================================================================================
UNITED STATES
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
For the fiscal year ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-27178
PEEKSKILL FINANCIAL CORPORATION
(Exact Name of Registrant 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)
Registrant'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 $0.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant'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 22, 1998, there were issued and outstanding 2,857,569
shares of the Registrant's Common Stock. The aggregate market value of the
voting stock held by non-affiliates of the Registrant, computed by reference to
the average of the closing bid and asked prices of such stock on the Nasdaq
National Market System as of September 22, 1998, was approximately $40.2
million.
DOCUMENTS INCORPORATED BY REFERENCE
PART II of Form 10-K--Annual Report to Stockholders for the fiscal year ended
June 30, 1998.
PART III of Form 10-K--Proxy Statement for the Annual Meeting of Stockholders
for the fiscal year ended June 30, 1998.
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<PAGE>
PEEKSKILL FINANCIAL CORPORATION
Annual Report on Form 10-K
<TABLE>
<CAPTION>
Page
----
PART I
<S> <C>
Item 1. Business 3
Item 2. Properties 35
Item 3. Legal Proceedings 37
Item 4. Submission of Matters to a Vote of Security Holders 37
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters 37
Item 6. Selected Financial Data 37
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 37
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 37
Item 8. Financial Statements and Supplementary Data 37
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 38
PART III
Item 10. Directors and Executive Officers of the Registrant 38
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain Beneficial Owners and Management 38
Item 13. Certain Relationships and Related Transactions 38
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 39
Signatures 41
</TABLE>
2
<PAGE>
PART I
Item 1. Business
General
Peekskill Financial Corporation ("Peekskill" or the "Company") was formed
in 1995 at the direction of First Federal Savings Bank ("First Federal" or the
"Bank"), formerly First Federal Savings and Loan Association of Peekskill, for
the purpose of becoming a unitary 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. Unless the context otherwise requires, all
references herein to the Bank or the Company include both entities on a
consolidated basis.
At June 30, 1998, the Company had total assets of $200.3 million, deposits
of $139.9 million and stockholders' equity of $43.2 million. The Company's
Common Stock is quoted on the Nasdaq National Market System under the symbol
"PEEK."
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 and branch offices located at 1961 Commerce Street in Yorktown Heights, New
York and Cortlandt Town Center on Route 6 in Mohegan Lake, New York.
First Federal's business involves attracting deposits from customers in its
market area and investing such funds primarily in mortgage-backed securities and
one-to-four family residential mortgages. At June 30, 1998, the Bank had total
assets of $199.1 million consisting primarily of $127.5 million of
mortgage-backed securities and $46.3 million of one-to-four family mortgage
loans representing 95.1% of the total loan portfolio. The Bank also held other
debt securities (consisting primarily of U.S. Government Agency obligations) of
$16.5 million at June 30, 1998.
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 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 on the
origination of one-to-four family residential loans, (iv) limiting other types
of loans that 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.
3
<PAGE>
The Company and the Bank are regulated by the Office of Thrift Supervision
("OTS"). The Bank is a member of the Federal Home Loan Bank System ("FHLB
System") and is 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").
Forward-Looking Statements
The Company has made, and may continue to make, various forward-looking
statements with respect to earnings, credit quality and other financial and
business matters for periods subsequent to June 30, 1998. The Company cautions
that these forward-looking statements are subject to numerous assumptions, risks
and uncertainties, and that statements for subsequent periods are subject to
greater uncertainty because of the increased likelihood of changes in underlying
factors and assumptions. Actual results could differ materially from
forward-looking statements.
In addition to those factors previously disclosed by the Company and those
factors identified elsewhere herein, the following factors could cause actual
results to differ materially from such forward-looking statements: pricing
pressures on loan and deposit products; actions of competitors; changes in local
and national economic conditions; customer deposit disintermediation; changes in
customers' acceptance of the Company's products and services; the extent and
timing of legislative and regulatory actions and reforms; and Year 2000 related
costs and issues substantially different from those now anticipated.
The Company's forward-looking statements speak only as of the date on which
such statements are made. By making any forward-looking statements, the Company
assumes no duty to update them to reflect new, changing or unanticipated events
or circumstances.
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 that may be more
willing than the Company or its competitors to make credit available but that
have not generally engaged in lending activities in the Company's market area in
the past. The Company's most direct competition for deposits 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 service, and offering products at generally competitive interest rates.
4
<PAGE>
Market Area
First Federal conducts business in Northern Westchester, Putnam and
Dutchess counties through its main office located in Peekskill, New York 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 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
Loan Portfolio Composition. The Company's loan portfolio consists primarily
of conventional first mortgage loans secured by one-to-four family properties.
At June 30, 1998, the Company had net loans of $47.6 million, which represents
23.8% of total assets. The percentage distribution of the loan portfolio at that
date was as follows: 95.1% of one-to-four family mortgage loans, the majority of
which are owner occupied; 1.4% of multi-family mortgage loans; 1.0% of
commercial mortgage loans; 1.4% of construction loans; and 1.1% of consumer
loans.
5
<PAGE>
The following table sets forth the composition of the loan portfolio in
dollar amounts and percentages as of the dates indicated. In addition, the table
sets forth the loan portfolio by fixed- and adjustable-rate balances as of the
dates indicated.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One-to-four family ............... $46,271 95.1% $44,163 94.9% $38,644 95.5%
Multi-family ..................... 674 1.4 724 1.6 394 1.0
Commercial ....................... 507 1.0 531 1.1 285 0.7
Construction ..................... 676 1.4 670 1.4 579 1.4
-------- --------- -------- --------- -------- ---------
Total real estate loans ...... 48,128 98.9 46,088 99.0 39,902 98.6
-------- --------- -------- --------- -------- ---------
Other Loans:
Passbook loans and other ........ 460 1.0 341 0.8 404 1.0
Student ......................... 63 0.1 102 0.2 143 0.4
-------- --------- -------- --------- -------- ---------
Total consumer loans ......... 523 1.1 443 1.0 547 1.4
-------- --------- -------- --------- -------- ---------
Total loans .................. 48,651 100.0% 46,531 100.0% 40,449 100.0%
========= ======== =========
Less:
Construction loans in process .... (112) (195) (114)
Allowance for loan losses ........ (682) (622) (519)
Net deferred loan origination fees (226) (207) (259)
--------- -------- ---------
Total loans, net ................. $47,631 $45,507 $39,557
========= ======== =========
Fixed-Rate Loans:
Real estate loans ............... $47,252 97.1% $45,015 96.7% $38,770 95.8%
Other loans ..................... 523 1.1 443 1.0 547 1.4
-------- --------- -------- --------- -------- ---------
Total-fixed rate loans ........ 47,775 98.2 45,458 97.7 39,317 97.2
Adjustable-Rate Loans:
Real estate loans ............... 876 1.8 1,073 2.3 1,132 2.8
-------- --------- -------- --------- -------- ---------
Total loans ................... $48,651 100.0% $46,531 100.0% $40,449 100.0%
======== ========= ======== ========= ======== =========
<CAPTION>
June 30,
---------------------------------------------
1995 1994
-------------------- --------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real Estate Loans:
One-to-four family ............... $40,112 95.2% $38,979 95.8%
Multi-family ..................... 426 1.0 458 1.1
Commercial ....................... 308 0.7 329 0.8
Construction ..................... 725 1.7 165 0.4
-------- --------- -------- ---------
Total real estate loans ...... 41,571 98.6 39,931 98.1
-------- --------- -------- ---------
Other Loans:
Passbook loans and other ........ 356 0.9 524 1.3
Student ......................... 215 0.5 255 0.6
-------- --------- -------- ---------
Total consumer loans ......... 571 1.4 779 1.9
-------- --------- -------- ---------
Total loans .................. 42,142 100.0% 40,710 100.0%
Less:
Construction loans in process .... (273) (50)
Allowance for loan losses ........ (474) (336)
Net deferred loan origination fees (335) (363)
-------- ---------
Total loans, net ................. $41,060 $39,961
======== =========
Fixed-Rate Loans:
Real estate loans ............... $40,297 95.6% $38,571 94.7%
Other loans ..................... 571 1.4 779 1.9
-------- --------- -------- ---------
Total-fixed rate loans ........ 40,868 97.0 39,350 96.6
Adjustable-Rate Loans:
Real estate loans ............... 1,274 3.0 1,360 3.4
-------- --------- -------- ---------
Total loans ................... $42,142 100.0% $40,710 100.0%
======== ========= ======== =========
</TABLE>
6
<PAGE>
Loan Maturities. The following table shows the contractual maturity of the
loan portfolio at June 30, 1998. All loans (including adjustable-rate loans) are
shown as maturing in the period that includes the final contractual due date, as
the table does not reflect the effects of periodic amortization payments,
possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Due in
------------------------------------
More than
Less than 1 Year to More than
1 Year 5 Years 5 Years Total
------ ------- ------- -----
Mortgage loans: (In thousands)
<S> <C> <C> <C> <C>
One-to-four family ... $ 72 $ 3,916 $42,283 $46,271
Multi-family ......... -- 322 352 674
Commercial ........... -- 233 274 507
Construction ......... 676 -- -- 676
------- ------- ------- -------
Total mortgage loans 748 4,471 42,909 48,128
Other loans ............ 460 58 5 523
------- ------- ------- -------
Total loans ........ $ 1,208 $ 4,529 $42,914 $48,651
======= ======= ======= =======
</TABLE>
The following table sets forth, by type of interest rate, the dollar
amounts in each loan category at June 30, 1998 that are contractually due in
more than one year.
Fixed Adjustable Total
----- ---------- -----
(In thousands)
Mortgage loans:
One-to-four family ........... $45,323 $ 876 $46,199
Multi-family ................. 674 -- 674
Commercial ................... 507 -- 507
------- ------- -------
Total mortgage loans ....... 46,504 876 47,380
Other loans .................... 63 -- 63
------- ------- -------
Total loans ................ $46,567 $ 876 $47,443
======= ======= =======
Loans-to-One-Borrower. 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, 1998, based on the 15% limitation, the Bank's
loans-to-one borrower limit was $6.5 million and the largest dollar amount
outstanding to one borrower, or group of related borrowers, was $350,000. This
loan, which is secured by a single-family residence in Putnam Valley, New York,
was performing in accordance with its contractual terms at June 30, 1998.
Loan Underwriting. The Bank's lending practices are subject to its written
underwriting standards and established loan origination procedures. Decisions on
loan applications are made on
7
<PAGE>
the basis of detailed applications and property valuations by independent
appraisers (consistent with the Bank's appraisal policy). 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. At June 30, 1998,
$46.3 million, or 95.1%, of the Bank's loan portfolio consisted of mortgage
loans secured by 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 except for loans
originated for the State of New York Mortgage Agency ("SONYMA") which are sold
to SONYMA at closing. 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 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 90% for owner-occupied homes. For
mortgage loans with loan-to-value ratios greater than 80%, the Bank originates
the loans 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,
8
<PAGE>
the borrower sells or otherwise disposes of the property subject to the mortgage
and the loan is not repaid.
The Bank also originates home equity loans secured by a lien on the
borrower's residence. Home equity loans are generally limited to $80,000 and are
originated using the same underwriting standards applicable to the Bank's
one-to-four family residential mortgage loans. The Bank currently offers home
equity loans for terms of up to 7 years. At June 30, 1998, the Bank had $1.9
million of outstanding advances under home equity loans (included in total
one-to-four family mortgage loans).
Multi-Family and Commercial Real Estate Lending. At June 30, 1998, the Bank
had $507,000 in commercial real estate loans, representing 1.0% of the total
loan portfolio, and $674,000 in multi-family loans, or 1.4% of the total loan
portfolio. The Bank's multi-family loan portfolio consists of a participation
interest in a loan secured by an apartment complex and two Bank-originated
loans. The Bank's commercial real estate loan portfolio consists of a
participation interest in a loan secured by a strip shopping center and three
Bank-originated loans. At June 30, 1998, all of these loans were performing in
accordance with their contractual 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 engage in multi-family and commercial real estate
lending from time to time 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
have terms of up to 30 years and are structured to provide both construction and
"permanent" financing. The borrower makes interest-only payments 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, 1998, the Bank had $436,000 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
9
<PAGE>
construction of single-family residences. At June 30, 1998, the Bank had one
loan of this type for $240,000. 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, 1998, other loans totaled
$523,000 or 1.1% of 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 "Competition" and "Market
Area." Historically, virtually all loans originated by First Federal have been
retained in the portfolio.
10
<PAGE>
The following table shows the loan origination and repayment activities of
the Bank for the periods indicated.
Year Ended June 30,
--------------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
Originations by type:
Mortgage loans:
One-to-four family ................. $ 9,161 $ 11,144 $ 4,355
Multi-family ....................... -- 364 --
Commercial ......................... -- 276 --
Construction ....................... 746 972 640
Other loans ............................... 479 529 560
-------- -------- --------
Total loans originated ............... 10,386 13,285 5,555
-------- -------- --------
Principal Repayments:
Mortgage loans:
One-to-four family ................. (6,806) (5,405) (5,684)
Multi-family ....................... (50) (34) (32)
Commercial ......................... (24) (30) (23)
Construction ....................... (740) (881) (627)
Other loans ............................... (399) (633) (584)
-------- -------- --------
Total principal repayments ........... (8,091) (6,983) (6,950)
-------- -------- --------
Loans transferred to real estate owned ...... (247) (220) (139)
-------- -------- --------
Net increase (decrease) in total loans $ 2,120 $ 6,082 $ (1,534)
======== ======== ========
Asset Quality
Loan Delinquencies. 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 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
a property is acquired or expected to be acquired by foreclosure or deed in lieu
of foreclosure, it is recorded at estimated fair value less the estimated cost
of disposition, with the resulting write-down charged to the allowance for loan
losses. After acquisition, all costs incurred in maintaining the property are
expensed. Costs relating to the development and improvement of the property,
however, are capitalized.
11
<PAGE>
The following table sets forth information concerning the Bank's loan
delinquencies at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Loans Delinquent For:
------------------------------------ Total Delinquent
60-89 Days 90 Days and Over Loans
---------------- ---------------- -----------------
Number Amount Number Amount Number Amount
---------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One-to-four family real estate
loans:
June 30, 1998 .............. 7 $313 16(1) $1,491(1) 23 $1,804
------ ------ ------ ------ ------ ------
June 30, 1997 .............. 9 $394 27(1) $2,004(1) 36 $2,398
------ ------ ------ ------ ------ ------
</TABLE>
(1) Includes a participation interest in certain residential mortgage loans, as
discussed below, of $876,000 at June 30, 1998 and $1.1 million at June 30,
1997.
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 probability 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 equal to 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, the Bank
classified $1.5 million of loans and $94,000 of real estate owned as substandard
at June 30, 1998. There were no assets classified as doubtful or loss at that
date. The foregoing asset classifications are generally consistent with those
made by the OTS.
12
<PAGE>
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets at the dates indicated. Loans are placed on
non-accrual status when the collection of principal and/or interest becomes
doubtful. Real estate owned represents properties acquired in settlement of
loans.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Accruing loans past due more than 90 days:
One-to-four family mortgage loans .......... $370 $930 $1,252 $2,096 $1,698
Consumer loans ............................. -- -- -- -- 18
Non-accrual loans:
One-to-four family mortgage loans .......... 245 -- -- -- --
Participation interest in one-to-four family
mortgage loans ............................... 876 1,074 -- -- --
------ ------ ------ ------ ------
Total non-performing loans ................... 1,491 2,004 1,252 2,096 1,716
Real estate owned:
Single-family property ..................... 94 220 -- -- --
------ ------ ------ ------ ------
Total non-performing assets .................. $1,585 $2,224 $1,252 $2,096 $1,716
------ ------ ------ ------ ------
Total as a percentage of total assets ........ 0.8% 1.2% 0.7% 1.3% 1.1%
====== ====== ====== ====== ======
</TABLE>
As of June 30, 1998, other than the participation interest discussed below,
the Bank's largest non-performing loan had a carrying value of $182,000.
During 1986 and 1987, the Bank purchased from the Thrift Association
Service Corporation ("TASCO") six participation interests in pools of
one-to-four family residential loans (the "TASCO Loans"). Pursuant to the
participation agreements, principal and interest payments on the underlying
loans within each pool were to be paid to the Bank whether or not such payments
were collected by TASCO.
During 1989, TASCO sold the servicing of the loans underlying the
participation interests to City Federal Savings Bank ("City Federal"). 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.
The FDIC is disputing its obligations under the applicable agreements to
make principal and interest payments on the underlying loans whether or not such
amounts are collected from the borrowers. The FDIC ceased forwarding all
payments to the participants (including those collected and due to participants)
during the quarter ended September 30, 1996, at which time the Bank placed the
TASCO Loans on non-accrual status. Further, the FDIC is demanding reimbursement
of principal and interest payments previously made by the FDIC but not collected
by them on the participation certificates. Its position is based on a review of
the operative documents, negotiations
13
<PAGE>
with TASCO regarding the guarantee, and a belief that servicers do not normally
act as financial guarantors. Settlement negotiations between the parties are
proceeding; however, no assurance can be given as to when a settlement may be
reached. Although the FDIC resumed making certain payments in the quarter ended
June 30, 1997, the matter has not been resolved. Accordingly, the TASCO Loans of
$876,000 remain on non-accrual status at June 30, 1998, and interest payments of
$55,000 and $21,000 received in fiscal 1998 and 1997, respectively, have been
deferred. Foregone interest income due to the non-accrual status of the TASCO
Loans was $76,000 and $74,000 for fiscal 1998 and 1997, respectively. Interest
income for fiscal 1997 was also reduced by the reversal of $67,000 in interest
previously received on the TASCO Loans.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset Quality" in the Annual Report to Stockholders
attached hereto as Exhibit 13, for a further discussion of non-performing
assets.
