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 1933
For the Quarter Ended March 31, 1999 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 April 30, 1999: Common Stock, No Par Value:
4,043,509 shares issued and 4,037,847 shares outstanding.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months
Ended March 31,
---------------
1999 1998
---- ----
Interest income:
Interest and fees on loans $ 7,193 $ 6,465
Interest on mortgage-backed securities 4,459 4,841
Interest and dividends on debt and
equity securities 1,050 474
Dividends on Federal Home Loan Bank of
New York ("FHLBNY") stock 195 187
------- -------
Total interest and dividend income 12,897 11,967
------- -------
Interest expense:
Deposits 3,315 3,865
Borrowed funds 3,062 2,040
------- -------
Total interest expense 6,377 5,905
------- -------
Net interest income 6,520 6,062
Provision for loan losses 249 150
------- -------
Net interest income after provision
for loan losses 6,271 5,912
Non-interest income:
Mortgage banking fees 44 -
Service charges 365 236
Loan and other fees 228 211
Net loss on sales of securities (2) -
Other income 83 87
------- -------
Total non-interest income 718 534
------- -------
Non-interest expense:
Salaries and employee benefits 2,759 2,491
Occupancy, net 635 574
Federal deposit insurance premiums 67 69
Professional fees 150 177
Insurance premiums 37 (3)
Data processing fees 190 162
Foreclosed real estate expense, net 2 20
Other 933 874
------- -------
Total non-interest expense 4,773 4,364
------- -------
Income before income taxes 2,216 2,082
Income taxes 854 778
------- -------
Net Income $ 1,362 $ 1,304
======= =======
Earnings per common share:
Basic $ 0.37 $ 0.32
======= =======
Assuming dilution $ 0.36 $ 0.31
======= =======
Weighted average number of common
shares outstanding:
Basic 3,678,980 4,029,523
========= =========
Assuming dilution 3,808,081 4,229,757
========= =========
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
March 31, December 31,
1999 1998
--------- ------------
(Unaudited)
Assets:
Cash and amounts due from depository
institutions $ 2,282 $ 7,090
Mortgage-backed securities available
for sale 276,239 248,035
Debt and equity securities available
for sale 61,842 68,312
Loans receivable, net 373,145 366,458
Accrued interest receivable, net 5,709 4,759
Real estate owned, net 591 523
Premises and equipment, net 6,853 6,547
FHLBNY stock, at cost 12,115 10,315
Excess of cost over fair value of net
assets acquired 53 70
Other assets 5,396 5,408
-------- --------
Total assets $744,225 $717,517
======== ========
Liabilities and shareholders' equity:
Liabilities:
Deposits $441,424 $443,705
Borrowed funds:
Securities sold under agreements
to repurchase 211,386 181,381
FHLBNY advances 26,600 25,300
-------- --------
Total borrowed funds 237,986 206,681
Advance payments by borrowers for taxes
and insurance 1,706 1,611
Accounts payable and other liabilities 4,259 5,021
-------- --------
Total liabilities 685,375 657,018
-------- --------
Shareholders' equity 58,850 60,499
-------- --------
Total liabilities and shareholders'
equity $744,225 $717,517
======== ========
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
Three Months
Ended March 31,
---------------
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 1,362 $ 1,304
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 249 150
Depreciation and amortization 314 274
Net amortization of deferred premiums and
unearned discounts 397 495
Net loss on sale of securities 2 -
Amortization of RRP awards and allocation
of ESOP shares 336 353
Net gain on sale of real estate owned (15) (15)
Changes in assets and liabilities:
Increase in accrued interest and dividends
receivable (950) (152)
Increase(decrease) in accrued interest
payable 107 (21)
Decrease in other assets 432 1,896
(Decrease)increase in accounts payable and
other liabilities (869) 440
------- -------
Net cash provided by operating activities 1,365 4,724
------- -------
Cash flows from investing activities:
Net (disbursements) receipts from lending
activities (7,571) 2,740
Proceeds from the sale of loans 736 -
Purchase of loans (229) (168)
Proceeds from mortgage-backed securities
principal repayments 25,752 25,838
Purchase of mortgage-backed securities (54,863) -
Proceeds from debt securities principal
