Selected Financial Data
(In Thousands, Except Per Share Amounts)
Set forth below are selected consolidated financial data of the Company. This
financial data is derived in part from, and should be read in conjunction with,
the Consolidated Financial Statements of the Company.
Selected Financial Condition Data:
At December 31, 1996 1995 1994 1993 1992
- --------------- ---- ---- ---- ---- ----
Total assets $1,516,016 $1,548,301 $1,565,095 $1,635,870 $1,698,440
Securities held-to-maturity/held-
for-investment, net 460,509 592,060 728,630 859,909 902,350
Loans receivable, net 854,774 768,245 711,295 668,376 642,074
Deposits 1,144,393 1,163,446 1,204,424 1,273,917 1,323,546
Employee Stock Ownership
Plan (ESOP) obligation - - - 1,045 4,303
Retained income 289,588 276,317 266,361 251,959 232,436
Total stockholders' equity 335,299 340,107 327,634 325,207 332,844
Selected Operating Data:
Years Ended December 31, 1996 1995 1994 1993 1992
- ------------------------ ---- ---- ---- ---- ----
Interest income $ 107,611 $ 107,726 $ 103,027 $ 108,205 $ 130,020
Interest expense 40,217 40,707 36,619 39,740 53,516
---------- ---------- ---------- ---------- ---------
Net interest income 67,394 67,019 66,408 68,465 76,504
Provision for possible
loan losses 640 636 608 600 601
(Recovery of) provision for
possible other credit losses (2,040) 2,040 - - -
---------- --------- ---------- ---------- ------
Net interest income after
provision for possible
credit losses 68,794 64,343 65,800 67,865 75,903
Non-interest income 5,081 3,995 6,752 2,239 3,999
Non-interest expense 27,598 29,561 30,937 33,657 34,726
---------- ---------- --------- ---------- ---------
Income before provision for
income taxes and cumulative
effect of accounting changes 46,277 38,777 41,615 36,447 45,176
Provision for income taxes 19,552 16,603 18,018 15,798 18,733
---------- ---------- ---------- ---------- ---------
Income before cumulative effect
of accounting changes 26,725 22,174 23,597 20,649 26,443
Cumulative effect of accounting
changes, net - - - 7,688 -
---------- ---------- ---------- ---------- --------
Net income $ 26,725 $ 22,174 $ 23,597 $ 28,337 $ 26,443
========== ========== ========== ========== ========
Income per share before cumulative
effect of accounting changes $2.54 $1.99 $2.02 $1.57 $1.89
Cumulative effect of accounting
changes, net - - - .59 -
----- ----- ----- ----- -----
Net income per share $2.54 $1.99 $2.02 $2.16 $1.89
===== ===== ===== ===== =====
Cash dividends per share $1.20 $1.00 $ .72 $ .60 $ .52
===== ===== ===== ===== =====
Quarterly Results
(In Thousands, Except Per Share Amounts and Yields)
1996 Quarter Ended
------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
Interest income $26,905 $26,958 $26,948 $26,800
Interest expense 10,147 10,041 10,060 9,969
------- ------- -------- -------
Net interest income 16,758 16,917 16,888 16,831
Provision for possible loan losses 161 160 160 159
Recovery of possible other credit losses - - - (2,040)
------- ------- ------- -------
Net interest income after provision
for possible credit losses 16,597 16,757 16,728 18,712
Non-interest income 1,215 1,135 1,646 1,085
Non-interest expense 7,266 6,062 6,965 7,305
------- ------- ------- -------
Income before provision for income taxes 10,546 11,830 11,409 12,492
Provision for income taxes 4,468 5,032 4,847 5,205
------- ------- ------- -------
Net income $ 6,078 $ 6,798 $ 6,562 $ 7,287
======= ======= ======= =======
Net income per share $ .56 $ .63 $ .64 $ .71
===== ===== ===== =====
Stock prices, Dividends and Yields:
High $34.00 $35.00 $37.13 $38.38
Low $31.50 $32.25 $32.75 $35.63
Close $33.63 $33.13 $36.13 $38.00
Cash dividends per share $ .30 $ .30 $ .30 $ .30
Dividend yield(1) 3.66% 3.57% 3.43% 3.24%
1995 Quarter Ended
------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
Interest income $26,720 $27,050 $26,978 $26,978
Interest expense 9,755 10,293 10,342 10,317
------- ------- -------- -------
Net interest income 16,965 16,757 16,636 16,661
Provision for possible loan losses 156 159 160 161
Provision for possible other credit losses - 2,040 - -
------ ------- ------- --------
Net interest income after provision
for possible credit losses 16,809 14,558 16,476 16,500
Non-interest income 814 1,041 1,143 997
Non-interest expense 7,771 7,980 6,682 7,128
------- ------- ------- -------
Income before provision for income taxes 9,852 7,619 10,937 10,369
Provision for income taxes 4,245 3,228 4,676 4,454
------- ------- ------- -------
Net income $ 5,607 $ 4,391 $ 6,261 $ 5,915
======= ======= ======= =======
Net income per share $ .50 $ .39 $ .56 $ .54
===== ===== ===== =====
Stock prices, Dividends and Yields:
High $32.00 $31.63 $31.75 $34.25
Low $23.75 $28.88 $28.88 $30.63
Close $31.00 $28.88 $31.38 $31.63
Cash dividends per share $ .25 $ .25 $ .25 $ .25
Dividend yield(1) 3.59% 3.31% 3.30% 3.08%
<FN>
(1)Dividend yield is calculated by annualizing the quarterly dividend per share
and dividing by an average of the high and low price for the quarter.
</FN>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
- -------
1996 marked the sixth full year of operation for JSB Financial, Inc. as a
publicly held company. Net income for the year was $26.7 million, or $2.54 per
share. The Company paid cash dividends on its common stock, which totaled $1.20
per share, or 47.2% of net income per share. During 1996, under two stock
repurchase programs, the Company reacquired 845,000 shares of its common stock
at an aggregate cost of $27.7 million, or at an average price of $32.72 per
share.
The Company's results of operations are most significantly affected by the
results of operations of its wholly owned subsidiary, Jamaica Savings Bank. The
Bank's results of operations are affected by general economic and competitive
conditions, particularly changes in market interest rates, as well as government
policies and actions of regulatory authorities. The Bank's core earnings are
provided from its net interest income. The operating results of the Bank are
also affected to a lesser extent by the amount of its non-interest income, such
as loan servicing income, results of real estate operations and miscellaneous
income. The principal non-interest expenses of the Bank include compensation and
employee benefits, occupancy costs and other general and administrative
expenses.
Asset/Liability Management
- --------------------------
Management aims at maintaining a stable net interest margin, through its
asset/liability structure, to minimize the effects of market interest rate
fluctuations on net interest income. Rates offered on interest bearing deposits
are established to control levels of change in deposits. Assets decreased by
$32.3 million, or 2.1% at December 31, 1996, compared to assets at December 31,
1995, while liabilities decreased by $27.5 million, or 2.3%, over the same
period. The Company maintains asset quality through its investment and loan
underwriting policies.
At December 31, 1996, investments in U.S. Government and agency securities
were $299.6 million and investments in CMOs were $155.3 million, representing
19.8% and 10.2% of total assets, respectively. During 1996, all investments in
U.S. Government and agency securities, CMOs, and mortgage-backed securities
(MBS), were designated held-to-maturity and carried at amortized cost.
Unrealized gains and losses in these portfolios are not expected to have a
material impact on future results of operations, as these securities are
intended to be held until maturity. Marketable equity securities are designated
as available-for-sale and carried at fair value. At December 31, 1996, these
securities, which had a cost basis of $11.7 million, were carried at their
aggregated fair value of $51.0 million.
During 1996, investments in CMOs increased, as purchases of $124.3 million
were made, while payments of $114.1 million were received from maturities and
amortization. CMOs meeting the Bank's CMO investment guidelines became more
readily available on the secondary market during 1996, compared to 1995. All of
the Bank's CMOs are First Tranche - Planned Amortization Class Bonds that are
collateralized by Federal National Mortgage Association (FNMA), Federal Home
Loan Mortgage Corporation (FHLMC), or Government National Mortgage Association
(GNMA), mortgage-backed securities which are collateralized by whole loans. At
December 31, 1996, the Bank did not have any CMOs that would be classified as
"high risk" securities as defined by a policy statement by the Federal Financial
Institutions Examination Council. At December 31, 1996, the estimated average
remaining maturity of the CMO portfolio was approximately fifteen months.
Management plans to continue to purchase CMOs which meet its investment
guidelines, when available.
The Bank offers adjustable-rate and fixed-rate mortgages secured by one-to
four-family properties, apartment buildings, underlying cooperative properties,
commercial real estate and offers various other consumer type loans that conform
to its lending requirements. During the first quarter of 1996, the Bank
re-established its FHA Title I Home Improvement Loan Program. During 1996, the
Bank sold $1.7 million of single family mortgage loans, originated for sale, to
government agencies. Loans held for sale are carried at the lower of cost or
market, in the aggregate. At December 31, 1996, there were no mortgage loans
held for sale.
Non-performing loans to total loans at December 31, 1996 was 1.64%,
compared to 1.78% at December 31, 1995. Non-performing loans at December 31,
1996 and 1995 included a $12.8 million underlying cooperative mortgage loan on
which the Bank has commenced foreclosure proceedings. At December 31, 1995, this
loan was 60 days in arrears and placed on non-accrual status. The mortgage is
secured by a 148 unit cooperative apartment building, located in Manhattan, New
York. No specific valuation allowances have been established against this loan.
