UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1999
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1019 Park Street, Peekskill, New York 10566
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 737-2777
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of September 14, 1999, there were issued and outstanding 1,828,228
shares of the Registrant's Common Stock. The aggregate market value of the
voting stock held by non-affiliates of the Registrant, computed by reference to
the average of the closing bid and asked prices of such stock on the Nasdaq
National Market System as of September 14, 1999, was approximately $24.0
million.
DOCUMENTS INCORPORATED BY REFERENCE
PART II of Form 10-K--Annual Report to Stockholders for the fiscal year ended
June 30, 1999.
PART III of Form 10-K--Proxy Statement for the Annual Meeting of Stockholders
for the fiscal year ended June 30, 1999.
<PAGE>
PEEKSKILL FINANCIAL CORPORATION
Annual Report on Form 10-K
Page
PART I
Item 1. Business 3
Item 2. Properties 34
Item 3. Legal Proceedings 35
Item 4. Submission of Matters to a Vote of Security Holders 35
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters 35
Item 6. Selected Financial Data 35
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 35
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 35
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 35
PART III
Item 10. Directors and Executive Officers of the Registrant 36
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners and Management 36
Item 13. Certain Relationships and Related Transactions 36
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 37
Signatures 39
<PAGE>
PART I
Item 1. Business
General
Peekskill Financial Corporation ("Peekskill" or the "Company") was
formed in 1995 at the direction of First Federal Savings Bank ("First Federal"
or the "Bank"), formerly First Federal Savings and Loan Association of
Peekskill, for the purpose of becoming a unitary savings and loan holding
company and owning all of the outstanding stock of the Bank issued on December
29, 1995 in connection with the Bank's conversion from the mutual to stock form
of organization (the "Conversion"). The Company is incorporated under the laws
of the State of Delaware and is authorized to do business in the State of New
York, and generally is authorized to engage in any activity that is permitted by
the Delaware General Corporation Law. Unless the context otherwise requires, all
references herein to the Bank or the Company include both entities on a
consolidated basis.
At June 30, 1999, the Company had total assets of $206.9 million,
deposits of $148.7 million and stockholders' equity of $27.4 million. The
Company's Common Stock is quoted on the Nasdaq National Market System under the
symbol "PEEK."
First Federal was originally organized as a state chartered savings and
loan association in 1924. In 1954, it converted to a federally chartered savings
and loan association. In December 1995, the Bank became a federally chartered
savings bank. First Federal serves the financial needs of communities in its
market area through its main office located at 1019 Park Street, Peekskill, New
York and branch offices located at 1961 Commerce Street in Yorktown Heights, New
York and Cortlandt Town Center on Route 6 in Mohegan Lake, New York.
First Federal's business involves attracting deposits from customers in
its market area and investing such funds primarily in mortgage-backed securities
and one-to-four family residential mortgages. At June 30, 1999, the Bank had
total assets of $206.9 million consisting primarily of $110.7 million of
mortgage-backed securities and $59.8 million of one-to-four family mortgage
loans representing 91.9% of the total loan portfolio. The Bank also held other
debt securities (consisting primarily of U.S. Government Agency obligations)
with a carrying value of $24.1 million at June 30, 1999.
The Bank has sought to enhance its net income through the adoption of a
strategy designed to maintain capital in excess of regulatory requirements,
limit loan delinquencies and enhance net interest spread while managing interest
rate risk. This strategy involves (i) maintaining a substantial portfolio of
mortgage-backed and other debt securities having terms to repricing of seven
years or less, (ii) controlling operating expenses, (iii) focusing on the
origination of one-to-four family residential loans, (iv) limiting other types
of loans that could increase credit risk or operating costs, and (v) using
customer service to build and maintain a substantial level of core deposit
accounts.
3
<PAGE>
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.
The Company and the Bank are regulated by the Office of Thrift
Supervision ("OTS"). The Bank is a member of the Federal Home Loan Bank System
("FHLB System") and is a stockholder in the Federal Home Loan Bank ("FHLB") of
New York. The Bank is also a member of the Savings Association Insurance Fund
("SAIF") and its deposit accounts are insured up to applicable limits by the
Federal Deposit Insurance Corporation ("FDIC").
Forward-Looking Statements
The Company has made, and may continue to make, various forward-looking
statements with respect to earnings, credit quality and other financial and
business matters for periods subsequent to June 30, 1999. The Company cautions
that these forward-looking statements are subject to numerous assumptions, risks
and uncertainties, and that statements for subsequent periods are subject to
greater uncertainty because of the increased likelihood of changes in underlying
factors and assumptions. Actual results could differ materially from
forward-looking statements.
In addition to those factors previously disclosed by the Company and
those factors identified elsewhere herein, the following factors could cause
actual results to differ materially from such forward-looking statements:
pricing pressures on loan and deposit products; actions of competitors; changes
in local and national economic conditions; customer deposit disintermediation;
changes in customers' acceptance of the Company's products and services; the
extent and timing of legislative and regulatory actions and reforms; and Year
2000 related costs and issues substantially different from those now
anticipated.
The Company's forward-looking statements speak only as of the date on
which such statements are made. By making any forward-looking statements, the
Company assumes no duty to update them to reflect new, changing or unanticipated
events or circumstances.
Competition
The Company faces significant competition for the loans it originates
and the deposits it accepts. The Company's market area has a high density of
financial institutions, from small community banks to branches of large
non-local institutions, all of which compete with the Company to varying
degrees. The Company's competition for loans comes principally from savings
banks, savings and loan associations, commercial banks, mortgage banking
companies and other institutional lenders. The Company successfully competes for
loans by emphasizing the quality of its loan services and by charging loan fees
and interest rates that are generally competitive within its market area.
Changes in the demand for loans relative to the availability of credit may
affect the level of competition from financial institutions that may be more
willing than the Company or its competitors to make credit available but that
have not generally engaged in lending activities in the Company's market area in
the past. The Company's most direct competition for deposits has historically
come from savings banks, savings and loan associations, and commercial banks, as
well as money market funds, stock and bond mutual funds, and brokerage
companies. The Company
4
<PAGE>
competes for deposits by emphasizing product delivery and customer service, and
offering products 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 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, 1999, the Company had net loans of $63.4 million, which
represents 30.7% of total assets. The percentage distribution of the loan
portfolio at that date was as follows: 91.9% of one-to-four family mortgage
loans, the majority of which are owner occupied; 3.7% of commercial mortgage
loans; 2.6% of construction loans; 1.0% of multi-family mortgage loans; and 0.8%
of consumer loans.
5
<PAGE>
The following table sets forth the composition of the loan portfolio
in dollar amounts and percentages as of the dates indicated. In addition, the
table sets forth the loan portfolio by fixed- and adjustable-rate balances as of
the dates indicated.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ---------------- ---------------- ---------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- ------- -------- -------- ------- ------- -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One-to-four family................... $59,802 91.9% $46,271 95.1% $44,163 94.9% $38,644 95.5% $40,112 95.2%
Multi-family......................... 619 1.0 674 1.4 724 1.6 394 1.0 426 1.0
Commercial........................... 2,389 3.7 507 1.0 531 1.1 285 0.7 308 0.7
Construction......................... 1,709 2.6 676 1.4 670 1.4 579 1.4 725 1.7
------- ----- ------- ---- ------- ---- ------- ----- ------- -----
Total real estate loans.......... 64,519 99.2 48,128 98.9 46,088 99.0 39,902 98.6 41,571 98.6
------- ----- ------- ---- ------- ---- -------- ----- ------- -----
Other Loans:
Passbook loans and other............ 465 0.7 460 1.0 341 0.8 404 1.0 356 0.9
Student............................. 77 0.1 63 0.1 102 0.2 143 0.4 215 0.5
------- ----- ------- ----- ------- ----- -------- ----- ------- -----
Total consumer loans............. 542 0.8 523 1.1 443 1.0 547 1.4 571 1.4
------- ----- ------- ----- ------- ----- -------- ----- ------- -----
Total loans...................... 65,061 100.0% 48,651 100.0% 46,531 100.0% 40,449 100.0% 42,142 100.0%
===== ===== ===== ===== =====
Less:
Construction loans in process........ (651) (112) (195) (114) (273)
Allowance for loan losses............ (742) (682) (622) (519) (474)
Net deferred loan origination fees .. (232) (226) (207) (259) (335)
------- ------- ------- ------- -------
Total loans, net..................... $63,436 $47,631 $45,507 $39,557 $41,060
======= ======= ======= ======= =======
Fixed-Rate Loans:
Real estate loans................... $63,876 98.2% $47,252 97.1% $45,015 96.7% $38,770 95.8% $40,297 95.6%
Other loans......................... 542 0.8 523 1.1 443 1.0 547 1.4 571 1.4
------- ----- ------- ----- ------- ---- ------- ---- ------- -----
Total fixed-rate loans............ 64,418 99.0 47,775 98.2 45,458 97.7 39,317 97.2 40,868 97.0
Adjustable-Rate Loans:
Real estate loans................... 643 1.0 876 1.8 1,073 2.3 1,132 2.8 1,274 3.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans....................... $65,061 100.0% $48,651 100.0% $46,531 100.0% $40,449 100.0% $42,142 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
6
<PAGE>
Loan Maturities. The following table shows the contractual maturity of
the loan portfolio at June 30, 1999. All loans (including adjustable-rate loans)
are shown as maturing in the period that includes the final contractual due
date, as the table does not reflect the effects of periodic amortization
payments, possible prepayments or enforcement of due-on-sale clauses.
Due in
------------------------------------------
Less than More than 1 More than
1 Year Year to 5 Years 5 Years Total
--------- --------------- --------- -----
(In thousands)
Mortgage loans:
One-to-four family............... $ 140 $4,478 $55,184 $59,802
Multi-family..................... 281 --- 338 619
Commercial....................... 204 --- 2,185 2,389
Construction..................... 1,709 --- --- 1,709
------ ------ ------- -------
Total mortgage loans........... 2,334 4,478 57,707 64,519
Other loans........................ 500 42 --- 542
------ ------ ------- -------
Total loans.................... $2,834 $4,520 $57,707 $65,061
====== ====== ======= =======
The following table sets forth, by type of interest rate, the dollar
amounts in each loan category at June 30, 1999 that are contractually due in
more than one year.
Fixed Adjustable Total
-------------------------------------
(In thousands)
Mortgage loans:
One-to-four family........... $59,019 $643 $59,662
Multi-family................. 338 --- 338
Commercial................... 2,185 --- 2,185
------- ---- -------
Total mortgage loans....... 61,542 643 62,185
Other loans.................... 42 --- 42
------- ---- -------
Total loans................ $61,584 $643 $62,227
======= ==== =======
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, 1999, based on the 15% limitation, the Bank's
loans-to-one borrower limit was $4.1 million and the largest dollar amount
outstanding to one borrower, or group of related borrowers, was $626,000. These
loans, which are secured by one-to-four family properties in Westchester County,
New York, were performing in accordance with their contractual terms at June 30,
1999.
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 by independent appraisers (consistent with the Bank's
appraisal policy). The loan applications are designed primarily to determine the
borrower's ability to repay and the more significant items on the application
are verified through use of credit reports, financial statements, tax returns
and/or confirmations.
Under the Bank's loan policy, the employee processing an application is
responsible for ensuring that all documentation is obtained prior to the
submission of the application to an officer for approval. In addition, an
officer verifies that the application meets the Bank's underwriting guidelines
described below. All mortgage loans must be approved by the Bank's Executive
Committee or the Board of Directors. Various officers of the Bank have
individual loan approval authority for other loans.
Generally, the Bank requires title insurance on properties securing 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, 1999,
$59.8 million, or 91.9%, 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 a limited
number of loans originated for the State of New York Mortgage Agency ("SONYMA")
which are sold to SONYMA at closing. In order to supplement one-to-four family
residential loan products, the Bank from time to time has purchased one-to-four
family residential loan participations, although it has not done so in recent
years. However, depending on future market conditions, it may do so in the
future.
The Bank currently offers conventional fixed-rate loans with maximum
terms of up to 30 years. The interest rate on such loans is generally based on
competitive factors. The Bank does not offer adjustable-rate residential loans,
although it may do so in the future, depending on market conditions.
In underwriting one-to-four family residential real estate loans, the
Bank evaluates the borrower's ability to make principal, interest and escrow
payments, the value of the property that will secure the loan, the loan-to-value
ratio and debt-to-income ratios. First Federal originates residential mortgage
loans with loan-to-value ratios of up to 90% for owner-occupied homes. For
mortgage loans with loan-to-value ratios greater than 80%, the Bank originates
the loans with private mortgage insurance to reduce the Bank's exposure to 80%
or less.
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, 1999, the Bank had $1.7
million of outstanding home equity loans (included in total one-to-four family
mortgage loans).
Multi-Family and Commercial Real Estate Lending. At June 30, 1999, the
Bank had $2.4 million in commercial real estate loans, representing 3.7% of the
total loan portfolio, and $619,000 in multi-family loans, or 1.0% 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 participation interests in nine loans (eight of these interests were
purchased in fiscal year 1999) and three Bank-originated loans. At June 30,
1999, all of the Bank's multi-family and commercial real estate loans were
performing in accordance with their contractual terms.
The $1.9 million increase in commercial loans, from $507,000 at June
30, 1998 to $2.4 million at June 30, 1999, was due primarily to the Company
purchased a $1.6 million participation interest in eight commercial loans
originated by another institution. The loans comply with the Bank's underwriting
standards.
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 continue to engage in multi-family and commercial
real estate lending from time to time in the future, it anticipates that future
volume will be modest.
Construction Lending. The Bank makes construction loans to individuals
for the construction of their primary or secondary residences and occasionally
to builders for the construction of new residences.
Loans to individuals for the construction of their residences typically
have terms of up to 30 years and are structured to provide both construction and
"permanent" financing. The borrower makes interest-only payments during the
construction period. Residential construction loans are generally underwritten
pursuant to the same guidelines used for originating conventional permanent
residential loans. At June 30, 1999, the Bank had $957,000 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, 1999, the Bank had four loans of this type aggregating $752,000.
While the Bank may continue to 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, 1999, other loans
totaled $542,000 or 0.8% of total loans outstanding. In the future, the Bank may
expand its consumer lending somewhat to increase home improvement loans.
Originations and Repayments of Loans. Real estate loans are originated
by First Federal's loan officers. In addition, in the future, the Bank may
utilize outside mortgage loan brokers in an attempt to increase loan production,
although there are no specific plans to do so at this time. Loan applications
are taken at each of First Federal's offices and processed at the main office.
The Bank's ability to originate loans is dependent upon competition and
customer demand for loans in its market area. Demand is affected by both the
local economy and the interest rate environment. See "Competition" and "Market
Area." Historically, virtually all loans originated by First Federal have been
retained in the portfolio.
10
<PAGE>
The following table shows the loan origination and repayment activities
of the Bank for the periods indicated.
Year Ended June 30,
--------------------------
1999 1998 1997
------- ------- -------
(In thousands)
Originations by type:
Mortgage loans:
One-to-four family.................. $20,765 $ 9,161 $11,144
Multi-family........................ --- --- 364
Commercial.......................... 1,942 --- 276
Construction........................ 1,720 746 972
Other loans........................... 446 479 529
------- ------- -------
Total loans originated (1).......... 24,873 10,386 13,285
------- ------- -------
Principal Repayments:
Mortgage loans:
One-to-four family.................. (7,234) (6,806) (5,405)
Multi-family........................ (55) (50) (34)
Commercial.......................... (60) (24) (30)
Construction........................ (687) (740) (881)
Other loans........................... (427) (399) (633)
------- ------- -------
Total principal repayments.......... (8,463) (8,091) (6,983)
------- ------- -------
Loans transferred to real estate owned.. --- (247) (220)
------- ------- -------
Net increase in total loans......... $16,410 $ 2,120 $ 6,082
======= ======= =======
(1) Amount for fiscal 1999 includes $1.6 million for purchases of eight
participation interests in commercial mortgage loans originated by other
lenders.
Asset Quality
Loan Delinquencies. When a borrower fails to make a required payment on
a loan, the Bank attempts to cure the delinquency by contacting the borrower. A
late notice is sent on all loans over 15 days delinquent. Additional written and
verbal contacts may be made with the borrower between 30 and 60 days after the
due date. If the loan is contractually delinquent 90 days, the Bank usually
sends a 30-day demand letter to the borrower and, after the loan is
contractually delinquent 120 days, institutes appropriate action to foreclose on
the property. If foreclosed, the property is sold at auction and may be
purchased by the Bank.
Real estate acquired by First Federal as a result of foreclosure or by
deed in lieu of foreclosure is classified as real estate owned until it is sold.
When a property is acquired or expected to be acquired by foreclosure or deed in
lieu of foreclosure, it is recorded at estimated fair value less the estimated
cost of disposition, with the resulting write-down charged to the allowance for
loan losses. After acquisition, all costs incurred in maintaining the property
are expensed. Costs relating to the development and improvement of the property,
however, are capitalized.
11
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The following table sets forth information concerning the Bank's loan
delinquencies at June 30, 1999 and 1998:
Loans Delinquent For:
---------------------------------------- Total Delinquent
60-89 Days 90 Days and Over Loans
---------------- ---------------------- ------------------
Number Amount Number (1) Amount (1) Number Amount
------- -------- ----------- ---------- -------- ---------
(Dollars in thousands)
One-to-four family
real estate loans:
June 30, 1999 3 $ 97 15 $1,130 18 $1,227
June 30, 1998 7 $ 313 16 $1,491 23 $1,804
(1) Includes three participation interests at June 30, 1999 for $316,000 and
six participation interests at June 30, 1998 for $876,000 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 probability of loss. An
asset classified as loss is considered uncollectible and of such little value
that continuance as an asset on the balance sheet of the institution is not
warranted. Assets classified as substandard or doubtful require the institution
to establish prudent general allowances for loan losses. If an asset or portion
thereof is classified as loss, the institution must either establish specific
allowances for loan losses equal to 100% of the portion of the asset classified
as loss, or charge off such amount. If an institution does not agree with an
examiner's classification of an asset, it may appeal this determination to the
District Director of the OTS. On the basis of management's review, the Bank
classified $1.1 million of loans as substandard at June 30, 1999. There were no
assets classified as doubtful or loss at that date. The foregoing asset
classifications are generally consistent with those made by the OTS.
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<PAGE>
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets at the dates indicated. Loans are placed on
non-accrual status when the collection of principal and/or interest becomes
doubtful. Real estate owned represents properties acquired in settlement of
loans.
June 30,
-------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
Accruing loans past due more than 90 days:
One-to-four family mortgage loans....... $432 $370 $930 $1,252 $2,096
Non-accrual loans:
One-to-four family mortgage loans....... 382 245 --- --- ---
Participation interests in one-to-four
family mortgage loans................... 316 876 1,074 --- ---
------ ------ ------ ------ ------
Total non-performing loans................ 1,130 1,491 2,004 1,252 2,096
Real estate owned:
Single-family properties................ --- 94 220 --- ---
------ ------ ------ ------ ------
Total non-performing assets............... $1,130 $1,585 $2,224 $1,252 $2,096
====== ====== ====== ====== ======
Total as a percentage of total assets..... 0.6% 0.8% 1.2% 0.7% 1.3%
=== === === === ===
As of June 30, 1999, other than the participation interests discussed
below, the Bank's largest non-performing loan had a carrying value of $159,000.
Included in the Company's loan portfolio are certain participation
interests in loans originated by Thrift Association Service Corporation ("TASCO
Loans") for which the FDIC, as a servicer of these loans, disputed its
obligation to pass-through certain principal and interest payments whether or
not such amounts are collected from the borrowers. The FDIC suspended payments
beginning in 1996, but resumed making certain payments in 1997 and has continued
to do so. As a result, interest payments of $44,000 received in fiscal 1999 were
recognized as income on a cash basis. Foregone interest income was approximately
$22,000, $76,000 and $74,000 in fiscal 1999, 1998 and 1997, respectively.
Interest income for fiscal 1997 was also reduced by the reversal of $67,000 in
interest previously received on the TASCO Loans.