repayments 2,000 1,000
Proceeds from the sale of debt securities 3,815 -
Purchase of debt and equity securities - (9,473)
Increase in short-term investments - (13,700)
Purchase of FHLBNY stock (1,800) -
Proceeds from collection and sale of real
estate owned 70 104
Purchases and improvements of premises and
equipment (603) (678)
------- -------
Net cash (used in) provided by investing
activities (32,693) 5,663
------- -------
Cash flows from financing activities:
Net (decrease) increase in deposits (2,281) 8,129
Repayment of borrowings (127,800) (26,500)
Proceeds from borrowings 159,105 12,200
Increase in advance payments by borrowers
for taxes and insurance 95 15
Cash dividends paid (487) (459)
Proceeds from the issuance of common stock 52 65
Purchase of common stock (2,164) -
------- -------
Net cash provided by (used in) financing
activities 26,520 (6,550)
------- -------
Net (decrease) increase in cash and cash
equivalents (4,808) 3,837
Cash and cash equivalents at beginning of
period 7,090 6,767
------- -------
Cash and cash equivalents at end of period $ 2,282 $10,604
======= =======
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Income taxes $ 800 $ 250
======= =======
Interest $ 6,266 $ 5,925
======= =======
Transfer from loans receivable to real
estate owned, net $ 123 $ 145
======= =======
Change in unrealized loss, net of income
tax, on securities available for sale $ (748) $ (281)
======= =======
See accompanying notes to consolidated financial statements
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 March 31, 1999.
As of March 31, 1999, the Bank operated 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 year ended December 31,
1998.
As of 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 Statewide's shareholders and by regulatory authorities,
Statewide Financial Corp. stockholders will receive a combination of
stock and cash subject to election, proration, and allocation
procedures. Based on 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 be completed during the fourth calendar
quarter of 1999 or by January 31, 2000.
2. Comprehensive Income
Comprehensive income during the periods is as follows:
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(Dollars in thousands)
Net income $1,362 $1,304
Other comprehensive income, net of
income tax:
Unrealized holding loss on securities
available for sale (748) (281)
------ ------
Comprehensive income $ 614 $1,023
====== ======
3. Shareholders' Equity
The components of shareholders' equity were as follows:
March 31, 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; 4,043,509 shares issued, and
4,037,847 shares outstanding at March 31,
1999, and 4,155,509 shares issued and
4,151,963 shares outstanding at December
31, 1998 - -
Additional paid in capital 30,871 32,904
Unallocated Employee Stock Ownership shares (2,751) (2,856)
Unearned Recognition and Retention Plan
shares (1,105) (1,282)
Retained earnings - substantially restricted 32,066 31,190
Treasury stock, at cost, 5,662 and 3,546
shares at March 31, 1999 and December 31,
1998 (70) (44)
Accumulated other comprehensive income:
Net unrealized (loss) gain of securities
available for sale, net of income tax
(161) 587
------- -------
Total shareholders' equity $58,850 $60,499
======= =======
4. Net Income Per Share
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the
period. Earnings per share, assuming dilution, starts with the
calculation of basic earnings 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 March 31,
---------------
1999 1998
---- ----
Numerator:
Net income available to common
shareholders $1,362,000 $1,304,000
========== ==========
Denominator:
Weighted average shares
outstanding - basic 3,678,980 4,029,523
Common stock equivalents 129,101 200,234
---------- ----------
Weighted average shares out-
standing - assuming dilution 3,808,081 4,229,757
========== =========
Earnings per common share:
Basic $ 0.37 $ 0.32
====== ======
Assuming dilution $ 0.36 $ 0.31
====== ======
5. Non-Performing Loans and the Allowance for Loan Losses
Non-performing loans were as follows:
March 31, December 31,
1999 1998
--------- ------------
(Dollars in thousands)
Loans delinquent 90 days or more:
Non-accrual $1,912 $2,193
Accruing 267 297
------ ------
Total loans delinquent 90 days or more $2,179 $2,490