In addition to non-performing loans, non-performing assets include Other
Real Estate (ORE) and any other investment not performing in accordance with
contractual terms. ORE represents real estate properties owned by the Bank as a
result of foreclosure or obtained by receiving a deed in lieu of foreclosure. At
December 31, 1996, the Bank held shares to 34 residential cooperative
apartments, (33 of which were attributable to one property), that comprised the
Bank's ORE of $647,000. Management closely monitors the value of properties that
are obtained through foreclosure actions. (See Note 12 to the Consolidated
Financial Statements.)
Non-performing assets to total assets at December 31, 1996 was .98%,
compared to 1.50% at December 31, 1995. The decrease in this ratio reflects the
recovery of the Bank's investments with Nationar Trust Company (Nationar).
During 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 $10.0 million;
demand accounts of $200,000 and $38,000 of Nationar capital stock. In accordance
with the Company's internal procedures for monitoring asset quality and
information available, the $38,000 stock investment was written off and a
provision for possible other credit losses of $2.0 million, or 20% of the
remaining investment, was established during 1995. During 1996, the Bank
received distributions from the Nationar estate for all amounts invested, except
the $38,000 of capital stock. Therefore, during the fourth quarter of 1996, the
Bank fully recovered the $2.0 million reserve.
Deposits at December 31, 1996, decreased by $19.1 million, or 1.6%,
compared to deposits at December 31, 1995. The most significant dollar change in
deposit composition was experienced in the Bank's passbook accounts, which
decreased by $32.9 million, or 5.2%. Money market accounts decreased by $3.7
million, or 4.0%, during 1996. However, certificate accounts increased $16.8
million, or 4.5%. Other interest bearing deposit accounts remained relatively
stable. In general, market interest rates decreased during 1996. Interest rates
on the various accounts offered by the Bank remained competitive with those of
other depository institutions in the Bank's market.
Customers have continued to withdraw funds to invest in alternative
instruments and shift funds into certificate accounts, both of which offered
higher yields. Management attributes this deposit outflow and shift in deposit
composition to the relatively low interest rate environment that has prevailed
over the last several years. The Bank controls deposit levels, and composition
through its interest rate structure. While the highest percentage of deposits
has historically remained in passbook and lease security accounts, the trend of
deposit shifts has continued towards certificate accounts. Management has
maintained an interest rate structure that has allowed deposits to continue to
shift and decline in a controlled fashion, rather than offering interest rates
that would result in significantly reducing net interest margins and interest
rate spreads or necessitate modifying the existing asset structure and
investment guidelines.
Net interest rate spread, net interest margin, liquidity, and related asset
quality are some of the key measures of financial performance that management
focuses on. The Bank's assets are structured such that gradual declines in
deposits, such as the current scenario, will not adversely affect the Company.
The Bank's liquidity ratios continue to exceed all short and long term minimum
regulatory requirements. Management is focused on providing quality customer
service as its main strategy for maintaining its relationships with its
customers. During the past year the Bank has expanded services offered to its
depositors. Automated telephone banking is now available 24 hours a day, 365
days a year. The Bank also began offering its customers credit cards. The credit
cards are issued and owned by an unrelated bank which manages and bears all
credit risk.
Analysis of Net Interest Income
- -------------------------------
Net interest income represents the difference between income on interest
earning assets and expense on interest bearing liabilities. Net interest income
depends upon the relative amount of interest earning assets and interest bearing
liabilities and the interest rate earned or paid on them.
Average Balance Sheet
The following table sets forth, for the periods indicated, information
relating to the Company's Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994 and reflects the average yield on interest
earning assets and average cost of interest bearing liabilities. Yields and
costs are derived by dividing income or expense by the average balance of the
related assets or liabilities, respectively, for the periods shown. Average
balances are derived from average daily balances. The yields and costs include
fees which are considered adjustments to yields. Average balances and yields
include non-accruing loans.
Year Ended December 31,
-----------------------------------------------------------------------------------
1996 1995 1994
-------------------------- -------------------------- ---------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost Balance Expense Cost
Assets (Dollars in Thousands)
Interest earning assets:
Mortgage loans, net...$ 792,579 $ 69,113 8.72% $ 702,252 $ 64,309 9.16% $ 656,694 $ 61,142 9.31%
Debt and equity
securities, net(1)... 361,106 21,695 6.01 456,581 27,545 6.03 392,210 19,088 4.87
CMOs, net............. 179,336 10,063 5.61 209,537 9,572 4.57 398,353 17,951 4.51
MBS, net.............. 6,540 739 11.30 8,650 969 11.20 11,773 1,288 10.94
Other loans, net...... 28,393 2,138 7.53 28,977 2,299 7.93 26,665 1,988 7.45
Federal funds sold.... 72,221 3,863 5.35 52,432 3,032 5.78 38,337 1,570 4.10
---------- --------- ---------- -------- ---------- ---------
Total interest earning
assets1................ 1,440,175 107,611 7.47 1,458,429 107,726 7.39 1,524,032 103,027 6.76
Non-interest earning
assets................. 93,539 80,701 88,899
---------- ---------- ----------
Total assets.........$1,533,714 $1,539,130 $1,612,931
========== ========== ==========
Liabilities and stockholders' equity
Interest bearing
liabilities:
Passbook and other.....$ 743,526 $ 20,440 2.75% $ 797,445 $ 23,058 2.89% $ 925,312 $ 25,599 2.77%
Certificate accounts... 383,215 19,777 5.16 343,229 17,649 5.14 292,762 10,995 3.75
---------- -------- ---------- -------- ---------- --------
1,126,741 40,217 3.57 1,140,674 40,707 3.57 1,218,074 36,594 3.00
ESOP obligation........ - - - - - - 394 25 6.35
---------- -------- ---------- -------- ---------- --------
Total interest
bearing liabilities.... 1,126,741 40,217 3.57 1,140,674 40,707 3.57 1,218,468 36,619 3.01
Non-interest bearing
liabilities.......... 74,928 65,963 66,150
---------- ---------- ----------
Total liabilities.... 1,201,669 1,206,637 1,284,618
Total stockholders'
equity.............. 332,045 332,493 328,313
---------- ---------- ----------
Total liabilities
and stockholders'
equity..............$1,533,714 $1,539,130 $1,612,931
========== ========== ==========
Net interest income/
interest rate spread(2) $ 67,394 3.90% $ 67,019 3.82% $ 66,408 3.75%
======== ==== ======== ==== ======== ====
Net interest earning
assets/net interest
margin(3)..............$ 313,434 4.68% $ 317,755 4.60% $ 305,564 4.36%
========== ==== ========== ==== ========== ====
Ratio of interest
earning assets to
interest bearing
liabilities............ 1.28x 1.28x 1.25x
===== ==== ====
<FN>
(1) Average balances for debt and equity securities and total interest earning
assets, exclude the net market appreciation recognized in connection with
Statement 115 and is not included in deriving the yield.
(2) Interest rate spread represents the difference between the average yield on
average interest earning assets and the average cost of average interest
bearing liabilities.
(3) Net interest margin represents net interest income divided by average
interest earning assets.
</FN>
Rate Volume Analysis
The following table presents the extent to which changes in interest rates
and changes in the volume of interest earning assets and interest bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
Year Ended December 31, 1996 Year Ended December 31, 1995
Compared to Compared to
Year Ended December 31, 1995 Year Ended December 31, 1994
---------------------------- ----------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In Thousands)
Interest earning assets:
Mortgage loans, net .............. $ 7,997 $ (3,193) $ 4,804 $ 4,169 $(1,002) $ 3,167
Debt and equity securities ....... (5,759) (91) (5,850) 3,450 5,007 8,457
CMOs, net......................... (1,499) 1,990 491 (8,615) 236 (8,379)
Other loans, net ................. (46) (115) (161) 178 133 311
MBS, net.......................... (239) 9 (230) (349) 30 (319)
Federal funds sold .............. 1,070 (239) 831 692 770 1,462
------- -------- -------- ------- ------- -------
Total ...................... 1,524 (1,639) (115) (475) 5,174 4,699
------- -------- -------- -------- ------- -------
Interest bearing liabilities:
Passbook and other ............... (1,400) (1,218) (2,618) (3,603) 1,062 (2,541)
Certificate accounts.............. 2,059 69 2,128 2,113 4,541 6,654
ESOP obligation................... - - - (25) - (25)
------- -------- -------- ------- ------- -------
Total....................... 659 (1,149) (490) (1,515) 5,603 4,088
------- -------- -------- -------- ------- -------
Net change in net interest income... $ 865 $ (490) $ 375 $ 1,040 $ (429) $ 611
======= ======= ======== ======= ======= =======
Comparison of Operating Results for the Years Ended December 31, 1996 and 1995
- ------------------------------------------------------------------------------
General
Net income for the year ended December 31, 1996 was $26.7 million, or $2.54
per share, compared with $22.2 million, or $1.99 per share, for 1995. Comments
regarding the components of net income are detailed in the following paragraphs.
