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| CSBK > SEC Filings for CSBK > Form 10-Q on 5-Feb-2009 | All Recent SEC Filings |
5-Feb-2009
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 41.7% and 49.9%, respectively, of total assets at December 31, 2008, as compared to 42.4% and 46.8%, respectively, at March 31, 2008. Cash and cash equivalents decreased to 3.6% of total assets at December 31, 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 $31.1 million, or 5.4% between March 31, 2008 and December 31, 2008, and borrowed funds increased by $4.0 million, or 2.8%. The balance in borrowed funds was $146.3 million at December 31, 2008 as compared to $142.3 million at March 31, 2008. During the nine months ended December 31, 2008, $25.0 million in long-term borrowings with an average rate of 3.77% were originated, while $21.0 million of long-term borrowings were repaid in accordance with their original terms. There were no short-term borrowed funds outstanding at December 31, 2008, as $22.0 million of short-term borrowings with an average rate of 1.57% were originated and repaid during the nine months ended December 31, 2008, in accordance with their original terms.
Net interest income increased $1.4 million, or 40.0%, during the three months ended December 31, 2008, when compared with the same 2007 period. Such increase was due to a $1.7 million increase in total interest income partially offset by an increase in total interest expense of $332,000. Average interest-earning assets increased $119.0 million, or 15.7%, while average interest-bearing liabilities increased $122.6 million, or 19.8%. The $3.6 million decrease in average net interest-earning assets was mainly attributable to a decrease of $66.2 million in the average balance of investment securities, coupled with increases of $30.3 million in the average balance of interest bearing deposits and $92.3 million in the average balance of borrowed funds, partially offset by increases of $148.3 million in the average balance
OVERVIEW OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D)
of mortgage-backed securities and $38.3 million in the average balance of loans. The interest rate spread increased 59 basis points to 1.68% from 1.09%. This was due to an increase of 11 basis points in the yield earned on interest-earning assets coupled with a 48 basis points decrease in the cost of interest-bearing liabilities.
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 December 31, 2008, the provision for loan losses remained unchanged, while non-interest income increased $3,000, or 1.1% and non-interest expense increased $30,000, or 1.0% from the comparable 2007 period.
CHANGES IN FINANCIAL CONDITION
The Company's assets at December 31, 2008 totaled $933.8 million, which represents an increase of $34.7 million, or 3.9% as compared with $899.1 million at March 31, 2008.
Cash and cash equivalents decreased $18.7 million, or 35.8% to $33.5 million at December 31, 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 decreased $7.6 million, or 8.4% to $82.6 million at December 31, 2008 when compared with $90.2 million at March 31, 2008. The decrease during the nine months ended December 31, 2008, resulted primarily from repayments totaling $8.6 million offset by an increase in unrealized gains of $970,000 on the portfolio.
Securities held to maturity increased $15.6 million, or 5.4% to $306.3 million at December 31, 2008 when compared with $290.7 million at March 31, 2008. The increase during the nine months ended December 31, 2008, resulted primarily from purchases of securities totaling $87.5 million<184> partially offset by maturities, calls and repayments totaling $71.8 million.
Net loans increased $45.3 million, or 10.8% to $465.9 million at December 31, 2008 when compared with $420.6 million at March 31, 2008. The increase during the nine months ended December 31, 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 $42.0 million, or 10.8%.
Total liabilities increased $35.5 million, or 4.9% to $762.2 million at December 31, 2008 from $726.7 million at March 31, 2008. Deposits increased $31.1 million, or 5.4% to $607.8 million at December 31, 2008 when compared with $576.7 million at March 31, 2008. The Bank has been able to retain and attract deposits by continuing to offer competitive rates for a broad range of deposit instruments. Borrowings increased $4.0 million, or 2.8% to $146.3 million at December 31, 2008, as compared with $142.3 million at March 31, 2008. During the nine months ending December 31, 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 $21.0 million of long-term borrowings were repaid in accordance with their original terms. During the three and nine months ended December 31, 2008, $22.0 million of short-term borrowings with an average rate of 1.57% were originated, and were repaid in accordance with their original terms. At December 31, 2008, the remaining borrowings of $146.3 million had an average interest rate of 3.86%.
