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, 1999
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 17, 1999, the aggregate market value of 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 $44.7 million.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Shares, $.01 par value 3,789,211
(Title of class) (outstanding at December 17, 1999)
<PAGE>
ANNUAL REPORT FOR 1999 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
Reports on Form 8-K
SIGNATURES
DOCUMENTS INCORPORATED BY REFERENCE
Documents Part of 10-K into which incorporated
--------- ------------------------------------
Portions of the Annual Report to
Stockholders for fiscal year
ended September 30, 1999. Parts II and IV
Definitive Proxy Statement of the
Registrant dated January 14, 2000,
in connection with the Annual
Meeting of Stockholders to be
held February 15, 2000, which is
expected to be filed on/or about
January 14, 2000. 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 Company 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 Company's primary market
area is comprised of Greene County and southern Albany and Schoharie Counties in
New York, serviced by the Bank's main office and five other banking offices.
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 such as borrowings, to originate one to four
family residential mortgages and, to a lesser extent, consumer (including home
equity lines of credit), commercial and multi-family real estate and other loans
in the Bank's primary market area. The Bank offers deposit accounts having a
range of interest rates and terms. The Bank only solicits deposits in its
primary market area and does not have brokered deposits. The Bank is a member of
the Federal Home Loan Bank of New York ("FHLB").
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. As a result of these examinations,
the Bank can be required to adjust its loan classifications or allowance for
loan losses, take other actions to correct deficiencies found during the
examinations, or cease engaging in certain activities. The Bank is generally
permitted to open deposit-taking branches throughout the United States,
regardless of local laws regarding branching.
The OTS may institute enforcement action against the Bank for violations of law
or for unsafe and unsound banking practices. Enforcement actions can include the
issuance of cease and desist orders, the commencement of removal proceedings in
which an employee, officer or director can be removed from involvement with the
Bank, the assessment of civil monetary penalties, and injunctive relief. The
FDIC may terminate the insurance of deposits, after notice and hearing, upon a
finding that an institution has engaged in unsafe and unsound practices, cannot
continue operations because it is in an unsafe and unsound condition, or has
violated any applicable law, regulation, rule, order or condition imposed by the
OTS or FDIC. The FDIC may instead impose less severe sanctions. Neither the OTS
nor the FDIC (which was also the Bank's primary federal regulator before the
Bank became a federal savings bank in January 1996) has 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 $7.8 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, 1999, 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, 1999, the Bank's OTS assessment was $35,474.
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 similar 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.
New Legislation. After the end of our 1999 fiscal year, President Clinton signed
the Gramm-Leach-Bliley Act which makes substantial changes in the permitted
relationships between banks, securities firms, insurance companies and their
holding companies. The statute is too new to be able to fully evaluate its
effects on the Company and the Bank. However, the Company believes most of the
direct effects of the statute will be minimal because it primarily affects the
operations of much larger institutions.
One significant change in the law which could indirectly affect the Company is a
change in the ability to become a unitary savings and loan holding company. In
general, the Company, as a unitary savings and loan holding company, may engage,
through non-banking subsidiaries, in whatever activities it wants to engage in.
The new law protects the existing rights of the Company to engage in a wide
range of activities. However, there can be no new unitary savings and loan
holding companies and existing companies cannot take advantage of the old law by
acquiring a pre-existing unitary savings and loan holding company. This could
adversely affect the market price of the stock of existing savings and loan
holding companies because acquisitions of them could cause them to lose their
broad powers to engage in non-banking activities.
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, 1999, the Bank had a tangible
capital ratio of 15.18%, a core capital ratio of 15.18% and a risk based capital
ratio of 31.75%. 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 had
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 Company.
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 for fiscal 1999 was approximately .012% of
insured deposits.
Dividend Restrictions. OTS regulates the amount of dividends and other capital
distributions payable by the Bank to the Company. In general, if the Bank will
satisfy all OTS capital requirements both before and after the distribution, the
Bank may make capital distributions to the Company in any year equal to the
current year's net income plus retained net income for the preceding two
calendar years. However, the Bank must notify the OTS of the distribution and
the OTS may object on safety and soundness grounds.
If any capital distribution will exceed these limits, or if the OTS either
considers the Bank a troubled or problem institution or gives the Bank a rating
in less than the two highest rating categories, then the Bank must get OTS
approval before making a capital distribution. The Bank is not currently
required to obtain OTS approval unless it exceeds the dollar limits. The Bank
paid $8.0 million in dividends to the Company in calendar year 1998, and expects
to pay dividends of $9.0 million in calendar year 1999, $8.0 million of which
had already been paid by September 30, 1999. Since the dividends paid in
calendar year 1998 and 1999 will exceed net income earned during those years,
dividends payable to the Company in calendar year 2000 would be limited to that
year's net income, unless the Bank requests prior OTS approval.
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, 1999, as well as
for every month during fiscal 1999.
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. Under
recently adopted rules the Bank's CRA performance is now evaluated based upon
the lending, investment and service activities of the Company. The Bank received
a `satisfactory' CRA rating from the OTS 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 Company. 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 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 Company'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 in
recent years.
Overall, the population of Albany County has remained relatively steady in the
last decade while the more rural Greene County benefited from a population
expansion. In 1995, Greene County registered a 48,000 population count, a 10.1%
increase from 1985.
The business sectors in Greene County which account for the largest percentage
of earnings are state and local government, the service industry and wholesale
and retail trade. Manufacturing also accounts for a noteworthy percentage of
earnings in Greene County. The New York State Thruway, which runs through Greene
County, as well as the county's lower cost of living, are attractive features to
local employers, especially distributors such as United Stationers and
manufacturers such as Dynabil Industries. Major sources of employment in Greene
County include a state prison, the county government and various health care
facilities, as well as various manufacturing companies.
Based on the FDIC annual deposit summary as of June 30, 1999, which is the
latest available data, there are a total of 20 branch offices of commercial
banks and thrift institutions in Greene County and 116 in Albany County. The
Company's four offices in Greene County hold 30.1% of all deposits and 57.6% of
thrift institution deposits. In Albany County, with a much larger deposit base,
the Company's share of all deposits was approximately 0.8%.
The Company's newest office opened in August 1999, in Schoharie County. As of
June 30, 1999, Schoharie County had 12 offices with total deposits of $295.3
million.
Lending Activities
General. The Company'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 Company 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 Company'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 Company originates multi-family and commercial real estate loans.
Loan originations are generated by the Company's marketing efforts, which
include print and radio advertising, lobby displays and direct contact with
local civic organizations, as well as by the Company's present customers,
walk-in customers and referrals from real estate agents and builders. At
September 30, 1999, the Company's gross loan portfolio totaled $153.0 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. Company 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 at least
annually by the Board of Directors.
The aggregate amount of loans that the Company 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,
1999, the maximum amount which the Company could have loaned to any one borrower
and the borrower's related entities was approximately $7.8 million. At that
date, the Company's largest lending relationship (representing less than 1% of
the Company'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,
1999, there were only thirteen other loans (or lending relationships) with
outstanding balances in excess of $250,000, aggregating $6.4 million, or less
than 4.2% of the Company's total loan portfolio.
<PAGE>
Loan Portfolio Composition. The following table presents information concerning
the composition of the Company's loan portfolio in dollar amounts and in
percentages as of the dates indicated.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------------------
1999 1998 1997
--------------------- -------------------- -------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One to four family.................... $121,151 79.19% $113,423 81.02% $102,232 80.69%
Multi-family and commercial........... 7,940 5.19 6,389 4.56 4,691 3.70
Construction.......................... 3,176 2.07 1,182 0.85 1,306 1.03
-------- ------ -------- ------ -------- -----
Total real estate loans........... 132,267 86.45 120,994 86.43 108,229 85.42
-------- ------ -------- ------ -------- -----
Commercial Loans....................... 994 .65 602 .43 63 .05
-------- ------ -------- ------ -------- -----
Consumer Loans:
Automobile........................... 7,947 5.20 6,301 4.50 6,655 5.25
Home equity.......................... 3,064 2.00 3,490 2.49 3,709 2.93
Other secured........................ 3,289 2.15 2,912 2.08 3,385 2.67
Student.............................. 2,707 1.77 2,795 2.00 2,658 2.10
Other unsecured...................... 2,355 1.54 2,366 1.69 1,316 1.04
Mobile home.......................... 367 .24 535 .38 687 .54
-------- ------ -------- ------ -------- -----
Total consumer loans.............. 19,729 12.90 18,399 13.14 18,410 14.53
-------- ------ -------- ------ -------- -----
Total Loans............................ 152,990 100.00% 139,995 100.00% 126,702 100.00%
-------- ====== -------- ====== -------- ======
Less:
Net deferred fees..................... 76 260 476
Allowance for loan losses............. 2,093 1,950 1,889
-------- -------- --------
Total loans receivable, net........... $150,821 $137,785 $124,337
======== ======== ========
<PAGE>
<CAPTION>
September 30,
------------------------------------------------
1996 1995
-------------------- -------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real Estate Loans:
One to four family.................... $100,383 80.34% $ 95,588 79.04%
Multi-family and commercial........... 5,115 4.09 5,132 4.24
Construction.......................... 423 .34 230 .19
-------- ------ -------- ------
Total real estate loans........... 105,921 84.77 100,950 83.47
-------- ------ -------- ------
Commercial Loans....................... --- --- --- ---
-------- ------ -------- ------
Consumer Loans:
Automobile........................... 7,029 5.63 6,652 5.50
Home equity.......................... 4,368 3.50 5,393 4.46
Other secured........................ 2,965 2.37 2,970 2.46
Student.............................. 2,450 1.96 2,373 1.96
Other unsecured...................... 1,430 1.15 1,415 1.17
Mobile home.......................... 782 .62 1,185 .98
-------- ------ -------- ------
Total consumer loans.............. 19,024 15.23 19,988 16.53
-------- ------ -------- ------
Total Loans............................ 124,945 100.00% 120,938 100.00%
-------- ====== ------- ======
Less:
Net deferred fees..................... 579 624
Allowance for loan losses............. 1,833 1,950
-------- --------
Total loans receivable, net........... $122,533 $118,364
======== ========
</TABLE>
<PAGE>
The following table presents the composition of the Company's loan portfolios by
fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------------
(Dollars in thousands)
1999 1998 1997
-------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One to four family......................... $97,428 63.68% $83,643 59.75% $67,782 53.50%
Multi-family and commercial................ 3,987 2.61 3,395 2.43 1,850 1.46
Construction............................... 3,060 2.00 1,079 .77 1,306 1.03
------- ------ ------- ------ ------- ------
Total real estate loans................. 104,475 68.29 88,117 62.95 70,938 55.99
------- ------ ------- ------ ------- ------
Consumer.................................... 13,958 9.12 12,114 8.65 14,638 11.55
------- ------ ------- ------ ------- ------
Total fixed-rate loans.................. 118,433 77.41 100,231 71.60 85,576 67.54
Adjustable-Rate Loans:
Real estate:
One to four family......................... 23,723 15.51 29,780 21.27 34,450 27.19
Multi-family and commercial................ 3,953 2.58 2,994 2.14 2,904 2.29
Construction............................... 116 .08 103 .07 --- ---
------- ------ ------- ------ ------- ------
Total real estate loans................. 27,792 18.17 32,877 23.48 37,354 29.48
------- ------ ------- ------ ------- ------
Consumer.................................... 5,771 3.77 6,285 4.49 3,709 2.93
------- ------ ------- ------ ------- ------
Commercial.................................. 994 .65 602 .43 63 .05
------- ------ ------- ------ ------- ------
Total adjustable-rate loans............. 34,557 22.59 39,764 28.40 41,126 32.46
------- ------ ------- ------ ------- ------
Total loans............................. 152,990 100.00% 139,995 100.00% 126,702 100.00%
------- ====== ------- ====== ------- ======
Less:
Net deferred fees........................... 76 260 476
Allowance for loan losses................... 2,093 1,950 1,889
------- ------- -------
Total loans receivable, net.............. 150,821 137,785 124,337
======= ======= =======
<PAGE>
<CAPTION>
September 30,
------------------------------------------------
(Dollars in thousands)
1996 1995
-------------------- -------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One to four family......................... $63,491 50.81% $53,993 44.65%
Multi-family and commercial................ 2,142 1.71 1,743 1.44
Construction............................... 423 0.34 230 .19
------- ------ ------- ------
Total real estate loans................. 66,056 52.86 55,966 46.28
------- ------ ------- ------
Consumer.................................... 14,656 11.73 14,595 12.06
------- ------ ------- ------
Total fixed-rate loans.................. 80,712 64.59 70,561 58.34
Adjustable-Rate Loans:
Real estate:
One to four family......................... 36,892 29.53 41,595 34.40
Multi-family and commercial................ 2,973 2.38 3,389 2.80
Construction............................... --- --- --- ---
------- ------ ------- ------
Total real estate loans................. 39,865 31.91 44,984 37.20
------- ------ ------- ------
Consumer.................................... 4,368 3.50 5,393 4.46
------- ------ ------- ------
Commercial.................................. --- --- --- ---
------- ------ ------- ------
Total adjustable-rate loans............. 44,233 35.41 50,377 41.66
------- ------ ------- ------
Total loans............................. 124,945 100.00% 120,938 100.00%
------- ====== ------- ======
Less:
Net deferred fees........................... 579 624
Allowance for loan losses................... 1,833 1,950
-------- --------
Total loans receivable, net.............. $122,533 $118,364
======== ========
</TABLE>
<PAGE>
The following table sets forth the contractual maturities of the Company's loan
portfolio at September 30, 1999. 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,
-------------------------------------
2000(1) 2001 2002 2003-2004 2005-2009
---------------- ----------------- ---------------- ---------------- -----------------
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 $7,003 7.35% $ 7,481 7.34% $ 7,855 7.38% $16,294 7.35% $38,950 7.26%
Multi-family and 336 8.73 387 8.69 572 8.88 2,712 8.57 1,450 8.50
Commercial..............
Construction............ 3,078 7.82 --- --- --- --- --- --- --- ---
Commercial
- ------------------------
Lines of credit......... 994 9.64 --- --- --- --- --- --- --- ---
Consumer
- ------------------------
Consumer ............... 5,094 9.11 3,826 8.87 2,702 8.96 2,717 9.09 1,156 9.23
------- ------- ------- ------- -------
Total Loans........ $16,505 8.15% $11,694 7.89% $11,129 7.84% $21,723 7.72% $41,556 7.36%
======= ======= ======= ======= =======
<CAPTION>
Due During Years Ending September 30,
-------------------------------------
2010-2014 2015 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 $27,353 7.24% $16,215 7.36% $121,151 7.30%
Multi-family and 1,340 8.75 1,143 8.59 7,940 8.63
Commercial..............
Construction............ --- --- 98 7.30 3,176 7.81
Commercial
- ------------------------
Lines of credit......... --- --- --- --- 994 9.64
Consumer
- ------------------------
Consumer ............... 1,723 7.72 2,511 8.60 19,729 8.86
------- ------- --------
Total Loans........ $30,416 7.34% $19,967 7.59% $152,990 7.60%
======= ======= ========
</TABLE>
(1) Includes demand loans, loans having no stated maturity and line of credit
loans.
<PAGE>
One to Four Family Residential Real Estate Lending
The Company's residential mortgage loan portfolio consists principally of loans
to purchase or refinance one to four family, owner-occupied residences and, to a
lesser extent, secondary residences. At September 30, 1999, $121.2 million, or
79.2%, of the Company's gross loans consisted of one to four family residential
mortgage loans. Approximately 80.4% of the Company's one to four family
residential mortgage loans provide for fixed rates of interest. The Company's
one to four family mortgage loans typically provide for repayment of principal
over a period not to exceed 30 years. The Company's one to four family
residential mortgage loans are priced competitively with the market.
Accordingly, the Company attempts to distinguish itself from its competitors
based on the quality of service.
The Company underwrites its one to four family residential mortgage loans using
Federal National Mortgage Association ("FNMA") secondary market standards. The
Company holds in its portfolio all of the one to four family residential
mortgage loans it originates. While the Company 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 Company. In underwriting one- to four-family residential mortgage loans,
the Company 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 appraisers.
The Company requires borrowers to obtain title insurance and hazard insurance
(including flood insurance, where appropriate) naming the Company as lienholder
in an amount not less than the amount of the loan, or the maximum insurable
value of the property.
The Company 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. In addition, 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 2.0% 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 Company'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
Company'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, 1999, however,
the Company had not experienced default rates on these loans materially higher
than on similar fixed rate loans.
The Company'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 Company generally contain a "due on sale" clause
allowing the Company to declare the unpaid principal balance due and payable
upon the sale of the mortgaged property. The Company may waive the due on sale
clause on loans held in its portfolio to permit assumptions of loans by
qualified borrowers.
The Company 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 Company requires that borrowers obtain
private mortgage insurance in amounts intended to reduce the Company's exposure
to 80% or less of the lower of the appraised value or the purchase price of the
real estate security.
