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, 1999
Commission File #0-26546
STATEWIDE FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
New Jersey22-3397900
(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 November 8, 1999: Common Stock, No Par Value:
4,054,757 shares issued and 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,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
Interest Income:
Interest and fees on loans $ 7,766 $6,836 $22,366 $19,918
Interest on mortgage-backed
securities 4,454 1,626 13,571 10,569
Interest and dividends on
debt and equity securities 908 1,091 2,917 2,428
Dividends on Federal Home Loan
Bank of New York ("FHLBNY")
stock 223 185 624 563
------- ------ ------- -------
Total interest and dividend
income 13,351 9,738 39,478 33,478
------- ------ ------- -------
Interest Expense:
Deposits 3,351 3,758 9,941 11,463
Borrowed funds 3,211 2,052 9,441 6,118
------- ------ ------- -------
Total interest expense 6,562 5,810 19,382 17,581
------- ------ ------- -------
Net interest income 6,789 3,928 20,096 15,897
Provision for loan losses 249 171 747 471
------- ------ ------- ------
Net interest income after
provision for loan losses 6,540 3,757 19,349 15,426
------- ------ ------- ------
Non-interest income:
Mortgage warehousing fees 72 16 182 16
Service charges 346 378 1,078 945
Loans and other fees 255 229 769 678
Net gain on sale of securities - - 26 -
Net gain of sale of loans - - 66 -
Other income 101 27 306 492
------- ------ ------- -------
Total non-interest income 774 650 2,427 2,131
------- ------ ------- -------
Non-interest expense:
Salaries and employee benefits 2,610 2,633 8,181 7,771
Occupancy, net 686 589 1,998 1,751
Federal deposit insurance
premiums 64 68 196 205
Professional fees 163 210 964 623
Insurance premiums 51 155 138 208
Data processing fees 196 175 579 514
Foreclosed real estate expense,
net 14 15 23 41
Other 982 948 3,065 2,783
------- ------ ------- -------
Total non-interest expense 4,766 4,793 15,144 13,896
------- ------ ------- -------
Income (loss) before income
taxes 2,548 (386) 6,632 3,661
Income tax expense (benefit) 920 (45) 2,478 1,484
------- ------ ------- -------
Net income (loss) $ 1,628 $ (341) $ 4,154 $ 2,177
======= ====== ======= =======
Earnings (loss) per common
share:
Basic $ 0.44 $(0.09) $ 1.13 $ 0.55
======= ====== ======= =======
Assuming dilution $ 0.42 $(0.09) $ 1.08 $ 0.52
======= ====== ======= =======
Weighted average number of
common stock shares
Basic 3,722,278 3,914,679 3,692,097 3,981,646
========= ========= ========= =========
Assuming dilution 3,897,351 3,914,679 3,856,615 4,161,318
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
September 30, December 31,
1999 1998
------------- -----------
(UNAUDITED) NOTE*
Assets:
Cash and amounts due from depository
institutions $ 9,398 $ 7,090
Mortgage-backed securities available
for sale 259,363 248,035
Debt and equity securities available
for sale 49,355 68,312
Loans receivable, net 389,394 366,458
Accrued interest receivable, net 4,740 4,759
Real estate owned, net 367 523
Premises and equipment, net 7,903 6,547
FHLBNY stock, at cost 12,590 10,315
Excess of cost over fair value of net
assets acquired 54 70
Other assets 10,572 5,408
-------- --------
Total assets $743,736 $717,517
======== ========
Liabilities and shareholders' equity:
Liabilities:
Deposits $448,551 $443,705
Borrowed funds:
Securities sold under agreement to
repurchase 207,000 181,381
FHLBNY advances 28,000 25,300
-------- --------
Total borrowed funds 235,000 206,681
Advance payments by borrowers for
taxes and insurance 1,921 1,611
Accounts payable and other liabilities 4,468 5,021
-------- --------
Total liabilities 689,940 657,018
-------- --------
Shareholders' equity 53,796 60,499
-------- --------
Total liabilities and
shareholders' equity $743,736 $717,517
======== ========
Note* The balance sheet at December 31, 1998 is taken from
Statewide's audited financial statements at that date but
does not include all information and footnotes required by
generally accepted accounting principles for complete
financial statements.