Interest Income
Income on mortgage loans increased by $4.8 million, or 7.5%, to $69.1
million, from $64.3 million. The average investment in mortgage loans increased
by $90.3 million, or 12.9%, to $792.6 million for 1996, from $702.3 million for
1995. The amount invested in mortgage loans has continued to increase over the
past seven years in both dollar amount and as a percentage of assets. Mortgages
originated for the Bank's portfolio during 1996, increased by $58.4 million, or
75.0%, to $136.2 million, from $77.8 million during 1995. The mortgage portfolio
yield decreased to 8.72% for 1996 from 9.16% for 1995.
Income on debt and equity securities decreased $5.9 million, or 21.2%, to
$21.7 million for 1996, compared to $27.5 million for 1995. The decrease in
income reflects a $95.5 million, or 20.9%, decrease in the average investment in
this portfolio and a minimal decrease in the yield to 6.01% for 1996, from 6.03%
for 1995. During 1996, activity in the investment securities portfolio included
purchases of $534.6 million and maturities of $675.0 million. During 1996, the
Bank sold or redeemed marketable equity securities totaling $30,000, realizing
gains of $4,000 and losses of $2,000. There were no sales of debt or equity
securities during 1995. At December 31, 1996, the $299.6 million debt securities
portfolio had net unrealized gains of $617,000, which are not expected to impact
future income, as these securities are designated as held-to-maturity. The
equity portfolio, which is designated as available-for-sale, was carried at its
aggregate market value of $51.0 million, which exceeds its cost of $11.7
million.
Income on CMOs increased by $491,000, or 5.1%, to $10.1 million, from $9.6
million. During 1996 an increased number of CMOs meeting the Bank's investment
guidelines became available on the secondary market, resulting in an increase of
CMOs purchased. Purchases of CMOs for 1996, totaled $124.3 million, compared
with $67.9 million for 1995. The average investment in CMOs decreased by $30.2
million, or 14.4%, to $179.3 million for 1996. Principal payments on CMOs
decreased to $114.1 million during 1996 from $237.1 million during 1995. During
1996, the CMO portfolio yielded 5.61% compared with 4.57% for 1995. At December
31, 1996, the $155.3 million CMO portfolio had net unrealized gains of $149,000,
which are not expected to impact future results of operations, as these
securities are designated as held-to-maturity.
During 1996, MBS continued and will continue to amortize without
replacement, as the Bank discontinued purchasing MBS during the 1980's. Income
earned on MBS decreased to $739,000 during 1996 from $969,000 during 1995,
reflecting the amortizing balance. There were no sales of MBS during 1996 or
1995. At December 31, 1996, there were unrealized gains of $509,000 and no
unrealized losses in the $5.6 million MBS portfolio. These gains are not
expected to impact future results of operations, as MBS securities are
designated as held-to-maturity.
Income from federal funds sold increased to $3.9 million for 1996 from $3.0
million for 1995. The average balance invested in federal funds sold increased
to $72.2 million during 1996, compared to $52.4 million during 1995. The average
yield on federal funds sold decreased to 5.35% during 1996 from 5.78% during
1995. Liquidity, provided by federal funds sold, is necessary to fund: mortgage
lending; deposit withdrawals; dividend payments on and repurchases of the
Company's common stock and to meet obligations for non-interest expense.
Interest Expense
Interest expense on deposits decreased to $40.2 million, or 1.2%, for 1996
from $40.7 million for 1995. This decrease reflects a decrease in average
interest bearing deposits of $13.9 million, or 1.2%, to $1.13 billion for 1996,
from $1.14 billion for 1995. Market interest rates fluctuated during 1996 and
the Bank's deposits continued to shift from passbook accounts into certificate
accounts. Management monitors deposit levels and interest rates offered by
competitors.
Net Interest Income
The Bank's profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest income on interest
earning assets, such as loans and investments, and its interest expense on
interest bearing deposits. The Bank, like most savings institutions, will
continue to be affected by general changes in levels of interest rates,
government regulations and other economic factors beyond its control.
Net interest income, increased by $375,000, to $67.4 million, from $67.0
million for 1995. For 1996, the net interest margin increased to 4.68% from
4.60% for 1995, and the net interest spread increased to 3.90% from 3.82% for
1995. The yield on interest earning assets increased to 7.47% for 1996 from
7.39% for 1995. The cost of interest bearing deposits remained unchanged at
3.57% for 1996 and 1995. The average balance of interest earning assets and
interest bearing deposits decreased by $18.3 million and $13.9 million,
respectively.
Provision For Possible Loan Losses
The provision for possible loan losses for 1996 remained stable at $640,000
compared to $636,000 for 1995. During 1996 and 1995 management made general
mortgage loan provisions of $600,000. Provisions of $40,000 and $36,000 were
made against the other loan portfolio during 1996 and 1995, respectively. Future
additions to the loan loss allowances will be based on management's continuing
evaluations of the loan portfolios and assessments of economic conditions.
Material changes in portfolio value, performance and/or general economic
conditions, would further affect the amount of any such loan provisions.
Provision For Possible Other Credit Losses
The Bank recovered the entire $2.0 million allowance that was established
during 1995 in connection with the seizure of Nationar (a check clearing and
trust company) by the Superintendent of Banks for the State of New York. The
Bank received two payments from the Nationar estate during 1996. The first
payment of $4.1 million was received during the second quarter and the final
distribution of $6.1 million, received during the fourth quarter, resulted in
the Bank recapturing the allowance.
Prior information indicated that the Bank was likely to incur some loss in
connection with its investments at Nationar. At the time of seizure, the Bank
had invested with Nationar $10.0 million of federal funds sold, cash in demand
accounts of $200,000 and $38,000 of capital stock. In accordance with the
Company's internal procedures for monitoring asset quality, the $38,000 stock
investment was written off and a provision for possible other credit losses of
$2.0 million, or 20% of the remaining investment, was made during 1995.
Non-Interest Income
Non-interest income for 1996 increased by $1.1 million, or 27.2%, to $5.1
million compared to $4.0 million in 1995. Loan fees and service charges
increased by $553,000, or 24.3%, primarily reflecting increases of $525,000 in
prepayment penalties; $67,000 in mortgage loan late charges and $51,000 in New
York Cash Exchange (NYCE) fees; partially offset by decreases of $32,000 each in
NOW account service charges and regular account fees. During 1995, the Bank
began to offer VISA and Mastercard credit cards resulting in related fee income
of $38,000 for 1996. The Bank has an agreement with an unrelated financial
institution, which bears all costs and credit risk associated with originating
and owning the credit card portfolio originated from the Bank's customer list.
In general, the Bank receives a fee for each new account opened or renewed and a
percentage of all finance charges paid by the cardholders.
The $542,000 net increase in income from real estate operations primarily
reflects a $437,000 retroactive property tax refund received for a property that
was sold during 1994. During 1996, gains of $571,000 were realized from the sale
of 25 cooperative apartments owned by the Bank's real estate subsidiaries.
During 1995, $587,000 of gains were realized from the sale of 31 cooperative
apartments. At December 31, 1996, 158 cooperative apartments, which are carried
at a zero basis, remained available for sale.
Income on loaned securities decreased by $21,000, to $37,000 for 1996,
compared to $58,000 for 1995. Lower market demand for loaned securities was
experienced during 1996. Management does not expect income from security loans
to contribute substantially to non-interest income in the near future.
Non-Interest Expense
Non-interest expense decreased $2.0 million, or 6.6%, to $27.6 million for
1996, compared to $29.6 million for 1995. Included in non-interest expense are
the costs of compensation and benefits, office occupancy, federal deposit
insurance corporation premiums, advertising, ORE and other general and
administrative expense.
Federal deposit insurance premiums, which rates are established by law,
were $2,000, the statutory minimum, for 1996, compared to $1.5 million for 1995.
During 1995, the Federal Deposit Insurance Corporation (FDIC) announced that the
Bank Insurance Fund (BIF) was recapitalized as of May 31, 1995, and issued
refunds of deposit insurance overpayments from June 1 through September 30,
1995. In connection with federal legislation, BIF members will be assessed a 1.3
basis point charge per $100 of insurable deposits to meet the FICO bond
obligations beginning in 1997 and continuing through 1999. Assuming that the BIF
remains fully funded, no additional charges will be assessed.
ORE operations generated income of $772,000 for 1996 compared to an expense
of $209,000 for 1995. This income includes a pretax gain of $705,000 recognized
on the sale of a property acquired through foreclosure during the first quarter
of 1996. Gains on the sale of ORE properties are recognized under the cost
recovery method. During 1996, $148,000 of gains on sales of ORE were deferred.
Occupancy and equipment expenses increased $254,000, to $5.2 million for
1996 from $5.0 million for 1995. This increase reflects increased costs as a
result of the renovations at the Company's headquarters. The renovations, which
began during 1995 and continued through 1996, are the first major capital
improvements since completion of the building in 1974.
Other general and administrative expense increased by $208,000, or 4.0%,
reflecting increased legal fees in connection with foreclosure actions for
problem loans and the Nationar claim.
Compensation and benefit expenses decreased by $167,000, to $16.4 million
from $16.6 million, or 1.0%. Salaries increased overall by $326,000, or 2.5%.
During 1995, the final vesting for the Bank Recognition and Retention Plans
(BRRPs) occurred, resulting in the Bank recognizing an expense of $594,000.
