2
THIS PAPER DOCUMENT IS BEING SUBMITTED PURSUANT TO RULE 901(d)
OF REGULATION S-T.
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended December 31, 1998
Commission File No. 0-14995
YORK FINANCIAL CORP.
(Exact name of Registrant as specified in its charter)
Pennsylvania
(State or other jurisdiction of
incorporation or organization)
23-2427539
(I.R.S. employer identification number)
101 South George Street York, Pa. 17401
(Address of principal executive offices)
(Zip code)
(717) 846-8777
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,
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 stock, par value $1.00 per share 9,700,984 shares
outstanding as of December 31, 1998.
YORK FINANCIAL CORP.
INDEX
Page
Part I. FINANCIAL INFORMATION Number
Item 1. Financial Statements
Consolidated balance sheets
December 31, 1998 and June 30, 1998
(unaudited) 3
Consolidated statements of income,
three months and six months ended
December 31, 1998 and 1997 (unaudited) 4
Consolidated statements of cash flows,
six months ended December 31, 1998
and 1997 (unaudited) 5
Notes to consolidated financial statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of
Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
<TABLE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December June
31 30
1998 1998
ASSETS (In thousands, unaudited)
<S> <C> <C>
Cash and due from banks:
Noninterest-earning $20,382 $17,934
Interest-earning 152,335 126,613
172,717 144,547
Loans held for sale, net 19,251 17,534
Securities held for trading 5,955 -
Securities available for sale 96,865 47,940
Securities held to maturity (fair
value at December 31, 1998 -
$18,706
and June 30, 1998 - $5,775) 18,715 5,784
Loans receivable, net 880,111 951,641
Real estate, net 9,646 10,994
Premises and equipment 20,812 19,634
Federal Home Loan Bank stock,
at cost 7,976 7,976
Accrued interest receivable 7,550 8,088
Other assets 19,010 9,451
Investments in joint ventures 4,040 5,679
Total Assets $1,262,648 $1,229,268
LIABILITIES AND STOCKHOLDERS'
EQUITY
Liabilities:
Deposits $1,100,821 $1,065,777
Federal Home Loan Bank advances
and other borrowings 28,215 27,861
Advances from borrowers for taxes
and insurance 2,413 4,634
Other liabilities 18,119 21,771
Total Liabilities 1,149,568 1,120,043
Stockholders' Equity:
Preferred Stock: 10,000,000
shares
authorized and unissued - -
Common Stock, $1.00 par value:
Authorized 20,000,000 shares;
issued Dec. 31, 1998 - 9,700,984
shares; June 30, 1998 -
8,968,031 shares 9,701 8,968
Additional capital 92,486 81,848
Retained earnings 12,054 18,886
Accumulated other comprehensive
income (366) 318
Unearned ESOP shares (795) (795)
Total Stockholders' Equity 113,080 109,225
Total Liabilities and
Stockholders' Equity $1,262,648 $1,229,268
See notes to consolidated financial statements
</TABLE>
<TABLE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
December 31 December 31
1998 1997 1998 1997
(In thousands except per share data, unaudited)
<S> <C> <C> <C> <C>
Interest
income:
Interest and
fees on loans $17,428 $20,741 $35,329 $41,242
Interest on
securities held
for trading 188 152 318 349
Interest on
securities
available for
sale 1,243 973 3,098 1,979
Interest and
dividends on
securities held
to maturity 224 244 438 499
Other interest
income 2,234 161 4,018 368
Total interest
income 21,317 22,271 43,201 44,437
Interest
expense:
Interest on
deposits 12,674 12,382 25,565 24,606
Interest on
borrowings 368 587 718 1,388
Total interest
expense 13,042 12,969 26,283 25,994
Net interest
income 8,275 9,302 16,918 18,443
Provision for
loan losses 992 1,060 1,857 1,813
Net interest
income after
provision for
loan losses 7,283 8,242 15,061 16,630
Other income:
Mortgage banking 855 1,385 1,361 2,235
Gain on sales of
real estate 45 16 135 22
Gain on sale of
securities
available for sale 5 - 794 -
Fees and service
charges 1,022 779 1,825 1,519
Income (loss)
from joint
ventures (42) 763 531 953
Other operating
income 275 368 597 677
Total other
income 2,160 3,311 5,243 5,406
Other
expenses:
Salaries and
employee
benefits 3,321 3,327 6,724 6,471
Occupancy 898 896 1,815 1,769
Federal deposit
insurance 156 158 319 313
Real estate 146 235 398 701
Data processing 315 290 610 556
Advertising 364 272 575 406
Other 1,706 1,590 3,269 2,976
Total other
expenses 6,906 6,768 13,710 13,192
Income before
income taxes 2,537 4,785 6,594 8,844
Provision for
income taxes 915 1,874 2,419 3,500
Net income $1,622 $2,911 $4,175 $5,344
Per share
data:
Net income $0.17 $0.32 $0.44 $0.58
Net income -
assuming
dilution $0.16 $0.29 $0.42 $0.54
Cash
dividends
paid $0.13 $0.12 $0.25 $0.23
Weighted
average
shares 9,596,077 9,181,559 9,511,882 9,156,384
Weighted
average
shares -
assuming
dilution 9,964,946 9,907,036 9,949,312 9,834,985
See notes to consolidated financial statements
</TABLE>
<TABLE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
