UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 NUMBER 0-27650
CATSKILL FINANCIAL CORPORATION
------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 14-1788465
------------------------------- ------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
341 MAIN STREET, CATSKILL, NY 12414
---------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(518)943-3600
-------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X[ NO [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE:
Common Shares, $.01 Par Value 4,585,615
----------------------------- ------------------------------
(TITLE OF CLASS) (OUTSTANDING AT APRIL 30, 1998
<PAGE>
CATSKILL FINANCIAL CORPORATION
FORM 10-Q
MARCH 31, 1998
INDEX
- -----
PART I FINANCIAL INFORMATION Page
- ------ ---------------------
Item 1. Consolidated Interim Financial Statements
Consolidated Statements of Financial Condition
as of March 31, 1998 (Unaudited) and September
30, 1997 ................................................ 1
Consolidated Statements of Income for the
three months and six months ended March 31,
1998 and 1997 (Unaudited) ............................... 2
Consolidated Statements of Changes in
Shareholders' Equity for the six months ended
March 31, 1998 and 1997 (Unaudited) ..................... 3
Consolidated Statements of Cash Flows for the
six months ended March 31, 1998 and 1997
(Unaudited) ............................................. 4
Notes to Unaudited Consolidated Interim
Financial Statements .................................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .......... 8
Item 3. Quantitative and Qualitative Disclosures about
Market Risk ............................................. 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ....................................... 23
Item 4. Submission of Matters to a Vote of Security
Holders ................................................. 23
Item 6. Exhibits and Reports on Form 8-K ........................ 23
Signatures .............................................. 24
<PAGE>
<TABLE>
<CAPTION>
CATSKILL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
Assets March 31, 1998 September 30, 1997
------ -------------- ------------------
(Unaudited)
-----------
<S> <C> <C>
Cash and cash equivalents $ 2,623 $ 2,274
Securities available for sale, at fair value 157,571 148,114
Investment securities, at amortized cost:
(Estimated fair value of $3,109 at March 31,
1998, and $8,112 at September 30, 1997) 3,062 8,055
Stock in Federal Home Loan Bank of NY, at cost 1,954 1,762
Loans receivable, net 125,644 124,337
Accrued interest receivable 2,253 2,303
Premises and equipment, net 2,405 2,367
Real estate owned, net 228 248
Other assets 192 159
-------- --------
Total Assets $295,932 $289,619
======== ========
Liabilities And Shareholders' Equity
------------------------------------
Liabilities:
Deposits:
Non-interest bearing $ 4,953 $ 4,370
Interest bearing 198,862 196,542
-------- --------
Total Deposits 203,815 200,912
Short-term borrowings 12,920 11,385
Long-term borrowings 5,000 --
Advance payments by borrowers for property
taxes and insurance 1,776 533
Accrued interest payable 126 59
Official bank checks 1,559 3,861
Accrued expenses and other liabilities 1,419 1,092
-------- --------
Total Liabilities $226,615 $217,842
-------- --------
Shareholders' Equity
Preferred stock, $.01 par value; authorized
5,000,000 shares -- --
Common stock, $.01 par value; authorized
15,000,000 shares; 5,686,750 shares issued
at March 31, 1998 and September 30, 1997 57 57
Additional paid-in capital 54,900 54,811
Retained earnings, substantially restricted 36,117 34,915
Common stock acquired by ESOP (4,095) (4,209)
Unearned management recognition plan (MRP) (1,628) (1,856)
Treasury stock, at cost (1,080,518 shares at
March 31, 1998, and 848,244 shares at
September 30, 1997) (17,037) (12,862)
Net unrealized gain (loss) on securities
available for sale, net of taxes 1,003 921
-------- --------
Total Shareholders' Equity 69,317 71,777
-------- --------
Total Liabilities and Shareholders' Equity $295,932 $289,619
======== ========
See accompanying notes to unaudited consolidated interim financial statements.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
CATSKILL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
March 31, March 31,
1998 1997 1998 1997
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans $ 2,534 $ 2,503 $ 5,085 $ 5,046
Securities available for sale 2,589 2,191 5,148 3,919
Investment securities 56 163 177 400
Federal funds sold and other 3 88 4 538
Stock in Federal Home Loan Bank of NY 34 18 65 37
---------- ---------- ---------- ----------
Total interest and dividend income 5,216 4,963 10,479 9,940
Interest expense:
Deposits 2,188 2,100 4,429 4,236
Short-term borrowings 144 2 328 2
Long-term borrowings 58 -- 58 --
---------- ---------- ---------- ----------
Total interest expense 2,390 2,102 4,815 4,238
---------- ---------- ---------- ----------
Net interest income 2,826 2,861 5,664 5,702
Provision for loan losses 45 75 99 150
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 2,781 2,786 5,565 5,552
---------- ---------- ---------- ----------
Noninterest income:
Recovery of Nationar loss contingency -- 16 -- 100
Service fees on deposit accounts 66 56 134 115
Net securities gains 33 5 52 5
Other income 41 44 73 78
---------- ---------- ---------- ----------
Total noninterest income 140 121 259 298
---------- ---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits 838 754 1,678 1,418
Advertising and business promotion 39 45 89 84
Net occupancy on premises 89 95 171 165
Federal deposit insurance premiums 7 6 14 7
Postage and supplies 82 86 146 132
Outside data processing fees 102 92 197 181
Equipment 43 55 83 91
Professional fees 67 70 104 132
Other real estate expenses, net (43) (24) (59) (21)
Other 170 162 319 323
---------- ---------- ---------- ----------
Total noninterest expense 1,394 1,341 2,742 2,512
---------- ---------- ---------- ----------
Income before taxes 1,527 1,566 3,082 3,338
Income tax expense 555 623 1,152 1,329
---------- ---------- ---------- ----------
Net income $ 972 $ 943 $ 1,930 $ 2,009
========== ========== ========== ==========
Basic earnings per common share $ .23 $ .20 $ .46 $ .41
Diluted earnings per common share $ .23 $ .20 $ .45 $ .41
Weighted Average Common Shares-Basic 4,165,075 4,710,177 4,208,213 4,902,587
Weighted Average Common Shares-Diluted 4,294,100 4,796,595 4,336,377 4,935,705
See accompanying notes to unaudited consolidated interim financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
CATSKILL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
Retained Common Unearned Net Unrealized
Additional Earnings, Stock Management Treasury Gain (Loss)
Common Paid-in Substantially Acquired by Recognition Stock, on Securities
Stock Capital Restricted ESOP Plan at Cost AFS, Net of Taxes Total
------ ---------- ------------- ----------- ----------- ------- ----------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997 $ 57 $54,811 $34,915 $(4,209) $(1,856) $(12,862) $ 921 $71,777
Net Income 1,930 1,930
Dividends paid on common stock (699) (699)
Allocation of ESOP stock
(11,363 shares) 89 114 203
Purchase of common stock
(236,675 shares) (4,242) (4,242)
Exercise of stock options
(4,401 shares issued, net) (29) 67 38
Amortization of unearned
MRP compensation 228 228
Change in net unrealized gain
