UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 0-18620
JSB FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3000874
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
303 Merrick Road, Lynbrook, New York 11563
(Address of principal executive offices)
Registrant's telephone number, including area code: (516) 887-7000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value (Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not considered herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form
10-K or any amendment to this Form 10-K. ( X )
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 11, 1997: Common stock par value $.01 per share,
$346,934,107. This figure is based on the closing price by the Nasdaq Stock
Market for a share of the registrant's common stock on March 11, 1997,
which was $41.50 as reported in the Wall Street Journal on March 12, 1997.
The number of shares of the registrant's Common Stock outstanding as of
March 17, 1997 was 9,824,884 shares.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 13, 1997
and portions of the 1996 Annual Report to Stockholders are incorporated
herein by reference Parts I, II and III.
FORM 10-K CROSS-REFERENCE INDEX
PART I Page
Item 1. Business ..................................................... 3
Item 2. Properties.................................................... 33
Item 3. Legal Proceedings............................................. 33
Item 4. Submission of Matters to a Vote of Security Holders........... 33
Additional Item. Executive Officers.................................... 34
PART II
Item 5. Market for JSB Financial Inc.'s Common Equity
and Related Stockholders' Matters........................... 35
Item 6. Selected Financial Data....................................... 35
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 35
Item 8. Financial Statements and Supplementary Data .................. 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 35
PART III
Item 10. Directors and Executive Officers.............................. 36
Item 11. Executive Compensation........................................ 36
Item 12. Security Ownership of Certain Beneficial Owner6
and Management.............................................. 36
Item 13. Certain Relationships and Related Transactions................ 36
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................... 37
SIGNATURES.............................................................. 39
PART I
ITEM 1. BUSINESS
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DESCRIPTION OF BUSINESS
General
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JSB Financial, Inc. ("JSB Financial" or the "Company") is a Delaware
corporation, incorporated on February 6, 1990, which acquired all of the stock
of Jamaica Savings Bank FSB ("Jamaica Savings" or the "Bank") upon the Bank's
conversion from a federally chartered mutual savings bank to a federally
chartered stock savings bank. The stock conversion was completed on June 27,
1990. The information presented in the financial statements and in the Form 10-K
reflect the financial condition and results of operations of the Company, as
consolidated with its wholly owned subsidiary, the Bank.
In addition to the Company's investment in the Bank, the Company invests in
U.S. Government and agency securities, federal funds sold (through the Bank) and
holds first mortgage loans. The Company received the mortgage loans as a
dividend from the Bank. (See Note 27 to the Consolidated Financial Statements,
included on pages 41 and 42 in the 1996 Annual Report to Stockholders.)
Jamaica Savings was organized in 1866 as a New York state chartered mutual
savings bank. In 1983, the Bank converted to a federally chartered savings bank,
retaining the "leeway" investment authority and broader investment powers
available to a state chartered savings bank, and its Federal Deposit Insurance
Corporation ("FDIC") insurance.
The Bank's principal business consists of attracting deposits from the
general public and investing those deposits, together with funds generated from
operations, in first mortgage loans secured by real estate, collateralized
mortgage obligations ("CMOs"), U.S. Government and agency securities, and to a
lesser extent, various other consumer loans and federal funds sold. The Bank has
a number of wholly-owned subsidiary corporations primarily for the purpose of
owning, operating and disposing of real estate properties.
Since 1990, the Company has maintained stock repurchase programs and paid
quarterly cash dividends to stockholders. During 1996, the Company repurchased
845,000 shares of its common stock at an average price of $32.72 per share, and
paid total cash dividends of $12.1 million, or $1.20 per common share.
Market Area and Competition
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Market Area - Headquartered in Lynbrook, New York, the Bank conducts
business from 13 full service branch offices, 10 of which are located in the New
York City borough of Queens, one in the borough of Manhattan and one each in
suburban Nassau (the headquarters) and Suffolk counties.
Jamaica Savings is a community-oriented financial institution serving its
market area with a wide selection of residential loans, consumer loans and
retail financial services. Management considers the Bank's retail branch
network, reputation for financial strength and quality customer service as its
major competitive advantages in attracting and retaining customers. Management
believes that the Bank benefits from its community bank orientation. The Bank's
long term relationships with its depositors are considered a valuable resource
for the future, as the Bank continues to expand services offered to customers.
Local Economy - The primary market area for the Bank is concentrated in the
neighborhoods surrounding its thirteen full service offices. Management believes
that its branch offices are located in communities that can generally be
characterized as stable, residential neighborhoods, comprised predominantly of
one-to four-family residences and middle income families, except for the
Manhattan branch which is in urban New York City. During the late 1980's to the
early 1990's, the New York metropolitan area experienced reduced employment as a
result of the general decline in the local economy and other factors. The area
experienced a general decline in real estate values and a decline in home sales
and construction and, sharp decreases in the value of commercial properties,
land, as well as cooperatives and condominiums. Currently there are a number of
encouraging signs in the local economy and the Bank's real estate markets;
however, it is unclear how these factors will affect the Company's asset quality
in the future.
These negative trends have stabilized somewhat in more recent periods;
however, there can be no assurances that conditions in the regional economy,
national economy, or real estate market in general will not deteriorate. A
weakness or deterioration in the economic conditions of the Bank's primary
lending area in the future could result in the Bank experiencing increases in
non-performing loans. Such increases would likely result in higher provisions
for possible loan losses, reduced levels of earning assets which would lower the
net interest income and possibly result in higher levels of other real estate
owned ("ORE") expense.
Highly Competitive Industry and Geographic Area - The Bank faces
significant competition for mortgage and consumer loan originations and in
attracting and retaining deposits. The New York City metropolitan and Long
Island areas have a high concentration of financial institutions, many of which
are significantly larger and have greater financial resources than the Bank, all
of which are competitors of the Bank to varying degrees. The Bank's competition
for loans and deposits comes principally from savings and loan associations,
savings banks, commercial banks, mortgage banking companies, insurance companies
and credit unions. The most direct competition for deposits has historically
come from savings and loan associations, savings banks, commercial banks and
credit unions. In addition, products offered by the securities industry have
created alternative investments, including money market accounts, mutual funds
and annuities, available to the general public. The Bank competes for deposits
through pricing, service and by offering a variety of deposit accounts and other
services. Management competes for loans principally through pricing, efficiency
and the quality of its services provided to borrowers, real estate and mortgage
brokers. Competition may also increase as a result of the lifting of
restrictions on interstate operations of financial institutions.
Lending Activities and Risk
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General - The Bank offers a variety of loans to serve the credit needs of
the communities in which it operates. The Bank's loan portfolio is comprised
primarily of first mortgage loans secured by: multi-family rental properties;
cooperative buildings; one-to four-family residences (which is almost entirely
comprised of mortgages secured by one-to two-family residences); commercial
property and to a lesser extent, construction loans. The Bank also offers other
loans, including: property improvement; loans secured by deposit accounts;
student loans; automobile loans and personal loans. At December 31, 1996, the
loan portfolio was $854.8 million, net of allowances of $5.3 million and
unearned fees and discounts of $3.8 million. At December 31, 1996, net loans
represented 56.4% of the Company's total assets. During 1996, mortgage loans
originated for portfolio were $136.2 million compared to $77.8 million during
1995. The Bank does not offer any loans that provide for negative amortization.
(See "Loan Portfolio" and "Maturities and Sensitivities of Loans to Changes in
Interest Rates" page 25, herein.) Management monitors the economy and real
estate market in which the Bank operates and modifies its lending policies as
considered appropriate.
The Bank has currently agreements to fund new home construction in Queens
and Brooklyn, New York. Pursuant to the New York City Housing Partnership/HPD
Homeownership Program, the Bank is providing the funding for two New York
construction projects, whereby the Bank will hold the first mortgage on the
premises and obtain personal guarantees from the builders. Advances for each of
these projects will be based on presales and construction progress on a per unit
basis for each house. These projects are as follows: (1) East New York Homes -
In February, 1997, the Bank entered into an agreement to finance the
construction of 45 2-family houses in East New York, Brooklyn. The Bank
commitment is for $6.9 million with no more than $3.5 million outstanding at any
one time. (2) Bayswater Village In December, 1996, the Bank entered into an
agreement to finance the construction of 16 two-family houses with a total
development cost of $3.5 million with no more than $1.9 million outstanding at
any one time.
In addition, the Bank makes 6 month construction loans to a builder who
constructs one and two-family houses in the Bank's market area. The loans are
approved on a per building basis and the Bank holds the first mortgage on the
premises and obtains a personal guarantee from the builder. At December 31,
1996, the Bank held a total $1.8 million in construction loans.
The Bank continues to emphasize lending on multi-family, underlying
cooperative and commercial real estate. Lending on these types of properties
poses significant additional risks to the lender as compared with one-to
four-family mortgage lending. These loans generally are made to single borrowers
or realty corporations controlled by an individual or group of individuals and
involve substantially higher loan balances than one-to four-family residential
mortgage loans. Moreover, the repayment of such loans is typically dependent on
the successful operation of the property, which in turn is dependent upon the
expertise and ability of the borrower to properly manage and maintain the
property. In addition, management recognizes that repayment of commercial and
multi-family loans is subject to adverse changes in the real estate market or
the economy, to a far greater extent than is repayment of one-to four-family
mortgage loans.
Multi-family, Underlying Cooperative and Commercial Real Estate Lending The
Bank originates mortgage loans secured by multi-family dwellings of 50 units or
more, cooperative buildings and income producing properties such as shopping
centers. At December 31, 1996, 51.8% of total gross mortgage loans were secured
by multi-family rental properties, 31.4% by cooperative buildings and 7.4% by
commercial real estate. At that date, the Bank's ten largest loans totaled
$112.4 million. These ten mortgage loans were comprised of: five loans totaling
$57.2 million secured by multi-family rental properties; three loans totaling
$31.6 million secured by underlying cooperative buildings; one $12.8 million
mortgage loan secured by the land underlying a luxury Manhattan hotel; and one
$10.8 million loan secured by a shopping center. At December 31, 1996, the
Bank's largest loan was an $18.5 million mortgage loan secured by a 684
apartment complex. The Bank's largest underlying cooperative loan which had a
balance of $12.8 million at December 31, 1996 was under foreclosure. (See
"Delinquencies and Classified Assets" page 26, herein.)
Substantially all of the Bank's mortgage loans on income producing
properties are secured by properties located within the Bank's market area.
Mortgages currently offered on income producing properties are underwritten for
terms that generally do not exceed 10 years. Since amortization (if any) on
multi-family rental, underlying cooperative and commercial mortgage loans is
over significantly longer periods than the terms to maturity, balloon payments
are due at maturity. In establishing interest rates, origination fees and
amortization terms for these types of loans, management considers current market
conditions, competition and the risks associated with the property securing the
loan. The interest rates on such loans are usually between 1.25% and 1.75% above
the five to ten year U.S. Treasury Constant Maturity Index, depending upon the
term to maturity and level of risk associated with the loan.
In underwriting mortgage loans secured by income producing properties,
including multi-family rental, underlying cooperative and commercial real
estate, the Bank's mortgage officers engage in a detailed analysis of the
property to ensure that its anticipated cash flow will be sufficient to cover
operating expenses and debt service. Under the Bank's current policy, at
origination, loan-to-value ratios generally do not exceed 75% on loans secured
by multi-family rental and commercial real estate properties and 40% on
underlying cooperatives. The Bank requires that the property securing such loans
be appraised by a member of the Bank's appraisal staff or a qualified
independent appraiser. The Bank requires the borrower to obtain title insurance
and hazard insurance naming the Bank as loss payee in an amount sufficient to
cover the mortgage. All loans secured by income producing property must be
approved by two members of the Bank's Mortgage Committee, which is comprised of
five members of the Board of Directors and the Chairman of the Board "ex
officio", or one member of the Mortgage Committee together with the senior
lending officer.
Underlying cooperative loans are first liens on the cooperative building
and the land. Underlying cooperative mortgages are senior to cooperative share
loans. Cooperative share loans are secured by the proprietary leases on the
individual units. Consequently, when the amount of an underlying loan is related
to the market value of a cooperative building, including the value of the
individual units, the resulting loan-to-value ratio generally is in the range of
15% to 30%.
Mortgage lending on multi-family, cooperative, and commercial properties
poses significant additional risks to the lender as compared with one-to
four-family mortgage lending. At December 31, 1996, the largest concentration of
loans to any one borrower consisted of nine mortgage loans in the aggregate
amount of $27.9 million, of which $12.7 million were held by the Bank and $15.2
million were held by the Company. This concentration was comprised of eight
mortgage loans totaling $24.8 million, secured by income producing multi-family
properties and one $3.1 million loan, secured by a commercial office property.
Management continually monitors the loan portfolios in order to identify
trends that may affect future collectibility. Specific attention is given to
concentrations of credit based on the loan collateral and concentrations to any
one borrower or category of borrower. (See "Delinquencies and Classified Assets"
and "Potential Problem Loans and Subsequent Developments" page 26 through 28,
herein.)
