UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER: 0-22599
POUGHKEEPSIE FINANCIAL CORP.
DELAWARE 16-1518711
- --------------------------------- -----------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
249 MAIN MALL, POUGHKEEPSIE, NEW YORK 12602
-------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(914) 431-6200
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING FOR THE
PAST 90 DAYS.
YES X NO
--- ---
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK AS OF AUGUST
4, 1997 WAS 12,594,725.
PAGE 1 OF 22 SEQUENTIALLY-NUMBERED PAGES
PART I. FINANCIAL INFORMATION
Page
----
Item 1 - Financial Statements
The information required by Rule 10-01 of Regulation S-X
is included herein as follows:
Consolidated Statements of Financial Condition
at June 30, 1997, Unaudited, and at December 31, 1996. 3
Consolidated Statements of Operations - Unaudited,
for the three and six month periods ended June 30, 1997 and 1996. 4
Consolidated Statements of Cash Flows - Unaudited,
for the six month periods ended June 30, 1997 and 1996. 5
Notes to Unaudited Consolidated Financial Statements. 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 21
Item 2 - Change in Securities 21
Item 3 - Defaults Upon Senior Securities 21
Item 4 - Submission of Matters to a Vote of Security Holders 21
Item 5 - Other Information 21
Item 6 - Exhibits and Reports on Form 8-K 21
SIGNATURES 22
2
POUGHKEEPSIE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
(Unaudited)
June 30, December 31,
ASSETS: 1997 1996
----------------------------------
Cash and due from banks $10,003 $ 6,863
Securities available for sale:
Mortgage-backed securities 125,616 113,575
Other securities 24,156 22,215
Securities held to maturity:
Mortgage-backed securities 27,847 29,957
- --------------------------------------------------------------------------------
Total securities 177,619 165,747
- --------------------------------------------------------------------------------
Loans, net
Residential real estate mortgage loans 397,984 393,513
Commercial real estate mortgage loans 213,772 210,982
Commercial business loans 7,508 7,194
Installment loans 34,445 31,194
- --------------------------------------------------------------------------------
653,709 642,883
Allowance for loan losses (9,519) (8,652)
Residential mortgage loans held for sale 854 456
- --------------------------------------------------------------------------------
Total loans, net 645,044 634,687
- --------------------------------------------------------------------------------
Federal Home Loan Bank stock 10,071 9,760
Accrued interest and dividends receivable 5,435 5,278
Bank premises and equipment 7,574 6,793
Other real estate owned 6,806 10,726
Net deferred tax assets 15,294 16,812
Other assets 2,350 2,024
- --------------------------------------------------------------------------------
Total assets $ 880,196 $ 858,690
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Savings accounts $ 97,424 $ 93,371
Certificates of deposit 319,294 314,059
Money market deposits 134,495 126,233
Demand deposits 48,666 41,583
- --------------------------------------------------------------------------------
Total deposits 599,879 575,246
- --------------------------------------------------------------------------------
Advances from Federal Home Loan Bank 65,500 84,800
Securities sold under repurchase agreements 128,408 113,894
Accrued interest payable 1,083 1,618
Mortgagors' escrow deposits 4,883 4,134
Other liabilities 6,812 7,330
- --------------------------------------------------------------------------------
Total liabilities 806,565 787,022
- --------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock -- --
Common stock 127 127
Additional paid-in capital 66,762 66,736
Retained earnings 8,526 6,827
Unrealized gains (losses) on securities 153 (85)
Treasury stock, at cost (1,937) (1,937)
- --------------------------------------------------------------------------------
Total stockholders' equity 73,631 71,668
- --------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $ 880,196 $ 858,690
================================================================================
See Notes to Consolidated Financial Statements
3
POUGHKEEPSIE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited) (Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------ -----------------------
1997 1996 1997 1996
------------------------ -----------------------
Interest and dividend income:
Real estate mortgage loans $ 12,787 $ 11,594 $ 25,358 $ 23,654
Other loans 895 792 1,729 1,734
Mortgage-backed securities 2,226 2,282 4,559 4,703
Other securities 568 436 1,090 904
Federal funds and money market investments 5 68 41 101
- ----------------------------------------------------------------------------------------- ----------------------
Total interest and dividend income 16,481 15,172 32,777 31,096
- ----------------------------------------------------------------------------------------- ----------------------
Interest expense:
Deposits 6,969 6,216 13,604 12,553
Borrowings 2,716 2,884 5,580 5,959
- ----------------------------------------------------------------------------------------- ----------------------
Total interest expense 9,685 9,100 19,184 18,512
- ----------------------------------------------------------------------------------------- ----------------------
Net interest income 6,796 6,072 13,593 12,584
Provision for loan losses 300 150 600 300
- ----------------------------------------------------------------------------------------- ----------------------
Net interest income after provision for loan losses 6,496 5,922 12,993 12,284
- ----------------------------------------------------------------------------------------- ----------------------
Non-interest income:
Retail banking fees and other income 716 537 1,443 991
Residential mortgage banking income 81 26 138 60
Loss on commercial loans held for bulk sale -- (894) -- (894)
- ----------------------------------------------------------------------------------------- ----------------------
Total other income 797 (331) 1,581 157
- ----------------------------------------------------------------------------------------- ----------------------
Non-interest expenses:
Salaries and wages 2,280 2,213 4,449 4,213
Employee benefits 571 640 1,287 1,352
Legal 71 221 207 325
Occupancy and equipment 685 593 1,394 1,231
Deposit insurance 138 395 274 784
Net cost of operating other real estate owned 179 248 402 667
Advertising and promotion 284 279 553 552
Data processing 181 178 351 344
Other 878 801 1,729 1,631
- ----------------------------------------------------------------------------------------- ----------------------
