SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM 10-K
Commission File Number: 0-14995
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
YORK FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2427539
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
101 South George Street, York, Pennsylvania 17401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 846-8777
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 $1.00 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 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 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 3, 1996, there were issued and outstanding 6,128,641
shares of the registrant's common stock. The aggregate market value of the
voting stock held by non-affiliates of the registrant, based on the closing
sales price of the registrant's common stock as quoted on the Nasdaq National
Market System on September 3, 1996 was $98,058,256 ($16.00 per share based
upon 6,128,641 shares.) Directors and officers of the registrant are not
considered affiliates for purposes of this calculation.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended June
30, 1996. (Parts I and II)
2. Portions of Proxy Statement for the 1996 Annual Meeting of Stockholders.
(Part III)
PART I
Item 1. Business
York Financial Corp. ("York Financial" or the "Corporation") was
incorporated in Pennsylvania in September 1985 and in August 1986 became a
unitary savings and loan holding company and the sole shareholder of York
Federal Savings and Loan Association ("York Federal" or the "Association").
At June 30, 1996, the Corporation had assets of $1.1 billion, total deposits
of $908.1 million and stockholders' equity of $93.5 million.
Presently, the primary business of York Financial is the business of
York Federal. York Federal received its federal charter in 1955. At June 30,
1996, York Federal's stockholders' equity was $82.1 million. York Federal is
a member of the Federal Home Loan Bank ("FHLB") of Pittsburgh and is subject
to supervision, examination, and regulation by the Office of Thrift
Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC").
The executive offices of York Federal and the Corporation are located at 101
South George Street, York, Pennsylvania (telephone number: (717) 846-8777).
The primary business of York Federal is attracting deposits from the
general public, commercial and governmental entities and investing these
deposits into loans secured by residential and commercial real property,
consumer loans and securities. York Federal's principal source of income is
interest and dividends received on loans and securities, fees received from
servicing loans sold to government sponsored agencies and other investors and
service charges assessed on loan and deposit transactions. York Federal's
principal expense is interest paid on deposits and borrowings. Primary
sources of funds to support lending and other general business activities are
operations, net deposits, loan repayments including monthly amortization and
prepayments, the sale of loans, securities held for trading, and securities
available for sale, short and long-term advances from the FHLB of Pittsburgh
and Federal Reserve Bank of Philadelphia and other short-term borrowings. The
Association does not rely on brokered deposits as a source of funds.
York Federal conducts its business through twenty-two offices located
in south central Pennsylvania and Maryland. York Federal maintains a
commissioned mortgage origination staff, as well as mortgage broker
relationships, which originate residential mortgage loans for the Association
primarily in Pennsylvania, Maryland, Virginia and Delaware.
Earnings depend to a large extent on the ability of the institution to
maintain a positive spread between the yield on earning assets and the cost
of funds. The spread is affected by general economic conditions, monetary and
fiscal policies of the federal government and the policies of regulatory
authorities supervising the operations of thrift institutions. York Federal
has maintained a positive spread between the yield on its earning assets and
its cost of funds and, as a result, has experienced net income from its
operations. No assurances, however, can be given that this experience will
continue.
York Financial, in addition to its ownership of York Federal, has
several wholly-owned subsidiaries. For information regarding these
subsidiaries and their activities, see "Business -- Subsidiaries of York
Federal" and "-- Subsidiaries and Joint Ventures of the Corporation" contained
herein.
Proposed Federal Legislation
Recapitalization of SAIF and its Impact on SAIF Premiums. Effective
January 1, 1996, the FDIC substantially reduced deposit insurance premiums for
well-capitalized, well-managed financial institutions that are members of the
Bank Insurance Fund ("BIF"). Under the new assessment schedule, approximately
92% of BIF members pay the statutory minimum annual assessment of $2,000.
With respect to financial institutions that are members of the Savings
Association Insurance Fund ("SAIF"), the FDIC has retained the existing rate
schedule of 23 to 31 basis points. The Association is a member of the SAIF
rather than the BIF. SAIF premiums may not be reduced for several years
because the SAIF has lower reserves than the BIF. Because deposit insurance
premiums are often a significant component of noninterest expense for insured
depository institutions, the reduction in BIF premiums may place the
Association at a competitive disadvantage since BIF-insured institutions (such
as most commercial banks) may be able to offer more attractive loan rates,
deposit rates, or both.
Proposed federal legislation would recapitalize the SAIF and resolve
the current premium disparity by requiring savings institutions like the
Association to pay a one-time assessment to increase SAIF's reserves to $1.25
per $100 of deposits that is expected to be approximately 68 basis points on
the amount of deposits held by a SAIF-member institution as of March 31, 1995.
The payment of a one-time fee would have the effect of immediately reducing
pre-tax earnings of SAIF-member institutions by the amount of the fee. Based
on the Association's assessable deposits of $815.6 million at March 31, 1995,
a one-time assessment of 68 basis points would equal approximately $5.5
million on a pre-tax basis, or $3.4 million after tax. Management cannot
predict whether any legislation imposing such a fee will be enacted, or, if
enacted, the amount or timing of any one-time fee or whether ongoing SAIF
premiums will be reduced to a level equal to that of BIF premiums. See
"Regulation."
Potential Operational Restrictions Associated with Regulatory
Oversight. The Association is subject to extensive regulation, supervision and
examination by the OTS, as its chartering authority and primary federal
regulator, and by the FDIC, which insures its
2
deposits up to applicable limits. The Association is a member of the FHLB
System and is subject to certain limited regulations promulgated by the Board
of Governors of the Federal Reserve System ("Federal Reserve"). As the
holding company of the Association, the Corporation also is subject to
regulation and oversight by the OTS. Such regulation and supervision govern
the activities in which an institution can engage and is intended primarily
for the protection of the insurance fund and depositors. Regulatory
authorities have been granted extensive discretion in connection with their
supervisory and enforcement activities which are intended to strengthen the
financial condition of the banking industry, including the imposition of
restrictions on the operation of an institution, the classification of assets
by the institution and the adequacy of an institution's allowance for loan
losses. Any change in such regulation and oversight, whether by the OTS, the
FDIC or Congress, could have a material impact on the Corporation, the
Association and their respective operations. See "Regulation." Legislation
proposing a comprehensive reform of the banking and thrift industries has
recently been discussed in the United States Congress. Under such
legislation, (i) the BIF and the SAIF would be merged, at which time thrifts
and banks would pay the same deposit insurance premiums, (ii) federal savings
associations would be required to convert to a national bank or a
state-chartered bank or thrift, (iii) all savings and loan holding companies
would become bank holding companies and (iv) the OTS would be merged with the
Office of the Comptroller of the Currency. It is uncertain when or if such
legislation may be passed and, if passed, in what form such legislation may be
passed.
Selected Financial Data and Other Items
The information contained in the Corporation's Annual Report to
Stockholders, attached hereto as Exhibit 13 ("Annual Report"), for the fiscal
year ended June 30, 1996, is incorporated herein by reference.
Interest Rate Sensitivity Management
The information contained on pages 4 and 5 of the Corporation's Annual
Report is incorporated herein by reference.
Lending Activities
General. On a consolidated basis, York Federal's loan portfolio
totaled $938.6 million at June 30, 1996, representing 84.6% of its total
assets. On that date, the portfolio consisted of loans secured by mortgages
on residential properties, commercial real estate loans, including loans
secured by undeveloped real estate, commercial business loans, and consumer
loans.
York Federal originates for its own portfolio adjustable rate and
intermediate term real estate mortgage loans, consumer loans
3
and certain commercial real estate loans. York Federal generally has a policy
of selling in the secondary market its originations of long-term (20 to 30
years), fixed rate real estate loans. This sales activity results in York
Federal's loan portfolio being more interest rate sensitive. Although other
loans within the portfolio may have original maturities of 15 to 30 years,
experience has indicated that because of refinancing and prepayments, such
loans remain outstanding for significantly shorter periods than their
contractual terms.
4
PAGE
Loan Portfolio Analysis. The following table sets forth the
composition of the Association's loan
portfolio by type of loan as of the dates indicated:
At June 30,
1996 1995 1994
1993 1992
$ % $ % $ % $
% $ %
(Dollars in Thousands)
Real estate
loans:
Residential
first mortgage
loans:
Conventional $718,755 76.6% $602,072 71.2% $441,544 65.9%
$443,586 65.7% $420,209 65.0%
Construction 65,725 7.0 79,742 9.4 90,781 13.6
77,204 11.4 53,661 8.3
784,480 83.6 681,814 80.6 532,325 79.5
520,790 77.1 473,870 73.3
Commercial first
mortgage loans:
Conventional 62,006 6.6 82,544 9.8 84,880 12.7
85,104 12.6 93,014 14.4
Constructional 9,840 1.0 6,409 0.8 9,456 1.3
18,015 2.7 25,227 3.9
71,846 7.6 88,953 10.6 94,336 14.0
103,119 15.3 118,241 18.3
856,326 91.2 770,767 91.2 626,661 93.5
623,909 92.4 592,111 91.6
Commercial
business loans 1,714 0.2 2,751 0.3 2,622 0.4
3,512 0.5 4,214 0.6
Consumer loans:
Automobile loans 5,301 0.6 5,945 0.7 2,328 0.3
2,517 0.4 2,621 0.4
Mobile home loans 1,362 0.1 1,306 0.2 1,076 0.2
947 0.1 2,444 0.4
Education loans 15,505 1.7 12,777 1.5 9,465 1.4
6,338 0.9 3,691 0.6
Savings account
loans 2,001 0.2 1,916 0.2 1,893 0.3
2,352 0.4 2,117 0.3
Home improvement
loans 3,901 0.4 3,360 0.4 2,490 0.4
2,724 0.4 2,797 0.4
Boat loans 3,126 0.3 4,326 0.5 5,504 0.8
8,343 1.2 11,639 1.8
Home equity
loans 49,217 5.2 49,900 5.9 44,657 6.7
39,569 5.9 37,181 5.8
Other 34,401 3.6 27,220 3.2 24,168 3.6
24,887 3.7 20,572 3.2
114,814 12.3 106,750 12.6 91,581 13.7
87,677 13.0 83,062 12.9
Subtotals 972,854 880,268 720,864
715,098 679,387
Less:
Loans in process 27,497 2.9 26,577 3.1 44,691 6.7
34,518 5.1 24,128 3.7
Unamortized
loan fees and
unearned income 178 -- 2,646 0.3 1,831 0.3
2,210 0.3 3,590 0.6
Allowance for
loan losses 6,609 0.7 5,840 0.7 4,492 0.6
3,346 0.5 5,204 0.8
34,284 3.6 35,063 4.1 51,014 7.6
40,074 5.9 32,922 5.1
Total $938,570 100.0% $845,205 100.0% $669,850 100.0%
$675,024 100.0% $646,465 100.0%
5
Residential Real Estate Loans. At June 30, 1996 approximately 83.6% of
York Federal's loan portfolio was comprised of one-to-four family residential
mortgage loans. OTS regulations require that all residential loans made in
excess of 90% loan-to-value ratio be insured for the amount by which the loan
exceeds 80% of value. The Association is authorized to make loans to
residential borrowers that do not otherwise comply with regulatory guidelines
in an amount up to 5% of total assets. As of June 30, 1996, the total of such
nonconforming loans was less than the 5% of assets limit.
Generally, the permanent fixed rate residential loans currently
originated by York Federal are structured to conform with terms and conditions
which would enable these loans to be sold in the secondary market. At June
30, 1996, $5.7 million of conventional mortgages were held for sale in the
secondary market. Permanent conventional residential mortgage loans
originated for sale to the Federal National Mortgage Association ("FNMA") and
the Federal Home Loan Mortgage Corporation ("FHLMC") are made for up to 95% of
the appraised value of the property when the loan is secured by real estate
containing no more than four family units. All fixed rate conventional loans
with a loan-to-value ratio in excess of 80% are required by secondary market
guidelines to have private mortgage insurance ("PMI") covering that portion of
the loan in excess of 65% of appraised value. The Association makes loans not
conforming to these secondary marketing requirements and retains these loans
in portfolio. All such loans are made with adjustable interest rates.
The loan-to-value ratio, maturity and other provisions of the loans
made by York Federal have generally reflected the policy of making the maximum
loan permissible consistent with applicable regulations, market conditions,
and lending practices and underwriting standards established by York Federal.
Mortgage loans made by York Federal are generally long-term loans, with
principal and interest due each month. Borrowers may refinance or prepay
loans at their option. Interest rates and points charged on loans originated
by York Federal are competitive with other lenders in the general market area.
York Federal also presently offers adjustable rate and intermediate
term mortgages on one-to-four unit residential dwellings for its portfolio.
The interest rate on most adjustable mortgages is adjustable once a year and
is tied to either the contract interest rate on loans closed to facilitate the
purchase of previously occupied homes published by the Federal Housing
Finance Board ("FHFB National Contract Rate") or the one-year constant
maturity treasury (CMT) yield. The Association also offers a 5/1 CMT
adjustable rate mortgage loan where the rate is fixed for the first five years
with annual adjustments to the one year CMT thereafter. Intermediate term
loans are primarily represented by seven year balloon loans where the interest
rate is fixed and the loan is amortized based on a 30 year amortization
6
schedule with the remaining loan balance at the end of seven years being due
and payable.
Commercial Real Estate Loans. York Federal may grant permanent loans
on commercial properties and multi-family properties with more than four
units. Such activities have been limited because of the market conditions for
commercial real estate. However, York Federal does intend to more
aggressively pursue this activity within its primary branch market area and
has reestablished a commercial real estate lending unit to that end. In
previous years, York Federal actively engaged in granting permanent commercial
real estate loans due to the higher yields and shorter terms and/or repricing
characteristics of these loans. The Association's existing portfolio includes
a mix of land development, construction and permanent financing on commercial
and multi-family real estate. Permanent commercial loans are typically made
for terms of up to 25 years either as adjustable interest rate loans with rate
adjustment provisions of one to three years, with monthly rate adjustment
provisions, or as "balloon" loans with abbreviated maturity dates. The
commercial real estate loan portfolio is secured by single family
condominiums, land for development, hotel/motel/restaurant, multi-family
residential, office building and other properties. These loans are made in
amounts generally limited to 80% of the appraised value of the property
securing the loan. York Federal has generally provided permanent financing on
commercial properties and multi-family properties on which it has made the
construction loan. Commercial real estate loans are generally considered to
be of higher risk than residential loans and constitute a lesser portion of
York Federal's portfolio (7.6% as of June 30, 1996).
As explained more fully under "Regulation - Investment Rules," the OTS
lending limitations on loans permitted to one borrower are equivalent to that
applicable to national banks.
Consumer Loans. Federal regulations permit federal associations to
make secured and unsecured consumer loans for personal, family and household
purposes up to 35% of an association's assets. In addition, a federal
association has unlimited lending authority for certain consumer loans, such
as property improvement loans, mobile home loans, savings account secured
loans and certain other secured and unsecured personal loans.
At June 30, 1996 consumer loans totalled $114.8 million or
approximately 12.3% of York Federal's total loan portfolio. York Federal
offers to its customers a home equity line of credit. Such loans are made in
amounts generally not to exceed the difference between 90% of the current
property value less the balance of other loans outstanding secured by the
property. Loans typically adjust monthly at a margin of 1.0% to 2.49% over
the Citibank prime rate with introductory terms to new customers which include
a fixed rate
7
PAGE
option for up to three years. At June 30, 1996, York Federal had
approximately $49.2 million of home equity loans outstanding under total lines
of credit available of $96.1 million.
The remaining portion of the consumer loan portfolio is composed of
automobile loans, loans secured by savings accounts, mobile home loans, home
improvement loans, boat loans, education loans and other consumer loans. It
is York Federal's intention to emphasize consumer lending consistent with
prudent underwriting practices in order to take advantage of the generally
higher yields on these loans as well as their shorter terms.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
assets that depreciate rapidly, such as automobiles and boats. In the latter
case, repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan and the remaining
deficiency often does not warrant further substantial collection efforts
against the borrower. In addition, consumer loan collections are dependent on
the borrower's continuing financial stability and, thus, are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amounts
recoverable on such loans.
Construction Loans. York Federal provides interim construction
financing for residential and commercial real estate properties. At June 30,
1996, the Association had $75.6 million or 8.1% of total loans outstanding in
interim construction loans, a decrease of $10.6 million, or 12.3% from June
30, 1995. This decrease in construction lending activity was due principally
to lower new residential home construction demand. The Association continues
to be committed to this type of lending. York Federal's policy is to grant
single family construction loans up to 95% of the appraised value for an
individual's personal residence and for builders up to 90% of the lesser of
cost or appraised value.
Residential construction loans generally are made for a nine-month
term. This period may be extended subject to negotiation and the payment of
an extension fee. York Federal generally provides permanent financing on
residential properties on which it has made the construction loan.
Commercial construction loans are made at adjustable rates of interest
for terms of one year, although York Federal periodically makes longer term
commercial construction loans on larger projects.
Commercial construction financing is considered to involve a higher
degree of credit risk than long term financing of residential properties.
York Federal's risk of loss on a
8
construction loan is dependent largely upon the accuracy of the initial
estimate of the property's value at completion of construction or development
and the estimated cost (including interest) of construction. If the estimate
of construction cost and the salability of the property upon completion of the
project proves to be inaccurate, York Federal may advance funds beyond the
amount originally committed to permit completion of the project. If the
estimate of value proves to be inaccurate, York Federal may be confronted, at
or prior to the maturity of the loan, with a project that is under valued and
which is insufficient to assure full repayment.
York Federal's underwriting criteria are designed to evaluate and
minimize the risks of each construction loan. Among other things, York
Federal considers the financial condition of the borrower and his or her
reputation, the amount of the borrower's equity in the project, the results of
an independent appraisal and review of cost estimates, pre-construction sale
and leasing information, and cash flow projections of the borrower. In
addition to these criteria, York Federal also considers the availability of
permanent financing or a takeout commitment to the borrower on commercial
construction properties.
9
Loan Maturity:
The following table sets forth the dollar amount of total loans
receivable which have predetermined interest rates and those which have
floating or adjustable interest rates.
Due within one year (1)
Pre- Floating
Determined or Adjustable
Rates Rates Total
(Dollars in Thousands)
Real Estate
Conventional
Residential and commercial $45,070 $82,782 $127,852
Construction
Residential and commercial 3,525 7,789 11,314
Consumer 18,356 58,141 76,497
Commercial business loans 180 1,526 1,706
Total $67,131 $150,238 $217,369
Due one to five years
After June 30, 1996(1)
Pre- Floating
Determined or Adjustable
Rates Rates Total
(Dollars in Thousands)
Real Estate
Conventional
Residential and commercial $140,346 $166,040 $306,386
Construction
Residential and commercial 10,328 6,933 17,261
Consumer 27,754 10,563 38,317
Commercial business loans -- 8 8
Total $178,428 $183,544 $361,972
Due more than five years
After June 30, 1996(1)
Pre- Floating
Determined or Adjustable Grand
Rates Rates Total Total
(Dollars in Thousands)
Real Estate
Conventional
Residential and commercial $161,484 $184,079 $345,563 $779,801
Construction
Residential and commercial 13,727 6,726 20,453 49,028
Consumer -- -- -- 114,814
Commercial business loans -- -- -- 1,714
Total $175,211 $190,805 $366,016 $945,357
_______________
(1) Based on contractual terms to maturity.
10
Loan Solicitation and Processing. York Federal solicits mortgage loan
applications from existing customers, real estate brokers, builders, real
estate developers, and various other persons. Upon receipt of a loan
application from a prospective borrower, a credit report is ordered to verify
specified information relating to the loan applicant's employment, income and
credit standing. An appraisal of the real estate intended to secure the
proposed loan is performed by a state certified and insured appraiser. As
soon as the required information has been obtained, the appraisal completed
and the loan underwritten by a loan underwriter, the loan is submitted for
internal committee or Board of Directors action depending on required level of
lending authority. All commercial mortgage loans are submitted to the
commercial lending committee which has lending authority up to $200,000. The
Board of Directors ratifies all loan decisions made in the commercial lending
committee; any loans which exceed committee limitations require the review and
approval of the Board of Directors.
York Federal has established a group of mortgage representatives which
solicits permanent and construction loans on residential properties located in
York Federal's lending market areas. Mortgage representatives are paid
commissions on loans originated by them and consummated by York Federal.
York Federal has established relationships with independent mortgage
brokers as an additional source of residential mortgage loans from within its
lending market areas as well as contiguous market areas. Mortgage brokers
submit completed loan applications including credit information relating to
the loan applicant and an appraisal of the real estate intended to secure the
property. The completed loan application is underwritten by a York Federal
loan officer against the same underwriting standards used for loans originated
directly by York Federal and submitted for approval to a committee consistent
with the process discussed above. The mortgage broker is compensated upon
closing the loan.
Loan Sales. Generally, fixed rate long-term mortgage loans are sold in
the secondary mortgage market to FNMA, FHLMC and other investors. In
addition, when deemed prudent, York Federal has securitized adjustable rate
mortgages. These transactions are generally consummated through York
Federal's participation in FNMA and FHLMC mortgage programs. Under the
programs, FNMA and FHLMC exchange an equal amount of mortgage-backed
securities ("MBS") for existing pools of mortgages. The fee charged by the
FNMA and FHLMC on a swap is the "guarantee fee" and the MBS have a lower yield
than the yield of the mortgage pool they represent. York Federal is willing
to pay the "guarantee fee" because participation in the "swap" program has
increased the liquidity of its asset portfolio since the MBS are generally
more marketable than the underlying loans. At June 30, 1996, York Federal had
outstanding commitments to sell $5.5 million in loans. York Federal generally
expects to
11
satisfy these commitments with loans originated within the respective
commitment period.
In connection with loan sale commitments, net loans held for sale at
June 30, 1996 totalled $5.7 million and represent loans in portfolio and
specifically identified to fill loan sale commitments. Such loans are carried
at the lower of cost or estimated market value in the aggregate.
In prior years, certain sales to FNMA included recourse provisions.
Transactions consummated in fiscal year 1996 are under FNMA special servicing
programs and are without recourse. The principal balance outstanding of loans
sold with recourse is $51.6 million at June 30, 1996. Such amount is included
in determining compliance with risk-based capital requirements and in
management's assessment of the adequacy of the allowance for loan loss. For
additional information, see Note 16 to the Notes to Consolidated Financial
Statements.