One-to Four-Family Lending - The Bank offers first mortgage loans secured
by one-to four-family residences and condominium units in complexes which are at
least 90% sold and cooperative apartment share loans where at least 65% of the
total cooperative shares are sold. While three-to four-family mortgages are
offered by the Bank, minimal demand has been experienced. At December 31, 1996,
one-to four-family mortgages totaled $76.8 million, of which $68.3 million were
fixed rate mortgage loans and $8.5 million were adjustable rate mortgage ("ARM")
loans. Loan applications are received from existing customers and generated by
referrals, branch and newspaper advertising. One-to four-family mortgage loans
are generally underwritten according to Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") guidelines, except
as to limitations on loan amount.
Upon receipt of a completed loan application from a prospective borrower,
for a loan secured by one-to four-family residential real estate, disclosures
are sent to the applicant(s). Income and certain other information is verified,
a credit report is ordered, and, if necessary, additional financial information
is requested. If the mortgage applicant's credit is verified and approved, an
appraisal and flood certification for the real estate are ordered. In addition
to utilizing its in-house appraisal staff, the Bank obtains some appraisals on
one-to four-family properties prepared by qualified independent appraisers. It
is the Bank's policy to require title insurance and hazard insurance prior to
closing on all real estate first mortgage loans. Borrowers are generally
required to advance funds on a monthly basis to a mortgage escrow account,
together with each payment of principal and interest. Disbursements are made
from escrow accounts for real estate taxes and insurance premiums.
The Bank offers fixed rate mortgages and ARMs, with interest rates and
other terms that are competitive with those available in its market area. The
interest rate on ARMs are adjusted based on a spread above an agreed upon index,
such as a United States Treasury Index. The Bank's ARM loan interest rates are
generally subject to annual rate change limitations of 2.00%, up or down. In
addition, ARM loans offered by the Bank provide for a lifetime cap on the
adjustment in the interest rate of 6.00% from the initial rate. These limits,
help to reduce the interest rate sensitivity of such loans during periods of
changing interest rates. During periods of rising interest rates, the increase
in the required monthly payment for ARM loans may increase the likelihood of
delinquencies. The ARM loans originated by the Bank reprice each year, on the
loan's anniversary date and do not provide for negative amortization.
The Bank currently requires that one-to four-family residential mortgage
loan originations, excluding cooperative apartment loans, not exceed the lesser
of 80% of appraised value of the property securing the loan or purchase price.
Up to 95% financing is available with the purchase of private mortgage insurance
("PMI"), provided that the loan qualifies for sale in the secondary market.
Loans on cooperative apartments (cooperative share loans) generally require a
down payment equal to 20% of the purchase price and are not offered with PMI.
The Bank offers one-to four-family mortgages with various terms. One-to
four-family loans must be approved by at least two senior officers of the
Mortgage, Consumer Loan or Real Estate Departments. Mortgage loans in the Bank's
portfolio ordinarily include due-on-sale clauses, which provide the Bank with
the contractual right to deem the loan immediately due and payable in the event
that the borrower transfers ownership of the property without the Bank's
consent. It is the Bank's policy to enforce due-on-sale provisions or to require
that the interest rate be adjusted to the current market rate when ownership is
transferred. Management monitors various economic indicators and competitive
conditions in its lending area, and, in connection therewith, may modify
underwriting standards based on their assessments.
During 1996, the Bank originated $1.6 million of mortgages for sale and
sold $1.7 million (a $94,000 mortgage was originated during 1995), without
recourse, on which the Bank retained servicing rights and income. Included in
the loan sales were mortgage loans of $556,000 to SONYMA originated and sold
pursuant to a program aimed at assisting prospective first time home buyers with
low to moderate income. As part of the Bank's agreement with the government
agencies, the Bank offers mortgage loans, for up to 95% of the lower of the
purchase price or appraised value, on single family principal residences to
credit qualified home buyers. In addition, the borrower must have not had income
greater than 115 percent of the area family median income as published by the
U.S. Department of Housing and Urban Development annually in the report,
"Estimated Median Family Incomes". During 1996, the Bank entered into an
agreement to originate and sell qualifying mortgages and FHA Title I loans to
FNMA. During 1996, the Bank sold $1.2 million to FNMA. Management expects to
enter into an agreement during 1997 to sell up to $1.0 million (which amount may
be modified at the Bank's request) of qualifying mortgages and FHA Title I Loans
to FNMA. The Bank plans to originate and sell, without recourse, other mortgage
loans in the secondary market and retain servicing.
On March 1, 1996, the Bank reestablished its FHA Home Improvement Loan
Program. The maximum loan amount for one-to four-family properties is $25,000
with a repayment term of five or ten years. Loan amounts in excess of $7,500
must be secured. No equity is required on owner occupied properties. Equity
equal to the loan amount is required for properties that are: non-owner
occupied; income producing; and, not completed structures occupied for less than
six months. Loans over $15,000, in this category, must have an appraisal.
Inspections are required on all loans in excess of $7,500 or if the borrower
fails to submit a completion certificate. The Bank plans to sell these loans,
without recourse, to FNMA, and retain servicing.
Other Lending - The Bank offers a variety of other loan products,
including: home improvement loans; loans secured by deposit accounts; student
loans; personal and automobile loans. At December 31, 1996, total gross other
loans was $27.9 million, or 3.2% of total gross loans. At December 31, 1996, the
other loan portfolio was comprised as follows: property improvement loans of
$8.8 million, or 31.5% of the other loan portfolio; loans secured by deposit
accounts, which are 100% secured, of $8.3 million, or 29.9% of the other loan
portfolio; and student loans, of $6.2 million, or 22.2% of the other loan
portfolio. Student loans are federally guaranteed to varying degrees. The Bank
sells student loans that are in repayment, without recourse, to the Student Loan
Marketing Association ("SLMA"); the Bank retains servicing for these loans. The
remainder of the portfolio was comprised of various consumer type loans and
overdraft lines of credit.
The Bank offers fixed rate home equity loans, which are reported herein
with property improvement loans. Home equity loans originated by the Bank are
disbursed at closing, and range from $10,100, to a maximum of $50,000 on one and
two-family owner-occupied residences only. Financing is available up to 75% of
the property's appraised value less any outstanding mortgage balance. In
connection with originating these loans, the Bank charges fees incurred to
perfect the lien on the property. At December 31, 1996, the Bank had $7.1
million of home equity loans, with interest rates ranging from 5.5% to 12.0%.
Loan Origination and Other Fees - In addition to interest earned on loans,
the Bank charges fees for originating loans, loan prepayments and modifications.
The income realized from such fees varies with the volume of loans made or
repaid, the availability of funds, and competitive conditions in the lending
market.
Investment Activities
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General - Federally chartered savings institutions have the authority to
invest in various types of liquid assets, including United States Treasury
obligations, securities of various agencies of the federal government, certain
certificates of deposit of insured depository institutions, certain banker's
acceptances, repurchase agreements and federal funds sold. Subject to various
restrictions, federally chartered savings institutions may also invest their
assets in commercial paper, investment grade corporate debt securities and
mutual funds whose assets conform to the investments that a federally chartered
savings institution is authorized to make directly. At December 31, 1996,
securities and the other investment portfolio combined, totaled $518.4 million,
or 34.2% of total assets, of which $299.6 million were in U.S. Government and
federal agency securities. (See "Investment Portfolio" page 23, herein.)
Management formulates the investment policies of the Company and its
subsidiary, the Bank, subject to approval by the Board of Directors. The Chief
Executive Officer, or his designated alternate, makes investment decisions on a
day-to-day basis while the Board of Directors acts in an advisory capacity. The
Bank's investments in securities have been primarily in CMOs and short-term U.S.
Government and agency securities with an average term to maturity of less than
three years. In response to the low interest rate environment, beginning during
1992, the Bank's purchases of investment securities generally include those
maturing in one to two years. The Bank's investment policy allows investment in
corporate debt securities rated AA or higher. The Bank classifies all
securities, other than marketable equity securities, as "held-to-maturity".
Marketable equity securities are classified as "available-for-sale" and carried
at fair value, which aggregated $51.0 million at December 31, 1996. During 1996,
the Company sold or redeemed marketable equity securities totaling $30,000,
realizing gross gains of $4,000 and gross losses of $2,000. Activity in the
held-to-maturity portfolio included, purchases of $534.6 million and maturities
of $675.0 million of U.S. Government and federal agency securities and purchases
of $124.3 million and maturities and amortization of $114.1 million in the CMO
portfolio, during 1996.
The Company, excluding activities of the Bank, invests in U.S. Government
and agency securities and through the Bank, invests in money market instruments.
By investing in short term securities and maintaining funds in cash and cash
equivalents (investments with an original maturity of less than three months),
the Company is able to meet its liquidity needs. In addition, the Company has
mortgage loans, which were $15.2 million at December 31, 1996, that were
received as a dividend from the Bank during 1994.
CMOs are mortgage-backed bonds secured by the cash flow of a pool of
mortgages. In a CMO, the regular principal and interest payments made by
borrowers are separated into different payment streams, creating several bonds
that repay invested capital at different rates. A given pool generally secures
several different classes of CMO bonds. CMOs pay the bondholder on a schedule
that is different from the mortgage pool as a whole, and includes fast pay,
medium pay, and slow pay bonds to suit the needs of different investors. The
common arrangements include: (i) a fast-pay bond with a maturity much shorter
than the total pool; (ii) a bond paying interest only for the period that may be
contingent on how prior CMOs perform, before payment of principal begins; (iii)
a bond paying variable interest based on an index, typically the London
Interbank Offered Rate ("LIBOR"), even though the mortgages themselves may be
fixed rate loans. CMOs manage the prepayment risk associated with
mortgage-related securities by splitting the pools of mortgage loans into
different categories of classes.
The Bank purchases Planned Amortization Class ("PAC") (also referred to as
Planned Principal Class) bond CMOs. PACs are designed to receive principal
payments using a predetermined principal balance schedule derived by assuming
two constant prepayment rates for the underlying mortgage-backed securities. All
of the Bank's CMOs are backed by FHLMC, FNMA or Government National Mortgage
Association ("GNMA") mortgage-backed securities, which are backed by whole
loans. Management believes these securities represent attractive and limited
risk alternatives relative to other investments. During 1996, the availability
of CMOs that met the Bank's CMO investment guidelines remained limited. At
December 31, 1996, $155.3 million, or 10.2% of total assets, was invested in
CMOs. At December 31, 1996, the Bank's CMO portfolio had an estimated average
maturity of fifteen months. (See "Contractual Maturity Distribution" page 23,
herein.)
Sources of Funds
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General - The Bank's primary source of funds is deposits, principal
payments from maturities on debt securities and CMOs, principal payments on
mortgage and other loans. Deposit flows and mortgage prepayments are greatly
influenced by general interest rate changes, economic conditions and
competition. The Bank has not directly borrowed any funds since 1984. (See
"Borrowings" page 33, herein and "Liquidity and Capital Resources" included on
pages 15 through 16 in the 1996 Annual Report to Stockholders.)
Deposits - The Bank offers a variety of deposit accounts having a range of
interest rates and terms. The Bank's deposits consist of the following types of
accounts: passbook and lease security; certificate; money market; negotiable
order of withdrawal ("NOW") and non-interest bearing demand deposits. As of
December 31, 1996, passbook and lease security accounts represented 52.4% of the
Bank's total deposits. The flow of deposits is influenced significantly by
changes in market interest rates, general economic conditions and competition.
The Bank's deposits are obtained primarily from the communities in which its
branches are located. The Bank does not use brokers to obtain deposits, relying
primarily on customer service and long-standing relationships with customers to
attract and retain these deposits. Certificate accounts in excess of $100,000
are not actively solicited by the Bank nor does the Bank pay preferential
interest rates on such accounts. (See Note 16 to the Consolidated Financial
Statements, included on pages 34 and 35 in the 1996 Annual Report to
Stockholders.)
The Bank controls deposit levels and composition through its interest rate
structure. Management believes that the relatively low level of interest rates
that has prevailed is the primary cause for the continued decline in deposits
over the past three years. Management chose to allow deposits to decline, rather
than pay rates that would result in a lower net income or necessitate modifying
of the Bank's existing investment structure and guidelines. Rates offered on the
Bank's deposit accounts are competitive with those rates offered by other
financial institutions in its market area. During 1996, interest rates were
relatively stable. While the highest percentage of deposits has remained in
passbook and lease security accounts, the trend of deposit shifts over the past
three years has been towards certificate accounts. Deposits at December 31,
1996, decreased by $19.1 million, or 1.6%, compared to deposits at December 31,
1995. The Bank's passbook and lease security accounts, which decreased by $32.9
million, or 5.2%, represented the most significant decrease of any deposit
category offered by the Bank. Money market accounts decreased by $3.7 million or
4.0%. However, certificate accounts increased by $16.8 million, or 4.5%.