December 31
1998 1997
(In thousands, unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $4,175 $5,344
Adjustments to reconcile
net income to net cash
provided by operating activities:
Amortization and accretion on
securities, net (22) (120)
Provision for loan losses 1,857 1,813
Provision for real estate losses 85 428
Depreciation and amortization 970 893
Loans originated for sale (82,817) (70,016)
Proceeds from sales of
trading securities 76,493 62,236
Realized gains on trading
securities (1,190) (1,044)
Realized gains on sales of
securities
available for sale (794) -
Decrease (increase) in other
assets (7,793) 1,054
Increase (decrease) in other
liabilities (2,728) 1,088
Other (940) (1,788)
Net cash used in operating
activities (12,704) (112)
INVESTING ACTIVITIES
Proceeds from sales of securities
available for sale 50,582 -
Purchases of securities available
for sale (53,535) (37)
Purchases of securities held to
maturity - (2,000)
Proceeds from maturities of
securities
held to maturity 2,000 5,090
Principal repayments on
securities 11,977 3,825
Net increase in short-term
investments (14,944) -
Loans originated or acquired, net
of change in deferred loan fees (141,780)(131,626)
Principal collected on loans 149,764 114,066
Purchases of real estate (192) (280)
Proceeds from sales of real
estate 3,644 3,151
Purchases of premises, equipment,
and tenant improvements, net (2,039) (2,223)
Other 192 (1,753)
Net cash provided by (used in)
investing activities 5,669 (11,787)
FINANCING ACTIVITIES
Net increase in noninterest-
bearing demand deposits,
interest-bearing transaction
accounts, savings accounts,
and 31-day certificates of
deposit 46,066 9,592
Net increase (decrease) in
certificates of deposit (10,765) 12,185
Net decrease in short-term
advances received from FHLB - (6,000)
Net increase in convertible
advance received from FHLB 109 279
Repayments of Federal Home Loan
Bank
advances and other borrowings (12) (6)
Issuance of common stock :
Dividend reinvestment plan 1,144 1,120
Stock option plans 1,056 128
Cash dividends paid (2,375) (2,108)
Cash paid in lieu of fractional
shares (18) (21)
Net cash provided by
financing activities 35,205 15,169
Increase in cash and cash
equivalents 28,170 3,270
Cash and cash equivalents at
beginning of year 144,547 23,139
Cash and cash equivalents at
end of year $172,717 $26,409
See notes to consolidated financial statements
</TABLE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note A -- Basis Of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. Such
preparation requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Although the interim amounts are unaudited, they do reflect all
adjustments (consisting of normal recurring accruals) that, in
the opinion of management, are considered necessary for a fair
presentation of the results of operations for the interim
periods. Operating results for the six month period ended
December 31, 1998 are not necessarily indicative of the results
that may be expected for the year ended June 30, 1999. For
further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended June 30, 1998.
Cash Flow Information: For purposes of the statements of cash
flows, cash equivalents include cash and amounts due from banks.
During the six months ended December 31, 1998 and 1997, the
Association exchanged loans for mortgage-backed securities in the
amounts of $140.4 million and $60.8 million, respectively.
During the six months ended December 31, 1998 and 1997, the
Association transferred unpaid loan balances from loans to real
estate acquired due to foreclosures of $2.5 million and $3.2
million, respectively.
Reclassifications: Certain reclassifications have been made to
the fiscal 1998 consolidated financial statements to conform with
the fiscal 1999 presentation.
Note B -- Per Share Data
On October 21, 1998, the Corporation declared a 5% stock
dividend, to shareholders of record on November 6, 1998, to be
distributed November 17, 1998. Net income per share is computed
based on the weighted average number of common shares outstanding
and dilutive common stock equivalents, adjusted for stock
splits/dividends. Cash dividends paid per share are based on the
number of common shares outstanding at each record date, adjusted
for stock splits/dividends.
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement No. 128, "Earnings per Share", which establishes
standards for computing and presenting earnings per share (EPS)
and applies to entities with publicly held common stock or
potential common stock. The Statement simplifies the standards
for computing earnings per share previously found in Accounting
Principles Board (APB) Opinion No. 15, "Earnings per Share", and
makes them comparable to international EPS standards. The
Corporation adopted Statement No. 128 on January 1, 1998 and all
prior-period EPS data presented was restated.