====== ======
Loans delinquent 90 days or more as a
percentage of total loans outstanding,
net 0.58% 0.68%
==== ====
An analysis of the allowance for loan losses follows:
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(Dollars in thousands)
Balance at beginning of period $3,056 $2,833
Provision charged to operations 249 150
Charge-offs, net (82) (93)
------ ------
Balance at end of period $3,223 $2,890
====== ======
SELECTED FINANCIAL AND REGULATORY RATIOS AND OTHER DATA
At or For the
Three Months Ended
March 31,
------------------
1999 1998
---- ----
Selected financial ratios (1):
Return on average assets 0.74% 0.78%
Return on average shareholders' equity 9.37% 8.09%
Capital to assets 7.91% 9.83%
Net interest rate spread (2) 3.38% 3.42%
Net interest margin (3) 3.61% 3.72%
Non-interest income to average assets 0.39% 0.32%
Non-interest expense to average assets 2.59% 2.62%
Efficiency ratio (4) 68.27% 66.46%
Ratio of interest-earning assets to
average deposits and borrowed funds 106.40% 108.30%
March 31, December 31,
1999 1998
--------- -----------
Regulatory capital ratios:
Tangible capital ratio 7.87% 7.95%
Core capital ratio 7.87% 7.95%
Risk-based capital ratio 12.76% 13.72%
Asset quality ratios:
Non-performing loans to total net
loans 0.58% 0.68%
Non-performing loans to total assets 0.29% 0.35%
Non-performing assets to total assets 0.37% 0.42%
Allowance for loan losses to
non-performing loans 147.91% 122.73%
Allowance for loan losses to total
net loans 0.86% 0.83%
Other data:
Number of deposit accounts 52,016 52,272
Number of offices 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 costs of deposits and borrowed funds.
(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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The following discussion and analysis refers to Statewide Financial
Corp. (the "Company") and its wholly-owned subsidiary, Statewide
Savings Bank, S.L.A. (the "Bank").
The Company realized net income of $1,362,000, or $0.36 per share,
assuming dilution, for the quarter ended March 31, 1999 as compared to
$1,304,000, or $0.31 per share, assuming dilution, for the same
quarter of the prior year. Basic earnings per share were $0.37 for
first quarter 1999, compared to $0.32 for the first quarter of 1998.
The increase in net income for the quarter ended March 31, 1999 from
the year ago period reflects an increase in net interest income after
provision for loan losses, and an increase in non-interest income
partially offset by an increase in non-interest expense. The increase
in net interest income reflects growth in average loan and investment
securities balances over the same period last year, partially offset
by increased borrowing costs to fund growth in assets and repurchase
the Company's common stock. Increased non-interest income reflects
continued benefits from the fee enhancement initiatives implemented
during mid 1998 along with increased fees from the growth in existing
and new products. Non-interest expense reflects increased costs
related to bank growth and expansion throughout 1998 and 1999 and
other normal increased operating costs.
Financial Condition
At March 31, 1999, total assets were $744.2 million compared to $717.5
million at December 31, 1998. The period end balances increased $26.7
million between these periods primarily from growth in the commercial
and consumer loan portfolios and growth in the mortgage-backed
securities portfolio partially offset by declines in one-to-four
family mortgage loans and debt securities. During the quarter ended
March 31, 1999, net loans increased $6.9 million as a result of a $7.5
million, or 9.3%, increase in construction, multi-family, commercial
mortgage and business loans, as the Company continued to change the
mix of the loan portfolio towards more commercial loan products. Of
this growth, $1.0 million resulted from the Company's new SBA lending
initiative. Also contributing to the loan growth was a $5.0 million,
or 10.4% increase in the Statewide Funding portfolio and a $1.2
million, or 3.0% increase in the consumer loan portfolio. Partially
offsetting this loan growth was a decline in the one-to-four family
mortgage portfolio of $6.8 million, or 3.4%. This decline ocurred
despite originations of $7.8 million in this portfolio during the
current quarter.