Management expects, in the long term, that the Bank will continue to retain its
deposit base. (See "Deposits" pages 31 and 32, herein.)
Subsidiaries of the Bank
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General - Beginning in the 1970's, under its New York State leeway
investment authority, the Bank organized a number of wholly-owned subsidiary
corporations, many of which formed partnerships. During those years, these
corporations: (i) took "equity interests" in the construction of income
producing properties on which the Bank made loans, (ii) acquired and operated,
primarily multi-family properties, as a result of foreclosure proceedings or by
obtaining deeds in lieu of foreclosure, and (iii) invested in commercial
properties in which the Bank established branch offices. In the late 1980's, one
corporation entered into a joint venture with an unrelated party to construct a
residential apartment building to be sold as a condominium. At December 31,
1996, the Bank had 21 subsidiary corporations, 17 of which are active in the
ownership or operation of real estate. (See "Grandfathered Savings Bank
Authority" page 18, herein, and Notes 11, 12 and 13 to the Consolidated
Financial Statements, included on pages 32 and 33 in the 1996 Annual Report to
Stockholders.)
The cyclical nature of real estate markets and interest rates influence the
level of financial risk to property owners. The Bank through its subsidiaries,
mitigates such risks through: (1) their financial ability to carry properties
until their optimal use and value can be achieved; (2) the use of internal
property management to maintain these properties; and (3) continuous monitoring
of properties' condition and the investments in properties. Management holds
certain real estate properties for the production of income and therefore
regards them as long-term investments and holds other properties for sale. The
condition and estimated values of all significant properties are monitored on a
continuous basis. If management determines to sell a property held for
investment, the property is reclassified to held for sale and adjustments, if
any, are made to account for the property at the lower of cost or net fair
value.
The activities of each of the Bank's wholly-owned subsidiary corporations
and the partnerships they form are described below. Bank subsidiaries that have
converted properties to cooperative residences have done so under New York State
non-eviction plans. Non-eviction plans provide that rent-stabilized tenants may
remain tenants in their units after a building has been sold to a cooperative
association. Due to the uncertainty of timing and future sales value of the
unsold cooperative shares, for financial statement purposes, unsold shares
acquired as a result of converting these properties, are carried at zero value.
Gains on the sale of these shares are included in income upon sale. However, for
income tax purposes, the value of all cooperative shares, sold and unsold, in
excess of the Bank's investment in the property prior to conversion to
cooperative, was included in taxable income at the time of the sale to the
cooperative. The tax basis of these cooperative shares is depreciated for tax
purposes.
Forty-Second & Park Corp. - Forty-Second & Park Corp. is a wholly-owned
subsidiary corporation of the Bank. At December 31, 1996, the subsidiary owned
31.1% of the shares representing 18 units in a six-story cooperative apartment
building containing 57 residential units and four professional offices located
in Forest Hills, Queens, New York City ("NYC"). The shares, relating to the
unsold units, are carried at zero value. The building was originally acquired by
obtaining the deed in lieu of foreclosure in 1979. This building, which had been
poorly maintained prior to acquisition, was renovated. In 1982, the property was
converted to a cooperative and sold to Barclay Plaza North Owner's, Inc. During
1996, 3 units were sold, resulting in a net gain, before taxes, of $144,000.
Rents received during 1996, on the unsold apartment units totaled $159,000,
covering the $146,000 of maintenance charges paid to the cooperative
association. For 1996, Forty-Second & Park Corp. had net income of $122,000,
after eliminating intercompany transactions. The Bank's net investment in
Forty-Second & Park Corp. was $11,000 at December 31, 1996.
Parkway Associates - Parkway Associates ("Parkway") is a partnership
between two of the Bank's wholly-owned subsidiary corporations, Grandcet Realty
Corp. and Litneck Realty Corp., each of which has a 50% partnership interest. At
December 31, 1996, Parkway owned 21.1% of the cooperative shares, representing
81 unsold apartment units plus parking spaces in a 400 unit cooperative garden
apartment complex located in Floral Park, Queens County, NYC. The shares,
relating to the unsold units, are carried at zero value. The property was
originally acquired through foreclosure in 1979 and initially operated as a
rental property. In the early 1980's, these apartments, which had been poorly
maintained, were substantially renovated. In 1989, the property was converted to
a cooperative and sold to Floral Park Owners, Inc. During 1996, 7 units were
sold, resulting in a net gain, before taxes, of $231,000. Rents received during
1996, from the unsold apartments and garage spaces totaled $609,000 and
maintenance charges paid to the cooperative association and costs for
maintenance employees totaled $614,000. For 1996, Parkway Associates had a net
operating income of $188,000, after eliminating intercompany transactions. The
Bank's net investment in Parkway was $48,000 at December 31, 1996.
Elmback Associates - Elmback Associates ("Elmback") is a partnership
between two of the Bank's wholly-owned subsidiary corporations, Before Real
Estate, Inc. and Afta Real Estate, Inc., each of which has a 50% partnership
interest. At December 31, 1996, Elmback owned 29.8% of the cooperative shares
representing 18 unsold apartment units in a six story cooperative apartment
building with 61 units, located in a low to moderate income area of Jamaica,
Queens County, NYC. The property, originally acquired by deed in lieu of
foreclosure in 1980, was subsequently renovated and operated as a rental
property. During 1996, 3 units were sold resulting in a net gain, before taxes,
of $57,000. In 1988, the property was converted to a cooperative and sold to
87-46 Chelsea Owners, Inc. The shares, relating to the unsold units, are carried
at zero value. Rents received during 1996, on the unsold apartment units totaled
$128,000 covering the $105,000 of maintenance charges paid to the cooperative
association.
In addition, as part of a 1994 mortgage loan workout between the Bank and
an unrelated borrower, Elmback took title to cooperative shares representing 57
unsold cooperative apartments in an 82 unit cooperative property, located in
Brooklyn, New York. During 1994 and 1995, some of the units were improved and
marketed for sale. During 1996, 10 units were sold and $148,000 of gains were
deferred. The remaining 33 units are reflected on the Company's consolidated
statement of financial condition as ORE, and account for substantially all of
the Bank's $647,000 of ORE. This property generated a net loss of $99,000 for
1996. (See "Other Real Estate" page 29, herein.)
For 1996, Elmback Associates had a net operating loss of $24,000, after
eliminating intercompany transactions. The Bank's net investment in Elmback was
$637,000 at December 31, 1996.
D & D Associates - D & D Associates ("D&D") is a partnership formed by
Pendex Real Estate Corp. and Sutdex Real Estate, Inc., two wholly-owned
subsidiaries of the Bank, each of which holds a 50% partnership interest. At
December 31, 1996, D&D owned 27.2% of the shares representing 41 unsold units in
two six-story cooperative apartment buildings with 176 units. These buildings,
located in Jamaica, Queens County, NYC, were originally acquired through
foreclosure proceedings in 1981. Subsequent to foreclosure, the buildings were
renovated and operated as rental properties. During 1985, one of the buildings
was converted to a cooperative and sold to the Tyler Towers Owners Corp. During
1988, the second building was converted to a cooperative and sold to the Park
Sanford Owners Corp. The shares, relating to the unsold apartment units, are
carried at zero value. During 1996, 12 units were sold, resulting in a net gain
before taxes of $139,000. Rental income from the buildings for 1996 totaled
$245,000 covering the maintenance charges of $203,000 paid to the cooperative
association. For 1996, D&D Associates had a net operating income of $166,000,
after eliminating intercompany transactions. The Bank's net investment in D&D
was $68,000 at December 31, 1996.
Bay Hill Gardens - Bay Hill Gardens is a partnership between 110-11 72nd
Ave., Corp. and Yalcrab Real Estate, Inc., two of the Bank's wholly-owned
subsidiary corporations, each of which holds a 50% interest in the partnership.
For 1996, this subsidiary had net income before taxes of $462,000, which
resulted from a real estate tax refund from prior years. At December 31, 1996,
the Bank had a net liability for this subsidiary of $55,000, comprised primarily
of accounts payable.
1995 Associates - 1995 Associates is a partnership between Jamsab Realty
Corp. and Jasthree Inc., two wholly-owned subsidiary corporations of the Bank,
holding 99% and 1% interests in the partnership, respectively. The partnership
was formed in 1973 to construct and operate an 18 story commercial building at
1995 Broadway, Manhattan, NYC, in which the Bank leased the main floor for a
branch office. During 1989, the Bank purchased the branch office space from the
partnership upon conversion of the property to a two-unit condominium consisting
of the branch office on the main floor and the office tower. For 1996, this
partnership had net income, before taxes of $851,000, after eliminating
intercompany transactions. The Bank's net investment in 1995 Associates was $5.7
million at December 31, 1996.
Lefmet Corp. - Lefmet Corp., a wholly-owned subsidiary corporation of the
Bank, owns and operates commercial property consisting of seven stores located
in Kew Gardens, Queens County, NYC, one of which the Bank occupies as a branch
office. During 1996, the property generated net income, before federal taxes, of
$42,000, after eliminating intercompany transactions. The Bank's net investment
in Lefmet Corp. was $195,000 at December 31, 1996.
Jade Associates and LeHavre Associates - Prior to December 1993, Jade was a
joint venture between Sher Park Realty Corp., ("Sher Park") a wholly-owned
subsidiary of the Bank and an unrelated general contractor, each with a 50%
interest. The joint venture was formed to fund, construct and subsequently sell
an eighty-four unit condominium complex in Flushing, New York.
The project was initially funded through equal contributions from the
partners and an $11.6 million building loan from LeHavre Associates ("LeHavre"),
another wholly-owned subsidiary of the Bank. (LeHavre is a partnership between
Jas Cove Corp. and Avre Realty Corp., both wholly-owned subsidiary corporations
of the Bank.) Between 1989 and 1993, a total of $4.0 million of reserves were
established against the investment and the loan, related to a decline in the
value of the property.
In December of 1993, an agreement was entered into with the joint venture
partner, whereby: (1) Jamlyn Realty Corp. ("Jamlyn"), a wholly-owned subsidiary
corporation of the Bank, acquired the joint ventures partner's 50% interest; (2)
the outside partner was forgiven the excess contributions of $1.5 million made
by Sher Park; (3) Jamlyn paid the costs, which totaled $579,000, incurred in
connection with the transfer of the partnership interest and property. The
inter-company loan from LeHavre was eliminated during 1994.
During 1996, 12 units were sold, resulting in deferred gains of $104,000,
as sales are being accounted for under the cost recovery method. At December 31,
1996, of there were 49 units remaining. For 1996, this property generated pretax
income of $173,000. The Bank's net investment in Jade was $4.6 million at
December 31, 1996.
Concerned Management - Concerned Management is a wholly-owned subsidiary of
the Bank, which was formed in 1979 to manage and operate the real estate
acquired by the Bank's other subsidiary corporations and partnerships. Concerned
Management operates from an office, which is leased, located in Flushing, Queens
County, NYC. The Bank's net investment in Concerned Management was $8,000 at
December 31, 1996.
Other Subsidiaries - Of the Bank's remaining four wholly-owned subsidiary
corporations, three are nominee corporations used in the conduct of the Bank's
business. The fourth, Jam-Ser Corp., was formed to act as agent to sell life
insurance as permitted by New York State law.
Savings Bank Life Insurance
- ---------------------------
The Bank is a customer of the Savings Bank Life Insurance ("SBLI")
Department, which is a separate legal mutual entity owned by its policy holders.
The Bank, through the SBLI Department offers SBLI to its customers up to the
legal maximum of $50,000 per insured individual and, as a trustee bank, offers
an additional $350,000 in group coverage per insured under the SBLI Department's
Financial Institution Group Life Insurance policy. The SBLI Department's
activities are segregated from the Bank and while they do not directly affect
the Bank's earnings, management believes that offering SBLI is beneficial to the
Bank's relationships with its depositors and the general public. The SBLI
Department pays its own expenses and reimburses the Bank for expenses incurred
on its behalf.
Personnel
- ---------
As of December 31, 1996, the Bank had 315 full-time employees and 117
part-time employees. The employees are not represented by a collective
bargaining unit and the Bank considers its relationship with its employees to be
good.
Regulation And Supervision
- --------------------------
The description of statutory provisions and regulations applicable to
savings institutions and their holding companies set forth in the Form 10-K does
not purport to be a complete description of such statutes and regulations and
their effects on the Bank and the Company.
General - The Company, as a unitary savings and loan holding company, is
required to file certain reports with, and otherwise comply with the rules and
regulations of the Office of Thrift Supervision ("OTS") under the Home Owners'
Loan Act, as amended (the "HOLA") and the Securities and Exchange Commission
("SEC") under the federal securities laws. In addition, the activities of
savings institutions, such as the Bank, are governed by the HOLA and the Federal
Deposit Insurance Act ("FDI Act"). Certain regulatory requirements applicable to
the Bank and the Company are referred to below or elsewhere herein.