CHANGES IN FINANCIAL CONDITION (CONT'D)
Stockholders' equity totaled $171.7 million and $172.4 million at December 31, 2008 and March 31, 2008, respectively. The decrease of $700,000, or 0.4%, for the nine months ended December 31, 2008, resulted primarily from the repurchase of approximately 544,000 shares of Company common stock for $5.6 million and cash dividends paid of $1.4 million, partially offset by net income of $4.0 million, a net increase in unrealized gains of $583,000 on the available for sale securities portfolios, ESOP shares committed to be released of $584,000, and $1.1 million 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 DECEMBER 31, 2008 AND 2007
Net income increased $848,000 or 121.7% to $1.55 million for the three months ended December 31, 2008 compared with $697,000 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, partially offset by an increase in income taxes.
Interest income on loans increased by $590,000, or 10.4% to $6.24 million during the three months ended December 31, 2008, when compared with $5.65 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 8 basis points to 5.34% from 5.26%, coupled with an increase in the average balance of $38.3 million, or 8.9% when compared to the same period in 2007. The increase in yield was a result of new loan originations which have yields significantly higher than the overall average yield on the portfolio. Interest on mortgage-backed securities increased $2.1 million, or 95.5% to $4.3 million during the three months ended December 31, 2008, when compared with $2.2 million for the same 2007 period. The increase during the 2008 period resulted from an increase of 34 basis points in the average yield earned on mortgage-backed securities to 5.29% from 4.95%, coupled with an increase of $148.3 million, or 84.0% in the average balance of mortgage-backed securities outstanding. The increase in yield was due to new purchases of securities at yields significantly higher than the overall portfolio yield. Interest earned on investment securities decreased by $772,000, or 50.4% to $758,000 during the three months ended December 31, 2008, when compared to $1.53 million during the same 2007 period, due to a decrease in the average balance by $66.2 million, or 60.0%, partially offset by an increase in the average yield of 5 basis points to 4.76% from 4.71%. 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 $190,000, or 68.6% to $87,000 during the three months ended December 31, 2008, when compared to $277,000 during the same 2007 period primarily due to a decrease of 326 basis points in average yield to 1.64% from 4.90%, coupled with a decrease of $1.4 million, or 6.2%, in the average balance of other interest-earning assets.
Interest expense on deposits decreased $520,000, or 9.3% to $5.06 million during the three months ended December 31, 2008, when compared to $5.58 million during the same 2007 period. Such decrease was primarily attributable to a decrease of 55 basis points in the average cost of interest-bearing deposits to 3.43% from 3.98%, partially offset by an increase of $30.3 million, or 5.5% in the average balance of interest-bearing deposits. The decrease in the average cost of deposits reflected lower market interest rates. Interest expense on borrowed money increased approximately $854,000, or 143.5% to $1.45 million during the three months ended December 31, 2008 when compared with $595,000 during the same 2007 period. Such increase was primarily attributable to an increase of $92.3 million, or 158.9% in the average
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2008 AND
2007 (CONT'D.)
balance of borrowings, partially offset by a decrease of 24 basis points in the average cost of borrowings to 3.86% from 4.10%. The decrease in the average cost of borrowings was a result of both existing borrowings at a higher rate being repaid in accordance with their original terms, and new borrowings being taken when market interest rates were lower than the average cost of existing borrowings.
Net interest income increased $1.4 million, or 40.0% during the three months ended December 31, 2008, to $4.9 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 $332,000. Average interest-earning assets increased $119.0 million, or 15.7% while average interest-bearing liabilities increased $122.6 million, or 19.8%. The $119.0 million increase in average interest-earning assets was mainly attributable to increases of $38.3 million in loans and $148.3 million in mortgage-backed securities, partially offset by decreases of $66.2 million in investment securities and $1.4 million 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 continuation 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 $122.6 million increase in average interest-bearing liabilities consisted of increases of $30.3 million in interest-bearing deposits and $92.3 million in borrowings. The net interest rate spread increased 59 basis points as an 11 basis point increase in the average yield earned on interest-earning assets was coupled with a decrease of 48 basis points in the average rate paid on interest-bearing liabilities. Long-term market rates decreased in 2008, however, the more significant decline in short-term market rates during 2008 lowered the average yield on interest-bearing liabilities at a faster pace, therefore causing an increase in spread.