The Company's participation interests in the TASCO Loans totaled
$643,000 and $876,000 at June 30, 1999 and 1998, respectively. The decrease
during fiscal 1999 reflects current year principal payments, as well as
principal reductions from the reclassification of $143,000 in interest payments
deferred in fiscal 1998 and 1997. Based on the present payment status of the
loans underlying the participation interests, management has classified
participation interests of $316,000 as non-performing at June 30, 1999. All
participation interests were classified as non-performing at June 30, 1998.
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.
13
<PAGE>
Other Loans of Concern. As of June 30, 1999, there were no loans (other
than non-performing loans) with respect to which known information about the
possible credit problems of the borrowers or the cash flows of the security
properties have caused management to have concerns as to the ability of the
borrowers to comply with present loan repayment terms and which may result in
the future inclusion of such loans in the non-performing asset categories.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses charged to earnings based on management's
evaluation of the risk inherent in the loan portfolio. The allowance is
established as an amount that management believes will be adequate to absorb
probable losses on existing loans. The allowance for loan losses consists of
amounts specifically allocated to non-performing loans and potential problem
loans (if any) as well as allowances determined for each major loan category.
Loan categories such as single-family residential mortgages and consumer loans
are generally evaluated on an aggregate or "pool" basis by applying loss factors
to the current balances of the various loan categories. The loss factors are
determined by management based on an evaluation of historical loss experience,
delinquency trends, volume and type of lending conducted, and the current
economic conditions in the Bank's market area.
While management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen market conditions could
result in adjustments to the allowance for loan losses, and net earnings could
be significantly affected, if circumstances differ substantially from the
assumptions used in making the final determination. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on their
judgments of information available to them at the time of examination.
The following table sets forth activity in the Bank's allowance for
loan losses for the periods indicated.
Year Ended June 30,
------------------------------------
1999 1998 1997 1996 1995
----- ------ ----- ------ ------
(Dollars in thousands)
Balance at beginning of year......... $682 $622 $519 $474 $336
Provision for loan losses............ 60 60 143 45 160
Charge-offs:
One-to-four family mortgage loans.. --- --- (40) --- (22)
Balance at end of year............... $742 $682 $622 $519 $474
==== ==== ==== ==== ====
Allowance for loan losses to:
Non-performing loans .............. 65.7% 45.7% 31.0% 41.5% 22.6%
Total loans, net .................. 1.2 1.4 1.4 1.3 1.2
14
<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,
-----------------------------------------------------------------------------------
1999 1998 1997
--------------------------- --------------------------- ---------------------------
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. $671 $59,802 91.9% $682 $46,271 95.1% $622 $44,163 94.9%
Multi-family....... 6 619 1.0 --- 674 1.4 --- 724 1.6
Commercial......... 48 2,389 3.7 --- 507 1.0 --- 531 1.1
Construction....... 17 1,709 2.6 --- 676 1.4 --- 670 1.4
Other.............. --- 542 0.8 --- 523 1.1 --- 443 1.0
---- ------- ----- ---- ------- ----- ---- ------- -----
Total.......... $742 $65,061 100.0% $682 $48,651 100.0% $622 $46,531 100.0%
==== ======= ===== ==== ======= ===== ==== ======= =====
</TABLE>
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------
1996 1995
--------------------------- ---------------------------
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
--------- -------- -------- --------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One-to-four family. $519 $38,644 95.5% $474 $ --- 95.2%
Multi-family....... --- 394 1.0 --- 426 1.0
Commercial......... --- 285 0.7 --- 308 0.7
Construction....... --- 579 1.4 --- 725 1.7
Other.............. --- 547 1.4 --- 571 1.4
---- ------- ----- ---- ------- -----
Total.......... $519 $40,449 100.0% $474 $42,142 100.0%
==== ======= ===== ==== ======= =====
</TABLE>
Investment Activities
General. The Bank utilizes mortgage-backed and other debt securities in
virtually all aspects of its asset/liability management strategy. In making
investment decisions, management considers, among other things, the Bank's yield
and interest rate objectives, its interest rate risk and credit risk position,
and its liquidity and cash flow. All investment transactions are ratified by the
Bank's Board of Directors or Executive Committee.
First Federal must maintain minimum levels of investments that qualify
as liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Cash flow projections are reviewed and
updated regularly to assure that adequate liquidity is maintained. The Bank's
level of liquidity is a result of management's asset/liability strategy. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Interest Rate Risk Management" in the Annual Report to Stockholders
attached hereto as Exhibit 13 and "Regulation - Liquidity."
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain savings certificates of insured
banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities, and mutual funds whose assets
conform to the investments that a federally chartered savings institution is
otherwise authorized to make directly.
15
<PAGE>
Securities Portfolio Composition. The following table sets forth the
composition of the Bank's securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------
1999 1998 1997
----------------- ------------------- --------------------
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................ $27,642 $27,866 $43,258 $43,806 $57,834 $57,910
Ginnie Mae................. 31,403 31,836 40,767 41,392 32,526 33,360
Fannie Mae................. 9,269 9,132 7,370 7,429 8,056 8,030
CMOs.......................... 42,389 41,741 36,065 36,267 18,049 18,144
-------- -------- -------- -------- -------- --------
110,703 110,575 127,460 128,894 116,465 117,444
U.S. Government Agency and other
debt securities................. 8,419 8,100 7,986 7,989 9,985 9,904
-------- -------- -------- -------- -------- --------
Total held-to-maturity....... 119,122 118,675 135,446 136,883 126,450 127,348
Available-for-sale:
U.S. Government Agency and other
debt securities................. 16,500 15,673 8,500 8,498 2,999 2,983
-------- -------- -------- -------- -------- --------
Total securities.............. $135,622 $134,348 $143,946 $145,381 $129,449 $130,331
======== ======== ======== ======== ======== ========
</TABLE>
Mortgage-Backed Securities. The Bank invests in mortgage-backed
pass-through securities in order to supplement loan production and achieve its
asset/liability management goals. All of these securities owned by the Bank are
issued, insured or guaranteed either directly or indirectly by a Federal agency
or are rated "AA" or higher. However, it should be noted that, while a Federal
guarantee (direct or indirect) or a high credit rating may indicate a high
degree of protection against default, such guarantees and ratings do not protect
the securities from declines in value based on changes in interest rates or
prepayment speeds. Reflecting its policy of maintaining a substantial portfolio
of investments having short to medium terms to repricing or maturity, the Bank's
mortgage-backed pass-through securities portfolio at June 30, 1999 included (i)
$19.7 million of securities with remaining contractual maturities of five years
or less and (ii) $34.2 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 that 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 18. Although a significant proportion of the Bank's CMOs are interests in
tranches that have been structured (through the use of cash flow priority and
"support" tranches) to give somewhat more predictable cash flows, the cash flows
and hence the values of CMOs are subject to change.
16
<PAGE>
The Bank invests in CMOs as an alternative to mortgage loans and
mortgage-backed pass-through securities as part of its asset/liability
management strategy. Management believes that CMOs represent attractive
investment alternatives relative to other investments due to the wide variety of
maturity and repayment options available through such investments. In
particular, the Bank has from time to time concluded that short and intermediate
duration CMOs (with an expected average life of five years or less) represent a
better combination of rate and duration than adjustable-rate mortgage-backed
securities. Because the Bank's CMOs are purchased as an alternative to mortgage
loans and because the Bank has the ability and intent to hold such securities to
maturity, all CMOs are classified as held-to-maturity. At June 30, 1999, the
Bank held CMOs with a carrying value of $42.4 million, substantially all of
which were of expected short and intermediate duration.
The fair values of a significant portion of the Bank's mortgage-backed
securities held-to-maturity have been from time to time significantly lower than
their carrying values. However, for financial reporting purposes, such declines
in value are considered to be temporary in nature since they have been due to
changes in interest rates rather than credit concerns. At June 30, 1999, the
total fair value of the Bank's mortgage-backed securities held-to-maturity was
$110.6 million, or $128,000 less than total amortized cost. See Note 2 of the
Notes to Consolidated Financial Statements.
In contrast to mortgage-backed pass-through securities in which cash
flow is received (and, hence, prepayment risk is shared) pro-rata by all
securities holders, the cash flows from the mortgages or mortgage-backed
securities underlying CMOs are segmented and paid in accordance with a
predetermined priority to investors holding various tranches of such securities
or obligations. A particular tranche of a CMO may therefore carry prepayment
risk that differs from that of both the underlying collateral and other
tranches. It is the Bank's strategy to purchase tranches of CMOs that are
categorized as "planned amortization classes," "targeted amortization classes"
or "very accurately defined maturities" and are intended to produce stable cash
flows in different interest rate environments.
The following table sets forth mortgage-backed securities purchases and
principal repayments for the periods indicated. There were no sales of
mortgage-backed securities during these periods.
Year Ended June 30,
--------------------------------
1999 1998 1997
--------- --------- --------
(In thousands)
Purchases:
Adjustable-rate pass-throughs...... $ 4,857 $17,414 $ 2,000
Fixed-rate pass-throughs........... 9,164 5,015 8,139
CMOs .............................. 23,928 26,985 7,794
-------- ------- -------
Total purchases............. 37,949 49,414 17,933
Principal repayments................. (54,706) (38,419) (19,689)
-------- ------- -------
Net (decrease) increase............ $(16,757) $10,995 $(1,756)
======== ======= =======
17
<PAGE>
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, 1999. Mortgage-backed securities are anticipated to be
repaid in advance of their contractual maturities as a result of projected
mortgage loan prepayments. In addition, under the structure of some of the
Bank's CMOs, the Bank's short- and intermediate-tranche interests have repayment
priority over the longer term tranches of the same underlying mortgage pool.
Principal Balances Due in
----------------------------------------------
Less 1 Year 5 Years More
than to to than
1 Year 5 Years 10 Years 10 Years Total
------- -------- --------- ---------- --------
(Dollars in thousands)
Mortgage-backed securities:
Pass-through securities:
Freddie Mac.............. $ 3,403 $13,469 $ 7,205 $3,845 $ 27,922
Ginnie Mae............... --- 36 717 30,611 31,364
Fannie Mae............... 439 1,898 3,125 3,813 9,275
CMOs........................ --- --- 885 41,521 42,406
------- ------- -------- ------- --------
Total.................... $ 3,842 $15,403 $ 11,932 $79,790 $110,967
======= ======= ======== ======= ========
Weighted average yield... 6.07% 6.11% 6.38% 6.32% 6.29%
U.S. Government Agency and
other debt securities....... $ --- $ 500 $9,000 $15,450 $24,950
====== ===== ====== ======= =======
Weighted average yield... ---% 6.21% 6.41% 6.44% 6.42%
18
<PAGE>
The Bank's holdings of mortgage-backed securities have increased in
recent years as a result of increased competition for mortgage loans and the
Bank's increased focus on its asset/ liability management. 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, 1999, the Bank did not own any debt
securities of a single issuer which exceeded 10% of the Bank's equity, other
than U.S. Government or Federal Agency obligations.
The following table sets forth the composition of the Bank's other debt
securities and other interest-earning assets at the dates indicated.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------
1999 1998 1997
--------------- ---------------- -----------------
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.................................. $ 8,419 33.8% $ 7,986 48.4% $ 9,985 76.9%
Available-for-sale(1)............................. 16,500 66.2 8,500 51.6 2,999 23.1
------- ----- ------- ----- ------- -----
Total.......................................... $24,919 100.0% $16,486 100.0% $12,984 100.0%
======= ===== ======= ===== ======= =====
Average remaining life of other debt securities..... 151 mos. 74 mos. 81 mos.
Other interest-earning assets:
FHLB stock........................................ $ 1,463 $ 1,463 $ 1,463
======= ======= =======
Interest-bearing deposits with banks.............. $ 3,200 $ 2,010 $ 3,680
======= ======= =======
<FN>
(1) The fair value of available-for-sale securities at June 30, 1999, 1998 and
1997 was $15.7 million, $8.5 million and $3.0 million, respectively.
</FN>
</TABLE>
19
<PAGE>
Sources of Funds
General. The Bank's primary sources of funds are depositor accounts,
payments (including prepayments) of loan principal, interest and dividends
earned on loans and securities, repayments of securities, borrowings, and funds
provided by operations.
Depositor Accounts. First Federal offers various types of depositor
accounts with a variety of interest rates and terms. These accounts consist of
regular savings and club accounts, money market and NOW accounts, and savings
certificates. The Bank relies primarily on competitive pricing policies and
customer service to attract and retain these depositor accounts.
The variety of deposit accounts offered by the Bank has allowed it to
be competitive in obtaining funds and to respond with flexibility to changes in
customer demand. As certain customers have become more interest rate conscious,
the Bank has become more susceptible to short-term fluctuations in deposit
flows. The Bank manages the pricing of its depositor accounts in keeping with
its asset/liability management, profitability and growth objectives.
Based on its experience, the Bank believes that substantial portions of
its regular savings, club, money market and NOW accounts are relatively stable
sources of funds. The Bank has used customer service and marketing initiatives
in an effort to maintain and increase the volume of these accounts. However, the
ability of the Bank to attract and maintain these accounts (as well as savings
certificates) has been and will be affected by competition and market
conditions. In particular, the Bank believes that it would be very difficult to
increase rapidly the "core" portion of its regular savings, club, money market
and NOW accounts. In total, these account types increased by $4.9 million in
fiscal 1999 and decreased by $872,000 and $4.8 million in fiscal 1998 and 1997,
respectively. Management believes that depositors periodically transfer a
portion of these account balances 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.
20
<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,
---------------------------------------------------
1999 1998 1997
---------------- ----------------- ----------------
Average Average Average
Amount Rate Amount Rate Amount Rate
------- -------- -------- -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Money market and NOW ............. $ 18,264 2.80% $ 13,196 2.85% $ 10,989 2.85%
Regular savings................... 50,759 2.75 50,928 2.75 54,000 3.00
Club accounts..................... 751 2.75 710 2.75 717 3.00
-------- -------- --------
69,774 2.76 64,834 2.77 65,706 2.97
-------- -------- --------
Savings certificates by
remaining period to maturity:
Less than 1 year............... 65,425 5.16 58,118 5.53 53,825 5.53
More than 1 year to 3 years.... 9,393 5.49 11,889 6.43 9,707 6.26
More than 3 years.............. 4,101 5.89 5,017 6.25 3,180 6.17
-------- -------- --------
78,919 5.24 75,024 5.72 66,712 5.66
-------- -------- --------
Total............................. $148,693 4.08% $139,858 4.35% $132,418 4.33%
======== ======== ========
</TABLE>
The following table sets forth the deposit activity at the Bank during
the periods indicated.
Year Ended June 30,
--------------------------------
1999 1998 1997
---------- ---------- ----------
(Dollars in thousands)
Opening balance............ $ 139,858 $132,418 $128,304
Deposits(1)................ 128,548 118,362 112,066
Withdrawals(1)............. (124,748) (115,748) (112,514)
Interest credited.......... 5,035 4,826 4,562
--------- -------- --------
Ending balance............. $ 148,693 $139,858 $132,418
========= ======== ========
Net increase............... $ 8,835 $ 7,440 $ 4,114
========= ======== =======
Percent increase........... 6.3% 5.6% 3.2%
=== === ===
(1) Includes transfers of funds within the Bank.
21
<PAGE>
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, 1999:
Weighted
Amount Average Rate
------- ------------
(Dollars in thousands)
Within three months.................. $2,071 4.96%
After 3 but within 6 months.......... 4,060 4.96
After 6 but within 12 months......... 4,210 5.50
After 12 months...................... 1,930 5.44
------- ----
Total.............................. $12,271 5.22%
======= ====
Borrowings. First Federal's other available sources of funds include
borrowings from the FHLB of New York. 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. The Bank may borrow funds from
the FHLB of New York subject to an overall limitation of 25% of total assets or
$51.7 million at June 30, 1999 (excluding securities repurchase agreements).
Funds may be borrowed through a combination of FHLB advances and overnight
borrowings under a line of credit. Each FHLB credit program has its own interest
rate, which may be fixed or variable, with a 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 6 of
the Notes to Consolidated Financial Statements.
The Bank has used FHLB advances from time to time to provide funds for
investment opportunities and to fund deposit outflows. The Bank may also use
advances to extend the maturity of its liabilities if deemed appropriate in
connection with its asset/liability management efforts.
The Company began utilizing repurchase agreements as a funding source
in fiscal 1998 to supplement retail deposit growth. Proceeds from the borrowings
were invested in fixed-rate government agency bonds, adjustable-rate
mortgage-backed securities and fixed-rate collateralized mortgage obligations at
an anticipated average spread of approximately 90 basis points. The spread was
conservatively achieved by closely matching the maturities of the securities and
borrowings.
22
<PAGE>
The following is a summary of borrowings from the FHLB at June 30:
1999 1998
-------- --------
(In thousands)
Securities repurchase agreements:
Final maturity in June 2005,
callable quarterly at the FHLB's
option beginning in June 1999,
and bearing interest at 5.20% $ 3,000 $ 3,000
Final maturity in December 2008,
callable quarterly at the FHLB's
option beginning in November 2000,
and bearing interest at 4.56% 5,000 ---
Final maturity in December 2008,
callable quarterly at the FHLB's
option beginning in November 2001,
and bearing interest at 4.72% 5,000 ---
Final maturity in January 2008,
callable quarterly at the FHLB's
option beginning in January 2003,
and bearing interest at 5.42% 10,000 10,000
-------- --------
23,000 13,000
FHLB advance maturing in June 2000
and bearing interest at an initial
rate of 4.985% at June 30, 1999,
adjusting thereafter to three-month
Libor minus 14 basis points 5,000 ---
======== ========
Total FHLB borrowings $ 28,000 $ 13,000
======== ========
The following table sets forth information concerning the balances and
interest rates on FHLB borrowings for the periods indicated. Amounts in fiscal
1999 represent securities repurchase agreements and an FHLB advance, while
amounts in fiscal 1998 represent only securities repurchase agreements.
Year Ended June 30,
-----------------------------------
1999 1998 1997
------------ ------------ ---------
(Dollars in thousands)
Maximum balance......................... $28,000 $13,000 $---
Average balance......................... 19,563 4,567 ---
Year-end balance........................ 28,000 13,000 ---
Interest rate at year end............... 5.04% 5.37% ---%
Average interest rate during the year... 5.07 5.36 ---
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, 1999, First Federal had no service
corporations subject to these limitations.
In May 1999, First Federal REIT, Inc. was formed as a wholly-owned
subsidiary of the Bank. The subsidiary is a real estate investment trust holding
a portion of the mortgage-related assets reported in the consolidated financial
statements.
23
<PAGE>
Employees
At June 30, 1999, the Bank had a total of 24 full-time and 4 part-time
employees. None of the Bank's employees are represented by any collective
bargaining agreement. Management considers its employee relations to be good.
Regulation
General. First Federal is a federally chartered savings bank, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, First Federal is subject to broad
Federal regulation and oversight extending to all its operations. First Federal
is a member of the FHLB of New York and is subject to certain limited regulation
by the Board of Governors of the Federal Reserve System ("Federal Reserve
Board"). As the savings and loan holding company of First Federal, the Company
also is subject to federal regulation and oversight. The purpose of the
regulation of the Company and other holding companies is to protect subsidiary
savings associations. First Federal's deposits are insured by the Savings
Association Insurance Fund ("SAIF"), which together with the Bank Insurance Fund
("BIF") are the two deposit funds administered by the FDIC. As a result, the
FDIC has certain regulatory and examination authority over First Federal.
Certain of these regulatory requirements and restrictions are discussed below or
elsewhere in this document.
Federal Regulation of Savings Associations. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, First Federal is required to file periodic reports with the OTS and
is subject to periodic examinations by the OTS and the FDIC. The last regular
OTS examination of First Federal was as of December 31, 1997. When these
examinations are conducted by the OTS and the FDIC, the examiners may require
First Federal to provide for higher general or specific loan loss reserves. All
savings associations are subject to a semi-annual assessment, based upon the
savings association's total assets, to fund the operations of the OTS. First
Federal's OTS assessment for the fiscal year ended June 30, 1999 was
approximately $54,000.
