United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[x] Quarterly Report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Quarter Ended March 31, 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
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(Exact name of the registrant as specified in its charter)
Delaware 13-3858258
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(State of incorporation) (I.R.S. Employer Identification No.)
1019 Park Street, Peekskill, New York 10566
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(Address of principal executive offices)
(914) 737-2777
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(Registrant's telephone number, including area code)
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 12 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Class: at May 7, 1999
- ------------------------------------------ ---------------------------
Common Stock, $0.01 par value 1,962,528
Peekskill Financial Corporation
Form 10-Q
Three and Nine Months Ended March 31, 1999
Part I - Financial Information
ITEM 1 - FINANCIAL STATEMENTS (Unaudited) Page
Condensed Consolidated Balance Sheets at March 31, 1999
and June 30, 1998 3
Condensed Consolidated Statements of Income for the three and nine
months ended March 31, 1999 and 1998 4
Condensed Consolidated Statement of Changes in Stockholders'
Equity for the nine months ended March 31, 1999 5
Condensed Consolidated Statements of Cash Flows for the nine
months ended March 31, 1999 and 1998 6
Notes to Condensed Consolidated Interim Financial Statements 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF 11
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 18
Part II - Other Information
Other Information 19
Signatures 21
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Peekskill Financial Corporation and Subsidiary
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share data)
March 31, June 30,
1999 1998
-------- --------
Assets:
Cash and cash equivalents................................ $ 3,794 $ 4,626
Securities:
Held-to-maturity, at amortized cost (fair value of
$122,378 at March 31, 1999 and $136,883
at June 30, 1998)................................... 121,312 135,446
Available-for-sale, at fair value (amortized cost of
$16,500 at March 31, 1999 and $8,500 at
June 30, 1998)...................................... 16,150 8,498
-------- --------
Total securities..................................... 137,462 143,944
-------- --------
Loans, net of allowance for loan losses of $727 at
March 31, 1999 and $682 at June 30, 1998............ 55,549 47,631
Federal Home Loan Bank stock............................. 1,463 1,463
Accrued interest receivable.............................. 1,072 1,050
Real estate owned........................................ --- 94
Deferred income taxes, net............................... 600 362
Other assets............................................. 1,252 1,171
-------- --------
Total assets........................................... $201,192 $200,341
======== ========
Liabilities and Stockholders' Equity:
Liabilities:
Depositor accounts..................................... $145,215 $139,858
Securities repurchase agreements....................... 23,000 13,000
Mortgage escrow deposits............................... 1,854 1,759
Other liabilities...................................... 2,646 2,518
-------- --------
Total liabilities.................................... 172,715 157,135
-------- --------
Stockholders' equity (Note 2):
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............................... 40,290 40,181
Unallocated common stock held by employee stock
ownership plan ("ESOP")................................ (2,747) (2,870)
Unamortized awards of common stock under recognition
and retention plan ("RRP")............................. (820) (922)
Treasury stock, at cost (2,137,222 shares at March 31,
1999 and 1,204,181 shares at June 30, 1998)............ (33,183) (17,730)
Retained earnings........................................ 25,106 24,508
Accumulated other comprehensive income (net unrealized
loss on available-for-sale securities, net of taxes)... (210) (2)
-------- --------
Total stockholders' equity............................ 28,477 43,206
-------- --------
Total liabilities and stockholders' equity............ $201,192 $200,341
======== ========
See accompanying notes to unaudited condensed consolidated interim
financial statements.