The mortgage-backed securities portfolio increased $28.2 million to
$276.2 million at March 31, 1999 from December 31, 1998. This
increase was principally from the purchase of $54.9 million of
securities which more than offset the $26.1 million of normal
amortization and accelerated prepayments recorded during the quarter.
In addition, during the quarter debt securities decreased from the
sale and maturity of approximately $5.8 million of corporate debt.
Borrowed funds at March 31, 1999 totaled $238.0 million, an increase
of $31.3 million from December 31, 1998. During the first quarter of
1999, the Company continued its strategy of leveraging to support
asset growth; repurchase the Company's common stock under its stock
repurchase program; and to fund maturities of certificates of deposit
for holders who sought rates higher than the Company's alternate
borrowing rates. Borrowed funds of $27.0 million are in overnight
advances, $65.0 million mature within 30 days and the remaining $146.0
million have final maturity dates ranging from July 2000 to September
2002. All of the $146.0 million 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 borrowed funds of $60.0 million, with an interest rate
of 5.52%, are first callable in November 1999 and quarterly
thereafter.
Deposits totaled $441.4 million at March 31, 1999 as compared to
$443.7 million at December 31, 1998. The decrease of $2.3 million in
total deposits from the prior quarter resulted primarily from declines
of $3.4 million in certificates of deposits and $0.7 million in money
market accounts. During the quarter, the Company continued with its
strategy of not matching competitors' most aggressive certificates of
deposit interest rates. These declines were partially offset by
growth in savings accounts of $1.1 million coupled with a $0.7 million
increase in demand and NOW accounts, of which non-interest-bearing
deposits increased $2.6 million, or 7.8%. Core deposits continue to
grow, reflecting the Company's successful cross selling and
relationship building efforts.
Shareholders' equity decreased $1.6 million during the quarter to
$58.9 million at March 31, 1999 from $60.5 million at December 31,
1998. The decreases during the current quarter resulted primarily
from the repurchase and retirement of 112,000 shares of the Company's
common stock, the payment of the quarterly dividend, and a decrease of
$0.7 million (net of tax) in the March 31, 1999 market value of the
Company's investment portfolio from the valuation at December 31,
1998. Partially offsetting these decreases were the current quarter
net income of $1.4 million and the allocation of shares under the
Company's Employee Stock Ownership Plan (ESOP) and other employee
benefit plans.
Results of Operations
Three-Month Periods Ending March 31, 1999 and 1998
Net Income. For the three months ended March 31, 1999, net income
increased to $1.4 million from $1.3 million during to the same quarter
last year. Net income per share, assuming dilution, for the period
increased $0.05 per share, or 16.1%, to $0.36 per share from $0.31 per
share for the same period of the prior year. Basic earnings per share
were $0.37 per share compared to $0.32 per share during the same
period last year. Increased net interest income after provision for
loan losses coupled with increased non-interest income partially
offset by an increase in non-interest expense resulted in higher
current period net income.
Interest Income. Total interest and dividend income increased $0.9
million, or 7.8%, to $12.9 million for the current quarter from $12.0
million for the same quarter last year. The rise in interest income
between the periods primarily resulted from an increase of $68.8
million in average interest-earning assets, partially offset by a
decline of 20 basis points in average yield. Interest income on loans
rose $0.7 million and interest income on securities rose $0.2 million
during the current quarter over the same quarter last year. The
Company's loan portfolio mix continues to change towards higher
yielding commercial loan products as a greater volume of these
products are originated. Average construction, multi-family,
commercial mortgage and business loans increased $31.5 million, or
59.4%, to $84.6 million for the current quarter from $53.1 million for
the same period last year. In addition, the average balance of
Statewide Funding lines of credit to mortgage bankers were $43.9
million during the current quarter as compared to no outstanding
balance during the same period last year. As a result, interest
income on commercial and wholesale loans to mortgage bankers increased
$1.5 million, or 125.3%, during the current quarter over the same
quarter last year. Average consumer loans increased $2.9 million over
the first quarter of 1998 resulting in a $30,000 rise in consumer loan
income despite a decline of 36 basis point in yield in this lower
interest rate environment. The positive activity mentioned above was
partially offset by continued prepayments in the one-to-four family
mortgage portfolio which reduced the average balance in this portfolio
$42.6 million to $195.3 million for the current quarter as compared to
the same quarter last year. Interest income from investment
securities increased during the current quarter as a result of an
increase of $34.1 million, or 11.2%, in average securities during the
current quarter. The increase reflects purchases made since the
fourth quarter of 1998 when the Federal Reserve lowered its federal
funds rate, allowing leverage through borrowing to again be a viable
growth strategy.