(loss) on securities AFS,
net of taxes 82 82
----- ------- ------- ------- ------- -------- ------- -------
Balance at March 31, 1998 $ 57 $54,900 $36,117 $(4,095) $(1,628) $(17,037) $ 1,003 $69,317
===== ======= ======= ======= ======= ======== ======= =======
Balance at September 30, 1996 $ 57 $54,864 $31,984 $(4,436) -- -- $ (88) $82,381
Net income 2,009 2,009
Dividends paid on common stock (345) (345)
Allocation of ESOP stock
(11,355 shares) 48 114 162
Grant of restricted shares under
MRP (178,732 shares) (167) (2,234) 2,401 --
Purchase of common stock
(660,000 shares) (9,516) (9,516)
Amortization of unearned
MRP compensation 192 192
Change in net unrealized gain
(loss) on securities AFS,
net of taxes (971) (971)
----- ------- ------- ------- ------- -------- ------- -------
Balance at March 31, 1997 $ 57 $54,745 $33,648 $(4,322) $(2,042) $ (7,115) $(1,059) $73,912
===== ======= ======= ======= ======= ======== ======= =======
See accompanying notes to unaudited consolidated interim financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
CATSKILL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Six Months Ended
March 31,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited)
<S> <C> <C>
Net Income $ 1,930 $ 2,009
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 105 84
Net amortization (accretion) on securities (22) (107)
Provision for loan losses 99 150
MRP compensation expense 228 192
ESOP compensation expense 203 162
Recovery of Nationar loss contingency -- (100)
Gains on sale of other real estate owned (68) (69)
Gains on sales and calls of securities (52) (5)
Decrease (increase) in other assets 17 (531)
Collection of deposits held at Nationar -- 183
Decrease in accrued expense and other liabilities (1,963) (849)
------- -------
Net cash provided by operating activities 477 1,119
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity/calls/paydown of investment securities 5,007 9,015
Net increase in loans receivable (1,658) (940)
Capital expenditures, net (143) (528)
Purchase of stock in Federal Home Loan Bank (192) --
Purchase of AFS securities (42,530) (92,404)
Proceeds from sale of securities available for sale 12,160 3,041
Proceeds from maturity/calls/paydown of AFS securities 21,110 52,871
Proceeds from sale of other real estate owned 340 300
------- -------
Net cash used by investing activities (5,906) (28,645)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of stock options 38 --
Net increase in deposits 2,903 402
Net increase (decrease) in advance payments by borrowers for
property taxes and insurance 1,243 (256)
Increase in short-term borrowings 1,535 --
Increase in long-term borrowings 5,000 --
Cash dividends on common stock (699) (345)
Purchase of common stock for treasury (4,242) (9,516)
------- -------
Net cash provided (used) by financing activities 5,778 (9,715)
------- -------
Net increase (decrease) in cash and cash equivalents 349 (37,241)
Cash and cash equivalents at beginning of period 2,274 39,712
------- -------
Cash and cash equivalents at end of period $ 2,623 $ 2,471
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 4,748 $ 4,235
Taxes 661 815
Transfer of loans to other real estate owned 252 302
Change in net unrealized gain (loss) on AFS securities, net of change
in deferred tax liability (benefit) of $55 and $(647) respectively 82 (971)
See accompanying notes to unaudited consolidated interim financial statements
</TABLE>
4
<PAGE>
CATSKILL FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The unaudited consolidated interim financial statements include the accounts
of Catskill Financial Corporation ("Company") and its wholly owned
subsidiary, Catskill Savings Bank ("Bank"). All intercompany accounts and
transactions have been eliminated in consolidation. Amounts in prior
periods' unaudited consolidated interim financial statements are
reclassified whenever necessary to conform to the current period's
presentation. In management's opinion, the unaudited consolidated interim
financial statements reflect all adjustments of a normal recurring nature,
and disclosures which are necessary for a fair presentation of the results
for the interim periods presented and should be read in conjunction with the
consolidated financial statements and related notes included in Catskill
Financial's 1997 Annual Report to Stockholders. The results of operations
for the interim periods are not necessarily indicative of the results of
operations to be expected for the full fiscal year ended September 30, 1998.
NOTE 2. EARNINGS PER SHARE
On December 31, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standard ("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 restricted
stock and stock options. SFAS No. 128 requires restatement of all prior
period earnings per share data presented. Unallocated ESOP shares are not
included in the weighted average number of common shares outstanding for
either the basic or diluted earnings per share calculations. The adoption of
SFAS No. 128 did not have a material effect on the Company's consolidated
financial position or results of operations.
5
<PAGE>
NOTE 2. EARNINGS PER SHARE - CONTINUED
The following sets forth certain information regarding the calculation of
basic and diluted earnings per share (EPS) calculations for the periods
indicated:
<TABLE>
<CAPTION>
Six Months Ended March 31,
--------------------------
1998 1997
-------------------------- --------------------------
Weighted Per- Weighted Per-
Net Average Share Net Average Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $1,930 4,208,213 $.46 $2,009 4,902,587 $.41
Dilutive effect of potential common
shares related to stock based compensation plans -- 128,164 -- 33,118
------ --------- ------ ---------
Diluted EPS $1,930 4,336,377 $.45 $2,009 4,935,705 $.41
====== ========= ====== =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
-------------------------- --------------------------
Weighted Per- Weighted Per-
Net Average Share Net Average Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $972 4,165,075 $.23 $943 4,710,177 $.20
Dilutive effect of potential common
shares related to stock based compensation plans -- 129,025 -- 86,418
---- --------- ---- ---------
Diluted EPS $972 4,294,100 $.23 $943 4,796,595 $.20
==== ========= ==== =========
</TABLE>
6
<PAGE>
NOTE 3. LONG-TERM BORROWINGS
On January 8, 1998, the Bank borrowed $5.0 million at a rate of 5.07%
(actual/360 days basis) under the FHLB's convertible advance program. The
borrowing is secured by GNMA mortgage-backed securities with a carrying
value of approximately $6.1 million. The borrowing has a contractual
maturity of ten (10) years, however, it also includes an option on January
8, 2001, and quarterly thereafter, in which the FHLB can call the debt.
NOTE 4. IMPACT OF NEW ACCOUNTING STANDARDS
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," which amends the disclosure requirements of SFAS No. 87,
"Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." SFAS No. 132 standardizes the
disclosure requirements of SFAS No. 87 and No. 106 to the extent practicable
and recommends a parellel format for presenting information about pensions
and other postretirements benefits. This Statement is applicable to all
entities and addresses disclosure only. The Statement does not change any of
the measurement or recognition provisions provided for in SFAS No. 87, No.