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its primary federal regulator, and the FDIC, as the deposit insurer.
The Bank is a member of the Federal Home Loan Bank ("FHLB") System and its
deposit accounts are insured up to applicable limits by the Bank Insurance Fund
("BIF") managed by the FDIC. The Bank must file reports with the OTS and the
FDIC concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other savings institutions. The OTS and the FDIC
conduct periodic examinations to test the Bank's compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulatory requirements and policies, whether by the OTS, the
FDIC or the Congress could have a material adverse impact on the Company, the
Bank and their operations. Certain of the regulatory requirements applicable to
the Bank and to the Company are referred to below or elsewhere herein.
Holding Company Regulations - The Company is a nondiversified unitary
savings and loan holding company within the meaning of the HOLA. As a unitary
savings and loan holding company, the Company generally is not restricted under
existing laws as to the types of business activities in which it may engage,
provided that the Bank continues to be a qualified thrift lender ("QTL"). (See
"Federal Savings Institution Regulation - Qualified Thrift Lender Test" page 16,
herein.) Upon any non-supervisory acquisition by the Company of another savings
institution or savings bank that meets the QTL test and is deemed to be a
savings institution by the OTS, the Company would become a multiple savings and
loan holding company (if the acquired institution is held as a separate
subsidiary) and would be subject to extensive limitations on the types of
business activities in which it could engage. The HOLA limits the activities of
a multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act ("BHC Act"), subject to
the prior approval of the OTS, and activities authorized by OTS regulation.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS; acquiring or retaining, with certain
exceptions, more than 5% of a nonsubsidiary company engaged in activities other
than those permitted by the HOLA; or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, the HOLA does prescribe such restrictions on
subsidiary savings institutions, as described below. The Bank must notify the
OTS 30 days before declaring any dividend to the Company. In addition, the
financial impact of a holding company on its subsidiary institution is a matter
that is evaluated by the OTS and the OTS has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
Federal Savings Institution Regulation
- --------------------------------------
Capital Requirements - The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital ratio; a
3.0% leverage (core) capital ratio; and an 8.0% risk-based capital ratio. In
addition, the prompt corrective action standards discussed below establish, in
effect, a minimum 2% tangible capital ratio, a 4% leverage (core) capital ratio
(3% for institutions receiving the highest rating on the CAMEL financial rating
system), and together with the risk-based capital standard itself, a 4% Tier I
risk based capital standard. Core capital is defined as common stockholders'
equity (including retained earnings), certain noncumulative perpetual preferred
stock and related surplus and minority interests in the equity accounts of
consolidated subsidiaries, less intangibles other than certain purchased
mortgage servicing rights and credit card relationships. The OTS regulations
also require that, in meeting the leverage (core) ratio, tangible and risk-based
capital standards, institutions must generally deduct investments in and loans
to subsidiaries engaged in activities not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of 4% and 8%, respectively.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, as
assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. The components of Tier I (core) capital are
equivalent to those discussed earlier. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the allowance for loan and lease losses, limited to a
maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary
capital included as part of total capital cannot exceed 100% of core capital.
The OTS regulatory capital requirements also incorporate an interest rate
risk component. Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings institution's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) that would result from
a hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12% is not subject to the interest rate risk component, unless the
OTS determines otherwise. At the present time, the OTS has deferred
implementation of the interest rate risk component. At December 31, 1996, the
Bank met each of its capital requirements, in each case and on a fully phased-in
basis and it is anticipated that the Bank will not be subject to the interest
rate risk component. A table presenting the Bank's capital position at December
31, 1996 is presented in Note 26 to the Consolidated Financial Statements,
contained on page 41 of the 1996 Annual Report to Stockholders, and is
incorporated herein by reference.
A reconciliation between the Bank's regulatory capital and GAAP capital at
December 31, 1996 in the accompanying consolidated financial statements is
presented below:
Tangible Capital
(In thousands)
GAAP capital-originally reported to
regulatory authorities and on the Bank's
consolidated financial statements ............ $ 223,791
Less:
Regulatory capital adjustments:
Investments in Non-includable Subsidiaries ... 13,687
Adjustment for net unrealized gains,
net of tax .................................. 21,795
----------
Regulatory Capital........................... $ 188,309
==========
Prompt Corrective Regulatory Action. Under the OTS prompt corrective action
regulations, (the "regulations") the OTS is required to take certain supervisory
actions against undercapitalized institutions, the severity of which depends
upon the institution's degree of undercapitalization.
The regulations define five capital categories and provide the minimum
numerical requirements, subject to certain exceptions, for each capital
category, as detailed below.
Total Risk- Tier I Leverage Tangible Capital
Capital Category Based Ratio (Core) Ratio to Assets Ratio
- ----------------------------------------------------------------------------------------------
Well capitalized 10% or above 6% or above 5% or above N/A
Adequately capitalized 8% or above 4% or above 4% or above(1) N/A
Undercapitalized Less than 8% Less than 4% Less than 4%(1) N/A
Significantly undercapitalized Less than 6% Less than 3% Less than 3% N/A
Critically undercapitalized N/A N/A N/A 2% or less
<FN>
(1) 3% for institutions with the highest examination rating.
</FN>
Well capitalized institutions must meet or exceed each of the ratios shown
in the table and may not be subject to any order, written agreement, capital
directive, or prompt corrective action directive to meet and maintain a specific
capital level. Institutions failing to meet any one of the minimum capital
requirements will be considered undercapitalized, significantly undercapitalized
or critically undercapitalized, depending on the institution's capital
condition. An institution's capital category is determined on the basis of its
most recent Call Report, Thrift Financial Report, or Report of Examination.
Subject to narrow exception, the banking regulator is required to appoint a
receiver or conservator for an institution that is identified as "critically
undercapitalized". The regulation also provides that a capital restoration plan
must be filed with the OTS within 45 days of the date a savings institution
receives notice that it is "undercapitalized", "significantly undercapitalized"
or "critically undercapitalized". Compliance with such plan must be guaranteed
by any parent holding company. In addition, numerous mandatory supervisory
actions become immediately applicable to the institution, including, but not
limited to, increased monitoring by regulators, restrictions on growth, capital
distributions and expansion. The OTS may also take any one of a number of
discretionary supervisory actions, including the issuance of a capital directive
and the replacement of senior executive officers and directors.
Insurance of Deposit Accounts - Deposits of the Bank are insured by the
BIF. Both the BIF and the Savings Association Insurance Fund ("SAIF"), are
statutorily required to be recapitalized to a 1.25% of insured reserve deposits
ratio. Until 1995, members of the BIF and SAIF were paying average deposit
insurance premiums of between 24 and 25 basis points. The BIF met the required
reserve ratio in 1995, whereas the SAIF is not expected to meet or exceed the
required level until 2002 at the earliest. This situation is primarily due to
the statutory requirement that SAIF members make payments on bonds issued in the
late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor
to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC adopted a new
assessment rate schedule from 0 to 27 basis points under which 92% of BIF
members paid an annual premium of only $2,000. The $2,000 statutory minimum
assessment has been eliminated. With respect to SAIF member institutions, the
FDIC adopted a final rule retaining the previously existing assessment rate
schedule applicable to SAIF member institutions of 23 to 31 basis points. As
long as the premium differential continues, it may have adverse consequences for
SAIF members, including reduced earnings and impaired the ability to raise funds
in the capital markets. In addition, SAIF members were placed at a substantial
competitive disadvantage to BIF members with respect to pricing of loans and
deposits and the ability to achieve lower operating costs.
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special
one-time assessment on SAIF member institutions to recapitalize the SAIF. As
required by the Funds Act, the FDIC imposed a special assessment of 65.7 basis
points on SAIF assessable deposits held as of March 15, 1995, payable November
27, 1996.
The Funds Act also spreads the obligations for payment of the FICO bonds
across all SAIF and BIF members. Effective January 1, 1997, BIF deposits are
assessed for the FICO obligation of 1.3 basis points, while SAIF deposits will
pay 6.48 basis points. Full prorata sharing of the FICO payments between BIF and
SAIF members will occur on the earlier of January 1, 2000 or the date the BIF
and SAIF are merged. The Funds Act specifies that the BIF and SAIF will be
merged on January 1, 1999, provided no savings associations exist at that time.
As a result of the Funds Act, the FDIC recently voted to effectively lower
SAIF assessments ranging from 0 to 27 basis points as of January 1, 1997, which
rates are comparable to those assessed for BIF members. The Bank paid $2,000 in
FDIC insurance premiums during 1996, of which $500 was subsequently refunded as
a result of legislation eliminating the statutory minimum assessment. BIF and
SAIF members will continue to pay assessments, as described above, to fund the
FICO obligation. Management cannot predict the level of FDIC insurance
assessments on an on-going basis, whether the savings association charter will
be eliminated or whether the BIF and SAIF will eventually be merged.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. Management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Thrift Rechartering Legislation - The Funds Act provides that the BIF and
SAIF will merge on January 1, 1999 if there are no more savings associations as
of that date. That legislation also requires that the Department of Treasury
submit a report to Congress by March 31, 1997 that makes recommendations
regarding a common financial institutions charter, including whether the
separate charters for thrifts and banks should be abolished. Various proposals
to eliminate the federal thrift charter, create a uniform financial institutions
charter and abolish the OTS have been introduced in Congress. The bill would
require federal savings institutions to convert to a national bank or some type
of state charter by a specified date (January 1, 1998 in one bill, June 30, 1998
in the other) or they would automatically become national banks. Converted
federal thrifts would generally be required to conform their activities to those
permitted for the charter selected and divestiture of nonconforming assets would
be required over a two year period, subject to two possible one year extensions.
State chartered thrifts would become subject to the same federal regulation as
applies to state commercial banks. Holding companies for savings institutions
would become subject to the same regulation as holding companies that control
commercial banks, with a limited grandfather provision for unitary savings and
loan holding company activities. The Bank is unable to predict whether such
legislation will be enacted, the extent to which legislation would restrict or
disrupt its operations or whether the BIF and SAIF funds will eventually merge.
Loans to One Borrower - Under the HOLA, as amended, savings institutions
are subject to the national bank limits on loans to one borrower. Generally,
savings institutions may not make a loan to a single or related group of
borrowers in an amount greater than 15% of its unimpaired capital and surplus.
An additional amount may be lent, equal to 10% of unimpaired capital and
surplus, if such loan is secured by readily marketable collateral, which is
defined to include certain financial instruments and bullion. At December 31,
1996, the Bank was in compliance with this limitation, with the highest
aggregate loans to one borrower of $25.2 million, or 11.2 % of the Bank's
capital. The Company, as a unitary savings and loan holding company, is not
subject to the loan to one borrower limitation. Management reviews the loans to
one borrower limit at the time the loan is made, however, subsequent changes in
the Bank's capital position may cause credit concentrations to exceed 15% of the
Bank's capital. The Bank carefully monitors the creditworthiness of borrowers
with high concentrations of credit as well as the properties that secure these
loans.
Qualified Thrift Lender Test - The HOLA requires savings institutions to
meet a QTL test. Under the QTL test, a savings institution is required to
maintain at least 65% of its portfolio assets (defined as total assets, less:
intangible assets including goodwill; property used by the institution in
conducting its business and specified liquid assets up to 20% of total assets)
in "qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) on a monthly basis in
9 out of every 12 months.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
December 31, 1996, the Bank maintained 86.3% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test.
Limitations on Capital Distributions - OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year or (ii) 75% of its net income for the previous
four quarters. Any additional capital distributions would require prior
regulatory approval. In the event a bank's capital falls below its regulatory
requirements or is notified by the OTS that it is in need of more than normal
supervision, an institution's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by regulation, if the OTS
determines that such distribution would constitute an unsafe or unsound
practice. In December 1994, the OTS proposed amendments to its capital
distribution regulation that would generally authorize the payment of capital
distributions without OTS approval, provided the payment does not make the
institution undercapitalized within the meaning of the prompt corrective action
regulation. However, institutions in a holding company structure would still
have a prior notice requirement. At December 31, 1996, the Bank was a Tier 1
Bank.
Liquidity - Information regarding liquidity appears under the caption
"Liquidity and Capital Resources" included on pages 15 and - 16 in the 1996
Annual Report to Stockholders.
Assessments - Savings institutions are required to pay assessments to the
OTS, to fund the operations of the OTS. The general assessments, to be paid on a
semiannual basis, is computed based upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the institution's latest
quarterly Thrift Financial Report. The Bank's total assessments for the year
ended December 31, 1996, was $262,000.
