 million, respectively,
since the Bank does not expect that these amounts will become taxable
in the foreseeable future. Under New York State tax law, as amended,
events that would result in taxation of these reserves include the
failure of the Bank to maintain a specified qualifying assets ratio
or meet other thrift definition tests for tax purposes. The unrecognized
deferred tax liabilities at September 30, 1997 with respect to the
Federal and State base-year reserves were approximately $1.2 million
and $446 thousand (net of Federal benefit), respectively.
(11) Employee Benefit Plans
(a) Pension Plan
The Company maintains a non-contributory defined
benefit pension plan with RSI Retirement Trust, covering substantially
all employees aged 21 and over with one year of service with the exception
employees who work less than 1,000 hours. Benefits are computed as
two percent of the highest three year average annual earnings multiplied
by credited service up to a maximum of 30 years and are paid as a
life annuity or actuarially equivalent alternative form of payment.
Full retirement benefits are available at age 65 with at least 5 years
of participation or after age 60 with at least 30 years of service.
Reduced retirement benefits are available prior to age 60. Employees
are fully vested at five years of service. The Plan also provides
death and disability benefits to eligible employees.
The amounts contributed to the plan are determined annually on the
basis of (a) the maximum amount that can be deducted for Federal income
tax purposes or (b) the amount certified by a consulting actuary as
necessary to avoid an accumulated funding deficiency as defined by
the Employee Retirement Income Security Act of 1974. Contributions
are intended to provide not only for benefits attributed to service
to date but also for those expected to
be earned in the future. Assets of the plan are primarily invested
in common and preferred stock, investment grade corporate bonds, and
U.S. government obligations.
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated statements of financial condition
at September 30, 1997 and 1996:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of $2,387 in 1997
and $2,094 in 1996 $(2,389) $(2,227)
Projected benefit obligation for service rendered to date (3,041) (3,029)
Plan assets at fair value 4,263 3,581
Plan assets in excess of projected benefit obligation 1,222 552
Unrecognized net gain from past experience different from that assumed
and effects of changes in assumptions (1,056) (398)
Unrecognized prior service cost 70 83
Unrecognized net asset being recognized over 12.5 years (61) (78)
Prepaid pension cost $ 175 $ 159
</TABLE>
Components of net periodic pension cost for the years ended September
30, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 83 $ 91 $ 81
Interest cost on estimated projected benefit obligation 214 215 199
Actual return on plan assets (783) (452) (452)
Net amortization and deferral 471 198 244
Net periodic pension cost (credit) $ (15) $ 52 $ 72
</TABLE>
Significant assumptions used in determining the actuarial present
value of the projected benefit obligation at September 30, 1997, 1996
and 1995 are as follows
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Weighted average discount rate 7.50% 7.75% 7.50%
Increase in future compensation 5.00% 5.50% 5.50%
Expected long-term rate of return 8.00% 8.00% 8.00%
</TABLE>
(b) 401(k) Savings Plan
The Company also maintains a defined contribution 401(k) savings plan,
covering all full time employees who have attained age 21 and have
completed one year of service in which they work more than 1,000 hours.
The Company matches 50% of employee contributions that are less than
or equal to 6% of the employee's salary. Total expense recorded during
1997, 1996, 1995 was $37 thousand, $34 thousand, and $31 thousand,
respectively.
(c) Postretirement Benefits
The Company accounts for postretirement benefits under SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
Under SFAS No. 106, the cost of postretirement benefits other than
pensions must be recognized on an accrual basis as employees perform
services to earn the benefits. Many of the provisions and concepts
of SFAS No. 106 are similar to current standards on accounting for
pensions. The Company adopted SFAS No. 106 as of October 1, 1995 and
opted to amortize the transition obligation into expense over the
allowed twenty year time period. The adoption of SFAS No. 106 did
not have a material effect on the Company's consolidated financial
statements.
The Company provides postretirement medical and life insurance benefits
to eligible retirees. The plans are
noncontributory except that the retiree must pay the full cost of
spouse medical coverage. Both of the plans are unfunded.
Life insurance is provided in the amount of $5,000 (50% of final year
compensation as an active employee if
compensation is less than $10,000).