The Company also offers construction loans to individuals for the construction
of their residences. The Company 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 Company or
another financial institution. Construction loans generally require construction
stage inspections before funds may be released to the borrower. At September 30,
1999, the Company's construction loan portfolio totaled $3.2 million, or
approximately 2.1% of its gross loan portfolio. Although no construction loans
were classified as non-performing as of September 30, 1999, 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 Company may have to hire another contractor to complete the
project at a higher cost, or completion could be delayed.
Multi-Family and Commercial Real Estate Lending
The Company has engaged in multi-family and commercial real estate lending
secured primarily by small offices, retail establishments and apartment
buildings located in the Company's primary market area. At September 30, 1999,
the Company had multi-family and commercial real estate loans totaling $8.0
million, which represented 5.2% of the Company's gross loan portfolio.
Multi-family and commercial real estate loans originated by the Company
generally have a variety of rate adjustment features and other terms. The
Company'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 Company 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 Company 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 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
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 Company currently originates substantially all of its consumer loans in its
primary market area. Management believes that offering consumer loan products
helps expand the Company'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 Company originates consumer loans
principally on a direct basis, in which the Company extends credit directly to
the borrower. At September 30, 1999, the Company's consumer loan portfolio
totaled $19.7 million, or 12.9% of the gross loan portfolio. Of consumer loans
at September 30, 1999, 70.7% were fixed-rate loans and 29.3% were
adjustable-rate loans.
The Company 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 25 years for
home equity lines of credit and 15 years for all other types of consumer loans.
Unsecured consumer lines of credit are extended to borrowers through their
checking account maintained at the Company. These credit lines currently bear
interest at 18.0% and are generally limited to $10,000.
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, 1999, automobile loans, the largest component of the Company's
consumer loan portfolio, totaled $7.9 million, or 40.3% of the Company's total
consumer loan portfolio and 5.2% of the Company's gross loan portfolio. The
Company originates loans to purchase both new and used automobiles at fixed
rates of interest and terms of up to six years. Generally, the Company's maximum
loan-to-value ratio on new and used automobile loans is 100% of the borrower's
cost, which includes such items as dealer options and sales tax. In June 1998,
the Company began originating consumer loans, principally auto loans, on an
indirect basis through a very limited number of dealers. The terms are
substantially the same as its direct loans, with the Company generally
underwriting the loans consistent with its existing credit standards. At
September 30, 1999, the Company had $2.6 million of indirect loans, representing
32.3% of the $7.9 million automobile loans and less than 1.7% of the Company's
gross loan portfolio.
Advances on home equity lines of credit represent the second largest component
of the Company's consumer loan portfolio. The Company'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
and/or under the prime rate. Home equity lines of credit generally require
interest only payments on the outstanding balance for the first ten years of the
loan, after which the outstanding balance may be converted into a fully
amortizing, adjustable-rate loan with a term not in excess of 15 years. As of
September 30, 1999, the Company had $3.1 million in outstanding advances on home
equity lines of credit, with an additional $1.9 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, 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, 1999,
$148,000, or .75% of the Company's consumer loan portfolio was non-performing,
approximately 46% of which 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
Company, 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 Company 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
Company's primary market area. The Company is one of 119 participating
commercial and savings banks. At September 30, 1999, the Company had
approximately $994,000 in commercial business loans outstanding, representing
less than 1.0% of its loan portfolio. In addition, certain commercial borrowers,
including the NYBDC, had unused lines of credit totaling $894,000 as of
September 30, 1999. At September 30, 1999, all of the Company'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 Company's loans are originated by its salaried employees, except for
certain auto loans, which are generated on an indirect basis.
The Company's ability to originate loans is dependent upon demand for loans in
its market. Demand is affected by the local economy and the interest rate
environment. The Company retains all new fixed-rate and adjustable-rate real
estate loans in its portfolio. The Company does not sell loans and has not
purchased any loans since fiscal 1993.
During the year ended September 30, 1999, the Company originated $38.7 million
of loans, compared to $38.9 million and $21.2 million in fiscal 1998 and 1997,
respectively. Management attributes the increase in originations during fiscal
1999 and 1998 to the low interest rate environment, in which interest rates on
fixed rate loans were at the lowest levels since 1993.
In periods of economic uncertainty, the Company's ability to originate
sufficient real estate loans with acceptable underwriting characteristics may be
substantially reduced or restricted. This could decrease net interest income, as
assets may have to be invested in lower-yielding securities or similar
investments. While the Company has no present intention to sell loans,
management may consider selling loans in the future depending on market
conditions and the asset/liability management requirements of the Company.
The following table shows the loan originations, purchases, sales, and repayment
activities of the Company for the periods indicated. The Company did not
purchase or sell any loans during the periods presented.
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Originations by type:
One to four family and construction.............. $ 24,133 $ 24,051 $ 12,588
Multi-family and commercial....................... 3,684 5,184 110
Consumer.......................................... 10,839 9,683 8,584
-------- -------- --------
Total loans originated..................... 38,656 38,918 21,282
-------- -------- --------
Purchases:
Total............................................. --- --- ---
Sales:
Total............................................. --- --- ---
Repayments:
Principal repayments.............................. (25,629) (25,373) (18,705)
Increase (decrease) in other items, net........... (32) (252) (820)
-------- -------- --------
Net increase (decrease).................... $ 12,995 $ 13,293 $ 1,757
======== ======== =======
</TABLE>
Asset Quality
Generally, when a borrower fails to make a required payment on a loan secured by
residential real estate, the Company initiates collection procedures by mailing
a delinquency notice after the account is 15 days delinquent. At 30 days
delinquent, the Company 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 Company again attempts to contact
the customer by telephone and another personal letter is sent. After 60 days
delinquent, the Company may commence foreclosure proceedings.
With respect to consumer loans, when a borrower fails to make a required
payment, the Company 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 Company 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 45 days delinquent, the Company again attempts to
contact the customer by telephone to secure payment. If the delinquency is not
cured by the 60th day, the Company refers the loan to its attorney, who sends
another personal letter notifying the customer that no further payments will be
accepted by the Company absent a meeting between the customer and a Company loan
officer. If no satisfactory arrangements have been made by the last business day
of the fourth month, repossession of collateral, if possible, is undertaken and,
if necessary, legal proceedings are generally commenced to collect the loan.
The following table sets forth the Company's loan delinquencies by type, by
amount and by percentage of that type at September 30, 1999.
<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................... 5 $ 300 .25% 7 $ 396 .33% 12 $696 .57%
Multi-family and -- -- -- -- -- -- -- -- --
Commercial real estate... -- -- -- -- -- -- -- -- --
Commercial................ -- -- -- -- -- -- -- -- --
Consumer.................. 13 47 .24 15 148 .75 28 195 .99
---- ----- ---- ----- ---- ----
Total................ 18 $ 347 .23% 22 $ 544 .36% 40 $891 .58%
==== ===== ==== ===== ==== ====
</TABLE>
Non-Performing Assets. The table below sets forth the amounts and categories of
the Company'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,
----------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-performing loans:
One to four family real estate ........ $ 396 $ 520 $ 780 $1,008 $ 784
Multi-family and commercial real estate -- -- -- 78 --
Consumer .............................. 148 71 137 283 251
------ ------ ------ ------ ------
Total .............................. $ 544 $ 591 $ 917 $1,369 $1,035
------ ------ ------ ------ ------
Troubled debt restructured loans:
Total .............................. -- -- -- -- --
------ ------ ------ ------ ------
Foreclosed assets, net:
One to four family real estate ........ -- 53 225 334 326
Multi-family and commercial real estate -- -- 23 23 158
------ ------ ------ ------ ------
Total .............................. -- 53 248 357 484
------ ------ ------ ------ ------
Total non-performing assets ............. $ 544 $ 644 $1,165 $1,726 $1,519
====== ====== ====== ====== ======
Total as a percentage of total assets ... .16% .20% .40% .61% .66%
====== ====== ====== ====== ======
</TABLE>
For the years ended September 30, 1999, 1998 and 1997, the additional gross
interest income which would have been recorded had the non-accruing loans been
current in accordance with their original terms amounted to $31,091, $28,053 and
$49,948, respectively.
Non-Accruing Loans. As of September 30, 1999, the Company had $396,000 in
non-accruing loans, which consisted of 7 one- to four-family residential
mortgage loans and represented .26% of the Company's gross loan portfolio.
Foreclosed Assets. As of September 30, 1999, the Company had no foreclosed
assets.
Other Loans of Concern. As of September 30, 1999, there were $299,337 of other
loans (consisting of four one to four family real estate loans totaling $272,087
and five consumer loans totaling $27,250) not included in nonperforming loans
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.
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 Company 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, 1999, the Company had
classified $571,000 as substandard and none as doubtful or loss.
Allowance for Loan Losses. At September 30, 1999, the Company had a total
allowance for loan losses of $2,093,000, representing 384.7% 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 charged to
operations.
The determination of the adequacy of the allowance is necessarily speculative,
and is based upon future loan performance outside the control of the Company.
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 income 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 Company's allowance for loan losses. Such agencies may
require the Company to increase the allowance based upon their judgment of the
information available to them at the time of their examination.
<PAGE>
The following table sets forth an analysis of the Company's allowance for loan
losses.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year ............ $ 1,950 $ 1,889 $ 1,833 $ 1,950 $ 1,746
Charge-offs:
One to four family real estate ........ (6) (58) (162) (237) (12)
Multi-family and commercial real estate -- -- (30) -- --
Consumer .............................. (89) (90) (90) (86) (50)
------- ------- ------- ------- -------
Total charge-offs .............. (95) (148) (282) (323) (62)
------- ------- ------- ------- -------
Recoveries:
One to four family real estate ........ 2 -- 4 -- 1
Consumer .............................. 46 20 34 11 10
------- ------- ------- ------- -------
Total recoveries ............... 48 20 38 11 11
------- ------- ------- ------- -------
Net charge-offs ......................... (47) (128) (244) (312) (51)
Provisions charged to operations ........ 190 189 300 195 255
------- ------- ------- ------- -------
Balance at end of year .................. $ 2,093 $ 1,950 $ 1,889 $ 1,833 $ 1,950
======= ======= ======= ======= =======
Ratio of net charge-offs to average loans
outstanding during the year ............. .03% .10% .19% .26% .04%
======= ======= ======= ======= =======
Ratio of net charge-offs to average
non-performing loans .................... 7.83% 21.39% 17.73% 18.60% 4.46%
======= ======= ======= ======= =======
</TABLE>
<PAGE>
The distribution of the Company's allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ----------------------------- ------------------------------
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 $1,110 $121,151 79.19% $ 947 $113,423 81.02% $ 573 $102,232 80.69%
real estate.........
Multi-family and
Commercial real
Estate............. 201 7,940 5.19 196 6,389 4.56 470 4,691 3.70
Construction......... 16 3,176 2.07 24 1,182 .85 --- 1,306 1.03
Commercial........... 12 994 .65 12 602 .43 --- 63 .05
Consumer............. 335 19,729 12.90 293 18,399 13.14 288 18,410 14.53
Unallocated.......... 419 --- --- 478 --- --- 558 --- ---
------ -------- ------ ------ -------- ------ ------ -------- ------
Total........... $2,093 $152,990 100.00% $1,950 $139,995 100.00% $1,889 $126,702 100.00%
====== ======== ====== ====== ======== ====== ====== ======== ======
<CAPTION>
September 30,
------------------------------------------------------------
1996 1995
----------------------------- -----------------------------
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 $ 496 $100,383 80.34% $ 737 $ 95,588 79.04%
real estate.........
Multi-family and
Commercial real
Estate............. 528 5,115 4.09 443 5,132 4.24
Construction......... --- 423 .34 --- 230 .19
Commercial........... --- --- --- --- --- ---
Consumer............. 250 19,024 15.23 220 19,988 16.53
Unallocated.......... 559 --- --- 550 --- ---
------ -------- ------ ------ -------- ------
Total........... $1,833 $124,945 100.00% $1,950 $120,938 100.00%
====== ======== ====== ====== ======== ======
</TABLE>
<PAGE>
Investment Activities
General. The Company 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
as compared to the return on loans. Historically, the Company 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 1999, the
Company's average regulatory liquidity ratio (liquid assets as a percentage of
net withdrawable deposits and current borrowings excluding those whose remaining
maturity exceeds one year) was 37.8%.
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 deposits 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, 1999, the Company's securities
portfolio, all of which is classified as available for sale, had an amortized
cost of $98.8 million, or 29.2% of total assets.
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 Company's conversion to a stock
institution, the Company'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,
1999, the weighted average term to maturity of the security portfolio, excluding
other marketable equity securities, was 15.51 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.
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, 1999, the Company had $71.5 million in mortgage-backed
securities, or 21.1% of total assets, all 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.
<PAGE>
The following table sets forth at amortized cost the composition of the
Company's investment securities, mortgage-backed securities and other
interest-earning assets at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------
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.............. $7,987 8.09% $21,954 29.33% $61,833 87.39%
Corporate bonds.................... 34,895 35.33 16,230 21.69 6,042 8.54
State and municipal obligations.... 53,354 54.02 34,414 45.98 194 .28
Other.............................. 2,532 2.56 2,242 3.00 2,682 3.79
------- ------ ------- ------ ------- ------
Total investment securities..... $98,768 100.00% $74,840 100.00% $70,751 100.00%
======= ====== ======= ====== ======= ======
Average remaining contractual
life of securities.................. 15.51 years 15.45 years 5.80 years
Federal Home Loan Bank of New York
stock, required by law............... $ 2,634 100.00% $ 1,954 100.00% $ 1,762 100.00%
======= ====== ======= ====== ======= ======
Mortgage-backed securities:
GNMA............................... $37,632 52.62% $41,828 47.12% $41,450 49.41%
FNMA............................... 23,441 32.77 31,151 35.09 29,920 35.67
FHLMC.............................. 9,561 13.37 15,691 17.68 12,416 14.80
Other.............................. 884 1.24 96 .11 97 .12
------- ------ ------- ------ ------- ------
Total mortgage-backed
securities..................... $71,518 100.00% $88,766 100.00% $83,883 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
<PAGE>
The composition and maturities of the investment securities portfolio by
contractual maturity are indicated in the following table.
<TABLE>
<CAPTION>
September 30, 1999
---------------------------------------------------------------------------------
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 and federal
agency obligations................. $ --- $ --- $ 7,987 $ --- $7,987 $ 7,991
Corporate bonds..................... --- 6,292 14,677 13,926 34,895 33,762
State and municipal obligations..... --- 178 23 53,153 53,354 50,213
Other............................... --- --- --- 2,532 2,532 2,593
------ ------- ------- ------- ------- -------
Total investment securities....... $ --- $ 6,470 $22,687 $69,611 $98,768 $94,559
====== ======= ======= ======= ======= =======
Weighted average tax equivalent
yield.............................. --- 7.68% 7.45% 7.57% 7.56%
</TABLE>
The Company's securities portfolio at September 30, 1999, 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.
<PAGE>
The following table sets forth the final contractual maturities of the Company's
mortgage-backed securities at amortized cost, at September 30, 1999.
<TABLE>
<CAPTION>
Due in September 30,
------------------------------------------------------------ 1999
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........................... $ 7 $ --- $ 136 $3,400 $34,089 $37,632
FNMA........................... --- 726 --- 9,233 13,482 23,441
FHLMC.......................... --- --- 17 5,956 3,588 9,561
Other.......................... --- --- --- --- 884 884
---- ----- ----- ------- ------- -------
Total..................... $ 7 $ 726 $ 153 $18,589 $52,043 $71,518
==== ===== ===== ======= ======= =======
</TABLE>
Sources of Funds
General. The Company'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 Company offers deposit accounts having a range of interest rates
and terms. The Company offers passbook and statement savings accounts, money
market savings accounts, both interest bearing and non-interest bearing
transaction accounts, and certificate of deposit accounts currently ranging in
terms from three months to ten years. The Company only solicits deposits from
its primary market area and does not have brokered deposits. The Company relies
primarily on competitive pricing policies, advertising and customer service to
attract and retain these deposits. The Company 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 Company has allowed it to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. In recent years, the Company has become more susceptible to
short-term fluctuations in deposit flows, as customers have become more interest
rate conscious. The Company manages the pricing of its deposits in keeping with
its asset/liability management, liquidity and profitability objectives. Based on
its experience, the Company 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 Company to attract and
maintain certificates of deposits 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 Company during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Opening balance............................... $209,977 $200,912 $196,753
Deposits...................................... 379,260 310,108 254,977
Withdrawals................................... (378,633) (309,896) (259,424)
Interest credited............................. 8,460 8,853 8,606
-------- -------- --------
Ending balance................................ $219,064 $209,977 $200,912
======== ======== ========
Net increase.................................. $ 9,087 $ 9,065 $ 4,159
======== ======== ========
Percent increase.............................. 4.33% 4.51% 2.11%
======== ======== ========
</TABLE>
The following table sets forth the dollar amount of deposits in the various
deposit programs offered by the Company for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
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 3.05%...... $16,365 7.47% $11,867 5.65% $8,388 4.17%
Non-interest bearing demand accounts.. 8,918 4.07 6,009 2.86 4,370 2.18
Passbook savings accounts 2.96%....... 65,529 29.91 66,208 31.53 71,060 35.37
NOW accounts 1.98%.................... 14,833 6.77 12,396 5.91 10,438 5.20
Money market accounts 2.96%........... 6,435 2.94 5,949 2.83 7,115 3.54
-------- ------ -------- ------ -------- ------
Total non-certificates................ 112,080 51.16 102,429 48.78 101,371 50.46
-------- ------ -------- ------ -------- ------
Certificates of Deposits:
2.00 - 3.99%........................ --- --- --- --- 20 .01
4.00 - 5.99%........................ 101,433 46.30 106,990 50.95 88,416 44.00
6.00 - 7.99%........................ 5,551 2.54 558 .27 11,105 5.53
-------- ------ -------- ------ -------- ------
Total certificates.................... 106,984 48.84 107,548 51.22 99,541 49.54
-------- ------ -------- ------ -------- ------
Total deposits........................ $219,064 100.00% $209,977 100.00% $200,912 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
(1) Interest rates shown are the Bank's stated rates as of September 30, 1999.
