Exhibit 1
Form 10-Q
For the period ended
March 31, 1997
Page 4 of 24 Pages.
DEPARTMENT OF THE TREASURY
OFFICE OF THRIFT SUPERVISION
WASHINGTON, DC 20552
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 MARCH 31, 1997
OR
-- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM -------------------------- TO -------------------
OTS DOCKET NUMBER 7708
POUGHKEEPSIE SAVINGS BANK, FSB
UNITED STATES OF AMERICA 14-0978220
- -------------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
249 MAIN MALL, POUGHKEEPSIE, NEW YORK 12602
- ----------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914)431-6200
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 MAY 9,
1997 WAS 12,594,725.
PAGE 1 OF 20 SEQUENTIALLY-NUMBERED PAGES
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
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 March 31, 1997, Unaudited, and at December 31, 1996. 3
Consolidated Statements of Operations -
Unaudited, for the three month periods
ended March 31, 1997 and 1996. 4
Consolidated Statements of Cash Flows -
Unaudited, for the three month periods ended
March 31, 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 8
PART II. OTHER INFORMATION 19
SIGNATURES 20
2
POUGHKEEPSIE SAVINGS BANK, FSB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
(Unaudited)
March 31 December 31,
1997 1996
----------------------------
ASSETS:
Cash and due from banks $ 7,518 $ 6,863
Securities available for sale:
Mortgage-backed securities 108,753 113,575
Other securities 24,057 22,215
Securities held to maturity:
Mortgage-backed securities 28,989 29,957
--------- --------
Total securities 161,799 165,747
--------- --------
Loans, net
Residential real estate mortgage loans 398,348 393,513
Commercial real estate mortgage loans 213,983 210,982
Commercial business loans 7,242 7,194
Installment loans 32,701 31,194
--------- --------
652,274 642,883
Allowance for loan losses (9,489) (8,652)
Residential mortgage loans held for sale 1359 456
--------- --------
Total loans, net 644,144 634,687
---------- --------
Federal Home Loan Bank stock 10,071 9,760
Accrued interest and dividends receivable 5,860 5,278
Bank premises and equipment 6,884 6,793
Other real estate owned 6,709 10,726
Net deferred tax assets 16,081 16,812
Other assets 2,070 2,024
---------- --------
Total assets $ 861,136 $ 858,690
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Savings accounts $ 94,964 $ 93,371
Certificates of deposit 318,085 314,059
Money market deposits 127,198 126,233
Demand deposits 42,885 41,583
--------- --------
Total deposits 583,132 575,246
--------- --------
Advances from Federal Home Loan Bank 85,700 84,800
Securities sold under repurchase agreements 109,362 113,894
Accrued interest payable 1,077 1,618
Mortgagors' escrow deposits 3,375 4,134
Other liabilities 6,020 7,330
--------- --------
Total liabilities 788,666 787,022
--------- --------
Commitments and contingencies
Stockholders' equity:
Common stock 127 127
Additional paid-in capital 66,762 66,736
Retained earnings 7,638 6,827
Unrealized losses on securities (120) (85)
Treasury stock, at cost (1,937) (1,937)
--------- --------
Total stockholders' equity 72,470 71,668
--------- --------
Total liabilities and stockholders' equity $ 861,136 $ 858,690
========= ========
See Notes to Consolidated Financial Statements
3
POUGHKEEPSIE SAVINGS BANK, FSB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
-------------------------
1997 1996
---- ----
Interest and dividend income:
Real estate mortgage loans $ 12,571 $ 12,060
Other loans 834 942
Mortgage-backed securities 2,333 2,421
Other securities 522 468
Federal funds and money market investments 36 33
---------- ----------
Total interest and dividend income 16,296 15,924
---------- ----------
Interest expense:
Deposits 6,635 6,337
Borrowings 2,864 3,075
---------- ----------
Total interest expense 9,499 9,412
---------- ----------
Net interest income 6,797 6,512
Provision for loan losses 300 150
---------- ----------
Net interest income after provision for loan losses 6,497 6,362
---------- ----------
Non-interest income:
Mortgage banking income 57 30
Fees and other income, net 727 458
---------- ----------
Total other income 784 488
---------- ----------
Non-interest expenses:
Salaries and wages 2,169 2,000
Employee benefits 716 712
Legal 136 104
Occupancy and equipment 709 638
Deposit insurance 136 389
Net cost of operating other real estate owned 223 419
Advertising and promotion 268 273
Data processing 170 166
Other 852 830
---------- ----------
Total other expenses 5,379 5,531
---------- ----------
Income before income taxes 1,902 1,319
Income tax expense 776 533
---------- ----------
Net income $ 1,126 $ 786
========== ==========