The following table presents the plan's funded status reconciled with
amounts recognized in the Company's consolidated balance sheets at
September 30, 1997 and 1996:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees $ (598) $ (642)
Fully-eligible active plan participants (100) (59)
Other active plan participants (481) (630)
Total APBO (1,179) (1,331)
Unrecognized transition obligation 957 1,011
Unrecognized (gain) loss (183) 90
Accrued postretirement benefit cost included in other liabilities
$ (405) $ (230)
</TABLE>
Net periodic postretirement benefit cost for the years ended September
30, 1997 and 1996 include the following components:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
<S> <C> <C>
Service cost $ 52 $ 42
Interest cost 103 90
Net amortization and deferral 54 54
Net periodic postretirement benefit cost $209 $186
</TABLE>
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.50% and 7.75% at September 30, 1997 and 1996,
respectively. For measurement purposes at September 30, 1997, an 8.5%
annual rate of increase in the per capital cost of covered health
care benefits was assumed for medical coverage for fiscal 1998; the
rate was assumed to decrease gradually to 5.5% by 2001 and to remain
at that level thereafter. The health care cost trend rate assumption
has a significant effect on the amounts reported. To illustrate, increasing
the assumed health care cost trend rates by one percentage point in
each year would increase the accumulated postretirement benefit obligation
as of September 30, 1997 by approximately 16% and the aggregate of
the service and interest cost components of the net periodic postretirement
benefit cost by approximately 21%.
(12) Stock-Based Compensation Plans
(a) Employee Stock Ownership Plan
As part of the conversion discussed in note 2, an employee stock ownership
plan (ESOP) was established to provide substantially all employees
of the Company the opportunity to also become shareholders. The ESOP
borrowed $4.5 million from the Company and used the funds to purchase
454,940 shares of the common stock of the Company issued in the conversion.
The loan will be repaid principally from the Company's discretionary
contributions to the ESOP over a period of twenty years. At September
30, 1997, the loan had an outstanding balance of $4.4 million and
an interest rate of 6.41%. Shares purchased with the loan proceeds
are held in a suspense account for allocation among participants as
the loan is repaid. Contributions to the ESOP and shares released
from the suspense account are allocated among participants on the
basis of compensation in the year of allocation.
The Company accounts for the ESOP in accordance with the American
Institute of Certified Public Accountants' Statement of Position No.
93-6 "Employees' Accounting For Stock Ownership Plans" (SOP 93-6).
Accordingly, the shares pledged as collateral are reported as
unallocated ESOP shares in shareholders' equity. As shares are released
from collateral, the Company reports compensation expense equal to the
average market price of the shares (during the applicable service period),
and the shares become outstanding for earnings per share computations.
Unallocated ESOP shares are notincluded in the earnings per share computations.
The Company recorded approximately $342 thousand and $119 thousand,
respectively, of compensation expense under the ESOP during the years ended
September 30, 1997 and 1996.
The ESOP shares as of September 30, 1997 were as follows:
<TABLE>
<CAPTION>
<S> <C>
Allocated shares 11,374
Shares released for allocation 22,722
Unallocated shares 420,844
454,940
Market value of unallocated shares at
September 30, 1997 $7,101,743
</TABLE>
(b) Stock Option Plan
On October 24, 1996, the Company's shareholders approved the Catskill
Financial Corporation 1996 Stock Option and Incentive Plan ("Stock
Option Plan"). The primary objective of the Stock Option Plan is to
provide officers and directors with a proprietary interest in the
Company and as an incentive to encourage such persons to remain with
the Company.
Under the Stock Option Plan, 568,675 shares of authorized but unissued
stock are reserved for issuance upon option exercises. The Company
also has the alternative to fund the Stock Option Plan with treasury
stock. Options under the plan may be either non-qualified stock options
or incentive stock options. Each option entitles the holder to purchase
one share of common stock at an exercise price equal to the fair market
value on the date of grant. Options expire no later than ten years
following the date of grant.
On October 24, 1996, 416,333 shares were awarded at an exercise price
of $12.50 per share, and on August 19, 1997, 10,000 shares were awarded
at an exercise price of $16.38 per share. These shares have a ten-year
term and vest at a rate of 20% per year from their respective grant
dates.