Since the BRRPs were terminated after the final vesting in 1995, no expense was
incurred for the BRRPs during 1996. A non-recurring expense of $330,000 was
recognized during 1996 in connection with the 1996 Stock Option Plan for the
difference between the option price set on the date of grant and the stock price
on the date of stockholder approval. During 1996, the Bank realized savings of
$564,000 for dental and medical insurance premiums resulting from excess
insurance fund reserves. The Bank does not expect such savings in the future.
Provision for Income Taxes
Income taxes increased by $2.9 million, or 17.8%, to $19.6 million for 1996
from $16.6 million for 1995. The provision for income taxes increased due to the
increase in pretax income, as the effective tax rate remained relatively stable
at 42.2% for 1996 compared to 42.8% for 1995. (See Note 15 to the Consolidated
Financial Statements.)
Comparison of Operating Results for the Years Ended December 31, 1995 and 1994
- ------------------------------------------------------------------------------
General
Net income for the year ended December 31, 1995 was $22.2 million, or $1.99
per share, compared with $23.6 million, or $2.02 per share, for 1994. Comments
regarding the components of net income are detailed in the following paragraphs.
Interest Income
Income on mortgage loans increased by $3.2 million, or 5.2%, to $64.3
million, from $61.1 million. The average investment in mortgage loans increased
by $45.6 million, or 6.9%, to $702.3 million for 1995, from $656.7 million for
1994. The amount invested in mortgage loans has continued to increase over the
past six years. Mortgages originated for the Bank's portfolio during 1995
remained relatively unchanged at $77.8 million, from $78.0 million during 1994.
Mortgage originations for 1994 included an $18.5 million mortgage made in
connection with the sale of a real estate property, which was included in the
Company's real estate held for sale portfolio. Market interest rates decreased
during 1995 compared to 1994. The mortgage portfolio yield decreased to 9.16%
for 1995 from 9.31% for 1994.
Income on debt and equity securities increased $8.5 million, or 44.3%, to
$27.5 million for 1995, compared to $19.1 million for 1994. The increase in
income reflects an increase in the yield to 6.03% for 1995, from 4.87% for 1994,
coupled with a $64.4 million, or 16.4%, (excluding the Statement 115 adjustments
for marketable equity securities), increase in the average investment in this
portfolio. During 1995, activity in the investment securities portfolio included
purchases of $300.0 million and maturities of $265.0 million. There were no
sales of debt or equity securities during 1995. At December 31, 1995, the $439.9
million debt securities portfolio had net unrealized gains of $1.3 million,
which are not expected to impact future income, as these securities are
designated as held-to-maturity. The equity portfolio, which is designated as
available-for-sale, was carried at its aggregate market value of $40.1 million,
which exceeds its original cost of $11.7 million.
Income on CMOs decreased by $8.4 million, or 46.7% to $9.6 million, from
$18.0 million. The average investment in CMOs decreased by $188.8 million, or
47.4%, to $209.5 million for 1995. Principal payments on CMOs increased to
$237.1 million during 1995 from $181.0 million during 1994. The increase in
principal payments reflects more CMO payments coming due during 1995 than in
1994. During 1995, the market availability of CMOs meeting the Bank's investment
guidelines remained limited, resulting in fewer CMO purchases. For 1995,
purchases totaled $67.9 million, compared with $79.5 million for 1994. During
1995, the CMO portfolio yielded 4.57% compared with 4.51% for 1994. At December
31, 1995, the $144.6 million CMO portfolio had net unrealized losses of
$203,000, which are not expected to impact future income, as these securities
are designated as held-to-maturity.
During 1995, MBS continued and will continue to amortize without
replacement, as the Bank had previously discontinued purchasing MBS. Income
earned on MBS decreased to $969,000 during 1995 from $1.3 million during 1994,
reflecting the declining balance. There were no sales of MBS during 1995 or
1994. At December 31, 1995, there were unrealized gains of $847,000 and no
unrealized losses in the $7.6 million MBS portfolio. These gains are not
expected to impact future income, as MBS securities are designated as
held-to-maturity.
Income from federal funds sold increased to $3.0 million for 1995 from $1.6
million for 1994. The average balance invested in federal funds sold increased
to $52.4 million during 1995, compared to $38.3 million during 1994. The average
yield on federal funds sold increased to 5.78% during 1995 from 4.10% during
1994. Liquidity, provided by federal funds sold, is necessary to fund: mortgage
lending; deposit withdrawals; dividend payments on and make repurchases of the
Company's common stock; and meet obligations for non-interest expense.
Interest Expense
Interest expense on deposits increased to $40.7 million, or 11.2%, for 1995
from $36.6 million for 1994. This increase reflects a 57 basis point increase in
the average cost of funds, partially offset by a decrease in average interest
bearing deposits of $77.4 million, or 6.4%, to $1.14 billion for 1995, from
$1.22 billion for 1994. The increase in market interest rates during 1994 and
the continued shift of the Bank's deposits from passbook and lease security
accounts into certificate accounts, contributed to the increase in interest
expense for 1995. Management continues to monitor deposit levels and interest
rates offered by competitors.
The obligation on the leveraged ESOP, which was satisfied during 1994, had
related interest expense of $25,000. The Bank continued to make contributions to
a non-leveraged ESOP during 1995.
Net Interest Income
Net interest income increased by $611,000, to $67.0 million, from $66.4
million for 1994. For 1995, the net interest margin increased to 4.60% from
4.36% for 1994, and the net interest spread increased to 3.82% from 3.75% for
1994. The yield on interest earning assets increased to 7.39% for 1995 from
6.76% for 1994. The cost of interest bearing deposits increased to 3.57% for
1995 from 3.00% for 1994. The average balance of interest earning assets and
interest bearing deposits decreased by $65.6 million and $77.4 million,
respectively. As interest rates began to decrease during 1995, management
reinvested proceeds from maturing investments in shorter-term securities than
those investments made during 1994.
The Bank's profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest income on interest
earning assets, such as loans and investments, and its interest expense on
interest bearing deposits. The Bank, like most savings institutions, will
continue to be affected by general changes in levels of interest rates,
government regulations and other economic factors beyond its control.
Provision For Possible Loan Losses
The provision for possible loan losses for 1995 increased slightly to
$636,000 compared to $608,000 for 1994. During 1995 and 1994 management made
general mortgage loan provisions of $600,000. Provisions of $36,000 and $8,000
were made against the other loan portfolio during 1995 and 1994, respectively.
Future additions to the loan loss allowances will be based on management's
continuing evaluations of the loan portfolio and assessments of economic
conditions. Material changes in portfolio value, performance and/or general
economic conditions, would further affect the amount of any such loan
provisions.
Provision For Possible Other Credit Losses
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 $10.0
million; demand accounts of $200,000 and $38,000 of Nationar capital stock. In
accordance with the Company's internal procedures for monitoring asset quality,
the $38,000 stock investment was written off and a provision for possible other
credit losses of $2.0 million, or 20% of the remaining investment, was
established during 1995.
Non-Interest Income
Non-interest income decreased by $2.7 million, or 40.8%, to $4.0 million
compared to $6.7 million in 1994. The $2.3 million net decrease in income from
real estate operations reflects a $2.6 million non-recurring gain realized
during 1994, from the sale of a 684 unit rental property, known as Bay Hill
Gardens. (See Note 13 to the Consolidated Financial Statements.) During 1995,
$587,000 of gains were realized from the sale of 31 cooperative apartments owned
by the Bank's real estate subsidiaries. At December 31, 1995, 183 cooperative
apartments, which are carried at a zero basis, remained available for sale.
Income on loaned securities decreased by $214,000, to $58,000 for 1995,
compared to $272,000 for 1994. Lower market demand for loaned securities was
experienced during 1995. Management does not expect income from security loans
to contribute substantially to non-interest income in the near future.
Loan fees and service charges decreased $272,000, or 10.7%, primarily
reflecting a decrease in prepayments and therefore the related prepayment
charges for commercial mortgages. During 1995, the Bank began to offer VISA and
Mastercard credit cards. This portfolio is managed by an unrelated company,
which also assumes the risk of any loss.
Non-Interest Expense
Non-interest expense decreased $1.3 million, or 4.5%, to $29.6 million for
1995, compared to $30.9 million for 1994. Included in non-interest expense are
the costs of compensation and benefits, office occupancy, FDIC insurance
premiums, advertising, ORE expenses and other general and administrative
expense.
Compensation and benefit expense decreased by $353,000, to $16.6 million
from $16.9 million, or 2.1%. Salaries increased overall by $396,000, or 3.3% and
medical insurance premiums increased $250,000. During 1994, the final
allocations of the initial grant were made from the ESOP and during 1995, awards
under the BRRPs were fully amortized, resulting in a $941,000 net savings. The
BRRPs were terminated during 1995 and the ESOP contributions were fixed at
approximately 6% of base salary.
Occupancy and equipment expenses remained relatively stable, decreasing
slightly by $44,000, to $4.9 million for 1995 from $5.0 million for 1994. This
decrease reflects the results of management's emphasis on expense control.
During 1996, it is expected that these costs will rise as a result of the
renovations at the Company's headquarters.
Federal deposit insurance premiums, which rates are established by law,
decreased by $1.5 million, or 50.5%. During the third quarter of 1995, the FDIC
announced that the BIF was recapitalized as of May 31, 1995, and issued refunds
of deposit insurance overpayments from June 1 through September 30, 1995.