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,
-----------------
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 4,154 $ 2,177
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 747 471
Provision for losses on real estate owned - 20
Depreciation and amortization 979 859
Net amortization of deferred premiums and
unearned discounts 500 3,368
Net gain on sale of securities (26) -
Amortization of RRP awards and allocation
of ESOP shares 769 1,064
Net gain on sale of real estate owned (46) (45)
Net gain of sale of deposits (66) (301)
Gain on sale of premises and equipment (15) (10)
Changes in assets and liabilities:
Decrease (increase) in accrued interest
and dividends receivable 42 (426)
Decrease (increase) in other assets (461) 6
Increase in accrued interest payable 29 93
Increase (decrease)in accounts payable
and other liabilities (431) 447
------- -------
Net cash provided by operating
activities 6,175 7,723
------- -------
Cash flows from investing activities:
Net disbursement from lending activities (23,867) (22,718)
Proceeds from sale of loans 802 95
Purchase of loans (843) (731)
Proceeds from mortgage-backed securities
principal repayments 60,658 87,845
Proceeds from the sale of mortgage-backed
securities 62,034 -
Purchase of mortgage-backed securities (144,327) -
Proceeds from debt securities principal
repayments 12,000 22,941
Proceeds from the sale of debt securities 3,815 -
Purchase of debt and equity securities - (56,463)
Increase in short-term investments - (15,200)
Purchase of FHLBNY stock (2,275) -
Proceeds from collection and sale of real
estate owned 372 332
Purchases and improvements of premises and
equipment (2,337) (1,698)
Proceeds from the sale of premises and
equipment 34 221
------- -------
Net cash provided by (used in)
investing activities (33,934) 14,624
------- -------
Cash flows from financing activities:
Net increase in deposits 4,846 953
Payment for sale of deposits - (6,208)
Repayment of borrowings (278,621) (27,000)
Proceeds from borrowings 306,940 12,979
Increase in advance payments by borrowers
for taxes and insurance 310 34
Cash dividends paid (1,501) (1,421)
Proceeds from issuance of common stock 257 69
Purchase of common stock (2,164) (4,847)
------- -------
Net cash provided by (used in)
financing activities 30,067 (25,441)
------- -------
Net increase (decrease) in cash
and cash equivalents 2,308 (3,094)
Cash and cash equivalents at beginning of
period 7,090 6,767
------- -------
Cash and cash equivalents at end of period $ 9,398 $ 3,673
======= =======
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Income taxes $ 3,776 $ 1,569
======= =======
Interest $19,347 $17,489
======= =======
Transfer from loans receivable to real
estate owned, net $ 170 $ 594
======= =======
Change in unrealized (loss), net of income
tax, on securities available for sale $(8,369) $ (727)
======= =======
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, 1999.
The Bank operates fifteen banking offices in Hudson, Union, Essex 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, 1998.
On April 12, 1999, the Company entered into a definitive agreement to
merge with Independence Community Bank Corp. ("Independence"). Under
the terms of the Independence merger agreement, which is subject to
approval by the Company's shareholders and by regulatory authorities,
Statewide Financial Corp. shareholders will receive a combination of
stock and cash subject to election, proration, and allocation
procedures. Based upon Independence's closing price on April 12,
1999, the transaction has an implied per share value of $25.31 per
Statewide Financial Corp. share. The transaction will be accounted
for as a purchase and is expected to close in the fourth quarter of
calendar 1999 or by January 31, 2000.
2. Comprehensive (Loss)Income
Comprehensive (loss) income during the periods is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands)
Net income (loss) $1,628 $(341) $4,154 $2,177
Other comprehensive income, net
of income tax:
Unrealized holding (loss) gain
on securities available for
sale (2,998) 75 (8,369) (727)
------- ----- ------- ------
Comprehensive (loss) income $(1,370) $(266) $(4,215) $1,450
======= ===== ======= ======
3. Shareholders' Equity
The components of shareholders' equity were as follows:
September 30, December 31,
1999 1998
------------- ----------
(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; 4,054,757 shares
issued and outstanding
at September 30, 1999 and 4,155,509
shares issued and 4,151,963 shares
outstanding at December 31, 1998 - -
Additional paid in capital 31,257 32,904
Cost of unallocated Employee Stock
Ownership Plan shares (2,645) (2,856)
Cost of unearned Recognition and Retention
Plan shares (878) (1,282)
Retained earnings - substantially
restricted 33,844 31,190
Treasury stock, at cost, 3,546 shares at
December 31, 1998 - (44)
Accumulated other comprehensive (loss)
income:
Net unrealized (loss) gain on securities
available for sale, net of income tax (7,782) 587
------- -------
Total shareholders' equity $53,796 $60,499
======= =======
In accord with the definitive merger agreement signed with
Independence on April 12, 1999, the Company terminated its ESOP
effective June 30, 1999. At that date, the ESOP held approximately
416,000 shares of the Company's common stock of which 264,500 had been
pledged as collateral for its debt, and accordingly, had not been
allocated to ESOP participants. The Company anticipates that by
December 31, 1999, the ESOP will sell a sufficient amount of these
unallocated shares to pay off this debt. When the debt is paid off,
all remaining unallocated shares will be allocated to ESOP
participants and the Company will incur an expense equal to their fair
market value.