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 for unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of First
Federal is prescribed by Federal laws which prohibit it from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by Federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. First Federal is in compliance with these restrictions.
Federal savings associations are generally authorized to branch nationwide.
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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, 1999, First Federal's lending limit
under the 15% limitation was $4.1 million. First Federal is in compliance with
the loans-to-one borrower limitation.
The OTS, as well as the other Federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure, and compensation and
other employee benefits. Any institution that fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action.
Insurance of Accounts and Regulation by the FDIC. First Federal is a
member of the SAIF, which is administered by the FDIC. Deposits are insured up
to applicable limits by the FDIC, and such insurance is backed by the full faith
and credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the SAIF or BIF. The FDIC also has the authority
to initiate enforcement actions against savings associations, after giving the
OTS an opportunity to take such action, and may terminate the deposit insurance
if it determines that the institution has engaged in unsafe or unsound practices
or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a total risk-based capital ratio of at least 10%) and considered
healthy pay the lowest premium. Institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
total risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classifications of all insured
institutions are made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
The premium schedule for BIF and SAIF insured institutions presently
ranges from 0 to 27 basis points. However, SAIF-insured institutions are
required to pay a Financing Corporation ("FICO") assessment, in order to fund
the interest on bonds issued to resolve thrift failures in the 1980's, presently
equal to approximately 1.48 basis points on domestic deposits, while BIF-insured
institutions presently pay an assessment equal to approximately 0.013 basis
points on domestic deposits until the earlier of December 31, 1999 or the date
upon which the last savings association ceases to exist, after which time the
assesment will be the same for all insured deposits.
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These assessments, which may be revised based upon the level of BIF and
SAIF deposits, will continue until the FICO bonds mature in the year 2017.
Regulatory Capital Requirements. Federally insured savings
associations, such as First Federal, are required to maintain a minimum level of
regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained earnings, and certain
noncumulative perpetual preferred stock and related surplus. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights and credit card relationships, must be deducted from tangible capital for
calculating compliance with the requirement. At June 30, 1999, First Federal had
no intangible assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. Debt and equity
investments in excludable subsidiaries are deducted from assets and capital. At
June 30, 1999, First Federal's real estate investment trust was an includable
subsidiary and, accordingly, the Bank's investment in the subsidiary was not
deducted from regulatory capital.
At June 30, 1999, First Federal had tangible capital of $27.7 million,
or 13.4% of adjusted total assets, which is approximately $24.5 million above
the minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 4% 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. At June 30, 1999, First Federal
had core capital equal to $27.7 million, or 13.4% of adjusted total assets,
which is $19.4 million above the minimum leverage ratio requirement of 4% of
adjusted total assets in effect on that date.
The OTS risk-based capital regulations require savings associations to
have total capital of at least 8% of risk-weighted assets. Total capital
consists of core capital, as defined above, and supplementary capital.
Supplementary capital consists of certain permanent and maturing capital
instruments that do not qualify as core capital, and general valuation loan and
lease loss allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based capital requirement
only up to the amount of core capital. The OTS is also authorized to require a
savings association to maintain an additional amount of total capital to account
for concentration of credit risk and the risk of non-traditional activities.
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
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nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments.
In determining the amount of risk-weighted assets, all assets,
including credit equivalent amounts for certain off-balance sheet items, are
multiplied by a risk weight, ranging from 0% to 100%, based on the risk inherent
in the type of asset. For example, the OTS has assigned a risk weight of 50% for
prudently underwritten permanent one-to-four family first lien mortgage loans
not more than 90 days delinquent and having a loan-to-value ratio of not more
than 80% at origination unless insured to such ratio by an insurer approved by
Fannie Mae or Freddie Mac.
OTS regulations also require savings associations with more than normal
interest rate risk exposure to deduct from total capital, for purposes of
determining compliance with the risk-based capital requirement, an amount equal
to 50% of the association's interest-rate risk exposure multiplied by the
present value of its assets. This exposure is a measure of the potential decline
in the net portfolio value of a savings association, greater than 2% of the
present value of its assets, based upon a hypothetical 200 basis point increase
or decrease in interest rates (whichever results in a greater decline). Net
portfolio value is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. Any savings association with less
than $300 million in assets and a total risk-based capital ratio in excess of
12% (such as First Federal) is exempt from this requirement unless the OTS
determines otherwise. The OTS has indefinitely deferred implementation of the
interest rate risk component of the risk-based capital requirements.
At June 30, 1999, First Federal had total risk-based capital of $28.4
million (including $27.7 million in core capital and $742,000 in qualifying
supplementary capital) and risk-weighted assets of $60.7 million, or total
capital of 46.8% of risk-weighted assets. This amount was $23.5 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% total risk-based capital ratio). Any such
association must submit a capital restoration plan and, until such plan is
approved by the OTS, may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a total risk-based capital ratio of less than 6%) must
be made subject to one or more additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with
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certain limited exceptions, within 90 days after it becomes critically
undercapitalized. Any undercapitalized association is also subject to the
general enforcement authority of the OTS and the FDIC, including the appointment
of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on First
Federal may have a substantial adverse effect on First Federal's operations and
profitability. Stockholders of the Company do not have preemptive rights, and
therefore, if the Company is directed by the OTS or the FDIC to issue additional
shares of common stock, such issuance may result in the dilution in the
percentage ownership of present shareholders.
Limitations on Dividends and Other Capital Distributions. OTS
regulations impose various restrictions on savings associations with respect to
their ability to make distributions of capital, which include dividends, stock
redemptions or repurchases, cash-out mergers and other transactions charged to
the capital account. OTS regulations also prohibit a savings association from
declaring or paying any dividends or from repurchasing any of its stock if, as a
result, the regulatory capital of the association would be reduced below the
amount required to be maintained for the liquidation account established in
connection with its mutual-to-stock conversion.
Generally, savings associations that meet their capital requirements
before and after the proposed distribution, may make capital distributions
during any calendar year up to an amount equal to net income of the current year
plus retained net income for the preceding two years. Distributions in excess of
such amount require OTS approval. Distributions from the Bank to the Company may
also have income tax consequences. See "Federal and State Taxation."
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%. Penalties may be imposed
upon associations for violations of the liquid asset ratio requirement. At June
30, 1999, First Federal was in compliance with this requirement, with a liquid
asset ratio of 16.6%.
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, 1999, 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. 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 May 1998 and received a rating of satisfactory.
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of First
Federal include the Company and any company which is under common control with
First Federal. In addition, a savings association may not lend to any affiliate
engaged in activities not permissible for a bank holding company or acquire the
securities of most affiliates. Subsidiaries of a savings association are
generally not deemed affiliates; however, the OTS has the discretion to treat
subsidiaries of savings associations as affiliates on a case-by-case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries (if any)
which also permits the OTS to restrict or prohibit activities that are
determined to be a serious risk to the subsidiary savings association.
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As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the 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 Company and any of its
subsidiaries (other than First Federal or any other SAIF-insured savings
association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition.
If First Federal fails the QTL test, the Company must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activities other than those approved for
multiple savings and loan holding companies or their subsidiaries. In addition,
within one year of such failure, the Company must register as, and will become
subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings and loan holding
company. See "Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. 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, 1999, First Federal was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS.
See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. First Federal is a member of the FHLB of
New York, which is one of 12 regional FHLBs, that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and
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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, 1999, First Federal had $1.5 million in
FHLB stock, which was in compliance with this requirement. Over the past five
calendar years, dividends received by the Bank on its FHLB stock have averaged
7.03% (including 6.89% for calendar year 1998).
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 deducted in computing taxable income for Federal
income tax purposes. The amount of the bad debt deduction is presently computed
under the experience method, although a percentage-of-taxable-income method was
also available in computing the deduction for tax years ended on or prior to
December 31, 1995. Under the experience method, the bad debt reserve deduction
is an amount determined under a formula based generally upon the bad debts
actually sustained by the savings association over a period of years.
Tax legislation enacted in 1996 imposes a requirement to recapture into
taxable income the portion of the tax bad debt reserves for qualifying and
non-qualifying loans in excess of the "base-year" balances. For the Bank, the
base-year reserves are the balances as of December 31, 1987. Recapture of the
excess reserves will occur over a six-year period. The Bank previously
established, and will continue to maintain, a deferred tax liability with
respect to its Federal tax bad debt reserves in excess of the base-year
balances; accordingly, the recapture requirement will have no effect on total
income tax expense for financial reporting purposes.
Also, under the 1996 legislation, the Bank's base-year Federal tax bad
debt reserves are "frozen" and subject to current recapture only in very limited
circumstances. Generally, recapture of all or a portion of the base-year
reserves will be required if the Bank pays a dividend in excess of its current
or accumulated earnings and profits (see below), 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
Federal deferred tax liability was $1.5 million at June 30, 1999.
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Distributions by the Bank to the Company in excess of the Bank's
accumulated earnings and profits (as calculated for Federal income tax purposes)
would result in taxation of the Bank's tax bad debt reserves. All dividends paid
to date by the Bank to the Company have been paid from the Bank's current and
accumulated earnings and profits. Since the Bank intends to limit future
dividend payments to amounts which will not result in the recapture of tax bad
debt reserves, the amount of additional funds which may be available for
dividend payments to the Company will generally be limited to the amount of the
Bank's current and accumulated earnings and profits. At June 30, 1999, the Bank
had approximately $3.4 million in current and accumulated earnings and profits
from which it could pay dividends without causing the recapture of any portion
of its tax bad debt reserves.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to the alternative minimum
tax. This tax is imposed at a tax rate of 20% on alternative minimum taxable
income, which is the sum of a corporation's regular taxable income (with certain
adjustments) and tax preference items, less any available exemption. The
alternative minimum tax is imposed to the extent it exceeds the corporation's
regular income tax, and net operating losses can offset no more than 90% of
alternative minimum taxable income. The Company and the Bank do not expect to be
subject to the alternative minimum tax.
The Bank has been audited by the IRS with respect to Federal income tax
returns through December 31, 1993, and all deficiencies have been satisfied. In
the opinion of management, any examination of still open returns would not
result in a deficiency that could have a material adverse effect on the
financial condition of the Bank.
New York Taxation. The Bank and the Company currently file a combined
New York state tax return on a calendar-year basis. The Bank is subject to the
New York State Franchise Tax on Banking Corporations in an annual amount equal
to the greater of (i) 9% of "entire net income" allocable to New York State
during the taxable year, or (ii) the applicable alternative minimum tax. The
alternative minimum tax is generally the greater of (a) 0.01% of the value of
assets allocable to New York State with certain modifications, (b) 3% of
"alternative entire net income" allocable to New York State, or (c) $250. Entire
net income is similar to Federal taxable income, subject to certain
modifications (including the fact that net operating losses cannot be carried
back or carried forward). Although the Bank has in the past been subject to the
9% tax on entire net income, it expects to be subject to the 3% tax on
alternative entire net income in the future, as a result of the recent formation
of a real estate investment trust. New York also imposes a Metropolitan Commuter
Transportation District surcharge of 17% that is assessed on the New York State
Franchise Tax.
In July 1996, New York State enacted legislation to preserve the use of
the percentage-of-taxable-income bad debt deduction for thrift institutions such
as the Bank. In general, the legislation provides for a deduction equal to 32%
of the Bank's New York State taxable income, which is comparable to the
deductions permitted under the prior law. The legislation also provides for a
floating base year, which allows the Bank to switch from the
percentage-of-taxable-income method to the experience method without recapture
of any reserve. Previously, the Bank had established a deferred New York State
tax liability for the excess of its New York State tax bad debt reserves over
the amount of its base-year New York State reserves. Since the 1996 legislation
effectively eliminated the reserves in excess of the base-year balances, the
Bank reduced its deferred tax liability by $238,000 (with a corresponding
reduction in income tax expense) during the quarter ended September 30, 1996.
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Generally, New York State has requirements similar to Federal
requirements regarding the recapture of base-year tax bad debt reserves. One
notable exception is that, after the 1996 legislation, New York continues to
require that the Bank maintain its thrift institution charter and hold at least
60% of its assets in specified assets (generally, loans secured by residential
real estate or deposits, educational loans, cash and certain government
obligations). The Bank expects to continue to meet the 60% requirement and does
not anticipate engaging in any of the transactions that would require recapture
of the base-year reserves. Accordingly, in conformity with SFAS No. 109, the
related state deferred tax liability of approximately $0.6 million (net of
Federal tax effect) has not been recognized.
Delaware Taxation. As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.
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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, 1999. At June 30, 1999, the
total net book value of the Bank's office properties and equipment (including
land, buildings, leasehold improvements, and furniture, fixtures and equipment)
was $1.1 million, distributed as follows by location:
Year Owned or Net Book Value at
Location Acquired Leased June 30, 1999
- ------------------------------- --------- --------- ---------------
Main Office:
1019 Park Street 1959 Owned $136,000
Peekskill, New York
Full Service Branches:
1961 Commerce Street 1977 Leased 59,000
Yorktown Heights, New York
Cortlandt Town Center, Rte. 6 1997 Owned (1) 919,000
Mohegan Lake, New York
(1) Building is owned; land is leased.
Management believes that the Bank's current facilities are adequate to
meet its present and foreseeable future needs.
The Bank's depositor and borrower customer files are maintained by an
independent data processing company.
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, 1999.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Page 46 of the attached 1999 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Selected Financial Data
Page 1 of the attached 1999 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 1999 Annual Report to Stockholders
are herein incorporated by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Pages 6 and 7 of the attached 1999 Annual Report to Stockholders are
herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Pages 16 through 43 of the attached 1999 Annual Report to Stockholders
are herein incorporated by reference.
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.
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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 1999 Annual Meeting of Stockholders, a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
Scott Nogles is Vice President of Finance of the Bank and Company. Mr.
Nogles joined the company in 1996 as Controller, before which he was employed by
KPMG LLP. In his capacity as Vice President of Finance, Mr. Nogles is
responsible for the accounting department and the creation of the majority of
SEC documents.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference to the definitive Proxy Statement for the 1999 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 1999 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
1999 Annual Meeting of Stockholders, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
36
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements
The following information appearing in 1999 Annual Report to
Stockholders is herein incorporated by reference:
Pages in
Annual Report Section Annual Report
- ---------------------------------------------------------------- ---------------
Independent Auditors' Report.......................................... 16
Consolidated Balance Sheets as of June 30, 1999 and 1998.............. 17
Consolidated Statements of Income for the Years
Ended June 30, 1999, 1998 and 1997.................................. 18
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended June 30, 1999, 1998 and 1997............................ 19
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1999, 1998 and 1997.................................. 20
Notes to Consolidated Financial Statements............................ 21-43
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is not applicable or has been included in the consolidated financial
statements and notes thereto.
(a)(3) Exhibits
Reference to Prior
Regulation Filing or Exhibit
S-K Exhibit Number
Number Document Attached Hereto
- --------------------------------------------------------------------------------
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
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
Employment Agreement of Scott Nogles 10
37
<PAGE>
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 None
of security holders
23 Consents of Experts and Counsel 23
24 Power of Attorney None
27 Financial Data Schedule (EDGAR filing only) 27
28 Information from reports furnished to state insurance None
regulatory authorities
99 Additional Exhibits None
* Filed as exhibits to the Company's Form S-1 registration statement filed on
October 3, 1995 (File No. 33-97730) pursuant to Section 5 of the Securities
Act of 1933. All of such previously filed documents are hereby incorporated
herein by reference in accordance with Item 601 of Regulation S-K.
** Filed as exhibits to the Company's Amendment No. 1 to Form S-1 registration
statement filed on November 8, 1995 (File No. 33-97730) pursuant to Section
5 of the Securities Act of 1933. All of such previously filed documents are
hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-K.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on May 6, 1999 to announce
earnings, the payment of a cash dividend and the commencement of a share
repurchase program.
38
<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 H. McGurty
- ----------------------------- ----------------------------
Dominick Bertoline, Director John H. McGurty, Director
Date: September 28, 1999 Date: September 28, 1999
/s/Edward H. Dwyer /s/Eldorus Maynard
- ----------------------------- ----------------------------
Edward H. Dwyer, Director Eldorus Maynard, Chief Executive
Officer and Chairman of the Board
Date: September 28, 1999 (Principal Executive and Operating Officer)
Date: September 28, 1999
/s/Robert E. Flower /s/William J. LaCalamito
- ----------------------------- ----------------------------
Robert E. Flower, Director William J. LaCalamito, President
and Chief Operating Officer
Date: September 28, 1999 (Principal Financial and Accounting
Officer)
Date: September 28, 1999
39
EXHIBIT 10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this 3rd day of July, 1998, by and between Peekskill Financial Corporation (the
"Holding Company"), and Scott Nogles (the "Employee").
WHEREAS, the Employee is currently serving as Vice President of Finance
of the Holding Company and Vice President of Finance of the Holding Company's
wholly-owned subsidiary, First Federal Savings Bank (the "Bank"); and
WHEREAS, the board of directors of the Holding Company (the "Board of
Directors") recognizes that, as is the case with publicly held corporations
generally, the possibility of a change in control of the Holding Company and/or
the Bank may exist and that such possibility, and the uncertainty and questions
which it may raise among management, may result in the departure or distraction
of key management personnel to the detriment of the Bank, the Holding Company
and their respective stockholders; and
WHEREAS, the Board of Directors believes it is in the best interests of
the Holding Company to enter into this Agreement with the Employee in order to
assure continuity of management of the Holding Company and the Bank and to
reinforce and encourage the continued attention and dedication of the Employee
to the Employee's assigned duties without distraction in the face of potentially
disruptive circumstances arising from the possibility of a change in control of
the Holding Company or the Bank, although no such change is now contemplated;
and
WHEREAS, the Board of Directors has approved and authorized the
execution of this Agreement with the Employee to take effect as stated in
Section 2 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. Definitions.
(a) The term "Change in Control" means (1) an event of a
nature that (i) results in a change in control of the Bank or the Holding
Company within the meaning of the Home Owners' Loan Act of 1933 and 12 C.F.R.
Part 574 as in effect on the date hereof; or (ii) would be required to be
reported in response to Item 1 of the current report on Form 8-K, as in effect
on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act"); (2) any person (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the beneficial owner
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of
securities of the Bank or the Holding Company representing 20% or more of the
Bank's or the Holding Company's outstanding securities; (3) individuals who are
members of the board of directors of the Bank or the Holding Company on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-quarters of
the directors comprising the Incumbent Board, or whose nomination for election
by the Holding Company's stockholders was approved by the nominating committee
serving under an Incumbent
1
<PAGE>
Board, shall be considered a member of the Incumbent Board; or (4) a
reorganization, merger, consolidation, sale of all or substantially all of the
assets of the Bank or the Holding Company or a similar transaction in which the
Bank or the Holding Company is not the resulting entity. The term "Change in
Control" shall not include an acquisition of securities by an employee benefit
plan of the Bank or the Holding Company. In the application of 12 C.F.R. Part
574 to a determination of a Change in Control, determinations to be made by the
OTS or its Director under such regulations shall be made by the Board of
Directors.
(b) The term "Commencement Date" means July 3, 1998.
(c) The term "Date of Termination" means the earlier of (1)
the date upon which the Holding Company or the Bank gives notice to the Employee
of the termination of the Employee's employment with the Holding Company or the
Bank or (2) the date upon which the Employee ceases to serve as an employee of
either the Holding Company or the Bank.
(d) The term "Involuntarily Termination" means termination of
the employment of Employee by either the Holding Company or the Bank without the
Employee's express written consent, and shall include a material diminution of
or interference with the Employee's duties, responsibilities and benefits as
Vice President of Finance of the Holding Company and of the Bank, including
(without limitation) any of the following actions unless consented to in writing
by the Employee: (1) a change in the principal workplace of the Employee to a
location outside of a 30 mile radius from the Bank's headquarters office as of
the date hereof; (2) a material demotion of the Employee; (3) a material
reduction in the number or seniority of other Holding Company and Bank personnel
reporting to the Employee or a material reduction in the frequency with which,
or in the nature of the matters with respect to which, such personnel are to
report to the Employee, other than as part of a Bank- or Holding Company-wide
reduction in staff; (4) a material adverse change in the Employee's salary,
perquisites, benefits, contingent benefits or vacation, other than as part of an
overall program applied uniformly and with equitable effect to all members of
the senior management of the Bank or the Holding Company; and (5) a material
permanent increase in the required hours of work or the workload of the
Employee. The term "Involuntary Termination" does not include Termination for
Cause or termination of employment due to retirement, death, disability or
suspension or temporary or permanent prohibition from participation in the
conduct of the Bank's affairs under Section 8 of the Federal Deposit Insurance
Act ("FDIA") and shall not include a material diminution of or interference with
the Employee's duties, responsibilities and benefits unless the Employee submits
to the Holding Company within 120 days after the occurrence of such event
written notice of his determination that such material diminution constitutes
Involuntary Termination.