The cost of ORE operations increased slightly to $209,000 for 1995 from
$200,000 for 1994. Gains on the sale of ORE properties are recognized under the
cost recovery method. During 1995, $167,000 of gains on the sale of ORE were
deferred. At December 31, 1995, there were two significant mortgage loans
totaling $20.9 million on which the Bank had commenced foreclosure proceedings.
(See "Asset/Liability Management".)
Other general and administrative expense increased by $433,000, or 9.1%,
reflecting increased legal fees in connection with problem loans and the
Nationar claim as well as the cost of upgrading the Bank's computer system.
Provision for Income Taxes
Income taxes decreased by $1.4 million or 7.9% to $16.6 million for 1995
from $18.0 million for 1994. The provision for income taxes decreased due to the
decrease in pretax income before cumulative effect of accounting changes. The
effective tax rate decreased to 42.8% for 1995 from 43.3% for 1994. (See Note 15
to the Consolidated Financial Statements.)
Liquidity and Capital Resources
- -------------------------------
The Company's funds are primarily obtained through dividends paid by the
Bank. During 1996, the Bank paid $20.0 million in dividends to the Company. The
Company is provided with the long-term liquidity resources of the Bank as well
as the liquidity provided by its own investments. The Bank's primary sources of
funds are deposits, proceeds from maturities of securities held-to-maturity,
amortization on and maturities of loans and cash flows from operations. Overall
liquidity is affected by activity in general interest rates, economic conditions
and competition.
The Company's investments, excluding investments made by the Bank, are
primarily in federal agency securities. The Company expects to utilize its funds
to continue investing in U.S. Government and agency securities, repurchasing
shares of the Company's common stock and paying dividends on its common stock,
as management deems appropriate. The Company presently has no plans to expand
its activities; however, should the Company decide to expand its investment
activities, the Bank may pay additional cash dividends to the Company, subject
to certain regulatory limitations, to fund such activities. (See Note 26 to the
Consolidated Financial Statements.)
During 1996, the Company used $27.7 million to repurchase 845,000 shares of
its common stock, which represents the largest use of funds for financing
activities. In addition, net deposit outflows of $19.1 million and dividend
payments of $12.1 million, contributed to the net cash outflow from financing
activities. The net deposit decline of $19.1 million during 1996, represents
deposit increases of $4.7 million during the first quarter, followed by deposit
outflows of $3.8 million, $13.3 million and $6.7 million during the second,
third and fourth quarters, respectively.
During 1996, the most significant investing activities for which cash was
used included purchases of debt securities held-to-maturity and securities
available-for-sale, originations of mortgage loans and purchases of CMOs. The
most significant investing activities which provided cash were maturities of
debt securities and principal payments on CMOs.
The Bank is required to maintain minimum levels of liquid assets as defined
by the Office of Thrift Supervision (OTS) regulations. This requirement, which
may be varied at the direction of the OTS, is based upon a percentage of
deposits and short-term borrowings. The required ratio at December 31, 1996 was
5.0%. The Bank's liquidity ratio is significantly in excess of the required
level. The Bank's average liquidity ratios were 34.0% and 44.0% for the years
ended December 31, 1996 and 1995, respectively. The Bank's high liquidity
reflects management's strategy of investing funds in short-term CMOs and U.S.
Government and agency securities. Management has structured the assets and
liabilities of the Company to enable the Bank to meet its regulatory liquidity
requirements. In addition, the asset/liability structure serves to provide funds
for operating, investing and financing activities of the Company, while holding
securities, other than marketable equity securities, to maturity.
Liquidity management for the Bank is both a daily and a long-term function.
Management expects the Bank to be able to maintain high levels of liquidity in
the future due to its investment strategy and projected earnings. Excess funds
are generally invested in short-term investments such as federal funds sold.
Investments in the U.S. Government and agency securities portfolio had an
average remaining maturity of thirteen months and the CMO portfolio had an
average anticipated remaining maturity of fifteen months as of December 31,
1996. The Bank's most liquid assets are cash and cash equivalents which include
investments in federal funds sold. The levels of these assets are dependent on
the Bank's operating, financing and investing activities during any given
period. (See the Consolidated Statements of Cash Flows which are part of the
Consolidated Financial Statements.)
Management is carefully monitoring the deposit outflow and has taken a
series of actions aimed at curtailing the erosion of the Bank's deposit base.
Management considers the Bank's relationship with its long-term customers vital
to enabling the Company to continue to enhance future stockholder value. If the
current trend of deposit shifts and outflows were to continue without management
intervention in the long-term, the Company's future interest rate spreads,
margins and net income would suffer as a result. To address these concerns,
management: (1) established a more aggressive interest rate structure, in order
to retain the Bank's customer relationships; (2) has placed emphasis on
expanding fee income as a means of offsetting future decreases in net interest
income; and (3) is focusing on the use of available technology in order to
continue to reduce banking staff, which will be accomplished through attrition.
To generate additional fee income, the Bank participates in the NYCE automated
teller system, and receives additional fee income for issuing credit cards. The
credit cards issued with the Bank's name are owned and managed by an unrelated
financial institution, who incurs all risk of loss. Lastly, management has
reduced assets to correlate with the decline in deposits, thereby shrinking the
Company, while maintaining strong liquidity and steady earnings.
In the event that the Bank should require funds beyond its internal
ability, it may take Federal Home Loan Bank (FHLB) of New York advances. The
Bank has not utilized FHLB advances to meet its liquidity needs.
Impact of Inflation and Changing Prices
- ---------------------------------------
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the Company's non-interest expense. Unlike most industrial
companies, nearly all the assets and liabilities of the Company are monetary. As
a result, interest rates have a greater impact on the Company's performance than
do the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the price of goods and
services.
Impact of New Accounting Standards Issued, But Not Yet Adopted
- --------------------------------------------------------------
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(Statement 125). Statement 125 establishes accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial components approach
that focuses on control. Under this approach, an entity, subsequent to a
transfer of financial assets, must recognize the financial and servicing assets
it controls and the liabilities it has incurred, derecognize financial assets
when control has been surrendered, and derecognize liabilities when
extinguished. Standards for distinguishing transfers of financial assets that
are sales from those that are secured borrowings are provided in Statement 125.
A transfer not meeting the criteria for a sale must be accounted for as a
secured borrowing with pledged collateral.
Statement 125 requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be initially
measured at fair value, if practicable. It additionally requires that servicing
assets and other retained interests in transferred assets be measured by
allocating the previous carrying amount between the assets sold, if any, and
retained interests, if any, based on their relative fair values at the date of
transfer. Servicing assets and liabilities must be subsequently measured by
amortization in proportion to and over the period of estimated net servicing
income or loss and assessed for asset impairment, or increased obligation, based
on their fair value.
Statement 125 requires that a liability be derecognized if either (a) the
debtor pays the creditor and is relieved of its obligation for the liability or
(b) the debtor is legally released from being the primary obligor under the
liability either judicially or by the creditor.
Statement 125 provides implementation guidance for assessing isolation of
transferred assets and for accounting for transfers of partial interests,
servicing of financial assets, securitizations, transfers of sales-type and
direct financing lease receivables, securities lending transactions, repurchase
agreements including "dollar rolls", "wash sales", loan syndications and
participations, risk participations in banker's acceptances, factoring
agreements, transfers of receivables with recourse and extinguishments of
liabilities.
Statement 125 supersedes FASB Statements No. 76, "Extinguishment of Debt"
and No. 77, "Reporting by Transferors for Transfer of Receivables with
Recourse". Statement 125 amends Statement 115, to prohibit the classification of
a debt security as held-to-maturity if it can be prepaid or otherwise settled in
such a way that the holder of the security would not recover substantially all
of its recorded investment. Statement 125 further requires that loans and other
assets that can be prepaid or otherwise settled in such a way that the holder
would not recover substantially all of its recorded investment shall be
subsequently measured like debt securities classified as available-for-sale or
trading under Statement 115, as amended by Statement 125. Statement 125 also
amends and extends to all servicing assets and liabilities the accounting for
mortgage servicing rights now in Statement 65, and supersedes Statement 122.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement 125". As amended, Statement 125 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, except that its provisions with
respect to securities lending, repurchase agreements and "dollar roll"
transactions are effective for transfers occurring after December 31, 1997.
The Company does not expect the adoption of Statement 125, as amended, to
have a material affect on its financial condition or results of operations.
Private Securities Litigation Reform Act Safe Harbor Statement
- --------------------------------------------------------------
In addition to historical information, this Annual Report may include
certain forward looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Bank's loan
and investment portfolios, changes in accounting principles, policies or
guidelines, and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices. Further description of the risks and uncertainties to the business are
included in detail in Item 1, "Business" of the Company's 1996 Form 10-K.