Interest Expense. Interest expense increased $472,000, or 8.0%,
during the current quarter as compared to the same quarter of the
prior year. Interest expense on borrowed funds increased $1.0 million
while interest expense on deposits decreased $0.5 million. The
average cost of deposits and borrowed funds decreased during the
current quarter compared to the same quarter last year, as a result of
lower costs for both deposits and borrowings, partially offset by a
change in mix towards borrowed funds. As general interest rates
decreased since March 31, 1998, the Company has periodically lowered
its rates paid to depositors. Consequently, its costs of deposits
decreased 45 basis points from the March 31, 1998 quarter to 3.05% for
the quarter ended March 31, 1999. Similarly, the costs of borrowings
for the quarter ended March 31, 1999 decreased from 5.57% for the
prior-year quarter to 5.35% for the current quarter. The higher
expense on borrowed funds resulted from additional borrowings which
were used to fund asset growth; to repurchase the Company's common
stock under its stock repurchase program; and to fund maturities of
certificates of deposits since the year-ago quarter. These additional
borrowings, incurred since the fall 1998 Federal Funds reduction, have
been short term, and similar to the duration or repricing
characteristic inherent in the asset growth. The growth in borrowed
funds, partially offset by lower rates paid on interest bearing
liabilities are reflected in the increased interest expense incurred
during the current quarter over the same period last year.
Net Interest Income. For the quarter ended March 31, 1999, net
interest income increased $458,000, or 7.6%, from the comparable
prior-year period. The increase reflects the growth in average
interest-earning assets, partially offset by a tighter spread between
interest earning assets and total deposits and borrowed funds. This
tightening of spread between interest-earning assets and deposits and
borrowed funds is reflected in the net interest margin which was 3.61%
for the current quarter as compared to 3.72% during the quarter ended
March 31, 1998.
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 March 31, 1999 and 1998. Average
loans include non-accrual loans, and related yields include loan fees
which are considered adjustments to yields.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------
1999 1998
--------------------------- ---------------------------
Average Period Average Average Period Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
---------------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
First mortgage loans $258,341 $ 4,949 7.66% $275,718 $ 5,231 7.59%
Consumer and other loans 41,596 932 9.09 38,712 902 9.45
Statewide Funding LOC 43,952 858 7.92 - - -
Commercial business loans 21,635 454 8.51 15,357 332 8.77
-------- ------- -------- -------
Total loans, net 365,524 7,193 7.91 329,787 6,465 7.86
-------- ------- -------- -------
Mortgage-backed securities 273,163 4,459 6.53 280,163 4,841 6.94
Debt securities 64,811 1,050 6.50 23,650 441 7.56
Money market investments - - - 2,622 33 5.03
FHLBNY stock 11,815 195 6.60 10,260 187 7.29
-------- ------- -------- -------
Total interest-earning assets 715,313 12,897 7.23% 646,482 11,967 7.43%
Non-interest-earning assets 21,649 ------- 20,995 -------
-------- --------
Total assets $736,962 $667,477
======== ========
Liabilities and shareholders'
equity:
Interest-bearing liabilities:
Savings accounts $156,732 946 2.45% $143,668 1,030 2.91%
Demand and NOW accounts 76,758 136 0.72 74,499 184 1.00
Money market accounts 37,527 251 2.71 43,855 326 3.01
Certificates of deposit 169,283 1,982 4.75 186,379 2,325 5.06
Borrowed funds 232,004 3,062 5.35 148,530 2,040 5.57
-------- -------- -------- -------
Total deposits and borrowed funds 672,304 6,377 3.85% 596,931 5,905 4.01%
-------- -------- -------- -------
Other liabilities 6,525 6,049
-------- --------
Total liabilities 678,829 602,980
Shareholders' equity 58,133 64,497
-------- --------
Total liabilities and share-
holders' equity $736,962 $667,477
======== ========
Net interest income $ 6,520 $ 6,062
======= =======
Net interest rate spread 3.38% 3.42%
==== ====
Net interest margin 3.61% 3.72%
==== ====
Ratio of interest-earning assets
to deposits and borrowed funds 106.40% 108.30%
====== ======
</TABLE>
Provision for Loan Losses. The provision for loan losses for the
