<PAGE>
==============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
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 $.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, 1997, there were issued and outstanding 3,193,121
shares of the Registrant's Common Stock. The aggre gate 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, 1997, was approximately $54.3
million.
DOCUMENTS INCORPORATED BY REFERENCE
PART II of Form 10-K--Annual Report to Stockholders for the fiscal year ended
June 30, 1997.
PART III of Form 10-K--Proxy Statement for the Annual Meeting of Stockholders
for the fiscal year ended June 30, 1997.
==============================================================================
<PAGE>
PEEKSKILL FINANCIAL CORPORATION
Annual Report on Form 10-K
<TABLE>
<CAPTION>
Page
----
PART I
<S> <C> <C>
Item 1. Business 3
Item 2. Properties 37
Item 3. Legal Proceedings 38
Item 4. Submission of Matters to a Vote of Security Holders 38
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters 38
Item 6. Selected Financial Data 38
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 38
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 38
Item 8. Financial Statements and Supplementary Data 38
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 39
PART III
Item 10. Directors and Executive Officers of the Registrant 39
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial Owners and Management 39
Item 13. Certain Relationships and Related Transactions 39
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 40
Signatures 42
</TABLE>
Explanatory Note: This Annual Report on Form 10-K contains certain
forward-looking statements consisting of estimates with respect to the
financial condition, results of operations and business of the Company that
are subject to various factors which could cause actual results to differ
materially from these estimates. These factors include changes in general,
economic and market, and legislative and regulatory conditions, and the
development of an interest rate environment that adversely affects the
interest rate spread or other income anticipated from the Company's operations
and investments.
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
the Company and the Bank on a consolidated basis.
At June 30, 1997, the Company had total assets of $182.6 million,
deposits of $132.4 million and stockholders' equity of $47.0 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 Westchester Mall 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, 1997, the
Bank had total assets of $179.7 million consisting primarily of $116.5 million
of mortgage-backed securities and $44.2 million of one-to-four family mortgage
loans representing 94.9% of the total loan portfolio. The Bank also had other
debt securities (consisting primarily of U.S. government obligations) of $13.0
million at June 30, 1997.
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 which could increase credit risk or operating
costs, and (v) using customer service to build and maintain a substantial
level of core depositor accounts.
The executive offices of the Company and the Bank are located at 1019
Park Street, Peekskill, New York 10566, and the telephone number at that
address is (914) 737-2777.
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").
Competition
The Company faces significant competition for the loans it originates
and the deposits it accepts. The Company's market area has a high density of
financial institutions, from small community banks to branches of large
non-local institutions, all of which compete with the Company to varying
degrees. The Company's competition for loans comes principally from savings
banks, savings and loan associations, commercial banks, mortgage banking
companies and other institutional lenders. The Company successfully competes
for loans by emphasizing the quality of its loan services and by charging loan
fees and interest rates that are generally competitive within its market area.
Changes in the demand for loans relative to the availability of credit may
affect the level of competition from financial institutions which may be more
willing than the Company or its competitors to make credit available but which
have not generally engaged in lending activities in the Company's market area
in the past. The Company's most direct competition for 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 support at generally competitive interest rates.
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
4
<PAGE>
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, 1997, the Company had net loans of $45.5 million,
which represents 24.9% total assets. The loan portfolio at that date consisted
of 94.9% of one-to-four family mortgage loans, the majority of which are owner
occupied; 1.6% of multi-family mortgage loans; 1.1% of commercial mortgage
loans; 1.4% of construction loans; and 1.0% of other 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,
----------------------------------------------------------------------------------
1997 1996 1995
--------------------- ----------------------- -----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One-to-four family ............... $ 44,163 94.9% $ 38,644 95.5% $ 40,112 95.2%
Multi-family ..................... 724 1.6 394 1.0 426 1.0
Commercial ....................... 531 1.1 285 0.7 308 0.7
Construction ..................... 670 1.4 579 1.4 725 1.7
-------- ----- -------- ----- -------- -----
Total real estate loans ...... 46,088 99.0 39,902 98.6 41,571 98.6
-------- ----- -------- ----- -------- -----
Other Loans:
Passbook loans and other ........ 341 0.8 404 1.0 356 0.9
Student ......................... 102 0.2 143 0.4 215 0.5
-------- ----- -------- ----- -------- -----
Total consumer loans ......... 443 1.0 547 1.4 571 1.4
-------- ----- -------- ----- -------- -----
Total loans .................. 46,531 100.0% 40,449 100.0% 42,142 100.0%
===== ===== =====
Less:
Loans in process ................. (195) (114) (273)
Net deferred loan origination fees (207) (259) (335)
Allowance for loan losses ........ (622) (519) (474)
-------- -------- --------
Total loans, net ................. $ 45,507 $39,557 $ 41,060
======== ======== ========
Fixed-Rate Loans:
Real estate loans ............... $ 45,015 96.7% $ 38,770 95.8% $ 40,297 95.6%
Other loans ..................... 443 1.0 547 1.4 571 1.4
-------- ----- -------- ----- -------- -----
Total fixed rate loans ........ 45,458 97.7 39,317 97.2 40,868 97.0
Adjustable-Rate Loans:
Real estate loans ............... 1,073 2.3 1,132 2.8 1,274 3.0
-------- ----- -------- ----- -------- -----
Total loans ................... $ 46,531 100.0% $ 40,449 100.0% $ 42,142 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------------------------
1994 1993
----------------------------------- ------------------------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Real Estate Loans:
One-to-four family ............... $ 38,979 95.8% $ 41,635 95.6%
Multi-family ..................... 458 1.1 460 1.1
Commercial ....................... 329 0.8 562 1.3
Construction ..................... 165 0.4 180 0.4
-------- ----- -------- -----
Total real estate loans ...... 39,931 98.1 42,837 98.4
-------- ----- -------- -----
Other Loans:
Passbook loans and other ........ 524 1.3 428 1.0
Student ......................... 255 0.6 287 0.6
-------- ----- -------- -----
Total consumer loans ......... 779 1.9 715 1.6
-------- ----- -------- -----
Total loans .................. 40,710 100.0% 43,552 100.0%
======== ===== ======== =====
Less:
Loans in process ................. (50) (32)
Net deferred loan origination fees (363) (349)
Allowance for loan losses ........ (336) (276)
-------- --------
Total loans, net ................. $ 39,961 $ 42,895
======== ========
Fixed-Rate Loans:
Real estate loans ............... $ 38,571 94.7% $ 41,155 94.5%
Other loans ..................... 779 1.9 715 1.6
-------- ----- -------- -----
Total fixed rate loans ........ 39,350 96.6 41,870 96.1
Adjustable-Rate Loans:
Real estate loans ............... 1,360 3.4 1,682 3.9
-------- ----- -------- -----
Total loans ................... $ 40,710 100.0% $ 43,552 100.0%
======== ===== ======== =====
</TABLE>
6
<PAGE>
Loan Maturities. The following table shows the contractual maturity
of the loan portfolio at June 30, 1997. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period that includes
the final contractual due date and, accordingly, does not reflect the effects
of periodic amortization payments, possible prepayments or enforcement of
due-on-sale clauses.
<TABLE>
<CAPTION>
Due in
---------------------------------------------
Less than More than 1 More than
1 Year Year to 5 Years 5 Years Total
-------- --------------- ---------- -----
(In thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
One-to-four family................ $ 52 $3,342 $40,769 $44,163
Multi-family...................... --- 360 364 724
Commercial........................ --- 348 183 531
Construction...................... 670 --- --- 670
------ ------ ------- -------
Total mortgage loans............ 722 4,050 41,316 46,088
Other loans......................... 351 44 48 443
------ ------ ------- -------
Total loans..................... $1,073 $4,094 $41,364 $46,531
====== ====== ======= =======
</TABLE>
The following table sets forth, by type of interest rate, the dollar
amounts in each loan category at June 30, 1997 that are contractually due in
more than one year.
<TABLE>
<CAPTION>
Fixed Adjustable Total
------- ---------- -------
(In thousands)
<S> <C> <C> <C>
Mortgage loans:
One-to-four family........... $43,038 $1,073 $44,111
Multi-family................. 720 --- 724
Commercial................... 531 --- 531
------- ------ -------
Total mortgage loans....... 44,293 1,073 45,366
Other loans.................... 92 --- 92
------- ------ -------
Total loans................ $44,385 $1,073 $45,458
======= ====== =======
</TABLE>
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, 1997, based on the 15% limitation, the Bank's
loans-to-one borrower limit was $6.7 million. On the same date, the Bank had
no borrowers with outstanding balances in excess of this amount. As of June
30, 1997, the largest dollar amount outstanding to one borrower, or group of
related borrowers, was $360,000. This asset, which consists of a loan
participation secured by a 61 unit residential apartment complex in Pelham,
New York, was performing in accordance with its contractual terms at June 30,
1997.
7
<PAGE>
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 the basis of detailed applications
and property valuations (consistent with the Bank's appraisal policy) by the
Bank's independent appraisers. The loan applications are designed primarily to
determine the borrower's ability to repay and the more significant items on
the application are verified through use of credit reports, financial
statements, tax returns and/or confirmations.
Under the Bank's loan policy, the employee processing an application
is responsible for ensuring that all documentation is obtained prior to the
submission of the application to an officer for approval. In addition, an
officer verifies that the application meets the Bank's underwriting guidelines
described below. All mortgage loans must be approved by the Bank's Executive
Committee or the Board of Directors. Various officers of the Bank have
individual loan approval authority for other loans.
Generally, the Bank requires title insurance on its mortgage loans as
well as fire and extended coverage casualty insurance in amounts at least
equal to the principal amount of the loan or the value of improvements on the
property, depending on the type of loan. The Bank also requires flood
insurance to protect the property securing its interest when the property is
located in a flood plain.
One-to-Four Family Residential Real Estate Lending. The cornerstone
of the Bank's lending program is the origination of fixed-rate loans secured
by mortgages on owner-occupied one-to-four family residences. At June 30,
1997, $44.2 million, or 94.9%, 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 80% for
owner-occupied homes. During fiscal year 1997, the Bank started originating
loans up to 90% of appraised value with private mortgage insurance to reduce
the Bank's exposure to 80% or less.
8
<PAGE>
The Bank's residential mortgage loans customarily include due-on-sale
clauses giving the Bank the right to declare the loan immediately due and
payable in the event that, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage and the loan is not repaid.
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, 1997, the Bank had $2.4
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, 1997,
the Bank had $531,000 in commercial real estate loans, representing 1.1% of
the total loan portfolio, and $724,000 in multi-family loans, or 1.6% 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, 1997, 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 consider investing from time to time in
multi-family and commercial real estate loans in the future, it anticipates
that future volume will continue to be modest.
Construction Lending. The Bank makes construction loans to
individuals for the construction of their primary or secondary residences and
occasionally to builders for the construction of new residences.
Loans to individuals for the construction of their residences
typically have terms of up to 30 years and are structured to provide both
construction and "permanent" financing. The borrower pays interest only during
the construction period. Residential construction loans are generally
underwritten pursuant to the same guidelines used for originating conventional
permanent residential loans. At June 30, 1997, the Bank had $430,000 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.
9
<PAGE>
On occasion, the Bank makes loans to builders to finance the
construction of one-to-four family residences. These loans are made on the
same terms as loans to individuals for the construction of single-family
residences. At June 30, 1997, 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, 1997, other loans
totaled $443,000 or 1.0% 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, all loans originated by First Federal are
retained in the Bank's portfolio.
10
<PAGE>
The following table shows the loan origination and repayment
activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------
1997 1996 1995
------- ------- -------
(In thousands)
Originations by type:
<S> <C> <C> <C>
Real estate - one-to-four family................... $11,144 $ 4,355 $ 5,139
- multi-family....................... 364 --- ---
- commercial......................... 276 --- ---
- construction....................... 972 640 949
Other.............................................. 529 560 414
------- ------- -------
Total loans originated...................... 13,285 5,555 6,502
------- ------- -------
Principal Repayments:
Real estate - one-to-four family................... (5,405) (5,684) (4,012)
- multi-family....................... (34) (32) (32)
- commercial......................... (30) (23) (21)
- construction....................... (881) (627) (384)
Other.............................................. (633) (584) (621)
------- ------- -------
Total principal repayments.................. (6,983) (6,950) (5,070)
------- ------- -------
Transferred to real estate owned..................... (220) (139) ---
------- ------- -------
Net increase (decrease) in total loans...... $ 6,082 $(1,534) $ 1,432
======= ======= =======
</TABLE>
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 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, 1997 and 1996:
<TABLE>
<CAPTION>
Loans Delinquent For:
-------------------------------------- Total Delinquent
60-89 Days 90 Days and Over Loans
------------------ ----------------- ----------------
Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------
(Dollars in thousands)
One-to-four family real
estate loans:
<S> <C> <C> <C> <C> <C> <C>
June 30, 1997............ 9 $ 394 27(1) $2,004(1) 36 $2,398
===== ======= ==== ====== ===== ======
June 30, 1996............ 16 $1,630 26 $1,252 42 $2,882
===== ====== ==== ====== ===== ======
</TABLE>
(1) Includes a $1.1 million participation interest in certain
residential mortgage loans as discussed below.
