UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
-------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- ---------
Commission File Number 0-27650
CATSKILL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 14-1788465
------------------------------ ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
341 MAIN STREET, CATSKILL, NY 12414
--------------------------------------------
(Address of principal executive offices) (Zip Code)
(518)943-3600
-------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Shares, $.01 par value 3,737,519
----------------------------- ---------------------
(Title of class) (outstanding at July 31, 2000)
<PAGE>
CATSKILL FINANCIAL CORPORATION
FORM 10-Q
June 30, 2000
INDEX
-----
<TABLE>
<CAPTION>
<S> <C> <C>
PART I FINANCIAL INFORMATION Page
------ ---------------------
Item 1. Consolidated Interim Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 2000 (Unaudited) and September 30, 1999...................... 1
Consolidated Statements of Income for the three
months and nine months ended June 30, 2000 and 1999
(Unaudited)........................................................... 2
Consolidated Statements of Changes in
Shareholders' Equity for the nine months
ended June 30, 2000 and 1999
(Unaudited)........................................................... 3
Consolidated Statements of Cash Flows for the nine
months ended June 30, 2000 and 1999 (Unaudited)....................... 4
Notes to Unaudited Consolidated Interim Financial Statements.......... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk............ 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................... 22
Item 2. Changes in Securities................................................. 22
Item 3. Default on Senior Securities.......................................... 22
Item 4. Submission of Matters to a Vote of Security Holders................... 22
Item 5. Other Information..................................................... 22
Item 6. Exhibits and Reports on Form 8-K...................................... 22
Signatures............................................................ 23
</TABLE>
<PAGE>
CATSKILL FINANCIAL CORPORATION
Consolidated Statements of Financial Condition
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
----- ----
(Unaudited)
-----------
<S> <C> <C>
Assets:
Cash and due from banks $ 3,585 $ 3,025
Federal funds sold 44,500 ---
-------- ------------
Total cash and cash equivalents 48,085 3,025
Securities available for sale, at fair value 75,944 165,833
Federal Home Loan Bank of NY stock, at cost 3,461 2,634
Loans receivable, net 167,196 150,821
Corporate-owned life insurance 10,761 10,381
Accrued interest receivable 1,546 2,576
Premises and equipment, net 3,822 3,297
Other real estate owned --- ---
Other assets 5,428 3,014
--------- ----------
Total assets $ 316,243 $ 341,581
======== ========
Liabilities and Shareholders' Equity:
Liabilities
Deposits:
Non-interest bearing $ 9,152 $ 8,918
Interest bearing 212,287 210,146
-------- --------
Total deposits 221,439 219,064
Short-term borrowings 20,000 31,100
Long-term borrowings 15,000 25,000
Mortgagors' escrow deposits 2,616 2,449
Other liabilities 3,669 4,756
--------- ----------
Total liabilities $ 262,724 $ 282,369
-------- --------
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 June 30, 2000 and September 30, 1999 57 57
Additional paid-in capital 55,146 55,114
Retained earnings, substantially restricted 34,483 39,997
Unallocated common stock acquired by ESOP (3,640) (3,753)
Unearned management recognition plan (685) (1,011)
Treasury stock, at cost (1,949,231 shares at
June 30, 2000 and 1,778,342
shares at September 30, 1999) (30,943) (28,521)
Accumulated other comprehensive income (loss) (899) (2,671)
----------- ----------
Total shareholders' equity 53,519 59,212
--------- ---------
Total liabilities and shareholders' equity $ 316,243 $ 341,581
======== ========
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
1
<PAGE>
CATSKILL FINANCIAL CORPORATION
Consolidated Statements of Income
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans $ 3,248 $ 2,801 $ 9,357 $ 8,343
Securities available for sale:
Taxable 1,838 1,992 5,792 5,941
Non-taxable 609 570 2,046 1,598
Investment securities held to maturity --- --- --- 43
Federal funds sold and other 124 1 127 5
Federal Home Loan Bank of NY stock 57 33 165 100
------------ ------------ ----------- ------------
Total interest and dividend income 5,876 5,397 17,487 16,030
Interest expense:
Deposits 2,118 2,112 6,277 6,456
Short-term borrowings 711 124 1,968 304
Long-term borrowings 198 325 714 976
----------- ----------- ---------- ----------
Total interest expense 3,027 2,561 8,959 7,736
---------- ---------- --------- ---------
Net interest income 2,849 2,836 8,528 8,294
Provision for loan losses 50 50 150 140
------------ ------------ ---------- ------------
Net interest income after provision for
loan losses 2,799 2,786 8,378 8,154
----------- ----------- --------- -----------
Non-interest income:
Corporate-owned life insurance 123 127 380 250
Service fees on deposit accounts 106 92 312 270
Net securities gains (losses) (11,683) --- (11,800) 22
Other income 55 40 164 128
----------- ----------- ---------- -----------
Total non-interest income (11,399) 259 (10,944) 670
--------- ---------- --------- ----------
Non-interest expense:
Salaries and employee benefits 936 921 2,790 2,673
Advertising and business promotion 41 31 147 89
Net occupancy on premises 119 125 353 318
Federal deposit insurance premiums 12 6 31 19
Postage and supplies 85 88 264 247
Data processing fees 127 131 385 398
Equipment 53 46 173 121
Professional fees 70 74 191 215
Other real estate operations, net (23) (1) (20) 32
Merger related transaction costs 163 --- 163 ---
Other 193 156 499 472
----------- ----------- ----------- -----------
Total non-interest expense 1,776 1,577 4,976 4,584
---------- ----------- ---------- ----------
Income (loss) before taxes (benefit) (10,376) 1,468 (7,542) 4,240
Income tax expense (benefit) (3,917) 369 (3,309) 1,119
----------- ----------- ---------- ----------
Net income (loss) $ (6,459) $ 1,099 $ (4,233) $ 3,121
============ =========== =========== ==========
Basic earnings (loss) per common share ($ 1.96) $ .29 ($ 1.27) $ .81
Diluted earnings (loss) per common share ($ 1.96) $ .28 ($ 1.27) $ .80
Weighted Average Common Shares-Basic 3,294,197 3,804,676 3,330,443 3,831,288
Weighted Average Common Shares-Diluted 3,294,197 3,898,696 3,330,443 3,898,447
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
2
<PAGE>
CATSKILL FINANCIAL CORPORATION
Consolidated Statements of Changes in Shareholders' Equity
(In thousands, except share and per share data) (Unaudited)
<TABLE>
<CAPTION>
Retained Common Unearned
Additional Earnings, Stock Management
Common Paid-in Substantially Acquired by Recognition
Stock Capital Restricted ESOP Plan
------ -------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1999 $ 57 $55,114 $39,997 $(3,753) $(1,011)