Peekskill Financial Corporation and Subsidiary
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
For the Three Months For the Nine Months
Ended March 31, Ended March 31,
-------------------------------- --------------------------------
1999 1998 1999 1998
--------------- ------------- ------------- -------------
Interest and dividend income:
Loans.................................. $ 1,032 $ 938 $ 3,054 $ 2,785
Securities............................. 2,163 2,188 6,648 6,318
Interest-bearing deposits and other.... 131 94 349 271
--------- ------ -------- -------
Total interest and dividend income.... 3,326 3,220 10,051 9,374
--------- ------ -------- -------
Interest expense:
Depositor accounts..................... 1,468 1,438 4,489 4,314
Securities repurchase agreements....... 292 102 690 102
FHLB advances.......................... --- --- 6 ---
--------- ------ -------- -------
Total interest expense................ 1,760 1,540 5,185 4,416
--------- ------ -------- -------
Net interest income................... 1,566 1,680 4,866 4,958
Provision for loan losses .............. 15 15 45 45
--------- ------ -------- -------
Net interest income after
provision for loan losses........ 1,551 1,665 4,821 4,913
--------- ------ -------- -------
Non-interest income..................... 61 54 193 166
--------- ------ -------- -------
Non-interest expense:
Compensation and benefits............. 445 527 1,351 1,428
Occupancy costs....................... 122 115 335 316
Professional fees..................... 77 39 156 122
Computer service fees................. 58 46 165 134
Federal deposit insurance costs....... 37 36 109 108
Safekeeping and custodial expenses.... 23 19 79 68
Other................................. 154 154 506 438
--------- ------ -------- -------
Total non-interest expense.......... 916 936 2,701 2,614
--------- ------ -------- -------
Income before income tax expense........ 696 783 2,313 2,465
Income tax expense...................... 301 346 1,018 1,072
--------- ------ -------- -------
Net income............................ $ 395 $ 437 $ 1,295 $ 1,393
========= ====== ======== =======
Earnings per share (Note 3):
Basic................................. $0.20 $0.16 $0.56 $0.51
Diluted............................... 0.19 0.16 0.54 0.49
===== ===== ===== =====
See accompanying notes to unaudited condensed consolidated interim financial
statements.
Peekskill Financial Corporation and Subsidiary
Condensed Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
(In thousands, except share data)
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 Income Equity
-------- --------- ----------- ----------- --------- --------- -------------- -------------
Balance at June 30, 1998........ $ 41 $40,181 $(2,870) $(922) $(17,730) $24,508 $ (2) $43,206
Net income................... --- --- --- --- --- 1,295 --- 1,295
Dividends paid ($0.27 per
share)................... --- --- --- --- --- (622) --- (622)
Amortization of RRP awards... --- --- --- 146 --- --- --- 146
RRP award (2,500 treasury
shares).................. --- 14 --- (44) 30 --- --- ---
Exercise of stock options
(20,499 treasury shares). --- --- --- --- 318 (75) --- 243
Tax benefit from vesting of
RRP awards............... --- 36 --- --- --- --- --- 36
Purchase of 956,040 treasury
shares................... --- --- --- --- (15,801) --- --- (15,801)
ESOP shares committed to be
released (12,300 shares). --- 59 123 --- --- --- --- 182
Change in net unrealized loss
on available-for-sale
securities, net of taxes. --- --- --- --- --- --- (208) (208)
------ ------- ------- ----- -------- -------- ------- --------
Balance at March 31, 1999....... $ 41 $40,290 $(2,747) $(820) $(33,183) $25,106 $ (210) $28,477
====== ======= ======= ===== ======== ======== ======== ========
See accompanying notes to unaudited condensed consolidated interim financial
statements.
Peekskill Financial Corporation and Subsidiary
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
For the Nine Months Ended
March 31,
----------------------
1999 1998
---------- ----------
Cash flows from operating activities:
Net income................................................. $ 1,295 $ 1,393
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses................................ 45 45
Depreciation and amortization expense.................... 76 72
ESOP and RRP expense..................................... 328 424
Net amortization and accretion of deferred fees, discounts
and premiums.......................................... (12) (52)
Net (increase) decrease in accrued interest receivable... (22) 110
Net (increase) decrease in other assets.................. (55) 41
Deferred tax benefit..................................... (91) (39)
Net increase in other liabilities........................ 524 583
--- ---
Net cash provided by operating activities.............. 2,088 2,577
-------- --------
Cash flows from investing activities:
Purchases of securities:
Held-to-maturity......................................... (36,866) (35,483)
Available-for-sale....................................... (17,500) (11,600)
Proceeds from principal payments, maturities
and calls of securities:
Held-to-maturity......................................... 51,042 29,826
Available-for-sale....................................... 9,500 4,600
Originations of loans, net of principal collections........ (7,964) (1,862)
Proceeds from sales of real estate owned................... 94 220
Purchases of office properties and equipment............... (102) (811)
---- ----
Net cash used in investing activities................... (1,796) (15,110)
-------- --------
Cash flows from financing activities:
Net increase in depositor accounts......................... 5,357 5,120
Net increase in mortgage escrow deposits................... 95 50
Proceeds from issuance of common stock..................... 243 ---
Proceeds from securities repurchase agreements............. 10,000 10,000
Treasury stock purchases................................... (16,197) (3,044)
Dividends paid............................................. (622) (771)
-------- --------
Net cash (used in) provided by financing activities..... (1,124) 11,355
-------- --------
Net decrease in cash and cash equivalents.................... (832) (1,178)
Cash and cash equivalents at beginning of period............. 4,626 4,158
-------- --------
Cash and cash equivalents at end of period................... $ 3,794 $2,980
======== ========
Supplemental information:
Interest paid.............................................. $ 5,165 $ 4,310
Income taxes paid.......................................... 749 740
Net decrease in liability for treasury stock purchased, not
yet settled............................................. (396) ---
Increase in liability for securities purchased, not yet --- 499
settled.................................................