Classification of Assets. Federal regulations require that each
savings association classify its own assets on a regular basis. In addition,
in connection with examinations of savings institutions, OTS and FDIC
examiners have authority to identify problem assets and, if appropriate,
require them to be classified. There are three classifications for problem
assets: substandard, doubtful, and loss. Substandard assets have one or more
defined weaknesses and are characterized by the distinct possibility that the
bank will sustain some loss if the deficiencies are not corrected. Doubtful
assets have the weaknesses of substandard assets, with the additional
characteristics that the weaknesses make collection or liquidation in full on
the basis of currently existing facts, conditions and values questionable, and
there is a high possibility of loss. An asset classified as loss is considered
uncollectible and of such little value that continuance as an asset on the
balance sheet of the institution is not warranted. Assets classified as
substandard or doubtful require the institution to establish prudent general
allowances for loan losses. If an asset or portion thereof is classified as
loss, the institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified as loss,
or charge off such amount. If an institution does not agree with an examiner's
classification of an asset, it may appeal this determination to the District
Director of the OTS. On the basis of management's review, the Bank classified
$2.0 million of loans and $220,000 of real estate owned as substandard at June
30, 1997. There were no assets classified as doubtful or loss at that date.
The foregoing asset classifications are generally consistent with those of the
OTS and FDIC.
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 become
doubtful. Real estate owned represents properties acquired in settlement of
loans.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Accruing loans past due more than 90 days:
One-to-four family mortgage loans.................. $ 930 $ 1,252 $ 2,096 $1,698 $2,054
Consumer loans..................................... --- --- --- 18 18
Non-accrual loans:
Participation interest in one-to-four family
mortgage loans.................................... 1,074 --- --- --- ---
------ ------ ------ ------ ------
Total non-performing loans........................... 2,004 1,252 2,096 1,716 2,072
Real estate owned:
Single-family property............................. 220 --- --- --- ---
------ ------ ------ ------ ------
Total non-performing assets.......................... $2,224 $1,252 $2,096 $1,716 $2,072
====== ====== ====== ====== ======
Total as a percentage of total assets................ 1.2% 0.7% 1.3% 1.1% 1.4%
=== === === === ===
</TABLE>
As of June 30, 1997, the Bank had no non-performing loans (other than
the TASCO participation interest discussed below) with a carrying value in
excess of $182,000.
During 1986 and 1987, the Bank purchased from the Thrift Association
Service Corporation ("TASCO") participation certificates representing six
participation interests in pools of one-to-four family residential loans (the
"TASCO Loans"). Pursuant to the participation certificates, 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 participation certificates
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 first quarter of fiscal 1997, at which time the
Bank placed the 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 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
13
<PAGE>
assurance can be given as to when a settlement may be reached. 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 remain on
non-accrual status at June 30, 1997 and interest payments of $21,000 received
in the fourth quarter have been deferred. Foregone interest income due to the
non-accrual status of the TASCO Loans was $74,000 for fiscal 1997. Interest
income for the year 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, 1997 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 items 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. Management's evaluation
of the adequacy of the allowance, which is subject to periodic review by the
Bank's regulators, takes into consideration such factors as the historical
loan loss experience, changes in the nature and volume of the loan portfolio,
overall portfolio quality, review of specific problem (non-performing) loans,
estimated value of underlying collateral, and current economic conditions that
may affect the borrowers' ability to pay.
While management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen market conditions could
result in adjustments to the allowance for loan losses, and net earnings could
be significantly affected, if circumstances differ substantially from the
assumptions used in making the final determination.
14
<PAGE>
The following table sets forth activity in of the Bank's allowance
for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year......................... $ 519 $ 474 $ 336 $ 276 $ 216
Provision for loan losses............................ 143 45 160 60 60
Charge-offs:
One-to-four family................................. (40) --- (22) --- ---
------ ------ ------ ------ ------
Balance at end of year............................... $ 622 $ 519 $ 474 $ 336 $ 276
====== ====== ====== ====== ======
Ratio of net charge-offs to average loans
outstanding ....................................... 0.1% ---% 0.1% ---% ---%
=== ==== ===== ====== ======
Ratio of net charge-offs to average non-performing
loans.............................................. 2.0% ---% 1.2% ---% ---%
=== ==== ===== ====== ======
</TABLE>
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,
---------------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------- --------------------------------- ------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- ----- --------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family......... $ 622 $44,163 94.9% $ 519 $38,644 95.5% $ 474 $ 40,112 95.2%
Multi-family............... --- 724 1.6 --- 394 1.0 --- 426 1.0
Commercial................. --- 531 1.1 --- 285 0.7 --- 308 0.7
Construction............... --- 670 1.4 --- 579 1.4 --- 725 1.7
Other...................... --- 443 1.0 --- 547 1.4 --- 571 1.4
------ ------- ----- ------- ------- ----- -------- -------- -----
Total.................. $ 622 $46,531 100.0% $ 519 $40,449 100.0% $ 474 $ 42,142 100.0%
====== ======= ===== ======= ======= ===== ======== ======== =====
</TABLE>
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------------
1994 1993
-------------------------------- -------------------------------
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
One-to-four family......... $ 336 $ 38,979 95.8% $ 276 $ 41,635 95.6%
Multi-family............... --- 458 1.1 --- 460 1.1
Commercial................. --- 329 0.8 --- 562 1.3
Construction............... --- 165 0.4 --- 180 0.4
Other...................... --- 779 1.9 --- 715 1.6
------- -------- ----- -------- -------- -----
Total.................. $ 336 $ 40,710 100.0% $ 276 $ 43,552 100.0%
======= ======== ===== ======== ======== =====
</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 investments are ratified by the
Bank's Board of Directors or Executive Committee.
First Federal must maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Cash flow projections are
regularly reviewed and updated to assure that adequate liquidity is
maintained. The Bank's level of liquidity is a result of management's
asset/liability strategy. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - 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,
--------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- --------------------
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...................... $57,834 $57,910 $ 64,437 $ 64,221 $ 64,597 $ 64,719
Ginnie Mae....................... 32,526 33,360 36,240 35,937 19,190 19,400
Fannie Mae....................... 8,056 8,030 7,096 6,956 3,135 3,154
CMOs................................ 18,049 18,144 10,448 10,261 13,025 12,985
-------- -------- --------- -------- -------- --------
116,465 117,444 118,221 117,375 99,947 100,258
U.S. Agency and other debt
securities.......................... 9,985 9,904 10,979 10,714 5,474 5,401
-------- -------- --------- -------- -------- ---------
Total held-to-maturity............. 126,450 127,348 129,200 128,089 105,421 105,659
Available-for-sale:
- ------------------
U.S. Agency and other debt
securities.......................... 2,999 2,983 2,500 2,459 1,998 1,976
-------- -------- --------- --------- --------- ---------
Total securities.................... $129,449 $130,331 $131,700 $130,548 $107,419 $107,635
======== ======== ======== ======== ======== ========
</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
(direct or indirect) Federal guarantee 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, 1997 included (i) $45.8 million of securities with remaining contractual
maturities of five years or less and (ii) $38.2 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 flow and hence the value 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 such securities are classified as
held-to-maturity. At June 30, 1997, the Bank held CMOs with a carrying value
of $18.0 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
18
<PAGE>
excess of a benchmark 30-year mortgage-backed pass-through security are
considered high-risk mortgage securities. Under the policy, savings
institutions may generally only invest in high-risk mortgage securities in
order to reduce interest rate risk. As of June 30, 1997, 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. 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.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------
1997 1996 1995
------- ------- -------
(In thousands)
Purchases:
<S> <C> <C> <C>
Adjustable-rate pass-throughs...................... $ 2,000 $20,475 $ 2,982
Fixed-rate pass-throughs........................... 8,139 17,747 4,017
CMOs .............................................. 7,794 --- ---
------- ------- -------
Total purchases............................. 17,933 38,222 6,999
Principal repayments................................. (19,689) (20,087) (11,641)
------- ------- -------
Net (decrease) increase ........................... $ (1,756) $18,135 $ (4,642)
======= ======= =======
</TABLE>
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, 1997. These securities are anticipated to be repaid in
advance of their contractual maturities as a result of projected mortgage loan
prepayments. In addition, under the structure of some of the Bank's CMOs, the
Bank's short- and intermediate-tranche interests have repayment priority over
the longer term tranches of the same underlying mortgage pool.
<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 .......... $ 3,142 $ 38,681 $ 9,439 $ 7,138 $ 58,400
Ginnie Mae ........... -- 75 894 31,595 32,564
Fannie Mae ........... -- 3,876 1,003 3,171 8,050
CMOs .................... -- 985 2,474 14,666 18,125
-------- -------- -------- -------- --------
Total ................ $ 3,142 $ 43,617 $ 13,810 $ 56,570 $117,139
======== ======== ======== ======== ========
Weighted average yield 5.70% 6.02% 6.75% 6.75% 6.45%
U.S. Agency and other debt
securities ............... $ -- $ 6,500 $ 3,000 $ 3,500 $ 13,000
======== ======== ======== ======== ========
Weighted average yield --- % 5.82% 6.79% 7.94% 6.61%
</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, 1997, 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 investments at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------------
1997 1996 1995
-------------------------- -------------------------- -----------------------
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................................... $ 9,985 76.9% $10,979 81.5% $5,474 73.3%
Available-for-sale(1).............................. 2,999 23.1 2,500 18.5 1,998 26.7
-------- ------ -------- ------ ------ -----
Total........................................... $12,984 100.0% $13,479 100.0% $7,472 100.0%
======= ===== ======= ===== ====== =====
Average remaining life of other debt securities...... 81 mo. 79 mo. 63 mo.
FHLB stock........................................... $ 1,463 $ 1,319 $1,319
======= ======== ======
Interest-bearing deposits with banks................. $ 3,680 $16,300 $3,300
======= ======= ======
</TABLE>
(1) The fair value of available-for-sale securities at June 30, 1997, 1996 and
1995 was $3.0 million, $2.5 million and $2.0 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 from operations.
Depositor Accounts. First Federal offers various types of depositor
accounts having a variety of interest rates and terms. These accounts consist
of regular savings and club accounts,
21
<PAGE>
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 $4.8 million, $7.3 million and $23.3 million in fiscal 1997, 1996
and 1995, 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,
1997 1996 1995
-----------------------------------------------------------------------------------
Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Money market and NOW ..................... $10,989 2.85% $12,090 2.45% $ 12,914 2.45%
Regular savings........................... 54,000 3.00 57,664 3.00 64,142 3.00
Club accounts............................. 717 3.00 725 3.00 733 3.00
-------- --------- --------
65,706 2.97 70,479 2.91 77,789 2.91
------ -------- ------
Savings certificates by remaining period
to maturity:
Less than 1 year....................... 53,825 5.53 48,026 5.38 39,012 5.56
More than 1 year to 3 years............ 9,707 6.26 5,464 5.54 8,391 6.35
More than 3 years...................... 3,180 6.17 4,335 6.94 5,741 6.40
-------- --------- --------
66,712 5.66 57,825 5.51 53,144 5.77
------- --------- - --------
Total..................................... $132,418 4.33% $128,304 4.08% $130,933 4.07%
======== ======== ========
</TABLE>
The following table sets forth the deposit activity at the Bank
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------
1997 1996 1995
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Opening balance............................. $128,304 $130,933 $133,891
Deposits(1)................................. 112,066 107,874 119,213
Withdrawals(1).............................. (112,514) (115,005) (126,115)
Interest credited........................... 4,562 4,502 3,944
--------- --------- --------
Ending balance.............................. $132,418 $128,304 $130,933
========= ========= ========
Net increase (decrease)..................... $ 4,114 $ (2,629) $ (2,958)
========= ========= ========
Percent increase (decrease)................. 3.2% (2.0)% (2.2)%
=== ======= =====
</TABLE>
(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, 1997.