<PAGE>
The following table shows rate and maturity information for the Company's
certificates of deposits as of September 30, 1999.
<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, 1999.............. $23,370 $ --- $23,370 21.84%
March 31, 2000................. 25,509 --- 25,509 23.84
June 30, 2000.................. 16,055 --- 16,055 15.01
September 30, 2000............. 12,133 --- 12,133 11.34
December 31, 2000.............. 9,022 --- 9,022 8.43
March 31, 2001................. 5,129 --- 5,129 4.79
June 30, 2001.................. 2,226 --- 2,226 2.08
September 30, 2001............. 3,040 --- 3,040 2.84
December 31, 2001.............. 1,916 --- 1,916 1.79
March 31, 2002................. 1,578 --- 1,578 1.47
June 30, 2002.................. 2,223 --- 2,223 2.08
September 30, 2002............. 376 449 825 .77
Thereafter..................... 3,940 18 3,958 3.72
-------- ----- -------- ------
Total....................... $106,517 $ 467 $106,984 100.00%
======== ===== ======== ======
Percent of total............ 99.56% .44%
======== =====
</TABLE>
The following table indicates the amount of the Company's certificates of
deposits by time remaining until maturity as of September 30, 1999.
<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 deposits less than $100,000..... $20,707 $22,970 $24,582 $26,192 $94,451
Certificates of deposits of $100,000 or more.... 2,663 2,539 3,606 3,725 12,533
------- ------- ------- ------- --------
Total certificates of deposits.................. $23,370 $25,509 $28,188 $29,917 $106,984
======= ======= ======= ======= ========
</TABLE>
Borrowings. Although deposits are the Company's primary source of funds, the
Company may utilize borrowings as a funding source. As a member of the FHLB, the
Company has access to overnight funds of approximately $15.6 million, along with
an additional line of $15.6 million for one-month advances. At September 30,
1999, the Company had borrowings of $13.1 million under its overnight line and
$8.0 million under its one-month advance line.
In January 1998, the Company 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,
1999, which had remaining lockout periods ranging from one month to five years.
For further detail, see Notes #15 and #16 to the Consolidated Financial
Statements.
<PAGE>
Subsidiary and Other Activities
As a federally chartered savings association, the Company is permitted by OTS
regulations to invest up to 2% of its assets or $6.7 million at September 30,
1999, in the stock of, or loans to, service corporation subsidiaries. The
Company 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, 1999, the Company had one subsidiary, Catskill Financial Services,
Inc., which commenced operations in January 1998, principally selling 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 Company 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 other savings institutions,
commercial banks and credit unions located in the same communities. The Company
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 five of the Company's offices. At September 30,
1999, the Company 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, 1999, the Company had a total of 79 employees, including six
part-time employees. The Company's employees are not represented by any
collective bargaining group. Management considers its employee relations to be
good.
<PAGE>
ITEM 2. PROPERTIES
The Company conducts its business at its main office and five other banking
offices in its primary market area. The Company does not own or lease any other
premises and operates principally from the Company's main office. The following
table sets forth information relating to each of the Company's offices as of
September 30, 1999. The Company 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 Company's premises and equipment (including land, building and
leasehold improvements and furniture, fixtures and equipment) at September 30,
1999, was $3.3 million. See Note 9 of Notes to Consolidated Financial
Statements. The Company believes that its current facilities are adequate to
meet the present and foreseeable needs of the Bank and the Company, subject to
possible future expansion.
<TABLE>
<CAPTION>
Total Net Book
Owned Approximate Value or Leasehold
Date or Square Improvement at
Location Acquired Leased Footage September 30, 1999
-------- -------- ------ ------- ------------------
(In thousands)
Main Office:
341 Main Street
<S> <C> <C> <C> <C>
Catskill, New York Prior to 1950 Owned 11,750 $ 687
Branch Offices:
Route 9-W
Ravena, New York 1972 Owned 2,822 326
Route 9-W
Corner Boulevard Avenue
Catskill, New York 1978 Owned 2,900 667
Route 296
Windham, New York 1996 Owned 3,620 690
Route 30(1)
Middleburgh, New York 1999 Owned 2,025 676
Supermarket Branch:
Bryant's Supermarket(2)
Route 32
Greenville, New York 1998 Leased 592 251
------
$3,297
======
</TABLE>
- ----------------
(1) Branch opened August 1999
(2) Branch opened April 1998 and lease term expires in April 2013
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is involved as plaintiff or defendant in various 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, 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 1999, there were no matters submitted to a
vote of shareholders of Catskill Financial Corporation.
<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, 1999, (the "Annual Report"), is incorporated
herein by reference: "SHAREHOLDER INFORMATION", which appears on page 59 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 3 and 4 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 6 through 26 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 9
through 13 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, 1999 and 1998, 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, 1999,
together with the related notes and the independent auditors' report thereon,
all of which appears on pages 27 through 58 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, 1999 ("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 8 through 14 of the Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information included in the Proxy Statement is incorporated herein
by reference: "VOTING SECURITIES AND CERTAIN HOLDERS THEREOF" which appears on
pages 6 through 8 of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included on page 16 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, 1999 and 1998, 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, 1999,
together with the related notes and the independent auditors' report thereon,
appearing in the Annual Report on pages 27 through 58 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.)
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 (Incorporated by
reference to Exhibit 10.9 to Form 10K for the year ended
September 30, 1998.)
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.
10.11 Employment Agreement dated February 1, 1999, by and between
Catskill Savings Bank and Deborah S. Henderson.
(Incorporated by reference to Exhibit 10.1 to Form 10Q for
the six month period ended March 31, 1999.)
10.12 Catskill Savings Bank Director Death Benefit Plan
(Incorporated by reference to Exhibit 10.1 to Form 10Q for
the nine month period ended June 30, 1999.)
11 Computation of Net Income per Common Share
13 1999 Annual Report to security holders
21 Subsidiaries of the registrant
23 Consent of KPMG LLP
27 Financial Data Schedule
</TABLE>
<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 17, 1999
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
Wilbur J. Cross Executive Officer December 17, 1999
/s/ David J. DeLuca Chief Financial Officer
- -------------------- (Principal Financial Officer
David J. DeLuca & Principal Accounting
Officer) December 17, 1999
/s/ George P. Jones
- --------------------
George P. Jones Director December 17, 1999
/s/ Richard A. Marshall
- ------------------------
Richard A. Marshall Director December 17, 1999
/s/ Allan D. Oren
- -----------------
Allan D. Oren Director December 17, 1999
/s/ Hugh J. Quigley
- --------------------
Hugh J. Quigley Director December 17, 1999
/s/ Edward P. Stiefel
- ----------------------
Edward P. Stiefel, Esq. Director December 17, 1999
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT 11
CATSKILL FINANCIAL CORPORATION
COMPUTATION OF NET INCOME PER COMMON SHARE
(In thousands, except share and per share data)
Three Months Ended Sept 30, Years Ended Sept 30,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income per common share - basic
Net income applicable to common shares ... $ 1,104 $ 978 $ 4,225 $ 3,882
Weighted average common shares outstanding 3,518,497 3,851,094 3,752,448 4,066,971
Net income per common share - basic ...... $ .31 $ .25 $ 1.13 $ .95
========== ========== ========== ==========
Net income per common share - diluted
Net income applicable to common shares ... $ 1,104 $ 978 $ 4,225 $ 3,882
Weighted average common shares outstanding 3,518,497 3,851,094 3,752,448 4,066,971
Dilutive common stock options (1) ........ 103,397 95,618 76,861 120,762
---------- ---------- ---------- ----------
Weighted average common shares
and common share equivalents outstanding 3,621,894 3,946,712 3,829,309 4,187,733
========== ========== ========== ==========
Net income per common share - diluted .... $ .30 $ .25 $ 1.10 $ .93
========== ========== ========== ==========
</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 related to either plan; to purchase the Company's common stock at the
average market price during the period.
<TABLE>
<CAPTION>
EXHIBIT 13
SELECTED CONSOLIDATED FINANCIAL INFORMATION
September 30,
----------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Consolidated Financial Condition Data:
- ----------------------------------------------
Total assets................................................... $338,796 $314,752 $289,619 $283,759 $230,102
Cash and cash equivalents...................................... 3,025 2,795 2,274 39,712 38,064
Loans receivable, net.......................................... 150,821 137,785 124,337 122,533 118,364
Securities available for sale.................................. 165,833 164,983 148,114 97,041 ---
Securities held to maturity.................................... --- 2,060 8,055 19,077 67,090
Deposits....................................................... 219,064 209,977 200,912 196,753 197,230
Borrowings..................................................... 56,100 31,840 11,385 --- ---
Shareholders' equity........................................... 59,212 67,831 71,777 82,381 28,667
<CAPTION>
Years Ended September 30,
----------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Consolidated Operating Data:
- ------------------------------------
Interest income................................................ $21,699 $21,132 $20,247 $17,962 $15,623
Interest expense............................................... 10,542 9,960 8,801 9,022 8,009
------- ------- ------- ------- -------
Net interest income......................................... 11,157 11,172 11,446 8,940 7,614
Provision for loan losses...................................... 190 189 300 195 255
------- ------- ------- ------- -------
Net interest income after provision for loan losses............ 10,967 10,983 11,146 8,745 7,359
Non-interest income............................................ 866 580 482 966 231
Non-interest expense........................................... 6,184 5,662 5,187 4,258 4,665
------- ------- ------- ------- -------
Income before taxes............................................ 5,649 5,901 6,441 5,453 2,925
Income tax expense............................................. 1,424 2,019 2,534 2,136 1,201
------- ------- ------- ------- -------
Net income.................................................. $ 4,225 $ 3,882 $ 3,907 $ 3,317 $ 1,724
======= ======= ======= ======= =======
Basic earnings per common share................................ $1.13 $.95 $.84 $.38* *
Diluted earnings per common share.............................. $1.10 $.93 $.83 $.38* *
Cash dividends per common share................................ $.405 $.333 $.21 --- ---
</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. Post conversion net income
during the fiscal year ended September 30, 1996 was approximately $2.0 million.
Certain reclassifications have been made to prior years' amounts to conform with
current year's presentation.
3
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION - CONTINUED
Year Ended September 30,
--------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
-----------------------------------------
Performance Ratios:
Return on average assets....................................... 1.30% 1.30% 1.40% 1.25% .76%
Return on average equity....................................... 6.42 5.60 5.22 6.33 6.15
Net interest rate spread....................................... 3.09 2.91 2.95 2.54 2.99
Net interest margin(1)......................................... 3.94 4.00 4.18 3.44 3.47
Ratio of non-interest expense to average total assets.......... 1.90 1.90 1.86 1.60 1.77(2)
Efficiency ratio(3)........................................... 47.08 46.32 43.80 45.56 51.05
Ratio of average interest-earning assets to average
interest-bearing liabilities............................... 124.90 131.97 138.60 125.79 112.97
Asset Quality Ratios:
Non-performing loans to total loans at end of period............ .36% .42% .73% 1.10% .86%
Non-performing assets to total assets at end of period.......... .16 .20 .40 .61 .66
Allowance for loan losses to non-performing loans............... 384.74 329.95 206.00 133.89 188.41
Allowance for loan losses to total loans at end of period....... 1.37 1.40 1.50 1.47 1.61
Net charge-offs to average loans................................ .03 .10 .19 .26 .04
Capital Ratios:
Equity to total assets at end of period......................... 17.48% 21.55% 24.78% 29.03% 12.46%
Average equity to average assets................................ 20.19 23.20 26.86 19.73 12.44
Other Data:
Number of full-service branch offices........................... 6 5 4 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.
4
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OF UNAUDITED CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
Year Ended September 30, 1999
-----------------------------------------------------
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
-----------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest income............................................... $ 5,353 $ 5,279 $ 5,397 $ 5,670 $ 21,699
Interest expense.............................................. 2,626 2,548 2,561 2,807 10,542
------- ------- ------- ------- --------
Net interest income........................................ 2,727 2,731 2,836 2,863 11,157
Provision for loan losses..................................... 45 45 50 50 190
------- ------- ------- ------- --------
Net interest income after provision for loan losses........... 2,682 2,686 2,786 2,813 10,967
Non-interest income........................................... 157 254 259 196 866
Non-interest expense.......................................... 1,465 1,542 1,577 1,600 6,184
------- ------- ------- ------- --------
Income before taxes........................................... 1,374 1,398 1,468 1,409 5,649
Income tax expense............................................ 393 357 369 305 1,424
------- ------- ------- ------- --------
Net income................................................. $ 981 $ 1,041 $ 1,099 $ 1,104 $4,225
======= ======= ======= ======= ========
Per share data
- --------------
Basic earnings per common share............................... $ .26 $ .27 $ .29 $ .31 $1.13
Diluted earnings per common share............................. .25 .27 .28 .30 1.10
Cash dividends per common share............................... .0925 .0925 .11 .11 .4050
Performance data
- ----------------
Return on average assets...................................... 1.24% 1.31% 1.35% 1.29% 1.30%
Return on average equity...................................... 5.79 6.23 6.55 7.19 6.42
Efficiency ratio.............................................. 46.97 47.52 46.78 47.04 47.08
<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>
Interest income............................................... $ 5,271 $ 5,223 $ 5,295 $ 5,343 $ 21,132
Interest expense.............................................. 2,425 2,390 2,507 2,638 9,960
------- ------- ------- ------- --------
Net interest income........................................ 2,846 2,833 2,788 2,705 11,172
Provision for loan losses..................................... 54 45 45 45 189
------- ------- ------- ------- --------
Net interest income after provision for loan losses........... 2,792 2,788 2,743 2,660 10,983
Non-interest income........................................... 111 133 155 181 580
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
======= ======= ======= ======= ========
Per share data
- --------------
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
Performance data
- ----------------
Return on average assets...................................... 1.31% 1.35% 1.29% 1.25% 1.30%
Return on average equity...................................... 5.32 5.57 5.73 5.81 5.60
Efficiency ratio.............................................. 45.30 45.84 47.31 46.83 46.32
</TABLE>
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Catskill Financial Corporation (the "Parent 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. Collectively, the Parent Company and the Bank are referred
to herein as the "Company". 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 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
principally 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 and Schoharie Counties and southern Albany
County in New York, which are serviced through six banking offices, the most
recent having opened in August 1999. 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 Company's provision for loan
losses, non-interest expenses such as salaries and employee benefits, occupancy
and other operating expenses and to a lesser extent, non-interest income such as
service charges on deposit accounts.
General economic conditions, competition and the monetary and fiscal policies of
the federal government also significantly affect financial institutions in
general, including the Company. The demand for and supply of housing,
competition among lenders, interest rate conditions and funds availability all
impact lending activities, while prevailing market rates on competing
investments, customer preference and the levels of personal income and savings
in the Bank's primary market area affect deposit inflows and outflows.
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.
6
<PAGE>
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:
o 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;
o the effect of certain customers and vendors of critical systems or services
failing to adequately address issues relating to becoming Year 2000
compliant;
o changes in market interest rates or changes in the speed at which market
interest rates adjust;
o changes in laws and regulations affecting the financial services industry;
o changes in competition; and
o 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.
FINANCIAL CONDITION
The Company expects, as part of its capital management strategies, to continue
to aggressively manage its capital through a combination of stock repurchases,
balance sheet leveraging and additional branching in contiguous markets. The
Company's branching strategies include expanding in small towns and rural
communities, where it can provide high quality personal service to the
under-served middle market.
Total assets were $338.8 million at September 30, 1999, an increase of $24.0
million, or 7.6% from the $314.8 million at September 30, 1998. The increase in
assets was primarily in loans and corporate-owned life insurance and was funded
principally by increases in short-term borrowings and deposits.