Loans transferred to real estate owned..................... --- 153
======== ========
See accompanying notes to unaudited condensed consolidated interim financial
statements.
Peekskill Financial Corporation and Subsidiary
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
Note 1: Basis of Presentation
Peekskill Financial Corporation (the "Holding 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 mutual savings bank to a stock savings bank (the
"Conversion"). The Holding Company and the Bank (collectively, the "Company")
are located in Peekskill, New York and the Holding Company's principal business,
subsequent to the Conversion, is the ownership of its wholly-owned subsidiary,
the Bank. The accompanying unaudited condensed consolidated interim financial
statements include the accounts of the Holding Company and the Bank.
The accompanying unaudited condensed consolidated interim financial
statements have been prepared in conformity with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. The accompanying unaudited
condensed consolidated interim financial statements should be read in
conjunction with the financial statements and related management's discussion
and analysis of financial condition and results of operations of the Company as
of and for the year ended June 30, 1998 included in the Form 10-K filed with the
Securities and Exchange Commission. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included herein. The results of operations for the
nine months ended March 31, 1999 are not necessarily indicative of results that
may be expected for the entire year ending June 30, 1999.
Note 2. Stockholders' Equity
From July 1, 1998 through March 31, 1999, the Holding Company purchased
956,040 shares for treasury at a cost of $15.8 million, or $16.53 per share.
From the date of the Conversion through March 31, 1999, the Holding Company
purchased an aggregate of 2,157,721 shares for treasury. The Holding Company
purchased these shares, in open market transactions, at a total cost of $33.5
million or $15.53 per share. Included in the 956,040 shares purchased during the
nine months ended March 31, 1999 was 800,040 shares purchased in a Modified
Dutch Auction Tender Offer, which was completed on February 2, 1999 at an
average price of $16.75.
On April 27, 1999, the Holding Company announced its intention to
purchase 100,000 shares of its common stock in the open market from time to time
dependent upon market conditions.
For income tax purposes, certain capital distributions made by a thrift
institution, such as the Bank, may be deemed to have been made from the thrift's
bad debt reserves. An amount equal to approximately one and one-half times the
amount of such a distribution would be included in the thrift's taxable income,
attributable to the "recapture" of a portion of its tax bad debt reserves.
Distributions resulting in taxable income include distributions in excess of the
thrift's current and accumulated earnings and profits, as calculated for Federal
income tax purposes; distributions in redemption of the thrift's stock; and
distributions in partial or complete liquidation of the thrift. However,
dividends paid from the thrift's current or accumulated earnings and profits do
not result in taxable income from bad debt reserve recapture.
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. The Holding
Company has relied on dividends from the Bank as the principal source of funding
for its more recent stock repurchases. Since the Bank intends to limit future
dividend payments to amounts that will not result in the recapture of tax bad
debt reserves, the amount of additional funds which may be available to the
Holding Company for future stock repurchases will generally be limited to the
amount of the Bank's current and accumulated earnings and profits. At December
31, 1998, the Bank had approximately $17.1 million in current and accumulated
earnings and profits from which it could pay dividends without causing the
recapture of any portion of its bad debt reserves. Subsequent to December 31,
1998, the Bank has paid dividends to the Holding Company of $14.5 million.
Note 3. Acquisition Offer and Related Matters
On January 5, 1999, the Company received an unsolicited conditional
expression of interest in acquiring the Company for a cash purchase price of
$17.25 per share, from BRT Realty Trust ("BRT"). After review of the unsolicited
conditional expression of interest, the Board of Directors determined not to
pursue the unsolicited conditional expression of interest and reaffirmed its
position that the Company is not for sale.