Total other expenses 5,267 5,568 10,646 11,099
- ----------------------------------------------------------------------------------------- ----------------------
Income before income taxes 2,026 23 3,928 1,342
Income tax expense 824 7 1,600 540
- ----------------------------------------------------------------------------------------- ----------------------
Net income $1,202 $16 $2,328 $802
========================================================================================= ======================
Net income per common and common equivalent share (Note 3) $0.09 $0.00 $0.18 $0.06
========================================================================================= ======================
Dividends per share $0.025 $0.025 $0.05 $0.05
========================================================================================= ======================
See Notes to Consolidated Financial Statements
4
POUGHKEEPSIE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Increase (decrease) in cash
(Unaudited)
Six Months Ended
June 30,
------------------------
1997 1996
------------------------
Cash flows from operating activities:
Net income $ 2,328 $ 802
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 600 300
Writedowns on other real estate owned 250 44
Writedowns on loans held for bulk sale -- 894
Depreciation 457 354
Amortization of premiums and discounts on mortgage-backed
securities, other securities and loans 571 517
Net (gain) loss on sale of assets (118) 4
Deferred tax expense 1,600 540
(Increase) decrease in interest and dividend receivable (157) 423
(Increase) decrease in other assets (498) 286
Decrease in interest payable (535) (601)
Decrease in other liabilities (518) (90)
(Increase) decrease in residential loans held for sale (398) 113
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,582 3,586
- ------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of mortgage-backed securities - available for sale (22,518) (19,841)
Purchase of other securities - available for sale (7,001) (16,500)
Proceeds from sales of mortgage-backed securities - available for sale -- 233
Proceeds from sales of other securities - available for sale -- 18,126
Principal repayments on mortgage-backed securities - available for sale 10,677 22,239
Principal repayments on mortgage-backed securities - held to maturity 1,926 2,486
Proceeds from maturities of other securities - available for sale 5,051 105
FHLB Stock purchases (310) (843)
Loan originations, net of repayments (27,213) (64,345)
Proceeds from sales of commercial loans held for bulk-sale -- 33,100
Proceeds from sales of loans in portfolio 18,306 3,705
Purchases of fixed assets (1,238) (739)
Proceeds from sale of other real estate owned 1,885 1,636
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (20,435) (20,638)
- ------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in demand, money market, and savings accounts 19,398 9,472
Net increase (decrease) in time deposits 5,235 (148)
Net increase in repurchase agreements 14,514 7,016
Net decrease in short-term FHLB borrowings (19,300) (899)
Increase in escrow deposits 749 259
Stock issued 26 27
Dividends paid (629) (629)
- ------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 19,993 15,098
- ------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,140 (1,954)
Cash and cash equivalents, beginning of period 6,863 9,960
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 10,003 $ 8,006
======================================================================================================
See Notes to Consolidated Financial Statements
5
POUGHKFEPSIE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - FORMATION OF HOLDING COMPANY
On May 30, 1997, Poughkeepsie Savings Bank, FSB (the "Bank") completed a
reorganization and formation of a thrift holding company - Poughkeepsie
Financial Corp. (the "Company"). The Company, a Delaware corporation, is a
thrift holding company whose sole subsidiary is the Bank. The holding company
structure and reorganization was approved by the shareholders of the Bank on
April 30, 1997. As a result of the holding company formation, each share of
common stock of the Bank became one share of common stock of Poughkeepsie
Financial Corp. which trades on the NASDAQ Stock Market under the symbol "PKPS".
NOTE 2 - PRESENTATION OF INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of the Company
include all adjustments which management believes necessary for a fair
presentation of the Company's financial condition at June 30, 1997, the results
of its operations for the three and six month periods ended June 30, 1997 and
1996, and the statements of cash flows for the six months then ended.
Adjustments are of a normal recurring nature. The consolidated financial
statements and related notes have been prepared in accordance with Regulation
S-X under the Securities Exchange Act of 1934, as amended, and consequently, do
not include all information and notes necessary for a complete presentation of
financial condition, results of operations and cash flows in conformity with
generally accepted accounting principles. These interim financial statements
should be read in conjunction with the audited consolidated financial statements
and note disclosures in the Annual Report on Form 10-K for the year ended
December 31, 1996 issued by Poughkeepsie Savings Bank, FSB. As the Bank
represents the Company's sole investment, the interim periods presented herein
are comparable to prior year data. Material intercompany items and transactions
have been eliminated in consolidation.
NOTE 3 - EARNINGS PER SHARE
Earnings per share were based on 13,110,509 and 13,081,016 weighted average
shares outstanding (including the dilutive effect of stock options) during the
three and six months ended June 30, 1997, respectively, compared to 12,907,787
and 12,915,104, respectively, during the comparable periods of 1996. The
weighted average number of common shares outstanding excludes 105,000 shares of
treasury stock for the three and six month periods ended June 30, 1997 and 1996,
respectively.
6
In February 1997 the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share". SFAS No. 128 is effective for periods ended after December
15, 1997 and earlier application in interim periods is not permitted. SFAS No.
128 simplifies the standards for computing earnings per share ("EPS") and makes
them comparable to international standards for computing EPS. When effective,
this statement will replace the presentation of primary EPS with a presentation
of basic EPS and will require a dual presentation of basic EPS and diluted EPS
on the face of the statement of operations.