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,
--------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands,
except per share data)
Numerator:
Net income (loss) available
to common shareholders $1,628 $(341) $4,154 $2,177
====== ===== ====== ======
Denominator:
Weighted average shares
outstanding - basic 3,722,278 3,914,679 3,692,097 3,981,646
Common stock equivalents* 175,073 - 164,518 179,672
--------- --------- --------- ---------
Weighted average shares
outstanding - assuming
dilution 3,897,351 3,914,679 3,856,615 4,161,318
========= ========= ========= =========
Earnings (loss) per common
share:
Basic $ 0.44 $(0.09) $ 1.13 $ 0.55
====== ====== ====== ======
Assuming dilution $ 0.42 $(0.09) $ 1.08 $ 0.52
====== ====== ====== ======
*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. Non-Performing Loans and the Allowance for Loan Losses
Non-performing loans were as follows:
September 30, December 31,
1999 1998
------------- -----------
(Dollars in thousands)
Loans delinquent 90 days or more:
Non-accrual $1,627 $2,193
Accruing 510 297
------ ------
Total net loans delinquent 90 days or more $2,137 $2,490
====== ======
Loans delinquent 90 days or more as a
percentage of total net loans outstanding 0.55% 0.68%
==== ====
An analysis of the allowance for loan losses follows:
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------- -------------
1999 1998 1999 1998
---- ---- ---- -----
(Dollars in thousands)
Balance at beginning of period $3,401 $2,969 $3,056 $2,833
Provision charged to operations 249 171 747 471
Charge offs, net (127) (183) (280) (347)
------ ------ ------ ------
Balance at end of period $3,523 $2,957 $3,523 $2,957
====== ====== ====== ======
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,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
Selected Financial Ratios (1):
Return on average assets 0.88% (0.21)% 0.75% 0.44%
Return on average shareholders' equity 12.18% (2.25)% 9.73% 4.58%
Capital to assets 7.23% 9.38 % 7.23% 9.38%
Net interest rate spread (2) 3.55% 3.11 % 3.48% 3.12%
Net interest margin (3) 3.76% 3.39 % 3.70% 3.41%
Non-interest income to average assets 0.42% 0.40 % 0.43% 0.43%
Non-interest expense to average assets 2.56% 2.93 % 2.72% 2.81%
Efficiency ratio (4) 65.16% 104.70 % 69.63% 78.68%
Ratio of interest-earning assets to
average deposits and borrowings 104.61% 107.67 % 105.61% 108.06%
September 30, December 31,
1999 1998
------------ ------------
Regulatory Capital Ratios:
Tangible capital ratio 7.59% 7.95%
Core capital ratio 7.59% 7.95%
Risk-based capital ratio 10.76% 13.72%
Asset Quality Ratios:
Non-performing loans to total net
loans 0.55% 0.68%
Non-performing loans to total assets 0.29% 0.35%
Non-performing assets to total assets 0.34% 0.42%
Allowance for loan losses to non-
performing loans 164.86% 122.73%
Allowance for loan losses to total
net loans 0.90% 0.83%
Other Data:
Number of deposit accounts 51,958 52,272
Number of offices (5) 15 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 70 Sip Avenue and Martin Luther King Drive branches were
consolidated into the PATH branch during the second quarter of
1999, and on June 5, 1999 the Maplewood branch opened for
business. The Passaic branch was sold as of the close of
business on April 10, 1998, and the North Arlington branch opened
for business on May 9, 1998.
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").
Net income for the quarter ended September 30, 1999 was $1,628,000, or
$0.42 per share, assuming dilution, as compared to a net loss of
$341,000, or $0.09, per share, assuming dilution, for the same quarter
of the prior year. The three-month period ending September 30, 1998
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. Basic earnings
per share was $0.44 for the third quarter of 1999, compared to basic
loss per share of $0.09 for the third quarter of 1998.
For the nine months ended September 30, 1999, net income totaled
$4,154,000, or $1.08 per share, assuming dilution, as compared to
$2,177,000, or $0.52, per share, assuming dilution, for the same
prior-year period. Earnings for the nine months ended September 30,
1999 include pre-tax acquisition costs of $503,000 incurred in
connection with the Company's pending acquisition by Independence
Community Bank Corp. ("Independence"). Excluding acquisition costs,
net income totaled $4,473,000, or $1.16 per share, assuming dilution,
for the nine months ended September 30, 1999. Earnings during the
nine months ended September 30, 1998 reflected the $1.9 million pre-
tax charge as discussed above. Basic earnings per share for the nine
months ended September 30, 1999 was $1.13 per share compared to $0.55
per share for the same period of the prior year. Basic earnings per
share for the nine months ended September 30, 1999, excluding
acquisition costs, was $1.21 per share.
The results of operations for the three and nine months ended
September 30, 1999 reflect increases in net interest income, before
provisions for loans losses, over the same periods a year ago, of $2.9
million and $4.2 million, respectively. Both prior-year periods
include the $1.9 million pre-tax charge to recognize additional
premium amortization expense. Excluding this prior-year amortization
charge, the increases in net interest income reflect growth in average
loan and investment security balances and the change in mix in
deposits from higher rate certificates of deposit into lower rate core
deposits, partially offset by increased borrowing costs to fund growth
in assets and to repurchase the Company's common stock. Increased
non-interest income reflects the result of fee enhancement initiatives
implemented during mid-1998, along with increased fees from growth in
lending and retail activities. Higher non-interest expense for the
year-to-date period reflects current and prior period growth and
expansion throughout the Company, acquisition costs related to the
Company's pending acquisition by Independence, and normal increases in
other operating costs.
FINANCIAL CONDITION
Total assets rose to $743.7 million at September 30, 1999, compared to
$717.5 million at December 31, 1998. This increase of $26.2 million
was principally from growth in the commercial and consumer portfolios
and the mortgage-backed securities portfolio, partially offset by
declines in debt securities, one-to-four family mortgage loans and a
slight pullback in utilization of lines of credit by mortgage banking
customers of Statewide Funding.
Loans at September 30, 1999 increased $22.9 million over December 31,
1998 as a result of growth of $25.6 million, or 31.9%, in the
construction, multi-family, commercial mortgage and business
portfolios, along with a $3.8 million, or 9.3%, increase in the
consumer loan portfolio. This growth was partially offset by a slight
decline in the one-to-four family mortgage loan portfolio of $1.0
million, or 0.5%, despite originations of $37.9 million during the
period. In addition, outstanding Statewide Funding loans to mortgage
bankers declined from $47.8 million to $42.9 million as mortgage
refinancings declined. However, while utilization under lines of
credit has declined, more customers have been added, so that total
lines of credit have increased $48.7 million to $127.2 million at
September 30, 1999.