In response to the Board of Directors' decision not to pursue the
unsolicited conditional expression of interest from BRT, a lawsuit, purporting
to be on behalf of stockholders, was filed in the Chancery Court of the State of
Delaware. The case, Michael Demetriou v. Eldorus Maynard, William LaCalamito,
Dominick Bertoline, Edward Dwyer, Robert Flower, John McGurty and Peekskill
Financial Corporation, filed on January 8, 1999, alleged among other things that
the directors violated their fiduciary obligations in connection with the
rejection of the unsolicited conditional expression of interest in acquiring the
Company. On April 27, 1999, the lawsuit was dismissed by stipulation of the
parties with no payment to the plaintiff of damages or his legal fees in
connection with the dismissal.
On January 13, 1999, the Company received a letter from BRT indicating,
among other things, that it was amenable to raising the price in its unsolicited
conditional expression of interest. In addition, on January 19, 1999, the
Company received a letter from Gould Investors, L.P., which is believed to be an
affiliate of BRT, demanding that the Company (1) halt the Modified Dutch Auction
Tender Offer, (2) hire a financial adviser to analyze the fair value of the
Company, (3) solicit offers for the sale of the Company and, (4) if offers are
at or near a price indicated by the financial advisers, sell the Company. The
Board considered these letters at length and, after review, continued to believe
that it was in the best interest of the stockholders for the Company to remain
independent and execute its business plan.
Note 4. Earnings Per Share
The Company reports both basic and diluted earnings per share ("EPS")
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share." Basic EPS excludes dilution and is computed by dividing
net income available to common stockholders by the weighted-average number of
common shares outstanding for the period. 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 then shared 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.
The table below summarizes the number of shares utilized in the
Company's EPS calculations for the three- and nine-month periods ended March 31,
1999 and 1998. For purposes of computing basic EPS, net income applicable to
common stock equaled net income for each period presented.
For the Three Months For the Nine Months
Ended March 31, Ended March 31,
------------------------- ------------------------
1999 1998 1999 1998
------------ ----------- ----------- -----------
(In thousands)
Weighted average common shares outstanding
for computation of basic EPS (1) 1,981 2,667 2,329 2,745
Common-equivalent shares due to the dilutive
effect of stock options and RRP awards (2) 53 103 59 110
------ ----- ----- -----
Weighted average common shares for
computation of diluted EPS 2,034 2,770 2,388 2,855
====== ====== ====== ======
<FN>
(1) Excludes unvested RRP awards and unallocated ESOP shares that have not been
committed to be released.
(2) Computed using the treasury stock method.
</FN>
Note 5. 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. The standard does not,
however, specify when to recognize or how to measure items that make up
comprehensive income. Comprehensive income represents net income and certain
amounts reported directly in stockholders' equity, such as the net unrealized
gain or loss on securities available-for-sale. While SFAS No. 130 does not
require a specific reporting format, it does require that an enterprise display
an amount representing total comprehensive income for the period.
The Company's comprehensive income for the three- and nine-month
periods ended March 31, 1999 and 1998 is summarized as follows:
For the Three Months For the Nine Months
Ended March 31, Ended March 31,
------------------ ----------------------
1999 1998 1999 1998
-------- ------- ---------- ---------
(In thousands)
Net income $ 395 $ 437 $ 1,295 $ 1,393
Net change in the after-tax
unrealized gain or loss on
available-for-sale securities (84) (14) (208) (5)
----- ----- ------- -------
Comprehensive income $ 311 $ 423 $ 1,087 $ 1,388
===== ===== ======= =======
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 March 31, 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 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.
Comparison of Financial Condition at March 31, 1999 and June 30, 1998
Total assets at March 31, 1999 were $201.2 million compared to $200.3
million at June 30, 1998, an increase of $851,000. This increase was due
primarily to a $7.9 million increase in net loans, substantially offset by a
$6.5 million decrease in total securities and an $832,000 decrease in cash and
cash equivalents. Changes in the Company's funding sources during the current
nine-month period included a $10.0 million increase in borrowings under
securities repurchase agreements and a $5.4 million increase in depositor
accounts, partially offset by a $14.7 million decrease in stockholders' equity.
Management intends to continue its current strategy of increasing the loan
portfolio (primarily through the origination of residential mortgage loans), as
market conditions permit, by introducing new products and stimulating loan
demand through advertising.