Other Loans of Concern. As of June 30, 1998, there were no loans (other
than non-performing 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 loans in the non-performing asset categories.
Allowance for Loan Losses. 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
probable losses on existing loans. The allowance for loan losses consists of
amounts specifically allocated to non-performing loans and potential problem
loans (if any) as well as allowances determined for each major loan category.
Loan categories such as single-family residential mortgages and consumer loans
are generally evaluated on an aggregate or "pool" basis by applying loss factors
to the current balances of the various loan categories. The loss factors are
determined by management based on an evaluation of historical loss experience,
delinquency trends, volume and type of lending conducted, and the current
economic conditions in the Bank's market area.
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. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on their
judgments of information available to them at the time of examination.
14
<PAGE>
The following table sets forth activity in of the Bank's allowance for loan
losses for the periods indicated.
Year Ended June 30,
-------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------
(Dollars in thousands)
Balance at beginning of year ..... $622 $519 $474 $336 $276
Provision for loan losses ........ 60 143 45 160 60
Charge-offs:
One-to-four family loans ....... -- (40) -- (22) --
---- ------ ---- ------ ----
Balance at end of year ........... $682 $622 $519 $474 $336
---- ------ ---- ------ ----
Allowance for loan losses to:
Non-performing loans ........... 45.7% 31.0% 41.5% 22.6% 19.6%
Total loans, net ............... 1.4 1.4 1.3 1.2 0.8
Net charge-offs to:
Average loans outstanding ...... --% 0.1% --% 0.1% --%
Average non-performing loans ... -- 2.0 -- 1.2 --
15
<PAGE>
The following table sets forth the allowance for loan losses allocated by
loan category, the total loan amounts by category, and the percent of loans in
each category to total loans at the dates indicated.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------------- ----------------------------------- ----------------------------------
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
Loans Loans Loans
Allowance Category Allowance Category Allowance Category
------------------ ------------------ ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family $ 682 $46,271 95.1% $ 622 $44,163 94.9% $ 519 $38,644 95.5%
Multi-family ..... -- 674 1.4 -- 724 1.6 -- 394 1.0
Commercial ....... -- 507 1.0 -- 531 1.1 -- 285 0.7
Construction ..... -- 676 1.4 -- 670 1.4 -- 579 1.4
Other ............ -- 523 1.1 -- 443 1.0 -- 547 1.4
------- ------- ----- ------- ------- ----- ------- ------- -----
Total ........ $ 682 $48,651 100.0% $ 622 $46,531 100.0% $ 519 $40,449 100.0%
======= ======= ===== ======= ======= ===== ======= ======= =====
<CAPTION>
June 30,
--------------------------------------------------------------------------
1995 1994
----------------------------------- -----------------------------------
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
Loans Loans
Allowance Category Allowance Category
------------------ ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One-to-four family $ 474 $40,112 95.2% $ 336 $38,979 95.8%
Multi-family ..... -- 426 1.0 -- 458 1.1
Commercial ....... -- 308 0.7 -- 329 0.8
Construction ..... -- 725 1.7 -- 165 0.4
Other ............ -- 571 1.4 779 1.9
------- ------- ----- ------- ------- -----
Total ........ $ 474 $42,142 100.0% $ 336 $40,710 100.0%
======= ======= ===== ======= ======= =====
</TABLE>
16
<PAGE>
Investment Activities
General. 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 investment transactions 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 reviewed and
updated regularly 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 - Interest Rate Risk Management" in the Annual Report to Stockholders
attached hereto as Exhibit 13 and "Regulation - Liquidity."
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.
Securities Portfolio Composition. The following table sets forth the
composition of the Bank's securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------------
1998 1997 1996
--------------------- ----------------------- -----------------------
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:
Pass-through securities:
Freddie Mac ............... $ 43,258 $ 43,806 $ 57,834 $ 57,910 $ 64,437 $ 64,221
Ginnie Mae ................ 40,767 41,392 32,526 33,360 36,240 35,937
Fannie Mae ................ 7,370 7,429 8,056 8,030 7,096 6,956
CMOs ......................... 36,065 36,267 18,049 18,144 10,448 10,261
-------- -------- -------- -------- -------- --------
127,460 128,894 116,465 117,444 118,221 117,375
U.S. Government Agency and other
debt securities .............. 7,986 7,989 9,985 9,904 10,979 10,714
-------- -------- -------- -------- -------- --------
Total held-to-maturity ...... 135,446 136,883 126,450 127,348 129,200 128,089
Available-for-sale:
U.S. Government Agency and other
debt securities .............. 8,500 8,498 2,999 2,983 2,500 2,459
-------- -------- -------- -------- -------- --------
Total securities ............. $143,946 $145,381 $129,449 $130,331 $131,700 $130,548
======== ======== ======== ======== ======== ========
</TABLE>
17
<PAGE>
Mortgage-Backed Securities. The Bank invests in mortgage-backed
pass-through securities in order to supplement loan production and achieve its
asset/liability management goals. All of these 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 Federal
guarantee (direct or indirect) or a high credit rating may indicate a high
degree of protection against default, such guarantees and ratings do not protect
the securities from declines in value based on changes in interest rates or
prepayment speeds. Reflecting its policy of maintaining a substantial portfolio
of investments having short to medium terms to repricing or maturity, the Bank's
mortgage-backed pass-through securities portfolio at June 30, 1998 included (i)
$36.1 million of securities with remaining contractual maturities of five years
or less and (ii) $41.4 million of adjustable-rate mortgage-backed securities.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations- Interest Rate Risk Management" in the Annual Report to Stockholders
attached hereto as Exhibit 13.
In addition to mortgage-backed pass-through securities, the Bank invests in
collateralized mortgage obligations ("CMOs"). Unlike pass-through securities
which have a single-class structure resulting in pro-rata distributions to all
security holders, 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 20. 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 flows and hence the values
of CMOs are subject to change.
The Bank invests in CMOs as an alternative to mortgage loans and
mortgage-backed pass-through 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 CMOs are classified as held-to-maturity. At June 30, 1998, the
Bank held CMOs with a carrying value of $36.1 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
18
<PAGE>
the policy, savings institutions may generally only invest in high-risk mortgage
securities in order to reduce interest rate risk. As of June 30, 1998, the Bank
had no high-risk securities.
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. At June 30, 1998, the
total market value of the Bank's mortgage-backed securities held-to-maturity was
$128.9 million, or $1.4 million greater than total amortized cost. 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.
19
<PAGE>
The following table sets forth mortgage-backed securities purchases and
principal repayments for the periods indicated. There were no sales of
mortgage-backed securities during these periods.
Year Ended June 30,
------------------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
Purchases:
Adjustable-rate pass-throughs ...... $ 17,414 $ 2,000 $ 20,475
Fixed-rate pass-throughs ........... 5,015 8,139 17,747
CMOs ............................... 26,985 7,794 --
-------- -------- --------
Total purchases ............. 49,414 17,933 38,222
Principal repayments ................. (38,419) (19,689) (20,087)
-------- -------- --------
Net increase (decrease) ............ $ 10,995 $ (1,756) $ 18,135
======== ======== ========
Portfolio Maturities and Yields. The following table sets forth the
contractual maturities and weighted average yields of the Company's securities
portfolio at June 30, 1998. Mortgage-backed 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.
<TABLE>
<CAPTION>
Principal Balances 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
------ ------- ----------------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Pass-through securities:
Freddie Mac .......... $ 8,362 $ 24,792 $ 4,900 $ 5,606 $ 43,660
Ginnie Mae ........... -- 43 911 39,728 40,682
Fannie Mae ........... -- 2,864 1,873 2,634 7,371
CMOs .................... 638 -- 1,698 33,708 36,044
-------- -------- -------- -------- --------
Total ................ $ 9,000 $ 27,699 $ 9,382 $ 81,676 $127,757
-------- -------- -------- -------- --------
Weighted average yield 6.19% 6.05% 6.83% 6.63% 6.48%
U.S. Government Agency and
other debt securities ... $ 1,500 $ 4,000 $ 9,500 $ 1,500 $ 16,500
======== ======== ======== ======== ========
Weighted average yield 4.63% 6.18% 6.53% 7.19% 6.33%
</TABLE>
20
<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. 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. 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. Accordingly, 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.
Other Debt Securities. 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, 1998, the Bank did not own any 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 interest-earning assets at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------------------------
1998 1997 1996
----------------------- ------------------------ ----------------------
Amortized % of Amortized % of Amortized % of
Cost Total Cost Total Cost Total
------- -------- ------- -------- ------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Other debt securities:
Held-to-maturity ............................ $ 7,986 48.4% $ 9,985 76.9% $10,979 81.5%
Available-for-sale(1) ....................... 8,500 51.6 2,999 23.1 2,500 18.5
------- -------- ------- -------- ------- ---------
Total .................................... $16,486 100.0% $12,984 100.0% $13,479 100.0%
------- -------- ------- -------- ------- ---------
Average remaining life of other debt securities 74 mos. 81 mos. 79 mos.
Other interest-earning assets:
FHLB stock .................................. $ 1,463 $ 1,463 $ 1,319
------- ------- --------
Interest-bearing deposits with banks ........ $ 2,010 $ 3,680 $16,300
------- ------- --------
</TABLE>
(1) The fair value of available-for-sale securities at June 30, 1998, 1997 and
1996 was $8.5 million, $3.0 million and $2.5 million, respectively.
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 by operations.
21
<PAGE>
Depositor Accounts. First Federal offers various types of depositor
accounts with a variety of interest rates and terms. These 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
customer demand. As certain 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 substantial portions of its
regular savings, club, money market and NOW accounts are relatively stable
sources of funds. The Bank has used customer service and marketing initiatives
in an effort to maintain and increase the volume of these 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, club, money market
and NOW accounts. In total, these account types decreased by $872,000, $4.8
million and $7.3 million in fiscal 1998, 1997 and 1996, respectively. Management
believes that a large portion of these amounts 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, the
retention of non-certificate accounts.
22
<PAGE>
The following table sets forth the distribution of depositor accounts and
the related weighted average interest rates as of the dates indicated.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------------------
1998 1997 1996
----------------------- ----------------------- ----------------------
Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Money market and NOW ................................ $ 13,196 2.85% $ 10,989 2.85% $ 12,090 2.45%
Regular savings ..................................... 50,928 2.75 54,000 3.00 57,664 3.00
Club accounts ....................................... 710 2.75 717 3.00 725 3.00
-------- -------- --------
64,834 2.77 65,706 2.97 70,479 2.91
-------- -------- --------
Savings certificates by remaining period to maturity:
Less than 1 year ................................. 58,118 5.53 53,825 5.53 48,026 5.38
More than 1 year to 3 years ...................... 11,889 6.43 9,707 6.26 5,464 5.54
More than 3 years ................................ 5,017 6.25 3,180 6.17 4,335 6.94
-------- - -------- --------
75,024 5.72 66,712 5.66 57,825 5.51
-------- -------- --------
Total ............................................... $139,858 4.35% $132,418 4.33% $128,304 4.08%
-------- -------- --------
</TABLE>
The following table sets forth the deposit activity at the Bank during the
periods indicated.
Year Ended June 30,
-------------------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars in thousands)
Opening balance ........... $ 132,418 $ 128,304 $ 130,933
Deposits(1) ............... 118,362 112,066 107,874
Withdrawals(1) ............ (115,748) (112,514) (115,005)
Interest credited ......... 4,826 4,562 4,502
--------- --------- ---------
Ending balance ............ $ 139,858 $ 132,418 $ 128,304
--------- --------- ---------
Net increase (decrease) ... $ 7,440 $ 4,114 $ (2,629)
--------- --------- ---------
Percent increase (decrease) 5.6% 3.2% (2.0)%
--------- --------- ---------
(1) Includes transfers of funds within the Bank.
The following table sets forth information about the Bank's savings
certificates greater than $100,000 by remaining period to maturity as of June
30, 1998:
Weighted
Amount Average Rate
------ ------------
(Dollars in thousands)
Within three months ........................ $ 1,881 5.48%
After 3 but within 6 months ................ 2,883 5.53
After 6 but within 12 months ............... 2,181 5.44
After 12 months ............................ 3,133 6.41
------- ----
Total .................................... $10,078 5.77%
-------
23
<PAGE>
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 10 of the Notes to Consolidated Financial Statements.
The Bank has used FHLB 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.
The Company began utilizing repurchase agreements as a funding source in
fiscal 1998 to supplement retail deposit growth. Proceeds from the borrowings
were invested in fixed-rate government agency bonds, adjustable-rate
mortgage-backed securities and fixed-rate collateralized mortgage obligations at
an anticipated average spread of approximately 90 basis points. The spread was
conservatively achieved by closely matching the maturities of the securities and
borrowings. During fiscal 1998, the Bank entered into the following securities
repurchase agreements with the FHLB of New York (dollars in thousands):
Agreement with a final maturity in January 2008, callable
quarterly at the FHLB's option beginning in January 2003,
and bearing interest at 5.42% $ 10,000
Agreement with a final maturity in June 2005, callable
quarterly at the FHLB's option beginning in June 1999, and
bearing interest at 5.20% 3,000
-------
Total outstanding at June 30, 1998 $ 13,000
========
The above securities repurchase agreements were collateralized by
securities included in the Company's portfolio with an amortized cost
of $13.1 million and a fair value of $13.2 million at June 30, 1998.
The following table sets forth information concerning the
balances and interest rates on FHLB borrowings for the periods
indicated. Amounts in fiscal 1998 represent securities repurchase
agreements, while amounts in fiscal 1996 represent FHLB advances.
Year Ended June 30,
-----------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Maximum balance ......................... $13,000 $ -- $15,500
Average balance ......................... 4,567 -- 150
Year-end balance ........................ 13,000 -- 500
Interest rate at year end ............... 5.37 % -- % 5.63%
Average interest rate during the year ... 5.36 % -- % 7.33%
24
<PAGE>
Service Corporations
As a federally chartered savings bank, 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, 1998, First Federal had no service
corporations.
Employees
At June 30, 1998, the Bank had a total of 25 full-time and 3 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. 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 Company also is
subject to federal regulation and oversight. The purpose of the regulation of
the Company and other holding companies is to protect subsidiary savings
associations. First Federal's deposits are insured by the Savings Association
Insurance Fund ("SAIF"), which together with the Bank Insurance Fund ("BIF") are
the two deposit funds administered 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 December 31, 1997. 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, 1998 was approximately
$60,000.
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The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including First Federal and the
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 for 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 which prohibit it 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. First Federal is in compliance with these restrictions.
Federal savings associations are generally authorized to branch nationwide.
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, 1998, First Federal's lending limit under the 15% limitation was $6.5
million. First Federal is in compliance with the loans-to-one borrower
limitation.
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 that 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
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core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least
6% and a total risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium. Institutions that are less than adequately capitalized
(i.e., core or Tier 1 risk-based capital ratios of less than 4% or a total
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classifications of all insured
institutions are made by the FDIC for each semi-annual assessment period.
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.
Effective January 1, 1997, the premium schedule for BIF and SAIF insured
institutions ranged from 0 to 27 basis points. However, SAIF-insured
institutions are required to pay a Financing Corporation ("FICO") assessment, in
order to fund the interest on bonds issued to resolve thrift failures in the
1980's, equal to approximately 6.48 basis points for each $100 in domestic
deposits, while BIF-insured institutions pay an assessment equal to
approximately 1.52 basis points for each $100 in domestic deposits. The
assessment is expected to be reduced to 2.43 basis points no later than January
1, 2000, when BIF insured institutions fully participate in the assessment.
These assessments, which may be revised based upon the level of BIF and SAIF
deposits will continue until the bonds mature in the year 2017.
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 earnings, and certain
noncumulative perpetual preferred stock and related surplus. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights and credit card relationships, must be deducted from tangible capital for
calculating compliance with the requirement. At June 30, 1998, First Federal had
no intangible assets.
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. Debt and equity
investments in
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excludable subsidiaries are deducted from assets and capital. At June 30, 1998,
First Federal had no subsidiaries.
At June 30, 1998, First Federal had tangible capital of $43.5 million, or
21.8% 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.
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 mortgage
servicing rights and 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, 1998, First Federal had core capital equal to $43.5 million, or
21.8% of adjusted total assets, which is $37.5 million above the minimum
leverage ratio requirement of 3% of adjusted total assets in effect on that
date.
The OTS risk-based capital regulations require 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 capital requirement only up to the amount 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. 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.
In determining the amount of risk-weighted assets, all assets, including
credit equivalent amounts for certain off-balance sheet items, are 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 Fannie Mae or
Freddie Mac.
OTS regulations also require savings associations with more than normal
interest rate risk exposure to deduct from total capital, for purposes of
determining compliance with the risk-based capital requirement, an amount equal
to 50% of the association's 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,
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liabilities and off-balance sheet contracts. Any savings association with less
than $300 million in assets and a total risk-based capital ratio in excess of
12% (such as First Federal) is exempt from this requirement unless the OTS
determines otherwise. The OTS has indefinitely deferred implementation of the
interest rate risk component of the risk-based capital requirements.
At June 30, 1998, First Federal had total risk-based capital of $44.1
million (including $43.5 million in core capital and $623,000 in qualifying
supplementary capital) and risk-weighted assets of $49.9 million, or total
capital of 88.6% of risk-weighted assets. This amount was $40.1 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 capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% total 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 total risk-based capital ratio of less than 6%) must be
made subject to one or more 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. Stockholders of the Company do not have preemptive rights, and
therefore, if the 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 ownership of present shareholders.
