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| CSBK > SEC Filings for CSBK > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
FORWARD-LOOKING STATEMENTS
This Form 10-Q may include certain forward-looking statements based on current management expectations. The Company's actual results could differ materially from those management expectations. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities, changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of loan and investment portfolios, changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices. Further description of the risks and uncertainties to the business are included in the Company's other filings with the Securities and Exchange Commission.
OVERVIEW OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's results of operations depend primarily on its net interest income, which is a direct result of the interest rate environment. Net interest income is the difference between the interest income earned on interest-earning assets and the interest paid on interest-bearing liabilities. It is a function of the average balances of loans and securities versus deposits and borrowed funds outstanding in any one period and the yields earned on those loans and securities and the cost of those deposits and borrowed funds.
Interest-earning assets consist primarily of investment and mortgage-backed securities and loans which comprised 41.5% and 51.1%, respectively, of total assets at September 30, 2008, as compared to 42.4% and 46.8%, respectively, at March 31, 2008. Cash and cash equivalents decreased to 2.3% of total assets at September 30, 2008, as compared to 5.8% at March 31, 2008. The Company's investment and mortgage-backed securities portfolios consist of only U.S. government-sponsored or guaranteed enterprises.
Interest-bearing liabilities consist of deposits and borrowings from the Federal Home Loan Bank of New York ("FHLB"). Deposits increased $2.3 million, or 0.4% between March 31, 2008 and September 30, 2008, and borrowed funds increased by $18.0 million, or 12.6%. The balance in borrowed funds was $160.3 million at September 30, 2008 as compared to $142.3 million at March 31, 2008. During the six months ended September 30, 2008, $25.0 million in long-term borrowings with an average rate of 3.77% were originated, while $7.0 million of long-term borrowings were repaid in accordance with their original terms.
Net interest income increased $1.2 million, or 35.5%, during the three months ended September 30, 2008, when compared with the same 2007 period. Such increase was due to a $1.7 million increase in total interest income which was partially offset by an increase in total interest expense of $487,000. Average interest-earning assets increased $116.4 million, or 15.5%, while average interest-bearing liabilities increased $126.2 million, or 20.8%. The $9.8 million decrease in average net interest-earning assets was mainly attributable to a reduction of $7.0 million in the average balance of interest-earning investment securities, coupled with an increase of $119.1 million in the average balance of borrowed funds, partially offset by a $156.3 million increase in the average balance of mortgage-backed securities. The interest rate spread increased 52 basis points to 1.58% from 1.06%. This was due to an increase of 11 basis points in the yield earned on interest-earning assets coupled with a 41 basis points decrease in the cost of interest-bearing liabilities.
OVERVIEW OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D)
Results of operations also depend, to a lesser extent, on non-interest income generated, provision for loan losses recorded, and non-interest expense incurred. During the three months ended September 30, 2008, the provision for loan losses increased $25,000, or 27.8%, while non-interest income decreased $1,000, or 0.3% and non-interest expense decreased $232,000, or 7.6% from the comparable 2007 period.
CHANGES IN FINANCIAL CONDITION
The Company's assets at September 30, 2008 totaled $917.7 million, which represents an increase of $18.7 million, or 2.1% as compared with $899.1 million at March 31, 2008.
Cash and cash equivalents decreased $31.2 million, or 59.8% to $21.0 million at September 30, 2008 as compared to $52.2 million at March 31, 2008. This decrease resulted primarily from cash being redeployed into higher yielding mortgage-backed securities and loans.
Securities available for sale at September 30, 2008 decreased $7.7 million, or 8.5% to $82.5 million when compared with $90.2 million at March 31, 2008. The decrease during the six months ended September 30, 2008, resulted primarily from maturities and repayments totaling $6.4 million and a decrease in unrealized gains of $1.3 million on the portfolio.
Securities held to maturity at September 30, 2008 increased $7.3 million, or 2.5% to $298.0 million when compared with $290.7 million at March 31, 2008. The increase during the six months ended September 30, 2008, resulted primarily from purchases of securities totaling $67.6 million, partially offset by maturities, calls and repayments totaling $60.3 million.
Net loans at September 30, 2008 increased $48.2 million, or 11.5% to $468.8 million when compared with $420.6 million at March 31, 2008. The increase during the six months ended September 30, 2008, resulted primarily from internal origination volume, primarily in residential real estate, which more than offset repayment levels. The largest increase in the loan portfolio was in one-to-four family residential real estate loans which increased $44.5 million, or 11.5%.