Net income per common and common equivalent share (Note 2) $ 0.09 $ 0.06
========== ==========
Dividends per share $ 0.025 $ 0.025
========== ==========
See Notes to Consolidated Financial Statements
4
POUGHKEEPSIE SAVINGS BANK, FSB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Increase (decrease) in cash
(Unaudited)
Three Months Ended
March 31,
-----------------------
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 1,126 $ 786
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 300 150
Writedowns on other real estate owned 250 20
Depreciation 227 176
Amortization of premiums and discounts on mortgage-backed
securities, other securities and loans 247 269
Net losses (gains) on sale of assets (183) 40
Deferred tax expense 776 533
(Increase) decrease in interest and dividend receivable (582) 9
Decrease in other assets 1 24
Decrease in interest payable (541) (795)
Decrease in other liabilities (1,310) (909)
(Increase) decrease in residential loans held for sale (903) 195
--------- ---------
Net cash provided by operating activities (592) 498
--------- --------
Cash flows from investing activities:
Purchase of other securities - available for sale (2,000) --
Proceeds from sales of other securities - available for sale -- 5,000
Principal repayments on mortgage-backed securities - available for sale 4,841 9,692
Principal repayments on mortgage-backed securities - held to maturity 842 628
Proceeds from maturities of other securities - available for sale -- 3
FHLB Stock purchases (310) (843)
Deposits received on bulk sale of commercial loans -- 5,684
Loan originations, net of repayments (14,246) (34,021)
Proceeds from sales of loans in portfolio 7,666 1,308
Purchases of fixed assets (318) (484)
Proceeds from sale of other real estate owned 1,566 425
--------- ---------
Net cash used in investing activities (1,959) (12,608)
--------- ---------
Cash flows from financing activities:
Net increase (decrease) in demand, money market, and savings accounts 3,860 3,534
Net increase (decrease) in time deposits 4,026 (1,315)
Net increase (decrease) in repurchase agreements (4,532) 6,404
Net decrease in short-term FHLB borrowings 900 1,561
Decrease in escrow deposits (759) (780)
Stock issued 26 11
Dividends paid (315) (314)
--------- ---------
Net cash provided by financing activities 3,206 9,101
--------- ---------
Net increase (decrease) in cash and cash equivalents 655 (3,009)
Cash and cash equivalents, beginning of period 6,863 9,960
--------- ---------
Cash and cash equivalents, end of period $ 7,518 $ 6,951
========= ==========
See Notes to Consolidated Financial Statements
5
POUGHKEEPSIE SAVINGS BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - PRESENTATION OF INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of Poughkeepsie
Savings Bank, FSB and subsidiaries ("PSB" or "Bank") include all adjustments
which management believes necessary for a fair presentation of the Bank's
financial condition at March 31, 1997, the results of its operations for the
three month periods ended March 31, 1997 and 1996, and the statements of cash
flows for the three 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 Bank's Annual
Report on Form 10-K for the year ended December 31, 1996.
NOTE 2 - EARNINGS PER SHARE
Earnings per share were based on 13,047,587 and 12,922,124 weighted average
shares outstanding (including the dilutive effect of stock options) during the
three months ended March 31, 1997 and 1996, respectively. The weighted average
number of common shares outstanding excludes 105,000 shares of treasury stock
for the three months ended March 31, 1997 and 1996, respectively.
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. Had SFAS No. 128 been applied as of
March 31, 1997, the Bank would have reported basic and diluted EPS of $.09 and
$.09 per share, and $.06 and $.06, for the three month periods ended March 31,
1997 and 1996, respectively.
6
NOTE 3 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For purposes of reporting cash flows, cash and cash equivalents includes cash,
amounts due from banks, federal funds sold and money market investments.
Supplemental cash flow disclosures are as follows:
Three months ended
March 31,
--------------------
1997 1996
---- ----
($ in Thousands)
Cash paid during period for:
Interest credited on deposits $6,619 $6,339
Interest paid on borrowings 3,421 3,871
Income/franchise taxes paid 22 66
Non-cash investing and financing activities:
Increase in net unrealized losses
on available for sale securities,
net of deferred tax effect $ 35 $141
Loans transferred to OREO 317 156
NOTE 4 - 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 Bank's consolidated financial statements.