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1996 and 1995 (In Thousands, Except Share and Per Share Amounts)
ASSETS 1996 1995
- ------ ---- ----
Cash and due from banks $ 12,894 $ 14,893
Federal funds sold 86,500 71,000
---------- ---------
Cash and cash equivalents 99,394 85,893
Securities available-for-sale, at estimated fair value 51,021 40,071
Securities held-to-maturity, net (estimated fair value
of $461,784 and $593,991, respectively) 460,509 592,060
Other investments 6,859 6,302
Mortgage loans, net 827,052 739,037
Other loans, net 27,722 29,208
Premises and equipment, net 16,829 15,157
Interest due and accrued 9,310 12,907
Real estate held for investment, net 6,082 6,395
Real estate held for sale and Other real estate 5,236 7,314
Claims receivable, net - 8,165
Other assets 6,002 5,792
---------- ----------
Total Assets $1,516,016 $1,548,301
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to depositors $1,144,393 $1,163,446
Advance payments for real estate taxes and insurance 8,265 8,231
Official bank checks outstanding 9,644 24,392
Accrued expenses and other liabilities 18,415 12,125
---------- ----------
Total Liabilities 1,180,717 1,208,194
---------- ----------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value, 15,000,000 shares
authorized; none issued) - -
Common stock ($.01 par value, 30,000,000 shares
authorized; 16,000,000 issued; 9,783,031 and
10,504,775 outstanding, respectively) 160 160
Additional paid-in capital 163,500 162,566
Retained income, substantially restricted 289,588 276,317
Net unrealized gain on securities available-for-sale,
net of tax 21,795 15,750
Common stock held by Benefit Restoration Plan
Trust, at cost (166,848 shares) (3,275) (3,270)
Common stock held in treasury, at cost (6,216,969
and 5,495,225 shares, respectively) (136,469) (111,416)
---------- ----------
Total Stockholders' Equity 335,299 340,107
---------- ----------
Total Liabilities and Stockholders' Equity $1,516,016 $1,548,301
========== ==========
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996, 1995 and 1994
(In Thousands, Except Per Share Amounts)
1996 1995 1994
---- ---- ----
Interest Income:
Mortgage loans, net $ 69,113 $ 64,309 $ 61,142
Debt & equity securities, net 21,695 27,545 19,088
Collateralized mortgage obligations, net (CMOs) 10,063 9,572 17,951
Other loans, net 2,138 2,299 1,988
Mortgage-backed securities, net (MBS) 739 969 1,288
Federal funds sold 3,863 3,032 1,570
--------- --------- ---------
Total Interest Income 107,611 107,726 103,027
--------- --------- ---------
Interest Expense:
Deposits 40,217 40,707 36,594
Employee Stock Ownership Plan obligation - - 25
--------- --------- ---------
Total Interest Expense 40,217 40,707 36,619
--------- --------- ---------
Net Interest Income 67,394 67,019 66,408
Provision for Possible Loan Losses 640 636 608
(Recovery of) Provision for Possible Other Credit Losses (2,040) 2,040 -
--------- --------- ---------
Net Interest Income After Provision
for Possible Credit Losses 68,794 64,343 65,800
--------- ---------- ---------
Non-Interest Income:
Real estate operations, net 1,767 1,225 3,497
Loan fees and service charges 2,833 2,280 2,552
Income on loaned securities 37 58 272
Miscellaneous income 444 432 431
--------- --------- ---------
Total Non-Interest Income 5,081 3,995 6,752
--------- --------- ---------
Non-Interest Expense:
Compensation and benefits 16,412 16,579 16,932
Occupancy and equipment expenses (net of rental
income of $1,126, $1,199 and $1,189, respectively) 5,211 4,957 5,001
Federal deposit insurance premiums 2 1,477 2,983
Advertising 1,340 1,142 1,057
Other real estate (income) expense, net (772) 209 200
Other general and administrative 5,405 5,197 4,764
--------- --------- ---------
Total Non-Interest Expense 27,598 29,561 30,937
--------- --------- ---------
Income Before Provision for Income Taxes 46,277 38,777 41,615
Provision for Income Taxes 19,552 16,603 18,018
--------- --------- ---------
Net Income $ 26,725 $ 22,174 $ 23,597
========= ========= =========
Income and Cash Dividends Per Share:
Earnings per common and common equivalent share $ 2.54 $ 1.99 $ 2.02
========= ========= =========
Cash Dividends $ 1.20 $ 1.00 $ .72
========= ========= =========
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1995 and 1994 (In Thousands, Except Per Share Amounts)
1996 1995 1994
---- ---- ----
Common Stock (Par value: $.01)
Balance at beginning and end of year $ 160 $ 160 $ 160
-------- -------- --------
Additional Paid-in Capital
Balance at beginning of year 162,566 160,962 159,606
Net allocation (distribution) of common stock
for Benefit Restoration Plan 5 (199) 373
Tax benefit for stock plans 599 1,645 983
Reallocation of forfeited Bank Recognition and
Retention Plans shares - 158 -
Compensation expense for 1996 option plan 330 - -
-------- -------- --------
Balance at end of year 163,500 162,566 160,962
-------- -------- --------
Retained Income, Substantially Restricted
Balance at beginning of year 276,317 266,361 251,959
Net income 26,725 22,174 23,597
Tax benefit for dividends paid to Employee Stock
Ownership Plan (ESOP) - - 11
Loss on reissuance of treasury stock (1,364) (1,602) (1,210)
Cash dividends on common stock ($1.20, $1.00, $.72,
respectively) (12,090) (10,616) (7,996)
------- ------- -------
Balance at end of year 289,588 276,317 266,361
------- ------- -------
Net Unrealized Gain on Securities Available-for-Sale, Net of Tax
Balance at beginning of year 15,750 8,892 -
Cumulative effect of a change in accounting for
securities available-for-sale at January 1, 1994
net unrealized gain (net of tax of $7,000) - - 8,761
Change in net unrealized gains on securities available-
for-sale (net of tax of $4,863, $5,517 and $105,
respectively) 6,045 6,858 131
-------- -------- --------
Balance at end of year 21,795 15,750 8,892
-------- -------- --------
Unallocated Common Stock Held by Leveraged ESOP
Balance at beginning of year - - (1,045)
Allocation of Leveraged ESOP stock - - 1,045
-------- -------- --------
Balance at end of year - - -
-------- -------- --------
Unearned Common Stock Held by Bank Recognition and
Retention Plans
Balance at beginning of year - (516) (1,504)
Earned during the period - 516 988
-------- -------- --------
Balance at end of year - - (516)
-------- -------- --------
Common Stock Held by Benefit Restoration Plan Trust, at Cost
Balance at beginning of year (3,270) (3,469) (3,096)
Common stock acquired (11) (9) (378)
Common stock distributed 6 208 5
-------- ------- --------
Balance at end of year (3,275) (3,270) (3,469)
-------- ------- --------
Common Stock Held in Treasury, at Cost
Balance at beginning of year (111,416) (104,756) (80,873)
Common stock reacquired (27,650) (9,881) (26,404)
Common stock reissued for options exercised 2,597 3,221 2,521
-------- -------- --------
Balance at end of year (136,469) (111,416) (104,756)
-------- -------- --------
Total Stockholders' Equity $335,299 $340,107 $327,634
======== ======== ========
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994 (In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES: 1996 1995 1994
---- ---- ----
Net income $ 26,725 $ 22,174 $ 23,597
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 640 636 608
(Recovery of) provision for possible other credit losses (2,040) 2,040 -
Loss on Nationar capital stock - 38 -
Net gain on sale/redemption of equity securities (2) - -
(Decrease) increase in deferred loan fees
and discounts, net (593) (608) 1,743
Accretion of discount (in excess of) less than
amortization of premium on MBS and CMOs (578) 320 896
Accretion of discount in excess of amortization
of premium on debt securities (249) (248) (140)
Depreciation and amortization of premises and equipment 1,826 1,920 1,847
Mortgage loans originated for sale (1,621) (1,792) (1,923)
Proceeds from sale of mortgage loans originated for sale 1,737 1,818 1,946
Gain on sale of mortgage and other loans (53) (61) (26)
Expense recognized for Bank Recognition and Retention Plans - 675 988
Net expense recorded for leveraged ESOP - - 978
Tax benefit for cash dividends paid to ESOP - - 11
Tax benefit for stock plans credited to capital 599 1,645 983
Gain on sale of real estate held for sale (571) (587) (2,737)
Decrease (increase) in interest due and accrued 3,597 752 (2,272)
Transfer of federal funds sold to Nationar to
claims receivable - (10,205) -
Payments received against Nationar claim 10,205 - -
Net gain on sale of other real estate (688) - -
(Increase) decrease in official bank checks outstanding (14,748) 3,986 (2,899)
Other 1,547 (1,389) 1,111
--------- --------- ---------
Net cash provided by operating activities 25,733 21,114 24,711
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated:
Mortgage loans (136,218) (77,826) (59,548)
Other loans (19,032) (25,718) (21,426)
Purchases of CMOs held-to-maturity (124,275) (67,889) (79,458)
Purchases of debt securities held-to-maturity and
securities available-for-sale (534,569) (300,047) (615,000)
Principal payments on:
Mortgage loans 46,506 22,672 31,129
Other loans 19,656 22,556 20,169
CMOs 114,105 237,060 181,024
MBS 2,047 2,324 4,900
Proceeds from maturities of U.S. Government and
federal agency securities 675,000 265,000 627,000
Proceeds from sale of other loans 934 1,372 1,391
Purchases of Federal Home Loan Bank stock (557) (188) -
Proceeds from redemption of Federal Home Loan Bank stock - - 4,147
Continued
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31, 1996, 1995 and 1994 (In Thousands)
1996 1995 1994
---- ---- ----
Proceeds from sale/redemption of equity securities 30 - -
Purchases of premises and equipment, net of disposals (3,498) (2,647) (2,212)
Net decrease (increase) in real estate held for
investment 313 168 (350)
Proceeds from sale of real estate held for sale 571 587 5,233
Proceeds from sale of Other real estate 2,759 - -
Net decrease in investment in real estate held for sale 1,522 1,995 1,022
------- ------- -------
Net cash provided by investing activities 45,294 79,419 98,021
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in due to depositors (19,053) (40,978) (69,493)
Increase (decrease) in advance payments for real
estate taxes and insurance 34 (79) 889
Proceeds upon exercise of common stock options 1,233 1,619 1,311
Contributions to leveraged ESOP - - (1,011)
Cash dividends paid to common stockholders (12,090) (10,616) (7,996)
Payments to repurchase common stock (27,650) (9,881) (26,404)
--------- --------- ---------
Net cash used by financing activities (57,526) (59,935) (102,704)
--------- --------- ---------
Net increase in cash and cash equivalents 13,501 40,598 20,028
Cash and cash equivalents at beginning of year 85,893 45,295 25,267
--------- --------- ---------
Cash and cash equivalents at end of year $ 99,394 $ 85,893 $ 45,295
========= ========= =========
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest on deposits $ 40,215 $ 40,721 $ 36,601
========= ========= =========
Income taxes $ 22,370 $ 18,216 $ 21,308
========= ========= =========
ESOP obligation $ - $ - $ (1,045)
========= ========= =========
Supplemental Disclosures of Noncash Investing and
Financing Activities
Real estate acquired through foreclosure $ 8,190 $ - $ 1,472
========= ========= =========
Mortgage originated upon sale of real estate
from the held for sale portfolio and Other real
estate $ 6,675 $ - $ 18,500
========= ========= =========
January 1, 1994 transfer of securities from held-
for-investment to available-for-sale, at estimated
fair value $ - $ - $ 27,364
========= ========= =========
Deferred tax liability on securities available-for-sale $ 17,534 $ 12,671 $ 7,154
========= ========= =========
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
JSB FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS
JSB Financial, Inc.(Company or Parent) is a unitary savings and loan
holding company. The Company holds all of the outstanding common stock of its
subsidiary, Jamaica Savings Bank FSB (the Bank or the Subsidiary). The Company
is subject to the financial reporting requirements of the Securities Exchange
Act of 1934.