The following table sets forth the computation of basic and
diluted earnings per share:
<TABLE>
Three Months Ended Six Months Ended
December 31 December 31
1998 1997 1998 1997
(Dollars in thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Numerator:
Net Income $1,622 $2,911 $4,175 $5,344
Numerator for
basic and
diluted earnings
per share $1,622 $2,911 $4,175 $5,344
Denominator:
Denominator
for basic
earnings
per share-
weighted-
average
shares 9,596,077 9,181,559 9,511,882 9,156,384
Effect of
dilutive
securities:
Employee
Stock
Options 368,869 725,477 437,430 678,601
Denominator
for diluted
earnings per
share-
adjusted
weighted-
average
shares
and assumed
conversion 9,964,946 9,907,036 9,949,312 9,834,985
Basic
earnings
per share $0.17 $0.32 $0.44 $0.58
Diluted
earnings per
share $0.16 $0.29 $0.42 $0.54
</TABLE>
Note C -- Comprehensive Income
Effective July 1, 1998, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 130. SFAS No. 130
establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements that are
displayed with the same prominence as other financial statements,
and also provides for footnote disclosure of total comprehensive
income in interim financial statements. Total comprehensive
income for the three months ended December 31, 1998 and 1997, was
$.8 million and $2.9 million, respectively. Year to date total
comprehensive income was $3.5 million for 1998 compared to $5.6
million for 1997. Comprehensive income was lower for the three
months ended December 31, 1998 as compared to the same period in
1997 due to lower net income and unrealized holding losses on
securities.
Note D -- Segment Information
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" became effective July 1, 1998. This
statement establishes standards for the way public enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports
issued to shareholders. The Statement supersedes FASB Statement
No. 14, "Financial Reporting for Segments of a Business
Enterprise." Segment information is not required to be disclosed
in interim financial statements in the initial year of
implementation. Presently, the Corporation is not required to
disclose segments in accordance with the Standard.
Note E -- Recently Issued Accounting Guidance
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities". Statement No.
133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts, and hedging activities. This statement is
effective for financial statements issued for all quarters of all
fiscal years beginning after June 15, 1999. The adoption of
Statement No. 133 is not expected to have a material impact on
the Corporation's consolidated financial statements.
In October 1998, the FASB issued Statement No. 134, "Accounting
for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise". The Statement conforms accounting treatment for
retained interest in mortgage-backed securities for nonmortgage
and mortgage banking activities. This statement is effective for
the first fiscal quarter beginning after December 15, 1998. The
adoption of Statement No. 134 is not expected to have a material
impact on the Corporation's consolidated financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
YORK FINANCIAL CORP.
Financial Review
The purpose of this discussion is to provide additional
information about York Financial Corp. ("York Financial" or
"Corporation"), its financial condition and results of
operations. Readers of this report should refer to the
consolidated financial statements and other financial data
presented throughout this report to fully understand the
following discussion and analysis.
York Financial is a unitary savings and loan holding company
incorporated in Pennsylvania in September 1985 and in August 1986
became the sole stockholder of York Federal Savings and Loan
Association ("York Federal" or "Association"), a federally
chartered stock savings and loan association. Presently, the
primary business of York Financial is the business of York
Federal. At December 31, 1998, the Corporation had consolidated
assets of $1.3 billion, total deposits of $1.1 billion and
stockholders' equity of $113.1 million. The Association is a
member of the Federal Home Loan Bank ("FHLB") of Pittsburgh and
is subject to supervision, examination and regulation by the
Office of Thrift Supervision ("OTS") and the Federal Deposit
Insurance Corporation ("FDIC"). The Association is primarily
engaged in the business of attracting deposits and investing
these deposits into loans secured by residential and commercial
real property, commercial business loans, consumer loans and
investment securities. York Federal conducts its business
through twenty-five offices located in south central Pennsylvania
and Maryland. In addition, York Federal maintains a commissioned
mortgage origination staff as well as mortgage broker
relationships which originate residential mortgage loans for the
Association primarily in Pennsylvania, Maryland and Virginia.
The Association's deposits are insured up to applicable limits by
the Savings Association Insurance Fund ("SAIF") of the FDIC.
The Corporation's net income is highly dependent on the interest
rate spread between the average rate earned on loans and
securities and the average rate paid on deposits and borrowings
as well as the amount of the respective assets and liabilities
outstanding. Other operating income is a strong supplement to
York Federal's interest income and is primarily the result of
mortgage banking activities including gains on sales of mortgage-
backed securities and related value attributed to mortgage
servicing rights created from loan originations and service fee
income derived from the portfolio of loans serviced for others.
