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, 1998
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 18, 1998, the aggregate market value of the voting stock held by
non-affiliates (based upon 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 $48.2 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 4,358,334
(Title of class) (outstanding at December 18, 1998)
<PAGE>
ANNUAL REPORT FOR 1998 ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risks
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial
Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits and Financial Statement Schedules and Reports on
Form 8-K
SIGNATURES
DOCUMENTS INCORPORATED BY REFERENCE
Documents Part of 10-K into which incorporated
--------- ------------------------------------
Portions of the Annual Report to
Shareholders for fiscal year
ended September 30, 1998. Parts II and IV
Definitive Proxy Statement of the
Registrant dated January 7, 1999,
in connection with the Annual
Meeting of Shareholders to be held
February 16, 1999, which is expected
to be filed on/or about January 7, 1999. Part III
<PAGE>
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 stock 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 four other banking offices. At
September 30, 1998, the Bank had total assets of $313.6 million, deposits of
$213.1 million and equity of $60.3 million, or 19.2% 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 mortgage 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
1
<PAGE>
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, 1998, was a $1.0 million participation 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, 1998, the Bank's OTS assessment was $32,116.
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 4.0% 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, 1998, the Bank had a tangible
capital ratio of 18.79%, a core capital ratio of 18.79% and a risk based capital
ratio of 49.86%. 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 has
previously been exempt from the deduction requirement because it had total
assets less than $300 million 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 no 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. The Bank must, however, pay a part of the
costs of the "FICO" bonds sold in the late 1980s to finance the savings and loan
bailout. The FICO bond assessment is approximately .012% of insured deposits.
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.
2
<PAGE>
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 Company. 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, 1998, as
well as for every month-end during fiscal 1998.
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 current
cash and due from banks, 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 on terms substantially similar to other business corporations.
Special rules allowing the Bank a special deduction to create a tax bad debt
reserve have been abolished. Furthermore, the Bank must recapture, over a period
of six to eight years, any additions to its 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 will 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.
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
3
<PAGE>
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 19 deposit
taking offices of commercial banks and thrift institutions in Greene County and
117 in Albany County. The Bank's four offices in Greene County hold 29.3% of all
deposits and 56.6% of thrift institution deposits. In Albany County, with a much
larger deposit base, the Bank's share of all deposits was approximately 0.7%.
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, 1998, the Bank's gross loan
portfolio totaled $140.0 million.
The approval of the Executive Committee of the Bank's Board of
Directors is required for all real estate loans in excess of $150,000, and
consumer loans in excess of $100,000. Bank employees with the authority to
approve such real estate loans of $150,000 or less, and consumer 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,
1998, 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 (representing less than 1% of the
Bank's total loan portfolio) was a $1.0 million commercial real estate loan
secured by a motel located in Albany County, New York. At September 30, 1998,
there were only eight other loans (or lending relationships) with outstanding
balances in excess of $250,000, representing $3.8 million, or less than 2.7% of
the Bank's total loan portfolio.
4
<PAGE>
Loan Portfolio Composition. The following table presents information concerning
the composition of the Bank's loan portfolio in dollar amounts and in
percentages as of the dates indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
- ------------------
One- to four-family................... $113,423 81.02% $102,232 80.69% $100,383 80.34%
Multi-family and commercial........... 6,389 4.56 4,691 3.70 5,115 4.09
Construction.......................... 1,182 0.85 1,306 1.03 423 .34
-------- ------ -------- ------ -------- ------
Total real estate loans........... 120,994 86.43 108,229 85.42 105,921 84.77
------- ------ -------- ------ -------- ------
Commercial Loans ...................... 602 .43 63 .05 --- ---
- ---------------- -------- ------ -------- ------
Consumer Loans:
- ---------------
Automobile........................... 6,301 4.50 6,655 5.25 7,029 5.63
Home equity.......................... 3,490 2.49 3,709 2.93 4,368 3.50
Other secured........................ 2,912 2.08 3,385 2.67 2,965 2.37
Student.............................. 2,795 2.00 2,658 2.10 2,450 1.96
Other unsecured...................... 2,366 1.69 1,316 1.04 1,430 1.15
Mobile home.......................... 535 .38 687 .54 782 .62
-------- ------ -------- ------ ------- ------
Total consumer loans.............. 18,399 13.14 18,410 14.53 19,024 15.23
-------- ------ -------- ------ ------- ------
Total Loans............................ 139,995 100.00% 126,702 100.00% 124,945 100.00%
-------- ====== -------- ====== ------- ======
Less:
Net deferred fees..................... 260 476 579
Allowance for loan losses............. 1,950 1,889 1,833
-------- -------- --------
Total loans receivable, net........... $137,785 $124,337 $122,533
======== ======== ========
<PAGE>
<CAPTION>
September 30,
------------------------------------------------
1995 1994
------------------------------------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real Estate Loans:
- ------------------
One- to four-family................... $ 95,588 79.04% $ 96,570 79.37%
Multi-family and commercial........... 5,132 4.24 5,606 4.61
Construction.......................... 230 .19 743 .61
-------- ------ -------- ------
Total real estate loans........... 100,950 83.47 102,919 84.59
-------- ------ -------- ------
Commercial Loans ...................... --- --- --- ---
- ----------------
Consumer Loans:
- ---------------
Automobile........................... 6,652 5.50 5,220 4.29
Home equity.......................... 5,393 4.46 6,021 4.95
Other secured........................ 2,970 2.46 2,680 2.20
Student.............................. 2,373 1.96 2,195 1.80
Other unsecured...................... 1,415 1.17 1,078 .89
Mobile home.......................... 1,185 .98 1,562 1.28
-------- ------ -------- ------
Total consumer loans.............. 19,988 16.53 18,756 15.41
-------- ------ -------- ------
Total Loans............................ 120,938 100.00% 121,675 100.00%
-------- ====== -------- ======
Less:
Net deferred fees..................... 624 696
Allowance for loan losses............. 1,950 1,746
-------- --------
Total loans receivable, net........... $118,364 $119,233
======== --------
</TABLE>
5
<PAGE>
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,
----------------------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family........................ $ 83,643 59.75% $ 67,782 53.50% $ 63,491 50.81%
Multi-family and commercial................ 3,395 2.43 1,850 1.46 2,142 1.71
Construction............................... 1,182 .84 1,306 1.03 423 0.34
-------- ------ -------- ------ -------- ------
Total real estate loans................. 88,220 63.02 70,938 55.99 66,056 52.86
-------- ----- -------- ------ -------- ------
Consumer.................................... 12,114 8.65 14,638 11.55 14,656 11.73
-------- ----- -------- ------ -------- ------
Total fixed-rate loans.................. 100,334 71.67 85,576 67.54 80,712 64.59
Adjustable-Rate Loans:
Real estate:
One- to four-family........................ 29,780 21.27 34,450 27.19 36,892 29.53
Multi-family and commercial................ 2,994 2.14 2,904 2.29 2,973 2.38
------- ----- -------- ------ -------- ------
Total real estate loans................. 32,774 23.41 37,354 29.48 39,865 31.91
------- ----- -------- ------ -------- ------
Consumer.................................... 6,285 4.49 3,709 2.93 4,368 3.50
------- ----- -------- ------ -------- ------
Commercial.................................. 602 --- 63 .05 --- ---
-------- ------ -------- ------ -------- ------
Total adjustable-rate loans............. 39,661 28.33 41,126 32.46 44,233 35.41
-------- ------ -------- ------ -------- ------
Total loans............................. 139,995 100.00% 126,702 100.00% 124,945 100.00%
-------- ====== -------- ====== -------- ======
Less:
Deferred fees............................... 260 476 579
Allowance for loan losses................... 1,950 1,889 1,833
-------- -------- --------
Total loans receivable, net.............. 137,785 124,337 $122,533
======== ======== ========
<PAGE>
<CAPTION>
September 30,
------------------------------------------------
1995 1994
------------------------------------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family........................ $ 53,993 44.65% $ 51,163 42.05%
Multi-family and commercial................ 1,743 1.44 2,295 1.88
Construction............................... 230 .19 743 .61
-------- ------ -------- ------
Total real estate loans................. 55,966 46.28 54,201 44.54
-------- ------ -------- ------
Consumer.................................... 14,595 12.06 12,735 10.47
-------- ------ -------- ------
Total fixed-rate loans.................. 70,561 58.34 66,936 55.01
Adjustable-Rate Loans:
Real estate:
One- to four-family........................ 41,595 34.40 45,407 37.32
Multi-family and commercial................ 3,389 2.80 3,311 2.72
-------- ------ -------- ------
Total real estate loans................. 44,984 37.20 48,718 40.04
-------- ------ -------- ------
Consumer.................................... 5,393 4.46 6,021 4.95
-------- ------ -------- ------
Commercial.................................. --- --- --- ---
-------- ------ -------- ------
Total adjustable-rate loans............. 50,377 41.66 54,739 44.99
-------- ------ -------- ------
Total loans............................. 120,938 100.00% 121,675 100.00%
-------- ====== -------- ======
Less:
Deferred fees............................... 624 696
Allowance for loan losses................... 1,950 1,746
-------- --------
Total loans receivable, net.............. $118,364 $119,233
======== ========
</TABLE>
6
<PAGE>
The following table sets forth the contractual maturities of the Bank's loan
portfolio at September 30, 1998. 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,
-------------------------------------
1999(1) 2000 2001 2002-2003 2004-2008
----------------- ----------------- ----------------- ------------------ ------------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate
- ----------------------------
One- to Four-Family......... $ 6,604 7.59% $ 6,960 7.55% $ 7,299 7.53% $15,340 7.56% $37,715 7.48%
Multi-family and 6 231 0 519 1 1,953 3 600
Commercial.................. 1,953 8.4 9.1 9.3 8.9 9.11
Construction................ 1,132 7.21 --- --- --- --- --- --- --- ---
Commercial
- ----------------------------
Lines of credit............. 602 8.90 --- --- --- --- --- --- --- ---
Consumer
- ----------------------------
Consumer ................... 4,462 9.14 3,655 8.90 2,342 8.98 2,117 9.29 1,361 9.85
------- ------ ------- ------- -------
Total Loans............ $14,753 8.19% $10,846 8.04 $10,160 7.95 $19,410 7.88 $39,676 7.59
======= ======= ======= ======= =======
<PAGE>
<CAPTION>
Due During Years Ending September 30,
-------------------------------------
2009-2013 2014 and following Total
----------------- ------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate
- ----------------------------
One- to Four-Family......... $24,851 7.45% $14,654 7.50 $113,423 7.50%
Multi-family and 7 6,389 1
Commercial.................. 457 9.39 676 9.2 8.9
Construction................ --- --- 50 7.97 1,182 7.28
Commercial
- ----------------------------
Lines of credit............. --- --- --- --- 602 8.90
Consumer
- ----------------------------
Consumer ................... 2,178 8.56 2,284 8.80 18,399 9.03
------- ------- -------
Total Loans............ $27,486 7.57 $17,664 7.74 $139,995 7.77
======= ======= ========
</TABLE>
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
7
<PAGE>
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, 1998, $113.4 million, or 81.0% of
the Bank's gross loans, consisted of one- to four-family residential mortgage
loans. Approximately 73.7% 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. 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, 1998, 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 90%, 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, 1998, the Bank's construction loan portfolio totaled $1,182,000,
or less than 1.0% of its gross loan portfolio. Although no construction loans
were classified as non-performing as of September 30, 1998, 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.
8
<PAGE>
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, 1998, the
Company had multi-family and commercial real estate loans totaling $6.4 million,
which represented 4.6% of the Bank's gross loan portfolio.
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
secured property as collateral for such loans. Appraisals on properties securing
multi-family and commercial real estate loans are performed by independent fee
appraisers.
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
principally on a direct basis, in which the Bank extends credit directly to the
borrower. At September 30, 1998, the Bank's consumer loan portfolio totaled
$18.4 million, or 13.1% of the gross loan portfolio. Of consumer loans at
September 30, 1998, 65.8% were fixed-rate loans and 34.2% were adjustable-rate
loans.
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 20 years
with respect to home equity lines of credit and 15 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, 1998, automobile loans, the largest component of the
Bank's consumer loan portfolio, totalled $6.3 million, or 34.2% of the Bank's
total consumer loan portfolio and 4.5% 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 90.0% 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
9
<PAGE>
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,
1998, the Bank had $3.5 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, 1998, $71,000, or .39% of the Bank's consumer loan portfolio was
non-performing, however, the majority were government guaranteed student loans.
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 principally through
secured and unsecured lines of credit as well as 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, 1998, the Bank had approximately $602,000 in
commercial business loans outstanding, representing less than 1.0% of its loan
portfolio, with an additional $109,000 committed for loans through NYBDC. At
September 30, 1998, 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, advertising 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, 1998, the Bank originated $38.9
million of loans, compared to $21.3 million and $26.8 million in fiscal 1997 and
1996, respectively. Management attributes the increase in originations during
fiscal 1998 to the low interest rate environment, in which interest rates on
fixed rate loans are at the lowest levels since 1993. 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.
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 net interest
income 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.
10
<PAGE>
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,
-----------------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
One- to four-family and construction.............. $ 24,051 $ 12,588 $ 19,760
Multi-family and commercial........................ 5,184 110 150
Consumer........................................... 9,683 8,584 6,938
-------- -------- --------
Total loans originated...................... 38,918 21,282 26,848
-------- -------- --------
Purchases:
Total.............................................. --- --- ---
Sales:
Total.............................................. --- --- ---
Repayments:
Principal repayments............................... (25,225) (18,705) (22,312)
Increase (decrease) in other items, net............ (400) (820) (529)
-------- -------- --------
Net increase (decrease)..................... $ 13,293 $ 1,757 $ 4,007
======== ======== ========
</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 generally
commenced to collect the loan.
<PAGE>
The following table sets forth the Bank's loan delinquencies by type,
by amount and by percentage of type at September 30, 1998.
<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.................... 3 $ 209 .18% 9 $ 520 .46% 12 $ 729 .64%
Multi-family and
commercial real estate.... 1 49 .77 -- -- -- 1 49 .77
Commercial................. -- -- -- -- -- -- -- -- --
Consumer................... 19 84 .46 10 71 .39 29 155 .84
--- ----- --- --- ----- --- -----
Total................. 23 $ 342 .24 19 $ 591 .42 42 $ 933 .67
=== ===== === ===== === =====
</TABLE>
11
<PAGE>
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 FHA insured, VA
guaranteed loans and government guaranteed student 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,
-----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-performing loans:
One- to four-family real estate ....... $ 520 $ 780 $1,008 $ 784 $ 650
Multi-family and commercial real estate -- -- 78 -- --
Consumer .............................. 71 137 283 251 --
------ ------ ------ ------ ------
Total .............................. 591 917 1,369 1,035 650
------ ------ ------ ------ ------
Troubled debt restructured loans:
Multi-family and commercial real estate -- -- -- -- --
------ ------ ------ ------ ------
Total .............................. -- -- -- -- --
------ ------ ------ ------ ------
Foreclosed assets, net:
One- to four-family real estate ....... 53 225 334 326 220
Multi-family and commercial real estate -- 23 23 158 158
------ ------ ------ ------ ------
Total .............................. 53 248 357 484 378
------ ------ ------ ------ ------
Total non-performing assets ............. $ 644 $1,165 $1,726 $1,519 $1,028
====== ====== ====== ====== ======
Total as a percentage of total assets ... .20% .40% .61% .66% .45%
====== ====== ====== ====== ======
</TABLE>
For the years ended September 30, 1998, 1997 and 1996, gross interest
income which would have been recorded had the non-accruing loans been current in
accordance with their original terms amounted to $28,053, $49,948 and $77,337,
respectively.
Non-Accruing Loans. At September 30, 1998, the Bank had $520,000 in
non-accruing loans, which consisted of 9 one- to four-family residential
mortgage loans and represented .37% of the Bank's gross loan portfolio.
Foreclosed Assets. As of September 30, 1998, the Bank had $53,000 in
carrying value of foreclosed assets consisting of two one- to four-family
properties.
Other Loans of Concern. As of September 30, 1998, there were $311
thousand of other loans (consisting of a restaurant/personal residence
aggregating $194,000, and two one to four family real estate loans totalling
$117,000) 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.
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.
12
<PAGE>
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, 1998, the Bank had
classified $844,000 as substandard and none as doubtful or loss.
Allowance for Loan Losses. At September 30, 1998, the Bank had a total
allowance for loan losses of $1,950,000, representing 329.9% 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.