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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 that meet their capital requirements before
and after the proposed distribution, may make capital distributions during any
calendar year equal to the greater of (i) 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 (ii)
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 notice 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 CAMELS rating of "1" or "2", 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.
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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. This liquid asset ratio
requirement may vary from time to time (between 4% and 10%) depending upon
economic conditions and savings flows of all savings associations. At the
present time, the minimum liquid asset ratio is 4%. Penalties may be imposed
upon associations for violations of the liquid asset ratio requirement. At June
30, 1998, First Federal was in compliance with this requirement, with a liquid
asset ratio of 34.4%.
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, 1998, First Federal met the
test and has always met the test since its effectiveness.
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."
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 institution. An unsatisfactory rating may be used as the basis
for the denial of an application by the OTS.
In 1995 the Federal banking agencies, including the OTS, adopted revisions
to the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due
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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 May 1998 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 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. Subsidiaries of a savings association are
generally not deemed affiliates; however, the OTS has the discretion to treat
subsidiaries of savings associations as affiliates on a case-by-case basis.
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 Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the 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 Company and its non-savings association subsidiaries (if any)
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.
If First Federal fails the QTL test, the Company must obtain the approval
of the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activities other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure, the 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 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.
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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 Company is registered with the SEC
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the 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, 1997, 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 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, 1998, First Federal had $1.5 million in FHLB
stock, which was in compliance with this requirement. Over the past five
calendar years, dividends received by the Bank on its FHLB stock have averaged
7.80% (including 6.59% for calendar year 1997).
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately-priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
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dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of First Federal's FHLB stock may result in a corresponding
reduction in First Federal's capital.
Federal and State Taxation
Federal Taxation. The Bank and the Company currently file separate Federal
income tax returns. These returns are filed on a calendar-year basis using the
accrual method of accounting.
Savings associations such as the Bank are permitted to establish reserves
for bad debts and to make annual additions thereto which may, within specified
formula limits, be deducted in computing taxable income for Federal income tax
purposes. The amount of the bad debt deduction is presently computed under the
experience method, although a percentage-of-taxable-income method was also
available in computing the deduction for tax years ended on or prior to December
31, 1995. 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.
Tax legislation enacted in 1996 imposes a requirement to recapture into
taxable income the portion of the tax bad debt reserves for qualifying and
non-qualifying loans in excess of the "base-year" balances. For the Bank, the
base-year reserves are the balances as of December 31, 1987. Recapture of the
excess reserves will occur over a six-year period. The Bank previously
established, and will continue to maintain, a deferred tax liability with
respect to its Federal tax bad debt reserves in excess of the base-year
balances; accordingly, the recapture requirement will have no effect on total
income tax expense for financial reporting purposes.
Also, under the 1996 legislation, the Bank's base-year Federal tax bad debt
reserves are "frozen" and subject to current recapture only in very limited
circumstances. Generally, recapture of all or a portion of the base-year
reserves will be required if the Bank pays a dividend in excess 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 Statement of
Financial Accounting Standards ("SFAS") No. 109 for its base-year Federal tax
bad debt reserves, as it does not anticipate engaging in any of the transactions
that would cause such reserves to be recaptured. The unrecognized deferred tax
liability was $1.5 million at June 30, 1998.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to the alternative minimum
tax. This tax is imposed at a 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. The Company and the Bank do not expect to be
subject to the alternative minimum tax.
The Bank has been audited by the IRS with respect to Federal income tax
returns through December 31, 1993, and all deficiencies have been satisfied. In
the opinion of management, any
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examination of still open returns would not result in a deficiency that could
have a material adverse effect on the financial condition of the Bank.
New York Taxation. The Bank and the Company currently file a combined New
York state tax return on a calendar-year basis. 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 "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
assets allocable to New York State with certain modifications, (b) 3% of
"alternative entire net income" allocable to New York State, or (c) $250. 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). New York also imposes a Metropolitan Commuter
Transportation District surcharge of 17% that is assessed on the New York State
Franchise Tax.
In July 1996, New York State enacted legislation to preserve the use of the
percentage-of- taxable-income bad debt deduction for thrift institutions such as
the Bank. In general, the legislation provides for a deduction equal to 32% of
the Bank's New York State taxable income, which is comparable to the deductions
permitted under the prior law. The legislation also provides for a floating base
year, which allows the Bank to switch from the percentage-of-taxable-income
method to the experience method without recapture of any reserve. Previously,
the Bank had established a deferred New York State tax liability for the excess
of its New York State tax bad debt reserves over the amount of its base-year New
York State reserves. Since the 1996 legislation effectively eliminated the
reserves in excess of the base-year balances, the Bank reduced its deferred tax
liability by $238,000 (with a corresponding reduction in income tax expense)
during the quarter ended September 30, 1996.
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, after the 1996 legislation, New York continues to require
that the Bank maintain its thrift institution charter and hold at least 60% of
its assets in 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 that would require recapture of the
base-year reserves. Accordingly, in conformity with SFAS No. 109, the related
state deferred tax liability of approximately $0.6 million (net of Federal tax
effect) has not been recognized.
Delaware Taxation. As a Delaware holding company, the 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 Company is also subject to
an annual franchise tax imposed by the State of Delaware.
Item 2. Properties
The Bank conducts its business at its main office and two other locations
in its market area. The following table sets forth information concerning each
of these offices as of June 30, 1998. At
35
<PAGE>
June 30, 1998, the total net book value of the Bank's office properties and
equipment (including land, building and leasehold improvements, and furniture,
fixtures and equipment) was $1.0 million, distributed as follows by location:
Year Owned or Net Book Value at
Location Acquired Leased June 30, 1998
-------- -------- ------ -------------
Main Office:
1019 Park Street 1959 Owned $115,000
Peekskill, New York
Full Service Branches:
1961 Commerce Street 1977 Leased 27,000
Yorktown Heights, New York
Cortlandt Town Center, Rte. 6 1997 Owned (1) 901,000
Mohegan Lake, New York
(1) Building is owned; land is leased.
Management believes that the Bank's current facilities are adequate to meet
its present and foreseeable future needs.
The Bank's depositor and borrower customer files are maintained by an
independent data processing company.
36
<PAGE>
Item 3. Legal Proceedings
From time to time, the Bank 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 Bank's financial condition 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, 1998.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Page 47 of the attached 1998 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Selected Financial Data
Page 1 of the attached 1998 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 15 of the attached 1998 Annual Report to Stockholders are
herein incorporated by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Pages 5 and 6 of the attached 1998 Annual Report to Stockholders are herein
incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Pages 16 through 45 of the attached 1998 Annual Report to Stockholders are
herein incorporated by reference.
37
<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.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning directors is incorporated herein by reference to the
definitive Proxy Statement for the 1998 Annual Meeting of Stockholders, 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 to the definitive Proxy Statement for the 1998 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 to the definitive Proxy Statement
for the 1998 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 to the definitive Proxy Statement for the 1998
Annual Meeting of Stockholders, a copy of which will be filed not later than 120
days after the close of the fiscal year.
38
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements
The following information appearing in 1998 Annual Report to Stockholders
is herein incorporated by reference:
Pages in
Annual
Annual Report Section Report
- --------------------- ------
Independent Auditors' Report............................................ 16
Consolidated Balance Sheets as of June 30, 1998 and 1997................ 17
Consolidated Statements of Income for the Years
Ended June 30, 1998, 1997 and 1996.................................... 18
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended June 30, 1998, 1997 and 1996.............................. 19
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1998, 1997 and 1996.................................... 20
Notes to Consolidated Financial Statements.............................. 21-45
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is not applicable or has been included in the consolidated financial
statements and notes thereto.
(a)(3) Exhibits
Reference to
Regulation Prior Filing or
S-K Exhibit Exhibit Number
Number Document Attached Hereto
------ -------- ---------------
2 Plan of acquisition, reorganization,
arrangement, liquidation or succession None
3(a) Articles of Incorporation *
3(b) By-Laws *
4 Instruments defining the rights of security
holders, including debentures *
9 Voting Trust Agreement None
10 Material contracts
Savings and Investment Plan *
Retirement Income Plan *
39
<PAGE>
Form of 1995 Stock Option and Incentive Plan *
Employment Agreements of Eldorus Maynard and *
William J. LaCalamito
Supplemental Executive Retirement Agreements of
Eldorus Maynard and William J. LaCalamito **
Form of Recognition and Retention Plan **
Employee Stock Ownership Plan **
11 Statement regarding computation of per share earnings None
13 Annual Report to Security Holders 13
16 Letter regarding change in certifying accountants None
18 Letter regarding change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to
vote of security holders None
23 Consents of Experts and Counsel 23
24 Power of Attorney None
27 Financial Data Schedule (EDGAR filing only)
28 Information from reports furnished to state
insurance regulatory authorities None
99 Additional Exhibits None
(*) 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.
(b) Reports on Form 8-K
During the quarter ended June 30, 1998, no current reports on Form 8-K were
filed by the Company.
40
<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 CORPORATION
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/ John A. McGurty
- -------------------------------- ----------------------------
Dominick Bertoline, Director John A. McGurty, Director
Date: September 28, 1998 Date: September 28, 1998
/s/ Edward H. Dwyer /s/ Eldorus Maynard
- -------------------------------- ----------------------------
Edward H. Dwyer, Director Eldorus Maynard, Chief Executive
Officer and Chairman of the Board
Date: September 28, 1998 (Principal Executive and
Operating Officer)
Date: September 28, 1998
/s/Robert E. Flower /s/ William J. LaCalamito
- -------------------------------- ----------------------------
Robert E. Flower, Director William J. LaCalamito, President,
Chief Operating Officer and Secretary
Date: September 28, 1998 (Principal Financial and
Accounting Officer)
Date: September 28, 1998
41
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
At or for the Fiscal Year ended June 30
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $ 200,341 $ 182,560 $ 191,323 $ 155,716 $ 156,652
Loans, net 47,631 45,507 39,557 41,060 39,961
Held-to-maturity securities (1) 135,446 126,450 129,200 105,421 113,966
Available-for-sale securities 8,498 2,983 2,459 1,976 --
Cash and cash equivalents 4,626 4,158 17,320 4,681 157
Depositor accounts 139,858 132,418 128,304 130,933 133,891
Securities repurchase agreements 13,000 -- -- -- --
Equity 43,206 46,966 59,774 21,178 19,267
Selected Operating Data:
Interest and dividend income $ 12,643 $ 12,309 $ 11,794 $ 10,722 $ 10,858
Interest expense 6,034 5,431 5,401 4,785 4,216
--------- --------- --------- --------- ---------
Net interest income 6,609 6,878 6,393 5,937 6,642
Provision for loan losses 60 143 45 160 60
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses 6,549 6,735 6,348 5,777 6,582
Loan fees and service charges 135 149 207 201 227
Other non-interest income 90 87 101 76 88
Non-interest expense (excluding special assessment) 3,474 3,318 2,807 2,490 2,315
SAIF special assessment (2) -- 884 -- -- --
--------- --------- --------- --------- ---------
Income before income tax expense and cumulative
effect of changes in accounting principles 3,300 2,769 3,849 3,564 4,582
Income tax expense (3) 1,446 957 1,628 1,640 2,040
Cumulative effect of changes in accounting principles:
Postretirement health care benefits, net -- -- (59) -- --
Income taxes -- -- -- -- (205)
--------- --------- --------- --------- ---------
Net income (4) $ 1,854 $ 1,812 $ 2,162 $ 1,924 $ 2,337
========= ========= ========= ========= =========
Earnings per share, from date of conversion (4):
Basic $ 0.68 $ 0.58 $ 0.36
Diluted 0.66 0.58 0.36
========= ========= =========
Selected Statistical Data:
Return on average assets (4) 0.98% 0.98% 1.23% 1.22% 1.52%
Return on average equity (4) 4.02 3.57 4.96 9.38 12.80
Net interest margin 3.55 3.76 3.66 3.82 4.38
Average interest rate spread 2.52 2.57 2.57 3.32 3.98
Equity to total assets at end of period 21.57 25.73 31.24 13.60 12.30
Efficiency ratio (5) 50.83 61.09 42.04 40.07 33.28
Non-interest expense to average assets (4) 1.84 2.27 1.59 1.58 1.50
Non-performing loans to total loans, net 3.13 4.40 3.17 5.10 4.29
Allowance for loan losses to non-performing loans 45.74 31.04 41.45 22.61 19.58
Non-performing assets to total assets 0.79 1.22 0.65 1.35 1.10
Book value per share $ 14.92 $ 14.71 $ 14.58
Cash dividends per share 0.36 0.36 0.09
Dividend payout ratio 54.69% 62.25% 26.86
</TABLE>
(1) At June 30, 1994, all securities were classified as "held-for-investment"
prior to the adoption of SFAS No. 115.
(2) Represents the Bank's share of a special assessment imposed on all
financial institutions with deposits insured by the Savings Association
Insurance Fund ("SAIF"). After taxes, this assessment reduced net income by
approximately $520,000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Comparison of Operating
Results for the Fiscal Years Ended June 30, 1997 and 1996."
(3) Income tax expense for fiscal 1997 has been reduced by a tax benefit of
$238,000 resulting from a change in New York state tax law. See Note 7 to
Consolidated Financial Statements.
(4) Excluding the after-tax SAIF charge and the state tax benefit described in
notes (2) and (3), net income for fiscal 1997 would have been $2,094,000,
resulting in a return on average assets of 1.13%, a return on average
equity of 4.13% and basic earnings per share of $0.68. The ratio of
non-interest expense to average assets would have been 1.80%.
(5) The efficiency ratio is computed by dividing non-interest expense by the
sum of net interest income and non-interest income (other than gains and
losses on sales of securities and real estate owned). Excluding the SAIF
special assessment, the efficiency ratio for fiscal 1997 would have been
48.24%.
1
<PAGE>
To Our Stockholders:
Peekskill Financial Corporation successfully completed its second full year of
operations as a public company by growing its core business and enhancing
stockholder value. During fiscal 1998, our subsidiary, First Federal Savings
Bank, a service-oriented community bank, opened a modern expanded facility in
Mohegan Lake, New York, introduced several new mortgage products and continued
to expand customer services by introducing 24 hour banking at two branch
locations.
Net income increased to $1.9 million, or $0.68 per basic share, for fiscal
1998 compared to net income of $1.8 million, or $0.58 per basic share, for
fiscal 1997. Net income for the year ended June 30, 1997 was affected by a
one-time charge to earnings for a Federal deposit insurance special assessment
and a credit to earnings for the recognition of a tax benefit due to a change in
the New York State tax law.
Total assets increased $17.7 million to $200.3 million at June 30, 1998
from $182.6 million at June 30, 1997. The increase was funded by a $7.4 million
increase in depositor accounts and $13.0 million of borrowings under securities
repurchase agreements, partially offset by a $3.8 million decrease in
stockholders' equity. The Company began utilizing repurchase agreements during
fiscal 1998 as a funding source to supplement retail deposit growth. Proceeds
from these borrowings were invested in fixed-rate government agency bonds,
adjustable-rate mortgage-backed securities and fixed-rate collateralized
mortgage obligations at an anticipated average spread of approximately 90 basis
points. The spread was conservatively achieved by closely matching the
maturities of these securities and borrowings. Any additional future leveraging
using borrowings will be carried out in the same conservative manner.
The Bank completed construction of a new building for its Mohegan Lake
branch. The new facility, with a drive-up teller and ATM, is located in the
Cortlandt Town Center, a 600,000 square foot shopping center, which allows the
branch greater visibility and foot traffic. While this increased the Bank's
occupancy costs in fiscal 1998, it also helped achieve the $7.4 million, or
5.6%, increase in depositor accounts during the year. The Bank's growth strategy
includes opening new brick and mortar branches where there exists the potential
of obtaining core deposits, or purchasing existing branches from consolidating
competitors.
The $3.8 million decrease in stockholders' equity in fiscal 1998 primarily
reflects treasury stock purchases of $5.2 million and dividends paid of $1.0
million, partially offset by net income of $1.9 million. During fiscal 1998, the
Company purchased 297,552 shares of its common stock at an average price of
$17.43. The Company plans to continue its current repurchase program as long as
the Company's stock continues to be an attractive investment. Since going public
on December 29, 1995, the Company has purchased 1.2 million treasury shares, or
29.37% of its issued stock, for $17.7 million. The stock purchases during fiscal
1998 caused the ratio of stockholders' equity to total assets to decrease to
21.57% at June 30, 1998 from 25.73% at June 30, 1997. Book value per share
increased from $14.71 at June 30, 1997 to $14.92 at June 30, 1998.
At this time, the Company would like to take the opportunity to regretfully
announce the passing of John Fay, a Director of the Bank since 1981. John
contributed substantially to the success of First Federal Savings Bank, and more
recently Peekskill Financial Corporation. His wisdom, leadership and sense of
humor will be missed. On behalf of the Board of Directors, I wish to thank our
customers, staff and stockholders for their continued support.
Sincerely,
Eldorus Maynard
Chairman of the Board and
Chief Executive Officer
2
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
General
Peekskill Financial Corporation (the "Holding Company" or, together with
its wholly-owned 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 "Stock
Offering").
The primary market area of the Company, with three full-service branches,
consists of northern Westchester, Putnam and Dutchess counties. The Bank is a
community-oriented savings institution engaged principally in the business of
attracting deposits from customers within its market area 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, or
the difference between interest income on earning assets (primarily loans and
securities) and interest expense on deposits and borrowings. Net income is also
affected by non-interest income, such as loan fees and service charges;
non-interest expense, which includes salaries and employee benefits and other
operating expenses; and Federal and state income taxes. The Holding Company's
primary business activity has been limited to its ownership of the Bank.
