SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1998 Commission File #0-26546
STATEWIDE FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
New Jersey 22-3397900
(State of Incorporation) (I.R.S. Employer Identification
Number)
70 Sip Avenue, Jersey City, New Jersey 07306
(Address of registrant's principal executive offices,
including zip code)
(201) 795-4000
(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
The number of shares outstanding of each of the registrant's classes
of common stock, as of October 31, 1998: Common Stock, No Par Value:
4,243,309 shares issued and 4,237,763 shares outstanding.
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Interest Income:
Interest and fees on loans $6,836 $ 6,473 $19,918 $19,435
Interest on mortgage-backed
securities 1,626 5,451 10,569 16,144
Interest and dividends on
debt and equity securities 1,091 494 2,428 1,764
Dividends on Federal Home Loan
Bank of New York ("FHLBNY")
stock 185 151 563 403
------ ------- ------- -------
Total interest and dividend
income 9,738 12,569 33,478 37,746
------ ------- ------- -------
Interest Expense:
Deposits 3,758 4,086 11,463 12,539
Borrowed funds 2,052 2,361 6,118 6,577
------ ------- ------- -------
Total interest expense 5,810 6,447 17,581 19,116
------ ------- ------- -------
Net interest income 3,928 6,122 15,897 18,630
Provision for loan losses 171 125 471 375
------ ------- ------ -------
Net interest income after
provision for loan losses 3,757 5,997 15,426 18,255
------ ------- ------ -------
Non-interest income:
Mortgage banking fees 16 - 16 -
Service charges 378 225 945 647
Loans and other fees 229 143 678 412
Other income 27 33 492 105
------ ------- ------- -------
Total non-interest income 650 401 2,131 1,164
------ ------- ------- -------
Non-interest expense:
Salaries and employee benefits 2,633 2,306 7,771 7,079
Occupancy, net 589 577 1,751 1,717
Federal deposit insurance
premiums 68 71 205 217
Professional fees 210 135 623 464
Insurance premiums 155 76 208 247
Data processing fees 175 131 514 444
Foreclosed real estate expense,
net 15 11 41 25
Other 948 866 2,783 2,547
------ ------- ------- -------
Total non-interest expense 4,793 4,173 13,896 12,740
------ ------- ------- -------
(Loss) income before income
taxes (386) 2,225 3,661 6,679
Income tax (benefit) expense (45) 843 1,484 2,522
------ ------- ------- -------
Net (loss) income $ (341) $ 1,382 $ 2,177 $ 4,157
====== ======= ======= =======
(Loss) earnings per common
share:
Basic $(0.09) $ 0.33 $ 0.55 $ 0.99
====== ======= ======= =======
Assuming dilution $(0.09) $ 0.32 $ 0.52 $ 0.96
====== ======= ======= =======
Weighted average number of
common stock shares
Basic 3,914,679 4,157,248 3,981,646 4,213,283
========= ========= ========= =========
Assuming dilution 3,914,679 4,305,557 4,161,318 4,343,154
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
September 30, December 31,
1998 1997
------------- -----------
(UNAUDITED)
Assets:
Cash and amounts due from depository
institutions $ 3,673 $ 6,767
Federal funds sold 15,200 -
Mortgage-backed securities available
for sale 198,774 290,044
Debt and equity securities available
for sale 51,728 19,093
Loans receivable, net 354,606 322,509
Accrued interest receivable, net 4,395 3,969
Real estate owned, net 727 440
Premises and equipment, net 6,720 6,064
FHLBNY stock, at cost 10,260 10,260
Excess of cost over fair value of net
assets acquired 78 106
Other assets 6,467 6,064
-------- --------
Total assets $652,628 $675,316
======== ========
Liabilities and Shareholders' Equity:
Liabilities:
Deposits $438,322 $443,878
Borrowed funds:
Securities sold under agreement to
repurchase 146,279 146,150
FHLBNY advances - 14,150
-------- --------
Total borrowed funds 146,279 160,300
Advance payments by borrowers for
taxes and insurance 1,783 1,749
Accounts payable and other liabilities 5,001 4,482
-------- --------
Total liabilities 591,385 610,409
-------- --------
Shareholders' Equity 61,243 64,907
-------- --------
Total liabilities and shareholders'
equity $652,628 $675,316
======== ========
See accompanying notes to consolidated financial statements
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
Nine Months Ended
September 30,
-----------------
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 2,177 $ 4,157
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 471 375
Provision for losses on real estate owned 20 -
Depreciation and amortization 859 743
Net amortization of deferred premiums and
unearned discounts 3,368 694
Amortization of RRP awards and allocation
of ESOP shares 1,064 914
Net gain on sale of real estate owned (45) (12)
Net gain of sale of deposits (301) -
Gain on sale of premises and equipment (10) -
Changes in assets and liabilities:
Increase in accrued interest
and dividends receivable (426) (263)
Increase in accrued interest payable 93 320
Decrease (increase) in other assets 6 (546)
Increase in accounts payable and other
liabilities 447 1,708
------- --------
Net cash provided by operating
activities 7,723 8,090
------- --------
Cash flows from investing activities:
Net disbursement from lending activities (22,718) (1,385)
Purchase of loans (731) (2,738)
Proceeds from sale of loans 95 -
Proceeds from mortgage-backed securities
principal repayments 87,845 36,671
Purchase of mortgage-backed securities - (111,189)
Proceeds from debt securities principal
repayments 22,941 19,000
Purchase of debt and equity securities (56,463) (5,611)
Increase in short-term investments (15,200) -
Purchase of FHLBNY stock - (2,133)
Proceeds from collection and sale of real
estate owned 332 376
Purchases and improvements of premises and
equipment (1,698) (539)
Proceeds from the sale of premises and equip-
ment 221 -
------- --------
Net cash provided by (used in)
investing activities 14,624 (67,548)
------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits 953 (14,600)
Payment for sale of deposits (6,208) -
Repayment of borrowings (27,000) (639,450)
Proceeds from borrowings 12,979 720,300
Increase in advance payments by borrowers
for taxes and insurance 34 6
Cash dividends paid (1,421) (1,349)
Proceeds from excise of stock options 69 -
Purchase of common stock (4,847) (5,958)
------- --------
Net cash (used in) provided by
financing activities (25,441) 58,949
------- --------
Net decrease in cash and cash
equivalents (3,094) (509)
Cash and cash equivalents at beginning of
period 6,767 6,586
------- --------
Cash and cash equivalents at end of period $ 3,673 $ 6,077
======= ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Income taxes $ 1,569 $ 1,950
======= ========
Interest $17,489 $ 18,796
======= ========
Transfer from loans receivable to real
estate owned, net $ 594 $ 37
======= ========
Change in unrealized gain, net of income
tax, on securities available for sale $ (727) $ 1,021
======= ========
See accompanying notes to consolidated financial statements
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements include the accounts of
Statewide Financial Corp. (the "Company") and its wholly owned
subsidiary, Statewide Savings Bank, S.L.A. (the "Bank"), and the
Bank's wholly owned subsidiaries, Seventy Sip Corporation, Statewide
Atlantic Corporation and Statewide Financial Services Inc. All
significant intercompany balances and transactions have been
eliminated in consolidation. The Bank and Statewide Financial
Services Inc. are the only active subsidiaries at September 30, 1998.
The Bank operates sixteen banking offices in Hudson, Union and Bergen
counties. Through its wholly owned subsidiary, Statewide Financial
Services, Inc., the Bank also engages in the sale of annuity products.