88, or No. 106. The Statement is effective for fiscal years beginning after
December 15, 1997. Management anticipates providing the required disclosures
in the September 30, 1999, consolidated financial statements.
7
<PAGE>
CATSKILL FINANCIAL CORPORATION
FORM 10-Q
MARCH 31, 1998
================================================================================
PART I - FINANCIAL INFORMATION (CONTINUED)
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
Catskill Financial Corporation (the "Company" or "Catskill Financial") was
formed in December 1995 to acquire all of the common stock of Catskill Savings
Bank (the "Bank") upon its conversion from a mutual savings bank to a stock
savings bank. On April 18, 1996, the Company completed its initial public stock
offering, issuing 5,686,750 shares of $.01 par value common stock at $10.00 per
share. Net proceeds to the Company were $54.9 million after conversion costs,
and $50.4 million excluding the shares acquired by the Company's Employee Stock
Ownership Plan (the "ESOP"), which were purchased with the proceeds of a loan
from the Company.
The consolidated financial condition and operating results of the Company are
primarily dependent upon its wholly owned subsidiary, the Bank, and all
references to the Company prior to April 18, 1996, except where otherwise
indicated, are to the Bank.
The Bank has been and continues to be a community oriented financial institution
offering a variety of financial services. The Bank attracts deposits from the
general public and uses such deposits, together with other funds, to originate
one to four family residential mortgages, and, to a lesser extent, consumer
(including home equity lines of credit), commercial, and multi-family real
estate and other loans in its primary market area. The Bank's primary market
area is comprised of Greene County and southern Albany County in New York, which
are serviced through four banking offices, the most recent having opened in
December 1996. The Bank's deposit accounts are insured by the Bank Insurance
Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC"), and, as a
federal savings bank, the Bank is subject to regulation by the Office of Thrift
Supervision ("OTS").
The Bank's profitability, like many financial institutions, is dependent to a
large extent upon its net interest income, which is the difference between the
interest it receives on interest earning assets, such as loans and investments,
and the interest it pays on interest bearing liabilities, principally deposits.
Results of operations are also affected by the Bank's provision for loan losses,
non-interest expenses such as salaries and employee benefits, occupancy and
other operating expenses and to a lesser extent, non-interest income such as
service charges on deposit accounts.
Financial institutions in general, including the Company, are significantly
affected by economic conditions, competition and the monetary and fiscal
policies of the federal government. Lending activities are influenced by the
demand for and supply of housing, competition among lenders, interest rate
conditions and funds availability. Deposit balances and cost of funds are
influenced by prevailing market rates on competing investments, customer
preference and the levels of personal income and savings in the Bank's primary
market area.
8
<PAGE>
FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project", "believe", or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigations Reform Act of 1995. In addition, certain disclosures and information
customarily provided by financial institutions, such as analysis of the adequacy
of the allowance for loan losses or an analysis of the interest rate sensitivity
of the Company's assets and liabilities, are inherently based upon predictions
of future events and circumstances. Furthermore, from time to time, the Company
may publish other forward-looking statements relating to such matters as
anticipated financial performance, business prospects, and similar matters.
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. Some of the risks and uncertainties that may affect
the operations, performance, development and results of the Company's business,
the interest rate sensitivity of its assets and liabilities, and the adequacy of
its allowance for loan losses, include but are not limited to the following:
a. Deterioration in local, regional, national or global economic
conditions which could result, among other things, in an increase in loan
delinquencies, a decrease in property values, or a change in the housing
turnover rate;
b. changes in market interest rates or changes in the speed at which
market interest rates change;
c. changes in laws and regulations affecting the financial service
industry;
d. changes in competition; and
e. changes in consumer preferences.
The Company wishes to caution readers not to place undue reliance on
any forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including those described above, could
affect the Company's financial performance and could cause the Company's actual
results or circumstances for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
FINANCIAL CONDITION
Total assets were $295.9 million at March 31, 1998, an increase of $6.3 million,
or 2.2% from the $289.6 million at September 30, 1997. The increase in assets
was primarily in securities, and to a lesser extent, loans and was funded
principally by an increase in long-term borrowings and deposits.
9
<PAGE>
Cash and cash equivalents were $2.6 million, an increase of $.3 million, or
13.0% from the $2.3 million at September 30, 1997. The change was principally
due to an increase in checks in process of collection.
Total securities, which include securities held to maturity ("HTM") and
securities available for sale ("AFS"), excluding Federal Home Loan Bank stock,
were $160.7 million, an increase of $4.5 million, or 2.9% over the $156.2
million as of September 30, 1997. The increase in securities consisted of a $9.5
million increase in AFS securities, primarily due to the Company's purchase of
one-year treasury indexed teaser rate adjustable mortgage backed securities
(ARM's) and municipal securities which provided the Company higher tax
equivalent yields and longer call protection, and a $5.0 million decrease in HTM
securities from scheduled maturities and calls. Consequently as of March 31,
1998, 98.1% 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.
Loans receivable were $127.6 million as of March 31, 1998, an increase of $1.4
million or 1.1% 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:
March 31, September 30,
1998 1997
--------- -------------
(In thousands)
Real Estate Loans
One-to-four family $103,500 $102,232
Multi-family and commercial 5,488 4,691
Construction 436 1,306
-------- --------
Total real estate loans 109,424 108,229
Consumer Loans 18,509 18,473
-------- --------
Gross Loans 127,933 126,702
Less: Net deferred loan fees (383) (476)
-------- --------
Total loans receivable $127,550 $126,226
======== ========
The increase in multi-family and commercial loans was principally represented by
loans to refinance a stripmall and a fitness complex in the Company's primary
market area, while the decrease in construction loans principally resulted from
seasonal differences as existing construction loans were reclassified as
one-to-four family loans once construction was completed and the loan converted
to an amortizing mortgage.
10
<PAGE>
Non-performing assets at March 31, 1998 were $.9 million, or .29% 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.