Other operating income also includes gains and losses on sales of
available for sale securities and real estate, equity in a
limited partnership interest, and fees and service charges
assessed on loan and deposit transactions.
Interest Rate Sensitivity Management
In an effort to maintain control over net interest income,
management of York Federal focuses its attention on managing the
interest rate sensitivity of assets and liabilities and
controlling the volume of lending, securities, deposit and
borrowing activities. By managing the ratio of interest
sensitive assets to interest sensitive liabilities repricing in
the same periods, the Corporation seeks to minimize the adverse
effect of interest rate fluctuations. The Corporation's assets
and liabilities are not directly exposed to foreign currency or
commodity price risk. At June 30, 1998, the Corporation had no
off-balance sheet derivative financial instruments.
Management utilizes an Asset/Liability Committee (ALCO), which
meets at least once a month, to review the Association's interest
sensitivity position on an ongoing basis and prepare strategies
that outline the overall acquisition and allocation of funds to
maximize earnings and maintain the interest rate sensitivity
position at acceptable levels to insulate earnings from the
effects of interest rate fluctuations. The Corporation
originates for portfolio principally short and intermediate term
and adjustable rate loans and sells most fixed rate loan
originations. The funding sources for these portfolio loans are
deposits with various maturities and short term borrowings.
The ALCO monitors the Corporation's interest rate risk position
utilizing simulation analysis. Fluctuations in net interest
income and net portfolio value are determined in various interest
rate scenarios and monitored against acceptable limitations
established by management and approved by the Board of Directors.
Such rate scenarios include immediate rate shocks adjusting rates
in +/- 100 basis point (bp) increments resulting in projected
changes to net interest income over the next 12 months and
projected changes in net portfolio value as indicated in the
following table.
An analysis of hypothetical changes in interest rates as of
December 31, 1998 compared to June 30, 1998 is as follows:
<TABLE>
December 31, 1998 June 30, 1998
Percentage change in
Basis point Net Net Net Net
Change in interest portfolio interest portfolio
interest rates income (1) value (2) income (1) value (2)
Increase (decrease)
<S> <C> <C> <C> <C>
200 (2%) (5%) (4%) (7%)
100 (1%) (3%) (2%) (3%)
(100) 0% 3% 1% 3%
(200) 1% 6% 3% 7%
(1) The percentage change in this column represents the net
interest income in the various rate scenarios, versus the net
interest for 12 months in a stable interest rate environment.
(2) The percentage change in this column represents the net
portfolio value in various rate scenarios, versus the net
portfolio value in a stable interest rate environment. Net
portfolio value is defined as the present value of expected net
cash flows from existing assets, minus the present value of
expected net cash flows from existing liabilities, plus or minus
the present value of expected net cash flows from existing off-
balance-sheet contracts.
</TABLE>
Simulation results are influenced by a number of estimates and
assumptions with regard to embedded options, prepayment
behaviors, pricing strategies, cashflows, and others. The
improvement in risk profile from period to period as indicated in
the above table is primarily attributed to an increase in
prepayment assumptions resulting in a shorter duration of the
earning asset portfolio. Assumptions and estimates used in
simulation analysis are inherently uncertain and, as a
consequence, results will neither precisely estimate net interest
income or net portfolio value nor precisely measure the impact of
higher or lower interest rates on net interest income or net
portfolio value. The results of these simulations are reported
to the Corporation's Board of Directors on a quarterly basis.
Management has determined that the level of interest rate risk is
within acceptable limits.
The management of York Federal is committed to managing the asset
and liability portfolios in order to maximize earnings and
maintain an interest rate sensitivity position that insulates
earnings from the potential negative effect of interest rate
fluctuations.
Asset Quality
Management is aware of the risks inherent in lending and
continually monitors risk characteristics of the loan portfolio.
The Association has created a Business Banking Group to offer
financial products and services to small and mid-sized businesses
in the Association's branch market area. The nature of these
products and services and the financial characteristics of the
target client group may have the effect of increasing the
Association's credit risk exposure. The Association has
recruited management expertise and adopted appropriate credit
management policies to control the credit risk exposure inherent
in this activity.
The Association's policy is to maintain the allowance for loan
losses at a level believed adequate by management to absorb
potential loan losses within the portfolio. Management's
determination of the adequacy of the allowance is performed by an
internal loan review committee and is based on risk
characteristics of the loans, including loans deemed impaired in
accordance with SFAS No. 114, past loss experience, economic
conditions and such other factors that deserve recognition.
Additions to the allowance are charged to operations.