Both the Company and the Bank are subject to supervision and
regulation by various agencies including the New Jersey Department of
Banking and Insurance, the Office of Thrift Supervision ("OTS") and
the Federal Deposit Insurance Corporation.
The consolidated financial statements contained herein have been
prepared without audit in accordance with the rules and regulations of
the Securities and Exchange Commission and reflect all adjustments
which, in the opinion of management, are necessary for a fair
statement of the results for interim periods. All adjustments made
were of a normal recurring nature. These consolidated financial
statements should be read in conjunction with the consolidated
financial statements and the notes thereto that are included in the
Company's Annual Report on Form 10-K for the fiscal period ended
December 31, 1997.
2. Comprehensive Income
On January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. Under SFAS No. 130,
comprehensive income is divided into net income and other
comprehensive income. Other comprehensive income includes items
previously recorded directly in equity, such as unrealized gains or
losses on securities available for sale.
Comprehensive income during the periods is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in thousands)
Net (loss) income $(341) $1,382 $2,177 $4,157
Other comprehensive income, net
of income tax:
Unrealized holding gain
(loss) on securities available
for sale 75 1,149 (727) 1,021
----- ------ ------ ------
Comprehensive (loss) income $(266) $2,531 $1,450 $5,178
===== ====== ====== ======
3. Shareholders' Equity
The components of shareholders' equity were as follows:
September 30, December 31,
1998 1997
------------- ----------
(Dollars in thousands)
Preferred stock, no par value, 2,000,000
shares authorized; no shares issued or
outstanding $ - $ -
Common stock, no par value 12,000,000
shares authorized; 4,293,309 shares
issued and 4,287,763 shares outstanding
at September 30, 1998 and 4,518,767
shares issued and 4,509,531 shares
outstanding at December 31, 1997 - -
Additional paid in capital 35,089 39,533
Cost of unallocated Employee Stock
Ownership Plan shares (2,962) (3,280)
Cost of unearned Recognition and Retention
Plan shares (1,372) (1,755)
Retained earnings - substantially
restricted 30,336 29,580
Treasury stock, at cost, 5,546 and 9,236
shares at September 30, 1998 and
December 31, 1997 (69) (119)
Accumulated other comprehensive income:
Net unrealized gain on securities
available for sale, net of income tax 221 948
------- -------
Total shareholders' equity $61,243 $64,907
======= =======
4. Net Income (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding
during the period. Earnings (loss) per share, assuming dilution,
starts with the calculation of basic earnings (loss) per share and
adds to it the dilutive effect of common stock equivalents. Such
equivalents are the number of shares which would be issued assuming
exercise of in-the-money options, and vesting of restricted awards,
net of shares which could be purchased in the open market with
proceeds from the assumed exercise of such options and from tax
benefits and the future amortization associated with vesting of
restricted awards.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in thousands,
except per share data)
Numerator:
Net (loss) income available
to common shareholders $(341) $1,382 $2,177 $4,157
===== ====== ====== ======
Denominator:
Weighted average shares
outstanding - basic 3,914,679 4,157,248 3,981,646 4,213,283
Common stock equivalents* - 148,309 179,672 129,871
Weighted average shares
outstanding - assuming
dilution 3,914,679 4,305,557 4,161,318 4,343,154
========= ========= ========= ========
(Loss) earnings per common
share:
Basic $(0.09) $ 0.33 $ 0.55 $ 0.99
====== ====== ====== ======
Assuming dilution $(0.09) $ 0.32 $ 0.52 $ 0.96
====== ====== ====== ======
*Common stock equivalents were not included in the computation of
diluted loss per share for the three months ended September 30,
1998, since inclusion would be anti-dilutive.
5. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for
derivative instruments and hedging activities. SFAS No. 133
supersedes the disclosure requirements in SFAS Nos. 80, 105 and 119.
This statement is effective for periods ending after June 15, 1999.
The adoption of SFAS No. 133 is not expected to have an impact on the
financial position or results of operations of the Company.
In October 1998, the FASB issued SFAS No. 134 "Accounting for
Mortgage-Backed Securities Retained After the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise". This
statement amends SFAS No. 65 "Accounting for Certain Mortgage Banking
Activities", to require that after the securitization of mortgage
loans held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed securities or other retained
interests based on its ability and intent to sell or hold those
investments. This statement is effective for periods beginning after
December 15, 1998. The adoption of this statement is not expected to
have a material impact on the financial position or results of
operations of the Company.
6. Non-Performing Loans and the Allowance for Loan Losses
Non-performing loans were as follows:
September 30, December 31,
1998 1997
------------- -----------
(Dollars in thousands)
Loans delinquent 90 days or more:
Non-accrual $2,140 $2,212
Accruing 330 291
------ ------
Total net loans delinquent 90 days or more $2,470 $2,503
====== ======
Loans delinquent 90 days or more as a
percentage of total net loans outstanding 0.70% 0.75%
==== ====
An analysis of the allowance for loan losses follows:
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- -----
(Dollars in thousands)
Balance at beginning of period $2,969 $2,747 $2,833 $2,613
Provision charged to operations 171 125 471 375
Charge offs, net (183) (85) (347) (201)
------ ------ ------ ------
Balance at end of period $2,957 $2,787 $2,957 $2,787
====== ====== ====== ======
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY
SELECTED FINANCIAL AND REGULATORY RATIOS AND OTHER DATA
At or For the At or For the
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Selected Financial Ratios (1):
Return on average assets (0.21)% 0.81% 0.44% 0.82%
Return on average shareholders' equity (2.25)% 8.62% 4.58% 8.65%
Capital to assets 9.38 % 9.36% 9.38% 9.36%
Net interest rate spread (2) 3.11 % 3.40% 3.12% 3.44%
Net interest margin (3) 3.39 % 3.73% 3.41% 3.76%
Non-interest income to average assets 0.40 % 0.23% 0.43% 0.23%
Non-interest expense to average assets 2.93 % 2.44% 2.81% 2.50%
Efficiency ratio (4) 104.70 % 65.22% 78.68% 65.61%
Ratio of interest-earning assets to
average deposits and borrowings 107.67 % 108.42% 108.06% 108.18%
September 30, December 31,
1998 1997
------------ ------------
Regulatory Capital Ratios:
Tangible capital ratio 9.11% 8.96%
Core capital ratio 9.11% 8.96%
Risk-based capital ratio 18.58% 22.93%
Asset Quality Ratios:
Non-performing loans to total net
loans 0.70% 0.75%
Non-performing loans to total assets 0.38% 0.37%
Non-performing assets to total assets 0.49% 0.44%
Allowance for loan losses to non-
performing loans 119.72% 113.18%
Allowance for loan losses to total
net loans 0.83% 0.85%
Other Data:
Number of deposit accounts 52,762 54,677
Number of offices (5) 16 16
Notes to Selected Financial Ratios:
(1) Ratios are annualized where appropriate.
(2) Interest rate spread represents the difference between the
weighted average yield on average interest-earning assets
and the weighted average cost of average interest-bearing
liabilities.
(3) Net interest margin represents net interest income as a
percent of average interest-earning assets.
(4) Efficiency ratio represents total non-interest expense divided by
the sum of net interest income after provision for loan losses,
and recurring non-interest income. (For the three months and
nine months ended September 1998, the efficiency ratio excluding
the $1.876 million pre-tax charge of premium amortization on
mortgage-backed securities would be 74.26% and 71.12%,
respectively.)