7
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL:
Poughkeepsie Savings Bank, FSB ("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. In April 1997, the Bank received
shareholder approval for the formation of a new thrift holding company by
approving an Agreement and Plan of Reorganization pursuant to which (a)
Poughkeepsie Savings Bank will, subject to necessary approvals, become a
wholly-owned subsidiary of a recently-formed Delaware corporation known as
"Poughkeepsie Financial Corp." (the "Company") and (b) each outstanding share of
common stock of Poughkeepsie Savings Bank will become, by operation of law, one
share of common stock of the Company.
In recent years the business of the Bank 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 Bank conducts community banking operations in the
Mid-Hudson Valley region of New York and contiguous counties through fourteen
retail branches and eight residential loan offices.
The Bank's core, tangible and risk-based capital ratios at March 31, 1997 were
6.86%, 6.86% and 11.61%, 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 Bank 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 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.
FINANCIAL CONDITION:
At March 31, 1997, the consolidated assets of the Bank totaled $861.1 million,
an increase of $2.4 million from December 31, 1996.
The Bank's 1-4 family residential real estate mortgage loan portfolio of $398.3
million at March 31, 1997 increased by $4.8 million or 1.2% from December 31,
1996. During the three month period ended March 31, 1997, the Bank originated
$20.4 million of residential mortgage loans compared with $38.6 million
originated during the same period of 1996. In the first three months of 1997 the
Bank sold $7.7 million of residential loans to secondary market investors and
retained the servicing rights on a majority of loans sold.
8
The Bank's commercial real estate mortgage loan portfolio of $214.0 million at
March 31, 1997 increased by $3.0 million or 1.4% from December 31, 1996. The
increase was primarily the result of commercial real estate loan originations
and advances within the Bank's market area. For the three months ended March 31,
1997, commercial real estate loan originations/advances totaled $16.9 million
compared with $12.5 million for the prior year period.
The Bank's allowance for loan losses increased by $0.8 million since year-end
1996 as recoveries of $0.7 million and provisions of $0.3 million were partially
offset by charge-offs of $0.2 million. The allowance for loan losses is
maintained at a level which management considers adequate based on its regular
review of the Bank's 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 74.34% of non-performing
loans and 1.45% of total portfolio loans at March 31, 1997 as compared with
56.10% and 1.35%, respectively, at December 31, 1996. A substantial portion of
the Bank'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, decreased from $143.5 million at the prior year-end
to $137.7 million at March 31, 1997 due to principal prepayments. These proceeds
were used to fund loan growth and/or pay down short-term borrowings.
Other real estate owned ("OREO") aggregated $6.7 million at March 31, 1997. The
following table summarizes the gross activity during the first quarter of 1997:
($ in thousands)
Commercial Residential
OREO OREO Total
---------- ---------- -----
Balance at 12/31/96 $9,733 $ 993 $10,726
Real estate acquired in
settlement of loans -- 317 317
Capital improvements 67 -- 67
Sales/dispositions (952) (614) (1,566)
Transfer to performing loans (2,585) -- (2,585)
Net excess cash flow -- -- --
Write-downs (250) -- (250)
------- ------- --------
Balance at 3/31/97 $6,013 $ 696 $ 6,709
======= ======= =======
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 March 31, 1997, the Bank's commercial
OREO was comprised of four apartment and condominium projects, one office
building, two single family residential development projects, and one
undeveloped land parcel. At such date, the largest commercial OREO asset, which
is located in upstate New York, amounted to $1.4 million. As of March 31, 1997
all remaining commercial OREO properties were located in New York. While
9
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 Bank 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 $583.1 million at March 31, 1997, an increase of $7.9 million, or
1.4%, from year-end 1996. All deposit types posted modest increases. The Bank
had no brokered deposits at either March 31, 1997 or December 31, 1996.
Total borrowings decreased by $3.6 million, or 1.8%, from year-end 1996 to
$195.1 million at March 31, 1997. Deposit growth and/or proceeds from principal
prepayments on mortgage-backed securities were used to pay down short-term
borrowings.