13
<PAGE>
The following table sets forth an analysis of the Bank's
allowance for loan losses.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period .............. $ 1,889 $ 1,833 $ 1,950 $ 1,746 $ 1,294
Charge-offs:
One- to four-family real estate ........... (58) (162) (237) (12) (3)
Multi-family and commercial real estate ... -- (30) -- -- --
Consumer .................................. (90) (90) (86) (50) (29)
------- ------- ------- ------- -------
Total charge-offs .................. (148) (282) (323) (62) (32)
------- ------- ------- ------- -------
Recoveries:
One- to four-family real estate ........... -- 4 -- 1 14
Consumer .................................. 20 34 11 10 5
------- ------- ------- ------- -------
Total recoveries ................... 20 38 11 11 19
------- ------- ------- ------- -------
Net charge-offs ............................. (128) (244) (312) (51) (13)
Provisions charged to operations ............ 189 300 195 255 465
------- ------- ------- ------- -------
Balance at end of period .................... $ 1,950 $ 1,889 $ 1,833 $ 1,950 $ 1,746
======= ======= ======= ======= =======
Ratio of net charge-offs during the period to
average loans outstanding during the period .10% .19% .26% .04% .02%
======= ======= ======= ======= =======
Ratio of net charge-offs during the period to
average non-performing assets .............. 21.39% 17.73% 18.60% 4.46% 1.01%
======= ======= ======= ======= =======
</TABLE>
14
<PAGE>
The distribution of the Bank's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- -------------------------------- --------------------------------
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......... $ 947 $113,423 81.02% $ 573 $102,232 80.69% $ 496 $100,383 80.34%
Multi-family and
commercial real
estate............. 196 6,389 4.56 470 4,691 3.70 528 5,115 4.09
Construction......... 24 1,182 .85 -- 1,306 1.03 -- 423 .34
Commercial........... 12 602 .43 -- 63 .05 -- -- --
Consumer............. 293 18,399 13.14 288 18,410 14.53 250 19,024 15.23
Unallocated.......... 478 -- -- 558 -- -- 559 -- --
------ -------- ------ ------ -------- ------ ------ -------- ------
Total........... $1,950 $139,995 100.00% $1,889 $126,702 100.00% $1,833 $124,945 100.00%
====== ======== ====== ====== ======== ====== ====== ======== ======
<CAPTION>
September 30,
--------------------------------------------------------------------
1995 1994
-------------------------------- --------------------------------
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......... $ 737 $ 95,588 79.04% $ 670 $ 96,570 79.37%
Multi-family and
commercial real
estate............. 443 5,132 4.24 419 5,606 4.61
Construction......... -- 230 .19 -- 743 .61
Commercial........... -- -- -- -- -- --
Consumer............. 220 19,988 16.53 134 18,756 15.41
Unallocated.......... 550 -- -- 523 -- --
------ -------- ------ ------ -------- ------
Total........... $1,950 $120,938 100.00% $1,746 $121,675 100.00%
====== ======== ====== ====== ======== ======
</TABLE>
15
<PAGE>
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 1998, the
Bank's average regulatory liquidity ratio (liquid assets as a percentage of net
withdrawable savings deposits and current borrowings) was 10.52%.
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, obligations of states and
political subdivisions, 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, 1998, the Company's securities
portfolio at amortized cost totaled $74.8 million, or 23.8% of total assets,
$72.8 million of which are classified as "available for sale" and the balance of
$2.0 million as "held to maturity."
Generally, the investment policy of the Company is to invest funds not
needed to fund loans, 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 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 the duration of its portfolio by purchasing longer term
municipal and corporate debt securities with maturities up to twenty years to
decrease its asset sensitivity, leverage its capital 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,
1998, the weighted average term to maturity of the security portfolio, excluding
other marketable equity securities, was 15.45 years. See Note 5 of the Notes to
Consolidated Financial Statements for information regarding the maturities of
the Company's securities available for sale portfolio and Note 6 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, 1998, the Company had $88.8 million in
mortgage-backed securities, or 28.2% of total assets, the majority of which, are
classified as available for sale. See Note 5 of the Notes to Consolidated
Financial Statements for information regarding the maturities of the Company's
mortgage-backed securities portfolio.
16
<PAGE>
The following table sets forth the composition of the Company's
investment securities, mortgage-backed securities and other interest-earning
assets at the dates indicated.
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------
1998 1997 1996
------------------ ----------------- ------------------
Amortized % of Amortized % of Amortized % of
Cost Total Cost Total Cost Total
--------- ------ --------- ------ --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and federal
agency obligations............... $21,954 29.33 $61,833 87.39% $70,807 87.41
Corporate bonds..................... 16,230 21.69 6,042 8.54 9,999 12.34
State and municipal obligations..... 34,414 45.98 194 .28 206 .25
Other............................... 2,242 3.00 2,682 3.79 3 --
------- ------ ------- ------ ------- ------
Total investment securities...... $74,840 100.00% $70,751 100.00% $81,015 100.00%
======= ====== ======= ====== ======= ======
Average remaining contractual
life of securities................... 15.45 years 5.80 years 3.83 years
Federal Home Loan Bank of New
York stock, required by law........... $ 1,954 100.00% $ 1,762 100.00% $ 1,159 100.00%
======= ====== ======= ====== ======= ======
Other interest-earning assets:
Federal funds sold.................. -- -- -- -- $35,600 100.0%
======= =====
Mortgage-backed securities:
GNMA................................ $41,828 47.12% $41,450 49.41% $17,169 48.71%
FNMA................................ 31,151 35.09 29,920 35.67 13,971 39.63
FHLMC............................... 15,691 17.68 12,416 14.80 4,011 11.38
Other............................... 96 .11 97 .12 98 .28
------- ------ ------- ------ ------- ------
Total mortgage-backed
securities...................... $88,766 100.00% $83,883 100.00% $35,249 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
<PAGE>
The composition and maturities of the investment securities portfolio by
contractual maturity are indicated in the following table.
<TABLE>
<CAPTION>
September 30, 1998
----------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over Total
1 Year Years Years 10 Years Investment 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........ $ 4,002 $ 2,991 $14,961 $ --- $21,954 $22,479
Corporate bonds..................... --- --- 4,480 11,750 16,230 16,226
State and municipal obligations..... --- 93 105 34,216 34,414 34,915
Other............................... --- --- --- 2,242 2,242 2,444
------- ------- ------- ------- ------- -------
Total investment securities....... $ 4,002 $ 3,084 $19,546 $48,208 $74,840 $76,064
======= ======= ======= ======= ======= =======
Weighted average tax equivalent
yield............................. 6.16% 7.20% 7.27% 7.60% 7.42%
</TABLE>
The Company's securities portfolio at September 30, 1998, 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.
17
<PAGE>
The following table sets forth the final contractual maturities of the
Company's mortgage-backed securities at September 30, 1998.
<TABLE>
<CAPTION>
September 30,
Due in 1998
3 Years 3 to 5 5 to 10 10 to 20 Over 20 Amortized
or Less Years Years Years Years Cost
------- ------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
GNMA ..... $ -- $ 12 $ 184 $ 4,226 $37,405 $41,827
FNMA ..... 3,970 1,165 -- 4,945 21,071 31,151
FHLMC .... -- -- 23 7,100 8,569 15,692
Other .... -- -- -- -- 96 96
------- ------- ------- ------- ------- -------
Total $ 3,970 $ 1,177 $ 207 $16,271 $67,141 $88,766
======= ======= ======= ======= ======= =======
</TABLE>
Sources of Funds
General. The Bank's primary sources of funds are deposits and
borrowings, amortization and prepayment of loan principal, maturities and
prepayments of 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.
<PAGE>
The following table sets forth the deposit flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance ............... $ 200,912 $ 196,753 $ 197,230
Deposits ...................... 310,108 254,977 235,800
Withdrawals ................... (309,896) (259,424) (244,962)
Interest credited ............. 8,853 8,606 8,685
--------- --------- ---------
Ending balance ................ $ 209,977 $ 200,912 $ 196,753
========= ========= =========
Net increase (decrease) ....... $ 9,065 $ 4,159 $ (477)
========= ========= =========
Percent increase (decrease) ... 4.51% 2.11% (.24)%
========= ========= =========
</TABLE>
18
<PAGE>
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,
-----------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -----------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-Certificate Deposits(1):
Statement savings accounts 3.54%....... $11,867 5.65% $8,388 4.17% $ 7,881 4.01%
Non-interest bearing demand
accounts............................. 6,009 2.86 4,370 2.18 3,714 1.89
Passbook savings accounts 3.20%........ 66,208 31.53 71,060 35.37 75,477 38.36
NOW accounts 1.98%..................... 12,396 5.91 10,438 5.20 9,070 4.61
Money market accounts 2.96%............ 5,949 2.83 7,115 3.54 7,752 3.94
-------- ------ -------- ------ -------- ------
Total non-certificates................. 102,429 48.78 101,371 50.46 103,894 52.81
-------- ------ -------- ------ -------- ------
Certificates of Deposit:
2.00 - 3.99%......................... --- --- 20 .01 30 .01
4.00 - 5.99%......................... 106,990 50.95 88,416 44.00 75,293 38.27
6.00 - 7.99%......................... 558 .27 11,105 5.53 17,536 8.91
-------- ------ -------- ------ -------- ------
Total certificates..................... 107,548 51.22 99,541 49.54 92,859 47.19
-------- ------ -------- ------ -------- ------
Total deposits......................... $209,977 100.00% $200,912 100.00% $196,753 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
- ------------------
(1) Interest rates shown are as of September 30, 1998.
19
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of September 30, 1998.
<TABLE>
<CAPTION>
4.00- 6.00- Percent
5.99% 7.99% Total of Total
-------- -------- -------- --------
(Dollars in Thousands)
Certificate accounts maturing
in quarter ending:
- ------------------------------
<S> <C> <C> <C> <C>
December 31, 1998.............. $ 27,973 $ --- $ 27,973 26.01%
March 31, 1999................. 23,233 36 23,269 21.64
June 30, 1999.................. 15,399 --- 15,399 14.32
September 30, 1999............. 12,005 --- 12,005 11.16
December 31, 1999.............. 5,036 --- 5,036 4.68
March 31, 2000................. 4,209 --- 4,209 3.91
June 30, 2000.................. 3,749 51 3,800 3.53
September 30, 2000............. 2,499 --- 2,499 2.32
December 31, 2000.............. 2,560 --- 2,560 2.38
March 31, 2001................. 2,946 --- 2,946 2.74
June 30, 2001.................. 1,259 26 1,285 1.20
September 30, 2001............. 1,947 --- 1,947 1.81
Thereafter..................... 4,175 445 4,620 4.30
-------- -------- -------- ------
Total....................... $106,990 $ 558 $107,548 100.00%
======== ======== ======== ======
Percent of total............ 99.48% .52%
======== ========
</TABLE>
<PAGE>
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of September 30, 1998.
<TABLE>
<CAPTION>
Maturity
----------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- -------- -------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000....... $24,313 $21,423 $24,819 $24,706 $95,261
Certificates of deposit of $100,000 or more...... 3,661 1,846 2,584 4,196 12,287
-------- -------- -------- -------- -------
Total certificates of deposit.................... $27,974 $23,269 $27,403 $28,902 $107,548
======= ======= ======= ======= ========
</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 FHLB,
the Bank has access to overnight funds of approximately $14.3 million, along
with an additional line of $14.3 million for one month advances. At September
30, 1998, the Bank had borrowings of $6.8 million under its overnight line.
In January 1998, the Bank began converting a portion of its short-term
borrowings to long-term borrowings principally through convertible (callable)
advances with the FHLB. The borrowings are secured by mortgage-backed
securities, and have contractual maturities of ten years, however, they include
options which give the lender the right to call the debt after a specified
lock-out period. The Company had $25 million of such borrowings at September 30,
1998, which had lock-out periods ranging from one to five years. For further
detail, see Note #16 to the Consolidated Financial Statements.
20
<PAGE>
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 $6.3 million at September
30, 1998, 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, 1998, the Bank had one subsidiary, Catskill Financial Services,
Inc., which commenced operations in January 1998, principally to issue Savings
Bank Life Insurance.
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 four of the Bank's offices. At
September 30, 1998, the Bank held approximately 30% of total financial
institution deposits and 57% 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, 1998, the Company had a total of 70 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 four other
banking offices in its primary market area. The Company does not own or lease
any other premises and operates principally from the Bank's main office. The
following table sets forth information relating to each of the Bank's offices as
of September 30, 1998. 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,
1998 was $2.5 million. See Note 9 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.
21
<PAGE>
<TABLE>
<CAPTION>
Total Net Book
Owned Approximate Value or Leasehold
Date or Square Improvement at
Location Acquired Leased Footage September 30, 1998
- -------------------------------- ---------------------- --------------- --------------------- -------------------
(In thousands)
<S> <C> <C> <C> <C>
Main Office:
341 Main Street
Catskill, New York Prior to 1950 Owned 11,750 $ 609
Branch Offices:
Route 9-W
Ravena, New York 1972 Owned 2,822 267
Route 9-W
Corner Boulevard Avenue
Catskill, New York 1978 Owned 2,900 709
Route 296
Windham, New York 1996 Owned 3,620 736
Supermarket Branch:
Bryant's Supermarket(1)
Route 32
Greenville, New York 1998 Leased 650 201
------
$2,522
======
</TABLE>
(1) Branch opened April 1998 and lease term expires in April 2013
ITEM 3. LEGAL PROCEEDINGS
The Company 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 the Company
in the proceedings, that the resolution of these proceedings should not have a
material effect on the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 1998, there were no matters
submitted to a vote of shareholders of Catskill Financial Corporation.
22
<PAGE>
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, 1998, (the "Annual Report"), is
incorporated herein by reference: "SHAREHOLDER INFORMATION", which appears on
page 65 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 pages 4 and 5 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 7 through 27 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 11 through 14 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, 1998 and 1997,
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the years in the three-year period ended September 30, 1998,
together with the related notes and the independent auditors' report thereon,
all of which appears on pages 28 through 64 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 a copy of which is expected to be filed within
120 days of September 30, 1998 ("the Proxy Statement"): "ELECTION OF DIRECTORS",
and "INFORMATION CONCERNING THE BOARD OF DIRECTORS AND EXECUTIVE OFFICERS",
which appears on pages 2 through 5 of the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information included on pages 7 through 13 of the Proxy Statement
is incorporated herein by reference.
23
<PAGE>
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 THROUGH 7 of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included on page 15 of the Proxy Statement is
incorporated herein by reference: "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, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the years in the three-year period ended September 30, 1998,
together with the related notes and the independent auditors' report thereon,
appearing in the Annual Report on pages 28 through 64 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, 1998, by and
between Catskill Savings Bank and Wilbur J.
Cross. (incorporated by reference to Exhibit
10.2 to Form 10Q for the nine month period ended
June 30, 1998.)
10.3 Catskill Financial Corporation Employee Stock
ownership Plan (incorporated by reference to
Exhibit 10.3 to Form S-1.)
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Regulation S - K Exhibit
Reference Number Description
- ------------------------ -----------
<S> <C>
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.)
10.5 Trustees Deferred Compensation Plan of Catskill
Savings Bank (incorporated by reference to
Exhibit 10.7 to Form S- 1.)
10.6 Employment agreement dated April 1, 1998, by and
between Catskill Financial Corporation and
Wilbur J. Cross. (Incorporated by reference to
Exhibit 10.1 to Form 10Q for the nine month
period ended June 30, 1998.)
10.7 Catskill Financial Corporation Supplemental
Executive Retirement Plan. (Incorporated by
reference to Exhibit 10.3 to Form 10Q for the
nine month period ended June 30, 1998.)
10.8 Catskill Financial Corporation Supplemental
Executive Retirement Plan Trust (incorporated by
reference to Exhibit 10.4 to Form 10Q for the
nine month period ended June 30, 1998.)
10.9 Employment Agreement dated August 1, 1998, by
and between Catskill Savings Bank and David J.
DeLuca.
10.10 Schedule pursuant to instruction #2 of Item 601
of Regulation SK. There is an employment
agreement with Keith Lampman, an executive
officer of the registrant, which is
substantially identical to the agreement
included as Exhibit 10.9. The only differences
are that the agreement is with Mr. Lampman,
contains his residence address, refers to his
title as "Vice President" and does not contain
section 1(e)(3) as contained in the agreement
included as Exhibit 10.9.
11 Computation of Net Income per Common Share
13 1998 Annual Report to security holders
21 Subsidiaries of the registrant
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
</TABLE>
25
<PAGE>
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: /s/ Wilbur J. Cross
------------------------------
Wilbur J. Cross
Director & Chairman of the Board,
President & Chief Executive Officer
Date: December 18, 1998
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>
/s/ Wilbur J. Cross Director & Chairman of the Board,
- --------------------------------- President and Chief December 18, 1998
Wilbur J. Cross Executive Officer
/s/ David J. DeLuca Chief Financial Officer
- --------------------------------- (Principal Financial Officer & December 18, 1998
David J. DeLuca Principal Accounting Officer)
/s/ George P. Jones Director December 18, 1998
- ---------------------------------
George P. Jones
/s/ Richard A. Marshall Director December 18, 1998
- --------------------------------
Richard A. Marshall
/s/ Allan D. Oren Director December 18, 1998
- -----------------------------------
Allan D. Oren
/s/ Hugh J. Quigley Director December 18, 1998
- -----------------------------------
Hugh J. Quigley
/s/ Edward P. Stiefel Director December 18, 1998
- -----------------------------------
Edward P. Stiefel, Esq.
</TABLE>
26
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this 1st day of August, 1998, by and between Catskill Savings Bank, a stock
savings bank organized and operating under the laws of the United States and
having its executive office at 341 Main Street, Catskill, New York 12414
(hereinafter referred to as the "Bank"), and David J. DeLuca, residing at 15
Rudder Lane, Latham, New York 12110.
WHEREAS, Mr. DeLuca is currently serving as Vice President and Chief
Financial Officer of the Bank; and WHEREAS, the Board of Directors of the Bank
(the "Board") believes it is in the best interests of the Bank to enter into
this Agreement with Mr. DeLuca in order to assure continuity of management of
the Bank and reinforce and encourage the continued attention and dedication of
Mr. DeLuca to his assigned duties without distraction; and
WHEREAS, the Board has approved and authorized the execution of this
Agreement and Mr. DeLuca is agreeable thereto.
NOW, THEREFORE, in consideration of the mutual covenants and
obligations of the parties hereto hereinafter set forth, it is agreed as
follows:
1. Definitions.
(a) The term "Change in Control" means: (1) an event of a nature that
(i) results in a change in control of the Bank or of Catskill Financial
Corporation, the Delaware corporation which owns all of the Bank's stock (the
"Holding Company"), within the meaning of the Home Owners' Loan Act and 12 C. F.
R. Part 574 as in effect on the date hereof; or (ii) would be required to be
reported in response to Item 1 of the current report on Form 8-K, as in effect
on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act"); (2) any person (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the beneficial owner
(as defined in Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly of securities of the Bank or the Holding Company representing 25% or
more of the Bank's or the Holding Company's then outstanding securities; (3)
individuals who are members of the board of directors of the Bank or the Holding
Company on the date hereof (each the "Incumbent Board") cease, for any reason,
to constitute at least a majority thereof, provided that any person becoming a
director subsequent to the date hereof whose election was approved by a vote of
at least three-quarters of the directors comprising the Incumbent Board, or
whose nomination for election by the Holding Company's stockholders was approved
by the nominating committee serving under an Incumbent Board, shall be
considered a member of the Incumbent Board; or (4) a reorganization, merger,
consolidation, sale of all or substantially all of the assets of the Bank or the
Holding Company or a similar transaction in which the Bank or the Holding
Company is not the resulting entity. The term "Change in Control" shall not
include an acquisition of securities by: (1) the trustee of an employee benefit
plan of the Bank or the Holding Company; (2) a corporation owned, directly or
indirectly, by the stockholders of the Holding Company in substantially the same
proportions as their ownership of stock of the Holding Company; or (3) Mr.