Total non-performing assets decreased $38,000, or 2.4%, from $1.6
million at June 30, 1998 to $1.5 million at March 31, 1999. At March 31, 1999,
the Company held an $841,000 participation interest in certain residential
mortgage loans purchased from Thrift Association Service Corporation (the "TASCO
Loans"). These loans were placed on non-accrual status during the quarter ended
September 30, 1996. As a servicer of these loans, the FDIC is disputing its
obligation to remit certain principal and interest payments on the loans whether
or not such amounts are collected from the borrowers. The FDIC suspended
payments beginning in 1996, but resumed making certain principal and interest
payments in the quarter ended June 30, 1997 and has continued to make current
payments. As a result, interest payments of $34,000 received in the nine-month
period ended March 31, 1999 were recognized as income on a cash basis. However,
the dispute over the suspended payments has not been resolved, and the TASCO
Loans of $841,000 at March 31, 1999 and $876,000 at June 30, 1998 are included
in the Company's total non-performing loans.
The Bank had three loans, with principal balances totaling $382,000, on
non-accrual status at March 31, 1999 and two loans, with principal balances
totaling $245,000 on non-accrual status at June 30, 1998. One-to-four family
mortgage loans past due more than 90 days but still accruing interest totaled
$324,000 at March 31, 1999 compared to $370,000 at June 30, 1998. The Bank had
no real estate owned at March 31, 1999 and one property classified as real
estate owned with a carrying value of $94,000 at June 30, 1998. The allowance
for loan losses was $727,000 or 47.0% of non-performing loans at March 31, 1999,
compared to $682,000 or 45.7% of non-performing loans at June 30, 1998. There
were no loan charge-offs or recoveries in the nine months ended March 31, 1999.
Stockholders' equity decreased $14.7 million from $43.2 million at June
30, 1998 to $28.5 million at March 31, 1999. The decrease primarily reflects
treasury stock purchases of $15.8 million and dividends paid of $622,000,
partially offset by net income of $1.3 million. Book value per share decreased
from $14.92 at June 30,1998 to $14.51 at March 31, 1999. The treasury stock
purchases include $13.5 million in the current quarter upon completion of the
Modified Dutch Auction Tender Offer.
Comparison of Operating Results for the Three Months Ended March 31, 1999 and
1998
Net income decreased $42,000 to $395,000, or $0.20 per basic share, for
the quarter ended March 31, 1999, compared to net income of $437,000, or $0.16
per basic share, for the same period last year. Diluted earnings per share
amounts were $0.19 and $0.16 for the quarters ended March 31, 1999 and 1998,
respectively. The decrease is primarily attributable to a $220,000 increase in
interest expense, partially offset by a $106,000 increase in interest and
dividend income. Net income for the three months ended March 31, 1998 was
reduced by $64,000 ($37,000 net of taxes) for the full vesting of certain
shares, under the Company's recognition and retention plan ("RRP"), due to the
vesting of shares upon the death of a director.
Net interest income decreased $114,000 in the current quarter compared
to the quarter ended March 31, 1998. Interest and dividend income increased
$106,000 to $3.3 million for the quarter ended March 31, 1999 compared to the
quarter ended March 31, 1998. The increase was caused primarily by a $14.5
million increase in average interest-earning assets, partially offset by a 27
basis point decrease in the average yield on interest-earning assets. Interest
expense increased $220,000 to $1.8 million for the quarter ended March 31, 1999
compared to the same quarter last year. This increase was due primarily to a
$23.9 million increase in average interest-bearing liabilities.
The provision for loan losses was $15,000 for the quarters ended March
31, 1999 and 1998. Management continues to evaluate the adequacy of the
allowance for loan losses based on local economic and real estate market
conditions, loan portfolio growth and the level of non-performing loans.
Non-interest expense decreased $20,000 for the quarter ended March 31,
1999 compared to the prior year quarter. The decrease was caused primarily by an
$82,000 decrease in compensation and benefits expense, partially offset by a
$12,000 increase in computer service fees and a $38,000 increase in professional
fees. The decrease in compensation and benefits expense was caused primarily by
the $64,000 charge to prior year earnings for vested RRP shares, as explained on
the previous page. The $38,000 increase in professional fees was primarily
related to additional legal and investment banking expenses attributable to the
unsolicited conditional expression of interest the Company received in January
1999 and the related lawsuit (see Note 3 of the Notes to Condensed Consolidated
Interim Financial Statements).
Income tax expense for the quarter ended March 31, 1999 decreased
$45,000 compared to the same period last year, primarily due to a decrease in
pre-tax income. The effective tax rates were 43.2% and 44.2% for the quarters
ended March 31, 1999 and 1998, respectively.