On March 31, 1997 the Bank had $72.5 million in total stockholders' equity
compared to $71.7 million at December 31, 1996. This increase resulted from net
income of $1.1 million for the three months ended March 31, 1997, offset by cash
dividends of $0.3 million. On January 28, 1997, the Bank declared a quarterly
cash dividend of $0.025 per share, which was paid on March 6, 1997 to
stockholders of record on February 14, 1997. In April 1997, the Bank declared a
quarterly cash dividend of $0.025 per share to be paid on June 5, 1997 to
stockholders of record on May 16, 1997.
The following table summarizes the calculation of the Bank's book value per
share at March 31, 1997 and December 31, 1996:
March 31, 1997 December 31, 1996
-------------- -----------------
Total stockholders' equity $72,470,000 $71,668,000
=========== ===========
Total shares issued 12,699,725 12,696,825
Less:
Treasury shares 105,000 105,000
----------- -----------
Net shares 12,594,725 12,591,825
=========== ===========
Book value per share $5.75 $5.69
====== ======
10
The Bank regularly monitors its interest rate risk position on a duration, gap
and simulation basis. As a result of the overall management of the Bank's loan
and investment portfolios, deposits and other borrowings, the Bank's one year
effective gap was (1.3)% of total assets at March 31, 1997, and (3.5)% of total
assets at December 31, 1996, as summarized in the following table (in millions):
March 31, December 31,
1997 1996
--------- ------------
Assets repricing or maturing in
less than one year $405.0 $413.3
Liabilities repricing or maturing
in less than one year 626.8 651.7
------- ------
(221.8) (238.4)
One year gap adjustments
o Impact of core deposits 95.6 93.6
o Interest rate hedge agreements 115.0 115.0
------- ------
One year effective gap $(11.2) $(29.8)
======== =======
The one year effective gap is discussed further in the section "Results of
Operations" contained herein.
LIQUIDITY:
The Bank must maintain sufficient liquidity to meet its funding requirements for
loan commitments, scheduled debt repayments, operating expenses, deposit
withdrawals, and to satisfy the regulatory requirements described below.
The Bank has a $84.7 million ($34.0 million unused) overnight line of credit
available with the FHLB of New York at March 31, 1997. The Bank actively
monitors and manages its cash inflows and outflows in an attempt to minimize its
level of non-earning cash balances.
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 March 31, 1997,
would have been approximately $220 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.
11
At March 31, 1997, the Bank had commitments to originate $32.3 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
$12.9 million, respectively. These commitments can be funded, as required, from
the sources outlined above.
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 March
31, 1997, are shown below (dollars in thousands):
Minimum Bank's Excess
Capital Standard Capital Requirements Capital Position % $
- ----------------- -------------------- ---------------- ---- --------
Tangible 1.5% $12,701 6.9% $58,099 5.4% $45,398
Core 3.0% 25,402 6.9% 58,099 3.9% 32,697
Risk-based 8.0% 44,875 11.6% 65,110 3.6% 20,235
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 March 31, 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.
12
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 March 31, 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.
13
NON-PERFORMING AND CLASSIFIED ASSETS:
The Bank's non-performing assets were $19.5 million at March 31, 1997 compared
to $26.1 million at December 31, 1996 and $18.4 million at March 31, 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 Bank's non-performing
assets, performing troubled debt restructurings, performing investment in real
estate, and accruing loans 90 days or more past contractual maturity at March
31, 1997 and December 31, 1996:
At 3/31/97 At 12/31/96
(Dollars in thousands)
Non-accrual loans:
1-4 family residential real estate loans $6,116 $5,453
Commercial real estate and multi-family residential loans 6,149 9,447
Commercial business 434 436
Consumer loans 90 days or more past due as to interest and accruing 65 87
------ ------
Total non-performing loans 12,764 15,423
Other real estate owned 6,709 10,726
------- -------
Total non-performing assets $19,473 $26,149
======== =======
Allowance for loan losses $ 9,489 $ 8,652
======= =======
Ratio of:
Non-performing loans to total loans 1.98% 2.43%
====== ======
Non-performing assets to total assets 2.26% 3.05%
====== ======
Allowance for loan losses to total non-performing loans 74.34% 56.10%
====== ======
Allowance for loan losses to total portfolio loans 1.45% 1.35%
====== ======
Total non-performing assets (details above) $19,473 $26,149
Accruing loans 90 days or more past contractual maturity (1) 7,236 7,016
Performing troubled debt restructurings ("TDRs") (2) 9,511 9,499
------- -------
Total non-performing assets, accruing loans 90 days or
more past contractual maturity, and performing TDRs $36,220 $42,664
======= =======
Total non-performing loans and accruing loans 90 days or
more past contractual maturity $20,000 $22,439
======= =======
Ratio of total allowance for loan losses to total non-performing
loans and accruing loans 90 days or more past contractual maturity 47.45% 38.16%
====== ======
(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.