March 31, September 30,
1998 1997
-------- -------------
(In thousands)
Non-performing loans:
One-to-four family $587 $ 780
Multi-family and commercial -- --
Consumer 55 137
---- ------
Total non-performing loans 642 917
---- ------
Foreclosed assets, net:
One-to-four family 228 225
Multi-family and commercial -- 23
---- ------
Total foreclosed assets, net 228 248
---- ------
Total non-performing assets $870 $1,165
==== ======
Total non-performing loans
as a % of total loans .50% .73%
Total non-performing assets
as a % of total assets .29% .40%
The decrease in non-performing loans at March 31, 1998 as compared to September
30, 1997 was attributable principally to the foreclosure of three loans and the
resulting acquisition of title to the mortgaged property by the Company. The net
realizable value of the properties, totalling $252,000, was transferred to other
real estate, and $56,000, 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 six months ended March
31, 1998, the Company completed the sale of six parcels of other real estate
which reduced real estate owned by $272,000. The following table summarizes the
activity in other real estate for the periods presented:
Six Months Ended March 31,
--------------------------
1998 1997
---- ----
(In thousands)
Other real estate beginning of
period $ 248 $ 357
Transfer of loans to other real
estate owned 252 302
Sales of other real estate, net (272) (231)
----- -----
Other real estate end of period $ 228 $ 428
===== =====
11
<PAGE>
The allowance for loan losses was $1.9 million, or 1.49% of period end loans at
March 31, 1998, and provided coverage of non-performing loans of 296.9%,
compared to coverage of 206.0% as of September 30, 1997. The following
summarizes the activity in the allowance for loan losses:
Six Months Ended March 31,
--------------------------
1998 1997
---- ----
(In thousands)
Allowance at beginning of period $1,889 $1,833
Charge-offs (89) (153)
Recoveries 7 7
------ ------
Net charge-offs (82) (146)
Provision for loan losses 99 150
------ ------
Allowance at end of period $1,906 $1,837
====== ======
Total deposits were $203.8 million at March 31, 1998, an increase of $2.9
million, or 1.4% 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>
March 31, 1998 September 30, 1997
---------------------------------- ----------------------------------
(In thousands) % of Deposits (In thousands) % of Deposits
<S> <C> <C> <C> <C>
Savings $ 79,271 38.9% $ 79,448 39.6%
Money market 6,066 3.0 7,115 3.5
NOW 11,209 5.5 10,438 5.2
Non-interest demand 4,953 2.4 4,370 2.2
Certificates of deposits 102,316 50.2 99,541 49.5
-------- ----- -------- -----
$203,815 100.0% $200,912 100.0%
======== ===== ======== =====
</TABLE>
The growth in deposits was principally related to the opening of our fourth full
service branch in late December 1996, and deposits at other offices decreased
$.3 million, down marginally since September 30, 1997. Although the Company
experienced deposit growth, money market deposits decreased $1.0 million or
14.7%, and now represent only 3.0% of deposits compared to 3.5% as of September
30, 1997. The composition of deposits continues to shift to higher costing
certificates of deposits ("CD's") as the decrease in money market deposits was
more than offset by a $2.8 million increase in certificates of deposit which now
represent 50.2% of deposits compared to 49.5% as of September 30, 1997. The
increase in CD's is principally from the Company's promotion of a 15-month
product to retain maturing longer-term CD's and satisfy demand in the Company's
market for higher yields. Management believes that this change in mix is
consistent with what other financial institutions are experiencing, as customers
seek to maximize their returns and the Company has to compete with other
investment products such as mutual funds.
The Company increased its borrowings from the Federal Home Loan Bank of New York
("FHLB") to $17.9 million at March 31, 1998, an increase of $6.5 million, or
57.0%, from the $11.4 million at September 30, 1997. The additional borrowings
were used to fund the Company's stock repurchase program and growth in earning
assets as the Company continues to leverage its capital. In January, the Company
borrowed $5.0 million under the FHLB's convertible advance program. This
represents the Company's first long-term borrowing, and the rate is set at 5.07%
(actual/360 days basis) for three years, at which time the FHLB could demand
immediate repayment, and the Company could either repay the borrowings, or
continue the borrowing for its remaining contractual
12
<PAGE>
term of seven years at the then prevailing rate of interest. Short-term
borrowings were $12.9 million at March 31, 1998, an increase of $1.5 million, or
13.2%, from the $11.4 million at September 30, 1997. As of March 31, 1998, the
Company still has additional credit of $1.4 million under its overnight line and
$14.3 million under its one month advance program.
Shareholders' equity at March 31, 1998 was $69.3 million, a decrease of $2.5
million, or 3.5% from the $71.8 million at September 30, 1997. The decrease was
principally caused by the Company's repurchase of 236,675 common shares at a
cost of $4.2 million, somewhat offset by the $1.2 million of net income retained
after cash dividends and a $.1 million change in the Company's net unrealized
gain (loss) on securities available for sale, net of taxes. The Company also
recorded a $.4 million increase in shareholders' equity due to the amortization
of restricted stock awards, exercise of stock options and the allocation of
shares under the Company's ESOP.
Shareholders' equity as a percent of total assets was 23.4% at March 31, 1998
compared to 24.8% at September 30, 1997. Book value per common share was $15.54
excluding unvested shares of the Company's restricted stock plan ("MRP"), and
was $17.11 excluding unallocated ESOP shares and unvested MRP shares.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND
1997
GENERAL
For the three months ended March 31, 1998, the Company recorded net income of
$972,000, an increase of $29,000, or 3.1%, compared to the three month period
ended March 31, 1997. Basic and diluted earnings per share were $.23, an
increase of 15.0% compared to basic and diluted earnings per share of $.20 for
the three months ended March 31, 1997. For the three months ended March 31,
1998, weighted average common shares - basic were 4,165,075, down 545,102, or
11.6%, due to the Company's share repurchase programs.
Annualized return on average assets for the three months ended March 31, 1998
and 1997, was 1.35% and 1.39%, respectively, and return on average equity was
5.57% and 5.03%, respectively.
NET INTEREST INCOME
Net interest income on a full tax equivalent basis for the three months ended
March 31, 1998, was $2.9 million, an increase of $40,000, or 1.4%, when compared
to the three months ended March 31, 1997. The increase was principally volume
related as the Company increased its average earning assets $15.4 million, more
than offsetting the loss of net interest income from the Company funding its
stock repurchase program. The Company funded the average cost of share
repurchases of approximately $9.7 million, along with its growth in earning
assets, principally with borrowings and, to a lesser extent, deposit growth.
Interest income for the three months ended March 31, 1998 was $5.3 million on a
tax equivalent basis, an increase of $328,000, or 6.6%, over the comparable
period last year. The $15.4 million increase in the average volume of earning
assets had a direct positive effect on interest income as the Company sought to
leverage its excess capital. The increase in average earning assets principally
consisted of increases in mortgage-backed and municipal securities and, to a
lesser extent, loans.
13
<PAGE>
Also positively affecting interest income was a six basis point increase in the
yield on average earning assets to 7.42% as the Company continued to change its
asset mix by investing more of its assets in higher yielding mortgage-backed and
municipal securities and less in lower yielding federal funds sold. Average
mortgage-backed securities represented 31.3% of average earning assets for the
three months ended March 31, 1998, compared to 29.3% for the comparable quarter
the prior year, while federal funds sold and other declined from 2.6% to less
than .1% of average earning assets between the same periods. The average yield
on mortgage-backed securities during the three months ended March 31, 1998, was
6.86%, down 17 basis points from the comparable period, but still higher than
the average yield of 5.19% earned on federal funds sold and other short-term
investments during the three months ended March 31, 1997. The yield on
mortgage-backed securities declined 17 basis points, as the Company has been
purchasing one year Treasury indexed teaser rate ARM's, consequently 15.7% of
the average mortgage-backed securities portfolio are now teaser rate ARM's. The
teaser ARM's were purchased during the initial teaser rate period, consequently
the initial average interest rate and yield will be less than the fully indexed
rate and yield. The Company had no teaser ARM's in the comparable period.