Comparison of Operating Results for the Nine Months Ended March 31, 1999 and
1998
Net income decreased $98,000 to $1.3 million, or $0.56 per basic share,
for the nine months ended March 31, 1999, compared to net income of $1.4
million, or $0.51 per basic share, for the same period last year. Diluted
earnings per share amounts were $0.54 and $0.49 for the nine months ended March
31, 1999 and 1998, respectively. The decrease is primarily attributable to a
$769,000 increase in interest expense and an $87,000 increase in non-interest
expense, partially offset by a $677,000 increase in interest and dividend
income.
Net interest income decreased $92,000 in the current nine-month period
compared to the nine months ended March 31, 1998. Interest and dividend income
increased $677,000 to $10.1 million for the nine months ended March 31, 1999
compared to the same period last year. The increase was caused primarily by a
$17.8 million increase in average interest-earning assets, partially offset by a
15 basis point decrease in the average yield on interest-earning assets.
Interest expense increased $769,000 to $5.2 million for the nine months ended
March 31, 1999 compared to the same period last year. This increase was due
primarily to a $23.9 million increase in average interest-bearing liabilities.
The provision for loan losses was $45,000 for the nine-month periods
ended March 31, 1999 and 1998. Management continues to evaluate the adequacy of
the allowance for loan losses based on local economic and real estate market
conditions, loan portfolio growth and the level of non-performing loans.
Non-interest expense increased $87,000 for the nine months ended March
31, 1999 compared to the prior year period. The increase was caused primarily by
increases of $31,000 in computer service fees, $68,000 in other operating
expenses and $34,000 in professional fees, partially offset by a $77,000
decrease in compensation and benefits expense.
Income tax expense for the nine months ended March 31, 1999 decreased
$54,000 compared to the same period last year, primarily due to a decrease in
pre-tax income. The effective tax rates were 44.0% and 43.5% for the nine months
ended March 31, 1999 and 1998, respectively.
The following table shows the Company's average consolidated balances,
interest income and expense, and average rates (annualized) for the periods
indicated.
Nine Months Ended
----------------------------------------------------------------------------
March 31, March 31,
1999 1998
----------------------------------------- ----------------------------------
Average Average Average Average
Balance (1) Interest Yield/Rate Balance (1) Interest Yield/Rate
------------- ------------- ------------- ------------ --------- -----------
(Dollars in thousands)
Interest-earning assets:
Loans (2).................................... $ 51,765 $3,054 7.87% $ 46,418 $ 2,785 8.00%
Mortgage-backed securities(3)................ 120,486 5,676 6.28 119,300 5,707 6.38
Other debt securities(3)..................... 20,302 972 6.38 12,555 611 6.49
Other interest-earning assets................ 8,992 349 5.17 5,458 271 6.62
-------- ------- -------- -------
Total interest-earning assets.............. 201,545 $ 10,051 6.65% 183,731 $ 9,374 6.80%
======== =======
Non interest-earning assets..................... 2,745 2,304
-------- --------
Total assets............................... $204,290 $186,035
======== ========
Interest-bearing liabilities:
Regular savings and club accounts............ $50,426 $1,050 2.78% $53,280 $1,180 2.95%
Money market and NOW accounts................ 15,135 301 2.65 11,628 246 2.82
Savings certificates and other............... 78,580 3,138 5.32 70,592 2,888 5.45
Securities repurchase agreements............. 17,950 690 5.13 3,000 102 4.53
FHLB advance................................. 250 6 3.20 --- ---
-------- ------- -------- -------
Total interest-bearing liabilities......... 162,341 $5,185 4.26% 138,500 $ 4,416 4.25%
====== =======
Non interest-bearing liabilities................ 1,663 977
-------- --------
Total liabilities.......................... 164,004 139,477
Stockholders' equity............................ 40,286 46,558
-------- --------
Total liabilities and stockholders' equity. $204,290 $186,035
======== ========
Net earning assets.............................. $39,204 $45,231
======== ========
Net interest income............................. $4,866 $ 4,958
====== =======
Net interest rate spread........................ 2.39% 2.55%
==== ====
Net yield on average interest-earning assets(4). 3.22% 3.60%
==== ====
Average interest-earning assets to average
interest-bearing liabilities................... 1.24x 1.33x
==== ====
Three Months Ended
----------------------------------------------------------------------------
March 31, March 31,
1999 1998
----------------------------------------- ----------------------------------
Average Average Average Average
Balance (1) Interest Yield/Rate Balance (1) Interest Yield/Rate
------------- ------------- ------------- ------------ --------- -----------
(Dollars in thousands)
Interest-earning assets:
Loans (2).................................... $ 53,529 $ 1,032 7.71% $ 47,064 $ 938 7.97%
Mortgage-backed securities(3)................ 114,920 1,763 6.14 123,744 1,967 6.36