Comprehensive income (loss):
Net income (loss) (4,233)
Other comprehensive income (loss), net of tax:
Unrealized net losses arising during the
period on AFS securities (pre-tax $8,847)
Reclassification adjustment for net losses
realized in net income (pre-tax $11,800)
Other comprehensive income
Comprehensive loss
Allocation of ESOP stock (11,373 shares) 40 113
Dividends paid on common stock ($.375 per share) (1,274)
Purchase of common stock (200,000 shares)
Grant of restricted stock (2,250 shares) (7)
Exercise of stock options (26,861 shares issued, net) (8)
Amortization of unearned MRP compensation 355
---------- --------- -------- ------- -------
Balance at June 30, 2000 $ 57 $55,146 $34,483 $(3,640) $ (685)
==== ======= ======= ======== =======
Balance at September 30, 1998 $ 57 $54,974 $37,374 $(3,981) $(1,433)
Comprehensive income:
Net income 3,121
Other comprehensive income (loss), net of tax:
Unrealized net losses arising during the
period on AFS securities (pre-tax $5,054)
Reclassification adjustment for gains
realized in net income (pre-tax $22)
Other comprehensive income (losses)
Comprehensive income
Allocation of ESOP stock (11,386 shares) 48 114
Dividends paid on common stock ($.295 per share) (1,162)
Purchase of common stock (178,780 shares)
Exercise of stock options (2,000 shares issued) (7)
Amortization of unearned MRP compensation
------ --------- ------ -------- -------
Balance at June 30, 1999 $ 57 $55,022 $39,326 $(3,867) $(1,086)
==== ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Treasury Other
Stock, Comprehensive Comprehensive
at Cost Income (Loss) Income Total
---------- -------------- ------------- -------
<S> <C> <C> <C> <C>
Balance at September 30, 1999 $(28,521) $ (2,671) $59,212
Comprehensive income (loss):
Net income (loss) $ (4,233) (4,233)
Other comprehensive income (loss), net of tax:
Unrealized net losses arising during the
period on AFS securities (pre-tax $8,847) (5,692)
Reclassification adjustment for net losses
realized in net income (pre-tax $11,800) 7,464
--------
Other comprehensive income 1,772 1,772 1,772
--------
Comprehensive loss $ (2,461)
=========
Allocation of ESOP stock (11,373 shares) 153
Dividends paid on common stock ($.375 per share) (1,274)
Purchase of common stock (200,000 shares) (2,888) (2,888)
Grant of restricted stock (2,250 shares) 36
Exercise of stock options (26,861 shares issued, net) 430 422
Amortization of unearned MRP compensation 355
--------- ------- -------
Balance at June 30, 2000 $(30,943) (899) $53,519
========= ======= =======
Balance at September 30, 1998 $(21,223) $ 2,063 $67,831
Comprehensive income:
Net income $ 3,121 3,121
Other comprehensive income (loss), net of tax:
Unrealized net losses arising during the
period on AFS securities (pre-tax $5,054) (3,033)
Reclassification adjustment for gains
realized in net income (pre-tax $22) (13)
-------
Other comprehensive income (losses) (3,046) (3,046) (3,046)
-------
Comprehensive income $ 75
=======
Allocation of ESOP stock (11,386 shares) 162
Dividends paid on common stock ($.295 per share) (1,162)
Purchase of common stock (178,780 shares) (2,894) (2,894)
Exercise of stock options (2,000 shares issued) 32 25
Amortization of unearned MRP compensation 347
--------- ------- -----
Balance at June 30, 1999 $(24,085) $(983) $64,384
========= ======= =======
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
3
<PAGE>
CATSKILL FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
2000 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited)
<S> <C> <C>
Net income (loss) $ (4,233) $ 3,121
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation 221 156
Net accretion on securities (414) (115)
Provision for loan losses 150 140
MRP compensation expense 355 347
ESOP compensation expense 245 251
Increase in cash surrender values on COLI (380) (250)
Losses (gains) on sale of other real estate owned (24) 28
Losses (gains) on sales of securities 11,800 (22)
Net increase in other assets (2,565) (312)
Net decrease in other liabilities (1,179) (554)
------- --------
Net cash provided by operating activities 3,976 2,790
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity/calls/paydown of investment securities --- 2,065
Net increase in loans (16,632) (8,221)
Capital expenditures, net (746) (480)
Purchase of corporate-owned life insurance --- (10,000)
Purchase of Federal Home Loan Bank stock (827) (101)
Purchase of AFS securities (4,809) (48,052)
Proceeds from sale of securities available for sale 77,965 5,394
Proceeds from maturity/calls/paydown of AFS securities 8,300 34,991
Proceeds from sale of other real estate owned 131 25
---------- ------------
Net cash provided (used) by investing activities 63,382 (24,379)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock option exercises 422 25
Net increase in deposits 2,375 10,102
Net increase in mortgagors' escrow deposits 167 1,870
Net increase (decrease) in short-term borrowings (11,100) 14,260
Repayment of long-term borrowings (10,000) ---
Cash dividends paid on common stock (1,274) (1,162)
Purchase of common stock for treasury (2,888) (2,894)
----------- --------
Net cash provided (used) by financing activities (22,298) 22,201
---------- -------
Net increase in cash and cash equivalents 45,060 612
Cash and cash equivalents at beginning of period 3,025 2,795
--------- -------
Cash and cash equivalents at end of period $ 48,085 $ 3,407
======== =======
Supplemental disclosure of cash flow information:
Interest paid $ 8,925 $ 7,717
Taxes paid 596 1,234
Transfer of loans to other real estate owned 107 32
Change in net unrealized gain (loss) on AFS securities,
net of change in deferred tax expense (benefit) of
$1,181 and $(2,030), respectively 1,772 (3,046)
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements
4
<PAGE>
CATSKILL FINANCIAL CORPORATION
Notes to Unaudited Consolidated
Interim Financial Statements
Note 1. Basis of Presentation
The unaudited consolidated interim financial statements include
the accounts of Catskill Financial Corporation (the "Company")
and its wholly owned subsidiary, Catskill Savings Bank (the
"Bank"). All intercompany accounts and transactions have been
eliminated in consolidation. Amounts in prior periods' unaudited
consolidated interim financial statements are reclassified
whenever necessary to conform to the current period's
presentation. In management's opinion, the unaudited consolidated
interim financial statements reflect all adjustments of a normal
recurring nature, and disclosures which are necessary for a fair
presentation of the results for the interim periods presented and
should be read in conjunction with the consolidated financial
statements and related notes included in the Company's 1999
Annual Report to Stockholders. The results of operations for the
interim periods are not necessarily indicative of the results of
operations to be expected for the full fiscal year ended
September 30, 2000.