During both the three months ended December 31, 2008 and 2007, there were no provisions for loan losses recorded. 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 December 31, 2008 and March 31, 2008, the Bank's non-performing loans, all of which were delinquent ninety days or more, totaled $444,000 and $265,000 respectively, at 0.10% and 0.06%, respectively, to total gross loans, and 0.05% and 0.03%, respectively, to total assets at the end of each period. During the three months ended December 31, 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 December 31, 2008, and $1.44 million, representing 0.34% of total gross loans at March 31, 2008.
Non-interest income increased $3,000, or 1.1% to $288,000 during the three months ended December 31, 2008 as compared to $285,000 for the same 2007 period.
Non-interest expense increased by $30,000, or 1.0% to $2.90 million during the three months ended December 31, 2008, when compared with $2.87 million during the same 2007 period. The components of non-interest expense which experienced the most significant change were salaries and employee benefits and net occupancy expense of premises which increased $31,000, or 1.9% and $19,000, or 7.3%, respectively. This was partially offset by a decrease of $28,000, or 36.4% in advertising expense as a result of a reduction in the number of newspaper advertisements during the 2008 quarter.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2008 AND
2007 (CONT'D.)
Income taxes totaled $724,000 and $192,000 during the three months ended December 31, 2008 and 2007, respectively. The increase of $532,000, or 277.1% during the 2008 period resulted from higher pre- tax income, coupled with an increase in the overall effective income tax rate which was 31.9% in the 2008 period, compared with 21.6% for 2007. The higher effective income tax rate in the 2008 period is due to an increase in taxable income, resulting in tax exempt income representing a smaller percentage of total income, therefore increasing the overall effective tax rate.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED DECEMBER 31, 2008 AND
2007
Net income increased $2.29 million, or 130.9% to $4.04 million for the nine months ended December 31, 2008 compared with $1.75 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 $1.3 million, or 7.8% to $17.9 million during the nine months ended December 31, 2008, when compared with $16.6 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 5.29% from 5.22%, coupled with an increase in the average balance of $25.8 million, or 6.1% when compared to the same period in 2007. Interest on mortgage-backed securities increased $6.3 million, or 110.5% to $12.0 million during the nine months ended December 31, 2008, when compared with $5.7 million for the same 2007 period. The increase during the 2008 period resulted from an increase of 50 basis points in the average yield earned on mortgage-backed securities to 5.23% from 4.73%, coupled with an increase of $144.5 million, or 89.9% in the average balance of mortgage-backed securities outstanding. The average yields on loans and securities increased as a result of yields on new loan originations and securities purchased being significantly higher than the overall existing portfolio yields. Interest earned on investment securities decreased by $2.1 million, or 42.0% to $2.9 million during the nine months ended December 31, 2008, when compared to $5.0 million during the same 2007 period, due to a decrease in the average balance by $64.0 million, or 44.4%, partially offset by an 11 basis point increase in average yield to 4.75% from 4.64%. 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 $521,000, or 45.9% to $613,000 during the nine months ended December 31, 2008, when compared to $1.13 million during the same 2007 period primarily due to a decrease of 277 basis points in average yield to 2.52% from 5.29%, partially offset by an increase of $3.8 million, or 13.4%, in the average balance.
Interest expense on deposits decreased $1.5 million, or 9.0% to $15.1 million during the nine months ended December 31, 2008, when compared to $16.6 million during the same 2007 period. Such decrease was primarily attributable to a decrease of 45 basis points in the average cost of interest-bearing deposits to 3.48% from 3.93%, partially offset by an increase of $16.9 million, or 3.0% in the average balance of interest-bearing deposits. Interest expense on borrowed money increased approximately $3.1 million, or 221.4% to $4.5 million during the nine months ended December 31, 2008 when compared with $1.4 million during the same 2007 period. Such increase was primarily attributable to an increase of $102.0 million, or 209.2% in the average balance of borrowings, coupled with an increase of 7 basis points in the average cost of borrowings to 3.93% from 3.86%.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED DECEMBER 31, 2008 AND
2007 (CONT'D.)