DeLuca, or any group otherwise constituting a person in which Mr. DeLuca is a
member.
(b) The term "Commencement Date" means August 1, 1998.
(c) The term "Date of Termination" means the date upon which Mr. DeLuca
ceases to serve as Vice President and Chief Financial Officer of the Bank.
(d) The term "Voluntary Termination" means termination of the
employment by Mr. DeLuca by resignation upon 90 days written notice but shall
not include resignation following a Change in Control (see subparagraph 1(e)
below), or material breach of this Agreement (see subparagraph 1(e) below) or
disability.
(e) The term "Involuntary Termination" means termination of the
employment of Mr. DeLuca by the Bank for any reason other than those reasons
which constitute Termination for Cause (see subparagraph 1(f),(below).
Involuntary Termination shall also include termination of the employment by Mr.
DeLuca as a result of his resignation, upon 30 days written notice, following a
Change in Control or material breach of this Agreement such as a material
diminution or interference with his duties, responsibilities and benefits as
Vice President and Chief Financial Officer of the Bank, including (without
limitation) any of the following actions unless consented to in writing by Mr.
DeLuca: (1) a material demotion of Mr. DeLuca; (2) a material reduction in the
number or seniority of other Bank personnel reporting to Mr. DeLuca or a
material reduction in the number or frequency with which, or in the nature of
the matters with respect to which, such personnel are to report to Mr. DeLuca,
other than as part of a Bank- or Holding Company-wide reduction in staff; (3) a
material adverse change in Mr. DeLuca's salary, perquisites, benefits,
contingent benefits or vacation, other than as part of an overall program
applied uniformly and with equitable effect to all members of the senior
management of the Bank or the Holding Company.
(f) The term "Termination for Cause" means termination of the
employment of Mr. DeLuca because of his personal dishonesty, incompetence,
willful misconduct, breach of a fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law,
rule, or regulation (other than traffic violations or similar offenses) or final
cease-and-desist order, or material breach of any provision of this Agreement.
2. Term. The term of this Agreement shall be a period of two years
commencing on the Commencement Date, subject to earlier termination as provided
herein. Beginning on the first anniversary of the Commencement Date, and on each
anniversary thereafter, the term of this Agreement shall be extended for a
period of one year in addition to the then-remaining term, provided that (1) the
Bank has not given notice in writing to Mr. DeLuca at least 90 days prior to
such anniversary that the term of this Agreement shall not be extended further;
and (2) prior to such anniversary, the Board of the Bank explicitly reviews and
approves the extension. Reference herein to the term of this Agreement shall
refer to both such initial term and such extended terms.
3. Employment.
(a) Mr. DeLuca is employed as Vice President and Chief
Financial Officer of the Bank and, except to the extent allowed under
subparagraph 3(b), below, shall devote his full business time and attention to
the business and affairs of the Bank and the Holding Company and use his best
efforts to advance their interests. He shall render such administrative and
management services under the supervision of the President of the Bank as are
customarily performed by persons situated in similar executive capacities, and
shall have such other powers and duties, not inconsistent with his title and
office, as the Board may prescribe from time to time.
(b) Mr. DeLuca may engage in personal business and investment
activities for his own account and serve as a member of the board of directors
of such business, community and charitable organizations as he may disclose, in
advance, to the Board from time to time so long as such activities and services
do not materially interfere with the performance of his duties under this
Agreement or involve entities which either compete with the Bank or may be
reasonably expected to negatively impact on the Bank's standing and reputation
in the community it serves.
4. Compensation.
(a) Salary. The Bank agrees to pay Mr. DeLuca during the term of this
Agreement, not less frequently than monthly, the salary established by the
Board, which shall be at least equal to Mr. DeLuca's salary in effect as of the
Commencement Date. The amount of Mr. DeLuca's salary shall be reviewed by the
Board, at least annually beginning not later than the first anniversary of the
Commencement Date. Adjustments in salary or other compensation shall not limit
or reduce any other obligation of the Bank under this Agreement. Mr. DeLuca's
salary in effect from time to time during the term of this Agreement shall not
thereafter be reduced. At each anniversary of the commencement date following a
Change in Control, Mr. DeLuca's salary shall be increased at least by
multiplying it by the greater of: (1) the quotient of (i) the U.S. Department of
Labor Consumer Price Index for all Urban Consumers (N.Y.-Northeastern N.J.) for
January of the then current calendar year divided by (ii) the U.S. Department of
Labor Consumer Price Index for all Urban Consumers (N.Y.-Northeastern N.J.) for
January of the immediately preceding calendar year; and (2) the quotient of (i)
the average annual rate of salary, determined as of the first business day of
such calendar year, of the officers of the Bank (other than Mr. DeLuca) who are
assistant vice president or more senior officers, divided by (ii) the average
annual rate of salary, determined as of the first business day of the
immediately preceding calendar year, of the officers of the Bank (other than Mr.
DeLuca) who are assistant vice presidents or more senior officers.
(b) Discretionary Bonuses. Mr. DeLuca shall be entitled to participate
in an equitable manner with all other executive officers of the Bank in such
discretionary bonuses as are authorized and declared by the Board to its
executive employees. No other compensation provided for in this Agreement shall
be deemed to substitute for Mr. DeLuca's right to participate in such bonuses
when and as declared by the Board.
(c) Expenses. Mr. DeLuca shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by him in performing services
under this Agreement in accordance with the policies and procedures applicable
to executive officers of the Bank, provided that he accounts for such expenses
as required under such policies and procedures.
5. Benefits.
(a) Participation in Retirement and Employee Benefit Plans. Mr. DeLuca
shall be entitled to participate in all plans relating to pension, thrift,
profit-sharing, group life and disability insurance, medical and dental
coverage, education, cash bonuses, and other retirement or employee benefits or
combinations thereof, in which the Bank's executive officers participate.
(b) Fringe Benefits. Mr. DeLuca shall be eligible to participate in,
and receive benefits under, any fringe benefit plans which are or may become
applicable to the Bank's executive officers.
6. Vacations; Leave. Mr. DeLuca shall be entitled to annual paid
vacation in accordance with the policies established by the Board for executive
officers and to voluntary leaves of absence, with or without pay, from time to
time, at such times and upon such conditions as the Board may determine in its
discretion.
7. Termination of Employment.
(a) Involuntary Termination. The Board may terminate Mr. DeLuca's
employment at any time. In the event of Involuntary Termination other than in
connection with a Change in Control, the Bank shall, during remaining term of
this Agreement, (1) pay to Mr. DeLuca, his salary at the rate in effect
immediately prior to the Date of Termination, payable in such manner and at such
times as such salary would have been payable under Section 4 if Mr. DeLuca had
continued to be employed by the Bank, (2) provide to Mr. DeLuca substantially
the same life, health and disability insurance benefits as the Bank maintained
for its executive officers immediately prior to the Date of Termination reduced
by the amount of any such insurance benefits provided to Mr. DeLuca by a
subsequent employer, and (3) provide to Mr. DeLuca such other benefits, if any,
to which he and his family and dependents would have been entitled as a former
officer or the family or dependents of a former officer under the employee
benefit plans and programs maintained for the benefit of the Bank's officers in
accordance with the terms of such plans and programs in effect immediately prior
to the Date of Termination.
(b) Termination for Cause. In the event of Termination for Cause, the
Bank shall (1) pay Mr. DeLuca his salary and benefits through the Date of
Termination, (2) pay him for unused vacation days, and (3) have no further
obligations to him under this Agreement.
(c) Voluntary Termination. Mr. DeLuca's employment may be voluntarily
terminated by him at any time by resignation. In the event of such Voluntary
Termination, the Bank shall be obligated to (1) pay to Mr. DeLuca his salary and
benefits through the Date of Termination, (2) pay him for unused vacation days,
and (3) have no further obligations to him under this Agreement.
(d) Change in Control. In the event of Involuntary Termination in
connection with or within 12 months after a Change in Control, the Bank shall,
subject to paragraph 8 of this Agreement, (1) pay to Mr. DeLuca an amount equal
to 200% of his "base amount" as defined in 26 U.S.C. Section 28OG which payment
shall be made in three equal installments, the first within 10 days after the
Date of Termination, the second on the fifth business day of January of the next
succeeding calendar year and the third on the fifth business day of January of
the second succeeding calendar year, (2) provide to Mr. DeLuca during the
remaining term of this Agreement substantially the same life, health and
disability insurance benefits as the Bank maintained for its executive officers
immediately prior to the Date of Termination, and (3) provide to Mr. DeLuca such
other benefits, if any, to which he and his family and dependents would have
been entitled as a former officer or the family or dependents of a former
officer under the employee benefit plans and programs maintained for the benefit
of the Bank's officers in accordance with the terms of such plans and programs
in effect immediately prior to the Date of Termination.
(e) Death; Disability. If Mr. DeLuca becomes disabled as defined in the
Bank's then current disability plan, if any, or if he is otherwise unable to
serve as Vice President and Chief Financial Officer, this Agreement shall
continue in full force and effect, except that the salary paid to Mr. DeLuca
shall be reduced by any disability insurance payments made to him on policies of
insurance maintained by the Bank at its expense. In addition, in the event of
the death or disability of Mr. DeLuca during the term of this Agreement, Mr.
DeLuca and his family and dependents (in the event of disability) and his family
and dependents (in the event of death) shall be provided with such benefits as
they would have been entitled to receive as a former officer or the family or
dependents of a former officer under the employee benefit plans and programs
maintained for the benefit of the Bank's officers in accordance with the terms
of such plans and programs in effect immediately prior to the death or
disability.
(f) Temporary Suspension or Prohibition. If Mr. DeLuca is suspended
and/or temporarily prohibited from participating in the conduct of the Bank's
affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA, 12
U.S.C. Section 1818(e)(3) and (g)(1), the Bank's obligations under this
Agreement, other than those which have vested, shall be suspended as of the date
of service, unless stayed by appropriate proceedings. If the charges in the
notice are dismissed, the Bank may in its discretion (1) pay Mr. DeLuca all or
part of the compensation withheld while its obligations under this Agreement
were suspended and (2) reinstate in whole or in part any of its obligations
which were suspended.
(g) Permanent Suspension or Prohibition. If Mr. DeLuca is removed
and/or permanently prohibited from participating in the conduct of the Bank's
affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12
U.S.C. Section 1818(e)(4) and (g)(1), all obligations of the Bank under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(h) Default of the Bank. If the Bank is in default (as defined in
Section 3(x)(1) of the FDIA), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect any
vested rights of the contracting parties.
(i) Termination by Regulators. All obligations under this Agreement
shall be terminated, except to the extent determined that continuation of this
Agreement is necessary for the continued operation of the Bank by the Director
of the Office of Thrift Supervision (the "Director") or his or her designee, at
the time: (1) the Federal Deposit Insurance Corporation enters into an agreement
to provide assistance to or on behalf of the Bank under the authority contained
in Section 13(c) of the FDIA; or (2) the Director or his or her designee
approves a supervisory merger to resolve problems related to operation of the
Bank; or (3) the Director or his or her designee determines the Bank to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by any such action.
8. Certain Reduction of Payments by the Bank. Notwithstanding any other
provision of this Agreement, if payments under this Agreement, together with any
other payments received or to be received by Mr. DeLuca in connection with a
Change in Control would cause any amount to be nondeductible by the Bank for
federal income tax purposes pursuant to 26 U.S.C. Section 28OG, then benefits
under this Agreement shall be reduced (not less than zero) to the extent
necessary so as to maximize payments to Mr. DeLuca without causing any amount to
become nondeductible by the Bank. Mr. DeLuca shall determine the allocation of
such reduction among payments to him.
9. No Mitigation. Mr. DeLuca shall not be required to mitigate the
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
Mr. DeLuca as the result of employment by another employer unless explicitly
stated herein, by retirement benefits after the Date of Termination or
otherwise.
10. Attorneys Fees. In the event the Bank exercises its right of
Termination for Cause, but it is determined by a court of competent jurisdiction
or by an arbitrator pursuant to Paragraph 18 that cause did not exist for such
termination, or if it is determined by a court or arbitrator that the Bank has
failed to meet any of its obligations or abide by any of the terms of this
Agreement, Mr. DeLuca shall be entitled to reimbursement for all reasonable
costs, including attorneys' fees, incurred in challenging such termination or
enforcing such obligations or terms. Such reimbursement shall be in addition to
all rights to which Mr. DeLuca is otherwise entitled under this Agreement.
11. No Assignments.
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that the Bank shall require any successor or assign (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Bank, by an assumption
agreement in form and substance satisfactory to Mr. DeLuca, to expressly assume
and agree to perform this Agreement in the same manner and to the same extent
that the Bank would be required to perform it if no such succession or
assignment had taken place. Failure of the Bank to obtain such an assumption
agreement prior to the effectiveness of any such succession or assignment shall
be a breach of this Agreement and shall entitle Mr. DeLuca to compensation from
the Bank in the same amount and on the same terms as the compensation pursuant
to Paragraph 7(d) hereof. For purposes of implementing the provisions of this
Paragraph 11(a), the date on which any such succession becomes effective shall
be deemed the Date of Termination.
(b) This Agreement and all rights of Mr. DeLuca hereunder shall inure
to the benefit of and be enforceable by his personal and legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If the Mr. DeLuca should die while any amounts would still be payable
to him hereunder if he had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
his devisee, legatee or other designee or if there is no such designee, to his
estate.
12. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, if to the Bank at its executive
office, to the attention of the Board with a copy to the Secretary of the Bank,
or, if to Mr. DeLuca, to his home at the address stated above, unless notice of
a change of address has been given pursuant hereto.
13. Entire Agreement; Amendments. This Agreement: i) sets forth the
entire understanding of the parties with respect to its subject matter and
supersedes all prior oral and written agreements between them, including the
"Change in Control Severance Agreement" entered into on August 13, 1996; and ii)
may be amended only by a writing signed by both parties.
14. Headings. The headings used in this Agreement are included solely
for convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
15. Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
17. Waiver. Failure, by either party, to insist on strict compliance
with any of the terms or conditions hereof shall not be deemed a waiver of such
term or condition.
18. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
New York.
19. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
Albany, New York in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award in
any court having jurisdiction.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
Attest: CATSKILL SAVINGS BANK
/s/ David L. Guldenstern By: /s/ Allan D. Oren
- ------------------------ -----------------------
SECRETARY DIRECTOR
WITNESS:
/s/ Wilbur J. Cross /s/ David J. DeLuca
- ------------------------ -----------------------
PRESIDENT DAVID J. DELUCA
EXHIBIT 11
CATSKILL FINANCIAL CORPORATION
COMPUTATION OF NET INCOME PER COMMON SHARE
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended Sept 30, Year Ended Sept 30,
----------------------------- ------------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income per common share - basic
Net income applicable to common shares .............. $ 978 $ 949 $ 3,882 $ 3,907
Weighted average common shares outstanding .......... 3,851,094 4,262,551 4,066,971 4,629,697
Net income per common share - basic ................. $ .25 $ .22 $ .95 $ .84
========== ========== ========== ==========
Net income per common share - diluted
Net income applicable to common shares .............. $ 978 $ 949 $ 3,882 $ 3,907
Weighted average common shares outstanding .......... 3,851,094 4,262,551 4,066,971 4,629,697
Dilutive common stock options (1) ................... 95,618 129,772 120,762 71,731
---------- ---------- ---------- ----------
Weighted average common shares and
common share equivalents outstanding .......... 3,946,712 4,392,323 4,187,733 4,701,428
========== ========== ========== ==========
Net income per common share - diluted ............... $ .25 $ .22 $ .93 $ .83
========== ========== ========== ==========
</TABLE>
(1) Dilutive common stock options (includes granted, but unvested, restricted
stock under the Company's MRP plan and options granted, but unexercised, under
its stock option plan) are based on the treasury stock method using average
market price. The treasury stock method recognizes the use of assumed proceeds
upon the exercise of options, and the amount of unearned compensation attributed
to future services under the Company's restricted stock plan, including any tax
benefits, to purchase the Company's common stock at the average market price
during the period.
EXHIBIT 13
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In Thousands)
Selected Consolidated Financial Condition Data:
- -----------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets...................................... $314,752 $289,619 $283,759 $230,102 $230,518
Cash and cash equivalents......................... 2,795 2,274 39,712 38,064 29,580
Loans receivable, net............................. 137,785 124,337 122,533 118,364 119,233
Mortgage-backed securities........................ 90,929 84,794 34,902 13,647 13,922
Other securities.................................. 78,068 73,137 82,375 53,443 64,151
Deposits.......................................... 209,977 200,912 196,753 197,230 200,825
Borrowings ....................................... 31,840 11,385 --- --- ---
Shareholders' equity.............................. 67,831 71,777 82,381 28,667 26,943
<CAPTION>
Years Ended September 30,
-------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(In Thousands)
Selected Consolidated Operations Data:
- --------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income............................... $21,104 $20,217 $17,932 $15,592 $15,022
Total interest expense.............................. 9,960 8,801 9,022 8,009 7,529
------- ------- ------- ------- -------
Net interest income.............................. 11,144 11,416 8,910 7,583 7,493
Provision for loan losses........................... 189 300 195 255 465
------- ------- ------- ------- -------
Net interest income after provision for loan losses. 10,955 11,116 8,715 7,328 7,028
Total non-interest income........................... 608 512 996 262 339
Total non-interest expense.......................... 5,662 5,187 4,258 4,665 3,814
------- ------- ------- ------- -------
Income before taxes................................. 5,901 6,441 5,453 2,925 3,553
Income tax expense.................................. 2,019 2,534 2,136 1,201 1,463
------- ------- ------- ------- -------
Net income....................................... $ 3,882 $ 3,907 $ 3,317 $ 1,724 $ 2,090
======= ======= ======= ======= =======
Basic earnings per common share .................... $.95 $.84 $.38* N/A N/A
Diluted earnings per common share .................. $.93 $.83 $.38* N/A N/A
</TABLE>
* The Company completed its initial public offering on April 18, 1996, so
earnings per common share is not applicable to all periods prior to that date.