(5) The Passaic branch was sold to Banco Popular FSB as of the close
of business on April 10, 1998, and the North Arlington branch
opened for business on May 9, 1998<PAGE>
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis refers to the Statewide
Financial Corp. (the "Company") and its wholly-owned subsidiary,
Statewide Savings Bank, S.L.A. (the "Bank").
The Company realized a net loss of $341,000, or $0.09 per share,
assuming dilution, for the quarter ended September 30, 1998 as
compared to net income of $1,382,000, or $0.32, per share, assuming
dilution, for the same quarter of the prior year. Basic loss per
share was $0.09 for third quarter of 1998, compared to basic earnings
per share of $0.33 for the third quarter of 1997. For the nine months
ended September 30, 1998, net income totaled $2,177,000, or $0.52 per
share, assuming dilution, as compared to $4,157,000, or $0.96, per
share, assuming dilution, for the same period of the prior year.
Basic earnings per share for the nine months ended September 30, 1998
were $0.55, compared $0.99 per share for the same period of the prior
year.
The results of operations for the three and nine months ended
September 30, 1998 reflect decreases in net interest income, before
provisions for loans losses, over the same periods a year ago, of $2.2
million and $2.7 million, respectively. Current year periods
decreases include a $1.9 million pre-tax charge to recognize
additional premium amortization expense stemming from estimated
increases in prepayments in the Company's mortgage-backed securities
portfolio, as a result of late third quarter changes in market
interest rates. Aside from this charge, decreases during the current
year periods primarily resulted from premium amortization; margin
compression as a result of reinvesting cash pay-downs in a lower
interest rate environment; declines in average interest-earning assets
as the Company de-leveraged compared to prior periods because of the
lack of spread differential between short and long-term investments;
increased non-interest expense substantially due to staffing, support
and marketing efforts to implement the Company's plan of generating
commercial and consumer loans and related core deposits, partially
offset by increases in non-interest income as a result of the
Company's fee enhancement programs.
FINANCIAL CONDITION
At September 30, 1998, total assets were $652.6 million compared to
$675.3 million at December 31, 1997 and $656.6 million at June 30,
1998. The period-end balances decreased $4.0 million between June 30,
1998 and September 30, 1998, as increases in the net loan portfolio
and the debt and equity securities portfolio were offset by a decrease
in the mortgage-backed securities portfolio. Loans at September 30,
1998 were $22.8 million higher than at June 30, 1998 as a result of
originations of $101.8 million by Statewide Funding, a division of the
Bank which specializes in short-term lending to mortgage bankers
utilizing first mortgages as collateral, commercial mortgage and
business loan originations of $6.3 million, and consumer loan
originations of $4.6 million. These efforts more than offset
repayments in these portfolios resulting in period-end loan balance
growth over the preceding quarter-end of $31.1 million, $0.9 million
and $0.8 million, respectively, to balances of $41.2 million, $60.1
million and $40.6 million, respectively. In addition, repayments of
residential mortgages, net of originations, resulted in a $11.0
million decline in the in one-to-four family mortgage loan portfolio
from the June 30, 1998 balance.
The mortgage-backed securities portfolio decreased $27.5 million
between September 30, 1998 and June 30, 1998, principally from normal
amortization and significantly accelerated prepayments. Partially
offsetting this decline was an increase in debt securities from the
purchase of $25.0 million of corporate debt, offset by calls of $18.9
million of federal agency debt during the quarter to $198.8 million,
and one-to-four family mortgages which decreased $11.0 million to
$210.3 million.
Total assets decreased $22.7 million from December 31, 1997 to
September 30, 1998 for reasons similar to those noted above. Loans at
September 30, 1998 were $22.1 million higher than at December 31, 1997
as originations from Statewide Funding, commercial mortgage and
business loans, and consumer loans more than offset repayments in
these and the one-to-four family mortgage loan portfolios from the
December 31, 1997 balances. Debt securities at September 30, 1998 were
$32.6 million more than the December 31, 1997 total, primarily
reflecting the purchase of $56.5 million of corporate debt, offset by
maturities and calls of federal agency debt during the period. At
September 30, 1998, the mortgage-backed securities portfolio reflected
pay-downs of $87.8 million from the beginning of the year. Cash was
utilized in loan portfolio growth, purchase of debt securities,
repurchase of the Company's common stock, and pay-downs of short-term
borrowings. The remaining cash was invested into short-term
instruments in order to limit duration risk in the current low
interest rate environment.
Borrowed funds were $146.3 million at September 30, 1998. Of this
amount $146.0 million have final maturity dates ranging from July 2000
to September 2002. All are callable earlier at the lender's option.
Borrowed funds of $86.0 million with interest rates ranging from 5.43%
to 5.54% are currently callable quarterly through maturity, and
borrowed funds of $60.0 million with an interest rate of 5.52% are
first callable in November 1999 and callable quarterly thereafter.
Borrowed funds remained flat as compared to the preceding quarter and
decreased $14.0 million from December 31, 1997. During 1998, the
Company repaid its short-term borrowed funds with cash flow from its
securities and residential mortgage portfolios rather than re-
investing these funds in financial instruments with significant
duration risks in a falling interest rate environment. The Company
may increase borrowings and leverage its capital to take advantage of
the Company's low interest rate borrowing capabilities in future
quarters.
Deposits totaled $438.3 million at September 30, 1998, as compared to
$440.5 million at June 30, 1998 and $443.9 million at December 31,
1997. The decrease in total deposits from the prior quarter resulted
primarily from the continued controlled runoff of higher rate
certificates of deposit of $5.5 million. Partially offsetting this
decrease was the growth in core deposits of $3.3 million, or 1.3% to
$263.8 million at September 30, 1998 reflecting cross selling and
marketing initiatives. Within core deposits, savings accounts and
non-interest-bearing demand deposit accounts increased $6.3 million
and $3.2 million, respectively, offset by deceases in money market
accounts and NOW accounts of $4.3 million and $1.9 million,
respectively.
The decrease in total deposits between December 31, 1997 and September
30, 1998 resulted primarily from the transfer of the lease and the
sale of the deposits of the Company's Passaic, New Jersey branch
during the second quarter this year coupled with further controlled
runoff of higher rate certificates of deposit. Despite the branch
sale, core deposits increased $5.1 million, or 2.0%, while
certificates of deposit decreased $10.7 million, or 5.8%. Growth in
savings accounts of $11.0 million coupled with a $4.9 million increase
in non-interest bearing demand accounts were partially offset by
decreases in NOW accounts of $5.2 million and money market deposits of
$5.6 million. Excluding the sale of the deposits of the Passaic
branch in the second quarter of 1998, total deposits increased $1.0
million between December 31, 1997 and September 30, 1998, of which
core deposits increased $9.5 million and certificates of deposit
decreased $8.5 million.