In connection with loan sales, York Federal retains the servicing of
the loans (i.e., collection of principal and interest payments) for which it
generally receives a servicing fee payable monthly of .25% to .375% per annum
of the unpaid balance of each loan. Previously, when the Association sold
loans in which the contract servicing fee rate exceeds the normal servicing
fee rate, the present value of the estimated future income payments which
differs from the normal servicing fee was recognized immediately as an excess
servicing gain. The recoverability of the excess servicing receivable
recorded at the time of the sale and certain other purchase mortgage servicing
rights were periodically re-evaluated in light of actual versus projected loan
prepayments. Effective July 1, 1995, the Company adopted FASB Statement No.
122, "Accounting for Mortgage Servicing Rights," an amendment of Statement No.
65. Statement No. 122 requires the capitalization of originated Mortgage
Servicing Rights ("OMSR") retained for loans sold or securitized determined by
an allocation of cost between the loan and the mortgage servicing rights based
on their relative fair values. Capitalization of such rights was previously
prohibited under Statement No. 65 except to the extent of excess servicing
fees. This allocation of value to mortgage servicing rights was the primary
factor in the increase gain on sales of loans and trading securities over the
prior year. Mortgage servicing rights are amortized over the period of
estimated net servicing income. Impairment of mortgage servicing rights is
measured based on the fair value of those rights determined using discounted
cash flows based on various assumptions including projected loan prepayments
and current market interest rates.
In accordance with FASB Statement No. 122, mortgage servicing rights of
$1,630,000 were capitalized during the year ended June 30, 1996. The book
value of mortgage servicing rights was approximately $2,108,000 (including
originated, purchased and
12
excess mortgage servicing rights), net of valuation allowance of $38,000 at
June 30, 1996, and $767,000 (including purchased and excess mortgage servicing
rights) at June 30, 1995. As of June 30, 1996, York Federal was servicing
loans for others aggregating approximately $593.2 million. See Notes 1 and 5
of the Notes to Consolidated Financial Statements.
The following table presents York Federal's real estate loans originated
or acquired and sales activity during the periods indicated.
Year Ended June 30,
1996 1995 1994
(Dollars in Thousands)
Loans originated:
Conventional real estate loans:
Construction loans $104,957 $131,152 $117,109
Loans on existing properties(1) 298,792 193,402 238,739
Other loans 73,859 70,506 56,598
Total loans originated $477,608 $395,060 $412,446
Loans securitized and/or sold:
Real estate:
Loans securitized(2) $153,312 $ 64,414 $209,305
Loans sold 1,622 2,319 2,270
Total real estate loans
securitized and/or sold $154,934 $ 66,733 $211,575
______________
(1) Includes loans refinanced from the Association's portfolio totalling
$40.6 million, $6.0 million and $81.1 million in years ended June 30,
1996, 1995 and 1994, respectively.
(2) Loans securitized in the year ended June 30, 1996, 1995 and 1994
includes loans securitized and sold totalling $96.4 million, $50.3
million and $174.5 million, respectively, and loans securitized and
retained in portfolio totalling $56.9 million, $14.1 million and $34.8
million, respectively. Included in the $56.9 million of loans
securitized and held in portfolio for the year ended June 30, 1996 was
$21.7 million of securities held for trading.
Loan Commitments. York Federal makes commitments to grant conventional
mortgage loans on existing residential dwellings for periods of up to 60 days
from the date of rate lock-in. Such commitments are generally made at the
market rate of interest prevailing at the time the loan application is
received. During fiscal 1996, less than 5% of loan commitments expired
without being funded. At June 30, 1996 York Federal's outstanding residential
and commercial mortgage loan commitments amounted to $34.8 million.
Asset Quality
The information contained on pages 6 and 7 of the Corporation's Annual
Report is incorporated herein by reference.
13
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses
in any category.
At June 30,
1996 1995 1994
% of loans % of loans % of loans
in each in each in each
category category category
to gross to gross to gross
Amount loans Amount loans Amount loans
(Dollars in Thousands)
Loans:
Real Estate
Residential $2,063 82.5% $1,500 78.0% $1,100 73.8%
Commercial 1,430 5.2 1,700 9.6 1,350 13.1
Commercial
business
loans 65 0.2 50 0.3 50 0.4
Consumer 406 12.1 350 11.6 350 12.7
Unallocated 2,645 NA 2,240 N/A 1,642 N/A
Total
allowance
for loan
losses $6,609 100.0% $5,840 100.0% $4,492 100.0%
At June 30,
1993 1992
% of loans % of loans
in each in each
category category
to gross to gross
Amount loans Amount loans
(Dollars in Thousands)
Loans:
Real Estate
Residential $ 960 73.0% $ 400 70.2%
Commercial 1,450 14.2 3,700 17.0
Commercial
business
loans 55 0.5 200 0.6
Consumer 300 12.3 400 12.2
Unallocated 581 N/A 504 N/A
Total allowance
for loan
losses $3,346 100.0% $5,204 100.0%
14
OTS regulations require that management of each insured association
classify its assets on a regular basis. In addition, in connection with
examinations of insured institutions, OTS examiners are authorized 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 must have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that
the weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions and values questionable and there is a
high possibility of loss. An asset classified as loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. If an asset or portion thereof is classified as
loss, the insured institution must either establish specific allowances for
loan losses in the amount of 100% of the portion of the asset classified as
loss, or charge off such amount. General loss allowances established to cover
possible losses related to assets classified substandard or doubtful may be
included in determining an institution's regulatory capital, while specific
valuation allowances for loans classified as loss do not qualify as regulatory
capital. Assets that do not currently expose an insured institution to
sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are designated "special mention" and are
monitored by the Association.
Management recognizes the importance of an adequate allowance for loan
losses and makes provision for loan losses during each fiscal year in amounts
consistent with evaluated risks. The management of York Federal monitors
asset classifications on an ongoing basis with the results representing a
primary consideration in determining the adequacy of the allowance for loan
losses. The Association has established its allowance for loan losses in
accordance with generally accepted accounting principles. It is the opinion of
management that the allowance for loan losses is adequate to absorb risk of
loss associated with loans of York Federal at June 30, 1996.
Non-Performing Loans. The information contained on page 6 through page
7 of the Corporation's Annual Report is incorporated herein by reference. See
Notes 1 and 4 of the Notes to Consolidated Financial Statements.
15
The following table sets forth information with respect to loans on
non-accrual status at the dates indicated.
At June 30,
1996 1995
(In Thousands)
Land held for development $ 200 $ --
Commercial real estate 1,473 3,282
Other loans 8 216
Total $1,681 $3,498
The non-performing loans are in various stages of resolution with
appropriate reserve allocations made where indicated based on the value of the
underlying collateral.
Real Estate Owned. The information contained on page 6 through page 7
of the Corporation's Annual Report is incorporated herein by reference. See
Notes 1 and 6 of the Notes to Consolidated Financial Statements.
Investment Activities
The following table sets forth the carrying value of York Federal's
short-term investments, securities held for trading, securities available for
sale, securities held to maturity and FHLB stock at the dates indicated.
At June 30,
1996 1995 1994
(Dollars in Thousands)
Short-term investments:
Interest bearing deposits $ 2,207 $19,861 $ 53,794
Securities:
Held for Trading:
Mortgage-backed 21,736 4,451 --
Available for Sale:
U.S. Treasury and other U.S.
Government Agencies 7,471 -- --
Mortgage-backed 45,644 31,569 46,214
Total 53,115 31,569 46,214
Held to maturity:
U.S. Treasury and other U.S.
Government Agencies 8,857 21,895 23,018
Mortgage-backed 418 7,398 8,234
Total 9,275 29,293 31,252
Federal Home Loan Bank of Pittsburgh
stock 6,733 5,177 4,857
Total $93,066 $90,351 $136,117
Income from securities provides the second largest source of interest
income for York Federal after interest on loans. York Federal is required
under OTS regulations to maintain a minimum
16
amount of liquid assets which may be invested in specified short- term
securities and is also permitted to make certain other securities investments.
The decrease in short term, liquid investments is a result of funding loan
growth with such monies and is consistent with the Association's desire to
manage liquidity levels consistent with regulatory requirements (currently 5%
as defined by OTS regulations).
Securities Held for Trading. In accordance with FASB Statement No.
115, securities created in the Association's mortgage banking activity are
deemed trading securities and are carried at fair value with unrealized gains
and losses reported in the statement of income. At June 30, 1996, an
unrealized loss of $943,000 was recognized as a component of mortgage banking
income. See Notes 1 and 5 of the Notes to Consolidated Financial Statements.
Securities Available for Sale. In November 1995, the FASB issued a
Guide to Implementation of Statement 115, "Accounting for Certain Investments
in Debt and Equity Securities." The guide stated that no later than December
31, 1995, an enterprise may reassess the appropriateness of the
classifications of all securities held at that time and account for any
resulting reclassifications at fair value. Reclassifications from the held-
to-maturity category that result from this one-time reassessment will not call
into question the intent of an enterprise to hold other debt securities to
maturity in the future. During the quarter ended December 31, 1995, the
Corporation transferred held- to-maturity securities with a fair value of
$14.3 million to available-for-sale with the resulting net unrealized gains of
$29,000, net of taxes, reported as a component of stockholders' equity. See
notes 1 and 3 of the Notes to Consolidated Financial Statements.
Federal Home Loan Bank (FHLB) Stock. The Association maintains its
stock position with the FHLB of Pittsburgh in an amount sufficient to satisfy
its membership requirement. See "Regulation -- Federal Regulation of Savings
Associations -- Federal Home Loan Bank System."
Investment decisions are made by the Investment Committee of York
Federal under the supervision of York Federal's Board of Directors.
17
The following table represents maturity distributions of various
securities based on contractual terms to maturity:
At June 30, 1996
One Year One to Five Five to Ten
or Less Years Years
________________ ________________ ________________
Amortized Amortized Amortized
Cost Yield Cost Yield Cost Yield
(Dollars in Thousands)
Securities:
Held for
Trading:
Mortgage-backed $3,641 6.65% $ 9,567 6.65% $ 7,197 6.65%
Available for Sale:
U.S. Treasury and
other U.S.
Government
agencies
and municipal $ 757 5.03% $ 3,328 5.03% $ 3,367 5.03%
Mortgage-backed 7,635 6.64 19,525 6.62 14,331 6.61
$8,392 6.49% $22,853 6.39% $17,698 6.31%
Held to Maturity:
U.S. Treasury and
other U.S.
Government
agencies
and municipal $ 864 6.22% $ 4,153 6.15% $3,840 6.22%
Mortgage-backed 67 8.52 176 8.52 133 8.52
$ 931 6.39% $ 4,329 6.25% $3,973 6.30%
At June 30, 1996
More Than
Ten Years Total Securities
________________ ______________________________
Amortized Amortized Fair Average
Cost Yield Cost Value Yield
(Dollars in Thousands)
Securities:
Held for
Trading:
Mortgage-backed $2,266 6.65% $22,671 $21,736 6.65%
Available for Sale:
U.S. Treasury
and other U.S.
Government
agencies
and municipal $ -- --% $ 7,453 $ 7,471 5.03%
Mortgage-backed 4,910 6.66 46,401 45,644 6.62
$4,910 6.66% $53,854 $53,115 6.40%
Held to Maturity:
U.S. Treasury
and other U.S.
Government
agencies
and municipal $ -- --% $ 8,857 $ 8,510 6.19%
Mortgage-backed 42 8.52 418 438 8.52
$ 42 8.52% $ 9,275 $ 8,948 6.29%
18
PAGE
Savings Activities and Other Sources of Funds
General. Deposits are the major source of York Federal's
funds for lending and other investment purposes. In addition to
deposits, York Federal obtains funds from operations, loan repayments
including monthly amortization and prepayments, proceeds from sales of loans,
loan participations, securities held for trading, securities available for
sale, advances from the FHLB of Pittsburgh and other short-term borrowings.
Fund inflows and outflows are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short-term
basis to compensate for reductions in the availability of other sources of
funds. They also may be used on a longer term basis for general business
purposes. York Federal has borrowed primarily from the FHLB of Pittsburgh.
Deposits. York Federal offers a number of deposit accounts,
including passbook and statement savings accounts, NOW accounts, money market
type accounts and certificate accounts, including Jumbo certificate accounts,
ranging in maturity from seven days to six years. Deposit accounts vary as to
terms, with the principal differences being the minimum balance required, the
time period the funds must remain on deposit and the interest rate. Deposit
accounts are primarily held by customers within York Federal's primary market
area. At June 30, 1996 there were no broker-originated deposits. See Note 9
to the Notes to the Consolidated Financial Statements.
Changes in the composition of the Association's deposit portfolio were
due to customers reaction to the higher rate environment in fiscal 1996. The
Association priced money market deposit accounts and certain certificate
accounts in order to maintain existing customers, extend maturities and
attract new customers searching for investment alternatives as other deposits
matured. This resulted in a shift in interest-bearing liabilities from low
cost transaction accounts to higher cost money market and certificate
accounts.
The following table indicates the amount of York Federal's certificates
of deposit of $100,000 or more by terms remaining to maturity as of June 30,
1996.
Certificates
Maturity Period of Deposit
(In Thousands)
Three months or less. . . . . . . . . . . $38,850
Three through six months. . . . . . . . . 11,308
Six through twelve months . . . . . . . . 7,708
Over twelve months. . . . . . . . . . . . 15,627
Total . . . . . . . . . . . . . . . . . $73,565
19
Borrowings. See Note 10 to the Notes to Consolidated Financial
Statements incorporated by reference herein.
Yields Earned and Rates Paid
See pages 9 through 11 of the Corporation's Annual Report
incorporated by reference herein.
Subsidiaries of York Federal
Under OTS regulations, York Federal is permitted to invest an
amount equal to 2% of its assets in its service corporations, with an
additional investment of 1% of assets where such investment is primarily for
inner-city and community development purposes. Under such limitations, on
June 30, 1996, York Federal was authorized to invest up to approximately $33.0
million in stock of, or loans to, service corporations. In addition, Federal
associations meeting regulatory net worth requirements and certain other tests
may invest up to 50% of the limitations on loans to one borrower in conforming
loans to service corporations. By meeting these requirements and tests, York
Federal, at June 30, 1996, was permitted to make approximately $6.6 million of
such conforming loans, for a total investment limitation of approximately
$39.6 million.
Advanced Real Estate Associates. Incorporated in 1985, Advanced Real
Estate Associates ("AREA") is a wholly owned subsidiary of the Association.
AREA engages in property management for certain real estate owned by the
Association. During 1996, AREA was inactive.
Residential Mortgage Corporation. Incorporated in 1994, Residential
Mortgage Corporation ("RMC") is a wholly owned subsidiary of the Association.
RMC engages in origination of residential mortgages through relationships with
prominent real estate firms in York and Lancaster County markets. RMC's net
worth at June 30, 1996 was $10,000. During the year ended June 30, 1996,
capital contributions were $78,000. RMC's net loss for the year ended June
30, 1996 was $93,000. The activity of this company is being discontinued.
Subsidiaries and Joint Ventures of the Corporation
The directors of all service corporations and subsidiaries
consist exclusively of persons who serve as either officers or directors of
the Corporation or York Federal.
Meridian Venture Partners. ("MVP") The Corporation invested $4.0
million in MVP, in equal annual installments in the five year period ending
1991. The net amount of the investment at June 30, 1996 including the
Corporation's share of reported gains/losses ($979,000 of pre-tax income
during this fiscal year attributable to
20
increased market value of certain portfolio investments) recognized using the
equity method of accounting and partnership distributions is $4.2 million.
MVP is an equity oriented venture capital partnership organized under the laws
of Pennsylvania in February 1987, and licensed as a small business investment
company. The purpose of MVP is to make equity investments, primarily in
established companies (as opposed to start-up companies). These companies
represent a diversity of industries with geographical focus generally in the
Mid-Atlantic and greater Delaware Valley areas; however, investments can also
be made outside this area. Although a limited partner, the Corporation is
represented on an advisory board of MVP, which was established to advise and
consult with the general partners and assist in the evaluation of certain
investment proposals. All investment decisions, however, are made by the
general partners of MVP. In addition, the Corporation is represented on a
valuation committee of MVP which semi-annually evaluates the value of
partnership investments with indicated market valuation adjustments reflected
in the operations of MVP. As of June 30, 1996, MVP had total assets of $40.8
million. As of September 30, 1994, the Small Business Administration was
admitted as a Preferred Limited Partner to MVP. This admission enables MVP to
draw down additional capital from the SBA in the form of Participating
Securities. These securities share in distributions from MVP. As of June 30,
1996, MVP had $13.4 million of Participating Securities outstanding.
First Capital Brokerage Services, Inc. ("First Capital"). First
Capital is a wholly owned discount securities brokerage subsidiary that
provides services to customers of York Federal and the general public was
managed with LSG. Operations commenced October 1987. First Capital's net
worth at June 30, 1996 was $134,000 and its net loss for the year ended June
30, 1996 was $24,000.
Lenders Support Group ("LSG"). LSG performs residential construction,
environmental and home inspection services for York Federal and the general
public. During fiscal 1995, an affiliate company, Appraisal Services, Inc.,
which was primarily engaged in performing appraisals for York Federal and the
general public, was merged with LSG. Operations for the year ended June 30,
1996 resulted in net income of $115,000. LSG's net worth was $103,000 at June
30, 1996 net of capital distributions to York Financial during fiscal 1996
totalling $178,000.
New Service Corp. ("New Service") New Service Corp. primarily engages
in land acquisition, development and construction projects for management or
resale. On March 29, 1991 York Federal dividended its investment in New
Service to York Financial. New Service, is engaged in two joint ventures
involving the acquisition and development of real estate and management of
commercial properties. For information regarding these joint ventures, see
Note 8 to the Notes to Consolidated Financial Statements. In
21
PAGE
addition, New Service has investments in real estate, primarily office
buildings. Losses were realized on operations of these properties due to
slower than planned lease up and inability to sell certain units held for
sale. New Service's net loss for the year ended June 30, 1996 was $203,000
and was funded by equity
infusions from York Financial totalling $439,000. At June 30, 1996
stockholders' equity was $95,000.
Y-F Service Corp. ("Y-F Service"). Y-F Service owns office facilities
which it leases to York Federal and affiliates and is engaged in land
acquisition, development and construction of future branch locations. In July
1991, York Federal dividended its investment in Y-F Service to York Financial.
During fiscal 1996, Y-F Service substantially completed the construction of an
office building consisting of approximately 45,000 square feet of retail
office space. This building will in part be occupied by the Association's
administrative support staff as well as unrelated third party leases. This
construction project included the restoration of an historically significant
facade and is representative of the Corporation's ongoing investment in its
community. Y-F Service's net income was $289,000 for the year ended June 30,
1996. Stockholders' equity was $2.7 million at June 30, 1996.
Y-F Insurance Agency. Incorporated in 1992, Y-F Insurance Agency, Inc.
is a wholly-owned subsidiary of the Corporation. Y-F Insurance Agency, Inc.
is available to provide credit life and health insurance products to certain
of the insured institution's consumer loan customers.
REGULATION
General
As a federally chartered and federally insured thrift institution, York
Federal is subject to extensive regulation. Lending activities and other
investments must comply with various statutory and regulatory capital
requirements. The Association is regularly examined by its federal regulators
and files periodic reports concerning the Association's activities and
financial condition. The Association's relationship with its depositors and
borrowers also is regulated to a great extent by both federal and state laws,
especially in such matters as the ownership of savings accounts and the form
and content of the Association's mortgage documents.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department
of the Treasury subject to the general oversight of the Secretary of the
Treasury. The OTS generally possesses the supervisory and regulatory duties
and responsibilities formerly
22
vested in the FHLBB. Among other functions, the OTS issues and enforces
regulations affecting federally insured savings
associations and regularly examines these institutions.
Federal Home Loan Bank System. The FHLB System, consisting of
12 FHLBs, is under the jurisdiction of the Federal Housing Finance Board
("FHFB"). The designated duties of the FHFB are to supervise the FHLBs, to
ensure that the FHLBs carry out their housing finance mission, to ensure that
the FHLBs remain adequately capitalized and able to raise funds in the capital
markets, and to ensure that the FHLBs operate in a safe and sound manner.
The Association, as a member of the FHLB of Pittsburgh, is required to
acquire and hold shares of capital stock in the FHLB of Pittsburgh in an
amount equal to the greater of (i) 1.0% of the aggregate outstanding principal
amount of residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or (ii) 1/20 of its advances
(borrowings) from the FHLB of Pittsburgh. The Association is in compliance
with this requirement with an investment in FHLB of Pittsburgh stock of
$6.7 million at June 30, 1996.
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB of Pittsburgh.
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. In 1989 the FDIC also became the insurer,
up to the prescribed limits, of the deposit accounts held at federally
insured savings associations and established two separate insurance funds: the
BIF and the SAIF. As insurer of deposits, the FDIC has examination,
supervisory and enforcement authority over all savings associations.
The Association's accounts are insured by the SAIF. The FDIC insures
deposits at the Association to the maximum extent permitted by law. The
Association currently pays deposit insurance premiums to the FDIC based on a
risk-based assessment system established by the FDIC for all SAIF-member
institutions with rates currently ranging from .23% for well capitalized,
financially sound institutions to .31% for undercapitalized institutions that
pose a substantial risk of loss to the SAIF unless effective corrective action
is taken. Until the second half of 1995, the same matrix applied to member
institutions of the BIF. The FDIC is authorized to raise assessment rates in
certain circumstances. The
23
Association's assessments were based on the .23% rate for the year ended June
30, 1996, and totalled $2.0 million.
Effective January 1, 1996, the FDIC substantially reduced deposit
insurance premiums for well-capitalized, well-managed financial institutions
that are members of the BIF. The Association is a member of the SAIF rather
than the BIF. SAIF premiums may not be reduced for several years because the
SAIF has lower reserves than the BIF and is responsible for more troubled
institutions. However, see "-- Proposed Federal Legislation."
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances that could
result in termination of the deposit insurance of the Association.