Mortgage-backed securities increased $11.3 million between December
31, 1998 and September 30, 1999 as the Company continued its growth
strategy with the purchase of $144.3 million of mortgage-backed
securities and private label collateralized mortgage obligations,
which more than offset $62.0 million of sales and $60.7 million in
normal amortization and accelerated prepayments recorded during the
period. At September 30, 1999, the debt securities portfolio declined
$19.0 million to $49.4 million from $68.3 million at December 31,
1998, reflecting calls, maturities and sales of U.S. Treasury, Agency
and corporate debt. Also, during the second quarter of this year,
Statewide purchased an additional $2.3 million of FHLBNY stock.
Borrowed funds totaled $235.0 million at September 30, 1999 as
compared to $206.7 million at December 31, 1998. This additional
$28.3 million in borrowed funds was used in conjunction with growth in
core deposits to fund growth in loans, maturities of certificates of
deposit for holders who sought rates higher than the Company's
alternate borrowing rates and repurchases of the Company's common
stock. Borrowed funds consist of $28.0 million in overnight advances,
$61.0 million of short-term repurchase agreements which mature within
7 days and $146.0 million which have final maturity dates ranging from
July 2000 to September 2002, but are callable earlier at the lender's
option. Of this $146.0 million, $86.0 million have interest rates
ranging from 5.43% to 5.54% and are callable quarterly through
maturity, and $60.0 million have an interest rate of 5.52% and are
first callable in November 1999 and quarterly thereafter.
Deposits totaled $448.6 million at September 30, 1999 as compared to
$443.7 million at December 31, 1998. The increase in total deposits
for the current year resulted primarily from growth in core deposits
of $9.5 million, partially offset by a decrease of $4.6 million in
certificates of deposit as the Company continued with its strategy of
not matching competitors' most aggressive interest rates unless the
Company believes that a key relationship is in jeopardy. At September
30, 1999, core deposits were $282.1 million compared to $272.6 million
at December 31, 1998. Within core deposits, savings and checking
accounts increased $6.9 million and $4.9 million, respectively,
reflecting the Company's continued relationship-building efforts, and
the expansion of the Company's branch network during the second
quarter of this year. Partially offsetting these increases was a
decrease in money market accounts of $2.3 million.
Shareholder's equity decreased $6.7 million during the current year to
$53.8 million at September 30, 1999 from $60.5 million at December 31,
1998. The decrease during the first nine months resulted from the
repurchase and retirement of 112,000 shares of the Company's common
stock for $2.2 million during the first quarter of 1999, the
declaration of three quarterly cash dividends, and a decrease of $8.4
million (net of tax) in the September 30, 1999 market value of the
Company's investment portfolio from the valuation at December 31,
1998. Partially offsetting these decreases were the current year's
net income of $4.2 million, funds received from the exercise of stock
options, and the allocation of shares under the Company's Employee
Stock Ownership Plan (ESOP) and other benefit plans.
RESULTS OF OPERATIONS
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
Net Income. For the three months ended September 30, 1999, net income
rose to $1,628,000, or $0.42 per share, assuming dilution, as compared
to a net loss of $341,000, or $0.09 per share, assuming dilution, for
the same period last year. Basic earnings per share was $0.44 per
share for the current-year quarter as compared to a $0.09 basic loss
per share for the quarter ending September 30, 1998. The prior-year
period included a $1.9 million pre-tax charge for the recognition of
additional premium amortization on mortgage-backed securities.
Excluding this charge, net income in the year was higher as a result
of increases in net interest income and recurring non-interest income.
Interest Income. Interest and dividend income totaled $13.4 million
for the current period as compared to $9.7 million for the prior year.
Excluding the $1.9 million charge incurred during 1998, interest
income for the current-year period increased $1.7 million. Of this
increase, interest income on loans accounted for $0.9 million,
primarily from continued growth in lending to mortgage bankers by
Statewide Funding and from growth in commercial loans. Average
balances of these portfolios increased $57.8 million for the three
months ended September 30, 1999 over the same period of the prior
year. Also, during the current-year period, the average consumer loan
portfolio increased $3.6 million. Partially offsetting the growth in
these portfolios was the effect from significant increases in mortgage
refinancing activity which caused a decline in the average one-to-four
family loan portfolio for the current-year period of $18.0 million,
over the same period of last year. Yields on one-to-four family loans
declined 8 basis points during the current three-month period to
7.36%. Interest income on securities, excluding the effect of the
1998 charge, increased during the current quarter over the same period
of the prior year by $0.8 million. This increase reflects purchases
in the investment securities portfolio during the fourth quarter of
1998 and first half of 1999 when greater spreads between funding rates
and yields on securities allowed leveraging to be a viable growth
strategy.
Interest Expense. Interest expense increased $752,000, or 12.9%,
during the current quarter as compared to the same period of the prior
year. The current-year period reflects higher borrowing levels which
were used to fund asset growth. Partially offsetting the increase in
interest expense from higher borrowing levels, was a decrease of 13
basis points in the average cost of deposits and borrowed funds
compared to the same three-month period of last year. This cost
decrease resulted from a change in the mix of deposits along with
lower costs for both deposits and borrowings. The Company lowered its
overall cost of core deposits because the increase in no or low
interest cost transaction accounts was greater than the increase in
core savings accounts. In addition, the Company lowered interest
rates offered to its depositors during the period of general interest
rate decline during 1998. As a result, the cost of deposits decreased
44 basis points from the September 30, 1998 quarter to 2.95% for the
quarter ended September 30, 1999.