The Company applies APB Opinion No. 25 and related Interpretations
in accounting for its stock option plan. Accordingly, no compensation
cost has been recognized for its stock option plans. SFAS No. 123
requires Companies not using a fair value based method of accounting
for employee stock options or similar plans, to provide pro forma
disclosure of net income and earnings per share as if that method
of accounting had been applied. The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for grants
in fiscal 1997: dividend yield of 1.8%; expected volatility of 25.0%;
risk free interest rates of 6.50% for the October 24, 1996 grant and
6.25% for the August 19, 1997 grant; and expected lives of 7 years.
Pro forma disclosures for the Company for the year ending September
30, 1997 is as follows:
<TABLE>
<CAPTION>
(in thousands, except per share data)
<S> <C>
Net income:
As reported $ 3,907
Pro forma 3,614
Earning per share:
As reported $ .84
Proforma .78
</TABLE>
Because the Company's employee stock options have characteristics
significantly different from those of traded options for which the
Black-Scholes model was developed, and because changes in the subjective
input assumptions can materially affect the fair value estimate, the
existing models, in management's opinion, do not necessarily provide
a reliable single measure of the fair value of its employee stock
options.
A summary of the status of the Company's stock option plans as of
September 30, 1997 and changes during the year on that date is presented
below:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
<S> <C> <C>
Options:
Outstanding at October 1 --
Granted 426,333 $12.59
Exercised --
Cancelled --
Outstanding at year-end 426,333
Exercisable at year-end --
Estimated weighted-average fair value
of options granted on October 24, 1996 $ 4.25
Estimated weighted-average fair value
of options granted on August 19, 1997 $ 5.47
</TABLE>
(c) Management Recognition Plan
On October 24, 1996, the Company's shareholders approved the Catskill
Financial Corporation Management Recognition Plan. The purpose of
the plan is to promote the long-term interests of the Company and
its shareholders by providing a stock based compensation program to
attract and retain officers and directors. Under the MRP, 227,470
shares of authorized but unissued shares, are reserved for issuance
under the plan. The Company also has the alternative to fund the MRP
with treasury stock.
On October 24, 1996 and August 19, 1997, 178,732 shares and 2,500
shares, respectively, were awarded under the MRP. The shares vest
in five equal installments commencing one year from the date of grant.
The fair market value of the shares awarded under the plan was $2.3
million at the grant dates, and is being amortized to compensation
expense on a straight line basis over the five year vesting periods.
Compensation expense of $419,000 was recorded in fiscal 1997, with
the remaining unearned compensation cost of $1.9 million shown as
a reduction of shareholders' equity at September 30, 1997.
(13) Commitments and Contingent Liabilities
(a) Legal Proceedings
The Company may, from time to time, be a defendant in legal proceedings
relating to the conduct of its business. In the best judgment of management,
the consolidated financial position of the Company will not be affected
materially by the outcome of any pending legal proceedings.
(b) Lease Commitments
The Company leases equipment under noncancelable
operating leases. Minimum rental commitments under these leases are
not significant. In addition, the Company has a data processing agreement
with minimum annual payments of approximately $100 thousand through
June 30, 1999.
(c) Off-Balance-Sheet Financing
and Concentrations of Credit
The Company is a party to certain financial instruments with off-balance
sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments
to extend credit. These instruments involve, to varying degrees, elements
of credit risk in excess of the amount recognized on the consolidated
statement of financial condition. The contract amounts of these instruments
reflect the extent of involvement the Company has in particular classes
of financial instruments.
The Company's exposure to credit loss in the event of nonperformance
by the other party to the commitments to extend credit is represented
by the contractual notional amount of these instruments. The Company
uses the same credit policies in making commitments as it does for
on-balance-sheet instruments.
Unless otherwise noted, the Company does not require collateral or
other security to support off-balance-sheet financial instruments
with credit risk.
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being fully drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral, if any, required
by the Company upon the extension of credit is based on management's
credit evaluation of the customer. Mortgage commitments are secured
by a first lien on real estate. Collateral on extensions of credit
for commercial loans varies but may include property, plant and equipment,
and income producing commercial property.