An analysis of the allowance for loan losses, for the
periods indicated is as follows:
<TABLE>
Six Months Fiscal Year
Ended Ended
December 31 June 30
1998 1998
(Dollars in thousands)
<S> <C> <C>
Total allowance for loan losses
at beginning of period $8,810 $6,413
Loans charged-off:
Real estate - mortgage:
Residential 782 1,701
Commercial 16 68
Consumer 36 89
Total charged-offs 834 1,858
Recoveries:
Real estate - mortgage:
Residential 154 212
Commercial 20 294
Consumer 4 12
Total recoveries 178 518
Net loans charged-off 656 1,340
Provision for loan losses 1,857 3,737
Total allowance for loan losses
at end of period $10,011 $8,810
Percentage of net charge-offs to
average loans outstanding during
the period 0.07% 0.13%
Percentage of allowance for loan
losses to adjusted total loans 1.12% 0.92%
</TABLE>
The allowance for loan losses totaled $10.0 million or 1.12% of
adjusted total loans of $890 million at December 31, 1998. Such
amount is considered adequate relative to management's assessment
of risk characteristics inherent in the loan portfolio. While
management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based
on specific circumstances related to problem loans as well as
changes in economic conditions.
During fiscal 1999, the Association expects to further increase
its percentage of allowance for loan losses to adjusted total
loans in connection with significant volume increases planned in
the commercial and consumer loan portfolios. This increase is
intended to provide an allowance position appropriate for the
risk characteristics of the changing loan portfolio. It is not a
reflection of any deterioration in actual credit quality or
loosening of credit underwriting standards.
An analysis of nonperforming assets is summarized as follows:
<TABLE>
December 31 June 30
1998 1998
(Dollars in thousands)
<S> <C> <C>
Loans accounted for on a
nonaccrual basis:
Nonmortgage:
Commercial $48 $-
Accruing loans which are
contractually
past due 90 days or more:
Real estate-mortgage:
Residential 12,263 14,487
Consumer 1,937 1,194
Total of 90 days past due loans 14,200 15,681
Total of nonaccrual and 90 days
past due loans $14,248 $15,681
As a percent of total loans 1.58% 1.63%
Real estate owned:
Real estate acquired through
foreclosure
or repossession by loan type:
Real estate:
Residential $5,267 $4,543
Commercial 1,064 2,687
Land 498 1,863
Allowance for real estate losses (28) (116)
Total real estate owned $6,801 $8,977
As a percent of total assets 0.54% 0.73%
Total nonperforming assets $21,049 $24,658
As a percent of total assets 1.67% 2.01%
</TABLE>
The Association's nonaccrual policy generally covers loans which
are 90 or more days past due. All commercial real estate loans
are placed on nonaccrual status when the collectibility of
interest is uncertain based on specific circumstances evaluated
on a loan by loan basis or when interest is more than 90 days
past due. In the case of residential real estate and consumer
loans, management evaluates the collectibility of accrued amounts
based on the underlying collateral value or knowledge of the
specific circumstances resulting from collection efforts and may
elect to place specific loans on nonaccrual status.
Management recognizes the risk of potential reduction in value of
real estate owned during the holding period and provides for such
risk by maintaining an allowance for real estate losses (such
allowance is separate from and in addition to the allowance for
loan losses). For the first six months of fiscal 1999, net
charge-offs were $173,000 and additions to the allowance totalled
$85,000 resulting in a decrease in the allowance to $28,000 at
December 31, 1998. Management continually monitors the risk
profile of real estate owned and maintains an allowance for real
estate losses at a level believed adequate to absorb potential
losses within the real estate portfolio.
Liquidity
The primary purpose of asset/liability management is to maintain
adequate liquidity and a desired balance between interest-
sensitive assets and liabilities. Liquidity management focuses
on the ability to meet the cash flow requirements of customers
wanting to withdraw or borrow funds for their personal or
business needs. Interest rate sensitivity management focuses on
consistent growth of net interest income in times of fluctuating
interest rates. The management of liquidity and interest rate
sensitivity must be coordinated since decisions involving one may
influence the other.
Liquidity needs can be met by either reducing assets or
increasing liabilities. Sources of asset liquidity include short
term investments, securities available for sale, maturing and
repaying loans and monthly cash flows from mortgage-backed
securities. The loan portfolio provides an additional source of
liquidity due to York Federal's participation in the secondary
mortgage market. Liquidity needs can be met by attracting
deposits and utilizing borrowing arrangements with the FHLB of
Pittsburgh and the Federal Reserve Bank of Philadelphia for short
and long term advances as well as other short-term borrowings.
Deposits represent the Association's primary source of funds.
The Association does not rely on brokered deposits as a source of
funds. During the first six months of fiscal 1999, the
Association's deposits increased $35.0 million. In addition, York
Federal has supplemented its deposit gathering efforts through
borrowings from the FHLB of Pittsburgh. At December 31, 1998,
York Federal had $25.9 million in FHLB advances outstanding at a
weighted average interest rate of 5.39%.
Amortization and prepayments of loans and proceeds from loan and
securities sales represent a substantial source of funds to York
Federal. These sources amounted to $286.8 million for the first
six months of fiscal 1999.