(e) The terms "Termination for Cause" and "Terminated for
Cause" mean termination of the employment of the Employee because of the
Employee's personal dishonesty, incompetence, willful misconduct, breach of a
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement.
2
<PAGE>
2. Term. The term of this Agreement shall be a period of three years
commencing on the Commencement Date, subject to earlier termination as provided
herein. Beginning on the day following the Commencement Date, and on each day
thereafter, the term of this Agreement shall be extended for a period of one day
in addition to the then-remaining term, provided that the Holding Company has
not given notice to the Employee in writing at least 90 days prior to such day
that the term of this Agreement shall not be extended further; and provided
further that the term this Agreement shall expire on the date on which the
Employee reaches age 65. Reference herein to the term of this Agreement shall
refer to both such initial term and such extended terms.
3. Employment. The Employee is employed as Vice President of Finance of
the Holding Company and of the Bank. As such, the Employee shall render
administrative and management services as are customarily performed by persons
situated in similar executive capacities, and shall have such other powers and
duties of an officer of the Holding Company or the Bank as the Board of
Directors or the board of directors of the Bank, respectively, may prescribe
from time to time.
4. Compensation.
(a) Salary. The Holding Company agrees to pay the Employee
during the term of this Agreement the salary payable by the Bank established by
the Bank's board of directors, which shall be at least the Employee's salary
payable by the Bank in effect as of the Commencement Date, and shall be
increased in accordance with salary increases approved by the Board of Directors
and such additional salary, if any, as the Board of Directors may determine to
pay the Employee from time to time. Adjustments in salary or other compensation
shall not limit or reduce any other obligation of the Holding Company under this
Agreement. The Employee's salary in effect from time to time during the term of
this Agreement shall not thereafter be reduced other than as part of an overall
program applied uniformly and with equitable effect on all members of the senior
management of the Bank and the Holding Company. To the extent that the Bank pays
salary and provides other compensation to the Employee provided for in any
section of this Agreement, to the Employee, the Holding Company's obligations to
pay salary and provide other compensation under this Agreement shall be deemed
satisfied.
(b) Benefits. While employed under this Agreement, the
Employee shall receive the same health insurance benefits as the Bank provides
generally from time to time during the term of this Agreement ("Health Insurance
Benefits").
5. Termination of Employment.
(a) Involuntary Termination. The Board of Directors may
terminate the Employee's employment at any time, but, except in the case of
Termination for Cause, termination of employment shall not prejudice the
Employee's right to compensation or other benefits under this Agreement. In the
event of Involuntary Termination other than in connection with or within 12
months after a Change in Control and subject to the provisions of Sections 6 and
7 of this Agreement, (1) the Holding Company shall pay to the Employee during
the remaining term of this Agreement the Employee's salary at the rate in effect
immediately prior to the Date of Termination, in such manner and at such times
as such salary would have been payable to the Employee under
3
<PAGE>
Section 4 of this Agreement, if the Employee had continued to be employed, and
(2) the Holding Company shall provide to the Employee during the remaining term
of this Agreement benefits substantially the same as the Health Insurance
Benefits as of the Date of Termination on terms as favorable to him as applied
as of the Date of Termination. The total of salary payments to the Employee
under this Section 7(a) shall not exceed three times his average annual cash
compensation from the Holding Company and the Bank over the five most recent
taxable years (or if employed by the Bank or the Holding Company for a shorter
period, over such period of his employment).
(b) Termination for Cause. In the event of Termination for
Cause, the Holding Company shall pay the Employee the Employee's salary through
the Date of Termination, and the Holding Company shall have no further
obligation to the Employee under this Agreement.
(c) Voluntary Termination. The Employee's employment may be
voluntarily terminated by the Employee at any time upon 90 days' written notice
to the Board of Directors or such shorter period as may be agreed upon between
the Employee and the Board of Directors. In the event of such voluntary
termination, the Holding Company shall be obligated to continue to pay to the
Employee the Employee's salary and benefits only through the Date of
Termination, at the time such payments are due, and the Holding Company shall
have no further obligation to the Employee under this Agreement.
(d) Change in Control. In the event of Involuntary Termination
in connection with or within 12 months after a Change in Control which occurs at
any time while the Employee is employed under this Agreement, the Holding
Company shall, subject to Sections 6 and 7 of this Agreement, (1) pay to the
Employee in a lump sum in cash within 25 business days after the Date of
Termination an amount equal to 299% of the Employee's "base amount" as defined
in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code");
and (2) provide to the Employee during the remaining term of this Agreement such
health benefits as are substantially the same as the Health Insurance Benefits
as of the Date of Termination on terms as favorable to him as applied as of Date
of Termination.
(e) Death; Disability. In the event of the death of the
Employee while employed under this Agreement and prior to any termination of
employment, the Employee's estate, or such person as the Employee may have
previously designated in writing, shall be entitled to receive from the Holding
Company the salary of the Employee through the last day of the calendar month in
which the Employee died. If the Employee becomes disabled as defined in the then
current disability plan, if any, of the Holding Company (or of the Bank, if, in
the absence of the such a plan of the Holding Company, the Bank has such a
plan), or if the Employee is otherwise unable to serve as Vice President of
Finance of the Holding Company and the Bank, the Employee shall be entitled to
receive group and other disability income benefits of the type, if any, then
provided for executive officers. However, the Holding Company shall be obligated
only to pay the Employee's salary pursuant to Section 4(a) of this Agreement
only to the extent the Employee's salary, in the absence of such disability,
would exceed (on an after tax basis) the disability income benefits received
pursuant to this paragraph. In addition, the Holding Company shall have the
right, upon resolution of the Board of Directors, to discontinue paying salary
pursuant to Section 4(a) beginning six months following a determination that the
Employee qualifies for the foregoing disability income benefits.
4
<PAGE>
(f) Temporary Suspension or Prohibition. If the Employee is
suspended and/or temporarily prohibited from participating in the conduct of the
Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA,
12 U.S.C. ss. 1818(e)(3) and (g)(1), the Holding Company's obligations under
this Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Holding
Company may in its discretion (i) pay the Employee all or part of the
compensation withheld while its obligations under this Agreement were suspended
and (ii) reinstate in whole or in part any of its obligations which were
suspended.
(g) Permanent Suspension or Prohibition. If the Employee is
removed and/or permanently prohibited from participating in the conduct of the
Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA,
12 U.S.C. ss. 1818(e)(4) and (g)(1), all obligations of the Holding Company
under this Agreement shall terminate as of the effective date of the order, but
vested rights of the contracting parties shall not be affected.
(h) Default of the Bank. If the Bank is in default (as defined
in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect any
vested rights of the contracting parties.
6. Certain Reductions of Payments.
(a) Notwithstanding any other provision of this Agreement, if
the value and amounts of benefits under this Agreement, together with any other
amounts and the value of benefits received or to be received by the Employee in
connection with a Change in Control would cause any amount to be nondeductible
by the Bank or the Holding Company for federal income tax purposes pursuant to
Section 280G of the Code, then amounts and benefits under this Agreement shall
be reduced (not less than zero) to the extent necessary so as to maximize
amounts and the value of benefits to the Employee without causing any amount to
become nondeductible by the Bank or the Holding Company pursuant to or by reason
of such Section 280G. The Employee shall determine the allocation of such
reduction among payments and benefits to the Employee.
(b) Any payments made to the Employee pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with 12 U.S.C. 1828(k) and any regulations promulgated thereunder.
7. Mitigation.
(a) Reduction of Salary Payments. The Holding Company's obligations to
pay salary under Section 5(a) of this Agreement shall be reduced by the amounts,
if any, of cash income (as defined below) earned by the Employee from providing
services during the remaining term of this Agreement. For purposes of this
Section 7, the term "cash income" shall include the amounts of salary, wages and
fees paid to the Employee in cash, but shall not include bonuses, incentive
compensation, shares of stock, stock, stock options, stock appreciation rights
or other benefits or earned income not paid to the Employee in cash.
5
<PAGE>
(b) Reduction of Health Insurance Benefits. The Bank's obligations to
provide benefits under Section 5(a) of this Agreement shall be reduced to the
extent, if any, of substantially the same benefits provided to the Employee on
no less favorable terms by another employer during the remaining term of this
Agreement.
(c) Reporting by Employee. The Employee agrees that, in the event he
becomes entitled to payment of salary and to benefits pursuant to Section 5(a)
of this Agreement during the remaining term of this Agreement, he shall promptly
inform the Holding Company of the nature and amounts of cash income and benefits
of the same or similar nature which he earns or receives from another employer
during the remaining term of this Agreement and shall provide such documentation
concerning such cash income and benefits as the Holding Company may reasonably
request from time to time. Changes in such cash income and benefits shall be
reported within 10 days following each change.
8. Attorneys Fees. In the event the Holding Company exercises its right
of Termination for Cause, but it is determined by a court of competent
jurisdiction or by an arbitrator pursuant to Section 16 of this Agreement that
cause as contemplated by Section 1(e) of this Agreement did not exist for such
termination, or if in any event it is determined by any such court or arbitrator
that the Holding Company has failed to make timely payment of any amounts owed
to the Employee under this Agreement, the Employee shall be entitled to
reimbursement for all reasonable costs, including attorneys' fees, incurred in
challenging such termination or collecting such amounts. Such reimbursement
shall be in addition to all rights to which the Employee is otherwise entitled
under this Agreement.
9. Confidential Information; Loyalty; Noncompetition
(a) During the term of the Employee's employment hereunder and
thereafter, the Employee shall not except as may be required to perform his
duties hereunder or as required by law, disclose to others or use, whether
directly or indirectly, any Confidential Information; provided, however, that
this prohibition shall not apply to requests for information from federal
banking regulators. "Confidential Information" means information about the
clients and customers of the Bank and the Holding Company which is not available
to the general public and was or shall be learned by the Employee in the course
of his employment by the Bank and the Holding Company, including without
limitation any data, formulae, information, proprietary knowledge, trade
secrets, and credit reports and analyses owned, developed and used in the course
of the business of the Bank or the Holding Company, including client and
customer lists and information related thereto; and all papers, records and
other documents (and all copies thereof) containing such Confidential
Information. The Employee acknowledges that such Confidential Information is
specialized, unique in nature and of great value to the Bank and the Holding
Company. The Employee agrees that upon the termination of his employment, the
Employee will promptly deliver to the Bank or the Holding Company all documents
(and all copies thereof) containing any Confidential Information.
(b) The Employee shall devote his full time to the performance
of his employment under this Agreement; provided, however, that the Employee may
serve, without compensation, as a director of charitable, community and industry
organizations and continue to serve, with
6
<PAGE>
compensation, as a director of the business corporations of which he is
currently a director to the extent such directorships do not inhibit the
performance of his duties hereunder or conflict with the business of the Bank
and the Holding Company. While employed by the Bank or the Holding Company, the
Employee shall not engage in any business or activity contrary to the business
affairs or interests of the Bank or the Holding Company.
(c) Upon the expiration of the term of the Employee's
employment hereunder or in the event the Employee's employment hereunder
terminates prior thereto for any reason whatsoever, the Employee shall not, for
a period of one year after the occurrence of such event, for himself, or as the
agent of, on behalf of, or in conjunction with, any person or entity, solicit or
attempt to solicit, whether directly or indirectly: (i) any employee of the Bank
or the Holding Company or any subsidiary thereof to terminate such employee's
employment relationship with the Bank or the Holding Company or any subsidiary
thereof; or (ii) any savings and loan, banking or either business from any
person or entity that is or was a client, employee, or customer of the Bank or
the Holding Company or any subsidiary thereof and had dealt with the Employee or
any other employee of the Bank or the Holding Company or any subsidiary thereof
under the supervision of the Employee.
(d) In the event that the Employee voluntarily resigns
pursuant to Section 7(c) of this Agreement, the Employee shall not for a period
of one year from the effective date of such resignation, or in the event the
Employee's employment hereunder is terminated for cause, the Employee shall not,
for a period of one year from the date of termination, directly or indirectly,
own, manage, operate or control, or participate in the ownership, management,
operation or control of, or be employed by or connected in any manner with, any
financial institution having an office located within five miles of any office
of the Bank as of the date of termination of employment.
(e) The provisions of this Section 9 shall not prevent the
Employee from purchasing, solely for investment, not more five percent of any
financial institution's stock or other securities which are traded on any
national or regional securities exchange or are actively traded in the
over-the-counter market and registered under Section 12(g) of the Securities
Exchange Act of 1934.
(f) The provisions of this Section 9 shall survive the
termination of the Employee's employment hereunder whether by expiration of the
term hereof or otherwise.
10. No Assignments.
(a) This Agreement is personal to each of the parties hereto,
and neither party may assign or delegate any of its rights or obligations
hereunder without first obtaining the written consent of the other party;
provided, however, that the Holding Company shall require any successor or
assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Holding Company or the Bank, by an assumption agreement in form and substance
satisfactory to the Employee, to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Holding Company
would be required to perform it if no such succession or assignment had taken
place. Failure of the Holding Company to obtain such an assumption agreement
prior to the effectiveness of any such succession or assignment shall be a
breach of this Agreement and shall entitle the Employee to compensation
7
<PAGE>
from the Holding Company in the same amount and on the same terms as the
compensation pursuant to Section 5(d) hereof. For purposes of implementing the
provisions of this Section 10(a), the date on which any such succession becomes
effective shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder
shall inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Employee should die while any
amounts would still be payable to the Employee hereunder if the Employee had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Employee's devisee,
legatee or other designee or if there is no such designee, to the Employee's
estate.
11. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Holding Company at its
principal office, to the attention of the Board of Directors with a copy to the
Secretary of the Holding Company, or, if to the Employee, to such home or other
address as the Employee has most recently provided in writing to the Holding
Company or the Bank.
12. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
13. Headings. The headings used in this Agreement are included solely
for convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
14. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
15. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
New York.
16. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
Attest: Peekskill Financial Corporation
- --------------------- ---------------------------
Secretary
By:
Its:
Employee
----------------------------
Scott Nogles
9
SELECTED CONSOLIDATED FINANCIAL DATA At or for the Fiscal Year ended June 30
(Dollars in thousands, except per share data)
<TABLE>
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Selected Financial Condition Data:
Total assets $206,932 $200,341 $182,560 $191,323 $155,716
Loans, net 63,436 47,631 45,507 39,557 41,060
Held-to-maturity securities 119,122 135,446 126,450 129,200 105,421
Available-for-sale securities 15,673 8,498 2,983 2,459 1,976
Cash and cash equivalents 4,157 4,626 4,158 17,320 4,681
Depositor accounts 148,693 139,858 132,418 128,304 130,933
Securities repurchase agreements and other borrowings 28,000 13,000 --- --- ---
Equity 27,351 43,206 46,966 59,774 21,178
Selected Operating Data:
Interest and dividend income $ 13,299 $ 12,643 $ 12,309 $ 11,794 $ 10,722
Interest expense 6,967 6,034 5,431 5,401 4,785
-------- -------- -------- -------- --------
Net interest income 6,332 6,609 6,878 6,393 5,937
Provision for loan losses 60 60 143 45 160
-------- -------- -------- -------- --------
Net interest income after provision for loan 6,272 6,549 6,735 6,348 5,777
losses
Loan fees and service charges 145 135 149 207 201
Other non-interest income 110 90 87 101 76
Non-interest expense (excluding special assessment) 3,806 3,474 3,318 2,807 2,490
SAIF special assessment (1) --- --- 884 --- ---
-------- -------- -------- -------- --------
Income before income tax expense and cumulative
effect of change in accounting principle 2,721 3,300 2,769 3,849 3,564
Income tax expense (2) 1,198 1,446 957 1,628 1,640
Cumulative effect of change in accounting for
postretirement health care benefits, net --- --- --- (59) ---
-------- ======== ======== ======== ========
Net income (3) $ 1,523 $ 1,854 $ 1,812 $ 2,162 $ 1,924
======== ======== ======== ======== ========
Earnings per share, from date of conversion (3) (4):
Basic $ 0.71 $ 0.68 $ 0.58 $ 0.36
Diluted 0.69 0.66 0.58 0.36
======== ======== ======== ========
Selected Statistical Data:
Return on average assets (3) 0.75% 0.98% 0.98% 1.23% 1.22%
Return on average equity (3) 4.05 4.02 3.57 4.96 9.38
Net interest margin 3.15 3.55 3.76 3.66 3.82
Average interest rate spread 2.39 2.52 2.57 2.57 3.32
Equity to total assets at end of period 13.22 21.57 25.73 31.24 13.60
Efficiency ratio (5) 57.78 50.83 61.09 42.04 40.07
Non-interest expense to average assets (3) 1.86 1.84 2.27 1.59 1.58
Non-performing loans to total loans, net 1.78 3.13 4.40 3.17 5.10
Allowance for loan losses to non-performing loans 65.66 45.74 31.04 41.45 22.61
Non-performing assets to total assets 0.55 0.79 1.22 0.65 1.35
Book value per share $ 14.49 $ 14.92 $ 14.71 $ 14.58
Cash dividends per share 0.36 0.36 0.36 0.09
Dividend payout ratio 50.76% 54.69% 62.25% 26.86%
<FN>
(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 - Comparison of Operating
Results for the Fiscal Years Ended June 30, 1998 and 1997."
(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 7 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 basic earnings per share of $0.68. The ratio of
non-interest expense to average assets would have been 1.80%.
(4) Earnings per share for 1996 is for the six-month period following the
conversion from mutual to stock form on December 29, 1995.
(5) The efficiency ratio is computed by dividing non-interest expense by the
sum of net interest income and non-interest income (other than gains and
losses on sales of securities and real estate owned). Excluding the SAIF
special assessment, the efficiency ratio for fiscal 1997 would have been
48.24%.
</FN>
</TABLE>
1
<PAGE>
To Our Stockholders:
In 1999, we are proud to celebrate the 75th anniversary of our
subsidiary, First Federal Savings Bank. Since its inception in 1924, First
Federal Savings Bank has emphasized customer service in serving consumers in
northern Westchester County and Putnam County. Over the years the Bank has
changed and evolved along with the entire financial services industry and the
changes continue.
The Bank's growth strategy includes opening new brick and mortar
branches or purchasing existing branches from consolidating competitors. The
Bank is interested in areas contiguous to existing branches where there exists
the potential of obtaining core deposits. In addition, the Bank will continue to
expand its product selection by introducing new products, such as the
introduction of free checking in fiscal 1999. This product enables the Bank to
collect no interest cost deposits to invest in securities and originate
mortgages. In May 1999, the Bank established a tax-advantaged subsidiary as a
real estate investment trust ("REIT") to hold a portion of the Bank's
mortgage-related assets. This strategy is expected to produce substantial state
tax savings and a lower effective tax rate for the Company in fiscal year 2000
and beyond.
Peekskill Financial Corporation went public in December 1995 by issuing
4,099,750 common shares, raising capital of over $36.7 million and increasing
its equity to assets ratio to over 30.0%. Since that time the Company has
stressed capital management to more effectively and profitably utilize its
capital. During fiscal 1999, the Company repurchased 1,030,740 common shares,
including 800,040 shares purchased in the Company's Modified Dutch Auction. At
June 30, 1999, treasury stock totaled 2,211,922 common shares, almost 54.0% of
the shares issued in the Company's public offering. This strategy reduced the
equity to assets ratio from 31.24% at June 30, 1996 to 13.22% at June 30, 1999,
and also was accretive to earnings per share.