Shareholders' equity decreased $2.6 million and $3.7 million during
the three and nine months ended September 30, 1998, respectively, to
$61.2 million, from $63.8 million at June 30, 1998 and from $64.9
million at December 31, 1997. The decreases during these periods
resulted primarily from the repurchase and retirement of 225,458
shares of the Company's common stock for $4.8 million during the
second and third quarters of 1998, along with the payment of quarterly
dividends partially offset by the allocation of ESOP shares and other
employee benefits. The change to shareholders' equity during the
third quarter of 1998 also reflects a $75,000, net of tax, increase in
the unrealized gain in the market value of the Company's investment
portfolio over its June 30, 1998 valuation and a $341,00 reduction
reflecting the current quarter's net loss. The change to
shareholders' equity in the nine-month period reflects a reduction in
the unrealized gain in the market value of the Company's investment
portfolio over its December 31, 1997 valuation of $727,000, net of
tax, and an increase of $2,177,000 from the year-to-date period's net
income.
RESULTS OF OPERATIONS
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
Net Income. For the three months ended September 30, 1998, the
Company realized a net loss of $341,000 including a $1.9 million pre-
tax charge to recognize additional premium amortization expense
stemming from estimated increases in prepayments in the Company's
mortgage-backed securities portfolio, as a result of late third
quarter changes in market interest rates as compared to net income of
$1,382,000 for the same period of the prior year. Basic loss per
share and loss per share, assuming dilution, was $0.09 for the three
months ended September 30, 1998, as compared to basic earnings per
share of $0.33 and earnings per share, assuming dilution, of $0.32 for
the same quarter during 1997. The results of operations for the three
months ended September 30, 1998, reflect decreases in net interest
income of $2.2 million and an increase in non-interest expense,
partially offset by growth in non-interest income.
Interest Income. Interest and dividend income totaled $9.7 million,
after giving effect to the pre-tax charge, for the three months ended
September 30, 1998 as compared to $12.6 million for the three months
ended September 30, 1997. The decline in interest income between the
periods primarily resulted from an overall decline of $32.4 million in
average interest-earning assets coupled with lower yields on mortgage-
backed securities and the recognition of the additional $1.9 million
mortgage-backed securities premium amortization charge. Average loan
balances increased $14.4 million, or 4.4% and the related yield
increased 9 basis points to 7.95% from 7.86% from the same quarter
last year, reflecting changes in the components of the loan portfolio.
Interest income from loans over the same periods last year increased
$363,000, or 5.6%. Within this increase mortgage loan yields increased
13 basis points concurrent with a $21.2 million growth in non-
residential mortgage loans. This non-residential mortgage loan growth
was offset by a reduction of $38.6 million in the average balance of
one-to-four family mortgage loans. As a result, total interest on
mortgage loans decreased $250,000 during the current quarter compared
to the same quarter last year. Average consumer loans increased $3.3
million, or 9.1%, for the current quarter over the same quarter last
year and resulted in a $21,000 rise in consumer loan income despite a
decline of 60 basis points in yield during this declining interest
rate environment. Average commercial business loans, including
wholesale loans to mortgage bankers, increased $28.5 million, or
186.9%, for the current quarter over the same period last year.
Statewide Funding had an average balance during the current quarter of
$25.1 million, and the average commercial business loan portfolio
increased $3.4 million, or 22.4%. As a result, current year quarterly
interest income on commercial business and wholesale loans to mortgage
bankers increased $592,000, or 169%, over the same period last year.
The positive loan and yield growth mentioned above was offset by a
decrease of $84.4 million in the current quarter average balance of
the mortgage-backed securities portfolio from the same period of the
prior year. Amortization of premiums related to accelerated
prepayments on mortgage-backed securities during the current year
period over the same period last year contributed to a lower effective
yield during the current year quarter. The average balance decrease
and increased premium amortization recorded on mortgage-backed
securities resulted in a $3,825,000 decrease in interest income during
this year's current quarter as compared to the same quarter last year.
Partially offsetting this decline for the current quarter over the
same quarter last year, was the increase in the average loan portfolio
mentioned above and an increase in the average debt securities
portfolio of $21.4 million, or 75.5%. Average short-term investments
also increased from zero during the third quarter of 1997 to $14.8
million for the current quarter. As a result, interest income on debt
and equity securities and short-term investments increased $597,000
during the current year quarter over the same quarter last year.
Interest Expense. Interest expense decreased $637,000, or 9.88%,
during the current quarter as compared to the same quarter of the
prior year. Throughout the decline in the interest rate environment,
the Company has been reducing the interest rates it pays for deposits
and has increased demand deposits from relationship building efforts
with its commercial customers. In addition, excess cash flows from
accelerated prepayments of mortgage-backed securities and one-to-four
family loans eliminated the need for short-term borrowings. As a
result, average total deposits and borrowed funds decreased $25.8
million, or 4.22%, and their average cost declined 25 basis points
during the current quarter over the same quarter of the prior year.
Average core deposits increased $8.3 million, or 3.27%, to $261.9
million for the current quarter versus $253.6 million in the prior-
year period, while average certificates of deposit decreased $13.7
million, or 7.12%, to $178.5 million for the current quarter from
$192.2 million in the prior-year period. The cost of total deposits
declined 25 basis points from the prior-year period due to a 38 basis
point decline in the cost of core deposits partially offset by an
increase of 8 basis points in the cost of certificates of deposit.
The average balance of borrowed funds decreased $20.4 million to
$146.3 million for the current quarter from $166.7 million in the
prior-year period, and the related cost declined slightly to 5.56%
from 5.62% for the prior-year period.
Net Interest Income. For the quarter ended September 30, 1998, net
interest income decreased $2.2 million, including the $1.9 million
premium amortization charge on mortgage-backed securities, from the
comparable prior-year period. Excluding this charge, net interest
income decreased $318,000, or 5.19% from the comparable prior-year
period. Increased prepayments in mortgage-backed securities caused
related premiums to be amortized at a faster pace, and related excess
cash flows to be deployed into lower yielding short-term instruments.
In addition, declines in interest-earning assets resulted as the
Company de-leveraged compared to the prior-year period due to the lack
of sufficient spread differential between short and long-term
investments. Although yields on total loans increased for the
current-year three-month period, total yields on interest-earning
assets declined more rapidly than the cost of deposits and borrowed
funds, causing further contractions in the net interest margin for the
period. The increased loan yield resulted from originations of
higher-yielding commercial and consumer loans. This increase in
yields, as well as the tightening of the spread between interest-
earning assets and deposits and borrowed funds and the $1.9 million
mortgage backed security premium charge, are reflected in the net
interest margin of 3.39% for the three months ended September 30,1998,
as compared to 3.73% for the three months ended September 30, 1997.
Excluding the $1.9 million charge to the current year periods, the net
interest margin would have declined 3 basis points for the three
months ended September 30, 1998 from the same period of the prior
year.
Table 1 following presents a summary of the Company's average
interest-earning assets and their average yields, average deposits and
borrowed funds and their average costs, and average shareholders'
equity for the three months ending September 30, 1998 and 1997.
Average loans include non-accrual loans, and related yields include
loan fees which are considered adjustments to yields.
