<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the fiscal year ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
Commission file number 0-27178
PEEKSKILL FINANCIAL CORPORATION
(Exact Name of Issuer as Specified in its Charter)
Delaware 13-3858258
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1019 Park Street, Peeksill, New York 10566
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (914) 737-2777
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve months (or for
such shorter period that the Issuer was required to file such reports), and (2)
has been subject to such requirements for the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of September 12, 1996, there were issued and outstanding 3,863,763
shares of the Issuer's Common Stock. The aggregate market value of the voting
stock held by non-affiliates of the Issuer, computed by reference to the average
of the closing bid and asked price of such stock on the Nasdaq National Market
System as of September 12 was approximately $45.1 million. (The exclusion from
such amount of the market value of the shares owned by any person shall not be
deemed an admission by the Issuer that such person is an affiliate of the
Issuer.)
DOCUMENTS INCORPORATED BY REFERENCE
PART II of Form 10-K--Annual Report to Stockholders for the transitional period
ended June 30, 1996.
PART III of Form 10-K--Proxy Statement for the Annual Meeting of Stockholders
for the transitional period ended June 30, 1996.
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<PAGE>
PART I
Item 1. Business
General
Peekskill Financial Corporation ("Peekskill" or the "Company") was
formed at the direction of First Federal Savings Bank ("First Federal" or the
"Bank"), formerly First Federal Savings and Loan Association of Peekskill, in
1995 for the purpose of becoming a savings and loan holding company and owning
all of the outstanding stock of the Bank issued on December 29, 1995 in
connection with the Bank's conversion from the mutual to stock form of
organization (the "Conversion"). The Company is incorporated under the laws of
the State of Delaware and is authorized to do business in the State of New York,
and generally is authorized to engage in any activity that is permitted by the
Delaware General Corporation Law.
At June 30, 1996, the Company had total assets of $191.3 million,
deposits of $128.3 million and stockholders' equity of $59.8 million. The
Company's Common Stock is quoted on the Nasdaq National Market System under the
symbol "PEEK." Unless the context otherwise requires, all references herein to
the Bank or the Company include the Company and the Bank on a consolidated
basis.
First Federal was originally organized as a state chartered savings and
loan association in 1924. In 1954, it converted to a federally chartered savings
and loan association. In December 1995 the Bank became a federally chartered
savings bank. First Federal serves the financial needs of communities in its
market area through its main office located at 1019 Park Street, Peekskill, New
York 10566 and branch offices located at 1961 Commerce Street in Yorktown
Heights, New York and Westchester Mall on Route 6 in Mohegan Lake, New York.
First Federal's business involves attracting deposits from the general
public and investing such funds in mortgage-backed securities, one- to
four-family residential mortgages and, to a much lesser extent, commercial and
other loans in its market area. At June 30, 1996, the Bank had total assets of
$174.6 million consisting primarily of $118.2 million of mortgage-backed
securities. On the same date, $38.6 million, or 95.5% of the Bank's total loan
portfolio consisited of one- to four-family mortgage loans. The Bank also has
other debt securities (consisting primarily of U.S. government obligations) and
liquidity investments. At June 30, 1996, the Bank had $14.8 million of other
debt securities, representing 7.7% of total assets.
The Bank has sought to enhance its net income through the adoption of a
strategy designed to maintain capital in excess of regulatory requirements,
limit loan delinquencies and enhance net interest spread while managing the
Bank's interest rate risk. This strategy involves (i) maintaining a substantial
portfolio of mortgage-backed and other debt securities having terms to repricing
of seven years or less, (ii) controlling operating expenses, (iii) focusing its
lending program on the origination of one- to four-family residential loans,
(iv) limiting its investment in other types of loans which could increase credit
risk or operating costs, and (v) using customer service to build and maintain a
substantial level of core depositor accounts.
The executive offices of the Company and the Bank are located at 1019
Park Street, Peekskill, New York 10566, and the telephone number at that address
is (914) 737-2777.
2
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The Company's and the Bank's operations are regulated by the Office of
Thrift Supervision (the "OTS"). The Bank is a member of the Federal Home Loan
Bank System ("FHLB System") and a stockholder in the Federal Home Loan Bank
("FHLB") of New York. The Bank is also a member of the Savings Association
Insurance Fund ("SAIF") and its deposit accounts are insured up to applicable
limits by the Federal Deposit Insurance Corporation ("FDIC").
Competition
The Company faces significant competition for the loans it originates
and the deposits it accepts. The Company's market area has a high density of
financial institutions, from small community banks to branches of large
non-local institutions, all of which compete with the Company to varying
degrees. The Company's competition for loans comes principally from savings
banks, savings and loan associations, commercial banks, mortgage banking
companies and other institutional lenders. The Company successfully competes for
loans by emphasizing the quality of its loan services and by charging loan fees
and interest rates that are generally competitive within its market area.
Changes in the demand for loans relative to the availability of credit may
affect the level of competition from financial institutions which may be more
willing than the Company or its competitors to make credit available but which
have not generally engaged in lending activities in the Company's market area in
the past. The Company's most direct competition for deposit has historically
come from savings banks, savings and loan associations, and commercial banks, as
well as money market funds, stock and bond mutual funds, and brokerage
companies. The Company competes for deposits by emphasizing product delivery and
customer support at generally competitive interest rates.
Market Area
First Federal conducts business in Northern Westchester, Putnam and
Dutchess counties through its main office located at 1019 Park Street,
Peekskill, New York 10566 and two branch offices located in Yorktown Heights,
New York and Mohegan Lake, New York. First Federal's primary market area
consists of communities within Westchester and Putnam counties. Peekskill is
located approximately 50 miles northwest of the Borough of Manhattan in New York
City.
Peekskill was traditionally a small town whose inhabitants were
employed in small and medium sized businesses in the surrounding communities.
However, with the growth of the New York Metropolitan area and the expansion of
business activities in the White Plains area, Peekskill, and particularly the
surrounding communities, have evolved into suburban bedroom communities. More
recently, however, Peekskill's market area has experienced limited economic and
demographic growth. The city of Peekskill has a significant level of low income
housing and has experienced very limited levels of single family housing
construction in recent decades. In contrast, other portions of the Bank's market
area such as Yorktown and Putnam Valley have recently experienced somewhat more
growth, both economically and demographically, with increased levels of single
family housing construction.
The local communities in and around Peekskill do not contain major
employers. Generally, residents commute to other areas of Westchester county to
work. Major employers
3
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located in Westchester County include the local government, IBM, U.S. Postal
Service, NYNEX, and Pepsico, Inc.
The population in Westchester County has remained stable over the last
ten years with a 1% increase in population from 1985 to 1994. Putnam County
experienced a 10.5% increase in population over the same period. The
unemployment rate for Westchester and Putnam Counties was 5.4% and 4.9%,
respectively, in December 1994. These figures are representative of the state
and U.S. unemployment rates for the same period.
Lending Activities
The Company's loan portfolio consists primarily of conventional first
mortgage loans secured by one- to four-family properties. At June 30, 1996, the
company had net loans of $39.6 million, which represents 20.7% of total assets.
The loan portfolio at this time consisted of 95.5% of one- to four-family loans,
the majority of which are owner occupied; 1.0% of multi-family loans; 0.7% of
commercial loans; 1.4% of construction loans and 1.4% of other loans.
4
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Loan Portfolio Composition. The following table sets forth the
composition of the Bank's loan portfolio in dollar amounts and in percentages of
the portfolio as of the dates indicated. In addition, the table sets forth the
Bank's loan portfolio by fixed- and adjustable-rate as of the dates indicated.
<TABLE>
<CAPTION>
June 30,
1996 1995 1994 1993 1992
-------------- -------------- -------------- -------------- --------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family..................... $38,644 95.5% $40,112 95.2% $38,979 95.8% $41,635 95.6% $43,193 95.2%
Multi-family............................ 394 1.0 426 1.0 458 1.1 460 1.1 469 1.0
Commercial.............................. 285 .7 308 .7 329 .8 562 1.3 590 1.3
Construction............................ 579 1.4 725 1.7 165 .4 180 .4 272 .6
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total real estate loans............. 39,902 98.6 41,571 98.6 39,931 98.1 42,837 98.4 44,524 98.1
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Other Loans:
Passbook loans and other............... 404 1.0 356 .9 524 1.3 428 1.0 470 1.0
Student................................ 143 .4 215 .5 255 .6 287 .6 397 .9
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total consumer loans................ 547 1.4 571 1.4 779 1.9 715 1.6 867 1.9
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans......................... 40,449 100.0% 42,142 100.0% 40,710 100.0% 43,552 100.0% 45,391 100.0%
------- ----- ------- ===== ------- ===== ------- ===== ------- =====
Less:
Loans in process........................ (114) (273) (50) (32) (106)
Net deferred loan fees and discounts.... (259) (335) (363) (349) (300)
Allowance for loan losses............... (519) (474) (336) (276) (216)
------- ------- ------- ------- -------
Total loans, net........................ $39,557 $41,060 $39,961 $42,895 $44,769
======= ======= ======= ======= =======
Fixed Rate Loans:
Real estate loans...................... $38,770 95.8% $40,297 95.6% $38,571 94.7% $41,155 94.5% $42,566 93.8%
Other loans............................ 547 1.4 571 1.4 779 1.9 715 1.6 867 1.9
------- ----- -------- ----- ------- ----- ------- ----- ------- -----
Total fixed rate loans............... 39,317 97.2 40,868 97.0 39,350 96.6 41,870 96.1 43,433 95.7
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Adjustable Rate Loans:
Real estate loans..................... 1,132 2.8 1,274 3.0 1,360 3.4 1,682 3.9 1,958 4.3
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans.......................... $40,449 100.0% $42,142 100.0% $40,710 100.0% 43,552 100.0% 45,391 100.0%
======= ===== ======= ===== ======= ===== ====== ===== ====== =====
</TABLE>
5
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio at June 30, 1996. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Due in
-----------------------------------------------
Less than More than 1 More than
One Year year to 5 Years 5 years Total
------------- --------------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family............... $ 62 $ 729 $37,853 $38,644
Multi-family...................... --- 394 --- 394
Commercial........................ --- 285 --- 285
Construction...................... 579 --- --- 579
------ ------- --------- ---------
Total mortgage loans............ 641 1,408 37,853 39,902
Other loans......................... 406 33 108 547
------ ------- -------- --------
Total loans..................... $1,047 $1,441 $37,961 $40,449
====== ====== ======= =======
</TABLE>
The following table sets forth, by type of interest rate, the dollar
amounts in each loan category at June 30, 1996 that are contractually due in
more than one year.
Fixed Adjustable Total
------- ------------ --------
(In thousands)
Mortgage loans:
One- to four-family.......... $37,450 $ 1,132 $38,582
Multi-family................. 394 --- 394
Commercial................... 285 --- 285
Construction................. --- --- ---
------- ------ -------
Total mortgage loans....... 38,129 1,132 39,261
Other loans.................... 141 --- 141
------- ------ -------
Total loans................ $38,270 $1,132 $39,402
======= ====== =======
Pursuant to Federal law the aggregate amount of loans that the Bank is
permitted to make to any one borrower is generally limited to 15% of unimpaired
capital and surplus (25% if the security for such loan has a "readily
ascertainable" value or 30% for certain residential development loans). At June
30, 1996, based on the above, the Bank's loans-to-one borrower limit was
approximately $6.5 million. On the same date, the Bank had no borrowers with
outstanding balances in excess of this amount. As of June 30, 1996, the largest
dollar amount outstanding to one borrower or, group of related borrowers, was
$394,000. This asset, which consists of a loan participation secured by a 61
unit residential apartment complex in Pelham, New York, was performing in
accordance with its terms at June 30, 1996.
The Bank's lending is subject to its written underwriting standards and
to loan origination procedures. Decisions on loan applications are made on the
basis of detailed applications and property valuations (consistent with the
Bank's appraisal policy) by the Bank's independent
6
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appraisers. The loan applications are designed primarily to determine the
borrower's ability to repay and the more significant items on the application
are verified through use of credit reports, financial statements, tax returns
and/or confirmations.
Under the Bank's loan policy, the employee processing an application is
responsible for ensuring that all documentation is obtained prior to the
submission of the application to an officer for approval. In addition, an
officer verifies that the application meets the Bank's underwriting guidelines
described below. All mortgage loans must be approved by the Bank's Executive
Committee or the Board of Directors. Various officers of the Bank have
individual loan approval authority for other loans.
Generally, the Bank requires title insurance on its mortgage loans as
well as fire and extended coverage casualty insurance in amounts at least equal
to the principal amount of the loan or the value of improvements on the
property, depending on the type of loan. The Bank also requires flood insurance
to protect the property securing its interest when the property is located in a
flood plain.
One- to Four-Family Residential Real Estate Lending. The cornerstone of
the Bank's lending program is the origination of fixed-rate loans secured by
mortgages on owner-occupied one- to four-family residences. Substantially all of
the residential loans originated by the Bank are secured by properties located
in its primary lending area. All of the one- to four-family residential loans
originated by the Bank are retained and serviced by it. In order to supplement
one- to four-family residential loan products, the Bank from time to time has
purchased one- to four-family residential loan participations, although it has
not done so in recent years. However, depending on future market conditions, it
may do so in the future.
The Bank currently offers conventional fixed-rate loans with maximum
terms of up to 30 years. The interest rate on such loans is generally based on
competitive factors. The Bank does not offer adjustable-rate residential loans,
although it may do so in the future, depending on market conditions.
In underwriting one- to four-family residential real estate loans, the
Bank evaluates both the borrower's ability to make principal, interest and
escrow payments, the value of the property that will secure the loan, the
loan-to-value ratio and debt to income ratios. First Federal originates
residential mortgage loans with loan-to-value ratios of up to 80% for
owner-occupied homes. However, the Bank is considering originating loans up to
90% of appraised value with private mortgage insurance to reduce the Bank's
exposure to 80% or less.
The Bank's residential mortgage loans customarily include due-on-sale
clauses giving the Bank the right to declare the loan immediately due and
payable in the event that, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage and the loan is not repaid.
Multi-Family and Commercial Real Estate Lending. At June 30, 1996, the
Bank had $285,000 in commercial real estate loans, representing 0.7% of the
Bank's total loan portfolio, and $394,000 in multi-family loans, or 1.0% of the
Bank's total loan portfolio. The Bank's multi-family and commercial real estate
loan portfolio consists of a participation interest in a
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loan secured by an apartment building and a participation interest in a loan
secured by a strip shopping center. At June 30, 1996, both of these loans were
performing in accordance with their terms.
Multi-family and commercial real estate loans generally present a
higher level of risk than loans secured by one- to four-family residences. This
greater risk is due to several factors, including larger outstanding balances,
the effects of general economic conditions on income producing properties and
the increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multi-family and commercial real
estate is typically dependent upon the successful operation of the related real
estate project. If the cash flow from the project is reduced (for example, if
leases are not obtained or renewed), the borrower's ability to repay the loan
may be impaired.
While the Bank may consider investing from time to time in multi-family
and commercial real estate loans in the future, it anticipates that future
volume will continue to be modest.
Construction Lending. The Bank makes construction loans to individuals
for the construction of their primary or secondary residences and occasionally
to builders for the construction of new residences.
Loans to individuals for the construction of their residences typically
run for up to 30 years and are structured to provide both construction and
"permanent" financing. The borrower pays interest only during the construction
period. Residential construction loans are generally underwritten pursuant to
the same guidelines used for originating conventional permanent residential
loans. At June 30, 1996, the Bank had $379,000 of one- to four-family
residential construction loans to borrowers intending to live in the properties
upon completion of construction. Subject to future market conditions, the Bank
intends to continue its construction lending activities to persons intending to
be owner occupants.
On occasion, the Bank makes loans to builders to finance the
construction of one- to four-family residences. These loans are made on the same
terms as loans to individuals for the construction of single family residences.
At June 30, 1996 the Bank had one loan of this type for $200,000. While the Bank
may engage in this type of lending from time to time in the future, the Bank
currently expects that its total volume at any one time will be limited.
Residential construction lending involves several risks. First,
construction loans are generally more difficult to evaluate and monitor. Second,
a lender's risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value upon completion of the
project and the estimated cost (including interest) of the project. If the
estimate of value proves to be inaccurate, the Bank may be confronted, at or
prior to the maturity of the loan, with a project with a value which is
insufficient to assure full repayment and/or the possibility of having to make
substantial investments to complete the project.
Other Loans. The Bank offers passbook, home improvement and student
loans for personal and educational purposes. At June 30, 1996, other loans
totaled $547,000 or 1.4% of
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total loans outstanding. In the future, the Bank may expand its consumer lending
somewhat to increase home improvement loans.
Originations and Repayments of Loans
Real estate loans are originated by First Federal's loan officers. In
addition, in the future, the Bank may utilize outside mortgage loan brokers in
an attempt to increase loan production, although there are no specific plans to
do so at this time. Loan applications are taken at each of First Federal's
offices and processed at the main office.
The Bank's ability to originate loans is dependent upon competition and
customer demand for loans in its market area. Demand is affected by both the
local economy and the interest rate environment. See " - Market Area."
Historically, all loans originated by First Federal are retained in the Bank's
portfolio.
See " - Investment Activities - Mortgage-Backed Securities" and Note
2 of the Notes to Consolidated Financial Statements.
The following table shows the loan origination and repayment activities
of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------
1996 1995 1994
-------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Real estate - one- to four-family.................. $4,355 $5,139 $3,989
- construction......................... 640 949 455
Other.............................................. 560 414 465
------- ------- ------
Total loans originated...................... 5,555 6,502 4,909
------ ------ ------
Principal Repayments:
Real estate - one- to four-family.................. (5,684) (4,012) (6,645)
- multi-family......................... (32) (32) (2)
- commercial........................... (23) (21) (233)
- construction......................... (627) (384) (470)
Other.............................................. (584) (621) (401)
------- ------ -------
Total principal repayments......................... (6,950) (5,070) (7,751)
Transferred to real estate owned................ (139) --- ---
-------- ---------- ----------
Net increase (decrease)..................... $(1,534) $ 1,432 $ (2,842)
======= ======== ========
</TABLE>
Delinquencies and Non-Performing Assets
Delinquency Procedures. When a borrower fails to make a required
payment on a loan, the Bank attempts to cure the delinquency by contacting the
borrower. A late notice is sent on all loans over 15 days delinquent. Additional
written and verbal contacts may be made with the borrower between 30 and 60 days
after the due date. If the loan is contractually delinquent 90
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days, the Bank usually sends a 30-day demand letter to the borrower and, after
the loan is contractually delinquent 120 days, institutes appropriate action to
foreclose on the property. If foreclosed, the property is sold at auction and
may be purchased by the Bank.