Diluted earnings per share increased to $0.69 for fiscal 1999 as
compared to $0.66 for the previous year. Excluding the one-time costs incurred
in fiscal 1999 for the establishment of the REIT, diluted earnings per share
would have been $0.75, a 13.6% increase over fiscal 1998.
Total assets increased $6.6 million to $206.9 million at June 30, 1999
from $200.3 million at June 30, 1998. During fiscal 1999, the Company followed a
strategy of shifting funds from generally lower yielding securities (decreasing
$9.1 million in fiscal 1999) to generally higher yielding loans (increasing
$15.8 million during fiscal 1999), by originating mortgages using security
principal payments. The Company originated $23.3 million in loans in fiscal
1999, which was a record level and over twice the dollar amount of originations
in fiscal 1998. Changes in the Company's funding sources in fiscal 1999 included
a $15.0 million increase in borrowings and an $8.8 million increase in depositor
accounts, partially offset by a $15.9 million decrease in stockholders' equity.
The decrease in stockholders' equity primarily reflects treasury stock purchases
of $16.8 million and dividends of $773,000, partially offset by net income of
$1.5 million. Book value per share was $14.49 at June 30, 1999 and $14.92 at
June 30, 1998. The decrease was primarily due to the dilutive effect of stock
repurchases made in the Company's Modified Dutch Auction.
All of us at Peekskill Financial Corporation remain committed to
serving our community by offering competitively priced products with exceptional
customer service. We look forward to seeing you at the Annual Meeting of
Stockholders of Peekskill Financial Corporation, to be held on October 20, 1999
at 3:30pm at our Peekskill, New York office.
Sincerely,
/s/ Eldorus Maynard
- --------------------------
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 (the "Stock Offering").
The primary market area of the Company, with three full-service branches,
consists of northern Westchester County and Putnam County. 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, 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.
Forward-Looking Statements
The Company has made, and may continue to make, various forward-looking
statements with respect to earnings, credit quality and other financial and
business matters for periods subsequent to June 30, 1999. The Company cautions
that these forward-looking statements are subject to numerous assumptions, risks
and uncertainties, and that statements for subsequent periods are subject to
greater uncertainty because of the increased likelihood of changes in underlying
factors and assumptions. Actual results could differ materially from
forward-looking statements.
In addition to those factors previously disclosed by the Company and those
factors identified elsewhere herein, the following factors could cause actual
results to differ materially from such forward-looking statements: pricing
pressures on loan and deposit products; actions of competitors; changes in local
and national economic conditions; customer deposit disintermediation; changes in
customers' acceptance of the
3
<PAGE>
Company's products and services; the extent and timing of legislative and
regulatory actions and reforms; and Year 2000 related costs and issues
substantially different from those now anticipated.
The Company's forward-looking statements speak only as of the date on which
such statements are made. By making any forward-looking statements, the Company
assumes no duty to update them to reflect new, changing or unanticipated events
or circumstances.
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, 1999,
the Bank's liquidity ratio of 16.6% 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 borrowings such as securities
repurchase agreements and Federal Home Loan Bank ("FHLB") advances, dividend
payments and capital stock transactions comprise the Company's principal cash
flows from financing activities. While maturities and scheduled payments on
loans and securities provide an indication of the timing of the receipt of
funds, external factors such as 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, 1999, the average annual net cash
provided by operating activities was in excess of $2.3 million. Net cash used in
investing activities during fiscal 1999 was approximately $7.6 million,
primarily reflecting net disbursements of $15.9 million to fund loan growth
partially offset by a net decrease of $8.3 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 $148.7
million at June 30, 1999 are core deposits. The deposit base increased by $8.8
million in fiscal 1999, reflecting the Company's increased advertising and
competitive rates for deposit products. Core deposits are generally considered
to be a highly stable source of liquidity due to the long-term relationships
with deposit customers. The Company also has the ability to borrow advances of
up to $51.7 million from the FHLB of New York at June 30, 1999. Significant
financing activities in fiscal 1999 also included borrowing $15.0 million from
the FHLB; disbursing $18.2 million for treasury stock purchases, and paying
$773,000 in cash dividends. The Holding Company's future ability to pay
dividends to stockholders or to repurchase stock will be dependent on
4
<PAGE>
dividends received from the Bank, which are subject to certain regulatory
restrictions and income tax considerations. See Notes 7 and 11 to Consolidated
Financial Statements.
At June 30, 1999, the Company had outstanding loan commitments of $6.7
million and loans in process of $651,000. Since certain origination commitments
may not be funded and loans in process may not be fully drawn upon, these
amounts do not necessarily represent future cash outlays. The Company's
liquidity sources described above are anticipated to be sufficient to fund
outstanding loan commitments and other obligations.
Capital
The OTS has established regulations which require savings associations, such
as the Bank, to meet minimum capital requirements. These requirements include
tangible capital of 1.5% of total adjusted assets; core capital of 4.0% of total
adjusted assets (effective April 1, 1999); and risk-based capital of 8.0% of
risk-weighted assets. The Bank satisfied these minimum capital standards at June
30, 1999 with tangible and core capital ratios of 13.4% and a total risk-based
capital ratio of 46.8%. 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 11 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.
Qualitative and Quantitative Disclosures About Market Risk
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 interest 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
5
<PAGE>
strategies, and oversees the timing and implementation of transactions to assure
attainment of the Board's objectives in the most effective manner.
Notwithstanding the Company's interest rate risk management activities, the
potential for changing interest rates is an uncertainty that can have an adverse
effect on net income.
In adjusting the Company's asset/liability position, the Board and management
attempt to manage the Company's interest rate risk while enhancing net interest
margins. At times, depending on the general level of interest rates, the
relationship between long and short-term interest rates, market conditions and
competitive factors, the Board and management may determine to increase the
Company's interest rate risk position somewhat in order to increase its net
interest margin. The Company's results of operations and net portfolio values
remain vulnerable to increases in interest rates and to fluctuations in the
difference between long- and short-term interest rates.
Consistent with the asset/liability management philosophy described above,
the Company has taken several steps to manage its interest rate risk. First, the
Company has structured the securities portfolio to shorten the lives of its
interest-earning assets. For a number of years, the Company has purchased
mortgage-backed securities that have either short or medium terms to maturity or
adjustable interest rates. At June 30, 1999, the Company had securities of $19.7
million with contractual maturities of five years or less and adjustable-rate
securities of $34.2 million. The Company has received average cash flows from
principal paydowns, maturities and calls of mortgage-backed and other securities
of $47.7 million annually over the past three fiscal years. The Company also
controls interest rate risk 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, 1999, the Company had $51.5 million of regular savings and club accounts,
and $18.3 million of money market and NOW accounts, representing 46.9% 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, 1999, 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 - 300 basis points, measured in 100 basis point
increments).
Estimated Increase
Change in Estimated (Decrease) in NPV
----------------------------
Interest Rates NPV Amount Amount Percent
- ----------------- ------------- -------------- -------------
(Basis Points) (Dollars in thousands)
+300 $23,536 $(13,578) (37)%
+200 28,407 (8,707) (23)
+100 33,025 (4,089) (11)
--- 37,114 --- ---
-100 40,233 3,119 8
-200 42,529 5,415 15
-300 45,098 7,984 22
6
<PAGE>
Certain assumptions utilized by the OTS in assessing the interest rate risk
of thrift institutions were employed in preparing data for the Bank included in
the preceding table. These assumptions relate to interest rates, loan prepayment
rates, deposit decay rates, and the market values of certain assets under the
various interest rate scenarios. It was also assumed that delinquency rates will
not change as a result of changes in interest rates although there can be no
assurance that this will be the case. Even if interest rates change in the
designated amounts, there can be no assurance that the Bank's assets and
liabilities would perform as set forth above. In addition, a change in U.S.
Treasury rates in the designated amounts accompanied by a change in the shape of
the Treasury yield curve would cause significantly different changes to the NPV
than indicated above.
The Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk. Even though such activities may be
permitted with the approval of the Board of Directors, the Company does not
intend to engage in such activities in the foreseeable future.
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign currency exchange rate risk and
commodity price risk, do not arise in the normal course of the Company's
business activities.
7
<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>
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
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> <C>
Interest-earning assets:
Loans (2) $ 53,463 $ 4,152 7.77% $ 46,559 $ 3,720 7.99% $ 42,956 $ 3,402 7.92%
Mortgage-backed securities (3) 118,532 7,397 6.24 120,993 7,709 6.37 116,546 7,440 6.38
Other debt securities (3) 21,040 1,334 6.34 12,904 852 6.60 13,005 858 6.60
Other interest-earning assets 8,306 416 5.01 5,474 362 6.61 10,346 609 5.89
--------- -------- --------- -------- --------- --------
Total interest-earning
assets 201,341 13,299 6.61 185,930 12,643 6.80 182,853 12,309 6.73
-------- -------- --------
Non interest-earning assets 2,810 2,382 1,863
--------- --------- ---------
Total assets $ 204,151 $ 188,312 $ 184,716
========= ========= =========
Interest-bearing liabilities:
Regular savings and club
accounts $ 50,480 $ 1,403 2.78% $ 52,922 $ 1,541 2.91% $ 56,300 $ 1,696 3.01%
Money market and NOW accounts 15,702 418 2.66 11,909 329 2.76 11,252 285 2.53
Savings certificates 78,973 4,145 5.25 71,717 3,919 5.46 62,973 3,450 5.48
Borrowings 19,750 1,001 5.07 4,567 245 5.36 --- --- ---
--------- -------- --------- -------- --------- --------
Total interest-bearing
liabilities 164,905 6,967 4.22 141,115 6,034 4.28 130,525 5,431 4.16
-------- -------- --------
Non interest-bearing liabilities 1,632 1,100 3,495
--------- --------- ---------
Total liabilities 166,537 142,215 134,020
Stockholders' equity 37,614 46,097 50,696
--------- --------- ---------
Total liabilities and
stockholders' equity $ 204,151 $ 188,312 $ 184,716
========= ========= =========
Net interest income $ 6,332 $ 6,609 $ 6,878
======== ======== ========
Interest rate spread 2.39% 2.52% 2.57%
Net interest margin (4) 3.15 3.55 3.76
Ratio of average interest-earning
assets to average interest-bearing
liabilities 1.22 1.32 1.40
<FN>
(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.
</FN>
</TABLE>
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.
Fiscal 1999 vs. 1998 Fiscal 1998 vs. 1997
------------------------ ----------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------- Net ------------- Net
Volume Rate Change Volume Rate Change
------ ----- ------ ------ ----- ------
(In thousands)
Interest-earning assets:
Loans $ 533 $(101) $ 432 $ 287 $ 31 $ 318
Mortgage-backed securities (156) (156) (312) 284 (15) 269
Other debt securities 514 (32) 482 (7) 1 (6)
Other interest-earning assets 102 (48) 54 (311) 64 (247)
------ ----- ----- ----- ----- -----
Total 993 (337) 656 253 81 334
------ ----- ----- ----- ----- -----
Interest-bearing liabilities:
Regular savings and club accounts (69) (69) (138) (99) (56) (155)
Money market and NOW accounts 100 (11) 89 18 26 44
Savings certificates 371 (145) 226 478 (9) 469
Borrowings 769 (13) 756 245 --- 245
------ ----- ----- ----- ----- -----
Total 1,171 (238) 933 642 (39) 603
====== ===== ===== ===== ===== =====
Net change in net interest income $ (178) $ (99) $(277) $(389) $ 120 $(269)
====== ===== ===== ===== ===== =====
8
<PAGE>
Comparison of Financial Condition at June 30, 1999 and 1998
Total assets increased $6.6 million from $200.3 million at June 30, 1998 to
$206.9 million at June 30, 1999. The increase primarily reflects a $15.8 million
increase in net loans, partially offset by a $9.1 million decrease in total
securities. Funding for the Company's asset growth in fiscal 1999 and its
treasury share repurchases of $16.8 million was provided primarily by $15.0
million of additional borrowings and an $8.8 million increase in depositor
accounts.
The $15.8 million, or 33.2%, increase in net loans primarily reflects
originations of $23.3 million, partially offset by $7.4 million of principal
paydowns. The majority of the increase was in the Company's one-to-four family
residential mortgage portfolio. The decrease in securities consisted of a $16.3
million decrease in held-to-maturity securities, partially offset by a $7.2
million increase in available-for-sale securities. During fiscal 1999 the
Company supplemented retail deposit growth by entering into $15.0 million of
additional borrowings, increasing the balance of securities repurchase
agreements and other borrowings to $28.0 million, or 13.5% of total assets, at
June 30, 1999.
Stockholders' equity decreased $15.9 million, or 36.7%, from $43.2 million at
June 30, 1998 to $27.4 million at June 30, 1999. The decrease primarily reflects
common stock purchases of $16.8 million for the treasury, dividends paid of
$773,000 and a $495,000 increase in the net unrealized loss on
available-for-sale securities, partially offset by net income of $1.5 million.
The ratio of stockholders' equity to total assets decreased from 21.57% at June
30, 1998 to $13.22% at June 30, 1999. The Company's tangible book value per
share was $14.49 at June 30, 1999 as compared to $14.92 at June 30, 1998.
Comparison of Operating Results for the Fiscal Years Ended June 30, 1999 and
1998
General. Net income for the fiscal year ended June 30, 1999 was $1.5 million,
or basic earnings per share ("EPS") of $0.71, as compared to net income of $1.9
million, or basic EPS of $0.68 for the fiscal year ended June 30, 1998. Diluted
EPS for fiscal 1999 and 1998 was $0.69 and $0.66, respectively. Net income for
fiscal 1999 was affected by a charge to earnings of $214,000 ($125,000
after-tax) for costs incurred to establish a Real Estate Investment Trust
("REIT") in the fourth quarter. Excluding the REIT expenses, basic and diluted
EPS would have been $0.77 and $0.75, respectively.
Net Interest Income. Net interest income decreased $277,000, or 4.2%, from
$6.6 million for the year ended June 30, 1998 to $6.3 million for the current
year. The Company's interest rate spread was 2.39% for fiscal 1999 as compared
to 2.52% for fiscal 1998. The net interest margin decreased 40 basis points to
3.15% for the year ended June 30, 1999. The components of net interest income
are interest and dividend income, which increased $656,000, and interest
expense, which increased $933,000.
Total interest and dividend income increased $656,000, or 5.2%, to $13.3
million for the year ended June 30, 1999 as compared to $12.6 million for the
year ended June 30, 1998. The increase primarily reflects a $15.4 million, or
8.3%, increase in average interest-earning assets, partially offset by a 19
basis point decrease in the average yield on interest-earning assets. The $15.4
million increase in average interest-earning assets is comprised of increases of
$6.9 million in the average loan portfolio, $5.7 million in the average
securities portfolio and $2.8 million in other interest-earning assets.
Management intends to
9
<PAGE>
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 $933,000 increase in total interest expense was caused primarily by a
$23.8 million, or 16.9%, increase in average interest-bearing liabilities,
partially offset by a 6 basis point decrease in the average rate paid on
interest-bearing liabilities. The increase in average interest-bearing
liabilities is comprised of increases of $3.8 million in money market and NOW
accounts, $7.3 million in savings certificates and $15.2 million in borrowings,
partially offset by a $2.4 million decrease in regular savings and club
accounts. During fiscal 1999, the Company obtained additional borrowings
(securities repurchase agreements and FHLB advances) of $15.0 million, at an
average initial rate of 4.76%.
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 probable loss inherent
in the existing loan portfolio. The allowance for loan losses consists of
amounts specifically allocated to non-performing loans (if any) as well as
allowances determined for each major loan category. Loan categories such as
single-family residential mortgages and consumer loans are generally evaluated
on an aggregate or "pool" basis by applying loss factors to the current balances
of the various loan categories. The loss factors are determined by management
based on an evaluation of historical loss experience, delinquency trends, volume
and type of lending conducted, and the current economic conditions in the
Company's market area. 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 income could be significantly affected, if circumstances
differ substantially from the assumptions used in making the final
determination.
The provision for loan losses was $60,000 for both fiscal 1999 and 1998. The
allowance for loan losses was $742,000 or 65.66% of non-performing loans at June
30, 1999, compared to $682,000 or 45.74% of non-performing loans at June 30,
1998. The allowance represented 1.17% of total loans at June 30, 1999, compared
to 1.43% a year earlier. The Company did not have any loan charge-offs or
recoveries in fiscal 1999 and 1998. Non-performing loans at June 30, 1999 were
$1.1 million as compared to $1.5 million at June 30, 1998. The ratio of
non-performing loans to net loans was 1.78% at June 30, 1999 as compared to
3.13% at June 30, 1998. See "Asset Quality" for further information.
Non-Interest Income. Non-interest income increased $30,000 to $255,000 for
fiscal 1999 from $225,000 for fiscal 1998. Non-interest income is primarily
comprised of loan fees, service charges and rental income on the Company's
office properties. The increase reflects a $10,000 increase in loan fees and
service charges and a $20,000 increase in other non-interest income.
Non-Interest Expense. Non-interest expense increased $332,000 to $3.8 million
for the year ended June 30, 1999 from $3.5 million for the prior year. The
increase is primarily the result of increases of $50,000 in computer service
fees, $248,000 in professional fees and $77,000 in other non-interest expenses,
partially offset by a $74,000 decrease in compensation and benefits. The
increase in computer service fees is due to upgrades being made by the Company
and the service bureau in preparation for the Year 2000, as well as increased
charges based on volume growth. The increase in professional fees is primarily
due to
10
<PAGE>
costs of approximately $214,000 incurred to establish the REIT in the fourth
quarter of fiscal 1999, as well as legal fees incurred in conjunction with a
lawsuit filed in January 1999. The lawsuit, purporting to be on behalf of the
Company's shareholders, was filed in response to the Company's decision not to
pursue an unsolicited acquisition offer. The lawsuit was dismissed in May 1999
and resulted in no payment by the Company to the plaintiff. The $74,000 decrease
in compensation and benefits primarily reflects a $64,000 charge in fiscal 1998
for the full vesting of certain shares under the Company's Recognition and
Retention Plan ("RRP"), due to the death of one of the Company's Directors.
Income Tax Expense. Income tax expense was $1.2 million and $1.4 million,
respectively, for fiscal years 1999 and 1998. The $248,000 decrease in tax
expense primarily reflects a $579,000 decrease in pre-tax income. The effective
tax rates for the years ended June 30, 1999 and 1998 were 44.0% and 43.8%,
respectively. The establishment of the REIT is expected to produce substantial
state tax savings and a lower effective tax rate for the Company in fiscal 2000
and beyond. The Company anticipates that the amount of tax benefits realized
within approximately the first year will match the after-tax costs incurred in
fiscal 1999 to establish the REIT.
Comparison of Operating Results for the Fiscal Years Ended June 30, 1998 and
1997
General. Net income for the fiscal year ended June 30, 1998 was $1.9 million,
or basic EPS of $0.68, as compared to net income of $1.8 million, or basic EPS
of $0.58 for the fiscal year ended June 30, 1997. Diluted EPS was $0.66 and
$0.58, respectively, for fiscal years 1998 and 1997. Net income for the year
ended June 30, 1998 was affected by a charge to earnings of $64,000 ($37,000 net
of taxes) for the full vesting of certain shares under the Company's RRP, due to
the death of one of the Company's Directors. Net income for the year ended June
30, 1997 was affected by a one-time charge to earnings for a Federal deposit
insurance special assessment of $884,000 ($520,000 net of taxes) and a credit to
earnings for the recognition of a $238,000 reduction to New York State tax
expense due to a change in tax law. Excluding these events, net income would
have been $1.9 million and $2.1 million for the years ended June 30, 1998 and
1997, respectively, and basic EPS would have been $0.70 and $0.68, respectively.
Net Interest Income. Net interest income decreased $269,000, or 3.9%, from
$6.9 million for the year ended June 30, 1997 to $6.6 million for the year ended
June 30, 1998. The components of net interest income are interest and dividend
income, which increased $334,000, and interest expense, which increased
$603,000. The Company's interest rate spread decreased to 2.52% for fiscal 1998
from 2.57% for fiscal 1997. The net interest margin decreased 21 basis points to
3.55% for the year ended June 30, 1998, reflecting a $7.5 million decrease in
average net earning assets.