Table 1
<TABLE>
Three Months Ended September 30,
-------------------------------------------------
1998 1997
---------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Average Interest Average Average Interest Average
Balance Yield/ Balance Yield/
Cost Cost
------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
First mortgage loans $259,244 $4,981 7.69% $276,689 $ 5,231 7.56%
Consumer and other loans 40,146 914 9.03 36,807 893 9.63
Statewide Funding LOC 25,096 518 8.19 - - -
Commercial business loans 18,669 423 8.99 15,253 349 9.08
-------- ------ -------- -------
Total loans, net 343,155 6,836 7.95 328,749 6,473 7.86
-------- ------ -------- -------
Mortgage-backed securities 213,612 1,626 5.67 298,028 5,451 7.33
Debt securities 49,818 881 7.11 28,393 494 7.03
Money market investments 14,837 210 5.68 - - -
FHLBNY stock 10,260 185 7.21 8,889 151 6.79
-------- ------ -------- -------
Total interest-earning
assets 631,682 9,738 7.04% 664,059 12,569 7.58%
------ -------
Non-interest-earning
assets 21,806 18,819
-------- --------
Total assets $653,488 $682,878
======== ========
Liabilities and
shareholders' equity:
Deposits and borrowed
funds:
Savings accounts $148,877 1,033 2.75% $139,595 1,030 2.93%
Demand and NOW accounts 72,831 168 0.92 69,015 308 1.77
Money market accounts 40,191 293 2.89 44,994 349 3.08
Certificates of deposit 178,472 2,264 5.03 192,153 2,399 4.95
Borrowed funds 146,293 2,052 5.56 166,731 2,361 5.62
-------- ------ -------- -------
Total deposits and borrowed
funds 586,664 5,810 3.93% 612,488 6,447 4.18%
-------- ------ -------- -------
Other liabilities 6,265 6,231
-------- --------
Total liabilities 592,929 618,719
Shareholders' equity
60,559 64,159
-------- --------
Total liabilities and
shareholders' equity $653,488 $682,878
======== ========
Net interest income $3,928 $ 6,122
====== =======
Net interest rate spread 3.11% 3.40%
==== ====
Net interest margin 3.39% 3.73%
==== ====
Ratio of interest-earning
assets to deposits and
borrowed funds 107.67% 108.42%
====== ======
</TABLE>
Provision for Loan Losses. The provision for loan losses for the
three months ended September 30, 1998 was $171,000, an increase of
$46,000 over the prior-year period. The provision for the three
months ended September 30, 1998 was determined by management after
review of, among other things, the Company's loan portfolio, the risk
inherent in the Company's lending activities, composition and volume
of the Company's loan portfolio and the economy in the Company's
market areas. Further provisions for loan losses will continue to be
based upon management's assessment of the loan portfolio and its
underlying collateral, trends in non-performing loans, the current
economic condition and other factors which warrant recognition in
order to maintain the allowance for loan losses at levels sufficient
to provide for estimated losses. As of September 30, 1998, non-
performing loans were $2.5 million and 0.70% of total net loans
outstanding, as compared to $2.5 million and 0.75%, respectively, at
December 31, 1997. At September 30, 1998, the allowance for loan
losses was $3.0 million, or 119.72%, of total non-performing loans
compared to 113.18% at December 31, 1997.
Non-Interest Income. Total non-interest income increased $249,000, or
62.09%, to $650,000 for the current quarter from $401,000 for the same
period of the prior year. This increase reflects in part the
Company's fee enhancement initiatives implemented during 1998 along
with core deposit and commercial lending growth which resulted in
increased service charges on deposit accounts, and increased loan fees
and charges. In addition, higher customer service fees were recorded
through the branch network; increased ATM surcharges to non-customers;
and moderate growth in fees from annuity sales were realized in the
current year period.
Non-Interest Expense. Total non-interest expense for the three months
ended September 30, 1998 totaled $4.8 million, an increase of
$620,000, or 14.86%, from $4.2 million incurred during the same period
of the prior year.
Salaries and employee benefits expense was the largest component
within non-interest expense. This category increased $327,000, or
14.18% during this quarter of 1998 over the same period last year.
This increase reflects growth in current year staff levels for the
newly formed Statewide Funding division, personnel additions to the
commercial lending division and staffing for the North Arlington, New
Jersey branch. Also contributing to this increase were: normal wage
increases; increased costs associated with the Company's ESOP program
resulting from higher average cost of the Company's common stock for
the current period versus the prior year's period, and other pension
related programs; and higher education benefit costs. In addition,
the current quarter reflects an unrealized market loss in the cash
surrender value of policies held in conjunction with Company life
insurance programs. These expected increases were partially offset by
reductions in compensation expense because of the sale of the Passaic
branch during the early second quarter of 1998, and elimination of the
current year's executive incentive plan benefits.
Professional fees increased $75,000, or 55.56%, for the current
quarter as compared to the same period of the prior year. The
increase for the current period resulted primarily from costs related
to the Company's earnings enhancement initiatives and in conjunction
with the Company's ongoing FIRREA litigation efforts against the
Federal Government.
Insurance premiums increased $79,000, or 103.95%, for the current
quarter as compared to the same period last year. Higher costs during
the current-year quarter resulted principally from an unrealized
market loss in the cash surrender value of corporate owned life
insurance.
Data processing expense increased $44,000, or 33.59%, for the current
quarter over the same quarter of the previous year. The higher costs
primarily reflect increased loan and deposit account transaction
activity, implementation of enhanced systems, and slightly higher
external payroll processing service costs.
The remaining components of non-interest expense increased $95,000, or
6.23%, for the current quarter as compared to the same quarter a year
ago. This increase resulted primarily from increased marketing
related to new product promotion and general advertising as well as
branch and office facilities and equipment modernization, increased
ATM and MAC usage and communication charges, partially offset by lower
correspondent bank and loan operating costs.
Income Tax (Benefit) Expense. The tax benefit for the three months
ended September 30, 1998 reflects the Company's loss during the
quarter, which as discussed above, is related to the $1.9 million
charge taken during the quarter. Income tax expense for the three
months ended September 30, 1997 is solely the result of the tax effect
of the pre-tax income recorded during that period.
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
Net Income. For the nine months ended September 30, 1998, net income
totaled $2,177,000 compared to $4,157,000 for the same period of the
prior year. The current period net income includes a $1.9 million
pre-tax charge to recognize additional premium amortization expense
stemming from estimated increases in prepayments in the Company's
mortgage-backed securities portfolio, as a result of late third
quarter changes in market interest rates. Net income per share,
assuming dilution, for the nine months ended September 30, 1998 was
$0.52 per share compared to $0.96 per share for the same period of the
prior year. Basic earning per share for the nine months ended
September 30, 1998 was $0.55 per share compared to $0.99 per share for
the same period of the prior year. The results of operations for the
nine months ended September 30, 1998, reflect decreases in net
interest income of $2.7 million, and an increase in non-interest
expense, partially offset by growth in non-interest income.
Interest Income. Interest and dividend income totaled $33.5 million,
for the nine months ended September 30, 1998 as compared to $37.7
million for the nine months ended September 30, 1997. The decline in
interest income between the periods primarily resulted from a decline
of $21.0 million in average interest-earning assets coupled with lower
yields on mortgage-backed securities and the recognition of the
additional $1.9 million mortgage-backed securities premium
amortization charge. Lower long-term interest rates and record level
refinancings have accelerated prepayments in the one-to-four family
residential mortgage loan and mortgage backed securities portfolios.
Average loan balances increased $6.2 million, or 1.9% and the related
yield increased 4 basis points to 7.96% from 7.92% from the same nine-
month period last year, reflecting changes in the mix of the loan
portfolio. Interest income from loans for the current nine-month
period over the same period last year increased $483,000, or 2.5%.
