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 SEPTEMBER 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
NOVEMBER 6, 1997 WAS 12,596,425.
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 September 30, 1997, Unaudited, and at December 31, 1996. 3
Consolidated Statements of Operations - Unaudited,
for the three and nine month periods ended September 30,
1997 and 1996. 4
Consolidated Statements of Cash Flows - Unaudited,
for the nine month periods ended September 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
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 20
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 21
Item 2 - Change in Securities - NONE
Item 3 - Defaults Upon Senior Securities - N/A
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 21
SIGNATURES 22
2
POUGHKEEPSIE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
(Unaudited)
September 30, December 31,
------------- ------------
1997 1996
---- ----
ASSETS:
Cash and due from banks $ 7,956 $ 6,863
Securities available for sale:
Mortgage-backed securities 130,120 113,575
Other securities 24,236 22,215
Securities held to maturity:
Mortgage-backed securities 26,832 29,957
-------- --------
Total securities 181,188 165,747
-------- --------
Loans, net
Residential real estate mortgage loans 390,699 393,513
Commercial real estate mortgage loans 219,262 210,982
Commercial business loans 8,446 7,194
Installment loans 36,948 31,194
-------- --------
655,355 642,883
Allowance for loan losses (8,834) (8,652)
Residential mortgage loans held for sale 1,606 456
-------- --------
Total loans, net 648,127 634,687
-------- --------
Federal Home Loan Bank stock 10,071 9,760
Accrued interest and dividends receivable 5,938 5,278
Bank premises and equipment 7,894 6,793
Other real estate owned 5,572 10,726
Net deferred tax assets 14,655 16,812
Other assets 2,580 2,024
-------- --------
Total assets $883,981 $858,690
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Savings accounts $ 98,480 $ 93,371
Certificates of deposit 325,227 314,059
Money market deposits 139,116 126,233
Demand deposits 48,908 41,583
-------- --------
Total deposits 611,731 575,246
-------- --------
Advances from Federal Home Loan Bank 64,200 84,800
Securities sold under repurchase agreements 120,739 113,894
Accrued interest payable 1,222 1,618
Mortgagors' escrow deposits 3,290 4,134
Other liabilities 8,363 7,330
-------- --------
Total liabilities 809,545 787,022
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock -- --
Common stock 127 127
Additional paid-in capital 66,763 66,736
Retained earnings 9,264 6,827
Unrealized gains (losses) on securities 219 (85)
Treasury stock, at cost (1,937) (1,937)
-------- --------
Total stockholders' equity 74,436 71,668
-------- --------
Total liabilities and stockholders' equity $883,981 $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)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ----------------
1997 1996 1997 1996
------ ------ ------ ------
Interest and dividend income:
Real estate mortgage loans $12,951 $12,093 $38,309 $35,747
Other loans 982 806 2,711 2,540
Mortgage-backed securities 2,460 2,481 7,019 7,184
Other securities 571 532 1,661 1,436
Federal funds and money market investments 4 26 45 127
------- ------- ------- -------
Total interest and dividend income 16,968 15,938 49,745 47,034
------- ------- ------- -------
Interest expense:
Deposits 7,270 6,559 20,873 19,112
Borrowings 2,699 3,035 8,279 8,994
------- ------- ------- -------
Total interest expense 9,969 9,594 29,152 28,106
------- ------- ------- -------
Net interest income 6,999 6,344 20,593 18,928
Provision for loan losses 350 250 950 550
------- ------- ------- -------
Net interest income after provision for loan losses 6,649 6,094 19,643 18,378
------- ------- ------- -------
Non-interest income:
Retail banking fees and other income 1,111 572 2,553 1,563
Residential mortgage banking income 62 25 200 85
Loss on commercial loans held for bulk sale -- -- -- (894)
------- ------- ------- -------
Total non-interest income 1,173 597 2,753 754
------- ------- ------- -------
Non-interest expenses:
Salaries and wages 2,258 1,998 6,707 6,211
Employee benefits 625 565 1,912 1,917