Total interest and dividend income increased $334,000, or 2.7%, to $12.6
million for fiscal 1998 from $12.3 million for fiscal 1997. The increase
primarily reflects a $3.1 million increase in average interest-earning assets
and a 7 basis point increase in the average yield on interest-earning assets.
The overall increase in average interest-earning assets is comprised of
increases of $3.6 million in the average loan portfolio and $4.3 million in the
average securities portfolio, partially offset by a decrease of $4.9 million in
other interest-earning assets. The change in mix of interest-earning assets
reflects the use of generally lower yielding other interest-earning assets to
purchase shares of the Company's common stock for the treasury.
11
<PAGE>
The $603,000 increase in total interest expense was caused primarily by a 12
basis point increase in the average rate paid on interest-bearing liabilities
and a $10.6 million increase in average interest-bearing liabilities. The higher
average rate in fiscal 1998 reflects a continuing shift in the mix of
interest-bearing deposits from generally lower rate savings and club accounts
(the average of which decreased $3.4 million during fiscal 1998) to generally
higher rate savings certificates (the average of which increased $8.7 million
during fiscal 1998). This shift was partially offset by a 10 basis point
decrease in the average rate paid on regular savings and club accounts. During
fiscal 1998, the Company entered into two securities repurchase agreements
totaling $13.0 million at an average rate of 5.36%, for which the Company
recorded $245,000 of interest expense.
Provision for Loan Losses. The provision for loan losses was $60,000 in
fiscal 1998 and $143,000 in fiscal 1997. The higher provision in fiscal 1997 was
due to the establishment of an $83,000 allowance for loan losses on certain
participation loans. The overall allowance for loan losses was $682,000, or
45.74% of non-performing loans at June 30, 1998, as compared to $622,000, or
31.04% of non-performing loans at June 30, 1997. The Company did not have any
charge-offs in fiscal 1998 as compared to $40,000 in fiscal 1997. Non-performing
loans at June 30, 1998 were $1.5 million compared to $2.0 million at June 30,
1997. The ratio of non-performing loans to net loans was 3.13% at June 30, 1998
compared to 4.40% at June 30, 1997. See "Asset Quality" for further information.
Non-Interest Income. Non-interest income decreased $11,000 to $225,000 for
fiscal 1998 from $236,000 for fiscal 1997. The decrease reflects a $14,000
decrease in loan fees and service charges, partially offset by a $3,000 increase
in other non-interest income.
Non-Interest Expense. Non-interest expense decreased $728,000 to $3.5 million
for the year ended June 30, 1998 from $4.2 million for the prior year. The
decrease is primarily the result of a $985,000 decrease in Federal deposit
insurance costs, partially offset by a $155,000 increase in compensation and
benefits expense and an $88,000 increase in occupancy costs. The decrease in
deposit insurance costs reflects the absence in fiscal 1998 of the special
assessment of $884,000 included in the fiscal 1997 amount, as well as lower
ongoing costs subsequent to recapitalization of the Savings Association
Insurance Fund ("SAIF"). Under legislation enacted on September 30, 1996, the
Federal Deposit Insurance Corporation ("FDIC") imposed 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 on each institution's SAIF-assessable deposits.
The Company's special SAIF assessment of $884,000 was charged to expense in the
first quarter of fiscal 1997. The increase in compensation and benefits expense
in fiscal 1998 primarily reflects (i) a $64,000 charge for the full vesting of
certain shares under the Company's RRP, due to the death of one of the Company's
Directors, and (ii) a $53,000 increase in expense related to the Employee Stock
Ownership Plan ("ESOP") due to increases in the Company's stock price. The
increase in occupancy costs primarily reflects costs associated with the new
building completed in fiscal 1998 for the Bank's Mohegan Lake branch.
Income Tax Expense. Income tax expense was $1.4 million and $957,000,
respectively, for fiscal years 1998 and 1997. The increase in tax expense
reflects a $531,000 increase in pre-tax income, as well as the Company's
recognition of a tax benefit of $238,000 in fiscal 1997 due to the reduction of
a deferred tax liability caused by an amendment to the New York State tax law.
As discussed in Note 7 to Consolidated Financial Statements, the amendment
changed the base-year for tax bad debt reserves and eliminated the need for a
deferred tax liability previously recognized for reserves in excess of the
base-year amount. The
12
<PAGE>
effective tax rates for the years ended June 30, 1998 and 1997 were 43.8% and
34.6%, respectively. Excluding the one-time benefit of $238,000, the effective
tax rate for fiscal 1997 would have been 43.2%.
Asset Quality
The following table sets forth information regarding non-performing loans and
real estate owned at the dates indicated. There were no troubled debt
restructurings at the dates set forth below.
At June 30,
-----------------------------------
1999 1998 1997 1996 1995
------ ------ ------- ------ ------
(Dollars in thousands)
Non-accrual (impaired) loans:
Participation interests in TASCO Loans $ 316 $ 876 $ 1,074 $ --- $ ---
One-to-four family mortgage loans 382
245 --- --- ---
------ ------ ------- ------ ------
Total non-accrual loans 698 1,121 1,074 --- ---
Accruing loans past due more than 90 days:
One-to-four family mortgage loans 432 370 930 1,252 2,096
------ ------ ------- ------ ------
Total non-performing loans 1,130 1,491 2,004 1,252 2,096
Real estate owned --- 94 220 --- ---
====== ====== ======= ====== ======
Total non-performing assets $1,130 $1,585 $ 2,224 $1,252 $2,096
====== ====== ======= ====== ======
Ratios:
Allowance for loan losses to:
Non-performing loans 65.66% 45.74% 31.04% 41.45% 22.61%
Total loans, net 1.17 1.43 1.37 1.31 1.15
Non-performing loans to total loans, net 1.78 3.13 4.40 3.17 5.10
Non-performing assets to total assets 0.55 0.79 1.22 0.65 1.35
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, 1999, non-performing assets totaled $1.1 million, or 0.55% of
total assets, compared to $1.6 million, or 0.79% of total assets, at June 30,
1998. The $455,000 decrease reflects decreases of $560,000 in non-accrual TASCO
Loans and $94,000 in real estate owned, partially offset by an increase of
$199,000 in non-performing one-to-four family mortgage loans. As discussed in
Note 3 to Consolidated Financial Statements, the TASCO Loans are participation
interests in loans originated by Thrift Association Service Corporation for
which the FDIC, as servicer of these loans, disputed its obligation to
pass-through certain principal and interest payments whether or not such amounts
are collected from the borrowers. The FDIC suspended making payments beginning
in 1996, but resumed making certain payments in 1997 and has continued to do so.
The Company's participation interests in the TASCO Loans totaled $643,000 and
$876,000 at June 30, 1999 and 1998, respectively. The decrease during fiscal
1999 reflects current year principal payments, as well as principal reductions
from the reclassification of $143,000 in interest
13
<PAGE>
payments deferred in fiscal 1998 and 1997. Based on the present payment status
of the loans underlying the participation interests, management has classified
participation interests of $316,000 as non-performing at June 30, 1999. All
participation interests were classified as non-performing at June 30, 1998.
The allowance for loan losses as a percentage of non-performing loans was
65.66% at June 30, 1999 compared to 45.74% at June 30, 1998 and 31.04% at June
30, 1997. As a percentage of total loans, the allowance for loan losses
decreased to 1.17% at June 30, 1999 compared to 1.43% at June 30, 1998 and 1.37%
at June 30, 1997.
The following table sets forth activity in the Company's allowance for loan
losses for the periods indicated.
Year ended June 30,
----------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of year $682 $622 $519 $474 $336
Provision for loan losses 60 60 143 45 160
Charge-offs --- --- (40) --- (22)
==== ==== ==== ==== ====
Balance at end of year $742 $682 $622 $519 $474
==== ==== ==== ==== ====
Impact of Inflation
The consolidated financial statements and related notes have been prepared in
conformity with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. Unlike industrial companies, virtually all of the
assets and liabilities of a financial institution are monetary in nature. As a
result, interest rates have a more significant impact on a financial
institution's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
Impact of Year 2000 Issue
Like other financial institutions, the Company relies on computers for the
daily conduct of its business, all its transaction processing and for general
data processing. The "Year 2000 Issue" arose because many existing computer
programs use only the last two digits to refer to a year. Therefore, these
computer programs may not properly recognize a year that begins with "20"
instead of the familiar "19", causing the programs to fail or create erroneous
results.
The Company has initiated formal communications with all its significant
suppliers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 Issue. The Company's
data processing for its core banking applications is performed by a third party
vendor. These core applications are the Company's mission-critical systems for
purposes of its Year 2000 plan. At this time, the vendor has asserted that it is
Year 2000 compliant and the Company, in conjunction with other customers of this
vendor, has tested the remediated system. The testing of the Company's data
processing vendor is complete and no significant problems were encountered. The
Company currently
14
<PAGE>
believes that, with modifications to existing software and conversions to new
software, the Year 2000 Issue will be mitigated without causing a material
adverse impact on its operations.
Contingency plans have been developed for all mission-critical areas of the
Company's operations. The contingency plan for the Company's data processing
function involves the manual processing of transactions by the Company's
employees. Contingency plans for the other mission-critical areas involve having
secondary providers ready if problems with primary providers are encountered.
The Company utilizes both internal and external resources to reprogram, or
replace, and test all software for Year 2000 modifications. Related costs are
expensed as incurred, except for costs incurred in the purchase of new software
or hardware, which are capitalized. At June 30, 1999, the cumulative costs
incurred to address the Year 2000 Issue amounted to approximately $160,000.
Costs incurred to date are primarily related to computer hardware purchases, and
management does not expect that additional costs to be incurred in connection
with the Year 2000 Issue will have a material impact on the Company's financial
condition or results of operations. Since substantially all of the Company's
loans are residential mortgages, the ability of the Company's borrowers to
become Year 2000 compliant is not a significant concern.
The estimated costs and timetable for the Year 2000 modifications are based
on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors with respect to both the
Company and its suppliers that might cause such material differences include,
but are not limited to, the availability and cost of personnel trained in this
field, the ability to locate and correct all relevant computer codes, testing
complications and similar uncertainties. In addition, there can be no guarantee
that the systems of other companies on which the Company's systems rely will be
timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with the Company's systems, would not have a
material adverse effect on the Company.
15
<PAGE>
Management's Report
Management is responsible for the preparation and integrity of the
consolidated financial statements and the other information presented in this
annual report. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and reflect
management's judgments and estimates with respect to certain events and
transactions.
Management is responsible for maintaining a system of internal control. The
purpose of this system is to provide reasonable assurance that transactions are
recorded in accordance with management's authorization, assets are safeguarded
against loss or unauthorized use, and underlying financial records support the
preparation of financial statements. The system includes the communication of
written policies and procedures, selection of qualified personnel, and
appropriate segregation of responsibilities.
The Board of Directors meets periodically with Company management and the
independent auditors, KPMG 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, 1999 and 1998, 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, 1999.
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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1999 in conformity with generally accepted
accounting principles.
Stamford, Connecticut
July 27, 1999
16
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
June 30,
-------------------------
1999 1998
---------- ----------
Assets
Cash and due from banks $ 957 $ 2,616
Interest-bearing deposits 3,200 2,010
Securities (note 2):
Held-to-maturity, at amortized cost
(fair value of $118,675 in 1999
and $136,883 in 1998) 119,122 135,446
Available-for-sale, at fair value
(amortized cost of $16,500 in
1999 and $8,500 in 1998) 15,673 8,498
---------- ----------
Total securities 134,795 143,944
Loans, net of allowance for loan losses
of $742 in 1999 and $682 in 1998 (note 3) 63,436 47,631
Federal Home Loan Bank stock, at cost 1,463 1,463
Accrued interest receivable 1,094 1,050
Office properties and equipment, net (note 4) 1,114 1,043
Deferred income taxes, net (note 7) 814 362
Real estate owned --- 94
Other assets 59 128
---------- ----------
Total assets $ 206,932 $ 200,341
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Depositor accounts (note 5) $ 148,693 $ 139,858
Securities repurchase agreements
and other borrowings (note 6) 28,000 13,000
Mortgage escrow deposits 1,692 1,759
Other liabilities (note 6) 1,196 2,518
---------- ----------
Total liabilities 179,581 157,135
---------- ----------
Commitments and contingencies (note 12)
Stockholders' equity (notes 8 and 11):
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 40,305 40,181
Unallocated common stock held by
employee stock ownership plan ("ESOP") (2,706) (2,870)
Unamortized awards of common stock
under recognition and retention plan ("RRP") (771) (922)
Treasury stock, at cost (2,211,922
shares in 1999 and 1,204,181 shares in 1998) (34,204) (17,730)
Retained earnings 25,183 24,508
Accumulated other comprehensive loss (note 10) (497) (2)
---------- ----------
Total stockholders' equity 27,351 43,206
========== ==========
Total liabilities and stockholders' equity $ 206,932 $ 200,341
========== ==========
See accompanying notes to consolidated financial statements.
17
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Year ended June 30,
-------------------------
1999 1998 1997
------- ------- -------
Interest and dividend income:
Loans $ 4,152 $ 3,720 $ 3,402
Securities 8,731 8,561 8,298
Interest-bearing deposits and other 416 362 609
------- ------- -------
Total interest and dividend income 13,299 12,643 12,309
------- ------- -------
Interest expense:
Depositor accounts (note 5) 5,966 5,789 5,431
Securities repurchase agreements 993 245 ---
Federal Home Loan Bank advances 8 --- ---
------- ------- -------
Total interest expense 6,967 6,034 5,431
------- ------- -------
Net interest income 6,332 6,609 6,878
Provision for loan losses (note 3) 60 60 143
------- ------- -------
Net interest income after
provision for loan losses 6,272 6,549 6,735
------- ------- -------
Non-interest income:
Loan fees and service charges 145 135 149
Other 110 90 87
------- ------- -------
Total non-interest income 255 225 236
------- ------- -------
Non-interest expense:
Compensation and benefits (note 8) 1,810 1,884 1,729
Occupancy costs 451 429 341
Computer service fees 232 182 180
Professional fees 411 163 140
Safekeeping and custodial services 107 98 94
Federal deposit insurance costs,
including a special assessment of
$884 in 1997 (note 5) 84 84 1,069
Other 711 634 649
------- ------- -------
Total non-interest expense 3,806 3,474 4,202
------- ------- -------
Income before income tax expense 2,721 3,300 2,769
Income tax expense (note 7) 1,198 1,446 957
------- ------- -------
Net income $ 1,523 $ 1,854 $ 1,812
======= ======= =======
Earnings per share (note 9):
Basic $ 0.71 $ 0.68 $ 0.58
Diluted 0.69 0.66 0.58
======= ======= =======
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 Accumulated
Additional Stock Common Other Total
Common Paid-in Held Stock Treasury Retained Comprehensive Stockholders'
Stock Capital By ESOP Under RRP Stock Earnings Loss Equity
------- ------- -------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $ 41 $39,972 $ (3,198) $ --- $ --- $22,984 $ (25) $59,774
Net income --- --- --- --- --- 1,812 --- 1,812
Other comprehensive income
(note 10) --- --- --- --- --- --- 15 15
-------
Total comprehensive income 1,827
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
------- ------- -------- ------- -------- ------- ------- -------
Balance at June 30, 1997 41 40,032 (3,034) (1,188) (12,543) 23,668 (10) 46,966
Net income --- --- --- --- --- 1,854 --- 1,854
Other comprehensive income
(note 10) --- --- --- --- --- --- 8 8
-------
Total comprehensive income 1,862
Dividends paid
($0.36 per share) --- --- --- --- --- (1,014) --- (1,014)
Purchase of 297,552
treasury shares --- --- --- --- (5,187) --- --- (5,187)
Amortization of RRP awards --- --- --- 266 --- --- --- 266
Tax benefit from vesting of
RRP awards --- 36 --- --- --- --- --- 36
ESOP shares allocated
(16,399 shares) --- 113 164 --- --- --- --- 277
------- ------- -------- ------- -------- ------- ------- -------
Balance at June 30, 1998 41 40,181 (2,870) (922) (17,730) 24,508 (2) 43,206
Net income --- --- --- --- --- 1,523 --- 1,523
Other comprehensive loss
(note 10) --- --- --- --- --- --- (495) (495)
-------
Total comprehensive income 1,028
Dividends paid ($0.36 per
share) --- --- --- --- --- (773) --- (773)
Purchase of 1,030,740
treasury shares --- --- --- --- (16,822) --- --- (16,822)
RRP award (2,500 shares)
--- 14 --- (44) 30 --- --- ---
Exercise of stock options
(20,499 treasury shares) --- --- --- --- 318 (75) --- 243
Amortization of RRP awards
--- --- --- 195 --- --- --- 195
Tax benefit from vesting of
RRP awards
--- 36 --- --- --- --- --- 36
ESOP shares allocated
(16,399 shares) --- 74 164 --- --- --- --- 238
------- ------- -------- ------- -------- ------- ------- -------
Balance at June 30, 1999 $ 41 $40,305 $ (2,706) $ (771) $(34,204) $25,183 $ (497) $27,351
======= ======= ======== ======= ======== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended June 30,
-------------------------
1999 1998 1997
------- -------- --------
Cash flows from operating activities:
Net income $ 1,523 $ 1,854 $ 1,812
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 60 60 143
Depreciation and amortization expense 101 96 66
ESOP and RRP expense 433 543 436
Net amortization and accretion of deferred
fees, discounts and premiums 59 (61) (122)
Net (increase) decrease in accrued
interest receivable (44) 14 47
Net decrease in other assets 69 43 2
Deferred tax benefit (146) (58) (384)
Net increase in other liabilities 24 434 90
Other adjustments, net (1) (1) 10
------- -------- --------
Net cash provided by operating activities 2,078 2,924 2,100
------- -------- --------
Cash flows from investing activities:
Purchases of securities:
Held-to-maturity (45,826) (52,950) (18,422)
Available-for-sale (17,500) (11,100) (1,000)
Proceeds from principal payments, maturities
and calls of securities:
Held-to-maturity 62,155 44,046 21,232
Available-for-sale 9,500 5,100 1,000
Disbursements for loan originations,
net of principal collections (15,865) (2,431) (6,261)
Purchase of Federal Home Loan Bank stock --- --- (144)
Proceeds from sales of real estate owned 94 373 ---
Purchases of office properties and equipment (171) (899) (122)
------- -------- --------
Net cash used in investing activities (7,613) (17,861) (3,717)
------- -------- --------
Cash flows from financing activities:
Net increase in depositor accounts 8,835 7,440 4,114
Proceeds from securities repurchase
agreements and other borrowings 15,000 13,000 ---
Repayments of Federal Home Loan Bank advances --- --- (500)
Net decrease in mortgage escrow deposits (67) (184) (88)
Treasury stock purchases (18,172) (3,837) (12,543)
Purchase of shares to fund current-year
RRP awards --- --- (1,400)
Proceeds from issuance of common stock 243 --- ---
Dividends paid (773) (1,014) (1,128)
------- -------- --------
Net cash provided by (used in) financing
activities 5,066 15,405 (11,545)
------- -------- --------
Net (decrease) increase in cash and cash equivalents (469) 468 (13,162)
Cash and cash equivalents at beginning of year 4,626 4,158 17,320
------- -------- --------
Cash and cash equivalents at end of year $ 4,157 $ 4,626 $ 4,158
======= ======== ========
Supplemental information:
Interest paid $ 6,940 $ 5,918 $ 5,468
Income taxes paid 1,346 1,390 1,105
(Decrease) increase in liability for
treasury stock purchased, not yet settled (1,350) 1,350 ---
(Decrease) increase in liability for securities
purchased, not yet settled --- (499) 499
Mortgage loans transferred to real estate owned --- 247 220
======= ======== ========
See accompanying notes to consolidated financial statements.