Within this increase, mortgage loan yields increased 9 basis points
concurrent with a $20.9 million increase in non-residential mortgage
loans. This non-residential mortgage loan growth was offset by a
reduction of $31.5 million in the average balance of one-to-four
family mortgage loans. As a result, total interest on mortgage loans
decreased $432,000 during the nine months ended September 30, 1998 as
compared to the same period last year. Average consumer loans
increased $3.5 million, or 9.8% for the current year-to-date period
over the same period last year and resulted in a $128,000 rise in
consumer loan income despite a decline of 43 basis points in yield
during this declining interest rate environment. Average commercial
business, including wholesale loans to mortgage bankers, increased
$13.4 million, or 102.4%, for the current nine-month period over the
same period last year. Statewide Funding whose operations commenced
mid-second quarter had an average year-to-date balance of $9.3
million, and the average commercial business loan portfolio increased
$4.1 million, or 31.0%. As a result, current year-to date interest
income on commercial business and wholesale loans to mortgage bankers
increased $787,000, or 86.0% over the same period last year.
The positive loan and yield growth mentioned above was offset by a
decrease of $42.7 million in the average balance of the mortgage-
backed securities portfolio during the current nine-month period from
the same period of the prior year. Amortization of premiums related
to accelerated prepayments on mortgage-backed securities during the
current year period over the same period last year contributed to a
lower effective yield during the current year quarter. The average
balance decrease and increased premium amortization recorded on
mortgage-backed securities resulted in a $5,575,000 decrease in
interest income during this year's current nine-month period as
compared to the same period last year. Partially offsetting this
decline for the current nine-month period over the same period last
year was the increase in the average loan portfolio mentioned above
and an increase in average short-term investments of $12.3 million.
Average debt securities increased by $1.3 million for the current-year
period over the same period last year. As a result, interest income on
debt and equity securities and short-term investments increased
$664,000 during the current nine-month period over the same period
last year.
Interest Expense. Interest expense decreased $1,535,000, or 8.03%,
during the nine months ended September 30, 1998 as compared to the
same period of the prior year. Throughout the decline in the interest
rate environment, the Company has been reducing the interest rates it
pays for deposits and has increased demand deposits from relationship
building efforts with its commercial customers. In addition, excess
cash flows from accelerated prepayments of mortgage-backed securities
and one-to-four family loans eliminated the need for short-term
borrowings. As a result, average total deposits and borrowed funds
decreased $18.8 million, or 3.08%, and their cost declined 21 basis
points during the current year nine-month period over the same period
of the prior year. Average core deposits increased $10.3 million, or
4.08%, to $261.4 million for the current nine-month period over the
$251.1 million in the prior-year period while average certificates of
deposit decreased $18.8 million, or 9.34%, to $182.5 million for the
current nine-month period from $201.3 million in the prior-year
period. The cost of total deposits declined 26 basis points from the
prior-year period due to a 35 basis point decline in the cost of core
deposits partially offset by a increase of 8 basis points in the cost
of certificates of deposit. Average borrowed funds decreased $10.2
million to $146.9 million for the current nine-month period over the
$157.2 million in the prior-year period. The cost of borrowed funds
declined slightly for the current-year period to 5.57% from 5.59% for
the prior-year period.
Net Interest Income. For the nine months ended September 30, 1998,
net interest income, including the $1.9 million premium amortization
charge on mortgage-backed securities, decreased $2,733,000, or 14.67%,
from the comparable prior-year period. Excluding the charge, net
interest income decreased $857,000, or 4.60% from the comparable
prior-year period. Increased prepayments in mortgage-backed
securities caused related premiums to be amortized at a faster pace,
and related excess cash flows to be deployed into lower yielding
short-term instruments. In addition, declines in interest-earning
assets resulted as the Company de-leveraged, compared to the prior-
year period, due to the lack of sufficient spread differential between
short and long-term investments. Although yields on total loans
increased for the current year nine-month period, total yields on
interest-earning assets declined more rapidly than the cost of
deposits and borrowed funds causing further contractions in the net
interest margin for the period. The increased loan yield resulted
from originations of higher yielding commercial and consumer loans.
This increase in yields, as well as the tightening of the spread
between interest-earning assets and deposits and borrowed funds and
the $1.9 million mortgage-backed security premium charge, are
reflected in the net interest margin of 3.41% for the nine months
ended September 30,1998, as compared to 3.76% for the nine months
ended September 30, 1997. Excluding the $1.9 million pre-tax charge
to the current-year period, the net interest margin would have
declined 5 basis points for the nine months ended September 30, 1998
from the same period of the prior year.
Table 2 following presents a summary of the Company's average
interest-earning assets and their average yields, average deposits and
borrowed funds and their average costs, and average shareholders'
equity for the nine months ending September 30, 1998 and 1997.
Average loans include non-accrual loans, and related yields include
loan fees which are considered adjustments to yields.
Table 2
<TABLE>
Nine Months Ended September 30,
------------------------------------------------
1998 1997
---------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Average Interest Average Average Interest Average
Balance Yield/ Balance Yield/
Cost Cost
------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
First mortgage loans $268,096 $15,498 7.71% $278,745 $15,930 7.62%
Consumer and other loans 39,282 2,718 9.25 35,767 2,590 9.68
Statewide Funding LOC 9,326 567 8.13 - - -
Commercial business loans 17,110 1,135 8.87 13,060 915 9.37
-------- ------- -------- -------
Total loans, net 333,814 19,918 7.96 327,572 19,435 7.92
-------- ------- -------- -------
Mortgage-backed securities 246,327 10,569 5.98 289,062 16,144 7.43
Debt securities 35,709 1,916 7.22 34,442 1,764 6.86
Money market investments 12,318 512 5.56 6 - 5.35
FHLBNY stock 10,260 563 7.32 8,335 403 6.45
-------- ------- -------- -------
Total interest-earning
assets 638,428 33,478 7.10% 659,417 37,746 7.63%
------- -------
Non-interest-earning assets 21,219 19,400
-------- --------
Total assets $659,647 $678,817
======== ========
Liabilities and
shareholders' equity:
Deposits and borrowed
funds:
Savings accounts $145,877 3,105 2.85% $139,830 3,033 2.90%
Demand and NOW accounts 73,151 520 0.95 66,742 979 1.96
Money market accounts 42,365 944 2.98 44,565 1,050 3.15
Certificates of deposit 182,471 6,894 5.05 201,265 7,477 4.97
Borrowed funds 146,940 6,118 5.57 157,172 6,577 5.59
-------- ------- -------- -------
Total deposits and borrowed
funds 590,804 17,581 3.98% 609,574 19,116 4.19%
-------- ------- -------- -------
Other liabilities 5,461 5,187
-------- --------
Total liabilities 596,265 614,761
Shareholders' equity 63,382 64,056
-------- --------
Total liabilities and
shareholders' equity $659,647 $678,817
======== ========
Net interest income $15,897 $18,630
======= =======
Net interest rate spread 3.12% 3.44%
==== ====
Net interest margin 3.41% 3.76%
==== ====
Ratio of interest-earning
assets to deposits and
borrowed funds 108.06% 108.18%
====== ======
</TABLE>
Provision for Loan Losses. The provision for loan losses for the nine
months ended September 30, 1998 was $471,000, an increase of $96,000
over the prior year period. The provision for the nine months ended
September 30, 1998 was determined by management after review of, among
other things, the Company's loan portfolio, the risk inherent in the
Company's lending activities, composition and volume of the Company's
loan portfolio and the economy in the Company's market areas. Further
provisions for loan losses will continue to be based upon management's
assessment of the loan portfolio and its underlying collateral, trends
in non-performing loans, the current economic conditions and other
factors which warrant recognition in order to maintain the allowance
for loan losses at levels sufficient to provide for estimated losses.