Liquidity Requirements. Under OTS regulations, each savings
institution is required to maintain an average daily balance of liquid assets
(cash, certain time deposits and savings accounts, bankers' acceptances, and
specified U.S. Government, state or federal agency obligations and certain
other investments) equal to a monthly average of not less than a specified
percentage (currently 5.0%) of its net withdrawable accounts plus short-term
borrowings. OTS regulations also require each savings institution to maintain
an average daily balance of short-term liquid assets at a specified percentage
(currently 1.0%) of the total of its net withdrawable savings accounts and
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet liquidity requirements. The Association has maintained
liquidity levels during the year ended June 30, 1996 in excess of regulatory
requirements.
Prompt Corrective Action. Under the Federal Deposit Insurance Act
("FDIA"), each federal banking agency is required to implement a system of
prompt corrective action for institutions that it regulates. The federal
banking agencies have promulgated substantially similar regulations to
implement this system of prompt corrective action. Under the regulations, an
institution shall be deemed to be (i) "well capitalized" if it has a total
risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital
ratio of 6.0% or more, has a leverage ratio of 5.0% or more
24
and is not subject to specified requirements to meet and maintain a specific
capital level for any capital measure; (ii) "adequately capitalized" if it has
a total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital
ratio of 4.0% or more and a leverage ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized;" (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a
leverage ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio
that is less than 6.0%, a Tier I risk-based capital ratio that is less than
3.0% or a leverage ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.
At June 30, 1996, the Association was categorized as "well capitalized"
under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The FDIA requires the federal
banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions relating to: (i) internal controls,
information systems and internal audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) interest rate risk exposure; (v) asset growth; and
(vi) compensation, fees and benefits. The federal banking agencies adopted
regulations and Interagency Guidelines Prescribing Standards for Safety and
Soundness ("Guidelines") to implement safety and soundness standards required
by the FDIA. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The agencies also
proposed asset quality and earnings standards which, if adopted in final,
would be added to the Guidelines. If the OTS determines that the Association
fails to meet any standard prescribed by the Guidelines, the agency may
require the Association to submit to the agency an acceptable plan to achieve
compliance with the standard, as required by the FDIA. Management is aware of
no conditions relating to these safety and soundness standards which would
require submission of a plan of compliance.
Qualified Thrift Lender Test. The QTL test, requires that a savings
association maintain at least 65% of its total tangible assets in "qualified
thrift investments" on a monthly average basis in nine out of every 12 months.
As of June 30, 1996 the Association's QTL ratio of 88.3% was in
compliance with the current QTL requirement.
25
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements. Also see Note 13 of the Notes
to Consolidated Financial Statements.
Limitations on Capital Distributions. OTS regulations require the
Association to give the OTS 30 days' advance notice of any proposed
declaration of dividends to York Financial, and the OTS has the authority
under its supervisory powers to prohibit the payment of dividends to York
Financial.
OTS regulations impose uniform limitations on the ability of savings
associations to engage in various distributions of capital such as dividends,
stock repurchases and cash-out mergers. The regulation utilizes a
three-tiered approach which permits various levels of distributions based
primarily upon a savings association's capital level.
The Association is currently meeting the criteria to be designated a
Tier 1 association and, consequently, could at its option (after prior notice
to, and no objection made by, the OTS) distribute up to 100% of its net income
during the calendar year plus 50% of its surplus capital ratio at the
beginning of the calendar year less any distributions previously paid during
the year or at June 30, 1996, $18.0 million.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Association's unimpaired capital and
surplus, plus an additional 10% of unimpaired capital and surplus, if such
loan is secured by readily-marketable collateral, which is defined to include
certain financial instruments and bullion. The OTS by regulation has amended
the loans to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower
in additional amounts under circumstances limited essentially to loans to
develop or complete residential housing units. At June 30, 1996, the
Association's limit on loans to one borrower was $13.2 million. At June 30,
1996, the Association's largest aggregate amount of loans to one borrower was
$6.6 million.
Activities of Associations and Their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide
the information each agency may, by regulation, require. Savings associations
also must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
26
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to
which the insured association or its subsidiaries may engage in certain
covered transactions with an affiliate to an amount equal to 10% of such
institution's capital and surplus and place an aggregate limit on all such
transactions with affiliates to an amount equal to 20% of such capital and
surplus, and (ii) require that all such transactions be on terms substantially
the same, or at least as favorable to the institution or subsidiary, as those
provided to a non-affiliate. The term "covered transaction" includes the
making of loans, the purchase of assets, the issuance of a guarantee and
similar types of transactions.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank
holding companies; (ii) a savings association may not purchase or invest in
securities issued by an affiliate (other than securities of a subsidiary); and
(iii) the OTS may, for reasons of safety and soundness, impose more stringent
restrictions on savings associations but may not exempt transactions from or
otherwise abridge Section 23A or 23B. Exemptions from Section 23A or 23B may
be granted only by the Federal Reserve Board, as is currently the case with
respect to all FDIC-insured banks. The Association has not been significantly
affected by the rules regarding transactions with affiliates.
The Association's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such
persons, is currently governed by Sections 22(g) and 22(h) of the Federal
Reserve Act, and Regulation O thereunder. Among other things, these
regulations require that such loans be made on terms and conditions
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Regulation O also places
individual and aggregate limits on the amount of loans the Association may
make to such persons based, in part, on the Association's capital position,
and requires certain board approval procedures to be followed. The OTS
regulations, with certain minor variances, apply Regulation O to savings
institutions.
27
Savings and Loan Holding Company Regulations
Holding Company Acquisitions. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without
prior OTS approval, from acquiring more than 5% of the voting stock of any
other savings association or savings and loan holding company or controlling
the assets thereof. They also prohibit, among other things, any director or
officer of a savings and loan holding company, or any individual who owns or
controls more than 25% of the voting shares of such holding company, from
acquiring control of any savings association not a subsidiary of such savings
and loan holding company, unless the acquisition is approved by the OTS.
Holding Company Activities. As a unitary savings and loan holding
company, the Corporation generally is not subject to activity restrictions.
If the Corporation acquires control of another savings association as a
separate subsidiary other than in a supervisory acquisition, it would become a
multiple savings and loan holding company. There generally are more
restrictions on the activities of a multiple savings and loan holding company
than on those of a unitary savings and loan holding company. The HOLA
provides that, among other things, no multiple savings and loan holding
company or subsidiary thereof which is not an insured association shall
commence or continue for more than two years after becoming a multiple savings
and loan association holding company or subsidiary thereof, any business
activity other than: (i) furnishing or performing management services for a
subsidiary insured institution, (ii) conducting an insurance agency or escrow
business, (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary insured institution, (iv) holding or managing properties
used or occupied by a subsidiary insured institution, (v) acting as trustee
under deeds of trust, (vi) those activities previously directly authorized by
regulation as of March 5, 1987 to be engaged in by multiple holding companies
or (vii) those activities authorized by the Federal Reserve Board as
permissible for bank holding companies, unless the OTS by regulation,
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above also must be approved by the OTS
prior to being engaged in by a multiple holding company.
Qualified Thrift Lender Test. The HOLA requires any savings and loan
holding company that controls a savings association that fails the QTL test,
as explained under "-- Federal Regulation of Savings Associations -- Qualified
Thrift Lender Test," must, within one year after the date on which the
association ceases to be a QTL, register as and be deemed a bank holding
company subject to all applicable laws and regulations.
28
Federal and State Taxation
Federal Income Taxation
General. The Corporation and the Association report their
income on a fiscal year basis using the accrual method of accounting and are
subject to federal income taxation in the same manner as other corporations
with some exceptions. The following discussion of tax matters is intended
only as a summary and does not purport to be a comprehensive description of
the tax rules applicable to the Association or the Corporation.
Tax Bad Debt Reserves. For taxable years beginning prior to January 1,
1996, savings institutions such as the Association which met certain
definitional tests primarily relating to their assets and the nature of their
business ("qualifying thrifts") were permitted to establish a reserve for bad
debts and to make annual additions thereto, which additions may, within
specified formula limits, have been deducted in arriving at their taxable
income. The Association's deduction with respect to "qualifying loans,"
which are generally loans secured by certain interests in real property, could
have been computed using an amount based on the Association's actual loss
experience (the experience method), or a percentage equal to 8% of the
Association's taxable income, computed with certain modifications and reduced
by the amount of any permitted additions to the nonqualifying reserve. The
Association's deduction with respect to nonqualifying loans was computed under
the experience method, which essentially allows a deduction based on the
Association's actual loss experience over a period of several years. Each
year the Association selected the most favorable way to calculate the
deduction attributable to an addition to the tax bad debt reserve. The
Association used the experience method bad debt deduction for the taxable
years ended June 30, 1996, 1995 and 1994.
Recently enacted legislation repealed the reserve method of accounting
for bad debt reserves for tax years beginning after December 31, 1995. As a
result, savings associations will no longer be able to calculate their
deduction for bad debts using the percentage-of-taxable-income method.
Instead, savings associations will be required to compute their deduction
based on specific charge-offs during the taxable year or, if the savings
association or its controlled group had assets of less than $500 million,
based on actual loss experience over a period of years. This legislation
also requires savings associations to recapture into income over a six-year
period their post-1987 additions to their bad debt tax reserves, thereby
generating additional tax liability. At June 30, 1996, the Association's tax
bad debt reserve approximated the base year reserve and therefore no amounts
are required to be recaptured into income.
29
Under the law applicable to the Association's tax year ending June 30,
1996, if the Association failed to satisfy the qualifying thrift definitional
tests in any taxable year, it would be unable to make additions to its bad
debt reserve. Instead, the Association would be required to deduct bad debts
as they occur and would additionally be required to recapture its bad debt
reserve deductions ratably over a multi-year period. At June 30, 1996, the
Association's total bad debt reserve for tax purposes was approximately $14.5
million. Among other things, the qualifying thrift definitional tests
required the Association to hold at least 60% of its assets as "qualifying
assets." Qualifying assets generally include cash, obligations of the United
States or any agency or instrumentality thereof, certain obligations of a
state or political subdivision thereof, loans secured by interests in improved
residential real property or by savings accounts, student loans and property
used by the Association in the conduct of its banking business. Under the
law, as it applies to the Association's tax year beginning after June 30, 1996
a savings association will not be required to recapture its pre-1988 bad debt
reserves (base year reserve).
Distributions. To the extent that the Association makes distributions
to the Corporation that are considered as made: (i) from the reserve for
losses on qualifying real property loans; or (ii) from the supplemental
reserve for losses on loans, then an amount based on the amount distributed
will be included in the Association's taxable income. Distributions which may
be considered made from the reserves include distributions in excess of the
Association's current and accumulated earnings and profits, distributions in
redemption of stock, and distributions in partial or complete liquidation.
Any dividends to the Corporation that would reduce amounts appropriated to the
Association's bad debt reserve and deducted for federal income tax purposes
would create a tax liability for the Association. The amount of additional
taxable income attributable to a distribution that is deemed to come from the
reserves is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, the Association
makes a distribution, then approximately one and one-half times the amount so
used would be includable in gross income for federal income tax purposes,
assuming a 35% corporate income tax rate (exclusive of state and local taxes).
See "REGULATION" for limits on the payment of dividends by the Association.
Dividends paid out of the Association's current or accumulated earnings and
profits, as calculated for federal income tax purposes, will not be considered
to result in a distribution from the Association's bad debt reserve. The
Association does not intend to pay dividends that would result in a recapture
of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The
30
excess of the tax bad debt reserve deduction using the percentage of taxable
income method over the deduction that would have been allowable under the
experience method is treated as a preference item for purposes of computing
the AMTI. In addition, only 90% of AMTI can be offset by net operating loss
carryovers. AMTI is increased by an amount equal to 75% of the amount by
which the Association's adjusted current earnings exceeds its AMTI (determined
without regard to this preference and prior to reduction for net operating
losses). For taxable years beginning after December 31, 1986, and before
January 1, 1996, an environmental tax of .12% of the excess of AMTI (with
certain modification) over $2.0 million is imposed on corporations, including
the Association, whether or not an Alternative Minimum Tax ("AMT") is paid.
Dividends-Received Deduction and Other Matters. The Corporation may
exclude from its income 100% of dividends received from the Association as a
member of the same affiliated group of corporations. The corporate
dividends-received deduction is generally 70% in the case of dividends
received from unaffiliated corporations with which the Corporation and the
Association will not file a consolidated tax return, except that if the
Corporation or the Association owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
York Financial and its subsidiaries file consolidated federal income
tax returns. The Corporation's income tax returns have not been audited by
federal or state authorities within the last five years.
See Notes 1, 11 and 13 to the Notes to Consolidated Financial
Statements contained in the Annual Report.
State Taxation
The Association is taxed under the Pennsylvania Mutual Thrift
Institution Tax Act, which exempts the Association from all other taxes
imposed by the Commonwealth of Pennsylvania for state income tax purposes, and
from all local taxation imposed by political subdivisions, except taxes on
real estate and real estate transfers. The current rate of this tax is 11.5%.
Competition
York Federal's most direct competition for savings deposits has
historically come from savings and loan associations, savings banks and
commercial banks located in its primary market area. It also faces
competition for savings from money market mutual funds, securities brokerage
firms and credit unions. Legislative and regulatory measures have increased
competition between thrift institutions and other financial institutions, such
as commercial
31
banks, by expanding the ranges of financial services that may be
offered by thrift institutions, such as demand deposits, trust services and
consumer and commercial loans, while reducing or eliminating the difference
between thrift institutions and commercial banks with respect to long-term
lending authority, taxation and maximum rates of interest that may be paid on
savings deposits. York Federal competes for savings by offering depositors
a wide variety of savings accounts at competitive interest rates, convenient
branch locations, the ability to make deposits or withdrawals at any branch,
tax-deferred retirement programs and other services such as cashiers' checks
and travelers' checks.
York Federal's competition for real estate loans comes principally from
other savings and loan associations, commercial banks, mortgage banking
companies, insurance companies and other institutional lenders. York Federal
competes for loans principally through the interest rate and loan fees it
charges and the efficiency and quality of the services it provides borrowers,
real estate brokers, and home builders.
Personnel
As of June 30, 1996, the Corporation and its subsidiaries had 360
full-time employees and 66 part-time employees. The employees are not
represented by a collective bargaining agreement. The Corporation believes
its employee relations are good.
Executive Officers. The executive officers of the Corporation and
Association are as follows:
Age at
June 30,
Name 1996 Position
Corporation Association
Robert W. Pullo 56 Director, President Chairman of the Board
and Chief Executive and Chief Executive
Officer Officer
Robert A. Angelo 49 Executive Vice President and Chief
President, Secretary Operating Officer
and General Counsel
Robert C.
Herzberger 42 Senior Vice President Executive Vice President
James H. Moss 42 Senior Vice President Executive Vice President
Chief Financial Chief Financial
Officer/Treasurer Officer
32
In addition to the above, the Association's executive officer
group includes:
Age at
Name June 30,1996 Position
Lynn D. Kramme 45 Executive Vice President
Rebecca S. McClure,
Esquire 36 Senior Vice President,
Secretary and General
Counsel
Robert W. Pullo of York, Pennsylvania, is President and Chief Executive
Officer of York Financial Corp. and a member of the Board of Directors. He is
also Chairman of the Board of Directors and Chief Executive Officer of York
Federal Savings and Loan Association, as well as Chairman of the Board of
Directors of subsidiary companies First Capital Brokerage Services, Inc.,
Lenders Support Group, Inc., New Service Corp., Y-F Insurance Agency, Inc. and
Y-F Service Corp., Inc. He serves on the Advisory Board of Meridian Venture
Capital Partnership and is Chairman of the Board of Lucas Metals, Inc. He is
a Past Chairman of the York Area Chamber of Commerce. He is a founder and
member of the Board of Directors of the Minority Business Finance Corporation
and had served as the original Chairman of the Board. He is the founding and
current Chairman of the Board of the White Rose Foundation and serves on the
Board of Trustees of the York YMCA and the York YWCA. Mr. Pullo is a member
of the Penn State York Advisory Board and is the First Vice President. He was
the charter Chairman of the United Way Housing Initiatives and is a past
Chairman of the United Way Annual Fund Raising Campaign. He is a member of
the Board of Directors of the Strand Capitol Performing Arts Center and is a
member of the founding Board of the Health Education Center of Central
Pennsylvania. Mr. Pullo is also a member of the Board of Directors of the
Community Bankers Association of Pennsylvania. He serves on the Board of
Directors and Executive Committees of Memorial Hospital of York and the parent
company Memorial Health Systems Corporation.
Robert A. Angelo, Esq., of York, Pennsylvania is Executive Vice
President, Secretary and General Counsel of York Financial and President and
Chief Operating Officer of York Federal. Prior to becoming Executive Vice
President in August, 1991, Mr. Angelo was Senior Vice President of the
Corporation. He obtained a Bachelor of Science Degree from La Salle College,
Philadelphia, Pennsylvania and his Juris Doctor Degree from the University of
Baltimore, School of Law, Baltimore, Maryland. Mr. Angelo is past Chairman of
the Pennsylvania Association of Savings Institutions Legal Committee. Mr.
Angelo is past Chairman of the Board and Executive Committee of the Housing
Initiatives Corporation of the United Way of York County. He is a member of
the Board of Directors of the York County Bar Association Foundation and
Misericordia Convalescent Home.
33
Robert C. Herzberger of Stewartstown, Pennsylvania, is Senior Vice
President of York Financial and Executive Vice President of York Federal. He
earned a Masters of Science Degree from the University of Baltimore and a
Bachelor of Science Degree from the University of Maryland. Mr. Herzberger is
a member of the Board of Directors and Chairman of Junior Achievement of South
Central Pennsylvania. He is a faculty member at Penn State York. Mr.
Herzberger has also taught at York College of Pennsylvania, University of
Baltimore and the College of Notre Dame. He is a member of the Baltimore
Economic Society.
James H. Moss joined York Federal in November 1984 and currently serves
as Senior Vice President, Chief Financial Officer/Treasurer for York Financial
and Executive Vice President of the Administrative Services Group and Chief
Financial Officer/Treasurer for York Federal. Mr. Moss is a Certified Public
Accountant and from January 1978 to November 1984 served in various audit
capacities with Ernst & Young LLP. He is a member of the American and
Pennsylvania Institutes of Certified Public Accountants. In addition, Mr.
Moss serves as a member of the Board of Directors of the York County United
Way and a co-chairman of the allocation steering committee within the United
Way's Fund Distribution Division.
Lynn D. Kramer is Executive Vice President of the Retail Division of
York Federal. A graduate of Towson State University, Ms. Kramer had over 15
years of commercial banking experience before joining York Federal as Vice
President of Marketing in 1993. A resident of northern Baltimore County,
Maryland, Ms. Kramer is a board member and chairman of the Marketing Committee
for Child Care Consultants, a York County non-profit organization. She is a
past board member of the Central Atlantic Bank Marketing Association and a
past member of the Citizen Advisory Committee for the Gunpowder Falls State
Park and North Central Hike and Bike Trail.
Rebecca S. McClure is Senior Vice President of the Corporate Services
Group and Secretary/General Counsel for York Federal. Prior to her promotion
in October 1994, Ms. McClure was a Staff Attorney for the Association
responsible for all litigation matters. She obtained a Bachelor of Arts
Degree from Franklin and Marshall College, Lancaster, Pennsylvania in 1981 and
a Juris Doctor Degree from Villanova University School of Law, Villanova,
Pennsylvania in 1986. She is licensed to practice in Pennsylvania and
Maryland. Ms. McClure is a member of the Board of Directors of the York
Chapter of the American Red Cross and chairperson of its Human Resource
committee. She was in private practice with the law firm of Zimmerman,
Pfannebecker and Nuffort, Lancaster, Pennsylvania for the four years prior to
joining York Federal's Legal Staff in May of 1990.
Item 2. Properties
The following table sets forth the location of York Federal's offices
and other facilities used in operations as well as certain
34
additional information relating to these offices and facilities as of June 30,
1996.
Year Expiration
Facility Net Book Leased/ Date of
Office Location Opened Cost Value(1) Owned Lease
Main Office:
101 South George
Street
York, PA 1979 $4,214,056 $2,603,699 Owned --
Branch Offices:
2690 S. Queen
Street
York, PA 1993 284,142 245,155 Owned --
Northern Way
York, PA 1995 509,781 489,975 Owned --
Haines Acre
Shopping Center
York, PA 1975 102,498 36,454 Leased 10/05
1940 Carlisle
Road
York, PA 1972 337,397 165,712 Owned --
1781 West
Market Street
York, PA 1986 360,053 293,007 Owned --
1442 Bannister
Street
West York, PA 1979 298,942 239,177 Owned --
MJ Carlisle Mall
Carlisle, PA 1978 242,990 17,037 Leased 1/99
880 W. Broadway
Red Lion, PA 1978 340,333 224,175 Owned --
Main Street &
Forrest Avenue
Shrewsbury, PA 1975 258,970 152,289 Owned --
798 Simpson Ferry
Road
Mechanicsburg, PA 1975 263,215 201,742 Owned --
1123 W. Governor
Road
Hershey, PA 1973 395,798 217,420 Owned --
75 Zimmerman Drive
Camp Hill, PA 1979 352,685 234,757 Owned --
1758 Oregon Pike
Lancaster, PA 1979 385,208 255,208 Owned --
201 Dart Drive
Hanover, PA 1980 389,952 286,685 Owned --
499 Tyler Run Rd.
York, PA 1989 314,390 270,510 Owned --
4157 North George
Street
York, PA 1989 354,445 295,316 Owned --
35
Year Expiration
Facility Net Book Leased/ Date of
Office Location Opened Cost Value(1) Owned Lease
3995 E. Market
Street
York, PA (2) 1990 $1,781,987 $1,354,420 Owned --
1816 Emmorton
Road
Bel Air, MD 1991 720,767 631,940 Owned --
2006 Rock Spring
Road
Bel Air, MD 1991 725,420 634,970 Owned --
39 Hanover Street
Spring Grove, PA 1993 419,621 390,110 Owned --
1700 Baltimore Pike
Hanover, PA 1993 385,815 352,470 Owned --
Other Facilities:
Haines Road MAC
York, PA 1987 28,038 10,280 Leased 9/96
Red Lion MAC
Red Lion, PA 1988 21,330 15,913 Owned --
30 East King Street
York, PA 1973 704,033 318,475 Owned --
42 East King
Street
York, PA 1989 229,790 182,269 Owned --
134 South Duke
Street Parking
York, PA Lot 25,470 25,470 Owned --
144 South Duke
Street Parking
York, PA Lot 136,926 128,364 Owned --
104-126 South
George Street --
York, PA (3) 4,013,314 4,013,314 Owned --
(1) Represents the net book value of land and buildings owned by York
Financial or in the case of leased property the value of leasehold
improvements.