Real estate acquired by First Federal as a result of foreclosure or by
deed in lieu of foreclosure is classified as real estate owned until it is sold.
When property is acquired or expected to be acquired by foreclosure or deed in
lieu of foreclosure, it is recorded at the lower of cost or estimated fair
value, less the estimated cost of disposition. The difference between those
amounts is charged-off. After acquisition, all costs incurred in maintaining the
property are expensed. Costs relating to the development and improvement of the
property, however, are capitalized to the extent of fair value less disposition
cost.
The following table sets forth the Bank's loan delinquencies by type,
by amount and by percentage of type at June 30, 1996.
<TABLE>
<CAPTION>
Loans Delinquent For:
----------------------------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
---------------------------------------------------------------------- -------------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------- ------ -------- ------- ------ -------- ------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family...... 16 $1,630 100.0% 26 $1,252 100.0% 42 $2,882 100.0%
------ ------ ------ ------ ----- ------
Total................. 16 $1,630 100.0% 26 $1,252 100.0% 42 $2,882 100.0%
====== ====== ====== ====== ===== ======
</TABLE>
Classification of Assets. Federal regulations require that each savings
association classify its own assets on a regular basis. In addition, in
connection with examinations of savings institutions, OTS and FDIC examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the bank will sustain some
loss if the deficiencies are not corrected. Doubtful assets have the weaknesses
of substandard assets, with the additional characteristics that the weaknesses
make collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified as loss is considered uncollectible and of such little value
that continuance as an asset on the balance sheet of the institution is not
warranted. Assets classified as substandard or doubtful require the institution
to establish prudent general allowances for loan losses. If an asset or portion
thereof is classified as loss, the institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified as loss, or charge off such amount. If an institution does not agree
with an examiner's classification of an asset, it may appeal this determination
to the District Director of the OTS. On the basis of management's review of its
assets, at June 30, 1996, the Bank had a total of $1.3 million of classified
assets, all of which were delinquent one- to four-family loans classified as
substandard.
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First Federal's classified assets consist of non-performing loans and
loans of concern. As of the date hereof, these asset classifications are
generally consistent with those of the OTS and FDIC.
The table below sets forth the amounts and categories of non-performing
assets in the Bank's loan portfolio. Loans are placed on non-accrual status when
the collection of principal and/or interest become doubtful. Foreclosed assets
include assets acquired in settlement of loans. The Bank had no non-accruing
loans during the periods presented.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------------------------- ------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Accruing loans delinquent more than 90 days:
One- to four-family................................ $1,252 $2,096 $1,698 $2,054 $1,786
Consumer........................................... --- --- 18 18 31
-------- -------- ------ ------ ------
Total........................................... 1,252 2,096 1,716 2,072 1,817
------ ----- ----- ----- -----
Foreclosed assets:
Multi-family....................................... --- --- --- --- 821
-------- ------- ------- ------- -----
Total........................................... --- --- --- --- 821
-------- ------- ------- ------- ------
Total non-performing assets.......................... $1,252 $2,096 $1,716 $2,072 $2,638
====== ====== ====== ====== ======
Total as a percentage of total assets................ 0.7% 1.3% 1.1% 1.4% 1.8%
=== === === === ===
</TABLE>
As of June 30, 1996, the Bank had no loans with a carrying value in
excess of $175,000 that were non-performing.
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of June 30, 1996 there were no loans with respect
to which known information about the possible credit problems of the borrowers
or the cash flows of the security properties have caused management to have
concerns as to the ability of the borrowers to comply with present loan
repayment terms and which may result in the future inclusion of such items in
the non-performing asset categories with the exception of the loans described
below.
During 1986 and 1987, the Bank purchased from the Thrift Association
Service Corporation ("TASCO") participation certificates representing six
participation interests in pools of one- to four-family residential loans (the
"TASCO Loans"). Pursuant to the participation certificates, the loans were to be
paid to the Bank whether or not such payments were collected by TASCO.
In February, 1989, TASCO sold the servicing of the loans underlying the
participation interests to City Federal Savings Bank, Bedinster, New Jersey
("City Federal") located in Jersey City, New Jersey. As part of the purchase
agreement, City Federal agreed to assume the guarantee of TASCO with regard to
the principal and interest payments of the loans. City Federal subsequently went
into receivership and its obligations were assumed by the Resolution Trust
Corporation ("RTC"). Subsequently, the obligations of the RTC were assumed by
the FDIC.
11
<PAGE>
The FDIC is disputing its obligations under the applicable agreements
to make payments on the participation certificates whether or not principal and
interest is collected and has ceased forwarding all payments to the
participants, including those collected and due to participants. Further, the
FDIC is demanding reimbursement of payments previously made by the FDIC on the
participation certificates. Its position is based on a review of the operative
documents, negotiations with TASCO regarding the guarantee and a belief that
servicers do not normally act as financial guarantors. Settlement negotiations
between the two parties are proceeding; however, no guarantee can be given as to
when a settlement may be reached. As a result, the required principal and
interest payments on the Bank's investment were 60 days delinquent at June 30,
1996. The Bank's investment in the TASCO Loans totaled $1.1 million at June 30,
1996. As of this date no resolution of this matter has been reached and no
assurance can be made at this time as to whether and when payments under the
TASCO Loans will resume. Subsequent to June 30, 1996, the Bank has placed the
TASCO Loans on nonaccrual and will continue to assess recoverability of these
loans as additional information becomes available. At June 30, 1996 there were
no specific reserves for these loans.
Management has considered the Bank's non-performing and "of concern"
assets in establishing its allowance for loan losses.
12
<PAGE>
The distribution of the Bank's allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------------- ------------------------------- ---------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
----------------------- ---------- ----------- ------------------- ---------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family........ $ 519 $38,644 95.5% $ 474 $ 40,112 95.2% $ 336 $ 38,979 95.8%
Multi-family............... --- 394 1.0 --- 426 1.0 --- 458 1.1
Commercial................. --- 285 .7 --- 308 .7 --- 329 .8
Construction............... --- 579 1.4 --- 725 1.7 --- 165 .4
Other...................... --- 547 1.4 --- 571 1.4 --- 779 1.9
-------- -------- ------ -------- --------- ----- ------- -------- -----
Total.................. $ 519 $40,449 100.0% $ 474 $ 42,142 100.0% $ 336 $ 40,710 100.0%
======= ======= ===== ======== ======== ===== ======= ======== =====
</TABLE>
[RESTUBBED FROM TABLE ABOVE]
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------
1993 1992
------------------------------ ------------------------------------
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- --------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
One- to four-family........ $ 276 $ 41,635 95.6% $ 216 $ 43,193 95.2%
Multi-family............... --- 460 1.1 --- 469 1.0
Commercial................. --- 562 1.3 --- 590 1.3
Construction............... --- 180 .4 --- 272 .6
Other...................... --- 715 1.6 --- 867 1.9
-------- -------- ------ -------- ------- -----
Total.................. $ 276 $ 43,552 100.0% $ 216 $45,391 100.0%
======== ======== ===== ======== ======= =====
</TABLE>
13
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ---------- --------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period....................... $ 474 $ 336 $ 276 $ 216 $ 156
Charge-offs:
One- to four-family................................ --- (22) --- --- ---
Provision for loan losses............................ 45 160 60 60 60
-------- ------ ------- ------- ------
Balance at end of period............................. $ 519 $ 474 $ 336 $ 276 $ 216
======= ===== ====== ====== ======
Ratio of net charge-offs during the period to
average loans outstanding during the period......... ---% 0.1% ---% ---% ---%
==== ===== ======= ======= =======
Ratio of net charge-offs during the period to
average non-performing assets....................... ---% 1.2% ---% ---% ---%
==== ===== ====== ====== ======
</TABLE>
The allowance for loan losses is established through a provision for
loan losses charged to earnings based on management's evaluation of the risk
inherent in the loan portfolio. The allowance is established as an amount that
management believes will be adequate to absorb losses on existing loans that may
become uncollectible, based on evaluations of the collectibility of loans and
prior loan loss experience. Management's evaluation of the adequacy of the
allowance takes into consideration such factors as the historical loan loss
experience, changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans and current economic
conditions that may affect the borrowers' ability to pay.
While management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen market conditions could
result in adjustments to the allowance for loan losses, and net earnings could
be significantly affected, if circumstances differ substantially from the
assumptions used in making the final determination.
Investment Activities
The Bank utilizes mortgage-backed and other debt securities in
virtually all aspects of its asset/liability management strategy. In making
investment decisions, management considers, among other things, the Bank's yield
and interest rate objectives, its interest rate risk and credit risk position
and its liquidity and cash flow. All investments are ratified by the Bank's
Board of Directors or Executive Committee.
First Federal must maintain minimum levels of investments that qualify
as liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Cash flow projections are regularly reviewed
and updated to assure that adequate liquidity is maintained. The Bank's level of
liquidity is a result of management's asset/liability strategy. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -
14
<PAGE>
Asset/Liability Management" in the Annual Report to Stockholders attached hereto
as Exhibit 13 and "Regulation - Liquidity."
Other Debt Securities. Federally chartered savings institutions have
the authority to invest in various types of liquid assets, including United
States Treasury obligations, securities of various federal agencies, certain
savings certificates of insured banks and savings institutions, certain bankers'
acceptances, repurchase agreements and federal funds. Subject to various
restrictions, federally chartered savings institutions may also invest their
assets in commercial paper, investment grade corporate debt securities and
mutual funds whose assets conform to the investments that a federally chartered
savings institution is otherwise authorized to make directly.
To date, the Bank's investment strategy has been directed toward
high-quality assets (primarily U.S. government and agency obligations) with
short and intermediate terms (ten years or less) to maturity and liquidity
investments. At June 30, 1996, the Bank did not own any other debt securities of
a single issuer which exceeded 10% of the Bank's equity, other than U.S.
government or federal agency obligations.
The following table sets forth the composition of the Bank's other debt
securities and other investments at the dates indicated.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- ------------------------
Amortized % of Amortized % of Amortized % of
Cost Total Cost Total Cost Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Other debt securities:
Held to maturity................................... $10,979 74.2% $5,474 62.3% $ --- ---%
Available for sale(1).............................. 2,500 16.9 1,998 22.7 --- ---
Held for investment................................ --- --- --- --- 9,463 88.2
FHLB stock........................................... 1,319 8.9 1,319 15.0 1,264 11.8
-------- ------ ---- ------- -----
Total other debt securities
and FHLB stock................................. $14,798 100.0% $8,791 100.0% $10,727 100.0%
======= ===== ====== ===== ======= =====
Average remaining life of other debt securities...... 79 mo. 63 mo. 67 mo.
Interest-bearing deposits with banks................. $16,300 100.0% $3,300 100.0% $ --- ---.%
======= ===== ====== ===== ======== ====
</TABLE>
- -------------
(1) The fair value of available-for-sale securities at June 30, 1996 and
1995 was $2.5 million and $2.0 million, respectively.
Mortgage-Backed Securities. In order to supplement loan production and
achieve its asset/liability management goals, the Bank invests in
mortgage-backed securities. All of the mortgage-backed securities owned by the
Bank are issued, insured or guaranteed either directly or indirectly by a
federal agency or are rated "AA" or higher. However, it should be noted that,
while a (direct or indirect) federal guarantee or a high credit rating may
indicate a high degree of protection against default, they do not indicate that
the securities will be protected from declines in value based on changes in
interest rates or prepayment speeds. Reflecting its policy
15
<PAGE>
of maintaining a substantial portfolio of investments having short to medium
terms to repricing or maturity, the Bank's mortgage-backed securities portfolio
at June 30, 1996 was comprised of (i) greater than $55.0 million of securities
with remaining contractual maturities of five years or less and (ii) $41.9
million of adjustable-rate mortgage-backed securities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations-
Asset/Liability Management" in the Annual Report to Stockholders attached hereto
as Exhibit 13. At June 30, 1996, the Bank did not have any mortgage-backed
securities of a single issuer where the total amount of securities of such
issues held exceeded 10% of equity except for Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") and
Government National Mortgage Association ("GNMA") issues, amounting to $7.1
million, $64.4 million and $36.2 million, respectively.
In addition to its conventional mortgage-backed securities, the Bank
invests in Collateralized Mortgage Obligations ("CMOs"). CMOs are securities
derived by reallocating the cash flows from mortgage-backed securities or pools
of mortgage loans in order to create multiple classes, or tranches, of
securities with coupon rates and average lives that differ from the underlying
collateral as a whole. The term to maturity of any particular tranche is
dependent upon the prepayment speed of the underlying collateral as well as the
structure of the particular CMO. As a result of these factors, the estimated
average lives of the CMOs could be shorter than the contractual maturities as
shown on the table on page 23. Although a significant proportion of the Bank's
CMOs are interests in tranches which have been structured (through the use of
cash flow priority and "support" tranches) to give somewhat more predictable
cash flows, the cash flow and hence the value of CMOs are subject to change.
The Bank invests in CMOs as an alternative to mortgage loans and
conventional mortgage-backed securities as part of its asset/liability
management strategy. Management believes that CMOs represent attractive
investment alternatives relative to other investments due to the wide variety of
maturity and repayment options available through such investments. In
particular, the Bank has from time to time concluded that short and intermediate
duration CMOs (with an expected average life of five years or less) represent a
better combination of rate and duration than adjustable rate mortgage-backed
securities. Because the Bank's CMOs are purchased as an alternative to mortgage
loans and because the Bank has the ability and intent to hold such securities to
maturity, all such securities are classified as held-to-maturity. At June 30,
1996, the Bank held CMOs with a carrying value of $10.4 million, substantially
all of which were of expected short and intermediate duration.
To assess price volatility, the Federal Financial Institutions
Examination Council ("FFIEC") adopted a policy in 1992 which requires an annual
"stress" test of mortgage derivative securities. This policy, which has been
adopted by the OTS, requires the Bank to annually test its CMOs and other
mortgage-related securities to determine whether they are high-risk or
nonhigh-risk securities. Mortgage derivative products with an average life or
price volatility in excess of a benchmark 30-year mortgage-backed pass-through
security are considered high-risk mortgage securities. Under the policy, savings
institutions may generally only invest in high-risk mortgage securities in order
to reduce interest rate risk. As of June 30, 1996, the Bank had no high risk
securities.
16
<PAGE>
The market values of a significant portion of the Bank's
mortgage-backed securities held-to-maturity have been from time to time
significantly lower than their carrying values. However, for financial reporting
purposes, such declines in value are considered to be temporary in nature since
they have been due to changes in interest rates rather than credit concerns. See
Note 2 of the Notes to Consolidated Financial Statements.
In contrast to mortgage-backed pass-through securities in which cash
flow is received (and, hence, prepayment risk is shared) pro rata by all
securities holders, the cash flows from the mortgages or mortgage-backed
securities underlying CMOs are segmented and paid in accordance with a
predetermined priority to investors holding various tranches of such securities
or obligations. A particular tranche of a CMO may therefore carry prepayment
risk that differs from that of both the underlying collateral and other
tranches. It is the Bank's strategy to purchase tranches of CMOs that are
categorized as "planned amortization classes," "targeted amortization classes"
or "very accurately defined maturities" and are intended to produce stable cash
flows in different interest rate environments. See "Business - Mortgage-backed
Securities."
The following table sets forth the composition of the Bank's security
portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------------------
1996 1995 1994
----------------------- ---------------------- --------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity:
Mortgage-backed securities:
GNMA................................ $ 36,240 $ 35,937 $ 19,190 $ 19,400 $ 18,905 $ 18,559
FNMA................................ 7,096 6,956 3,135 3,154 3,549 3,518
FHLMC............................... 64,437 64,221 64,597 64,719 67,779 66,147
CMOs................................ 10,448 10,261 13,025 12,985 14,270 13,905
-------- -------- -------- -------- -------- --------
118,221 117,375 99,947 100,258 104,503 102,129
U.S. Agency and other debt
securities.......................... 10,979 10,714 5,474 5,401 9,463 9,120
-------- -------- -------- -------- -------- --------
Total held-to-maturity............. 129,200 128,089 105,421 105,659 113,966 111,249
Available-for-sale:
U.S. Agency and other debt
securities.......................... 2,500 2,459 1,998 1,976 --- ---
-------- -------- -------- -------- -------- --------
Total securities.................... $131,700 $130,548 $107,419 $107,635 $113,966 $111,249
======== ======== ======== ======== ======== ========
</TABLE>
17
<PAGE>
The following table presents mortgage-backed securities purchase, sale
and repayment activities of the Bank for the periods indicated.
Year Ended June 30,
1996 1995 1994
------- --------- --------
(In Thousands)
Purchases:
Adjustable-rate(1)..................... $20,475 $ 2,982 $ 3,944
Fixed-rate............................. 17,747 4,017 27,943
CMOs .................................. --- --- 1,000
------- ------- -------
Total purchases................. 38,222 6,999 32,887
------- ------- -------
Principal repayments..................... (20,087) (11,641) (23,942)
------- ------- -------
Net increase (decrease)................ $18,135 $(4,642) $ 8,945
======= ======= ========
- ---------------
(1) Consists of pass-through securities.
The following table sets forth the contractual maturities and weighted
average yields of the Company's security portfolio at June 30, 1996. These
securities are anticipated to be repaid in advance of their contractual
maturities as a result of projected mortgage loan prepayments. In addition,
under the structure of some of the Bank's CMOs, the Bank's short- and
intermediate-tranche interests have repayment priority over the longer term
tranches of the same underlying mortgage pool. The amounts set forth below
represent principal balances only and do not include premiums, discounts and
market value adjustments.