At September 30, 1998, the allowance for loan losses was $3.0 million,
or 119.72%, of total non-performing loans and 0.83% of total net loans
compared to 113.18% of non-performing loans and 0.85% of total net
loans at December 31, 1997.
Non-Interest Income. Total non-interest income increased $967,000, or
83.08%, to $2,131,000 for the nine months ended September 30, 1998
from $1,164,000 for the same period of the prior year. Included in
non-interest income for the current nine-month period is a gain of
$301,000 on the sale of the Passaic branch. Excluding this gain, the
Company recorded increases in non-interest income of $666,000, or
57.22%, for the nine months ended September 30, 1998 over the same
period of the prior year. This increase reflects, in part, the
Company's fee enhancement initiatives implemented during mid second
quarter of 1998 along with core deposits and commercial lending growth
which resulted in increased service charges on deposit accounts, and
increased loan fees and charges. In addition, growth of non-interest
income came from fees related to advances on Statewide Funding lines
of credit, fees earned on commercial lending origination efforts,
service charges on checking accounts for returned items and deposit
account maintenance charges, higher ATM surcharges to non-customers,
and higher annuity sales generated through the Bank's branch network.
Non-Interest Expense. Total non-interest expense for the nine months
ended September 30, 1998 totaled $13.9 million, an increase of $1.2
million, or 9.07%, from $12.7 million recorded during the same period
of the prior year. This increase primarily reflects increases in
salaries and employee benefits, marketing and advertising costs,
professional fees, and branch and bank operations cost, partially
offset by lower insurance expense.
Salaries and employee benefits expense was the largest component
within non-interest expenses. This category increased $692,000, or
9.78% during the first nine months of 1998 over the same period last
year. This increase reflects growth in current year staff levels for
the newly formed Statewide Funding division, personnel additions to
the commercial lending division and staffing for the North Arlington,
New Jersey branch. Also contributing to this increase were: normal
wage increases; the Company's ESOP program whose cost is based upon
the average price of the Company's common stock and other pension
related programs; and higher employment recruitment costs. In
addition, the current period also reflects an unrealized market loss
in the cash surrender value of policies held in conjunction with
Company life insurance programs. These expected increases were
partially offset by decreases in compensation from the sale of the
Passaic branch during the early second quarter of 1998 and elimination
of the current year's executive incentive plan benefits.
Professional fees increased $159,000, or 34.27%, for the nine months
ended September 30, 1998 over the same period of the prior year. The
increase resulted primarily from costs related to the Company's fee
enhancement and cost reduction studies, ESOP structure and allocation
review, and other benefit review costs, along with costs incurred in
conjunction with the Company's ongoing FIRREA litigation against the
federal government .
Data processing expense increased $70,000, or 15.77%, for the current
quarter over the same quarter of the previous year. The higher costs
primarily reflect increased loan and deposit account transaction
activity, implementation of enhanced systems, and slightly higher
external payroll processing service costs.
The remaining components of non-interest expense increased $235,000,
or 4.94%, from $4,753,000 for the nine months ended September 30, 1997
to $4,988,000 for the nine months ended September 30, 1998. This
increase resulted primarily from increased marketing and advertising
related to bank product and name recognition, opening of the North
Arlington branch, facilities and equipment modernization, increased
communication and postage expense due to higher loan and deposit
volume and fee structure notice changes, higher foreclosed real estate
carrying costs and increased ATM and MAC usage and communication
charges. These increased costs were partially offset by lower
literature and printing costs, correspondent bank and branch operating
costs and director benefit reductions.
Income Tax Expense. Income tax for the nine months ended September
30, 1998 reflects tax on that period's income at the Company's
effective tax rate and a tax benefit of $675,000, which is the result
of the tax effect of the $1.9 million charge recorded during the third
quarter of 1998. Income tax expense for the nine months ended
September 30, 1997 is solely the result of the tax effect of the
pre-tax income recorded during that period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity is a measure of its ability to fund loans and
withdrawals of deposits in a cost-effective manner. The Company's
primary financing sources are deposits obtained in its own market
area, advances from the FHLBNY and securities sold under repurchase
agreements. Other sources of funds include scheduled amortization and
prepayments of loan principal and mortgage-backed securities,
maturities and calls of debt securities and funds provided by
operations. At September 30, 1998, the Company had total liquid
assets (consisting of cash and due from banks, federal funds sold,
debt and mortgage-backed securities having final maturities within one
year, and accrued interest from debt and mortgage-backed securities)
which represent 3.29% of total assets and 4.89% of total deposits at
September 30, 1998. At September 30, 1998, the Company had available
to it $33.7 million under a line of credit with the FHLBNY, expiring
October 31, 1998, and approximately $48.2 million of excess collateral
pledged with the FHLBNY. In addition, the Company has approximately
$53.5 million of unpledged debt, equity and mortgage-backed securities
which are classified as available for sale, and approximately $210.2
million of loans which could be used to collateralize additional
borrowings or sold to provide liquidity.
At September 30, 1998, capital resources were sufficient to meet
outstanding loan commitments of $57.8 million, commitments on unused
lines of credit of $55.6 million and commercial letters of credit of
$3.2 million. Certificates of deposit, which are scheduled to mature
in one year or less from September 30, 1998, totaled $148.4 million.
Management is unable to predict the amount of such deposits that will
renew with the Company. As a result of the Company's liquidity
position, management does not believe the Company's operation will be
materially affected by a failure to renew these deposits. However,
trends and the Company's prior experience indicate that a significant
portion of such deposits should remain with the Company.
During the nine months ended September 30, 1998, proceeds from pay
downs, calls and maturities of investment securities and cash provided
from operating activities represented the primary source of funds.
Maturities and principal repayments on mortgage-backed and debt
securities outpaced purchases of debt securities by $54.3 million. In
addition, funds of $7.7 million were provided by operating activities
during this period. During this period $22.7 million of funds were
used for loan disbursements, net of receipts, and $4.8 million for
repurchase of the Company's common stock. The excess source of funds
were primarily used to decrease short-term borrowings by $14.0
million, increase short-term investments by $15.2 million, and fund
the reduction in deposits of $5.3 million (which primarily resulted
from the sale of the Passaic branch).
During the nine months ended September 30, 1997, investment and
lending activities represented the primary funding need. Purchase of
mortgage-backed and debt securities exceeded maturities and principal
repayments of these securities by $61.1 million. In addition funds
were used for loan disbursements net of repayments of $4.1 million,
increase of FHLBNY stock of $2.1 million, deposit declines of $14.6
million, and the repurchase of the Company's common stock of $6.0
million. The principal source of funding these activities were
increases in borrowings, net of repayments, from the FHLBNY of $80.9
million and cash provided by operating activities of $8.1 million.
At September 30, 1998, the Bank exceeded each of the regulatory
capital requirements applicable to it. The table below presents the
Bank's actual capital amounts and ratios at September 30, 1998 as
compared to the OTS minimum capital adequacy requirements and the OTS
requirements for classification as a well-capitalized institution.