Legal 181 87 388 412
Occupancy and equipment 788 614 2,182 1,845
Deposit insurance 137 358 411 1,142
SAIF special assessment -- 2,624 -- 2,624
Net cost of operating other real estate owned 615 237 1,017 904
Advertising and promotion 257 232 809 784
Data processing 199 151 550 496
Other 983 807 2,713 2,437
------- ------- ------- -------
Total non-interest expenses 6,043 7,673 16,689 18,772
------- ------- ------- -------
Income (loss) before income taxes 1,779 (982) 5,707 360
Income tax expense (benefit) 725 (394) 2,325 146
------- ------- ------- -------
Net income (loss) $1,054 ($ 588) $3,382 $ 214
======= ======= ======= =======
Net income (loss) per common and common equivalent
share (Note 3) $ 0.08 ($0.05) $ 0.26 $ 0.02
======= ======= ======= =======
Dividends per share $0.025 $0.025 $0.075 $0.075
======= ======= ======= =======
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)
Nine Months Ended
September 30,
------------------------------
1997 1996
Cash flows from operating activities:
Net income $ 3,382 $ 214
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 950 550
Writedowns on other real estate owned 718 135
Writedowns on loans held for bulk sale -- 894
Depreciation 700 546
Amortization of premiums and discounts on mortgage-backed
securities, other securities and loans 828 552
Gains on sales of assets, net (88) (43)
Deferred tax expense 2,325 146
Increase in interest and dividend receivable (660) (39)
Increase in other assets (857) (466)
Decrease in interest payable (396) (635)
Increase in other liabilities 1,033 3,036
Increase in residential loans held for sale (1,150) (77)
-------- --------
Net cash provided by operating activities 6,785 4,813
-------- --------
Cash flows from investing activities:
Purchase of mortgage-backed securities - available for sale (34,007) (19,841)
Purchase of other securities - available for sale (7,001) (19,459)
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 17,322 28,606
Principal repayments on mortgage-backed securities - held to maturity 3,134 2,818
Proceeds from maturities of other securities - available for sale 5,051 129
FHLB Stock purchases (310) (843)
Loan originations, net of repayments (41,096) (92,946)
Proceeds from sales of commercial loans held for bulk-sale -- 33,100
Proceeds from sales of loans in portfolio 29,142 9,106
Purchases of fixed assets (1,801) (931)
Proceeds from sale of other real estate owned 2,906 2,063
-------- --------
Net cash used in investing activities (26,660) (39,839)
-------- --------
Cash flows from financing activities:
Net increase in demand, money market, and savings accounts 25,317 22,479
Net increase in time deposits 11,168 8,540
Net increase in repurchase agreements 6,845 83,855
Net decrease in short-term FHLB borrowings (20,600) (80,499)
Decrease in escrow deposits (844) (576)
Stock issued 27 33
Dividends paid (945) (941)
-------- --------
Net cash provided by financing activities 20,968 32,891
-------- --------
Net increase (decrease) in cash and cash equivalents 1,093 (2,135)
Cash and cash equivalents, beginning of period 6,863 9,960
-------- --------
Cash and cash equivalents, end of period $ 7,956 $ 7,825
======== ========
See Notes to Consolidated Financial Statements
5
POUGHKEEPSIE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - FORMATION OF HOLDING COMPANY
Poughkeepsie Financial Corp., a Delaware corporation, is a thrift holding
company whose sole subsidiary is Bank of the Hudson (the "Bank"). On May 30,
1997, the Bank completed a reorganization and formation of a thrift holding
company - Poughkeepsie Financial Corp. 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.
NOTE 2 - PRESENTATION OF INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of Poughkeepsie
Financial Corp. (together with its subsidiary, the "Company") include all
adjustments which management believes necessary for a fair presentation of the
Company's financial condition at September 30, 1997, the results of its
operations for the three and nine month periods ended September 30, 1997 and
1996, and the statements of cash flows for the nine 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 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.