<TABLE>
<CAPTION>
Due in
----------------------------------------------------------------
More than
Less than 1 year to More than 5 More than
1 year 5 years years to 10 years 10 years Total
-------------- ---------- ----------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities:
GNMA............................... $ --- $ 74 $ 414 $35,742 $ 36,230
FNMA............................... --- 4,531 --- 2,569 7,100
FHLMC.............................. 1,189 48,653 6,994 8,278 65,114
CMOs............................... --- 1,000 2,601 6,904 10,505
-------- -------- -------- -------- ---------
Total........................... $ 1,189 $54,258 $10,009 $53,493 $118,949
======== ======= ======= ======= ========
Weighted average yield.......... 6.50% 5.98% 6.77% 6.31% 6.20%
U.S. Agency and other debt
securities.......................... $ 1,500 $ 5,000 $ 5,000 $ 2,000 $13,500
========= ======= ======= ======= =======
Weighted average yield.......... 6.49% 5.55% 6.79% 7.89% 6.46%
</TABLE>
18
<PAGE>
The Bank's holdings of mortgage-backed securities have increased in
recent years as a result of increased competition for mortgage loans and the
Bank's increased focus on its asset liability management. Since federal agency
mortgage-backed securities carry a yield generally lower than that of the
corresponding type of residential loan (due to the implied federal agency
guarantee fee and the retention of a servicing spread by the loan servicer), and
the Bank's other debt securities also carry lower yields (due to the implied
federal agency guarantee and because such securities tend to have shorter actual
durations than 30 year loans), if the proportion of the Bank's assets consisting
of mortgage-backed and other debt securities increases, the Bank's asset yields
would likely be somewhat adversely affected. The Bank will evaluate
mortgage-backed securities purchases in the future based on its asset/liability
objectives, market conditions and alternative investment opportunities.
Sources of Funds
General. The Bank's primary sources of funds are depositor accounts,
payments (including prepayments) of loan principal, interest and dividends
earned on loans and securities, repayments of securities, borrowings and funds
provided from operations.
Depositor accounts. First Federal offers a variety of depositor
accounts having a wide range of interest rates and terms. The Bank's depositor
accounts consist of regular savings and club accounts, money market and NOW
accounts and savings certificates. The Bank relies primarily on competitive
pricing policies and customer service to attract and retain these depositor
accounts.
The variety of deposit accounts offered by the Bank has allowed it to
be competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. As customers have become more interest rate conscious, the Bank
has become more susceptible to short-term fluctuations in deposit flows. The
Bank manages the pricing of its depositor accounts in keeping with its
asset/liability management, profitability and growth objectives.
Based on its experience, the Bank believes that a substantial portion
of its regular savings and club accounts, money market and NOW accounts are
relatively stable sources of depositor accounts and has used customer service
and marketing initiatives in an effort to maintain and increase the volume of
such depositor accounts. However, the ability of the Bank to attract and
maintain these accounts (as well as savings certificates) has been and will be
affected by competition and market conditions. In particular, the Bank believes
that it would be very difficult to increase rapidly the "core" portion of its
regular savings and club, money market and NOW accounts. During fiscal 1996, the
Bank experienced a slight decline in the balance of non-savings certificates
(much of which is believed to have transferred into savings certificates) as a
result of interest rate increases on alternate investments. In the future, the
Bank will continue to stress, subject to market conditions, non-savings
certificates.
19
<PAGE>
The following table sets forth the dollar amount of depositor accounts
in the various types of savings programs offered by the Bank as of the dates
indicated.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------------
1996 1995 1994
--------------------- -------------------- -----------------------
Average Average Average
Amount Rate Amount Rate Amount Rate
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Money Market/NOW ......................... $ 12,090 2.45% $ 12,914 2.45% $ 16,263 2.45%
Regular Savings........................... 57,664 3.00 64,142 3.00 84,067 3.00
Club accounts............................. 725 3.00 733 3.00 751 3.00
-------- -------- --------
70,479 2.91 77,789 2.91 101,081 2.91
-------- -------- --------
Savings Certificates by remaining
period to maturity:
Less than 1 year....................... 48,026 5.38 39,012 5.56 23,573 3.41
More than 1 year to 3 years............ 5,464 5.54 8,391 6.35 4,731 4.81
More than 3 years...................... 4,335 6.94 5,741 6.40 4,506 5.45
-------- -------- --------
57,825 5.51 53,144 5.77 32,810 3.89
-------- -------- --------
Total..................................... $128,304 4.08% $130,933 4.07% $133,891 3.15%
======== ======== ========
</TABLE>
The following table sets forth the savings flows at the Bank during the
periods indicated.
Year Ended June 30,
1996 1995 1994
--------- --------- ---------
(Dollars in Thousands)
Opening balance..................... $130,933 $133,891 $129,584
Deposits(1)......................... 107,874 119,213 110,392
Withdrawals(1)...................... 115,005 126,115 109,586
Interest credited................... 4,502 3,944 3,501
-------- -------- ---------
Ending balance...................... $128,304 $130,933 $133,891
======== ======== ========
Net increase (decrease)............. $ (2,629) $ (2,958) $ 4,307
======== ======== =========
Percent increase (decrease)......... (2.0)% (2.2)% 3.3%
==== ==== ===
- ------------
(1) Includes transfers of funds within the Bank
The following table sets forth additional information about the Bank's
savings certificates greater than $100,000 by remaining period to maturity as of
June 30, 1996.
Weighted
Amount Average Rate
Within three months.............................. $2,179 5.35%
After 3 but within 6 months...................... 2,215 5.25
After 6 but within 12 months..................... 1,644 5.26
After 12 months.................................. 1,227 6.65
------
Total.......................................... $7,265 5.52%
======
20
<PAGE>
For additional information regarding the composition of the Bank's
depositor accounts, see Note 5 of the Notes to Consolidated Financial
Statements.
Borrowings. First Federal's other available sources of funds include
advances from the FHLB of New York and other borrowings. As a member of the FHLB
of New York, the Bank is required to own capital stock in the FHLB of New York
and is authorized to apply for advances from the FHLB of New York. Each FHLB
credit program has its own interest rate, which may be fixed or variable, and
range of maturities. The FHLB of New York may prescribe the acceptable uses for
these advances, as well as limitations on the size of the advances and repayment
provisions. See Note 9 of the Notes to Consolidated Financial Statements.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances for the periods indicated. The Bank had no
other outstanding borrowings during the periods shown.
Year Ended June 30,
----------------------------------
1996 1995 1994
------- ------- ------
(In Thousands)
Maximum Balance:
FHLB advances......................... $15,500 $7,500 $4,000
Average Balance:
FHLB advances......................... $ 150 $2,454 $1,169
The Bank has used advances from time to time to provide funds for
investment opportunities and to fund deposit outflows. The Bank may also use
advances to extend the maturity of its liabilities if deemed appropriate in
connection with its asset/liability management efforts.
Service Corporations
As a federally chartered savings and loan association, First Federal is
permitted by OTS regulations to invest up to 2% of its assets in the stock of,
or loans to, service corporation subsidiaries, and may invest an additional 1%
of its assets in service corporations where such additional funds are used for
inner-city or community development purposes. At June 30, 1996 First Federal had
no service corporations.
Employees
At June 30, 1996, the Bank had a total of 22 full-time and 2 part-time
employees. None of the Bank's employees are represented by any collective
bargaining agreement. Management considers its employee relations to be good.
Regulation
General. First Federal is a federally chartered savings bank, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government.
21
<PAGE>
Accordingly, First Federal is subject to broad federal regulation and oversight
extending to all its operations. First Federal is a member of the FHLB of New
York and is subject to certain limited regulation by the Board of Governors of
the Federal Reserve System ("Federal Reserve Board"). As the savings and loan
holding company of First Federal, the Holding Company also is subject to federal
regulation and oversight. The purpose of the regulation of the Holding Company
and other holding companies is to protect subsidiary savings associations. First
Federal is a member of the Savings Association Insurance Fund ("SAIF"), which
together with the Bank Insurance Fund ("BIF") are the two deposit funds
administered by the FDIC, and the deposits of First Federal are insured by the
FDIC. As a result, the FDIC has certain regulatory and examination authority
over First Federal. Certain of these regulatory requirements and restrictions
are discussed below or elsewhere in this document.
Federal Regulation of Savings Associations. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, First Federal is required to file periodic reports with the OTS and
is subject to periodic examinations by the OTS and the FDIC. The last regular
OTS examination of First Federal was as of June 30, 1996. When these
examinations are conducted by the OTS and the FDIC, the examiners may require
First Federal to provide for higher general or specific loan loss reserves. All
savings associations are subject to a semi-annual assessment, based upon the
savings association's total assets, to fund the operations of the OTS. First
Federal's OTS assessment for the fiscal year ended June 30, 1996 was
approximately $47,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including First Federal and the
Holding Company. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions. In general, these enforcement actions
may be initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of First
Federal is prescribed by federal laws, and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. First Federal is in compliance with the noted
restrictions.
First Federal's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At June 30, 1996, First Federal's lending limit
under this restriction was $6.5 million. First Federal is in compliance with the
loans-to-one borrower limitation.
22
<PAGE>
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action.
Insurance of Accounts and Regulation by the FDIC. First Federal is a
member of the SAIF, which is administered by the FDIC. Deposits are insured up
to applicable limits by the FDIC, and such insurance is backed by the full faith
and credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the SAIF or BIF. The FDIC also has the authority
to initiate enforcement actions against savings associations, after giving the
OTS an opportunity to take such action, and may terminate the deposit insurance
if it determines that the institution has engaged in unsafe or unsound practices
or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
For the first six months of 1995, the assessment schedule for Bank Insurance
Fund ("BIF") members and SAIF members ranged from .23% to .31% of deposits.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the BIF of the FDIC in
order to maintain the reserve ratio of the BIF at 1.25% of BIF insured deposits.
As a result of the BIF reaching its statutory reserve ratio, the FDIC revised
the premium schedule for BIF insured institutions to provide a range of .04% to
.31% of deposits. The revisions became effective in the third quarter of 1995.
In addition, the BIF rates were further revised, effective January 1996, to
provide a range of 0% to .27% with a minimum annual assessment of $2,000. The
SAIF rates, however, were not adjusted. As a result of these revisions, BIF
members will generally pay lower premiums.
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The SAIF is not expected to attain the designated reserve ratio until
the year 2002 due to the shrinking deposit base for SAIF assessments and the
requirement that SAIF premiums be used to make the interest payments on bonds
issued by the Financing Corporation ("FICO") in order to finance the costs of
resolving thrift failures in the 1980s. As a result, SAIF members will generally
be subject to higher deposit insurance premiums than BIF members until, all
things being equal, the SAIF attains the required reserve ratio.
The effect of this disparity on the Bank and other SAIF members is
uncertain at this time. It may have the effect of permitting BIF insured
institutions to offer loan and deposit products on more attractive terms than
SAIF members due to the cost savings achieved through lower deposit premiums,
thereby placing SAIF members at a competitive disadvantage. In order to
eliminate this disparity, a number of proposals to recapitalize the SAIF have
been recently considered by the United States Congress. The plan under current
consideration provides for a one-time assessment anticipated to be approximately
.66%, to be imposed on all deposits assessed at the SAIF rates as of March 31,
1995, including those held by commercial banks, and for BIF deposit insurance
premiums to be used to pay the FICO bond interest on a pro rata basis together
with SAIF premiums. If the proposed assessment of 0.66% was effected, the Bank's
special assessment would amount to approximately $880,000, before taxes. The BIF
and SAIF would be merged into one fund as soon as practicable, but no later than
January 1, 1998. There can be no assurance that any particular proposal will be
enacted or that premiums for either BIF or SAIF members will not be adjusted in
the future by the FDIC or by legislative action.
Regulatory Capital Requirements. Federally insured savings
associations, such as First Federal, are required to maintain a minimum level of
regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At June 30, 1996, First Federal had no intangible assets which
were required to be deducted from tangible capital.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital.
At June 30, 1996, First Federal had tangible capital of $43.1 million,
or 24.7% of adjusted total assets, which is approximately $40.5 million above
the minimum requirement of 1.5% of adjusted total assets in effect on that date.
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The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At June 30, 1996, First
Federal had no intangibles which were subject to these tests.
At June 30, 1996, First Federal had core capital equal to $43.1
million, or 24.7% of adjusted total assets, which is $37.9 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At June 30, 1996, First Federal had
$519,000 of general loss reserves, which was less than 1.25% of risk-weighted
assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. First Federal had no such
exclusions from capital and assets at June 30, 1996.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
The OTS has adopted a final rule that requires every savings
association with more than normal interest rate risk exposure to deduct from its
total capital, for purposes of determining compliance with such requirement, an
amount equal to 50% of its interest-rate risk exposure multiplied by the present
value of its assets. This exposure is a measure of the potential decline in the
net portfolio value of a savings association, greater than 2% of the present
value of its assets, based upon a hypothetical 200 basis point increase or
decrease in interest rates (whichever results in a greater decline). Net
portfolio value is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The rule provides for a two quarter
lag between calculating interest rate risk and recognizing any deduction from
capital. The rule will not become effective until the OTS evaluates the process
by which savings associations may appeal an interest rate risk deduction
determination. It is uncertain as to when
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this evaluation may be completed. Any savings association with less than $300
million in assets and a total capital ratio in excess of 12% is exempt from this
requirement unless the OTS determines otherwise.
On June 30, 1996, First Federal had total capital of $43.6 million
(including $43.1 million in core capital and $519,000 in qualifying
supplementary capital) and risk-weighted assets of $41.8 million; or total
capital of 104.4% of risk-weighted assets. This amount was $40.3 million above
the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core ratio, a 4% Tier 1 risked-based
capital ratio or an 8% risk-based capital ratio). Any such association must
submit a capital restoration plan and until such plan is approved by the OTS may
not increase its assets, acquire another institution, establish a branch or
engage in any new activities, and generally may not make capital distributions.
The OTS is authorized to impose the additional restrictions that are applicable
to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on First
Federal may have a substantial adverse effect on First Federal's operations and
profitability. Holding Company stockholders do not have preemptive rights, and
therefore, if the Holding Company is directed by the OTS or the FDIC to issue
additional shares of Common Stock, such issuance may result in the dilution in
the percentage of ownership of the Holding Company of those persons purchasing
shares in the Conversion.
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Limitations on Dividends and Other Capital Distributions. OTS
regulations impose various restrictions on savings associations with respect to
their ability to make distributions of capital, which include dividends, stock
redemptions or repurchases, cash-out mergers and other transactions charged to
the capital account. OTS regulations also prohibit a savings association from
declaring or paying any dividends or from repurchasing any of its stock if, as a
result, the regulatory capital of the association would be reduced below the
amount required to be maintained for the liquidation account established in
connection with its mutual to stock conversion.
Generally, savings associations, such as the Bank, that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. First Federal may
pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period based on safety and soundness concerns.
See "Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity. All savings associations, including First Federal, are
required to maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. For a discussion of
what the Bank includes in liquid assets, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." This liquid asset ratio requirement may vary from time to
time (between 4% and 10%)
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depending upon economic conditions and savings flows of all savings
associations. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At June 30, 1996, First Federal was in compliance with both
requirements, with an overall liquid asset ratio of 49.5% and a short-term
liquid assets ratio of 3.05%
Accounting. An OTS policy statement applicable to all savings
associations clarifies and re-emphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance with
GAAP. Under the policy statement, management must support its classification of
and accounting for loans and securities (i.e., whether held for investment, sale
or trading) with appropriate documentation. First Federal is in compliance with
these amended rules.
OTS accounting regulations, which may be made more stringent than GAAP
by the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must incorporate any other accounting regulations or orders prescribed by the
OTS.
Qualified Thrift Lender Test. All savings associations, including First
Federal, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. Such assets primarily consist of residential
housing related loans and investments. At June 30, 1996, First Federal met the
test and has always met the test since its effective date.
Any savings association that fails to meet the QTL test must convert to
a national bank charter unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
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Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), every FDIC insured institution has a continuing and affirmative
obligation consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with the examination of First Federal, to assess
the institution's record of meeting the credit needs of its community and to
take such record into account in its evaluation of certain applications, such as
a merger or the establishment of a branch, by the Bank. An unsatisfactory rating
may be used as the basis for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in October 1993 and received a rating of satisfactory.
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of First
Federal include the Holding Company and any company which is under common
control with First Federal. In addition, a savings association may not lend to
any affiliate engaged in activities not permissible for a bank holding company
or acquire the securities of most affiliates.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation. The Holding Company is a unitary savings
and loan holding company subject to regulatory oversight by the OTS. As such,
the Holding Company is required to register and file reports with the OTS and is
subject to regulation and examination by the OTS. In addition, the OTS has
enforcement authority over the Holding Company and its non-savings association
subsidiaries which also permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Holding Company
generally is not subject to activity restrictions. If the Holding Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Holding Company and any of its subsidiaries (other than First Federal or any
other SAIF-insured savings association) would become subject to such
restrictions unless such other associations each qualify as a QTL and were
acquired in a supervisory acquisition.
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If First Federal fails the QTL test, the Holding Company must obtain
the approval of the OTS prior to continuing after such failure, directly or
through its other subsidiaries, any business activity other than those approved
for multiple savings and loan holding companies or their subsidiaries. In
addition, within one year of such failure, the Holding Company must register as,
and will become subject to, the restrictions applicable to bank holding
companies. The activities authorized for a bank holding company are more limited
than are the activities authorized for a unitary or multiple savings and loan
holding company. See "- Qualified Thrift Lender Test."
The Holding Company must obtain approval from the OTS before acquiring
control of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law. The stock of the Holding Company is registered
with the SEC under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Holding Company is subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Exchange Act.
Holding Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Holding Company may not
be resold without registration or unless sold in accordance with certain resale
restrictions. If the Holding Company meets specified current public information
requirements, each affiliate of the Holding Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At June 30, 1996, First Federal was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
First Federal is a member of the FHLB of New York, which is one of 12
regional FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB, which are subject to the oversight of the
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Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, First Federal is required to purchase and maintain stock
in the FHLB of New York. At June 30, 1996, First Federal had $1.3 million in
FHLB stock, which was in compliance with this requirement.
Federal and State Taxation
Federal Taxation. Savings associations such as the Bank that meet
certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code of 1986, as amended (the
"Code"), are permitted to establish reserves for bad debts and to make annual
additions thereto which may, within specified formula limits, be taken as a
deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction for "non-qualifying loans" is computed
under the experience method. The amount of the bad debt reserve deduction for
"qualifying real property loans" (generally loans secured by improved real
estate) may be computed under either the experience method or the percentage of
taxable income method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
The percentage of specially computed taxable income that is used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") is 8%. The
percentage bad debt deduction thus computed is reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permits qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equals the amount by
which 12% of the amount comprising savings accounts at year end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year. At June
30, 1996, the 6% limitation
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did not restrict the percentage bad debt deduction available to the Bank.
However, in taxable years 1995 and 1994 the Bank met the 12% limitation.