Weighted
Amount Average Rate
------ ------------
(Dollars in thousands)
Within three months.......................... $1,039 5.34%
After 3 but within 6 months.................. 3,146 5.48
After 6 but within 12 months................. 1,937 5.39
After 12 months.............................. 2,043 6.44
------
Total...................................... $8,165 5.68%
======
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 9 of the Notes to Consolidated Financial
Statements.
The following table sets forth information concerning the balances
and interest rates on FHLB advances for the periods indicated. The Bank had no
other outstanding borrowings during the periods shown.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------
1997 1996 1995
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Maximum balance..................................... $ --- $15,500 $7,500
Average balance..................................... --- 150 2,454
Year-end balance.................................... --- 500 ---
Interest rate at year end........................... --- % 5.63% ---%
Average interest rate during the year............... --- % 7.33% 4.65%
</TABLE>
The Bank has used advances from time to time to provide funds for
investment opportunities and to fund deposit outflows. The Bank may also use
advances to extend the maturity of its liabilities if deemed appropriate in
connection with its asset/liability management efforts.
Service Corporations
As a federally chartered savings 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, 1997, First Federal
had no service corporations.
Employees
At June 30, 1997, 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.
24
<PAGE>
Accordingly, First Federal is subject to broad Federal regulation and
oversight extending to all its operations. First Federal is a member of the
FHLB of New York and is subject to certain limited regulation by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board"). As the
savings and loan holding company of First Federal, the 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 June 30, 1996. When these
examinations are conducted by the OTS and the FDIC, the examiners may require
First Federal to provide for higher general or specific loan loss reserves.
All savings associations are subject to a semi-annual assessment, based upon
the savings association's total assets, to fund the operations of the OTS.
First Federal's OTS assessment for the fiscal year ended June 30, 1997 was
approximately $52,000.
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 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. Federal savings associations are also generally
authorized to branch nationwide. First Federal is in compliance with the noted
restrictions.
First Federal's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At June 30, 1997, First Federal's lending
limit under the 15% limitation was $6.7 million. First Federal is in
compliance with the loans-to-one borrower limitation.
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The OTS, as well as the other Federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to
comply with an approved plan will subject the institution to further
enforcement action.
Insurance of Accounts and Regulation by the FDIC. First Federal is a
member of the SAIF, which is administered by the FDIC. Deposits are insured up
to applicable limits by the FDIC, and such insurance is backed by the full
faith and credit of the United States Government. As insurer, the FDIC imposes
deposit insurance premiums and is authorized to conduct examinations of and to
require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the SAIF or BIF. The FDIC also
has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices or is in an unsafe or unsound
condition.
The FDIC's deposit insurance premiums are assessed through a
risk-based system under which all insured depository institutions are placed
into one of nine categories and assessed insurance premiums based upon their
level of capital and supervisory evaluation. Under the system, institutions
classified as well capitalized (i.e., a core capital ratio of at least 5%, a
ratio of Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based
capital") of at least 6% and a risk-based capital ratio of at least 10%) and
considered healthy pay the lowest premium while institutions that are less
than adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of
less than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern pay the highest premium. Risk 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.
For the first six months of 1995, the assessment schedule for BIF
and SAIF deposits ranged from 0.23% to 0.31% of deposits. As is the case with
the SAIF, the FDIC is authorized to adjust the insurance premium rates for
banks that are insured by the BIF in order to maintain the reserve ratio of
the BIF at 1.25% of BIF insured deposits. As a result of the BIF reaching its
statutory reserve ratio, the FDIC revised the premium schedule for BIF insured
institutions to provide a range of 0.04% to 0.31% of deposits. The revisions
became effective in the third quarter of 1995. In addition, the BIF rates were
further revised, effective January 1997, to provide a range of 0% to 0.27%.
The SAIF rates, however, were not adjusted.
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In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums' legislation to recapitalize the SAIF was enacted on September 30,
1996. The legislation provided for a one-time assessment to be imposed on all
deposits assessed at the SAIF rates as of March 31, 1995, in order to
recapitalize the SAIF. It also provides for the merger of the BIF and the SAIF
on January 1, 1999 if no savings associations then exist. The special
assessment rate was established at 0.657% of deposits by the FDIC; First
Federal's resulting assessment of $884,000 was paid in November 1996. This
special assessment significantly increased non-interest expense and adversely
affected the Bank's results of operations for the year ended June 30, 1997. As
a result of the special assessment, First Federal's annual deposit insurance
premiums were reduced to zero for calendar 1997 based upon its current risk
classification and the new assessment schedule for SAIF insured institutions.
These premiums are subject to change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations
issued by a federally chartered Financing Corporation ("FICO") to provide
financing for resolving the thrift crisis in the 1980s. Although the FDIC
equalized the SAIF and BIF assessment schedule effective October 1, 1996,
SAIF-insured institutions will continue to be subject to a FICO assessment as
a result of this continuing obligation. Although the legislation also now
requires FICO assessments to be made on BIF-assessable deposits, effective
January 1, 1997, that assessment will be limited to 20% of the rate imposed on
SAIF assessable deposits until the earlier of December 31, 1999 or when no
savings association continues to exist, thereby imposing a greater burden on
SAIF member institutions such as the Bank. Thereafter, however, assessments on
BIF-member institutions will be made on the same basis as SAIF-member
institutions. The calendar 1997 rates established by the FDIC to implement
this requirement for all FDIC-insured institutions are 6.48 basis points on
SAIF deposits and 1.3 basis points on BIF deposits. First Federal's FICO
assessment amounted to $42,000 for the six months ended June 30, 1997.
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, 1997, 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
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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 excludable
subsidiaries are deducted from assets and capital. At June 30, 1997, First
Federal had no subsidiaries.
At June 30, 1997, First Federal had tangible capital of $44.7
million, or 24.9% of adjusted total assets, which is approximately $42.0
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, 1997, First Federal had core capital equal to $44.7
million, or 24.9% of adjusted total assets, which is $39.3 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. At June 30, 1997, First Federal had $622,000 of
general loss reserves, which exceeded 1.25% of risk-weighted assets by
$37,000.
Certain exclusions from capital and assets are required to be made
for the purpose of calculating total capital. Such exclusions consist of
equity investments (as defined by regulation) and that portion of land loans
and nonresidential construction loans in excess of an 80% loan-to-value ratio
and reciprocal holdings of qualifying capital instruments. First Federal had
no such exclusions from capital and assets at June 30, 1997.
In determining the amount of risk-weighted assets, all assets,
including 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 FNMA or
FHLMC.
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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, 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.
On June 30, 1997, First Federal had total risk-based capital of $45.3
million (including $44.7 million in core capital and $581,000 in qualifying
supplementary capital) and risk-weighted assets of $46.8 million, or total
capital of 96.8% of risk-weighted assets. This amount was $41.5 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% risk-based capital ratio). Any such
association must submit a capital restoration plan and, until such plan is
approved by the OTS, may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized
associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more 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.
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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.
Limitations on Dividends and Other Capital Distributions. OTS
regulations impose various restrictions on savings associations with respect
to their ability to make distributions of capital, which include dividends,
stock redemptions or repurchases, cash-out mergers and other transactions
charged to the capital account. OTS regulations also prohibit a savings
association from declaring or paying any dividends or from repurchasing any of
its stock if, as a result, the regulatory capital of the association would be
reduced below the amount required to be maintained for the liquidation account
established in connection with its mutual-to-stock conversion.
Generally, savings associations (such as the Bank) that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of (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 CAMEL 1 or 2 rating,
is not of supervisory concern, and would remain adequately capitalized (as
defined in the OTS prompt corrective action regulations) following the
proposed distribution. Savings associations that would remain adequately
capitalized following the proposed distribution but do not meet the other
noted requirements must notify the OTS 30 days prior to declaring a capital
distribution. The OTS stated it will generally regard as permissible that
amount of capital distributions that do not exceed 50% of the institution's
excess regulatory capital plus net income to date during the calendar year. A
savings association may not make a capital distribution without prior approval
of the OTS and the FDIC if it is undercapitalized before, or as a result of,
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such a distribution. As under the current rule, the OTS may object to a
capital distribution if it would constitute an unsafe or unsound practice. No
assurance may be given as to whether or in what form the regulations may be
adopted.
Liquidity. All savings associations, including First Federal, are
required to maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. 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 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's
average daily balance of net withdrawable deposit accounts and current
borrowings.
Penalties may be imposed upon associations for violations of either
liquid asset ratio requirement. At June 30, 1997, First Federal was in
compliance with both requirements, with an overall liquid asset ratio of 42.0%
and a short-term liquid assets ratio of 3.4%.
Accounting. An OTS policy statement applicable to all savings
associations clarifies and re-emphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance
with GAAP. Under the policy statement, management must support its
classification of and accounting for loans and securities (i.e., whether held
for investment, sale or trading) with appropriate documentation. First Federal
is in compliance with these amended rules.
OTS accounting regulations, which may be made more stringent than
GAAP by the OTS, require that transactions be reported in a manner that best
reflects their underlying economic substance and inherent risk and that
financial reports must incorporate any other accounting regulations or orders
prescribed by the OTS.
Qualified Thrift Lender Test. All savings associations, including
First Federal, are required to meet a qualified thrift lender ("QTL") test to
avoid certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out
of every 12 months on a rolling basis. Such assets primarily consist of
residential housing related loans and investments. At June 30, 1997, 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
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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 to the heightened attention being
given to the CRA in the past few years, the Bank may be required to devote
additional funds for investment and lending in its local community. The Bank
was examined for CRA compliance in October 1995 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.
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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 activity 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. 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
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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, 1997, First Federal had $1.5 million in
FHLB stock, which was in compliance with this requirement. In past years,
First Federal has received substantial dividends on its FHLB stock. Over the
past five calendar years such dividends have averaged 8.46% and were 6.38% for
calendar year 1996.
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 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 taken as a deduction in computing taxable income
for Federal income tax purposes. The amount of the bad
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debt reserve deduction for "non-qualifying loans" is computed under the
experience method. The amount of the bad debt reserve deduction for
"qualifying real property loans" (generally loans secured by improved real
estate) is also computed under the experience method. A
percentage-of-taxable-income method was also available in computing the
qualifying loan bad debt 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.
The percentage of specially-computed taxable income that was used to
compute a savings association's bad debt reserve deduction under the
percentage-of-taxable-income method (the "percentage bad debt deduction") was
8% for the years 1987-1995. The percentage bad debt deduction thus computed
was reduced by the amount permitted as a deduction for non-qualifying loans
under the experience method. The availability of this
percentage-of-taxable-income method permitted qualifying savings associations
to be taxed at a lower effective federal income tax rate than that which was
applicable to corporations generally (approximately 31.3% assuming the maximum
percentage bad debt deduction). Pursuant to changes in Federal tax law enacted
in August 1996, the percentage bad debt deduction has been eliminated for tax
years beginning after December 31, 1995.
This legislation also imposes a requirement to recapture into taxable
income the portion of the qualifying and non-qualifying loan reserves in
excess of the "base-year" balances of such reserves. 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 which will begin for the
Bank either in 1997 or 1998, depending on whether it meets certain residential
lending requirements. 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 legislative
changes will have no effect on total income tax expense for financial
reporting purposes.
Also, under the August 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 $1.7 million at June 30, 1997.
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
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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 examination of still open returns
would not result in a deficiency which could have a material adverse effect on
the financial condition of the Bank.
New York Taxation. The Bank 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. In
addition, New York also imposes a general surtax on the applicable tax
described above. The surtax was reduced to 2.5% for taxable years ended after
June 30, 1996 and before July 1, 1997, and expired for taxable years
thereafter. Entire net income is similar to Federal taxable income, subject to
certain modifications (including the fact that net operating losses cannot be
carried back or carried forward). In addition, New York also imposes a
Metropolitan Commuter Transportation District surcharge of 17% that is
assessed on the New York State Franchise Tax (before general surtax).
In 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 will allow 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 new 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 recent 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 which
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.