NOTE 3 - EARNINGS PER SHARE
Earnings per share were based on 13,263,963 and 13,154,340 weighted average
shares outstanding (including the dilutive effect of stock options) during the
three and nine months ended September 30, 1997, compared to 12,890,994 and
12,907,096 during the comparable periods of 1996. The weighted average number of
common shares outstanding excludes 105,000 shares of treasury stock for the nine
months ended September 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 September 30, 1997.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ---------------
1997 1996 1997 1996
---- ---- ---- ----
Basic $.08 $(.05) $.27 $.02
Diluted .08 (.05) .25 .02
NOTE 4 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For purposes of reporting cash flows, cash and cash equivalents includes cash,
amounts due from banks, federal funds sold and money market investments.
Supplemental cash flow disclosures are as follows:
Nine months ended September 30,
-------------------------------
1997 1996
---- ----
($ in thousands)
Cash paid during period for:
Interest credited on deposits $20,810 $19,033
Interest paid on borrowings 8,739 9,997
Income/franchise taxes paid 408 198
Non-cash investing and financing activities:
(Decrease) increase in net unrealized losses
on available for sale securities, net of
deferred tax effect $ (304) $ 101
Investment securities transferred from
available-for-sale to held-to-maturity
category -- 35,300
Loans transferred to OREO 750 798
Loans to facilitate the sale of OREO 2,585 4,469
Commercial loans held for bulk sale
returned to portfolio -- 26,700
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 is 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 - AGREEMENT AND PLAN OF MERGER
On October 22, 1997, Poughkeepsie Financial Corp. ("PFC") and HUBCO, Inc.
("HUBCO"), a New Jersey corporation and registered bank holding company,
announced the signing of a definitive merger agreement. Under terms of the
agreement each share of PFC Common Stock will be exchanged for .30 shares of
HUBCO Common Stock, as long as the median closing price for HUBCO Common Stock
during a pre-closing period is at or above $33.33. If the median HUBCO price
during the pre-closing period is below $33.33 but above $31.25, each share of
PFC Common Stock would be exchanged for shares of HUBCO Common Stock with a
value of $10.00. If HUBCO's median pre-closing price is $31.25 or below, a
maximum exchange ratio of .32 would apply. The agreement also provides that PFC
will be able to increase its quarterly cash dividend to an amount substantially
equivalent to HUBCO's cash dividend as adjusted for the exchange ratio. In
connection with the Agreement, PFC issued an option, exercisable under certain
circumstances, to HUBCO to purchase up to 2,000,000 shares of authorized and
unissued PFC Common Stock at a price of $7.875 per share. The Merger Agreement
contains customary anti-dilution measures; however, no anti-dilution adjustments
will be made with respect to HUBCO's 3% stock dividend to be paid on December 1,
1997 to stockholders of record on November 13, 1997.
During the third quarter of 1997, PFC expensed $212,000 of costs ($127,000 net
of tax) related to the definitive merger agreement. The merger, which is
expected to close in the first quarter of 1998, is expected to be treated as a
tax-free exchange of HUBCO Common Stock for Poughkeepsie Financial Corp. Common
Stock and be accounted for as a pooling of interests.
8
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL:
On October 22, 1997, Poughkeepsie Financial Corp. ("PFC") and HUBCO, Inc.
("HUBCO"), a New Jersey corporation and registered bank holding company,
announced the signing of a definitive merger agreement which sets forth the
terms and conditions under which PFC will merge with and into HUBCO. PFC is the
holding company for Bank of the Hudson (formerly known as Poughkeepsie Savings
Bank, FSB) (the "Bank").The merger is expected to close in the first quarter of
1998. See Note 6 to Consolidated Financial Statements (Unaudited).
On May 30, 1997 PFC became the parent company of the Bank via a simple
reorganization. The Holding Company structure and reorganization was previously
approved by the shareholders of the Bank. As of September 30, 1997, the
Company's sole subsidiary was 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. On October 14,
1997, the Bank changed its name from Poughkeepsie Savings Bank, FSB to Bank of
the Hudson.