The Company's results of operations are significantly affected by general
economic and competitive conditions (particularly changes in market interest
rates), government policies, changes in accounting standards and actions of
regulatory agencies. Future changes in applicable laws, regulations or
government policies may have a material impact on the Company. Lending
activities are influenced by the demand for and supply of housing, competition
among lenders, the level of interest rates and the availability of funds.
Deposit flows and costs of funds are influenced by prevailing market interest
rates (including rates on non-deposit investment alternatives), account
maturities, and the levels of personal income and savings in the Company's
market area.
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 at least 5.0%, as
defined by the regulations of the Office of Thrift Supervision (the "OTS"). At
June 30, 1998, the Bank's liquidity ratio of 34.4% 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 received on loans and
securities, and payments for interest on deposits and operating expenses. Cash
flows from
3
<PAGE>
investing activities include disbursements for purchases of securities and loan
originations, as well as proceeds from principal payments, maturities and calls
of securities and principal collections on loans. Changes in depositor accounts,
proceeds and repayments of borrowings such as securities repurchase agreements
and Federal Home Loan Bank ("FHLB") advances, dividend payments and capital
stock transactions comprise the Company's principal cash flows from financing
activities. While maturities and scheduled payments on loans and securities
provide an indication of the timing of the receipt of funds, changes in interest
rates, economic conditions, and competition strongly influence mortgage
prepayment rates and deposit flows, reducing the predictability of the timing of
these cash flows.
For the three-year period ended June 30, 1998, the average annual net cash
provided by operating activities was in excess of $2.4 million. Net cash used in
investing activities during fiscal 1998 was approximately $17.9 million,
primarily reflecting net purchases of $14.9 million from securities transactions
and net disbursements of $2.4 million to fund loan growth.
An important source of funds is the Company's core deposit base. Management
believes that a substantial portion of the Company's total deposits of $139.9
million at June 30, 1998 are core deposits. The deposit base increased by $7.4
million in fiscal 1998, reflecting the Company's increased advertising and more
competitive rates for deposit products. Core deposits are generally considered
to be a highly stable source of liquidity due to the long-term relationships
with deposit customers. The Company also has the ability to borrow advances of
up to $49.9 million from the FHLB of New York at June 30, 1998. Significant
financing activities in fiscal 1998 also included borrowing $13.0 million
through securities repurchase agreements with the FHLB; disbursing $3.8 million
for treasury stock purchases; and paying $1.0 million in cash dividends. The
Holding Company's future ability to pay dividends to stockholders or to
repurchase stock will be dependent on dividends received from the Bank, which
are subject to certain regulatory restrictions and income tax considerations.
See Notes 7 and 9 to Consolidated Financial Statements.
At June 30, 1998, the Company had outstanding loan commitments of $6.6
million and loans in process of $112,000. Since certain origination commitments
may not be funded and loans in process may not be fully drawn upon, these
amounts 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.
Capital
The OTS has established regulations which require savings associations,
such as the Bank, to meet minimum capital requirements. These requirements
include tangible capital of 1.5% of total adjusted assets; core capital of 3.0%
of total adjusted assets; and risk-based capital of 8.0% of risk-weighted
assets. The Bank satisfied these minimum capital standards at June 30, 1998 with
tangible and core capital ratios of 21.8% and a total risk-based capital ratio
of 88.6%. In determining the amount of risk-weighted assets, savings
associations must classify all assets, and certain off-balance sheet items, into
one of four risk-weighted categories. The amount of risk-weighted assets is
determined by applying a specific percentage (ranging from 0% for cash and
obligations issued by the United States Government or its agencies to 100% for
consumer and commercial loans) to the amounts in each category. These capital
requirements, which are applicable to the Bank only, do not consider additional
capital held at the Holding Company level, and require certain adjustments to
the Bank's total equity to arrive at the various regulatory capital amounts.
4
<PAGE>
See Note 9 to Consolidated Financial Statements for a further analysis of the
Bank's actual and required regulatory capital.
At the time of the Conversion, the Bank was required to establish a
liquidation account equal to its capital as of June 30, 1995. This liquidation
account is reduced to the extent that eligible account holders have reduced
their qualifying deposits. In the unlikely event of a complete liquidation of
the Bank, each eligible account holder will be entitled to receive a
distribution from the liquidation account. The Bank is not permitted to declare
or pay dividends on its capital stock, or repurchase any of its outstanding
stock, if the effect thereof would cause its stockholder's equity to be reduced
below the amount required for the liquidation account or applicable regulatory
capital requirements.
Interest Rate Risk 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 given 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 recommend adjustments for consideration
by the Board of Directors. Management also reviews the Bank's securities
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. Notwithstanding the Company's interest rate risk
management activities, the potential for changing interest rates is an
uncertainty that can have an adverse effect on net income.
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 general level of 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. The Company's results of operations and net portfolio
values remain vulnerable to increases in interest rates and to fluctuations in
the difference between long- and short-term interest rates.
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, 1998, the Company had securities of $40.2 million
with contractual maturities of five years or less and adjustable-rate securities
of $45.1 million. Mortgage-backed securities amortize and experience prepayments
of principal; the Company has received average cash flows from principal
paydowns, maturities and calls of securities of $31.1 million annually over the
past three fiscal years. The Company also controls interest rate risk by
emphasizing non-certificate depositor accounts. The Board and
5
<PAGE>
management believe that such accounts carry a lower cost than certificate
accounts, and that a material portion of such accounts may be more resistant to
changes in interest rates than are certificate accounts. At June 30, 1998, the
Company had $51.6 million of regular savings and club accounts, and $13.2
million of money market and NOW accounts, representing 46.4% of total depositor
accounts.
One approach used to quantify interest rate risk is the net portfolio value
("NPV") analysis. In essence, this analysis calculates the difference between
the present value of liabilities and the present value of expected cash flows
from assets and off-balance sheet contracts. The following table sets forth, at
June 30, 1998, an analysis of the Bank's interest rate risk as measured by the
estimated changes in NPV resulting from instantaneous and sustained parallel
shifts in the yield curve (+ or - 400 basis points, measured in 100 basis point
increments).
Estimated Increase
(Decrease) in NPV
Change in Estimated -------------------------------------
Interest Rates NPV Amount Amount Percent
- ---------------------- ------------------ ------------------- -----------------
(Basis Points) (Dollars in thousands)
+400 $37,493 $ (10,468) (22)%
+300 40,936 (7,025) (15)
+200 44,098 (3,863) (8)
+100 46,573 (1,388) (3)
--- 47,961 --- ---
-100 48,960 999 2
-200 49,512 1,551 3
-300 50,431 2,470 5
-400 51,727 3,766 8
Certain assumptions utilized by the OTS in assessing the interest rate risk
of thrift institutions were employed in preparing data for the Bank included in
the preceding table. These assumptions relate to interest rates, loan prepayment
rates, deposit decay rates, and the market values of certain assets under the
various interest rate scenarios. It was also assumed that delinquency rates will
not change as a result of changes in interest rates although there can be no
assurance that this will be the case. Even if interest rates change in the
designated amounts, there can be no assurance that the Bank's assets and
liabilities would perform as set forth above. In addition, a change in U.S.
Treasury rates in the designated amounts accompanied by a change in the shape of
the Treasury yield curve would cause significantly different changes to the NPV
than indicated above.
The Company does not currently engage in trading activities or use
derivative instruments to control interest rate risk. Even though such
activities may be permitted with the approval of the Board of Directors, the
Company does not intend to engage in such activities in the foreseeable future.
Interest rate risk is the most significant market risk affecting the
Company. Other types of market risk, such as foreign currency exchange rate risk
and commodity price risk, do not arise in the normal course of the Company's
business activities.
6
<PAGE>
Analysis of Net Interest Income
The following table sets forth the Company's average consolidated balance
sheets, interest income and expense, average yields and costs, and certain other
information for the fiscal years ended June 30:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------- ------------------------------- ----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance(1) Interest Rate Balance(1) Interest Rate Balance(1) Interest Rate
---------- -------- ----- ---------- -------- ------ ---------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (2) $ 46,559 $ 3,720 7.99% $ 42,956 $ 3,402 7.92% $ 39,171 $ 3,363 8.59%
Mortgage-backed securities (3) 120,993 7,709 6.37 116,546 7,440 6.38 109,740 6,959 6.34
Other debt securities (3) 12,904 852 6.60 13,005 858 6.60 9,887 589 5.96
Other interest-earning assets 5,474 362 6.61 10,346 609 5.89 16,290 883 5.42
-------- ------- -------- ------- -------- -------
Total interest-earning assets 185,930 $12,643 6.80% 182,853 $12,309 6.73% 175,088 $11,794 6.73%
======= ======= =======
Non interest-earning assets 2,382 1,863 1,384
-------- -------- --------
Total assets $188,312 $184,716 $176,472
======== ======== ========
Interest-bearing liabilities:
Regular savings and club accounts $ 52,922 $ 1,541 2.91% $ 56,300 $ 1,696 3.01% $ 62,029 $ 1,903 3.07%
Money market and NOW accounts 11,909 329 2.76 11,252 285 2.53 12,069 303 2.51
Savings certificates 71,717 3,919 5.46 62,973 3,450 5.48 55,506 3,184 5.74
Borrowings 4,567 245 5.36 -- -- -- 150 11 7.33
-------- ------- -------- ------- -------- -------
Total interest-bearing liabilities 141,115 $ 6,034 4.28% 130,525 $ 5,431 4.16% 129,754 $ 5,401 4.16%
======= ======= =======
Non interest-bearing liabilities 1,100 3,495 3,094
-------- -------- --------
Total liabilities 142,215 134,020 132,848
Stockholders' equity 46,097 50,696 43,624
-------- -------- --------
Total liabilities and stockholders'
equity $188,312 $184,716 $176,472
======== ======== ========
Net interest income $ 6,609 $ 6,878 $ 6,393
======= ======= =======
Interest rate spread 2.52% 2.57% 2.57%
Net yield on interest-earning assets (4) 3.55 3.76 3.66
Average interest-earning assets to
average interest-bearing liabilities 1.32 1.40 1.35
</TABLE>
(1) Average balances are calculated using end-of-month balances, producing
results which are not materially different from average daily balances.
(2) Balances are net of deferred loan fees and loans in process. Non-accrual
loans are included in the balances.
(3) Balances represent amortized cost. Yields are not stated on a
tax-equivalent basis, as the Company does not invest in tax-exempt
securities.
(4) Represents net interest income divided by average total interest-earning
assets.
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"). The changes attributable to the combined impact of
volume and rate have been allocated proportionately to the changes due to volume
and rate.
<TABLE>
<CAPTION>
Fiscal 1998 vs. 1997 Fiscal 1997 vs. 1996
-------------------------------- ---------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------ Net ------------------- Net
Volume Rate Change Volume Rate Change
------ ---- ------ ------ ---- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 287 $ 31 $ 318 $ 311 $(272) $ 39
Mortgage-backed securities 284 (15) 269 434 47 481
Other debt securities (7) 1 (6) 201 68 269
Other interest-earning assets (311) 64 (247) (345) 71 (274)
----- ----- ----- ----- ----- -----
Total 253 81 334 601 (86) 515
----- ----- ----- ----- ----- -----
Interest-bearing liabilities:
Regular savings and club accounts (99) (56) (155) (174) (33) (207)
Money market and NOW accounts 18 26 44 (21) 3 (18)
Savings certificates 478 (9) 469 416 (150) 266
Borrowings 245 -- 245 (11) -- (11)
----- ----- ----- ----- ----- -----
Total 642 (39) 603 210 (180) 30
===== ===== ===== ===== ===== =====
Net change in net interest income $(389) $ 120 $(269) $ 391 $ 94 $ 485
===== ===== ===== ===== ===== =====
</TABLE>
7
<PAGE>
Comparison of Financial Condition at June 30, 1998 and 1997
Total assets were $200.3 million at June 30, 1998, as compared to $182.6
million at June 30, 1997. The $17.7 million overall increase reflects a $14.5
million increase in securities, a $2.1 million increase in net loans and an
$803,000 increase in office properties and equipment. Funding the Company's
asset growth was a $7.4 million increase in depositor accounts and $13.0 million
of securities repurchase agreements, partially offset by a $3.8 million decrease
in stockholders' equity.
The increase in securities consisted of increases of $9.0 million and $5.5
million in held-to-maturity securities and available-for-sale securities,
respectively. The increase in net loans reflects growth in the one-to-four
family residential mortgage portfolio. The increase in depositor accounts
reflects an $8.3 million increase in savings certificates and a $2.2 million
increase in money market demand and NOW accounts, partially offset by a $3.1
million decrease in regular savings accounts. The Company began utilizing
repurchase agreements as a funding source in fiscal 1998 to supplement retail
deposit growth. Proceeds from the borrowings were invested in fixed-rate
government agency bonds, adjustable-rate mortgage-backed securities and
fixed-rate collateralized mortgage obligations at an anticipated average spread
of approximately 90 basis points. The spread was conservatively achieved by
closely matching the maturities of the securities and borrowings.
Stockholders' equity decreased $3.8 million from $47.0 million at June 30,
1997 to $43.2 million at June 30, 1998. The decrease primarily reflects common
stock purchases of $5.2 million for the treasury and dividends paid of $1.0
million, partially offset by net income of $1.9 million. The Company plans to
continue its current repurchase program as long as the Company's stock continues
to be an attractive investment. The ratio of stockholders' equity to total
assets decreased from 25.73% at June 30, 1997 to 21.57% at June 30, 1998. The
Company's tangible book value per share was $14.92 at June 30, 1998 compared to
$14.71 at June 30, 1997.
Comparison of Operating Results for the Fiscal Years Ended June 30, 1998 and
1997
General. Net income for the fiscal year ended June 30, 1998 was $1.9
million, or basic earning per share ("EPS") of $0.68, as compared to net income
of $1.8 million, or basic EPS of $0.58 for the fiscal year ended June 30, 1997.
Diluted EPS was $0.66 and $0.58, respectively, for fiscal years 1998 and 1997.
Net income for the year ended June 30, 1998 was affected by a charge to earnings
of $64,000 ($37,000 net of taxes) for the full vesting of certain shares under
the Company's Recognition and Retention Plan ("RRP"), due to the death of one of
the Company's Directors. Net income for the year ended June 30, 1997 was
affected by a one-time charge to earnings for a Federal deposit insurance
special assessment of $884,000 ($520,000 net of taxes) and a credit to earnings
for the recognition of a $238,000 reduction to New York State tax expense due to
a change in tax law. Excluding these events, net income would have been $1.9
million and $2.1 million for the years ended June 30, 1998 and 1997,
respectively, and basic EPS would have been $0.70 and $0.68, respectively.
Net Interest Income. Net interest income decreased $269,000, or 3.9%, from
$6.9 million for the year ended June 30, 1997 to $6.6 million for the current
year. The components of net interest income are interest and dividend income,
which increased $334,000, and interest expense, which increased $603,000. The
Company's interest rate spread decreased to 2.52% for fiscal 1998 from 2.57% for
fiscal 1997. The
8
<PAGE>
net yield on interest-earning assets decreased 21 basis points to 3.55% for the
year ended June 30, 1998, reflecting a $7.5 million decrease in average net
earning assets.
Total interest and dividend income increased $334,000, or 2.7%, to $12.6
million for fiscal 1998 from $12.3 million for fiscal 1997. The increase
primarily reflects a $3.1 million increase in average interest-earning assets
and a 7 basis point increase in the average yield on interest-earning assets.
The overall increase in average interest-earning assets is comprised of
increases of $3.6 million in the average loan portfolio and $4.3 million in the
average securities portfolio, partially offset by a decrease of $4.9 million in
other interest-earning assets. The change in mix of interest-earning assets
reflects the use of generally lower yielding other interest-earning assets to
purchase shares of the Company's common stock for the treasury. Management
intends to continue its current strategy of increasing the loan portfolio
(primarily residential mortgage loans), as market conditions permit, by
introducing new products and stimulating loan demand through advertising.
The $603,000 increase in total interest expense was caused primarily by a
12 basis point increase in the average rate paid on interest-bearing liabilities
and a $10.6 million increase in average interest-bearing liabilities. The higher
average rate in fiscal 1998 reflects a continuing shift in the mix of
interest-bearing deposits from generally lower rate savings and club accounts
(the average of which decreased $3.4 million during fiscal 1998) to generally
higher rate savings certificates (the average of which increased $8.7 million
during fiscal 1998). This shift was partially offset by a 10 basis point
decrease in the average rate paid on regular savings and club accounts. During
fiscal 1998, the Company entered into two securities repurchase agreements
totaling $13.0 million at an average rate of 5.36%, for which the Company
recorded $245,000 of interest expense.
Provision for Loan Losses. The provision for loan losses is a charge
against income which increases the allowance for loan losses. The adequacy of
the allowance for loan losses is evaluated periodically and is determined based
on management's judgment concerning the amount of risk and potential loss
inherent in the portfolio. Management's judgment is based upon a number of
factors including a review of non-performing and other classified loans, the
value of collateral for such loans, historical loss experience, changes in the
nature and volume of the loan portfolio, and current economic conditions. When
doubt exists in the view of management as to the collectibility of the remaining
balance of a loan, the Company will charge-off that portion deemed to be
uncollectible. 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.
The provision for loan losses was $60,000 in fiscal 1998 and $143,000 in
fiscal 1997. The higher provision in fiscal 1997 was due to the establishment of
an $83,000 allowance for loan losses on certain participation loans. The overall
allowance for loan losses was $682,000, or 45.74% of non-performing loans at
June 30, 1998, as compared to $622,000, or 31.04% of non-performing loans at
June 30, 1997. The Company did not have any charge-offs in fiscal 1998 as
compared to $40,000 in fiscal 1997. Non-performing loans at June 30, 1998 were
$1.5 million compared to $2.0 million at June 30, 1997. The ratio of
non-performing loans to net loans was 3.13% at June 30, 1998 compared to 4.40%
at June 30, 1997. See "Comparison of Operating Results for the Fiscal Years
ended June 30, 1997 and 1996" and "Asset Quality" for further information.