Total liabilities increased $21.4 million, or 2.9% to $748.1 million at September 30, 2008 from $726.7 million at March 31, 2008. Deposits at September 30, 2008 increased $2.3 million, or 0.4% to $579.0 million when compared with $576.7 million at March 31, 2008. Borrowings increased $18.0 million, or 12.6% to $160.3 million at September 30, 2008, as compared with $142.3 million at March 31, 2008. During the six months ending September 30, 2008, $25.0 million in long-term borrowings with an average rate of 3.77% were originated, as part of the Bank's leverage strategy, while $7.0 million of long-term borrowings were repaid in accordance with their original terms. At September 30, 2008, the remaining borrowings of $160.3 million had an average interest rate of 3.86%.
CHANGES IN FINANCIAL CONDITION (CONT'D)
Stockholders' equity totaled $169.6 million and $172.4 million at September 30, 2008 and March 31, 2008, respectively. The decrease of $2.8 million, or 1.6%, for the six months ended September 30, 2008, resulted primarily from the repurchase of approximately 449,000 shares of Company common stock for $4.6 million, cash dividends paid of $950,000, and a net decrease in unrealized gains of $797,000 on the available for sale securities portfolios, partially offset by net income of $2.5 million, ESOP shares committed to be released of $385,000, and $706,000 for stock options and awards earned under the Company's 2005 Equity Incentive Plan and related tax benefits.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
Net income increased $870,000 or 177.6% to $1.36 million for the three months ended September 30, 2008 compared with $490,000 for the same 2007 period. The increase in net income during the 2008 period primarily was the result of an increase in the net interest rate spread and a reduction of non-interest expense, as well as favorable trends in loan production due to our continued competitive rates, partially offset by an increase in income taxes.
Interest income on loans increased by $500,000, or 9.1% to $6.0 million during the three months ended September 30, 2008, when compared with $5.5 million for the same 2007 period. The increase during the 2008 period resulted from an increase in the average yield earned on the loan portfolio of 9 basis points to 5.28% from 5.19%, coupled with an increase in the average balance of $30.4 million, or 7.2% when compared to the same period in 2007. Interest on mortgage-backed securities increased $2.2 million, or 115.8% to $4.1 million during the three months ended September 30, 2008, when compared with $1.9 million for the same 2007 period. The increase during the 2008 period resulted from an increase of 48 basis points in the average yield earned on mortgage-backed securities to 5.22% from 4.74%, coupled with an increase of $156.3 million, or 100.0% in the average balance of mortgage-backed securities outstanding. Interest earned on investment securities decreased by $821,000, or 48.8% to $863,000 during the three months ended September 30, 2008, when compared to $1.68 million during the same 2007 period, due to a decrease in the average balance by $70.0 million, or 48.7%, while the average yield remained at 4.68% for both periods. Investment securities decreased primarily due to the redeployment of maturities and calls of investment securities into higher yielding loans and mortgage-backed securities. Interest earned on other interest-earning assets decreased by $186,000, or 45.8% to $220,000 during the three months ended September 30, 2008, when compared to $406,000 during the same 2007 period primarily due to a decrease of 249 basis points in average yield to 3.03% from 5.52%, coupled with a decrease of $284,000, or 1.0%, in the average balance of other interest-earning assets.
Interest expense on deposits decreased $690,000, or 12.3% to $4.91 million during the three months ended September 30, 2008, when compared to $5.60 million during the same 2007 period. Such decrease was primarily attributable to a decrease of 54 basis points in the average cost of interest-bearing deposits to 3.44% from 3.98%, partially offset by an increase of $7.1 million, or 1.3% in the average balance of interest-bearing deposits. Interest expense on borrowed money increased approximately $1.17 million, or 291.5% to $1.57 million during the three months ended September 30, 2008 when compared with $402,000 during the same 2007 period. Such increase was primarily attributable to an increase of $119.1 million, or 282.0% in the average balance of borrowings, coupled with an increase of 10 basis points in the average cost of borrowings to 3.90% from 3.80%.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
AND 2007 (CONT'D.)