(a) Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities and disclosures of
contingent assets and liabilities as of the dates of the consolidated statements
of financial condition and revenues and expenses for the periods presented.
Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowances for credit losses and the
valuation of real estate held for sale and other real estate and real estate
held for investment (real estate holdings). These estimates are primarily
reactive to actual and anticipated changes in the real estate market, the
economy in the Bank's market area and debtors' financial condition. In
connection with the determination of allowances, management reviews: loan
performance; historical trends; appraisals of properties securing significant
mortgages; investment ratings for equity securities; and capital and liquidity
levels for correspondent banks, on an ongoing basis.
The ultimate collection of the Bank's loan portfolio and the recovery of
its various real estate holdings is susceptible to economic conditions in the
Bank's market area and changes thereto. The Bank's mortgage loans are secured
primarily by properties located in the New York-metropolitan area. In addition,
all real estate holdings are located in the same market area.
Management believes that the allowances for credit losses as presented in
these consolidated financial statements are adequate. Available information is
utilized to identify probable losses on loans, real estate holdings, and various
other investments. Future additions to the allowances could be necessary based
on changes in debtors' financial condition, economic conditions or if economic
conditions differ from management's previous assessments. Various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowances for losses. Such agencies may require the Bank to
recognize additions to the allowances based on their judgments about information
available to them at the time of their examination.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, the Bank, as consolidated with its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
(c) Consolidated Statements of Cash Flows
For the purposes of reporting cash flows, the Company considers all
short-term investments with a maturity of less than three months from date of
purchase to be cash equivalents.
(d) Securities
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" (Statement 115). Under Statement 115, the Company is
required to report debt, readily-marketable equity, and mortgage-backed
securities in one of the following categories: (i) "held-to-maturity" (when
management has a positive intent and ability to hold to maturity) which are
reported at amortized cost; (ii) "trading" (when held for current resale) which
are to be reported at estimated fair value, with unrealized gains and losses
included in earnings; and (iii) "available-for-sale" (all other debt and equity
securities not designated as held-to-maturity or trading) which are reported at
estimated fair value, with unrealized gains and losses excluded from earnings
and reported, net of tax, as a separate component of stockholders' equity.
The designation of a security as held-to-maturity or available-for-sale is
made at the time of acquisition. Upon adopting Statement 115, management
reviewed the composition of the investment portfolio and designated all
securities, other than marketable equity securities, as held-to-maturity. On
January 1, 1994, marketable equity securities totaling $11,577,000, at cost,
were designated as available-for-sale and recorded at their fair value of
$27,364,000. The Company does not maintain any investments for trading purposes.
The adoption of Statement 115 had no impact on net income.
Discounts on debt securities are accreted to income and premiums are
amortized against income over the life of the security using a method which
approximates the level yield method. Gains and losses on the sales of
securities, if any, are recognized upon realization, using the specific
identification method.
(e) Loans
Loans are carried at unpaid principal balances net of any deferred loan
fees and unearned discounts. Discounts are accreted to income using a method
which approximates the level yield method, over the composite average life of
the loans. Loan fees received for commitments to make or purchase loans, are
deferred and accreted into income over the life of the loan using the level
yield method.
Interest is accrued monthly on the outstanding balances of loans. Mortgages
90 days in arrears and/or loans where full collection of principal and interest
is questionable are placed on nonaccrual status, at which time loan interest due
and accrued is reversed against interest income of the current period. A
nonaccrual loan is restored to accrual status when principal and interest
payments are current and full payment of principal and interest is expected.
Cash receipts on an impaired loan are applied to principal and interest in
accordance with the contractual terms of the loan unless full payment of
principal is not expected, in which case both principal and interest payments
received are netted against the loan balance. The Bank continues to accrue
interest income on non-insured other loans up to 120 days delinquent, beyond
which time the loan balance is written off.
On January 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" (Statement 114), and the amendment thereof,
SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition Disclosures" (Statement 118). In accordance with these standards,
the Company considers a loan impaired if it is probable that, based upon current
information, a creditor will be unable to collect all amounts due according to
the contractual terms of a loan agreement. Statement 114 does not apply to large
groups of smaller-balance homogeneous loans that are collectively evaluated for
impairment including the Company's one-to four-family mortgage loans and
consumer loans other than those modified in a troubled debt restructure (TDR).
The Company generally does not consider a loan impaired when the delay in the
timing of payments is three months or less or the shortfall in the amount of
payments is the lower of $10,000 or 1.0% of the loan amount. The adoption of
Statements 114 and 118 had no impact on net income.
Loans individually reviewed for impairment by the Company are limited to
loans secured by multi-family, commercial, construction and underlying
cooperative properties, loans modified in TDRs and selected large one-to
four-family loans. Examples of measurement techniques utilized by the Company
include present value of expected future cash flows, the loan's market price if
one exists and the estimated fair value of the collateral. Reserves are
established against impaired loans in amounts equal to the difference between
the recorded investment in the asset and either the present value of the cash
flows expected to be received, or the fair value of the underlying collateral if
foreclosure is deemed probable or if the loan is considered collateral
dependent. The Company's impaired loan identification and measurement process is
conducted in conjunction with the Company's review of the adequacy of its
allowance for loan losses.
A loan is deemed a TDR by the Company when concessionary modifications to
the original contractual terms are made for economic or legal reasons related to
the debtor's financial difficulties. Loans modified in a TDR subsequent to the
adoption of Statement 114 are considered impaired, unless in periods subsequent
to restructuring the loan is performing in accordance with the new terms of the
agreement and such terms reflect those that would be offered by the Bank for a
new credit. Valuation allowances associated with such impaired loans are
measured in accordance with Statement 114 throughout the loan term.
Modifications made to loans in TDRs prior to the adoption of Statement 114 that
are not considered impaired based on the terms of the restructuring agreement
continue to be accounted for under Statement 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructurings", are not included in the Company's
impaired loan statistics.
Loans originated for sale are carried at the lower of unpaid principal
balance, net of any discounts and deferred fees or estimated fair value, in the
aggregate.
(f) Allowance for Possible Loan Losses
The allowance for possible loan losses is available for future charge-offs
of loans. The allowance is increased by the provision for possible loan losses
made and recoveries of loans previously charged off. The allowance is reduced by
charge-offs, in whole or in part, of problem loans. The allowance for possible
loan losses is based on continuous analysis of the loan portfolio and reflects
an amount which in management's judgment is adequate to provide for possible
loan losses in the existing portfolio. In evaluating the portfolio, management
considers numerous factors, such as the Bank's loan growth, prior loss
experience, present and potential risks of the loan portfolio and current
economic conditions and entails management's review of delinquency reports, loan
to value ratios, collateral condition and debt coverage ratios.
(g) Premises and Equipment
Depreciation is computed on the straight-line method over the estimated
useful life of the related assets. Estimated lives are 15 to 60 years for
buildings and 5 to 8 years for furniture and fixtures. Amortization for
leasehold improvements is computed on the straight-line method over the lesser
of the term of the lease or the asset's estimated useful life. Premises and
equipment are carried at cost, net of accumulated depreciation.