In the following discussion, references to the "Company" relate to the
Poughkeepsie Financial Corp. together with its subsidiary, Bank of the Hudson.
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. A sixteenth retail branch is
expected to open in November 1997 in Fishkill, New York.
The Bank's core, tangible and risk-based capital ratios at September 30, 1997
were 7.06%, 7.06% and 12.10%, respectively, all of which substantially exceed
regulatory and statutory requirements for the Bank to be designated as "well
capitalized."
The earnings of the Company are largely dependent upon net interest income from
its banking operations and 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 September 30, 1997, the consolidated assets of the Company totaled $884.0
million, an increase of $25.3 million from December 31, 1996.
The 1-4 family residential real estate mortgage loan portfolio of $390.7 million
at Seqtember 30, 1997 decreased by $2.8 million from December 31, 1996. During
the nine month period ended September 30, 1997, the Company originated $56.4
million of residential mortgage loans compared with $104.9 million originated
during the same period of 1996. In the first nine months of 1997, $29.1 million
of residential loans were sold to secondary market investors; servicing rights
were retained on a majority of loans sold. During the quarter ended September
30, 1997, the Company moved $2.5 million of residential real estate loans into
the held for sale category. These loans were generally non-performing and were
transferred to the held for sale category net of $1.0 million of charge-offs to
reflect lower of cost or market value. The sale of these loans was completed on
October 31, 1997.
The commercial real estate mortgage loan portfolio of $219.3 million at
September 30, 1997 increased by $8.3 million or 3.9% 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 nine months ended
September 30, 1997, commercial real estate loan originations/advances totaled
$67.6 million compared with $52.8 million for the prior year period.
During the nine month period ended September 30, 1997, the allowance for loan
losses increased by $0.2 million as recoveries of $0.8 million and provisions of
$1.0 million were largely offset by charge-offs of $1.6 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 75.81% of
non-performing loans and 1.34% of total portfolio loans at September 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 $157.0 million at September 30, 1997 due to the purchase of agency securities
during the second and third quarters of 1997.
10
Other real estate owned ("OREO") aggregated $5.6 million at September 30, 1997.
The following table summarizes the gross activity during the first nine months
of 1997:
Commercial Residential
OREO OREO Total
----------- ----------- -------
($ in thousands)
Balance at 12/31/96 $ 9,733 $ 993 $10,726
Real estate acquired in
settlement of loans -- 750 750
Capital improvements 305 -- 305
Sales/dispositions (1,626) (1,280) (2,906)
Transfer to performing loans (2,585) -- (2,585)
Net excess cash flow -- -- --
Write-downs (664) (54) (718)
------- ------ ------
Balance at 9/30/97 $ 5,163 $ 409 $5,572
======= ====== ======
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 September 30, 1997, the Bank's largest
commercial OREO asset, a residential sub-division located in Westchester County,
New York, amounted to $1.7 million. As of September 30, 1997 all 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 $611.7 million at September 30, 1997, an increase of $36.5
million, or 6.3%, from year-end 1996. All deposit types posted increases. There
were no brokered deposits at either September 30, 1997 or December 31, 1996 as
the Bank has not used this as a source of funding. The Bank opened four new
supermarket branches during the nine months ended September 30, 1997; the Bank
now has nine supermarket branches and six traditional branches. A seventh
traditional branch is scheduled to open in Fishkill, New York in November 1997.
Total borrowings decreased by $13.8 million, or 6.9%, from year-end 1996 to
$184.9 million at September 30, 1997. Deposit growth was used to fund asset
growth and pay down short-term borrowings.