Management expects the average yield of these ARM's to increase as they 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 and
the securities prepayments. In addition, the yield on other securities increased
43 basis points to 7.13%, as the Company has been purchasing longer call
protected municipal securities to increase yields and reduce reinvestment risk
if rates decline. Municipal securities now represent 14.3% of average other
securities, compared to less than 1% in the comparable period.
Interest expense for the three months ended March 31, 1998, was $2.4 million, an
increase of $288,000, or 13.7%. The change was principally due to an increase in
the average volume of interest bearing liabilities. The Company also experienced
an increase of 10 basis points in its cost of funds. Average interest bearing
liabilities were $214.0 million, an increase of $21.7 million, or 11.3%, as the
Company borrowed in order to fund the Company's stock repurchase program and
earning asset growth. Average long-term borrowings were up $4.6 million, as the
Company borrowed $5.0 million in January 1998 under the FHLB's convertible
advance program. There were no long-term borrowings in the comparable period.
Average short-term borrowings were $10.1 million for the three months ended
March 31, 1998, while there were only $.1 million of borrowings in the
comparable three month period. In addition, the Company's average CD's increased
$8.2 million, or 8.8%, as the Company's customers continue to move toward higher
costing CD's and away from lower costing deposits. The 10 basis point increase
in the cost of funds was caused by the increase in the level of borrowings and
CD's, which represent the Company's highest cost funding sources. The average
rate paid on CD's also increased by 9 basis points due to competitive pressures
and a special 15 month CD program which offered premium rates.
The Company's net yield on average earning assets was 4.13% for the three months
ended March 31, 1998, compared to 4.30% for the comparable quarter of the prior
year. The decrease was principally caused by the Company's stock repurchase
program, which reduced the level of no-cost funding sources, and consequently
increased the amount of average earning assets funded by interest bearing
liabilities. In the three months ended March 31, 1998, the Company had $71.0
million of average earning assets with no related funding costs, a decrease of
$6.3 million from the $77.3 million for the three months ended March 31, 1997.
The Company also experienced a 4 basis point decline in its net spread, as its
cost of funds increased more than its yield on earning assets. The cost of funds
increase was principally caused by the change in funding mix as borrowings, one
of the Company's highest cost funding sources, now represent 6.9% of interest
bearing liabilities, compared to only .1% for the comparable three month period.
14
<PAGE>
For more information on average balances, interest, yield and rate, please refer
to Table #1, included in this report.
PROVISION FOR LOAN LOSSES
The Company establishes an allowance for loan losses based on an analysis of
risk factors in its loan portfolio. This analysis includes concentrations of
credit, past loan loss experience, current economic conditions, amount and
composition of loan portfolio, estimated fair market value of underlying
collateral, delinquencies and other factors. Accordingly, the calculation of the
adequacy of the allowance for loan losses is not based solely on the level of
non-performing loans.
The provision for loan losses was $45,000 for the three months ended March 31,
1998, a decrease of $30,000 from the comparable period of the prior year. The
decrease is principally the result of a $35,000, or 54.7%, reduction in net
charge-offs to $29,000 for the three months ended March 31, 1998 compared to the
comparable quarter of the prior year. In addition, the Company has reduced its
non-performing loans $303,000, or 32.1%, so the allowance represents 296.9% of
non-performing loans at March 31, 1998, as compared to 194.4% as of March 31,
1997.
NON-INTEREST INCOME
Non-interest income was $140,000 for the three months ended March 31, 1998, an
increase of $19,000 or 15.7% from the three months ended March 31, 1997. The
increase was principally higher securities gains and service charge income,
offset somewhat by a decrease in Nationar recoveries. Security gains were
$33,000, an increase of $28,000, as the Company sold certain ARM's with a
lagging index and replaced them with Treasury indexed ARM's which are more
market sensitive. Service fee income was up $10,000, or 17.9%, principally from
the Company's strategy of increasing commercial non-interest bearing deposits.
In the three months ended March 31, 1997, the Company recovered the remaining
$16,000 of its Nationar loss reserve, consequently there were no recoveries in
the quarter ended March 31, 1998.
NON-INTEREST EXPENSE
Non-interest expense for the three months ended March 31, 1998 was $1,394,000,
an increase of $53,000, or 4.0%, over the comparable period last year,
principally from increased personnel costs, somewhat offset by lower other real
estate expenses.
Salaries and employee benefits for the quarter ended March 31, 1998 increased
$84,000, or 11.1%, compared to the period ended March 31, 1997, principally from
the higher cost of stock-based compensation plans, and increased staffing costs.
ESOP compensation increased $15,000, or 17.3%, due to an increase in the average
market price of the Company's stock. Staffing costs increased principally from
hiring additional staff for our new full service supermarket branch, which
opened in April 1998, as well as additional staff for other offices, which have
increased transaction volumes. Other real estate expenses net, were down $19,000
as the Company benefitted from the reduction in the number of parcels in other
real estate.
INCOME TAX EXPENSE
Income tax expense for the three months ended March 31, 1998, was $555,000, a
decrease of $68,000, or 10.9%, from the comparable period last year. The
Company's effective tax rates for the
15
<PAGE>
three months ended March 31, 1998 and 1997, were 36.35% and 39.78%,
respectively. The decreases were principally the impact of the Company's
purchase of tax advantaged securities, primarily bank qualified municipal
securities and preferred stock.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND 1997
GENERAL
For the six months ended March 31, 1998, the Company recorded net income of
$1,930,000, a decrease of $79,000 or 3.9%, compared to the six month period
ended March 31, 1997. The decrease was principally caused by certain
non-recurring items which increased net income in the six months ended March 31,
1997, by approximately $100,000. Basic and diluted earnings per share were $.46
and $.45 respectively for the six months ended March 31, 1998, compared to basic
and diluted earnings per share of $.41 for the six months ended March 31, 1997.
Weighted average common shares - basic for the six months ended March 31, 1998,
were 4,208,213, a decrease of 694,374 or 14.2% from the 4,902,587 for the
comparable period ended March 31, 1997. The decrease was principally
attributable to the share repurchase programs under which the Company, through
March 31, 1998, had purchased 1,266,151 shares or 22.3% of the shares issued in
its initial public offering. The aggregate cost to the Company was $19.5
million, or an average of $15.44 per common share repurchased.