Note 2. Merger Agreement
On June 7, 2000, the Company signed a definitive agreement by
which Troy Financial Corporation ("Troy") will acquire all of the
Company's outstanding shares for $23.00 in cash per share. The
transaction (the "Merger") is expected to close by the end of
2000 and is subject to shareholder and regulatory approval.
In connection with the Merger, the Company determined to sell its
municipal and corporate bond portfolio, which had a book value of
approximately $86.2 million, and represented approximately 52.2%
of its total securities available for sale. The Merger agreement
required the Company to complete the sale no later than 30 days
from the date of agreement and further provides that if the
aggregate pre-tax net sales proceeds were less than $73.2
million, the per share merger consideration would be reduced. On
June 13, 2000, the Company completed the sale of the securities
identified in the Merger agreement for approximately $74.5
million, and accordingly, the Company does not anticipate that
the amount per share will be reduced.
Note 3. Earnings (Loss) Per Share
Basic earnings (loss) per share excludes dilution and is computed
by dividing income (loss) available to common stockholders by the
weighted average number of common shares outstanding for the
period. Unvested restricted stock is not considered outstanding
and is only included in the computation of basic earnings per
share on the date that 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. Furthermore, for the three and nine month
periods ended June 30, 2000, weighted average common shares
including potential dilution, excluded 76,459 and 45,292 shares,
respectively, because they would have been antidilutive and
reduced the reported diluted loss per share. 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.
5
<PAGE>
The following sets forth certain information regarding the calculation of basic
and diluted earnings (loss) per share for the three-month and nine-month periods
ended June 30:
<TABLE>
<CAPTION>
(in thousands, except share and per share data)
Three Months Ended Nine Months Ended
June 30 June 30
---------- -------
2000 1999 2000 1999
---- ----- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ (6,459) $ 1,099 $ (4,233) $ 3,121
=========== =========== =========== ===========
Weighted average common shares 3,294,197 3,804,676 3,330,443 3,831,288
Dilutive effect of potential common shares
related to stock compensation plans -- 94,020 -- 67,159
----------- ----------- ----------- -----------
Weighted average common shares including
potential dilution 3,294,197 3,898,696 3,330,443 3,898,447
=========== =========== =========== ===========
Basic earnings (loss) per share $ (1.96) $ .29 $ (1.27) $ .81
Diluted earnings (loss) per share $ (1.96) $ .28 $ (1.27) $ .80
</TABLE>
6
<PAGE>
CATSKILL FINANCIAL CORPORATION
FORM 10-Q
June 30, 2000
PART I - FINANCIAL INFORMATION (continued)
--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
GENERAL
-------
Catskill Financial Corporation (the "Company" or "Catskill Financial") is a
savings and loan holding company, which owns all of the outstanding common stock
of Catskill Savings Bank (the "Bank").
The Bank has been and continues to be a community oriented financial institution
offering a variety of financial services. The Bank attracts deposits from the
general public and uses such deposits, together with other funds, to originate
one to four family residential mortgages, and, to a lesser extent, consumer
(including home equity lines of credit), commercial, and multi-family real
estate and other loans in its primary market area. The Bank's primary market
area is comprised of Greene and Schoharie Counties and southern Albany County in
New York, which are serviced through seven banking offices, the most recent
having opened in February 2000. 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").
On June 7, 2000, the Company signed a definitive agreement by which Troy
Financial Corporation ("Troy") will acquire all of the Company's outstanding
shares for $23.00 in cash per share. The transaction (the "Merger") is expected
to close by the end of 2000 and is subject to shareholder and regulatory
approval.
In connection with the Merger, the Company determined to sell its municipal and
corporate bond portfolio, which had a book value of approximately $86.2 million,
and represented approximately 52.2% of its total securities available for sale.
The Merger agreement required the Company to complete the sale no later than 30
days from the date of agreement and further provides that if the aggregate
pre-tax net sales proceeds were less than $73.2 million, the per share merger
consideration would be reduced. On June 13, 2000, the Company completed the sale
of the securities identified in the Merger agreement for approximately $74.5
million, and accordingly, the Company does not anticipate that the amount per
share will be reduced. The Company realized a loss of approximately $11.7
million from the securities sale, which has adversely impacted the Company's
operating performance for the three and nine-month periods ended June 30, 2000.
In addition, the Company's operating earnings for the periods were also
adversely impacted by $163,000 of non-deductible merger related transaction
costs.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q or future filings by the Company with
the Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project", "believe", or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. In addition, certain disclosures and information
customarily provided by financial institutions, such as analysis of the adequacy
of the allowance for loan losses or an analysis of the interest rate sensitivity
of the Company's assets and liabilities, are inherently based upon predictions
of future events and circumstances. Furthermore, from time to time, the Company
may publish other forward-looking statements relating to such matters as
anticipated financial performance, business prospects, and similar matters.
The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements. In order to comply with the terms of
the safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. Some of the risks and uncertainties that may affect
the operations, performance, development and results of the Company's business,
the interest rate sensitivity of its assets and liabilities, and the adequacy of
its allowance for loan losses, include but are not limited to the following:
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 changes in market interest rates or changes in the speed at which
market interest rates change;
o changes in laws and regulations affecting the financial service
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 anticipated or unanticipated events or
circumstances after the date of such statements.
FINANCIAL CONDITION
-------------------
Total assets were $316.2 million at June 30, 2000, a decrease of $25.4 million,
or 7.4% from the $341.6 million at September 30, 1999. The decrease reflects the
Company's sale of a substantial portion of its securities available for sale
portfolio, as the Company, in connection with the Merger, sold its corporate and
municipal bond portfolios. Part of the proceeds were used to paydown short-term
borrowings, which reduced the Company's leverage and the balance of the
proceeds, or approximately $44.5 million, were invested in lower yielding
Federal Funds.
8
<PAGE>
Cash and cash equivalents were $48.1 million, an increase of $45.1 million from
the $3.0 million at September 30, 1999. The increase was principally in Federal
Funds, as the Company reinvested part, or approximately $44.5 million, of the
proceeds from its securities portfolio sale.
Securities available for sale ("AFS") were $75.9 million, down $89.9 million, or
54.2% from $165.8 million. The decrease was principally from the sale in June
2000 of the Company's corporate and municipal bond portfolios, which had an
aggregate book value of approximately $86.2 million and resulted in net proceeds
of approximately $74.5 million. In addition to the security sale, the decrease
in the AFS portfolio was caused by the Company investing only a portion of the
cash flow from its mortgage-backed securities ("MBS") portfolio in new MBS
backed by adjustable rate mortgages ("ARM's") with teaser rates, with the
balance used to fund loan growth.