The table below summarizes the basic and fully diluted EPS that the Company
would have reported had SFAS No. 128 been applied at June 30, 1997.
Three Months Ended Six Months Ended
June 30, June 30,
------------- -----------
1997 1996 1997 1996
---- ---- ---- ----
Basic $.10 $.00 $.18 $.06
Diluted .09 .00 .18 .06
NOTE 4 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For purposes of reporting cash flows, cash and cash equivalents includes cash,
amounts due from banks, federal funds sold and money market investments.
Supplemental cash flow disclosures are as follows:
Six months ended June 30,
------------------------
1997 1996
---- ----
($ in thousands)
Cash paid during period for:
Interest credited on deposits $13,579 $12,515
Interest paid on borrowings 6,140 6,608
Income/franchise taxes paid 271 153
Non-cash investing and financing activities:
(Decrease) increase in net unrealized losses on available
for sale securities, net of deferred tax effect ($238) $166
Investment securities transferred from available-
for-sale to held-to-maturity category -- 35,300
Loans transferred to OREO 764 413
Loans to facilitate the sale of OREO 2,585 4,469
7
NOTE 5 - TRANSFERS AND SERVICING OF FINANCIAL ASSETS
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", specifies accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities and for distinguishing whether a transfer of financial assets in
exchange for cash or other consideration should be accounted for as a sale or as
a pledge of collateral in a secured borrowing. SFAS No. 125 became effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, except for certain provisions (relating to
the accounting for secured borrowings and collateral and the accounting for
transfers and servicing of repurchase agreements, dollar rolls, securities
lending and similar transactions) which have been deferred until January 1, 1998
in accordance with SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125." The adoption of these standards did not
have a material impact on the Company's consolidated financial statements.
NOTE 6 - REPORTING COMPREHENSIVE INCOME AND DISCLOSURES ABOUT BUSINESS SEGMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information".
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
This statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income is defined as "the change in equity
of a business enterprise during a period from transactions and other events and
circumstances from nonowner sources. It includes all changes in equity during a
period, except those resulting from investments by owners and distributions to
owners." This statement is effective for fiscal years beginning after December
15, 1997.
SFAS No. 131 establishes the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. This statement is effective for financial statements for periods
beginning after December 15, 1997.
Both of these statements relate to disclosures that public companies must make
in their financial statements. Accordingly, implementation of these statements
will not have a significant effect on the results of operations or financial
condition, as currently reported by the Company.
8
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL:
On May 30, 1997 Poughkeepsie Financial Corp. (the "Company") became the parent
company of Poughkeepsie Savings Bank, FSB (the "Bank") as a result of the Bank's
holding company reorganization. The holding company structure and reorganization
was previously approved by the shareholders of the Bank. As of June 30, 1997,
the Company's sole subsidiary was the Bank and the Company currently has no
operations except for its investment in the Bank.
The Bank is a federally chartered, federally insured savings association
headquartered in Poughkeepsie, New York. The Bank was chartered as a mutual
savings bank by the New York State legislature in 1831, converted to a federal
mutual savings bank in 1981 and converted to stock form in 1985. In June 1993,
the Bank issued additional shares of its common stock, pursuant to an offering
to its stockholders on a rights offering basis, to standby investors and to
certain others. The Bank has recently announced its intention to change its name
to "Bank of the Hudson." The name change is expected to take place in October
1997.
In the following discussion, references to the "Company" relate to the
Poughkeepsie Financial Corp. together with its subsidiary, Poughkeepsie Savings
Bank, FSB.
In recent years the business of the Company has consisted primarily of obtaining
funds in the form of deposits and borrowings and using such funds to originate
1-4 family residential mortgages, income property mortgages, commercial business
loans, consumer and student loans along with investing in mortgage-backed and
other securities. The Company conducts community banking operations in the
Mid-Hudson Valley region of New York and contiguous counties through fifteen
retail branches and eight residential loan offices.
The Bank's core, tangible and risk-based capital ratios at June 30, 1997 were
6.89%, 6.89% and 11.95%, respectively, all of which substantially exceed
regulatory and statutory requirements. The Bank is designated by the Office of
Thrift Supervision ("OTS") as "well capitalized."
The earnings of the Company are largely dependent upon net interest income from
its banking operations and to a lesser extent on non-interest income. Net
interest income is the difference between interest earned on its loan and
security portfolios and interest paid on its deposit accounts and borrowed
funds. Non-interest income includes: gains (losses) on the sale of loans and
securities; deposit account and transaction fees; late charges on commercial,
residential and installment loans; and net commission income earned by the
Bank's financial services department.
9
FINANCIAL CONDITION:
At June 30, 1997, the consolidated assets of the Company totaled $880.2 million,
an increase of $21.5 million from December 31, 1996.
The 1-4 family residential real estate mortgage loan portfolio of $398.0 million
at June 30- 1997 increased by $4.5 million or 1.1% from December 31, 1996.
During the six month period ended June 30, 1997, the Company originated $39.4
million of residential mortgage loans compared with $70.2 million originated
during the same period of 1996. In the first six months of 1997, $18.3 million
of residential loans were sold to secondary market investors; servicing rights
were retained on a majority of loans sold.