11
Stockholders' equity at September 30, 1997 was $74.4 million, an increase of
$2.8 million or 3.8% from December 31, 1996. This increase resulted from net
income of $3.4 million for the nine months ended September 30, 1997 and higher
unrealized gains on "available for sale" investment securities, reduced by cash
dividends of $0.9 million. Quarterly cash dividends of $0.025 per share were
paid in March, June and September of 1997. On October 28, 1997, the Company
declared an adjusted quarterly cash dividend of $0.05 per share to be paid on
December 4, 1997 to stockholders of record on November 14, 1997.
The following table summarizes the calculation of the Company's book value per
share at September 30, 1997 and December 31, 1996:
September 30, 1997 December 31, 1996
------------------ -----------------
Total stockholders' equity $74,436,000 $71,668,000
=========== ===========
Total shares issued 12,700,325 12,696,825
Less:
Treasury shares 105,000 105,000
----------- -----------
Net shares outstanding 12,595,325 12,591,825
=========== ===========
Book value per share $5.91 $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 (4.0)% of total assets at September 30, 1997, and (3.5)%
of total assets at December 31, 1996, as summarized in the following table (in
millions):
September 30, 1997 December 31, 1996
------------------ -----------------
Assets repricing or maturing in
less than one year $397.7 $413.3
Liabilities repricing or maturing in
less than one year 619.9 651.7
---------- ----------
(222.2) (238.4)
One year gap adjustments
Impact of core deposits 102.0 93.6
Interest rate hedge agreements 85.0 115.0
---------- ----------
One year effective gap $(35.2) $(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 ability to borrow funds from several sources. The Bank is a
member of the Federal Home Loan Bank of New York ("FHLBNY") and, at September
30, 1997, the Bank has a $84.8 million ($55.5 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 September 30,
1997, would have been approximately $210 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
period.
At September 30, 1997, the Bank had commitments to originate $37.4 million of
one-to-four family residential mortgage loans and commitments under standby
letters of credit and unused lines of credit of approximately $2.7 million and
$14.3 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
September 30, 1997, are shown below (dollars in thousands):
Excess
Minimum Bank's --------------
Capital Standard Capital Requirements Capital Position % $
- - ------------------ -------------------- ---------------- ------- -----
Tangible 1.5% $13,063 7.1% $61,457 5.6% $48,394
Core 3.0% 26,126 7.1% 61,457 4.1% 35,331
Risk 8.0% 45,298 12.1% 68,526 4.1% 23,228
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 September 30, 1997 the Bank had regulatory capital substantially in excess of
requirements for the Bank to be designated as "well capitalized".
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 September 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 1997 semi-annual assessment periods 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 $17.2 million at September 30, 1997 compared to $26.1
million at December 31, 1996 and $23.4 million at September 30, 1996. The
decline from year-end 1996 was due to the payoff on a non-accrual $3.1 million
commercial real estate loan, the sale of a $3.0 million commercial OREO
property, and charge-offs/write-downs totaling $1.4 million. The payoff on the
non-accrual loan resulted in a recovery of $0.5 million which was added to the
allowance for loan losses. The sale of the commercial OREO property resulted in
a $0.2 million gain on sale which reduced the net costs of operating OREO.