Loans receivable were $169.4 million at June 30, 2000, an increase of $16.5
million or 10.8% over the $152.9 million at September 30, 1999. The following
table shows the loan portfolio composition as of the balance sheet dates shown:
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
-------------- ------------
(In thousands) % of Loans (In thousands) % of Loans
---------- ----------
<S> <C> <C> <C> <C>
Real Estate Loans
One-to-four family $123,914 73.3% $121,151 79.2%
Multi-family and commercial 8,905 5.3 7,940 5.2
Construction 2,250 1.3 3,176 2.1
------- ----- ------- ---------
Total real estate loans 135,069 79.9 132,267 86.5
Consumer Loans 27,456 16.2 19,729 12.9
Commercial Loans 6,623 3.9 994 .6
------- ----- ------- ----------
Gross Loans 169,148 100.0% 152,990 100.0%
==========
Net deferred loan costs (fees) 248 (76)
-------- ----------
Total loans receivable $169,396 $ 152,914
======== ==========
</TABLE>
One-to-four family real estate loans increased $2.7 million, or 2.2%, as the
Company continues to promote 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. Consumer loans increased $7.7
million or 39.1% from September 30, 1999, due principally to an increase in
indirect auto loans. The Company began its indirect auto program in June 1998,
and still originates only through a limited number of dealers in, or contiguous
to, its market area. At June 30, 2000, the Company had $10.0 million of indirect
consumer loans representing 36.4% of the consumer loan portfolio, and less than
5.9% of the Company's total loan portfolio. Commercial loans now total $6.6
million, up $5.6 million from September 30, 1999. The increase is primarily due
to an increase in secured indirect lending to small businesses, and is
collateralized principally by autos. At June 30, 2000, the Company had $5.0
million of indirect commercial loans representing 75.2% of its commercial loan
portfolio, and approximately 3.0% of the Company's total loan portfolio.
9
<PAGE>
Non-performing assets at June 30, 2000 were $494,000, or .16% of total assets,
compared to the $544,000, or .16% of total assets at September 30, 1999. The
table below sets forth the amounts and categories of the Company's
non-performing assets.
June 30, September 30,
2000 1999
----------------------------
(In thousand)
Non-performing loans:
One-to-four family $355 $396
Multi-family and commercial -- --
Consumer 139 148
---- ----
Total non-performing loans 494 544
---- ----
Foreclosed assets, net:
One-to-four family -- --
Multi-family and commercial -- --
---- ----
Total foreclosed assets, net -- --
---- ----
Total non-performing assets $494 $544
==== ====
Total non-performing loans
as a % of total loans .29% .36%
The decrease in non-performing loans at June 30, 2000 as compared to September
30, 1999 was principally due to the foreclosure of one loan, which resulted in
the Company acquiring title to the mortgaged property. The net realizable value
of the property, totaling $107,000, was transferred to other real estate, and
since the net realizable value exceeded the Company's carrying value, the
Company recorded no loss.
The following table summarizes the activity in other real estate for the periods
presented:
Nine Months Ended June 30,
--------------------------
2000 1999
---- ----
(In thousands)
Other real estate beginning of
period $ -- $ 53
Transfer of loans to other real
estate owned 107 32
Sales of other real estate, net (107) (53)
----- -----
Other real estate end of period $ -- $ 32
===== =====
Additionally, at June 30, 2000, the Company had identified approximately
$180,000 in loans having more than normal credit risk, substantially, all of
which were 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.
10
<PAGE>
The allowance for loan losses was $2.2 million, or 1.30%, of period end loans at
June 30, 2000, and provided coverage of non-performing loans of 445.3%, compared
to 1.37% and coverage of 384.7% as of September 30, 1999. The following
summarizes the activity in the allowance for loan losses:
Nine Months Ended June 30,
--------------------------
2000 1999
----------- ----------
(In thousands)
Allowance at beginning of the period $ 2,093 $ 1,950
Charge-offs (77) (68)
Recoveries 34 28
------- -------
Net charge-offs (43) (40)
Provision for loan losses 150 140
------- -------
Allowance at end of the period $ 2,200 $ 2,050
======= =======
Total deposits were $221.4 million at June 30, 2000, up $2.3 million, or 1.0%,
from the $219.1 million at September 30, 1999. The following table shows the
deposit composition as of the two dates:
<TABLE>
<CAPTION>
June 30, 2000 September 30, 1999
----------------------------- -----------------------------
(In thousands) % of Deposits (In thousands) % of Deposits
<S> <C> <C> <C> <C>
Savings $ 81,816 36.9% $ 81,894 37.4%
Money market 5,708 2.6 6,435 2.9
NOW 16,963 7.7 14,833 6.8
Non-interest demand 9,152 4.1 8,918 4.1
Certificates of deposits 107,800 48.7 106,984 48.8
-------- ----- -------- -----
$221,439 100.0% $219,064 100.0%
======== ===== ======== =====
</TABLE>
The increase in deposits was generated principally by the Middleburgh branch,
which opened in August 1999. In addition, in February 2000, the Company opened
its seventh full-service branch in Oak Hill, and the Company expects this branch
to contribute to its strategy of growing its core deposits. Core deposits,
representing all deposits other than certificates of deposit, represent
approximately 51.0% of total deposits.
The Company's borrowings, which are with the Federal Home Loan Bank of New York
("FHLB"), were $35.0 million at June 30, 2000, down $21.1 million, or 37.6% from
the $56.1 million at September 30, 1999. The decrease was principally from the
Company's sale of its corporate and municipal bond portfolios, as the Company
used part of the proceeds to paydown all short-term borrowings that could be
repaid. In addition, the Company has an additional $5.0 million of borrowings
which mature in July, and the Company expects to reduce its Federal Funds Sold
and repay those as well. At June 30, 2000, the Company still had additional
available credit of $21.9 million under its overnight line and $11.9 million
under its one-month advance program with the FHLB.
Shareholders' equity at June 30, 2000 was $53.5 million, a decrease of $5.7
million or 9.6% from the $59.2 million at September 30, 1999. The decrease was
principally caused by the after tax net loss of $4.2 million, the cost of the
Company's share repurchases of $2.9 million and cash dividends paid of $1.3
million. Somewhat offsetting the decreases were the $1.8 million reduction in
the Company's net unrealized loss on its AFS securities portfolio net of tax,
due to the portfolio sale and the $.9 million increase in shareholders' equity
11
<PAGE>
due to the amortization of restricted stock awards, release of shares under the
Company's ESOP, and proceeds from stock options exercises.