The commercial real estate mortgage loan portfolio of $213.8 million at June 30,
1997 increased by $2.8 million or 1.3% from December 31, 1996. The increase was
primarily the result of commercial real estate loan originations and advances
within the Company's market area. For the six months ended June 30, 1997,
commercial real estate loan originations/advances totaled $39.8 million compared
with $29.9 million for the prior year period.
During the six- month period ended June 30, 1997, the allowance for loan losses
increased by $0.9 million as recoveries of $0.6 million and provisions of $0.6
million were only partially offset by charge-offs of $0.3 million. The allowance
for loan losses is maintained at a level which management considers adequate
based on its regular review of the loan portfolios and certain individual loans,
taking into consideration the likelihood of repayment, the diversity of the
borrowers, the type of loan, the quality of the collateral, current market
conditions and the associated risks. The allowance for loan losses was 75.65% of
non-performing loans and 1.45% of total portfolio loans at June 30, 1997 as
compared with 56.10% and 1.35%, respectively, at December 31, 1996. A
substantial portion of the Company's loans are secured by commercial real estate
and, accordingly, the performance of such loans may be affected by market
conditions for such real estate. While management uses available information to
anticipate losses on loans, future additions to the allowance or further
reductions in net carrying values may be necessary based on changes in economic
conditions.
Mortgage-backed securities, including both "available for sale" and "held to
maturity" classifications, increased from $143.5 million at the prior year-end
to $153.5 million at June 30, 1997 due to the purchase of $22.5 million of FNMA
ARM Bonds in June 1997 and partially offset by principal payments and
prepayments.
10
Other real estate owned ("OREO") aggregated $6.8 million at June 30, 1997. The
following table summarizes the gross activity during the first six months of
1997:
Commercial Residential
OREO OREO Total
---------- ----------- --------
($ in thousands)
Balance at 12/31/96 $ 9,733 $ 993 $10,726
Real estate acquired in
settlement of loans -- 590 590
Capital improvements 210 -- 210
Sales/dispositions (1,032) (853) (1,885)
Transfer to performing loans (2,585) -- (2,585)
Net excess cash flow -- -- --
Write-downs (250) -- (250)
------ ---- ----
Balance at 6/30/97 $ 6,076 $730 $6,806
======= ==== ======
Other real estate owned is carried at the lower of cost or estimated fair value
less anticipated costs of disposition; OREO primarily represents assets acquired
in settlement or foreclosure of loans. At June 30, 1997, the largest commercial
OREO asset, a residential sub-division located in Westchester County New York,
amounted to $2.0 million. As of June 30, 1997 all remaining commercial OREO
properties were located in New York. While management uses available information
to estimate fair value, further reductions in net carrying value may be
necessary based on changes in economic conditions. The amount of OREO, which is
mainly attributable to deterioration in prior periods in the related real estate
markets, produces a corresponding reduction in interest-earning assets and net
interest income. The assets held as OREO are expected to continue to negatively
affect the earnings of the Company until the properties are sold or rented and
the resulting proceeds are invested in interest-earning assets or are used to
reduce interest-bearing liabilities. Sales of such properties also may result
in the recognition of additional losses.
In addition, the OTS, as an integral part of its examination process,
periodically reviews the Bank's allowance for loan losses and the net carrying
value of OREO. The OTS completed its most recent examination of the Bank in
December 1996.
Deposits were $599.9 million at June 30, 1997, an increase of $24.6 million, or
4.3%, from year-end 1996. All deposit types posted increases during the six
months ended June 30, 1997. There were no brokered deposits at either June 30,
1997 or December 31, 1996. The Bank opened three new supermarket branches during
the six months ended June 30, 1997, and a fourth supermarket branch in July
1997. The Bank now has nine supermarket branches and six traditional branches.
Total borrowings decreased by $4.8 million, or 2.4%, from year-end 1996 to
$193.9 million at June 30, 1997. Deposit growth was used to pay down short-term
borrowings.
11
Stockholders' equity at June 30, 1997 was $73.6 million, an increase of $1.9
million or 2.7% from December 31, 1996. This increase resulted from net income
of $2.3 million for the six months ended June 30, 1997 and higher unrealized
gains on "available for sale" investment securities, reduced by cash dividends
of $0.6 million. Quarterly cash dividends of $0.025 per share were paid in March
and June of 1997. On July 29, 1997, the Company declared a quarterly cash
dividend of $0.025 per share to be paid on September 4, 1997 to stockholders of
record on August 15, 1997.
The following table summarizes the calculation of the Company's stockholders'
equity (or "book value") per share at June 30, 1997 and December 31, 1996:
June 30, 1997 December 31, 1996
------------- -----------------
Total stockholders' equity $73,631,000 $71,668,000
=========== ===========
Total shares issued 12,699,725 12,696,825
Less:
Treasury shares 105,000 105,000
----------- -----------
Net shares outstanding 12,594,725 12,591,825
=========== ===========
Book value per share $5.85 $5.69
============ ============
The Company regularly monitors its interest rate risk position on a duration,
gap and simulation basis. As a result of the overall management of the Company's
loan and investment portfolios, deposits and other borrowings, the Company's one
year effective gap was (3.6)% of total assets at June 30, 1997, and (3.5)% of
total assets at December 31, 1996, as summarized in the following table (in
millions):
June 30, December 31,
1997 1996
------- ------------
Assets repricing or maturing in
less than one year $395.5 $413.3
Liabilities repricing or maturing in
less than one year 613.1 651.7
----------- -----------
(217.6) (238.4)
One year gap adjustments
o Impact of core deposits 101.1 93.6
o Interest rate hedge agreements 85.0 115.0
---------- -----------
One year effective gap $(31.5) $(29.8)
=========== ===========
The one year effective gap is discussed further in the section "Results of
Operations" contained herein.