three months ended March 31, 1999 was $249,000, an increase of $99,000
over the prior-year period. The provision for the three months ended
March 31, 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, composition and volume of the Company's
loan portfolio and the economy in the Company's market areas. The
increase in provision reflects both increased average balance of loans
as well as the 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, 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. As of March 31, 1999, non-performing
loans were $2.2 million and as a percentage of total net loans
outstanding equaled 0.58%, compared to $2.5 million and 0.68%,
respectively at December 31, 1998. At March 31, 1999, the allowance
for loan losses was $3.2 million, or 147.91%, of total non-performing
loans compared to 122.73% at December 31, 1998.
Non-Interest Income. Total non-interest income increased $184,000, or
34.5%, to $718,000 for the current quarter from $534,000 for the same
period of the prior year. This increase reflects continued benefits
from the Company's fee enhancement initiatives implemented during mid
1998 along with increased fees from existing and new products. This
growth resulted in increased deposit account fees for return check
assessment charges, recurring maintenance fees on checking and savings
products, safe deposit and other branch service fees and higher
annuity sales generated through the bank's branch network. In
addition, the current quarter non-interest income includes $44,000
from fees related to advances on Statewide Funding lines of credit to
mortgage bankers while no like fees were recorded during the same
quarter last year.
Non-Interest Expense. Total non-interest expense increased $0.4
million to $4.8 million for the current quarter from $4.4 million for
the same period of the prior year. This increase primarily reflects
increases in salaries and benefits, occupancy, insurance,
correspondence and communication costs partially offset by lower
professional, marketing and real estate owned costs.
Salaries and employee benefits expense, the largest component within
non-interest expense, increased $268,000, or 10.8%, during the current
quarter over the same period last year. This increase reflects staff
additions which occurred primarily during the second quarter of 1998
for the newly formed Statewide Funding division and the opening of the
North Arlington, NJ branch as well as for staff additions for the
expanded commercial lending division. Also contributing to the
current year increase were: normal annual merit increases; incentive
plan accruals; higher medical benefit costs; and higher education and
recruitment costs.
Occupancy costs increased $61,000, or 10.6%, for the current quarter
as compared to the same quarter 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 improvements related to
the opening of the North Arlington branch, the creation of Statewide
Funding and operating system enhancements.
The remaining components of non-interest expense increased $80,000, or
6.2%, for the current quarter as compared to the same quarter a year
ago. This increase resulted primarily from higher operating costs
related to product development and data processing. In addition, the
prior year period reflected expense reductions from increases in the
cash surrender value of insurance policies maintained for benefit
programs. Offsetting the increases were lower professional, marketing
and real estate owned costs.
Income Tax Expense. The increase in income tax expense for the
current year period is primarily the result of the tax effect of the
increase in pre-tax income recorded during the period.
Liquidity and Capital Resources
The Company's liquidity is a measure of its ability to fund loans,
withdrawals of deposits and repay maturing borrowed funds 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 March 31, 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 1.34% of total assets and
2.26% of total deposits. At March 31, 1999, the Company had available
to it $6.2 million under a line of credit with the FHLBNY, expiring
November 2, 1999, and approximately $58.9 million of excess collateral
pledged with the FHLBNY. In addition, the Company has approximately
$67.8 million of unpledged debt, equity and mortgage-backed securities
which are classified as available for sale, and approximately $193.5
million of loans which could be used to collateralize additional
borrowings or sold to provide liquidity.