Net Interest Income. For the quarter ended September 30, 1999, net
interest income increased $2.9 million as compared to the prior-year
period which included a $1.9 million premium amortization charge on
mortgage-backed securities. Excluding this charge, the increase in
net interest income was the result of continued growth in average
loans and securities and a lower cost of deposits, partially offset by
an increase in short-term borrowed funds.
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, 1999 and 1998.
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,
-------------------------------------------------
1999 1998
---------------------- ------------------------
<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 $268,143 $5,128 7.65% $259,244 $4,981 7.69%
Consumer and other loans 43,739 1,006 9.13 40,146 914 9.03
Statewide Funding LOC 49,465 1,024 8.21 25,096 518 8.19
Commercial business loans 25,167 608 8.64 18,669 423 8.99
-------- ------ -------- ------
Total loans, net 386,514 7,766 7.96 343,155 6,836 7.95
-------- ------ -------- ------
Mortgage-backed securities 268,322 4,454 6.45 213,612 1,626 5.67
Debt securities 50,118 908 6.97 49,818 881 7.11
Money market investments - - - 14,837 210 5.68
FHLBNY stock 12,590 223 7.08 10,260 185 7.21
-------- ------ -------- ------
Total interest-earning
assets 717,544 13,351 7.35% 631,682 9,738 7.04%
------ ------
Non-interest-earning
assets 26,640 21,806
-------- --------
Total assets $744,184 $653,488
======== ========
Liabilities and
shareholders' equity:
Deposits and borrowed
funds:
Savings accounts $164,034 1,026 2.48% $148,877 1,033 2.75%
Demand and NOW accounts 84,800 150 0.70 72,831 168 0.92
Money market accounts 36,470 250 2.72 40,191 293 2.89
Certificates of deposit 165,805 1,925 4.61 178,472 2,264 5.03
Borrowed funds 234,824 3,211 5.43 146,293 2,052 5.56
-------- ------ -------- ------
Total deposits and borrowed
funds 685,933 6,562 3.80% 586,664 5,810 3.93%
-------- ------ -------- ------
Other liabilities 4,769 6,265
-------- --------
Total liabilities 690,702 592,929
Shareholders' equity 53,482 60,559
-------- --------
Total liabilities and
shareholders' equity $744,184 $653,488
======== ========
Net interest income $6,789 $3,928
====== ======
Net interest rate spread 3.55% 3.11%
==== ====
Net interest margin 3.76% 3.39%
==== ====
Ratio of interest-earning
assets to deposits and
borrowed funds 104.61% 107.67%
====== ======
</TABLE>
Provision for Loan Losses. The provision for loan losses for the
three months ended September 30, 1999 was $249,000, an increase of
$78,000 over the prior-year period. The provision 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. The increase in provision reflects
both an increased average balance of loans as well as a change in
composition of the portfolio toward more commercial loans. 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, 1999, non-performing loans were $2.1 million and
0.55% of total net loans outstanding as compared to $2.5 million and
0.68%, respectively, at December 31, 1998. At September 30, 1999, the
allowance for loan losses was $3.5 million, or 164.86%, of total
non-performing loans compared to 122.73% at December 31, 1998.
Non-interest Income. Total non-interest income increased $124,000, or
19.1%, to $774,000 for the current quarter from $650,000 for the same
period of the prior year. This increase reflects increased ATM
surcharges to non-customers and higher annuity sales generated in the
retail branches. In addition, wholesale mortgage funding transaction
fees earned during the three months ended September 30, 1999 totaled
$72,000 as compared to $16,000 for last year's quarter. Partially
offsetting the current quarter's growth was a decrease in transactions
generating deposit account activity fees.
Non-interest Expense. Total non-interest expense for the three months
ended September 30, 1999 totaled $4.8 million, unchanged from the
prior-year level.
Salaries and employee benefits expense decreased $23,000 over the
prior-year level, despite staff additions during 1998 for the newly
formed Statewide Funding division, for the opening of the North
Arlington, New Jersey branch and for expansion within the commercial
lending division. Serving to offset the higher staff level, the
termination of the ESOP, effective June 30, 1999 in accordance with
the terms and conditions of the Independence merger agreement, reduced
the current year's quarter salary and benefits from the prior year.
Professional fees decreased $47,000, or 22.4%, for the current quarter
as compared to the same period of the prior year. The three-month
period ending September 30, 1998 included costs related to the
Company's earnings enhancement initiatives and in conjunction with the
Company's ongoing FIRREA litigation efforts against the Federal
Government.
Occupancy costs increased $97,000, or 16.5%, for the current quarter
as compared to the same period of the previous year. Higher occupancy
costs occurred from increased capital improvements related to
furnishings and repairs and maintenance costs from past and ongoing
renovations throughout the Company, along with capital improvements
and rent expense related to the opening of the Maplewood branch,
operating system enhancements, and the refurbishment of the Jersey
City PATH branch in 1999.
Insurance premiums decreased $104,000, or 67.1%, for the current
three-month period as compared to the same period last year. Higher
costs during the prior-year quarter resulted principally from an
unrealized market loss in the cash surrender value of corporate owned
life insurance.
The remaining components of non-interest expense increased $50,000, or
4.1%, for the current quarter as compared to the same quarter a year
ago.
Income Tax Expense. The change in income tax expense for the current
year period is primarily the result of the tax effect of the change in
pre-tax income recorded during the period.
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
Net Income. For the nine months ended September 30, 1999, net income
was $4,154,000, or $1.08 per share, assuming dilution, compared to
$2,177,000, or $0.52 per share, assuming dilution, for the same period
of the prior year. Earnings for the nine months ending September 30,
1999 include pre-tax acquisition costs of $503,000 incurred in
connection with the Company's pending acquisition by Independence.