36
<PAGE>
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, 1997. At June 30, 1997, the
total net book value of Peekskill's office properties and equipment (including
land, building and leasehold improvements, and furniture, fixtures and
equipment) was $240,000, distributed as follows by location:
Year Owned or Net Book Value at
Location Acquired Leased June 30, 1997
- ---------------------------- -------- -------- ----------------
Main Office:
1019 Park Street 1959 Owned $137,000
Peekskill, New York
Full Service Branches:
1961 Commerce Street 1977 Leased 8,000
Yorktown Heights, New York
Westchester Mall, Rte. 6 1973 Leased 95,000
Mohegan Lake, New York
The Bank is constructing a full service branch, for which it will
have a ground lease with a base term of 20 years. This new location will
replace our existing branch in Mohegan Lake, New York and is scheduled to open
in the Company's fiscal second quarter.
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.
37
<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, 1997.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
Page 43 of the attached 1997 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Selected Financial Data
Page 1 of the attached 1997 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 1997 Annual Report to Stockholders
are herein incorporated by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Pages 6 through 8 of the attached 1997 Annual Report to Stockholders
are herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Pages 16 through 41 of the attached 1997 Annual Report to
Stockholders are herein incorporated by reference.
38
<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 1997 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 1997 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 1997 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
1997 Annual Meeting of Stockholders, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
39
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a)(1) Financial Statements
The following information appearing in 1997 Annual Report to
Stockholders is herein incorporated by reference:
<TABLE>
<CAPTION>
Pages in
Annual
Annual Report Section Report
- --------------------- ------
<S> <C>
Independent Auditors' Report............................................................................. 16
Consolidated Balance Sheets as of June 30, 1997 and 1996................................................. 17
Consolidated Statements of Income for the Years
Ended June 30, 1997, 1996 and 1995..................................................................... 18
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended June 30, 1997, 1996 and 1995............................................................... 19
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1997, 1996 and 1995.................................................................... 20
Notes to Consolidated Financial Statements............................................................... 21-41
</TABLE>
(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
<TABLE>
<CAPTION>
Reference to
Regulation Prior Filing or
S-K Exhibit Exhibit Number
Number Document Attached Hereto
----------- -------- ----------------
<S> <C> <C> <C>
2 Plan of acquisition, reorganization, arrangement, None
liquidation or succession
3(a) Articles of Incorporation *
3(b) By-Laws *
4 Instruments defining the rights of security holders, *
including debentures
9 Voting Trust Agreement None
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
10 Material contracts
Savings and Investment Plan *
Retirement Income Plan *
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 None
security holders
23 Consents of Experts and Counsel None
24 Power of Attorney None
27 Financial Data Schedule (EDGAR filing only)
28 Information from reports furnished to state insurance None
regulatory authorities
99 Additional Exhibits None
</TABLE>
- ------------------------
* Filed as exhibits to the Company's Form S-1 registration statement
filed on October 3, 1995 (File No. 33-97730) pursuant to Section 5
of the Securities Act of 1933. All of such previously filed documents
are hereby incorporated herein by reference in accordance with Item
601 of Regulation S-K.
** Filed as exhibits to the Company's Amendment No. 1 to Form S-1
registration statement filed on November 8, 1995 (File No. 33-97730)
pursuant to Section 5 of the Securities Act of 1933. All of such
previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-K.
(b) Reports on Form 8-K
During the quarter ended June 30, 1997, no current reports on Form
8-K were filed by the Company.
41
<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 Patrick Fay
- ---------------------------- --------------------------------------------
Dominick Bertoline, Director John Patrick Fay, Director
Date: September 26, 1997 Date: September 26, 1997
/s/ Edward H. Dwyer /s/ Eldorus Maynard
- ---------------------------- --------------------------------------------
Edward H. Dwyer, Director Eldorus Maynard, Chief Executive
Officer and Chairman of the Board
Date: September 26, 1997 (Principal Executive and Operating Officer)
Date: September 26, 1997
/s/ Robert E. Flower /s/ William J. LaCalamito
- ---------------------------- --------------------------------------------
Robert E. Flower, Director William J. LaCalamito, President,
Chief Operating Officer and President
Date: September 26, 1997 (Principal Financial and Accounting
Officer)
Date: September 26, 1997
42
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
At or for the Fiscal Year ended June 30
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $182,560 $191,323 $155,716 $156,652 $149,684
Loans, net 45,507 39,557 41,060 39,961 42,895
Mortgage-backed securities 116,465 118,221 99,947 104,503 95,669
Other securities 12,968 13,438 7,450 9,463 6,991
Cash and cash equivalents 4,158 17,320 4,681 157 1,566
Depositor accounts 132,418 128,304 130,933 133,891 129,584
Equity 46,966 59,774 21,178 19,267 16,930
Selected Operating Data:
Interest and dividend income $ 12,309 $ 11,794 $ 10,722 $ 10,858 $ 11,111
Interest expense 5,431 5,401 4,785 4,216 4,850
---------- ---------- ---------- ---------- ----------
Net interest income 6,878 6,393 5,937 6,642 6,261
Provision for loan losses 143 45 160 60 60
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses 6,735 6,348 5,777 6,582 6,201
Loan fees and service charges 149 207 201 227 194
Gain on sale of real estate owned --- 24 --- --- 217
Net loss on securities held for investment --- --- --- --- 807
Other non-interest income 87 77 76 88 84
Non-interest expense (excluding special assessment) 3,318 2,807 2,490 2,315 2,289
SAIF special assessment (1) 884 --- --- --- ---
---------- ---------- ---------- ---------- ----------
Income before income tax expense and cumulative
effect of changes in accounting principles 2,769 3,849 3,564 4,582 3,600
Income tax expense (2) 957 1,628 1,640 2,040 1,709
Cumulative effect of changes in accounting
principles:
Postretirement health care benefits, net --- (59) --- --- ---
Income taxes --- --- --- (205) ---
---------- ---------- ---------- ---------- ----------
Net income (3) $ 1,812 $ 2,162 $ 1,924 $ 2,337 $ 1,891
========== ========== ========== ========== ==========
Earnings per share, from date of conversion (3) $ 0.56 $ 0.36
========== ==========
Selected Statistical Data:
Return on average assets (3) 0.98 % 1.23 % 1.22 % 1.52 % 1.27 %
Return on average equity (3) 3.57 4.96 9.38 12.80 12.27
Net interest margin 3.76 3.66 3.82 4.38 4.29
Average interest rate spread 2.57 2.57 3.32 3.98 3.87
Equity to total assets at end of period 25.73 31.24 13.60 12.30 11.31
Efficiency ratio (4) 61.09 42.04 40.07 33.28 35.01
Non-interest expense to average assets (3) 2.27 1.59 1.58 1.50 1.54
Non-performing loans to total loans, net 4.40 3.17 5.10 4.29 4.79
Allowance for loan losses to non-performing loans 31.04 41.45 22.61 19.58 13.32
Non-performing assets to total assets 1.22 0.65 1.35 1.10 1.38
Book value per share $ 14.71 $ 14.58
Cash dividends per share 0.36 0.09
Dividend payout ratio 62.25 % 26.86 %
</TABLE>
(1) 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 - Impact of Recent
Legislation - SAIF Recapitalization."
(2) 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 6 to
Consolidated Financial Statements.
(3) Excluding the after-tax SAIF charge and the state tax benefit described in
notes (1) and (2), 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 earnings per share of $0.65. The ratio of non-interest
expense to average assets would have been 1.80%.
(4) 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's first full fiscal year operating as a public
company has proven to be a challenging year and one resulting in the
successful implementation of several strategies which improved our core
business and enhanced stockholder value. First Federal Savings Bank, Peekskill
Financial Corporation's wholly-owned subsidiary, continues to be a
competitive, local community focused institution whose top priority is
building customer relationships.
In fiscal 1997, two legislative changes affected the Company's
financial results. The first was the Deposit Insurance Funds Act of 1996,
which reduced the disparity for deposit insurance costs between deposits
insured by the Savings Association Insurance Fund ("SAIF"), such as the Bank's
deposits, and those insured by the Bank Insurance Fund. The legislation also
imposed a special assessment on SAIF-insured deposits to recapitalize the
fund. The Bank's share of this assessment was $884,000, which reduced net
income for fiscal 1997 by $520,000 after taxes. In the future, the Bank's
annual deposit insurance costs are expected to be lower as a result of the
legislation. The second legislative change was the enactment of certain
amendments to New York state tax laws regarding bad debt deductions. The
amendments effectively eliminated the excess New York state reserve for which
the Company had recognized a deferred tax liability. As a result, during
fiscal 1997, the Company eliminated the deferred tax liability and its income
tax expense was reduced by $238,000.
Net income for the year ended June 30, 1997 was $1.8 million, or
$0.56 per share, as compared to $2.2 million for the year ended June 30, 1996.
Earnings per share was $0.36 for the six-month period from the Company's
initial public offering to June 30, 1996. Excluding the special SAIF
assessment and the one-time benefit due to a change in New York state tax law,
net income for fiscal 1997 would have been $2.1 million, or $0.65 per share.
Net interest income increased $485,000, or 7.6%, to $6.9 million for the year
ended June 30, 1997.
During 1997, First Federal expanded its core business by introducing
new mortgage products and enhancing existing products. As a result, net loans
increased $6.0 million, or 15.0%, to $45.5 million at June 30, 1997. The ratio
of net loans to total assets increased from 20.7% at June 30, 1996 to 24.9% at
June 30, 1997. In addition, we continue to focus on better serving our
customers; and in that regard we are constructing a full service branch with
drive-up tellers and a 24 hour banking facility. This new location will
replace our existing branch in Mohegan Lake, New York and is scheduled to open
in our fiscal second quarter.
Stockholders' equity decreased $12.8 million to $47.0 million at June
30, 1997 from $59.8 million at June 30, 1996. This decrease was due primarily
to common stock purchases totaling $13.9 million for the Company's treasury
and to fund the Recognition and Retention Plan, partially offset by net
earnings retained for the year. The ratio of stockholders' equity to total
assets decreased to 25.7% at June 30, 1997 from 31.2% at June 30, 1996. Book
value per share increased from $14.58 at June 30, 1996 to $14.71 at June 30,
1997 due primarily to the stock purchases and retained earnings for the year.
The Company continues to focus on enhancing stockholder value. In
addition to the stock repurchase program, the Company has paid five
consecutive quarterly cash dividends of $0.09 per share. The Company
repurchased 906,629 shares for treasury, representing 22% of the total shares
issued in the conversion. The Company's closing stock price increased from
$11.75 at June 30, 1996 to $15.00 at June 30, 1997, an increase of $3.25 per
share, or 27.7%. The total return on the Company's stock, including dividends,
was in excess of 30% for the fiscal year ended June 30, 1997.
On behalf of the Board of Directors, I wish to thank our customers,
staff and stockholders for your continued support of Peekskill Financial
Corporation.
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.
Impact of Recent Legislation
SAIF Recapitalization. For the period from January 1 through September 30,
1996, there existed a disparity of 23 cents per $100 of deposits 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"). In
response to this disparity, on September 30, 1996 the Deposit Insurance Funds
Act of 1996 (the "Funds Act") was enacted into law. 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
3
<PAGE>
SAIF-assessable deposits. For the calendar year 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
Financial Corporation ("FICO bonds") to recapitalize the now defunct Federal
Savings and Loan Insurance Corporation. In order to fund such interest
payments, a separate assessment of 1.3 basis points for BIF-assessable
deposits and 6.48 basis points for SAIF-assessable deposits became effective
on January 1, 1997. The Funds Act requires that, until December 31, 1999 or
such earlier date on which the last savings association ceases to exist, the
rates of assessment for FICO bond payments imposed on BIF-assessable deposits
will be one-fifth of the rate imposed on SAIF-assessable deposits. As a result
of the lower overall assessment rates, the Bank's non-interest expense for the
six months ended June 30, 1997 was reduced by $106,000 compared to the same
period in 1996.
The Funds Act also provides for the merger of the BIF and SAIF on January
1, 1999, with such merger being conditioned upon the prior elimination of the
thrift charter. The Funds Act required the Secretary of Treasury to conduct a
study of relevant factors with respect to the development of a common charter
for all insured depository institutions and the abolition of separate charters
for banks and thrifts, and to report the Secretary's conclusions and the
findings to Congress. The Secretary of the Treasury has recommended that the
separate charter for thrifts be eliminated only if other legislation is
adopted that permits bank holding companies to engage in certain non-financial
activities. Absent legislation permitting such non-financial activity, the
Secretary of the Treasury recommended retention of the thrift charter. Other
proposed legislation has been introduced in Congress that would require thrift
institutions to convert to bank charters. The Secretary of the Treasury also
recommended that the BIF and the SAIF be merged irrespective of the
elimination of the thrift charter.