7
<PAGE>
Cash and cash equivalents were $3.0 million at September 30, 1999, up $.2
million from September 30, 1998, due principally to the Company's strategy of
growing its checking accounts, which increases the amount of checks in process
of collection.
Total securities, which include securities held to maturity and securities
available for sale, excluding Federal Home Loan Bank stock, were $165.8 million,
a decrease of $1.2 million, or .7% from the $167.0 million as of September 30,
1998. The lower interest rate environment in late 1998 and early 1999
accelerated the rate of prepayments on the Company's mortgage-backed securities
("MBS") portfolio, consequently, MBS's now represent only 43.0% of the total
investment portfolio as compared to 54.3% as of September 30, 1998. The Company
replaced MBS run-offs, as well as calls on its agency portfolio, with
non-callable corporates and municipals with longer call protection. The change
in portfolio mix was also made to reduce the Company's cash flow uncertainty, as
the securities purchased have more defined cash flows than the MBS's the Company
replaced. The Company also used some of the MBS paydowns, as well as the
proceeds from security sales, to fund a $10.0 million purchase of
corporate-owned life insurance ("COLI") as a financing vehicle for pre- and post
retirement employee benefits. The COLI's investment returns and death benefits
are not taxable to the Company, and the insurance premiums are non-deductible.
The insurance policy provides that the initial lump sum premium, after certain
deductions, is maintained in a separate account, which minimizes the Company's
exposure to insurance carrier credit risk and allows the Company to select both
the investment manager and the investment portfolio strategy.
Loans receivable were $152.9 million as of September 30, 1999, an increase of
$13.2 million or 9.4% over the $139.7 million at September 30, 1998. The
following table shows the loan portfolio composition as of the respective
balance sheet dates:
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
--------------------------------- ------------------------------
(In thousands) % of Loans (In thousands) % of Loans
<S> <C> <C> <C> <C>
Real Estate Loans
One-to-four family $ 121,151 79.2% $ 113,423 81.0%
Multi-family and commercial 7,940 5.2 6,389 4.6
Construction 3,176 2.1 1,182 0.8
--------- ----- --------- -----
Total real estate loans 132,267 86.5 120,994 86.4
Consumer Loans 19,729 12.9 18,399 13.2
Commercial Loans 994 0.6 602 0.4
--------- ----- --------- -----
Gross Loans 152,990 100.0% 139,995 100.0%
===== =====
Less: Net deferred loan fees (76) (260)
--------- ---------
Total loans receivable $ 152,914 $ 139,735
========= =========
</TABLE>
One-to-four family real estate loans increased $7.8 million, or 6.9%, as the
Company has 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. Loans to finance mobile home
parks, a convenience store and a multi-family dwelling were the primary
contributors to an increase in multi-family and commercial real estate loans.
All of these loans were made within the Company's primary market area.
Construction loans are up due to several commercial projects under development
as well as seasonal one-to-four family residential construction, with the
Company providing both construction and permanent financing.
8
<PAGE>
Total deposits were $219.1 million at September 30, 1999, an increase of $9.1
million, or 4.3% from the $210.0 million at September 30, 1998. The following
table shows the deposit composition as of the dates shown:
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
------------------ ------------------
(In thousands) % of Deposits (In thousands) % of Deposits
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Savings $ 81,894 37.4% $ 78,075 37.2%
Money market 6,435 2.9 5,949 2.8
NOW 14,833 6.8 12,396 5.9
Non-interest demand 8,918 4.1 6,009 2.9
Certificates of deposits 106,984 48.8 107,548 51.2
-------- ----- -------- -----
$219,064 100.0% $209,977 100.0%
======== ===== ======== =====
</TABLE>
The Company's new branches, the most recent of which opened in August 1999, were
the principal contributors to the growth in deposits. In addition, the Company
continues its strategy of growing its core deposits (defined as all deposits
except for certificates of deposits ("CD")), principally checking accounts. Core
deposits now represent over 51% of total deposits, and checking accounts
represent almost 11.0% of deposits.
The Company's borrowings, which are principally with the Federal Home Loan Bank
of New York ("FHLB"), were $56.1 million at September 30, 1999, an increase of
$24.3 million from the $31.8 million at September 30, 1998. As of September 30,
1999, the Company still had additional available credit of $2.5 million under
its overnight line and $7.6 million under its one-month advance program with the
FHLB.
Shareholders' equity at September 30, 1999 was $59.2 million, a decrease of $8.6
million or 12.7% from the $67.8 million at September 30, 1998. The Company's
repurchase of 466,034 shares of its stock at a cost of $7.6 million, and a $4.7
million adverse change in the Company's net unrealized gain (loss) on securities
available for sale, net of taxes were the principal causes for the decline in
equity. The adverse change in the unrealized gain (loss) was caused by an
increase in interest rates during the fiscal year. The reductions in equity were
partially offset by the $2.7 million of net income retained after cash
dividends. In addition, the Company recorded a $1.0 million increase to
shareholders' equity due to the amortization of restricted stock awards,
proceeds from the exercise of stock options and the release of shares under the
Company's ESOP. Shareholders' equity as a percentage of total assets was 17.5%
at September 30, 1999 compared to 21.6% at September 30, 1998. Book value per
common share was $15.15.
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, when compared to 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.
9
<PAGE>
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, 1999, the Company had 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 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, 1999, which
the Company anticipates, based upon certain assumptions, will 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 Company assumes that one to four family mortgage loans
will be prepaid at a constant rate of 10% per annum and mortgage-backed
securities will be prepaid at 18%, which approximates the last three month
prepayment performance. Callable securities, principally U.S. Government
agencies, corporates and municipals, are shown principally by their maturity
date, since most of the securities would not be called based on current interest
rates. Savings deposit accounts are shown with a decay rate of 9% annually.
Money Market deposits are assumed to immediately reprice, 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, 1999, had a
one-year cumulative negative gap of $47.4 million, or 14.2% of total assets.
Consequently, if interest rates were to increase over a one-year period, the
Company's net interest income could be adversely impacted. However, if interest
rates were to decrease, the Company's net interest income might not benefit
correspondingly since prepayments on mortgage loans and mortgage backed
securities could increase, and certain securities with calls might then be
called, both of which could accelerate the downward repricing of assets.
Although the Company's net interest income may be vulnerable to a rising
interest rate environment, management expects its stable deposit base to
minimize this risk, as deposits repricing within one year total $91.1 million.
Management does expect to reduce its negative GAP over the next year by
selectively extending maturities of its short-term borrowings, purchasing
adjustable rate MBS and pursuing growth of its core deposits.
10
<PAGE>
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 following table.
11
<PAGE>
<TABLE>
<CAPTION>
At September 30, 1999
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...... $ 12,655 $ 9,274 $29,243 $20,842 $32,461 $104,475
Adjustable rate one- to four-family, multi-family
and commercial real estate and construction loans.. 13,963 7,081 6,028 674 46 27,792
Commercial loans.................................... 994 --- --- --- --- 994
Consumer loans...................................... 5,670 4,487 5,915 2,237 1,420 19,729
Mortgage-backed securities.......................... 13,663 15,296 16,513 9,271 16,775 71,518
Other securities(*)................................. 8,031 999 7,832 7,914 76,623 101,399
Federal funds and other............................. 126 --- --- --- --- 126
-------- ------- ------- ------- ------- --------
Total interest-earning assets.................. 55,102 37,137 65,531 40,938 127,325 326,033
-------- ------- ------- ------- ------- --------
Savings deposits.................................... 4,196 3,419 12,230 10,208 51,841 81,894
Money market........................................ 6,435 --- --- --- --- 6,435
Certificate accounts................................ 48,879 28,188 25,959 3,614 344 106,984
NOW deposits........................................ --- --- --- --- 14,833 14,833
Other deposits...................................... 2,449 --- --- --- 363 2,812
Short-term borrowings............................... 31,100 --- --- --- --- 31,100
Long-term borrowings................................ 10,000 5,000 5,000 5,000 --- 25,000
-------- ------- ------- ------- ------- --------
Total interest-bearing liabilities............. 103,059 36,607 43,189 18,822 67,381 269,058
-------- ------- ------- ------- ------- --------
Interest-earning assets less interest-bearing
liabilities........................................ $(47,957) $ 530 $ 22,342 $ 22,116 $ 59,944 $ 56,975
========= ======= ======== ======== ======== ========
Cumulative interest-rate sensitivity gap............ $(47,957) $(47,427) $ (25,085) $ (2,969) $ 56,975
Cumulative interest-rate gap as a percentage of
interest-earning assets at September 30, 1999...... (14.71)% (14.55)% (7.70)% (0.91)% 17.48%
Cumulative interest-rate gap as a percentage of
total assets at September 30, 1999................. (14.16)% (14.00)% (7.40)% (0.88)% 16.82%
</TABLE>
(*)Includes all securities available for sale 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 OTS also evaluates the Bank's interest rate sensitivity quarterly using a
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 NPV divided by the market value of assets. The OTS
model uses financial data that the Bank submits, but the OTS determines many of
the assumptions such as loan and securities prepayments and deposit decay rates.
The following are the estimated impact at September 30, 1999, of immediate
changes in interest rates as calculated by the OTS model:
12
<PAGE>
<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>
+300 $ 32,241 $ (25,486) (44.1)% 10.21% (654bp)
+200 40,894 (16,833) (29.2) 12.56 (419bp)
+100 49,621 (8,106) (14.0) 14.79 (196bp)
static * 57,727 16.75
(100) 64,409 6,682 11.6 18.27 152bp
(200) 71,275 13,548 23.5 19.76 301bp
(300) 78,420 20,693 35.8 21.24 449bp
</TABLE>
* Represents Bank only. The Company has additional portfolio equity of
approximately $9.9 million not shown in the OTS analysis. If included, the %
changes would be less, because of the larger capital base.
As is the case with the gap table, certain shortcomings are inherent in the
methodology used in NPV measurements. Estimating changes in NPV requires 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 interest rates change uniformly, regardless of the maturity
of the asset. 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. The Company places loans 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 the Company designates a loan as non-accrual, the Company
reverses all accrued but unpaid interest as a reduction of current period
interest income and subsequent cash receipts generally are applied to reduce the
unpaid principal balance.
13
<PAGE>
Non-performing assets at September 30, 1999, were $.5 million, or .16% of total
assets, compared to the $.6 million or .20% of total assets at September 30,
1998. The table below sets forth the amounts and categories of the Company's
non-performing assets. The Company had no troubled debt restructurings on any of
the dates set forth below.
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-performing loans:
One- to four-family real estate................ $ 396 $ 520 $ 780 $1,008 $784
Multi-family and commercial real estate........ --- --- --- 78 ---
Consumer....................................... 148 71 137 283 251
----- ----- ------- ------ ------
Total....................................... 544 591 917 1,369 1,035
----- ----- ------- ------ ------
Foreclosed assets, net:
One- to four-family real estate................ --- 53 225 334 326
Multi-family and commercial real estate........ --- --- 23 23 158
----- ----- ------- ------ ------
Total....................................... --- 53 248 357 484
----- ----- ------- ------ ------
Total non-performing assets...................... $ 544 $ 644 $ 1,165 $1,726 $1,519
===== ===== ======= ====== ======
Total non-performing loans as a % of total loans. .36% .42% .73% 1.10% .86%
=== === === ==== ===
Total as a percentage of total assets............ .16% .20% .40% .61% .66%
=== === === === ===
</TABLE>
The decrease in non-performing loans at September 30, 1999 as compared to
September 30, 1998 was principally from the improved payment performance of
several mortgage borrowers, as well as the foreclosure of one loan which
resulted in the Company acquiring title to the mortgaged property. The net
realizable value of the property, totaling $32,000, was transferred to other
real estate, and since the net realizable value approximated the Company's
carrying value, there was no loss recorded. The increase in non-performing
consumer loans in 1999 was principally in home equity lines, which management
does not expect to cause a material loss due to underlying collateral values.
During the year ended September 30, 1999, the Company sold its remaining parcels
of other real estate; consequently, it currently has no other real estate owned.
The following table summarizes the activity in other real estate for the periods
presented:
<PAGE>
<TABLE>
<CAPTION>
Years Ended September 30,
----------------
1999 1998
----- ----
(In thousands)
<S> <C> <C>
Other real estate at the beginning of year $ 53 $ 248
Transfer of loans to other real estate owned 32 252
Sales of other real estate, net (85) (447)
----- ----
Other real estate at the end of year $ --- $ 53
===== ====
</TABLE>
Additionally, at September 30, 1999, the Company had identified approximately
$299,000 in loans having more than normal credit risk, principally, all of which
are secured by real estate. 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.
14
<PAGE>
The allowance for loan losses was $2.1 million, or 1.37% of period end loans at
September 30, 1999, and provided coverage of non-performing loans of 384.7%,
compared to an allowance of 1.40% of loans and coverage of 329.9% at September
30, 1998. The following summarizes the activity in the allowance for loan losses
for the past five years:
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year.................... $ 1,950 $ 1,889 $ 1,833 $1,950 $1,746
Charge-offs:
One- to four-family real estate............... (6) (58) (162) (237) (12)
Multi-family and commercial real estate....... --- --- (30) --- ---
Consumer...................................... (89) (90) (90) (86) (50)
------- ------- ------- ------ ------
Total charge-offs.................... (95) (148) (282) (323) (62)
------- ------- ------- ------ ------
Recoveries:
One- to four-family real estate............... 2 --- 4 --- 1
Consumer...................................... 46 20 34 11 10
------- ------- ------- ------ ------
Total recoveries..................... 48 20 38 11 11
------- ------- ------- ------ ------
Net charge-offs................................. (47) (128) (244) (312) (51)
Provision charged to operations................. 190 189 300 195 255
------- ------- ------- ------ ------
Balance at end of year.......................... $2,093 $1,950 $1,889 $1,833 $1,950
======= ======= ======= ====== ======
Ratio of net charge-offs to average loans
outstanding for the year........................ .03% .10% .19% .26% .04%
======= ======= ======= ====== ======
Allowance for loan losses as a % of loans....... 1.37% 1.40% 1.50% 1.47% 1.61%
======= ======= ======= ====== ======
</TABLE>
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1999 AND 1998
GENERAL
For the fiscal year ended September 30, 1999, the Company recorded net income of
$4,225,000, an increase of $343,000, or 8.8%, compared to the fiscal year ended
September 30, 1998. Basic earnings per share were $1.13, an increase of 18.9%
compared to basic earnings per share of $.95 for the fiscal year ended September
30, 1998. Diluted earnings per share were $1.10 for the fiscal year, an increase
of 18.3% compared to $.93 for the comparable fiscal year. For the fiscal year
ended September 30, 1999, weighted average common shares - basic were 3,752,448,
down 314,523, or 7.7%, due to the Company's share repurchase programs.
Return on average assets for both the fiscal years ended September 30, 1999 and
1998, was 1.30% and return on average equity was 6.42% and 5.60%, respectively.
NET INTEREST INCOME
The Company's net income is primarily dependent upon its 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 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.
15
<PAGE>
Net interest income for the fiscal year ended September 30, 1999, was $12.3
million on a tax equivalent basis, an increase of $626,000, or 5.4%, when
compared to the fiscal year ended September 30, 1998. The increase was
principally volume related as the Company increased its average earning assets
$20.2 million, or 6.9%, more than offsetting the increase in interest expense
from the borrowings used to fund its share repurchases and corporate-owned life
insurance ("COLI"). The Company funded the share repurchases, the COLI purchase
and its earning asset growth principally with borrowings and, to a lesser
extent, deposit growth.
Interest income for the fiscal year ended September 30, 1999, was $22.8 million
on a tax equivalent basis, an increase of $1,208,000, or 5.6%, over the
comparable period. The $20.2 million, or 6.9%, increase in average earning
assets had a positive effect on interest income as the Company sought to
leverage its excess capital. This positive effect was offset somewhat by a 10
basis point drop in the yield on its average earning assets, principally loans.
The increase in average earning assets consisted principally of a 12.3% increase
in the loan portfolio and a 2.6% increase in the securities portfolio. Loan
growth was principally due to the promotion of a 15 year fixed rate mortgage
product, which increased volume, but had an adverse impact on the loan portfolio
yield since the loans were originated at rates below the average loan portfolio
yield. In addition, the Company, due to lower market interest rates at the
beginning of the fiscal year, experienced higher loan prepayments and
refinancing of its existing portfolio which, together with a high level of
originations related to the loan promotion, caused the yield on the loan
portfolio to decrease 30 basis points to 7.70%.
Average MBS were $76.8 million for the fiscal year ended September 30, 1999,
down $12.6 million, or 14.1%, from the comparable period. The average yield on
MBS was 6.44%, down 30 basis points from the comparable period, primarily
because the Company has been purchasing adjustable rate MBS's with low initial
interest rates to balance its asset mix, since most of its loan originations
have been at fixed rates. These MBS's were purchased during the initial teaser
rate period of the underlying mortgage loans when the initial interest rate on
the loans is less than the fully indexed rate and yield. Management expects the
average yield of these MBS's to increase as the loans 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. In fiscal 1999,
28.0% of the average MBS portfolio represented teaser rate ARM's compared to
less than 18.7% in the comparable period.