Other debt securities(3)..................... 23,982 400 6.67 13,429 221 6.58
Other interest-earning assets................ 11,690 131 4.48 5,340 94 7.04
-------- ------- -------- -------
Total interest-earning assets.............. 204,121 $ 3,326 6.52% 189,577 $ 3,220 6.79%
======= =======
Non interest-earning assets..................... 2,871 2,462
-------- --------
Total assets............................... $206,992 $192,039
======== ========
Interest-bearing liabilities:
Regular savings and club accounts............ $50,454 $ 351 2.78% $52,592 $ 370 2.81%
Money market and NOW accounts................ 15,998 107 2.68 12,035 83 2.76
Savings certificates and other............... 79,684 1,010 5.07 73,084 985 5.39
Securities repurchase agreements............. 23,000 292 5.08 7,500 102 5.44
-------- ------- -------- -------
Total interest-bearing liabilities......... 169,136 $ 1,760 4.16% 145,211 $ 1,540 4.24%
======= =======
Non interest-bearing liabilities................ 1,747 1,101
-------- --------
Total liabilities.......................... 170,883 146,312
Stockholders' equity............................ 36,109 45,727
-------- --------
Total liabilities and stockholders' equity. $206,992 $192,039
======== ========
Net earning assets.............................. $34,985 $44,366
======== ========
Net interest income............................. $ 1,566 $ 1,680
======= =======
Net interest rate spread........................ 2.36% 2.55%
==== ====
Net yield on average interest-earning assets(4). 3.07% 3.54%
==== ====
Average interest-earning assets to average
interest-bearing liabilities................... 1.21x 1.31x
==== ====
<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>
Liquidity and Capital Resources
The Bank's primary sources of funds are depositor accounts from its
market area; proceeds from principal and interest payments on loans,
mortgage-backed securities and other debt securities; and borrowings from the
Federal Home Loan Bank of New York ("FHLB") and other sources. While maturities
and scheduled payments on loans and securities are a predictable source of
funds, deposit flows and loan and securities prepayments are greatly influenced
by general interest rates, economic conditions and competition.
The primary investing activities of the Bank are the origination of
mortgage loans and the purchase of securities, and its primary financing
activity is the attraction of depositor accounts.
The Bank may borrow from the FHLB of New York subject to an overall
limitation of 25% of total assets or $49.7 million at March 31, 1999. Funds may
be borrowed through a combination of FHLB advances and overnight borrowings
under a $15.5 million line of credit. The Bank had no such borrowings
outstanding at March 31, 1999 and June 30, 1998.
In January 1998, the Company began to utilize securities repurchase
agreements as a funding source, in order to supplement retail deposit growth. At
March 31, 1999, the Company had borrowed a total of $23.0 million and invested
the proceeds in securities and overnight deposits. The Company may engage in
other repurchase agreements, from time to time, as conditions warrant.
The Bank is required to maintain a minimum level of liquid assets as
defined by OTS regulations, based upon a percentage of liquid assets to
depositor accounts and short-term borrowings. For the month of March 1999, the
Bank's average daily total liquidity ratio was 16.7%, compared to the minimum
OTS requirement of 4.0%.
The Bank's most liquid assets are cash and cash equivalents, which
consist of interest-bearing deposits in other financial institutions and
short-term highly liquid investments with original maturities of less than three
months that are readily convertible to known amounts of cash. The level of these
assets is dependent on cash flows from the Bank's operating, financing and
investing activities during any given period. Cash and cash equivalents
decreased $832,000, from $4.6 million at June 30, 1998 to $3.8 million at March
31, 1999.
The Bank anticipates that it will have sufficient funds available to
meet its current commitments and other funding needs. At March 31, 1999, the
Bank had commitments to originate loans of $5.5 million. Savings certificates
which are scheduled to mature in one year or less at March 31, 1999 totaled
$63.8 million. Management believes that a significant portion of such depositor
accounts will remain with the Bank.
At March 31, 1999, the Bank's capital exceeded each of the OTS minimum
capital requirements and the requirements for classification as a
"well-capitalized" institution. The current minimum regulatory capital ratio
requirements are 1.5% for tangible capital, 3.0% for Tier I (core) capital and
8.0% for total risk-based capital. In order to be considered well-capitalized,
an institution must maintain a core capital ratio of at least 5.0%; a Tier I
risk-based capital ratio of at least 6.0%; and a total risk-based capital ratio
of at least 10.0%. At March 31, 1999, the Bank had both tangible and core
capital of $27.4 million (13.8% of total adjusted assets); Tier I risk-based
capital of $27.4 million (49.3% of total risk-weighted assets); and total
risk-based capital of $28.1 million (50.6% of total risk-weighted assets).