(2) Approximately 25.0% of the building is used as branch office with the
remainder of the building used as an income producing property.
(3) Represents the cost to date on the construction of an office building
to be used as operational offices and third party rentals, starting
July 1, 1996. Amount represents approximately 90% of total expected
project costs.
As of June 30, 1996, the total book value of office properties and
equipment owned by the Corporation and its subsidiaries, less allowances for
depreciation and amortization, was $16.4 million.
36
Item 3. Legal Proceedings
Periodically, there are various claims and lawsuits involving York
Financial, York Federal and its subsidiaries mainly as defendants, such as
claims to enforce liens, condemnation proceedings on properties in which York
Federal holds security interests, claims involving the making and servicing of
real property loans and other issues incident to York Federal's business. In
the opinion of management and the Corporation's legal counsel, no material
loss is expected from any of such pending claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended June 30, 1996.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The information contained under the caption "Market Information" in the
Annual Report is incorporated herein by reference.
Item 6. Selected Financial Data
The information contained in the table captioned "Selected Consolidated
Financial Data" in the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information contained in the section captioned "Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations of York Financial" in the Annual Report is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
The report of independent auditors and audited consolidated financial
statements contained in the Annual Report which are listed under Item 14
herein, and the information contained in the section captioned "Supplementary
Consolidated Financial Data" in the Annual Report are incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
37
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained under the section captioned "Proposal I --
Election of Directors" in the Corporation's definitive proxy statement for the
Corporation's 1996 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference. Information on the Corporation's executive
officers is included in "Part I - Item 1. - Business" in this Form 10-K.
The information contained under the section captioned "Proposal I -
Election of Directors -- Compliance With Section 16(a) of the Exchange Act" in
the Proxy Statement is incorporated herein by reference.
Item 11. Executive Compensation
The information contained under the section captioned "Proposal I -
Election of Directors -- Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities
and Principal Holders Thereof" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein
by reference to the sections captioned "Voting Securities
and Principal Holders Thereof" and "Proposal I --
Election of Directors" of the Proxy Statement.
(c) Changes In Control
The Corporation is not aware of any arrangements,
including any pledge by any person of securities of the
Corporation, the operation of which may at a subsequent
date result in a change in control of the Corporation.
38
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein
by reference to the section captioned "Voting Securities and Principal Holders
Thereof" and "Proposal I -- Election of Directors" of the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) (2) Report of Independent Auditors*
Consolidated Financial Statements*
(a) Consolidated Balance Sheets, June 30, 1996 and 1995
(b) Consolidated Statements of Income For the Years
Ended June 30, 1996, 1995 and 1994
(c) Consolidated Statements of Stockholders' Equity For
the Years Ended June 30, 1996, 1995 and 1994
(d) Consolidated Statements of Cash Flows For the Years
Ended June 30, 1996, 1995 and 1994
(e) Notes to Consolidated Financial Statements
Schedules to the consolidated financial statements have
been omitted as the required information is inapplicable.
(3) Exhibits
(3.1) Articles of Incorporation of York Financial
Corp.**
(3.2) Bylaws of York Financial Corp.**
(10)(a) York Financial Corp. Incentive Stock Option
Plan**
(b) York Financial Corp. Nonqualified Stock Option
Plan for Directors***
(c) 1992 York Financial Corp. Stock Option and
Incentive Plan***
(13) York Financial Corp. 1996 Annual Report to
Stockholders
(21) Parent and Subsidiaries of the Registrant
(23) Consent of Independent Auditors
(27) Financial Data Schedule
(b) The Corporation did not file any Reports on Form 8-K
during the quarter ended June 30, 1996.
* Incorporated by reference from the Annual Report attached as an exhibit
hereto.
** Incorporated by reference from the Form S-4 filed by the Corporation
under its former name of First Capital Group, Inc. with the Securities
and Exchange Commission on September 19, 1985.
*** Incorporated by reference from the 1992 Annual Meeting Proxy Statement
filed by the Corporation with the Securities and Exchange Commission on
September 24, 1992.
39
SIGNATURES
Pursuant to the requirements of section 13 or 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.
YORK FINANCIAL CORP.
Date: September 27, 1996 By: /s/ Robert W. Pullo
------------------------
Robert W. Pullo
President and Chief
Executive Officer
Pursuant to the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Robert W. Pullo President, Chief September 27, 1996
___________________________
Robert W. Pullo Executive Officer and
Director (Principal
Executive Officer)
/s/ James H. Moss Senior Vice President September 27, 1996
___________________________
James H. Moss (Principal Financial
and Accounting Officer)
/s/ Thomas W. Wolf Chairman of the Board September 27, 1996
___________________________
Thomas W. Wolf of Directors
/s/ Cynthia A. Dotzel Director September 27, 1996
___________________________
Cynthia A. Dotzel
/s/ Robert W. Erdos Director September 27, 1996
___________________________
Robert W. Erdos
/s/ Randall A. Gross Director September 27, 1996
___________________________
Randall A. Gross
/s/ Paul D. Mills Director September 27, 1996
___________________________
Paul D. Mills
/s/ Byron M. Ream Director September 27, 1996
___________________________
Byron M. Ream
/s/ Carolyn E. Steinhauser Director September 27, 1996
___________________________
Carolyn E. Steinhauser
/s/ Robert L. Simpson Director September 27, 1996
___________________________
Robert L. Simpson
EXHIBIT 13
1996 Annual Report to Stockholders
YORK FINANCIAL CORP.
ANNUAL REPORT 1996
["GROWTH" in appears in the bottom
right hand corner of cover]
[Picture of the New Operations Complex]
122 South George Street
Part of York Federal's New Operations Complex
Our Vision
When individuals and businesses in the communities we serve are in need of
high quality financial Services, they select York Financial Corp.
our Mission
The mission of York Financial Corp. is to achieve superior financial
performance through the development of mutually beneficial relationships with
our constituents, including customers, employees, stockholders, vendors and
the community.
Table of Contents
Page 1 - Consolidated Financial Highlights
Page 1 - Market Information
Page 2 - Selected Consolidated Financial Data
Page 3 - President's Message
Page 4 - Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations of
York Financial
Page 16 - Report of Management
Page 17 - Report of Independent Auditors
Page 18 - Consolidated Financial Statements
Page 51 - Supplementary Consolidated Financial Data
Page 52 - Directors and Officers
Page 54 - Branch Offices
Page 55 - Corporate Organization
Page 55 - Corporate Information
YORK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL HIGHLIGHTS
(In thousands, except per share data)
For the
Year ended June 30 % CHANGE
1996 1995(1) Increase (Decrease)
GROWTH
Average assets $1,409,894 $922,367 13.8%
Average loans 895,912 751,646 19.2%
Average deposits 869,370 789,710 10.1%
Average stockholders' equity 89,383 81,674 9.4%
OPERATING PERFORMANCE
Net interest income $ 34,975 $ 31,753 10.1%
Provision for loan losses 2,300 2,340 (1.7%)
Other income 8,630 5,706 51.2%
Other expenses 24,450 22,616 8.1%
Net income 10,343 7,666 34.9%
FINANCIAL RATIOS
Return on average assets $ 0.99% 0.83% 19.3%
Return on average stockholders'
equity 11.57% 9.39% 23.2%
STOCK PERFORMANCE
Net income $ 1.63 1.25 30.4%
Book value per share 15.37 14.31 7.4%
Market value per share 16.75 15.45 8.4%
Cash dividends paid per share 0.56 0.52 7.7%
(1) Amounts per share are adjusted for stock dividends effected through June
30, 1996.
MARKET INFORMATION
The common stock of York Financial Corp. is traded on the National Association
of Securities Dealers Automated Quotation ("Nasdaq") National Market System
under the symbol YFED. At the close of business on September 3, 1996, there
were approximately 2,700 stockholders of record owning 6,128,641 outstanding
shares of common stock. This does not reflect the number of persons or
entities who hold their stock in nominee or "street" name through various
brokerage firms.
The table below sets forth the quarterly range of high and low closing sales
prices for York Financial Corp. Common Stock as reported by Nasdaq and
dividends declared per common share.
Cash
Market Price Dividends(1)(2)
High(1) Low(1)
Fiscal 1996
1st quarter $17.95 $14.32 $0.136
2nd quarter 18.86 16.25 0.136
3rd quarter 18.50 16.38 0.140
4th quarter 18.00 16.50 0.150
$0.562
Fiscal 1995
1st quarter $17.15 $14.87 $0.124
2nd quarter 15.29 14.05 0.124
3rd quarter 15.45 13.18 0.136
4th quarter 17.05 14.77 0.136
$0.520
(1) Market prices and dividends per share are adjusted for stock dividends
effected through June 30, 1996.
(2) Restrictions are placed on the Corporation's ability to pay cash dividends
as discussed in Note 13 of the Notes to Consolidated Financial Statements.
1
SELECTED CONSOLIDATED FINANCIAL DATA
June 30
1996 1995 1994 1993 1992
(Dollars in Thousands)
Assets $1,109,804 $1,009,918 $888,543 $885,467 $892,645
Short term investments 2,207 19,861 53,794 51,754 90,024
Loans held for sale, net 5,686 6,450 10,314 18,361 15,364
Securities and Federal Home
Loan Bank stock 90,859 70,490 82,573 64,231 67,200
Loans receivable, net 938,570 845,205 669,850 675,024 646,465
Deposits 908,123 832,056 785,483 786,550 788,469
Borrowings 74,380 65,759 1,668 3,853 14,500
Stockholders' equity 93,540 85,330 78,626 70,556 62,644
Loans serviced for others 593,166 571,351 563,595 506,561 475,562
Number of:
Real estate loans
outstanding 9,724 9,786 9,063 9,558 9,661
Loans serviced for others 9,649 9,648 9,579 8,888 8,690
Deposit accounts 118,758 114,541 112,271 113,371 114,486
Offices 22 22 22 22 20
Year Ended June 30
1996 1995 1994 1993 1992
(Dollars in Thousands, Except Per Share Data)
Interest income $ 80,880 $ 68,155 $ 62,235 $ 66,421 $ 74,337
Interest expense 45,905 36,402 30,798 35,046 45,501
Net interest income 34,975 31,753 31,437 31,375 28,836
Provision for loan
losses 2,300 2,340 2,200 2,515 2,840
Net interest income
after provision for
loan losses 32,675 29,413 29,237 28,860 25,996
Other income 8,630 5,706 5,786 9,106 7,695
Other expenses 24,450 22,616 23,384 23,889 20,549
Income before income
taxes and cumulative
effect of change in
accounting principle 16,855 12,503 11,639 14,077 13,142
Provision for income
taxes 6,512 4,837 4,353 5,254 5,728
Income before
cumulative effect of
change in accounting
principle 10,343 7,666 7,286 8,823 7,414
Cumulative effect of
change in accounting
principle -- -- 2,088 -- --
Net income 10,343 7,666 9,374 8,823 7,414
Per share data:
Net income $ 1.63 $ 1.25 $ 1.55 $ 1.51 $ 1.37
Cash dividends paid $ 0.56 $ 0.52 $ 0.49 $ 0.45 $ 0.43
Book value $ 15.37 $ 14.31 $ 13.49 $ 12.51 $ 11.45
Shares outstanding
(year end) 6,087,722 5,964,144 5,829,516 5,638,571 5,475,097
Weighted average
shares 6,327,326 6,116,585 6,043,396 5,824,702 5,404,938
Other financial ratios:
Return on average
assets 0.99% 0.83% 1.05% 1.01% 0.87%
Return on average
equity 11.57% 9.39% 12.30% 13.38% 12.54%
Dividend payout ratio 32.69% 39.94% 29.62% 28.88% 31.24%
Average equity to
average assets 8.51% 8.85% 8.55% 7.53% 6.96%
All per share data is adjusted for stock dividends effected through June 30,
1996.
2
PRESIDENT'S MESSAGE
We are proud to report that our last fiscal year ended with strong asset
growth and record earnings. Earnings for the year were $10,343,000 or $1.63
per share. This represents a 34.9% increase over the previous year when the
company earned $7,666,000 or $1.25 per share. Total assets grew to an
all-time high of $1,109,804,000, representing an increase of 9.9% over total
assets of $1,009,918,000 at the previous year-end. Deposits, our primary
source of funds, grew by 9.1% or $76,067,000 from $832,056,000 at year-end
June 30, 1995, to $908,123,000 at year-end June 30, 1996. Book value of our
common stock at year- end also grew to $15.37 per share.
Each quarterly report of the last year included an announcement that earnings
had improved over the comparable quarters in the previous year. This year's
earnings increased our total capital or net worth, net of dividends, to a
total of $93,540,000, and it is expected that our book value should exceed
$100,000,000 in the near future. Throughout the year we focused our attention
on the profitable pricing of products, introduction of new products, and cost
containment and reduction. These efforts were rewarded to the extent that our
return on average assets (ROA) grew from .83% for year-end 1995 to .99% for
year-end 1996.
During the year we closed a record $477,600,000 in total loans. The principal
source of this growth was our primary investment product, residential
mortgages. We also continued our success in originating adjustable loans at a
level exceeding national trends. This, combined with our interest rate risk
strategy of selling fixed rate loans and certain other loan types into the
secondary mortgage market, resulted in net loans increasing by 11.0%. The
consequence of these important strategies is a loan
portfolio dominated by adjustable rate investments which has materially
contributed to our favorable earnings performance.
We are committed to strategies and practices that will maintain or improve our
performance. While we have continuously distinguished ourselves in the thrift
industry, we look forward to the many industry challenges that await us in the
future. One anticipated change is the recapitalization of the Savings
Association Insurance Fund and its expected subsequent merger with
the Bank Insurance Fund. It is expected that this merger will be implemented
by an act of Congress in the near future and should pave the way for future
consolidation and structural changes within the financial services industry.
We anxiously await and look forward to the challenges and opportunities these
actions will provide for us.
Structural changes currently taking place in our nation's financial
institutions, along with changes most likely to occur in the future, are
altering the description of financial services and the systems by which they
are delivered. We are a dedicated community bank in a nation of fewer and
fewer such institutions. We believe that the continuing trend of small
community banks being acquired by regional and national conglomerates leaves a
void in service and influence in the community. In the past, small community
banks have been of critical assistance to the economies of the neighborhoods
they served. Our near term goal is to continue to grow by filling that niche
and by expanding our services to meet growing community needs. As the thrift
charter continues to evolve into one more comparable to a commercial bank, we
will be able to expand our community commitment through a broader range of
services.
Since becoming a publicly owned company, we have had uninterrupted earnings in
every reporting period. We have increased the stockholder dividend at least
once in every year and we have grown to record earnings and record size.
While none of this implies that our future is certain, nor can we assume we
will achieve continued success without working both harder and
smarter, it does provide us with a solid base of experience from which to
grow. With change comes opportunity, and change is not a stranger to the
directors, officers, and staff of York Financial Corp.'s companies. We
appreciate the confidence and support of our investors and customers. As we
face new challenges, we are inspired to reach new heights and greater
achievements.
/s/Robert W. Pullo
Robert W. Pullo
President and
Chief Executive Officer
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF YORK FINANCIAL
Financial Review
The purpose of this discussion is to provide additional information about York
Financial Corp. ("York Financial" or "Corporation"), its financial condition
and results of operations. Readers of this annual report should refer to the
consolidated financial statements and other financial data presented
throughout this report to fully understand the following discussion and
analysis.
York Financial is a unitary savings and loan holding company incorporated in
Pennsylvania in September 1985 and in August 1986 became the sole stockholder
of York Federal Savings and Loan Association ("York Federal" or
"Association"), a federally chartered stock savings and loan association.
Presently, the primary business of York Financial is the business of York
Federal. At June 30, 1996, the Corporation had consolidated assets of $1.1
billion, total deposits of $908.1 million and stockholders' equity of $93.5
million. The Association is a member of the Federal Home Loan Bank ("FHLB")
of Pittsburgh and is subject to supervision, examination and regulation by the
Office of Thrift Supervision ("OTS") and the Federal Deposit Insurance
Corporation ("FDIC"). The Association is primarily engaged in the business of
attracting deposits and investing these deposits into loans secured by
residential and commercial real property, consumer loans and securities. York
Federal conducts its business through twenty-two offices located in south
central Pennsylvania and Maryland. In addition, York Federal maintains a
commissioned mortgage origination staff as well as mortgage broker
relationships which originate residential mortgage loans for the Association
primarily in Pennsylvania, Maryland, Virginia and Delaware. The Association's
deposits are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF") of the FDIC.
The Corporation's net income is highly dependent on the interest rate spread
between the average rate earned on loans and securities and the average rate
paid on deposits and borrowings as well as the amount of the respective assets
and liabilities outstanding. Other operating income is a strong supplement to
York Federal's interest income and is primarily the result of mortgage banking
activities including gains on sales of mortgage-backed securities created from
loan originations and the resulting service fee income derived from the
portfolio of loans serviced for others. Other operating income also includes
gains and losses on sales of real estate and fees and service charges assessed
on loan and deposit transactions.
Interest Rate Sensitivity Management
In an effort to maintain control over net interest income, management of York
Federal focuses its attention on managing the interest rate sensitivity of
assets and liabilities and controlling the volume of lending, securities,
deposit and borrowing activities. By managing the ratio of interest sensitive
assets to interest sensitive liabilities repricing in the same periods, the
Corporation seeks to minimize the adverse effect of interest rate
fluctuations.
Management reviews the Association's interest sensitivity position on an
ongoing basis and prepares strategies to adjust that sensitivity to maximize
the yield on the asset portfolio while maintaining the interest rate
sensitivity on earning assets at acceptable levels to insulate it from the
effects of interest rate fluctuations. The Corporation originates for
portfolio principally short and intermediate term and adjustable rate loans
and sells most fixed rate loan originations. The funding sources for these
portfolio loans are deposits with various maturities and short term
borrowings. The result of this origination and funding activity was a $3.8
million asset sensitive gap at the one year time period at June 30, 1996.
4
A traditional measurement utilized to quantify interest rate risk is an
interest sensitivity gap analysis. The following table presents the
Corporation's interest sensitivity gap between interest-earning
assets and interest-bearing liabilities for various time frames as of June 30,
1996. Fixed rate loans are shown in the time frame corresponding to
contractual principal amortization schedules, adjusted for annual prepayment
assumptions based on market expectations regarding future prepayment speeds.
Adjustable rate loans are shown in the time frame corresponding to the next
contractual interest rate adjustment date. Passbook and NOW accounts are
assumed to be subject to repricing throughout the periods shown based on OTS
statistical information.
Interest Sensitivity Gap Analysis
Subject to Repricing
0-30 31-90 91-365 1-5 Over 5
Days Days Days Years Years Total
Interest-earning
assets:
Loans(1) $ 147,417 $ 93,932 $352,619 $ 180,760 $ 169,528 $ 944,256
Securities
held for
trading 21,736 -- -- -- -- 21,736
Securities
available
for sale 12,864 1,125 4,965 17,389 16,772 53,115
Securities
held to
maturity(2) 3,506 5,012 49 533 6,908 16,008
Other
interest-
earning
assets 2,207 -- -- -- -- 2,207
Total 187,730 100,069 357,633 198,682 193,208 1,037,322
Interest-bearing
liabilities:
Deposits
NOW accounts 3,761 6,149 22,073 36,324 16,981 85,288
Savings
accounts 16,055 2,010 8,249 28,264 26,733 81,311
Money market
accounts 211,939 -- -- -- -- 211,939
Certificate
accounts 108,715 47,149 141,505 203,817 17,283 518,469
Borrowings 74,061 2 9 49 259 74,380
Total 414,531 55,310 171,836 268,454 61,256 971,387
Interest sensi-
tivity gap $(226,801) $ 44,759 $185,797 $ (69,772) $131,952 $ 65,935
Cumulative
interest
sensitivity
gap $(226,801) $(182,042) $ 3,755 $ (66,017) $ 65,935
As a percent
of total
assets(3) (20.44%) (16.40%) 0.34% (5.95%) 5.94%
___________
(1) Includes loans held for sale of $5.7 million.
(2) Includes Federal Home Loan Bank stock of $6.7 million.
(3) A negative percentage is favorable to net interest income in a decreasing
rate environment and a positive percentage is favorable to net interest
income in an increasing rate environment.
The Corporation also monitors its interest rate risk in accordance with
regulatory guidance. Fluctuations in net interest income and the market value
of portfolio equity are determined in various interest rate scenarios and
monitored against acceptable limitations established by management and
approved by the Board of Directors. Interest rate risk as indicated through
balance sheet simulations at June 30, 1996 is considered to be within
acceptable limits. The management of York Federal is committed to managing
the asset portfolio in order to maximize the yield and maintain an interest
rate sensitivity of York Federal's earning assets that insulates it from the
potential negative effect of interest rate fluctuations.
5
Asset Quality
Management is aware of the risks inherent in lending and continually monitors
risk characteristics of the loan portfolio. The Association's policy is to
maintain the allowance for loan losses at a level believed adequate by
management to absorb potential loan losses within the portfolio.
Management's determination of the adequacy of the allowance is performed by an
internal loan review committee and is based on risk characteristics of the
loans including loans deemed impaired in accordance with FASB Statement No.
114, past loss experience, economic conditions and such other factors that
deserve recognition. Additions to the allowance are charged to operations.
An analysis of the allowance for loan losses is as follows:
Year Ended June 30
1996 1995 1994 1993 1992
(Dollars in Thousands)
Total allowance for loan
losses at beginning of
period $5,840 $4,492 $3,346 $5,204 $4,635
Loans charged-off:
Real estate-mortgage:
Residential 1,151 1,138 913 730 185
Commercial 620 5 125 3,668 2,095
Consumer 100 127 314 141 110
Total charge-offs 1,871 1,270 1,352 4,539 2,390
Recoveries:
Real estate-mortgage:
Residential 156 185 266 152 117
Commercial 184 92 31 12 --
Consumer -- 1 1 2 2
Total recoveries 340 278 298 166 119
Net loans charged-off 1,531 992 1,054 4,373 2,271
Provision for loan losses 2,300 2,340 2,200 2,515 2,840
Total allowance for loan
losses at end of period $6,609 $5,840 $4,492 $3,346 $5,204
Percentage of net charge-
offs to average loans
outstanding during the
period 0.17% 0.13% 0.15% 0.66% 0.35%
Percentage of allowance
for loan losses to
adjusted total loans 0.70% 0.69% 0.67% 0.49% 0.80%
The allowance for loan losses totaled $6.6 million or .70% of adjusted total
loans of $945.2 million at June 30, 1996. Such amount is considered adequate
relative to management's assessment of risk characteristics inherent in the
loan portfolio. While management uses available information to recognize
losses on loans, future additions to the allowance may be necessary based on
specific circumstances related to problem loans as well as changes in economic
conditions.