14
The Bank's classified assets, including unfunded commitments, as of March 31,
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 3/31/97 12/31/96
----------- -------- ---- ------- --------
(in thousands)
Commercial real estate and multi-family
residential loans $ 7,445 - - $ 7,445 $12,375
1-4 family residential loans 8,416 $ 65 - 8,481 7,524
Other loans 762 7 - 769 569
------- ---- --- ------- -------
Total classified loans 16,623 72 - 16,695 20,468
Other real estate owned 6,173 536 - 6,709 10,726
------- ---- --- ------ -------
Total classified assets $22,796 $608 - $23,404 $31,194
======= ==== === ======= =======
RESULTS OF OPERATIONS:
Net income for the first quarter of 1997 was $1.1 million, or $0.09 per share,
compared with net income of $0.8 million, or $0.06 per share in the first
quarter of 1996. Increased earnings were reflective of the growth in the Bank's
lending and retail banking operations as well as lower deposit insurance rates
and lower costs of operating OREO. Since March 31, 1996, the Bank's branch
network has increased from nine to fourteen branch locations through the
addition of five in-store branch locations, while the total loan portfolio has
increased by $34.2 million.
The Bank'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 the Bank's net interest income.
Net interest income was $6.8 million for the quarter ended March 31, 1997, an
increase of $0.3 million over the comparable period of 1996. The net interest
margin for the first quarter of 1997 was 3.30% compared with 3.32% in the fourth
quarter of 1996 and 3.28% for the first quarter of 1996. Margins were
essentially unchanged from the first quarter of 1996 primarily because
competitive pressures lowered yields on residential and commercial mortgages,
the effect of which was offset by lower funding costs.
15
The table below sets forth information relating to the Bank's average
interest-earning assets (including non-performing loans), average
interest-bearing liabilities and net interest income during the periods
indicated.
For the three months ended March 31,
-----------------------------------------------------------
1997 1996
-------------------------- -------------------------
Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate (1)
------- -------- -------- ------- -------- --------
(dollars in thousands)
Interest-earning assets:
Residential real estate loans $396,947 $ 7,570 7.63% $333,235 $ 6,567 7.88%
Commercial real estate loans 212,262 5,003 9.43% 229,405 5,493 9.59%
Installment loans 31,998 685 8.68% 28,994 665 9.30%
Commercial business loans 7,168 149 8.43% 10,791 277 10.43%
Mortgage-backed securities 141,422 2,333 6.60% 158,362 2,421 6.11%
Other securities 32,356 521 6.44% 29,697 468 6.39%
Federal funds and other 2,783 35 5.10% 2,319 33 5.73%
------- ------- ---- ------- ------ ----
Total earning assets 824,936 16,296 7.90% 792,803 15,924 8.05%
------- ------- ---- ------- ------ ----
Interest-bearing liabilities:
Total deposits 582,791 6,634 4.62% 539,696 6,337 4.76%
Total borrowings (2) 199,819 2,864 5.81% 213,701 3,075 5.75%
------- ------ ---- ------- ------ ----
Total paying liabilities 782,610 9,499 4.92% 753,397 9,412 5.07%
------- ------ ---- ------- ------ ----
Excess of interest-earning assets
over interest-bearing liabilities $42,326 $39,406
======= =======
Net interest income $ 6,797 $ 6,512
======= =======
Interest rate spread (3) 2.98% 2.98%
==== ====
Net interest margin (4) 3.30% 3.28%
==== ====
(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 agreements 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 $110 thousand and $37 thousand for the three months ended
March 31, 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.
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 March 31, 1997, the Bank had a negative adjusted one-year gap of $11.2
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 and cap
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.
16
The following table summarizes the Bank's interest-rate sensitive assets and
liabilities at March 31, 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
One Year Years Years
-------- ----------- ----------
(Dollars in millions)
Total interest-earning assets $405.0 $226.6 $181.2
Total interest-bearing liabilities 531.2 194.8 55.4
------- ------- ------
(126.2) 31.8 125.8
One year gap adjustments:
Interest rate swap agreement (1) 20.0 (20.0) --
Interest rate collar agreements (2) 95.0 (95.0) --
------- ------ ------
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities ($11.2) ($83.2) $125.8
======= ======= =======
Excess (deficiency) as a percent of total assets (1.3%) (9.7%) 14.6%
Cumulative excess as a percent of total assets (1.3%) (11.0%) 3.6%
(1) 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%.