Net interest income increased $1.2 million, or 35.5% during the three months ended September 30, 2008, to $4.7 million when compared to $3.5 million for the same 2007 period. Such increase was due to a $1.7 million increase in total interest income, which more than offset an increase in total interest expense of $487,000. Average interest-earning assets increased $116.4 million, or 15.5% while average interest-bearing liabilities increased $126.2 million, or 20.8%. The $116.4 million increase in average interest-earning assets was mainly attributable to increases of $30.4 million in loans and $156.3 million in mortgage-backed securities, partially offset by a decrease of $70.0 million in investment securities and $284,000 in other interest earning assets. Loans and mortgage-backed securities increased primarily due to the redeployment of maturities and calls of investment securities into higher yielding assets. In addition, mortgage-backed securities increased due to the implementation of a leverage strategy initiated in November 2007, under which the Bank borrowed funds from the Federal Home Loan Bank of New York ("FHLB") and simultaneously invested those funds into higher yielding mortgage-backed securities. The $126.2 million increase in average interest-bearing liabilities consisted of increases of $7.1 million in interest-bearing deposits and $119.1 million in borrowings. The net interest rate spread increased 52 basis points as an 11 basis point increase in the average yield earned on interest-earning assets was coupled with a decrease of 41 basis points in the average rate paid on interest-bearing liabilities.
During the three months ended September 30, 2008 and 2007, the Bank recorded $115,000 and $90,000, respectively, as a provision for loan losses. The allowance for loan losses is based on management's evaluation of the risk inherent in the Bank's loan portfolio and gives due consideration to the changes in general market conditions and in the nature and volume of the Bank's loan activity. The Bank intends to continue to evaluate the need for a provision for loan losses based on its periodic review of the loan portfolio and general market conditions. At September 30, 2008 and March 31, 2008, the Bank's non-performing loans, which were delinquent ninety days or more, totaled $533,000 and $265,000 respectively, at 0.11% and 0.06%, respectively, to total gross loans and 0.06% and 0.03%, respectively, to total assets at the end of each period. During the three months ended September 30, 2008 and 2007, the Bank did not charge off any loans. The allowance for loan losses amounted to $1.56 million, representing 0.33% of total gross loans at September 30, 2008, and $1.44 million, representing 0.34% of total gross loans at March 31, 2008.
Non-interest income decreased $1,000, or 0.3% to $285,000 during the three months ended September 30, 2008 as compared to $286,000 for the same 2007 period.
Non-interest expense decreased by $230,000, or 7.5% to $2.82 million during the three months ended September 30, 2008, when compared with $3.05 million during the same 2007 period. The components of non-interest expense which experienced the most significant change were salaries and employee benefits, legal expenses, and miscellaneous expenses, which decreased by $62,000, or 3.5%, $110,000, or 213.3%, and $23,000, or 6.1%, respectively. Salaries and employee benefits were lower during the three months ended September 30, 2008 mainly due to a decrease in stock option expense, as the Bank's option expense methodology results in less expense each year as the options vest. The decrease in legal expense was mostly due to a $92,000 insurance recovery of previously expensed fees relating to litigation. The decrease in miscellaneous expenses was mainly due to a $21,000 decrease in State of New Jersey bank supervisory fees. The Bank converted from a New Jersey chartered savings and loan association to a federally chartered savings bank in September 2007.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
AND 2007 (CONT'D.)
Income taxes totaled $657,000 and $103,000 during the three months ended September 30, 2008 and 2007, respectively. The increase of $554,000 or 537.9% during the 2008 period resulted from higher pre- tax income, coupled with an increase in the overall effective income tax rate which was 32.5% in the 2008 period, compared with 17.4% for 2007. The higher effective income tax in the 2008 period is due to an increase in taxable income, of which tax exempt income represented a smaller percentage, therefore increasing the overall effective tax rate.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2008 AND
2007
Net income increased $1.45 million or 138.1% to $2.50 million for the six months ended September 30, 2008 compared with $1.05 million for the same 2007 period. The increase in net income during the 2008 period primarily was the result of an increase in the net interest rate spread and a reduction of non-interest expense, as well as continued favorable trends in loan production, partially offset by an increase in income taxes.