Branching - OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute. This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
Transactions with Related Parties - The Bank's authority to engage in
transactions with related parties or "affiliates" (e.g., any company that
controls or is under common control with an institution, including the Company
and the Bank's real estate subsidiaries), or to make loans to certain insiders,
is limited by Section 23A and 23B of the Federal Reserve Act ("FRA"). Section
23A limits the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution. The
aggregate amount of transactions with all affiliates is limited to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A, and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution, as those prevailing at the time for comparable
transactions with nonaffiliated individuals or entities. In the absence of
comparable transactions, such transactions may only occur under terms and
circumstances, including credit standards, that in good faith would be offered
to or would apply to non-affiliated individuals or entities. In addition,
savings institutions are prohibited from lending to any affiliate that is
engaged in activities that are not permissible for bank holding companies under
Section 4(c) of the Bank Holding Company Act. Further, no savings institution
may invest in the securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is
governed by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder.
Among other things, such loans are required to be made on terms substantially
the same as those offered to unaffiliated individuals and do not involve more
than the normal risk of repayment. Recent legislation created an exception for
loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference to
insiders over other employees. Regulation O also places individual and aggregate
limits on the amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval procedures to be
followed.
Enforcement - Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive, or cease and desist orders; the removal of officers and/or
directors; appointment of a receiver or conservator; or termination of deposit
insurance. Civil penalties cover a wide range of violations and an amount to
$25,000 per day, or possibly $1 million per day in especially egregious cases.
Under the FDI Act, the FDIC has the authority to recommend to the Director of
the OTS enforcement action to be taken with respect to a particular savings
institution. If action is not taken by the Director, the FDIC has authority to
take such action under certain circumstances. Federal law also establishes
criminal penalties for certain violations.
Standards for Safety and Soundness - The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; and compensation, fees and benefits.
If the appropriate federal banking agency determines that an institution fails
to meet any standard prescribed by the Guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard, as required by the FDI Act. The final rule establishes
deadlines for the submission and review of such safety and soundness compliance
plans when such plans are required.
Grandfathered Savings Bank Authority - Until 1983, the Bank was a New York
state chartered savings bank with investment powers conferred by New York State
law. The Bank retained such power when it converted to a federally chartered
savings bank. The HOLA and OTS regulations empower the Bank to exercise all the
powers that its predecessor state chartered savings bank possessed under New
York State law, whether or not such powers had been exercised, subject to the
authority of the OTS and FDIC to limit such powers for safety and soundness
reasons. These powers, which were preserved in the FIRREA, are in addition to
powers the Bank possesses as a federally chartered savings bank. Where a
"grandfathered" power overlaps with a power authorized under federal law, the
Bank may act under the more favorable authority.
The grandfathered powers include the authority to invest in various
types of investment securities, including corporate bonds and stock, and in real
estate development. In addition, the Bank has grandfathered authority to make
leeway investments, which include, subject to certain specific exceptions, any
investment not otherwise authorized by the New York State Banking Law at the
time of the Bank's charter conversion, provided that any single investment does
not exceed 1% of the Bank's assets and that all such investments do not exceed
5% of its assets. At December 31, 1996, the Bank's capital investments, computed
for regulatory purposes, retained under the leeway provisions were $14.1
million, or 1.0% of the Bank's assets. Under generally accepted accounting
principles, these assets netted to $10.7 million, on a consolidated basis. These
powers allow the Bank to pursue diversified acquisition opportunities and
provide the Bank with flexibility in restructuring its assets. The Bank intends
to continue to utilize these powers as opportunities arise and as permitted
under applicable rules and regulations. (See "Thrift Rechartering Legislation"
page 16, herein.)
Federal Home Loan Bank System - The Bank is a member of the FHLB System
which consists of 12 regional FHLBs. The FHLB provides a central credit
facility, primarily for member institutions. The Bank, as a member of the
FHLB-New York ("FHLB-NY"), is required to acquire and hold shares of capital
stock in the FHLB-NY in an amount at least equal to 1% of the aggregate
principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB-NY, if any, whichever is greater. The Bank was in compliance with
this requirement, with an investment in FHLB-NY stock at December 31, 1996 of
$6.8 million. Should the Bank obtain FHLB advances, these advances must be
secured by specified types of collateral and may be obtained primarily for the
purpose of providing funds for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements have limited the FHLB-NY's ability to pay dividends to their
members and could also result in the FHLBs imposing higher interest rates on
advances to their members. Further, there can be no assurance that the impact of
FIRREA on the FHLBs will not also cause a decrease in the value of the FHLB-NY
stock held by the Bank. For the years ended December 31, 1996, 1995 and 1994,
dividends from the FHLB-NY to the Bank were $438,000, $481,000 and $514,000
respectively. Changes in the dividends paid by the FHLB affect the Bank's net
interest income.
Federal Reserve System - The Federal Reserve Board ("FRB") regulations
require savings institutions to maintain non-interest earning reserves against
their transaction accounts (primarily NOW and regular checking accounts). During
1996, the FRB regulations generally required that reserves be maintained against
aggregate transaction accounts as follows: for accounts aggregating $52.0
million or less (subject to adjustment by the FRB) a reserve requirement of 3%;
and for accounts greater than $52.0 million, a reserve requirement of $1.6
million plus 10% (subject to adjustment by the FRB between 8% and 14%) against
that portion of total transaction accounts in excess of $52.0 million. The first
$4.3 million of otherwise reservable balances (subject to adjustments by the
FRB) were exempted from the reserve requirements. The Bank is in compliance with
the foregoing requirements.
The balances maintained to meet the reserve requirements imposed by the FRB
may be used to satisfy liquidity requirements which may be imposed by the OTS.
Because required reserves must be maintained in the form of either vault cash, a
non-interest bearing account at a Federal Reserve Bank, or a pass-through
account as defined by the FRB, the effect of the reserve requirement is to
reduce the Bank's interest earning assets. FHLB System members are also
authorized to borrow from the Federal Reserve "discount window", but FRB
regulations require institutions to exhaust all FHLB sources before borrowing
from a Federal Reserve Bank.
Taxation
- --------
General - The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Company. The Bank was audited by the Internal Revenue Service
for taxable years 1990 through 1993 and audited for New York State taxes for
taxable years 1991 through 1993. The Bank was notified that a New York City tax
audit was scheduled for taxable years 1991 through 1993.
Federal - The Bank is subject to the rules of federal income taxation
applicable to corporations. The Bank computes taxable income, using the accrual
method of accounting, on a consolidated basis. The current maximum federal
corporate tax rate for all income, including capital gains, is 35%.
Bad Debt Reserves: The Bank, as a "qualifying thrift", was permitted to
establish a reserve for bad debts and to make annual additions thereto, which
additions may, within specified formula limits, be deducted in arriving at
taxable income. The Bank will be a qualifying thrift only if, among other
requirements, at least 60% of its assets are assets described in Section
7701(a)(19)(C) of the Internal Revenue Code of 1986, as amended (the "Code").
These assets generally include cash, obligations of the United States or an
agency or instrumentality thereof, certain obligations of a state or political
subdivision thereof, residential real estate loans and related loans, loans
secured by savings accounts, student loans and property used by the Bank in the
conduct of its business.
Recently, the federal law was amended to eliminate the reserve method. The
new law eliminated the reserve method, including the percentage of taxable
income method of computing the federal bad debt deduction for taxable years
beginning after December 31, 1995. The legislation requires recapture of
reserves accumulated after 1987 (the base year). The Bank's base year reserve is
equal to the Bank's bad debt reserve at December 31, 1995 for federal income tax
purposes and accordingly there is no excess to recapture. The base year reserves
and supplemental reserve are frozen, not forgiven. These reserves continue to be
segregated as they are subject to recapture if used for purposes other than to
absorb losses on loans.
State and Local Taxation - The Bank is subject to New York State ("NYS")
Franchise Tax on Banking Corporations and to the NYC Banking Corporation Tax.
The NYS and NYC taxes on banking corporations are each imposed in an annual
amount equal to the greater of; (1) 9% of the Bank's "Entire Net Income"
allocable to NYS (and to NYC for purposes of the City tax) during the taxable
year, or (2) the applicable alternative minimum tax. The applicable alternative
minimum tax is generally the greater of (1) a percentage of the value of the
Bank's assets allocable to NYS (and to NYC for the City tax) with certain
modifications, (2) 3% of the Bank's "Alternative Entire Net Income" allocable to
NYS (and to NYC for the City tax) or (3) A minimum tax of $325 ($300 in the case
of the NYC tax).
For purposes of the NYS and NYC taxes on banking corporations, "Entire Net
Income" is similar to federal taxable income, subject to certain modifications
(including the fact that net operating losses cannot be carried back or carried
forward), and "Alternative Entire Net Income" is similar to "Entire Net Income",
subject to certain further modifications.
New York State adopted legislation to reform the franchise taxation of
thrift reserves for loan losses. The act applies to taxable years beginning
after December 31, 1995. The legislation, among other things, "decouples" New
York State's thrift bad debt provisions from the federal tax law, discussed
above and continues to allow a percentage of taxable income bad debt deduction,
subject to certain overall limitations. The New York State bad debt deduction
will no longer be predicated on the Federal deduction.
In addition to the foregoing, the New York State Tax Law also imposes a
temporary surcharge equal to 17% of that portion of the NYS franchise tax
otherwise payable which is attributable to the Bank's activities in NYC and in
several other New York counties in the NYC Metropolitan Area. This surcharge
currently applies to taxable years ending before December 31, 1997. Further, for
years ending after June 30, 1989 and before July 1, 1997, New York State imposes
a surcharge. This surcharge is equal to 2.5% of the franchise tax after the
deduction of credits for calendar year 1996. This credit is reduced to 0% for
years ending after June 30, 1997.
New York City adopted legislation to reform the franchise taxation of
thrift reserves for loan losses. The act applies to taxable years beginning
after December 31, 1995. The legislation, among other things, "decouples" New
York City's thrift bad debt provisions from the federal tax law, discussed above
and continues to allow a percentage of taxable income bad debt deduction,
subject to certain overall limitations. The New York City bad debt deduction
will no longer be predicated on the Federal deduction. The New York State and
New York City law allows the percentage of taxable income deduction subject to
certain overall limitations.
Delaware Taxation - As a Delaware holding company not earning income in
Delaware, the Company is exempted from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
STATISTICAL DATA
The detailed statistical data which follows is presented in accordance with
Guide 3, prescribed by the SEC. This data should be read in conjunction with the
financial statements and related notes and Management's Discussion and Analysis
of Financial Condition and Results of Operations incorporated herein by
reference to the 1996 Annual Report to Stockholders as Exhibit 13.01.
I. Distribution of Assets, Liabilities and Stockholders' Equity: Interest
Rates and Interest Differential
A, B. Page 9 of the Company's 1996 Annual Report to Stockholders (portions of
which are filed herewith as Exhibit 13.01) presents the distribution of assets,
liabilities and stockholders' equity and interest differential, under the
caption "Average Balance Sheet" and is incorporated herein by reference.
C. Interest Differential
Page 10 of the Company's 1996 Annual Report to Stockholders (portions of
which are included herewith as Exhibit 13.01) presents the interest differential
under the caption "Rate/Volume Analysis" and is incorporated herein by
reference.
Interest Rate Sensitivity Analysis
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest earning assets
maturing or repricing within a specific time period and the amount of interest
bearing liabilities maturing or repricing within that time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income while a positive
gap would tend to result in an increase in net interest income. During a period
of falling interest rates, a negative gap would tend to result in an increase in
net interest income while a positive gap would tend to adversely affect net
interest income.
At December 31, 1996, the Company had a negative short-term gap. In
general, the lower the level of market interest rates (on a relative basis), the
shorter (term) the Company's investments. The Company generally invests in
securities with maturities ranging from three months to two years. As interest
rates increase the Company purchases securities with longer terms, and may
purchase securities with maturities of up to three years. While management
regularly reviews the Company's gap analysis, the gap is considered an
analytical tool which has limited value. Management has long followed
short-term, high quality standards for the Company's interest-earning asset
portfolios, resulting in high liquidity. This strategy enables the Company
flexibility to reprice assets and liabilities over a relatively short period of
time.
The following prepayment rate assumptions for mortgage loans are based upon
historical performance. Prepayment rate assumptions for fixed rate one-to
four-family mortgage loans and mortgage-backed securities ("MBS") based upon the
remaining term to contractual maturity were as follows: (a) 30% if less than six
months; (b) 12% if beyond six months to one year or beyond five to ten years;
(c) 10% if beyond one year to three years or beyond ten years to twenty years;
(d) 8% if beyond three years to five years; and (e) 19% if beyond 20 years. All
other mortgage loans are assumed to prepay at 3%. Adjustable-rate mortgages are
assumed to prepay at 15% and second mortgages at 18%. All deposit accounts,
which are subject to immediate withdrawal/repricing, except certificates, are
assumed to reprice in the earliest period presented. Securities
available-for-sale, which are comprised entirely of marketable equity securities
which do not have a fixed maturity date, are reflected as repricing in the five
to ten year category.