12
LIQUIDITY:
Liquidity is defined as the ability to generate sufficient cash flow to meet all
present and future funding commitments, scheduled debt repayments, operating
expenses, deposit withdrawals, and to satisfy regulatory requirements described
below.
The Bank has the facility to borrow funds from several sources. The Bank is a
member of the Federal Home Loan Bank of New York ("FHLBNY") and, at June 30,
1997, the Bank has a $84.7 million ($54.2 million unused) overnight line of
credit available with the FHLBNY.
Management continually reviews expected cash inflows and outflows in order to
ensure its ability to meet its overall funding requirements. The Bank relies on
operating cash flows to meet its daily requirements, and on borrowings to meet
additional significant requirements.
Cash flows are classified according to their source - operating activities,
investing activities and financing activities. Further details concerning cash
flows are provided in the "Consolidated Statements of Cash Flows."
In 1984, the Bank sold tax-exempt municipal investment securities subject to a
14 day put option, under certain circumstances, to a unit investment trust. The
transaction was accounted for as a borrowing due to the recourse nature of the
put option and the municipal securities are included in "mortgage-backed
securities". The underlying collateral to the municipal security is a first
mortgage secured by a commercial property. The Bank believes that this
underlying mortgage may prepay faster than originally anticipated. Such
prepayment would cause the dissolution of the put option as well as the
elimination of the Bank's investment and borrowing. Such prepayment could result
in a loss to the Bank. The loss, had such prepayment occurred at June 30, 1997,
would have been approximately $215 thousand.
Under OTS regulations, the Bank is required to maintain a minimum "regulatory
liquidity" ratio. This ratio, defined as the ratio of the average daily balance
of liquid assets to the average daily balance of net withdrawable accounts plus
short term borrowings, is currently set at 5.0%, but may be changed from time to
time. The Bank's policy is to maintain a liquidity ratio in excess of the
regulatory minimum. The Bank complied with this requirement throughout the
periods discussed herein. The OTS recently proposed to lower its regulatory
liquidity requirements, this proposal is not expected to have a material effect
on the Bank's liquidity.
At June 30, 1997, the Bank had commitments to originate $19.8 million of
one-to-four family residential mortgage loans and commitments under standby
letters of credit and unused lines of credit of approximately $2.4 million and
$13.4 million, respectively. These commitments can be funded, as required, from
the sources outlined above.
13
CAPITAL RESOURCES:
OTS regulations require the Bank to meet certain minimum regulatory capital
requirements. The current requirements, and the Bank's actual levels as of June
30, 1997, are shown below (dollars in thousands):
Excess
Minimum Bank's ------------
Capital Standard Capital Requirements Capital Position % $
- ------------------ -------------------- ---------------- -----------------
Tangible 1.5% $12,996 6.9% $59,711 5.4% $46,715
Core 3.0% 25,991 6.9% 59,711 3.9% 33,720
Risk 8.0% 44,643 11.9% 66,687 3.9% 22,044
In September 1992, the federal banking agencies (including the OTS) adopted
substantially similar regulations which are intended to implement the system of
prompt corrective action established by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). These regulations became
effective December 19, 1992. Under the regulations, a savings association shall
be deemed to be "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized". At each successive downward level of capital, institutions
are subject to more restrictions and regulators are given less flexibility in
deciding how to deal with the bank or thrift.
At June 30, 1997 the Bank had regulatory capital substantially in excess of
requirements. The Bank is deemed to be "well capitalized" by its regulators.
On August 21, 1995, the OTS released Thrift Bulletin 67 which established (i) an
appeals process to handle "requests for adjustments" to the interest rate risk
component and (ii) a process by which "well-capitalized" institutions may obtain
authorization to use their own interest rate risk model to determine their
interest rate risk component. The Director of the OTS indicated, concurrent with
the release of Thrift Bulletin 67, that the OTS will continue to delay the
implementation of the capital deduction for interest rate risk pending the
testing of the appeals process set forth in Thrift Bulletin 67. Management of
the Bank believes that the OTS' adoption of an interest rate risk component to
the risk-based capital requirement will not adversely affect the Bank.
FDIC INSURANCE PREMIUMS:
The Federal Deposit Insurance Act ("FDIA"), as amended by the FDICIA, required
the FDIC to establish a risk-based assessment system, to be effective no later
than January 1, 1994. The risk-based assessment system established by the FDIC
created nine assessment risk classifications. As of June 30, 1997, these
assessment risk classifications carry premium rates ranging from 0.0% for well
capitalized, healthy institutions to 0.27% for undercapitalized institutions
with substantial supervisory concerns. The insurance premium applicable to the
Bank during the first semi-annual period of 1997 was 0.0% of insured deposits.
The deposits of the Bank are currently insured by the Savings Association
Insurance Fund ("SAIF"). SAIF is administered by the FDIC. From 1997 through
1999, SAIF members must pay 6.4 basis points on insured deposits to fund the
Financing Corporation (FICO) while Bank Insurance Fund ("BIF") member
institutions will pay approximately 1.3 basis points.