In calculating earnings per share for fiscal 1996, 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.
4
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION - CONTINUED
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Selected Financial Ratios and Other Data:
- -----------------------------------------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on assets (ratio of net income to average total assets) 1.30% 1.40% 1.25% .76% .90%
Return on equity (ratio of net income to average equity) ...... 5.60 5.22 6.33 6.15 8.06
Average net interest rate spread .............................. 2.90 2.93 2.54 2.99 3.03
Net interest margin(1) ........................................ 3.99 4.17 3.44 3.47 3.36
Ratio of operating expense to average total assets ............ 1.90 1.86 1.60 1.77(2) 1.65
Efficiency ratio(3) ........................................... 46.32 43.80 45.56 51.05 48.47
Ratio of average interest-earning assets to average interest-
bearing liabilities ........................................ 131.97 138.60 125.79 112.97 109.92
Quality Ratios:
Non-performing loans to total loans at end of period ........... .42 .73 1.10 .86 .54
Non-performing assets to total assets at end of period ......... .20 .40 .61 .66 .45
Allowance for loan losses to non-performing loans .............. 329.95 206.00 133.89 188.41 268.62
Allowance for loan losses to total loans at end of period ...... 1.40 1.50 1.47 1.61 1.43
Capital Ratios:
Equity to total assets at end of period ........................ 21.55 24.78 29.03 12.46 11.69
Average equity to average assets ............................... 23.20 26.86 19.73 12.44 11.23
Other Data:
Number of full-service offices ................................. 5 4 3 3 3
</TABLE>
(1) Net interest income on a tax equivalent basis divided by average
interest-earning assets.
(2) Excludes $660,000 provision for Nationar loss contingency.
(3) Efficiency ratio is non-interest expense/(non-interest income + net
interest income on a tax equivalent basis). For 1997 and 1996, excludes
Nationar recoveries included in non-interest income of $100,000, and
$560,000, respectively and for 1995 excludes $660,000 provision for
Nationar loss contingency included in non-interest expense.
5
<PAGE>
SUMMARY OF UNAUDITED CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Year Ended September 30, 1998
---------------------------------------------------------------
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
(In Thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Total interest income ........................................ $ 5,263 $ 5,216 $ 5,288 $ 5,337 $21,104
Total interest expense ....................................... 2,425 2,390 2,507 2,638 9,960
------- ------- ------- ------- -------
Net interest income ....................................... 2,838 2,826 2,781 2,699 11,144
Provision for loan losses .................................... 54 45 45 45 189
------- ------- ------- ------- -------
Net interest income after provision for loan losses .......... 2,784 2,781 2,736 2,654 10,955
Total non-interest income .................................... 119 140 162 187 608
Total non-interest expense ................................... 1,348 1,394 1,469 1,451 5,662
------- ------- ------- ------- -------
Income before taxes .......................................... $ 1,555 $ 1,527 $ 1,429 $ 1,390 $ 5,901
Income tax expense ........................................... 597 555 455 412 2,019
------- ------- ------- ------- -------
Net income ................................................ $ 958 $ 972 $ 974 $ 978 $ 3,882
======= ======= ======= ======= =======
Basic earnings per common share .............................. $ .23 $ .23 $ .24 $ .25 $ .95
Diluted earnings per common share ............................ .22 .23 .24 .25 .93
Cash dividends per common share .............................. .08 .08 .08 .0925 .3325
<CAPTION>
Year Ended September 30, 1997
---------------------------------------------------------------
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
(In Thousands, except per share amounts)
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
======= ======= ======= ======= =======
Basic earnings per common share .............................. $ .21 $ .20 $ .21 $ .22 $ .84
Diluted earnings per common share ............................ $ .21 .20 .21 .22 .83
Cash dividends per common share .............................. -- .07 .07 .07 .21
</TABLE>
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Catskill Financial Corporation (the "Company" or "Catskill Financial") was
formed in December 1995 to acquire all of the common stock of Catskill Savings
Bank (the "Bank") upon its conversion from a mutual savings bank to a stock
savings bank. On April 18, 1996, the Company completed its initial public stock
offering, issuing 5,686,750 shares of $.01 par value common stock at $10.00 per
share. Net proceeds to the Company were $54.9 million after conversion costs,
and $50.4 million excluding the shares acquired by the Company's Employee Stock
Ownership Plan (the "ESOP"), which were purchased with the proceeds of a loan
from the Company.
The consolidated financial condition and operating results of the Company are
primarily dependent upon its wholly owned subsidiary, the Bank, and all
references to the Company prior to April 18, 1996, except where otherwise
indicated, are to the Bank.
The Bank has been and continues to be a community oriented financial institution
offering a variety of financial services. The Bank attracts deposits from the
general public and uses such deposits, together with other funds, to originate
one to four family residential mortgages, and, to a lesser extent, consumer
(including home equity lines of credit), commercial, and multi-family real
estate and other loans in its primary market area. The Bank's primary market
area is comprised of Greene County and southern Albany County in New York, which
are serviced through five banking offices, the most recent having opened in
April 1998. 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, 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
and borrowings.
Results of operations are also affected by the Bank's provision for loan losses,
non-interest expenses such as salaries and employee benefits, occupancy and
other operating expenses and to a lesser extent, non-interest income such as
service charges on deposit accounts.
Financial institutions in general, including the Company, are significantly
affected by economic conditions, competition and the monetary and fiscal
policies of the federal government. Lending activities are influenced by the
demand for and supply of housing, competition among lenders, interest rate
conditions and funds availability. Deposit balances and cost of funds are
influenced by prevailing market rates on competing investments, customer
preference and the levels of personal income and savings in the Bank's primary
market area.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in this Annual Report or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project", "believe", or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigations Reform Act of 1995. In addition, certain disclosures and information
customarily provided by financial institutions, such as analysis of the adequacy
of the allowance for loan losses or an analysis of the interest rate sensitivity
of the Company's assets and liabilities, are inherently based upon predictions
of future events and circumstances. Furthermore, from time to time, the Company
may publish other forward-looking statements relating to such matters as
anticipated financial performance, business prospects, and similar matters.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, the Company notes that a variety of factors could cause the Company's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in the Company's forward-looking statements.
Some of the risks and uncertainties that may affect the operations, performance,
development and results of the Company's business, the interest rate sensitivity
of its assets and liabilities, and the adequacy of its allowance for loan
losses, include but are not limited to the following:
a. Deterioration in local, regional, national or global economic
conditions which could result, among other things, in an increase
in loan delinquencies, a decrease in property values, or a change
in the housing turnover rate;
b. changes in market interest rates or changes in the speed at which
market interest rates change;
c. changes in laws and regulations affecting the financial service
industry;
d. changes in competition; and
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 any revisions to any forward-looking statements to reflect the
occurrence of events or circumstances after the date of such statements.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Total assets were $314.8 million at September 30, 1998, an increase of $25.2
million, or 8.7% from the $289.6 million at September 30, 1997. The increase in
assets was primarily in loans and, to a lesser extent, securities and was funded
principally by increases in long-term borrowings and deposits.
Cash and cash equivalents were $2.8 million, an increase of $.5 million, or
21.7% from the $2.3 million at September 30, 1997. The change was principally an
increase in vault cash and checks in process of collection due to the opening of
a new full service branch in April 1998.
Total securities, which include securities held to maturity ("HTM") and
securities available for sale ("AFS"), excluding Federal Home Loan Bank stock,
were $167.0 million, an increase of $10.8 million, or 6.9% over the $156.2
million as of September 30, 1997. The increase in securities consisted of a
$16.8 million increase in AFS securities, offset by a $6.0 million decrease in
HTM securities from scheduled maturities and calls. The Company generally
classifies its newly purchased securities as AFS to maintain flexibility for
balance sheet management purposes. Consequently, as of September 30, 1998, 98.7%
of the Company's investment portfolio excluding the Federal Home Loan Bank Stock
was classified as AFS, compared to 94.8% as of September 30, 1997. In 1998, the
Company purchased approximately $81.0 million of AFS securities, and had
repayments, calls, sales and paydowns of $66.2 million. The purchases were
principally bank qualified municipals, which provide the Company higher tax
equivalent yields and longer call protection, and teaser rate adjustable
mortgage-backed securities to replace run-off in the Company's existing
adjustable mortgage loan portfolio.
<PAGE>
Loans receivable were $139.7 million as of September 30, 1998, an increase of
$13.5 million or 10.7% over the $126.2 million as of September 30, 1997. The
following table shows the loan portfolio composition as of the respective
balance sheet dates:
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
---- ----
(In thousands) % of loans (In thousands) % of loans
<S> <C> <C> <C> <C>
Real Estate Loans
One-to-four family $113,423 81.0% $102,232 80.7%
Multi-family and commercial 6,389 4.6 4,691 3.7
Construction 1,182 .8 1,306 1.0
-------- ------ -------- ------
Total real estate loans 120,994 86.4 108,229 85.4
Consumer Loans 18,399 13.2 18,410 14.5
Commercial Loans 602 .4 63 .1
-------- ------ ------- ------
Gross Loans 139,995 100.00% 126,702 100.00%
====== ======
Less: Net deferred loan fees (260) (476)
-------- --------
Total loans receivable $139,735 $126,226
======== ========
</TABLE>
During fiscal 1998, the Company originated $38.9 million in loans, an increase
of $17.6 million, or 82.6%, from the $21.3 million originated in 1997. The
increase was principally caused by aggressive
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
loan promotions during a period of high potential loan volume as lower interest
rates created one of the most favorable refinancing markets since 1993.
One-to-four family loans increased $11.2 million, or 10.9%, as the Company
aggressively promoted a 15 year fixed rate mortgage product with a preferred
rate for borrowers who have their monthly payments automatically deducted from a
checking account with the Bank. The increase in multi-family and commercial real
estate loans was principally represented by loans to refinance a stripmall and a
fitness complex in the Company's primary market area, as well as participation
loans on certain commercial properties. Commercial loans increased as the
Company began offering secured and unsecured lines of credit to its commercial
deposit customers.
Total deposits were $210.0 million at September 30, 1998, an increase of $9.1
million, or 4.5% from the $200.9 million at September 30, 1997. The following
table shows the deposit composition as of the respective balance sheet dates:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------ ------------------
(In % of (In % of
thousands) Deposits thousands) Deposits
<S> <C> <C> <C> <C>
Savings $ 78,075 37.2% $ 79,448 39.6%
Money market 5,949 2.8 7,115 3.5
NOW 12,396 5.9 10,438 5.2
Non-interest demand 6,009 2.9 4,370 2.2
Certificates of deposits 107,548 51.2 99,541 49.5
-------- ----- -------- -----
$209,977 100.0% $200,912 100.0%
======== ===== ======== =====
</TABLE>
The growth in deposits of $9.1 million was principally related to the opening of
our fourth and fifth full service branches in December 1996 and April 1998, as
deposits at other offices increased only $.9 million since September 30, 1997.
The Company experienced growth in checking accounts, and certificates of
deposits ("CD's"), offset somewhat by a reduction in its money market deposit
product. The increase in checking accounts resulted principally from offering
employees cash incentives for new accounts as well as promoting certain loan
products at a preferred loan rate if the customer's payment is directly charged
to a checking account. The increase in CD's is principally from the Company's
promotion of a 15-month product, at a premium rate, to retain maturing
longer-term CD's and to satisfy demand in the Company's market for higher
yields.
The Company increased its borrowings, which are principally with the Federal
Home Loan Bank of New York ("FHLB"), to $31.8 million at September 30, 1998, an
increase of $20.4 million from the $11.4 million at September 30, 1997. The
additional borrowings were used to fund the Company's stock repurchase program
and the growth in earning assets as the Company continues to leverage its
capital. In January 1998, the Company began converting a portion of its
short-term borrowings to long-term borrowings principally through convertible
(callable) advances. The borrowings are secured by mortgage-backed securities,
and have contractual maturities of ten years; however, they include options
which give the lender the right to call the debt after a specified lock-out
period. The Company has entered into five such borrowings, each in the amount of
$5 million, which have lock-outs ranging from one to five years.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Short-term borrowings were $6.8 million at September 30, 1998, a decrease of
$4.6 million, or 40.4%, from the $11.4 million at September 30, 1997. As of
September 30, 1998, the Company still has additional available credit of $7.5
million under its overnight line and $14.3 million under its one month advance
program with the FHLB.
Shareholders' equity at September 30, 1998, was $67.8 million, a decrease of
$4.0 million, or 5.6% from the $71.8 million at September 30, 1997. The decrease
was principally caused by the Company's repurchase of 486,573 of its common
shares at a cost of $8.5 million, somewhat offset by the $2.5 million of net
income retained after cash dividends and a $1.1 million change in the Company's
net unrealized gain (loss) on securities available for sale, net of taxes. The
Company also recorded a $.9 million increase in shareholders' equity due to the
amortization of restricted stock awards, the exercise of stock options and the
allocation of shares under the Company's ESOP.
Shareholders' equity as a percent of total assets was 21.5% at September 30,
1998 compared to 24.8% at September 30, 1997. Book value per common share at
September 30, 1998, was $15.56 or $16.11 excluding unvested shares of the
Company's restricted stock plan ("MRP"), and $17.35 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, 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, as of September 30, 1998, the Company has not entered
into any derivatives such as futures, forwards, interest rate swaps or other
financial instruments with similar characteristics to manage interest rate risk,
or for any other reason. The extent of the movement of interest rates is an
uncertainty that could have a negative impact on the
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
earnings of the Company. The Company monitors its interest rate risk as such
risk relates to its business 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 Executive Committee on a quarterly basis.
The table on the following page sets forth the amounts of interest-earning
assets and interest-bearing liabilities outstanding at September 30, 1998, 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, 1998, within a six-month period and subsequent
selected time intervals. Annual prepayments for the Company's one to four family
mortgage loan portfolio and its mortgage-backed securities were assumed to be 18
CPR (Constant prepayment rate), which approximates the last three month
prepayment performance. Callable securities, principally U.S. Government
agencies, corporates and municipals, are shown principally by their call date,
since most of the securities would be called based on the securities' estimated
market value. Savings deposit accounts are shown with a decay rate of 9%
annually. Money Market deposits are assumed to be immediately repricable, even
though the product is not indexed and the Bank has sole discretion as to rate
changes. Long-term borrowings are shown by their respective call date, even
though the issuer has the option not to call the borrowing at that time.
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.
Based on these assumptions, the Company, as of September 30, 1998, had a
cumulative one year positive gap of $4.4 million, or 1.4% of total assets.
Consequently, if interest rates were to decrease over a one year period, the
Company's net interest income could be adversely impacted. However, if interest
rates were to rise, the Company's net interest income might not benefit
correspondingly since prepayments on mortgage loans and mortgage backed
securities could slow down, and certain securities with calls might no longer be
called, both of which could delay the upward repricing of assets while the cost
of funds increases. 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 following 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 may 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.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
At September 30, 1998
Maturing or Repricing
---------------------
Over 6
6 Months Months to Over 1-3 Over 3-5 Over
or Less One Year Years Years 5 Years Total
Amount Amount Amount Amount Amount Amount
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed rate one- to four-family, multi-family and
commercial real estate and construction loans ...... $ 10,420 $ 8,962 $ 25,979 $ 18,069 $ 24,476 $ 87,906
Adjustable rate one- to four-family, multi-family
and commercial real estate and construction loans .. 14,443 10,080 8,119 6 180 32,828
Commercial loans .................................... 602 -- -- -- -- 602
Consumer loans ...................................... 5,664 4,647 5,063 1,529 1,496 18,399
Mortgage-backed securities .......................... 24,685 15,262 18,594 10,507 21,976 91,024
Other securities(*) ................................. 11,930 7,007 6,977 7,277 44,781 77,972
Federal funds and other ............................. 67 -- -- -- -- 67
-------- -------- -------- -------- -------- --------
Total interest-earning assets .................. 67,811 45,958 64,732 37,388 92,909 308,798
-------- -------- -------- -------- -------- --------
Savings deposits .................................... 4,020 3,271 11,700 9,766 49,318 78,075
Money market ........................................ 5,949 -- -- -- -- 5,949
Certificate accounts ................................ 51,242 27,404 24,282 3,055 1,565 107,548
NOW deposits ........................................ -- -- -- -- 12,396 12,396
Other deposits ...................................... 673 -- -- -- 292 965
Short-term borrowings ............................... 6,840 -- -- -- -- 6,840
Long-term borrowings ................................ -- 10,000 10,000 5,000 -- 25,000
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities ............. 68,724 40,675 45,982 17,821 63,571 236,773
-------- -------- -------- -------- -------- --------
Interest-earning assets less interest-bearing
liabilities ........................................ $ (913) $ 5,283 $ 18,750 $ 19,567 $ 29,338 $ 72,025
======== ======== ======== ======== ======== ========
Cumulative interest-rate sensitivity gap ............ $ (913) $ 4,370 $ 23,120 $ 42,687 $ 72,025 --
Cumulative interest-rate gap as a percentage of
interest-earning assets at September 30, 1998 ...... (0.30)% 1.42% 7.49% 13.82% 23.32% --
Cumulative interest-rate gap as a percentage of total
assets at September 30, 1998 ........................ (0.29)% 1.39% 7.35% 13.56% 22.88% --
</TABLE>
(*) 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.