Tax Bad Debt Reserves. Federal tax law changes were enacted in August 1996
to eliminate the "thrift bad debt" method of calculating bad debt deductions
for tax years after 1995 and to require thrifts to recapture into taxable
income (over a six-year period) all bad debt reserves accumulated after 1987.
The Company previously established, and will continue to maintain, a deferred
tax liability with respect to such excess Federal reserves. The tax law
changes also provide that taxes associated with the recapture of pre-1988 bad
debt reserves would become payable under more limited circumstances than under
prior law. For example, such taxes would no longer be payable in the event
that the thrift charter is eliminated and the Bank is required to convert to a
bank charter.
Amendments to the New York state tax law redesignate the Bank's state bad
debt reserve at December 31, 1995 as the base-year amount and also provide for
future additions to the base-year reserve using the percentage-of-taxable-income
method. This change 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. Taxes associated with the recapture of the
state base-year reserve would still become payable under various circumstances,
including conversion to a bank charter or failure to meet various thrift
definition tests.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
109, deferred tax liabilities have not been recognized with respect to the
base-year tax bad debt reserves, since the Company does not expect that these
4
<PAGE>
reserves will become taxable in the foreseeable future. The unrecognized
deferred tax liabilities at June 30, 1997 with respect to the Federal and
state base-year reserves were $1.7 million and $0.6 million, respectively. See
Note 6 to Consolidated Financial Statements for a further discussion of tax
bad debt reserves.
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, 1997, the Bank's liquidity ratio of 42.0% 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 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 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, 1997, the average annual net cash
provided by operating activities was in excess of $2.1 million. Net cash used
in investing activities during fiscal 1997 was approximately $3.7 million,
primarily reflecting net disbursements of $6.3 million to fund loan growth
less net collections of $2.8 million from securities transactions.
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 $132.4
million at June 30, 1997 are core deposits. The deposit base increased by $4.1
million in fiscal 1997, 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 up to $43.6 million from the FHLB of New York at June 30, 1997, at
which time the Company had no outstanding borrowings. Significant financing
activities in fiscal 1997 also included disbursements of $12.5 million for
treasury stock purchases; $1.4 million to purchase shares to fund the
Recognition and Retention Plan ("RRP"); and $1.1 million for cash dividends.
The Holding Company's future ability to pay dividends to stockholders could be
dependent on dividends received from the Bank, which are subject to certain
regulatory restrictions. See Note 8 to Consolidated Financial Statements.
5
<PAGE>
At June 30, 1997, the Company had outstanding loan commitments of $3.6
million and loans in process of $195,000. 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. At June
30, 1997, the Company had a commitment of approximately $700,000 for the
construction of a full service branch facility to replace an existing office.
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, 1997
with tangible and core capital ratios of 24.9% and a total risk-based capital
ratio of 96.8%. 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. See Note 8 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
6
<PAGE>
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 level of general interest
rates, the relationship between long and short-term interest rates, market
conditions and competitive factors, the Board and management may determine to
increase the Company's interest rate risk position somewhat in order to
increase its net interest margin. 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, 1997, the Company had securities of $46.8 million
with contractual maturities of five years or less and adjustable rate
securities of $38.2 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 $19.5
million annually over the past three fiscal years. The Company also controls
interest rate risk reduction by emphasizing non-certificate depositor
accounts. The Board and 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, 1997, the Company had $54.7 million of regular savings
and club accounts, and $11.0 million of money market and NOW accounts,
representing 49.6% 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, 1997, 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
Change in (Decrease) in NPV
Interest Estimated ----------------------------
Rates NPV Amount Amount Percent
- -------------- -------------- ------------- --------------
(Basis Points) (Dollars in thousands)
+400 $ 37,940 $ (12,271) (24) %
+300 41,284 (8,927) (18)
+200 44,177 (6,034) (12)
+100 47,688 (2,523) (5)
--- 50,211 --- ---
-100 51,871 1,660 3
-200 52,617 2,406 5
-300 53,875 3,664 7
-400 55,770 5,559 11
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
7
<PAGE>
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 immediate 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.
8
<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>
1997 1996 1995
------------------------------ ------------------------------ ------------------------------
Average Average Average Average Average Average
Balance(1) Interest Yield/Rate Balance(1) Interest Yield/Rate Balance(1) Interest Yield/Rate
---------- -------- ---------- ---------- -------- ---------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (2) $ 42,956 $ 3,402 7.92% $ 39,171 $ 3,363 8.59% $ 41,258 $ 3,522 8.54%
Mortgage-backed securities (3) 116,546 7,440 6.38 109,740 6,959 6.34 103,325 6,527 6.32
Other debt securities (3) 13,005 858 6.60 9,887 589 5.96 8,699 536 6.16
Other interest-earning assets 10,346 609 5.89 16,290 883 5.42 2,047 137 6.69
-------- ------- ------- ------- -------- -------
Total interest-earning
assets 182,853 $12,309 6.73% 175,088 $11,794 6.73% $155,329 10,722 6.90%
======= ======= =======
Non interest-earning assets 1,863 1,384 2,278
-------- -------- --------
Total assets $184,716 $176,472 $157,607
======== ======== ========
Interest-bearing liabilities:
Regular savings and club
accounts $ 56,300 $ 1,696 3.01% $ 62,029 $ 1,903 3.07% $ 74,806 $ 2,255 3.01%
Money market and NOW accounts 2.53 2.51 2.48
11,252 285 12,069 303 14,814 368
Savings certificates 5.48 5.74 4.91
62,973 3,450 55,506 3,184 41,735 2,048
Borrowings --- --- --- 150 11 7.33 2,454 114 4.65
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities 130,525 $ 5,431 4.16% $129,754 5,401 4.16% 133,809 4,785 3.58%
======= ======= =======
Non interest-bearing liabilities 3,495 3,094 3,397
-------- -------- --------
Total liabilities 134,020 132,848 137,206
Stockholders' equity 50,696 43,624 20,401
-------- -------- --------
Total liabilities and
stockholders' equity
$184,716 $176,472 $157,607
======== ======== ========
Net interest income $ 6,878 $ 6,393 $ 5,937
======= ======= =======
Interest rate spread 2.57% 2.57% 3.32%
Net yield on interest-earning assets(4) 3.76 3.66 3.82
Average interest-earning assets to
average interest-bearing
liabilities 1.40 1.35 1.16
</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.
<PAGE>
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 1997 vs. 1996 Fiscal 1996 vs. 1995
--------------------------------- ---------------------------------
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 $ 311 $ (272) $ 39 $ (179) $ 20 $ (159)
Mortgage-backed securities 434 47 481 407 25 432
Other debt securities 201 68 269 73 (20) 53
Other interest-earning asset (345) 71 (274) 953 (207) 746
------- ------- ------- ------- ------- -------
Total 601 (86) 515 1,254 (182) 1,072
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Regular savings and club accounts (174) (33) (207) (432) 80 (352)
Money market and NOW accounts (21) 3 (18) (69) 4 (65)
Savings certificates 416 (150) 266 596 540 1,136
Borrowings (11) -- (11) (164) 61 (103)
------- ------- ------- ------- ------- -------
Total 210 (180) 30 (69) 685 616
------- ------- ------- ------- ------- -------
Net change in net interest income $ 391 $ 94 $ 485 $ 1,323 $ (867) $ 456
======= ======= ======= ======= ======= =======
</TABLE>
9
<PAGE>
Comparison of Financial Condition at June 30, 1997 and 1996
Total assets were $182.6 million at June 30, 1997, as compared to $191.3
million at June 30, 1996. The $8.7 million decrease was primarily attributable
to a $13.2 million decrease in cash and cash equivalents and a $2.2 million
decrease in securities, partially offset by a $6.0 million or 15.0% increase
in net loans. The decrease in cash and cash equivalents primarily reflects
common stock purchases of $13.9 million, discussed below. The increase in net
loans reflects growth in the one-to-four family residential mortgage
portfolio, which was funded by a $4.1 million increase in depositor accounts
and the $2.2 million decrease in securities. The decrease in securities
consisted of a $2.7 million decrease in securities held-to-maturity, partially
offset by a $524,000 increase in securities available-for-sale. The increase
in depositor accounts reflects an $8.9 million increase in savings certificate
accounts, partially offset by decreases of $3.7 million in regular savings
accounts and $1.1 million in money market demand and NOW accounts.
Stockholders' equity at June 30, 1997 was $47.0 million, a decrease of
$12.8 million from $59.8 million at June 30, 1996. The decrease primarily
reflects common stock purchases of $13.9 million, consisting of $12.5 million
for repurchases of 906,629 treasury shares and $1.4 million to fund
current-year awards of 117,290 shares under the RRP. These purchases were
partially offset by net income of $1.8 million less dividends paid of $1.1
million. The ratio of stockholders' equity to total assets at June 30, 1997
was 25.73%, as compared to 31.24% at June 30, 1996. The Company's tangible
book value per share was $14.71 at June 30, 1997 compared to $14.58 at June
30, 1996.
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 $0.56 per share, as compared to $2.2 million for the year ended
June 30, 1996. Earnings per share 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 $0.65 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.
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
10
<PAGE>
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 on the average rate paid on savings
certificates to 5.48%.
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 $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),
11
<PAGE>
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 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. For the year ended June 30, 1997, non-interest
expense increased $1.4 million to $4.2 million, as compared to $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. See "Impact of Recent Legislation - SAIF Recapitalization." The
increase in compensation and benefits expense primarily reflects (i) a
$129,000 increase in expense recognized for the Company's employee stock
ownership plan ("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.
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. The amendment changed the base-year for bad debt reserves to
December 31, 1995 and eliminated the need for a deferred tax liability
previously recognized for reserves in excess of the base-year amount. The
effective tax rate for fiscal 1997 and 1996 was 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. See "Impact of Recent Legislation - Tax Bad Debt
Reserves."
Comparison of Operating Results for the Fiscal Years Ended June 30, 1996 and
1995
General. For the year ended June 30, 1996, the Company's net income was
$2.2 million as compared to $1.9 million for 1995, an increase of $238,000, or
12.4%. The increase was caused by a $1.1 million increase in total interest
and dividend income and a $115,000 decrease in the provision for loan losses,
partially offset by a $616,000 increase in interest expense, a $317,000
increase in total non-interest expense and a $59,000 charge for the cumulative
effect of a change in accounting for postretirement health care benefits.
Net Interest Income. Net interest income increased $456,000, or 7.7%, to
$6.4 million for the year ended June 30, 1996 compared to $5.9 million for
fiscal 1995. The components of net interest income, interest and dividend
income and interest expense, increased $1.1 million, or 10.0% and $616,000, or
12.9%, respectively. The Company's interest rate spread narrowed by 75 basis
12
<PAGE>
points to 2.57% for the year ended June 30, 1996 from 3.32% for the prior
year, and the net yield on interest-earning assets narrowed by 16 basis points
to 3.66% from 3.82%. The lower spread and net yield were primarily caused by a
58 basis point increase in the rate paid on average interest-bearing
liabilities due to depositors shifting their accounts from generally lower
rate regular savings accounts to generally higher rate savings certificates,
as market interest rates gradually increased, and from the investment of a
portion of the proceeds from the Stock Offering into shorter term investments.
Interest Income. Total interest income increased $1.1 million, a 10.0%
increase over the prior year. This increase is the result of a $19.8 million
increase in average interest-earning assets, partially offset by a 17 basis
point decrease in the yield on interest-earning assets. The increase in
interest-earning assets was due to funds received in the Stock Offering, which
were primarily invested in mortgage-backed securities and interest-bearing
deposits. The decrease in the yield on interest-earning assets reflects the
investment of a portion of the proceeds from the Stock Offering in shorter
term, lower yielding investments.
Interest Expense. Interest expense on deposits and FHLB advances totaled
$5.4 million, a $616,000, or 12.9%, increase from the prior year. This
increase is attributable to a 58 basis point increase in the average rate paid
on deposits partially offset by a $4.1 million decrease in average
interest-bearing liabilities. The increase in the average rate paid on
deposits was due to the general rise in interest rates and the shift of
deposits from savings accounts to higher yielding savings certificates. During
fiscal 1996, the average balance of savings and club accounts (with an average
rate of 3.07%) decreased $12.8 million, while savings certificates (with an
average rate of 5.74%) increased $13.8 million.