Interest income on loans increased by $670,000, or 6.1% to $11.62 million during the six months ended September 30, 2008, when compared with $10.95 million for the same 2007 period. The increase during the 2008 period resulted from an increase in the average yield earned on the loan portfolio of 7 basis points to 5.26% from 5.19%, coupled with an increase in the average balance of $20.1 million, or 4.8% when compared to the same period in 2007. Interest on mortgage-backed securities increased $4.2 million or 120.0% to $7.7 million during the six months ended September 30, 2008, when compared with $3.5 million for the same 2007 period. The increase during the 2008 period resulted from an increase of 54 basis points in the average yield earned on mortgage-backed securities to 5.20% from 4.66%, coupled with an increase of $144.6 million, or 95.8% in the average balance of mortgage-backed securities outstanding. The average yields on loans and securities increased as a result of the increasing long-term rate environment. Interest earned on investment securities decreased by $1.39 million, or 39.9% to $2.09 million during the six months ended September 30, 2008, when compared to $3.48 million during the same 2007 period, due to a decrease in the average balance by $63.6 million, or 42.2%, partially offset by an 18 basis point increase in average yield to 4.80% from 4.62%. Interest earned on other interest-earning assets decreased by $332,000, or 38.7% to $526,000 during the six months ended September 30, 2008, when compared to $858,000 during the same 2007 period primarily due to a decrease of 258 basis points in average yield to 2.80% from 5.38%, partially offset by an increase of $5.7 million, or 18.0%, in the average balance. Investment securities decreased primarily due to the redeployment of maturities of investment securities into higher yielding loans and mortgage-backed securities. Other interest-earning assets increased due to calls of investment securities during the 2008 period.
Interest expense on deposits decreased $920,000, or 8.4% to $10.06 million during the six months ended September 30, 2008, when compared to $10.98 million during the same 2007 period. Such decrease was primarily attributable to a decrease of 38 basis points in the average cost of interest-bearing deposits to 3.52% from 3.90%, partially offset by an increase of $8.8 million, or 1.6% in the average balance of interest-bearing deposits. Interest expense on borrowed money increased approximately $2.18 million, or 267.2% to $3.00 million during the six months ended September 30, 2008 when compared with $817,000 during the same 2007 period. Such increase was primarily attributable to an increase of $109.5 million, or 254.5% in the average balance of borrowings, coupled with an increase of 14 basis points in the average cost of borrowings to 3.94% from 3.80%.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2008 AND
2007 (CONT'D.)
Net interest income increased $1.86 million, or 26.5% during the six months ended September 30, 2008, to $8.87 million when compared to $7.01 million for the same 2007 period. Such increase was due to a $3.11 million increase in total interest income which more than offset an increase in total interest expense of $1.26 million. Average interest-earning assets increased $106.8 million, or 14.1% while average interest-bearing liabilities increased $118.2 million, or 19.5%. The $106.8 million increase in average interest-earning assets was mainly attributable to an increase of $20.1 million in loans, $144.6 million in mortgage-backed securities and $5.7 million in other interest-earning assets, partially offset by a decrease of $63.6 million in investment securities. Loans and mortgage-backed securities increased primarily due to the redeployment of maturities and calls of investment securities into higher yielding assets. In addition, mortgage-backed securities increased due to the implementation of a leverage strategy initiated in November 2007, under which the Bank borrowed funds from the FHLB and simultaneously invested those funds into higher yielding mortgage-backed securities. The $118.2 million increase in average interest-bearing liabilities consisted of increases of $8.8 million in interest-bearing deposits and $109.5 million in borrowings. The net interest rate spread increased 39 basis points as an 11 basis point increase in the average yield earned on interest-earning assets was coupled with a decrease of 28 basis points in the average rate paid on interest-bearing liabilities.
During the six months ended September 30, 2008 and 2007, the Bank recorded $115,000 and $90,000, respectively, as a provision for loan losses. The allowance for loan losses is based on management's evaluation of the risk inherent in the Bank's loan portfolio and gives due consideration to the changes in general market conditions and in the nature and volume of the Bank's loan activity. The Bank intends to continue to evaluate the need for a provision for loan losses based on its periodic review of the loan portfolio and general market conditions. At September 30, 2008 and March 31, 2008, the Bank's non-performing loans, which were delinquent ninety days or more, totaled $533,000 and $265,000 respectively, at 0.11% and 0.06%, respectively, to total gross loans, and 0.06% and 0.03%, respectively, to total assets at the end of each period. During the six months ended September 30, 2008 and 2007, the Bank did not charge off any loans. The allowance for loan losses amounted to $1.56 million, representing 0.33% of total gross loans at September 30, 2008, and $1.44 million representing 0.34% of total gross loans at March 31, 2008.