6
An analysis of nonperforming assets is summarized as follows:
Year Ended June 30
1996 1995 1994 1993 1992
(Dollars in Thousands)
Loans accounted for on a
nonaccrual basis:
Real estate-mortgage:
Commercial $1,481 $3,498 $ 546 $1,760 $8,421
Land 200 -- -- -- --
Total nonaccrual loans 1,681 3,498 546 1,760 8,421
Accruing loans which are
contractually past due
90 days or more:
Real estate-mortgage:
Residential 10,029 9,133 11,905 13,577 9,293
Consumer 383 433 445 679 1,557
Total of 90 days past
due loans 10,412 9,566 12,350 14,256 10,850
Total of nonaccrual and 90
days past due loans 12,093 13,064 12,896 16,016 19,271
As a percent of total loans 1.28% 1.53% 1.90% 2.31% 2.91%
Real estate owned:
Real estate acquired through
foreclosure or repossession
by loan type:
Real estate:
Residential $4,913 $5,981 $3,398 $4,346 $4,070
Commercial 2,370 2,278 9,421 5,503 6,272
Land 3,349 5,107 6,254 5,961 6,997
Consumer -- -- -- 19 --
Loans classified as in sub-
stance foreclosure -- 200 713 7,571 2,053
Allowance for real estate
losses (955) (630) (1,453) (1,238) (308)
Total real estate owned $9,677 $12,936 $18,333 $22,162 $19,084
As a percent of total
assets 0.87% 1.28% 2.06% 2.50% 2.14%
Total nonperforming assets $21,770 $26,000 $31,229 $38,178 $38,355
As a percent of total
assets 1.96% 2.57% 3.51% 4.31% 4.30%
The Association's nonaccrual policy generally covers loans which are 90 or
more days past due. All commercial real estate loans are placed on
nonaccrual status when the collectibility of interest is uncertain based on
specific circumstances evaluated on a loan by loan basis or when interest is
more than 90 days past due. In the case of residential real estate and
consumer loans, management evaluates the collectibility of accrued amounts
based on the underlying collateral value or knowledge of the specific
circumstances resulting from collection efforts and may elect to place
specific loans on nonaccrual status. As noted in the previous table,
residential mortgage loans contractually past due 90 days or more have
increased as compared to the prior period. However, in management's judgment,
such residential assets present a relatively low risk of loss as a result of
related underwriting requirements, normal collection efforts and the
underlying value of collateral. Also see Notes 1 and 4 of the Notes to
Consolidated Financial Statements.
Management recognizes the risk of potential reduction in value of real estate
owned during the holding period and provides for such risk by maintaining a
general allowance for real estate losses (such reserve is separate from and in
addition to the allowance for loan losses). In fiscal 1996, net charge-offs
were $278,000 and additions to the allowance totaled $603,000 resulting in an
increase in the allowance to $955,000. Management continually monitors the
risk profile of real estate owned and maintains an allowance for real estate
losses at a level believed adequate to absorb potential losses within the real
estate portfolio.
7
Liquidity
The primary purpose of asset/liability management is to maintain adequate
liquidity and a desired balance between interest sensitive assets and
liabilities. Liquidity management focuses on the ability to meet the cash
flow requirements of customers wanting to withdraw or borrow funds for their
personal or business needs. Interest rate sensitivity management focuses on
consistent growth of net interest income in times of fluctuating interest
rates. The management of liquidity and interest rate sensitivity must be
coordinated since decisions involving one may influence the other.
Liquidity needs can be met by either reducing assets or increasing
liabilities. Sources of asset liquidity include short term investments,
securities available for sale, maturing and repaying loans and monthly cash
flows from mortgage-backed securities. The loan portfolio provides an
additional source of liquidity due to York Federal's participation in the
secondary mortgage market. Liquidity needs can be met by attracting deposits
and utilizing borrowing arrangements with the FHLB and the Federal Reserve
Bank of Philadelphia for short and long term advances as well as other short
term borrowings.
Deposits represent the Association's primary source of funds. The Association
does not rely on brokered deposits as a source of funds. During fiscal 1996,
the Association's deposits increased $76.1 million. In addition, York Federal
has supplemented its deposit gathering efforts through borrowings from the
FHLB of Pittsburgh. At June 30, 1996, York Federal had $73.3 million in FHLB
advances outstanding at a weighted average interest rate of 5.43%. For
additional details of FHLB advances and other borrowings, refer to Note 10 of
the Notes to Consolidated Financial Statements.
Under current regulations, York Federal is required to maintain liquid assets
at 5.0% or more of its net withdrawable deposits plus short term borrowings.
Throughout the fiscal years ended June 30, 1996 and 1995, York Federal
maintained an average liquidity level which was in compliance with the
regulatory requirements. At June 30, 1996, the Association's liquidity level
was 5.1%.
Amortization and prepayments of loans and proceeds from loan and securities
sales within the Association's mortgage banking activity represent a
substantial source of funds to York Federal. These sources amounted to $315.9
million, $223.1 million and $327.7 million in fiscal 1996, 1995 and 1994,
respectively.
The principal use of York Federal funds is the origination of mortgage and
other loans. Loan demand resulted in total originations of $477.6 million in
fiscal 1996. Loan originations were obtained through various channels
including the retail branch system, commissioned mortgage origination staff,
tele-mortgage activity and expanded mortgage broker relationships. The volume
of originations was favorably impacted by a relatively stable interest rate
environment and included traditional long term fixed rate loans primarily
originated for sale as well as adjustable rate and residential construction
loan products. In addition, in response to changing customer preferences
intermediate term mortgage products, i.e. seven year balloon loans and 5/1 CMT
adjustable rate loans (fixed rate for the first five years with annual
adjustments thereafter), became a more significant component of origination
volume.
The sources of liquidity previously discussed are deemed by management to be
sufficient to fund outstanding loan commitments and meet other obligations.
See Notes 16 and 17 of the Notes to Consolidated Financial Statements for
information on commitments and fair value of financial instruments at June 30,
1996.
8
Capital
The management of capital provides the foundation for future asset and
profitability growth and is a major strategy in the management of York
Financial Corp. Stockholders' equity at June 30, 1996 totaled $93.5 million
compared to $85.3 million at June 30, 1995, an increase of $8.2 million or
9.6%. This growth was a result of a combination of factors including improved
earnings growth, cash dividends paid representing a payout ratio of 32.7%,
issuance of shares in connection with various benefit and dividend
reinvestment plans and the impact of unrealized losses on "available for sale"
securities.
OTS regulated thrifts must comply with three separate capital standards:
Tangible Capital. Generally, common stock plus retained earnings must equal
at least 1.5% of adjusted total assets.
Core Capital to total assets. Tangible capital plus qualifying supervisory
goodwill (arising from the purchase of a troubled savings association) and
other qualifying intangible assets must equal at least 3.0%
of adjusted total assets.
Risk-Based Capital. Risk-based capital must equal at least 8.0% of
risk-weighted assets, as defined in the regulations. Core capital component
of risk-based capital, as defined above, must equal at least 4.0% of risk
weighted assets.
At June 30, 1996, York Federal's tangible and core capital both equaled 7.5%
($82.5 million), substantially in excess of the minimum regulatory
requirements of 1.5% and 3.0%, respectively, as indicated above. York
Federal's total assets do not include any goodwill. York Federal's core
capital to risk weighted assets equaled 11.5% ($182.5 million) at June 30,
1996, which exceeds its required level of 4.0%. Finally, York Federal's
risk-based capital ratio equaled 12.3% ($88.5 million) at June 30, 1996,
which exceeds its required level of 8.0% by $30.9 million. For a more
comprehensive analysis of capital, refer to Note 13 of the Notes to
Consolidated Financial Statements.
Results of Operations
Fiscal 1996 Compared to Fiscal 1995
Net Interest Income
York Financial's earnings are affected by the level of York Federal's net
interest income, the difference between the income it receives on its loan
portfolio and other investments, and its cost of funds, consisting primarily
of interest paid on deposits and borrowings. Net interest income is affected
by the average yield on interest-earning assets, the average rate on
interest-bearing liabilities, and the ratio of interest-earning assets to
interest-bearing liabilities.
Net interest income for fiscal 1996 was $35.0 million, as compared to $31.8
million for fiscal 1995, which represents a 10.1% increase. The margin on
interest-earning assets for fiscal 1996 decreased to 3.54% from 3.70% for
fiscal 1995. The following table provides information regarding the dollar
amount of interest income earned on interest-earning assets and the resulting
yields, as well as the dollar amount of interest expense on interest-bearing
liabilities and the resulting rates paid for the three years ending June 30,
1996.
9
Average Balance and Interest Yield/Rate Analysis
Year Ended June 30
1996 1995
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Interest-earning
assets:
Loans (1)(2) $895,912 $75,001 8.37% $751,646 $61,354 8.16%
Securities held
for trading 6,300 479 7.60 3,918 291 7.43
Securities
available for
sale 47,126 3,142 6.67 47,059 3,369 7.16
Securities held
to maturity 22,888 1,361 5.95 35,239 2,069 5.87
Other interest-
earning assets 16,116 897 5.57 21,077 1,072 5.09
Total interest-
earning assets 988,342 80,880 8.18 858,939 68,155 7.93
Non-interest-
earning assets 61,552 63,428
Total $1,049,894 $922,367
Interest-bearing
liabilities:
Deposits:
NOW accounts 81,803 1,865 2.28 85,259 2,001 2.35
Savings accounts 87,144 2,419 2.78 126,365 3,497 2.77
Money market
accounts 182,626 8,114 4.44 124,269 4,307 3.47
Certificate
accounts 514,339 29,923 5.82 447,573 24,527 5.48
Borrowings 63,464 3,584 5.65 35,193 2,070 5.88
Total interest-
bearing
liabilities 929,376 45,905 4.94 818,659 36,502 4.45
Noninterest-bearing
deposits 3,458 6,244
Noninterest-bearing
liabilities 27,677 15,790
960,511 840,693
Stockholders'
equity 89,383 81,674
Total 1,049,894 922,367
Ratio of interest-
earning assets to
interest-bearing
liabilities 1.06x 1.05x
Net interest
income/interest
rate spread $ 34,975 3.24% 31,753 3.49%
Net interest-
earning assets/
margin on
interest-
earning
assets $ 58,966 3.54% $ 40,280 3.70%
Year Ended June 30
1994
Average Yield/
Balance Interest Rate
Interest-earning
assets:
Loans (1)(2) $683,931 $55,279 8.08%
Securities held
for trading 8,254 564 6.83
Securities
available for
sale 33,399 2,462 7.37
Securities held
to maturity 33,737 1,851 5.49
Other interest-
earning assets 63,550 2,079 3.27
Total interest-
earning assets 822,871 62,235 7.56
Noninterest-
earning assets 68,535
Total 891,406
Interest-bearing
liabilities:
Deposits:
NOW accounts $ 86,192 2,233 2.59
Savings accounts 163,449 4,761 2.91
Money market
accounts 125,173 3,940 3.15
Certificate
accounts 404,172 19,764 4.89
Borrowings 1,485 100 6.73
Total interest-
bearing liabilities 780,471 30,798 3.95
Noninterest-bearing
deposits 17,441
Noninterest-bearing
liabilities 17,294
815,206
Stockholders' equity 76,200
Total $891,406
Ratio of interest-
earning assets to
interest-bearing
liabilities 1.05x
Net interest income/
interest rate spread $31,437 3.62%
Net interest-earning
assets/margin on
interest-earning
assets $ 42,400 3.82%
During fiscal 1996, York Federal originated $477.6 million of loans including
loans refinanced from the Association's portfolio totalling $40.6 million and
mortgage loans securitized or sold of $154.9 million. The result of these
activities, when combined with loan repayments including refinance activity,
was a 19.2% increase in average loans outstanding during fiscal 1996. This
increase is primarily attributable to the success by our mortgage broker
relationships of selling our intermediate term mortgage loan products. These
programs represented $106.5 million or 22.3% of total loan originations.
Securities and other interest-earning assets represented a net decrease of
$14.9 million over the prior fiscal year. This shift in composition of the
Association's assets had a positive effect on interest income and reflected
the utilization of excess liquidity to assist in funding loan demand. In
total, interest-earning assets averaged 15.1% more in fiscal 1996 than in
fiscal 1995, resulting in an increase in interest income. In addition
to the above mentioned change in asset composition, upward loan repricing
contributed to the yield on earning assets increasing 25 basis points to
8.18%. This combination of volume and rate changes resulted in an increase in
interest income of $12.7 million.
10
Interest expense increased as a result of a 13.5% increase in the average
level of interest-bearing liabilities and a 49 basis point increase in the
cost of funds to 4.94. In order to maintain and attract new deposits during
fiscal 1996, the Association continued to successfully market a Guaranteed
Money Fund Account (based on nationally reported money fund rates) as well as
providing very competitive interest rate offerings and special promotional
rates on selected certificate of deposit account programs. This response to
the increased competitive pressures for deposits resulted in an increase in
deposit balances and a shift in the composition of the deposit portfolio from
low cost transaction accounts to higher cost money market and certificate
accounts. These changes in the deposit portfolio in addition to an increase
in short term borrowings required to fund asset growth contributed to the
increased cost of funds.
The volume/rate analysis shown in the following table presents a comparative
analysis of reported interest income and expense in relation to changes in
specific asset and liability account balances (volume) and corresponding
interest rates (rate). This analysis illustrates the net impact of previously
discussed volume and rate changes on net interest income for fiscal 1996
compared to fiscal 1995, and fiscal 1995 compared to fiscal 1994. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in volume and
(2) changes in rates. The change in interest income/expense due to both
volume and rate has been allocated to volume and rate changes in proportion to
the relationship of the absolute dollar amounts of the change in each.
Volume/Rate Analysis
Year Ended June 30
1996 compared 1995 compared
to 1995 to 1994
Increase (Decrease) Increase (Decrease)
Due to Due to
Volume Rate Net Volume Rate Net
(In thousands)
Interest income:
Loans $12,042 $1,065 $13,647 $5,522 $ 553 $6,075
Securities held for
trading 181 7 188 (296) 23 (273)
Securities available
for sale 4 (231) (277) 978 (71) 907
Securities held to
maturity (725) 17 (708) 85 133 218
Other interest-
earning assets (252) 77 (175) (1,389) 382 (1,007)
Total 11,250 1,475 12,725 4,900 1,020 5,920
Interest expense:
Deposits
NOW accounts (80) (56) (136) (22) (210) (232)
Savings accounts (1,085) 7 (1,078) (1,072) (192) (1,264)
Money market
accounts 2,379 1,428 3,807 (28) 395 367
Certificate
accounts 3,818 1,578 5,396 2,243 2,520 4,763
Borrowings 1,597 (83) 1,514 1,983 (13) 1,970
Total 6,629 2,874 9,503 3,104 2,500 5,604
Net interest income $ 4,621 $(1,399) $ 3,222 $ 1,796 ($1,480) $ 316
Provision for Loan Losses
In fiscal 1996, additions were made to the allowance for loan losses in the
amount of $2.3 million resulting in an allowance (net of charge-offs and
recoveries of $1.5 million) of $6.6 million, or .70% of the loan portfolio,
compared to an allowance of $5.8 million, or .69% at fiscal year end 1995.
See "Asset Quality".
11
Other Income
Other income was $8.6 million for fiscal 1996, an increase of 51.2% over
fiscal 1995. Mortgage banking income for fiscal 1996 increased $337,000 to
$2.5 million or 15.4% as compared to the same period in 1995 and includes the
adoption of FASB Statement No. 122 effective July 1, 1995. Statement No. 122
requires the capitalization of Originated Mortgage Servicing Rights ("OMSR")
retained for loans sold or securitized determined by an allocation of cost
between the loan and mortgage servicing right based on their relative fair
values. Mortgage servicing rights capitalized during the year ended June 30,
1996 was the primary factor in the increased gain on sales of loans and
trading securities over the prior year.
Mortgage backed securities created in conjunction with the Association's
mortgage banking activities are deemed trading securities and are carried at
fair value with unrealized gains and losses reported in the income statement.
At June 30, 1996, securities held for trading were $21.7 million with an
indicated unrealized loss of $943,000 recognized as a component of mortgage
banking income.
The portfolio of loans serviced for others totaled $593.2 million at June 30,
1996, with an average net servicing rate of approximately 23.4 basis points,
as compared to $571.4 million at June 30, 1995 with an average net servicing
rate of approximately 28.5 basis points. Included in the change in the
balance serviced for others was the sale of servicing rights on approximately
$47.1 million of loans serviced for others consummated in June 1996 at a net
gain of $496,000. The average balance outstanding of loans serviced for
others increased $35.6 million in fiscal 1996. The decrease in net servicing
rate of 5.1 basis points includes an increase in interest cost totalling
$214,000 in fiscal 1996 compared to $135,000 in fiscal 1995 resulting from the
timing of loan payoffs and remittances to government sponsored agencies in the
secondary market. The combination of these volume and rate changes caused
loan servicing fees for fiscal 1996 to decrease $201,000 or 12.6% to $1.4
million as compared to fiscal 1995. For additional information on loan
servicing fees and mortgage banking activity refer to Notes 1 and 5 of the
Notes to Consolidated Financial Statements.
Gain on sales of real estate during fiscal 1996 totalled $1.3 million and is
primarily attributed to the sale of real estate held for investment. Fees and
service charges for fiscal 1996 increased $287,000 or 12.9 % to $2.5 million
as compared to $2.2 million in fiscal 1995, and is primarily a result of a new
service charge fee structure coupled with growth in both loans and deposits.
The Corporation is a partner in various joint ventures. In the year ended
June 30, 1996, income from joint ventures totalled $1.2 million. The income
is related to the Corporation's share in the net income of a venture capital
partnership resulting from the increased market value of underlying portfolio
investments. For additional information on investments in and advances to
joint ventures refer to Note 8 of the Notes to Consolidated Financial
Statements.
Other operating income was $713,000 in fiscal 1996 as compared to $759,000 in
fiscal 1995. This amount represents income from operations of subsidiaries
including commissions earned from discount brokerage activities and appraisal
and construction inspection fees for services provided to independent third
parties.
Other Expenses
Other expenses of $24.5 million increased $1.8 million or 8.1% in fiscal 1996
as compared to $22.6 million in fiscal 1995. Salaries and employee benefits
increased $697,000 or 6.2% in fiscal 1996 over fiscal 1995 and is attributable
to a combination of the following factors: revisions to the salary
administration program wherein staff salary levels were adjusted to bring
salaries in line with current market target pay amounts for respective
12
positions, increases in incentive compensation payouts as a result of improved
operating performance measures, lower commissions paid to loan originators as
a result of increased emphasis on correspondent mortgage broker relationships,
and a decrease in full time equivalent personnel from 419 at June 30, 1995 to
393 at June 30, 1996. Occupancy expense increased $218,000 or 8.8% in fiscal
1996 over fiscal 1995 as a result of increased cost of services used in
operations as well as the initial startup cost for the recently completed
operations office in York, Pa. This project included the restoration of an
historically significant facade and is representative of the Association's
ongoing investment in its community.
Federal deposit insurance premiums increased $136,000 or 7.5% in fiscal 1996
over 1995 and is attributable to increased deposits. Real estate expenses
increased $183,000 in fiscal 1996 over fiscal 1995 and is primarily
attributable to an increase in the provision for possible real estate losses.
Other expenses increased $550,000 or 10.2% in fiscal 1996 as compared to
fiscal 1995 and includes contributions in connection with community
redevelopment projects.
Provision for Income Taxes
The provision for income taxes of $6.5 million for fiscal 1996 represents an
effective tax rate of 38.6% as compared to 38.7% for fiscal 1995. For a more
comprehensive analysis of income tax expense, refer to Note 11 of the Notes to
Consolidated Financial Statements.
Fiscal 1995 Compared to Fiscal 1994
Net Interest Income
Net interest income for fiscal 1995 was $31.8 million, which represented a
slight increase over fiscal 1994. The margin in interest-earning assets for
fiscal 1995 decreased to 3.70% from 3.82% for fiscal 1994. For further
information, see "Average Balances and Interest Yield/Rate Analysis" and
"Volume/Rate Analysis" tables included in this document.
During fiscal 1995, York Federal originated $395.1 million of loans including
loans refinanced from the Association's portfolio totalling $6.0 million and
mortgage loans securitized or sold of $66.7 million. The result of these
activities, when combined with loan repayments including refinance activity,
was a 9.9% increase in average loans outstanding during fiscal 1995.
Securities and other interest-earning assets represented a net decrease of
$31.6 million over the prior fiscal year. This shift in composition of the
Association's assets had a positive effect on interest income and reflected
the utilization of excess liquidity to assist in funding loan demand. In
total, interest-earning assets averaged 4.4% more in fiscal 1995 than
in fiscal 1994, resulting in an increase in interest income. In addition to
the above mentioned change in composition, a higher interest rate environment
resulted in upward loan repricing contributing to the yield on earning assets
increasing 37 basis points to 7.93%. This combination of volume and rate
changes resulted in an increase in interest income of $5.9 million. Interest
expense was effected by a 4.9% increase in the average level of
interest-bearing liabilities and a 50 basis point increase in the cost of
funds to 4.45%. The primary reasons for the higher cost of funds are
attributed to a higher rate environment and a shift in interest-bearing
liabilities from low cost transaction accounts to higher cost certificate
accounts and short term borrowings.
Provision for Loan Losses
In fiscal 1995, additions were made to the allowance for loan losses in the
amount of $2.3 million resulting in an allowance (net of charge-offs and
recoveries of $992,000) of $5.8 million, or .69% of the loan portfolio,
compared to an allowance of $4.5 million, or .67% at fiscal year end 1994.