Net interest income increased $3.2 million, or 30.5% during the nine months ended December 31, 2008, to $13.7 million when compared to $10.5 million for the same 2007 period. Such increase was due to a $4.9 million increase in total interest income which more than offset an increase in total interest expense of $1.6 million. Average interest-earning assets increased $110.1 million, or 14.5% while average interest-bearing liabilities increased $118.9 million, or 19.5%. The $110.1 million increase in average interest-earning assets was mainly attributable to an increase of $25.8 million in loans, $144.5 million in mortgage-backed securities and $3.8 million in other interest-earning assets, partially offset by a decrease of $64.0 million in investment securities. Loans and mortgage-backed securities increased primarily due to the redeployment of maturities and calls of investment securities into these higher yielding assets. In addition, mortgage-backed securities increased due to the continuation 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 $118.9 million increase in average interest-bearing liabilities consisted of increases of $16.9 million in interest-bearing deposits and $102.0 million in borrowings. The net interest rate spread increased 46 basis points as an 11 basis point increase in the average yield earned on interest-earning assets was coupled with a decrease of 35 basis points in the average rate paid on interest-bearing liabilities.
During the nine months ended December 31, 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. The larger provision in the 2008 period was a result of both increases in non-performing loans and the loan portfolio balance. The gross loan portfolio increased $45.3 million, or 10.7% from March 31, 2008 to December 31, 2008, and only $8.3 million, or 2.0% from March 31, 2007 to December 31, 2007. At December 31, 2008 and March 31, 2008, the Bank's non-performing loans, all of which were delinquent ninety days or more, totaled $444,000 and $265,000 respectively, at 0.10% and 0.06%, respectively, to total gross loans, and 0.05% and 0.03%, respectively, to total assets at the end of each period. During the nine months ended December 31, 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 December 31, 2008, and $1.44 million representing 0.34% of total gross loans at March 31, 2008.
Non-interest income increased $19,000, or 2.4% to $863,000 during the nine months ended December 31, 2008 as compared to $844,000 for the same 2007 period.
Non-interest expense decreased by $440,000, or 4.9% to $8.57 million during the nine months ended December 31, 2008, when compared with $9.01 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 $156,000, or 3.0%, $122,000, or 69.8%, and $111,000, or 9.7%, respectively. Salaries and employee benefits were lower during the nine months ended December 31, 2008 due to decreases in stock option, ESOP and health insurance expenses while the decrease in legal expense was mainly 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
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED DECEMBER 31, 2008 AND
2007 (CONT'D.)
due to a $49,000 recovery of previously expensed consulting fees, and a $47,000 decrease in State of New Jersey bank supervisory fees.
Income taxes totaled $1.88 million and $473,000 during the nine months ended December 31, 2008 and 2007, respectively. The increase of $1.41 million, or 297.6% during the 2008 period resulted from higher pre-tax income, coupled with an increase in the overall effective income tax rate which was 31.8% in the 2008 period, compared with 21.3% for 2007. The higher effective income tax in the 2008 period is due to an increase in taxable income, resulting in tax exempt income representing a smaller percentage of total income, 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 $116.1 million, or 12.4% of total assets at December 31, 2008 as compared to $142.4 million, or 15.8% of total assets at March 31, 2008.
The Company's liquidity, represented by cash, cash equivalents and securities available for sale, is a product of its operating, investing and financing activities.
Cash was generated by operating and financing activities during the three and nine months ended December 31, 2008. The primary source of cash was net income, a net increase in deposits, and the proceeds from advances from the FHLB. The Company declared and paid a cash dividend during the three months ended December 31, 2008, totaling $460,000. Dividends declared and paid totaled $1.4 million during the nine months ended December 31, 2008.
The Company's primary investing activities are lending and purchases of securities. Net loans amounted to $465.9 million and $420.6 million at December 31, 2008 and March 31, 2008, respectively. Securities, including available for sale and held to maturity issues, totaled $389.0 million and $380.9 million at December 31, 2008 and March 31, 2008, respectively. In addition to funding new loan production through operating and financing activities, new loan production was 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 . . .
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