The following table sets forth, as of December 31, 1996, repricing
information on earning assets and interest bearing liabilities. The data
reflects estimated principal amortization and prepayments on mortgage loans, and
estimated attrition of deposit accounts based as previously discussed. The table
does not necessarily indicate the impact of general interest rate movements on
the Bank's net interest income because the repricing of certain categories of
assets and liabilities is beyond the Bank's control. As a result, certain assets
and liabilities indicated as repricing within a stated period may in fact
reprice at different times and at different rate levels.
At December 31, 1996
--------------------
More More More More More
Than Than Than Than Than
3 1 Year 3 Years 5 Years 10 Years More
0-3 Months to 3 to 5 to 10 to 20 Than
Months to 1 Year Years Years Years Years 20 Years Total
------- --------- ------ ------- ------- -------- -------- ------
(Dollars in Thousands)
Interest earning assets:
Mortgage loans ,net (1)........ $ 77,153 $157,456 $236,821 $151,854 $163,351 $ 31,602 $ 13,991 $ 832,228
Debt and equity securities and
other investments, net (2).... 101,859 84,829 119,816 - 51,021 - - 357,525
CMOs, net...................... 29,174 76,756 46,436 2,906 - - - 155,272
MBS, net....................... 301 873 1,748 889 1,081 700 - 5,592
Other loans, net (1)........... 153 701 12,235 4,291 10,493 - - 27,873
Federal funds sold............. 86,500 - - - - - - 86,500
-------- -------- -------- -------- -------- --------- -------- ----------
Total interest earning assets 295,140 320,615 417,056 159,940 225,946 32,302 13,991 1,464,990
-------- -------- -------- -------- -------- --------- -------- ----------
Interest bearing liabilities:
Passbook and lease
security accounts......... ... 599,951 - - - - - - 599,951
Certificate accounts........... 130,340 193,448 48,391 14,969 17 - - 387,165
Money market accounts.......... 89,081 - - - - - - 89,081
NOW accounts................... 36,256 - - - - - - 36,256
-------- -------- -------- -------- -------- --------- -------- ----------
Interest bearing liabilities. 855,628 193,448 48,391 14,969 17 - - 1,112,453
-------- -------- -------- -------- -------- --------- -------- ----------
Interest sensitivity gap
per period.................... $(560,488) $127,167 $368,665 $144,971 $225,929 $ 32,302 $ 13,991 $ 352,537
========= ======== ======== ======== ======== ========= ======== ==========
Cumulative interest
sensitivity gap............... $(560,488) $(433,321)$(64,656) $ 80,315 $306,244 $338,546 $352,537 $ -
========= ========= ======== ======== ======== ======== ======== =======
Percentage of gap per period to
total assets................. (36.97%) 8.39% 24.32% 9.56% 14.90% 2.13% 0.92%
Percentage of cumulative gap to
total assets................ (36.97%) (28.58%) (4.26%) 5.30% 20.20% 22.33% 23.25%
<FN>
(1) Includes non-performing loans and excludes the allowance for possible loan
losses.
(2) Securities available-for-sale are shown including the market value
appreciation of $39.3 million, before tax, from Statement 115.
Note:
Certain short comings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as ARM loans, have features which
limit changes in interest rates on a short-term basis and over the life of the
asset. Further, in event of a change in interest rates, prepayment and early
withdrawal levels may deviate significantly from those assumed in calculating
the table.
</FN>
INVESTMENT PORTFOLIO
A. The following table sets forth certain information regarding the
Company's investment portfolio at the dates indicated:
At December 31,
1996 1995 1994
---- ---- ----
(In Thousands)
Securities Available-for-Sale:
Marketable equity securities, at fair value ..... $ 51,021 $ 40,071 $ 27,646
======== ======== ========
Securities Held-to-Maturity:
U.S Government and federal agency securities .... $299,645 $439,896 $404,651
CMOs, net ....................................... 155,272 144,607 314,180
Mortgage-backed securities:
GNMA, net ..................................... 4,999 6,667 8,597
FNMA, net ..................................... 152 235 325
FHLMC, net .................................... 441 655 877
-------- -------- --------
Total ......................................... $460,509 $592,060 $728,630
======== ======== ========
Other investments:
FHLB-NY stock (investment required by law) ...... $ 6,829 $ 6,272 $ 6,082
Other stock...................................... 30 30 70
-------- -------- --------
Total other investments........................ $ 6,859 $ 6,302 $ 6,152
======== ======== ========
Contractual Maturity Distribution
The table below sets forth certain information regarding the carrying
value, weighted average yields and maturities of the Company's securities
held-to-maturity at December 31, 1996. The table does not reflect prepayments or
scheduled amortization on CMOs or MBS. For MBS, the maturities indicated are the
dates the final payments are due. For CMOs, the maturities reflect the "final
payment dates", which as defined by the issuer, represent the latest date by
which the CMO will be retired. The assumptions used by the issuer in calculating
the final payment dates are highly conservative, and the actual retirement may
occur earlier than its final payment date. The estimated actual average maturity
on the entire CMO portfolio at December 31, 1996 was fifteen months. For
principal reduction on these securities, for the years ended December 31, 1996,
1995 and 1994: See the "Consolidated Statements of Cash Flows", included on
pages 22 and 23 of the 1996 Annual Report to Stockholders.
At December 31, 1996
------------------------
One Year or Less Over 1 to 5 Years Over 5 to 10 Years After 10 years
------------------- ------------------- -------------------- ---------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Federal agency ...... $ 95,000 5.29% $ - - % $ - - % $ - - %
U.S. Government ..... 84,829 5.75 119,816 6.14 - - - -
CMOs ................ - - 55,649 5.47 99,623 5.82 - -
MBS ................. - - 2,152 10.94 - - 3,440 9.61
-------- -------- -------- ----- -------
Total .......... $179,829 5.51% $177,617 5.99% $ 99,623 5.82% $ 3,440 9.61%
======== ======== ======== ===== =======
LOAN PORTFOLIO
A. The following table sets forth the composition of the mortgage and other
loan portfolios in dollar amounts:
At December 31,
------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands)
Mortgage loans:
Multi-family .......................... $433,224 $344,337 $294,003 $238,756 $207,192
Underlying cooperative ... ............ 262,221 263,972 251,580 253,460 235,439
One- to four-family ................... 76,848 82,391 86,531 95,357 113,948
Commercial ............................ 61,829 55,662 58,070 59,942 63,373
Construction .......................... 1,836 1,492 2,518 410 -
-------- -------- -------- -------- --------
Total mortgage loans ............... 835,958 747,854 692,702 647,925 619,952
-------- -------- -------- -------- --------
Other loans:
Student ............................... 6,204 7,466 9,656 11,132 11,504
Loans secured by deposit accounts ..... 8,328 8,489 9,167 9,340 10,076
Property improvement .................. 8,775 9,165 6,762 5,599 5,624
Consumer .............................. 4,350 4,092 1,821 1,516 1,892
Overdraft loans ....................... 237 220 224 210 181
-------- -------- -------- ------- --------
Total other loans .................. 27,894 29,432 27,630 27,797 29,277
-------- -------- -------- -------- --------
Total loans receivable ............. 863,852 777,286 720,332 675,722 649,229
-------- -------- -------- -------- --------
Less:
Unearned discounts, premiums and
deferred loan fees, net .............. 3,751 4,344 4,952 3,210 3,601
Allowance for possible loan losses .... 5,327 4,697 4,085 4,136 3,554
-------- -------- -------- -------- --------
Loans receivable, net .............. $854,774 $768,245 $711,295 $668,376 $642,074
======== ======== ======== ======== ========
B. Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table shows the contractual maturity of the loan portfolios
at December 31, 1996. The table does not reflect prepayments, or scheduled
principal amortization or repricing of adjustable rate loans. (For principal
reduction on loans, for the years ended December 31, 1996, 1995 and 1994: See
the "Consolidated Statements of Cash Flows", included on pages 22 and 23 in the
1996 Annual Report to Stockholders.)
Other
Mortgage Loans Loans Total
-------------- ----- -----
(In Thousands)
Under- One-to
Multi- lying- Four- Commer- Construct-
Family Co-op Family cial tion Other
------ ----- ------ ---- ---- -----
Amounts due:
Within 1 Year ......... $ 35,340 $ 19,603 $ 9,053 $ 21,870 $ 1,613 $ 8,505 $ 95,984
-------- -------- -------- -------- --------- ------- --------
After 1 Year:
1 to 2 years .......... 12,844 22,283 356 6,723 - 1,886 44,092
2 to 3 years .......... 30,900 12,723 615 2,045 223 2,719 49,225
3 to 5 years .......... 105,074 73,539 1,227 5,449 - 4,291 189,580
5 to 10 years ......... 218,096 106,368 5,777 22,006 - 10,493 362,740
10 to 20 years ........ 30,516 27,705 36,866 3,736 - - 98,823
Over 20 years ......... 454 - 22,954 - - - 23,408
-------- -------- -------- -------- --------- ------- --------
Total due after 1 year .... $397,884 $242,618 $ 67,795 $ 39,959 $ 223 $19,389 $767,868
-------- -------- -------- -------- --------- ------- --------
Total amounts due ... $433,224 $262,221 $ 76,848 $ 61,829 $ 1,836 $27,894 $863,852
======== ======== ========= ======== ========= ======= --------
Less:
Unearned discounts,
premiums and deferred
loan fees, net ....... 3,751
Allowance for possible
loan losses .......... 5,327
--------
Loans receivable, net ... $854,774
========
The following table sets forth at December 31, 1996, the dollar amount of
all loans due after December 31, 1997 and whether such loans have fixed interest
rates or adjustable interest rates.
Fixed Adjustable Total
----- ---------- -----
(In Thousands)
Due after December 31, 1996:
Mortgage loans:
Multi-family ........................ $ 397,884 $ - $ 397,884
Underlying cooperative .............. 242,618 - 242,618
One-to four-family .................. 59,302 8,493 67,795
Commercial .......................... 39,959 - 39,959
Construction ........................ 223 - 223
Other loans:
Student ............................. 3,319 2,659 5,978
Loans secured by deposit accounts ... 421 - 421
Property improvement ................ 8,568 - 8,568
Consumer ............................ 4,185 - 4,185
Overdraft loans ..................... 237 - 237
---------- ------- ----------
Total loans receivable ................ $ 756,716 $11,152 $ 767,868
========== ======= ==========
C. Delinquencies and Classified Assets - Delinquent loans are reviewed by
management monthly and by the Board of Directors quarterly. When a borrower
fails to make a scheduled loan payment, efforts are made to have the borrower
cure the delinquency. The borrower is notified of the delinquency in writing and
by telephone by the Bank's collection staff. For mortgage loans, under certain
circumstances, a site inspection of the property is required. Most delinquencies
are cured within 90 days and no legal action is taken. If a mortgage delinquency
exceeds 90 days, the Bank institutes measures to enforce its remedies, including
commencing a foreclosure action. For delinquent Federal Housing Administration
("FHA") and Veterans Administration ("VA") mortgage loans, the Bank follows
notification and foreclosure procedures prescribed by FHA and VA. Property
acquired by the Bank as a result of a foreclosure is classified as "Other Real
Estate". For uninsured non-mortgage loans, delinquent loans are charged off
after 120 days and are referred to the Bank's attorneys for collection.
At December 31, 1996, 1995 and 1994, delinquencies in the loan portfolios
were as follows:
61-90 Days 90 Days and Over
---------- ----------------
Number Principal Number Principal
of balance of balance
loans of loans loans of loans
----- -------- ----- --------
(Dollars in Thousands)
At December 31, 1996
--------------------
Delinquent loans:
Guaranteed1 78 $ 390 144 $ 692
Non-guaranteed 9 20 15 13,459
--- ------ --- -------
87 $ 410 159 $14,151
=== ====== === =======
Ratio of delinquent
loans to total loans .05% 1.64%
=== ====
At December 31, 1995
--------------------
Delinquent loans:
Guaranteed1 91 $ 476 132 $ 751
Non-guaranteed 10 8,165 8 324
--- ------ --- -------
101 $8,641 140 $ 1,075
=== ====== === =======
Ratio of delinquent
loans to total loans 1.11% .14%
===== ===
At December 31, 1994
--------------------
Delinquent loans:
Guaranteed(1) 101 $ 585 247 $ 960
Non-guaranteed 9 119 9 329
--- ------ --- -------
110 $ 704 256 $ 1,289
=== ====== === =======
Ratio of delinquent
loans to total loans .10% .18%
=== ===
<FN>
(1) Loans which are FHA, VA or SLMA guaranteed.
</FN>
The following table sets forth information regarding non-accrual,
restructured and impaired loans and loans which are 90 days or more delinquent
but on which the Bank is accruing interest at the dates indicated.