Average other securities increased $16.8 million, or 23.4%, as the Company
purchased longer call protected bank qualified municipals and non-callable
corporate securities to increase yields and reduce reinvestment risk if rates
decline. The average yield on the other securities portfolio for the fiscal year
ended September 30, 1999, was 7.48%, an increase of 27 basis points from the
comparable period, as the Company replaced securities called or matured with
tax-free municipal securities with a higher after-tax yield. Municipal
securities now represent 47.7% of average other securities, compared to less
than 23.4% in the comparable period.
16
<PAGE>
Interest expense for the fiscal year ended September 30, 1999, was $10.5
million, an increase of $582,000, or 5.8%. The change was principally due to an
increase in the average volume of interest bearing liabilities offset somewhat
by a decrease in the Company's cost of funds. Average interest bearing
liabilities were $249.4 million, an increase of $28.7 million, or 13.0%, as
deposits increased and the Company borrowed in order to fund the Company's stock
repurchases, its COLI purchase and earning asset growth. Average long-term
borrowings were up $17.2 million, as the Company funded its stock repurchases
and its earning asset growth, as well as converted a portion of its short-term
borrowings to long-term borrowings, principally through FHLB convertible
(callable) advances. Average short-term borrowings were $13.0 million for the
fiscal year ended September 30, 1999, up $1.6 million from the comparable fiscal
year. In addition, the Company's average CD's increased $5.0 million, or 4.8%,
as the Company in fiscal 1998 promoted a special 15 month CD program at a
premium rate due to competitive pressures. The cost of funds decreased 28 basis
points to 4.23% as the Company has generally lowered its deposit rates in
response to lower market interest rates.
The Company's net yield on average earning assets was 3.94% for the fiscal year
ended September 30, 1999, down 6 basis points compared to 4.00% for the prior
fiscal year. The decrease was principally caused by the Company's funding of
both the stock repurchase program and COLI purchase. For the fiscal year ended
September 30, 1999, the Company had $62.1 million of average earning assets with
no funding costs, a decrease of $8.5 million, or 12.0%, from the $70.6 million
for the fiscal year ended September 30, 1998. The Company did, however, increase
its net interest spread 18 basis points as the cost of funds decreased 28 basis
points, principally due to the lower deposit costs, while the yield on earning
assets only decreased 10 basis points as increases in the yield on securities
somewhat offset the decline in the loan portfolio yield.
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.
17
<PAGE>
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 $1.1
million in 1999, $472,000 in 1998 and $14,000 in 1997. Non-accruing loans have
been included in the table as loans with interest recognized generally on a cash
basis. MBS are primarily classified as available for sale. Securities include
all securities, other than MBS, from both the securities available for sale
portfolio and the held to maturity portfolio. Securities available for sale are
included at amortized cost.
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Outstanding Earned/ Outstanding Earned/
Balance Paid Yield/Rate Balance Paid Yield/Rate Balance Paid Yield/Rate
-----------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable.................. $145,685 $11,213 7.70% $129,737 $ 10,373 8.00% $125,146 $ 10,113 8.08%
Mortgage-backed securities........ 76,818 4,946 6.44 89,400 6,030 6.74 75,069 5,319 7.09
Securities........................ 88,890 6,646 7.48 72,058 5,197 7.21 63,521 4,283 6.74
Federal funds sold and other...... 65 7 10.77 68 4 5.88 10,214 546 5.35
-------- ------- -------- -------- -------- --------
Total interest-earning assets.... $311,458 22,812 7.32 $291,263 21,604 7.42 $273,950 20,261 7.40
------- -------- --------
Non-interest earning assets........ 14,276 7,437 4,982
-------- -------- --------
Total Assets.................. $325,734 $298,700 $278,932
======== ======== ========
Interest-Bearing Liabilities:
Savings deposits.................. $ 80,887 $ 2,428 3.00% $ 78,903 $ 2,620 3.32% $80,697 $ 2,821 3.50%
Certificates of deposit........... 107,384 5,611 5.23 102,431 5,768 5.63 95,215 5,309 5.58
Money market...................... 6,269 191 3.05 6,341 198 3.12 7,418 242 3.26
NOW deposits...................... 14,232 276 1.94 11,650 268 2.30 9,667 237 2.45
Other............................. 2,627 64 2.44 2,252 51 2.26 2,065 43 2.08
Short-term borrowings............. 12,962 667 5.15 11,317 650 5.74 2,590 149 5.75
Long-term borrowings.............. 25,000 1,305 5.22 7,802 405 5.19 --- ---
-------- ------- -------- -------- -------- --------
Total interest-bearing
liabilities.................. 249,361 10,542 4.23 220,696 9,960 4.51 197,652 8,801 4.45
------- -------- --------
Non-interest bearing liabilities.. 10,598 8,710 6,372
Shareholders' equity.............. 65,775 69,294 74,908
-------- -------- --------
Total liabilities and equity..... $325,734 $298,700 $278,932
======== ======== ========
Net interest income................ $ 12,270 $ 11,644 $ 11,460
======== ======== ========
Net interest rate spread........... 3.09% 2.91% 2.95%
===== ===== =====
Net earning assets................. $ 62,097 $ 70,567 $ 76,298
======== ======== ========
Net yield on average
interest-earning assets............ 3.94% 4.00% 4.18%
===== ===== =====
Average interest-earning assets to
average interest-bearing
liabilities....................... 124.90% 131.97% 138.60%
====== ====== ======
</TABLE>
18
<PAGE>
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>
Years Ended September 30,
-------------------------------------------------------------------------
1999 vs 1998 1998 vs 1997
-------------------------------------------------------------------------
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........................ $1,208 $ (368) $ 840 $ 377 $(117) $ 260
Mortgage-backed securities.............. (824) (260) (1,084) 959 (248) 711
Securities.............................. 1,248 201 1,449 601 313 914
Federal funds sold and other............ --- 3 3 (602) 60 (542)
------ ------ ------- ------ ---- ------
Total interest-earning assets......... $1,632 $ (424) $ 1,208 $1,335 $ 8 $1,343
====== ======= ======= ====== ==== ======
Interest-bearing liabilities:
Savings deposits........................ $ 68 $ (260) $(192) $(61) $ (140) $(201)
Certificate accounts.................... 334 (491) (157) 410 49 459
Money market............................ (2) (5) (7) (34) (10) (44)
NOW deposits............................ 28 (20) 8 45 (14) 31
Other................................... 9 4 13 4 4 8
Short-term borrowings................... 59 (42) 17 501 --- 501
Long-term borrowings.................... 898 2 900 405 --- 405
------ ------ ------- ------ ---- ------
Total interest-bearing liabilities.... $1,394 $ (812) $ 582 $1,270 $ (111) $1,159
------ ------ ------- ------ ---- ------
Net change in net interest income........ $ 626 $ 184
===== =====
</TABLE>
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 $190,000, or .13% of average loans, for the
fiscal year ended September 30, 1999, essentially unchanged from $189,000, or
.15% of average loans, in the comparable year. The decrease as a percentage of
loans is principally attributable to a reduction in net charge-offs to $47,000,
or .03% of average loans, for the fiscal year ended September 30, 1999, as
compared to $128,000, or .10% of average loans, in the comparable period.
Despite the decrease in net charge-offs, the Company's provision remained
relatively constant due to the 12.3% growth in average loans outstanding.
Non-performing loans were $544,000 at September 30, 1999, or .36% of total
loans, a decrease of $47,000 from September 30, 1998, when they were .42% of
total loans. At September 30, 1999, the allowance for loan losses was $2,093,000
or 1.37% of period end loans, and provided coverage of non-performing loans of
384.7%, compared to an allowance of 1.40% of total loans and 329.9% of
non-performing loans at September 30, 1998.
19
<PAGE>
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 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 the OTS's judgment of the information available
to it at the time of the examination.
NON-INTEREST INCOME
Non-interest income was $866,000 for the fiscal year ended September 30, 1999,
an increase of $286,000, or 49.3% from the fiscal year ended September 30, 1998.
The increase was principally due to the investment performance on the Company's
corporate owned life insurance which increased its cash surrender value by
$381,000, more than offsetting the $188,000 reduction in net securities gains
(losses). In addition, service fees on deposit accounts increased $75,000, or
25.5%, as the Company continues to promote checking related products to increase
core deposits and diversify its revenues.
NON-INTEREST EXPENSE
Non-interest expense for the fiscal year ended September 30, 1999, was
$6,184,000, an increase of $522,000, or 9.2%, over the comparable period. The
increase was principally the cost of our new branches, as well as higher other
real estate expenses, other professional fees, and higher data processing fees
due to a contract termination charge to switch ATM service providers.
Salaries and employee benefits were up $170,000, or 4.9%, principally from
staffing new branches which opened in April 1998 and August 1999 and the cost of
an Executive Supplemental Retirement Plan implemented in the third quarter of
fiscal 1998. Net occupancy increased $71,000 or 20.1%, principally from
renovation expenses at the Company's main office, and the cost of the two new
branches. Other real estate expenses net, increased $81,000, as the Company had
losses on sales of other real estate during the fiscal year ended September 30,
1999, compared to gains on sales in the comparable period. Other professional
fees were $284,000, an increase of $52,000, or 22.4% as the Company incurred
higher costs principally due to its COLI purchase. Data processing fees were
higher due to increased transactional volume and Y2K related expenses. In
addition, the Company also paid a contract termination charge and conversion
costs of approximately $32,000 during the period to switch ATM service
providers. Management expects the change to improve customer service, reduce
operating costs, and increase service fee income by allowing the Company to
charge fees on non-customer ATM transactions.
20
<PAGE>
INCOME TAX EXPENSE
Income tax expense for the fiscal year ended September 30, 1999, was $1,424,000,
a decrease of $595,000, or 29.5%, from the comparable period. The Company's
effective tax rates for the fiscal year ended September 30, 1999 and 1998, were
25.21% and 34.21%, respectively. The Company's purchase of tax-exempt
securities, primarily bank qualified municipals, as well as the non-taxable
increase in cash surrender value of the COLI were the principal causes for the
decline in both the effective tax rate and income tax expense.
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
$.95 and $.93 respectively for the year ended September 30, 1998, compared to
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
Net interest income on a tax equivalent basis for the year ended September 30,
1998, was $11.6 million, an increase of $184,000, 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 $1,343,000, 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 benefited 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
21
<PAGE>
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 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 FHLB 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 4.00% for the year ended
September 30, 1998, down 18 basis points compared to 4.18% 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 4 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.
PROVISION FOR LOAN LOSSES
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 35.6% 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.
22
<PAGE>
NON-INTEREST INCOME
Non-interest income was $580,000 for the year ended September 30, 1998, an
increase of $98,000, or 20.3%, 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 the cost of implementing an executive supplemental
retirement plan. Furthermore, results for the fiscal year ended September 30,
1997, benefited 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 $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 $453,000, an increase of $55,000, or 13.8%, over the
$398,000 for fiscal 1997. The increases were principally volume related, as the
Company's new branches increased its customer base, as well as certain start-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.
23
<PAGE>
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.
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 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 Company's primary sources of funds for operations are deposits, borrowings,
principal and interest payments on loans, mortgage-backed securities and other
securities. The Company's $165.8 million securities available for sale
portfolio, which represents 48.9% of total assets, is another source of
liquidity.
Net cash provided by operating activities was $5.4 million for the fiscal year
ended September 30, 1999, an increase of $2.0 million from the comparable
period. The increase was principally the change in other liabilities caused by a
decrease in official bank checks outstanding in the prior year. 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 1999.
Investing activities used $31.4 million in the fiscal year ended September 30,
1999, as the Company increased its assets principally from the $13.3 million in
loan growth, a $10.0 million purchase of COLI, and a $6.5 million increase in
the Company's securities portfolio. Financing activities provided $26.2 million,
as the Company experienced a $24.3 million increase in short-term borrowings, a
$9.1 million increase in deposits, and a $1.8 million increase in mortgagors'
escrow deposits, somewhat offset by the cost to purchase treasury stock of $7.6
million and the payment of cash dividends of $1.6 million 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 $219.1 million of
deposits are a dependable source of funds due to long-term customer
relationships. The Company does not currently use brokered deposits as a source
of funds, and as of September 30, 1999, deposit accounts having balances in
excess of $100,000 totaled $22.8 million, or 10.4%, 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% measured on a monthly basis and for September 1999, the Bank far exceeded
that, maintaining an average liquidity ratio of 37.8%, primarily due to the
large percentage of assets represented by AFS securities.
24
<PAGE>
The Company anticipates that it will have sufficient funds to meet its current
commitments. At September 30, 1999, the Company had commitments to originate
mortgage loans of $4.6 million. In addition, the Company had undrawn commitments
of $3.9 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,
1999, totaled $77.1 million, and management believes, based on past experience,
that a significant portion of such deposits will remain with the Company.
Although there are no minimum capital ratio requirements for the Company, OTS
regulations require that the Bank maintain minimum regulatory capital ratios. As
of September 30, 1999, the Bank met all capital adequacy requirements and
qualifies as a well-capitalized institution under OTS regulations. For further
information on regulatory capital including ratios, refer to Note 2 of the Notes
to Consolidated Financial Statements.
Beginning on April 18, 1999, the Company was no longer subject to any stock
repurchase restrictions of the OTS and shortly thereafter announced a 10% share
repurchase program for 436,034 shares. From April 18 through August 10, 1999,
the Company repurchased those shares at a cost of $7.1 million, or $16.29 per
common share. On August 18, 1999, the Company announced an additional 10% share
repurchase program for approximately 394,000 shares. As of September 30, 1999,
the Company had repurchased 30,000 shares under that program at an average cost
of $15.11 per share. At September 30, 1999, the Company had approximately $5.6
million in available resources to pursue stock repurchases without dividends
from the Bank. Dividends from the Bank are permitted without notice or
application to the OTS, under revised regulations effective April of this year,
if total dividends for a year do not exceed current period net income plus
retained net income for the two previous years and certain other standards are
met. Dividends from the Bank to the Company this calendar year to date have
already exceeded that level, and hence the Bank cannot pay additional dividends
to the Company at this time without prior OTS approval other than a $1 million
dividend to be paid in December 1999, which the OTS has already approved.
YEAR 2000
The following disclosure is a Year 2000 Readiness Disclosure and a Year 2000
Statement, as defined in the Year 2000 Information and Readiness Disclosure Act.
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 equipment provided by, vendors.
25
<PAGE>
The Company's progress on its Year 2000 readiness is continuing as scheduled.
The Company has completed the testing of all of its mission critical systems. In
addition, the testing of other customers of the Company's data processing
service provider, disclosed no Year 2000 issues, consequently, as of September
30, 1999, all production systems are now operating in a Y2K compliant
environment. Furthermore, since substantially all of the Company's loans are
residential mortgages, the ability of the Company's borrowers to become Y2K
compliant is not expected to be a significant concern. The Company expects to
continue to monitor all of its systems, and will test upgrades, if any, for Y2K
compliance as well.
The Company's total Y2K project cost is estimated to be $100,000, of which
$50,000 is expected to be hardware and software upgrades. So far, the Company
has expensed approximately $36,000 of the project cost, and expects to amortize
the hardware and software upgrades, which have already been purchased, over
their estimated useful lives of three to five years.
The Company expects that when the century changes, disruption in service may
come not from a failure of its systems or the systems of the providers with whom
it interfaces, but possibly 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.
The Company has written a Disaster Recovery Plan, a Year 2000 Contingency Plan,
and a Y2K Liquidity Plan, all of which management expects to test through the
end of the year. The Company is also undertaking various customer awareness
programs, such as posted statements, mailing of FDIC brochures and publishing
information on its website.
IMPACT OF INFLATION AND CHANGING PRICES
The Company's consolidated financial statements are prepared in accordance with
generally accepted accounting principles which require the measurement of
financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increasing cost of the
Company's operations. Unlike most industrial companies, nearly all assets and
liabilities of the Company are monetary. As a result, interest rates have a
greater impact on the Company's performance than do the effects of general
levels of inflation. In addition, interest rates do not necessarily move in the
direction, or to the same extent as the price of goods and services. However, in
general, high inflation rates are accompanied by higher interest rates, and vice
versa.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. In May 1999, this Statement was
delayed by the FASB; consequently, it will now be effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. Management is currently
evaluating the impact of this Statement on the Company's consolidated financial
statements.
26
<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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 1999, in conformity with generally accepted
accounting principles.