Annualized return on average assets for the six months ended March 31, 1998 and
1997, was 1.33% and 1.45%, respectively, and return on average equity was 5.44%
and 5.14%, respectively.
NET INTEREST INCOME
Net interest income on a full tax equivalent basis for the six months ended
March 31, 1998, was $5.8 million, an increase of $56,000, or 1.0%, when compared
to the six months ended March 31, 1997. The increase was volume related as the
Company increased its average earning assets $11.4 million, more than offsetting
the loss of net interest income due to the Company's funding of its stock
repurchase program. The Company funded the cost of the share repurchases which
averaged approximately $13.1 million more than the comparable period ended March
31, 1997, along with its growth in average earning assets with borrowings and,
to a lesser extent, deposit growth.
Interest income on a tax equivalent basis for the six months ended March 31,
1998, was $10.6 million, an increase of $633,000, or 6.4%, over the comparable
six month period. The increase was principally the deliberate shift of asset
mix, as the Company substantially reduced its average federal funds and other
short-term investments and increased its mortgage-backed securities portfolio.
Average mortgage-backed securities represented 30.9% of average earning assets
for the six months ended March 31, 1998, compared to 24.2% for the comparable
period of the prior year, while federal funds sold and other declined from 7.4%
to less than .1% of average earning assets between the periods. The average
yield on mortgage-backed securities during the six months ended March 31, 1998,
was 6.94%, down 11 basis points from the comparable period, but still higher
than the yield of 5.35% earned on average federal funds sold in the six months
ended March 31, 1997. Mortgage-backed securities yields declined 11 basis points
principally from the Company's purchase of $17.1 million of Treasury indexed
teaser rate ARM's, which yield much less than the fully indexed rate.
16
<PAGE>
The Company's investment portfolio had no teaser ARM's in the comparable period.
Management expects the average yield of these ARM's to increase as they 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 and
the securities prepayments. In addition, the yield on other securities increased
37 basis points to 7.06%, as the Company has been purchasing longer call
protected municipal securities to increase yields and reduce reinvestment risk
if rates decline.
Interest expense for the six months ended March 31, 1998, was $4.8 million, an
increase of $577,000, or 13.6%. The increase was principally volume related as
the Company increased average interest bearing liabilities $19.6 million, or
10.2%. The increases were to fund the Company's share repurchase program, as
well as to fund earning asset growth.
Average long-term borrowings were up $2.3 million, as the Company borrowed $5.0
million in January 1998, under the FHLB's convertible advance program, there
were no long-term borrowings in the comparable six month period. Average
short-term borrowings increased $11.3 million, and now represent 5.4% of average
interest bearing liabilities. In addition, the Company's average CD's increased
$8.0 million, or 8.7%, 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 14 basis points in
its cost of funds, principally caused by an increase in the level of borrowings
and CD's, which represent the Company's highest cost funding sources.
The Company's net yield on average earning assets was 4.07% for the six months
ended March 31, 1998, down 13 basis points compared to 4.20% for the comparable
period of the prior year. The decrease was principally caused by the Company's
stock repurchase program, which substantially reduced the level of no-cost
funding sources, and consequently increased the amount of average earning assets
funded by interest bearing liabilities. For the six months ended March 31, 1998,
the Company had $71.4 million of average earning assets with no funding costs, a
decrease of $8.3 million, or 10.4%, from the comparable six month period. The
Company did, however, increase its net spread 2 basis points to 2.91%, as the
Company's change in asset mix increased yields on earning assets more than
offsetting the increase in the cost of funds caused by the change in funding mix
to more borrowings, its highest cost funding source.
For more information on average balances, interest, yield and rate, please refer
to Table #2 included in this report.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $99,000 for the six months ended March 31,
1998, a decrease of $51,000 from the comparable six month period. The decrease
was primarily the result of a $64,000, or 43.8%, reduction in net charge-offs to
$82,000. In addition, the Company has reduced its non-performing loans $303,000,
or 32.1%, so that the allowance now represents 296.9% of non-performing loans at
March 31, 1998, as compared to 194.4% as of March 31, 1997.
17
<PAGE>
NON-INTEREST INCOME
Non-interest income was $259,000 for the six months ended March 31, 1998, a
decrease of $39,000, or 13.1%, from the comparable period. The decrease was
principally due to the $100,000 of Nationar recoveries in the six months ended
March 31, 1997; there were no Nationar recoveries in the six months ended March
31, 1998. Offsetting the impact of the Nationar recovery was an increase in net
securities gains of $47,000 and an increase of $19,000, or 16.5%, in service
charge income. The increase in securities gains was principally the sale of
certain ARM's with a lagging index, while the increase in service charges was
primarily the impact of the Company promoting non-interest bearing accounts to
commercial customers, which has increased the number of accounts.
NON-INTEREST EXPENSE
Non-interest expense for the six months ended March 31, 1998, was $2,742,000, an
increase of $230,000, or 9.2%, over the comparable six month period. Increases
in personnel costs and outside data processing fees were somewhat offset by
reductions in professional fees and other real estate expenses.
Salaries and employee benefits for the six months ended March 31, 1998,
increased $260,000, or 18.3%, principally from staffing new branches and the
increased cost of the Company's stock based compensation plans. Furthermore,
results for the six months ended March 31, 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 March 31, 1998. Stock based compensation costs increased $77,000, or
21.8%. ESOP compensation increased $41,000, or 25.3%, due to an increase in the
average market price of the Company's common stock. The cost of the MRP plan
increased $36,000, principally because the plan was only outstanding for a
portion of the six months ended March 31, 1997, as the plan was approved at a
special meeting of shareholders on October 24, 1996 ("special meeting"), and
became effective, immediately thereafter. Outside data processing fees were
$197,000, an increase of $16,000, or 8.8%, due to the new full service branch in
Windham, which has increased transaction volumes.
Professional fees were $104,000, a decrease of $28,000, or 21.2%, principally
from the costs associated with the special meeting held in the six months ended
March 31, 1997; there was no such meeting in the six months ended March 31,
1998.
Other real estate expenses, net were down $38,000, as the Company benefitted
from the substantial reduction in the number of parcels of other real estate.
INCOME TAX EXPENSE
Income tax expense for the six months ended March 31, 1998, was $1,152,000, a
decrease of $177,000, or 13.3%, from the comparable six month period. The
Company's effective tax rates for the six months ended March 31, 1998 and 1997,
were 37.38% and 39.81%, respectively. The decrease in both the income tax
expense and effective tax rate is directly attributable to the Company's
purchase of tax advantaged securities, primarily bank qualified municipal
securities and preferred stock.
18
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability to generate cash flows to meet present and expected
future funding needs. Management monitors the Company's liquidity position on a
daily basis to evaluate its ability to meet expected and unexpected depositor
withdrawals and to make new loans and or investments. The Company is seeking to
reduce its high level of liquidity, but continues to 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, and
principal and interest payments on loans, mortgage backed securities and other
securities available for sale.