Shareholders' equity as a percentage of total assets was 16.9% at June 30, 2000,
as compared to 17.3% at September 30, 1999. Book value per common share was
$14.32 at June 30, 2000, down from $15.15 at September 30, 1999, due principally
to the $7.4 million after tax security loss.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND
--------------------------------------------------------------------------------
1999
----
General
-------
For the three months ended June 30, 2000, the Company recorded a net loss of
$6,459,000, a decrease of $7,558,000 compared to net income of $1,099,000 for
the three month period ended June 30, 1999. Diluted loss per share was $1.96
compared to diluted earnings per share of $.28 for the three months ended June
30, 1999. Basic loss per share was $1.96 for the three month period compared to
basic earnings per share of $.27 for the comparable quarter. For the three
months ended June 30, 2000, weighted average common shares - basic were
3,294,197, down 510,479, or 13.4% from the comparable period, due to the
Company's share repurchase programs.
Annualized return on average assets for the three months ended June 30, 2000 and
1999, was -7.63% and 1.35%, respectively, and the annualized return on average
equity was -48.08% and 6.35%, respectively.
The Company's reported earnings for the quarter ended June 30, 2000, were
adversely impacted by a $7.4 million after-tax securities loss taken to
facilitate the pending Merger. In addition, operating earnings were adversely
impacted by $163,000 in after-tax merger related transaction costs. Excluding
the after-tax security loss and merger related costs, the Company's operating
earnings would have been approximately $1,105,000, up .5% from the comparable
period, and diluted earnings per share would have been $.33 per share, up 17.9%.
Furthermore, the annualized return on average assets would have been 1.31% and
return on average equity would have been 8.23%.
Net Interest Income
-------------------
Net interest income on a tax equivalent basis for the three months ended June
30, 2000, was $3.1 million, an increase of $29,000, or .9%, when compared to the
three months ended June 30, 1999. The increase was principally volume related as
the Company increased its average interest earning assets $18.4 million, or
5.9%, more than offsetting the increase in interest expense related to increased
short-term borrowing costs due to rising interest rates, and the additional
borrowings used to fund the Company's stock repurchases and average earning
asset growth.
Interest income for the three months ended June 30, 2000 was $6.2 million on a
tax equivalent basis, an increase of $495,000, or 8.7%, over the comparable
period last year. The $18.4 million increase in the average volume of earning
assets had a direct positive effect on interest income as the Company sought to
leverage its excess capital. The Company also benefited from a 19 basis point
increase in the yield on its average earning assets caused primarily by
increases in the yield earned on its loans, securities and MBS portfolios due to
higher market interest rates.
12
<PAGE>
Average earning assets increased principally in the loan portfolio, which on
average grew 13.7%. Loan growth was principally in 15 year fixed rate
one-to-four family mortgages and the Company's indirect auto program. Yield on
the average loan portfolio was 7.82%, up 15 basis points from the comparable
quarter due to an increase in the percentage of higher yielding consumer and
commercial loans. Consumer and commercial loans represented 18.7% of average
loans, up from 12.8% in the comparable quarter.
Average MBS were $67.7 million for the three months ended June 30, 2000, down
$4.6 million or 6.3% from the comparable period due principally to payments. The
Company used some of the proceeds to fund higher yielding loans rather than
purchase additional MBS. The average yield on MBS was 6.82%, up 36 basis points
from the comparable period, as the interest rates on the Company's MBS's with
underlying teaser rate ARM's purchased in prior periods continue to reset to
higher rates. Management expects the average yield of these ARM's to continue 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 securities decreased $4.7 million, or 5.1%, as the Company sold in June
2000, its corporate and municipal bond portfolios with a book value of
approximately $86.2 million. Part of the proceeds were used to paydown
short-term borrowings with the remaining balance invested in lower yielding
Federal Funds. The Company expects that the deleveraging of the balance sheet
along with the reinvestment in Federal Funds will adversely impact its interest
income, temporarily, until its merger with Troy is consummated. The average
yield on the securities portfolio for the three months ended June 30, 2000, was
7.59%, an increase of 12 basis points from the comparable period, as the Company
replaced securities called and/or matured with higher yielding municipal and
corporate debt securities.
Interest expense for the three months ended June 30, 2000, was $3.0 million, an
increase of $466,000, or 18.2%. The increase was principally due to the higher
volume of average interest-bearing liabilities, as well as an increase in the
Company's cost of funds. Average interest-bearing liabilities were $275.3
million, an increase of $26.9 million, or 10.8%, as the Company borrowed in
order to fund its earning asset growth and the stock repurchase program. Average
short-term borrowings were $44.9 million for the three months ended June 30,
2000, up $34.9 million from the comparable three-month period. The cost of funds
increased 29 basis points to 4.42% as the Company's short-term borrowing costs
increased 140 basis points to 6.36% due to the rising level of short-term
interest rates. Somewhat offsetting the increase in short-term borrowing costs
was a 2 basis point drop in the cost of average interest-bearing deposits to
3.97%. Average CD costs were essentially flat, however, the Company expects that
the average cost of its CD portfolio will begin to increase due to the rising
level of interest rates and competitive pressures.
The Company's net yield on average earning assets was 3.85% for the three months
ended June 30, 2000, down 18 basis points compared to the same period of the
prior year. The decrease was principally caused by the reduced level of no cost
funding sources as the Company funded its stock repurchase program with
short-term borrowings, which increased the percentage of earning assets funded
by interest-bearing liabilities. For the three months ended June 30, 2000, the
Company had $52.8 million of average earning assets with no funding costs, a
decrease of $8.5 million, or 13.9%, from the three months ended June 30, 1999.
13
<PAGE>
For more information on average balances, interest, yield and rate, please refer
to Table #1, included in this report.
Provision for Loan Losses
-------------------------
The Company establishes an allowance for loan losses based on an analysis of
risk factors in its loan portfolio. This analysis includes concentrations of
credit, past loan loss experience, current economic conditions, amount and
changes to the 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 current level of non-performing loans.
The provision for loan losses was $50,000 for the three months ended June 30,
2000, the same as the comparable period of the prior year despite the decrease
in non-performing loans and net charge-offs due to loan growth and the change in
the portfolio mix. The provision was .12% annualized of average loans in the
current period compared to .13% of average loans in the prior period. The
Company had net charge-offs of $13,000 or .03% of average loans for the quarter,
down from the $30,000 or .08% of average loans in the comparable period.
Non-performing loans were $494,000 as of June 30, 2000, or .29% of total loans,
a decrease of $114,000 from June 30, 1999, when they were .41% of total loans.
At June 30, 2000, the allowance for loan losses was $2,200,000, or 1.30%, of
period end loans, and provided coverage of non-performing loans of 445.3%
compared to 1.39% and 337.0%, respectively, as of June 30, 1999.