9
<PAGE>
Non-Interest Income. Non-interest income decreased $11,000 to $225,000 for
fiscal 1998 from $236,000 for fiscal 1997. Non-interest income is primarily
comprised of loan fees, service charges and rental income on the Company's
office properties. The decrease reflects a $14,000 decrease in loan fees and
service charges, partially offset by a $3,000 increase in other non-interest
income.
Non-Interest Expense. Non-interest expense decreased $728,000 to $3.5
million for the year ended June 30, 1998 from $4.2 million for the prior year.
The decrease is primarily the result of a $985,000 decrease in Federal deposit
insurance costs, partially offset by a $155,000 increase in compensation and
benefits expense and an $88,000 increase in occupancy costs. The decrease in
deposit insurance costs reflects the absence in fiscal 1998 of the special
assessment of $884,000 included in the fiscal 1997 amount, as well as lower
ongoing costs subsequent to recapitalization of the SAIF. The increase in
compensation and benefits expense primarily reflects (i) a $64,000 charge for
the full vesting of certain shares under the Company's RRP, due to the death of
one of the Company's Directors, and (ii) a $53,000 increase in expense related
to the Employee Stock Ownership Plan ("ESOP") due to increases in the Company's
stock price. The increase in occupancy costs primarily reflects costs associated
with the new building completed in fiscal 1998 for the Bank's Mohegan Lake
branch.
Income Tax Expense. Income tax expense was $1.4 million and $957,000,
respectively, for fiscal years 1998 and 1997. The increase in tax expense
reflects a $531,000 increase in pre-tax income, as well as the Company's
recognition of a tax benefit of $238,000 in fiscal 1997 due to the reduction of
a deferred tax liability caused by an amendment to the New York State tax law.
The effective tax rates for the years ended June 30, 1998 and 1997 were 43.8%
and 34.6%, respectively. Excluding the one-time benefit of $238,000, the
effective tax rate for fiscal 1997 would have been 43.2%.
Comparison of Operating Results for the Fiscal Years Ended June 30, 1997 and
1996
General. Net income for the fiscal year ended June 30, 1997 was $1.8
million, or basic EPS of $0.58 per share, as compared to net income of $2.2
million for the year ended June 30, 1996. Basic EPS was $0.36 for the six-month
period from the Stock Offering to June 30, 1996. The $350,000 decrease in net
income was primarily the result of a one-time charge to earnings of $884,000 for
a special Federal deposit insurance assessment, a $346,000 increase in
compensation and benefits expense and a $269,000 increase in other non-interest
expense, partially offset by a $485,000 increase in net interest income and a
$671,000 decrease in income tax expense. The lower tax expense was partially
attributable to a $238,000 tax benefit resulting from a change in New York state
tax law. Excluding this tax benefit and the after-tax charge for the special
deposit insurance assessment, net income for the year ended June 30, 1997 would
have been $2.1 million, or $0.68 per share.
Net Interest Income. Net interest income increased $485,000, or 7.6%, to
$6.9 million for the year ended June 30, 1997 from $6.4 million for fiscal 1996.
The components of net interest income are interest and dividend income, which
increased $515,000, and interest expense, which increased $30,000. The Company's
interest rate spread was unchanged at 2.57% in fiscal 1997, with no overall
change in the average yield on interest-earning assets or average rate paid on
interest-bearing liabilities. The net yield on interest-earning assets increased
10 basis points to 3.76% for fiscal 1997, reflecting a $7.0 million increase in
average net earning assets.
10
<PAGE>
Total interest and dividend income increased $515,000 to $12.3 million for
fiscal 1997, as compared to $11.8 million for fiscal 1996. This increase
primarily reflects a $7.8 million increase in average interest-earning assets
principally due to the investment of funds from the Stock Offering (net of
subsequent stock purchases) for a full year in fiscal 1997 compared to six
months in fiscal 1996. The overall increase in average interest-earning assets
reflects increases of $3.8 million in the average loan portfolio and $9.9
million in the average securities portfolio, partially offset by a $5.9 million
decrease in other interest-earning assets. The change in mix of interest-earning
assets reflects the deployment of capital raised in the Stock Offering from
short-term investments to higher-yielding loans and securities. Management
intends to continue its current strategy of increasing the loan portfolio
(primarily residential mortgage loans), as market conditions permit, by
introducing new products and stimulating loan demand through advertising.
The overall yield on average interest-earning assets was unchanged at 6.73%
in fiscal 1997, as higher average yields on securities and other earning assets
were offset by a 67 basis point decline in the average yield on loans. The lower
yield in fiscal 1997 reflects the overall decline in interest rates, the
origination of certain loans at lower introductory rates, and the effect of
non-accrual loans. Interest income for the year ended June 30, 1997 was reduced
by the reversal of $67,000 in interest previously received on the Company's
participation interest in certain residential mortgage loans purchased from
Thrift Association Service Corporation ("TASCO Loans"). Since these loans were
placed on non-accrual status during the first quarter of fiscal 1997, interest
income was further reduced by foregone interest of $74,000 for the year. The
Company took these actions since the FDIC, as a servicer of these loans, is
disputing its obligation to pass-through certain principal and interest payments
on the loans whether or not such amounts are collected from the borrowers.
Although the FDIC resumed making certain payments in the fourth quarter of
fiscal 1997, the matter has not been resolved and the TASCO Loans of $1.1
million remained on non-accrual status at June 30, 1997. There were no other
loans on non-accrual status at June 30, 1997 and 1996. See "Asset Quality" for
further information.
Interest expense of $5.4 million in fiscal 1997 reflected a $30,000
increase over fiscal 1996, primarily due to an increase of $771,000 in total
average interest-bearing liabilities. Although the overall average cost of
interest-bearing liabilities was unchanged at 4.16% in fiscal 1997, this rate
reflects a continuing shift in the mix of interest-bearing deposits from
generally lower rate savings and club accounts (the average of which decreased
$5.7 million during fiscal 1997) to generally higher rate savings certificates
(the average of which increased $7.5 million during fiscal 1997). This shift was
offset by a 26 basis point decrease in the average rate paid on savings
certificates to 5.48%.
Provision for Loan Losses. The provision for loan losses was $143,000 in
fiscal 1997 and $45,000 in fiscal 1996. The $98,000 increase is primarily due to
the establishment of an $83,000 allowance for loan losses on the TASCO Loans.
The overall allowance for loan losses was $622,000, or 31.04% of non-performing
loans at June 30, 1997, as compared to $519,000, or 41.45% of non-performing
loans at June 30, 1996. Charge-offs amounted to $40,000 in fiscal 1997 (none in
fiscal 1996), partially due to the foreclosure of a residential mortgage loan.
Non-performing loans at June 30, 1997 were $2.0 million compared to $1.3 million
at June 30, 1996. The ratio of non-performing loans to net loans was 4.40% at
June 30, 1997 compared to 3.17% at June 30, 1996. See "Asset Quality" for
further information.
Non-Interest Income. Non-interest income decreased $72,000 to $236,000 for
fiscal 1997, as compared to $308,000 for the 1996 fiscal year. Non-interest
income is primarily comprised of loan fees, service charges and rental income on
the Company's office properties. The decrease reflects a $58,000 decrease in
11
<PAGE>
loan fees and service charges, as well as the inclusion in fiscal 1996 of a
$24,000 gain on the sale of real estate owned.
Non-Interest Expense. Non-interest expense increased $1.4 million to $4.2
million for the year ended June 30, 1997 from $2.8 million for the year ended
June 30, 1996. The increase is primarily the result of the $884,000 SAIF special
assessment, a $346,000 increase in compensation and benefits expense and a
$269,000 increase in other non-interest expense, partially offset by a $122,000
decrease in ongoing Federal deposit insurance costs. The increase in
compensation and benefits expense primarily reflects (i) a $129,000 increase in
expense recognized for the Company's ESOP which was in effect for all of fiscal
1997 compared to six months in fiscal 1996, and (ii) recognition of $212,000 in
RRP expense for the year ended June 30, 1997 (none in fiscal 1996). Other
non-interest expense increased primarily from increased advertising expenses,
printing and other costs associated with operations as a public company for a
full year in fiscal 1997 compared to six months in fiscal 1996.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the "Funds
Act") was enacted into law to address the disparity in the minimum deposit
insurance assessment rates applicable to deposits insured by the Bank Insurance
Fund ("BIF") and the higher assessment rates applicable to deposits insured by
the Savings Association Insurance Fund ("SAIF"). The Funds Act authorized the
Federal Deposit Insurance Corporation ("FDIC") to impose a special assessment on
all financial institutions with SAIF-assessable deposits in the amount necessary
to recapitalize the SAIF. Pursuant to such authority, the FDIC imposed a special
assessment of 65.7 basis points per $100 of an institution's SAIF-assessable
deposits held on March 31, 1995. The Company's special SAIF assessment of
$884,000 before taxes ($520,000 net of taxes) was charged to expense in
September 1996 and paid in November 1996. In view of the recapitalization of the
SAIF, the FDIC reduced the assessment rates for SAIF-assessable deposits. For
the calendar years 1998 and 1997, the SAIF assessment rates range from 0 to 27
basis points, which is the same range of rates applicable to the BIF. Prior to
the SAIF recapitalization, all SAIF-insured institutions were subject to a
minimum assessment of 23 basis points. The Funds Act also expanded the
assessment base to include BIF-insured, as well as SAIF-insured, institutions to
fund payments on the bonds issued by the Financing Corporation to recapitalize
the now defunct Federal Savings and Loan Insurance Corporation. In order to fund
such interest payments, a separate assessment has been in effect since January
1, 1997.
Income Tax Expense. Income tax expense for the years ended June 30, 1997
and 1996 was $957,000 and $1.6 million, respectively. The reduction in tax
expense reflects the lower pre-tax income in fiscal 1997, as well as a benefit
of $238,000 due to the reduction of a deferred tax liability caused by an
amendment to the New York State tax law enacted during the first quarter of
fiscal 1997. As discussed in Note 7 to Consolidated Financial Statements, the
amendment changed the base-year for tax bad debt reserves and eliminated the
need for a deferred tax liability previously recognized for reserves in excess
of the base-year amount. The effective tax rates for fiscal 1997 and 1996 were
34.6% and 42.3%, respectively. Excluding the $238,000 one-time benefit, the
effective tax rate would have been 43.2% in fiscal 1997.
12
<PAGE>
Asset Quality
The following table sets forth information regarding non-performing loans
and real estate owned at the dates indicated. The Company's prospective adoption
of SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," effective
July 1, 1995, had no impact on the comparability of the information set forth in
the table. See Notes 1 and 3 to Consolidated Financial Statements for further
information concerning SFAS No. 114. There were no troubled debt restructurings
at the dates set forth below.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual (impaired) loans:
Participation interest in TASCO Loans $ 876 $ 1,074 $ -- $ -- $ --
One-to-four family mortgage loans 245 -- -- -- --
--------- --------- --------- --------- ---------
Total non-accrual loans 1,121 1,074 -- -- --
Accruing loans past due more than 90 days:
One-to-four family mortgage loans 370 930 1,252 2,096 1,698
Other loans -- -- -- -- 18
--------- --------- --------- --------- ---------
Total non-performing loans 1,491 2,004 1,252 2,096 1,716
Real estate owned 94 220 -- -- --
--------- --------- --------- --------- ---------
Total non-performing assets $ 1,585 $ 2,224 $ 1,252 $ 2,096 $ 1,716
========= ========= ========= ========= =========
Ratios:
Allowance for loan losses to:
Non-performing loans 45.74% 31.04% 41.45% 22.61% 19.58%
Total loans, net 1.43 1.37 1.31 1.15 0.84
Non-performing loans to total loans, net 3.13 4.40 3.17 5.10 4.29
Non-performing assets to total assets 0.79 1.22 0.65 1.35 1.10
</TABLE>
Non-performing loans are those loans past due for more than 90 days, or for
a shorter period if management determines the ability of the borrower to make
contractual payments is in doubt. When a borrower is more than 90 days past due,
management evaluates the loan, the underlying collateral and the borrower's
credit history to determine whether to place the loan on non-accrual status.
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, 1998, non-performing assets totaled $1.6 million, or 0.79% of
total assets, compared to $2.2 million, or 1.22% of total assets, at June 30,
1997. The $513,000 decrease in non-performing loans primarily reflects the
foreclosure of two properties during the year, with balances totaling $247,000,
and a $198,000 decrease in the TASCO Loans reflecting principal payments
received during the year. At June 30, 1998, the Company had $1.1 million of
non-accrual loans consisting of $876,000 in TASCO Loans and two one-to-four
family mortgages with principal balances totaling $245,000. Real estate owned at
June 30, 1998 represents a single-family residence acquired by foreclosure in
fiscal 1998. The allowance for loan losses as a percentage of non-performing
loans was 45.74% at June 30, 1998 compared to 31.04% at June 30, 1997 and 41.45%
at June 30, 1996. As a percentage of total loans, the allowance for loan losses
increased to 1.43% at June 30, 1998 compared to 1.37% at June 30, 1997 and 1.31%
at June 30, 1996.
13
<PAGE>
The following table sets forth activity in the Company's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------------------
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 622 $ 519 $ 474 $ 336 $ 276
Provision for loan losses 60 143 45 160 60
Charge-offs -- (40) -- (22) --
----- ----- ----- ----- -----
Balance at end of year $ 682 $ 622 $ 519 $ 474 $ 336
===== ===== ===== ===== =====
Ratio of charge-offs to average loans outstanding --% 0.09% --% 0.10% --%
Ratio of charge-offs to average non-performing loans -- 2.00 -- 1.20 --
</TABLE>
Recent Accounting Pronouncements
See Note 12 to Consolidated Financial Statements for a discussion of
recently issued accounting standards concerning comprehensive income, segment
reporting, benefit plan disclosures, and derivatives and hedging activities.
Impact of Inflation
The consolidated financial statements and other 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 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 do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
Impact of Year 2000 Issue
Like other financial institutions, the Company relies on computers for the
daily conduct of its business, all its transaction processing and for general
data processing. The "Year 2000 Issue" arose because many existing computer
programs use only the last two digits to refer to a year. Therefore, these
computer programs may not properly recognize a year that begins with "20"
instead of the familiar "19", causing the programs to fail or create erroneous
results.
The Company has initiated formal communications with all its significant
suppliers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 Issue. The Company's
data processing is performed almost entirely by a third party vendor. At this
time, the vendor has asserted that it is Year 2000 compliant and the Company, in
conjunction with other customers of this vendor, will begin testing the updated
system during the quarter ending September 30, 1998. The Company currently
believes that, with modifications to existing software and conversions to
14
<PAGE>
new software, the Year 2000 Issue will be mitigated without causing a material
adverse impact on its operations. However, if such modifications and conversions
are not made, or are not completed timely, the Year 2000 Issue could have a
material adverse impact on the operations of the Company.
The Company will utilize both internal and external resources to reprogram,
or replace, and test all software for Year 2000 modifications. Related costs are
expensed as incurred, except for costs incurred in the purchase of new software
or hardware, which are capitalized. To date, costs incurred and expensed relate
to the dedication of internal resources employed in the assessment of and
development of the Company's Year 2000 compliance remediation plan, as well as
the testing of the hardware and software owned or licensed for its personal
computers. Costs incurred to date are not material, and management does not
expect that additional costs to be incurred in connection with the Year 2000
Issue will have a material impact on the Company's financial condition or
results of operations. Since substantially all of the Company's loans are
residential mortgages, the ability of the Company's borrowers to become Year
2000 compliant is not a significant concern.
The estimated costs and timetable for the Year 2000 modifications are based
on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors in respect of both the
Company and its suppliers that might cause such material differences include,
but are not limited to, the availability and cost of personnel trained in this
field, the ability to locate and correct all relevant computer codes, testing
complications and similar uncertainties. In addition, there can be no guarantee
that the systems of other companies on which the Company's systems rely will be
timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with the Company's systems, would not have a
material adverse effect on the Company.
The Company plans to complete the Year 2000 project not later than December
31, 1998. Given the near-term timing of the test plan, the Company has not
developed a contingency plan, but will do so if testing results are not
satisfactory. Such a contingency plan could entail converting all data
processing applications to a third party vendor who is already Year 2000
compliant.
15
<PAGE>
Management's Report
Management is responsible for the preparation and integrity of the
consolidated financial statements and the 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 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 Company's internal control 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, 1998 and 1997, 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, 1998.