Net cash provided by operating activities was $.5 million for the six months
ended March 31, 1998, a decrease of $.6 million from the comparable six month
period last year. The change was principally the reduction in accrued expenses
and other liabilities caused by a decrease in official bank checks outstanding.
Official bank checks decreased principally as a result of the Company's payment
of real estate taxes for mortgage borrowers using escrowed funds at September
30, 1997, and is somewhat offset by an increase in cash flows from financing
activities, as the Company experienced a net increase in advance payments by
borrowers for taxes and insurance of $1.5 million due to a change in school tax
due dates.
Investing activities used $5.9 million in the six months ended March 31, 1998,
as the Company continued to leverage its balance sheet by increasing earning
assets, principally $4.2 million in securities, and $1.7 million in loans.
Financing activities provided $5.8 million, as the Company experienced increases
in deposits, long-term borrowings, short-term borrowings and advances by
borrowers for taxes, somewhat offset by the purchase of treasury stock and
payment of cash dividends on its common stock. For more details concerning the
Company's cash flows, see "Consolidated Statements of Cash Flows."
An important source of the Company's funds is the Bank's core deposits.
Management believes that a substantial portion of the Bank's $203.8 million of
deposits are a dependable source of funds due to long-term customer
relationships. The Company does not currently use brokered deposits as a source
of funds, and at March 31, 1998, deposit accounts having balances in excess of
$100,000 totaled $19.6 million or less than 9.6% 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 March 1998, the Bank exceeded that, maintaining an
average liquidity ratio of 16.92%.
The Company anticipates that it will have sufficient funds to meet its current
commitments. At March 31, 1998, the Company had commitments to originate loans
of $3.6 million. In addition, the Company had undrawn commitments of $2.4
million on home equity and other lines of credit. Certificates of deposits which
are scheduled to mature in one year or less at March 31, 1998, totaled $71.3
million, and management believes that a significant portion of such deposits
will remain with the Company.
19
<PAGE>
Although there are no minimum capital ratio requirements for the Company, the
Bank is required to maintain minimum regulatory capital ratios. The following is
a summary of the Bank's actual capital amounts and ratios at March 31, 1998,
compared to the OTS minimum capital requirements:
Actual Minimum
------ -------
Amount % Amount %
------ ---- ------ ----
(Dollars in Thousands)
Tangible Capital $61,166 20.9% $ 4,394 1.5%
Core Capital 61,166 20.9 11,717 4.0
Risk Based Capital 62,442 60.4 8,268 8.0
In November 1997, the Company received a regulatory waiver from the OTS to
repurchase up to 5% or 241,117 shares of its common stock outstanding. The
Company, as of March 31, 1998, had repurchased 220,500 shares under the current
program, which expires April 18, 1998. The Company itself has adequate resources
to repurchase the remaining 20,617 shares without dividends from the Bank.
Furthermore, at March 31, 1998, the Bank could pay $26.6 million of dividends to
the Company after notifying the OTS in writing.
IMPACT OF YEAR 2000
The Company's progress on its Year 2000 issue is continuing. The Company
received additional guidance from its primary service provider, including a
$25,000 cost estimate to be passed along to the Company as a "validation" fee.
The testing program is quite extensive and will involve end-to-end testing. 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 available, but management has not negotiated
what these costs will be, however, it does not expect these costs to have a
material impact on its consolidated financial condition or results of
operations.
PART I - FINANCIAL INFORMATION (CONTINUED)
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company believes there have been no material changes in the Company's
interest rate risk position since September 30, 1997. Other types of market
risk, such as foreign exchange rate risk and commodity price risk, do not arise
in the normal course of the Company's business activities.
20
<PAGE>
TABLE #1 AVERAGE BALANCES, INTEREST, YIELD AND RATE
The following table presents, for the periods indicated, the total dollar amount
of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. Tax equivalent adjustments reflected
principally on municipal securities totalled $75,000 in the three month period
ended March 31, 1998; there were no tax equivalent adjustments in the comparable
period. All average balances are daily average balances. Non-accruing loans have
been included in the table as loans receivable with interest earned recognized
on a cash basis only. Securities include both the securities available for sale
portfolio and the held to maturity portfolio, other than mortgage backed
securities which are shown separately. Mortgage backed securities are primarily
classified as available for sale. Securities available for sale are shown at
amortized cost.
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED
--------------------------------------------------------------------
March 31, 1998 March 31, 1997
------------------------------- ----------------------------------
Average Average
Balance Interest Yield/rate Balance Interest Yield/rate
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans receivable, net $126,961 $2,534 7.98% $125,069 $2,503 8.01%
Mortgage-backed securities 89,256 1,530 6.86% 79,091 1,390 7.03%
Other securities 68,710 1,224 7.13% 58,652 982 6.70%
Federal funds sold and other 129 3 9.43% 6,878 88 5.19%
------- ------ -------- ------
Total interest-earning assets 285,056 5,291 7.42% 269,690 4,963 7.36%
Allowance for loan losses (1,900) ------ (1,845) ------
Other assets, net 9,621 6,983
-------- --------
Total Assets $292,777 $274,828
======== ========
Interest-Bearing Liabilities
Savings deposits $ 78,657 $ 644 3.32% $ 80,807 $ 697 3.50%
Money market 6,412 50 3.16% 7,454 59 3.21%
Now deposits 11,043 67 2.46% 9,119 55 2.45%
Certificates of deposit 101,637 1,417 5.65% 93,428 1,282 5.56%
Short-term borrowings 10,065 144 5.80% 122 2 6.65%
Long-term borrowings 4,624 58 5.09% --
Escrow and other 1,587 10 2.56% 1,439 7 1.97%
-------- ------ -------- ------
Total interest-bearing
liabilities 214,025 2,390 4.53% 192,369 2,102 4.43%
Non-interest bearing 4,886 ------ 3,646 ------
Other liabilities 3,114 2,822
Shareholders' equity 70,752 75,991
-------- --------
Total Equity and Liabilities $292,777 $274,828
======== ========
Net interest income $2,901 $2,861
====== ======
Net interest rate spread 2.89% 2.93%
==== ====
Net yield on average 4.13% 4.30%
interest-earning assets ==== ====
Average interest earning
assets to average interest
bearing liabilities 133.19% 140.19%
======== ========
Earning Assets/Total Assets 97.36% 98.13%
======== ========
</TABLE>
21
<PAGE>
TABLE #2 AVERAGE BALANCES, INTEREST, YIELD AND RATE
The following table presents, for the periods indicated, the total dollar amount
of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. Tax equivalent adjustments reflected
principally on municipal securities totalled $94,000 in the six month period
ended March 31, 1998; there were no tax equivalent adjustments in the comparable
period. All average balances are daily average balances. Non-accruing loans have
been included in the table as loans receivable with interest earned recognized
on a cash basis only. Securities include both the securities available for sale
portfolio and the held to maturity portfolio, other than mortgage backed
securities which are shown separately. Mortgage backed securities are primarily
classified as available for sale. Securities available for sale are shown at
amortized cost.