Provision for Loan Losses. The provision for loan losses decreased $115,000
to $45,000 for the year ended June 30, 1996 from $160,000 for fiscal 1995. The
decrease is primarily attributable to an $844,000, or 40.3%, decrease in
non-performing loans, from $2.1 million at June 30, 1995 to $1.3 million at
June 30, 1996. The decrease in non-performing loans is due to several factors
including collections and the stabilization in the local economy and
residential real estate market. The ratio of the allowance for loan losses to
non-performing loans was 41.45% at June 30, 1996 compared to 22.61% a year
earlier. See "Asset Quality" for further information.
Non-Interest Income. For the year ended June 30, 1996, non-interest income
increased $31,000 to $308,000 from $277,000 for the year ended June 30, 1995.
Non-interest income is primarily comprised of loan fees, service charges and
rental income on the Company's office properties. The increase is primarily
due to the Company recognizing a $24,000 gain on the sale of real estate owned
during fiscal 1996.
Non-Interest Expense. Non-interest expense increased $317,000, or 12.7%, to
$2.8 million for the year ended June 30, 1996 from $2.5 million for the year
ended June 30, 1995. The increase is primarily attributable to an increase in
compensation and benefits of $154,000, and increases of $43,000 in
professional fees and $81,000 in other expenses. The increase in compensation
and benefits to $1.4 million for the year ended June 30, 1996 compared to $1.2
million for fiscal 1995 is primarily due to $95,000 of expense recognized for
the ESOP in fiscal 1996, and the $100,000 payment made in fiscal 1996 to the
estate of the Company's former Chief Executive Officer who died during the
year. The increases in professional fees and other expenses are primarily due
to costs associated with operations as a public company.
13
<PAGE>
Income Tax Expense. Income tax expense for each of the years ended June 30,
1996 and 1995 was $1.6 million, reflecting effective tax rates of 42.3% and
46.0%, respectively. The lower effective rate in fiscal 1996 is due primarily
to a decrease in the New York state tax rate.
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,
--------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual (impaired) loans:
Participation interest in one-to-four family mortgage loans $1,074 $ -- $ -- $ -- $ --
Accruing loans past due more than 90 days:
One-to-four fami1y mortgage loans 930 1,252 2,096 1,698 2,054
Other loans -- -- -- 18 18
------ ------ ------ ------ ------
Total non-performing loans 2,004 1,252 2,096 1,716 2,072
Real estate owned 220 -- -- -- --
====== ====== ====== ====== ======
Total non-performing assets $2,224 $1,252 $2,096 $1,716 $2,072
====== ====== ====== ====== ======
Ratios:
Allowance for loan losses to:
Non-perfoming loans 31.04% 41.45% 22.61% 19.58% 13.32%
Total loans, net 1.37 1.31 1.15 0.84 0.64
Non-performing loans to total loans, net 4.40 3.17 5.10 4.29 4.79
Non-performing assets to total assets 1.22 0.65 1.35 1.10 1.38
</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, 1997, non-performing assets totaled $2.2 million, or 1.22% of
total assets, compared to $1.3 million, or 0.65% of total assets, at June 30,
1996. The $752,000 increase in non-performing loans reflects a $1.1 million
increase for the TASCO Loans which were on non-accrual status at June 30,
1997, less a $322,000 decrease in accruing one-to-four family mortgage loans
past due more than 90 days. Real estate owned at June 30, 1997 represents a
single-family residence acquired by foreclosure in fiscal 1997. For further
information concerning the TASCO Loans, including their effect on interest
income and the provision for loan losses for fiscal 1997, see "Comparison of
Operating Results for the Fiscal Years Ended June 30, 1997 and 1996 - Net
Interest Income" and "- Provision for Loan Losses". The allowance for loan
14
<PAGE>
losses as a percentage of non-performing loans was 31.04% in 1997 compared to
41.45% in 1996 and 22.61% in 1995. As a percentage of total loans, the
allowance for loan losses increased to 1.37% in 1997 compared to 1.31% in 1996
and 1.15% in 1995.
The following table sets forth activity in the Company's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 519 $ 474 $ 336 $ 276 $ 216
Provision for loan losses 143 45 160 60 60
Charge-offs (40) -- (22) -- --
====== ====== ===== ===== =====
Balance at end of year $ 622 $ 519 $ 474 $ 336 $ 276
====== ====== ===== ===== =====
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 11 to Consolidated Financial Statements for a discussion of
recently issued accounting standards concerning earnings per share,
comprehensive income and segment reporting.
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.
15
<PAGE>
Management's Report
Management is responsible for the preparation and integrity of the
consolidated financial statements and other information presented in this
annual report. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and reflect
management's judgments and estimates with respect to certain events and
transactions.
Management is responsible for maintaining a system of internal control.
The purpose of this system is to provide reasonable assurance that
transactions are recorded in accordance with management's authorization,
assets are safeguarded against loss or unauthorized use, and that underlying
financial records support the preparation of financial statements. The system
includes the communication of written policies and procedures, selection of
qualified personnel, and appropriate segregation of responsibilities.
The Board of Directors meets periodically with Company management and the
independent auditors, KPMG Peat Marwick LLP, to review matters related to the
quality of financial reporting, internal control, and the nature, extent and
result of the audit efforts.
The independent auditors conduct an annual audit of the Company's
consolidated financial statements to enable them to express an opinion as to
the fair presentation of the statements. In connection with the audit, the
independent auditors consider the 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, 1997 and 1996, 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,
1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1997 in conformity with generally accepted
accounting principles.
As discussed in notes 1, 2 and 7 to the consolidated financial
statements, the Company changed its methods of accounting for certain
postretirement benefits in fiscal 1996 and securities in fiscal 1995.
KPMG Peat Marwick, LLP
KPMG PEAT MARWICK, LLP
Stamford, Connecticut
July 23, 1997
16
<PAGE>
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30,
-----------------------
1997 1996
--------- ---------
<S> <C> <C>
Assets
Cash and due from banks $ 478 $ 1,020
Interest-bearing deposits 3,680 16,300
Securities (note 2):
Held-to-maturity, at amortized cost (fair value of $127,348 in 1997 and $128,089 in 1996) 126,450 129,200
Available-for-sale, at fair value (amortized cost of $2,999 in 1997 and $2,500 in 1996) 2,983 2,459
--------- ---------
Total securities 129,433 131,659
Loans, net of allowance for loan losses of $622 in 1997 and $519 in 1996 (note 3) 45,507 39,557
Federal Home Loan Bank stock 1,463 1,319
Accrued interest receivable 1,064 1,111
Office properties and equipment, net (note 4) 240 184
Real estate owned 220 --
Deferred income taxes, net (note 6) 304 --
Other assets 171 173
--------- ---------
Total assets $ 182,560 $ 191,323
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Depositor accounts (note 5) $ 132,418 $ 128,304
Mortgage escrow deposits 1,943 2,031
Deferred income taxes, net (note 6) -- 70
Other liabilities (notes 7 and 9) 1,233 1,144
--------- ---------
Total liabilities 135,594 131,549
--------- ---------
Stockholders' equity (notes 7 and 8):
Preferred stock (par value $0.01 per share; 100,000 shares authorized; none
issued or outstanding) -- --
Common stock (par value $0.01 per share; 4,900,000 shares authorized;
4,099,750 shares issued) 41 41
Additional paid-in capital 40,032 39,972
Unallocated common stock held by employee stock ownership plan ("ESOP") (3,034) (3,198)
Unamortized awards of common stock under recognition and retention plan ("RRP") (1,188) --
Treasury stock, at cost (906,629 shares) (12,543) --
Retained earnings, substantially restricted 23,668 22,984
Net unrealized loss on available-for-sale securities, net of taxes (note 2) (10) (25)
--------- ---------
Total stockholders' equity 46,966 59,774
--------- ---------
Total liabilities and stockholders' equity $ 182,560 $ 191,323
========= =========
</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,
---------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Interest and dividend income:
Loans $ 3,402 $ 3,363 $ 3,522
Securities 8,298 7,548 7,063
Interest-bearing deposits and other 609 883 137
-------- -------- --------
Total interest and dividend income 12,309 11,794 10,722
-------- -------- --------
Interest expense:
Depositor accounts and mortgage escrow deposits 5,431 5,390 4,671
Federal Home Loan Bank advances -- 11 114
-------- -------- --------
Total interest expense 5,431 5,401 4,785
-------- -------- --------
Net interest income 6,878 6,393 5,937
Provision for loan losses (note 3) 143 45 160
-------- -------- --------
Net interest income after provision for loan losses 6,735 6,348 5,777
-------- -------- --------
Non-interest income:
Loan fees and service charges 149 207 201
Other 87 101 76
-------- -------- --------
Total non-interest income 236 308 277
-------- -------- --------
Non-interest expense:
Compensation and benefits (note 7) 1,729 1,383 1,229
Federal deposit insurance:
Regular premiums 185 307 308
Special assessment (note 5) 884 -- --
Occupancy costs (note 9) 341 328 301
Computer service fees 180 179 171
Professional fees 140 137 94
Safekeeping and custodial services 94 93 88
Other 649 380 299
-------- -------- --------
Total non-interest expense 4,202 2,807 2,490
-------- -------- --------
Income before income tax expense and cumulative effect of
change in accounting principle 2,769 3,849 3,564
Income tax expense (note 6) 957 1,628 1,640
-------- -------- --------
Income before cumulative effect of change in accounting principle 1,812 2,221 1,924
Cumulative effect of change in accounting for postretirement health care benefits,
net of taxes (note 7) -- (59) --
-------- -------- --------
Net income $ 1,812 $ 2,162 $ 1,924
======== ======== ========
Earnings per share, from date of conversion (note 8) $ 0.56 $ 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>
Unallocated Unamortized
Common Awards 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, 1994 $ -- $ -- $ -- $ -- $ -- $ 19,267 $ -- $ 19,267
Net income -- -- -- -- -- 1,924 -- 1,924
Net unrealized loss on
available-for-sale securities,
net of taxes:
As of July 1, 1994 -- -- -- -- -- -- (28) (28)
Net decrease during the year -- -- -- -- -- -- 15 15
-------- -------- -------- -------- -------- -------- -------- --------
Balance at June 30, 1995 -- -- -- -- -- 21,191 (13) 21,178
Net income -- -- -- -- -- 2,162 -- 2,162
Dividends paid ($0.09 per share) -- -- -- -- -- (369) -- (369)
Issuance of 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
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,812 $ 2,162 $ 1,924
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 143 45 160
Depreciation and amortization expense 66 66 67
ESOP and RRP expense 436 95 --
Net amortization and accretion of deferred fees, discounts and premiums (122) (186) (138)
Net decrease (increase) in accrued interest receivable 47 (263) 35
Net decrease (increase) in other assets 2 11 (48)
Deferred tax benefit (384) (117) (45)
Net increase in other liabilities 90 423 17
Other adjustments, net 10 35 --
-------- -------- --------
Net cash provided by operating activities 2,100 2,271 1,972
-------- -------- --------
Cash flows from investing activities:
Purchases of securities:
Held-to-maturity (18,422) (44,722) (7,500)
Available-for-sale (1,000) (1,500) --
Proceeds from principal payments, maturities and calls of securities:
Held-to-maturity 21,232 21,068 14,143
Available-for-sale 1,000 1,000 --
Net (disbursements) receipts for loan originations and principal collections (6,261) 1,319 (1,208)
Purchases of Federal Home Loan Bank stock (144) -- (55)
Proceeds from sale of real estate owned -- 163 --
Purchases of office properties and equipment (122) (23) (9)
-------- -------- --------
Net cash (used in) provided by investing activities (3,717) (22,695) 5,371
-------- -------- --------
Cash flows from financing activities:
Net increase (decrease) in depositor accounts 4,114 (2,629) (2,958)
Net (decrease) increase in mortgage escrow deposits (88) (1,159) 139
Proceeds from Federal Home Loan Bank advances -- 7,630 14,100
Repayments of Federal Home Loan Bank advances (500) (7,130) (14,100)
Treasury stock purchases (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 (1,128) (369) --
-------- -------- --------
Net cash (used in) provided by financing activities (11,545) 33,063 (2,819)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (13,162) 12,639 4,524
Cash and cash equivalents at beginning of year 17,320 4,681 157
-------- -------- --------
Cash and cash equivalents at end of year $ 4,158 $ 17,320 $ 4,681
======== ======== ========
Supplemental information:
Interest paid $ 5,468 $ 5,366 $ 4,791
Income taxes paid 1,105 1,722 1,559
Securities purchased, not yet settled 499 -- --
Mortgage loans transferred to real estate owned 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
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities",
prospectively on July 1, 1994. Individual securities are classified as
held-to-maturity securities, trading securities, or available-for-sale
securities. 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.