At December 31,
---------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
Mortgage loans:
One-to four-family, multi-family and
commercial real estate loans:
Non-accrual loans (1) ................... $12,754 $20,903 $ 500 $ - $ -
------- ------- ------ ------ ------
Accruing loans 90 or more days overdue:
Conventional mortgages .................... 686 311 322 326 1,615
VA and FHA mortgages (2) .................. 361 557 581 937 1,174
------ ------ ------ ------ ------
Total ................................ 1,047 868 903 1,263 2,789
------ ------ ------ ------ ------
Other loans:
Non-accrual loans ........................ - - - - -
Accruing 90 or more days overdue:
Student loans .......................... 331 194 379 429 280
Consumer loans ......................... 19 13 7 19 5
------ ------ ------ ------ ------
Total ................................ 350 207 386 448 285
------ ------ ------ ------ ------
Total non-performing loans:
Non-accrual .............................. 12,754 20,903 500 - -
Accruing 90 days or more overdue ......... 1,397 1,075 1,289 1,711 3,074
------ ------ ------ ------ ------
Total ................................ $14,151 $21,978 $1,789 $1,711 $3,074
======= ======= ====== ====== ======
Non-accrual loans to total loans ........... 1.48% 2.69% .07% - % - %
Accruing loans 90 or more days overdue
to total loans ........................... .16 .14 .18 .25 .47
Non-performing loans to total loans ........ 1.64 1.78(3) .25 .25 .47
At December 31:
Restructured loans ......................... $ 1,874 $ 1,663 $1,828 $ - $ -
For the years ended 12/31:
Income forfeited due to
restructured loans ........................ $ 62 $ 62 $ 6 $ - $ -
Income unrecorded due to
non-accrual/impaired loans ................ $ 1,180 $ 226 $ 150(4) $ - $ -
<FN>
(1) See "Asset/Liability Management", included on pages 7 and 8 in the 1996
Annual Report to Stockholders.
(2) The Bank's FHA and VA loans are guaranteed, seasoned loans. These loans,
including the past due loans, do not present any significant collection risk to
the Bank and therefore, are presented separately from conventional mortgages.
(3) Does not include the $8.2 million mortgage loan that was on non-accrual
status, as payments were received through the bankruptcy court.
(4) As part of restructuring interest was waived, therefore loan was placed on
non-accrual status.
</FN>
There were no loans included in the preceding table which were modified in
a troubled debt restructure ("TDR"). The entire balance of impaired loans at
December 31, 1996 represents loans on non-accrual status. The average balance of
impaired loans for 1996 and 1995 was $12,754,000 and $208,000, respectively.
There was no interest income recorded for impaired loans (for the period in
which the loans were identified as impaired) during 1996 and 1995. For the years
ended December 31, 1996 and 1995, impaired loans resulted in foregone interest
of $1,180,000 and $29,000, respectively. At December 31, 1996 and 1995, loans
restructured in a TDR, other than those classified as impaired loans and/or
non-accrual loans, were $1,874,000 and $1,663,000, respectively. Interest
forfeited attributable to these loans was $62,000, $62,000 and $6,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
Classified Assets - Federal regulations provide for the classification of
loans and other assets such as debt and equity securities considered by the OTS
to be of lesser quality as "substandard", "doubtful" or "loss" assets. An asset
is considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
Substandard assets include those characterized by the distinct possibility that
the insured institution will sustain some loss if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard", with the added characteristic that the
weaknesses present make "collection or liquidation in full", on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable". Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Pursuant to OTS
rules, the Bank recently discontinued classifying assets as "special mention" if
such assets possessed weakness but do not expose the Bank to sufficient risk to
warrant classification in one of the aforementioned categories. However, the
Bank still maintains a "special mention" category under its internal asset
review system.
When an insured institution classifies problem assets as either
"substandard" or "doubtful", it is required to establish general allowances for
loan losses in an amount deemed prudent by management. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss", it is required to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge off such amount. An institution's determination as to
the classification of its assets and the amount of its valuation allowances is
subject to review by the OTS which can order the establishment of additional
general or specific loss allowances. In connection with the filing of its
periodic reports with the OTS, the Bank regularly reviews the problem loans in
its portfolio to determine whether any loans require classification in
accordance with applicable regulations.
Allowances for Possible Loan and Other Credit Losses - The allowances for
possible credit losses are established through provisions made, based on
management's evaluation of the risk inherent in its asset portfolios and changes
in the nature and volume of investment activity. Such evaluation, which includes
a review of all assets for which full collection may not be reasonably assured,
considers among other matters, the estimated fair value of the underlying
collateral, economic conditions, historical loss experience and other factors
that warrant recognition in providing for adequate credit allowances. (For a
more complete discussion of the Bank's problem assets see "Provision For
Possible Loan Losses" and "Provision For Possible Other Credit Losses", included
on page 11 in the 1996 Annual Report to Stockholders.)
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with other federal banking agencies, have an
interagency policy statement on the allowance for loan and lease losses. The
policy statement provides guidance for financial institutions on both the
responsibilities of management for the assessment and establishment of adequate
allowances and guidance for banking agency examiners to use in determining the
adequacy of general valuation allowances. Generally, the policy statement
requires that: institutions have effective systems and controls to identify,
monitor and address asset quality problems; have analyzed all significant
factors that affect the collectibility of the portfolio in a reasonable manner;
and have established acceptable allowance evaluation processes that meet the
objectives set forth in the policy statement.
Potential Problem Loans and Other Assets and Subsequent Developments
Management has identified underlying cooperative loans, which are less than 51%
sold and have loan to value ratios greater than 30% as having a level of credit
risk greater than underlying cooperative loans not meeting these criteria. At
December 31, 1996, two underlying cooperative loans, totaling $3.6 million met
both of these conditions.
Other Real Estate - During 1994, as part of the restructuring of a $1.9
million mortgage loan secured by a cooperative building, the Bank, through a
subsidiary corporation, took title to cooperative shares representing 57
apartments in an 82 unit cooperative property, located in Brooklyn, New York. As
part of the agreement, the Bank made an additional five year loan to the
cooperative to make improvements to the building and pay expenses of the
cooperative association, In addition, on February 1, 1994, the scheduled
maturity of the mortgage, the loan was extended for an additional five years at
7.25%. This additional loan is scheduled to be repaid over a five year period
commencing March 1, 1994 through maintenance charged to the cooperative
shareholders. At December 31, 1996, the balance of the additional loan was
$386,000.
In connection with this transaction $1.6 million of the $2.4 million
cooperative indebtedness was reclassified from mortgage loans to ORE. The amount
classified as ORE is based on the percentage of cooperative shares owned by the
Bank, compared to the building's total cooperative shares. At December 31, 1996,
the Bank included $1.3 million in mortgage loans and $607,000 in ORE in
connection with this property. The carrying amount of ORE is increased by
capitalized improvements, not to exceed net fair value, and reduced by deferred
gains. At December 31, 1996, a deferred cumulative gain of $347,000 on the sale
of 24 units was deferred; of the remaining 33 units owned by the Bank's
subsidiary, 32 units were rented, and 1 unit was vacant and being marketed for
sale. This property accounted for all but $40,000 of the $647,000 in ORE at
December 31, 1996.
ORE operations generated income of $772,000 for the year ended December 31,
1996. This income reflects a pre-tax gain of $705,000 recognized on the sale of
a property acquired through foreclosure during the first quarter of 1996. The
$705,000 gain reflects the recovery of $529,000 for legal fees, expensed in
prior periods, incurred in connection with the foreclosure process. There were
no provisions established against ORE during the year ended December 31, 1996.
Claims Receivable - On February 6, 1995, the Superintendent of Banks for
the State of New York seized Nationar, a check-clearing and trust company,
freezing all of Nationar's assets. On that date, the Bank had: Federal funds
sold to Nationar of $10,000,000; demand accounts of $200,000 and $38,000 of
Nationar capital stock In May, 1995, management, in accordance with the
Company's standard procedures for monitoring asset quality established a
$2,040,000, or 20%, valuation allowance against the claims receivable. During
1995, the Bank wrote off the $38,000 stock investment.
During 1996, the Bank received distributions from the Nationar estate, for
all amounts invested, except the $38,000 of capital. Therefore, during the
fourth quarter of 1996, the Bank fully recovered the $2,040,000 reserve.
SUMMARY OF LOAN LOSS EXPERIENCE
Activity in the allowance for possible loan losses for the mortgage loan
portfolio and the other loan portfolio are summarized as follows, respectively,
for the years ended December 31
Mortgage Portfolio Loan Loss Allowance: 1996 1995 1994 1993 1992
- -------------------------------------- ---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of period $4,575 $3,976 $4,000 $3,400 $2,800
Provision for possible loan losses 600 600 600 600 600
Loans charged-off - (1) (624) - -
Recoveries of loans previously charged off 1 - - - -
------ ------ ------- ------ ------
Balance at end of period $5,176 $4,575 $3,976 $4,000 $3,400
====== ====== ====== ====== ======
Ratios:
Net charge-offs to average mortgages - % - % .10% - % - %
Allowance for possible loan losses to
net mortgage loans at December 31: .63% .62% .58% .62% .55%
Allowance for possible loan losses to mortgage
loans delinquent 90 days or more at December 31: 37.50% 5.27x 4.40x 3.17x 1.22x
Other Loan Portfolio Loss Allowance:
- ------------------------------------
Balance at beginning of period $ 122 $ 109 $ 136 $ 154 $ 176
Provision for possible loan losses 40 36 8 - 1
Loans charged off (33) (43) (40) (33) (41)
Recoveries of loans previously charged off 22 20 5 15 18
------ ------ ------ ------ -----
Balance at end of period $ 151 $ 122 $ 109 $ 136 $ 154
====== ====== ====== ====== =====
Ratios:
- -------
Net charge-offs to average other loans .04% .08% .13% .06% .08%
Allowance for possible loan losses to
net other loans at December 31: .54% .42% .40% .49% .53%
Allowance for possible loan losses to other
loans delinquent 90 days or more at December 31: 43.14% 58.94% 28.24% 30.36% 54.04%
DEPOSITS
Deposit balances are summarized as follows at December 31:
1996 1995 1994
---- ---- ----
Stated Stated Stated
rate Amount rate Amount rate Amount
---- ------ ---- ------ ---- ------
(Dollars in Thousands)
Balance by interest rate:
Demand - % $ 31,940 - % $ 30,711 - % $ 28,818
NOW 2.47 36,256 2.47 36,680 2.66 36,866
Money market 2.96 89,081 2.96 92,774 2.81 109,603
Passbook & lease
security 2.71 599,951 2.96 632,879 2.96 717,988
Certificates: - - - - 2.95- 3.00 384
- - 3.70- 4.00 2,083 3.01- 4.00 132,837
4.14- 5.00 174,155 4.01- 5.00 135,386 4.01- 5.00 131,177
5.01- 6.00 187,890 5.01- 6.00 203,054 5.01- 6.00 34,034
6.01- 7.00 25,120 6.01- 7.00 29,016 6.01- 7.00 9,063
7.01- 8.00 - 7.01- 8.00 863 7.01- 8.00 3,045
8.01- 9.00 - 8.01- 9.00 - 8.01- 9.00 609
9.01-10.00 - _ 9.01-10.00 - 9.01-10.00 -
---------- ---------- -------
387,165 370,402 311,149
---------- ---------- ----------
Total deposits $1,144,393 $1,163,446 $1,204,424
========== ========== ==========
Time certificates in
excess of $100,000 $ 32,676 $ 27,039 $ 19,663
========== ========== ==========
The following table sets forth the maturity of certificate accounts in
amounts of $100,000 or more at December 31:
1996
----
(In Thousands)
Three months or less $11,792
Over three months through six months 10,132
Over six months through twelve months 5,816
Over twelve months 4,936
-------
$32,676
=======
The following table sets forth certain of the Bank's average interest
bearing deposit categories and the related average interest rates for the years
ended December 31:
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
Passbook and lease
security $ 615,591 2.72% $ 661,356 2.88% $ 765,098 2.77%
Certificates 383,215 5.16 343,229 5.14 292,762 3.75
Money Market 91,597 3.08 99,016 3.08 122,277 2.78
NOW 36,338 2.47 37,073 2.55 37,937 2.56
---------- ---------- ----------
$1,126,741 3.57% $1,140,674 3.57% $1,218,074 3.00%
========== ========== ==========
The FDIC, an agency of the U.S. Government, insures each depositor's
savings up to $100,000 through the BIF.
Financial Highlights
For the Years Ended December 31: 1996 1995 1994
- ------------------------------- ---- ---- ----
Return on average assets 1.74% 1.44% 1.46%
Return on average equity 8.05 6.67 7.19
Dividend payout ratio(1) 47.24 50.25 35.64
Average equity to average assets 21.65 21.60 20.36
Equity to total assets 22.12 22.01 20.93
Interest rate spread 3.90 3.82 3.75
Net interest margin 4.68 4.60 4.36
Non-interest expense to
average assets 1.80 1.92 1.92
Non-performing loans to total loans(2) 1.64 1.78 0.25
Non-performing assets to total assets(2) 0.98 1.50 0.22
Efficiency ratio(3) 40.40 42.36 44.57
Ratio of net interest income to
non-interest expense 2.44x 2.27x 2.15x
Average interest earning assets to
average interest bearing liabilities 1.28x 1.28x 1.25x
<FN>
(1) Dividend payout ratio is calculated by dividing dividends declared per
share by net income per share.