October 20, 1999
Albany, New York
27
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except for share amounts)
September 30
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Assets
Cash and due from banks ........................................... $ 3,025 $ 2,795
Securities available for sale, at fair value ...................... 165,833 164,983
Investment securities held to maturity (estimated fair value of
$2,106 at September 30, 1998) ................................. -- 2,060
Federal Home Loan Bank of NY stock, at cost ....................... 2,634 1,954
Loans receivable, net ............................................. 150,821 137,785
Corporate-owned life insurance .................................... 10,381 --
Accrued interest receivable ....................................... 2,576 2,398
Premises and equipment, net ....................................... 3,297 2,522
Other real estate owned ........................................... -- 53
Other assets ...................................................... 229 202
--------- ---------
Total assets ........................................ $ 338,796 $ 314,752
========= =========
Liabilities and Shareholders' Equity
Liabilities:
Due to depositors:
Non-interest bearing .......................................... $ 8,918 $ 6,009
Interest bearing .............................................. 210,146 203,968
--------- ---------
Total deposits ...................................... 219,064 209,977
Short-term borrowings ......................................... 31,100 6,840
Long-term borrowings .......................................... 25,000 25,000
Mortgagors' escrow deposits ................................... 2,449 673
Other liabilities ............................................. 1,971 4,431
--------- ---------
Total liabilities ................................... 279,584 246,921
--------- ---------
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, 1999 and 1998 ..... 57 57
Additional paid-in capital .................................... 55,114 54,974
Retained earnings, substantially restricted ................... 39,997 37,374
Unallocated common stock held by ESOP ......................... (3,753) (3,981)
Unearned management recognition plan .......................... (1,011) (1,433)
Treasury stock, at cost (1,778,342 shares at September 30, 1999
and 1,328,416 shares at September 30, 1998) ................ (28,521) (21,223)
Accumulated other comprehensive
income (loss) .............................................. (2,671) 2,063
--------- ---------
Total shareholders' equity .......................... 59,212 67,831
--------- ---------
Total liabilities and shareholders' equity .......... $ 338,796 $ 314,752
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 1999, 1998 and 1997
(in thousands, except for per share amounts)
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest and dividend income:
Loans ......................................... $ 11,213 $ 10,373 $ 10,113
Securities available for sale:
Taxable .................................... 7,991 9,347 8,747
Non-taxable ................................ 2,304 1,016 58
Investment securities held to maturity ........ 41 255 688
Federal funds sold and other .................. 7 4 546
Federal Home Loan Bank of NY stock ............ 143 137 95
-------- -------- --------
Total interest and dividend income ......... 21,699 21,132 20,247
Interest expense:
Deposits ...................................... 8,570 8,905 8,652
Short-term borrowings ......................... 667 650 149
Long-term borrowings .......................... 1,305 405 --
-------- -------- --------
Total interest expense ..................... 10,542 9,960 8,801
-------- -------- --------
Net interest income ........................ 11,157 11,172 11,446
Provision for loan losses ......................... 190 189 300
-------- -------- --------
Net interest income after provision for loan
losses ..................................... 10,967 10,983 11,146
-------- -------- --------
Non-interest income:
Corporate-owned life insurance ................ 381 -- --
Recovery of Nationar loss contingency ......... -- -- 100
Service fees on deposit accounts .............. 369 294 243
Net securities gains (losses) ................. (45) 143 19
Other income .................................. 161 143 120
-------- -------- --------
Total non-interest income .................. 866 580 482
-------- -------- --------
Non-interest expenses:
Salaries and employee benefits ................ 3,622 3,452 2,996
Advertising and business promotion ............ 129 126 200
Net occupancy on premises ..................... 425 354 329
Federal deposit insurance premium ............. 24 24 20
Postage and supplies .......................... 332 297 239
Data processing fees .......................... 541 453 398
Equipment ..................................... 167 173 177
Professional fees ............................. 284 232 262
Other real estate expenses, net ............... 24 (57) (54)
Other ......................................... 636 608 620
-------- -------- --------
Total non-interest expense ................. 6,184 5,662 5,187
-------- -------- --------
Income before taxes ............................... 5,649 5,901 6,441
Income tax expense ................................ 1,424 2,019 2,534
-------- -------- --------
Net income ................................. $ 4,225 $ 3,882 $ 3,907
======== ======== ========
Basic earnings per share .......................... $ 1.13 $ .95 $ .84
======== ======== ========
Diluted earnings per share ........................ $ 1.10 $ .93 $ .83
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
29
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended September 30, 1999, 1998 and 1997
(dollars in thousands, except for share and per share amounts)
Unallocated
Retained common Unearned
Additional earnings, stock management Treasury
Common paid-in substantially held recognition stock,
stock capital restricted by ESOP plan at cost
----------- ------------ ------------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996 57 54,864 $ 31,984 $ (4,436) -- $ --
Comprehensive income:
Net income -- -- 3,907 -- -- --
Other comprehensive income, net of tax:
Unrealized net gains on AFS securities
(pre-tax $1,700) -- -- -- -- -- --
Reclassification adjustment for gains
realized in Net income (pre-tax $19)
Other comprehensive income
Comprehensive income
Dividends paid on common stock ($.21 per share) -- -- (976) -- -- --
Purchases of common stock (1,029,476 shares) -- -- -- -- -- (15,305)
Allocation of ESOP stock (22,722 shares) -- 115 -- 227 -- --
Grant of restricted stock (181,232 shares) -- (168) -- -- (2,275) 2,443
Amortization of unearned MRP compensation -- -- -- -- 419 --
----------- ------------ ------------- ----------- ------------- ----------
Balance at September 30, 1997 57 54,811 34,915 (4,209) (1,856) (12,862)
Comprehensive income:
Net income -- -- 3,882 -- -- --
Other comprehensive income, net of tax:
Unrealized net gains on AFS securities
(pre-tax $2,047) -- -- -- -- -- --
Reclassification adjustment for gains
realized in net income (pre-tax $143)
Other comprehensive income
Comprehensive income
Dividends paid on common stock ($.33 per share) -- -- (1,394) -- -- --
Purchases of common stock (486,573 shares) -- -- -- -- -- (8,459)
Allocation of ESOP stock (22,747 shares) -- 161 -- 228 -- --
Grant of restricted stock (2,000 shares) -- 2 -- -- (33) 31
Exercise of stock options (4,401 shares issued, net) -- -- (29) -- -- 67
Amortization of unearned MRP compensation -- -- -- -- 456 --
----------- ------------ ------------- ----------- ------------- ----------
Balance at September 30, 1998 $ 57 54,974 37,374 (3,981) (1,433) (21,223)
Comprehensive income:
Net income -- -- 4,225 -- -- --
Other comprehensive income, net of tax:
Unrealized net losses on AFS securities
(pre-tax $7,935) -- -- -- -- -- --
Reclassification adjustment for losses
realized in net income (pre-tax $45)
Other comprehensive loss
Comprehensive loss
Dividends paid on common stock ($.405 per share) -- -- (1,551) -- -- --
Purchases of common stock (466,034 shares) -- -- -- -- -- (7,556)
Allocation of ESOP stock (22,755 shares) -- 114 -- 228 -- --
Grant of restricted stock (2,500 shares) -- 1 -- -- (41) 40
Exercise of stock options (13,608 shares issued, net) -- 25 (51) -- -- 218
Amortization of unearned MRP compensation -- -- -- -- 463 --
----------- ------------ ------------- ----------- ------------- ----------
Balance at September 30, 1999 $ 57 55,114 $ 39,997 $ (3,753) (1,011) $ (28,521)
=========== ============ ============= =========== ============= ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated
other
comprehensive Comprehensive
income (loss) income
-------------- ---------------
<S> <C> <C>
Balance at September 30, 1996 $ (88)
Comprehensive income:
Net income -- $ 3,907
Other comprehensive income, net of tax:
Unrealized net gains on AFS securities
(pre-tax $1,700) 1,020
Reclassification adjustment for gains
realized in Net income (pre-tax $19) (11)
Other comprehensive income 1,009 1,009
===============
Comprehensive income $ 4,916
===============
Dividends paid on common stock ($.21 per share) --
Purchases of common stock (1,029,476 shares) --
Allocation of ESOP stock (22,722 shares) --
Grant of restricted stock (181,232 shares) --
Amortization of unearned MRP compensation --
-------------- ---------------
Balance at September 30, 1997 921
Comprehensive income:
Net income -- $ 3,882
Other comprehensive income, net of tax:
Unrealized net gains on AFS securities
(pre-tax $2,047) 1,228
Reclassification adjustment for gains
realized in net income (pre-tax $143) (86)
---------------
Other comprehensive income 1,142 1,142
===============
Comprehensive income $ 5,024
===============
Dividends paid on common stock ($.33 per share) --
Purchases of common stock (486,573 shares) --
Allocation of ESOP stock (22,747 shares) --
Grant of restricted stock (2,000 shares) --
Exercise of stock options (4,401 shares issued, net) --
Amortization of unearned MRP compensation --
-------------- ---------------
Balance at September 30, 1998 $ 2,063
Comprehensive income:
Net income -- $ 4,225
Other comprehensive income, net of tax:
Unrealized net losses on AFS securities
(pre-tax $7,935) (4,761)
Reclassification adjustment for losses
realized in net income (pre-tax $45) 27
---------------
Other comprehensive loss (4,734) (4,734)
===============
Comprehensive loss $ (509)
===============
Dividends paid on common stock ($.405 per share) --
Purchases of common stock (466,034 shares) --
Allocation of ESOP stock (22,755 shares) --
Grant of restricted stock (2,500 shares) --
Exercise of stock options (13,608 shares issued, net) --
Amortization of unearned MRP compensation --
--------------
Balance at September 30, 1999 $ (2,671)
==============
</TABLE>
See accompanying notes to financial statements.
30
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1999, 1998 and 1997 (in thousands)
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income .................................................. $ 4,225 $ 3,882 $ 3,907
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation ............................................ 214 222 183
Provision for loan losses ............................... 190 189 300
Recovery of Nationar loss contingency ................... -- -- (100)
MRP compensation expense ................................ 463 456 419
ESOP compensation expense ............................... 342 389 342
Increase in cash surrender value on COLI ................ (381) -- --
Losses (gains) on sale of other real estate owned ....... 20 (70) (140)
Losses (gains) on sales and calls of securities ......... 45 (143) (19)
Net accretion on securities ............................. (226) (43) (157)
Deferred tax benefit .................................... (237) (188) (156)
Collection of deposits held at Nationar ................. -- -- 183
Net increase in other assets ............................ (205) (138) (551)
Net increase (decrease) in other liabilities ............ 933 (1,154) 1,502
--------- --------- ---------
Net cash provided by operating activities ......... 5,383 3,402 5,713
--------- --------- ---------
Cash flows from investing activities:
Proceeds from maturity, paydowns, and
calls of investment securities held to maturity ......... 2,065 6,007 11,023
Proceeds from maturity, paydowns, and calls of AFS securities 43,895 50,728 64,415
Proceeds from sales of AFS securities ....................... 11,348 15,446 5,959
Purchase of corporate-owned life insurance .................. (10,000) -- --
Purchase of Federal Home Loan Bank stock .................... (680) (192) (603)
Purchase of AFS securities .................................. (63,807) (80,966) (119,590)
Net increase in loans ....................................... (13,258) (13,889) (2,642)
Capital expenditures, net ................................... (989) (377) (664)
Proceeds from sale of other real estate owned ............... 65 517 787
--------- --------- ---------
Net cash used by investing activities ............. (31,361) (22,726) (41,315)
--------- --------- ---------
Cash flows from financing activities:
Net increase in deposits .................................... 9,087 9,065 4,159
Increase (decrease) mortgagors' escrow deposits ............. 1,776 140 (1,099)
Cash dividends paid on common stock ......................... (1,551) (1,394) (976)
Proceeds from the exercise of stock options ................. 192 38 --
Purchase of common stock for treasury ....................... (7,556) (8,459) (15,305)
Net increase (decrease) in short-term borrowings ............ 24,260 (4,545) 11,385
Increase in long-term borrowings ............................ -- 25,000 --
--------- --------- ---------
Net cash (used) provided by financing activities ... 26,208 19,845 (1,836)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ........... 230 521 (37,438)
Cash and cash equivalents at beginning of year ................. 2,795 2,274 39,712
--------- --------- ---------
Cash and cash equivalents at end of year ....................... $ 3,025 $ 2,795 $ 2,274
========= ========= =========
Supplemental cash flow information:
Interest paid ...................................... $ 10,491 $ 9,731 $ 8,800
Income taxes paid .................................. 1,574 2,062 2,770
Non-cash investing activities:
Transfer of loans to other real estate owned ................ $ 32 $ 252 $ 538
Change in net unrealized gain (loss) on AFS securities,
net of deferred tax expense (benefit) of ($3,156)
$761 and $673, respectively ............................. $ (4,734) 1,142 1,009
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
NOTE 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:
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.
Use of Estimates
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.
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 and other real estate owned, if any. 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.
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 in shareholders' equity
as a component of accumulated other comprehensive income, net of income taxes.
the Company does not maintain a trading portfolio.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
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, the Federal Home Loan Mortgage Corporation, or the Federal
National Mortgage Association, 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.
Cash Surrender Value of Life Insurance
The Company maintains life insurance contracts on substantially all of its
employees and directors. The Company is the beneficiary of the policies and pays
all the costs related thereto. The cash surrender value on the policies is
recorded as an asset on the Company's consolidated statements of financial
condition. Increases in cash surrender value, representing the investment
performance on the assets in the underlying insurance contract, net of asset
based charges and related insurance premium costs, is shown as other
non-interest income.
Loans Receivable, Net
A significant portion of the Company's loans is secured by real estate in Greene
and Albany Counties 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.
Loans receivable are reported at unpaid principal amount, net of deferred loan
fees and/or costs and an allowance for loan losses. Loan origination fees net of
certain related costs are amortized into income over the estimated life of the
loan using the interest method of amortization. Interest income on loans is not
recognized when considered doubtful of collection by management.
Loans considered doubtful of collection by management are placed on a nonaccrual
status for the recording of interest. Generally loans past due 90 days or more
as to principal or interest are placed on nonaccrual status except for certain
loans which, in management's judgment, are adequately secured and in the process
of collection. 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 and there has been a period of
payment performance. Amortization of related deferred fees or costs is suspended
when a loan is placed on non-accrual status.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
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 economic conditions. The
allowance is increased by provisions for loan losses charged to operations.
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. 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 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.
Other Real Estate Owned
Other real estate owned includes assets received from foreclosure and
in-substance foreclosures. A loan is classified as an insubstance foreclosure
when the Company has taken possession of the collateral regardless of whether
formal foreclosure proceedings have taken place.
Foreclosed assets, including in-substance foreclosures, are recorded on an
individual asset basis at net realizable value which is the lower of fair value
minus estimated costs to sell or "cost" (defined as the fair value at initial
foreclosure). When a property is acquired or identified as in-substance
foreclosure, the excess of the loan balance over fair value is charged to the
allowance for loan losses. Subsequent write-downs to carry the property at fair
value less costs to sell are included in noninterest expense. Costs incurred to
develop or improve properties are capitalized, while holding costs are charged
to expense.
The Company had no other real estate owned at September 30, 1999, and at
September 30, 1998, other real estate owned consisted primarily of residential
one to four family properties. The Company had no in-substance foreclosures at
September 30, 1999 and 1998.
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 10 years for
furniture, fixtures and office equipment.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
Income Taxes
Income taxes are provided on income reported in the consolidated statements of
income regardless of when such taxes are payable. The Company utilizes the asset
and liability method of accounting for income taxes. Under the asset and
liability method, 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. 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.
Pension Plan
The Company has a defined benefit pension plan covering all full time employees
meeting age and service requirements. The plan is accounted for in accordance
with SFAS No. 87 "Employers Accounting for Pensions." In February 1998, the FASB
issued SFAS No. 132, "Employers' Disclosures About Pension and Other
Post-retirement Benefits." SFAS No. 132 only addresses disclosure and does not
change any of the measurement or recognition provisions provided for in SFAS No.
87. The Company adopted SFAS No. 132 in fiscal 1999, and prior periods
disclosures were revised accordingly.
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.
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.
Stock Based Compensation Plans
Compensation expense in connection with the Company's Employee Stock Ownership
Plan ("ESOP") is recorded based on average market value of the Company's common
stock and the number of shares allocated and released.
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.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
Segment Information
During fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 requires public
companies to report certain financial information about significant
revenue-producing segments of the business for which such information is
available and utilized by the chief operating decision-maker. Specific
information to be reported for individual operating segments includes a measure
of profit and loss, certain revenue and expense items, and total assets. As a
community-oriented financial institution, substantially all of the Company's
operations involve the delivery of loan and deposit products to customers.
Management makes operating decisions and assesses performance based on an
ongoing review of these community banking operations, which constitute the
Company's only operating segment for financial reporting.
Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" in fiscal
1999. All comparative financial statements have been reclassified to reflect the
provisions of this statement. Comprehensive income includes net income and all
other items that are currently accounted for as direct entries to equity, which
for the Company represents the mark to market adjustment on securities available
for sale. The Company has reported comprehensive income (loss) and its
components in the consolidated statement of changes in shareholders' equity.
Comprehensive income (loss) and accumulated other comprehensive income (loss)
are reported net of related income taxes. Accumulated other comprehensive income
(loss) for the Company consists solely of unrealized gains or losses on
available for sale securities.
Earnings per Share
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. 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.