Contract amounts of financial instruments that represent the future
extension of credit as of September 30, 1997 and 1996 at fixed and
variable interest rates are as follows:
<TABLE>
<CAPTION>
Financial instruments whose contract amounts represent Credit risk:
1997
(in thousands) Fixed Variable Total
<S> <C> <C> <C>
Mortgages $1,308 $ -- $1,308
Consumer 18 -- 18
Lines of credit 535 385 920
Home Equity 30 1,553 1,583
$1,891 $1,938 $3,829
</TABLE>
<TABLE>
<CAPTION>
Financial instruments whose contract amounts represent Credit risk:
1996
(in thousands) Fixed Variable Total
<S> <C> <C> <C>
Mortgages $2,901 369 $3,270
Consumer 18 -- 18
Lines of credit 834 531 1,365
Home Equity 41 1,341 1,382
$3,794 $2,241 $6,035
</TABLE>
The range of interest on fixed rate commitments was 7.125% to 18.00%
at September 30, 1997 and 7.625% to 18.00% at September 30, 1996.
The range of interest on adjustable rate commitments was 8.25% to
10.50% at September 30, 1997 and 6.75% to 10.25% at September 30,
1996, respectively.
(14) Deposits Held at Nationar, Net
On February 6, 1995, the New York Superintendent of Banks (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 that Nationar was seized by the Superintendent,
the Bank had a total of approximately $3.3 million on deposit with
Nationar in an account which was used primarily to fund checks written
by the Bank's customers and drafts drawn by the Bank, as well as Nationar
capital stock of approximately $7,200, and a Nationar debenture of
approximately $40 thousand collateralized by a $100 thousand investment
security.
As of September 30, 1995, the Bank had charged off the $40 thousand
Nationar debenture and the $7,200 Nationar capital stock. The Bank
also reclassified the demand account balance to other assets and,
based upon uncertainties of collecting the demand account balance,
management, as advised by legal counsel, set up a reserve for probable
losses as of September 30, 1995 of $660 thousand, representing approximately
20% of the Bank's deposit claim. In fiscal 1996, the Bank received
a cash payment of $3.1 million from the Superintendent relating to
its Nationar claim, and recorded a recovery of $560 thousand on the
reserve for probable Nationar losses. During fiscal 1997, the Company
received the remaining $200 thousand of its claim and recovered the
remaining $100 thousand of the loss reserve. Both recoveries are shown
in the consolidated statements of operations as other income.
(15) Short-Term Borrowings
In March 1997, the Bank activated its line of credit program with
the Federal Home Loan Bank of New York ("FHLB"). Under the program,
the Bank has access to overnight funds of approximately $13.1 million,
along with an additional line of $13.1 million for one month advances.
The Company has only used its overnight line. Borrowings outstanding
under the overnight line were $11.4 million as of September 30, 1997,
at a rate of 6.25%. Borrowings for the year ended September 30, 1997,
averaged $2.6 million, at an average rate of 5.75%. The maximum month
end balance for the year ended September 30, 1997 was $11.4 million.
(16) Fair Values
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires that the Bank disclose estimated fair values for certain
financial instruments. Fair value estimates are made at a specific point
in time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market exists for
a significant portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected net
cash flows, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Significant assets
and liabilities that are not considered financial assets or liabilities
include the deferred tax asset and bank premises and equipment. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in the estimates of fair
value under SFAS No. 107.
In addition, there are significant intangible assets that SFAS No.
107 does not recognize, such as the value of "core deposits," the
Bank's branch network and other items generally referred to as "goodwill."
The specific estimation methods and assumptions used can have a substantial
impact on the resulting fair values ascribed to financial instruments.
Following is a brief summary of the significant methods and assumptions
used:
Securities
The carrying amounts for short-term investments approximate fair value
because they mature in 90 days or less and do not present unanticipated
credit concerns. The fair value of longer-term investments and mortgage
backed securities, except certain state and municipal securities,
is estimated based on bid prices published in financial newspapers
or bid quotations received from securities dealers. The fair value
of certain state and municipal securities is not readily available
through market sources other than dealer
quotations, so fair value estimates are based on quoted market prices
of similar instruments, adjusted for differences between the quoted
instruments and the instruments being valued. See notes 4 and 5 for
detail disclosure of securities available for sale and investment
securities, respectively. The estimated fair value of stock in the
Federal Home Loan Bank of New York is assumed to be its cost given
the lack of a public market available for this investment.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as single family
loans, consumer loans and commercial loans. Each loan category is
further segmented into fixed and adjustable rate interest terms and
by performing and nonperforming categories.