14
NON-PERFORMING AND CLASSIFIED ASSETS:
Non-performing assets were $19.4 million at June 30, 1997 compared to $26.2
million at December 31, 1996 and $23.0 million at June 30, 1996. The decline
from year-end 1996 was due to the payoff on a non-accrual $3.1 million
commercial real estate loan and the sale of a $3.0 million commercial OREO
property. The payoff on the non-accrual loan resulted in a recovery of $0.5
million which was credited to the allowance for loan losses. The sale of the
commercial OREO property resulted in a $0.2 million gain on sale which was
credited to net costs of operating OREO.
The following table presents information regarding the Company's non-performing
assets, performing troubled debt restructurings, and accruing loans 90 days or
more past contractual maturity at June 30, 1997 and December 31, 1996:
At 6/30/97 At 12/31/96
---------- -----------
(Dollars in thousands)
Non-accrual loans:
1-4 family residential real estate loans $5,724 $5,453
Commercial real estate and multi-family residential loans 6,301 9,447
Commercial business 421 436
Home equity loans 125 ---
Consumer loans 90 days or more past due as to interest and accruing 12 87
------ ------
Total non-performing loans 12,583 15,423
Other real estate owned 6,806 10,726
------- -------
Total non-performing assets $19,389 $26,149
======= =======
Allowance for loan losses $9,519 $ 8,652
====== =======
Ratio of:
Non-performing loans to total loans 1.95% 2.43%
====== ======
Non-performing assets to total assets 2.20% 3.05%
====== ======
Allowance for loan losses to total non-performing loans 75.65% 56.10%
====== ======
Allowance for loan losses to total portfolio loans 1.45% 1.35%
====== ======
Total non-performing assets (details above) $19,389 $26,149
Accruing loans 90 days or more past contractual maturity (1) 4,138 7,016
Performing troubled debt restructurings ("TDRs") (2) 14,258 9,499
-------- -------
Total non-performing assets, accruing loans 90 days or
more past contractual maturity, and performing TDRs $37,785 $42,664
======= =======
Total non-performing loans and accruing loans 90 days or
more past contractual maturity $16,721 $22,439
======= =======
Ratio of total allowance for loan losses to total non-performing
loans and accruing loans 90 days or more past contractual maturity 56.93% 38.56%
====== ======
(1) Consists of loans past due as to principal repayment but which continue to
make interest payments in accordance with their terms and on which the Bank
continues to accrue interest.
(2) Includes seasoned restructured non-performing loans returned to a performing
status and/or restructured performing loans.
15
Classified assets, including unfunded commitments, as of June 30, 1997 and
December 31, 1996 are set forth in the following table. Non-performing assets
reported on the prior page are also "classified" assets and therefore, are also
included in the table below:
Classified Assets
-----------------------------------------
Total Total
Substandard Doubtful Loss 6/30/97 12/31/96
----------- -------- ---- ------- --------
(in thousands)
Commercial real estate and multi-family
residential loans $ 7,426 --- --- $ 7,426 $12,375
1-4 family residential loans 7,723 $ 65 --- 7,788 7,524
Other loans 554 7 --- 561 569
-------- ---- --- ------- --------
Total classified loans 15,703 72 --- 15,775 20,468
Other real estate owned 6,270 536 --- 6,806 10,726
-------- ---- --- ------- --------
Total classified assets $21,973 $608 --- $22,581 $31,194
======= ==== === ======= =======
RESULTS OF OPERATIONS
General
Net income for the second quarter of 1997 was $1.2 million, or $0.09 per share,
as compared with net income of $16 thousand or $0.00 per share for the second
quarter of 1996. For the six months ended June 30, 1997, net income was $2.3
million, or $ 0.18 per share, compared to net income of $0.8 million, or $0.6
per share, for the first six months of 1996. Prior year results for the second
quarter and first half of 1996 included a $894 thousand pre-tax loss related to
commercial real estate loans "held for bulk sale" and a $200 thousand pre-tax
charge for severance costs related to certain staff reductions.
The following table summarizes the net of tax results for 1997 and 1996:
Three months ended Six months ended
------------------ ----------------
6/30/97 6/30/96 6/30/97 6/30/96
------- ------- ------- -------
Net income $1,202 $ 16 $2,328 $ 802
Add back special items:
Loss on commercial loans
held for bulk sale --- 536 --- 536
Severance costs --- 120 --- 120
------ ------ ------ ------
Earnings before special items $1,202 $ 672 $2,328 $1,458
====== ====== ====== ======
The increase in earnings before special items from 1996 to 1997 reflects an
increase in net interest-earning assets, increased fee income and an increase in
deposits (which generally are lower costing than borrowings) as a percent of
total funding.
Net Interest Income
Net interest income for the quarter ended June 30, 1997 was $6.8 million, an
increase of $0.7 million over the $6.1 million reported in the second quarter of
1996. For the first six months of 1997 and 1996, net interest income was $13.6
million and $12.6 million, respectively. The Company's net interest margins were
as follows:
1997 1996
------ -----
Second Quarter 3.31% 3.09%
Six Months 3.30% 3.19%
16
The Company's earnings are largely dependent on net interest income. Net
interest income is affected by a number of variables including interest rate
spread (that is, the difference between the yields on average interest-earning
assets and the cost of average interest-bearing liabilities) and the relative
amounts of interest-earning assets and interest-bearing liabilities. Non-
performing assets have an adverse affect on net interest income. Net interest
income and net interest margins have increased due, among other things, to lower
levels of non-performing assets and improved yields on mortgage-backed
securities.
The table below sets forth information relating to average interest-earning
assets (including non-performing loans), average interest-bearing liabilities
and net interest income during the periods indicated.