The Bank OTS Requirements
-------------- ----------------------------------
Minimum Capital For Classification
Adequacy As Well-Capitalized
--------------- -------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Tangible Capital $59,346 9.11% $ 9,773 1.50%
Tier 1 (core)Capital 59,346 9.11 26,062 4.00 $32,577 5.00%
Risk Based Capital:
Tier 1 59,346 17.78 13,354 4.00 20,030 6.00
Total $62,018 18.58% $26,707 8.00% $33,384 10.00%
YEAR 2000 READINESS
The Year 2000 technology issues pose potential problems to financial
institutions and other businesses who rely on computers to assist in
normal daily operations of their business. Many computer programs and
applications which use date fields may cease to function normally as a
result of the way date fields have been programmed historically. Date
sensitive software may recognize a date using 00 as the year 1900
rather than the year 2000. This could result in a system failure,
miscalculations or lost systems files, causing disruptions of
operations and could result in a temporary inability to process
transactions or conduct normal business activity.
The Company has implemented a Year 2000 compliance plan. The
objective of this plan is to ensure that the Company will be Year 2000
ready prior to the turn of the century. To monitor and execute the
Company's Year 2000 plan, the Company formed a Year 2000 Steering
Committee and a Year 2000 Action Committee. The Year 2000 Steering
Committee consists of senior executive officers of the Bank who review
the progress of the plan and approve the course of action taken by the
Year 2000 Action Committee. The Year 2000 Action Committee consists
of department heads from various operating areas of the Company. This
action committee performs the necessary steps needed to assure the
Company is Year 2000 ready.
As recommended by the Federal Financial Institutions Examination
Council ("FFIEC") guide, the Year 2000 compliance plan includes the
following phases: Awareness, Assessment, Renovation, Validation
(Testing), and Implementation. Completing these phases will enable
the Company to assess the risks and effects of the Year 2000 issues,
develop a strategic plan and a systematic approach guide, perform
adequate testing, and implement corrective action necessary to be
adequately assured that the Company's processing and information
systems are Year 2000 ready.
As of September 30, 1998, the Company has substantially completed the
Awareness, Assessment and Renovation phases of the Year 2000
compliance plan. ATM software upgrades will be installed in mid-
November; this software is certified as being Year 2000 ready. The
Company's facilities, HVAC, alarms, and elevators are Year 2000 ready.
The Company is currently focusing on preparations for the Validation
(Testing) phase and is expecting to start testing on the system
applications in November and continue into March 1999. The
Implementation phase is targeted for completions by the end of the
second quarter of 1999. The Company's primary computer processing
applications are handled by an outside third party vendor. The
Company has received confirmation that this vendor has developed a
Year 2000 action plan, is currently testing its systems, and a portion
of its application modules are already Year 2000 ready. The vendor
expects to be Year 2000 ready by the end of the first quarter of 1999.
In the event the vendor's application systems fail to be Year 2000
ready by the time indicated, the Company will proceed with its
contingency plan to switch to the vendor's client server-based system,
which is Year 2000 ready.
The Company has also initiated formal communication with all of its
vendors and major borrowers to determine the extent to which the
Company is vulnerable to third parties' failure to become Year 2000
ready. Replies received indicate that major borrowers and vital
vendors are in various "in process" stages of the Year 2000 compliance
issue. Continued contact and follow up will be maintained. However,
there can be no guarantee that the systems of external third parties,
of which the Company relies, will become Year 2000 ready, or that the
failure of these third parties to become Year 2000 ready would not
have a material adverse effect on the Company.
Currently, management believes that the cost incurred to become Year
2000 ready, both with regard to the Company's internal and outsourced
data processing operations, will not be material. The costs
identified directly with the Year 2000 contingency plan are not
expected to exceed $75,000. These costs will be funded through
operating cash flows and expensed when incurred. Costs will also be
incurred for replacement of various personal computers, software
upgrades, and upgraded server software. The Company planned to
upgrade and replace these items and accordingly did not accelerate
replacement due to Year 2000 compliance. These estimated costs are
management's best estimates based upon currently known information.
There can be no guarantee that actual costs incurred to become Year
2000 ready will not increase due to additional issues which may arise
internally in the future, and by the failure of third parties to fail
to become Year 2000 ready.
QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's operations may be subject to a variety of market risks,
the most material of which is the risk of changing interest rates.
Most generally, interest rate risk ("IRR") is the volatility in
financial performance, attributable to changes in market interest
rates, which may result in either fluctuation of net interest income
or changes to the economic value of the equity of the Company.
The principal objective of the Company's IRR management activities is
to provide maximum levels of net interest income while maintaining
acceptable levels of interest rate and liquidity risk and facilitating
the funding needs of the Company.
Consistent with its definition of IRR, the Company measures earnings
at risk and value at risk. To measure earnings at risk, the Company
utilizes an income simulation model which starts with a detailed
inventory of balance sheet items and factors in the probability of the
maturity and repricing characteristics of assets and liabilities,
including assumed prepayment risks. Simulation of net interest income
takes into account the relative sensitivities of these balance sheet
items to dynamic rates and projects their behavior over an extended
period of time. Simulation analysis of net interest income reflects
both the possibility and probability of the behavior of balance sheet
items.
In addition to simulating net interest income to measure earnings at
risk, the Company also measures IRR from the perspective of value at
risk. Such analysis is the measurement and management of IRR from the
longer term perspective of the economic value of the equity of the
Company. This is performed through Net Portfolio Value (NPV) analysis
which is intended to address the changes in equity value arising from
movements in interest rates. The NPV analysis first reprices all of
the assets and liabilities under the current interest rate
environment, then compares this result to repricing under a changed
interest rate environment, thus evaluating the impact of immediate and
sustained interest rate shifts across the current interest rate yield
curve on the market value of the current balance sheet. A significant
limitation inherent in NPV analysis is that it is static.
Consequently, there is no recognition of the potential for strategy
adjustments in a volatile rate environment which would protect or
conserve equity values.
Changes in the estimates and assumptions made for IRR analysis could
have a significant impact on projected results and conclusions. These
analyses involve a variety of significant estimates and assumptions,
including, among others: (1) estimates concerning assets and
liabilities without definite maturities or repricing characteristics;
(2) how and when yields on interest-earning assets and costs of
interest-bearing liabilities will change in response to movement of
market interest rates; (3) prepayment speeds; (4) future cash flows;
and (5) discount rates. Therefore, these techniques may not
accurately reflect the impact of general market interest rate
movements on the Company's net interest income or the value of its
economic equity.
The Company's most recent available information indicate if interest
rates increase or decrease 200 basis points from current rates in an
immediate and sustained shock over a twelve-month period, the Company
would expect net interest income to decrease 2.0%, and to decrease
5.0%, respectively. In addition, based on the same 200 basis point
increase and decrease, the Company would expect its estimated Net
Portfolio Value to decrease $7.5 million, and to decrease $7.8
million, respectively.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
There are various claims and lawsuits in which the Bank is
periodically involved incidental to the Bank's business. In
the opinion of management, no material loss is expected from
any such pending claims or lawsuits.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Report of Form 8-K.
(a) Exhibits.
Number Description
------ -----------
27 Financial Data Schedule
(b) Reports on Form 8-K.
1.) The Registrant filed a Current Report on Form 8-K
dated July 21, 1998 announcing its earnings for
the second quarter ended June 30, 1998.
2.) The Registrant filed a Current Report on Form 8-K
dated August 18, 1998 announcing its third quarter
dividend of $0.13 per share.
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.
STATEWIDE FINANCIAL CORP.
Date: November 16, 1998 By: Bernard F. Lenihan
-------------------
BERNARD F. LENIHAN
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
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