The fair value of performing loans is calculated by discounting scheduled
cash flows through the estimated maturity using estimated market discount
rates that reflect the credit and interest rate risk inherent in the
loan. The estimate of maturity is based on the contractual term of
the loans to maturity taking into consideration certain prepayment
assumptions.
Fair value for significant non-performing loans is based on recent
external appraisals and/or discounting of cash flows. Estimated cash
flows are discounted using a rate commensurate with the risk associated
with the estimated cash flows. Assumptions regarding credit risk,
cash flows, and discount rates are judgmentally determined using available
market information and specific borrower information.
Deposit Liabilities
Under SFAS No. 107, the fair value of deposits with no stated maturity,
such as non-interest bearing demand deposit, passbook savings accounts,
statement savings accounts, NOW accounts, and money market accounts,
must be stated at the amount payable on demand as of September 30,
1997 and 1996. The fair value of certificates of deposit is based
on the discounted value of contractual cash flows. The discount rate
is estimated using the rates currently offered for deposits of similar
remaining maturities. These fair value estimates do not include the
benefit that results from the low-cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the market.
Other Items
The following items are considered to have a fair value equal to carrying
value due to the nature of the financial instrument and the period
within which it will be settled: cash and due from banks, federal
funds sold, accrued interest receivable, advances from borrowers for
taxes and insurance, short term borrowings, and accrued interest payable.
Table of Financial Instruments
The carrying values and estimated fair values of financial instruments
as of September 30, 1997 and September 30, 1996 were as follows
<TABLE>
<CAPTION>:
September 30, 1997 September 30, 1996
Carrying Estimated Carrying Estimated
(in thousands) Value Fair Value Value Fair Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 2,274 $ 2,274 $ 39,712 $ 39,712
Securities available for sale 148,114 148,114 97,041 97,041
Investment securities 8,055 8,112 19,077 19,090
Federal Home Loan Bank Stock 1,762 1,762 1,159 1,159
Loans 126,702 128,623 124,945 124,870
Less: Allowance for loan losses 1,889 -- 1,833 --
Net deferred loan fees 476 -- 579 --
Net loans 124,337 128,623 122,533 124,870
Accrued interest receivable 2,303 2,303 1,736 1,736
Financial liabilities:
Deposits:
Demand, statement, passbook, money market, and NOW accounts 101,371 101,371 103,894 103,894
Certificates of deposit 99,541 99,701 92,859 92,877
Short-Term Borrowings 11,385 11,385 -- --
Accrued interest on depositors accounts 59 59 58 58
Advances from borrowers for taxes and insurance 533 533 1,632 1,632
</TABLE>
Commitments to Extend Credit
and Financial Guarantees Written
The fair value of commitments to extend credit is estimated using
the fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the present
credit worthiness of the counterparties. For fixed rate loan commitments,
fair value also considers the difference between current levels of
interest rates and the committed rates. The fair value of financial
guarantees written is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties. Fees, such as these
are not a major part of the Bank's business and in the Bank's business
territory are not a "normal business practice." Therefore, based upon
the above facts the Company believes that book value equals fair value
and the amounts are not significant.