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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1998 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick, LLP
Stamford, Connecticut
July 30, 1998
16
<PAGE>
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
Assets
Cash and due from banks $ 2,616 $ 478
Interest-bearing deposits 2,010 3,680
Securities (note 2):
Held-to-maturity, at amortized cost (fair value of $136,883 in 1998 and $127,348 in 1997) 135,446 126,450
Available-for-sale, at fair value (amortized cost of $8,500 in 1998 and $2,999 in 1997) 8,498 2,983
--------- ---------
Total securities 143,944 129,433
Loans, net of allowance for loan losses of $682 in 1998 and $622 in 1997 (note 3) 47,631 45,507
Federal Home Loan Bank stock, at cost 1,463 1,463
Accrued interest receivable 1,050 1,064
Office properties and equipment, net (note 4) 1,043 240
Real estate owned 94 220
Deferred income taxes, net (note 7) 362 304
Other assets 128 171
--------- ---------
Total assets $ 200,341 $ 182,560
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Depositor accounts (note 5) $ 139,858 $ 132,418
Securities repurchase agreements (note 6) 13,000 --
Mortgage escrow deposits 1,759 1,943
Other liabilities 2,518 1,233
--------- ---------
Total liabilities 157,135 135,594
--------- ---------
Stockholders' equity (notes 8 and 9):
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 shares issued) 41 41
Additional paid-in capital 40,181 40,032
Unallocated common stock held by employee stock ownership plan ("ESOP") (2,870) (3,034)
Unamortized awards of common stock under recognition and retention plan ("RRP") (922) (1,188)
Treasury stock, at cost (1,204,181 shares in 1998 and 906,629 shares in 1997) (17,730) (12,543)
Retained earnings 24,508 23,668
Net unrealized loss on available-for-sale securities, net of taxes (note 2) (2) (10)
--------- ---------
Total stockholders' equity 43,206 46,966
--------- ---------
Total liabilities and stockholders' equity $ 200,341 $ 182,560
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Interest and dividend income:
Loans $ 3,720 $ 3,402 $ 3,363
Securities 8,561 8,298 7,548
Interest-bearing deposits and other 362 609 883
-------- -------- --------
Total interest and dividend income 12,643 12,309 11,794
-------- -------- --------
Interest expense:
Depositor accounts (note 5) 5,789 5,431 5,390
Securities repurchase agreements 245 -- --
Federal Home Loan Bank advances -- -- 11
-------- -------- --------
Total interest expense 6,034 5,431 5,401
-------- -------- --------
Net interest income 6,609 6,878 6,393
Provision for loan losses (note 3) 60 143 45
-------- -------- --------
Net interest income after provision for loan losses 6,549 6,735 6,348
-------- -------- --------
Non-interest income:
Loan fees and service charges 135 149 207
Other 90 87 101
-------- -------- --------
Total non-interest income 225 236 308
-------- -------- --------
Non-interest expense:
Compensation and benefits (note 8) 1,884 1,729 1,383
Federal deposit insurance costs, including a special assessment of
$884 in 1997 (note 5) 84 1,069 307
Occupancy costs (note 10) 429 341 328
Computer service fees 182 180 179
Professional fees 163 140 137
Safekeeping and custodial services 98 94 93
Other 634 649 380
-------- -------- --------
Total non-interest expense 3,474 4,202 2,807
-------- -------- --------
Income before income tax expense and cumulative effect of
change in accounting principle 3,300 2,769 3,849
Income tax expense (note 7) 1,446 957 1,628
-------- -------- --------
Income before cumulative effect of change in accounting principle 1,854 1,812 2,221
Cumulative effect of change in accounting for postretirement health care benefits,
net of taxes (note 8) -- -- (59)
-------- -------- --------
Net income $ 1,854 $ 1,812 $ 2,162
======== ======== ========
Earnings per share, from date of conversion in fiscal 1996 (note 9):
Basic $ 0.68 $ 0.58 $ 0.36
Diluted 0.66 0.58 0.36
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Dollars in
thousands, except share data)
<TABLE>
<CAPTION>
Unamortized
Unallocated Awards
Common of Net
Additional Stock Common Unrealized Total
Common Paid-in Held Stock Treasury Retained Loss on Stockholders'
Stock Capital By ESOP Under RRP Stock Earnings Securities Equity
----- ------- ------- --------- ----- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 4,099,750 common
shares 41 39,959 -- -- -- -- -- 40,000
Shares purchased by ESOP
(327,980 shares) -- -- (3,280) -- -- -- -- (3,280)
ESOP shares allocated (8,200
shares) -- 13 82 -- -- -- -- 95
Increase in net unrealized loss on
available-for-sale securities,
net of taxes -- -- -- -- -- -- (12) (12)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at June 30, 1996 41 39,972 (3,198) -- -- 22,984 (25) 59,774
Net income -- -- -- -- -- 1,812 -- 1,812
Dividends paid ($0.36 per share) -- -- -- -- -- (1,128) -- (1,128)
Purchase of 859,929 treasury
shares -- -- -- -- (11,985) -- -- (11,985)
Purchase of 163,990
shares to fund the RRP:
Awarded to participants
(117,290 shares) -- -- -- (1,400) -- -- -- (1,400)
Treasury stock available for
future awards (46,700
shares) -- -- -- -- (558) -- -- (558)
Amortization of RRP awards -- -- -- 212 -- -- -- 212
ESOP shares allocated (16,399
shares) -- 60 164 -- -- -- -- 224
Decrease in net unrealized loss on
available-for-sale securities,
net of taxes -- -- -- -- -- -- 15 15
-------- -------- -------- -------- -------- -------- -------- --------
Balance at June 30, 1997 41 40,032 (3,034) (1,188) (12,543) 23,668 (10) 46,966
Net income -- -- -- -- -- 1,854 -- 1,854
Dividends paid ($0.36 per share) -- -- -- -- -- (1,014 -- (1,014)
Purchase of 297,552 treasury
shares -- -- -- -- (5,187) -- -- (5,187)
Amortization of RRP awards -- -- -- 266 -- -- -- 266
Tax benefit from vesting of
RRP awards -- 36 -- -- -- -- -- 36
ESOP shares allocated (16,399
shares) -- 113 164 -- -- -- -- 277
Decrease in net unrealized loss on
available-for-sale securities,
net of taxes -- -- -- -- -- -- 8 8
-------- -------- -------- -------- -------- -------- -------- --------
Balance at June 30, 1998 $ 41 $ 40,181 $ (2,870) $ (922) $(17,730) $ 24,508 $ (2) $ 43,206
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,854 $ 1,812 $ 2,162
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 60 143 45
Depreciation and amortization expense 96 66 66
ESOP and RRP expense 543 436 95
Net amortization and accretion of deferred fees, discounts and premiums (61) (122) (186)
Net decrease (increase) in accrued interest receivable 14 47 (263)
Net decrease in other assets 43 2 11
Deferred tax benefit (58) (384) (117)
Net increase in other liabilities 434 90 423
Other adjustments, net (1) 10 35
-------- -------- --------
Net cash provided by operating activities 2,924 2,100 2,271
-------- -------- --------
Cash flows from investing activities:
Purchases of securities:
Held-to-maturity (52,950) (18,422) (44,722)
Available-for-sale (11,100) (1,000) (1,500)
Proceeds from principal payments, maturities and calls of securities:
Held-to-maturity 44,046 21,232 21,068
Available-for-sale 5,100 1,000 1,000
Net (disbursements) receipts for loan originations and principal collections (2,431) (6,261) 1,319
Purchase of Federal Home Loan Bank stock -- (144) --
Proceeds from sales of real estate owned 373 -- 163
Purchases of office properties and equipment (899) (122) (23)
-------- -------- --------
Net cash used in investing activities (17,861) (3,717) (22,695)
-------- -------- --------
Cash flows from financing activities:
Net increase (decrease) in depositor accounts 7,440 4,114 (2,629)
Proceeds from securities repurchase agreements 13,000 -- --
Proceeds from Federal Home Loan Bank advances -- -- 7,630
Repayments of Federal Home Loan Bank advances -- (500) (7,130)
Net decrease in mortgage escrow deposits (184) (88) (1,159)
Treasury stock purchases (3,837) (12,543) --
Purchase of shares to fund current-year RRP awards -- (1,400) --
Net proceeds from issuance of common stock, exclusive of ESOP shares -- -- 36,720
Dividends paid (1,014) (1,128) (369)
-------- -------- --------
Net cash provided by (used in) financing activities 15,405 (11,545) 33,063
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 468 (13,162) 12,639
Cash and cash equivalents at beginning of year 4,158 17,320 4,681
-------- -------- --------
Cash and cash equivalents at end of year $ 4,626 $ 4,158 $ 17,320
======== ======== ========
Supplemental information:
Interest paid $ 5,918 $ 5,468 $ 5,366
Income taxes paid 1,390 1,105 1,722
(Decrease) increase in liability for securities purchased, not yet settled (499) 499 --
Increase in liability for treasury stock purchased, not yet settled 1,350 -- --
Mortgage loans transferred to real estate owned 247 220 139
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
On December 29, 1995, Peekskill Financial Corporation (the "Holding Company" or,
together 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 Company operates three full-service branches, and serves northern
Westchester, Putnam and Dutchess counties as its primary market area. The Bank
is engaged principally in the business of attracting deposits from customers in
its market area 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 ("SAIF") of the Federal Deposit
Insurance Corporation. The Company's primary regulator is the Office of Thrift
Supervision ("OTS").
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 consolidation. Prior to the 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.
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation. For purposes of reporting cash flows, cash and cash
equivalents represent cash and due from banks and interest-bearing deposits.
Securities
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", requires the classification
of individual securities as held-to-maturity, trading, or available-for-sale.
SFAS No. 115 limits the held-to-maturity category 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. Management determines the appropriate
classification of the Company's securities at the time of purchase.
21
<PAGE>
Notes to Consolidated Financial Statements (continued)
Held-to-maturity securities are carried at amortized cost. 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
stockholders' equity. The Company has no trading securities. Federal Home Loan
Bank stock is a non-marketable security held in accordance with certain
regulatory requirements and, accordingly, is carried at cost.
Premiums and discounts on debt securities are amortized to interest income on a
level-yield basis over the expected term of the security. Purchases and sales of
securities are recorded on the trade date. Realized gains and losses on sales of
securities are determined based on the amortized cost of the specific securities
sold. Unrealized losses are charged to earnings when the decline in fair value
of a security is judged to be other than temporary.
Allowance for Loan Losses
The allowance for loan losses is increased by provisions for losses charged to
income. Losses on loans (including impaired loans) are charged to the allowance
for loan losses when all or a portion of a loan is deemed to be uncollectible.
Recoveries of loans previously charged-off are credited to the allowance when
realized. Management estimates the allowance for loan losses based on an
evaluation of the Company's past loan loss experience, known and inherent risks
in the portfolio, estimated value of underlying collateral, and current economic
conditions. In management's judgment, the allowance for loan losses is adequate
to absorb probable losses in the existing portfolio.
Establishing the allowance for loan losses involves significant management
judgments utilizing the best information available at the time. Those judgments
are subject to further review by various sources, including the Company's
regulators. Adjustments to the allowance for loan losses may be necessary in the
future 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.
Under SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as
amended by SFAS No. 118, 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. 118 allows creditors to continue
to use existing methods for recognizing interest income on impaired loans. The
Company applies SFAS No. 114 to loans (including participation interests) that
are individually evaluated for collectibility. The standard generally does not
apply to smaller-balance homogeneous loans (such as individual one-to-four
family mortgage loans) that are collectively evaluated for impairment.
Interest and Fees on Loans
Interest income is accrued monthly on outstanding loan principal balances unless
management considers collection to be uncertain. Interest collections on
non-accrual loans are either deferred or reported as
22
<PAGE>
Notes to Consolidated Financial Statements (continued)
interest income, depending on management's judgment as to the likelihood of
further collections. Loans are returned to accrual status when collectibility is
no longer considered 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 term 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 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 term 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 as incurred. Costs of significant improvements are
capitalized.
Real Estate Owned
Property acquired through foreclosure is initially recorded at fair value less
estimated sales costs, with any resulting writedown charged to the allowance for
loan losses. Thereafter, an allowance for losses on real estate owned is
established for any further declines in fair value less estimated sales costs.
Fair value estimates are based on recent appraisals and other available
information.
Securities Repurchase Agreements
In securities repurchase agreements, the Company transfers securities to a
counterparty under an agreement to repurchase the identical securities at a
fixed price in the future. These agreements are accounted for as secured
financing transactions provided the Company maintains effective control over the
transferred securities and meets the other criteria for such accounting as
specified in SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." When agreements are accounted for as
secured financings, the transaction proceeds are recorded by the Company as
borrowed funds and the underlying securities continue to be carried in the
Company's securities portfolio.
Income Taxes
In accordance with the asset and liability method required by SFAS No. 109,
"Accounting for Income Taxes," 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,
23
<PAGE>
Notes to Consolidated Financial Statements (continued)
management determines that it is more likely than not that a 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.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to future taxable income. The effect on deferred tax assets
and liabilities of a change in tax laws or rates is recognized in income tax
expense in the period that includes the enactment date of the change.
Treasury Stock
Treasury stock is carried at cost and is presented as a deduction from
stockholders' equity. Purchases of treasury shares are recorded on the trade
date.
Postretirement Benefit Plans
The Company maintains a non-contributory defined benefit pension plan which
covers substantially all employees. Pension costs are funded on a current basis.
Costs for this plan, as well as supplemental retirement agreements, are
accounted for in accordance with SFAS No. 87, "Employers' Accounting for
Pensions."
Effective July 1, 1995, the Company changed its method of accounting for
postretirement health care benefits upon adoption of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The full amount of
the Company's accumulated benefit obligation at July 1, 1995 (net of related
income taxes) was recognized as the cumulative effect of a change in accounting
principle in the 1996 consolidated 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. Prior to fiscal 1996, the Company
recognized the cost of these benefits on a pay-as-you-go (cash) basis.
Stock-Based Compensation Plans
Compensation expense is recognized for the Company's employee stock ownership
plan ("ESOP") equal to the fair value of shares committed to be released for
allocation to participant accounts. Any difference between the fair value at
that time and the ESOP's original acquisition cost is charged or credited to
stockholders' equity (additional paid-in capital). The cost of unallocated ESOP
shares (shares not yet committed to be released) is reflected as a reduction of
stockholders' equity.
The Company accounts for its stock option plan in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation expense is recognized only if the exercise
price of the option is less than the fair value of the underlying stock at the
grant date. SFAS No. 123, "Accounting for Stock-Based Compensation," encourages
entities to recognize the fair value of all stock-based awards (measured on the
grant date) as compensation expense over the vesting period. Alternatively, SFAS
No. 123 allows entities to apply the provisions of APB Opinion No. 25 and
provide pro forma disclosures of net income and earnings per share as if the
fair-value-based method defined in SFAS No. 123 had been applied to awards
granted in fiscal years beginning after
24
<PAGE>
Notes to Consolidated Financial Statements (continued)
December 15, 1994. The Company has elected to apply the provisions of APB
Opinion No. 25 and provide these pro forma disclosures.
The Company's recognition and retention plan ("RRP") is also accounted for in
accordance with APB Opinion No. 25. The fair value of the shares awarded,
measured at the grant date, is recognized as unearned compensation (a deduction
from stockholders' equity) and amortized to compensation expense as the shares
become vested.
Earnings Per Share
The Company has adopted SFAS No. 128, "Earnings per Share," which requires
entities with complex capital structures to present both basic earnings per
share ("EPS") and diluted EPS. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted number of
common shares outstanding for the period. Shares outstanding for this purpose
exclude unallocated ESOP shares that have not been committed to be released to
participants. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock (such as stock options) were
exercised or converted into common stock or resulted in the issuance of common
stock that would then share in the earnings of the entity. Diluted EPS is
computed by dividing net income by the weighted average number of common shares
outstanding for the period, plus common-equivalent shares computed using the
treasury stock method. In accordance with SFAS No. 128, the Company has restated
all prior period EPS data (reported for periods following the Conversion) to
conform to the new requirements.
25
<PAGE>
Notes to Consolidated Financial Statements (continued)
2. Securities
A summary of the Company's securities follows:
<TABLE>
<CAPTION>
Gross Unrealized
Amortized -------------------------- Fair
Cost Gains Losses Value
--------- --------- --------- ---------
June 30, 1998 (In thousands)
<S> <C> <C> <C> <C>
Held-to-Maturity Securities
Mortgage-backed securities:
Pass-through securities:
Freddie Mac $ 43,258 $ 684 $ (136) $ 43,806
Ginnie Mae 40,767 625 -- 41,392
Fannie Mae 7,370 62 (3) 7,429
Collateralized mortgage obligations 36,065 213 (11) 36,267
--------- --------- --------- ---------
127,460 1,584 (150) 128,894
U.S. Government Agency and other debt securities 7,986 21 (18) 7,989
--------- --------- --------- ---------
Total $ 135,446 $ 1,605 $ (168) $ 136,883
========= ========= ========= =========
Available-for-Sale Securities
U.S. Government Agency and other debt securities $ 8,500 $ 5 $ (7) $ 8,498
========= ========= ========= =========
June 30, 1997
Held-to-Maturity Securities
Mortgage-backed securities:
Pass-through securities:
Freddie Mac $ 57,834 $ 185 $ (109) $ 57,910
Ginnie Mae 32,526 834 -- 33,360
Fannie Mae 8,056 36 (62) 8,030
Collateralized mortgage obligations 18,049 159 (64) 18,144
--------- --------- --------- ---------
116,465 1,214 (235) 117,444
U.S. Government Agency and other debt securities 9,985 3 (84) 9,904
--------- --------- --------- ---------
Total $ 126,450 $ 1,217 $ (319) $ 127,348
========= ========= ========= =========
Available-for-Sale Securities
U.S. Government Agency and other debt securities $ 2,999 $ 1 $ (17) $ 2,983
========= ========= ========= =========
</TABLE>
The amortized cost of securities at June 30, 1998 consisted of approximately
$98.8 million of fixed-rate securities and $45.1 million of adjustable-rate
securities ($91.2 million and $38.2 million, respectively, at June 30, 1997).
Substantially all collateralized mortgage obligations at June 30, 1998 and 1997
were Freddie Mac and Fannie Mae securities.
Changes in the after-tax unrealized holding gains and losses on
available-for-sale securities resulted in an increase (decrease) in
stockholders' equity of $8,000 in fiscal 1998, $15,000 in fiscal 1997 and
($12,000) in fiscal 1996. These gains and losses will continue to fluctuate
based on changes in the portfolio and market conditions.
The Company did not sell any securities during fiscal 1998, 1997 and 1996.