In August 1996, Federal legislation was enacted that repeals the
percentage of taxable income method used by many thrifts, including the Bank, to
calculate their bad debt reserve for federal income tax purposes. As a result,
small thrifts (generally, those with less than $500 million in total assets),
such as the Bank, must recapture that portion of their federal tax bad debt
reserve that exceeds the amount that could have been taken under the experience
method for post 1987 tax years. Recapture will occur over a six year period, the
commencement of which may be delayed until the first taxable year beginning
after December 31, 1997, provided that the Bank meets certain residential
lending requirements. The Bank had previously established a deferred tax
liability for its post 1987 federal tax bad debt reserves and therefore, there
will be no financial statement impact as a result of their rcapture (i.e. the
deferred tax liability will be ratably shifted from a deferred liability to a
current liability).
The Bank's pre 1987 tax bad debt reserves are "frozen" and not subject
to current recapture. Generally, recapture of all or a portion of the Bank's pre
1987 reserves will be required if the Bank pays a dividend in excess of the
greater of its current or accumulated earnings and profits, redeems any of its
stock, or is liquidated. The Bank has not established a deferred federal tax
liability under FAS 109 for its pre-1987 tax bad debt reserves as it does not
anticipate engaging in any of the transactions that would cause such reserves to
be recaptured. The Bank's pre-1987 federal tax bad debt reserve is approximately
$4.9 million.
The legislation also requires small thrifts, including the Bank, to
account for bad debts for federal income tax purposes on the same basis as small
commercial banks (generally, those with less than $500 million in total assets)
for tax years beginning after December 31, 1995.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
The Bank has been audited by the IRS with respect to federal income tax
returns through December 31, 1993. With respect to years examined by the IRS,
all deficiencies have been
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satisfied. In the opinion of management, any examination of still open returns
would not result in a deficiency which could have a material adverse effect on
the financial condition of the Bank.
New York Taxation. The Bank is subject to New York state taxation. The
Bank is subject to the New York State Franchise Tax on Banking Corporations in
an annual amount equal to the greater of (i) 9% of the Bank's "entire net
income" allocable to New York State during the taxable year, or (ii) the
applicable alternative minimum tax. The alternative minimum tax is generally the
greater of (a) 0.01% of the value of the Bank's assets allocable to New York
State with certain modifications, (b) 3% of the Bank's "alternative entire net
income" allocable to New York State, or (c) $250. In addition, New York also
imposes a general surtax on the applicable tax described above. The surtax is
scheduled to be reduced to 2.5% for taxable years ending after June 30, 1996 and
before July 1, 1997. The surtax is scheduled to expire for taxable years
thereafter. Entire net income is similar to federal taxable income, subject to
certain modifications (including the fact that net operating losses cannot be
carried back or carried forward). In addition, New York also imposes a
Metropolitan Commuter Transportation District surcharge of 17% that is assessed
on the New York State Franchise Tax (before general surtax).
In August 1996, New York state enacted legislation to preserve the use
of the percentage of taxable income bad debt deduction used by thrifts such as
the Bank. In general, the legislation provides for a deduction equal to 32% of
the Bank's New York state taxable income. It also provides for a floating base
year, which will allow the Bank to switch from the percentage of taxable income
to the experience method without recapture of any reserve. Previously, the Bank
had established a deferred New York state tax liability of approximately
$238,000 for the excess its New York state tax bad debt reserve over the amount
of its base year New York state reserve. Accordingly, the Bank will reverse such
New York State liability as a reduction of state income tax expense in the
quarter ending September 30, 1996, which includes the date of enactment.
Generally, New York state has requirements similar to federal
requirements regarding the recapture of base year tax bad debt reserves. One
notable exception is that New York continues to require that at least 60% of the
Bank's assets consist of specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations). The Bank expects to continue to meet the 60%
requirement and does not anticipate engaging in any of the transactions which
would require recapture of such base year reserves, accordingly under FAS 109,
it has not provided any deferred tax liability on them. At December 31, 1995,
the Bank's floating New York State base year reserves were approximately $8.2
million.
Delaware Taxation. As a Delaware holding company, the Holding Company
is exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Holding Company
is also subject to an annual franchise tax imposed by the State of Delaware.
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Item 2. Description of Properties
Peekskill conducts its business at its main office and two other
locations in its market area. The following table sets forth information
concerning each of Peekskill's offices as of June 30, 1996. At June 30, 1996,
the total net book value of Peekskill's premises and equipment (including land,
building and leasehold improvements, and furniture, fixtures and equipment) was
approximately $184,000.
Year Owned or Net Book Value at
Location Acquired Leased June 30, 1996
- -------------------------------- -------- -------- -----------------
Main Office:
1019 Park Street 1959 Owned $184,000
Peekskill, New York
Full Service Branches:
1961 Commerce Street 1977 Lease ---
Yorktown Heights, New York
Westchester Mall, Rte. 6 1973 Lease ---
Mohegan Lake, New York
The Company believes that its current facilities are adequate to meet
the present and foreseeable future needs of the Company.
The Bank's depositor and borrower customer files are maintained by an
independent data processing company.
Item 3. Legal Proceedings
From time to time, the Company is involved as plaintiff or defendant in
various legal proceedings arising in the normal course of its business. While
the ultimate outcome of these various legal proceedings cannot be predicted with
certainty, it is the opinion of management that the resolution of these legal
actions should not have a material effect on the Company's financial position or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 1996.
34
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Pages 31 and 32 of the attached 1996 Annual Report to Stockholders is
herein incorporated by reference.
Item 6. Selected Consolidated Financial Data
Page 1 of the attached 1996 Annual Report to Stockholders is herein
incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Pages 3 through 10 of the attached 1996 Annual Report to Stockholders
is herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
The following information appearing in the Company's Annual Report to
Stockholders for the year ended June 30, 1996, is incorporated by reference in
this Annual Report on Form 10-K as Exhibit 13.
<TABLE>
<CAPTION>
Pages in
Annual
Annual Report Section Report
<S> <C>
Report of Independent Auditors........................................................................... 11
Consolidated Balance Sheets as of June 30, 1996 and 1995................................................. 12
Consolidated Statements of Income for the Years
Ended June 30, 1996, 1995 and 1994..................................................................... 13
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended June 30, 1996, 1995 and 1994............................................................... 14
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1996, 1995 and 1994..................................................................... 15
Notes to Consolidated Financial Statements............................................................... 16-30
</TABLE>
With the exception of the aforementioned information, the Company's
Annual Report to Stockholders for the year ended June 30, 1996, is not deemed
filed as part of this Annual Report on Form 10-K.
35
<PAGE>
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
36
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
Information concerning directors of the Registrant is incorporated
herein by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held in 1996, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders, a copy of which will be filed not later than 120 days after the
close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders, a copy of which will be filed not later than 120
days after the close of the fiscal year.
37
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Sequential Page
Number Where
Reference to Attached Exhibits
Regulation Prior Filing or Are Located in
S-K Exhibit Exhibit Number This Form 10-K
Number Document Attached Hereto Report
------------- ----------------------------------------------------- ----------------- --------------------
<S> <C> <C> <C>
2 Plan of acquisition, reorganization, arrangement, None Not applicable
liquidation or succession
3(a) Articles of Incorporation * Not applicable
3(b) By-Laws * Not applicable
4 Instruments defining the rights of security holders, * Not applicable
including debentures
9 Voting Trust Agreement None Not applicable
10 Material contracts
Savings and Investment Plan * Not applicable
Retirement Income Plan * Not applicable
Form of 1995 Stock Option and Incentive Plan * Not applicable
Employment Agreements of Eldorus Maynard and * Not applicable
William J. LaCalamito Not applicable
Supplemental Executive Retirement Agreements of
Eldorus Maynard and William LaCalamito ** Not applicable
Form of Recognition and Retention Plan **
Employee Stock Ownership Plan **
11 Statement regarding computation of per share None Not applicable
earnings
13 Annual Report to Security Holders 13 Page __
16 Letter regarding change in certifying accountants None Not applicable
18 Letter regarding change in accounting principles None Not applicable
21 Subsidiaries of Registrant 21 Page __
22 Published report regarding matters submitted to vote None Not applicable
of security holders
23 Consents of Experts and Counsel None Not applicable
24 Power of Attorney None Not applicable
27 Financial Data Schedule
28 Information from reports furnished to state insurance None Not applicable
regulatory authorities
99 Additional Exhibits None Not applicable
</TABLE>
- ----------
* Filed as exhibits to the Company's Form S-1 registration statement
filed on October 3, 1995 (File No. 33- 97730) pursuant to Section 5 of
the Securities Act of 1933. All of such previously filed documents are
hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-K.
** Filed as exhibits to the Company's Amendment No. 1 to Form S-1
registration statement filed on November 8, 1995 (File No. 33-97730)
pursuant to Section 5 of the Securities Act of 1933. All of such
previously filed documents are hereby incorporated herein by reference
in accordance with Item 601 of Regulation S-K.
38
<PAGE>
b) Reports on Form 8-K
During the quarter ended June 30, 1996, one current report on Form 8-K
was filed by the Company.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) 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.
PEEKSKILL FINANCIAL CORPORATON
By: /s/ Eldorus Maynard
----------------------------------------
Eldorus Maynard, Chief Executive Officer
and Chairman of the Board
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
/s/ Dominick Bertoline /s/ Eldorus Maynard
- ---------------------------- -------------------------------------------
Dominick Bertoline, Director Eldorus Maynard, Chief Executive
Officer, and Chairman of the Board
Date: September 26, 1996 (Principal Executive and Operating Officer)
----------------------
Date: September 26, 1996
----------------------
/s/ Edward H. Dwyer /s/ John Patrick Fay
- ---------------------------- -------------------------------------------
Edward H. Dwyer, Director John Patrick Fay, Director
Date: September 26, 1996
----------------------
Date: September 26, 1996
----------------------
/s/ Robert E. Flower /s/ William J. LaCalamito
- ---------------------------- -------------------------------------------
Robert E. Flower, Director William J. LaCalamito, President,
Chief Operating Officer and Secretary
Date: September 26, 1996 (Principal Financial and Accounting
---------------------- Officer)
Date: September 26, 1996
----------------------
40
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
===============================================================================
At or for the Fiscal Year ended June 30
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets $191,323 $155,716 $156,652 $149,684 $145,605
Loans, net 39,557 41,060 39,961 42,895 44,769
Mortgage-backed securities 118,221 99,947 104,503 95,669 74,319
Other securities 13,438 7,450 9,463 6,991 22,292
Cash and cash equivalents 17,320 4,681 157 1,566 1,617
Depositor accounts 128,304 130,933 133,891 129,584 128,294
Equity 59,774 21,178 19,267 16,930 13,952
SELECTED OPERATING DATA:
Interest and dividend income $ 11,794 $ 10,722 $ 10,858 $ 11,111 $ 11,592
Interest expense 5,401 4,785 4,216 4,850 7,033
-------- -------- -------- -------- --------
Net interest income 6,393 5,937 6,642 6,261 4,559
Provision for loan losses 45 160 60 60 60
-------- -------- -------- -------- --------
Net interest income after provision for loan losses 6,348 5,777 6,582 6,201 4,499
Loan fees and service charges 207 201 227 194 182
Gain on sale of real estate owned 24 --- --- 217 ---
Net loss on securities held for investment --- --- --- 807 264
Other non-interest income 77 76 88 84 109
Non-interest expense 2,807 2,490 2,315 2,289 2,317
-------- -------- -------- -------- --------
Income before income tax expense and
cumulative effect of change in accounting principle 3,849 3,564 4,582 3,600 2,209
Income tax expense 1,628 1,640 2,040 1,709 949
Cumulative effect of changes in accounting principle:
Income taxes --- --- (205) --- ---
Postretirement health care benefits, net (59) --- --- --- ---
-------- -------- -------- -------- --------
Net income $ 2,162 $ 1,924 $ 2,337 $ 1,891 $ 1,260
======== ======== ======== ======== ========
SELECTED STATISTICAL DATA:
Return on average assets 1.23% 1.22% 1.52% 1.27% 0.88%
Return on average equity 4.96 9.38 12.80 12.27 9.97
Net interest margin 3.66 3.82 4.38 4.29 3.20
Average interest rate spread 2.57 3.32 3.98 3.87 2.68
Equity to total assets at end of period 31.24 13.60 12.30 11.31 9.58
Efficiency ratio 42.04 40.07 33.28 35.01 47.77
Non-interest expense to average assets 1.59 1.58 1.50 1.54 1.55
Non-performing loans to total loans 3.17 5.10 4.38 4.87 4.10
Allowance for loan losses to non-performing loans 41.45 22.61 19.58 13.32 11.89
Non-performing assets to total assets 0.65 1.35 1.10 1.38 1.81
Book value per share $ 14.58
Earnings per share, from date of conversion $ 0.36
</TABLE>
1
<PAGE>
Exhibit 13
Management's Discussion and Analysis of Financial Condition and Results
of Operations
=============================================================================
GENERAL
Peekskill Financial Corporation (the "Holding Company," or together with
its subsidiary, the "Company") was incorporated in September 1995 and on
December 29, 1995 became the holding company for First Federal Savings Bank
(the "Bank") upon the completion of the conversion of the Bank from a
federally chartered mutual savings bank to a federally chartered stock
savings bank (the "Conversion"). Concurrent with the Conversion, the Holding
Company sold 4,099,750 shares of its common stock in a subscription offering
at a price of $10 per share, resulting in net proceeds of $40.0 million.
The primary market area of the Company, with three full service branches,
consists of northern Westchester, Putnam and Dutchess counties. The Bank is
engaged principally in the business of attracting deposits from the general
public and investing those funds in residential mortgage loans and
mortgage-backed and other securities. The financial condition and operating
results of the Company are primarily dependent upon the financial condition
and operating results of the Bank. The operating results of the Company
depend primarily on its net interest income, the difference between interest
income on earning assets, primarily loans and securities, and interest
expense on deposits and borrowings. Net income of the Company is also
affected by non-interest income, such as service fees and gain on sale of
real estate owned; non-interest expense, which includes salaries and employee
benefits and other operating expenses; and Federal and state income taxes.
LIQUIDITY
Liquidity is defined as the ability to generate sufficient cash flow to
meet all present and future funding commitments, depositor withdrawals and
operating expenses. Management monitors the Company's liquidity position on
a daily basis and evaluates its ability to meet depositor withdrawals and to
make new loans and investments as opportunities arise. The Bank is required
to maintain an average daily balance of liquid assets as a percentage of net
withdrawable deposit accounts plus short-term borrowings of 5.0%, as defined
by the regulations of the Office of Thrift Supervision (the "OTS"). At June
30, 1996 the Bank's liquidity ratio of 49.5% was in compliance with the OTS
regulations.
The Company's cash flows are classified according to their source:
operating activities, investing activities and financing activities. Cash
flows from operating activities consist primarily of interest income on loans
and securities offset by interest expense on deposits. Cash flows from
investing activities include the purchase of securities and loan
originations, offset by principal payments, maturities and calls of
securities and principal collections on loans. Changes in depositor
accounts, proceeds and repayments of Federal Home Loan Bank advances and
stock transactions comprise cash flows from financing activities.
For the three year period ended June 30, 1996, the Company averaged
annual net cash flows from operating activities in excess of $2.2 million.
Net cash used by investing activities was approximately $22.7 million for the
year ended June 30, 1996 and was due to the Company investing a portion of
the proceeds from the issuance of common stock in securities. The proceeds
from the issuance of common stock, net of ESOP shares, $36.7 million, was the
main cause of the $33.1 million in net cash provided by financing activities.
An important source of funds is the Company's core deposit base.
Management believes that a substantial portion of the Company's deposits of
$128.3 million and $130.9 million at June 30, 1996 and 1995, respectively,
are core deposits. The reduction in deposits reflects the current interest
rate environment and the desire of some customers to invest in instruments
which have higher yields than bank deposit products. Core deposits are
generally considered to be a highly stable source of liquidity due to the
long-term relationships with deposit customers. In addition to the funding
sources discussed above the Company has the ability to borrow from the
Federal Home Loan Bank ("FHLB") of New York up to $15.5 million at June 30,
1996, at which time the Company had borrowings of $500,000.
At June 30, 1996, the Company had outstanding loan commitments of $4.4
million and loans in process of $114,000. Since some of these commitments
will not be utilized and all of the loans in process may not be drawn upon
these commitments do not necessarily represent future cash outlays. The
Company's liquidity sources described above are anticipated to be sufficient
to fund outstanding loan commitments and other obligations.
3
<PAGE>
==============================================================================
CAPITAL
The OTS has established regulations which require savings associations,
such as the Bank, to meet minimum capital requirements. These requirements
include tangible capital, 1.5% of total adjusted assets, core capital, 3.0%
of total adjusted assets, and risk-based capital, 8.0% of risk-weighted
assets. In determining the amount of risk-weighted assets, savings
associations must classify all its assets, and certain off-balance sheet
items, into one of four risk-weighted categories. The amount of risk-based
assets is determined by applying a specific percentage, ranging from 0% to
100%, depending on the level of credit risk, to the amounts assigned to each
category. At June 30, 1996 the Bank had tangible and core capital ratios of
24.7% and a risk-based capital ratio of 104.4%, as detailed below:
CAPITAL EXCESS
AMOUNT REQUIREMENTS CAPITAL
------ ------------ -------
(IN THOUSANDS)
Tangible capital $43,119 $2,619 $40,500
Core capital 43,119 5,239 37,880
Risk-based capital 43,638 3,344 40,294
The Holding Company can have several capital transactions: sale of stock,
repurchase of stock, dividends paid to stockholders and dividends received
from the Bank. The Holding Company's ability to pay dividends to
stockholders depends substantially on dividends received from the Bank. The
Bank may not declare or pay cash dividends on or repurchase any of its shares
of common stock if the effect thereof would cause equity to be reduced below
applicable regulatory capital requirements or the amount required to be
maintained for the liquidation account. Unlike the Bank, the Holding Company
is not subject to OTS regulatory restrictions on the payment of dividends to
its stockholders. On May 29, 1996 the Holding Company declared a $0.09 cash
dividend paid on June 26, 1996 to stockholders of record on June 12, 1996.
The Company also paid a $0.09 dividend on September 11, 1996 to stockholders
of record on August 28, 1996.
On July 15, 1996 the Company completed a 4% repurchase program to fund
the Company's Recognition and Retention Plan, which was approved by
stockholders at a Special Meeting on July 3, 1996. The Company purchased
163,990 shares of common stock for approximately $2.0 million. Also, on
August 15, 1996 the Company completed the repurchase of 5% of its outstanding
common stock. The Company purchased 204,987 shares of common stock for
approximately $2.5 million. On September 4, 1996 the Company received approva
l from the OTS to repurchase an additional 5% of outstanding common stock.