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. While the
OTS model uses financial data submitted by the Bank, many of the assumptions
imbedded in the model, such as loan and securities prepayments and deposit decay
rates are determined by the OTS. The following are the estimated impacts of
immediate changes "rate shocks" in interest rates at September 30, 1998, as
calculated by the OTS model:
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
NPV as a %
Net Portfolio Value Assets
Rate Change -------------------------------------------------- -----------------------------------
In Basis Dollars in Thousands
Points ----------------------------- % NPV Basis Point ("bp")
(Rate Shock) Amount Change Change Ratio Change
------------ ------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C>
+400 $ 38,652 $ (33,351) (46.3)% 13.50% (865bp)
+300 46,820 (25,183) (35.0) 15.83 (632bp)
+200 55,300 (16,703) (23.2) 18.09 (406bp)
+100 63,635 (8,368) (11.6) 20.18 (197bp)
static * 72,003 22.15
(100) 80,679 8,676 12.0 24.06 191bp
(200) 90,692 18,689 26.0 26.14 399bp
(300) 102,830 30,827 42.8 28.51 636bp
(400) 116,421 44,418 61.7 30.96 881bp
</TABLE>
* Represents Bank only, Holding Company has additional portfolio equity
of $7.5 million not shown in analysis, which if included, would reduce the %
changes.
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.
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.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Non-performing assets at September 30, 1998 were $.6 million, or .20% of total
assets, compared to the $1.2 million or .40% of total assets at September 30,
1997. The table below sets forth the amounts and categories of the Company's
non-performing assets.
<TABLE>
<CAPTION>
September 30,
-------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-performing loans:
One- to four-family real estate ........ $ 520 $ 780 $1,008 $ 784 $ 650
Multi-family and commercial real estate -- -- 78 -- --
Consumer* .............................. 71 137 283 251 --
------ ------ ------ ------ ------
Total ............................... 591 917 1,369 1,035 650
------ ------ ------ ------ ------
Troubled debt restructured loans:
Multi-family and commercial real estate -- -- -- -- --
------ ------ ------ ------ ------
Foreclosed assets, net:
One- to four-family real estate ........ 53 225 334 326 220
Multi-family and commercial real estate -- 23 23 158 158
------ ------ ------ ------ ------
Total ............................... 53 248 357 484 378
------ ------ ------ ------ ------
Total non-performing assets .............. $ 644 $1,165 $1,726 $1,519 $1,028
====== ====== ====== ====== ======
Total non-performing loans as a % of total
loans ................................... .42% .73% 1.10% .86% .54%
====== ====== ====== ====== ======
Total as a percentage of total assets .... .20% .40% .61% .66% .45%
====== ====== ====== ====== ======
</TABLE>
*Loans greater than 90 days past due and still accruing, principally student
loans.
The decrease in non-performing loans at September 30, 1998 as compared to
September 30, 1997 was attributable principally to the foreclosure of three
loans which resulted in the Company acquiring title to the mortgaged property.
The net realizable value of the properties, totaling $252,000, was transferred
to other real estate, and $58,000, representing the excess of the carrying value
of the related loan over the net realizable value of the property, was charged
against the allowance for loan losses. In addition, during the year ended
September 30, 1998, the Company sold nine parcels of other real estate which
reduced real estate owned by $447,000. The following table summarizes the
activity in other real estate for the periods presented:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Other real estate beginning of period ................ $ 248 $ 357
Transfer of loans to other real estate owned ......... 252 538
Sales of other real estate, net ...................... (447) (647)
----- -----
Other real estate end of period ...................... $ 53 $ 248
===== =====
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Additionally, at September 30, 1998, the Company has identified approximately
$311,000 in loans secured by real estate 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 $2.0 million, or 1.40% of period end loans at
September 30, 1998, and provided coverage of non-performing loans of 329.9%,
compared to coverage of 206.0% as of September 30, 1997. The following
summarizes the activity in the allowance for loan losses for the past five
years:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ............... $ 1,889 $ 1,833 $ 1,950 $ 1,746 $ 1,294
Charge-offs:
One- to four-family real estate ............ (58) (162) (237) (12) (3)
Multi-family and commercial real
estate ............................ -- (30) -- -- --
Consumer ................................... (90) (90) (86) (50) (29)
------- ------- ------- ------- -------
Total charge-offs ................... (148) (282) (323) (62) (32)
------- ------- ------- ------- -------
Recoveries:
One- to four-family real estate ............ -- 4 -- 1 14
Consumer ................................... 20 34 11 10 5
------- ------- ------- ------- -------
Total recoveries .................... 20 38 11 11 19
------- ------- ------- ------- -------
Net charge-offs .............................. (128) (244) (312) (51) (13)
Provision charged to operations .............. 189 300 195 255 465
------- ------- ------- ------- -------
Balance at end of period ..................... $ 1,950 $ 1,889 $ 1,833 $ 1,950 $ 1,746
======= ======= ======= ======= =======
Ratio of net charge-offs during the period to
average loans outstanding during the period .. .10% .19% .26% .04% .02%
======= ======= ======= ======= =======
Allowance for loan losses as a % of period-end
loans ........................................ 1.40% 1.50% 1.47% 1.61% 1.43%
======= ======= ======= ======= =======
</TABLE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1998
AND 1997
GENERAL
For the year ended September 30, 1998, the Company recorded net income of
$3,882,000, a decrease of $25,000 or .6%, compared to the year ended September
30, 1997. The decrease was principally caused by the Company's stock repurchase
program, which reduced the number of common shares outstanding but increased
interest expense as the Company increased borrowings to offset the reduction in
capital, as a funding source. In addition, net income for the fiscal year ended
September 30, 1997, benefitted from certain non-recurring items, which increased
net income by approximately $117,000. Basic and diluted earnings per share were
$.96 and $.93 respectively for the year ended September 30, 1998, compared to
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
basic and diluted earnings per share of $.84 and $.83 respectively for the year
ended September 30, 1997. Weighted average common shares - basic for the year
ended September 30, 1998, were 4,066,971, a decrease of 562,726 or 12.2% from
the 4,629,697 for the comparable period ended September 30, 1997. The decrease
was principally the share repurchase programs under which the Company, through
September 30, 1998, had purchased 1,516,049 shares or 26.7% of the shares issued
in its initial public offering. The aggregate cost to the Company was $23.8
million, or an average of $15.68 per common share repurchased.
Return on average assets for the years ended September 30, 1998 and 1997, was
1.30% and 1.40%, respectively, and return on average equity was 5.60% and 5.22%,
respectively.
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 on a tax equivalent basis for the year ended September 30,
1998, was $11.6 million, an increase of $186,000, or 1.6%, when compared to the
year ended September 30, 1997. The increase was primarily volume related as the
Company increased its average earning assets $17.3 million, more than offsetting
the increase in interest expense from the Company's funding of its stock
repurchase program. The Company funded the cost of the share repurchases, along
with its growth in earning assets principally with borrowings and, to a lesser
extent, deposit growth.
Interest income on a tax equivalent basis for the year ended September 30, 1998,
was $21.6 million, an increase of $1,345,000, or 6.6%, over the comparable year.
The increase was principally volume related, with average earning assets up
$17.3 million, or 6.3%. In addition, interest income benefitted from a
deliberate shift of asset mix, as the Company reduced its average federal funds
and other short-term investments and increased its mortgage-backed and municipal
securities portfolios. Average mortgage-backed and municipal securities
represented 30.7% and 5.8%, respectively, of average earning assets for the year
ended September 30, 1998, compared to 27.4% and less than .1% for the prior
year, while federal funds sold and other declined from 3.7% to less than .1% of
average earning assets between the periods. The average yield on mortgage-backed
securities during the year ended September 30, 1998, was 6.74%, down 35 basis
points from the comparable period, but still higher than the yield of 5.35%
earned on average federal funds sold in the year ended September 30, 1997.
Mortgage-backed securities yields declined 35 basis points principally from the
Company's purchase of Treasury indexed teaser rate ARM's, which yield much less
than the fully indexed rate. The Company's mortgage backed securities portfolio
had no teaser ARM's in fiscal 1997. Management purchased the ARM's to replace
run-off in its existing adjustable rate loan portfolio and expects the average
yield of these ARM's to increase as they
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
adjust to their fully indexed rate; however, the actual increase will depend
upon the level of the one year constant maturity treasury index when the rates
adjust. Average other securities increased $8.5 million, or 13.4%. In addition,
the tax equivalent yield on other securities increased 47 basis points to 7.21%,
as the Company has been purchasing longer call protected bank qualified
municipal securities to increase yields and reduce reinvestment risk if rates
decline.
Interest expense for the year ended September 30, 1998, was $10.0 million, an
increase of $1,159,000, or 13.2%. The increase was principally volume related as
the Company increased average interest bearing liabilities $23.0 million, or
11.7%. The increases were to fund the Company's share repurchase program, as
well as to fund earning asset growth.
Average long-term borrowings were $7.8 million, or 3.5% of average interest
bearing liabilities, as the Company converted a portion of its short-term
borrowings to long-term borrowings principally through convertible (callable)
advances. There were no long-term borrowings in the comparable period. Average
short-term borrowings increased $8.7 million, and now represent 5.1% of average
interest bearing liabilities. In addition, the Company's average CD's increased
$7.2 million, or 7.6%, as the Company's customers continue to move toward higher
costing CD's and away from lower costing deposits, such as savings and money
market accounts. The Company also experienced an increase of 6 basis points in
its cost of funds, principally caused by a change in the Company's funding mix
as borrowings and CD's, which represent the Company's highest cost funding
sources, now fund 41.7% of earning assets compared to 35.7% in the prior year.
This was partially offset by an 18 basis point decline in the rate paid on
savings accounts, as the Company reduced savings rates in response to the lower
market rates.
The Company's net yield on average earning assets was 3.99% for the year ended
September 30, 1998, down 18 basis points compared to 4.17% for the comparable
period of 1997. The decrease was principally caused by the Company's stock
repurchase program, which reduced the level of no-cost funding sources, and
consequently increased the amount of average earning assets funded by interest
bearing liabilities. For the year ended September 30, 1998, the Company had
$70.6 million of average earning assets with no funding costs, a decrease of
$5.7 million, or 7.5%, from the $76.3 million for the comparable period. The
Company also experienced a 3 basis point decrease in its spread principally from
the increase in leverage as the Company's borrowings, with higher average costs
than deposits, now represent 8.6% of its average funding mix, compared to only
1.3% in fiscal 1997.
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.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 $472
thousand in 1998 and $14 thousand in 1997; there were no tax equivalent
adjustments in 1996. 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.
<PAGE>
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1998 1997
------ ------
Average Interest Average Interest
Outstanding Earned/ Outstanding Earned/
Balance Paid Yield/Rate Balance Paid Yield/Rate
------- ---- ---------- ------- ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable................... $129,737 $ 10,345 7.97% $125,146 $ 10,083 8.06%
Mortgage backed securities......... 89,400 6,030 6.74 75,069 5,319 7.09
Securities......................... 72,058 5,197 7.21 63,521 4,283 6.74
Federal funds sold and other....... 68 4 5.88 10,214 546 5.35
-------- -------- ----- -------- -------- -----
Total interest-earning assets..... $291,263 21,576 7.41 $273,950 20,231 7.38
Non-interest bearing assets ....... 7,437 4,982
------- --------
Total Assets .................. $298,700 $278,932
======== ========
Interest-Bearing Liabilities:
Savings deposits................... $ 78,903 $ 2,620 3.32% $80,697 $ 2,821 3.50%
Certificate accounts............... 102,431 5,768 5.63 95,215 5,309 5.58
Money market....................... 6,341 198 3.12 7,418 242 3.26
NOW deposits....................... 11,650 268 2.30 9,667 237 2.45
Other(1)........................... 2,252 51 2.26 2,065 43 2.08
Short-term borrowings.............. 11,317 650 5.74 2,590 149 5.75
Long-term borrowings............... 7,802 405 5.19 --- ---
-------- ------- ------ -------- -------
Total interest-bearing liabilities 220,696 9,960 4.51 197,652 8,801 4.45
------- ----- ------- -----
Non-interest bearing liabilities .. 8,710 6,372
Shareholders' equity .............. 69,294 74,908
-------- --------
Total liabilities and equity ..... $298,700 $278,932
======== ========
Net interest income................. $ 11,616 $ 11,430
======== ========
Net interest rate spread............ 2.90% 2.93%
===== =====
Net earning assets.................. $ 70,567 $ 76,298
======== ========
Net yield on average interest-earning
assets............................. 3.99% 4.17%
===== =====
Average interest-earning assets to
average interest-bearing liabilities 131.97x 138.60x
====== ======
<PAGE>
<CAPTION>
Years Ended September 30,
-------------------------
1996
-----
Average Interest
Outstanding Earned/
Balance Paid Yield/Rate
------- ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-Earning Assets:
Loans receivable................... $121,105 $ 9,783 8.08%
Mortgage backed securities......... 19,541 1,462 7.48
Securities......................... 51,182 3,062 5.98
Federal funds sold and other....... 67,245 3,625 5.39
-------- -------- -----
Total interest-earning assets..... $259,073 17,932 6.92
--------
Non-interest bearing assets ....... 6,440
--------
Total Assets .................. $265,513
========
Interest-Bearing Liabilities:
Savings deposits................... $ 84,607 $ 2,962 3.50
Certificate accounts............... 92,699 5,218 5.63
Money market....................... 8,431 289 3.43
NOW deposits....................... 8,764 216 2.46
Other(1)........................... 11,451 337 2.94
Short-term borrowings.............. --- ---
Long-term borrowings............... --- ---
--------- --------
Total interest-bearing liabilitie $205,952 9,022 4.38
-------- -----
Non-interest bearing liabilities .. 7,186
Shareholders' equity .............. 52,375
--------
Total liabilities and equity ..... $265,513
========
Net interest income................. $ 8,910
=======
Net interest rate spread............ 2.54%
=====
Net earning assets.................. $ 53,121
========
Net yield on average interest-earning
assets............................. 3.44%
====
Average interest-earning assets to
average interest-bearing liabilities 125.79x
======
</TABLE>
(1) 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 3.5%
interest on those subscriptions, which was its savings deposit rate at
that time.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
average outstanding balances and 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,
---------------------------------------------------------------------------
1998 vs 1997 1997 vs 1996
---------------------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
----------------- Increase ----------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable........................ $ 377 $ (115) $ 262 $ 315 $ (15) $ 300
Mortgage-backed securities.............. 959 (248) 711 3,929 (72) 3,857
Securities.............................. 601 313 914 800 421 1,221
Federal funds........................... (602) 60 (542) (3,052) (27) (3,079)
------ ------ ------ ------ ----- ------
Total interest-earning assets......... $1,335 $ 10 $1,345 $1,992 $ 307 $2,299
====== ====== ====== ====== ===== ======
Interest-bearing liabilities:
Savings deposits........................ $ (61) $(140) $(201) $(141) --- $(141)
Certificate accounts.................... 410 49 459 135 (44) 91
Money market............................ (34) (10) (44) (33) (14) (47)
NOW deposits............................ 45 (14) 31 22 (1) 21
Other(1)................................ 4 4 8 (301) 7 (294)
Short-term borrowings .................. 501 --- 501 149 --- 149
Long-term borrowings ................... 405 --- 405 --- --- ---
------ ------ ------ ------ ----- ------
Total interest-bearing liabilities.... $1,270 $(111) $1,159 $(169) $(52) $(221)
------ ------ ------ ------ ----- ------
Net change in net interest income........ $ 186 $2,520
====== ======
</TABLE>
(1) 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 at that time of
3.5% on those subscriptions.
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.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The provision for loan losses was $189,000 for the year ended September 30,
1998, a decrease of $111,000 from the comparable period of 1997. The decrease
was primarily the result of a $116,000, or 47.5%, reduction in net charge-offs
to $128,000, or .10% of average loans, compared to $244,000, or .19% of average
loans in 1997. In addition, the Company has reduced its non-performing loans
$326,000, or 34.6% since September 30, 1997, so that the allowance now
represents 329.9% of non-performing loans at September 30, 1998, as compared to
206.0% at September 30, 1997.
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 its examination process, which may result in the establishment of an
additional allowance based upon its judgment of the information available to
them at the time of their examination.
NON-INTEREST INCOME
Non-interest income was $608,000 for the year ended September 30, 1998, an
increase of $96,000, or 18.8%, from the comparable period. The increase was
principally higher securities gains and service charge income, offset somewhat
by the reduction in Nationar recoveries. The increase in securities gains of
$124,000 was principally gains on securities called at a premium along with net
gains realized on securities sold for various balance sheet management purposes.
Service fees on deposit accounts increased $51,000, or 21.0%, principally from
the Company promoting checking accounts, which has substantially increased the
number of accounts. In the fiscal year ended September 30, 1997, the Company
recovered $100,000 from its Nationar loss reserve. There were no such recoveries
in the fiscal year ended September 30, 1998.
NON-INTEREST EXPENSE
Non-interest expense for the fiscal year ended September 30, 1998, was
$5,662,000, an increase of $475,000, or 9.2%, over the comparable fiscal year.
Increases in personnel, data processing and supply costs were somewhat offset by
reductions in advertising and professional fees.
Salaries and employee benefits for the fiscal year ended September 30, 1998,
increased $456,000, or 15.2%, principally from higher staffing and stock based
compensation costs as well as cost of implementing an executive supplemental
retirement plan. Furthermore, results for the fiscal year ended September 30,
1997, benefitted from an insurance refund, which reduced that period's medical
insurance costs. During that period, the Company changed insurance carriers and
received a refund of $95,000 due to favorable claims experience. There were no
such refunds in the comparable period ended September 30, 1998. Staffing costs
increased approximately $81,000 from hiring additional staff for our new full
service supermarket branch. In April 1998, the Company implemented an Executive
Supplemental Retirement Plan, which restores retirement benefits otherwise
capped by the Company's qualified pension plan. The cost of the new plan was
$40,000 in fiscal 1998. Stock based compensation costs increased
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
$84,000, or 11.0%. ESOP compensation increased $47,000, or 13.7%, due to an
increase in the average market price of the Company's common stock. The cost of
the MRP plan increased $37,000, or 8.8%, principally because the plan was only
outstanding for a portion of the fiscal year ended September 30, 1997, as the
plan was approved at a special meeting of shareholders on October 24, 1996
("special meeting"), and became effective immediately thereafter.