At March 31, 1999, capital resources were sufficient to meet
outstanding loan commitments of $51.2 million, commitments on unused
lines of credit of $67.9 million and commercial letters of credit of
$3.2 million. An important source of the Company's funds is the
Bank's core deposits. Management believes that a substantial portion
of the Bank's core deposits of $273.7 million are a dependable source
of funds due to long-term customer relationships. Certificates of
deposit, which are scheduled to mature in one year or less from March
31, 1999, totaled $143.5 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 three months ended March 31, 1999, investment activities
represented the primary funding need. Purchase of mortgage-backed
securities exceeded maturities and principal repayments of
mortgage-backed and debt securities by $23.3 million. In addition,
funds were used for loan disbursements net of repayments of $7.6
million, to purchase $1.8 million of additional FHLBNY stock, to
repurchase $2.2 million of the Company's common stock, and to fund the
reduction in deposits of $2.3 million. The principal source of
funding for these activities were net increases in borrowed funds from
the FHLBNY of $31.3 million, and cash provided by operating activities
of $1.4 million.
During the three months ended March 31, 1998, proceeds from
investments and deposit activities represented the primary source of
funds. Maturities and principal repayments on mortgage-backed and
debt securities outpaced purchases of debt securities by $17.4
million. In addition, funds were provided from growth in deposits of
$8.1 million, by operating activities of $4.7 million and loan
receipts of $2.6 million, net of disbursements and purchases. The
excess source of funds were primarily used to decrease short-term
borrowings by $14.3 million and increase short-term investments by
$13.7 million.
At March 31, 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 March 31, 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
--------------- -----------------------------
For
Classification
Minimum Capital As Well-
Adequacy Capitalized
------------- -------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Tangible Capital $58,564 7.87% $11,163 1.50%
Tier 1 (core) Capital 58,564 7.87 29,768 4.00 $37,210 5.00%
Risk Based Capital:
Tier 1 58,564 12.14 19,295 4.00 28,942 6.00
Total 61,547 12.76 38,589 8.00 48,237 10.00
======= ===== ======= ==== ======= =====
Quantitative and Qualitative Disclosure About Market Risk
There have been no material changes to information required regarding
quantitative and qualitative disclosures about market risk from the
end of the preceding fiscal year to date of the most recent interim
balance sheet.
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 March 31, 1999, the Company has substantially completed the
awareness, assessment and renovation phases of the Year 2000
compliance plan. The Company is currently nearing the completion of
the testing phase. The Company has confirmed that its primary third
party data processing vendor has developed a Year 2000 action plan,
that certain of its application modules are currently Year 2000 ready,
and that it is currently testing its remaining systems and remedying
as necessary. In addition, the Company and the vendor are jointly
testing the Company's applications which are processed or affected by
the vendor. This testing phase is on target for completion in May
1999, and the implementation phase is targeted for completion by the
end of the second quarter 1999. The vendor also expects to have all
of its systems tested, remedied and Year 2000 ready by the end of the
second quarter 1999. In the event that the vendor does not meet
acceptable target dates, the Company will proceed with its contingency
plan to convert to the vendor's client server-based system, which is
currently Year 2000 ready.
The Company is in the implementation phase for its hardware and other
software. Its ATM software upgrades will be installed by the end of
May 1999. This software has been certified as Year 2000 ready. The
Company's wide area network and hardware along with its facilities,
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 initiated formal communication
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 all new loan customers and renewals of
existing loans. Continued contact and follow up will be maintained.
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, $37,000 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.
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.
None.
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 January 26, 1999 announcing
Registrant's year end and fourth quarter
earnings.
2. The Registrant filed a current report on Form
8-K on February 25, 1999 announcing
Registrant's quarterly dividend of $0.13 per
share.
3. The Registrant filed a current report on Form
8-K on March 22, 1999 announcing Registrant's
stock repurchase program.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
STATEWIDE FINANCIAL CORP.
Date: May 14, 1999 By: Bernard F. Lenihan
Senior Vice President and Chief
Financial Officer
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