20
<PAGE>
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Peekskill Financial Corporation (the "Holding Company") is a savings and loan
holding company which owns all of the outstanding common stock of First Federal
Savings Bank (the "Bank"), formerly First Federal Savings and Loan Association
of Peekskill. The Holding Company and the Bank are collectively referred to
herein as "the Company." The Bank operates three full-service branches, and
serves northern Westchester County and Putnam County as its primary market area.
The Bank is a community-oriented savings institution 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. The Bank is a federally chartered stock savings bank with deposits
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").
Basis of Presentation
The consolidated financial statements include the accounts of the Holding
Company, the Bank and First Federal REIT, Inc. (a wholly-owned subsidiary of the
Bank formed in May 1999 as a real estate investment trust to hold a portion of
the Company's mortgage-related assets). All significant intercompany accounts
and transactions have been eliminated in consolidation.
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.
Actual results could differ significantly from those estimates. Significant
estimates that are particularly susceptible to near-term change are the
allowance for loan losses and deferred income taxes, which are discussed below.
For purposes of reporting cash flows, cash and cash equivalents represent cash
and due from banks and interest-bearing deposits.
Securities
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", requires the classification
of individual securities as held-to-maturity, trading, or available-for-sale.
SFAS No. 115 limits the held-to-maturity category to debt securities for which
the entity has the positive intent and ability to hold to maturity. Trading
securities are debt and equity securities that are bought principally for the
purpose of selling them in the near term. All other debt and equity securities
are classified as available-for-sale. Management determines the appropriate
classification of the Company's securities at the time of purchase.
21
<PAGE>
Notes to Consolidated Financial Statements (continued)
Held-to-maturity securities are carried at amortized cost. Available-for-sale
securities are carried at fair value, with unrealized gains and losses excluded
from earnings and reported on a net-of-tax basis as a separate component of
stockholders' equity (accumulated other comprehensive income or loss). 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 loan 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.
In accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," a loan is considered to be impaired when, based on current information
and events, it is probable that the Company will be unable to collect all
principal and interest contractually due. The Company applies SFAS No. 114 to
loans (including participation interests) that are individually evaluated for
collectibility. The standard generally does not apply to smaller-balance
homogeneous loans (such as individual one-to-four family mortgage loans) that
are collectively evaluated for impairment. Under SFAS No. 114, 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.
Interest and Fees on Loans
Interest income is accrued monthly on outstanding loan principal balances unless
management considers collection to be uncertain. Interest collections on
non-accrual loans are either deferred or reported as
22
<PAGE>
interest income, depending on management's judgment as to the likelihood of
further collections. Loans are returned to accrual status when collectibility is
no longer considered uncertain.
Loan origination fees and certain direct loan origination costs are deferred,
and the net fee or cost is recognized as an adjustment to interest income using
the level-yield method over the contractual term of the related loan. Net
deferred fees and costs applicable to prepaid loans are recognized in interest
income at the time of prepayment.
Office Properties and Equipment
Office properties and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation is computed using the straight-line
method over the estimated useful lives of the related assets. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or the estimated useful life of the improvement. Repairs and
maintenance, as well as renewals and replacements of a routine nature, are
charged to expense as incurred. Costs of significant improvements are
capitalized.
Real Estate Owned
Property acquired through foreclosure is initially recorded at fair value less
estimated sales costs, with any resulting writedown charged to the allowance for
loan losses. Thereafter, an allowance for losses on real estate owned is
established for any further declines in fair value less estimated sales costs.
Fair value estimates are based on recent appraisals and other available
information.
Securities Repurchase Agreements
In securities repurchase agreements, the Company transfers securities to a
counterparty under an agreement to repurchase the identical securities at a
fixed price in the future. These agreements are accounted for as secured
financing transactions provided the Company maintains effective control over the
transferred securities and meets the other criteria for such accounting as
specified in SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." Since all of the Company's
agreements are accounted for as secured financings, the transaction proceeds are
recorded as borrowed funds and the underlying securities continue to be carried
in the Company's securities portfolio.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Accordingly, 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. 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>
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.
Treasury Stock
Treasury stock is carried at cost and is presented as a deduction from
stockholders' equity. Purchases of treasury shares are recorded on the trade
date.
Pension 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."
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 deducted from 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. 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.
24
<PAGE>
Earnings Per Share
In accordance with SFAS No. 128, "Earnings per Share," the Company has presented
both basic earnings per share ("EPS") and diluted EPS. Basic EPS excludes
dilution and is computed by dividing income available to common stockholders by
the weighted number of common shares outstanding for the period. Shares
outstanding for this purpose exclude unallocated ESOP shares that have not been
committed to be released to participants. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
(such as stock options) were exercised or converted into common stock or
resulted in the issuance of common stock that would then share in the earnings
of the entity. Diluted EPS is computed by dividing net income by the weighted
average number of common shares outstanding for the period, plus
common-equivalent shares computed using the treasury stock method.
Segment Information
During fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 requires public
companies to report certain financial information about significant
revenue-producing segments of the business for which such information is
available and utilized by the chief operating decision maker. Specific
information to be reported for individual operating segments includes a measure
of profit and loss, certain revenue and expense items, and total assets. As a
community-oriented financial institution, substantially all of the Company's
operations involve the delivery of loan and deposit products to customers.
Management makes operating decisions and assesses performance based on an
ongoing review of these community banking operations, which constitute the
Company's only operating segment for financial reporting.
25
<PAGE>
2. Securities
A summary of the Company's securities follows:
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ---------------- Fair
Cost Gains Losses Value
-------- ----- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
June 30, 1999
Held-to-Maturity Securities
Mortgage-backed securities:
Pass-through securities:
Freddie Mac $ 27,642 $ 406 $ (182) $ 27,866
Ginnie Mae 31,403 437 (4) 31,836
Fannie Mae 9,269 27 (164) 9,132
Collateralized mortgage obligations 42,389 25 (673) 41,741
-------- ------ ------- --------
110,703 895 (1,023) 110,575
U.S. Government Agency and other debt securities 8,419 --- (319) 8,100
-------- ------ ------- --------
Total $119,122 $ 895 $(1,342) $118,675
======== ====== ======= ========
Available-for-Sale Securities
U.S. Government Agency and other debt securities $ 16,500 $ --- $ (827) $ 15,673
======== ====== ======= ========
June 30, 1998
Held-to-Maturity Securities
Mortgage-backed securities:
Pass-through securities:
Freddie Mac $ 43,258 $ 684 $ (136) $ 43,806
Ginnie Mae 40,767 625 --- 41,392
Fannie Mae 7,370 62 (3) 7,429
Collateralized mortgage obligations 36,065 213 (11) 36,267
-------- ------ ------- --------
127,460 1,584 (150) 128,894
U.S. Government Agency and other debt securities 7,986 21 (18) 7,989
-------- ------ ------- --------
Total $135,446 $1,605 $ (168) $136,883
======== ====== ======= ========
Available-for-Sale Securities
U.S. Government Agency and other debt securities $ 8,500 $ 5 $ (7) $ 8,498
======== ====== ======= ========
</TABLE>
The amortized cost of securities at June 30, 1999 consisted of approximately
$101.4 million of fixed-rate securities and $34.2 million of adjustable-rate
securities ($98.8 million and $45.1 million, respectively, at June 30, 1998).
Substantially all collateralized mortgage obligations at June 30, 1999 and 1998
were Freddie Mac, Fannie Mae and Ginnie Mae securities.
The Company did not sell any securities during fiscal years 1999, 1998 and 1997.
26
<PAGE>
The following is a summary of the amortized cost and fair value of debt
securities, other than mortgage-backed securities, by remaining term to
contractual maturity as of June 30, 1999. Actual maturities may differ from
these amounts because certain issuers have the right to call or prepay their
obligations.
Held-to-Maturity Available-for-Sale
----------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------- -------- -------- --------
(In thousands)
More than one year to five years $ 500 $ 495 $ --- $ ---
More than five years to ten years 1,500 1,448 7,500 7,218
More than ten years 6,419 6,157 9,000 8,455
------- -------- -------- --------
Total $ 8,419 $ 8,100 $ 16,500 $ 15,673
======= ======== ======== ========
3. Loans
Loans at June 30 consist of the following:
1999 1998
--------- --------
(In thousands)
Mortgage loans:
One-to-four family $ 59,802 $ 46,271
Multi-family 619 674
Commercial 2,389 507
Construction 1,709 676
Construction loans in process (651) (112)
-------- --------
63,868 48,016
-------- --------
Other loans:
Passbook loans and other 465 460
Student loans 77 63
-------- --------
542 523
-------- --------
Total loans 64,410 48,539
Allowance for loan losses (742) (682)
Net deferred loan origination fees (232) (226)
-------- --------
Total loans, net $ 63,436 $ 47,631
======== ========
Total loans (net of construction loans in process) consisted of approximately
$63.8 million of fixed-rate loans and $643,000 of adjustable-rate loans at June
30, 1999 ($47.7 million and $876,000, respectively, at June 30, 1998).
One-to-four family mortgage loans include home equity loans of $1.7 million and
$1.9 million at June 30, 1999 and 1998, 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 northern
Westchester County and Putnam County, 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.
27
<PAGE>
Activity in the allowance for loan losses is summarized as follows for the years
ended June 30:
1999 1998 1997
------- ------- --------
(In thousands)
Balance at beginning of year $ 682 $ 622 $ 519
Provision for losses 60 60 143
Charge-offs --- --- (40)
------- ------- --------
Balance at end of year $ 742 $ 682 $ 622
======= ======= ========
The Company's non-performing loans at June 30 are summarized as follows:
1999 1998
------- -------
(In thousands)
Non-accrual loans:
Participation interests (1) $ 316 $ 876
One-to-four family mortgage loans 382 245
------- -------
Total non-accrual loans 698 1,121
Accruing one-to-four family mortgage
loans past due more than 90 days 432 370
======= =======
Total non-performing loans $ 1,130 $ 1,491
======= =======
(1) Amounts represent the Company's recorded investment in impaired loans within
the scope of SFAS No. 114. A related impairment allowance of $83,000 is
included in the allowance for loan losses at both June 30, 1999 and 1998.
The average recorded investment in impaired loans was $835,000, $965,000 and
$1.1 million in fiscal 1999, 1998 and 1997, respectively.
Included in the Company's loan portfolio are certain participation interests in
loans originated by Thrift Association Service Corporation ("TASCO Loans") for
which the FDIC, as a servicer of these loans, disputed its obligation to
pass-through certain principal and interest payments whether or not such amounts
are collected from the borrowers. The FDIC suspended payments beginning in 1996,
but resumed making certain payments in 1997 and has continued to do so. As a
result, interest payments of $44,000 received in fiscal 1999 were recognized as
income on a cash basis. Foregone interest income was approximately $22,000,
$76,000 and $74,000 in fiscal 1999, 1998 and 1997, respectively. Interest income
for fiscal 1997 was also reduced by the reversal of $67,000 in interest
previously received on the TASCO Loans.
The Company's participation interests in the TASCO Loans totaled $643,000 and
$876,000 at June 30, 1999 and 1998, respectively. The decrease during fiscal
1999 reflects current year principal payments, as well as principal reductions
from the reclassification of $143,000 in interest payments deferred in fiscal
1998 and 1997. Based on the present payment status of the loans underlying the
participation interests, management has classified participation interests of
$316,000 as non-performing at June 30, 1999. All participation interests were
classified as non-performing at June 30, 1998.
28
<PAGE>
4. Office Properties and Equipment
A summary of office properties and equipment at June 30 follows:
1999 1998
-------- --------
(In thousands)
Land $ 55 $ 55
Buildings 1,472 1,452
Furniture, fixtures and equipment 488 456
Leasehold improvements 164 157
-------- --------
2,179 2,120
Less accumulated depreciation and amortization (1,065) (1,077)
-------- --------
Office properties and equipment, net $ 1,114 $ 1,043
======== ========
5. Depositor Accounts
Depositor accounts at June 30 are summarized below:
1999 1998
---------------- ------------------
Average Average
Amount Rate Amount Rate
--------- ------ --------- --------
(Dollars in thousands)
Money market demand and NOW $ 18,264 2.80% $ 13,196 2.85%
Regular savings 50,759 2.75 50,928 2.75
Club 751 2.75 710 2.75
--------- ---------
69,774 2.76 64,834 2.77
--------- ---------
Savings certificates by remaining
period to maturity:
Under one year 65,425 5.16 58,118 5.53
One year to under three years 9,393 5.49 11,889 6.43
Three years and over 4,101 5.89 5,017 6.25
--------- ---------
78,919 5.24 75,024 5.72
--------- ---------
Total $ 148,693 4.08% $ 139,858 4.35%
========= =========
Savings certificates issued in denominations greater than $100,000 totaled $12.3
million and $10.1 million at June 30, 1999 and 1998, respectively.
The following is a summary of interest expense on depositor accounts for the
years ended June 30:
1999 1998 1997
------------ ----------- -----------
(In thousands)
Money market demand and NOW $ 418 $ 329 $ 285
Regular savings and club 1,403 1,541 1,696
Savings certificates 4,145 3,919 3,450
======= ======= =======
Total $ 5,966 $ 5,789 $ 5,431
======= ======= =======
29
<PAGE>
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. Securities Repurchase Agreements and Other Borrowings
The following is a summary of borrowings from the Federal Home Loan Bank
("FHLB") of New York at June 30:
1999 1998
--------- ----------
(Dollars in thousands)
Securities repurchase agreements:
Final maturity in June 2005,
callable quarterly at the FHLB's
option beginning in June 1999,
and bearing interest at 5.20% $ 3,000 $ 3,000
Final maturity in December 2008,
callable quarterly at the FHLB's
option beginning in November
2000, and bearing interest at 4.56% 5,000 ---
Final maturity in December 2008,
callable quarterly at the FHLB's
option beginning in November 2001,
and bearing interest at 4.72% 5,000 ---
Final maturity in January 2008,
callable quarterly at the FHLB's
option beginning in January 2003,
and bearing interest at 5.42% 10,000 10,000
-------- ---------
23,000 13,000
Other borrowings:
FHLB advance maturing in June 2000
and bearing interest at an
initial rate of 4.985% at June 30,
1999, adjusting thereafter to
three-month Libor minus 14 basis points 5,000 ---
======== =========
Total securities repurchase agreements
and other borrowings $ 28,000 $ 13,000
======== =========
Weighted average interest rate at June 30 5.04% 5.37%
======== =========
Securities repurchase agreements were collateralized by securities with an
amortized cost of $26.0 million and a fair value of $24.8 million at June 30,
1999. During the years ended June 30, 1999 and 1998, the average borrowings
under securities repurchase agreements were $19.5 million and $4.6 million,
respectively, and the maximum borrowings under securities repurchase agreements
were $23.0 million and $13.0 million, respectively. The Company did not have any
borrowings during the year ended June 30, 1997. Accrued interest payable of
$139,000 and $110,000 on borrowings is included in other liabilities at June 30,
1999 and 1998, respectively.
The Bank may borrow funds from the FHLB of New York subject to an overall
limitation of 25% of total assets or $51.7 million at June 30, 1999 (excluding
securities repurchase agreements). Funds may be borrowed through a combination
of FHLB advances and overnight borrowings under a line of credit. The FHLB
advance at June 30, 1999 was collateralized by securities with an amortized cost
and fair value of $7.1 million. FHLB borrowings may also be secured by the
Bank's investment in FHLB stock and by a blanket security agreement which
requires maintenance of specified levels of qualifying assets (principally
securities and residential mortgage loans) not otherwise pledged.
30
<PAGE>
7. Income Taxes
Income tax expense for the years ended June 30 consisted of the following
components:
1999 1998 1997
----------- ----------- ------------
(In thousands)
Federal:
Current $ 983 $ 1,086 $ 972
Deferred (118) (39) 31
---------- ----------- ------------
865 1,047 1,003
---------- ----------- ------------
State:
Current 361 418 369
Deferred (28) (19) (415)
---------- ----------- ------------
333 399 (46)
---------- ----------- ------------
Total:
Current 1,344 1,504 1,341
Deferred (146) (58) (384)
---------- ----------- ------------
$ 1,198 $ 1,446 $ 957
========== =========== ============
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:
1999 1998 1997
--------- -------- -------
(In thousands)
Tax at Federal statutory rate $ 925 $1,122 $ 941
State taxes, net of Federal tax benefit 220 263 (30)
Other, net 53 61 46
--------- -------- -------
Actual income tax expense $1,198 $1,446 $ 957
========= ======== =======
The tax effects of temporary differences and tax carryforwards that give rise to
the Company's deferred tax assets and liabilities at June 30 are as follows:
1999 1998
----- -----
(In thousands)
Deferred tax assets:
Allowance for loan losses $ 274 $ 279
Unrealized loss on available-for-sale securities 330 ---
Loan origination fees 86 93
Other deductible temporary differences 355 259
Capital loss carryforward --- 19
----- -----
Total gross deferred tax assets 1,045 650
Less valuation allowance --- (19)
-----
-----
Deferred tax assets, net 1,045 631
----- -----
Deferred tax liabilities:
Federal tax bad debt reserve
in excess of base-year amount (231) (268)
Other taxable temporary differences --- (1)
----- -----
-----
Total gross deferred tax liabilities (231) (269)
----- -----
Net deferred tax asset $ 814 $ 362
===== =====
31
<PAGE>
Based on the Company's historical and anticipated future pre-tax earnings,
management believes that it is more likely than not that the Company's net
deferred tax assets will be realized.
As a thrift institution, the Bank is subject to special provisions in the
Federal and New York state tax laws regarding its allowable tax bad debt
deductions and related tax bad debt reserves. These deductions historically were
determined using methods based on loss experience or a percentage of taxable
income. Tax bad debt reserves represent the excess of allowable deductions over
actual bad debt losses and other reserve reductions. These reserves consist of a
defined base-year amount, plus additional amounts ("excess reserves")
accumulated after the base year. Deferred tax liabilities are recognized with
respect to such excess reserves, as well as any portion of the base-year amount
that is expected to become taxable (or "recaptured") in the foreseeable future.
Certain amendments to the Federal and New York state tax laws regarding bad debt
deductions were enacted in the first quarter of fiscal 1997. The Federal
amendments eliminated the percentage-of-taxable-income method for tax years
beginning after December 31, 1995 and imposed a requirement to recapture into
taxable income (over a six-year period) the bad debt reserves in excess of the
base-year amounts. The Company has recognized a deferred tax liability with
respect to excess Federal reserves that have not yet been recaptured. The New
York State amendments redesignated the state bad debt reserve as the base-year
amount and permit future additions to the base-year reserve using the
percentage-of-taxable-income method. These changes effectively eliminated the
excess New York state reserve for which the Company had recognized a deferred
tax liability. Accordingly, the Company reduced its deferred tax liability by
$238,000, with a corresponding reduction in income tax expense, in the first
quarter of fiscal 1997.
At June 30, 1999, the Bank's base-year Federal and state tax bad debt reserves
were $4.5 million and $8.6 million, respectively. 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, (ii) distributions to the Holding
Company in excess of the Bank's accumulated earnings and profits calculated for
Federal income tax purposes, as discussed in note 11, and (iii) 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, 1999, the Bank's
unrecognized deferred tax liabilities with respect to the Federal and state
base-year reserves totaled approximately $2.1 million.
8. Employee Benefit and Stock Compensation Plans
Pension Benefits
All eligible employees are included in a non-contributory, defined benefit
pension plan. Benefits are based on credited service and final earnings, as
defined. The Company's policy is to fund the consulting actuary's maximum
recommended contribution, which includes the amortization of unfunded
liabilities over 30 years from their date of establishment.