Non-Interest Income
-------------------
Non-interest income, excluding the loss of $11.7 million on the Company's sale
of its corporate and municipal portfolios, was $284,000 for the three months
ended June 30, 2000, up $25,000, or 9.7%. Service fees on deposit accounts
increased $14,000, or 15.2%, as the Company continues to promote checking
accounts to increase its core deposits. The Company also earned $18,000 in fees
from ATM surcharges during the quarter on non-customer transactions; the Company
did not charge this fee in the comparable period.
Non-Interest Expense
--------------------
Non-interest expense for the three months ended June 30, 2000, excluding the
$163,000 of merger related transaction costs, was $1,613,000, an increase of
$36,000, or 2.3%, over the comparable period last year. The increase was
principally the cost attributable to our new branch in Oak Hill, which opened in
February 2000, including promotional and start-up costs, as well as the ongoing
costs of our Middleburgh office, which opened in August 1999.
Income Tax (Benefit) Expense
----------------------------
Income tax benefit for the three months ended June 30, 2000, was $3,917,000,
compared to an income tax expense of $369,000 in the comparable period last
year. The Company's effective tax rates for the three months ended June 30, 2000
and 1999, were -37.75% and 25.14%, respectively. The tax benefit realized on the
security losses was less than the Company's statutory rate due principally to
the lack of carry forward/carry back provisions in New York State franchise
14
<PAGE>
taxes in calendar year 2000. The tax benefit was also adversely impacted by the
non-deductibility of the $163,000 in merger related transaction costs.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
General
-------
For the nine months ended June 30, 2000, the Company recorded a net loss of
$4,233,000 compared to net income of $3,121,000 for the nine-month period ended
June 30, 1999. The Company's reported net loss for the period was adversely
impacted by the previously discussed $7.4 million in after-tax security losses
and $163,000 in non-deductible merger related transaction costs. Excluding the
after-tax securities loss and merger costs, operating income would have been
approximately $3,331,000. Diluted loss per share was $1.27 compared to diluted
earnings per share of $.80 for the nine months ended June 30, 1999. Basic loss
per share was $1.27 for the nine month period compared to basic earnings per
share of $.81 for the comparable nine month period. For the nine months ended
June 30, 2000, weighted average common shares - basic were 3,330,443, down
500,845, or 13.1%, due to the Company's share repurchase programs.
Annualized return on average assets for the nine months ended June 30, 2000 and
1999, was -1.65% and 1.30%, respectively, and return on average equity was
-10.21% and 6.19%, respectively. If you exclude the after-tax impact of the
securities loss and merger costs, the annualized return on average assets would
have been 1.30% and the return on average equity would have been 8.03%.
Net Interest Income
-------------------
Net interest income for the nine months ended June 30, 2000, was $9.5 million on
a full tax equivalent basis, an increase of $448,000, or 4.9%, when compared to
the nine months ended June 30, 1999. The increase was principally volume related
as the Company increased its average earning assets $22.6 million, or 7.4%, 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 nine months ended June 30, 2000 was $18.5 million on a
tax equivalent basis, an increase of $1,671,000, or 9.9%, over the comparable
period. The $22.6 million, or 7.4%, increase in the average volume of earning
assets had a positive effect on interest income as the Company sought to
leverage its excess capital. Furthermore, the Company benefited from an 18 basis
point increase in the yield on its average earning assets.
Average earning assets increased principally in the loan and securities
portfolios, which on average grew 11.7% and 1.9%, respectively. 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 portfolio yield. In
addition, the Company had an increase of $7.6 million, or 40.4%, in its average
consumer and commercial loan portfolios due to its indirect lending program. The
yield on average loans increased 3 basis points as the higher yielding consumer
and commercial portfolios offset the lower yield on the mortgage portfolios
15
<PAGE>
caused by lower market rates in late 1998 and early 1999, which resulted in
higher prepayments and/or refinancing of its existing portfolio.
Average MBS were $69.5 million for the nine months ended June 30, 2000, down
$8.4 million, or 10.8%, from the comparable period. The average yield on MBS was
6.74%, up 35 basis points from the comparable period, as interest rates on the
Company's MBS ARM's purchased in prior periods with teaser rates continue to
reset to higher rates. Management expects the average yield of these ARM's to
continue 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 $11.5 million, or 13.6%, as the Company
purchased in 1999 longer call protected bank qualified municipals and
non-callable corporate securities to increase yields and reduce reinvestment
risk if rates had declined. The average yield on the other securities portfolio
for the nine months ended June 30, 2000, was 7.60%, an increase of 15 basis
points from the comparable period, as the Company replaced securities called or
matured with higher yielding municipals.
Interest expense for the nine months ended June 30, 2000, was $9.0 million, an
increase of $1,223,000, or 15.8%. The change was principally due to an increase
in the average volume of interest-bearing liabilities, as well as an 8 basis
point increase in the Company's cost of funds due to rising short-term borrowing
costs. Average interest-bearing liabilities were $275.6 million, an increase of
$32.5 million, or 13.4%, as the Company borrowed in order to fund the Company's
stock repurchases, its COLI purchase and earning asset growth. Average
short-term borrowings were up $35.7 million, as the Company funded its stock
repurchases and its earning asset growth, as well as repaid called long-term
borrowings. Average long-term borrowings were $18.1 million for the nine months
ended June 30, 2000, down $6.9 million from the comparable nine-month period due
to the repayment of called borrowings. In addition, the Company continues to
grow its core deposits with average Now accounts up $2.7 million, or 19.1%. The
Company's cost of funds increased 8 basis points to 4.34%, as rapidly rising
short-term borrowing costs were somewhat offset by lower deposit costs. Average
deposit costs for the nine-month period ended June 30, 2000, were down 19 basis
points to 3.94%, which somewhat offset the 100 basis point rise in short-term
borrowing costs due to an increase in short-term interest rates.
The Company's net yield on average earning assets was 3.86% for the nine months
ended June 30, 2000, down 9 basis points compared to 3.95% for the comparable
period of the prior year. The decrease was principally caused by the Company's
stock repurchase program, which reduced the level of no-cost funding sources,
and increased the amount of earning assets funded by average interest-bearing
liabilities. For the nine months ended June 30, 2000, the Company had $53.8
million of average earning assets with no funding costs, a decrease of $9.9
million, or 15.6%, from the $63.7 million for the nine months ended June 30,
1999.
For more information on average balances, interest, yield and rate, please refer
to Table #2, included in this report.
16
<PAGE>
Provision for Loan Losses
-------------------------
The provision for loan losses was $150,000, or .12% annualized of average loans
for the nine months ended June 30, 2000, up $10,000, or 7.1%. The increase was
principally based on loan growth, as well as the change in portfolio mix, as the
provision represented .13% of average loans in the comparable period.