See "Asset Quality".
13
Other Income
Other income was $5.7 million for fiscal 1995, a decrease of 1.4% from the
fiscal 1994 level of $5.8 million. Included in the fiscal 1995 net gains on
securities, loans and real estate were losses pertaining to securities created
in mortgage banking activities that were deemed appropriate portfolio
investments and as such were retained in the Corporation's securities
available for sale portfolio. Losses totalling $143,000 were reported as
realized in the income statement in fiscal 1995 as a result of this transfer
between securities portfolios.
Loan servicing fees for fiscal 1995 increased $536,000 or 50.2% to $1.6
million as compared to fiscal 1994. This increase primarily reflects a lower
level of refinancing activity in fiscal 1995 that resulted in a decreased
interest cost incurred by the Corporation in connection with the timing of
loan payoffs and remittances to government sponsored agencies in the secondary
market. This interest cost totaled $135,000 in fiscal 1995 compared to
$623,000 in fiscal 1994. In addition, the average balance outstanding of
loans serviced for others increased $33.6 million in fiscal 1995, resulting in
an increase in service fees of approximately $72,000. Partially offsetting
these factors was the continued change in composition of the portfolio of
loans serviced for others to a higher percentage of fixed rate loans at
generally lower servicing fee rates versus adjustable rate loans which
generally have higher servicing fee rates. Also, since originated mortgage
servicing was primarily related to fixed rate loans which carry servicing fee
rates approximating normal servicing fee rates, excess servicing gains
recognized in fiscal 1995 decreased as compared to fiscal 1994.
The portfolio of loans serviced for others totaled $571.4 million at June 30,
1995, with an average net servicing rate of approximately 28.5 basis points,
as compared to $563.6 million at June 30, 1994, with an average net servicing
rate of approximately 20.2 basis points.
Other operating income was $759,000 in fiscal 1995 as compared to $1.2 million
in fiscal 1994. This amount represents income from operations of subsidiaries
including commissions earned from discount brokerage activities, appraisal and
construction inspection fees for services provided to independent third
parties, and equity in earnings of joint ventures.
Other Expenses
Other expenses of $22.6 million decreased $768,000 or 3.3% in fiscal 1995 as
compared to fiscal 1994. Salaries and employee benefits increased $121,000 or
1.1% in fiscal 1995 over fiscal 1994 representing a combination of merit
increases, reduction in overall staffing levels, and lower total commissions
paid to loan originators as a result of decreased volume from this source of
loans. Full-time equivalent personnel totaled 419 employees at June 30, 1995,
as compared to 447 employees at June 30, 1994. Occupancy expense and federal
deposit insurance premiums remained relatively constant between fiscal 1995
and 1994. Real estate expenses decreased $1.1 million to $807,000 as compared
to the fiscal year 1994 level. This decrease is primarily attributable to
carrying costs related to maintaining a decreasing portfolio of such
properties, settlement and legal fees related to disposition of properties and
a decrease in additions to the allowance for possible real estate losses of
$325,000 as compared to provisions made in fiscal 1994. See "Asset Quality".
Provision for Income Taxes and Cumulative Effect of Change in Accounting
Principle
The provision for income taxes of $4.8 million for fiscal 1995 represents an
effective tax rate of 38.7% as compared to 37.4% for fiscal 1994. For a more
comprehensive analysis of income tax expense, refer to Note 11 of the Notes to
Consolidated Financial Statements.
14
Regulatory Matters
York Federal is insured by the FDIC through the SAIF and pays annual insurance
fees of 23 basis points on insured deposits, the lowest rate currently
permitted. The FDIC insures commercial banks and certain savings banks
through the Bank Insurance Fund ("BIF"), which has generally lowered their
rates to the statutory minimum annual assessment of $2,000 since the BIF has
reached the required capitalization level of $1.25 for each $100 in deposits.
This BIF and SAIF insurance premium disparity places SAIF insured institutions
at a significant competitive disadvantage since the average SAIF premium
currently remains at 24 basis points.
Proposed legislation to accelerate the recapitalization of the SAIF by
assessing a one-time charge on SAIF-insured deposits is under consideration.
If enacted, this one time assessment could result in a charge to the
Association's earnings of approximately $3.4 million net of applicable income
tax benefits. Such charge will not impact York Federal's status as a
well-capitalized institution qualifying for the lowest SAIF insurance premium.
Management expects that the existing annual SAIF premium paid by the
Association will be lowered to a level consistent with the rates paid by BIF
insured institutions as a result of the proposed one time assessment resulting
in a favorable impact to earnings in future years. It cannot be determined at
this time what the outcome of these events and proposals will be.
Transactions with affiliates are limited to 10% of capital and surplus per
affiliate with an aggregate limit on all such transactions with affiliates to
20% of capital and surplus. At June 30, 1996, such transactions are within
these regulatory limits.
Effects of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes
in relative purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities
of a financial institution are monetary in nature. As a result, interest
rates generally have a more significant impact on a financial institution's
performance than does the effect of inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the price
of goods and services since such prices are affected by inflation. In the
current interest rate environment, the liquidity and maturity structures of
York Federal's assets and liabilities are critical to the maintenance of
acceptable performance levels.
15
REPORT OF MANAGEMENT
FINANCIAL STATEMENTS
York Financial Corp. ("Corporation") is responsible for the preparation,
integrity and fair presentation of its published financial statements as of
June 30, 1996 and the year then ended. The consolidated financial statements
of the Corporation have been prepared in accordance with generally accepted
accounting principles and, as such, include some amounts that are based on
judgments and estimates of management.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an effective
internal control structure over financial reporting. The system contains
monitoring mechanisms, and actions are taken to correct deficiencies
identified.
There are inherent limitations in the effectiveness of any system of internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control
system can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the
effectiveness of an internal control system may vary over time.
Management assessed the Corporation's internal control structure over
financial reporting as of June 30, 1996. This assessment was based on
criteria for effective internal control over financial reporting described in
"Internal Control--Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment,
management believes that the Corporation maintained an effective internal
control structure over financial reporting as of June 30, 1996.
COMPLIANCE WITH LAWS AND REGULATIONS
Management is also responsible for compliance with the federal and state laws
and regulations concerning dividend restrictions and federal laws and
regulations concerning loans to insiders designated by the FDIC as safety and
soundness laws and regulations.
Management assessed compliance by York Federal Savings and Loan Association
("Association") with the designated laws and regulations relating to safety
and soundness. Based on this assessment, management believes that the
Association complied, in all significant respects, with the designated laws
and regulations related to safety and soundness for the year ended June 30,
1996.
/s/Robert W. Pullo /s/James H. Moss
Robert W. Pullo James H. Moss
President -- Chief Executive Officer Senior Vice President--
Chief Financial
Officer/Treasurer
16
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
York Financial Corp.
We have audited the accompanying consolidated balance sheets of York Financial
Corp. and subsidiaries as of June 30, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for
each of the three years in the period ended June 30, 1996. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of York Financial
Corp. and subsidiaries at June 30, 1996 and 1995, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, the Corporation effective
July 1, 1993, changed its method of accounting for income taxes, and effective
July 1, 1995, changed its method of accounting for mortgage servicing rights.
[signature of Ernst & Young L.L.P]
Baltimore, Maryland
July 19, 1996
17
YORK FINANCIAL CORP. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30
1996 1995
(In Thousands)
Assets
Cash and due from banks:
Noninterest-earning $21,864 $19,468
Interest-earning 2,207 19,861
24,071 39,329
Loans held for sale, net 5,686 6,450
Securities held for trading 21,736 4,451
Securities available for sale 53,115 31,569
Securities held to maturity (fair
value of $8,948--1996 and
$28,902--1995) 9,275 29,293
Loans receivable, net 938,570 845,205
Real estate, net 13,361 17,656
Premises and equipment 16,398 12,536
Federal Home Loan Bank stock, at cost 6,733 5,177
Accrued interest receivable 7,370 6,460
Other assets 8,142 8,091
Investments in joint ventures 5,347 3,701
Total Assets $1,109,804 $1,009,918
18
YORK FINANCIAL CORP. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
June 30
1996 1995
(In Thousands)
Liabilities and stockholders' equity
Liabilities:
Deposits $908,123 $832,056
Federal Home Loan Bank advances and other borrowings 74,380 65,759
Advances from borrowers for taxes and insurance 4,237 5,098
Other liabilities 29,524 21,675
Total Liabilities 1,016,264 924,588
Stockholders' Equity:
Preferred Stock:10,000,000 shares authorized and unissued -- --
Common Stock, $1.00 par value:
Authorized 10,000,000 shares; issued 1996--6,087,722 shares:
1995--5,421,949 shares 6,088 5,422
Additional capital 67,809 55,911
Retained earnings 21,154 24,946
Unrealized gains (losses) on available for sale securities,
net of taxes (benefit) of ($289) in 1996 and $156 in 1995 (451) 244
Unearned ESOP shares (1,060) (1,193)
Total stockholders' equity 93,540 85,330
Total liabilities and stockholders' equity $1,109,804 $1,009,918
See accompanying notes
19
YORK FINANCIAL CORP. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended June 30
1996 1995 1994
(In Thousands, Except Per Share Data)
Interest income:
Interest and fees on loans $75,001 $61,354 $55,279
Interest on securities held for trading 479 291 564
Interest on securities available for sale 3,142 3,369 2,462
Interest and dividends on securities held
to maturity 1,361 2,069 1,851
Other interest income 897 1,072 2,079
Total interest income 80,880 68,155 62,235
Interest expense:
Interest on deposits 42,321 34,332 30,698
Interest on borrowings 3,584 2,070 100
Total interest expense 45,905 36,402 30,798
Net interest income 34,975 31,753 31,437
Provision for loan losses 2,300 2,340 2,200
Net interest income after provision for
loan losses 32,675 29,413 29,237
Other income:
Mortgage banking 2,527 2,190 918
Gain (loss) on sales of securities available
for sale 358 687 1,171
Gain (loss) on sales of real estate 1,291 (251) (31)
Fees and service charges 2,508 2,221 2,205
Income from joint ventures 1,233 100 319
Other operating income 713 759 1,204
Total other income 8,630 5,706 5,786
Other expenses:
Salaries and employee benefits 11,863 11,166 11,045
Occupancy 2,690 2,472 2,460
Federal deposit insurance 1,955 1,819 1,833
Real estate 990 807 1,909
Data processing 1,006 956 760
Other 5,946 5,396 5,377
Total other expenses 24,450 22,616 23,384
Income before income taxes and cumulative
effect of change in accounting principle 16,855 12,503 11,639
Provision for income taxes 6,512 4,837 4,353
Income before cumulative effect of change
in accounting principle 10,343 7,666 7,286
Cumulative effect of change in accounting
principle 0 0 2,088
Net income $10,343 $7,666 $9,374
Per share data:
Income before cumulative effect of change
in accounting principle $1.63 $1.25 $1.21
Cumulative effect of change in accounting
principle 0 0 0.34
Net income $1.63 $1.25 $1.55
Cash dividends paid $0.56 $0.52 $0.49
Weighted average shares 6,327,326 6,116,585 6,043,396
See accompanying notes
20
YORK FINANCIAL CORP. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unrealized Un-
Gains (Losses) earned
Common Additional Retained on Available for ESOP Treasury
Stock Capital Earnings Sale Securities Shares Stock Total
(In Thousands)
Balance,
June 30,
1993 $4,236 $34,183 $32,137 $ -- $ -- $ -- $70,556
Adjustment
to beginning
balance for
change in
accounting
method, net
of income
tax of
$841 -- -- -- 1,316 -- -- 1,316
Net income -- -- 9,374 -- -- -- (9,374)
Cash
dividends
paid -- -- (2,777) -- -- (2,777) --
Stock
options
exercised 18 198 -- -- -- -- 216
Common stock
issued
under
dividend
reinvestment
plan 75 1,396 -- -- -- -- 1,471
10% Common
stock
dividend
--425,047
shares at
fair
value 425 9,351 (9,801) -- -- -- (25)
Change in
unrealized
gains
(losses),
net of
income
tax
(benefits)
of ($962) -- -- (1,505) -- -- (1,505)
Common
stock
issued
to ESOP 64 1,261 -- -- (1,325) -- --
Balance,
June 30,
1994 4,818 46,389 28,933 (189) (1,325) -- 78,626
Net
income -- -- 7,666 -- -- -- 7,666
Cash
dividends
paid -- -- (3,062) -- -- -- (3,062)
Stock
options
exercised 43 389 -- -- -- -- 432
Common
stock
issued
under
dividend
reinvestment
plan 109 1,522 -- -- -- -- 1,631
10% Common
stock
dividend--
482,788
shares
at fair
value 483 8,087 (8,591) -- -- -- (21)
Release
of ESOP
shares -- (12) -- -- 132 -- 120
Acquisition
of treasury
stock--
30,579
shares at
fair value -- -- -- -- -- (495) (495)
Retirement
of treasury
stock (31) (464) -- -- -- 495 --
Change in
unrealized
gains
(losses),
net of
income tax
(benefits)
of $277 -- -- -- 433 -- -- 433
Balance,
June 30,
1995 5,422 55,911 24,946 244 (1,193) -- 85,330
Net
income -- -- 10,343 -- -- -- 10,343
Cash
dividends
paid -- -- (3,381) -- -- -- (3,381)
Stock
options
exercised 14 82 -- -- -- -- 96
Common
stock
issued
under
dividend
reinvestment
plan 108 1,610 -- -- -- -- 1,718
10% Common
stock
dividend--
543,436
shares at
fair value 544 10,190 (10,754) -- -- -- (20)
Release of
ESOP shares -- 16 -- -- 133 -- 149
Change in
unrealized
gains
(losses),
net of
income tax
(benefits)
of ($445) -- -- -- (695) -- -- (695)
Balance,
June 30,
1996 $6,088 $67,809 $21,154 ($451) ($1,060) $-- $93,540
See accompanying notes
21
YORK FINANCIAL CORP. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Year Ended June 30
1996 1995 1994
(In Thousands)
Operating Activities
Net income $10,343 $7,666 $ 9,374
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization and accretion on
securities and loans, net (1,898) (1,707) (548)
Provision for loan losses 2,300 2,340 2,200
Provision for real estate losses 603 490 815
Depreciation and amortization 1,501 1,517 1,257
Cumulative effect of change in
accounting principle -- -- (2,088)
Loans originated for sale (154,169) (62,578) (193,808)
Proceeds from sales of trading
securities 96,410 50,309 174,477
Realized gains on trading securities (1,583) (140) (476)
Realized gains on sale of securities
available for sale (358) (687) (1,171)
Decrease (increase) in other assets 729 (2,876) 1,208
Increase (decrease) in other
liabilities 8,499 2,223 (1,458)
Other (1,419) 1,437 1,036
Net cash used in operating activities (39,042) (2,006) (9,182)
Investing Activities
Proceeds from sales of securities
available for sale 25,268 20,648 13,201
Purchases of securities held to maturity
and Federal Home Loan Bank stock (1,557) (320) (9,313)
Proceeds from maturities of securities
held to maturity 4,170 250 --
Principal repayments on securities 7,089 7,078 12,862
Loans originated or acquired, net of
increase in deferred loan fees (283,359) (324,000) (137,007)
Principal collected on loans 183,271 143,346 126,505
Proceeds from sales of loans 1,637 2,334 2,293
Purchases of real estate (194) (328) (886)
Proceeds from sales of real estate 10,801 9,593 6,576
Purchases of premises and equipment, net (6,307) (1,401) (936)
Other (136) 3,185 1,272
Net cash provided by (used in)
investing activities (59,317) (139,615) 14,567
22
YORK FINANCIAL CORP. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (Continued)
Year Ended June 30
1996 1995 1994
Financing Activities (In Thousands)
Net increase (decrease) in noninterest-
bearing demand deposits,interest-bearing
transaction accounts, savings accounts,
and 31-day certificates of deposit 54,168 (49,870) (12,943)
Net increase in certificates of deposit 21,899 96,443 11,876
Net increase in short-term advances
received from Federal Home Loan Bank 8,765 64,235 --
Repayments of Federal Home Loan Bank
advances and other borrowings (144) (12) (3,510)
Issuance of common stock:
Dividend Reinvestment Plan 1,718 1,631 1,471
Employee Stock Ownership Plan -- -- 1,325
Stock Option Plans 96 24 216
Cash dividends paid (3,381) (3,062) (2,777)
Acquisition of treasury stock -- (87) --
Cash paid in lieu of fractional shares (20) (21) (25)
Net cash provided by (used in) financing
activities 83,101 109,281 (4,367)
Increase (decrease) in cash and cash
equivalents (15,258) (32,340) 1,018
Cash and cash equivalents at beginning
of year 39,329 71,669 70,651
Cash and cash equivalents at end of year $24,071 $39,329 $71,669
See accompanying notes
23
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1995, AND 1994
1. Summary of Significant Accounting Policies
Description of Business
York Financial Corp. (Corporation) is a unitary savings and loan holding
company. York Federal Savings and Loan Association (Association), a federally
chartered savings and loan association, is the primary operating unit of the
Corporation. The Association is a member of the Federal Home Loan Bank (FHLB)
of Pittsburgh and is subject to supervision, examination and regulation by the
Office of Thrift Supervision (OTS) and the Federal Deposit Insurance
Corporation (FDIC). The Association is primarily engaged in the business of
attracting deposits and investing these deposits into loans secured by
residential and commercial real property, consumer loans and securities. York
Federal conducts its business through twenty-two offices located in south
central Pennsylvania and Maryland. In addition, York Federal maintains a
commissioned mortgage origination staff as well as mortgage broker
relationships which originate residential mortgage loans for the Association
primarily in Pennsylvania, Maryland, Virginia and Delaware. The Association's
deposits are insured up to applicable limits by the Savings Association
Insurance Fund (SAIF) of the FDIC.
Basis of Presentation
The consolidated financial statements include the accounts of York Financial
Corp. and its wholly-owned subsidiaries including York Federal Savings and
Loan Association. All significant intercompany accounts and transactions
have been eliminated in consolidation. Preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
the estimates. Certain reclassifications have been made to the 1995 and 1994
consolidated financial statements to conform with the 1996 presentation.
Loans Held for Sale
The Corporation originates certain mortgage loans and creates mortgage-backed
securities generally through government sponsored agencies for sale in the
secondary market. During the period of origination, mortgage loans are
designated as held either for investment purposes or for sale. Loans held
for sale are carried at lower of cost or market based on quoted market prices
of securities collateralized by similar loans. Gains or losses on the sales
of loans held for sale are determined using the specific identification
method.
Securities Held for Trading
Securities classified by the Corporation as "held for trading" are principally
mortgage-backed securities held for sale in conjunction with the Association's
mortgage banking activities and are carried at fair value. Unrealized gains
and losses are reported in the statements of income.
24
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (continued)
Securities Available for Sale and Held to Maturity
The classification of securities is determined at the time of acquisition and
is reevaluated at each reporting date. Securities are classified as "held to
maturity" based upon management's ability and positive intent to hold such
securities to maturity. Held-to-maturity securities are carried at amortized
cost.
Securities not classified as trading or held-to-maturity are classified as
"available for sale." Available-for-sale securities are carried at fair
value, with unrealized gains and losses, net of taxes, reported as a component
of stockholders' equity.
The cost of securities classified as held-to-maturity or available-for-sale is
adjusted for amortization of premiums and accretion of discounts, both
computed on the interest method. Such amortization/accretion, as well as
interest and dividends, is included in interest income. Realized gains and
losses and declines in value judged to be other than temporary are included in
net gains(losses) on securities sales. The cost of securities sold is based
on the specific identification method, and all sales are recorded as of the
trade date.
Loans Receivable
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal balance adjusted for any charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans.
Interest on loans is accrued and credited to operations based upon principal
amounts outstanding.
Loan origination and commitment fees and certain direct loan origination
costs are deferred and the net amount amortized as an adjustment of the
related loan's yield, generally over the contractual life of the related
commitments or loans.
In May 1993, the Financial Accounting Standards Board (FASB) issued Statement
No. 114, "Accounting by Creditors for Impairment of a Loan" as amended by
Statement No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures". As a result of applying the new rules, certain
loans which are deemed to be impaired are reported at the present value of
expected future cash flows using the loan's effective interest rate, or as a
practical expedient, at the loans observable market price or the fair value of
the collateral if the loan is collateral dependent.
Loans (including loans impaired under Statement No. 114) are generally placed
on nonaccrual status when principal or interest is past due 90 days or more
and when, in the opinion of management, full collection of principal or
interest is unlikely. After a loan is placed on nonaccrual status, income is
recognized only to the extent of cash received and collection o principal is
not in doubt.
25
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (continued)
Loans Receivable (continued)
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential loan losses. Management's determination of
the adequacy of the allowance is based on the risk characteristics of the
loans, past loss experience, economic conditions, and such other relevant
factors which in management's judgment deserve recognition. During 1996, the
allowance for loan losses related to impaired loans was determined in
accordance with the provisions of Statement No. 114.
Real Estate
Real estate consists of property held for investment and foreclosed assets
held for sale. Prior to the adoption of Statement No. 114, a loan was
classified as an in-substance foreclosure when the Corporation took possession
of the collateral regardless of whether formal foreclosure proceedings took
place. Loans previously classified as in-substance foreclosure totalling
$200,000 but for which the Corporation had not taken possession of the
collateral have been reclassified to loans. Properties held for investment
are carried at the lower of cost or net realizable value. Costs related to
development and improvement of real estate are capitalized until the real
estate reaches a saleable condition. Those costs incurred related to holding
the real estate are charged to real estate expenses.
Foreclosed assets held for sale are initially valued at the lower of cost or
fair value thereby establishing a new cost basis. Current valuations of real
estate are periodically performed by management. An allowance for real estate
losses is maintained at a level believed adequate by management to absorb
potential real estate losses.
Losses on sales of real estate are recognized at the time sales occur. Gains
on sales of real estate are recognized when the criteria for gain recognition
have been met.
Loan Servicing Fees
Effective July 1, 1995, the Company adopted FASB Statement No. 122,
"Accounting for Mortgage Servicing Rights", an amendment of Statement No. 65.