Excluding acquisition costs, net income totaled $4,473,000, or $1.16
per share, assuming dilution, for the nine months ended September 30,
1999. The prior year's net interest income included a $1.9 million
charge for the recognition of additional premium amortization on
mortgage-backed securities. Excluding the acquisition costs in the
current nine-month period and the additional amortization in the prior
nine-month period, net income rose by $1.1 million over the same
period last year. The increase in net income in the current year,
excluding the respective costs for each of the nine-month periods,
reflects an increase in net interest income and recurring non-interest
income, partially offset by an increase in non-interest expense.
Basic earnings per share for the nine months ended September 30, 1999
was $1.13 per share compared to $0.55 per share for the same period of
the prior year. Basic earnings per share for the current nine-month
period, excluding acquisition costs, was $1.21 per share.
Interest Income. Interest and dividend income totaled $39.5 million,
for the nine months ended September 30, 1999 as compared to $33.5
million for the same period last year. Excluding the $1.9 million
charge incurred during 1998, interest income for the current-year
period increased $4.1 million. Of this increase, interest income on
loans accounted for $2.4 million, primarily from continued growth in
lending to mortgage bankers by Statewide Funding and from growth in
commercial loans. Average balances of these portfolios increased
$69.9 million for the nine months ended September 30, 1999 over the
same period of the prior year. Also, during the current nine-month
period, the average consumer loan portfolio increased $3.4 million.
Partially offsetting the growth in these portfolios was the effect of
significant increases in mortgage refinancing activity which caused a
decline in the average one-to-four family loan portfolio for the
current nine-month period ending September 30, 1999 of $32.2 million
over the same period last year, despite originations of $37.9 million
during the nine months ended September 30, 1999. Yields on one-to-
four family loans declined 13 basis points during the current nine-
month period to 7.40%. Interest income on securities, excluding the
effect of the 1998 charge, increased during the current year-to-date
period over the same period of the prior year by $1.7 million. This
increase reflects purchases in the investment securities portfolio
during the fourth quarter of 1998 and first half of 1999, when greater
spreads between funding rates and yields on securities allowed
leveraging to be a viable growth strategy.
Interest Expense. Interest expense increased $1,801,000, or 10.24%,
during the nine months ended September 30, 1999 as compared to the
same period of the prior year. This increase resulted from increased
borrowing levels partially offset by lower costs paid on deposits and
borrowed funds. The current-year period reflects higher borrowing
levels which were used to fund asset growth. These additional
borrowings continue to remain short term, and are similar to the
duration or repricing characteristic inherent in the asset growth.
The average cost of deposits and borrowed funds decreased 17 basis
points during the nine months ended September 30, 1999 as compared to
the same periods a year ago. This decrease was a result of a change
in the mix of deposits along with lower costs for both deposits and
borrowings. The Company lowered its overall cost of core deposits
because the increase in no or low interest cost transaction accounts
was greater than the increase in core savings accounts. In addition,
the Company lowered interest rates offered to its depositors during
the period of general interest rate decline during 1998. The cost of
deposits for the current-year nine-month period decreased 46 basis
points to 2.99% as compared to the same period last year. Also,
during the current period, the costs of borrowings decreased 21 basis
points as compared to the prior-year period.
Net Interest Income. For the nine months ended September 30, 1999,
net interest income increased $4,199,000, or 26.41%, including the
$1.9 million premium amortization charge on mortgage-backed
securities, from the comparable prior-year period. Excluding the
charge, net interest income increased $2,323,000, or 13.07% from the
comparable prior-year period. The increase reflects the growth in
average loans and securities, a decline in the cost of deposits from
the change in the mix of deposits, partially offset by an increase in
short-term borrowed funds. In addition, during the second quarter of
1999, the cost of deposits and borrowed funds began to decrease at a
greater pace than yields on interest-earning assets. As a result, the
net interest margin has improved by 29 basis points to 3.70% for the
nine months ended September 30, 1999 as compared to 3.41% during the
prior-year period.
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, 1999 and 1998.