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.
Effective July 1, 1995, the Company prospectively adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118. Under SFAS No. 114, 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's adoption of these statements
did not affect its overall allowance for loan losses or income recognition
policy.
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 interest income,
22
<PAGE>
Notes to Consolidated Financial Statements (continued)
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.
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, 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.
23
<PAGE>
Notes to Consolidated Financial Statements (continued)
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 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
Earnings per share is reported for periods following the Conversion based on
net income divided by the weighted average number of common shares outstanding
and common stock equivalents. Unallocated ESOP shares that have not been
committed to be released to participants are excluded from outstanding shares
in computing earnings per share.
24
<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
-------- -------- -------- --------
<S> <C> <C> <C> <C>
June 30, 1997 (In thousands)
- -------------
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
-------- -------- -------- --------
Total 116,465 1,214 (235) 117,444
US Agency and other debt securities 9,985 3 (84) 9,904
-------- -------- -------- --------
Total $126,450 $ 1,217 $ (319) $127,348
======== ======== ======== ========
Available-for-Sale Securities
US Agency and other debt securities $ 2,999 $ 1 $ (17) $ 2,983
======== ======== ======== ========
June 30, 1996
- -------------
Held-to-Maturity Securities
Mortgage-backed securities:
Pass-through securities:
Freddie Mac $ 64,437 $ 184 $ (400) $ 64,221
Ginnie Mae 36,240 145 (448) 35,937
Fannie Mae 7,096 4 (144) 6,956
Collateralized mortgage obligations 10,448 18 (205) 10,261
-------- -------- -------- --------
Total 118,221 351 (1,197) 117,375
US Agency and other debt securities 10,979 3 (268) 10,714
-------- -------- -------- --------
Total $129,200 $ 354 $ (1,465) $128,089
======== ======== ======== ========
Available-for-Sale Securities
US Agency and other debt securities $ 2,500 $ 4 $ (45) $ 2,459
======== ======== ======== ========
</TABLE>
Notes to Consolidated Financial Statements (continued)
The amortized cost of securities at June 30, 1997 consisted of approximately
$91.2 million of fixed-rate securities and $38.2 million of adjustable-rate
securities ($89.8 million and $41.9 million, respectively, at June 30, 1996).
Collateralized mortgage obligations at June 30, 1997 consisted of government
agency securities of $17.9 million and privately-issued securities of $124,000
($10.0 million and $475,000, respectively, at June 30, 1996).
The net unrealized loss on available-for-sale securities was $16,000 ($10,000
after taxes) at June 30, 1997 and $41,000 ($25,000 after taxes) at June 30,
1996. Changes in unrealized holding gains and losses resulted in an after-tax
increase (decrease) in stockholders' equity of $15,000 in fiscal 1997,
($12,000) in fiscal 1996 and $15,000 in fiscal 1995. 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 1997, 1996 and 1995.
25
<PAGE>
Notes to Consolidated Financial Statements (continued)
The amortized cost and fair value of debt securities, other than
mortgage-backed securities, are shown below by remaining term to contractual
maturity as of June 30, 1997. Actual maturities may differ from these amounts
because certain issuers have the right to call or prepay their obligations.
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
------------------------- --------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C>
More than one year to five years $4,998 $4,956 $1,500 $1,484
More than five years to ten years 2,988 2,951 -- --
More than ten years 1,999 1,997 1,499 1,499
------ ------ ------ ------
$9,985 $9,904 $2,999 $2,983
====== ====== ====== ======
</TABLE>
3. Loans
Loans at June 30 consist of the following:
1997 1996
-------- --------
Mortgage loans: (In thousands)
One-to-four family $ 44,163 $ 38,644
Multi-family 724 394
Commercial 531 285
Construction 670 579
Construction loans in process (195) (114)
-------- --------
45,893 39,788
-------- --------
Other loans:
Passbook loans and other 341 404
Student loans 102 143
-------- --------
443 547
-------- --------
Total loans 46,336 40,335
Allowance for loan losses (622) (519)
Net deferred loan origination fees (207) (259)
-------- --------
Total loans, net $ 45,507 $ 39,557
======== ========
Total loans (net of construction loans in process) consisted of approximately
$45.2 million of fixed-rate loans and $1.1 million of adjustable-rate loans at
June 30, 1997 ($39.2 million and $1.1 million, respectively, at June 30,
1996). One-to-four family mortgage loans include home equity loans of $2.4
million and $1.0 million at June 30, 1997 and 1996, 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 applies SFAS No. 114 to loans (including participation interests)
that are individually evaluated for collectibility; the standard is not
applied to smaller-balance homogeneous loans (such as individual one-to-four
26
<PAGE>
Notes to Consolidated Financial Statements (continued)
family mortgage loans) that are collectively evaluated for impairment. The
Company's impaired loans at June 30, 1997, as defined under SFAS No. 114,
consisted of the $1.1 million participation interest described below (none at
June 30, 1996). The allowance for loan losses at June 30, 1997 includes an
impairment allowance of $83,000 established in fiscal 1997 with respect to
this participation interest. The Company's average recorded investment in
impaired loans was $1.1 million in fiscal 1997 (none in fiscal 1996).
The Company holds a $1.1 million 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 $74,000 for the year. 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 remained on non-accrual status at June 30, 1997 and interest
payments of $21,000 received in the fourth quarter have been deferred.
There were no other loans on non-accrual status at June 30, 1997 and 1996.
One-to-four family mortgage loans past due more than 90 days but still
accruing interest totaled $930,000 and $1.3 million at June 30, 1997 and 1996,
respectively.
Activity in the allowance for loan losses is summarized as follows for the
years ended June 30:
1997 1996 1995
----- ----- -----
(In thousands)
Balance at beginning of year $ 519 $ 474 $ 336
Provision for losses 143 45 160
Charge-offs (40) -- (22)
----- ----- -----
Balance at end of year $ 622 $ 519 $ 474
===== ===== =====
4. Office Properties and Equipment
A summary of office properties and equipment at June 30 follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Land $ 55 $ 55
Buildings 738 638
Furniture, fixtures and equipment 335 313
Leasehold improvements 216 216
------- -------
1,344 1,222
Less accumulated depreciation and amortization (1,104) (1,038)
------- -------
Office properties and equipment, net $ 240 $ 184
======= =======
</TABLE>
27
<PAGE>
Notes to Consolidated Financial Statements (continued)
5. Depositor Accounts
Depositor accounts at June 30 are summarized below:
<TABLE>
<CAPTION>
1997 1996
--------------------------- ----------------------------
Average Average
Amount Rate Amount Rate
-------- ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Money market demand and NOW $ 10,989 2.85% $ 12,090 2.45%
Regular savings 54,000 3.00 57,664 3.00
Club 717 3.00 725 3.00
-------- --------
65,706 2.97 70,479 2.91
-------- --------
Savings certificates by remaining period to maturity:
Under one year 53,825 5.53 48,026 5.38
One year to under three years 9,707 6.26 5,464 5.54
Three years and over 3,180 6.17 4,335 6.94
-------- --------
66,712 5.66 57,825 5.51
-------- --------
Total $132,418 4.33% $128,304 4.08%
======== ========
</TABLE>
Savings certificates issued in denominations of $100,000 or more totaled $8.8
million and $7.3 million at June 30, 1997 and 1996, respectively.
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.
6. Income Taxes
Income tax expense for the years ended June 30 consisted of the following
components:
1997 1996 1995
------- ------- -------
(In thousands)
Federal:
Current $ 972 $ 1,235 $ 1,184
Deferred 31 (88) (34)
------- ------- -------
1,003 1,147 1,150
------- ------- -------
New York State:
Current 369 510 501
Deferred (415) (29) (11)
------- ------- -------
(46) 481 490
------- ------- -------
Total:
Current 1,341 1,745 1,685
Deferred (384) (117) (45)
------- ------- -------
$ 957 $ 1,628 $ 1,640
======= ======= =======
<PAGE>
Notes to Consolidated Financial Statements (continued)
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:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Tax at Federal statutory rate $ 941 $1,309 $1,212
State taxes, net of Federal tax benefit (30) 317 323
Other, net 46 2 105
------ ------ ------
Actual income tax expense $ 957 $1,628 $1,640
====== ====== ======
</TABLE>
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>
1997 1996
------- -------
Deferred tax assets: (In thousands)
<S> <C> <C>
Capital loss carryforward $ 428 $ 428
Allowance for loan losses 256 213
Loan origination fees 85 107
Other deductible temporary differences 237 123
------- -------
Total gross deferred tax assets 1,006 871
Less valuation allowance (428) (428)
------- -------
Deferred tax assets, net 578 443
------- -------
Deferred tax liabilities:
Tax bad debt reserve in excess of base-year amounts:
Federal (268) (268)
State -- (238)
Other taxable temporary differences (6) (7)
------- -------
Total gross deferred tax liabilities (274) (513)
------- -------
Net deferred tax asset (liability) $ 304 $ (70)
======= =======
</TABLE>
A capital loss carryforward of approximately $1.0 million is available at June
30, 1997 to reduce future capital gains, if any, through 1998. The valuation
allowance for deferred tax assets relates to this unused carryforward. 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
have been 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 July and August 1996. The Federal amendments
include elimination of the percentage-of-taxable-income method for tax years
beginning after December 31, 1995 and imposition of a requirement to recapture
into taxable income (over a six-year period) the bad debt reserves in excess
29
<PAGE>
Notes to Consolidated Financial Statements (continued)
of the base-year amounts. At June 30, 1997, the Bank's tax bad debt reserve
for Federal tax purposes exceeded the base-year reserve by $787,000. Since the
Company had established a deferred tax liability of $268,000 with respect to
this excess reserve, enactment of the recapture requirement did not result in
an adjustment of the Bank's deferred tax accounts. The New York state
amendments redesignate the Bank's state bad debt reserve at December 31, 1995
as the base-year amount and also provide for future additions to the base-year
reserve using the percentage-of-taxable-income method. This change 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.
At June 30, 1997, the Bank's base-year Federal and state tax bad debt reserves
were $4.9 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,
1997, the Bank's unrecognized deferred tax liabilities with respect to the
Federal and state base-year reserves were $1.7 million and $0.6 million,
respectively.
7. 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>
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Accumulated benefit obligation:
Vested $(1,947) $(1,846)
Non-vested (13) (46)
------- -------
Total accumulated benefit obligation (1,960) (1,892)
Effect of future salary increases (265) (234)
------- -------
Projected benefit obligation for service rendered to date (2,225) (2,126)
Plan assets at fair value, primarily cash and short-term investments 1,987 1,690
------- -------
Projected benefit obligation in excess of plan assets (238) (436)
Unrecognized net (gain) loss (84) 74
Unrecognized prior service cost 32 39
Unrecognized net transition obligation 69 84
------- -------
Accrued pension cost $ (221) $ (239)
======= =======
</TABLE>
The unrecognized net transition obligation is being amortized over a period of
approximately 15 years.
30
<PAGE>
Notes to Consolidated Financial Statements (continued)
The components of net pension expense are as follows for the years ended June
30:
1997 1996 1995
----- ----- -----
(In thousands)
Service cost $ 58 $ 60 $ 62
Interest cost 155 149 165
Actual return on plan assets (235) (68) (132)
Net amortization and deferral 110 (59) 25
----- ----- -----
Net pension expense $ 88 $ 82 $ 120
===== ===== =====
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation
were 8.0% and 6.0%, respectively, at June 30, 1997; 7.0% and 5.0%,
respectively, at June 30, 1996; and 8.25% and 6.0%, respectively, at June 30,
1995. 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 and
$29,000 during fiscal 1997 and 1996, respectively. The accumulated benefit
obligation was approximately $62,000 at June 30, 1997, all of which is
unfunded. This amount was determined using a discount rate of 7.75% 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. Postretirement benefit expense was $1,500 in fiscal 1997
and $3,000 in fiscal 1996.
The accumulated postretirement benefit obligation was approximately $100,000
and $95,000 at June 30, 1997 and 1996, respectively, all of which is unfunded.