32
<PAGE>
The following is a summary of changes in the plan's projected benefit obligation
and the fair value of plan assets, together with a reconciliation of the plan's
funded status to the accrued pension costs recognized in the consolidated
balance sheets at June 30:
1999 1998
----------- ----------
(In thousands)
Change in benefit obligations:
Beginning of year $ 2,629 $ 2,225
Service cost 91 66
Interest cost 181 175
Actuarial loss 29 241
Benefits paid (111) (78)
---------- ---------
End of year 2,819 2,629
---------- ---------
Change in fair value of plan assets:
Beginning of year 2,149 1,987
Actual return on plan assets 125 129
Employer contributions 162 111
Benefits paid (111) (78)
---------- ---------
End of year 2,325 2,149
---------- ---------
Funded status at end of year (494) (480)
Unrecognized net actuarial loss 300 204
Unrecognized prior service cost 17 24
Unrecognized net transition obligation 41 55
---------- ---------
Accrued pension cost $ (136) $ (197)
========== =========
The components of net pension expense are as follows for the years ended June
30:
1999 1998 1997
------ ------ ------
(In thousands)
Service cost (benefits earned during the year) $ 91 $ 66 $ 58
Interest cost on projected benefit obligation 181 175 155
Expected return on plan assets (190) (177) (146)
Amortization of prior service cost and net
transition obligation 21 21 21
------ ------ ------
Net pension expense $ 103 $ 86 $ 88
====== ====== ======
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation were
7.0% and 5.0%, respectively, at June 30, 1999 and 1998 (8.0% and 6.0%,
respectively, at June 30, 1997). 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 $84,000 in
fiscal 1999, and $36,000 in both fiscal 1998 and 1997. The projected benefit
obligation was approximately $428,000 at June 30, 1999 and $322,000 at June 30,
1998, all of which is unfunded. These amounts were determined using a discount
rate of 7.0% and a projected salary increase rate of 5.0%.
33
<PAGE>
Other 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. The periodic expense for these benefits
was insignificant in fiscal 1999, 1998 and 1997.
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, but
without an employer matching contribution.
Employee Stock Ownership Plan
The Company established an ESOP for eligible employees in connection with its
initial public offering in December 1995. 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.
Expense recognized in fiscal 1999, 1998 and 1997 with respect to allocated
shares amounted to $238,000, $277,000 and $224,000, respectively, based on the
average fair value of the Holding Company's common stock for each period. A
cumulative total of 57,397 shares have been allocated to participants through
June 30, 1999. The cost of the 270,583 shares which have not yet been allocated
to participant accounts ($2.7 million at June 30, 1999) is deducted from
stockholders' equity. The fair value of these shares was approximately $3.6
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. During fiscal
1999, additional options were granted for 10,000 shares at an exercise price of
$17.75 per share and options were exercised for 20,499 shares. Options
34
<PAGE>
outstanding at June 30, 1999 totaled 286,485, with a weighted average exercise
price of $12.08 per share and a weighted average remaining term of approximately
7.0 years. A total of 110,596 options were exercisable at June 30, 1999, at a
weighted average exercise price of $11.875 per share. There were 102,991
reserved shares available for future option grants at June 30, 1999.
All options have been granted at exercise prices equal to the fair value of the
common stock at the grant dates. 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 vested. 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 was $3.18 in
fiscal 1997 and $4.32 in fiscal 1999, estimated using the Black-Scholes
option-pricing model with assumptions approximately as follows: dividend yield
of 2.75%; expected volatility rate of 20%; risk-free interest rates of 6.26% in
fiscal 1997 and 5.25% in fiscal 1999; and expected option life of 8 years. Had
the Company applied the fair-value-based method to the options granted, it would
have reported net income, basic earnings per share and diluted earnings per
share of $1.4 million, $0.66 and $0.64, respectively, in fiscal 1999; $1.7
million, $0.64 and $0.61, respectively, in fiscal 1998; and $1.7 million, $0.55
and $0.54, respectively, in fiscal 1997.
Recognition and Retention Plan
On July 3, 1996, stockholders also approved The Peekskill Financial Corporation
1996 Recognition and Retention Plan ("RRP"). The purpose of this plan is to
provide officers and non-employee directors of the Company with a proprietary
interest in the Company in a manner designed to encourage their retention.
Awards granted under this plan vest ratably over the respective vesting periods
from the date of grant. On July 16, 1996, the Company completed the funding of
the RRP by purchasing 163,990 shares of common stock in the open market for $2.0
million. RRP awards under this plan totaled 117,290 in fiscal 1997 and 2,500 in
fiscal 1999, with the remaining 44,200 purchased shares included in treasury
stock at June 30, 1999 and available for future awards. Unearned compensation of
$1.4 million was recorded with respect to the shares awarded. Subsequent
amortization, which is included in compensation and benefits expense, was
$195,000 in fiscal 1999, $266,000 in fiscal 1998 and $212,000 in fiscal 1997.
9. Earnings per Share
The following is an analysis of the number of shares utilized in the Company's
EPS calculations for the years ended June 30, 1999, 1998 and 1997. For purposes
of computing basic EPS, net income applicable to common stock equaled net income
for each of the years presented.
1999 1998 1997
-------- ------- -------
(In thousands)
Weighted average common shares outstanding
for computation of basic EPS (1) 2,144 2,714 3,101
Common-equivalent shares due to the dilutive
effect of stock options and RRP awards (2) 54 111 48
-------- ------- -------
Weighted average common shares for
computation of diluted EPS 2,198 2,825 3,149
======== ======= =======
(1) Excludes unvested RRP awards and unallocated ESOP shares that have not been
committed to be released.
(2) Computed using the treasury stock method.
35
<PAGE>
10. Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income," which
establishes standards for the reporting and display of comprehensive income (and
its components) in financial statements. Comprehensive income represents the sum
of net income and items of "other comprehensive income" which are reported
directly in stockholders' equity, such as the change during the period in the
after-tax net unrealized gain or loss on securities available-for-sale. In
accordance with SFAS No. 130, the Company has reported its comprehensive income
for fiscal 1999, 1998 and 1997 in the consolidated statements of changes in
stockholders' equity.
The Company's other comprehensive income or loss, which is attributable to gains
and losses on securities available-for-sale, is summarized as follows for the
years ended June 30:
1999 1998 1997
------- ----- ------
(In thousands)
Net unrealized holding (loss)
gain arising during the year $ (825) $ 14 $ 25
Related income tax effect 330 (6) (10)
------- ----- ------
Other comprehensive (loss) income $ (495) $ 8 $ 15
======= ===== ======
The Company's accumulated other comprehensive loss, which is included in
stockholders' equity, represents the after-tax net unrealized loss on securities
available-for-sale of $497,000 and $2,000 at June 30, 1999 and 1998,
respectively.
11. Regulatory Matters
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 4.0% (effective April 1, 1999); 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.
36
<PAGE>
Management believes that, as of June 30, 1999 and 1998, 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.
The following is a summary of the Bank's actual capital amounts and ratios as of
June 30, 1999 and 1998, compared to the OTS requirements for classification as a
well-capitalized institution and for minimum capital adequacy:
Classification as Minimum Capital
Bank Actual Well Capitalized Adequacy
----------------- ----------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ------ ------- -----
(Dollars in thousands)
June 30, 1999
Tangible capital $27,652 13.4% N/A N/A $3,107 1.5%
Tier I (core) capital 27,652 13.4 $10,358 5.0% 8,287 4.0
Risk-based capital:
Tier I 27,652 45.6 3,640 6.0 N/A N/A
Total 28,394 46.8 6,067 10.0 4,854 8.0
June 30, 1998
Tangible capital $43,493 21.8% N/A N/A $2,992 1.5%
Tier I (core) capital 43,493 21.8 $ 9,975 5.0% 5,985 3.0
Risk-based capital:
Tier I 43,493 87.4 2,986 6.0 N/A N/A
Total 44,116 88.6 4,977 10.0 3,982 8.0
Liquidation Account
In accordance with regulatory requirements, the Bank established a liquidation
account at the time of its conversion to stock form, in the amount of $21.2
million representing its total 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. 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.
Capital Distributions
Under OTS regulations which became effective April 1, 1999, savings associations
such as the Bank generally may declare annual cash dividends up to an amount
equal to net income of the current year plus retained net income for the
preceeding two years. Dividends in excess of such amount require OTS approval.
The Bank paid $17.5 million and $3.0 million of dividends to the Holding Company
during fiscal 1999 and 1998, respectively. No dividends were paid by the Bank
during fiscal 1997.
37
<PAGE>
As discussed in note 7, distributions by the Bank to the Holding Company in
excess of the Bank's accumulated earnings and profits (as calculated for Federal
income tax purposes) would result in taxation of the Bank's tax bad debt
reserves. All dividends paid to date by the Bank to the Holding Company have
been paid from the Bank's current and accumulated earnings and profits. Since
the Bank intends to limit future dividend payments to amounts which will not
result in the recapture of tax bad debt reserves, the amount of additional funds
which may be available for dividend payments to the Holding Company will
generally be limited to the amount of the Bank's current and accumulated
earnings and profits. At June 30, 1999, the Bank had approximately $3.4 million
in current and accumulated earnings and profits from which it could pay
dividends without causing the recapture of any portion of its tax bad debt
reserves.
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.
Treasury share purchases in fiscal 1999 include 800,040 shares purchased in a
Modified Dutch Auction Tender Offer, which was completed on February 2, 1999 at
a total cost of $13.4 million or an average of $16.75 per share.
12. Commitments and Contingencies
Off-Balance Sheet Financial Instruments
The Company's financial instruments with off-balance sheet risk were limited to
fixed-rate mortgage loan origination commitments with total contractual amounts
of $6.7 million and $6.6 million at June 30, 1999 and 1998, respectively.
Substantially all of these commitments carry fixed interest rates and have been
issued to customers within the Company's primary lending area described in note
3. 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.
Lease Commitments
At June 30, 1999, the Company was obligated under two non-cancellable operating
leases for office space. These leases contain escalation clauses providing for
increased rentals and renewal options. Rent expense under operating leases was
approximately $109,000, $97,000 and $60,000 for the years ended June 30, 1999,
1998 and 1997, respectively. The future minimum lease payments under operating
leases at June 30, 1999 were $99,000 annually for fiscal years 2000 through
2002; $90,000 for fiscal 2003; $77,000 for fiscal 2004; and an aggregate of $1.1
million for later years.
38
<PAGE>
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.
13. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosures with respect to financial instruments for which it is practicable to
estimate fair value, whether or not such financial instruments are recognized on
the balance sheet. Fair value is defined by SFAS No. 107 as the amount at which
a financial instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation.
Quoted market prices are used to estimate fair value when those prices are
available. However, active markets do not exist for many types of financial
instruments. Consequently, fair values for these instruments must be estimated
by management using techniques such as discounted cash flow analysis and
comparison to similar instruments. Estimates developed using these methods are
highly subjective and require judgments regarding significant matters, such as
the amount and timing of future cash flows and the selection of discount rates
that appropriately reflect market and credit risks. Changes in these judgments
often have a material effect on the fair value estimates. Since these estimates
are made at a certain point in time, they are susceptible to material near-term
changes. Fair values disclosed in accordance with SFAS No. 107 do not reflect
any premium or discount that could result from the sale of a large volume of a
particular financial instrument, nor do they reflect possible tax ramifications
or transaction costs.
39
<PAGE>
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:
1999 1998
------------------------ ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- -------- --------- ----------
(In thousands)
Financial assets:
Cash and due from banks $ 957 $ 957 $ 2,616 $ 2,616
Interest-bearing deposits 3,200 3,200 2,010 2,010
Securities 134,795 134,348 143,944 145,381
Loans 63,436 63,180 47,631 48,230
FHLB stock 1,463 1,463 1,463 1,463
Accrued interest receivable 1,094 1,094 1,050 1,050
Financial liabilities:
Savings certificates 78,919 78,812 75,024 75,386
Other deposit accounts 69,774 69,774 64,834 64,834
Securities repurchase
agreements and other
borrowings 28,000 26,476 13,000 12,315
Accrued interest payable 139 139 110 110
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 fair values for performing loans
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. These
fair values do not include the value of core deposit relationships which
comprise a significant portion of the Company's deposit base. Management
believes that the Company's core deposit relationships provide a relatively
stable, low-cost funding source which has a substantial unrecognized value
separate from the deposit balances.
40
<PAGE>
Borrowings
Fair value represents contractual cash flows discounted using current interest
rates available for borrowings with similar characteristics and remaining terms.
Other Financial Instruments
The other financial assets and liabilities shown in the preceding table have
fair values which approximate the respective carrying amounts because the
instruments are payable on demand or have short-term maturities and present
relatively low credit risk and interest rate risk. Fair values of the loan
origination commitments described in note 12 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, 1999 and 1998, the fair
values of these commitments approximated the related carrying amounts which were
not significant.
14. Recent Accounting Standard
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
requires entities to recognize all derivatives as either assets or liabilities
in the balance sheet at fair value. If certain conditions are met, a derivative
may be specifically designated as a fair value hedge, a cash flow hedge, or a
foreign currency hedge. A specific accounting treatment applies to each type of
hedge. Entities may reclassify securities from the held-to-maturity category to
the available-for-sale category at the time of adopting SFAS No. 133. As
recently amended, SFAS No. 133 is effective for fiscal years beginning after
June 15, 2000, although early adoption is permitted as of the beginning of any
fiscal quarter prior to that time. The Company has not selected an adoption date
or decided whether it will reclassify securities between categories. The Company
does not presently engage in derivatives and hedging activities covered by the
new standard and, accordingly, the related provisions of SFAS No. 133 are not
expected to affect the Company's consolidated financial statements.
41
<PAGE>
15. Parent Company Condensed Financial Information
Set forth below are the condensed balance sheets of Peekskill Financial
Corporation as of June 30, 1999 and 1998, and the related condensed statements
of income and cash flows for the years ended June 30, 1999, 1998 and 1997:
June 30,
-------------------------
1999 1998
-------------- ----------
Condensed Balance Sheets (In thousands)
Assets:
Cash $ 8 $ 39
Interest-bearing deposits 400 810
Investment in subsidiary 27,016 43,491
Other assets 53 345
-------- --------
Total $ 27,477 $ 44,685
======== ========
Liabilities and Stockholders' Equity:
Liabilities $ 126 $ 1,479
Stockholders' equity 27,351 43,206
-------- --------
Total $ 27,477 $ 44,685
======== ========
Year ended June 30,
-------------------------------
1999 1998 1997
-------- ------- -------
Condensed Statements of Income (In thousands)
Dividends received from subsidiary $ 17,500 $ 3,000 $ ---
Interest income 241 271 611
Non-interest expense (195) (127) (187)
-------- ------- -------
Income before income tax expense
and effect of subsidiary earnings 17,546 3,144 424
Income tax expense (42) (87) (195)
-------- ------- -------
Income before effect of subsidiary
earnings 17,504 3,057 229
Effect of subsidiary earnings:
Excess of dividends over current
earnings of subsidiary (15,981) (1,203) ---
Equity in undistributed earnings
of subsidiary --- --- 1,583
-------- ------- -------
Net income $ 1,523 $ 1,854 $ 1,812
======== ======= =======
42
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------
1999 1998 1997
--------- ------- --------
Condensed Statements of Cash Flows (In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,523 $ 1,854 $ 1,812
Adjustments to reconcile net income to net cash provided by
operating activities:
Excess of dividends over current earnings of subsidiary 15,981 1,203 ---
Equity in undistributed earnings of subsidiary --- --- (1,583)
Other adjustments, net 757 291 461
--------- ------- --------
Net cash provided by operating activities 18,261 3,348 690
--------- ------- --------
Cash flows from financing activities:
Treasury stock purchases (18,172) (3,837) (12,543)
Purchase of shares to fund current-year RRP awards --- --- (1,400)
Proceeds from issuance of common stock 243 --- ---
Dividends paid (773) (1,014) (1,128)
--------- ------- --------
Net cash used in financing activities (18,702) (4,851) (15,071)
--------- ------- --------
Net decrease in cash and cash equivalents (441) (1,503) (14,381)
Cash and cash equivalents at beginning of year 849 2,352 16,733
========= ======= ========
Cash and cash equivalents at end of year $ 408 $ 849 $ 2,352
========= ======= ========
Supplemental information:
(Decrease) increase in liability for treasury
stock purchased, not yet settled $ (1,350) $ 1,350 $ ---
========= ======= ========
</TABLE>
43
<PAGE>
16. Selected Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for fiscal 1999 and 1998 is shown below:
Three Months Ended
------------------------------------------
September 30 December 31 March 3 June 30
------------ ----------- ------- -------
(In thousands, except per share data)
Fiscal 1999
Interest and dividend income $ 3,355 $ 3,370 $ 3,326 $ 3,248
Interest expense 1,695 1,730 1,760 1,782
------- ------- ------- -------
Net interest income 1,660 1,640 1,566 1,466
Provision for loan losses 15 15 15 15
Non-interest income 63 69 61 62
Non-interest expense 885 900 916 1,105
------- ------- ------- -------
Income before income tax expense 823 794 696 408
Income tax expense 367 350 301 180
------- ------- ------- -------
Net income $ 456 $ 444 $ 395 $ 228
======= ======= ======= =======
Earnings per share:
Basic $ 0.18 $ 0.18 $ 0.20 $ 0.14
Diluted 0.18 0.18 0.19 0.14
======= ======= ======= =======
Fiscal 1998
Interest and dividend income $ 3,095 $ 3,059 $ 3,220 $ 3,269
Interest expense 1,446 1,430 1,540 1,618
------- ------- ------- -------
Net interest income 1,649 1,629 1,680 1,651
Provision for loan losses 15 15 15 15
Non-interest income 57 55 54 59
Non-interest expense 826 852 936 860
------- ------- ------- -------
Income before income tax expense 865 817 783 835
Income tax expense 370 356 346 374
------- ------- ------- -------
Net income $ 495 $ 461 $ 437 $ 461
======= ======= ======= =======
Earnings per share:
Basic $ 0.18 $ 0.17 $ 0.16 $ 0.18
Diluted 0.17 0.16 0.16 0.17
======= ======= ======= =======
44
<PAGE>
Corporate Information
Directors
Eldorus Maynard, Chairman of the Board
Dominick Bertoline
Edward H. Dwyer
Robert E. Flower
William J. LaCalamito
John A. McGurty, Jr.
Officers
Eldorus Maynard
Chairman of the Board and Chief Executive Officer
William J. LaCalamito
President and Chief Operating Officer
Scott D. Nogles
Vice President of Finance
Corporate Offices
Peekskill Financial Corporation
1019 Park Street
Peekskill, NY 10566
(914) 737-2777
Annual Meeting
The annual meeting of stockholders will be held on October 20, 1999 at 3:30 p.m.
at the Company's offices at 1019 Park Street, Peekskill, New York.
Annual Report on Form 10-K
For the 1999 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 LLP
3001 Summer Street
Stamford, CT 06905
45
<PAGE>
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
1,336 at June 30, 1999.
The cash dividends declared by the Company, and the high and low sales prices of
the Company's common stock in the Over-the-Counter market of the NASDAQ National
Market System, were as follows for the quarters indicated:
Closing Sales Prices
Cash ----------------------------
Dividends End of
Quarter ended Declared High Low Period
------------- --------- -------- ------- -------
June 30, 1999 $ 0.09 $13.875 $12.375 $13.250
March 31, 1999 0.09 16.875 13.250 13.500
December 31, 1998 0.09 17.250 12.000 15.938
September 30, 1998 0.09 18.125 13.875 14.250
June 30, 1998 $ 0.09 $18.063 $16.625 $17.875
March 31, 1998 0.09 17.750 16.000 17.375
December 31, 1997 0.09 18.250 16.500 16.750
September 30, 1997 0.09 18.250 15.125 16.750
These quotations represent prices between dealers and do not include retail
markup, markdown or commission. They do not necessarily represent actual
transactions.
46
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Subsidiary or Percent of State of
Parent Organization Ownership Incorporation
- ---------------------- --------------------- ---------- -------------
Peekskill Financial First Federal Savings 100% Federal
Corporation Bank
First Federal Savings First Federal REIT, 100% New York
Bank Inc.
EXHIBIT 23
Consent of Independent Certified Public Accountants
The Board of Directors
Peekskill Financial Corporation:
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (No. 333-41933 and No. 333-41943) of our report dated July 27, 1999
relating to the consolidated balance sheets of Peekskill Financial Corporation
and subsidiary as of June 30, 1999 and 1998, 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, 1999, which report appears
in the June 30, 1999 Annual Report on Form 10-K of Peekskill Financial
Corporation.
/s/ KPMG LLP
Stamford, Connecticut
September 28, 1999
<TABLE> <S> <C>
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<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT FILED ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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