The following table presents information regarding the Company's non-performing
assets, performing troubled debt restructurings, performing investment in real
estate, and accruing loans 90 days or more past contractual maturity at
September 30, 1997 and December 31, 1996:
At 9/30/97 At 12/31/96
---------- -----------
(Dollars in thousands)
Non-accrual loans:
1-4 family residential real estate loans $ 4,554 $ 5,453
Commercial real estate and multi-family residential loans 6,557 9,447
Commercial business 414 436
Home equity loans 125 --
Consumer loans 90 days or more past due as to interest and accruing 2 87
-------- --------
Total non-performing loans 11,652 15,423
Other real estate owned 5,572 10,726
-------- --------
Total non-performing assets $ 17,224 $ 26,149
======== ========
Allowance for loan losses $ 8,834 $ 8,652
======== ========
Ratio of:
Non-performing loans to total loans 1.80% 2.43%
======== ========
Non-performing assets to total assets 1.95% 3.05%
======== ========
Allowance for loan losses to total non-performing loans 75.81% 56.10%
======== ========
Allowance for loan losses to total portfolio loans 1.34% 1.35%
======== ========
Total non-performing assets (details above) $ 17,224 $ 26,149
Accruing loans 90 days or more past contractual maturity (1) 5,410 7,016
Performing troubled debt restructurings ("TDRs") (2) 14,393 9,499
-------- ---------
Total non-performing assets, accruing loans 90 days or
more past contractual maturity, and performing TDRs $ 37,027 $ 42,664
======== =========
Total non-performing loans and accruing loans 90 days or
more past contractual maturity $ 17,062 $ 22,439
======== =========
Ratio of total allowance for loan losses to total non-performing
loans and accruing loans 90 days or more past contractual maturity 51.78% 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 September 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 9/30/97 12/31/96
----------- -------- ---- ------- --------
(in thousands)
Commercial real estate and multi-family
residential loans $ 7,245 - - $ 7,245 $12,375
1-4 family residential loans 7,572 - - 7,572 7,524
Other loans 543 - - 543 569
-------- ---- --- --------- --------
Total classified loans 15,360 - - 15,360 20,468
Other real estate owned 5,372 $200 - 5,572 10,726
-------- ---- --- --------- --------
Total classified assets $20,732 $200 - $20,932 $31,194
======== ==== ==== ========= ========
RESULTS OF OPERATIONS
General
Net income for the third quarter of 1997 was $1.1 million, or $0.08 per share,
as compared with a net loss of $0.6 million or $(0.05) per share for the third
quarter of 1996. For the nine months ended September 30, 1997, net income was
$3.4 million, or $ 0.26 per share, versus net income of $0.2 million, or $0.2
per share, for the first nine months of 1996. Results for 1996 included a $1.6
million (net of tax) special assessment to re-capitalize the SAIF insurance fund
recorded in September of 1996 and a $0.5 million (net of tax) loss related to
commercial real estate loans "held for bulk sale" recorded in June 1996. The
effect of these items was to reduce 1996 results by $0.12 per share in the third
quarter and by $0.16 per share for the nine months ended September 30, 1996.
Adjusting for these special items, comparable results for the three and nine
months ended September 30, 1996 would have been $0.07 and $0.18 per share,
respectively.
The following table summarizes the net of tax results for 1997 and 1996:
Three months ended Nine months ended
------------------- -----------------
9/30/97 9/30/96 9/30/97 9/30/96
------- ------- ------- -------
Net income (loss) $1,054 $ (588) $3,382 $ 214
SAIF special assessment -- 1,575 -- 1,575
Loss on commercial loans held for bulk sale -- -- -- 536
------ ------- ------ --------
Comparable earnings $1,054 $ 987 $3,382 $2,325
------ ------- ------ --------
The increase in comparable earnings from 1996 to 1997 reflects a stronger
balance sheet, increased fee income and an increase in deposits as a percent of
total funding. Third quarter and year-to-date 1997 results are net of $127
thousand (net of tax) of professional services costs incurred in connection with
the merger agreement with HUBCO.