For three months ended June 30,
---------------------------------------------------------------------------
1997 1996
--------------------------------- ----------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate (1)
------- -------- -------- ------- -------- --------
(dollars in thousands)
Interest-earning assets:
Residential real estate loans $397,144 $ 7,616 7.67% $356,391 $ 6,926 7.77%
Commercial real estate loans 213,068 5,171 9.63% 205,755 4,668 9.01%
Installment loans 33,585 734 8.77% 29,241 642 8.81%
Commercial business loans 7,337 161 8.80% 7,433 150 8.09%
Mortgage-backed securities 135,619 2,226 6.57% 154,186 2,282 5.92%
Other securities 34,538 568 6.58% 27,415 436 6.36%
Federal funds and other 324 5 6.19% 5,473 68 4.98%
---------- --------- -------- -------- ------- ------
Total interest-earning assets 821,615 16,481 8.01% 785,894 15,172 7.72%
--------- -------- -------- -------- ------ ------
Interest-bearing liabilities:
Total deposits 596,758 6,969 4.68% 544,481 6,216 4.58%
Total borrowings (2) 181,619 2,716 6.00% 201,865 2,884 5.65%
--------- -------- -------- -------- ------- ------
Total interest-bearing liabilities 778,377 9,685 4.99% 746,346 9,100 4.89%
--------- -------- -------- -------- ------- ------
Excess of interest-earning assets
over interest-bearing liabilities $43,238 $39,548
========= ========
Net interest income $6,796 $6,072
========= =======
Interest rate spread (3) 3.02% 2.83%
======== ======
Net interest margin (4) 3.31% 3.09%
======== ======
(1) As adjusted for loan fees treated as adjustments to loan yields.
(2) Other borrowings include FHLB Advances, draws under the FHLB overnight line
of credit, and securities sold under agreement to repurchase. The net cost
of certain interest rate hedge agreements is included as a cost of
borrowings. The net cost or (income) related to these interest rate hedge
agreements was $104 thousand and ($1) thousand for the three months ended
June 30, 1997 and 1996, respectively.
(3) Interest rate spread represents the difference between the yield on average
interest-earning assets and the cost of average interest-bearing
liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets, as annualized.
17
The table below sets forth information relating to the Company's average
interest-earning assets (including non-performing loans), average
interest-bearing liabilities and net interest income during the periods
indicated.
For the six months ended June 30,
--------------------------------------------------------------------------------
1997 1996
--------------------------------- ----------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate (1)
------- -------- -------- ------- -------- -------
(dollars in thousands)
Interest-earning assets:
Residential real estate loans $397,046 $15,185 7.65% $344,787 $13,492 7.83%
Commercial real estate loans 212,669 10,173 9.51% 217,740 10,162 9.30%
Installment loans 32,796 1,419 8.73% 29,118 1,307 9.06%
Commercial business loans 7,253 310 8.62% 8,937 427 9.65%
Mortgage-backed securities 138,157 4,559 6.60% 156,242 4,703 6.02%
Other securities 33,452 1,090 6.52% 28,556 904 6.37%
Federal funds and other 1,547 41 5.34% 3,896 101 5.22%
-------- ------ -------- ------- ------- -----
Total interest-earning assets 822,920 32,777 7.97% 789,276 31,096 7.88%
--------- --------- -------- ------- -------- --------
Interest-bearing liabilities:
Total deposits 589,813 13,604 4.65% 542,088 12,553 4.67%
Total borrowings (2) 190,669 5,580 5.90% 207,783 5,959 5.73%
------- --------- -------- ------- ------- ------
Total interest-bearing liabilities 780,482 19,184 4.96% 749,871 18,512 4.98%
------- --------- -------- ------- ------- ------
Excess of interest-earning assets
over interest-bearing liabilities $42,438 $39,405
========= =======
Net interest income $13,593 $12,584
========= =======
Interest rate spread (3) 3.01% 2.90%
========= =====
Net interest margin (4) 3.30% 3.19%
======== =====
(1) As adjusted for loan fees treated as adjustments to loan yields.
(2) Other borrowings include FHLB Advances, draws under the FHLB overnight line
of credit, and securities sold under agreement to repurchase. The net cost
of certain interest rate hedge agreements is included as a cost of
borrowings. The net cost related to these interest rate hedge agreements was
$214 thousand and $38 thousand for the six months ended June 30, 1997 and
1996, respectively.
(3) Interest rate spread represents the difference between the yield on average
interest-earning assets and the cost of average interest-bearing
liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
18
Another factor affecting net interest income is interest rate sensitivity, which
can be measured as the excess or deficiency of assets that mature or reprice in
a particular period. Generally, where rate-sensitive liabilities exceed
rate-sensitive assets (a negative gap), net interest margin will be negatively
affected during periods of increasing interest rates and will be positively
affected during periods of decreasing interest rates. Where rate-sensitive
assets exceed rate-sensitive liabilities (a positive gap), net interest margin
is positively affected during periods of increasing interest rates and
negatively affected during periods of decreasing interest rates.
At June 30, 1997, the Company had a negative adjusted one-year gap of $31.5
million compared with a negative adjusted one-year gap of $29.8 million at
December 31, 1996. The decline was due primarily to more fixed-rate commercial
and residential real estate loans in portfolio. Interest rate swap, cap and
collar agreements are used by the Company in an effort to lengthen the effective
maturity of certain of the Bank's liabilities and are shown as an adjustment to
interest-bearing liabilities. Core deposits are comprised of checking, passbook,
NOW, club, and escrow accounts which do not have a stated maturity nor reprice.