The principal use of funds is the origination of mortgage and
other loans. Loan demand resulted in total originations of
$250.9 million for the period ended December 31, 1998. Loan
originations were obtained through various channels including the
retail branch system, commissioned mortgage origination staff,
tele-mortgage activity, expanded mortgage broker relationships
and Business Banking relationship managers. The volume of
originations was favorably impacted by a relatively stable and
low-rate interest rate environment and included traditional long
term fixed rate loans originated primarily for sale as well as
adjustable rate and residential construction loan products.
The combination of the above referenced sources and uses of funds
resulted in an increase in liquid assets as evidence in the
Corporation's interest-earning overnight cash position of $152.3
million at December 31, 1998, as compared to $126.6 at June 30,
1998. Primary factors contributing to this increase are the
interest rate environment that resulted in increased originations
of fixed rate loans subsequently sold into the secondary market
as well as an increased level of refinance activity resulting in
higher than expected loan payoffs, certain loan and security
sales to manage interest rate risk levels within acceptable
limits, and deposit pricing decisions to facilitate maintenance
and expansion of customer relationships.
Under current regulations, York Federal is required to maintain
liquid assets at 4.0% or more of its net withdrawable deposits
plus short-term borrowings. Effective November 24, 1997, the
Office of Thrift Supervision lowered liquidity requirements from
5.0% to 4.0%. Additionally, the OTS streamlined the calculations
used to measure compliance with liquidity requirements, expanded
the types of investments considered to be liquid assets, and
reduced the liquidity base by modifying the definition of net
withdrawable accounts to exclude accounts with maturities
exceeding one year. The result of these changes to the liquidity
requirements is to significantly increase the reported liquidity
position of the Association. At December 31, 1998, the
Association's liquidity level was 23.3%.
Capital
The management of capital provides the foundation for future
asset and profitability growth and is a major strategy in the
management of York Financial Corp. Stockholders' equity at
December 31, 1998, totaled $113.1 million compared to $104.8
million at December 31, 1997, an increase of $8.3 million or
7.9%. This growth was a result of a combination of factors
including current earnings, cash dividends paid (representing a
payout ratio of 56.9%), issuance of shares in connection with
various benefit and dividend reinvestment plans, and the impact
of unrealized gains on "available for sale" securities.
OTS regulated thrifts must comply with various capital standards:
Tangible Capital. Generally, common stock plus retained earnings
must equal at least 1.5% of adjusted total assets.
Tier 1 (Core) Capital to total assets. Tangible capital plus
qualifying supervisory goodwill (arising from the purchase of a
troubled savings association) and other qualifying intangible
assets must equal at least 3.0% of adjusted total assets; 5.0% to
be deemed well capitalized.
Risk-Based Capital. Risk-based capital must equal at least 8.0%
of risk-weighted assets, as defined in the regulations; 10% to be
deemed well capitalized. The tier 1 (core) capital component of
risk-based capital, as defined above, must equal at least 6.0% of
risk weighted assets to be deemed well capitalized.
At December 31, 1998, York Federal's tangible and core capital
both equaled 7.7% ($96.4 million), substantially in excess of the
minimum regulatory requirements of 1.5% and 3.0%/5.0%,
respectively. York Federal's total assets do not include any
goodwill. York Federal's core capital to risk-weighted assets
equaled 12.3% ($96.4 million) at December 31, 1998, which exceeds
its required level of 8.0% by $42.6 million, and exceeds the
required level to be deemed well capitalized of 10.0% by $26.9
million.
Transactions with Affiliates
Transactions with affiliates are limited to 10% of capital and
surplus per affiliate with an aggregate limit on all such
transactions with affiliates to 20% of capital and surplus. At
December 31, 1998 such transactions are within these regulatory
limits.
Results of Operations
Six months ended December 31, 1998 compared to December 31, 1997
Net Interest Income
York Financial's earnings are affected by the level of York
Federal's net interest income, the difference between the income
it receives on its loan portfolio and other investments, and its
cost of funds, consisting primarily of interest paid on deposits
and borrowings. Net interest income is affected by the average
yield on interest-earning assets, the average rate paid on
interest-bearing liabilities, and the ratio of interest-earning
assets to interest-bearing liabilities.