ASSET / LIABILITY MANAGEMENT
The Company's net income is dependent on its net interest income. Net
interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than
interest-earning assets. When interest-bearing liabilities mature or reprice
more quickly than interest-earning assets in a give period, a significant
increase in market rates of interest could adversely affect net interest
income. Similarly, when interest-earning assets mature or reprice more
quickly than interest-bearing liabilities, falling interest rates could
result in a decrease in net income.
In an attempt to manage its exposure to changes in interest rates,
management monitors the Company's interest rate risk. Since 1991,
management's asset/liability committee has met monthly to review the
Company's interest rate risk position and profitability and to make
recommendations for adjustments to the Company's Board of Directors.
Management also reviews the Bank's portfolio, formulates investment
strategies and oversees the timing and implementation of transactions to
assure attainment of the Board's objectives in the most effective manner.
In adjusting the Company's asset/liability position, the Board and
management attempt to manage the Company's interest rate risk while enhancing
net interest margins. At times, depending on the level of general interest
rates, the relationship between long and short-term interest rates, market
conditions and competitive factors, the Board and management may determine to
increase the Company's interest rate risk position somewhat in order to
increase its net interest margin.
Consistent with the asset/liability management philosophy described
above, the Company has taken several steps to manage its interest rate risk.
First, the Company has structured the security portfolio to shorten the lives
of its interest-earning assets. The Company's recent purchases of
mortgage-backed securities have had either short or medium terms to maturity
or adjustable interest rates. At June 30, 1996 the Company had securities
with carrying values in excess of $60.0 million with contractual maturities
of five years or less and adjustable rate securities with carrying values in
excess of $40.0 million. Mortgage-backed securities amortize and experience
4
<PAGE>
==============================================================================
prepayments of principal; the Company has had cash flows from principal
paydowns, maturities and calls of securities in excess of $20.0 million
annually over the past four years. The Company's other major interest rate
risk reduction initiative is its emphasis on non-certificate depositor
accounts. The Board and management believe that such depositor accounts
carry a lower cost than do certificate accounts and that a material portion
of such accounts may be more resistant to changes in interest rates than are
other types of depositor accounts. At June 30, 1996, the Company had $58.4
million of regular savings and club accounts and $12.1 million of money
market and NOW accounts, totaling 54.9% of total depositor accounts.
One approach used to quantify interest rate risk is the net portfolio
value analysis ("NPV"). In essence, this approach calculates the difference
between the present value of liabilities and the expected cash flows from
assets and off-balance sheet contracts. Under OTS regulations which may be
implemented in the near future, an institution's "normal" level of interest
rate risk in the event of an assumed change in interest rates is a decrease
in the institution's NPV in an amount not exceeding 2% of the present value
of its assets. Had this regulation been implemented at June 30, 1996 the
Company's interest rate risk would have been considered "normal".
The following table sets forth, at June 30, 1996, an analysis of the
Bank's interest rate risk as measured by its changes in NPV resulting from
instantaneous and sustained parallel shifts in the yield curve, in 100 basis
point increments, up and down 400 basis points.
ESTIMATED INCREASE
CHANGE IN NPV
CHANGE IN ESTIMATED -----------------------
INTEREST RATE NPV AMOUNT AMOUNT PERCENT
- ------------- ---------- ------ -------
(Dollars in thousands)
+400 34,268 (11,925) (26)%
+300 37,595 (8,598) (19)
+200 40,773 (5,420) (12)
+100 43,736 (2,457) (5)
--- 46,193 --- ---
-100 47,937 1,744 4
-200 48,977 2,784 6
-300 50,370 4,177 9
-400 52,044 5,851 13
5
<PAGE>
Analysis of Net Interest Income
==============================================================================
The following table shows the Company's average consolidated balances,
interest income and expense, and average rates for the years ended June 30:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------- -------------------------------- ------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE(1) INTEREST YIELD/RATE BALANCE(1) INTEREST YIELD/RATE BALANCE(1) INTEREST YIELD/RATE
--------- --------- ---------- ---------- -------- ---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans $ 39,171 $ 3,363 8.59% $ 41,258 $ 3,522 8.54% $ 41,097 $ 3,604 8.77%
Mortgage-backed securities 109,740 6,959 6.34 103,325 6,527 6.32 101,408 6,611 6.52
Other debt securities 9,887 589 5.96 8,699 536 6.16 7,829 514 6.57
Other interest earning assets 16,290 883 5.42 2,047 137 6.69 1,407 129 9.17
-------- ------- -------- ------- -------- -------
Total interest-earning assets 175,088 $11,794 6.73% 155,329 $10,722 6.90% 151,741 $10,858 7.16%
======== ======== ========
Non-interest earning assets 1,384 2,278 2,261
-------- -------- --------
Total assets $176,472 $157,607 $154,002
======== ======== ========
INTEREST-BEARING LIABILITIES:
Regular savings and club accounts $ 62,029 $ 1,903 3.07% $ 74,806 $ 2,255 3.01% $ 82,852 $ 2,514 3.03%
Money market and NOW accounts 12,069 303 2.51 14,814 368 2.48 15,962 399 2.50
Savings certificates 55,506 3,184 5.74 41,735 2,048 4.91 32,605 1,258 3.86
Borrowings 150 11 7.33 2,454 114 4.65 1,169 45 3.85
-------- ------- -------- ------- -------- -------
Total interest-bearing liabilities 129,754 $ 5,401 4.16% 133,809 $ 4,785 3.58% 132,588 $ 4,216 3.18%
======== ======== ========
Non interest-bearing liabilities 3,094 3,397 3,150
-------- -------- --------
Total liabilities 132,848 137,206 135,738
Stockholders' Equity 43,624 20,401 18,264
-------- -------- --------
Total liabilities and stockholders'
equity
$176,472 $157,607 $154,002
======== ======== ========
Net interest income $ 6,393 $ 5,937 $ 6,642
======== ======== ========
Interest rate spread 2.57% 3.32% 3.98%
Net yield on interest-earning assets 3.66 3.82 4.38
Average interest-earning assets to
average interest-bearing liabilities 1.35 1.16 1.14
</TABLE>
(1) Average balances are calculated using end-of-month balances.
The following table sets forth, for the years indicated, an analysis of
changes in interest and dividend income, interest expense and net interest
income resulting from changes in average balances ("volume") and changes in
average rates ("rate").
<TABLE>
<CAPTION>
FISCAL 1996 VS. 1995 FISCAL 1995 VS. 1994
--------------------------------- -------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
-------------------- NET ---------------------- NET
VOLUME RATE CHANGE VOLUME RATE CHANGE
------ ---- ------ ------- ---- -------
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Loans $ (179) $ 20 $ (159) $ 14 $ (96) $ (82)
Mortgage-backed securities 407 25 432 131 (215) (84)
Other debt securities 73 (20) 53 49 (27) 22
Other interest earning assets 953 (207) 746 20 (12) 8
------ ----- ------ ---- ----- -----
Total 1,254 (182) 1,072 214 (350) (136)
------ ----- ------ ---- ----- -----
INTEREST-BEARING LIABILITIES:
Regular savings and club accounts (432) 80 (352) (243) (16) (259)
Money market and NOW accounts (69) 4 (65) (29) (2) (31)
Savings certificates 596 540 1,136 401 389 790
Borrowings (164) 61 (103) 58 11 69
------ ----- ------ ---- ----- -----
Total (69) 685 616 187 382 569
------ ----- ------ ---- ----- -----
Net change in net interest income $1,323 $(867) $ 456 $ 27 $(732) $(705)
====== ===== ====== ==== ===== =====
</TABLE>
6
<PAGE>
Comparison of Financial Condition at June 30, 1996 and 1995
==============================================================================
Total assets of the Company increased $35.6 million from $155.7 million at
June 30, 1995 to $191.3 million at June 30, 1996. The increase was due
primarily to the net proceeds received from the subscription offering of
$36.7 million, partially offset by a $2.6 million decrease in depositor
accounts.
The funds provided by the subscription offering were primarily invested
in securities and interest-bearing deposits. Securities increased $24.3
million to $131.7 million at June 30, 1996 from $107.4 million at June 30,
1995 and interest-bearing deposits increased $13.0 million to $16.3 million
from $3.3 million. Substantially all of the increase in securities was in
the held-to-maturity category, which increased $23.8 million, while
available-for-sale securities increased $483,000.
Total loans, net decreased $1.5 million to $39.6 million at June 30, 1996
from $41.1 million at June 30, 1995. However, during the latter half of
fiscal 1996 management implemented an advertising program to stimulate loan
demand which resulted in over $4.0 million of loan commitments at June 30,
1996, compared to $373,000 at June 30, 1995.
Stockholders' equity increased $38.6 million to $59.8 million at June 30,
1996 from $21.2 million at June 30, 1995. The increase is primarily due to
the net proceeds from the stock conversion of $36.7 million and net income of
$2.2 million for the year, partially offset by dividends paid of $369,000.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED JUNE 30, 1996 AND
1995
GENERAL. For the year ended June 30, 1996, the Company's net income was
$2.2 million as compared to $1.9 million for 1995, an increase of $238,000,
or 12.4%. The increase was caused by a $1.1 million increase in total
interest and dividend income and a $115,000 decrease in the provision for
loan losses, partially offset by a $616,000 increase in interest expense, a
$317,000 increase in total non-interest expense and a $59,000 charge for the
cumulative effect of the change in accounting principle for postretirement
health care benefits.
NET INTEREST INCOME. Net interest income increased $456,000, or 7.7%, to
$6.4 million for the year ended June 30, 1996 compared to $5.9 million for
the same period in 1995. The components of net interest income, interest and
dividend income and interest expense, increased $1.1 million, or 10.0% and
$616,000, or 12.9%, respectively.
INTEREST INCOME. Total interest income increased $1.1 million, a 10.0%
increase over the prior year. This increase is the result of a $19.8 million
increase in average interest-earning assets, partially offset by a 17 basis
point decrease in the yield on interest-earning assets. The increase in
interest-earning assets was due to funds received in the stock offering,
which were primarily invested in mortgage-backed securities and
interest-bearing deposits. The decrease in the yield on interest-earning
assets is the result of the Company investing the proceeds from the stock
offering in shorter term, lower yielding investments.
INTEREST EXPENSE. Interest expense on deposits and FHLB advances totaled
$5.4 million, a $616,000, or 12.9%, increase from the prior year. This
increase is attributable to a 58 basis point increase in the average rate
paid on deposits partially offset by a $4.1 million decrease in average
interest-bearing liabilities. The increase in the average rate paid on
deposits was due to the general rise in interest rates and the shift of
deposits from savings accounts to higher yielding saving certificates.
During fiscal 1996 the average balance of savings and club accounts, with an
average rate of 3.07%, decreased $12.8 million, and savings certificates,
with an average rate of 5.74%, increased $13.8 million for the same time
period.
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased
$115,000 to $45,000 for the year ended June 30, 1996 from $160,000 for the
year ago period. The decrease is primarily attributable to an $844,000, or a
40.3%, decrease in non-performing loans, from $2.1 million at June 30, 1995
to $1.3 million at June 30, 1996. The decrease in non-performing loans is
due to several factors including collections and the stabilization in the
local economy and the residential real estate market. The ratio of allowance
for loan losses to non-performing assets was 41.5% at June 30, 1996 versus
22.6% a year ago. See "Asset Quality" for further information.
NON-INTEREST INCOME. For the year ended June 30, 1996, non-interest
income increased $31,000 to $308,000 from $277,000 for the year ended June
30, 1995. Non-interest income is primarily comprised of loan fees, service
charges and rental income on the Company's office properties. The increase
is primarily due to the Company recognizing a $24,000 gain on the sale of
real estate owned during fiscal year 1996.
7
<PAGE>
==============================================================================
NON-INTEREST EXPENSE. Non-interest expense increased $317,000, or 12.7%,
to $2.8 million for the year ended June 30, 1996 from $2.5 million for the
year ended June 30, 1995. The increase is primarily attributable to an
increase in compensation and benefits of $154,000, and an increase in other
expenses of $124,000. The increase in compensation and benefits to $1.4
million for the year ended June 30, 1996 compared to $1.2 million for the
year ago period is primarily due to $95,000 of costs associated with the
employee stock ownership plan and the $100,000 payment made to the estate of
the Company's former Chief Executive Officer who died during the year. The
increase in other expenses to $470,000 for the year ended June 30, 1996
compared to $346,000 for the year ago period is primarily due to costs
associated with operating as a public company. The increase in non-interest
expense caused an increase in the Company's efficiency ratio, from 40.1% for
fiscal year 1995 to 42.0% for fiscal year 1996.
Non-interest expense for fiscal 1997 will include a full year of ESOP
expense, versus half a year in fiscal 1996, and expense relating to the
Company's Recognition and Retention Plan.
INCOME TAX EXPENSE. Income tax expense for the years ended June 30, 1996
and 1995 was $1.6 million, reflecting effective tax rates of 42.3% and 46.0%.
The decrease is due primarily to a decrease in the New York State tax rate
during fiscal 1996.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED JUNE 30, 1995 AND
1994
GENERAL. Net income for the year ended June 30, 1995 was $1.9 million
compared with $2.3 million for the year ended June 30, 1994. The decrease in
net income of $413,000 during fiscal 1995 was primarily due to the decrease
in net interest income of $705,000 resulting from higher market interest
rates combined with an increase in the provision for loan losses of $100,000
and an increase in other expenses of $175,000 offset by a decrease in income
tax expense of $400,000 and a charge for the cumulative effect of the change
in the method of accounting for income taxes of $205,000 in 1994.
NET INTEREST INCOME. Net interest income decreased $705,000, or 10.6%,
from $6.6 million during 1994 to $5.9 million during 1995, as the average net
interest rate spread decreased by 66 basis points from 3.98% during 1994 to
3.32% during 1995.
INTEREST AND DIVIDEND INCOME. Interest and dividend income decreased
$136,000 from $10.8 million to $10.7 million, during 1994 and 1995,
respectively. The decrease was due to the decrease in yield on
interest-earning assets. The average yield on the Bank's interest-earning
assets decreased 26 basis points from 7.16% for the year ended June 30, 1994
to 6.90% for the year ended June 30, 1995 due primarily to the prepayment of
higher yielding assets. The average balance of interest-earning assets
increased $3.6 million from $151.7 million for the year ended June 30, 1994
to $155.3 million for the same period in 1995.
INTEREST EXPENSE. Interest expense increased $569,000 from $4.2 million
for the year ended June 30, 1994 to $4.8 million for the same period in 1995.
The increase was due primarily to an increase in the cost of average
interest-bearing liabilities resulting from increases in market interest
rates during the year as well as a shift in the type of interest-bearing
liabilities from generally lower rate regular savings and club accounts, the
balance of which declined by $19.9 million from June 30, 1994 to June 30,
1995, to generally higher rate savings certificates, the average balance of
which increased by $20.3 million over the same period.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased
$100,000 during the year ended June 30, 1995 compared with the same period in
1994 reflecting the Bank's evaluation of the loan portfolio including a
$398,000 increase in loans delinquent more than 90 days and a $1.1 million
increase in the balance of loans receivable. The increased provision also
reflects consideration of the receipt by the Bank of lower appraisals on
several outstanding loans. The Bank also considered significant layoffs by
major employers in the Bank's market area during the period as well as
conditions in the local housing market based on discussions with local
realtors. The Bank will continue to monitor and modify its allowance for
loan losses as conditions dictate.
OTHER EXPENSES. Other expenses increased $175,000, from $2.3 million to
$2.5 million for the years ended June 30, 1994 and 1995, respectively. The
largest portion of the increase is attributable to an increase in
compensation and benefits expense of $96,000 during the year ended June 30,
1995 resulting primarily from normal salary increases.
8
<PAGE>
==============================================================================
INCOME TAX EXPENSE. Income tax expense decreased by $400,000 from $2.0 million
to $1.6 million primarily due to a decrease in taxable income of
$1.0 million in 1995 as compared to 1994.
ASSET QUALITY
The following table sets forth information regarding non-performing loans
and real estate owned. There were no impaired loans or troubled debt
restructurings within the meaning of Statement of Financial Accounting
Standards ("SFAS") No. 114 at any of the periods below.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- ------- ------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
ACCRUING LOANS DELINQUENT
MORE THAN 90 DAYS:
<S> <C> <C> <C> <C> <C>
One-to-four family $1,252 $2,096 $1,698 $2,054 $1,786
Other --- --- 18 18 31
------ ------ ------ ------ ------
Total non-performing loans 1,252 2,096 1,716 2,072 1,817
Real estate owned --- --- --- --- 821
------ ------ ------ ------ ------
Total non-performing assets $1,252 $2,096 $1,716 $2,072 $2,638
====== ====== ====== ====== ======
RATIOS:
Allowance for loan losses to:
Non-performing assets 41.45% 22.61% 19.58% 13.32% 8.19%
Total loans, net 1.31 1.15 0.84 0.64 0.48
Non-performing loans to
total loans, net 3.17 5.10 4.29 4.79 4.02
Non-performing assets to total assets 0.65 1.35 1.10 1.38 1.81
</TABLE>
Non-performing loans are those loans greater than 90 days past due, or
earlier if management determines the ability of the borrower to make
contractual payments is in doubt. When a borrower is greater than 90 days
past due management evaluates the loan, underlying collateral and the
borrower's credit history to determine whether to place the loan on
non-accrual. Management and the Board of Directors perform a monthly review
of all non-performing loans. The actions taken by the Company with respect
to delinquencies (workout, settlement or foreclosure) vary depending on the
nature of the loan, length of delinquency and the borrower's past credit
history. The classification of a loan as non-performing does not necessarily
indicate that the principal and interest ultimately will be uncollectible.
Historical experience indicates that a portion of non-performing assets will
eventually be recovered.
At June 30, 1996, non-performing assets totaled $1.3 million, or 0.65% of
total assets, compared to $2.1 million, or 1.35% of total assets, at June 30,
1995. The $844,000 decrease in non-performing loans is due to the Company's
focus on the loan portfolio's asset quality. Stability in the local economy
and certain sectors of the real estate market in fiscal 1996 contributed to
positive trends in the Company's asset quality. The allowance for loan
losses as a percentage of non-performing assets rose to 41.45% in 1996
compared to 22.61% in 1995 and 19.58% in 1994. As a percentage of total
loans, the allowance for loan losses was 1.31% in 1996 compared to 1.15% in
1995 and 0.84% in 1994.