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,
------------------------------------------------
1999 1998
---------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Average Interest Average Average InterestAverage
Balance Yield/ Balance Yield/
Cost Cost
------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
First mortgage loans $261,203 $15,037 7.68% $268,096 $15,498 7.71%
Consumer and other loans 42,730 2,917 9.12 39,282 2,718 9.25
Statewide Funding LOC 47,922 2,866 8.00 9,326 567 8.13
Commercial business loans 23,128 1,547 8.60 17,110 1,135 8.87
-------- ------- -------- -------
Total loans, net 374,983 22,367 7.94 333,814 19,918 7.96
-------- ------- -------- -------
Mortgage-backed securities 273,748 13,571 6.54 246,327 10,569 5.98
Debt securities 57,245 2,916 6.71 35,709 1,916 7.22
Money market investments - - - 12,318 512 5.56
FHLBNY stock 12,246 624 6.79% 10,260 563 7.32%
-------- ------- -------- -------
Total interest-earning
assets 718,222 39,478 7.29% 638,428 33,478 7.10%
------- -------
Non-interest-earning assets 23,494 21,219
-------- --------
Total assets $741,716 $659,647
======== ========
Liabilities and
shareholders' equity:
Deposits and borrowed
funds:
Savings accounts $159,676 2,922 2.45% $145,877 3,105 2.85%
Demand and NOW accounts 80,362 422 0.70 73,151 520 0.95
Money market accounts 36,886 748 2.71 42,365 944 2.98
Certificates of deposit 167,833 5,849 4.66 182,471 6,894 5.05
Borrowed funds 235,338 9,441 5.36 146,940 6,118 5.57
-------- ------- -------- -------
Total deposits and borrowed
funds 680,095 19,382 3.81% 590,804 17,581 3.98%
-------- ------- -------- -------
Other liabilities 4,718 5,461
-------- --------
Total liabilities 684,813 596,265
Shareholders' equity 56,903 63,382
-------- --------
Total liabilities and
shareholders' equity $741,716 $659,647
======== ========
Net interest income $20,096 $15,897
======= =======
Net interest rate spread 3.48% 3.12%
==== ====
Net interest margin 3.70% 3.41%
==== ====
Ratio of interest-earning
assets to deposits and
borrowed funds 105.61% 108.06%
====== ======
</TABLE>
Provision for Loan Losses. The provision for loan losses for the nine
months ended September 30, 1999 was $747,000, an increase of $276,000
over the prior-year period. The provision for the nine months ended
September 30, 1999 was determined by management after review of, among
other things, the Company's loan portfolio, the risk inherent in the
Company's lending activities, changes in the composition and volume of
the Company's loan portfolio and the local 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, 1999, the allowance
for loan losses was $3.5 million, or 164.86%, of total non-performing
loans and 0.90% of total net loans compared to 122.73% of non-
performing loans and 0.83% of total net loans at December 31, 1998.
Non-interest Income. Non-interest income for the nine months ended
September 30, 1999 totaled $2,427,000 as compared to $2,131,000 for
the same period of the prior year. Recurring non-interest income,
which excludes net security gains and a $0.3 million gain recorded on
the sale of the Passaic branch in the second quarter of 1998, grew
$0.6 million, or 31.2%, for the nine months ended September 30, 1999
over the same period of the prior year. This increase reflects the
Company's fee enhancement initiatives implemented during mid-1998,
along with increased ATM revenue from greater volume in non-customer
ATM usage, growth in both wire transfer and branch service fees as
more commercial services are being provided to the Company's expanding
commercial customer base, higher annuity sales generated in the retail
branches, and $66,000 from sales of SBA loans with no like fees earned
during the preceding year. In addition, wholesale mortgage funding
transaction fees earned during the nine months ended September 30,
1999 totaled $182,000 compared to only $16,000 for the prior year, as
the program was initiated in mid-1998.
Non-interest Expense. Non-interest expense for the nine months ended
September 30, 1999 totaled $14.6 million, excluding acquisition costs
as compared to $13.9 million for the same period of the prior year.
Increased non-interest expense for the current-year nine-month period
primarily reflects higher salaries, benefit costs and operating costs
associated with expansion initiatives of the Bank, partially offset by
lower professional fees and net insurance costs.
Salaries and employee benefits expense, the largest component within
non-interest expense, increased $410,000, or 5.28%, during the nine
months ended September 30, 1999 over the same period last year. This
increase fully reflects staff additions during 1998 for the newly
formed Statewide Funding division, for the opening of the North
Arlington, New Jersey branch, and for the expansion within the
commercial lending division, whereas there is limited related expense
for these staff additions in the prior-year period. In addition,
normal annual merit increases, incentive plan accruals, employee
training and education, payroll tax, and the opening of the Maplewood,
New Jersey branch late in the second quarter of 1999 contributed to
the rise during the current-year period.
Professional fees increased $341,000, or 54.7%, for the nine months
ended September 30, 1999 as compared to the preceding year period.
The current-year increase includes $503,000 of costs incurred in
connection with the Company's pending acquisition by Independence.
Excluding acquisition costs, professional fees decreased $162,000, or
26.0%, for the nine months ended September 30, 1999 as compared to the
preceding-year period. Higher costs during the prior year related to
the Company's earnings enhancement initiatives, ESOP structure and
allocation review, higher costs incurred in conjunction with the
Company's ongoing FIRREA litigation efforts against the Federal
Government, and other benefit review costs.
Occupancy costs increased $247,000, or 14.1%, for the nine months
ended September 30, 1999 as compared to the same period of the
previous year. Higher occupancy costs occurred from increased capital
improvements related to furnishings and repairs and repairs and
maintenance costs from past and ongoing renovations throughout the
Company, along with capital improvements and rent expense related to
the opening of the North Arlington and Maplewood branches, operating
system enhancements, utility usage costs and the refurbishment of the
Jersey City PATH branch in 1999.
Insurance premiums decreased $70,000, or 33.7%, from the prior-year
period. The current nine-month period reflects lower premium costs
and an amortization adjustment.
The remaining components of non-interest expense increased $320,000,
or 9.0%, for the nine months ended September 30, 1999 as compared to
the same period of the preceding year. This increase resulted from
higher costs for advertising and marketing for continued product
development, and for advertising and promotions related to the newly
refurbished Jersey City PATH branch and the grand opening of the
Maplewood, New Jersey branch. In addition, increased branch and other
operating charges, ATM and MAC service costs, postage, literature and
printing costs, temporary help and shareholder related costs increased
during the current-year period as compared to the same period last
year. These increases were partially offset by lower communication
charges, and director costs from the reduction of certain benefits
plans implemented during the third quarter of 1998.
Income Tax Expense. The change in income tax expense for the nine
months ended September 30, 1999 is primarily the result of the tax
effect of the change in pre-tax income recorded during the period.