Net interest income for the six months ended December 31, 1998
was $16.9 million compared to $18.4 million for the same period
last year, which represents a 8.3% decrease. The decrease in net
interest income was primarily attributable to a flattening of the
average yield curve for the six month period ending December 31,
1998 and December 31, 1997 by approximately 50 basis points and a
less favorable earning asset composition. The margin on interest-
earning assets decreased to 2.92% from 3.38% for the six months
ended December 31, 1998 and 1997, respectively. During the six
months ended December 31, 1998, York Federal originated $250.9
million of loans including loans refinanced from the
Association's portfolio. The result of these originations, when
combined with mortgage securitizations and sales totaling $140.4
million and loan repayment activity, was a 11.1% decrease in
average loans outstanding during the first half of fiscal 1999 as
compared to the same period in the prior year. The average
balance of securities and other interest earning assets increased
$176.9 million over the same period last year and results from
the above mentioned secondary market activity as well as an
increase in deposits partially offset by repayment of short-term
borrowing positions. The resulting composition shift of the
Association's assets had a negative effect on interest income and
contributed to the yield on earning assets decreasing 67 basis
points to 7.38%. The average rate on interest-bearing liabilities
decreased to 4.82% as compared to 5.01% in the same period last
year. The lower rate on interest-bearing liabilities was as a
result of the ability to reprice our deposit products lower in a
relatively stable and low-rate interest rate environment and
consistent with the flattening yield curve discussed above. The
net effect caused the interest rate spread for the current period
to decrease to 2.56% from 3.03% in the same period last year.
Provision for Loan Losses
Management is aware of the risks inherent in lending and
continually monitors risk characteristics of the loan portfolio.
See "Asset Quality".
Other Income
Other income was $5.2 million for the six months ended December
31, 1998, a decrease of $163,000 from the six months ended
December 31, 1997. Mortgage banking income for the six months
ended December 31, 1998 decreased $874,000 to $1,361,000 or 39.1%
as compared to the same period in 1997. The decrease in mortgage
banking income includes a $517,000 decrease in net gains
primarily attributable to prior period gain on sale of servicing.
Such amount was partially offset by gains attributable to
capitalized servicing of $774,000 in the current year compared to
$603,000 in the prior year. Additionally, there was a decrease in
income from loan servicing fees as discussed below. Mortgage
backed securities created in conjunction with the Association's
mortgage banking activities are deemed trading securities and are
carried at fair value with unrealized gains and losses reported
in the income statement. At December 31, 1998, securities held
for trading were $6.0 million with an indicated unrealized gain
of $54,000 which was recognized as a component of mortgage
banking income.
The combination of volume and rate changes caused loan servicing
fees as of December 31, 1998 to decrease $357,000 to $122,000 as
compared to December 31, 1997. The decrease is primarily
attributable to the implementation of SFAS No. 122 and the
related capitalization of mortgage servicing rights as discussed
above. Amortization of capitalized mortgage servicing rights for
the six months ended December 31, 1998 was $350,000 and is
recognized as a reduction of gross servicing fee income. Such
amount compares to $206,000 for December 31, 1997. Mortgage
servicing rights represent estimates which are adjusted monthly
based on current market conditions. The change in estimate due
primarily to faster prepayment speeds resulted in a decrease of
$204,000 in the carrying value of mortgage servicing rights in
the six months ended December 31, 1998 as compared to $14,000 in
the same period in 1997. In addition, interest costs incurred by
the Association in connection with the increased level of
repayments resulted in downward pressure on the net servicing
rate.
Gain on the sale of available for sale securities totaled
$794,000 at December 31, 1998 as compared to $0 at December 31,
1997. FannieMae (FNMA) recently introduced a program which
provides for the securitization of high loan-to-value seven year
balloon loans. Management, recognizing the default risk
associated with this loan type, securitized $58.0 million of
portfolio loans qualifying under the new FNMA program.
Furthermore, in consideration of the interest rate risk
associated with this asset, $40.6 million of these securities
were sold resulting in the aforementioned gain for the six months
ended December 31, 1998. The balance of such securities are held
in securities available for sale portfolio at December 31, 1998.
Fees and service charges for the six months ended December 31,
1998 increased by 20.1% to $1,825,000 compared to $1,519,000 in
the same period in 1997, and is primarily a result of the current
service charge fee structure coupled with growth in deposits.
The Corporation is a partner in various joint ventures. For the
first six months of fiscal 1999, income from these joint ventures
totaled $531,000 as compared to $953,000 for the same period in
fiscal 1998. The current period income was primarily related to
the Corporation's share in the net income of a venture capital
partnership. For fiscal 1999, gains on security distributions and
income related to the increased market value of underlying
portfolio investments was lower than amounts recognized in fiscal
1998.
Other operating income was $597,000 in the first six months of
fiscal 1999 as compared to $677,000 in the first six months of
fiscal 1998. Lenders Support Group, an affiliate of York Federal,
performed appraisal and inspection activities for the Association
and the general public. Effective September 30, 1998, the
activities of Lenders Support Group were absorbed into the
Association with appraisal and inspection activities for third
parties discontinued. Therefore, the decrease in other operating
income is primarily attributable to reduction in appraisal and
inspection services performed for third parties.