The following is a summary of the amortized cost and fair value of debt
securities, other than mortgage-backed securities, by remaining term to
contractual maturity as of June 30, 1998. Actual maturities may differ from
these amounts because certain issuers have the right to call or prepay their
obligations.
26
<PAGE>
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
------------------------- -------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C>
Less than one year $1,500 $1,499 $ -- $ --
More than one year to five years 2,000 1,997 2,000 2,000
More than five years to ten years 4,486 4,493 5,000 5,001
More than ten years -- -- 1,500 1,497
------ ------ ------ ------
Total $7,986 $7,989 $8,500 $8,498
====== ====== ====== ======
</TABLE>
3. Loans
Loans at June 30 consist of the following:
1998 1997
-------- --------
(In thousands)
Mortgage loans:
One-to-four family $ 46,271 $ 44,163
Multi-family 674 724
Commercial 507 531
Construction 676 670
Construction loans in process (112) (195)
-------- --------
48,016 45,893
-------- --------
Other loans:
Passbook loans and other 460 341
Student loans 63 102
-------- --------
523 443
-------- --------
Total loans 48,539 46,336
Allowance for loan losses (682) (622)
Net deferred loan origination fees (226) (207)
-------- --------
Total loans, net $ 47,631 $ 45,507
======== ========
Total loans (net of construction loans in process) consisted of approximately
$47.7 million of fixed-rate loans and $876,000 of adjustable-rate loans at June
30, 1998 ($45.2 million and $1.1 million, respectively, at June 30, 1997).
One-to-four family mortgage loans include home equity loans of $1.9 million and
$2.4 million at June 30, 1998 and 1997, respectively.
The Company primarily originates mortgage loans secured by existing
single-family residential properties. The Company also originates multi-family
and commercial real estate loans, and construction loans. A substantial portion
of the loan portfolio is secured by real estate properties located in
Westchester County, New York, and, to a lesser extent in Putnam and Dutchess
Counties, New York. The ability of the Company's borrowers to make principal and
interest payments is dependent upon, among other things, the level of overall
economic activity and the real estate market conditions prevailing within the
Company's concentrated lending area.
The Company's impaired loans at June 30, 1998, as defined under SFAS No. 114,
consisted of the participation interest described below (which had a recorded
investment of $876,000 at June 30, 1998 and $1.1 million at June 30, 1997). The
allowance for loan losses at both dates includes an impairment
27
<PAGE>
Notes to Consolidated Financial Statements (continued)
allowance of $83,000 established in fiscal 1997 with respect to this
participation interest. The Company's average recorded investment in impaired
loans was $965,000 in fiscal 1998 and $1.1 million in fiscal 1997 (none in
fiscal 1996).
The Company holds a participation interest in certain residential mortgage loans
purchased from Thrift Association Service Corporation (the "TASCO Loans"). The
Company placed this participation interest on non-accrual status during the
first quarter of fiscal 1997, resulting in foregone interest income of
approximately $76,000 in fiscal 1998 and $74,000 in fiscal 1997. Interest income
for fiscal 1997 was also reduced by the reversal of $67,000 in interest
previously received on the TASCO Loans. The Company took these actions since the
FDIC, as a servicer of these loans, is disputing its obligation to pass-through
certain principal and interest payments on the loans whether or not such amounts
are collected from the borrowers. Although the FDIC resumed making certain
payments in the fourth quarter of fiscal 1997, the matter has not been resolved.
Accordingly, the TASCO Loans have remained on non-accrual status, and interest
payments of $55,000 and $21,000 received in fiscal 1998 and 1997, respectively,
have been deferred.
The Company had two additional loans on non-accrual status at June 30, 1998 with
principal balances totaling $245,000 (none at June 30, 1997). One-to-four family
mortgage loans past due more than 90 days but still accruing interest totaled
$370,000 and $930,000 at June 30, 1998 and 1997, respectively.
Activity in the allowance for loan losses is summarized as follows for the years
ended June 30:
1998 1997 1996
----- ----- -----
(In thousands)
Balance at beginning of year $ 622 $ 519 $ 474
Provision for losses 60 143 45
Charge-offs -- (40) --
----- ----- -----
Balance at end of year $ 682 $ 622 $ 519
===== ===== =====
4. Office Properties and Equipment
A summary of office properties and equipment at June 30 follows:
1998 1997
------- -------
(In thousands)
Land $ 55 $ 55
Buildings 1,452 738
Furniture, fixtures and equipment 456 335
Leasehold improvements 157 216
------- -------
2,120 1,344
Less accumulated depreciation and amortization (1,077) (1,104)
------- -------
Office properties and equipment, net $ 1,043 $ 240
======= =======
28
<PAGE>
Notes to Consolidated Financial Statements (continued)
5. Depositor Accounts
Depositor accounts at June 30 are summarized below:
1998 1997
------------------- -------------------
Average Average
Amount Rate Amount Rate
------ ------- ------ -------
(Dollars in thousands)
Money market demand and NOW $ 13,196 2.85% $ 10,989 2.85%
Regular savings 50,928 2.75 54,000 3.00
Club 710 2.75 717 3.00
-------- --------
64,834 2.77 65,706 2.97
-------- --------
Savings certificates by remaining
period to maturity:
Under one year 58,118 5.53 53,825 5.53
One year to under three years 11,889 6.43 9,707 6.26
Three years and over 5,017 6.25 3,180 6.17
-------- --------
75,024 5.72 66,712 5.66
-------- --------
Total $139,858 4.35% $132,418 4.33%
======== ========
Savings certificates issued in denominations greater than $100,000 totaled $10.1
million and $8.2 million at June 30, 1998 and 1997, respectively.
The following is a summary of interest expense on depositor accounts for the
years ended June 30:
1998 1997 1996
------ ------ ------
(In thousands)
Money market demand and NOW $ 329 $ 285 $ 303
Regular savings and club 1,541 1,696 1,903
Savings certificates 3,919 3,450 3,184
------ ------ ------
Total $5,789 $5,431 $5,390
====== ====== ======
The Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted into law
on September 30, 1996. Among other things, the Funds Act required depository
institutions to pay a one-time special assessment of 65.7 basis points on their
SAIF-assessable deposits held on March 31, 1995, in order to recapitalize the
SAIF to the level required by law. The Bank's special assessment of $884,000 was
accrued as a charge to non-interest expense for the quarter ended September 30,
1996. The assessment was paid in November 1996.
29
<PAGE>
Notes to Consolidated Financial Statements (continued)
Securities Repurchase Agreements
The following borrowings under securities repurchase agreements were outstanding
at June 30, 1998 (dollars in thousands):
<TABLE>
<S> <C>
Agreement with a final maturity in January 2008, callable quarterly at the
counterparty's option beginning in January 2003, and bearing interest at 5.42% $ 10,000
Agreement with a final maturity in June 2005, callable quarterly at the counterparty's
option beginning in June 1999, and bearing interest at 5.20% 3,000
--------
$ 13,000
========
</TABLE>
The Federal Home Loan Bank ("FHLB") of New York is the counterparty in these
transactions which were collateralized by securities included in the Company's
portfolio with an amortized cost of $13.1 million and a fair value of $13.2
million at June 30, 1998. During the year ended June 30, 1998, the average and
maximum borrowings under securities repurchase agreements were $4.6 million and
$13.0 million, respectively. Accrued interest payable of $110,000 on securities
repurchase agreements is included in other liabilities at June 30, 1998. The
Company did not borrow under securities repurchase agreements during the years
ended June 30, 1997 and 1996.
7. Income Taxes
Income tax expense for the years ended June 30 consisted of the following
components:
1998 1997 1996
------- ------- -------
(In thousands)
Federal:
Current $ 1,086 $ 972 $ 1,235
Deferred (39) 31 (88)
------- ------- -------
1,047 1,003 1,147
------- ------- -------
State:
Current 418 369 510
Deferred (19) (415) (29)
------- ------- -------
399 (46) 481
------- ------- -------
Total:
Current 1,504 1,341 1,745
Deferred (58) (384) (117)
------- ------- -------
$ 1,446 $ 957 $ 1,628
======= ======= =======
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:
1998 1997 1996
------ ------ ------
(In thousands)
Tax at Federal statutory rate $1,122 $ 941 $1,309
State taxes, net of Federal tax benefit 263 (30) 317
Other, net 61 46 2
------ ------ ------
Actual income tax expense $1,446 $ 957 $1,628
====== ====== ======
30
<PAGE>
Notes to Consolidated Financial Statements (continued)
The tax effects of temporary differences that give rise to the Company's
deferred tax assets and liabilities at June 30 are as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 279 $ 256
Capital loss carryforward 19 428
Loan origination fees 93 85
Other deductible temporary differences 259 237
------- -------
Total gross deferred tax assets 650 1,006
Less valuation allowance (19) (428)
------- -------
Deferred tax assets, net 631 578
------- -------
Deferred tax liabilities:
Federal tax bad debt reserve in excess of base-year amount (268) (268)
Other taxable temporary differences (1) (6)
------- -------
Total gross deferred tax liabilities (269) (274)
------- -------
Net deferred tax asset $ 362 $ 304
======= =======
</TABLE>
A capital loss carryforward of approximately $46,000 is available at June 30,
1998 to reduce future capital gains, if any, through December 31, 1998. The
valuation allowances for deferred tax assets at June 30, 1998 and 1997 relate to
unused capital loss carryforwards. The decrease in the valuation allowance in
fiscal 1998 reflects the expiration of capital loss carryforwards which had no
effect on income tax expense for the year. 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.
As a thrift institution, the Bank is subject to special provisions in the
Federal and New York state tax laws regarding its allowable tax bad debt
deductions and related tax bad debt reserves. These deductions historically were
determined using methods based on loss experience or a percentage of taxable
income. Tax bad debt reserves represent the excess of allowable deductions over
actual bad debt losses and other reserve reductions. These reserves consist of a
defined base-year amount, plus additional amounts ("excess reserves")
accumulated after the base year. SFAS No. 109 requires recognition of deferred
tax liabilities with respect to such excess reserves, as well as any portion of
the base-year amount which is expected to become taxable (or "recaptured") in
the foreseeable future.
Certain amendments to the Federal and New York state tax laws regarding bad debt
deductions were enacted in the quarter ended September 30, 1996. The Federal
amendments eliminated the percentage-of-taxable-income method for tax years
beginning after December 31, 1995 and imposed a requirement to recapture into
taxable income (over a six-year period) the bad debt reserves in excess of the
base-year amounts. The Company previously established, and has continued to
maintain, a deferred tax liability with respect to such excess Federal reserves.
The New York State amendments redesignated the then-existing state bad debt
reserve as the base-year amount and provide for future base-year reserve
additions using the percentage-of-taxable-income method. These changes
effectively eliminated the excess New York state reserve for which the Company
had recognized a deferred tax liability. Accordingly, the Company reduced its
deferred tax liability in the quarter ended September 30, 1996, by $238,000,
representing a state deferred tax benefit of $361,000 less related deferred
Federal taxes of $123,000.
31
<PAGE>
Notes to Consolidated Financial Statements (continued)
At June 30, 1998, the Bank's base-year Federal and state tax bad debt reserves
were $4.5 million and $8.6 million, respectively. In accordance with SFAS No.
109, deferred tax liabilities have not been recognized with respect to these
reserves, since the Bank does not expect that these amounts will become taxable
in the foreseeable future. Under the tax laws as amended, events that would
result in taxation of these reserves include (i) redemptions of the Bank's stock
or certain excess distributions to the Holding Company, and (ii) failure of the
Bank to maintain a specified qualifying assets ratio or meet other thrift
definition tests for New York state tax purposes. At June 30, 1998, the Bank's
unrecognized deferred tax liabilities with respect to the Federal and state
base-year reserves were $1.5 million and $0.6 million, respectively.
8. Employee Benefit and Stock Compensation Plans
Pension Benefits
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.
The following is a reconciliation of the funded status of the plan and the
amount of accrued pension cost included in other liabilities at June 30:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Accumulated benefit obligation:
Vested $(2,346) $(1,947)
Non-vested (31) (13)
------- -------
Total accumulated benefit obligation (2,377) (1,960)
Effect of future salary increases (252) (265)
------- -------
Projected benefit obligation for service rendered to date (2,629) (2,225)
Plan assets at fair value, primarily cash and short-term investments 2,149 1,987
------- -------
Projected benefit obligation in excess of plan assets (480) (238)
Unrecognized net loss (gain) 204 (84)
Unrecognized prior service cost 24 32
Unrecognized net transition obligation 55 69
------- -------
Accrued pension cost $ (197) $ (221)
======= =======
</TABLE>
The unrecognized net transition obligation is being amortized over a period of
approximately 15 years.
32
<PAGE>
Notes to Consolidated Financial Statements (continued)
The components of net pension expense are as follows for the years ended June
30:
1998 1997 1996
----- ----- -----
(In thousands)
Service cost (benefits earned during the year) $ 66 $ 58 $ 60
Interest cost on projected benefit obligation 175 155 149
Actual return on plan assets (129) (235) (68)
Net amortization and deferral (26) 110 (59)
----- ----- -----
Net pension expense $ 86 $ 88 $ 82
===== ===== =====
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation were
7.0% and 5.0%, respectively, at June 30, 1998; 8.0% and 6.0%, respectively, at
June 30, 1997; and 7.0% and 5.0%, respectively, at June 30, 1996. The expected
long-term rate of return on plan assets was 9.0% for each year.
The Company entered into non-qualified Supplemental Executive Retirement
Agreements 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 $36,000 in
both fiscal 1998 and 1997, and $29,000 in fiscal 1996. The accumulated benefit
obligation was approximately $115,000 at June 30, 1998, all of which is
unfunded. This amount was determined using a discount rate of 7.0% and a
projected salary increase rate of 5.0%.
Postretirement Health Care Benefits
Substantially all employees who retired prior to October 19, 1995 are eligible
for postretirement health care (medical and dental) benefits 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 these benefits to
adopt SFAS No. 106 and recognize the costs 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
consolidated statement of income as the cumulative effect of a change in
accounting principle. The periodic expense for these benefits was insignificant
in fiscal 1998, 1997 and 1996.
The accumulated postretirement benefit obligation was approximately $100,000 at
June 30, 1998, all of which is unfunded. This amounts was determined using (i) a
discount rate of 8.0% and (ii) an assumed rate of increase in future health care
costs of 7.5%, gradually decreasing to 5.0% in fiscal 2003 and remaining at that
level thereafter.
Savings and Investment Plan
The Company also maintains a Savings and Investment Plan for the benefit of its
employees. This 401(k) plan was frozen in December 1995. Since that time,
employees have not been permitted to make salary reduction contributions to the
plan. The Company may allow salary reduction contributions in the future,
33
<PAGE>
Notes to Consolidated Financial Statements (continued)
but without an employer matching contribution. Plan expense was $30,000 in
fiscal 1996 prior to freezing the plan.
Employee Stock Ownership Plan
In connection with the Conversion, the Company established an 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 Bank makes semi-annual contributions to the ESOP
equal to the debt service requirements less all dividends received by the ESOP
on unallocated shares. The ESOP uses these contributions and dividends to repay
principal and interest over the 20-year term of the loan.
Shares purchased by the ESOP are held in a suspense account by the plan trustee
for allocation to participants on June 30 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
cumulative total of 40,998 shares have been allocated to participants through
June 30, 1998. Expense recognized in fiscal 1998, 1997 and 1996 with respect to
allocated shares amounted to $277,000, $224,000 and $95,000, respectively, based
on the average fair value of the Holding Company's common stock for each period.
The cost of the 286,982 shares which have not yet been allocated to participant
accounts ($2.9 million at June 30, 1998) is reflected as a reduction to
stockholders' equity. The fair value of these shares was approximately $5.1
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 are reserved for
issuance upon option exercises. Options 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 equal to the fair market value of
the stock on the grant date. Options have a ten-year term and vest ratably over
five years.
Effective July 3, 1996, initial option grants were made under the Stock Option
Plan for 296,984 shares at an exercise price of $11.875 per share. All of these
options were outstanding at June 30, 1998, with a remaining life of 8.0 years. A
total of 75,797 options were exercisable at June 30, 1998, and there were
112,991 reserved shares available for future option grants.
Options were granted at an exercise price equal to the fair value of the common
stock at the grant date. Therefore, in accordance with the provisions of APB
Opinion No. 25 related to fixed stock options, no compensation expense is
recognized with respect to options granted or exercised. Under the alternative
fair-value-based method defined in SFAS No. 123, the fair value of all fixed
stock options on the grant date would be recognized as expense over the vesting
period. The estimated per-share fair value of options granted in July 1996 was
$3.18, estimated using the Black-Scholes option-pricing model with assumptions
approximately as follows: dividend yield of 2.75%; expected volatility rate of
20.2%; risk-free interest rate of 6.26%; and expected option life of 8 years.
Had the Company applied the fair-value-based
34
<PAGE>
Notes to Consolidated Financial Statements (continued)
method to the options granted, it would have reported net income, basic earnings
per share and diluted earnings per share of $1.7 million, $0.64 and $0.61,
respectively, in fiscal 1998 ($1.7 million, $0.55 and $0.54, respectively, in
fiscal 1997).
Recognition and Retention Plan
On July 3, 1996, stockholders also 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 the respective vesting periods
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 $2.0
million. RRP awards for 117,290 of these shares were made in fiscal 1997, with
the remaining 46,700 purchased shares included in treasury stock and available
for future awards. Unearned compensation of $1.4 million was recorded with
respect to the shares awarded. Subsequent amortization of that amount, which is
included in compensation and benefits expense, was $266,000 in fiscal 1998 and
$212,000 in fiscal 1997.
9. Stockholders' Equity
Conversion and Stock Offering
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, after deducting conversion
costs of approximately $1.0 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 is 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 unlikely 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.