Impact of Year 2000 Issue
Like other financial institutions, the Company relies on computers for
the daily conduct of its business, all its transaction processing and for
general data processing. The "Year 2000 Issue" arose because many existing
computer programs use only the last two digits to refer to a year. Therefore,
these computer programs may not properly recognize a year that begins with "20"
instead of the familiar "19", causing the programs to fail or create erroneous
results.
The Company has initiated formal communications with all its
significant suppliers to determine the extent to which the Company is vulnerable
to those third parties' failure to remediate their own Year 2000 Issue. The
Company's data processing is performed almost entirely by a third party vendor.
At this time, the vendor has asserted that it is Year 2000 compliant and the
Company, in conjunction with other customers of this vendor, has begun testing
the updated system. The testing of the Company's data processing vendor is
complete and no major problems were encountered. The Company currently 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. However, if such modifications and conversions are not made,
or are not completed timely, the Year 2000 Issue could have a material adverse
impact on the operations of the Company.
The Company will utilize both internal and external resources to
reprogram, or replace, and test all software for Year 2000 modifications.
Related costs are expensed as incurred, except for costs incurred in the
purchase of new software or hardware, which are capitalized. To date, costs
incurred and expensed relate to the dedication of internal resources employed in
the assessment of and development of the Company's Year 2000 compliance
remediation plan, as well as the testing of the hardware and software owned or
licensed for its personal computers. Costs incurred to date are not material,
and management does not expect that additional costs to be incurred in
connection with the Year 2000 Issue will have a material impact on the Company's
financial condition or results of operations. Since substantially all of the
Company's loans are residential mortgages, the ability of the Company's
borrowers to become Year 2000 compliant is not a significant concern.
The estimated costs and timetable for the Year 2000 modifications are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors in respect of both the
Company and its suppliers that might cause such material differences include,
but are not limited to, the availability and cost of personnel trained in this
field, the ability to locate and correct all relevant computer codes, testing
complications and similar uncertainties. In addition, there can be no guarantee
that the systems of other companies on which the Company's systems rely will be
timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with the Company's systems, would not have a
material adverse effect on the Company.
The Company plans to complete the Year 2000 project not later than June
30, 1999. Contingency plans have been developed for all mission critical areas
of the Bank's operations. The contingency plan for the Bank's data processing
function involves the manual processing of transactions by the Bank's employees.
Contingency plans for the other mission critical areas involve having secondary
providers ready if problems with primary providers are encountered.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's interest rate risk
position since June 30, 1998. 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.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company was a defendant in a lawsuit resulting from the
rejection of an unsolicited conditional expression of interest. For
more information, see Note 3 to the unaudited financial statements in
Part 1. From time to time, the Company is involved as plaintiff or
defendant in other legal proceedings arising in the normal course of
its business. While the ultimate outcome of these various legal
proceedings cannot be predicted with certainty, it is the opinion of
management that the resolution of these legal actions should not have
a material effect on the Company's financial condition or results of
operations.
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
27. Financial Data Schedule
b. Reports on Form 8-K
1. A Current Report on Form 8-K was filed on January 13, 1999
to include a press release announcing the rejection of an
unsolicited acquisition offer and the continuation of its
previously announced Dutch Auction Tender Offer.
2. A Current Report on Form 8-K was filed on January 19, 1999
to include a press release announcing the Company's plans to
remain independent and continue the previously announced
Dutch Auction Tender Offer.
3. A Current Report on Form 8-K was filed on January 29, 1999
to include a press release announcing the oversubscription
of the Dutch Auction Tender Offer.
4. A Current Report on Form 8-K was filed on February 3, 1999
to include a press release announcing the final results of
the Dutch Auction Tender Offer.
SIGNATURES
Pursuant to the requirements 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
(Registrant)
DATE: May 13, 1999 BY: /s/ Eldorus Maynard
------------------- -------------------
Eldorus Maynard
Chairman of the Board and
Chief Executive Officer
DATE: May 13, 1999 BY: /s/ William J. LaCalamito
------------------- -------------------------
William J. LaCalamito
President
(principal financial officer)