Under Statement No. 65, the capitalization of originated mortgage servicing
rights (OMSR) was prohibited, with normal fees and costs associated with
servicing loans recognized as incurred and the present value of projected
contract servicing fees that exceed normal servicing fees recognized
immediately as a gain from excess servicing. Statement No. 122 requires the
capitalization of OMSR retained for loans sold or securitized. When the
Association sells or securitizes mortgage loans, the total cost is allocated
between the loan and mortgage servicing rights based on their relative fair
values. Mortgage servicing rights are amortized over the period of estimated
net servicing income. Impairment of mortgage servicing rights is assessed
based on the fair value of those rights. Fair values are estimated using
discounted cash flows based on various assumptions including projected loan
prepayments and current market interest rates. For purposes of measuring
impairment, the rights are stratified based on loan type, term and interest
rates. The amount of impairment recognized is the amount by which the
capitalized mortgage servicing rights for a stratum exceed their fair value.
The adoption of Statement No. 122 resulted in an increase in after-tax income
of $785,000 for the year ended June 30, 1996. In accordance with Statement
No. 122, prior period financial statements have not been restated.
26
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (continued)
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on the straight-line
method over the estimated useful lives of the various assets; amortization is
included in depreciation expense.
Income Taxes
In February 1992, the FASB issued Statement No. 109, "Accounting for Income
Taxes." Statement No. 109 requires the liability method for financial
accounting and reporting of income taxes. Under the liability method,
deferred tax assets and liabilities are determined based on the differences
between financial statement carrying amounts and the tax bases of existing
assets and liabilities. These differences are measured at the enacted tax
rates that will be in effect when these differences reverse. Prior to the
adoption of Statement No. 109, income tax expense was determined using the
deferred method. Deferred tax expense was based on items of income and
expense that were reported in different years in the financial statements and
tax returns and were measured at the tax rate in effect in the year the
difference originated.
The Corporation adopted the provisions of the new standard effective July 1,
1993 and recognized a favorable cumulative effect of a change in accounting
principle adjustment of approximately $2,088,000 or $.34 per share. The
Corporation and its subsidiaries file a consolidated Federal income tax
return.
Per Share Data
Net income per share is computed based upon the weighted average number of
common shares outstanding considering dilutive common stock equivalents (see
Note 13) and unearned ESOP shares adjusted for stock dividends. Cash
dividends paid per share are based on the number of shares outstanding at
each record date, adjusted for stock dividends.
Cash Flow Information
For purposes of the statements of cash flows, cash equivalents include cash
and amounts due from banks. During 1996, 1995, and 1994, the Association
exchanged loans for mortgage-backed securities in the amounts of $153,056,000,
$62,578,000, and $208,070,000, respectively. During 1996, 1995, and 1994, the
Association transferred unpaid loan balances from loans to real estate
acquired due to foreclosure of $6,205,000, $4,575,000, and $4,045,000,
respectively.
The Corporation paid $45,963,000, $34,310,000, and $30,825,000 in interest on
deposits and other borrowings during 1996, 1995, and 1994, respectively.
27
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (continued)
Recently Issued Accounting Guidance
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Corporation will
adopt Statement No. 121 in the first quarter of 1997 and, based on current
circumstances, does not believe the effect of adoption will be material.
The Corporation records compensation expense for all stock-based compensation
plans as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees". In October 1995, the FASB issued Statement No. 123, "Accounting
for Stock-Based Compensation," which encourages companies to
recognize expense for stock-based awards based on their estimated fair value
on the date of grant. Statement No. 123, effective for the year ended June
30, 1997, does not require companies to change their existing accounting for
stock-based awards, but if the new fair value method is not adopted, pro forma
income and earnings per share data should be provided in the footnotes to the
financial statements. The Corporation intends to continue to account for the
stock-based compensation plans as prescribed for by APB No. 25, and will
supplementally disclose in its 1997 annual financial statements the required
pro forma information as if the fair value method had been adopted.
In June 1996, the FASB issued Statement No. 125, "Accounting for the Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," which
clarifies and provides consistent guidance for distinguishing transfers of
financial assets that are sales from transfers that are borrowings. The
standard is based on a financial components approach that focuses on control.
Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and liabilities it
has incurred, and derecognizes liabilities when extinguished. The Corporation
will adopt Statement No. 125 on January 1, 1997, and will apply the Statement
prospectively. The Corporation has not completed its assessment of the impact
of adopting Statement No. 125.
2. Restrictions on Cash and Due from Bank Accounts
The Association was required to maintain certain average reserve balances of
$509,000 as established by the Federal Reserve Bank. The actual reserve
balance at June 30, 1996 was $891,000.
28
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Securities
The following is a summary of available for sale and held to maturity
securities:
June 30, 1996
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
Available for Sale:
U.S. Treasury and
other U.S. Government
agencies $7,453 $27 ($9) $7,471
Mortgage-backed
securities 46,401 190 (947) 45,644
$53,854 $217 ($956) $53,115
Held to Maturity:
U.S. Treasury and
other U.S. Government
agencies $8,857 $-- ($347) $8,510
Mortgage-backed
securities 418 20 -- 438
$9,275 $20 ($347) $8,948
June 30, 1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
Available for Sale:
Mortgage-backed
securities $31,168 $551 ($150) $31,569
Held to Maturity:
U.S. Treasury and
other U.S. Government
agencies $21,895 $28 ($467) $21,456
Mortgage-backed
securities 7,398 48 -- 7,446
$29,293 $76 ($467) $28,902
29
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Securities (continued)
The amortized cost and fair value of securities at June 30, 1996, as
presented in the following table are segregated by contractual maturity; where
applicable, contractual principal amortization schedules, adjusted for annual
prepayment assumptions based on consensus market forecasts, were utilized.
Expected maturities may differ from contractual maturities because the issuers
of the securities may have the right to prepay obligations without prepayment
penalties.
U.S. Treasury
and other U.S.
Government agencies Mortgage-backed
Securities Securities Total
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(In Thousands)
Available for Sale:
Due in one year
or less $757 $759 $7,635 $7,514 $8,392 $8,273
Due after one year
through five years 3,328 3,337 19,526 19,205 22,854 22,542
Due after five years
through ten years 3,368 3,375 14,330 14,090 17,698 17,465
Due after ten years -- -- 4,910 4,835 4,910 4,835
$7,453 $7,471 $46,401 $45,644 $53,854 $53,115
Held to Maturity:
Due in one year
or less $864 $829 $67 $70 $931 $899
Due after one year
through five years 4,153 3,996 176 185 4,329 4,181
Due after five years
through ten years 3,840 3,685 133 139 3,973 3,824
Due after ten years -- -- 42 44 42 44
$8,857 $8,510 $418 $438 $9,275 $8,948
Securities with an amortized cost of $63,161,000 and $52,437,000 on June 30,
1996 and 1995, respectively, were pledged to secure public deposits and for
certain other purposes as required by law.
Gross realized gains of $397,000, $687,000 and $1,171,000 and gross realized
losses of $39,000, $0, and $0 were realized on sales of available for sale
securities during 1996, 1995, and 1994, respectively.
For the years ended June 30, 1995 and 1994, trading securities with a fair
value of $3,470,000 and $18,471,000, respectively were transferred to
securities available for sale with related losses of $143,000 and $1,140,000
included in earnings during the periods indicated. For the year ended June
30, 1996, no such transfers were made.
30
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Securities (continued)
In November 1995, the FASB issued a Guide to Implementation of Statement 115,
"Accounting for Certain Investments in Debt and Equity Securities." The guide
stated that no later than December 31, 1995, an enterprise may reassess the
appropriateness of the classifications of all securities held at that time and
account for any resulting reclassifications at fair value. Reclassifications
from the held-to-maturity category that result from this one-time reassessment
will not call into question the intent of an enterprise to hold other debt
securities to maturity in the future. During the quarter ended December 31,
1995, the Corporation transferred held-to-maturity securities with a fair
value of $14.3 million to available-for-sale with the resulting net unrealized
gains of $29,000, net of taxes, reported as a component of stockholders'
equity.
4. Loans Receivable
Loans receivable are summarized as follows:
June 30
1996 1995
(In Thousands)
First mortgage loans:
Conventional:
Residential $718,755 $602,072
Commercial 62,006 82,544
780,761 684,616
Construction:
Residential 65,725 79,742
Commercial 9,840 6,409
75,565 86,151
Commercial business loans 1,714 2,751
Consumer loans 114,814 106,750
116,528 109,501
Less:
Undisbursed portion of loans in process 27,497 26,577
Deferred fees, net and unearned income 178 2,646
Allowance for loan losses 6,609 5,840
34,284 35,063
$938,570 $845,205
31
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Loans Receivable (continued)
At June 30, 1996 and 1995, nonaccrual loans totaled $1,681,000 and $3,498,000,
respectively. When interest accrual is discontinued, all unpaid accrued
interest is reversed. The interest excluded from interest income on loans on
nonaccrual status amounted to $294,000, $144,000 and $94,000 for the years
ended June 30, 1996, 1995, and 1994, respectively. The Association had no
commitments to lend additional funds to borrowers whose loans were on
nonaccrual status at June 30, 1996. At June 30, 1996, the recorded investment
in loans that are considered to be impaired under Statement No. 114 was $2.9
million. The related allowance for credit losses associated with this
impaired loan was $500,000. The average recorded investment in impaired loans
for the year ended June 30, 1996 was approximately $1.2 million. During the
year ended June 30, 1996, the Corporation did not receive any cash payments
representing interest income on impaired loans.
The primary market area for the Association's loan originations is central
Pennsylvania, Maryland, Virginia, and Delaware.
The Association's commercial loan portfolio is comprised of loans secured by
single family condominiums, land for development, hotel/motel/restaurant,
multifamily residential, office buildings and other properties. The total
commercial loan portfolio of $68.3 million at June 30, 1996 is collateralized
by properties in Pennsylvania (45%), Maryland (24%), Virginia (29%), and other
(2%).
An analysis of the allowance for loan losses is as follows:
Year ended June 30
1996 1995 1994
(In Thousands)
Balance at beginning of year $5,840 $4,492 $3,346
Provision charged to expense 2,300 2,340 2,200
Recoveries credited to
allowance 340 278 298
Less: Loan losses charged
to allowance (1,871) (1,270) (1,352)
Balance at end of year $6,609 $5,840 $4,492
At June 30, 1996, the Association had outstanding commitments to sell
$5,500,000 in loans. The Association expects to satisfy these commitments
with loans originated/settled in the commitment period.
32
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Mortgage Banking
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances
of mortgage loans serviced for others was $593,166,000, $571,351,000 and
$563,595,000 at June 30, 1996, 1995 and 1994, respectively. Custodial escrow
balances maintained in connection with the foregoing loan servicing, and
included in demand deposits, were approximately $3,885,000, $4,972,000 and
$4,975,000 at June 30, 1996, 1995 and 1994, respectively.
In accordance with FASB Statement No. 122, mortgage servicing rights of
$1,630,000 were capitalized during the year ended June 30, 1996. The book
value of mortgage servicing rights was approximately $2,108,000 (including
originated, purchased and excess mortgage servicing rights), net of valuation
allowance of $38,000 at June 30, 1996, and $767,000 (including purchased and
excess mortgage servicing rights) at June 30, 1995. Amortization of mortgage
servicing rights was $217,000, $136,000 and $270,000 in the years ended June
30, 1996, 1995 and 1994, respectively.
The components of mortgage banking income are as follows:
Year Ended June 30
1996 1995 1994
(In thousands)
Gain on sales of loans and
trading securities $1,583 $283 $1,616
Loss on transfer of trading
securities -- (143) (1,140)
Unrealized gain (loss) on
loans and trading securities (943) 458 (450)
Loan servicing fee income,
net of amortization 1,391 1,592 892
Gain on sale of mortgage
servicing rights 496 -- --
$2,527 $2,190 $918
33
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Real Estate
A summary of real estate is as follows:
June 30
1996 1995
(In Thousands)
Held for investment (net of accumulated
depreciation of $1,302,000 in 1996
and $1,152,000 in 1995) $3,684 $4,720
Foreclosed assets held for sale 10,632 13,366
Loans classified as in substance foreclosure -- 200
14,316 18,286
Less: Allowance for real estate losses 955 630
$13,361 $17,656
An analysis of the allowance for real estate losses is as follows:
Year Ended June 30
1996 1995 1994
(In Thousands)
Balance at beginning of year $630 $1,453 $1,23
Provision charged to real estate expense 603 490 815
Recoveries credited to allowance 10 -- 62
Less: Real estate losses charged to
allowance (288) (1,313) (662)
Balance at end of year $955 $630 $1,453
34
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Premises and Equipment
A summary of premises and equipment is as follows:
June 30
1996 1995
(In Thousands)
Land and improvements $4,334 $4,487
Buildings 11,651 8,377
Leasehold improvements 1,231 1,174
Furniture, fixtures, and equipment 8,317 6,791
25,533 20,829
Less: Accumulated depreciation and
amortization (9,135) (8,293)
$16,398 $12,536
8. Investments in and Advances to Joint Ventures
The Corporation is a partner in an unconsolidated joint venture in which its
ownership percentage is less than 20%. The Corporation's investment in this
joint venture is accounted for under the equity method of accounting. At June
30, 1996, the carrying value of this investment was approximately $4,160,000.
The Corporation's share of the venture's net income for the year ended June
30, 1996 is $979,000.
Subsidiaries of the Corporation are partners in various joint ventures for the
purpose of acquiring and developing real property for ultimate resale or for
management of the resulting income-producing property. In addition, the
Association is a limited partner in several partnerships designed to generate
federal rehabilitation tax credits by acquiring, renovating, operating and
leasing qualified low income housing and historic properties. At June 30,
1996, aggregate net equity investment in these ventures approximated
$1,187,000. In addition, at June 30, 1996 loans payable to subsidiaries of
the Corporation by these ventures totaled $1,928,000. The Corporation's share
of the ventures' net income of $254,000 (which approximates 50%) is included
in operations under the equity method of accounting.
35
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Deposits
Deposits are summarized as follows:
June 30
1996 1995
(In Thousands)
Demand and savings accounts:
Noninterest-bearing $11,116 $10,336
NOW accounts 85,288 80,578
Savings accounts 81,311 98,473
Money market accounts 211,939 144,956
389,654 334,343
Certificate accounts 518,469 497,713
$908,123 $832,056
At June 30, 1996, the scheduled maturities of certificate accounts for the
succeeding five fiscal years are as follows: 1997--$297,369; 1998--$84,859;
1999--$46,132; 2000--$22,915; 2001 and thereafter--$67,194.
The aggregate amount of short-term certificates of deposit with a minimum
denomination of $100,000 was approximately $73,565,000 and $74,901,000 at June
30, 1996 and 1995, respectively.
36
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Federal Home Loan Bank (FHLB) Advances and Other Borrowings
Borrowings consist of the following:
June 30
1996 1995
(In Thousands)
FHLB advances payable to FHLB
Pittsburgh, secured by all FHLB
stock and certain first mortgage
loans:
Short-term advances:
Due July 1, 1996, 5.21% $3,000 $ --
Due July 3, 1996, 5.44% 70,000 --
Due July 5, 1995, 6.08% 10000 10,000
Due July 12, 1995, 6.06% 54235 54,235
73,000 64,235
Other advances:
Due 2008, 2.00% 320 331
73,320 64,566
Other borrowings:
Due 2004, prime plus .75% 1,060 1,193
$74,380 $65,759
Maturities of FHLB advances and other borrowings for the succeeding five
fiscal years are as follows: 1997--$73,144,000; 1998--$145,000;
1999--$145,000; 2000--$145,000; 2001--$145,000.
The FHLB of Pittsburgh has an established credit policy which permits the
Association to borrow amounts up to twenty times the amount of the
Association's holding of FHLB stock, at a negotiated interest rate. At June
30, 1996, additional borrowings available under this policy were approximately
$61,348,000. The Association may increase its borrowings over amounts
currently available by purchasing additional FHLB stock.
The Association has a credit agreement with the Federal Reserve Bank of
Philadelphia whereby the Association can borrow to meet short-term liquidity
requirements in amounts up to approximately $3,018,000. Certain mortgage
loans held in safekeeping by the Federal Reserve Bank collateralize borrowings
under this credit agreement. At June 30, 1996, there were no borrowings under
this credit agreement.
The Corporation has established a revolving line of credit with a commercial
bank in the amount of $2,000,000 at an interest rate equal to the current
prime rate. The Corporation can borrow amounts to fund working capital needs
with such amounts secured by certain premises of the Corporation. At June 30,
1996, there were no borrowings under this credit agreement.
37
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Federal Home Loan Bank (FHLB) Advances and Other Borrowings (continued)
During 1994, the Corporation on behalf of the Employee Stock Ownership Trust
arranged for a loan in the amount of $1,325,000 payable in equal annual
installments of $132,500 plus interest at prime plus .75% for a period of 10
years. The final maturity will be March 31, 2004. The proceeds were used to
acquire shares of the Corporation's stock for the benefit of the corporate
sponsored employee stock ownership plan (See note 11).
11. Income Taxes
The provision for income taxes in the consolidated statements of income
consists of the following:
Year Ended June 30
1996 1995 1994
(In Thousands)
Current:
Federal $3,877 $4,814 $2,952
State 995 1,029 732
4,872 5,843 3,684
Deferred:
Federal 1,568 (1,006) 629
State 72 -- 40
1,640 (1,006) 669
Total provision for
income taxes $6,512 $4,837 $4,353
The provision for income taxes includes ($163,000), $327,000, and $384,000 in
1996, 1995 and 1994, respectively, of applicable income taxes related to gains
(losses) on sales of securities of ($418,000), $809,000, and $999,000,
respectively.
38
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Income Taxes (continued)
Income tax expense for the Corporation is different than the amounts computed
by applying the statutory federal income tax rate to income before income
taxes because of the following:
Percentage of Income
Before Income Taxes
Year Ended June 30
1996 1995 1994
Income tax expense at federal
statutory rate 35.0 % 35.0 % 34.0 %
Tax-exempt income (0.2) (0.5) (0.7)
State income taxes, net of
federal benefit 4.1 5.4 4.4
Other (0.3) (1.2) (0.3)
Effective tax rate 38.6 % 38.7 % 37.4 %
The Corporation made income tax payments of $5,949,000, $4,973,000, and
$3,811,000 during 1996, 1995, and 1994, respectively.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30
are as follows:
1996 1995
(In thousands)
Deferred tax assets:
Deferred loan fees $5 $876
Bad debt 2,481 2,146
Securities available for sale 289 --
Other 1,067 1,073
Total gross deferred tax assets 3,842 4,095
Deferred tax liabilities:
Depreciation and amortization 431 351
Joint Ventures 514 186
Securities valuation adjustment 592 310
Securities available for sale -- 156
Servicing Rights 426 --
Other 387 405
Total gross deferred tax liabilities 2,350 1,408
Net deferred tax asset $1,492 $2,687
39
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Income Taxes (continued)
As required by FAS 109, the Corporation has determined that a valuation
reserve for the net deferred tax asset is not required since it is more likely
than not that the net deferred tax asset can be principally realized through
carryback to taxable income in prior years and future reversals of existing
taxable temporary differences.
12. Employee Stock Ownership Plan and Pension Plan
The Corporation sponsors an employee stock ownership plan (ESOP) which
provides all eligible employees an opportunity to share in the ownership of
the Corporation's common stock. The ESOP generally acquires shares of common
stock with contributions made to the ESOP. Expenses related to ESOP
contributions amounted to $372,000, $326,000 and $135,000 in 1996, 1995 and
1994, respectively. In May 1994, the ESOP borrowed $1,325,000 and acquired
77,265 shares (as adjusted for subsequent stock dividends) of the
Corporation's common stock to be released and allocated to eligible employees
as the borrowing is repaid. In accordance with the provisions of AICPA
Statement of Position 93-6 "Employers' Accounting for Employee Stock
Ownership Plans", at June 30, 1996, the borrowing is reflected as a liability
and the related shares as a contra equity account, unearned ESOP shares, on
the Corporation's balance sheet. At June 30, 1996, the ESOP debt outstanding
was $1,060,000 and the fair value of related shares (66,707 including shares
acquired through the dividends paid on unearned ESOP shares) was $1,117,000.
The Corporation has committed to make contributions sufficient to provide for
ESOP debt service requirements.
The Corporation and its subsidiaries have a noncontributory pension plan
covering all eligible employees. The benefits are based on the employee's
compensation and years of service. The Corporation's funding policy is to
contribute amounts required under ERISA.
The following table sets forth the plan's funded status and amounts recognized
in the Corporation's consolidated financial statements.
June 30
Accumulated Benefits 1996 1995
Actuarial present value of benefit obligations: (In Thousands)
Accumulated benefit obligation including
vested benefits of $3,812 in 1996 and
$3,088 in 1995 ($3,922) ($3,180)
Accrued Pension Liability
Actuarial present value of projected benefit
obligation for services rendered to date ($4,271) ($3,596)
Plan assets at fair value, including shares
of York Financial Corp. stock with a fair
value of $548 in 1996 and $487 in 1995,
and equity and debt funds 4,107 3,659
Plan assets in excess of (less than)
projected benefit obligation (164) 63
Unrecognized net loss from past experience
different from that assumed 899 858
Unrecognized net transition asset (394) (443)
Prepaid pension cost $341 $478
40
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Employee Stock Ownership Plan and Pension Plan (continued)
Net pension cost included the following components:
Year Ended June 30
1996 1995 1994
(In Thousands)
Service cost-benefits earned
during the period $312 $285 $269
Interest cost on projected
benefit obligation 283 236 202
Actual return on plan assets (356) (371) (169)
Net amortization and deferral (5) 86 (113)
Net periodic pension cost $234 $236 $189
The weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected
benefit obligation was 7.5% and 5.0%, respectively, at June 30, 1996 and 1995.
The expected long-term rate of return on plan assets in 1996, 1995, and 1994
was 9.0%.
13. Stockholders' Equity
Retained earnings includes $14,470,000 at June 30, 1996, and 1995, for which
no provision for federal income tax has been made. These amounts represent
deductions for bad debt reserves for tax purposes only which were allowed to
savings institutions which met certain definitional tests prescribed by the
Internal Revenue Code of 1986, as amended. The Small Business Job Protection
Act of 1996 passed on August 20, 1996 eliminates the special bad debt
deduction granted solely to thrifts. Under the terms of the Act, there would
be no recapture of the pre-1988 (base year) reserves. However, these pre-1988
reserves would be subject to recapture under the rules of the Internal Revenue
Code section 593(e), if the Association itself redeems its shares, pays a cash
dividend in excess of earnings and profits, or
liquidates.