Earnings per Share
As discussed in note 1, the Company has adopted SFAS No. 128 and restated its
EPS data for all periods to present basic EPS and diluted EPS in accordance with
the new requirements.
35
<PAGE>
Notes to Consolidated Financial Statements (continued)
The following is a summary of the number of shares utilized in the Company's EPS
calculations for the years ended June 30, 1998, 1997 and 1996. For purposes of
computing basic EPS, net income applicable to common stock equaled net income
for each of the years presented.
1998 1997 1996(1)
----- ----- -----
(In thousands)
Weighted average common shares outstanding
for computation of basic EPS (2) 2,714 3,101 3,776
Common-equivalent shares due to the dilutive
effect of stock options and RRP awards (3) 111 48 --
----- ----- -----
Weighted average common shares for
computation of diluted EPS 2,825 3,149 3,776
===== ===== =====
(1) From the date of Conversion, December 29, 1995.
(2) Excludes unvested RRP awards and unallocated ESOP shares that have not
been committed to be released.
(3) Computed using the treasury stock method.
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 that meet their regulatory capital
requirements (such as the Bank), 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 paid $3.0 million of dividends to the Holding Company
during fiscal 1998 and an additional dividend of $1.0 million in July 1998. No
dividends were paid by the Bank during fiscal 1997 and 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 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.
During fiscal 1997, the Company received approvals from the OTS to repurchase an
aggregate of 926,135 common shares for its treasury, in addition to shares
purchased to fund the RRP. The repurchases were authorized in four separate
programs, three involving 5% of outstanding shares and one involving 10%.
Through June 30, 1997, the Holding Company repurchased 859,929 common shares, in
open market transactions, at a total cost of $12.0 million or $13.94 per share.
The remaining 66,206 shares were repurchased in fiscal 1998 at a total cost of
$1.2 million.
During fiscal 1998, the Company received approvals from the OTS to repurchase an
aggregate of 304,874 common shares for its treasury, or 10% of outstanding
shares. Through June 30, 1998, the Holding Company repurchased 231,346 common
shares under these programs, in open market transactions, at a total cost of
$4.0 million, or $17.39 per share. This total cost includes $1.35 million for
purchases made
36
<PAGE>
Notes to Consolidated Financial Statements (continued)
but not settled at June 30, 1998, which is reflected in other liabilities in the
consolidated balance sheet. At June 30, 1998, an additional 73,528 shares were
authorized for repurchase prior to December 1998.
Regulatory Capital Requirements
OTS regulations require savings institutions to maintain a minimum ratio of
tangible capital to total adjusted assets of 1.5%; a minimum ratio of Tier I
(core) capital to total adjusted assets of 3.0%; and a minimum ratio of total
(core and supplementary) capital to risk-weighted assets of 8.0%.
Under its prompt corrective action regulations, the OTS is required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an undercapitalized institution. Such actions could have a direct
material effect on the institution's financial statements. The regulations
establish a framework for the classification of savings 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 Tier I (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%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the OTS about capital components, risk
weightings and other factors. These capital requirements, which are applicable
to the Bank only, do not consider additional capital at the Holding Company
level.
Management believes that, as of June 30, 1998 and 1997, the Bank met all capital
adequacy requirements to which it is subject. Further, the most recent OTS
notification categorized the Bank as a well-capitalized institution under the
prompt corrective action regulations. There have been no conditions or events
since that notification that management believes have changed the Bank's capital
classification.
37
<PAGE>
Notes to Consolidated Financial Statements (continued)
The following is a summary of the Bank's actual capital amounts and ratios as of
June 30, 1998 and 1997, compared to the OTS requirements for classification as a
well-capitalized institution and for minimum capital adequacy:
For Classification
as Minimum Capital
Bank Actual Well Capitalized Adequacy
--------------- ---------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
June 30, 1998
Tangible capital $43,493 21.8% N/A N/A $ 2,992 1.5%
Tier I (core) capital 43,493 21.8 $ 9,975 5.0% 5,985 3.0
Risk-based capital:
Tier I 43,493 87.4 2,986 6.0 N/A N/A
Total 44,116 88.6 4,977 10.0 3,982 8.0
June 30, 1997
Tangible capital $44,697 24.9% N/A N/A $ 2,696 1.5%
Tier I (core) capital 44,697 24.9 $ 8,986 5.0% 5,392 3.0
Risk-based capital:
Tier I 44,697 95.6 2,806 6.0 N/A N/A
Total 45,278 96.8 4,677 10.0 3,742 8.0
10. Commitments and Contingencies
Off-Balance Sheet Financial Instruments
The Company's financial instruments with off-balance sheet risk were limited to
fixed-rate mortgage loan origination commitments with total contractual amounts
of $6.6 million and $3.6 million at June 30, 1998 and 1997, 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 payment of a fee
by the customer. Commitments are subject to the Company's credit approval
process, including a case-by-case evaluation of the customer's creditworthiness
and related collateral requirements.
FHLB of New York Advances
The Bank may borrow funds from the FHLB of New York subject to an overall
limitation of 25% of total assets or $49.9 million at June 30, 1998. Funds may
be borrowed through a combination of FHLB advances and overnight borrowings
under a $15.5 million line of credit. FHLB borrowings are secured by the Bank's
investment in FHLB stock and by a blanket security agreement. This agreement
requires maintenance of specified levels of qualifying assets (principally
securities and residential mortgage loans) not otherwise pledged.
38
<PAGE>
Notes to Consolidated Financial Statements (continued)
Lease Commitments
At June 30, 1998, the Company was obligated under two non-cancellable operating
leases for office space. These leases contain escalation clauses providing for
increased rentals and renewal options. Rent expense under operating leases was
approximately $97,000, $60,000 and $63,000 for the years ended June 30, 1998,
1997 and 1996, respectively. The future minimum lease payments under operating
leases at June 30, 1998 were $99,000 annually for fiscal years 1999 through
2002; $90,000 for fiscal 2003; and an aggregate of $1.2 million for later years.
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.
11. 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.
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.
39
<PAGE>
Notes to Consolidated Financial Statements (continued)
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:
<TABLE>
<CAPTION>
1998 1997
-------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 2,616 $ 2,616 $ 478 $ 478
Interest-bearing deposits 2,010 2,010 3,680 3,680
Securities 143,944 145,381 129,433 130,331
Loans 47,631 49,532 45,507 45,717
FHLB stock 1,463 1,463 1,463 1,463
Accrued interest receivable 1,050 1,050 1,064 1,064
Financial liabilities:
Savings certificates 75,024 75,386 66,712 66,640
Other deposit accounts 64,834 64,834 65,706 65,706
Securities repurchase agreements 13,000 12,315 -- --
Accrued interest payable 110 110 -- --
</TABLE>
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 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 savings 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
unrecognized value separate from the deposit balances.
40
<PAGE>
Notes to Consolidated Financial Statements (continued)
Securities Repurchase Agreements
Fair value represents contractual cash flows discounted using current interest
rates available for repurchase agreements with similar characteristics and
remaining terms.
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 10 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, 1998 and 1997, the fair
values of these financial instruments approximated the related carrying amounts
which were not significant.
12. Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income," which establishes standards for the
reporting and display of comprehensive income (and its components) in financial
statements. The standard does not, however, specify when to recognize or how to
measure items that make up comprehensive income. Comprehensive income represents
net income and certain amounts reported directly in equity, such as the net
unrealized gain or loss on available-for-sale securities. While SFAS No. 130
does not require a specific reporting format, it does require that an enterprise
display in the financial statements an amount representing total comprehensive
income for the period. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997 and, accordingly, will be adopted by the Company in
fiscal 1999. Had SFAS No. 130 applied to the Company in fiscal 1998, 1997 and
1996, the Company would have reported comprehensive income substantially equal
to its reported net income for each of those years.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." Among other things, SFAS No. 131
requires public companies to report (i) certain financial and descriptive
information about its reportable operating segments (as defined), and (ii)
certain enterprise-wide financial information about products and services,
geographic areas and major customers. The required segment financial disclosures
include a measure of profit or loss, certain specific revenue and expense items,
and total assets. SFAS No. 131 is effective for periods beginning after December
15, 1997 and, accordingly, will be adopted by the Company in fiscal 1999.
Management does not expect that SFAS No. 131 will have a significant impact on
the Company's financial reporting.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which standardizes the disclosure
requirements for these benefits; requires additional information on changes in
the benefit obligations and fair values of plan assets; and eliminates certain
present disclosure requirements. SFAS No. 132 is effective for fiscal years
beginning after December 15, 1997 and, accordingly, will be adopted by the
Company in fiscal 1999. Management does not expect that this standard will
significantly affect the Company's financial reporting.
41
<PAGE>
Notes to Consolidated Financial Statements (continued)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet at fair value.
If certain conditions are met, a derivative may be specifically designated as a
fair value hedge, a cash flow hedge, or a foreign currency hedge. A specific
accounting treatment applies to each type of hedge. Entities may reclassify
securities from the held-to-maturity category to the available-for-sale category
at the time of adopting SFAS No. 133. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999 and, accordingly, will
apply to the Company beginning on July 1, 1999. The Company plans to adopt the
standard at that time and does not presently intend to reclassify securities
between categories. The Company does not presently engage in derivatives and
hedging activities covered by the new standard and, accordingly, SFAS No. 133 is
not expected to have a material impact on the Company's financial statements.
42
<PAGE>
Notes to Consolidated Financial Statements (continued)
13. Parent Company Condensed Financial Information
Set forth below are the condensed balance sheets of Peekskill Financial
Corporation as of June 30,1998 and 1997, and its condensed statements of income
and cash flows for the periods ended June 30, 1998, 1997 and 1996:
June 30,
---------------------
1998 1997
------- -------
Condensed Balance Sheets (In thousands)
Assets:
Cash $ 39 $ 172
Interest-bearing deposits 810 2,180
Investment in subsidiary 43,491 44,687
Other assets 345 17
------- -------
Total $44,685 $47,056
======= =======
Liabilities and Stockholders' Equity:
Liabilities $ 1,479 $ 90
Stockholders' equity 43,206 46,966
------- -------
Total $44,685 $47,056
======= =======
<TABLE>
<CAPTION>
Period ended June 30,
-----------------------------
1998 1997 1996*
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Condensed Statements of Income
Dividends received from subsidiary $ 3,000 $ -- $ --
Interest income 271 611 534
Non-interest expense (127) (187) (85)
------- ------- -------
Income before income tax expense and effect of subsidiary earnings 3,144 424 449
Income tax expense (87) (195) (215)
------- ------- -------
Income before effect of subsidiary earnings 3,057 229 234
Effect of subsidiary earnings:
Excess of dividends over current earnings of subsidiary (1,203) -- --
Equity in undistributed earnings of subsidiary -- 1,583 1,140
------- ------- -------
Net income $ 1,854 $ 1,812 $ 1,374
======= ======= =======
</TABLE>
* From the date of Conversion, December 29, 1995.
43
<PAGE>
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
Period ended June 30,
--------------------------------
1998 1997 1996*
-------- -------- --------
(In thousands)
Condensed Statements of Cash Flows
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,854 $ 1,812 $ 1,374
Adjustments to reconcile net income to net cash provided by
operating activities:
Excess of dividends over current earnings of subsidiary 1,203 -- --
Equity in undistributed earnings of subsidiary -- (1,583) (1,140)
Other adjustments, net 291 461 148
-------- -------- --------
Net cash provided by operating activities 3,348 690 382
-------- -------- --------
Cash flows from investing activities:
Purchase of subsidiary's common stock -- -- (20,000)
-------- -------- --------
Cash flows from financing activities:
Treasury stock purchases (3,837) (12,543) --
Purchase of shares to fund current-year RRP awards -- (1,400) --
Net proceeds from issuance of common stock, exclusive of ESOP shares -- -- 36,720
Dividends paid (1,014) (1,128) (369)
-------- -------- --------
Net cash (used in) provided by financing activities (4,851) (15,071) 36,351
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (1,503) (14,381) 16,733
Cash and cash equivalents at beginning of period 2,352 16,733 --
-------- -------- --------
Cash and cash equivalents at end of period $ 849 $ 2,352 $ 16,733
======== ======== ========
Supplemental information:
Increase in liability for treasury stock purchased, not yet settled $ 1,350 $ -- $ --
======== ======== ========
</TABLE>
* From the date of Conversion, December 29, 1995.
44
<PAGE>
Notes to Consolidated Financial Statements (continued)
14. Selected Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for fiscal 1998 and 1997 is shown
below:
<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 1998
Interest and dividend income $ 3,095 $ 3,059 $ 3,220 $ 3,269
Interest expense 1,446 1,430 1,540 1,618
------- ------- ------- -------
Net interest income 1,649 1,629 1,680 1,651
Provision for loan losses 15 15 15 15
Non-interest income 57 55 54 59
Non-interest expense 826 852 936 860
------- ------- ------- -------
Income before income tax expense 865 817 783 835
Income tax expense 370 356 346 374
------- ------- ------- -------
Net income $ 495 $ 461 $ 437 $ 461
======= ======= ======= =======
Earnings per share:
Basic $ 0.18 $ 0.17 $ 0.16 $ 0.18
Diluted 0.17 0.16 0.16 0.17
======= ======= ======= =======
Fiscal 1997
Interest and dividend income $ 3,056 $ 3,121 $ 3,045 $ 3,087
Interest expense 1,322 1,339 1,361 1,409
------- ------- ------- -------
Net interest income 1,734 1,782 1,684 1,678
Provision for loan losses 98 15 15 15
Non-interest income 60 64 52 60
Non-interest expense (1) 1,720 846 812 824
------- ------- ------- -------
(Loss) income before income tax (benefit) expense (24) 985 909 899
Income tax (benefit) expense (1) (233) 419 385 386
------- ------- ------- -------
Net income $ 209 $ 566 $ 524 $ 513
======= ======= ======= =======
Earnings per share:
Basic $ 0.06 $ 0.17 $ 0.18 $ 0.18
Diluted 0.06 0.17 0.18 0.18
======= ======= ======= =======
</TABLE>
(1) For the quarter ended September 30, non-interest expense includes the SAIF
special assessment of $884,000 and income tax benefit includes $238,000
attributable to a change in state tax law. See notes 5 and 7.
45
<PAGE>
Corporate Information
Directors
Eldorus Maynard, Chairman of the Board
Dominick Bertoline
Edward H. Dwyer
Robert E. Flower
William J. LaCalamito
John A. McGurty, Jr.
Officers
Eldorus Maynard
Chairman of the Board and Chief Executive Officer
William J. LaCalamito
President and Chief Operating Officer
Scott D. Nogles
Vice President of Finance
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 21, 1998 at 3:30 p.m.
at the Company's offices at 1019 Park Street, Peekskill, New York.
Form 10-K
For the 1998 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, NY 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
46
<PAGE>
Corporate Information
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
714 at June 30, 1998.
The cash dividends declared by the Company, and the high and low sales price of
the Company's common stock in the Over-the-Counter market of the NASDAQ National
Market System were as follows for the quarters indicated:
<TABLE>
<CAPTION>
Closing Sales Prices
Cash -----------------------------------------------------------
Dividends End of
Quarter ended Declared High Low Period
------------- -------- ---- --- ------
<S> <C> <C> <C> <C>
June 30, 1998 $ 0.09 $18.063 $16.625 $17.875
March 31, 1998 0.09 17.750 16.000 17.375
December 31, 1997 0.09 18.250 16.500 16.750
September 30, 1997 0.09 18.250 15.125 16.750
June 30, 1997 0.09 15.250 13.375 15.000
March 31, 1997 0.09 15.500 13.500 13.875
December 31, 1996 0.09 14.875 13.250 14.250
September 30, 1996 0.09 14.000 11.250 13.750
</TABLE>
These quotations represent prices between dealers and do not include retail
markup, markdown or commission. They do not necessarily represent actual
transactions.
47
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Subsidiary or Percent of State of
Parent Organization Ownership Incorporation
Peekskill Financial First Federal Savings 100% Federal
Corporation Bank
EXHIBIT 23
Consent of Independent Certified Public Accountants
The Board of Directors
Peekskill Financial Corporation:
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (No. 333-41933 and No. 333-41943) of our report dated July 30, 1998
relating to the consolidated balance sheets of Peekskill Financial Corporation
and subsidiary as of June 30, 1998 and 1997, 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, 1998, which report appears
in the June 30, 1998 Annual Report on Form 10-K of Peekskill Financial
Corporation.
KPMG Peat Marwick, LLP
Stamford, Connecticut
September 28, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT FILED ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 2,616
<INT-BEARING-DEPOSITS> 2,010
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,498
<INVESTMENTS-CARRYING> 135,446
<INVESTMENTS-MARKET> 136,883
<LOANS> 47,631
<ALLOWANCE> 682
<TOTAL-ASSETS> 200,341
<DEPOSITS> 139,858
<SHORT-TERM> 13,000
<LIABILITIES-OTHER> 2,518
<LONG-TERM> 0
0
0
<COMMON> 41
<OTHER-SE> 43,165
<TOTAL-LIABILITIES-AND-EQUITY> 200,341
<INTEREST-LOAN> 3,720
<INTEREST-INVEST> 8,561
<INTEREST-OTHER> 362
<INTEREST-TOTAL> 12,643
<INTEREST-DEPOSIT> 5,789
<INTEREST-EXPENSE> 249
<INTEREST-INCOME-NET> 6,609
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,474
<INCOME-PRETAX> 3,300
<INCOME-PRE-EXTRAORDINARY> 1,446
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,854
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.66
<YIELD-ACTUAL> 3.55
<LOANS-NON> 1,121
<LOANS-PAST> 370
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 622
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 682
<ALLOWANCE-DOMESTIC> 682
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