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.
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, 1999, 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 1.32% of total assets and 2.2% of total deposits at
September 30, 1999. At September 30, 1999, the Company had available
to it $4.8 million under a line of credit with the FHLBNY, which
expired on November 2, 1999 and approximately $26.7 million of excess
collateral pledged with the FHLBNY. In addition, the Company has
approximately $75.0 million of unpledged debt, equity and
mortgage-backed securities which are classified as available for sale,
and approximately $125.5 million of loans which could be used to
collateralize additional borrowings or sold to provide liquidity. On
November 2, 1999, the Company renewed its lines of credit with the
FHLBNY for $37.3 million, expiring on November 2, 2000, providing an
additional $4.5 million under its line of credit.
At September 30, 1999, capital resources were sufficient to meet
outstanding loan commitments of $64.8 million, commitments on unused
lines of credit of $124.4 million and commercial letters of credit of
$6.5 million. Certificates of deposit, which are scheduled to mature
in one year or less from September 30, 1999, totaled $145.1 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, 1999, investment activities
represented the primary funding need. Purchases of collateralized
mortgage obligations and mortgage-backed securities exceeded
maturities, sales and principal repayments of mortgage-backed and debt
securities by $5.8 million. In addition, funds were used for loan
disbursements, net of repayments of $23.9 million, to purchase $2.3
million of additional FHLBNY stock, and to repurchase $2.2 million of
the Company's common stock. Other uses of funds during the current
year included disbursements of $2.3 million for purchases and
improvements of premises and equipment related to renovation and
expansion in the Bank. The principal sources of funding for these
activities were net increases in borrowed funds of $28.3 million, an
increase in deposits of $4.8 million and cash provided by operating
activities of $6.2 million.
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).
At September 30, 1999, 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, 1999 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 $57,351 7.59% $11,335 1.50%
Tier 1 (core)Capital 57,351 7.59 30,227 4.00 $37,784 5.00%
Risk Based Capital:
Tier 1 57,351 10.16 22,570 4.00 33,855 6.00
Total 60,716 10.76 45,140 8.00% 56,425 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 and the
execution of this plan is currently on target. 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. The objective of this plan is to ensure that the
Company will be Year 2000 ready prior to the turn of the century.
As of September 30, 1999, the Company has completed the awareness,
assessment, renovation and testing phases of the Year 2000 compliance
plan. The Company's primary third party data processing vendor has
developed a Year 2000 action plan, confirmed that the application
modules used by the Company are Year 2000 ready, and that testing and
remediation of its remaining systems and computer equipment on which
they run is complete. In addition, the Company and the vendor jointly
completed testing and implemented changes necessary to the Company's
applications which are processed or affected by the vendor. The
Company's Year 2000 contingency and business resumption plan in the
event of disruption of power or communications calls for the use of an
alternate processing site. In addition, procedures are in place to
carry on business activity in the event of disruption to the Bank's
data processing service occurs.
The Company has completed of the implementation phase for its hardware
and other software to be ready for business. The Company's wide area
network and hardware, along with its facilities, ATM, HVAC, alarm
systems and elevators are all Year 2000 ready.
The Company continues its ongoing formal communication with all of its
vendors to determine the extent to which the Company is vulnerable to
third parties' failure to become Year 2000 ready. Replies received
indicate that vital vendors, including power and telephone companies,
are in various "in process" stages of the Year 2000 compliance issue.
Continued contact and follow up will be maintained.
The Company has analyzed and segregated its loan portfolio into two
categories for Year 2000 ready issues: loans collateralized by real
estate and loans not collateralized by real estate, in order to
determine and minimize the potential impact of its borrower's failure
to become Year 2000 ready. The underlying value of the real estate on
the loans secured by real estate minimizes the risk related to Year
2000 readiness. Of the remaining loans, which are not secured by real
estate, the Company has identified and has maintained formal
communications with borrowers to determine which borrowers may
experience a disruption in their business, because of a failure to
become Year 2000 ready. Replies received indicate that the majority
of these borrowers are in various "in process" stages of the Year 2000
compliance issue and are expected to be Year 2000 ready. A minimal
number of borrowers have been identified as having additional credit
risk as a direct result of the Year 2000 issue. Those risks have been
estimated and incorporated in the analysis of the adequacy of the loan
loss allowance. Assessment of Year 2000 readiness is part of the
underwriting process for new commercial loan customers and renewals of
existing loans. Continued contact and follow up is being performed.
However, there can be no guarantee that the systems of external third
party vendors, on whom the Company relies, will become Year 2000
ready, or that the failure of the Bank's loan customers 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 are being funded through
operating cash flows and expensed as incurred. To date, $63,000 has
been incurred. A significant amount of the Company's hardware has
been purchased since July 1996, and is Year 2000 ready. However,
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 indicates 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 increase 3.34% and to decrease
2.25%, respectively. In addition, based on the same 200 basis point
increase and decrease, the Company would expect its estimated Net
Portfolio Value to decrease $34.5 million and to increase $26.3
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 20, 1999 announcing its third quarter
dividend of $0.13 per share.
2.) The Registrant filed a Current Report on Form 8-K
dated July 27, 1999 announcing Registrant's second
quarter earnings.
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 12, 1999 By: Bernard F. Lenihan
-------------------
BERNARD F. LENIHAN
SENIOR VICE PRESIDENT, CHIEF
FINANCIAL OFFICER, SECRETARY
AND TREASURER
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