The Act also provides for the recapture of permanent deductions arising from
"applicable excess reserve" defined as the total amount of reserve over the
base year reserve. The Association's total reserve approximates the base
year reserve, and therefore, no recapture tax is due.
The Association is subject to various regulatory capital requirements
administered by the OTS. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators, that if undertaken, could have a direct material effect on the
Association's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Association must meet
specific capital guidelines that involve quantitative measures of the
Association's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Association's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
41
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Stockholders' Equity (continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth in
the table below) of tangible, core and risk-based capital as defined in the
regulations. At June 30, 1996, the Association meets all capital adequacy
requirements to which it is subject.
At June 30, 1996, the most recent notification from the OTS categorized the
Association as well capitalized under the regulatory framework for prompt
corrective action. There were no conditions or events since that notification
that management believes have changed the Association's category.
The following table sets forth Office of Thrift Supervision capital
requirements as compared to the capital position of the Association as of
June 30, 1996:
To be well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Minimum Required Minimum Required
Amount Ratio Amount Ratio Amount Ratio
(Dollars In Thousands)
Tangible capital $82,533 7.5% $16,529 1.5% $16,529 1.5%
Core capital
(to total
assets) $82,533 7.5% $33,057 3.0% $55,096 5.0%
Core capital
(to risk
weighted
assets) $82,533 11.5% $28,776 4.0% $43,164 6.0%
Risk-based
capital $88,495 12.3% $57,552 8.0% $71,940 10.0%
The Association may make dividend distributions to the Corporation up to 100%
of its net income in the calendar year plus an amount that would reduce its
surplus risk-based capital ratio at the beginning of the calendar year by
one-half. At June 30, 1996, the total allowable dividend distribution was
$17,988,000.
42
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Stock Option Plans
The Corporation has reserved 1,165,188 shares of common stock for options
granted or available for grant to certain directors and officers under the
Incentive Stock Option Plans and the Non-Incentive Stock Option Plans (Plans),
as amended. Options granted under the Incentive Stock Option Plans become
exercisable over periods of five to eight years on a cumulative basis,
beginning on the date of grant, and expiring ten years after the date of
grant. Options granted under the Non-Incentive Stock Option Plans become
exercisable over periods determinable at the date of grant and expire ten
years after the date of grant. Options under the Plans are granted at prices
not less than 100% of the fair market value at the date of option grant. In
case of termination of employment, options and grants not yet exercisable are
subject to the risk of forfeiture.
Under the Plans, the Corporation may also grant stock appreciation rights,
either singly or in tandem with stock options. No stock appreciation rights
were outstanding at June 30, 1996, 1995, or 1994.
Stock option transactions, adjusted for stock dividends, under the Plans were
as follows:
Year Ended June 30
1996 1995 1994
Options outstanding at beginning of year 826,348 679,043 659,057
Options granted at $12.98 to $18.18 per
share 187,441 194,283 42,609
Options exercised at $5.43 to $14.09
per share (14,050) (46,978) (22,623)
Options forfeited (11,000) -- --
Options outstanding at end of year 988,739 826,348 679,043
Options available for grant at June 30 176,449
Options exercisable at June 30 at $5.43
to $18.18 per share 884,890
43
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. York Financial Corp. (Parent Company Only) Financial Information
June 30
Balance Sheets 1996 1995
Assets (In Thousands)
Cash $3,896 $3,997
Loan receivable, net 1,709 1,700
Investment in real estate -- 848
Prepaid expenses and other assets 23 24
Investment in joint venture 4,160 3,261
Investments in subsidiaries:
York Federal Savings and Loan Association 82,140 75,360
Other 3,004 2,018
Total investments in subsidiaries 85,144 77,378
$94,932 $87,208
Liabilities
Other borrowings $1,060 $1,193
Accrued expenses and other liabilities 332 685
Stockholders' equity 93,540 85,330
$94,932 $87,208
Statements of Income Year Ended June 30
1996 1995 1994
Dividend income: (In Thousands)
York Federal Savings and Loan Association $1,798 $1,382 $2,313
Other 178 129 154
Interest Income 386 347 146
Gain on sales of real estate 841 -- --
Income (loss) from joint venture 979 (93) 111
Other Income 46 169 287
4,228 1,934 3,011
Other expenses 709 636 669
Income before equity in undistributed
net income of subsidiaries and
income taxes 3,519 1,298 2,342
Equity in undistributed net income (loss)
of subsidiaries:
York Federal Savings and Loan
Association 7,476 6,330 6,954
Other (1) (102) (67)
Income before income taxes and cumulative
effect of change in accounting principle 10,994 7,526 9,229
Provision for income taxes (benefit) 651 (140) (235)
Income before cumulative effect of change
in accounting principle 10,343 7,666 9,464
Cumulative effect of change in accounting
principle -- -- (90)
Net Income $10,343 $7,666 $9,374
44
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. York Financial Corp. (Parent Company Only) Financial Information
(continued)
Year ended June 30
1996 1995 1994
Statements of Cash Flows (In Thousands)
Operating activities
Net income $10,343 $7,666 $9,374
Adjustments to reconcile net income
to net cash provided by
operating activities:
Equity in undistributed net
income of subsidiaries (7,475) (6,228) (6,887)
Other (1,235) 717 1,080
Net cash provided by operating
activities 1,633 2,155 3,567
Investing activities
Loans originated or acquired -- (360) (37)
Principal collected on loans 53 19 33
Purchase of equipment -- -- (4)
Increase in investments in
subsidiaries (1,048) (579) (1,060)
Decrease in investment in real
estate 848 744 --
Net cash used in investing
activities (147) (176) (1,068)
Financing activities
Issuance of common stock:
Dividend Reinvestment Plan 1,718 1,631 1,471
Employee Stock Ownership Plan -- -- 1,325
Stock Option Plans 96 24 --
Cash dividends paid (3,381) (3,062) (2,777)
Acquisition of treasury stock -- (87) 216
Cash in lieu of fractional shares (20) (21) (25)
Net cash provided by (used in)
financing activities (1,587) (1,515) 210
Increase (decrease) in cash (101) 464 2,709
Cash at beginning of year 3,997 3,533 824
Cash at end of year $3,896 $3,997 $3,533
45
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Financial Instruments with Off-Balance Sheet Risk
The Association is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers.
Financial instruments with off-balance sheet risk are summarized as follows:
June 30
1996 1995
(In Thousands)
Commitments to extend credit:
Loan origination commitments:
Fixed interest rates $28,118 $14,342
Variable interest rates 6,718 13,460
34,836 27,802
Unused home equity lines of credit 46,876 44,123
Unused unsecured lines of credit 1,128 1,365
$82,840 $73,290
Standby letters of credit $1,012 $773
Loans sold with recourse $51,603 $62,115
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected
to expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. The Association evaluates
each customer's credit worthiness on a case-by-case basis using the same
credit policies in making commitments and conditional obligations as it does
for on-balance sheet instruments. The amount of collateral obtained, if
deemed necessary by the Association upon extension of credit, is based on
management's credit evaluation of the customer and generally
consists of real estate.
Standby letters of credit are conditional commitments issued by the
Association to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers. The Association holds
collateral, when deemed necessary, supporting those commitments.
46
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Financial Instruments with Off-Balance Sheet Risk (continued)
The Association has sold loans to the Federal National Mortgage Association
(FNMA) which include certain recourse provisions for the life of the loans
whereby the Association is required to repurchase the buyer's interest in
individual loans on which foreclosure proceedings have been completed. The
Association does not believe that its recourse obligations subject it to
material risk of loss in the future. There were no sales of loans with
recourse in fiscal years ending June 30, 1996 and 1995.
17. Fair Value of Financial Instruments
FASB Statement No. 107, "Disclosure about Fair Value of Financial
Instruments," requires disclosure of the fair value of financial instruments.
A substantial portion of the Corporation's assets and liabilities are
considered financial instruments. Significant assumptions were used in the
calculation of fair market values. The following assumptions and methods
were used by the Corporation to estimate the fair values of each type of the
Corporation's Financial Instruments.
Cash and Due from Banks - Noninterest and Interest Earning
The fair value for cash and due from banks is book value, due to the short
maturity of, and negligible credit concerns within, those instruments.
Loans Held for Sale
Loans held for sale are generally fixed rate mortgage loans. The fair value
for such loans is based on quoted market prices of securities collateralized
by similar loans.
Securities Held for Trading and Available for Sale
The fair value for securities held for trading and available for sale is based
on available market quotes. If a market quote is not available, fair value is
approximated by using the market price of a similar security.
Securities Held to Maturity
The fair value for securities held to maturity which includes the Federal Home
Loan Bank (FHLB) stock is based on available market quotes and the cost for
the FHLB stock. If a market quote is not available, fair value is approximated
by using the market price of a similar security.
47
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Fair Value of Financial Instruments (continued)
Loans
The fair value of adjustable rate loans that reprice frequently is
approximately their carrying value. The fair value of fixed rate loans and
adjustable rate loans with repricing frequencies of greater than one year is
estimated by discounting the future cash flows using the current rate at which
similar loans would be made to borrowers with similar credit ratings.
Mortgages and certain consumer loans include prepayment assumptions.
Other Financial Assets
Currently other financial assets consist of excess servicing fees and
originated mortgage servicing rights whose fair values are calculated based on
the present values of their estimated future cashflows.
Deposits
The fair value of deposits with no stated maturity, such as noninterest
bearing deposits, NOW accounts, savings accounts, and money market accounts
is, by definition, equal to the amount payable on demand (i.e., their carrying
amounts). The fair value of fixed rate certificates of deposit is based on
the discounted value of cash flows, using appropriate Federal Home Loan Bank
borrowing rates. The carrying amounts for variable rate certificates of
deposit approximate their fair values. The estimated fair value of core
deposits do not include the benefits commonly referred to as a core deposit
intangible resulting from low-cost funding compared to the cost of borrowing
funds in the financial markets nor is such benefit recorded as an intangible
asset on the balance sheet.
Borrowings
The fair value of adjustable rate borrowings that reprice frequently is
approximately their carrying value. The fair value of long term borrowings is
calculated based on the discounted value of contractual cash flows, using
rates currently existing for borrowings from the Federal Home Loan Bank with
similar remaining maturities.
Off-Balance Sheet Financial Instruments
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements taking into account
market interest rates, the remaining terms and present creditworthiness of
the counterparties. The fair value of guarantees and letters of credit is
based on fees currently charged for similar agreements.
The fair values estimated are dependent upon subjective assumptions and
involve significant uncertainties resulting in estimates that vary with
changes in assumptions. Any changes in assumptions or estimation
methodologies may have a material effect on the estimated fair values
disclosed.
48
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Fair Value of Financial Instruments (continued)
At June 30, 1996, the Corporation's estimated fair values of financial
instruments based on assumptions disclosed above are as follows:
June 30
1996 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
(In Thousands)
Cash and due from
banks - non-
interest and
interest-
bearing $24,071 $24,071 $39,329 $39,329
Loans held for sale 5,686 5,686 6,450 6,450
Securities held for
trading 21,736 21,736 4,451 4,451
Securities available
for sale 53,115 53,115 31,569 31,569
Securities held to
maturity 16,008 15,681 34,470 34,079
Loans:
Residential 762,261 759,695 656,697 661,370
Commercial 68,282 68,364 90,244 90,655
Consumer 114,814 113,617 106,750 105,375
Total gross loans 945,357 941,676 853,691 857,400
Other financial
assets 1,914 2,045 486 514
Noninterest-bearing
deposits 11,116 11,116 10,336 10,336
NOW accounts 85,288 85,288 80,578 80,578
Savings accounts 81,311 81,311 98,473 98,473
Money market
accounts 211,939 211,939 144,956 144,956
Certificates of
deposit 518,469 526,581 497,713 508,304
Total deposits 908,123 916,235 832,056 842,647
FHLB advances and
other borrowings 74,380 74,259 65,759 65,637
Off-balance-sheet
financial instruments:
Commitments to extend
credit ($214) ($250)
Standby letters of credit (15) (12)
49
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Commitments and Contingencies
In the ordinary course of business, the Corporation has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Corporation
is a defendant in certain claims and legal actions arising in the ordinary
course of business. In the opinion of management, after consultation with
legal counsel, the ultimate disposition of these matters is not expected to
have a material adverse effect on the consolidated financial condition of the
Corporation.
50
SUPPLEMENTARY CONSOLIDATED FINANCIAL DATA
Summaries of consolidated results of operations on a quarterly basis for the
years ended June 30, 1996 and 1995 are as follows:
Three Months Ended
September 30 December 31 March 31 June 30
Fiscal Year 1996
Interest income $ 19,813 $20,385 $20,294 $20,388
Interest expense 11,316 11,846 11,293 11,450
Net interest income 8,497 8,539 9,001 8,938
Provision for loan
losses 600 700 500 500
Net interest income
after provisions
for loan losses 7,897 7,839 8,501 8,438
Other income 1,309 3,412 1,905 2,004
Other expenses 5,579 5,608 6,870 6,393
Income tax expense 1,456 2,256 1,198 1,602
Net income $ 2,171 $ 3,387 $ 2,338 $ 2,447
Per share data:
Net income $ 0.35 $ 0.54 $ 0.37 $ 0.38
Cash dividends paid $ 0.136 $ 0.136 $ 0.140 $ 0.150
Fiscal Year 1995
Interest income $ 15,594 $16,490 $17,366 $18,705
Interest expense 7,795 8,328 9,547 10,732
Net interest income 7,799 8,162 7,819 7,973
Provision for loan
losses 670 670 500 500
Net interest income
after provisions
for loan losses 7,129 7,492 7,319 7,473
Other income 1,400 1,126 1,256 1,924
Other expenses 5,176 5,472 6,030 5,938
Income tax expense 1,302 1,185 991 1,359
Net income $ 2,051 $ 1,961 $1,554 $ 2,100
Per share data:
Net income $ 0.33 $ 0.33 $ 0.25 $ 0.34
Cash dividends paid $ 0.124 $ 0.124 $0.136 $ 0.136
All per share data is adjusted for stock dividends effected through June 30,
1996
51
DIRECTORS AND OFFICERS
YORK FINANCIAL CORP.
Executive Officers
Thomas W. Wolf Robert W. Pullo Robert A. Angelo, Esq.
Chairman of the Board President and Executive Vice President
Chief Executive Officer Secretary/General Counsel
James H. Moss, CPA Robert C. Herzberger
Senior Vice President Senior Vice President
Chief Financial Officer/Treasurer
YORK FINANCIAL CORP. AND YORK FEDERAL SAVINGS AND LOAN ASSOCIATION
Directors
Cynthia A. Dotzel, CPA
Dotzel and Company, Inc., Certified Public Accountants
Robert W. Erdos
Owner, Stomp Off Records
Randall A. Gross
President, RG Industries
Paul D. Mills
Owner, Willow Tree Farms
Robert W. Pullo
President and Chief Executive Officer, York Financial Corp.
Chairman of the Board and Chief Executive Officer,
York Federal Savings and Loan Association
Byron M. Ream
Executive Vice President, R & R Components, Inc.
Robert L. Simpson
Executive Director, Crispus Attucks Association, Inc.
Carolyn E. Steinhauser
Executive Director, York Foundation
Thomas W. Wolf
President, The Wolf Organization
Directors Emeriti
Paul W. Moyer
Hiram L. Wiest, M.D.
William T. Wolf, Chairman of the Board Emeriti
52
DIRECTORS AND OFFICERS--continued
YORK FINANCIAL CORP.
EXECUTIVE OFFICERS
Robert W. Pullo
Chairman of the Board and Chief Executive Officer
Robert A. Angelo, Esq.
President and Chief Operating Officer
EXECUTIVE VICE PRESIDENTS VICE PRESIDENTS
Robert C. Herzberger Milles C. Baxter
Mortgage Banking Group Branch Administration
Lynn D. Kramer Fern W. Bressler, CPA
Retail Banking Group Controller
James H. Moss, CPA William J, Groft
Administrative Services Group Continual Improvement
Chief Financial Officer/Treasurer
Carol M. Hinkle
SENIOR VICE PRESIDENTS Lancaster Mortgage Origination Company
Robert H. Boyer Sharon L. Luker
Mortgage Origination Division Human Resources
Richard E. Bricker Robert J. Matulevich
Lending Division Correspondent Lending
Rebecca S. McClure, Esq. Michael J. McClure
Corporate Services Group Product Sales
Secretary/General Counsel
Craige L. Smith, Jr. Thomas R. Strause
Support Services Division Auditor
Frances M. Teller
Commercial Real Estate Lending
Gary S. Thomas
York Mortgage Origination Center
53
YORK FEDERAL SAVINGS AND LOAN ASSOCIATION
MAIN OFFICE
101 South George Street
York, Pennsylvania
Joye E. Matysek, Assistant Vice President
PENNSYLVANIA BRANCH OFFICES
York County
2690 South Queen Street, York 201 Dart Drive, Hanover
Judith A. Grube-Myers, Assistant Tammy L. Ford, Assistant
Vice President Vice President
100 North Northern Way, York 1781 West Market Street, York
Wendy J. Spangler, Assistant Vice President Margaret A. Medice, Assistant
Vice President
1940 Carlisle Road, York 499 Tyler Run Road, York
Edward R. Fadely, Sr., Assistant Margarette A. Sboray, Assistant
Vice President Vice President
1 North Main Street, Shrewsbury 4157 North George Street,
Dawn M. Singley, Assistant Vice President Manchester, Tammy A.
Schopf-Smith, Assistant
Vice President
1001 Haines Road, Haines Acres 3995 East Market Street, York
Shopping Center, York Loretta A. Emerick, Assistant
Victoria A. Schofield, Assistant Vice President
Vice President
880 West Broadway, Red Lion 39 Hanover Street, Spring Grove
Fred L. Landis II, Assistant Vice President Cathy L. Warner, Assistant
Vice President
1442 Bannister Street, York 1700 Baltimore Pike, Hanover
Margaret A. Medice, Assistant Tammy L. Ford, Assistant
Vice President Vice President
Cumberland County Dauphin County
798 East Simpson Street, Mechanicsburg 1123 West Governor Road,
Wendy L. Meneses, Assistant Vice President Hershey, Debra E. Dupler,
Assistant Vice President
MJ Carlisle Mall, 180 Noble Boulevard, Carlisle
Teresa F. Kline, Assistant Vice President
Lancaster County
75 Zimmerman Drive, Camp Hill 1785 Oregon Pike, Lancaster
Paul R. Remy, Assistant Vice President Jay E. Lowman, Assistant
Vice President
HARFORD COUNTY, MARYLAND BRANCH OFFICES
1816 Emmorton Road, Bel Air 2006 Rock Spring Road,
Charlotte D. Smith, Assistant Forest Hill
Vice President Charlotte D. Smith, Assistant
Vice President
54
CORPORATE ORGANIZATION
SUBSIDIARIES OF YORK FINANCIAL CORP.
YORK FEDERAL SAVINGS AND LOAN ASSOCIATION
Robert W. Pullo
Chairman of the Board and Chief Executive Officer
Robert A. Angelo, Esq.
President and Chief Operating Officer
Y-F SERVICE CORP.
Harry A. Lloyd
President and Chief Executive Officer
NEW SERVICE CORP.
Harry A. Lloyd
President and Chief Executive Officer
LENDERS SUPPORT GROUP, INC.
Harry A. Lloyd
President and Chief Executive Officer
FIRST CAPITAL BROKERAGE SERVICES, INC.
Kenneth P. Fetrow
President and Chief Executive Officer
Y-F INSURANCE AGENCY
Richard E. Bricker
President and Chief Executive Officer
CORPORATE INFORMATION
Corporate Headquarters Independent Auditors
101 South George Street Ernst & Young, LLP
York, Pennsylvania 17401 One North Charles
Baltimore, Maryland 21201
Special Counsel Transfer Agent and Registrar
Breyer & Aguggia American Stock Transfer and Trust Co.
1300 I Street, N.W. 40 Wall Street
Suite 470 East 46th Floor
Washington, D.C. 20005 New York, New York 10005
10-K Information
A copy of Form 10-K as filed with the Securities and Exchange Commission will
be furnished without charge to stockholders of record on September 3, 1996,
upon written request to James H. Moss, Senior Vice President and Chief
Financial Officer/Treasurer, York Financial Corp., 101 South George Street, P.
O. Box 15068, York, Pennsylvania 17405.
Annual Meeting
The Annual Meeting of the stockholders of York Financial Corp. will be held on
Wednesday, October 23, 1996, at 3:00 p.m. at the Yorktowne Hotel, 48 East
Market Street, York, Pennsylvania 17405.
York Financial Corp. is an Equal Opportunity Affirmative Action Employer.
55
EXHIBIT 21
Subsidiaries of the Registrant
Percentage Jurisdiction or
Subsidiaries (1) Owned State of Incorporation
York Federal Savings
and Loan Association 100% Federally chartered
Advanced Real Estate
Associates, Inc.(2) 100% Pennsylvania
Residential Mortgage
Corp. (2) 100% Pennsylvania
Y-F Service Corp. 100% Pennsylvania
New Service Corp. 100% Pennsylvania
Lenders Support Group, Inc. 100% Pennsylvania
First Capital Brokerage
Services, Inc. 100% Pennsylvania
Y-F Insurance
Agency, Inc. 100% Maryland
(1) The operations of the Corporation's subsidiaries are included in the
Corporation's consolidated financial statements.
(2) A wholly-owned subsidiary of York Federal Savings and Loan Association
at June 30, 1996.
EXHIBIT 23
Consent of Independent Auditors
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in the following Registration
Statements of York Financial Corp. and in the related Prospectuses of our
report dated July 19, 1996, with respect to the consolidated financial
statements of York Financial Corp. included in the 1996 Annual Report to
Stockholders of York Financial Corp. and incorporated by reference in this
Annual Report (Form 10-K) for the year ended June 30, 1996:
Number 33-27812 on Form S-3 dated April 3, 1989
Number 33-89228 on Form S-3 dated April 5, 1995
Number 33-87300 on Form S-8 dated December 13, 1994
ERNST & YOUNG LLP
Baltimore, Maryland
September 24, 1996
EXHIBIT 27
Financial Data Schedule