(2) The Bank entered into a total of $95.0 million notional amount interest rate
collar agreements which will all expire by the year 2000. These rate collar
agreements have caps and floors indexed to 3 month LIBOR; the weigted
average cap rate was 6.75% and the weighted average floor rate was 5.35%. If
3 month LIBOR exceeds the cap index, the Bank would receive cash from the
counterparty; if the 3 month LIBOR were to fall below the floor index the
Bank would pay the counterparty based on the notional principal amount. At
March 31, 1997, 3 month LIBOR was 5.75%.
For purposes of the above interest sensitivity analysis:
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.
For purposes of measuring interest sensitivity, interest-bearing
liabilities are reduced by the amount of core deposits, interest rate
swaps, and interest rate collars. Core deposits are estimated to be
withdrawn at rates ranging from 15% to 20% per year.
Total interest and dividend income increased by $0.4 million in the three months
ended March 31, 1997 as compared to the comparable period in 1996. The increase
for the three month period was largely due to higher average levels of earning
assets (led by residential mortgage originations) offset, in part, by the effect
of lower yields related to prevailing interest rates and competitive pressures.
17
Total interest expense on deposits and borrowings for the three month period
ended March 31, 1997 increased by only $0.1 million over the comparable 1996
period. The increase resulted from higher average levels of deposits and
borrowings, the effect of which was largely offset by generally lower funding
costs. For the three months ended March 31, 1997, average retail deposits were
74.5% of total interest-bearing liabilities as compared with 71.6% for the prior
year period.
Total non-interest income for the three month period ended March 31, 1997 was
$0.8 million, compared with $0.5 million during the comparable 1996 period. The
increase in non-interest income was driven by the expanded branch network and by
fee income from checking and other Bank products as well as by fees earned on
sales of alternative investment products.
Total non-interest expenses for the three month period ended March 31, 1997
totaled $5.4 million versus $5.5 million during the comparable 1996 period. The
incremental operating expenses related to the five new in-store branches opened
since March 31, 1996 were largely offset by lower deposit insurance premiums.
The net costs of operating foreclosed real estate declined by $0.2 million due
to lower levels of OREO and improved cash flow at certain remaining commercial
OREO properties.
The combined effective income tax rate was 40% for both periods.
18
PART II OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Bank 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 Bank.
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
The Bank's Annual Meeting of Stockholders was held on April 30, 1997.
1. With respect to the election of three directors to serve three-year terms
expiring at the Annual Meeting of Stockholders to be held in the year
2000 or until their respective successors are elected and qualified, the
following are the number of shares voted for each nominee:
Noel deCordova, Jr. For 11,233,831 Withheld 218,832
Burton Gold For 11,211,511 Withheld 241,152
Henry C. Meagher For 11,222,324 Withheld 230,339
2. With respect to the proposal to approve the formation on a new thrift
holding company, the following are the number of shares voted:
For 6,981,039 Against 562,414 Abstain 108,253
3. With respect to the ratification of the appointment of Deloitte & Touche
LLP as the Bank's independent auditors for the fiscal year ending
December 31, 1997, the following are the number of shares voted:
For 11,302,981 Against 92,431 Abstain 57,251
There were 3,800,957 "broker non-votes" cast at the Annual Meeting.
ITEM 5 - OTHER INFORMATION None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
On May 8, 1997, the Bank filed a report on Form 8-K related to a press
release announcing the results of its 1997 Annual Meeting of Stockholders
held on April 30, 1997. Stockholders re-elected three directors; ratified
the appointment of Deloitte & Touche as independent certified public
accountants for 1997; and approved the formation of a holding company to
be called Poughkeepsie Financial Corp. and to effect a reorganization
wherein the Bank would become a wholly-owned subsidiary of the holding
company.
19
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 SAVINGS BANK, FSB
(Registrant)
Date: May 13, 1997 /s/ Joseph B. Tockarshewsky
------------ ---------------------------
Joseph B. Tockarshewsky
Chairman of the Board, President
and Chief Executive Officer
Date: May 13, 1997 /s/ Robert J. Hughes
------------ --------------------
Robert J. Hughes
Executive Vice President and
Chief Financial Officer
20