Net Interest Income
Net interest income for the quarter ended September 30, 1997 was $7.0 million,
an increase of $0.7 million over the $6.3 million reported in the third quarter
of 1996. For the first nine months of 1997 and 1996, net interest income was
$20.6 million and $18.9 million, respectively. The Company's net interest
margins were as follows:
1997 1996
------ -----
Third Quarter 3.34% 3.14%
Nine Months 3.32% 3.17%
16
The Conpany'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 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 the quarter ended September 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 $395,448 $7,572 7.66% $377,253 $ 7,211 7.65%
Commercial real estate loans 214,354 5,379 9.87% 210,670 4,882 9.12%
Installment loans 35,654 811 9.02% 29,694 664 8.87%
Commercial business loans 7,707 171 8.81% 6,676 142 8.44%
Mortgage Backed Securities 149,377 2,460 6.59% 151,125 2,481 6.56%
Other Securities 34,247 571 6.67% 31,801 532 6.65%
Federal funds and other 328 4 5.32% 1,978 26 5.21%
---------- ------ -------- ------- ------- -----
Total earning assets 837,115 16,968 8.06% 809,197 15,938 7.81%
--------- --------- -------- ------- -------- --------
Interest - bearing liabilities:
Total deposits 615,394 7,270 4.69% 558,532 6,559 4.66%
Total borrowings (2) 178,299 2,699 6.01% 209,338 3,035 5.75%
------- --------- -------- ------- ------- ------
Total paying liabilities 793,693 9,969 4.98% 767,870 9,594 4.96%
------- --------- -------- ------- ------- ------
Excess of interest-earning assets
over interest-bearing liabilities $43,422 $41,327
========= =======
Net interest income $ 6,999 $ 6,344
========= =======
Interest rate spread (3) 3.08% 2.85%
========= =====
Net interest margin (4) 3.34% 3.14%
========= =====
(1) As adjusted for loan fees treated as adjustments to loan yields.
(2) 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 $105
thousand and $5 thousand for the three months ended September 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.
17
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 nine months ended September 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 $396,508 $22,757 7.65% $355,688 $20,704 7.76%
Commercial real estate loans 213,237 15,552 9.62% 215,365 15,043 9.21%
Installment loans 33,759 2,230 8.83% 29,311 1,971 8.96%
Commercial business loans 7,406 481 8.69% 8,178 569 9.28%
Mortgage-backed securities 141,897 7,019 6.60% 153,353 7,184 6.25%
Other securities 33,720 1,661 6.57% 29,645 1,436 6.46%
Federal funds and other 1,136 45 5.25% 3,252 127 5.19%
---------- --------- -------- -------- ------- ------
Total Earning Assets 827,663 49,745 8.01% 794,792 47,034 7.88%
--------- -------- -------- -------- ------ ------
Interest-bearing liabilities:
Total deposits 598,434 20,873 4.66% 548,617 19,112 4.64%
Total borrowings (2) 186,500 8,279 5.94% 211,395 8,994 5.67%
--------- -------- -------- -------- ------- ------
Total paying liabilities 784,934 29,152 4.97% 760,012 28,106 4.93%
--------- -------- -------- -------- -------- ------
Excess of interest-earning assets
over interest-bearing liabilities $42,729 $34,780
========= ========
Net interest income $20,593 $18,928
========== ========
Interest rate spread (3) 3.04% 2.95%
======== ======
Net Interest Margin (4) 3.32% 3.17%
======== ======
(1) As adjusted for loan fees treated as adjustments to loan yields.
(2) 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 $318
thousand and $35 thousand for the nine months ended September 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.
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 September 30, 1997, the Company had a negative adjusted one-year gap of $35.2
million compared with a negative adjusted one-year gap of $29.8 million at
December 31, 1996. The decline was due primarily to more fixed-rate commercial
and residential real estate loans in portfolio. Interest rate swap, cap and
collar agreements are used to effectively lengthen the maturity of certain of
the Bank's liabilities and are shown as an adjustment to interest-bearing
liabilities. Core deposits are comprised of checking, passbook, NOW, club, and
escrow accounts which do not have a stated maturity nor reprice. For
interest-sensitivity measurement purposes, core deposits are assumed to be
withdrawn at a rates ranging from 15% to 20% per year.