Non-interest income increased $17,000, or 3.0% to $575,000 during the six months ended September 30, 2008 as compared to $558,000 for the same 2007 period.
Non-interest expense decreased by $470,000, or 7.7% to $5.67 million during the six months ended September 30, 2008, when compared with $6.14 million during the same 2007 period. The components of non-interest expense which experienced the most significant change were salaries and employee benefits, legal expense, and miscellaneous expenses, which decreased by $187,000, or 5.2%, $113,000, or 98.6%, and $123,000, or 15.9%, respectively. Salaries and employee benefits were lower during the six months ended September 30, 2008 due to decreases in stock option, ESOP and health insurance expenses while the decrease in legal expense was due to a $92,000 insurance recovery of previously expensed fees relating to litigation. Stock option expense decreased as the Bank's option expense methodology results in less expense each year as the options vest, while ESOP expense decreased due to a decrease in the Company's stock price. Health insurance expense decreased due to a change in insurance carriers and overall plan to reduce these type costs. The decrease in miscellaneous expenses was mostly due to a $49,000 recovery of previously expensed consulting fees, a $41,000 decrease in State of New Jersey bank supervisory fees due to the Bank's charter conversion, and to a lesser extent, due to decreases of $11,000 in insurance expense, $12,000 in audit and accounting services and $15,000 in stationary, supplies and printing.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2008 AND
2007 (CONT'D.)
Income taxes totaled $1.16 million and $281,000 during the six months ended September 30, 2008 and 2007, respectively. The increase of $876,000 or 311.7% during the 2008 period resulted from higher pre-tax income, coupled with an increase in the overall effective income tax rate which was 31.7% in the 2008 period, compared with 21.1% for 2007. The higher effective income tax in the 2008 period is due to an increase in taxable income, of which tax exempt income represented a smaller percentage, therefore increasing the overall effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains levels of liquid assets sufficient to ensure the Bank's safe and sound operation. The Company adjusts its liquidity levels in order to meet funding needs for deposit outflows, payment of real estate taxes from escrow accounts on mortgage loans, repayment of borrowings, when applicable, and loan funding commitments. The Company also adjusts its liquidity level as appropriate to meet its asset/liability objectives. Liquid assets, which include cash and cash equivalents and securities available for sale, totaled $103.5 million, or 11.3% of total assets at September 30, 2008 as compared to $142.4 million, or 15.8% of total assets at March 31, 2008.
The Company's liquidity, represented by cash and cash equivalents, is a product of its operating, investing and financing activities.
Cash was generated by operating and financing activities during the three and six months ended September 30, 2008, respectively. The primary source of cash was net income and the proceeds from advances from the FHLB. The Company declared and paid a cash dividend during the three months ended September 30, 2008, totaling $464,000. Dividends declared and paid totaled $950,000 during the six months ended September 30, 2008.
The primary uses of investing activity are lending and the purchases of securities. Net loans amounted to $468.8 million and $420.6 million at September 30, 2008 and March 31, 2008, respectively. Securities, including available for sale and held to maturity issues, totaled $380.5 million and $380.9 million at September 30, 2008 and March 31, 2008, respectively. In addition to funding new loan production through operating and financing activities, such activities were funded by principal repayments and maturities on existing loans and securities.
Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments, such as interest-bearing deposits. If the Bank requires funds beyond its ability to generate them internally, the Bank can borrow funds from the FHLB up to approximately $88.9 million under an overnight line of credit and $88.9 million under a one-month overnight repricing line of credit agreement. The Bank's membership in FHLB also provides access to additional sources of borrowed funds based on the Bank's ability to collateralize such borrowings. At September 30, 2008, advances from the FHLB amounted to $160.3 million at a weighted average rate of 3.86%.
The Bank anticipates that it will have sufficient funds available to meet its current commitments. At September 30, 2008, the Bank had outstanding commitments to originate and purchase loans, and fund customers' approved unused equity lines of credit, aggregating $10.0 million. At September 30, 2008, the Bank had outstanding commitments to purchase a $750,000 participation in a $5.8 million construction
LIQUIDITY AND CAPITAL RESOURCES (CONT'D)
loan, a $750,000 participation in a $7.3 million construction loan, and a $500,000 participation in a $3.0 million construction loan with adjustable interest rates of 3.00%, 2.50% and 2.75%, respectively, over the one month . . .
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