Non-Interest Income
-------------------
Non-interest income, excluding the loss of $11.7 million on the Company's sale
of its corporate and municipal bond portfolios in June 2000, was $739,000 for
the nine months ended June 30, 2000, an increase of $69,000, or 10.3% from the
nine months ended June 30, 1999. The increase was principally due to
three-quarters of investment performance on the Company's corporate-owned life
insurance in this period compared to only two quarters in the prior period. The
cash surrender value increased by $130,000. Offsetting most of that increase was
the $139,000 change in net security transactions other than the previously
discussed Merger related sale. In the nine months ended June 30, 2000, the
Company realized losses of $117,000 compared to gains of $22,000 in the
comparable period. In addition, service fees on deposit accounts increased
$42,000, or 15.6%, as the Company continues to promote checking related products
to increase core deposits and diversify its revenues. Furthermore, the Company
earned $51,000 in fees from ATM surcharges on non-customer transactions; the
Company did not charge this fee in the comparable period.
Non-Interest Expense
--------------------
Non-interest expense, excluding the $163,000 of merger related transaction
costs, for the nine months ended June 30, 2000 was $4,813,000, an increase of
$229,000, or 5.0%, over the comparable period last year. The increase was due
principally to the cost attributable to our two new branches, which opened in
August 1999 and February 2000.
Salaries and employee benefits were up $117,000, or 4.4%, principally from
staffing the two new offices. Advertising, as well as occupancy, equipment and
supplies were all higher, principally from the new branches.
Income Tax (Benefit) Expense
----------------------------
Income tax benefit for the nine months ended June 30, 2000, was $3,309,000 as
compared to an income tax expense of $1,119,000 in the comparable period last
year. The Company's effective tax rates for the nine months ended June 30, 2000
and 1999, were -43.87% and 26.39%, respectively. The tax benefit realized on the
security losses was less than the Company's statutory rate due principally to
lack of carry forward/carry back provisions in New York State franchise taxes in
calendar year 2000. The tax benefit was also adversely impacted by the
non-deductibility of the $163,000 in merger related transaction costs.
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.
17
<PAGE>
The Company's primary sources of funds for operations are its Federal Funds
Sold, deposits, borrowings, principal and interest payments on loans,
mortgage-backed securities and other securities available for sale.
Net cash provided by operating activities was $3,976,000 for the nine months
ended June 30, 2000, an increase of $1,186,000 from the comparable nine month
period. The increase was principally caused by the Company's sale of its
corporate and municipal bond portfolios, which reduced the Company's accrued
interest receivable balances.
Investing activities provided $63.4 million in the nine months ended June 30,
2000, due principally to the sale of AFS securities. Proceeds from the sale of
AFS securities were $78.0 million, $74.5 million of which related to the
corporate and municipal bond sale in connection with the Company's pending
merger with Troy. Somewhat offsetting the cash flow from the Company's
securities portfolio were the $16.6 million increase in loans, $.8 million
purchase of FHLB stock and $.7 million in capital expenditures principally for
the construction of a new full service branch. Financing activities used $22.3
million, as the Company paid off $11.1 million in short-term borrowings, and
$10.0 million of long-term borrowings. Furthermore, the Company experienced a
$2.4 million deposit increase and used $2.9 million to fund its stock repurchase
program and $1.3 million to pay cash dividends. 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 $221.4 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 June 30, 2000, deposit accounts having balances in excess of
$100,000 totaled $26.2 million, or 11.8%, 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 the month of June 2000, the Bank exceeded
that, maintaining an average liquidity ratio of 50.5%, primarily due to the
large percentage of its assets represented by Federal Funds Sold and AFS
securities.
The Company anticipates that it will have sufficient funds to meet its current
commitments. At June 30, 2000, the Company had commitments to originate loans of
$3.6 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 June 30, 2000, totaled $81.7 million,
and management believes that a significant portion of such deposits will remain
with the Company.
Although there are no minimum capital ratio requirements for the Company, the
Bank is required to maintain minimum regulatory capital ratios. The following is
a summary of the Bank's actual capital amounts and ratios at June 30, 2000,
compared to the OTS minimum capital requirements:
18
<PAGE>
Actual Minimum
Amount % Amount %
------ --- ------ ---
(Dollars in thousands)
Tangible Capital $44,324 14.03% $ 4,738 1.5%
Core Capital 44,324 14.03 12,635 4.0
Risk Based Capital 46,128 30.50 11,626 8.0
At June 30, 2000, the Company had $5.7 million of available resources at the
holding company level on an unconsolidated basis to use for direct activities of
the Company. Furthermore, the Company has the ability to obtain dividends from
the Bank to provide additional funds. However, OTS regulations require advance
OTS approval before the Bank can declare a dividend if dividends paid during the
two prior years plus the current period exceed net income during that same
period. The Bank has already paid dividends to the Company in the past two years
in excess of that amount. Therefore, OTS approval for additional dividends from
the Bank to the Company would be required unless and until the passage of time
and additional net income from the Bank cause cumulative dividends on a rolling
basis to fall below that threshold. The Company has already applied and received
approval to declare and receive dividends of $2.0 million in September 2000, as
well as $1.0 million in December 2000.
Year 2000 Disclosure
--------------------
Concerns over the arrival of the Year 2000 ("Y2K") and its impact on the
embedded computer technologies used by financial institutions, among others, led
bank regulatory authorities to require substantial advance testing and
preparations by all banking organizations, including the Company. As of the date
of this filing, the Company has experienced no material problems in connection
with the arrival of Y2K, either in connection with the services and products it
provides to its customers or in connection with the services and products it
receives from third party vendors or suppliers. However, while no such
occurrence has developed, Y2K issues may arise that may not become immediately
apparent. Therefore, the Company will continue to monitor and work to remedy any
issues that arise. Although the Company expects that its business will not be
materially impacted, such future events cannot be known with certainty.
PART I - FINANCIAL INFORMATION (continued)
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Due to the Company's sale of its corporate and municipal bond portfolios
discussed previously and the reinvestment of a significant portion of those
proceeds in Federal Funds Sold, the Company has substantially changed its
interest rate risk position since September 30, 1999. Whereas the Company's net
interest income was more exposed to rising rates, prior to the portfolio sale,
the Company's net interest income is now more at risk in a declining rate
environment, since its assets are now more rate sensitive. Other types of market
risk, such as foreign exchange rate risk and commodity price risk, do not arise
in the normal course of the Company's business activities.
19
<PAGE>
TABLE #1 AVERAGE BALANCES, INTEREST, YIELD AND RATE
-------------------------------------------
The following table presents, for the periods indicated, the total
dollar amount of interest income from average interest-earning assets
and the resultant yields, as well as the interest expense on average
interest-bearing liabilities, expressed both in dollars and rates. Tax
equivalent adjustments, principally on municipal securities, totaled
$292,000 and $276,000 for the three-month periods ended June 30, 2000
and 1999, respectively. All average balances are daily average balances.