Data processing costs were $404,000, an increase of $47,000, or 13.2%, over the
$357,000 for fiscal 1997. The increases were principally volume related, as the
Company's new branches increased its customer base, as well as certain set-up
costs for the new branch. In addition, the Company expensed approximately $8,000
of its contractual commitment of $25,000 to set up its Year 2000 test sites.
Postage and supplies increased $58,000, or 24.3%, as the Company incurred
start-up and other promotional costs related to its new supermarket branch.
Advertising costs were $126,000, down $74,000, or 37.0%, as the Company has
migrated more of its marketing away from high cost newsprint, and more towards
radio campaigns. Professional fees were $232,000, a decrease of $30,000, or
11.4%, principally from the costs associated with the special meeting held in
the fiscal year ended September 30, 1997; there was no such meeting in the
fiscal year ended September 30, 1998.
INCOME TAX EXPENSE
Income tax expense for the fiscal year ended September 30, 1998, was $2,019,000,
a decrease of $515,000, or 20.3%, from the comparable period of 1997. The
Company's effective tax rates for the fiscal year ended September 30, 1998 and
1997, were 34.21% and 39.34%, respectively. The decrease in the effective tax
rate and approximately $289,000 of the decrease in income tax expense is
attributable to the Company's purchase of tax exempt securities, primarily bank
qualified municipal securities. In addition, income tax expense was down due to
the $540,000, or 8.4%, reduction in income before income taxes in the fiscal
year ended September 30, 1998.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1997
AND 1996.
GENERAL
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. Basic and dilutive earnings per common share for the year ended September
30, 1997, were $.84 and $.83, respectively, based on weighted average common
shares outstanding of 4,629,697 for basic, and 4,701,428 for dilutive. 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.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income on a tax equivalent basis 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 on a tax equivalent basis 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 liabilities were $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 fiscal 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.
PROVISION FOR LOAN LOSSES
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
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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%.
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.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INCOME TAXES
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.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability to generate cash flows to meet present and expected
future funding needs. Management monitors the Company's liquidity position on a
daily basis to evaluate its ability to meet expected and unexpected depositor
withdrawals and to make new loans and or investments. The Company, since
September 30, 1997, has reduced its high level of liquidity, but continues to
manage its balance sheet so there has been no need for unanticipated sales of
assets.
The primary sources of funds for operations are deposits, borrowings, principal
and interest payments on loans, mortgage backed securities and other securities
available for sale. If the Bank requires additional funds beyond its internal
ability to generate, it has additional borrowing capacity of $21.8 million with
the FHLB as well as collateral eligible for advances and/or repurchase
agreements.
Net cash provided by operating activities was $3.4 million for the fiscal year
ended September 30, 1998, a decrease of $2.3 million from the comparable period
last year. The decrease was principally the reduction in accrued expenses and
other liabilities caused by the change in official bank checks outstanding.
Official bank checks decreased principally as a result of the Company's payment
of real estate taxes for mortgage borrowers using escrowed funds earlier in
September 1998, than in September 1997.
Investing activities used $22.7 million in the fiscal year ended September 30,
1998, as the Company continued to leverage its balance sheet by increasing
earning assets, principally $9.0 million in securities, and $13.9 million in
loans. Financing activities provided $19.8 million, as the Company experienced
increases in deposits and borrowings, somewhat offset by the purchase of
treasury stock and payment of cash dividends on its common stock. For more
details concerning the Company's cash flows, see "Consolidated Statements of
Cash Flows."
An important source of the Company's funds is the Bank's core deposits.
Management believes that a substantial portion of the Bank's $210.0 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 as of September 30, 1998, deposit accounts having balances in
excess of $100,000 totaled $21.7 million, or less than 10.3%, 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 4% and for the month of September 1998, the Bank exceeded that,
maintaining an average liquidity ratio of 10.52%.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company anticipates that it will have sufficient funds to meet its current
commitments. At September 30, 1998, the Company had commitments to originate
loans of $4.8 million. In addition, the Company had undrawn commitments of $2.8
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, 1998, totaled $78.6
million, and management believes that a significant portion of such deposits
will remain with the Company.
IMPACT OF THE YEAR 2000
The Year 2000 ("Y2K") issue confronting the Company and its suppliers,
customers, customers' suppliers and competitors centers on the inability of
computer systems to recognize the year 2000. Many existing computer programs and
systems originally were programmed with six digit dates that provided only two
digits to identify the calendar year in the date field. With the impending new
millennium, these programs and computers will recognize "00" as the year 1900
rather than the year 2000.
Substantially, all of the Company's mission critical systems are outsourced or
are purchased software packages. As a result, much of the remediation and
testing process is dependent on the accuracy of work performed by, and the Year
2000 compliance of software, hardware and firmware and equipment provided by,
vendors. The Company has initiated discussions with its vendors and monitored
their Year 2000 compliance programs and the compliance of their products or
services with required standards. The Company received guidance from its primary
service provider, including a $25,000 cost to be passed along to the Company as
a "validation" fee. So far, the Company has expensed approximately $20,000, of
the estimated Y2K project cost of $100,000. The Company has written the majority
of its testing scripts, which are quite extensive and will involve end-to-end
testing, which is scheduled to begin in November 1998. In addition, the Company
has now determined that one of its modules will not be supported for Year 2000
compliance and will require migrating to upgraded versions. Upgraded programs
are now available, and the Company has already purchased and expects to install
the system, which will cost approximately $50,000, in February 1999. The Company
expects its mission critical systems to be compliant by June 1999, and all
others by September 1999.
The Company expects that when the century changes, disruption in service will
come not from a failure of its systems or the systems of the providers with whom
it interfaces, but rather from outside agencies (i.e. electric and telephone
companies) beyond its control. Therefore, contingency planning and business
resumption planning will be based on the Company's formal Disaster Recovery
Program, which includes using such things as spreadsheet software or reverting
to manual systems until problems can be corrected.
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
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
extent as the price of goods and services. However, in general, high inflation
rates are accompanied by higher interest rates, and vice versa.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") 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 1999 annual consolidated financial
statements.
In June 1997, the FASB 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 1999 annual consolidated financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Post-Retirement Benefits," ("SFAS No. 132") which amends the
disclosure requirements of SFAS No. 87, "Employers' Accounting for Pensions,"
SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits," and SFAS No. 106,
"Employers' Accounting for Post-Retirement Benefits Other Than Pensions." SFAS
No. 132 standardizes the disclosure requirements of Statements No. 87 and No.
106 to the extent practicable and recommends a parallel format for presenting
information about pensions and other post-retirement benefits. This statement is
applicable to all entities and addresses disclosure only. The statement does not
change any of the measurement or recognition provisions provided for in
Statements No. 87, No. 88, or No. 106. The statement is effective for fiscal
years beginning after December 15, 1997. Management anticipates developing the
required information for inclusion in the 1999 annual consolidated financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. Management will be
reviewing the statement to determine what impact, if any, this statement will
have on its accounting or disclosures.
27
<PAGE>
INDEPENDENT AUDITORS' 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, 1998 and 1997, and the related statements of income, changes in
shareholders' equity and cash flows for each of the years in the three-year
period ended September 30, 1998. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 1998, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
October 21, 1998
Albany, New York
28
<PAGE>
<TABLE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
(in thousands, except for share amounts)
<CAPTION>
September 30
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Assets
Cash and due from banks ........................................... $ 2,795 2,274
Securities available for sale, at fair value ...................... 164,983 148,114
Investment securities held to maturity (estimated fair value of
$2,106 in 1998 and $8,112 in 1997) ............................ 2,060 8,055
Stock in Federal Home Loan Bank of NY, at cost .................... 1,954 1,762
Loans receivable, (net) ........................................... 137,785 124,337
Accrued interest receivable ....................................... 2,398 2,303
Premises and equipment, net ....................................... 2,522 2,367
Real estate owned ................................................. 53 248
Other assets ...................................................... 202 159
--------- ---------
Total assets ............................................ $ 314,752 289,619
========= =========
<PAGE>
<CAPTION>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
(in thousands, except for share amounts)
September 30
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Liabilities and Shareholders' Equity
Liabilities:
Due to depositors:
Non-interest bearing .......................................... 6,009 4,370
Interest bearing .............................................. 203,968 196,542
--------- ---------
Total deposits .......................................... 209,977 200,912
Short-term borrowings ............................................. 6,840 11,385
Long-term borrowings .............................................. 25,000 --
Advance payments by borrowers for taxes and insurance ............. 673 533
Accrued interest payable .......................................... 288 59
Official bank checks .............................................. 1,986 3,861
Accrued expenses and other liabilities ............................ 2,157 1,092
--------- ---------
Total liabilities ....................................... 246,921 217,842
--------- ---------
Commitments and contingent liabilities
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, 1998 and 1997 ..... 57 57
Additional paid-in capital .................................... 54,974 54,811
Retained earnings, substantially restricted ................... 37,374 34,915
Common stock acquired by ESOP ................................. (3,981) (4,209)
Unearned management recognition plan (MRP) .................... (1,433) (1,856)
Treasury stock, at cost (1,328,416 shares at September 30, 1998
and 848,244 shares at September 30, 1997) .................. (21,223) (12,862)
Net unrealized gain (loss) on securities available for sale,
net of tax ................................................. 2,063 921
--------- ---------
Total shareholders' equity .............................. 67,831 71,777
--------- ---------
Total liabilities and shareholders' equity .............. $ 314,752 289,619
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
Years ended September 30, 1998, 1997 and 1996
(in thousands, except for share amounts)
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Interest and dividend income:
Loans ......................................... $ 10,345 10,083 9,783
Securities available for sale:
Taxable .................................... 9,347 8,747 2,201
Non-taxable ................................ 1,016 58 --
Investment securities held to maturity ........ 255 688 2,282
Federal funds sold and other .................. 4 546 3,625
Stock in Federal Home Loan Bank of NY ......... 137 95 41
-------- -------- --------
Total interest and dividend income ......... 21,104 20,217 17,932
Interest expense:
Deposits ...................................... 8,905 8,652 9,022
Short-term borrowings ......................... 650 149 --
Long-term borrowings .......................... 405 -- --
-------- -------- --------
Total interest expense ..................... 9,960 8,801 9,022
-------- -------- --------
Net interest income ........................ 11,144 11,416 8,910
Provision for loan losses ......................... 189 300 195
-------- -------- --------
Net interest income after provision for loan
losses .................................. 10,955 11,116 8,715
-------- -------- --------
Noninterest income:
Recovery of Nationar loss contingency ......... -- 100 560
Service fees on deposit accounts .............. 294 243 218
Net securities gains .......................... 143 19 33
Other income .................................. 171 150 185
-------- -------- --------
Total noninterest income ................... 608 512 996
-------- -------- --------
<PAGE>
<CAPTION>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
Years ended September 30, 1998, 1997 and 1996
(in thousands, except for share amounts)
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Noninterest expenses:
Salaries and employee benefits ................ 3,452 2,996 2,173
Advertising and business promotion ............ 126 200 137
Net occupancy on premises ..................... 354 329 251
Federal deposit insurance premium ............. 24 20 21
Postage and supplies .......................... 297 239 171
Outside data processing fees .................. 404 357 337
Equipment ..................................... 173 177 153
Professional fees ............................. 232 262 210
Other real estate expenses, net ............... (57) (54) 211
Other ......................................... 657 661 594
-------- -------- --------
Total noninterest expense .................. 5,662 5,187 4,258
-------- -------- --------
Income before taxes ............................... 5,901 6,441 5,453
Income tax expense ................................ 2,019 2,534 2,136
-------- -------- --------
Net income ................................. $ 3,882 3,907 3,317
======== ======== ========
Basic earnings per share .......................... $ .95 .84 .38
======== ======== ========
Diluted earnings per share ........................ $ .93 .83 .38
======== ======== ========
</TABLE>
For 1996, earnings per share amounts are calculated using post conversion net
income (see note 1)
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
Years ended September 30, 1998, 1997 and 1996
(dollars in thousands, except for share amounts)
Retained Common Unearned
Additional earnings, stock management
Shares Common paid-in substantially acquired recognition
issued stock capital restricted by ESOP plan
------------ ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 -- $ -- -- 28,667 -- --
Net income -- -- -- 3,317 -- --
Common stock issued 5,686,750 57 54,858 -- -- --
Acquisition of common stock by ESOP
(454,940 shares) -- -- -- -- (4,549) --
Allocation of ESOP stock (11,374 shares) -- -- 6 -- 113 --
Change in net unrealized gain (loss) on securities
available for sale, net of tax -- -- -- -- -- --
------------ ----------- ----------- ----------- ----------- -----------
Balance at September 30, 1996 5,686,750 57 54,864 31,984 (4,436) --
Net income -- -- -- 3,907 -- --
Dividends paid on common stock ($.21 per share) -- -- -- (976) -- --
Purchases of common stock (1,029,476 shares) -- -- -- -- -- --
Allocation of ESOP stock (22,722 shares) -- -- 115 -- 227 --
Change in net unrealized gain (loss) on
securities available for sale, net of tax -- -- -- -- -- --
Grant of restricted stock under MRP
(181,232 shares) -- -- (168) -- -- (2,275)
Amortization of unearned MRP compensation -- -- -- -- -- 419
------------ ----------- ------------------------ ----------- -----------
Balance at September 30, 1997 5,686,750 57 54,811 34,915 (4,209) (1,856)
Net income -- -- -- 3,882 -- --
Dividends paid on common stock ($.33 per share) -- -- -- (1,394) -- --
Purchases of common stock (486,573 shares) -- -- -- -- -- --
Allocation of ESOP stock (22,747 shares) -- -- 161 -- 228 --
Change in net unrealized gain (loss) on
securities available for sale, net of tax -- -- -- -- -- --
Grant of restricted stock under MRP
(2,000 shares) -- -- 2 -- -- (33)
Exercise of stock options (4,401 shares
issued, net) -- -- -- (29) -- --
Amortization of unearned MRP compensation -- -- -- -- -- 456
------------ ----------- ----------- ----------- ----------- -----------
Balance at September 30, 1998 5,686,750 $ 57 54,974 37,374 (3,981) (1,433)
============ =========== =========== =========== =========== ===========
<PAGE>
<CAPTION>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
Years ended September 30, 1998, 1997 and 1996
(dollars in thousands, except for share amounts)
Net realized
gain (loss) on
securities
Treasury available
stock, for sale,
at cost net of tax Total
----------- ----------- ------------
<S> <C> <C> <C>
Balance at September 30, 1995 -- -- 28,667
Net income -- -- 3,317
Common stock issued -- -- 54,915
Acquisition of common stock by ESOP
(454,940 shares) -- -- (4,549)
Allocation of ESOP stock (11,374 shares) -- -- 119
Change in net unrealized gain (loss) on
securities available for sale, net of tax -- (88) (88)
----------- ----------- ------------
Balance at September 30, 1996 -- (88) 82,381
Net income -- -- 3,907
Dividends paid on common stock ($.21 per share) -- -- (976)
Purchases of common stock (1,029,476 shares) (15,305) -- (15,305)
Allocation of ESOP stock (22,722 shares) -- -- 342
Change in net unrealized gain (loss) on
securities available for sale, net of tax -- 1,009 1,009
Grant of restricted stock under MRP
(181,232 shares) 2,443 -- --
Amortization of unearned MRP compensation -- -- 419
----------- ----------- ------------
Balance at September 30, 1997 (12,862) 921 71,777
Net income -- -- 3,882
Dividends paid on common stock $.33 per share) -- -- (1,394)
Purchases of common stock (486,573 shares) (8,459) -- (8,459)
Allocation of ESOP stock (22,747 shares) -- -- 389
Change in net unrealized gain (loss) on
securities available for sale, net of tax -- 1,142 1,142
Grant of restricted stock under MRP
(2,000 shares) 31 -- --
Exercise of stock options (4,401 shares
issued, net) 67 -- 38
Amortization of unearned MRP compensation -- -- 456
----------- ----------- ------------
Balance at September 30, 1998 (21,223) 2,063 67,831
=========== =========== ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended September 30, 1998, 1997 and 1996
(in thousands)
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income .............................................................. $ 3,882 3,907 3,317
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation ...................................................... 222 183 136
Provision for loan losses ......................................... 189 300 195
Recovery of Nationar
loss contingency ............................................... -- (100) (560)
MRP compensation expense .......................................... 456 419 --
ESOP compensation expense ......................................... 389 342 119
Writedown on real estate owned .................................... -- -- 134
Loss (gain) on sale of other real
estate owned ................................................... (70) (140) 85
Gain on sales and calls of securities ............................. (143) (19) (33)
Net accretion on securities ....................................... (43) (157) (308)
Deferred tax benefit .............................................. (188) (156) (151)
Collection of deposits held at Nationar ........................... -- 183 3,083
Net increase in other assets ...................................... (138) (551) (149)
Net increase (decrease) in accrued
expenses and other liabilities ................................. (1,154) 1,502 25
-------- -------- --------
Net cash provided by operating
activities ................................................ 3,402 5,713 5,893
Cash flows from investing activities:
Proceeds from maturity, paydowns, and
calls of investment securities held to maturity ...................... 6,007 11,023 28,884
Proceeds from maturity, paydowns, and
calls of securities available for sale ............................... 50,728 64,415 126,656
Proceeds from sales of securities available
sale ................................................................. 15,446 5,959 --
Purchases of investment securities held to maturity ..................... -- -- (6,015)
Purchase of Federal Home Loan Bank
Stock ................................................................ (192) (603) (1,159)
Purchases of securities available for sale .............................. (80,966) (119,590) (198,359)
Net increase in loans ................................................... (13,889) (2,642) (4,570)
Capital expenditures, net ............................................... (377) (664) (290)
Proceeds from sale of other real estate
owned ................................................................ 517 787 114
-------- -------- --------
Net cash used by investing activities ....................... (22,726) (41,315) (54,739)
<PAGE>
<CAPTION>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended September 30, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in demand,
statement, passbook, money market
and NOW deposit accounts ................................................ $ 1,058 (2,523) (1,814)
Net increase in certificates of deposit .................................... 8,007 6,682 1,337
Increase (decrease) in advances from
borrowers for taxes and insurance ....................................... 140 (1,099) 605
Net proceeds from sale of common stock ..................................... -- -- 54,915
Common stock acquired by ESOP .............................................. -- -- (4,549)
Cash dividends on common stock ............................................. (1,394) (976) --
Net proceeds from the exercise of stock
options ................................................................. 38 -- --
Purchase of common stock for treasury ...................................... (8,459) (15,305) --
Net increase (decrease) in short-term ...................................... (4,545) 11,385 --
borrowings
Increase in long-term borrowings ........................................... 25,000 -- --
-------- -------- --------
Net cash (used) provided by
financing activities .............................................. 19,845 (1,836) 50,494
Net increase (decrease) in cash and cash
equivalents ................................................................ 521 (37,438) 1,648
Cash and cash equivalents at beginning
of year .................................................................... 2,274 39,712 38,064
-------- -------- --------
Cash and cash equivalents at end of year ....................................... $ 2,795 2,274 39,712
======== ======== ========
Supplemental disclosures of cash flow information -
cash paid during the year for:
Interest ............................................................. $ 9,731 8,800 9,018
======== ======== ========
Income taxes ......................................................... $ 2,062 2,770 2,274
======== ======== ========
<PAGE>
<CAPTION>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended September 30, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Noncash investing activities:
Reduction in loans receivable, net resulting
from the transfer to real estate owned ................................. $ 252 538 206
======== ======== ========
Investment securities transferred to securities available for sale in
accordance with the Financial Accounting Standards Board's "Special
Reports," fair value of securities transferred was $25,300 .............. $ -- -- 24,800
======== ======== ========
Change in net unrealized gain (loss) on
securities available for sale, net of
change in deferred tax of $761, $673
and ($59) respectively .................................................. $ 1,142 1,009 (88)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1998, 1997 and 1996
(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 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. In the "Parent Company Only" financial
statements, the investment in the Bank is carried under the equity
method of accounting.