9
<PAGE>
==============================================================================
The table below sets forth activity in the Company's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $474 $336 $276 $216 $156
Charge offs --- (22) --- --- ---
Provision for loan losses 45 160 60 60 60
----- ----- ----- ----- -----
Balance at end of year $519 $474 $336 $276 $216
===== ===== ===== ===== =====
Ratio of net charge-offs during the
period to average loans outstanding
during the period ---% 0.10% ---% ---% ---%
Ratio of net charge-offs during the
period to average non-performing assets --- 1.20 --- --- ---
</TABLE>
IMPACT OF INFLATION
The consolidated financial statements and related consolidated financial
information presented in this annual report have been prepared in conformity
with generally accepted accounting principles, which require the measurement
of financial position and operating results in terms of historical dollars
without considering changes in the relative purchasing power of money over
time due to inflation. Unlike most industrial companies, virtually all of
the assets and liabilities of a financial institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services.
IMPACT OF PROPOSED LEGISLATION (BIF/SAIF)
The deposits of savings associations such as the Bank are presently
insured by the Savings Association Insurance Fund (the "SAIF"), which along
with the Bank Insurance Fund (the "BIF") are the two insurance funds
administered by the Federal Deposit Insurance Corporation (the "FDIC").
Financial institutions which are members of the BIF are experiencing
substantially lower deposit insurance premiums because the BIF has achieved
its required level of reserves while the SAIF has not yet achieved its required
reserves. A recapitalization plan for the SAIF under consideration by
Congress reportedly provides for a one-time special assessment of 0.66% of
deposits to be imposed on all SAIF insured institutions to enable the SAIF to
achieve its required level of reserves. If the proposed assessment of 0.66%
was effected based on deposits as of March 31, 1995 (as proposed), the Bank's
special assessment would amount to approximately $880,000, before taxes.
Accordingly, this special assessment would significantly increase
non-interest expense in the quarter in which it is paid and would adversely
affect the Company's results of operations. Conversely, depending upon the
Bank's capital level and supervisory rating, and assuming the insurance
premium levels for BIF and SAIF members are the same as they were prior to
the lowering of BIF insurance premiums, future deposit insurance premiums are
expected to decrease significantly, to as low as 0.00% from the 0.23% of
deposits currently paid by the Bank, which would reduce non-interest expense
for future periods. No assurance can be given, however, as to whether the
recapitalization plan will be implemented as proposed or as to the nature or
extent of any competitive disadvantage which may be experienced by SAIF
member institutions.
10
<PAGE>
==============================================================================
MANAGEMENT'S REPORT
Management is responsible for the preparation and integrity of the
consolidated financial statements and other information presented in this
annual report. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and reflect
management's judgments and estimates with respect to certain events and
transactions.
Management is responsible for maintaining a system of internal control.
The purpose of this system is to provide reasonable assurance that
transactions are recorded in accordance with management's authorization,
assets are safeguarded against loss or unauthorized use, and that underlying
financial records support the preparation of financial statements. The
system includes the communication of written policies and procedures,
selection of qualified personnel, and appropriate segregation
of responsibilities.
The Board of Directors meets periodically with Company management and the
independent auditors, KPMG Peat Marwick LLP, to review matters related to the
quality of financial reporting, internal control, and the nature, extent and
result of the audit efforts.
The independent auditors conduct an annual audit of the Company's
consolidated financial statements to enable them to express an opinion as to
the fair presentation of the statements. In connection with the audit, the
independent auditors consider the internal control structure, to the extent
they consider necessary to determine the nature, timing and extent of their
auditing procedures.
Eldorus Maynard William J. LaCalamito
Chairman and Chief Executive Officer President
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Peekskill Financial Corporation:
We have audited the accompanying consolidated balance sheets of Peekskill
Financial Corporation and subsidiary as of June 30, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the years in the three-year period ended June 30,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material aspects, the financial position of Peekskill
Financial Corporation and subsidiary as of June 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1996 in conformity with generally accepted
accounting principles.
As discussed in notes 1, 2, 6 and 7 to the consolidated financial
statements, the Company changed its method of accounting for certain
postretirement benefits in fiscal 1996, securities in fiscal 1995, and income
taxes in fiscal 1994.
Stamford, Connecticut
July 19, 1996
11
<PAGE>
CONSOLIDATED BALANCE SHEETS
==============================================================================
(In thousands, except share data)
ASSETS JUNE 30,
---------------------
1996 1995
-------- --------
Cash and due from banks $ 1,020 $ 1,381
Interest-bearing deposits 16,300 3,300
Securities (note 2)
Held-to-maturity (fair value of $128,089 in 1996
and $105,659 in 1995) 129,200 105,421
Available-for-sale (amortized cost of $2,500
in 1996 and $1,998 in 1995) 2,459 1,976
-------- --------
Total Securities 131,659 107,397
Loans, net (note 3):
Loans 40,076 41,534
Allowance for loan losses (519) (474)
-------- --------
Total loans, net 39,557 41,060
Federal Home Loan Bank stock 1,319 1,319
Accrued interest receivable 1,111 848
Office properties and equipment (note 4) 184 227
Prepaid expenses and other assets 173 184
-------- --------
Total Assets $191,323 $155,716
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Depositor accounts (note 5) $128,304 $130,933
Mortgage escrow 2,031 3,190
Accrued interest payable and other liabilities (note 9) 1,144 221
Deferred income taxes, net (note 6) 70 194
-------- --------
Total liabilities 131,549 134,538
STOCKHOLDERS' EQUITY (note 8):
Preferred stock (par value $0.01 per share; 100,000
shares authorized; none issued or outstanding) --- ---
Common stock (par value $0.01 per share; 4,900,000
shares authorized; 4,099,750 issued and outstanding) 41 ---
Additional paid-in capital 39,972 ---
Unallocated common stock (319,780 shares) held by
employee stockownership plan ("ESOP") (3,198) ---
Retained earnings, substantially restricted 22,984 21,191
Net unrealized loss on available-for-sale
securities, net of taxes (note 2) (25) (13)
-------- --------
Total stockholders' equity 59,774 21,178
-------- --------
Total liabilities and stockholders' equity $191,323 $155,716
======== ========
See accompanying notes to consolidated financial statements.
12
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
==============================================================================
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Loans $ 3,363 $ 3,522 $ 3,604
Securities 7,548 7,063 7,125
Interest-bearing deposits and other 883 137 129
-------- -------- --------
Total interest and dividend income 11,794 10,722 10,858
INTEREST EXPENSE:
Depositor accounts and mortgage escrow
deposits (note 5) 5,390 4,671 4,171
Federal Home Loan Bank advances 11 114 45
-------- -------- --------
Total interest expense 5,401 4,785 4,216
-------- -------- --------
Net interest income 6,393 5,937 6,642
Provision for loan losses (note 3) 45 160 60
-------- -------- --------
Net interest income after provision
for loan losses 6,348 5,777 6,582
-------- -------- --------
NON-INTEREST INCOME:
Loan fees and service charges 207 201 227
Gain on sale of real estate owned 24 --- ---
Other 77 76 88
-------- -------- --------
Total non-interest income 308 277 315
-------- -------- --------
NON-INTEREST EXPENSE:
Compensation and benefits (note 7) 1,383 1,229 1,133
Federal deposit insurance premiums 354 355 319
Occupancy costs 328 301 307
Computer service fees 179 171 165
Safekeeping and custodial services 93 88 97
Other 470 346 294
-------- -------- --------
Total non-interest expense 2,807 2,490 2,315
-------- -------- --------
Income before income tax expense and
cumulative effect of
change in accounting principles 3,849 3,564 4,582
Income tax expense (note 6) 1,628 1,640 2,040
-------- -------- --------
Income before cumulative effect of
change in accounting principles 2,221 1,924 2,542
Cumulative effect of change in
accounting principles:
Income taxes (note 6) --- --- (205)
Postretirement health care benefits,
net of taxes (note 1) (59) --- ---
-------- -------- --------
Net income $ 2,162 $ 1,924 $ 2,337
======== ======== ========
Earnings per share, from date of conversion $ 0.36
========
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
==============================================================================
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- ADDITIONAL COMMON NET UNREALIZED TOTAL
SHARES PAID-IN STOCK HELD RETAINED LOSS ON STOCKHOLDERS'
OUTSTANDING AMOUNT CAPITAL BY ESOP EARNINGS SECURITIES EQUITY
------------ --------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993 $ --- $ --- $ --- $16,930 $ --- $ 16,930
Net Income --- --- --- 2,337 --- 2,337
------- -------- -------- -------- ------- --------
Balance at June 30, 1994 --- --- --- 19,267 --- 19,267
Net income --- --- --- 1,924 --- 1,924
Net unrealized loss on securities
available-for-sale, net of taxes:
As of July 1, 1994 --- --- --- --- (28) (28)
Net change during the year --- --- --- --- 15 15
------- -------- -------- -------- ------- --------
Balance at June 30, 1995 --- --- --- --- 21,191 (13) 21,178
Net income --- --- --- --- 2,162 --- 2,162
Dividends paid ($0.09 per share) --- --- --- --- (369) --- (369)
Issuance of common stock 4,099,750 41 39,959 --- --- --- 40,000
Shares purchased by ESOP --- --- --- (3,280) --- --- (3,280)
ESOP shares committed
to be released --- --- 13 82 --- --- 95
Increase in net unrealized loss
on available-for-sale securities,
net of taxes --- --- --- --- --- (12) (12)
--------- ------- -------- -------- -------- ------- --------
Balance at June 30, 1996 4,099,750 $ 41 $ 39,972 $ (3,198) $ 22,984 $ (25) $ 59,774
========= ====== ======== ======== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
===============================================================================
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,162 $ 1,924 $ 2,337
Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect of change in accounting principle 59 --- 205
Provision for loan losses 45 160 60
Gain on sale of real estate owned (24) --- ---
Depreciation and amortization expense 66 67 78
ESOP expense 95 --- ---
Net amortization and accretion of deferred fees, discounts
and premiums (186) (138) (142)
Net (increase) decrease in accrued interest receivable (263) 35 (116)
Net decrease (increase) in prepaid and other assets 11 (48) (24)
Change in deferred taxes (117) (45) 34
Net increase (decrease) in accrued interest payable and
other liabilities 423 17 116
-------- -------- --------
Net cash provided by operating activities 2,271 1,972 2,548
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities:
Held-to-maturity (44,722) (7,500) ---
Available-for-sale (1,500) --- ---
Held-for-investment --- --- (37,580)
Proceeds from principal payments, maturities and calls of securities:
Held-to-maturity 21,068 14,143 ---
Available-for-sale 1,000 --- ---
Held-for-investment --- --- 26,431
Principal collection on loans, net of originations 1,319 (1,208) 2,860
(Purchases) redemption of Federal Home Loan Bank stock --- (55) 69
Proceeds from sale of real estate owned 163 --- ---
Purchases of office properties and equipment (23) (9) (13)
-------- -------- --------
Net cash (used in) provided by investing activities (22,695) 5,371 (8,233)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in depositor accounts (2,629) (2,958) 4,307
Net (decrease) increase in mortgage escrow deposits (1,159) 139 (31)
Proceeds from Federal Home Loan Bank advances 7,630 14,100 11,000
Repayments of Federal Home Loan Bank advances (7,130) (14,100) (11,000)
Net proceeds from issuance of common stock 40,000 --- ---
Common stock purchased by ESOP (3,280) --- ---
Dividends paid (369) --- ---
-------- -------- --------
Net cash provided by (used in) financing activities 33,063 (2,819) 4,276
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 12,639 4,524 (1,409)
Cash and cash equivalents at beginning of year 4,681 157 1,566
-------- -------- --------
Cash and cash equivalents at end of year $17,320 $ 4,681 $ 157
======== ======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 5,366 $ 4,791 $ 4,241
Income taxes paid 1,722 1,559 1,919
Mortgage loans transferred to real estate owned 139 --- ---
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
==============================================================================
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
As discussed in note 8, on December 29, 1995 Peekskill Financial Corporation
(the "Holding Company," or collectively with its wholly-owned subsidiary, the
"Company") became the holding company for First Federal Savings Bank (the
"Bank"), formerly First Federal Savings and Loan Association of Peekskill,
upon the completion of the conversion of the Bank from a mutual savings bank
to a stock savings bank (the "Conversion").
The primary market area of the Company, with three full service branches,
consists of northern Westchester, Putnam and Dutchess counties. The Bank is
engaged principally in the business of attracting deposits from the general
public and investing those funds in residential mortgage loans and
mortgage-backed and other securities. Deposits are insured up to applicable
limits by the Savings Association Insurance Fund of the Federal Deposit
Insurance Corporation.
The following is a summary of the significant accounting policies followed by
the Company in the preparation of the consolidated financial statements.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Holding
Company and the Bank. All significant intercompany accounts and transactions
have been eliminated in the consolidated financial statements. Prior to
Conversion, the Holding Company had no operations other than those of an
organizational nature. Subsequent thereto, the Holding Company's only
significant business activity is the ownership of the Bank. All financial
information included herein for periods prior to the Conversion refers to the
Bank.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Material estimates that are particularly susceptible to
near-term change include the allowance for loan losses and the valuation
allowance for deferred tax assets. The Company's accounting policies with
respect to these estimates are discussed below.
For purposes of reporting cash flows, cash equivalents are defined as cash
and interest-bearing deposits.
Certain reclassifications have been made to prior years amounts to conform to
the current year presentation.
SECURITIES
The securities portfolio includes mortgage-backed securities, consisting of
collateralized mortgage obligations ("CMOs") and pass-through securities
issued by United States government-sponsored entities or government agencies
(the Federal Home Loan Mortgage Corporation, the Federal National Mortgage
Association and the Government National Mortgage Association).
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities",
prospectively on July 1, 1994. SFAS No. 115 requires that individual
securities be classified as held-to maturity securities, trading securities,
or available-for-sale securities. Securities classified as held-to-maturity
are limited to debt securities for which the entity has the positive intent
and ability to hold to maturity. Trading securities are debt and equity
securities that are bought principally for the purpose of selling them in the
near term. All other debt and equity securities are classified as
available-for-sale.
Securities held-to-maturity are carried at amortized cost under SFAS No. 115.
Available-for-sale securities are carried at fair value, with unrealized
gains and losses excluded from earnings and reported on a net-of-tax basis as
a separate component of equity. The Company has no trading securities.
Federal Home Loan Bank stock is a restricted security held in accordance with
certain regulatory requirements and, accordingly, is carried at cost.
Premiums and discounts are amortized to interest income on a level yield
basis over the term of the security. Realized gains and losses on sales of
securities are determined based on the amortized cost of the specific
securities sold. Unrealized losses on held-to-maturity and
available-for-sale securities are charged to earnings when the decline in
fair value of a security is judged to be other than temporary.
16
<PAGE>
==============================================================================
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level deemed adequate by
management based on an evaluation of the known and inherent risk in the
portfolio, past loan loss experience, estimated value of underlying
collateral, and current and prospective economic conditions. In management's
judgment, the allowance for loan losses is adequate to absorb probable losses
in the existing portfolio. The allowance is increased by the provision for
loan losses charged to operations and decreased by charge-offs (net of
recoveries).
Establishing the allowance for loan losses involves significant judgments
utilizing the best information available at the time of review. Those
judgments are subject to further review by various sources, including the
Company's regulators. Further adjustments to the allowance may be necessary
based on changes in economic and real estate market conditions, further
information obtained regarding known problem loans, the identification of
additional problem loans, and other factors.
Effective July 1, 1995, the Company prospectively adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan" as amended by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures." Under these statements a loan is considered to be impaired
when, based on current information and events, it is probable that the
creditor will be unable to collect all principal and interest contractually
due. Creditors are permitted to measure impaired loans based on (i) the
present value of expected future cash flows discounted at the loan's
effective interest rate, (ii) the loan's observable market price or (iii) the
fair value of the collateral if the loan is collateral dependent. If the
approach used results in a measurement that is less than an impaired loan's
recorded investment, an impairment loss is recognized as part of the
allowance for loan losses. SFAS No. 114 generally does not apply to large
groups of smaller-balance homogeneous loans, such as residential mortgages,
that are collectively evaluated for impairment. The Company had no impaired
loans at June 30, 1996 or during fiscal 1996 under SFAS No. 114.
INTEREST AND FEES ON LOANS
Interest income is accrued monthly on outstanding loan principal balances
unless management considers collection to be uncertain. Loan origination
fees and certain direct loan origination costs are deferred, and the net fee
or cost is recognized as an adjustment to interest income using the
level-yield method over the contractual life of the related loan. Net
deferred fees and costs applicable to prepaid loans are recognized in
interest income at the time of prepayment.
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are comprised of land (carried at cost) and
buildings, furniture, fixtures, equipment, and leasehold improvements
(carried at cost less accumulated depreciation and amortization).
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets. Leasehold improvements are amortized
using the straight-line method over the shorter of the lease or the estimated
useful life of the improvement. Repairs and maintenance, as well as renewals
and replacements of a routine nature, are charged to expense, while costs
incurred to improve or extend the life of existing assets are capitalized.
INCOME TAXES
Effective July 1, 1993 the Company changed its method of accounting for
income taxes upon adoption of SFAS No. 109, "Accounting for Income Taxes,"
and reported the cumulative effect of the accounting change in the fiscal
1994 statement of income. Under the asset and liability method required by
SFAS No. 109, deferred taxes are recognized for the estimated future tax
effects attributable to temporary differences and tax loss carryforwards.
Temporary differences are differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
A deferred tax liability is recognized for all temporary differences that
will result in future taxable income. A deferred tax asset is recognized for
all temporary differences that will result in future tax deductions and for
all unused tax loss carryforwards, subject to reduction of the asset by a
valuation allowance in certain circumstances. This valuation allowance is
recognized if, based on an analysis of available evidence, management
determines that it is more likely than not that some portion or all of the
deferred tax asset will not be realized. The valuation allowance is subject
to ongoing adjustment based on changes in circumstances that affect
management's judgment about the realizability of the deferred tax asset.
Adjustments to increase or decrease the valuation allowance are charged or
credited, respectively, to income tax expense.
17
<PAGE>
=============================================================================
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax laws or rates is recognized in
income in the period that includes the enactment date of the change.
POSTRETIREMENT BENEFIT PLANS
Effective July 1, 1995, the Company changed its method of accounting for
postretirement benefits upon adoption of SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," and reported the cumulative
effect of the accounting change in the fiscal 1996 consolidated statement of
income. The cumulative effect of the accounting change ($59,000) represented
the full amount of the Company's accumulated benefit obligation at July 1,
1995, net of related income taxes. Under SFAS No. 106, the cost of
postretirement health care benefits is recognized on an accrual basis as such
benefits are earned by active employees. Prior to fiscal 1996, the Company
recognized the cost of these benefits on a pay-as-you-go (cash) basis.