These amounts were determined using a discount rate of 8.0%. The assumed rate
of increase in future health care costs was 7.5% for fiscal 1997, gradually
decreasing to 5.0% in fiscal 2002 and remaining at that level thereafter. A
one-percentage-point increase in the assumed health care cost trend rate would
increase the accumulated benefit obligation by approximately $6,300 at June
30, 1997.
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,
31
<PAGE>
Notes to Consolidated Financial Statements (continued)
but without an employer matching contribution. Plan expense was $55,000 in
fiscal 1995 and $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 24,599 shares have been
allocated to participants through June 30, 1997. Expense recognized in fiscal
1997 and 1996 with respect to allocated shares amounted to $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 303,381 shares which
have not yet been allocated to participant accounts ($3.0 million at June 30,
1997) is reflected as a reduction to stockholders' equity. The fair value of
these shares was approximately $4.6 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, 1997 with a remaining life of 9.0
years, although no options were exercisable at that date. At June 30, 1997,
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 method to
32
<PAGE>
Notes to Consolidated Financial Statements (continued)
the options granted, net income and earnings per share for fiscal 1997 would
have been $1.7 million and $0.51, respectively, compared to the reported
amounts of $1.8 million and $0.56, respectively.
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 at June 30, 1997 and available for future awards. Unearned
compensation of $1.4 million was recorded with respect to the shares awarded
and $212,000 of that amount was amortized to compensation expense in fiscal
1997.
8. 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
Earnings per share ("EPS") of $0.56 for fiscal 1997 and $0.36 for the
six-month period ended June 30, 1996 were based on weighted-average common and
common equivalent shares of 3,220,785 and 3,776,387, respectively. EPS data
has not been presented for periods prior to the Conversion.
Capital Distributions
The Bank may not declare or pay cash dividends on or repurchase any of its
shares of common stock if the effect thereof would cause equity to be reduced
below applicable regulatory capital requirements or the amount required to be
maintained for the liquidation account. The OTS capital distribution
regulations applicable to savings institutions (such as the Bank) that meet
their regulatory capital requirements, generally limit dividend payments in
33
<PAGE>
Notes to Consolidated Financial Statements (continued)
any one year to the greater of (i) 100% of year-to-date net income plus an
amount that would reduce surplus capital by one-half or (ii) 75% of net income
for the most recent four quarters. Surplus capital is the excess of actual
capital at the beginning of the year over the institution's minimum regulatory
capital requirement. The Bank did not pay any dividends to the Holding Company
during fiscal 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. At June 30, 1997, an additional 66,206 shares were authorized for
repurchase prior to December 1997.
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, 1997 and 1996, 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.
34
<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, 1997 and 1996, compared to the OTS requirements for classification
as a well-capitalized institution and for minimum capital adequacy:
<TABLE>
<CAPTION>
For Classification as Minimum Capital
Bank Actual Well Capitalized Adequacy
---------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- --------- ----- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
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
June 30, 1996
Tangible capital $ 43,119 24.7 % N/A N/A $ 2,619 1.5%
Tier I (core) capital 43,119 24.7 $ 8,731 5.0% 5,239 3.0
Risk-based capital:
Tier I 43,119 103.2 2,508 6.0 N/A N/A
Total 43,638 104.4 4,180 10.0 3,344 8.0
</TABLE>
9. 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 $3.6 million and $4.4 million at June 30, 1997 and 1996,
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.
Federal Home Loan Bank ("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 $43.6 million at June 30, 1997. 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.
35
<PAGE>
Notes to Consolidated Financial Statements (continued)
At June 30, 1996, outstanding FHLB borrowings of $500,000 are included in
other liabilities in the consolidated balance sheet. These advances were
repaid on July 1, 1996. There were no outstanding FHLB advances at June 30,
1997.
Lease Commitments
At June 30, 1997, the Company was obligated under two noncancellable operating
leases for office space. These leases contain escalation clauses providing for
increased rentals and renewal options. Rent expense under operating leases was
approximately $60,000, $63,000 and $57,000 for the years ended June 30, 1997,
1996 and 1995, respectively. The future minimum lease payments under operating
leases at June 30, 1997 were $85,000 for fiscal 1998; $99,000 annually for
fiscal years 1999 - 2002; and an aggregate of $1.3 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.
10. Fair Value of Financial Instruments
SFAS No. 107 requires disclosures about the fair value of financial
instruments for which it is practicable to estimate fair value, whether or not
such financial instruments are recognized on the balance sheet. Fair value is
defined by SFAS No. 107 as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation.
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.
36
<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>
1997 1996
---------------------------- -----------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------- ---------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 478 $ 478 $ 1,020 $ 1,020
Interest-bearing deposits 3,680 3,680 16,300 16,300
Securities 129,433 130,331 131,659 130,548
Loans 45,507 45,717 39,557 39,527
FHLB stock 1,463 1,463 1,319 1,319
Accrued interest receivable 1,064 1,064 1,111 1,111
Financial liabilities:
Savings certificates 66,712 66,640 57,825 57,899
Other deposit accounts 65,706 65,706 70,479 70,479
</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.
37
<PAGE>
Notes to Consolidated Financial Statements (continued)
Other Financial Instruments
The other financial assets and liabilities shown in the preceding table have
fair values which approximate the respective carrying amounts because the
instruments are payable on demand or have short-term maturities and present
relatively low credit risk and interest rate risk. Fair values of the loan
origination commitments described in note 9 were estimated based on an
analysis of the interest rates and fees currently charged to enter into
similar transactions, considering the remaining terms of the instruments and
the creditworthiness of the potential borrowers. At June 30, 1997 and 1996,
the fair values of these financial instruments approximated the related
carrying values which were not significant.
11. Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share," which requires presentation of both basic
EPS and diluted EPS by all entities with complex capital structures. Basic EPS
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution which could occur if
securities or other contracts to issue common stock (such as the Company's
stock options) were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the entity.
As required, the Company will adopt SFAS No. 128 in its fiscal quarter ending
December 31, 1997 and will restate all prior-period EPS data at that time.
In June 1997, the 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 an
amount representing total comprehensive income for the period. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997.
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.
Management does not anticipate that the adoption of these standards will have
a material impact on the Company's consolidated financial statements.
38
<PAGE>
Notes to Consolidated Financial Statements (continued)
12. Parent Company Condensed Financial Information
Set forth below are the condensed balance sheets of Peekskill Financial
Corporation as of June 30,1997 and 1996, and its condensed statements of
income and cash flows for the periods then ended:
June 30,
--------------------
1997 1996
------- -------
Condensed Balance Sheets (In thousands)
Assets:
Cash $ 172 $ 433
Interest-bearing deposits 2,180 16,300
Investment in subsidiary 44,687 43,094
Other assets 17 3
------- -------
Total $47,056 $59,830
======= =======
Liabilities and Stockholders' Equity:
Liabilities $ 9 $ 56
Stockholders' equity 46,966 59,774
------- -------
Total $47,056 $59,830
======= =======
<TABLE>
<CAPTION>
Year ended June 30,
-------------------
1997 1996*
------ ------
<S> <C> <C>
Condensed Statements of Income (In thousands)
Interest income $ 611 $ 534
Non-interest expense 187 85
------ -----
Income before income tax expense and equity in undistributed earnings of subsidiary 424 449
Income tax expense 195 215
------ -----
Income before equity in undistributed earnings of subsidiary 229 234
Equity in undistributed earnings of subsidiary 1,583 1.140
------ -----
Net income $1,812 1,374
====== ======
</TABLE>
* From the date of Conversion, December 29, 1995.
39
<PAGE>
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------
1997 1996*
-------- --------
<S> <C> <C>
Condensed Statements of Cash Flow (In thousands)
Cash flows from operating activities:
Net income $ 1,812 $ 1,374
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiary (1,583) (1,140)
Other adjustments, net 461 148
-------- --------
Net cash provided by operating activities 690 382
-------- --------
Cash flows from investing activities:
Purchase of subsidiary's common stock -- (20,000)
-------- --------
Cash flows from financing activities:
Treasury stock purchases (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 (1,128) (369)
-------- --------
Net cash (used in) provided by financing activities (15,071) 36,351
-------- --------
Net (decrease) increase in cash and cash equivalents (14,381) 16,733
Cash and cash equivalents at beginning of period 16,733 --
-------- --------
Cash and cash equivalents at end of period $ 2,352 $ 16,733
======== ========
</TABLE>
* From the date of Conversion, December 29, 1995.
40
<PAGE>
Notes to Consolidated Financial Statements (continued)
13. Selected Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for fiscal 1997 and 1996 is shown
below:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------
September 30 December 31 March 31 June 30
------------ ----------- -------- -------
<S> <C> <C> <C> <C>
Fiscal 1997 (In thousands, except per share data)
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 $ 0.06 $ 0.16 $ 0.17 $ 0.17
======= ======= ======= =======
Fiscal 1996
Interest and dividend income $ 2,687 $ 2,789 $ 3,136 $ 3,182
Interest expense 1,365 1,407 1,316 1,313
------- ------- ------- -------
Net interest income 1,322 1,382 1,820 1,869
Provision for loan losses 15 15 5 10
Non-interest income 80 69 68 91
Non-interest expense 640 736 680 751
------- ------- ------- -------
Income before income tax expense and cumulative
effect of change in accounting principle 747 700 1,203 1,199
Income tax expense 285 315 532 496
------- ------- ------- -------
Income before cumulative effect of change in
accounting principle 462 385 671 703
Cumulative effect of change in accounting principle (59) -- -- --
------- ------- ------- -------
Net income $ 403 $ 385 $ 671 $ 703
======= ======= ======= =======
Earnings per share $ 0.18 $ 0.18
======= =======
</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 6.
41
<PAGE>
Corporate Information
Directors
Eldorus Maynard, Chairman of the Board
Dominick Bertoline
Edward H. Dwyer
John Patrick Fay
Robert E. Flower
William J. LaCalamito
Officers
Eldorus Maynard
Chairman of the Board and Chief Executive Officer
William LaCalamito
President and Chief Operating Officer
Corporate Offices
Peekskill Financial Corporation
1019 Park Street
Peekskill, NY 10566
(914) 737-2777
Annual Meeting
The annual meeting of stockholders will be held on October 22, 1997 at 3:30
p.m. at the Company's offices at 1019 Park Street, Peekskill, New York.
Form 10-K
For the 1997 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
42
<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 637 at June 30, 1997.
The high and low sales price of the Company's common stock in the
Over-the-Counter market of the NASDAQ National Market System for the quarters
indicated were as follows:
<TABLE>
<CAPTION>
Closing Sale Price
Cash --------------------------------------------------------------
Dividends End of
Quarter ended Declared High Low Period
- ------------- ------------ ------------ ------------- ------------------
<S> <C> <C> <C> <C>
March 31, 1996 --- $12.500 $11.000 $11.625
June 30, 1996 $0.09 12.125 11.125 11.750
September 30, 1996 0.09 14.000 11.250 13.750
December 31, 1996 0.09 14.875 13.250 14.250
March 31, 1997 0.09 15.500 13.500 13.875
June 30, 1997 0.09 15.250 13.375 15.000
</TABLE>
These quotations represent prices between dealers and do not include retail
markup, markdown or commission. They do not necessarily represent actual
transactions.
43
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Subsidiary or Percent of State of
Parent Organization Ownership Incorporation
- ------ ------------ --------- -------------
Peekskill Financial First Federal Savings Bank 100% Federal
Corporation
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 478
<INT-BEARING-DEPOSITS> 3,680
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,983
<INVESTMENTS-CARRYING> 126,450
<INVESTMENTS-MARKET> 127,348
<LOANS> 46,129
<ALLOWANCE> (622)
<TOTAL-ASSETS> 182,560
<DEPOSITS> 132,418
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,176
<LONG-TERM> 0
0
0
<COMMON> 41
<OTHER-SE> 46,926
<TOTAL-LIABILITIES-AND-EQUITY> 182,560
<INTEREST-LOAN> 3,402
<INTEREST-INVEST> 8,292
<INTEREST-OTHER> 609
<INTEREST-TOTAL> 12,309
<INTEREST-DEPOSIT> 5,431
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 6,878
<LOAN-LOSSES> 143
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,202
<INCOME-PRETAX> 2,769
<INCOME-PRE-EXTRAORDINARY> 2,769
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,812
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.56
<YIELD-ACTUAL> 3.76
<LOANS-NON> 1,074
<LOANS-PAST> 930
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 519
<CHARGE-OFFS> 40
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 622
<ALLOWANCE-DOMESTIC> 622
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