(17) Parent Company Financial Information
The Holding Company began operations on April 18, 1996 in conjunction
with the Bank's mutual-to-stock conversion and the Company's initial
public offering of its common stock
<TABLE>
Statement of Financial Condition as of September 30, 1997 and 1996
<CAPTION>
(in thousands, except share data) 1997 1996
<S> <C> <C>
Assets
Cash and cash equivalents $ 3,005 $ 1,138
Securities available for sale 4,030 22,002
ESOP loan receivable from subsidiary 4,359 4,479
Equity in net assets of subsidiary 59,933 54,791
Other assets 500 24
Total assets $ 71,827 $82,434
Liabilities and Shareholders' Equity
Liabilities:
Accrued expenses and other liabilities $ 50 $ 53
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 September 30, 1997 and 1996 57 57
Additional paid-in capital 54,811 54,864
Retained earnings, substantially restricted 34,915 31,984
Common stock acquired by ESOP (4,209) (4,436)
Unearned management recognition plan (1,856) --
Treasury stock, at cost (848, 244 shares at September 30, 1997)
(12,862) --
Net unrealized gain (loss) on securities available for sale, net
of taxes 921 (88)
Total shareholders' equity 71,777 82,381
Total liabilities and shareholders' equity $ 71,827 $82,434
</TABLE>
<TABLE>
Statement of Operations For the Year Ended September 30, 1997
and for the Period From Inception (April 18, 1996) Through September 30,1996
<CAPTION>
(in thousands) 1997 1996
<S> <C> <C>
Interest income $ 475 $ 296
Non interest expense 223 70
Income before income taxes and equity in undistributed earnings of
subsidiary 252 226
Income tax expense 61 91
Income before equity in undistributed earnings of subsidiary
191 135
Equity in undistributed earnings of subsidiary 3,716 3,182
Net income $3,907 $3,317
</TABLE>
<TABLE>
Statement of Cash Flows For the Year Ended September 30,1997
and for the Period From Inception (April 18, 1996) Through September 30,1996
<CAPTION>
(in thousands) 1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,907 $ 3,317
Adjustment to reconcile net income to net cash provided by operating
activities:
Equity in undistributed earnings of subsidiary (3,716) (3,182)
Net accretion on securities (42) --
Increase in other assets (57) (24)
Increase (decrease) in liabilities (16) 53
Net cash provided by operating activities 76 164
Cash flows from investing activities:
Purchase of securities available for sale (25,000) (122,347)
Proceeds from the maturity of securities available for sale 43,045 100,345
Investment in common stock of subsidiary (93) (27,460)
Net decrease (increase) in ESOP loan receivable from subsidiary 120 (4,479)
Net cash provided by (used in) investing activities 18,072 (53,941)
Cash flows from financing activities:
Proceeds from issuance of common stock, net -- 54,915
Purchase of common stock for treasury (15,305) --
Cash dividends on common stock (976) --
Net cash provided by (used in) provided by financing activities (16,281) 54,915
Net increase in cash and cash equivalents 1,867 1,138
Cash and cash equivalents:
Beginning of period 1,138 --
End of period $ 3,005 $ 1,138
Supplemental disclosures of cash flow information:
Cash paid during year for income taxes $ 91 --
Noncash investing activities:
Change in net unrealized gain (loss) on securities available for
sale, net of deferred tax liability of $13 $ 18 --
Recording of subsidiary's equity, including retained earnings, common
stock acquired by ESOP, and net unrealized loss on securities available
for sale, net of taxes, on date of investment in common stock of
subsidiary -- $ 24,149
</TABLE>
These financial statements should be read in conjunction with the
Company's consolidated financial statements and notes thereto.
(18) Regulatory Capital Requirements
OTS capital regulations require savings institutions to
maintain minimum levels of regulatory capital. Under the regulations
in effect at September 30, 1997 and 1996, the Bank was required to
maintain a minimum ratio of tangible capital to total tangible assets
of 1.5%; a minimum leverage ratio of core (Tier 1) capital to total
adjusted tangible assets of 3.0%; and a minimum ratio of total capital
(core capital and supplementary capital) to risk-weighted assets of
8.0%, of which 4.0% must be core (Tier 1) capital.
Under the prompt corrective action regulations, the OTS is required
to take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized institution. Such actions
could have a direct material effect on an institution's financial
statements. The regulations establish a framework for the classification
of savings institutions into five categories: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized. Generally, an institution is considered
well capitalized if it has a core (Tier 1) capital ratio of at least
5.0% (based on average total assets); a core (Tier 1) risk-based capital
ratio of at least 6.0%; and a total risk-based capital ratio of at
least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. Capital amounts
and classifications are also subject to qualitative judgments by the
OTS about capital components, risk weightings and other factors.
Management believes that, as of September 30, 1997 and 1996, the Bank
meets all capital adequacy requirements to which it is subject. Further,
the most recent OTS notification categorized the Bank as a well-capitalized
institution under the prompt corrective action regulations. There
have been no conditions or events since that notification that management
believes have changed the Bank's capital classification.