EMPLOYEE STOCK OWNERSHIP PLAN
Compensation expense is recognized equal to the average fair value, as
defined, of ESOP shares that are committed to be released for allocation to
participant accounts. To the extent that the fair value of these shares
differs from the original cost, the difference is charged or credited to
stockholders' equity (additional paid-in capital). The cost of unallocated
ESOP shares not yet committed to be released is reflected as a reduction of
stockholders' equity.
EARNINGS PER SHARE
Earnings per share is computed based on net income for the period following
the Conversion divided by the weighted average number of common shares
outstanding. Unallocated ESOP shares that have not been committed to be
released to participants are excluded from outstanding shares in computing
earnings per share. For the six-month period ended June 30, 1996 the Company
had 3,776,387 weighted average shares outstanding.
18
<PAGE>
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2. SECURITIES
The Company prospectively adopted SFAS No. 115 effective July 1, 1994 and
classified securities with a carrying value of $2.0 million as
available-for-sale and $112.0 million as held-to-maturity. As a result of
adoption, equity at July 1, 1994 was decreased by $28,000, representing the
net unrealized loss on securities available-for-sale less applicable income
taxes. At June 30, 1996 the net unrealized loss on the available-for-sale
portfolio was $41,000 ($25,000 net of taxes) compared to a net loss of
$22,000 ($13,000 net of taxes) at June 30, 1995.
A summary of the Company's securities at June 30 follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED --------------------- FAIR
COST GAINS LOSSES VALUE
---------- ------- ------- --------
1996 (IN THOUSANDS)
<S> <C> <C> <C> <C>
HELD-TO-MATURITY SECURITIES
Mortgage-backed securities:
GNMA certificates $ 36,240 $145 $ (448) $ 35,937
FNMA certificates 7,096 4 (144) 6,956
FHLMC certificates 64,437 184 (400) 64,221
Collateralized mortgage obligations 10,448 18 (205) 10,261
-------- ----- -------- --------
Total 118,221 351 (1,197) 117,375
US Agency and other debt securities 10,979 3 (268) 10,714
-------- ----- -------- --------
Total $129,200 $354 $(1,465) $128,089
======== ===== ======== ========
AVAILABLE-FOR-SALE
US Agency and other debt securities $ 2,500 $ 4 $ (45) $ 2,459
1995
HELD-TO-MATURITY SECURITIES
Mortgage-backed securities:
GNMA certificates $ 19,190 $251 $ (41) $ 19,400
FNMA certificates 3,135 22 (3) 3,154
FHLMC certificates 64,597 249 (127) 64,719
Collateralized mortgage obligations 13,025 39 (79) 12,985
-------- ----- -------- --------
Total 99,947 561 (250) 100,258
US Agency and other debt securities 5,474 14 (87) 5,401
-------- ----- -------- --------
Total $105,421 $575 $ (337) $105,659
======== ===== ======== ========
AVAILABLE-FOR-SALE
US Agency and other debt securities $ 1,998 $ 7 $ (29) $ 1,976
======== ===== ======== ========
</TABLE>
The Company did not sell any securities during fiscal 1996, 1995 and 1994.
Amortized cost of securities at June 30, 1996 consisted of approximately
$89.8 million of fixed rate securities and $41.9 million of adjustable rate
securities. Collateralized Mortgage Obligations at June 30, 1996 consisted
of approximately $10.0 million and $475,000 of government agency and private
label CMO's, respectively.
The amortized cost and fair value of debt securities, other than
mortgage-backed securities, are shown below by remaining term to contractual
maturity as of June 30, 1996. Actual maturities may differ from these
amounts because certain issuers have the right to call or prepay obligations.
<TABLE>
<CAPTION>
HELD-TO-MATURITY AVAILABLE-FOR-SALE
AMORTIZED FAIR AMORTIZED FAIR
--------------------- ----------------------
COST VALUE COST VALUE
-------- ------- -------- --------
<S> <C> <C> <C> <C>
(In thousands)
One year or less $ 1,500 $ 1,503 $ - $ -
More than one year to five years 4,494 4,369 500 478
More than five years to ten years 3,486 3,362 1,500 1,487
More than ten years 1,499 1,480 500 494
------- ------- ------- -------
Total $10,979 $10,714 $ 2,500 $ 2,459
======= ======= ======= =======
</TABLE>
19
<PAGE>
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3. LOANS
Loans at December 31 consist of the following:
1996 1995
-------- --------
MORTGAGE LOANS: (IN THOUSANDS)
One-to-four family $38,644 $40,112
Multi-family 394 426
Commercial 285 308
Construction 579 725
Loans in process (114) (273)
-------- --------
39,788 41,298
-------- --------
Other loans:
Passbook loans and other 404 356
Student loans 143 215
-------- --------
547 571
-------- --------
Total Loans 40,335 41,869
Net deferred loan origination fees (259) (335)
Allowance for loan losses (519) (474)
-------- --------
Total loans, net $39,557 $41,060
======== ========
Total loans (net of loans in process) consisted of approximately $39.2
million of fixed rate and $1.1 million of adjustable rate loans at June 30,
1996.
Conventional mortgage loans delinquent 90 days or more or in process of
foreclosure amounted to $1.3 million (26 loans) and $2.1 million (39 loans)
at June 30, 1996 and 1995, respectively. There were no loans on non-accrual
status at June 30, 1996 and 1995.
However, at June 30, 1996 there were participation loans being serviced by
the FDIC in the amount of $1.1 million for which payments from the FDIC were
60 days past due. The FDIC is disputing its obligation under the applicable
agreements to pass through principal and interest payments on the loans
whether or not the same is collected from the borrowers. The Bank has placed
the loans on non-accrual status subsequent to June 30, 1996. No resolution
of this matter has been reached and no assurance can be made at this time as
to whether and when payments under the participation loans will resume.
Activity in the allowance for loan losses is summarized as follows for the
years ended June 30:
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
Balance at beginning of year $474 $336 $276
Provision for losses 45 160 60
Charge-offs - (22) -
---- ---- ----
Balance at end of year $519 $474 $336
==== ==== ====
4. OFFICE PROPERTIES AND EQUIPMENT
A summary of office properties and equipment at June 30 follows:
1996 1995
----- -----
(IN THOUSANDS)
Land $ 55 $ 55
Buildings 638 638
Leasehold improvements 216 216
Furniture, fixtures and equipment 313 290
------ -----
Total office properties and equipment 1,222 1,199
Less accumulated depreciation and accretion (1,038) (972)
------ -----
Office properties and equipment, net $ 184 $ 227
------ -----
Depreciation and amortization expense was $66,000, $67,000 and $78,000 for
the years ended June 30, 1996, 1995 and 1994, respectively.
20
<PAGE>
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5. DEPOSITOR ACCOUNTS
Depositor accounts at June 30 are summarized below:
<TABLE>
<CAPTION>
1996 1995
------------------------ ----------------------
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Money market demand/NOW $ 12,090 2.45% $ 12,914 2.45%
Regular Savings 57,664 3.00 64,142 3.00
Club 725 3.00 733 3.00
-------- --------
70,479 2.91% 77,789 2.91%
Savings certificates by remaining period to maturity:
Under one year 48,026 5.38% 39,012 5.56%
One year to under three years 5,464 5.54 8,391 6.35
Three years and over 4,335 6.94 5,741 6.40
-------- --------
57,825 5.51 53,144 5.77
-------- --------
Total $128,304 4.08% $130,933 4.07%
======== ========
</TABLE>
The aggregate amount of savings certificates in denominations of $100,000 or
more was $7.3 million and $6.3 million at June 30, 1996 and 1995, respectively.
6. INCOME TAXES
As discussed in note 1, the Company adopted SFAS No. 109 effective July 1,
1993. The cumulative effect of the change in accounting principle, in the
amont of $205,000, has been reported as a separate charge to earnings in the
fiscal 1994 statement of income.
Income tax expense for the years ended June 30 consists of the following
components:
1996 1995 1994
------- ------ -------
(IN THOUSANDS)
FEDERAL:
Current $1,235 $1,184 $1,374
Deferred (88) (34) 36
------ ------ ------
Total 1,147 1,150 1,410
------ ------ ------
NEW YORK STATE:
Current 510 501 627
Deferred (29) (11) 3
------ ------ ------
Total 481 490 630
------ ------ ------
TOTAL:
Current 1,745 1,685 2,001
Deferred (117) (45) 39
------ ------ ------
Total $1,628 $1,640 $2,040
====== ====== ======
Total income tax expense differs from the amounts computed by applying the
applicable statutory Federal income tax rate of 34% to income before income
taxes. A reconciliation of tax expense at the statutory rate to the
Company's actual tax expense follows for the years ended June 30:
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
Tax at Federal statutory rate $1,309 $1,212 $1,558
State taxes, net of Federal tax benefit 317 323 416
Other, net 2 105 66
------ ------ ------
$1,628 $1,640 $2,040
------ ------ ------
21
<PAGE>
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The tax effects of temporary differences that give rise to the Company's
deferred tax assets and liabilities at June 30 are as follows:
1996 1995
---- ----
(IN THOUSANDS)
DEFERRED TAX LIABILITIES:
Tax bad debt reserve in excess of base-
year amount $ 506 $ 572
Other taxable temporary differences 7 13
----- -----
Total gross deferred tax liabilities 513 585
----- -----
DEFERRED TAX ASSETS:
Allowance for loan losses 213 196
Loan origination fees 107 139
Depreciation 37 53
Capital loss carryforward 428 431
Other deductible temporary differences 86 3
----- -----
Total gross deferred tax assets 871 822
Less valuation allowance (428) (431)
----- -----
Deferred tax assets, net 443 391
----- -----
Net deferred tax liabilities $ 70 $ 194
===== =====
Based on the Company's historical and anticipated future pre-tax earnings,
management believes that it is more likely than not that the Company's net
deferred tax assets will be realized.
A capital loss carryforward of approximately $1.0 million is available at
June 30, 1996 to reduce future capital gains, if any, through 1998. The
valuation allowance for deferred tax assets relates to this unused
carryforward.
If certain definition tests and other conditions were met, the Bank is
allowed a special bad debt deduction in determining its federal taxable
income, through December 31, 1995 based upon either a specified experience
formula or a percentage of its taxable income. For income tax purposes, bad
debt reserves are maintained equal to the excess of tax bad debt deductions
over actual losses. At June 30, 1996, the Bank's federal tax bad debt
reserve was approximately $5.7 million, which exceeded the "base-year"
reserves by approximately $787,000. In August 1996, the federal tax law was
amended to (1) require recapture (over a six-year period) of bad debt
reserves in excess of the base-year amount and (2) eliminate the bad debt
deduction based on a percentage of taxable income for tax years beginning
after December 31, 1995. Since the bank has established a deferred tax
liability of $268,000 at June 30, 1996 for the reserves in excess of the
base-year amount, enactment of the new recapture provisions did not result in
an adjustment to the Bank's deferred tax accounts. In accordance with SFAS
No. 109, deferred tax liabilities have not been recognized with respect to
the base-year tax reserves, since the Bank does not expect that these amounts
will become taxable in the future. Events that would result in taxation of
these reserves include certain capital distributions by the Bank to the
Holding Company. The unrecognized federal deferred tax liability applicable
to the base-year tax reserves was approximately $787,000 at June 30, 1996.
In August 1996, the New York State tax law was amended to prevent a recapture
of the bank's bad debt reserve, and to permit continued future use of the bad
debt reserve method for the purpose of determining the bank's New York State
tax liability. The Bank has established a deferred tax liability of $238,000
for the excess of its current level of state tax bad debt reserves over the
base-year tax reserves, as defined in the prior law. Due to the foregoing
amendment on the New York State laws, the Company will eliminate this
deferred tax liability (with a corresponding reduction in income tax expense)
during the quarter ending September 30, 1996. After such adjustment the
unrecognized state deferred tax liability applicable to the base-year tax
reserve, as defined in the new law, is approximately $642,000.
7. EMPLOYEE BENEFIT AND STOCK OPTION PLANS
PENSION PLANS
All eligible employees are included in a non-contributory, defined benefit
pension plan. Benefits are based on credited service and final earnings, as
defined. The Company's policy is to fund the consulting actuary's maximum
recommended contribution, which includes the amortization of unfunded
liabilities over 30 years from their date of establishment.
22
<PAGE>
The following is a reconciliation of the funded status of the plan and the
amount of accrued pension cost at June 30:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
(IN THOUSANDS)
Accumulated benefit obligation:
Vested $(1,846) $(1,809)
Non-vested (46) (30)
------- -------
Total accumulated benefit obligation (1,892) (1,839)
Effect of future salary increases (234) (217)
------- -------
Projected benefit obligation for service rendered to date (2,126) (2,056)
Plan assets at fair value, primarily cash
and short-term investments 1,690 1,473
------- -------
Projected benefit obligation in excess or plan assets (436) (583)
Unrecognized net loss 84 239
Unrecognized prior service cost 74 51
Unrecognized net transition obligation 39 105
------- -------
Accrued pension cost (included in other liabilities) $ (239) $ (188)
======= =======
</TABLE>
The unrecognized net transition obligation is being amortized over a period
of approximately 15 years.
The components of net pension expense follow for the years ended June 30:
1996 1995 1994
----- ----- ------
(IN THOUSANDS)
Service cost $ 60 $ 62 $ 57
Interest cost 149 165 139
Return on plan assets (149) (132) (130)
Net amortization and deferral 22 25 22
---- ---- ----
Net pension expense $ 82 $ 120 $ 88
==== ===== ====
A discount rate of 7.0% and a rate of increase in future compensation levels
of 5.0% were used in determining the actuarial present value of the projected
benefit obligation at June 30, 1996; 8.25% and 6.0%, respectively at June 30,
1995 and 7.25% and 4.5%, respectively, at June 30, 1994. The expected
long-term rate of return on plan assets was 9% for 1996, 1995 and 1994.
POSTRETIREMENT HEALTH CARE BENEFITS
Substantially all employees who retired prior to October 19, 1995 were
eligible for postretirement health care benefits (medical and dental) if they
met certain age and length of service requirements. As discussed in note 1,
effective July 1, 1995 the Company changed its method of accounting for the
cost of these benefits to adopt SFAS No. 106, and reported the cumulative
effect of the accounting change in the fiscal 1996 statement of income.
Under SFAS No. 106, the cost of postretirement health care benefits is
recognized on an accrual basis as such benefits are earned by active
employees.
The Company recognized the full amount of its accumulated postretirement
benefit obligation as of July 1, 1995, in the amount of $97,000, as a charge
to earnings. The after-tax charge of $59,000 has been reported in the fiscal
1996 statement of income as the cumulative effect of a change in accounting
principle. The accumulated postretirement benefit obli-gation as of June 30,
1996 was $95,000 and the fiscal 1996 expense was approximately $3,000.
The accumulated postretirement benefit obligation was determined using a
discount rate of 8.25%, and the assumed rate of increase in future health
care costs was 10.5% for fiscal 1997, gradually decreasing to 5.5% in the
fiscal year 2006 and remaining at that level thereafter.
23
<PAGE>
===============================================================================
EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the Conversion, the Company established an employee stock
ownership plan ("ESOP") for eligible employees. The ESOP borrowed
approximately $3.3 million from the Holding Company and used the funds to
purchase 327,980 shares of the Holding Company's common stock sold in the
offering. The ESOP will repay the loan primarily from the Bank's
contributions to the ESOP over a twenty-year period. The Bank makes
semi-annual contributions equal to the debt service requirements less all
dividends received by the ESOP.
Shares purchased by the ESOP are held in a suspense account by the plan
trustee for future allocation to participants on June 30, the plan year-end,
of each year. Shares released from the suspense account are allocated to
participants on the basis of their relative compensation. Participants
become vested in the shares allocated to their respective accounts over a
period not to exceed five years. Any forfeited shares are allocated to other
participants in the same proportion as contributions. A total of 8,200
shares were allocated to participants as of June 30, 1996. Expense
recognized in fiscal 1996 with respect to these 8,200 shares amounted to
$95,000, based on the average fair value, as defined, of the Holding
Company's common stock for the period. The cost of the 319,780 shares which
have not yet been committed to be released to participant accounts ($3.2
million at June 30, 1996) is reflected as a reduction to stockholders'
equity. The fair value of these shares was approximately $3.8 million at
that date.
STOCK OPTION PLAN
On July 3, 1996, stockholders approved The Peekskill Financial Corporation
1996 Stock Option Plan ("Stock Option Plan"). Under the Stock Option Plan,
409,975 shares of authorized but unissued Holding Company stock would be
reserved for issuance upon option exercises. Options under this plan may be
either non-qualified stock options or incentive stock options. Each option
entitles the holder to purchase one share of common stock at an exercise
price of $11.81, the fair market value on the date of the grant. These
options vest ratably over five years from the date of grant. As of July 3,
1996 approximately 297,000 options have been granted.
RECOGNITION AND RETENTION PLAN
On July 3, 1996 stockholders approved The Peekskill Financial Corporation
1996 Recognition and Retention Plan ("RRP"). The purpose of this plan is to
provide officers and non-employee directors of the Company with a proprietary
interest in the Company in a manner designed to encourage their retention.
Awards granted under this plan vest ratably over five years from the date of
grant. On July 16, 1996 the Company completed the funding of the RRP by
purchasing 163,990 shares of common stock in the open market for
approximately $2.0 million. The cost of the shares will be reflected as a
reduction to stockholders equity; shares granted will be amortized to
compensation expense over the related vesting period. As of July 3, 1996
approximately 120,000 shares have been granted.
SAVINGS AND INVESTMENT PLAN
The Company maintains a Savings and Investment Plan for the benefit of its
employees (the "401(k) Plan"). The Plan and its related Trust comply with
the applicable provisions of Sections 401(a), 401(k) and 501(a) of the
Internal Revenue Code of 1986. This Plan was frozen in December of 1995, not
allowing employees to make salary reduction contributions. It is anticipated
that the Company will allow salary reduction contributions in the future, but
without an employer match.
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENTS
The Company has entered into non-qualified Supplemental Executive Retirement
Agreements ("SERA") with certain executives during fiscal 1996 to provide
them with supplemental retirement benefits in addition to the benefits
provided by the pension plan. The expense related to these agreements
amounted to $29,000 during fiscal 1996. The SERA expense was determined
using a discount rate of 8.25% and an expected long-term rate of 9.0%.