(2) See also "Asset/Liability Management", included on pages 7 and 8 in the
1996 Annual Report to Stockholders.
(3) Amount is determined by dividing non-interest expense, excluding Other Real
Estate (income) expense, by net interest income plus loan fees and service
charges.
</FN>
BORROWINGS
The Bank has not directly borrowed funds since 1984, however, in the event
that the Bank should require funds beyond its internal ability, it may take
advances from the Federal Home Loan Bank, New York.
The final payment on the Employee Stock Ownership Plan ("ESOP") obligation
was made during 1994, through the Bank's contributions of $1.0 million. Total
interest expense incurred on the obligation during 1994 was $25,000. The Bank
has continued to make contributions to a non-leveraged ESOP.
ITEM 2. PROPERTIES
----------
The Bank conducts its business through 13 full-service branch offices, 10
located in the borough of Queens, one in the borough of Manhattan and one each
in Nassau and Suffolk counties. The Company believes that the Bank's current
facilities are adequate to meet the present and immediately foreseeable needs of
the Bank and the Company. (See Note 9 to the Consolidated Financial Statements,
included on page 31 in the 1996 Annual Report to Stockholders.)
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Bank is a defendant in several lawsuits arising out of the normal
conduct of business. In the opinion of management, after consultation with legal
counsel, the ultimate outcome of these matters is not expected to have a
material adverse effect on the results of operations, business operations or the
consolidated financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
ADDITIONAL ITEM. EXECUTIVE OFFICERS
------------------
The following table sets forth certain information with respect to each
executive officer of the Company who is not also a director of the Company. The
Board of Directors appoints or reaffirms the appointment of all of the Company's
Executive Officers each April. The term of each Executive Officer of the Company
is generally one year, or until a respective successor is elected (or
appointed).
Age at Position held
Name December 31, 1996 with the Company
- ---- ----------------- ----------------
John F. Bennett 62 Senior Vice President
Ronald C. Spielberger 59 Senior Vice President
Jack Connors 47 Senior Vice President
John Conroy 50 Senior Vice President
Bernice Glaz 55 Senior Vice President
Lawrence J. Kane 43 Senior Vice President
Thomas R. Lehmann 46 Chief Financial Officer
Robert A. Neumuth 53 Senior Vice President
Joseph J. Hennessy 54 Asst. Treasurer/Comptroller
The following table sets forth certain information with respect to each
executive officer of the Bank who is not a director of the Bank.
Age at Position held
Name December 31, 1996 with the Bank
- ---- ----------------- -------------
John F. Bennett 62 Senior Vice President
Ronald C. Spielberger 59 Senior Vice President
Jack Connors 47 Senior Vice President
John Conroy 50 Senior Vice President
Bernice Glaz 55 Senior Vice President
Thomas R. Lehmann 46 Chief Financial Officer
Treasurer and Comptroller
Lawrence J. Kane 43 Senior Vice President
Robert A. Neumuth 53 Senior Vice President
PART II
ITEM 5. MARKET FOR JSB FINANCIAL INC.'S COMMON EQUITY AND RELATED
---------------------------------------------------------
STOCKHOLDERS' MATTERS
---------------------
JSB Financial, Inc. common stock is traded on the Nasdaq National Market
and quoted under the symbol "JSBF".
Information regarding JSB Financial, Inc. common stock and its price for
the 1996 calendar year appears on page 6 of the 1996 Annual Report to
Stockholders, portions of which are filed herewith as Exhibit 13.01, under the
caption "Quarterly Results" and is incorporated herein by reference.
As of February 13, 1997, JSB Financial, Inc. had approximately 2,228
shareholders of record, not including the number of persons or entities holding
stock in nominee or street name through various brokers and banks.
During 1996, the Company declared four cash dividends totaling $1.20 per
share each on its common stock. Although the Company cannot guarantee dividend
payments, management expects to continue to pay cash dividends, provided that
dividend payments are in the best interest of the Company's stockholders.
Certain restrictions exist regarding the amount of dividends that the Company
may declare and pay. (See Note 17 to the Consolidated Financial Statements,
included on page 35 in the 1996 Annual Report to Stockholders.) Dividends were
paid during calendar 1996 to stockholders as follows:
Declaration Date Record Date Payment Date Dividend Per Share
---------------- ----------- ------------ ------------------
January 10, 1996 February 7, 1996 February 21, 1996 $.30
April 9, 1996 May 8, 1996 May 22, 1996 $.30
July 9, 1996 August 7, 1996 August 21, 1996 $.30
October 14, 1996 November 6, 1996 November 20, 1996 $.30
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
Information regarding selected financial data appears on pages 2 and 5 of
the Company's 1996 Annual Report to Stockholders, and is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Pages 7 through 17, of the Company's 1996 Annual Report to Stockholders,
are incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Pages 19 through 42, of the Company's 1996 Annual Report to Stockholders,
are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
-----------------------------------------------------------
AND FINANCIAL DISCLOSURES
-------------------------
None.
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant has filed a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement"), and certain information included therein
is incorporated herein by reference. Only those sections of the Proxy Statement
which specifically address the items set forth herein are incorporated by
reference. Such incorporation does not include the Report of the Compensation
Committee or the Stock Performance Graphs included in the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
-----------------------------------------------
Information presented under the heading "Information With Respect to
Nominees and Continuing Directors" on pages 4 and 5 in the Company's Proxy
Statement for its Annual Meeting of Stockholders to be held on May 13, 1997, is
incorporated herein by reference. Information concerning Executive Officers who
are not directors is contained in Part I of this report pursuant to paragraph
(b) of Item 401 of Regulation S-K in reliance on Instruction G.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Information included under the headings "Directors' Compensation" and
"Executive Compensation" on pages 9 through 12 (excluding the Report of the
Compensation Committee on pages 10 and 11) in the Company's Proxy Statement for
its Annual Meeting of Stockholders to be held on May 13, 1997, is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Information included under the headings "Security Ownership of Certain
Beneficial Owners" and "Stock Ownership of Management" on pages 3 and 8 in the
Company's Proxy Statement for its Annual Meeting of Stockholders to be held on
May 13, 1997, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information included under the headings "Indebtedness of Management and
Transactions with Certain Related Persons" on page 19 in the Company's Proxy
Statement for its Annual Meeting of Stockholders to be held on May 13, 1997, is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) 1. Financial Statements
The following Consolidated Financial Statements of the Company, its
subsidiary, Jamaica Savings Bank FSB, and the independent auditors' report
thereon, included on pages 19 through 43, of the Company's 1996 Annual Report to
Stockholders, are incorporated herein by reference:
- Consolidated Statements of Financial Condition at December 31,
1996 and 1995
- Consolidated Statements of Income for each of the years in the three
year period ended December 31, 1996
- Consolidated Statements of Changes in Stockholders' Equity for each of
the years in the three year period ended December 31, 1996
- Consolidated Statements of Cash Flows for each of the years in the
three year period ended December 31, 1996
- Notes to the Consolidated Financial Statements
- Independent Auditors' Report
The remaining information appearing in the 1996 Annual Report to
Stockholders is not deemed to be filed as part of this report, except as
expressly provided herein.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or Notes thereto.
(b) Reports on Form 8-K filed during the last quarter of 1996: None
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K:
Exhibit No. Description
----------- -----------
3.01 Articles of Incorporation (1)
3.02 Bylaws (2)
4.01 Stock Certificate of JSB Financial, Inc. (1)
Employment Agreement between the Company and:
10.01 Park T. Adikes (3)
10.02 Edward P. Henson (3)
10.04 Ronald C. Spielberger (3)
10.05 Joanne Corrigan (3)
10.06 Supplemental Employment Agreement entered into on July 9, 1996
between the Company and (filed herewith):
Park T. Adikes
Edward P. Henson
Ronald C. Spielberger
Joanne Corrigan
Continued
Exhibit No. Description
----------- -----------
Employment Agreement between the Bank and:
10.07 Park T. Adikes (3)
10.08 Edward P. Henson (3)
10.09 Ronald C. Spielberger (3)
10.10 Joanne Corrigan (3)
10.11 John F. Bennett (3)
10.12 Jack Connors (4)
10.13 John J. Conroy (4)
10.14 Bernice Glaz (4)
10.15 Thomas R. Lehmann (4)
10.16 Lawrence J. Kane (3)
10.17 Robert A. Neumuth, filed herewith
10.18 Supplemental Employment Agreement entered into on July 9, 1996
between the Bank and, (filed herewith):
Park T. Adikes
Edward P. Henson
Ronald C. Spielberger
Joanne Corrigan
John F. Bennett
Jack Connors
John J. Conroy
Bernice Glaz
Thomas R. Lehmann
Lawrence J. Kane
Robert A. Neumuth
Special Termination Agreements between the Bank, guaranteed by
the Company, and:
10.19 Teresa DiRe-Covello (4)
10.20 Joseph J. Hennessy (4)
10.21 Philip Pepe (5)
10.22 Supplemental Special Termination Agreements entered into on July
9, 1996 between the Bank, (filed herewith) and:
Teresa DiRe-Covello
Joseph J. Hennessy
Philip Pepe
Continued
Exhibit No. Description
----------- -----------
10.23 Jamaica Savings Bank FSB Benefit Restoration Plan
(Amended and Restated) (6)
10.24 JSB Financial, Inc. 1990 Incentive Stock Option Plan
(Amended and Restated) (7)
10.25 JSB Financial, Inc. 1990 Stock Option Plan
For Outside Directors (Amended and Restated) (7)
10.26 Jamaica Savings Bank FSB Employee Severance
Compensation Plan (1)
10.27 Jamaica Savings Bank FSB Outside Directors' Consultation
and Retirement Plan (8)
10.28 Incentive Savings Plan of Jamaica Savings Bank FSB (8)
10.29 The JSB Financial, Inc. 1996 Stock Option Plan (9)
11.01 Statement regarding computation of per share earnings, filed herewith
13.01 Portions of the 1996 Annual Report to Stockholders, filed herewith
23.01 Consent of KPMG Peat Marwick LLP, filed herewith
27.00 Financial Data Schedule, filed herewith
99.01 Form 11-K for the 1996 Incentive Savings Plan of
Jamaica Savings Bank FSB (10)
<FN>
(1) Incorporated herein by reference to Exhibits filed with the Registration Statement on Form S-1,
Registration No. 33-33821.
(2) Incorporated herein by reference to Exhibits filed with the Registration
Statement on Form S-1, Registration No. 33-33821, as amended by Form 8-K
on January 14, 1992.
(3) Incorporated herein by reference to Exhibits filed with the Form 10-K for the Year Ended December 31, 1990.
(4) Incorporated herein by reference to Exhibits filed with the Form 10-Q for the Quarter Ended June 30, 1995.
(5) Incorporated herein by reference to Exhibits filed with the Form 10-K for the year ended December 31, 1993.
(6) Incorporated herein by reference to Exhibits filed with the Form 10-K for the Year Ended December 31, 1994.
(7) Incorporated herein by reference to Exhibits filed with the Form 10-K for the Year Ended December 31, 1992.
(8) Incorporated herein by reference to Exhibits filed with the Pre-Effective Amendment No.1 to Form S-1,
Registration No. 33-33821, filed on April 2, 1990.
(9) Incorporated herein by reference to Appendix A (pages 21 through 33) of the Proxy Statement, dated March
29, 1996.
(10) To be filed.
</FN>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
JSB Financial, Inc.
-------------------
(Registrant)
/s/ Park T. Adikes 3/21/97
- ------------------------------------
Park T. Adikes
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
/s/ Park T. Adikes 3/21/97 /s/ Thomas R. Lehmann 3/21/97
- --------------------------- ------- ----------------------------------
Park T. Adikes Thomas R. Lehmann
Chief Executive Officer Chief Financial Officer
Chairman and Director (Principal Accounting Officer)
/s/ James E. Gibbons, Jr. 3/21/97 /s/ Paul R. Screvane 3/21/97
- --------------------------- ------- ------------------------ -------
James E. Gibbons, Jr. Paul R. Screvane
Director Director
/s/ Arnold B. Pritcher 3/21/97 /s/ Alfred F. Kelly 3/24/97
- --------------------------- ------- ------------------------ -------
Arnold B. Pritcher Alfred F. Kelly
Director Director
/s/ Howard J. Dirkes, Jr. 3/24/97 /s/ Edward P. Henson 3/21/97
- ---------------------------- ------- ------------------------ -------
Howard J. Dirkes, Jr. Edward P. Henson
Director President and Director
/s/ Joseph C. Cantwell 3/24/97
- --------------------------- -------
Joseph C. Cantwell
Director