Non-accruing loans have been included in the table as loans receivable
with interest earned recognized on a cash basis only. Securities include
both the securities available for sale portfolio and the held to
maturity portfolio, other than mortgage backed securities which are
shown separately. Mortgage backed securities are primarily classified as
available for sale. Securities available for sale are shown at amortized
cost.
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED
-------------------------------------------------------------
June 30, 2000 June 30, 1999
--------------------- -----------------------------
Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-Earning Assets
Loans receivable, net $166,074 $ 3,248 7.82% $146,125 $ 2,801 7.67%
Mortgage-backed securities 67,664 1,153 6.82% 72,235 1,166 6.46%
Securities 86,616 1,643 7.59% 91,286 1,705 7.47%
Federal funds sold and other 7,695 124 6.48% 49 1 8.19%
---------- ------- ---------- --------
Total interest-earning assets 328,049 6,168 7.52% 309,695 5,673 7.33%
------ ------
Allowance for loan losses (2,179) (2,029)
Other assets, net 14,686 19,279
--------- ---------
Total Assets $340,556 $326,945
======== ========
Interest-Bearing Liabilities
Savings deposits $ 81,094 $600 2.98% $ 82,410 $611 2.97%
Money market 5,987 46 3.09% 6,484 50 3.09%
Now deposits 17,235 83 1.94% 14,613 71 1.95%
Certificates of deposit 107,942 1,367 5.09% 107,151 1,363 5.10%
Short-term borrowings 44,928 711 6.36% 10,032 124 4.96%
Long-term borrowings 15,000 198 5.31% 25,000 325 5.21%
Escrow and other 3,103 22 2.85% 2,745 17 2.48%
--------- -------- --------- --------
Total interest-bearing liabilities 275,289 3,027 4.42% 248,435 2,561 4.13%
------- -------
Non-interest bearing 8,693 8,101
Other liabilities 2,541 3,112
Shareholders' equity 54,033 67,297
------- -------
Total Equity and Liabilities $340,556 $326,945
======== ========
Net interest income $3,141 $3,112
====== ======
Net interest rate spread 3.10% 3.20%
==== ====
Net yield on average interest-earning assets 3.85% 4.03%
==== ====
Average interest earning assets to average
interest bearing liabilities 119.17% 124.66%
====== ======
Earning Assets/Total Assets 96.33% 94.72%
===== =====
</TABLE>
20
<PAGE>
TABLE #2 AVERAGE BALANCES, INTEREST, YIELD AND RATE
-----------------------------------------------------
The following table presents, for the periods indicated,
the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well
as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates. Tax
equivalent adjustments, principally on municipal
securities, totaled $985,000 and $771,000 for the
nine-month periods ended June 30, 2000 and 1999,
respectively. All average balances are daily average
balances. Non-accruing loans have been included in the
table as loans receivable with interest earned recognized
on a cash basis only. Securities include both the
securities available for sale portfolio and the held to
maturity portfolio, other than mortgage backed securities
which are shown separately. Mortgage backed securities are
primarily classified as available for sale. Securities
available for sale are shown at amortized cost.
<TABLE>
<CAPTION>
NINE MONTH PERIODS ENDED
---------------------------------------------------
June 30, 2000 June 30, 1999
--------------------- -------------------------------
Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans receivable, net $161,162 $ 9,357 7.74% $144,225 $ 8,343 7.71%
Mortgage-backed securities 69,463 3,510 6.74% 77,860 3,729 6.39%
Securities 96,087 5,478 7.60% 84,595 4,724 7.45%
Federal funds sold and other 2,652 127 6.40% 68 5 9.83%
---------- ------- ---------- --------
Total interest-earning assets 329,364 18,472 7.48% 306,748 16,801 7.30%
------ ------
Allowance for loan losses (2,147) (1,996)
Other assets, net 15,033 16,440
--------- ---------
Total Assets $342,250 $321,192
======== ========
Interest-Bearing Liabilities
Savings deposits $ 81,006 $1,807 2.98% $ 80,024 $1,803 3.01%
Money market 6,109 141 3.08% 6,258 141 3.01%
Now deposits 16,491 240 1.94% 13,843 202 1.95%
Certificates of deposit 107,452 4,033 5.01% 107,583 4,267 5.30%
Short-term borrowings 43,850 1,968 5.99% 8,144 304 4.99%
Long-term borrowings 18,113 714 5.27% 25,000 976 5.22%
Escrow and other 2,575 56 2.90% 2,207 43 2.60%
--------- -------- --------- --------
Total interest-bearing liabilities 275,596 8,959 4.34% 243,059 7,736 4.26%
-------- --------
Non-interest bearing 8,662 7,292
Other liabilities 2,606 3,426
Shareholders' equity 55,386 67,415
------- -------
Total Equity and Liabilities $342,250 $321,192
======== ========
Net interest income $9,513 $9,065
====== ======
Net interest rate spread 3.14% 3.04%
==== ====
Net yield on average interest-earning assets 3.86% 3.95%
==== ====
Average interest earning assets to average
interest bearing liabilities 119.51% 126.20%
====== ======
Earning Assets/Total Assets 96.23% 95.50%
===== ======
</TABLE>
21
<PAGE>
CATSKILL FINANCIAL CORPORATION
FORM 10-Q
JUNE 30, 2000
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, the Company and the Bank may
be subject to legal actions which involve claims for monetary
relief. Management, based on advice of counsel, does not believe
that any currently known legal actions, individually or in the
aggregate will have a material effect on its consolidated
financial condition or results of operation.
Item 2. Change in Securities
None
Item 3. Defaults on Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10.1) Employment agreement dated April 1, 2000, by
and between Catskill Savings Bank and Wilbur
J. Cross
(11) Computation of Net Income per Common Share
(27) Financial Data Schedule
(b) Reports on Form 8-K
On June 16, 2000, the Company filed a Form 8-K
announcing the merger with Troy Financial
Corporation. The Form 8-K was filed pursuant to
"Item #5 Other Events" and did not require any
financial statements, however, it did include, as
exhibits, the Agreement and Plan of Merger, the
Stock Option Agreement and the press release
announcing the merger.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CATSKILL FINANCIAL CORPORATION
Date: August 11, 2000 /s/ Wilbur J. Cross
-------------------------------
Wilbur J. Cross
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
Date: August 11, 2000 /s/ David J. DeLuca
-------------------------
David J. DeLuca
Chief Financial Officer
(Principal Financial and
Accounting Officer)
22