<TABLE>
<CAPTION>
SIX MONTH PERIODS ENDED
-----------------------------------------------------------------------
March 31, 1998 March 31, 1997
--------------------------------- ---------------------------------
Average Average
Balance Interest Yield/rate Balance Interest Yield/rate
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans receivable, net $126,692 $ 5,085 8.03% $125,346 $5,046 8.05%
Mortgage-backed securities 87,723 3,044 6.94% 65,860 2,321 7.05%
Other securities 69,143 2,440 7.06% 60,880 2,035 6.69%
Federal funds sold and other 86 4 9.33% 20,181 538 5.35%
-------- ------- -------- ------
Total interest-earning assets 283,644 10,573 7.46% 272,267 9,940 7.30%
Allowance for loan losses (1,888) (1,829) ------
Other assets, net 9,196 6,736
-------- --------
Total Assets $290,952 $277,174
======== ========
Interest-Bearing Liabilities
Savings deposits $ 78,446 $ 1,326 3.39% $ 81,454 $1,420 3.50%
Money market 6,669 106 3.19% 7,641 127 3.33%
Now deposits 11,015 135 2.46% 9,167 112 2.45%
Certificates of deposit 100,789 2,841 5.65% 92,743 2,562 5.54%
Short-term borrowings 11,384 328 5.78% 61 2 6.58%
Long-term borrowings 2,312 59 5.12% --
Escrow and other 1,579 20 2.54% 1,494 15 2.01%
-------- ------- -------- ------
Total interest-bearing 212,194 4,815 4.55% 192,560 4,238 4.41%
liabilities ------- ------
Non-interest bearing 4,731 3,612
Other liabilities 2,930 2,600
Shareholders' equity 71,094 78,402
-------- --------
Total Equity and Liabilities $290,949 $277,174
======== ========
Net interest income $ 5,758 $5,702
======= ======
Net interest rate spread 2.91% 2.89%
==== ====
Net yield on average 4.07% 4.20%
interest-earning assets ==== ====
Average interest earning
assets to average interest
bearing liabilities 133.67% 141.39%
======== ========
Earning Assets/Total Assets 97.49% 98.23%
======== ========
</TABLE>
22
<PAGE>
CATSKILL FINANCIAL CORPORATION
FORM 10-Q
MARCH 31, 1998
================================================================================
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In the ordinary course of business, the Company and the Bank are subject to
legal actions which involve claims for monetary relief. Management, based on
advice of counsel, does not believe that any currently known legal actions,
individually or in the aggregate will have a material effect on its consolidated
financial condition or results of operation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of shareholders held on February 17, 1998, there were
3,139,552 voting shares present in person or by proxy, which represented 67.81%
of the Company's outstanding shares of 4,630,243. Votes were taken on the
following shareholder proposals:
Proposal #1 "Election of one director, to serve for a three year term
and until his successor has been duly elected and qualified."
Votes
For Withheld
--------- --------
Richard A. Marshall 3,122,148 17,404
The Board of Directors of the Company currently consists of six
members. In addition to the director named above, continuing directors
are Wilbur J. Cross, George P. Jones, Allan D. Oren, Hugh J. Quigley
and Edward P. Stiefel.
Proposal #2 "Ratification of the appointment of KPMG Peat Marwick LLP
as auditors for the Company for the fiscal year ending September 30,
1998."
Votes Votes
For Against Abstain
--------- ------- -------
3,114,724 10,391 14,437
There were no broker non-votes for either proposal #1 or proposal #2.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(11) Computation of Net Income per Common Share
(27) Financial Data Schedule (included only in EDGAR filing)
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CATSKILL FINANCIAL CORPORATION
Date: May 14, 1998 /s/ WILBUR J. CROSS
------------------------------------
Wilbur J. Cross
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1998 /s/ DAVID J. DELUCA
------------------------------------
David J. DeLuca
Chief Financial Officer
(Principal Financial and
Accounting Officer)
24
Exhibit 11
<TABLE>
<CAPTION>
CATSKILL FINANCIAL CORPORATION
COMPUTATION OF NET INCOME PER COMMON SHARE
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Three Months Ended March 31, Six Months Ended March 31,
---------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME PER COMMON SHARE - BASIC
Net income applicable to common shares $ 972 $ 943 $ 1,930 $ 2,009
Weighted average common shares outstanding 4,165,075 4,710,177 4,208,213 4,902,587
Net income per common share - basic $.23 $.20 $.46 $.41
==== ==== ==== ====
NET INCOME PER COMMON SHARE - DILUTED
Net income applicable to common shares $ 972 $ 943 $ 1,930 $ 2,009
Weighted average common shares outstanding 4,165,075 4,710,177 4,208,213 4,902,587
Dilutive common stock options (1) 129,025 86,418 128,164 33,118
---------- ---------- ---------- ----------
Weighted average common shares and
common share equivalents outstanding 4,294,100 4,796,595 4,336,377 4,935,705
========== ========== ========== ==========
Net income per common share - diluted $.23 $.20 $.45 $.41
==== ==== ==== ====
</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.
26
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,623
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 157,571
<INVESTMENTS-CARRYING> 3,062
<INVESTMENTS-MARKET> 3,109
<LOANS> 127,550
<ALLOWANCE> 1,906
<TOTAL-ASSETS> 295,932
<DEPOSITS> 203,815
<SHORT-TERM> 12,920
<LIABILITIES-OTHER> 4,880
<LONG-TERM> 5,000
0
0
<COMMON> 57
<OTHER-SE> 69,260
<TOTAL-LIABILITIES-AND-EQUITY> 295,932
<INTEREST-LOAN> 5,085
<INTEREST-INVEST> 5,325
<INTEREST-OTHER> 69
<INTEREST-TOTAL> 10,479
<INTEREST-DEPOSIT> 4,429
<INTEREST-EXPENSE> 4,815
<INTEREST-INCOME-NET> 5,664
<LOAN-LOSSES> 99
<SECURITIES-GAINS> 52
<EXPENSE-OTHER> 2,742
<INCOME-PRETAX> 3,082
<INCOME-PRE-EXTRAORDINARY> 3,082
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,930
<EPS-PRIMARY> .46
<EPS-DILUTED> .45
<YIELD-ACTUAL> 4.07
<LOANS-NON> 642
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,998
<ALLOWANCE-OPEN> 1,889
<CHARGE-OFFS> 89
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 1,906
<ALLOWANCE-DOMESTIC> 1,491
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 415
</TABLE>