The following is a summary of the Bank's actual capital amounts and
ratios as of September 30, 1997 and 1996, compared to the OTS minimum
capital adequacy requirements and the OTS requirements for classification
as a well-capitalized institution. Although the OTS capital regulations
apply at the Bank level only, the Company's consolidated capital amounts
and ratios are also presented. The OTS does not have a holding company
capital requirement.
<TABLE>
<CAPTION>
1997
Minimum Capital For Classification
Actual Adequacy as Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Bank
Tangible capital $59,031 20.70% $4,278 1.50% $ -- --
Tier 1 (core) capital 59,031 20.70 8,556 3.00 14,259 5.00%
Risk-based capital:
Tier 1 59,031 60.13 -- -- 5,890 6.00
Total 60,159 61.28 7,854 8.00 9,817 10.00
</TABLE>
<TABLE>
<CAPTION>
Actual
Amount Ratio
<S> <C> <C>
Consolidated
Tangible capital $70,856 24.54%
Tier 1 (core) capital 70,856 24.54
Risk-based capital:
Tier 1 70,856 69.27
Total 71,984 70.38
</TABLE>
<TABLE>
<CAPTION>
1996
Minimum Capital For Classification
Actual Adequacy as Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Bank
Tangible capital $54,879 20.93% $3,934 1.50% $ -- --
Tier 1 (core) capital 54,879 20.93 7,867 3.00 13,112 5.00%
Risk-based capital:
Tier 1 54,879 60.59 -- -- 5,435 6.00
Total 56,034 61.08 7,339 8.00 9,173 10.00
</TABLE>
<TABLE>
<CAPTION>
Actual
Amount Ratio
<S> <C> <C>
Consolidated
Tangible capital $82,469 29.05%
Tier 1 (core) capital 82,469 29.05
Risk-based capital:
Tier 1 82,469 91.05
Total 83,624 91.16
</TABLE>
Shareholder information
Corporate Offices
Catskill Financial Corporation
341 Main Street
Catskill, New York 12414-1450
(518) 943-3600
Annual Meeting of Shareholders
The annual meeting of Catskill Financial Corporation will be held
7:00 p.m., Tuesday, February 17, 1998 at the Bank's office at 341
Main Street, Catskill, New York
Annual Report on Form 10-K
For the 1997 fiscal year, Catskill Financial Corporation will file
an Annual Report on Form 10-K. Shareholders wishing a copy may obtain
one free of charge by writing:
David L. Guldenstern
Corporate Secretary
Catskill Financial Corporation
341 Main Street
Catskill, New York 12414-1450
Stock Transfer Agent and Registrar
Shareholders wishing to change name, address or ownership of stock,
or to report lost certificates and or consolidate accounts are asked
to contact the Company's stock registrar and transfer agent directly
at:
Registrar & Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
(800) 368-5948
Counsel
Serchuk & Zelermyer, LLP
81 Main Street
White Plains, New York 10601
Independent Auditors
KPMG Peat Marwick LLP
74 North Pearl Street
Albany, New York 12207
Market Information for Common Stock
The common stock of Catskill Financial Corporation trades on the Nasdaq
Stock Market under symbol CATB.
At December 3, 1997, there were approximately 900 shareholders of
record not including the number of persons or entities holding stock
in nominee or street names through various brokers and banks.
Catskill Financial Corporation common stock was issued at $10.00 per
share in connection with the Company's initial public offering completed
on April 18, 1996. The following table shows the range of high and
low sale prices for each quarterly period since the Company began
trading in April.
<TABLE>
<CAPTION>
1997 High Low Dividend
<S> <C> <C> <C>
First Quarter $14.50 $12.13
Second Quarter $16.50 $13.75 $.07
Third Quarter $16.50 $13.50 $.07
Fourth Quarter $17.25 $15.25 $.07
</TABLE>
<TABLE>
<CAPTION>
1996 High Low
<S> <C> <C>
Third Quarter $11.00 $10.00
Fourth Quarter $12.38 $ 9.88
</TABLE>
During the second quarter of fiscal 1997, the Company declared its
first quarterly dividend. The Company expects to continue to pay
dividends, however, dividend payment decisions are made with consideration
of a variety of factors including earnings, financial condition, market
considerations and regulatory restrictions. Restrictions on dividend
payments are described in Note 2 of the Notes to Consolidated Financial
Statements included in this Annual Report.