Other Expenses
Other expenses of $13.7 million increased $518,000 or 3.9% for
the six months ended December 31, 1998 as compared to the same
period in 1997.
Salaries and employee benefits for the six months ended December
31, 1998 increased $253,000 or 3.9% over the same period in 1997
and is attributable to a combination of the following factors:
annual adjustments through the salary administration program,
compensation investments related to the Business Banking Group
formed in the Spring of 1997 and to the Retail Banking Group in
connection with new branches in the process of development at the
end of the fiscal period. Full time equivalent personnel
increased from 389 at December 31, 1997 to 406 at December 31,
1998. Real estate expenses decreased $303,000 when compared to
December 31, 1997 and is primarily attributable to a decrease in
the provision for possible real estate losses. Advertising cost
increased $169,000 or 41.6% for the six months ended December 31,
1998 as compared to the same period in 1997, and is primarily
attributable to ongoing efforts to enhance customer and product
awareness through various media campaigns. Other expenses for
the six months ended December 31, 1998 increased $293,000 or 9.8%
compared to the same period in 1997, resulting from increased
cost of services and the effects of increased loan and deposit
volume.
Provision for Income Taxes
The provision for income taxes of $2.4 million for the six months
ended December 31, 1998 represents an effective tax rate of 36.7%
as compared to 39.6% for the same period last year.
Other Matters
Impact of Year 2000
We are less than eleven months from the turn of the century.
This milestone has generated widespread concern over its
potential impact on business continuity. Historically, most
computer programs were written using two digits rather than four
to designate the applicable year. As a result, it is anticipated
that computer systems may recognize a date using "00" as the year
1900 rather than the year 2000. This situation along with
certain other date issues is commonly referred to as the "Year
2000 Issue." Such situations could cause a system failure or
miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business
activities.
The Year 2000 Issue is recognized by the Corporation as a
significant business issue and is receiving intense management
focus. The majority of the Corporation's transaction processing
is provided by a third party processor. A Year 2000 project team
has been organized and a comprehensive action plan designed to
achieve Year 2000 readiness. The project is addressing not only
computer and technology areas but all areas of our business.
Many non-computer systems include embedded technology and may be
affected by the Year 2000 Issue if not appropriately addressed.
The action plan has five key project phases: awareness,
assessment, remediation, validation, and implementation
addressing systems for both the Corporation and its third party
processor. The awareness and assessment phases have been
completed and the remediation, validation and implementation
phases were substantially completed by the December 31, 1998
deadline. All additional interface and integration testing is
expected to be substantially complete by March 31, 1999. This
timeline provides an opportunity to perform additional testing
and resolve any other issues that may arise prior to the turn of
the century.
As part of the Year 2000 action plan the Corporation has
initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which
its systems will need to be modified or replaced or are
vulnerable to those third parties' failure to remediate their own
Year 2000 issues. While the Corporation has taken and will
continue to take appropriate actions to mitigate the risk of
adverse consequences associated with the failure of a third party
to address these issues, there can be no guarantee that the
systems of third parties will be timely converted and will not
have an adverse effect on York Financial. As a precaution the
Corporation is in the process of developing and will test
contingency plans for all mission critical systems and services
no later than June 30, 1999.
It is difficult to isolate the incremental cost of the Year 2000
effort given that it impacts technical personnel already in place
in operational areas across our business as well as possibly
accelerating already planned technology investments. However,
such costs and related investments are presently estimated to
total $350,000 and the timing of recognizing such costs is not
considered to be material to any one fiscal period.
The costs of the project and the date on which the Corporation
believes it will complete the Year 2000 project are based on
management's best estimates. However, there can be no guarantee
that these estimates will be achieved and actual results could
differ materially from those anticipated.
Effects of Inflation and Changing Prices
The consolidated financial statements and related financial data
presented herein have been 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 changes in relative purchasing power
over time due to inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature.
As a result, interest rates generally have a more significant
impact on a financial institution's performance than does the
effect of inflation. Interest rates do not necessarily move in
the same direction or in the same magnitude as the price of goods
and services since such prices are affected by inflation. In the
current interest rate environment, the liquidity and maturity
structures of York Federal's assets and liabilities are critical
to the maintenance of acceptable performance levels.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Annual meeting of Stockholders of York Financial Corp.
was held October 28, 1998. Business transacted at the
meeting was as outlined in the Notice of Annual Meeting
and Proxy Statement dated September 28, 1998.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The company filed Form 8-K on February 9, 1999 relating
to the announcement on February 3, 1999 of a stock
repurchase program.
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.
York Financial Corp.
(Registrant)
Date February 11, 1999
/s/ Robert W. Pullo
Robert W. Pullo
President - Chief Executive Officer
Date February 11, 1999
/s/ James H. Moss
James H. Moss
Senior Vice President -
Chief Financial Officer/Treasurer
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