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 and 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.
34
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
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 for loan losses
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 Held to
Maturity 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 held to maturity 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, Net
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.
35
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
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.
36
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
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, 1998 and 1997, real estate owned consisted
primarily of residential one to four family properties. The
Company had no in-substance foreclosures at September 30, 1998 and
1997.
(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 bases. 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. In considering if it
is more likely than not that some or all of the deferred tax
assets will not be realized, the Company considers temporary
taxable differences, historical taxes and estimates of future
taxable income.
(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."
37
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(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 plan 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 over
the respective vesting periods. Any difference in the cost of
treasury stock used to fund the MRP is recorded through
shareholders' equity.
38
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(m) Earnings per Share
On December 31, 1997, the Company adopted the provisions of SFAS
No. 128, "Earnings per Share," which establishes standards for
computing and presenting earnings per share. SFAS No. 128
supercedes Accounting Principles Board Opinion No. 15, "Earnings
per Share" and related interpretations. SFAS No. 128 requires dual
presentation of basic and diluted earnings per share on the face
of the income statement for all entities with a complex capital
structure and specifies additional disclosure requirements. Basic
earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average
number of common shares outstanding for the period. Unvested
restricted stock is considered outstanding and included in the
computation of basic earnings per share as of the date they are
fully vested. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in
the earnings of the entity, such as the Company's stock options
and unvested restricted stock. SFAS No. 128 requires restatement
of all prior period earnings per share data presented. Unallocated
ESOP shares are not included in the weighted average number of
common shares outstanding for either the basic or diluted earnings
per share calculations. The adoption of SFAS No. 128 did not have
a material effect on the Company's consolidated financial position
or results of operations.
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) 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.
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.
39
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
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, 1998, the maximum amount that could have been
paid by the Bank to the Holding Company was approximately $23.4 million.
Unlike the Bank, the Holding Company is not subject to these regulatory
restrictions on the payment of dividends to its stockholders.
(3) Earnings Per Share
The following sets forth certain information regarding the calculation of
basic and diluted earnings per share (EPS) for the years ended September
30:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(In thousands, except share and per share data)
<S> <C> <C> <C>
Net income ............................... $ 3,882 3,907 3,317
========== ========== ==========
Weighted average common shares ........... 4,066,971 4,629,697 5,231,810
Dilutive effect of potential common shares
related to stock based compensation
plans ............................... 120,762 71,731 --
---------- ---------- ----------
Weighted average common shares including
potential dilution .................. 4,187,733 4,701,428 5,231,810
========== ========== ==========
Basic earnings per share ................. $ .95 .84 .38
Diluted earnings per share ............... .93 .83 .38
</TABLE>
For 1996, earnings per share were compiled using estimated post
conversion net income of approximately $2.0 million.
(4) 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 $493,000 and $386,000 at September 30, 1998 and
1997, 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, 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.
40
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(5) Securities Available for Sale
The amortized cost and estimated fair values of securities available for
sale at September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Cost gains losses value
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and other
U.S. Government
agencies ........................................ $ 19,990 479 -- 20,469
Mortgage backed
securities ...................................... 88,670 2,264 (5) 90,929
Corporate bonds ................................... 16,230 293 (297) 16,226
Obligations of states
and political
subdivisions .................................... 34,414 536 (35) 34,915
Other ............................................. 2,242 202 -- 2,444
-------- -------- -------- --------
Total securities
available for sale ........................... $161,546 3,774 (337) 164,983
======== ======== ======== ========
<PAGE>
<CAPTION>
1997
----------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Cost gains losses value
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and other
U.S. Gov- ernment
agencies ........................................ $ 54,875 417 (59) 55,233
Mortgage backed
securities ...................................... 83,786 1,069 (61) 84,794
Corporate bonds ................................... 5,042 40 (12) 5,070
Obligations of states
and political
subdivisions .................................... 194 9 -- 203
Other ............................................. 2,682 132 -- 2,814
-------- -------- -------- --------
Total securities
available for sale ........................... $146,579 1,667 (132) 148,114
======== ======== ======== ========
During the years ended September 30, 1998 and 1997, proceeds from sales
of securities available for sale were $15.4 and $6.0 million,
respectively. Gross gains realized on these transactions were
approximately $150 thousand and $19 thousand, respectively. There were $7
thousand in gross realized losses in 1998 and no gross realized losses in
1997. There were no sales of securities available for sale during the
year ended September 30, 1996.
41
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The amortized cost and estimated fair value of securities available for
sale at September 30, 1998, 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.
September 30, 1998
-----------------------
Amortized Estimated
Cost fair value
-------- ----------
(in thousands)
<S> <C> <C>
Due within one year .............................. $ 1,998 2,002
Due one year to five years ....................... 7,646 7,730
Due five years to ten years ...................... 20,376 21,037
Due after ten years .............................. 131,526 134,214
-------- --------
Total securities available for sale ......... $161,546 164,983
======== ========
</TABLE>
(6) Investment Securities Held to Maturity
The amortized cost and estimated fair value of investment securities held
to maturity at September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Cost gains losses value
------ ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and other
U.S. Government
agencies ........................................ $1,964 46 -- 2,010
Corporate bonds ................................... -- -- -- --
Mortgage backed
securities ...................................... 96 -- -- 96
------ ------ ------ ------
Total investment
securities ...................................... $2,060 46 -- 2,106
====== ====== ====== ======
<PAGE>
<CAPTION>
1997
---------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Cost gains losses value
------ ------ ------ ------
(in thousands)
<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>
42
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The amortized cost and estimated fair value of investment securities held
to maturity at September 30, 1998, 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
Cost fair value
---- ----------
(in thousands)
<S> <C> <C>
Due within one year .............................. $1,964 2,010
Due one year to five years ....................... -- --
Due after five years to ten years ............... -- --
Due after ten years .............................. 96 96
------ ------
Totals ....................................... $2,060 2,106
====== ======
</TABLE>
There were no sales of investment securities held to maturity during the
years ended September 30, 1998, 1997 or 1996.
<PAGE>
(7) Loans Receivable, Net
Loans receivable consist of the following at September 30, 1998 and 1997:
<TABLE>
<CAPTION>
September 30,
----------------------
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Loans secured by real estate:
Conventional one- to four-family .............. $113,363 102,145
Commercial and multi-family ................... 6,389 4,691
FHA and VA insured loans ...................... 60 87
Construction .................................. 1,182 1,306
-------- --------
Total loans secured by real estate ........ 120,994 108,229
-------- --------
Commercial loans ................................... 602 63
-------- --------
Consumer loans:
Student loans ................................. 2,795 2,658
Automobile loans .............................. 6,301 6,655
Secured/unsecured ............................. 3,165 2,698
Mobile home ................................... 535 687
Passbook loans ................................ 1,091 952
Home improvement .............................. 848 935
Home equity ................................... 3,490 3,709
Other ......................................... 174 116
-------- --------
Total consumer loans ...................... 18,399 18,410
-------- --------
Less:
Net deferred loan fees ................. 260 476
Allowance for loan losses .............. 1,950 1,889
-------- --------
2,210 2,365
-------- --------
$137,785 124,337
======== ========
</TABLE>
43
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Activity in the allowance for loan losses is summarized as follows for
the years ended:
<TABLE>
<CAPTION>
September 30,
-----------------------------------
1998 1997 1996
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Balance at beginning of period ....... $ 1,889 1,833 1,950
Provision charged to operations ...... 189 300 195
Charge-offs .......................... (148) (282) (323)
Recoveries ........................... 20 38 11
------- ------- -------
Balance at end of period ............. $ 1,950 1,889 1,833
======= ======= =======
</TABLE>
The following table sets forth the information with regard to
non-performing loans:
<TABLE>
<CAPTION>
September 30,
-----------------------------
1998 1997 1996
----- ----- -----
(in thousands)
<S> <C> <C> <C>
Loans in a non-accrual status .............. $ 520 780 1,086
Loans past due 90 days and still
accruing .............................. 71 137 283
Restructured loans ......................... -- -- --
----- ----- -----
Total non-performing loans ............ $ 591 917 1,369
===== ===== =====
</TABLE>
For the years ended September 30, 1998, 1997 and 1996, interest income
that would have been recorded on non-performing loans had they remained
performing amounted to approximately $28 thousand, $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, 1998 and 1997.
As of September 30, 1998 and 1997, there was no recorded investment in
loans that were considered to be impaired under SFAS No. 114. During
1998, 1997 and 1996, the average balance of impaired loans was
approximately $0, $3,000, and $78,000, respectively. Interest income
recorded on impaired loans during fiscal 1997 and 1996 was approximately
$0 and $2,000, respectively, all of which was collected.
<PAGE>
(8) Accrued Interest Receivable
Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
September 30,
----------------------
1998 1997
------ ------
(in thousands)
<S> <C> <C>
Investment securities .......................... $ 21 111
Securities available for sale .................. 1,521 1,374
Loans .......................................... 856 818
------ ------
$2,398 2,303
====== ======
</TABLE>
44
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(9) Premises and Equipment, Net
A summary of premises and equipment is as follows:
<TABLE>
<CAPTION>
September 30,
----------------------
1998 1997
------ ------
(in thousands)
<S> <C> <C>
Banking house and land ........................... $2,580 2,357
Furniture, fixtures and equipment ................ 817 785
------ ------
3,397 3,142
Less accumulated depreciation .................... 875 775
------ ------
Premises and equipment, net ................. $2,522 2,367
====== ======
</TABLE>
Amounts charged to depreciation expense were approximately $222 thousand,
$183 thousand, and $136 thousand for the years ended September 30, 1998,
1997 and 1996, respectively.
(10) Due to Depositors
Due to depositors are summarized as follows as of September 30, 1998 and
1997:
<TABLE>
<CAPTION>
Approximate
Stated September 30,
Rates 1998 1997
----------- -------- -------
(in thousands)
<S> <C> <C> <C>
Passbook savings accounts 1998 - 3.20% $ 66,208 71,060
1997 - 3.50%
Statement savings accounts 1998 - 3.54% 11,867 8,388
1997 - 3.50%
Certificates of deposit:
3.00 - 3.99% - 20
4.00 - 4.99% 1,324 -
5.00 - 5.99% 105,666 88,416
6.00 - 6.99% 558 8,737
7.00 - 7.99% - 2,368
-------- -------
107,548 99,541
-------- -------
Money market accounts 1998 - 1.98-2.96% 5,949 7,115
1997 - 2.50-3.20%
NOW accounts 1998 - 1.98% 12,396 10,438
1997 - 2.50%
Non-interest bearing accounts -- 6,009 4,370
-------- -------
Total deposits $209,977 200,912
======== =======
</TABLE>
45
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The approximate amount of contractual maturities of certificates of
deposit for the years subsequent to September 30, 1998 are as follows:
(in thousands)
Years ended September 30,
1999 $ 78,646
2000 15,544
2001 8,738
2002 1,509
2003 1,546
Thereafter 1,565
--------
$107,548
========
The aggregate amount of time deposit accounts with a balance of $100,000
or more (not federally-insured beyond $100,000) were approximately $12.3
million and $8.2 million at September 30, 1998 and 1997, respectively.
Interest expense on deposits and advances from borrowers for property
taxes and insurance (escrow balances) for the years ended September 30,
1998, 1997 and 1996, is summarized as follows:
<TABLE>
<CAPTION>
September 30,
1998 1997 1996
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Passbook savings accounts .................. $2,263 2,544 2,702
Statement savings accounts ................. 357 277 260
Certificates of deposit .................... 5,768 5,309 5,218
Money market accounts ...................... 198 242 289
NOW accounts ............................... 268 237 216
Escrow balances (including common
stock subscriptions) .................... 51 43 337
------ ------ ------
Total interest expense .............. $8,905 8,652 9,022
====== ====== ======
</TABLE>
Interest expense on escrow balances for the year ended September 30, 1996
includes interest expense on common stock subscriptions held in
connection with the Company's initial public offering.
(11) Income Taxes
The components of income tax expense are as follows for the years ended
September 30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
September 30,
1998 1997 1996
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Current tax expense:
Federal ......................... $ 1,720 2,111 1,605
State ........................... 487 579 682
------- ------- -------
2,207 2,690 2,287
Deferred tax benefit ................. (188) (156) (151)
------- ------- -------
Total income tax expense ........ $ 2,019 2,534 2,136
======= ======= =======
</TABLE>
46
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Actual tax expense for the years ended September 30, 1998, 1997 and 1996
differs from expected tax expense, computed by applying the Federal
corporate tax rate of 34% to income before taxes is as follows:
<TABLE>
<CAPTION>
September 30,
1998 1997 1996
---- ---- ----
% Pretax % Pretax % Pretax
Amount income Amount income Amount income
------- ---- ------- ---- ------- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Expected tax expense .......... $ 2,006 34.0% $ 2,190 34.0% $ 1,854 34.0%
State taxes, net of Federal
income tax benefit ....... 351 5.9 380 5.9 333 6.1
Tax-exempt interest income .... (289) (4.9) -- -- -- --
Reduction in valuation
allowance for deferred tax
assets ................... -- -- -- -- (131) (2.4)
Other items ................... (49) (.8) (36) (.6) 80 1.5
------- ---- ------- ---- ------- ----
$ 2,019 34.2% $ 2,534 39.3% $ 2,136 39.2%
======= ==== ======= ==== ======= ====
</TABLE>
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, are as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses ............................ $ 447 329
Postretirement benefits .............................. 240 175
Nonqualified deferred compensation ................... 142 100
Loan accounting differences .......................... 78 103
MRP compensation expense ............................. 184 180
Other items .......................................... 25 48
------ ------
Total deferred tax assets ..................... 1,116 935
Valuation reserve .................................... 150 150
------ ------
Deferred tax asset net of valuation reserve .......... 966 785
------ ------
Deferred tax liabilities:
Bond accretion ....................................... 57 86
Prepaid pension ...................................... 40 14
Other items .......................................... 102 106
------ ------
Total deferred tax liabilities ................ 199 206
------ ------
Net deferred tax assets at end of period ............. 767 579
Net deferred tax asset at beginning of period ........ 579 423
------ ------
Deferred tax benefit for year ........................ $ 188 156
====== ======
</TABLE>
In addition to the deferred tax amounts described above, the Company also
had deferred tax liabilities of approximately $1,374 thousand and $614
thousand at September 30, 1998 and 1997, respectively related to the net
unrealized gains and losses on securities available for sale.
47
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The valuation allowance for deferred tax assets as of September 30, 1998
and 1997 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, 1998 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, 1998 with respect to the Federal and State
base-year reserves were approximately $1.2 million and $446 thousand (net
of Federal benefit), respectively.
48
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(12) 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 1 year of service with the
exception of employees who work less than 1,000 hours. Benefits
are computed as two percent of the highest three year average
annual earnings during the last five years of service 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 5 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, 1998 and 1997:
<PAGE>
<TABLE>
<CAPTION>
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $2,889 in 1998 and $2,387 in 1997 ........ $(2,896) (2,389)
======= =======
Projected benefit obligation for service rendered to
date ................................................. (3,638) (3,041)
Plan assets at fair value .............................. 4,153 4,263
------- -------
Plan assets in excess of projected benefit obligation .. 515 1,222
Unrecognized net gain from past experience different
from that assumed and effects of changes in
assumptions .......................................... (283) (1,056)
Unrecognized prior service cost ........................ 56 70
Unrecognized net asset being recognized over 12.5
years ................................................ (43) (61)
------- -------
Prepaid pension cost ................................... $ 245 175
======= =======
</TABLE>
49
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Components of net periodic pension cost for the years ended
September 30, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(in thousands)
<S> <C> <C> <C>
Service cost-benefits earned
during the period ..................... $ 96 83 91
Interest cost on estimated
projected benefit obligation .......... 230 214 215
Expected return on plan
assets ................................ (337) (283) (452)
Net amortization and
deferral .............................. (60) (29) 198
----- ----- -----
Net periodic pension cost
(credit) .............................. $ (71) (15) 52
===== ===== =====
</TABLE>
Significant assumptions used in determining the actuarial present
value of the projected benefit obligation at September 30, 1998,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Weighted average discount
rate .................................. 6.75% 7.50% 7.75%
Increase in future
compensation .......................... 4.50% 5.00% 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 1998, 1997 and 1996 was $47
thousand, $37 thousand, and $34 thousand, respectively.