The following table summarizes interest-rate sensitive assets and liabilities at
September 30, 1997 according to the time periods in which they are expected to
reprice and the resulting gap for each time period (excluding non-performing and
cash basis assets):
Within One to Five Over Five
($ in millions) One Year Years Years
-------- ----- -----
Total interest-earning assets (1) $397.7 $269.9 $169.0
Total interest-bearing liabilities (2) 517.9 223.7 58.5
----- ------ ------
(120.2) 46.2 110.5
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 $(35.2) $(38.8) $110.5
====== ====== ======
Excess (deficiency) as a percent of total assets (4.0%) (4.4%) 12.5%
Cumulative excess (deficiency) as a percent of total assets (4.0%) (8.4%) 4.1%
(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
September 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
September 30, 1997, 3 month LIBOR was 5.77% and within the collar range.
19
Total interest and dividend income increased by $1.0 million, or 6.5%, and $2.7
million, or 5.8%, respectively in the three and nine month periods ended
September 30, 1997 as compared to the comparable periods in 1996. The increase
for the three and nine month periods were largely due to higher average levels
of earning assets (led by residential mortgage and consumer loan 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 nine month
periods ended September 30, 1997 increased by $0.4 million and $1.0 million
respectively over the comparable 1996 periods. The increases resulted from
higher average funding levels and slightly higher average cost of funds. For the
nine months ended September 30, 1997, average retail deposits were 76.2% of
total interest-bearing liabilities as compared with 72.2% for the prior year
period.
Non-Interest Income
- - -------------------
Total non-interest income for the three and nine month periods ended September
30, 1997 was $1.2 million and $2.8 million respectively, compared with $0.6
million and $0.8 million, respectively, during the comparable 1996 periods.
Total non-interest income for the three and nine month periods ended September
30, 1997 included a $0.3 million prepayment fee on a commercial loan
relationship, while the total non-interest income for the nine month period
ended September 30, 1996 included a $0.9 million loss on commercial loans held
for bulk sale. Excluding these special items, non-interest income for 1997
reflected increases over the comparable prior year periods of $0.3 million and
$0.8 million for the three and nine month periods ended September 30, 1997,
respectively. These increases of 51% during both periods were due to increased
deposit levels and the number of branches, the continued success of the "High
Performance Checking" account products, as well as higher fees earned on sales
of alternative investment products.
Non-Interest Expense
- - --------------------
Total non-interest expenses for the three and nine month periods ended September
30, 1997 totalled $6.0 million and $16.7 million, respectively, versus $7.7
million and $18.8 million during the comparable 1996 periods. The SAIF special
assessment of $2.6 million was recorded in September 1996. Excluding the effect
of the SAIF special assessment in 1996, operating expenses for the three and
nine months ended September 30, 1997 increased by $1.0 million and $0.5 million
over the comparable periods of 1996. The incremental operating expenses related
to the six new in-store branches opened since September 30, 1996, higher
write-downs on commercial OREO properties and professional costs incurred in
relation to the merger agreement with HUBCO all contributed to these increases.
The effects of these increases were mitigated by lower deposit insurance
premiums.
Income Tax Expense
- - ------------------
The combined effective income tax rate was approximately 40% for all periods.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
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
Exhibit 27: Financial Data Schedule.
On November 12, 1997, the Company filed a report on Form 8-K (under Item
5) relating to an Agreement and Plan of Merger (the "Agreement") entered
into on October 22, 1997 between the Company, Bank of the Hudson, a
federal savings bank wholly owned by the Company, and HUBCO, Inc.
("HUBCO"), a New Jersey corporation and registered bank holding company.
The Agreement sets forth the terms and conditions under which the Company
will merge with and into HUBCO.
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: November 12, 1997 /s/ Joseph B. Tockarshewsky
---------------------------
Joseph B. Tockarshewsky
Chairman of the Board, President
and Chief Executive Officer
Date: November 12, 1997 /s/ Robert J. Hughes
---------------------------
Robert J. Hughes
Executive Vice President and
Chief Financial Officer
22