Reclassifications
Amounts in the prior years' consolidated financial statements are reclassified
whenever necessary to conform to the current year's presentations.
NOTE 2 REGULATORY MATTERS
Regulatory Capital
The Company is subject to various regulatory capital regulations. 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 banks 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%.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
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, 1999 and 1998, the Bank meets all
capital adequacy requirements to which it is subject. Further, the most recent
OTS notification categorized the Bank as a well-capitalized institution under
the prompt corrective action regulations. There have been no conditions or
events since that notification that management believes have changed the Bank's
capital classification.
The following is a summary of the Bank's actual capital amounts and ratios as of
September 30, 1999 and 1998, compared to the minimum capital adequacy and the
requirements for classification as a well-capitalized institution. Although the
OTS does not have a holding company capital requirement, the Company's
consolidated capital amounts and ratios are also presented.
<TABLE>
<CAPTION>
1999
-------------------------------------------------------------------------
Minimum capital For classification
Actual adequacy as well capitalized
--------------------- ------------------ --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Bank (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 (core) capital $ 51,892 15.18% $ 13,669 4.00% $ 17,087 5.00%
Tier 1 risk-based capital 51,892 30.52 6,802 4.00 10,202 6.00
Total risk-based capital 53,985 31.75 13,603 8.00 17,004 10.00
<CAPTION>
Actual
------------------
Amount Ratio
------ -----
Consolidated
<S> <C> <C>
Tier 1 (core) capital $ 61,883 17.89%
Tier 1 risk-based capital 61,883 35.51
Total risk-based capital 63,976 36.71
<CAPTION>
1998
-------------------------------------------------------------------------
Minimum capital For classification
Actual adequacy as well capitalized
--------------------- ------------------ --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Bank (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 (core) capital $ 58,286 18.79% $ 12,408 4.00% $ 15,511 5.00%
Tier 1 risk-based capital 58,286 48.67 4,791 4.00 7,186 6.00
Total risk-based capital 59,713 49.86 9,581 8.00 11,977 10.00
<CAPTION>
Actual
------------------
Amount Ratio
------ -----
Consolidated
<S> <C> <C>
Tier 1 (core) capital $ 65,768 21.13%
Tier 1 risk-based capital 65,768 53.54
Total risk-based capital 67,185 54.69
</TABLE>
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
Liquidation Account
In accordance with regulatory requirements, the Bank established a liquidation
account at the time of its conversion to stock form, in the amount of $28.7
million, representing its total equity at September 30, 1995. The liquidation
account is maintained for the benefit of eligible account holders who continue
to maintain their accounts at the Bank. The liquidation account is reduced
annually to the extent that eligible account holders have reduced their
qualifying deposits as of each anniversary date. Subsequent increases will not
restore an eligible account holder's interest in the liquidation account. In the
unlikely event of a complete liquidation of the Bank, each eligible account
holder will be entitled to receive a distribution from the liquidation account
in the amount proportionate to the current adjusted qualifying balances for
accounts then held.
Capital Distributions
Under OTS regulations which became effective April 1, 1999, savings associations
such as the Bank generally may declare annual cash dividends up to an amount
equal to net income of the current year plus retained net income for the
preceding two years. Dividends in excess of such amount require OTS approval.
The Bank paid $11.0 million and $5.0 million of dividends to the Parent Company
during fiscal 1999 and 1998, respectively. No dividends were paid by the Bank
during fiscal 1997.
NOTE 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>
1999 1998 1997
---------- ---------- ----------
(In thousands, except share and per share data)
<S> <C> <C> <C>
Net income ................................... $ 4,225 $ 3,882 $ 3,907
========== ========== ==========
Weighted average common shares ............... 3,752,448 4,066,971 4,629,697
Dilutive effect of potential common shares
related to stock based compensation plans 76,861 120,762 71,731
---------- ---------- ----------
Weighted average common shares including
potential dilution ...................... 3,829,309 4,187,733 4,701,428
========== ========== ==========
Basic earnings per share ..................... $ 1.13 $ .95 $ .84
Diluted earnings per share ................... $ 1.10 $ .93 $ .83
</TABLE>
NOTE 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 $643,000 and $493,000 at September 30, 1999 and 1998,
respectively.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
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.
NOTE 5 SECURITIES AVAILABLE FOR SALE
The amortized cost and the related estimated fair values of securities available
for sale at September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999
----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
(in thousands) Cost gains losses value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
U.S. Government and agencies $ 7,987 $ 38 $ (34) $ 7,991
Mortgage-backed securities . 71,518 317 (561) 71,274
Corporate bonds ............ 34,895 43 (1,176) 33,762
Obligations of states and
political subdivisions ... 53,354 3 (3,144) 50,213
Equity securities .......... 2,532 118 (57) 2,593
-------- -------- -------- --------
Total securities
available for sale ..... $170,286 $ 519 $ (4,972) $165,833
======== ======== ======== ========
<CAPTION>
1998
----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
(in thousands) Cost gains losses value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
U.S. Government and 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
Equity securities .......... 2,242 202 -- 2,444
-------- -------- -------- --------
Total securities
available for sale ..... $161,546 $ 3,774 $ (337) $164,983
======== ======== ======== ========
</TABLE>
During the years ended September 30, 1999, 1998 and 1997, proceeds from sales of
securities available for sale were $11.3, $15.4 and $6.0 million, respectively.
Gross gains realized on these transactions were approximately $85 thousand, $150
thousand and $19 thousand, respectively. There were gross realized losses of
$130 thousand and $7 thousand in 1999 and 1998, respectively. There were no
gross realized losses in 1997.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
The amortized cost and estimated fair value of securities available for sale at
September 30, 1999, by contractual maturity, are shown below (mortgage backed
securities are included by final contractual maturity). Actual maturities will
differ from contractual maturities because certain issuers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
September 30, 1999
-------------------------
Amortized Estimated
Cost fair value
-------- --------
(in thousands)
<S> <C> <C>
Due within one year ............................ $ -- $ --
Due one year to five years ..................... 7,203 7,113
Due five years to ten years .................... 22,840 22,484
Due after ten years ............................ 140,243 136,236
-------- --------
Total securities available for sale ....... $170,286 $165,833
======== ========
</TABLE>
NOTE 6 INVESTMENT SECURITIES HELD TO MATURITY
The following table shows the amortized cost and the related estimated fair
value of investment securities held to maturity at September 30, 1998. The
Company had no securities held to maturity at September 30, 1999.
<TABLE>
<CAPTION>
1998
---------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Cost gains losses value
------ ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C>
U.S. Government agencies ............. $1,964 $ 46 $ -- $2,010
Mortgage-backed securities ........... 96 -- -- 96
------ ------ ------ ------
Total investment securities .......... $2,060 $ 46 $ -- $2,106
====== ====== ====== ======
</TABLE>
There were no sales of investment securities held to maturity during the years
ended September 30, 1999, 1998 or 1997.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
NOTE 7 LOANS RECEIVABLE, NET
Loans receivable consist of the following at September 30, 1999 and 1998:
<TABLE>
<CAPTION>
September 30,
------------------------
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Loans secured by real estate:
Conventional one- to four-family .......... $121,151 $113,423
Commercial and multi-family ............... 7,940 6,389
Construction .............................. 3,176 1,182
-------- --------
Total loans secured by real estate .... 132,267 120,994
-------- --------
Commercial loans ............................... 994 602
-------- --------
Consumer loans:
Student loans ............................. 2,707 2,795
Automobile loans .......................... 7,947 6,301
Secured/unsecured ......................... 3,783 3,339
Mobile home ............................... 367 535
Passbook loans ............................ 1,043 1,091
Home improvement .......................... 818 848
Home equity-lines of credit ............... 3,064 3,490
-------- --------
Total consumer loans .................. 19,729 18,399
-------- --------
Total loans .................................... $152,990 $139,995
Less:
Net deferred loan fees ............. 76 260
Allowance for loan losses .......... 2,093 1,950
-------- --------
2,169 2,210
-------- --------
Loan receivable, net ........................... $150,821 $137,785
======== ========
</TABLE>
<PAGE>
Activity in the allowance for loan losses is summarized as follows for the years
ended:
<TABLE>
<CAPTION>
September 30,
-----------------------------------
1999 1998 1997
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Balance at beginning of period ....... $ 1,950 $ 1,889 $ 1,833
Provision charged to operations ...... 190 189 300
Charge-offs .......................... (95) (148) (282)
Recoveries ........................... 48 20 38
------- ------- -------
Balance at end of period ............. $ 2,093 $ 1,950 $ 1,889
======= ======= =======
</TABLE>
The following table sets forth the information with regard to non-performing
loans:
<TABLE>
<CAPTION>
September 30,
--------------------------
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Loans in a non-accrual status ................. $396 $520 $780
Loans past due 90 days and still accruing ..... 148 71 137
Restructured loans ............................ -- -- --
---- ---- ----
Total non-performing loans ............... $544 $591 $917
==== ==== ====
</TABLE>
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
For the years ended September 30, 1999, 1998 and 1997, interest income that
would have been recorded on non-performing loans had they remained performing
amounted to approximately $31 thousand, $28 thousand and $50 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 shareholders' equity at September 30, 1999
and 1998.
As of September 30, 1999 and 1998, there was no recorded investment in loans
that were considered to be impaired under SFAS No. 114. During 1999, 1998 and
1997, the average balance of impaired loans was approximately $0, $0, and
$3,000, respectively. There was no interest income recorded on impaired loans
during fiscal 1999, 1998 or 1997.
NOTE 8 ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
September 30,
------------------------
1999 1998
------ ------
(in thousands)
<S> <C> <C>
Investment securities ...................... $ -- $ 21
Securities available for sale .............. 1,664 1,521
Loans ...................................... 912 856
------ ------
$2,576 $2,398
====== ======
</TABLE>
NOTE 9 PREMISES AND EQUIPMENT, NET
A summary of premises and equipment is as follows:
<TABLE>
<CAPTION>
September 30,
1999 1998
------ ------
(in thousands)
<S> <C> <C>
Banking house and land ......................... $3,334 $2,580
Furniture, fixtures and equipment .............. 760 817
------ ------
4,094 3,397
Less accumulated depreciation .................. 797 875
------ ------
Premises and equipment, net ............... $3,297 $2,522
====== ======
</TABLE>
Amounts charged to depreciation expense were approximately $214 thousand, $222
thousand and $183 thousand, for the years ended September 30, 1999, 1998 and
1997, respectively.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
NOTE 10 DUE TO DEPOSITORS
Due to depositors are summarized as follows as of September 30, 1999 and 1998:
<TABLE>
<CAPTION>
September 30,
--------------------------
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Savings accounts ........................... $ 81,894 $ 78,075
Certificates of deposit .................... 106,984 107,548
Money market accounts ...................... 6,435 5,949
NOW accounts ............................... 14,833 12,396
Non-interest bearing accounts .............. 8,918 6,009
-------- --------
Total deposits ........................ $219,064 $209,977
======== ========
</TABLE>
The approximate amounts of contractual maturities of certificates of deposit for
the years subsequent to September 30, 1999 are as follows:
(in thousands)
Years ended September 30,
2000 $ 77,067
2001 19,417
2002 6,542
2003 1,737
2004 1,877
Thereafter 344
--------
$106,984
========
The aggregate amount of time deposit accounts with a balance of $100,000 or more
(not federally insured beyond $100,000) were approximately $12.5 million and
$12.3 million at September 30, 1999 and 1998, respectively.
Interest expense on deposits and mortgagors' escrow deposits for the years ended
September 30, 1999, 1998 and 1997, is summarized as follows:
<TABLE>
<CAPTION>
September 30,
----------------------------------
1999 1998 1997
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Savings .............................. $2,428 $2,620 $2,821
Certificates of deposit .............. 5,611 5,768 5,309
Money market ......................... 191 198 242
NOW .................................. 276 268 237
Mortgagors' escrow deposits .......... 64 51 43
------ ------ ------
Total interest expense ........ $8,570 $8,905 $8,652
====== ====== ======
</TABLE>
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
NOTE 11 INCOME TAXES
The components of income tax expense are as follows for the years ended
September 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
September 30,
-----------------------------------
1999 1998 1997
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Current tax expense:
Federal ................ $ 1,210 $ 1,720 $ 2,111
State .................. 451 487 579
------- ------- -------
1,661 2,207 2,690
Deferred tax benefit ........ (237) (188) (156)
------- ------- -------
Total income tax expense $ 1,424 $ 2,019 $ 2,534
======= ======= =======
</TABLE>
Actual tax expense for the years ended September 30, 1999, 1998 and 1997 differs
from expected tax expense, computed by applying the Federal corporate statutory
tax rate of 34% to income before taxes is as follows:
<TABLE>
<CAPTION>
September 30,
1999 1998 1997
--------------------- --------------------- ----------------------
% Pretax % Pretax % Pretax
Amount income Amount income Amount income
------ ------ ------ ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Expected federal tax expense $ 1,921 34.0% $ 2,006 34.0% $ 2,190 34.0%
State taxes, net of federal
income tax benefit 336 5.9 351 5.9 380 5.9
Tax-exempt interest income (670) (11.9) (289) (4.9) - -
Corporate-owned life insurance (152) (2.7) - - - -
Other items, net (11) (.1) (49) (.8) (36) (.6)
---------- ------ -------- ------ --------- -------
$ 1,424 25.2% $ 2,019 34.2% $ 2,534 39.3%
========= ====== ======== ====== ======== ======
</TABLE>
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
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>
1999 1998
------ ------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses ................. $ 601 $ 447
Post-retirement benefits .................. 264 240
Nonqualified deferred compensation ........ 210 142
Loan accounting differences ............... 54 78
MRP compensation expense .................. 181 184
Other items ............................... 33 25
------ ------
Total deferred tax assets .......... 1,343 1,116
Valuation reserve ......................... 150 150
------ ------
Deferred tax asset net of valuation reserve 1,193 966
------ ------
Deferred tax liabilities:
Bond accretion ............................ 27 57
Prepaid pension ........................... 29 40
Other items ............................... 133 102
------ ------
Total deferred tax liabilities ..... 189 199
------ ------
Net deferred tax assets at end of year .... 1,004 767
Net deferred tax asset at beginning of year 767 579
------ ------
Deferred tax benefit for year ............. $ 237 $ 188
====== ======
</TABLE>
In addition to the deferred tax amounts described above, the Company also had
deferred tax asset of approximately $1,781 thousand and a deferred tax liability
of $1,374 thousand at September 30, 1999 and 1998, respectively related to the
net unrealized gains and losses on securities available for sale.
The valuation allowance for deferred tax assets at September 30, 1999 and 1998,
was $150 thousand. 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. Any changes in the deferred tax
asset valuation allowance are based upon the Company's continuing evaluation of
the level of such allowance 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.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
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, 1999, 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, 1999, with
respect to the Federal and state base-year reserves were approximately $1.2
million and $446 thousand (net of Federal benefit), respectively.
NOTE 12 EMPLOYEE BENEFIT PLANS
Pension Plan
The Company maintains a non-contributory defined benefit pension plan with RSI
Retirement Trust, covering substantially all employees aged 21 and over with one
year of service with the exception 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 changes in the pension benefit obligation for
the years ended September 30:
<TABLE>
<CAPTION>
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Obligation at beginning of year ............ $ 3,638 $ 3,041
Service cost ........................... 119 96
Interest cost .......................... 238 230
Actuarial (gain) loss .................. (385) 374
Benefits paid .......................... (111) (103)
------- -------
Obligation at end of year .................. $ 3,499 $ 3,638
======= =======
</TABLE>
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
Changes in the fair value of plan assets for the years ended September 30:
<TABLE>
<CAPTION>
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Fair value at beginning of year ............ $ 4,153 $ 4,263
Actual return on plan assets ........... 734 (7)
Employer contributions ................. -- --
Benefits paid .......................... (111) (103)
------- -------
Fair value at end of year .................. $ 4,776 $ 4,153
======= =======
</TABLE>
The reconciliation of the funded status of the plan to the consolidated
statements of financial condition as of September 30, is as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Funded status at beginning of year ........... $ 1,277 $ 515
Unrecognized transition asset ............ (26) (43)
Unrecognized net gain .................... (1,074) (283)
Unrecognized prior service cost .......... 43 56
------- -------
Prepaid pension cost at end of year .......... $ 220 $ 245
======= =======
</TABLE>
Components of net periodic pension cost (credit) for the years ended September
30, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
(in thousands)
<S> <C> <C> <C>
Service cost ............................ $ 119 $ 96 $ 83
Interest cost ........................... 238 230 214
Expected return on plan assets .......... (328) (337) (283)
Amortization of net transition asset .... (17) (17) (17)
Amortization of past service costs ...... 13 13 13
Amortization of net gains ............... -- (56) (25)
----- ----- -----
Net periodic pension cost (credit) ...... $ 25 $ (71) $ (15)
===== ===== =====
</TABLE>
Significant assumptions used in determining the actuarial present value of the
projected benefit obligation at September 30 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate .......... 7.75% 6.75% 7.50%
Increase in future compensation ......... 5.50% 4.50% 5.00%
Expected long-term rate of return ....... 8.00% 8.00% 8.00%
</TABLE>
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 have worked 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 the years ended September 30, 1999, 1998
and 1997 was $48 thousand, $47 thousand, and $37 thousand, respectively.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
Executive Supplemental Retirement Plan
During fiscal 1998, the Company adopted an Executive Supplemental Retirement
Plan for the Chief Executive Officer to restore benefits he would be due if they
were not limited under the Internal Revenue Code. An expense of $80 thousand and
$40 thousand was recorded in fiscal 1999 and 1998, respectively.