24
<PAGE>
==============================================================================
8. STOCKHOLDERS' EQUITY
STOCK CONVERSION
Concurrent with the Conversion, on December 29, 1995, the Holding Company
sold 4,099,750 shares of its common stock in a subscription offering at a
price of $10 per share, for net proceeds of $40.0 million. The Holding
Company used $20.0 million of the net proceeds to acquire all of the common
stock issued by the Bank in the Conversion.
In accordance with regulatory requirements, the Bank established a
liquidation account at the time of Conversion in the amount of $21.2 million,
equal to its equity at June 30, 1995. The liquidation account is maintained
for the benefit of eligible account holders who continue to maintain their
accounts at the bank after the Conversion. The liquidation account will be
reduced annually to the extent that eligible account holders have reduced
their qualifying deposits as of each anniversary date. Subsequent increases
will not restore an eligible account holder's interest in the liquidation
account. In the event of a complete liquidation of the Bank, each eligible
account holder will be entitled to receive a distribution from the
liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held.
CAPITAL DISTRIBUTIONS
The Bank may not declare or pay cash dividends on or repurchase any of its
shares of common stock if the effect thereof would cause equity to be reduced
below applicable regulatory capital requirements or the amount required to be
maintained for the liquidation account. The OTS capital distribution
regulations applicable to savings institutions (such as the Bank) that meet
their regulatory capital requirements, generally limit dividend payments in
any one year to the greater of (i) 100% of year-to-date net income plus an
amount that would reduce surplus capital by one-half or (ii) 75% of net
income for the most recent four quarters. Surplus capital is the excess of
actual capital at the beginning of the year over the institution's minimum
regulatory capital requirement. The Bank did not pay any dividends to the
Holding Company during fiscal 1996.
Unlike the Bank, the Holding Company is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders. The Holding
Company is subject, however, to the requirements of Delaware law, which
generally limits dividends to an amount equal to the excess of the net assets
of the Holding Company (the amount by which total assets exceed total
liabilities) over its statutory capital, or if there is no such excess, to
its net profits for the current and/or immediately preceding fiscal year.
REGULATORY CAPITAL REQUIREMENTS
The regulations of the OTS require that savings institutions, such as the
Bank, maintain minimum levels of regulatory capital. Under the regulations
in effect at June 30, 1996, the Bank was required to maintain (i) a minimum
tangible capital ratio of 1.5% of total adjusted assets, (ii) a minimum
leverage (core capital) ratio of 3.0% of total adjusted assets and (iii)
minimum tier I and total risk-based capital ratios of 4.0% and 8.0%,
respectively.
Under its prompt corrective action regulations, the OTS is required to take
certain supervisory actions with respect to undercapitalized institutions.
These regulations establish a framework for the classification of depository
institutions into five categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. Generally, an institution is considered well capitalized
if it has a leverage, core capital, ratio of at least 5.0%, a Tier I
risk-based capital ratio of at least 6.0% and a total risk-based capital
ratio of at least 10.0%.
At June 30, 1996 the bank was in compliance with the OTS regulatory capital
requirements and was classified as a well-capitalized institution, with
tangible and leverage capital ratios of 24.7%, and Tier I and total
risk-based capital ratios of 103.2% and 104.4%, respectively.
25
<PAGE>
===============================================================================
9. COMMITMENTS AND CONTINGENCIES
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Company's financial instruments with off-balance sheet risk at June 30,
1996 and 1995 were limited to fixed-rate mortgage loan origination
commitments of $4.4 million and $373,000, respectively. These instruments
involve elements of credit risk and interest rate risk in addition to the
amounts recognized in the consolidated balance sheets. The contractual
amounts represent the Company's maximum potential exposure to credit loss,
but do not necessarily represent future cash requirements since certain
commitments may expire without being funded. Loan commitments generally have
fixed expiration dates or other termination clauses and may require a payment
of a fee by the customer. Commitments are subject to the same credit
approval process applied in the Company's general lending activities,
including a case-by-case evaluation of the customer's creditworthiness and
related collateral requirements.
FEDERAL HOME LOAN BANK ("FHLB") OF NEW YORK ADVANCES
The Bank may borrow funds from the FHLB of New York subject to certain
limitations. Based on the level of qualifying collateral available to secure
advances at June 30, 1996 the Bank's borrowing capacity was $15.5 million, of
which the Bank had borrowed $500,000 at that date (included in other
liabilities on the balance sheet). The borrowings at June 30, 1996 have a
maturity of July 1, 1996 and a rate of 5.625%. Advances are secured by the
Bank's investment in FHLB stock, $1.3 million, and by a blanket security
agreement. Under the blanket security agreement the Bank has pledged
securities with a market value of $1.5 million at June 30, 1996. There were
no borrowings outstanding at the end of fiscal 1995.
The Company can also borrow from the FHLB up to 25% of the Bank's assets,
which amounted to $43.6 million at June 30, 1996. At June 30, 1996 and 1995
there were no such borrowings outstanding.
LEASE COMMITMENTS
At June 30, 1996, the Company was obligated under a number of noncancellable
operating leases for office space. Certain leases contain escalation clauses
providing for increased rentals and renewal options. Rent expense under
operating leases was approximately $63,000, $57,000 and $52,000 for the years
ended June 30, 1996, 1995 and 1994, respectively. The future minimum lease
payments under operating leases at June 30, 1996 were $26,000, $27,000,
$29,000, $29,000 and $29,000 for the years ended June 30, 1997, 1998, 1999,
2000 and 2001, respectively, and $43,000 for the year ended June 30, 2002 and
thereafter.
LEGAL PROCEEDINGS
In the normal course of business, the Company is involved in various
outstanding legal proceedings. Management has discussed the nature of these
proceedings with legal counsel. In the opinion of management, the financial
position of the company will not be affected materially as a result of the
outcome of such legal proceedings.
OTHER
A recapitalization plan for the Savings Association Insurance Fund (the
"SAIF") under consideration by Congress reportedly provides for a one-time
special assessment of 0.66% of deposits to be imposed on all SAIF insured
institutions to enable the SAIF to achieve its required level of reserves.
If the proposed assessment of 0.66% was effected based on deposits as of
March 31, 1995 (as proposed), the Bank's special assessment would amount to
approximately $880,000, before taxes. No assurance can be given, however, as
to whether the recapitalization plan will be implemented as proposed or as to
the nature or extent of any competitive disadvantage which may be experienced
by SAIF member institutions.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosures about the fair value of financial
instruments for which it is practicable to estimate fair value, whether or
not such financial instruments are recognized on the balance sheet. Fair
value is defined by SFAS No. 107 as the amount at which a financial
instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation.
26
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Quoted market prices are used to estimate fair value when those prices are
available. However, active markets do not exist for many types of financial
instruments. Consequently, fair values for these instruments must be
estimated by management using techniques such as discounted cash flow
analysis and comparison to similar instruments. Estimates developed using
these methods are highly subjective and require judgments regarding
significant matters such as the amount and timing of future cash flows and
the selection of discount rates that appropriately reflect market and credit
risks. Changes in these judgments often have a material effect on the fair
value estimates. Since these estimates are made at a certain point in time,
they are susceptible to material near-term changes.
Fair values disclosed in accordance with SFAS No. 107 do not reflect any
premium or discount that could result from the sale of a large volume of a
particular financial instrument, nor do they reflect possible tax
ramifications or transaction costs. In addition, these fair values are not
necessarily indicative of the amounts at which financial assets will be
recovered or financial liabilities will be settled by the Company in the
ordinary course of business. The following is a summary of the carrying
amounts and fair values of the Company's financial assets and liabilities
(none of which are held for trading purposes) at June 30, 1996:
CARRYING ESTIMATED
VALUE FAIR VALUE
---------------------------
(IN THOUSANDS)
Financial assets:
Cash and due from banks $ 1,020 $ 1,020
Interest-bearing deposits 16,300 16,300
Securities 131,659 130,548
Loans 39,557 39,527
FHLB Stock 1,319 1,319
Financial liabilities:
Savings certificates 57,825 57,899
Other deposit accounts 70,479 70,479
The following paragraphs describe the valuation methods used by the Company
to estimate the fair values of its financial instruments:
SECURITIES
The fair values of securities were based on market prices or securities
dealers' estimated prices.
LOANS
Fair values were estimated by portfolio, for loans with similar financial
characteristics. Loans were segregated by type, such as one- to four-family
residential, multi-family residential, commercial loans and other loans.
Each loan category was further segmented into fixed and adjustable-rate
categories, and by performing and non-performing categories. The pricing
methodology for performing one- to four-family residential mortgage loans was
determined based on the zero-coupon yield curve plus the option adjusted
spread for fixed-rate mortgages. The fair values for performing loans in
other portfolio categories were estimated by discounting the expected cash
flows using current market rates for loans with similar terms to borrowers of
similar credit quality. The fair values of non-performing loans were based
on management's analysis of estimated cash flows discounted at rates
commensurate with the credit risk involved.
DEPOSIT LIABILITIES
The fair value of saving certificates represents contractual cash flows
discounted using interest rates currently offered on accounts with similar
characteristics and remaining maturities. In accordance with SFAS No. 107,
the fair values of other deposit accounts (those with no stated maturity,
such as savings accounts) are equal to the carrying amounts payable on
demand. In accordance with SFAS No. 107, these fair values do not include
the value of core deposit relationships which comprise a significant portion
of the Company's deposit base. Management believes that the Company's core
deposit relationships provide a relatively stable, low-cost funding source
which has a substantial intangible value separate from the deposit balances.
27
<PAGE>
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OTHER FINANCIAL INSTRUMENTS
The other financial assets and liabilities shown in the preceding table have
fair values which approximate the respective carrying amounts because the
instruments are payable on demand or have short-term maturities and present
relatively low credit risk and interest rate risk. Fair values of the loan
origination commitments described in note 9 were estimated based on an
analysis of the interest rates and fees currently charged to enter into
similar transactions, considering the remaining terms of the instruments and
the creditworthiness of the potential borrowers. At June 30, 1996 and 1995,
the fair values of these financial instruments approximated the related
carrying values which were not significant.
11. RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No.
121 establishes accounting standards for reviewing and measuring the
impairment of long-lived assets and certain identifiable intangible assets.
Various assets are excluded from the scope of SFAS No. 121, including
financial instruments which constitute most of the Company's assets. For
assets included in the scope of SFAS No. 121, such as office property and
equipment, an impairment loss must be recognized when the estimate of total
undiscounted future cash flows attributable to the asset is less than the
asset's carrying value. Measurement of the impairment loss is based on the
fair value of the asset. SFAS No. 121 is effective for fiscal years
beginning after December 15, 1995. The Company's prospective adoption of
SFAS No. 121 in fiscal year 1997 is expected to have no impact on the results
of operations or financial position.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which addresses accounting for stock-based compensation
arrangements such as the stock option plans and the recognition and retention
plans described in note 7. Under SFAS No. 123, entities can recognize
stock-based compensation expense in the basic financial statements using
either (i) the approach set forth in Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees", or (ii) the fair
value based method introduced in SFAS No. 123. Under APB Opinion No. 25,
compensation expense equals the option's intrinsic value, or the excess (if
any) of the market price of the underlying stock at the measurement date over
the amount the employee is required to pay. Under the fair value based
method introduced in SFAS No. 123, compensation expense is based on the
option's fair value at grant date.
The Company will adopt the provisions of APB Opinion No. 25 in accounting for
the stock option plans and the recognition and retention plans. No
compensation expense will be recognized for the stock option plans since the
exercise price will equal the market price at the grant date. The fair value
of the shares granted by the recognition and retention plans will be
recognized as an expense on a straight-line basis over the five-year vesting
period. In accordance with SFAS No. 123, beginning in fiscal 1997 the
Company will make pro forma disclosures of net income and earnings per share
as if it had adopted the fair value method of accounting.
12. SUBSEQUENT EVENTS
On July 16, 1996 the Company announced it had filed for a regulatory waiver
with the OTS to repurchase up to 5% of its outstanding common stock. The
Company completed the repurchase of 204,987 shares between July 31, 1996 and
August 15, 1996 for $2.5 million.
On September 4, 1996 the Company received approval from the OTS to repurchase
an additional 5% of its outstanding common stock.
28
<PAGE>
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13. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
The condensed balance sheet of Peekskill Financial Corporation as of June 30,
1996, and its condensed statements of income and cash flows for the period
from December 29, 1995 (the Conversion date) to June 30, 1996 are presented
below:
JUNE 30,
1996
--------------
CONDENSED BALANCE SHEET
(IN THOUSANDS)
Assets:
Cash $ 433
Interest-bearing deposits 16,300
Investment in subsidiary 43,094
Other assets 3
-------
Total assets $59,830
=======
Liabilities and Stockholders' Equity
Accrued expenses and other liabilities $ 56
Stockholders' equity 59,774
-------
Total liabilities and stockholders' equity $59,830
=======
FROM DECEMBER 29, 1995
TO JUNE 30, 1996
----------------------
CONDENSED STATEMENT OF INCOME
(IN THOUSANDS)
Interest income $ 534
Non-interest expense 85
-------
Income before income tax expense and equity
in undistributed earnings of subsidiary 449
Income tax expense 215
-------
Income before equity in undistributed earnings
of subsidiary 234
Equity in undistributed earnings of subsidiary 1,140
-------
Net income $ 1,374
=======
CONDENSED STATEMENT OF CASH FLOW
Cash flows from operating activities:
Net income $ 1,374
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of subsidiary (1,140)
Other assets (3)
Accrued expenses 56
Other 53
-------
Net cash provided by operating activities 340
-------
Cash flows from investing activities:
Purchase of subsidiary's common stock (20,000)
-------
Cash flows from financing activities:
Net proceeds from sale of common stock 40,000
Loan to ESOP (3,280)
Principal collection on ESOP loan 42
Dividends paid (369)
-------
Net cash provided by financing activities 36,393
-------
Increase in cash and cash equivalents 16,733
Cash and cash equivalents at beginning of period ---
-------
Cash and cash equivalents at end of period $16,733
=======
29
<PAGE>
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14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------ ----------- --------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
FISCAL 1996
Interest income $2,687 $2,789 $3,136 $3,182
Interest expense 1,365 1,407 1,316 1,313
------- ------- ------- -------
Net interest income 1,322 1,382 1,820 1,869
Provision for loan losses 15 15 5 10
Non-interest income 80 69 68 91
Non-interest expense 640 736 680 751
------- ------- ------- -------
Income before income tax expense and cumulative
effect of change in accounting principle 747 700 1,203 1,199
Income tax expense 285 315 532 496
------- ------- ------- -------
Income before cumulative effect of change in
accounting principle 462 385 671 703
Cumulative effect of change in accounting principle (59) --- --- ---
------- ------- ------- -------
Net income $ 403 $ 385 $ 671 $ 703
======= ======= ======= =======
Earnings per share $ 0.18 $ 0.18
======= =======
FISCAL 1995
Interest income $2,698 $2,695 $2,646 $2,683
Interest expense 1,116 1,151 1,218 1,300
------- ------- ------- -------
Net interest income 1,582 1,544 1,428 1,383
Provision for loan losses 15 15 15 115
Non-interest income 75 68 65 69
Non-interest expense 620 627 628 615
------- ------- ------- -------
Income before income tax expense 1,022 970 850 722
Income tax expense 470 430 380 360
------- ------- ------- -------
Net income $ 552 $ 540 $ 470 $ 362
======= ======= ======= =======
</TABLE>
30
<PAGE>
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CORPORATE INFORMATION
DIRECTORS
Eldorus Maynard, Chairman of the Board
Dominick Bertoline
Edward H. Dwyer
John Patrick Fay
Robert E. Flower
William J. LaCalamito
OFFICERS
Eldorus Maynard
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
William J. LaCalamito
PRESIDENT AND CHIEF OPERATING OFFICER
CORPORATE OFFICES
Peekskill Financial Corporation
1019 Park Street
Peekskill, NY 10566
(914) 737-2777
ANNUAL MEETING
The annual meeting of stockholders will be held on October 23, 1996 at 3:45
p.m. at the Bank's offices at 1019 Park Street, Peekskill, New York.
FORM 10-K
For the 1996 fiscal year Peekskill Financial Corporation will file an Annual
Report on Form 10-K with the Securities and Exchange Commission.
Stockholders wishing a copy may obtain one by writing to:
William J. LaCalamito
Secretary
Peekskill Financial Corporation
1019 Park Street
Peekskill, New York 10566
TRANSFER AGENT AND REGISTRAR
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
3001 Summer Street
Stamford, CT 06905
31
<PAGE>
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GENERAL COUNSEL
Carl Olson
1019 Park Street
Peekskill, NY 10566
SPECIAL COUNSEL
Silver, Freedman & Taff, LLP
1100 New York Avenue, NW
Washington, DC 20005
COMMON STOCK
The common stock of Peekskill Financial Corporation is traded on the NASDAQ
Stock Market under the symbol "PEEK." The approximate number of stockholders
was 710 at June 30, 1996.
The high and low sales price of the Company's common stock in the
Over-the-Counter market of the NASDAQ National Market System for the quarters
indicated were as follows:
QUARTER ENDED HIGH LOW
- ------------- ------ ------
March 31, 1996 $12.50 $11.00
June 30, 1996 12.12 11.12
These quotations represent prices between dealers and do not include retail
markup, markdown or commission. They do not necessarily represent actual
transactions.
A quarterly cash dividend of $.09 per common share was paid in the fourth
quarter of fiscal 1996.
32
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,020
<INT-BEARING-DEPOSITS> 16,300
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,459
<INVESTMENTS-CARRYING> 129,200
<INVESTMENTS-MARKET> 128,089
<LOANS> 40,076
<ALLOWANCE> 519
<TOTAL-ASSETS> 191,323
<DEPOSITS> 130,335
<SHORT-TERM> 500
<LIABILITIES-OTHER> 714
<LONG-TERM> 0
0
0
<COMMON> 40,013
<OTHER-SE> 19,761
<TOTAL-LIABILITIES-AND-EQUITY> 191,323
<INTEREST-LOAN> 3,363
<INTEREST-INVEST> 7,548
<INTEREST-OTHER> 883
<INTEREST-TOTAL> 11,794
<INTEREST-DEPOSIT> 5,390
<INTEREST-EXPENSE> 11
<INTEREST-INCOME-NET> 6,393
<LOAN-LOSSES> 45
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,807
<INCOME-PRETAX> 3,849
<INCOME-PRE-EXTRAORDINARY> 3,849
<EXTRAORDINARY> 0
<CHANGES> (59)
<NET-INCOME> 2,162
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4
<LOANS-NON> 0
<LOANS-PAST> 1,252
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 474
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 519
<ALLOWANCE-DOMESTIC> 519
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