For interest-sensitivity measurement purposes, core deposits are assumed to be
withdrawn at a rates ranging from 15% to 20% per year.
The following table summarizes interest-rate sensitive assets and liabilities at
June 30, 1997 according to the time periods in which they are expected to
reprice and the resulting gap for each time period (excluding non-performing and
cash basis assets):
Within One to Five Over Five
($ in millions) One Year Years Years
-------- ----- -----
Total interest-earning assets (1) $395.5 $254.5 $179.7
Total interest-bearing liabilities (2) 512.0 228.7 58.1
----- ----- -----
(116.5) 25.8 121.6
One year gap adjustments:
Interest rate swap agreement (3) 20.0 (20.0) ---
Interest rate collar agreements (4) 65.0 (65.0) ---
----- ----- -----
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $(31.5) $(59.2) $121.6
====== ====== ======
Excess (deficiency) as a percent of total assets (3.6%) (6.7%) 13.8%
Cumulative excess (deficiency) as a percent of total assets (3.6%) (10.3%) 3.5%
(1) Fixed rate assets are scheduled by contractual maturity and adjustable rate
assets are scheduled by the next repricing date. Normal amortization and
prepayment estimates have been applied to both fixed rate and adjustable
rate assets, where appropriate.
(2) For purposes of measuring sensitivity, interest-bearing liabilities are
reduced by the amount of core deposits.
(3) The Bank entered into a $20.0 million notional amount interest rate swap
agreement in March 1995 which will expire in March 2000. The rate swap
agreement obligates the contract "seller" to pay the Bank a floating rate
based on the three month LIBOR and obligates the Bank to pay the contract
seller a fixed rate of 7.335%.
(4) The Bank entered into a total of $115.0 million notional amount interest
rate collar agreements which will all expire by the year 2000; as of June
30, 1997, $50.0 million will expire within one year. These rate collar
agreements have caps and floors indexed to 3 month LIBOR; as of June 30,
1997, 3 month LIBOR was 5.72% and within the collar range.
19
Total interest and dividend income increased by $1.3 million, or 8.6%, and $1.7
million, or 5.4%, respectively in the three and six month periods ended June 30,
1997 as compared to the comparable periods in 1996. The increase for the three
and six month periods were largely due to higher average levels of
interest-earning assets (led by residential mortgage originations), and by
higher yields on commercial real estate loans and mortgage-backed securities.
Total interest expense on deposits and borrowings for the three and six month
periods ended June 30, 1997 increased by $0.6 million and $0.7 million
respectively over the comparable 1996 periods. The increases resulted from
higher average funding levels and, for three months ended June 30, 1997,
slightly higher rates. For the six months ended June 30, 1997, average retail
deposits were 75.6% of total interest-bearing liabilities as compared with 72.3%
for the prior year period.
Non-Interest Income
Total non-interest income for the three and six month periods ended June 30,
1997 was $0.8 million and $1.6 million respectively, compared with ($0.3)
million and $0.2 million, respectively, during the comparable 1996 periods.
Total non-interest income for the three and six month periods ended June 30,
1996 included a $0.9 million loss on commercial loans held for bulk sale.
Excluding this special item from 1996, non-interest income for 1997 reflected
increases over the comparable period of last year of $0.2 million and $0.5
million for the three and six month periods ended June 30, 1997, respectively.
These increases of 42% and 50%, respectively, were due primarily to increased
deposit levels and the number of branches, continued increases in the amount of
fee income generated by the Bank's "High Performance Checking" account products,
as well as fees earned on sales of alternative investment products.
Non-Interest Expense
Total non-interest expenses for the three and six month periods ended June 30,
1997 totalled $5.3 million and $10.6 million, respectively, compared to $5.6
million and $11.1 million during the comparable 1996 periods. The incremental
operating expenses related to the six new in-store branches opened since June
30, 1996 were largely offset by lower deposit insurance premiums. 1996 operating
expenses also included a non-recurring $0.2 million charge for severance costs
related to June 1996 staff reductions.
Income Tax Expense
The combined effective income tax rate was approximately 40% for all periods
reported herein.
20
PART II OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is involved in routine legal proceedings occurring in the ordinary
course of business. In the opinion of management, final disposition of these
lawsuits will not have a material adverse effect on the financial condition or
results of operation of the Company.
ITEM 2 - CHANGE IN SECURITIES - None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - Not Applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5 - OTHER INFORMATION - None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
2.1 Agreement and Plan of Reorganization, dated January Incorporated by reference from Exhibit
17, by and between Poughkeepsie Savings Bank, FSB, 2 to the Registration Statement on Form
Poughkeepsie Interim Federal Savings Bank and S-4 filed February 27, 1997 with the
Poughkeepsie Financial Corp. Securities and Exchange Commission.
3.1 Certificate of Incorporation Incorporated by reference from Exhibit
3(a) to the Registration Statement on
Form S-4.
3.2 Bylaws Incorporated by reference from Exhibit
3(b) to the Registration Statement on
Form S-4.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
POUGHKEEPSIE FINANCIAL CORP.
-------------------------------
(Registrant)
Date: August 12, 1997 /s/ Joseph B. Tockarshewsky
--------------- ---------------------------
Joseph B. Tockarshewsky
Chairman of the Board, President
and Chief Executive Officer
Date: August 12, 1997 /s/ Robert J. Hughes
--------------- --------------------
Robert J. Hughes
Executive Vice President and
Chief Financial Officer
22