(c) Executive Supplemental Retirement Plan
During fiscal 1998, the Company adopted an Executive Supplemental
Retirement Plan for the Chief Executive Officer. An expense of
approximately $40,000 was recorded in fiscal 1998.
(d) 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.
50
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to 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, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------ ------
(in thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees ............................................. $ (482) (598)
Fully-eligible active plan participants .............. (128) (100)
Other active plan participants ....................... (293) (481)
------ ------
Total APBO ...................................... (903) (1,179)
Unrecognized transition obligation ....................... 903 957
Unrecognized (gain) loss ................................. (556) (183)
------ ------
Accrued postretirement benefit cost included in
other liabilities ...................................... $ (556) (405)
====== ======
</TABLE>
Net periodic postretirement benefit cost for the years ended
September 30, 1998, 1997 and 1996 include the following
components:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Service cost ............................... $ 52 52 42
Interest cost .............................. 89 103 90
Net amortization and deferral .............. 50 54 54
---- ---- ----
Net periodic postretirement
benefit cost ........................... $191 209 186
==== ==== ====
</TABLE>
The discount rate used in determining the accumulated
postretirement benefit obligation was 6.75%, 7.50% and 7.75% at
September 30, 1998, 1997 and 1996, respectively. For measurement
purposes at September 30, 1998, an 6.5% 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 5.0% by 2002 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, 1998 by
approximately 14.1% and the aggregate of the service and interest
cost components of the net periodic postretirement benefit cost by
approximately 19.5%.
51
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(13) 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 Holding
Company and used the funds to purchase 454,940 shares, or 8% of
the common stock of the Holding Company issued in the conversion.
The shares are pledged as collateral for the loan. The loan will
be repaid principally from the Bank's discretionary contributions
to the ESOP over a period of twenty years. At September 30, 1998
and 1997, the loan had an outstanding balance of $4.2 million and
$4.4 million, respectively. The interest rate on the loan is
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 generally allocated among participants on the
basis of compensation in the year of allocation.
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 not included in the
earnings per share computations. The Company recorded
approximately $389 thousand, $342 thousand and $119 thousand,
respectively, of compensation expense under the ESOP during the
years ended September 30, 1998, 1997 and 1996.
The ESOP shares as of September 30, 1998 were as follows (in
thousands, except share data):
Allocated shares 56,843
Unallocated shares 398,097
--------
Total ESOP shares 454,940
========
Market value of unallocated shares at
September 30, 1998 $ 5,623
========
(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 options were awarded at an exercise
price of $12.50 per share; on August 19, 1997, 10,000 options were
awarded at an exercise price of $16.38 per share; and on April 21,
1998, 8,000 shares were awarded at an exercise price of $17.56 per
share. These shares have a ten-year term and vest at a rate of 20%
per year from their respective grant dates.
52
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
A summary of the status of the Company's stock option plans as of
September 30, 1998 and 1997 and changes during the year is
presented below:
<TABLE>
<CAPTION>
1998 1997
------------------------- ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Options:
Outstanding at beginning of year 426,333 $ 12.59 - -
Granted 8,000 17.56 426,333 $ 12.59
Exercised (7,658) 12.50 - -
Cancelled - - - -
------- -------
Outstanding at year-end 426,675 12.69 426,333 $ 12.59
------- -------
Exercisable at year-end 77,605 $ 12.59 - -
</TABLE>
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 1998 and
1997: dividend yield of 1.8%; expected volatility of 25.0%; risk
free interest rates of 6.50% for the October 24, 1996 grant, 6.25%
for the August 19, 1997 grant and 5.72% for the April 21, 1998
grant; and expected lives of 7 years. Based on the aforementioned
assumptions, the Company has estimated that the fair value of the
options granted on October 24, 1996, August 19, 1997 and April 21,
1998, were $5.64, $5.47 and $4.25, respectively. Pro forma
disclosures for the Company for the year ending September 30, 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands except per share data)
<S> <C> <C>
Net income:
As reported $3,882 3,907
Pro forma 3,596 3,614
Basic earnings per share:
As reported .96 .84
Pro forma .88 .79
Diluted earnings per share:
As reported .93 .83
Pro forma .88 .79
</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.
53
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(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.
During the years ended September 30, 1998 and 1997, grants of
2,000 shares and 181,232 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
$456,000 and $419,000 was recorded in fiscal 1998 and 1997
respectively, with the remaining unearned compensation cost shown
as a reduction of shareholders' equity.
(14) 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
In fiscal 1998, the Company entered into a noncancelable operating
lease agreement for a branch facility which expires in 2013.
Rental expense for the year ended September 30, 1998, was $6
thousand. A summary of the future minimum commitments required
under the agreement for the years ending September 30 are as
follows:
Years Dollars in thousands
----- --------------------
1999 $ 13
2000 16
2001 21
2002 23
2003 23
Thereafter 233
------------
$ 329
============
(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.
54
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
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, 1998 and 1997 at
fixed and variable interest rates are as follows:
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
Fixed Variable Total
-------------------- -------------------- ------------
(in thousands)
<S> <C> <C> <C>
Mortgages $ 4,171 582 4,753
Consumer 72 20 92
Lines of credit 721 533 1,254
Home Equity - 1,556 1,556
-------------------- -------------------- ------------
$ 4,964 2,691 7,655
==================== ==================== ============
<CAPTION>
1997
------------------------------------------------------------
Fixed Variable Total
-------------------- -------------------- ------------
(in thousands)
<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>
The range of interest on fixed rate commitments was 6.50% to
18.00% at September 30, 1998 and 7.13% to 18.00% at September 30,
1997. The range of interest on adjustable rate commitments was
8.00% to 11.50% at September 30, 1998 and 8.25% to 10.50% at
September 30, 1997, respectively.
55
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(15) Short-Term Borrowings
The Bank, as a member of the FHLB, has access to a line of credit program
with a maximum borrowing capacity of $28.6 million and $26.2 million as
of September 30, 1998 and 1997, respectively. Borrowings under the
overnight program at September 30, 1998 and 1997, which are priced at the
federal funds rate plus 12.5 basis points, were $6.8 million, at a rate
of 6.00% and $11.4 million at a rate of 6.63%, respectively. The Bank has
pledged mortgage loans and FHLB stock as collateral on these borrowings.
The following table sets forth the maximum month-end balance and average
balance for the years ended September 30:
1998 1997
---- ----
(dollars in thousands)
Maximum balance .............................. $14,245 11,385
Average balance .............................. 11,317 2,590
Weighted average interest rate ............... 5.74% 5.75%
(16) Long-Term Borrowings
In fiscal 1998, the Company began using fixed rate long-term borrowings,
principally convertible advances from the FHLB, as a source of funds.
Information on the borrowings is summarized as follows:
<TABLE>
<CAPTION>
Maturity Date Amount Rate Call Date
------------- ------ ---- ---------
(in thousands)
<S> <C> <C> <C>
January 8, 2008 $ 5,000 5.07% January 8, 2001
June 16, 2008 5,000 4.95% June 16, 1999
July 2, 2008 5,000 5.46% July 2, 2003
July 23, 2008 5,000 5.10% July 23, 1999
August 26, 2008 5,000 5.16% August 26, 2000
-------
$25,000
=======
</TABLE>
Interest on the borrowings is calculated on an actual/360 day basis and
is callable by the issuer on the dates shown and quarterly thereafter,
except for the borrowing which matures on June 16, 2008, which is
callable monthly.
The borrowings are secured by mortgage-backed securities with a carrying
value of approximately $26.4 million. The securities used as collateral
for the convertible advances are being held in safe keeping at the FHLB,
except the maturity of June 16, 2008, which is held by First Union
Capital Markets.
56
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(17) 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 5 and 6 for detail disclosure of securities available for sale and
investment securities held to maturity, 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.
57
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
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, 1998 and
1997. 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.
Long Term Borrowings
The fair value for the Company's long-term borrowings is estimated based
on the quoted market prices for the same or similar issues.
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.
58
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Table of Financial Instruments
The carrying values and estimated fair values of financial instruments as
of September 30, 1998 and September 30, 1997 were as follows:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
---------------------------------- -------------------------
Estimated Estimated
Carrying fair Carrying fair
value value value value
----- ----- ----- -----
(in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 2,795 2,795 2,274 2,274
Securities available for
sale 164,983 164,983 148,114 148,114
Investment securities held
to maturity 2,060 2,106 8,055 8,112
Federal Home Loan Bank Stock 1,954 1,954 1,762 1,762
Loans 139,995 141,867 126,702 128,623
Less: Allowance for loan
losses 1,950 - 1,889 -
Net deferred loan fees 260 - 476 -
----------- ----------- --------- ---------
Net loans 137,785 141,867 124,337 128,623
Accrued interest receivable 2,398 2,398 2,303 2,303
Financial liabilities:
Deposits:
Demand, statement,
passbook, money market,
and NOW accounts 102,429 102,429 101,371 101,371
Certificates of deposit 107,548 108,562 99,541 99,701
Short-term borrowings 6,840 6,840 11,385 11,385
Long-term borrowings 25,000 25,500 - -
Accrued interest payable 288 288 59 59
Advances from borrowers for
taxes and insurance 673 673 533 533
</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.
59
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(18) 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>
Condensed Statement of Financial Condition
as of September 30, 1998 and 1997
<CAPTION>
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Assets
Cash and cash equivalents .............................. $ 1,144 3,005
Securities available for sale .......................... 1,884 4,030
ESOP loan receivable from subsidiary ................... 4,231 4,359
Equity in net assets of subsidiary ..................... 60,304 59,933
Other assets ........................................... 477 500
------- -------
Total assets ..................................... $68,040 71,827
======= ======
Liabilities and Shareholders' Equity
Accrued expenses and other liabilities ................. $ 209 50
Total shareholders' equity ............................. 67,831 71,777
------- -------
Total liabilities and shareholders' equity ....... $68,040 71,827
======= =======
</TABLE>
<TABLE>
Condensed Statements of Income
For the Year Ended September 30, 1998 and 1997 and for the Period
From Inception (April 18, 1996) Through September 30, 1996
<CAPTION>
1998 1997 1996
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Dividends from subsidiary .............. $ 5,000 -- --
Net interest income .................... 596 475 296
------- ------- -------
5,596 475 296
Non interest expense ................... 298 223 70
------- ------- -------
Income before income taxes and
equity in undistributed
earnings of subsidiary .............. 5,298 252 226
------- ------- -------
Income tax expense ..................... 142 61 91
------- ------- -------
Income before equity in
undistributed earnings of
subsidiary .......................... 5,156 191 135
Equity in undistributed earnings
of subsidiary ....................... (1,274) 3,716 3,182
------- ------- -------
Net income ............................. $ 3,882 3,907 3,317
======= ======= =======
</TABLE>
60
<PAGE>
<TABLE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Statements of Cash Flows
For the Years Ended September 30, 1998 and 1997 and for the Period
From Inception (April 18, 1996) Through September 30, 1996
<CAPTION>
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 3,882 3,907 3,317
Adjustment to reconcile net income
to net cash provided by
operating activities:
Net (increase) decrease in
equity in undistributed
earnings of subsidiary ..................................... 1,274 (3,716) (3,182)
Net accretion on securities ................................... -- (42) --
Gain on sales of securities ................................... (77) -- --
Net (increase) decrease in
other assets ............................................... 23 (57) (24)
Net increase (decrease) in
liabilities ................................................ 152 (16) 53
-------- -------- --------
Net cash provided by
operating activities ....................................... 5,254 76 164
-------- -------- --------
Cash flows from investing activities:
Purchase of securities available for
sale ............................................................ (2,376) (25,000) (122,347)
Proceeds from the maturity of
securities available for sale ................................... 1,000 43,045 100,345
Proceeds from sales of securities
available for sale .............................................. 3,642 -- --
Investment in subsidiary ............................................ (140) (93) (27,460)
Net decrease (increase) in ESOP loan
receivable from subsidiary ...................................... 128 120 (4,479)
-------- -------- --------
Net cash provided by (used in)
investing activities ............................................ 2,254 18,072 (53,941)
-------- -------- --------
61
<PAGE>
<CAPTION>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of common
stock, net ...................................................... -- -- 54,915
Net proceeds from the exercise of
stock options ................................................... 38 -- --
Purchase of common stock for
treasury ........................................................ (8,459) (15,305) --
Proceeds from subsidiary for
issuance of vested MRP shares ................................... 446 -- --
Cash dividends on common stock ...................................... (1,394) (976) --
-------- -------- --------
Net cash (used in) provided by
financing activities ............................................ (9,369) (16,281) 54,915
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents ................................................ (1,861) 1,867 1,138
Cash and cash equivalents:
Beginning of period ................................................. 3,005 1,138 --
-------- -------- --------
End of period ....................................................... $ 1,144 3,005 1,138
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during year for income
taxes ........................................................... $ 107 91 --
======== ======== ========
Noncash investing activities:
Change in net unrealized gain
(loss) on securities available
for sale, net of change in
deferred tax of $17 and $12 ..................................... $ 45 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.
62
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(19) Regulatory Capital Requirements
OTS capital regulations require savings institutions to maintain minimum
levels of regulatory capital. Under the regulations in effect at
September 30, 1998 and 1997, 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 4.0% for 1998 and 3.0% for 1997 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 quarterly 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, 1998 and 1997, 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.
63
<PAGE>
CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The following is a summary of the Bank's actual capital amounts and
ratios as of September 30, 1998 and 1997, 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>
1998
-------------------------------------------------------------------------
Minimum capital For classification
Actual adequacy as well capitalized
------------------ ---------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Bank
Tangible capital $58,286 18.79% $ 4,653 1.50% $ - -
Tier 1 (core) capital 58,286 18.79 12,408 4.00 15,511 5.00%
Risk-based capital:
Tier 1 58,286 48.67 - - 7,186 6.00
Total 59,713 49.86 9,581 8.00 11,977 10.00
Actual
-----------------
Amount Ratio
------ -----
Consolidated
Tangible capital $65,768 21.13%
Tier 1 (core) capital 65,768 21.13
Risk-based capital:
Tier 1 65,768 53.54
Total 67,185 54.69
<PAGE>
<CAPTION>
1997
-------------------------------------------------------------------------
Minimum capital For classification
Actual adequacy as well capitalized
------------------ ---------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in thousands)
<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
Actual
-----------------
Amount Ratio
------ -----
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>
64
<PAGE>
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 16, 1999 at the Bank's office at 341 Main Street, Catskill,
New York
Annual Report on Form 10-K
For the 1998 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
515 Broadway
Albany, New York 12207
<PAGE>
Market Information for Common Stock
The common stock of Catskill Financial Corporation trades on the Nasdaq Stock
Market under symbol CATB.
At December 2, 1998, 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.
1998 High Low Dividend
- --------------------- ------- ------ ---------
First Quarter $19.63 $16.50 $ .08
Second Quarter $19.00 $17.00 $ .08
Third Quarter $18.50 $16.13 $ .08
Fourth Quarter $17.50 $12.00 $ .0925
1997 High Low Dividend
- --------------------- ------- ------ ---------
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
1996 High Low
- --------------------- ------- ------
Third Quarter $11.00 $10.00
Fourth Quarter $12.38 $ 9.88
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.
65
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State of
Percentage of Incorporation
Parent Subsidiary Ownership or Organization
------ ---------- --------- ---------------
<S> <C> <C> <C>
Catskill Financial Catskill Savings Bank 100% New York
Corporation
</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 21, 1998, relating to the consolidated
statements of financial condition of Catskill Financial Corporation and
subsidiary as of September 30, 1998 and 1997, and related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the years in the three-year period ended September 30, 1998, which report
appears in the annual report on Form 10-K of Catskill Financial Corporation for
the fiscal year ended September 30, 1998.
/s/ KPMG Peat Marwick LLP
-----------------------------
KPMG Peat Marwick LLP
Albany, New York
December 22, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,795
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 164,983
<INVESTMENTS-CARRYING> 2,060
<INVESTMENTS-MARKET> 2,106
<LOANS> 139,735
<ALLOWANCE> 1,950
<TOTAL-ASSETS> 314,752
<DEPOSITS> 209,977
<SHORT-TERM> 6,840
<LIABILITIES-OTHER> 5,104
<LONG-TERM> 25,000
0
0
<COMMON> 57
<OTHER-SE> 67,774
<TOTAL-LIABILITIES-AND-EQUITY> 314,752
<INTEREST-LOAN> 10,345
<INTEREST-INVEST> 10,755
<INTEREST-OTHER> 4
<INTEREST-TOTAL> 21,104
<INTEREST-DEPOSIT> 8,905
<INTEREST-EXPENSE> 9,960
<INTEREST-INCOME-NET> 11,144
<LOAN-LOSSES> 189
<SECURITIES-GAINS> 143
<EXPENSE-OTHER> 5,662
<INCOME-PRETAX> 5,901
<INCOME-PRE-EXTRAORDINARY> 5,901
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,882
<EPS-PRIMARY> .95
<EPS-DILUTED> .93
<YIELD-ACTUAL> 3.99
<LOANS-NON> 520
<LOANS-PAST> 71
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 311
<ALLOWANCE-OPEN> 1,889
<CHARGE-OFFS> 148
<RECOVERIES> 20
<ALLOWANCE-CLOSE> 1,950
<ALLOWANCE-DOMESTIC> 1,472
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 478
</TABLE>