Post-retirement Benefits
The Company provides post-retirement medical and life insurance benefits to
eligible retirees. The plans are noncontributory except that most retirees 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).
Effective October 1, 1999, the Company ceased offering post-retirement medical
benefits to employees hired after that date. In addition, the Company
implemented a service based coverage benefit of 3% per year of service, with a
maximum service benefit of 90%. The Company also added an employer cap of $3,500
per participant. Consequently, as a result of these changes, the employee now
pays at least 10% of the cost of medical coverage, in addition to being
responsible for any costs over the cap. The impact of these changes decreased
the accumulated benefit obligation by $202 thousand, and the impact of this
unrecognized service credit will be amortized beginning in fiscal 2000, over
approximately 12 years.
The following table sets forth the changes in the pension benefit obligation for
the years ended September 30:
<TABLE>
<CAPTION>
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Obligation at beginning of year ............ $ 903 $ 1,179
Service cost ........................... 18 52
Interest cost .......................... 60 89
Actuarial (gain) loss .................. (107) (377)
Benefits paid .......................... (43) (40)
Plan amendments ........................ (202) --
------- -------
Obligation at end of year .................. $ 629 $ 903
======= =======
</TABLE>
The reconciliation of the funded status of the plan to the consolidated
statements of financial condition as of September 30 is as follows:
<TABLE>
<CAPTION>
1999 1998
----- -----
(in thousands)
<S> <C> <C>
Funded status at beginning of year ............. $(629) $(903)
Unrecognized transition obligation ......... 849 903
Unrecognized gains ......................... (630) (556)
Unrecognized past service credit ........... (202) --
----- -----
Accrued post-retirement benefit cost ........... $(612) $(556)
===== =====
</TABLE>
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
Net periodic post-retirement benefit cost for the years ended September 30,
1999, 1998 and 1997 include the following components:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
(in thousands)
<S> <C> <C> <C>
Service cost .......................... $ 18 $ 52 $ 52
Interest cost ......................... 60 89 103
Amortization of net transition
obligation ............... 54 54 54
Amortization of net gains ............. (33) (4) --
----- ----- -----
Net periodic post-retirement
benefit cost ............. $ 99 $ 191 $ 209
===== ===== =====
</TABLE>
The discount rate used in determining the accumulated post-retirement benefit
obligation was 7.75% and 6.75% at September 30, 1999 and 1998, respectively. For
measurement purposes at September 30, 1999, a 6.5% annual rate of increase in
the per capital cost of covered health care benefits was assumed for medical
coverage for fiscal 1999; the rate was assumed to decrease gradually to 5.0% by
2003 and to remain at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. To illustrate,
changing the assumed health care cost trend rates by one percentage point in
each year would increase or decrease the accumulated post-retirement benefit
obligation as of September 30, 1999, by approximately $13 thousand and $18
thousand, respectively, and the aggregate of the service and interest cost
components of the net periodic post-retirement benefit cost would change by
approximately $14 thousand and $11 thousand.
NOTE 13 STOCK-BASED COMPENSATION PLANS
Employee Stock Ownership Plan
As part of the conversion discussed in note 2, an employee stock ownership plan
was established to provide substantially all employees who are at least 21 and
have been credited with at least one year of service 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, 1999
and 1998, the loan had an outstanding balance of $4.1 million and $4.2 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 $342
thousand, $389 thousand and $342 thousand, respectively, of compensation expense
under the ESOP during the years ended September 30, 1999, 1998 and 1997.
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
The ESOP shares as of September 30, 1999, were as follows:
<TABLE>
<CAPTION>
<S> <C>
Allocated shares 79,598
Unallocated shares 375,342
----------
Total ESOP shares 454,940
----------
Market value of unallocated shares at September 30, 1999 $5,654,000
==========
</TABLE>
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. Each of these options has a ten-year term
and vest at a rate of 20% per year from their respective grant dates.
A summary of the status of the Company's stock option plans as of September 30,
1999, and 1998 and changes during the year is presented below:
<TABLE>
<CAPTION>
1999 1998
------------------------------ ----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Options:
Outstanding at beginning of year 426,675 $ 12.69 426,333 $ 12.59
Granted - - 8,000 17.56
Exercised (14,466) 12.50 (7,658) 12.50
Cancelled - - - -
--------------- -------------
Outstanding at year-end 412,209 12.69 426,675 $ 12.69
--------------- -------------
Exercisable at year-end 150,002 $ 12.66 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 (there were
no options granted in fiscal 1999): dividend yield of 1.8%; expected volatility
of 25.0%; risk free interest rates of 5.72% for the April 21, 1998, grant; 6.25%
for the August 19, 1997, grant and 6.50% for the October 24, 1996, grant and
expected lives of 7 years. Based on the aforementioned assumptions, the Company
has estimated that the fair value of the options granted in fiscal 1998 was
$5.64 and were $5.47 and $4.25 for the fiscal 1997 grants. Pro forma disclosures
for the Company for the years ending September 30, were as follows:
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ---------
(in thousands except per share data)
<S> <C> <C> <C>
Net income:
As reported ................ $4,225 $3,882 $ 3,907
Pro forma .................. 3,934 3,596 3,614
Basic earnings per share:
As reported ................ $ 1.13 $ .95 $ .84
Pro forma .................. 1.05 .88 .79
Diluted earnings per share:
As reported ................ 1.10 .93 .83
Pro forma .................. 1.05 .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.
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, 1999, 1998 and 1997, grants of 2,500
shares, 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 $463,000, $456,000 and $419,000 was recorded in fiscal 1999, 1998 and
1997 respectively, with the remaining unearned compensation cost shown as a
reduction of shareholders' equity.
NOTE 14 COMMITMENTS AND CONTINGENT LIABILITIES
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.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
Lease Commitments
The Company in fiscal 1998, entered into a noncancelable operating lease
agreement for a branch facility which expires in 2013. Rental expense for the
years ended September 30, 1999 and 1998, were $12 thousand and $6 thousand,
respectfully. A summary of the future minimum commitments required under the
agreement for the years ending September 30, are as follows:
Years Dollars in thousands
----- --------------------
2000 $ 14
2001 19
2002 21
2003 21
2004 21
Thereafter 193
---------------
$ 289
===============
Off-Balance-Sheet Financing and Concentrations of Credit
The Company is a party to certain financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit.
These instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized on the consolidated statement of financial condition.
The contract amounts of these instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the commitments to extend credit is represented by the
contractual notional amount of these instruments. The Company uses the same
credit policies in making commitments as it does for on-balance-sheet
instruments.
Unless otherwise noted, the Company does not require collateral or other
security to support off-balance-sheet financial instruments with credit risk.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being fully drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral, if any,
required by the Company upon the extension of credit is based on management's
credit evaluation of the customer. Mortgage commitments are secured by a first
lien on real estate. Collateral on extensions of credit for commercial loans
varies but may include property, plant and equipment, and income producing
commercial property.
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
Contract amounts of financial instruments that represent the future extension of
credit as of September 30, 1999 and 1998, at fixed and variable interest rates
are as follows:
<TABLE>
<CAPTION>
1999
----------------------------------------
Fixed Variable Total
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Mortgages ................... $4,345 $ 254 $4,599
Consumer .................... -- -- --
Lines of credit ............. 840 1,077 1,917
Home Equity ................. 50 1,898 1,948
------ ------ ------
$5,235 $3,229 $8,464
====== ====== ======
<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
====== ====== ======
</TABLE>
The range of interest on fixed rate commitments was 6.75% to 18.00% at September
30, 1999, and 6.50% to 18.00% at September 30, 1998. The range of interest on
adjustable rate commitments was 6.98% to 11.00% at September 30, 1999, and 8.00%
to 11.50% at September 30, 1998, respectively.
NOTE 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 $31.4 million and $28.6 million as of September
30, 1999 and 1998, respectively. Borrowings under the overnight program at
September 30, 1999 and 1998, which are priced at the federal funds rate plus
10.0 basis points and 12.5 basis points, were $21.1 million, at a rate of 5.73%
and $6.8 million at a rate of 6.00%, 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:
<TABLE>
<CAPTION>
1999 1998
------- -------
(dollars in thousands)
<S> <C> <C>
Maximum month-end balance .................. $31,100 $14,245
Average balance ............................ 12,962 11,317
Weighted average interest rate ............. 5.15% 5.74%
</TABLE>
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
NOTE 16 LONG-TERM BORROWINGS
The Company uses 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% October 16, 1999
July 2, 2008 5,000 5.46% July 2, 2003
July 23, 2008 5,000 5.10% October 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 $27.9 million. The securities used as collateral for the
convertible advances are being held in safekeeping at the FHLB, except for the
borrowing that matures on June 16, 2008, which is held by First Union Capital
Markets.
NOTE 17 FAIR VALUES
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
that the Company 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:
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
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 detailed 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.
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, 1999 and 1998. The fair value of
certificates of deposits 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, mortgagors' escrow deposits, short term borrowings, and accrued
interest payable.
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
Table of Financial Instruments
The carrying values and estimated fair values of financial instruments as of
September 30, were as follows:
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
------------------------------- -------------------------------
Estimated Estimated
Carrying fair Carrying fair
Value value value value
----- ----- ----- -----
(in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 3,025 3,025 2,795 2,795
Securities available for sale 165,833 165,833 164,983 164,983
Investment securities held to maturity - - 2,060 2,106
Federal Home Loan Bank Stock 2,634 2,634 1,954 1,954
Loans 152,990 152,138 139,995 141,867
Less: Allowance for loan losses 2,093 - 1,950 -
Net deferred loan fees 76 - 260 -
--------- --------- --------- ---------
Net loans 150,821 152,138 137,785 141,867
--------- --------- --------- ---------
Accrued interest receivable 2,576 2,576 2,398 2,398
Financial liabilities:
Deposits:
Demand, statement, passbook,
money market, and NOW accounts 112,080 112,080 102,429 102,429
Certificates of deposit 106,984 106,425 107,548 108,562
short-term borrowings 31,100 31,100 6,840 6,840
Long-term borrowings 25,000 24,823 25,000 25,500
Accrued interest payable 339 339 288 288
Mortgagors' escrow deposits 2,449 2,449 673 673
</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.
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
NOTE 18 CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
<TABLE>
<CAPTION>
Condensed Statement of Financial Condition
as of September 30, 1999 and 1998
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Assets
Cash and cash equivalents ............................ $ 1,574 $ 1,144
Securities available for sale ........................ 4,043 1,884
ESOP loan receivable from subsidiary ................. 4,094 4,231
Equity in net assets of subsidiary ................... 49,273 60,304
Other assets ......................................... 505 477
------- -------
Total assets ................................ $59,489 $68,040
======= =======
Liabilities and Shareholders' Equity
Other liabilities .................................... $ 277 $ 209
Total shareholders' equity ........................... 59,212 67,831
------- -------
Total liabilities and shareholders' equity .. $59,489 $68,040
======= =======
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Condensed Statements of Income
For the Years ended September 30, 1999, 1998 and 1997
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Dividends from subsidiary .................... $ 11,000 $ 5,000 $ --
Net interest income .......................... 527 596 475
-------- -------- --------
11,527 5,596 475
Non interest expense ......................... 319 298 223
-------- -------- --------
Income before income taxes and equity in
undistributed earnings of subsidiary ...... 11,208 5,298 252
-------- -------- --------
Income tax expense ........................... 62 142 61
-------- -------- --------
Income before equity in undistributed
earnings of subsidiary .................... 11,146 5,156 191
Change in undistributed earnings of subsidiary (6,921) (1,274) 3,716
-------- -------- --------
Net income ................................... $ 4,225 $ 3,882 $ 3,907
======== ======== ========
</TABLE>
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Statements of Cash Flows
For the Years Ended September 30, 1999, 1998 and 1997
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ...................................... $ 4,225 $ 3,882 $ 3,907
Adjustment to reconcile net income to net
cash provided by operating activities:
Net (increase) decrease in undistributed
earnings of subsidiary ........................ 6,921 1,274 (3,716)
Net accretion on securities ..................... -- -- (42)
Gain on sales of securities ..................... -- (77) --
Increase (decrease) in deferred income taxes .... 39 24 (10)
Net (increase) decrease in other assets ......... (36) 23 (57)
Net increase (decrease) in other liabilities .... 94 128 (6)
-------- -------- --------
Net cash provided by operating activities ....... 11,243 5,254 76
-------- -------- --------
Cash flows from investing activities:
Purchase of AFS securities ...................... (2,320) (2,376) (25,000)
Proceeds from the maturity of AFS securities .... -- 1,000 43,045
Proceeds from the sale of AFS securities ........ -- 3,642 --
Investment in subsidiary ........................ (161) (140) (93)
Net decrease in ESOP loan receivable ............ 137 128 120
-------- -------- --------
Net cash provided by (used in) investing
Activities ......................................... (2,344) 2,254 18,072
-------- -------- --------
Cash flows from financing activities:
Net proceeds from the exercise of stock options . 168 38 --
Purchase of common stock for treasury ........... (7,556) (8,459) (15,305)
Proceeds received from subsidiary for issuance of
vested MRP shares ............................ 470 446 --
Cash dividends on common stock .................. (1,551) (1,394) (976)
-------- -------- --------
Net cash used in financing activities ........... (8,469) (9,369) (16,281)
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents ................................ 430 (1,861) 1,867
Cash and cash equivalents:
Beginning of period ............................. 1,144 3,005 1,138
-------- -------- --------
End of period ................................... $ 1,574 $ 1,144 $ 3,005
======== ======== ========
Supplemental cash flow information:
Cash paid during year for income taxes .......... $ 55 107 91
Non-cash investing activities:
Change in net unrealized gain (loss)
on AFS securities, net of change in
deferred tax expense (benefit) of ($65), $ (97) 45 18
$17 and $12, respectively
</TABLE>
These financial statements should be read in conjunction with the Company's
consolidated financial statements and notes thereto.
58
<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 15, 2000 at the Bank's office at 341 Main Street, Catskill,
New York
Annual Report on Form 10-K
For the 1999 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 LLP
515 Broadway
Albany, New York 12207
Market Information for Common Stock
The common stock of Catskill Financial Corporation trades on the Nasdaq Stock
Market under symbol CATB.
At December 1, 1999, 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.
1999 High Low Dividend
- ---- ---- --- --------
First Quarter $15.00 $11.25 $ .0925
Second Quarter $15.75 $13.81 $ .0925
Third Quarter $16.75 $14.06 $ .11
Fourth Quarter $16.75 $14.13 $ .11
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 Dividend
- ---- ---- --- --------
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.
59
<TABLE>
<CAPTION>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
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 20, 1999, relating to the consolidated
statements of financial condition of Catskill Financial Corporation and
subsidiary as of September 30, 1999 and 1998, 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, 1999, which report
appears in the annual report on Form 10-K of Catskill Financial Corporation for
the fiscal year ended September 30, 1999.
/s/ KPMG LLP
------------
KPMG LLP
Albany, New York
December 23, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,025
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 165,833
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 152,914
<ALLOWANCE> 2,093
<TOTAL-ASSETS> 338,796
<DEPOSITS> 219,064
<SHORT-TERM> 31,100
<LIABILITIES-OTHER> 4,420
<LONG-TERM> 25,000
0
0
<COMMON> 57
<OTHER-SE> 59,155
<TOTAL-LIABILITIES-AND-EQUITY> 338,796
<INTEREST-LOAN> 11,213
<INTEREST-INVEST> 10,479
<INTEREST-OTHER> 7
<INTEREST-TOTAL> 21,699
<INTEREST-DEPOSIT> 8,570
<INTEREST-EXPENSE> 10,542
<INTEREST-INCOME-NET> 11,157
<LOAN-LOSSES> 190
<SECURITIES-GAINS> (45)
<EXPENSE-OTHER> 6,184
<INCOME-PRETAX> 5,649
<INCOME-PRE-EXTRAORDINARY> 5,649
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,225
<EPS-BASIC> 1.13
<EPS-DILUTED> 1.10
<YIELD-ACTUAL> 3.94
<LOANS-NON> 396
<LOANS-PAST> 148
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 299
<ALLOWANCE-OPEN> 1,950
<CHARGE-OFFS> 95
<RECOVERIES> 48
<ALLOWANCE-CLOSE> 2,093
<ALLOWANCE-DOMESTIC> 1,674
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 419
</TABLE>