(h) Real Estate Held for Investment
Real estate held for investment represents real estate properties financed,
owned and operated by the Bank's subsidiaries. Significant improvements have
been made to the properties, thereby increasing the amount invested in
individual properties. The properties were initially recorded at the lower of
cost or fair value at acquisition (if foreclosed property) or cost (if
purchased) and subsequently increased by capital improvements and decreased by
depreciation. Management monitors each investment on a continuous basis.
Valuation allowances for estimated losses on real estate held for investment are
provided when a significant and permanent decline in value occurs.
In the event of a change in classification from "held for investment" to
"held for sale", the property's carrying value is compared to fair value less
estimated selling costs (i.e. net fair value). If the carrying value exceeds net
fair value, the investment is adjusted down through a valuation allowance, and
subsequently carried at the lower of the carrying value or net fair value.
(i) Real Estate Held for Sale and Other Real Estate
Real estate held for sale is carried at lower of cost or net fair value.
Gains on the sale, if any, are accounted for using the cost recovery method.
Revenues and expenses from the operations are reflected, as incurred, in the
Company's operating results. (See Note 12.)
Real estate properties acquired through foreclosure, known as other real
estate (ORE), are recorded at the lower of the net unpaid loan balance at the
foreclosure date plus related costs, or net fair value. Subsequent valuation
adjustments are made if the net fair value decreases below the carrying amount.
Gains, if any, on the sale of ORE are accounted for using the cost recovery
method.
(j) Income Taxes
The Company follows SFAS No. 109, "Accounting for Income Taxes" (Statement
109), which requires the asset and liability method of accounting for income
taxes. Under the asset liability method, deferred income taxes are recognized
for the tax consequences of "temporary differences" by applying enacted
statutory tax rates, applicable to future years, to differences between the
financial statement carrying amounts and the tax basis of existing assets and
liabilities. Under Statement 109, deferred tax assets are recognized if it is
more likely than not that a future benefit will be realized. It is management's
position, as currently supported by the facts and circumstances, that no
valuation allowance is necessary against any of the Company's deferred tax
assets (See Notes 15 and 17.)
(k) Earnings Per Share
Earnings per share is based on net income for the periods presented,
divided by the sum of the weighted average number of shares actually outstanding
plus common stock equivalents. Common stock equivalents are computed under the
treasury stock method. For the years ended December 31, 1996, 1995 and 1994,
weighted average common stock and common stock equivalents, used to compute
primary earnings per share, were 10,531,000, 11,138,000 and 11,663,000,
respectively.
(l) Reclassification
Reclassifications have been made to prior year financial statements to
conform with the 1996 presentation.
(m) Treasury Stock
Repurchases of common stock are accounted for under the cost method,
whereby shares repurchased are recorded in a contra-equity account. (See Note
2.)
(n) Adoption of Accounting Standards
Stock Based Compensation
------------------------
In October, 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, "Accounting for Stock-Based Compensation" (Statement 123).
Statement 123 applies to all transactions in which an entity acquires goods or
services by issuing equity instruments or by incurring liabilities where the
payment amounts are based on the entity's common stock price, except for
employee stock ownership plans.
Statement 123 established a fair value based method of accounting for
stock-based compensation arrangements with employees rather than the intrinsic
value based method that is contained in Accounting Principles Board Opinion 25
(Opinion 25). Statement 123 does not require an entity to adopt the new fair
value based method for purposes of preparing its basic financial statements.
While the Statement 123 fair value based method is considered by the FASB to be
preferable to the Opinion 25 method, entities may opt to continue to use the
method prescribed by Opinion 25. Entities not adopting the fair value based
method under Statement 123 are required to present pro forma net income and
earnings per share, in the notes to the financial statements, as if the fair
value based method had been adopted.
The accounting requirements of Statement 123 are effective for transactions
entered into during fiscal years that begin after December 15, 1995. The
disclosure requirements became effective for financial statements for fiscal
years beginning after December 15, 1995, or for any earlier fiscal year for
which Statement 123 is initially adopted for recognizing compensation cost. Pro
forma disclosures required for entities that elect to continue to measure cost
using the Opinion 25 method must include the effects of all awards granted in
fiscal years that begin after December 15, 1994. Pro forma disclosures for
awards granted in the first fiscal year beginning after December 15, 1994, need
not be included in financial statements for that fiscal year but should be
presented subsequently whenever financial statements for that fiscal year are
presented for comparative purposes with financial statements for a later year.
During 1996, the Company adopted the disclosure provisions of Statement 123 and
continues to measure cost using the Opinion 25 method for purposes of preparing
its consolidated financial statements. Therefore, Statement 123 had no impact on
the Company's financial condition or results of operation. (See Note 22.)
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
-------------------------------------------------------------------------
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (Statement
121). This statement requires that long-lived assets and certain identifiable
intangibles, and goodwill related to those assets to be held and used and
long-lived assets and certain identifiable intangibles to be disposed of, be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
In performing the review for recoverability, the entity should estimate the
future cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the asset, an
impairment loss is recognized. Otherwise, an impairment loss is not recognized.
Measurement of an impairment loss for long-lived assets and identifiable
intangibles that an entity expects to hold and use should be based on the fair
value of the asset.
Statement 121 generally requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell.
Statement 121 became effective for fiscal years beginning after December
15, 1995, applied prospectively. The Company's adoption of Statement 121,
effective January 1, 1996, had no material impact on its financial condition or
results of operations.
Mortgage Servicing Rights
-------------------------
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights" (Statement 122). Statement 122 amends SFAS No. 65, "Accounting
for Certain Mortgage Banking Activities" (Statement 65), to require that a
company recognize, as separate assets, rights to service mortgage loans for
others, regardless of how those servicing rights are acquired. A company that
acquires mortgage servicing rights through either the purchase or origination of
mortgage loans and sells or securitizes those loans with servicing rights
retained should allocate the total cost of the mortgage loans to the mortgage
servicing rights and the loans (without the mortgage servicing rights) based on
their relative fair values if it is practicable to estimate those fair values.
This statement also requires that a company assess its capitalized mortgage
servicing rights for impairment based on an estimated fair value of those
rights.
Statement 122 became effective for fiscal years beginning after December
15, 1995, applied prospectively. The Company's adoption of Statement 122,
effective January 1, 1996 has not resulted in the recognition of mortgage
servicing rights as separate assets, as the Company's sales of mortgage loans
with servicing retained have been immaterial.
(o) Impact of New Accounting Standards Not Yet Adopted
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities
-----------
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (Statement
125). Statement 125 establishes accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial components approach that focuses on
control. Under this approach, an entity, subsequent to a transfer of financial
assets, must recognize the financial and servicing assets it controls and the
liabilities it has incurred, derecognize financial assets when control has been
surrendered, and derecognize liabilities when extinguished. Standards for
distinguishing transfers of financial assets that are sales from those that are
secured borrowings are provided in Statement 125. A transfer not meeting the
criteria for a sale must be accounted for as a secured borrowing with pledged
collateral.
Statement 125 requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be initially
measured at fair value, if practicable. It additionally requires that servicing
assets and other retained interests in transferred assets be measured by
allocating the previous carrying amount between the assets sold, if any, and
retained interests, if any, based on their relative fair values at the date of
transfer. Servicing assets and liabilities must be subsequently measured by
amortization in proportion to and over the period of estimated net servicing
income or loss and assessed for asset impairment, or increased obligation, based
on their fair value.
Statement 125 requires that a liability be derecognized if either (a)
the debtor pays the creditor and is relieved of its obligation for the liability
or (b) the debtor is legally released from being the primary obligor under the
liability either judicially or by the creditor.
Statement 125 provides implementation guidance for assessing isolation of
transferred assets and for accounting for transfers of partial interests,
servicing of financial assets, securitizations, transfers of sales-type and
direct financing lease receivables, securities lending transactions, repurchase
agreements including "dollar rolls", "wash sales", loan syndications and
participations, risk participations in banker's acceptances, factoring
agreements, transfers of receivables with recourse and extinguishments of
liabilities.
Statement 125 supersedes FASB Statements No. 76, "Extinguishment of Debt"
and No. 77, "Reporting by Transferors for Transfer of Receivables with
Recourse". Statement 125 amends Statement 115, to prohibit the classification of
a debt security as held-to-maturity if it can be prepaid or otherwise settled in
such a way that the holder of the security would not recover substantially all
of its recorded investment. Statement 125 further requires that loans and other
assets that can be prepaid or otherwise settled in such a way that the holder
would not recover substantially all of its recorded investment shall be
subsequently measured like debt securities classified as available-for-sale or
trading under Statement 115, as amended by Statement 125. Statement 125 also
amends and extends to all servicing assets and liabilities the accounting for
mortgage servicing rights now in Statement 65, and supersedes Statement 122.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement 125". As amended, Statement 125 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, except that its provisions with
respect to securities lending, repurchase agreements and dollar-roll
transactions are effective for transfers occurring after December 31, 1997.
The Company does not expect that the adoption of Statement 125, as amended,
will have a material affect on its financial condition or results of operations.
NOTE (2) STOCK REPURCHASE PROGRAMS
During the years ended December 31, 1996, 1995 and 1994, the Company
repurchased 845,000, 339,485 and 1,116,515 shares at an average price of $32.72,
$29.11 and $23.65 per share, respectively. The Company issued 123,256, 161,860
and 131,104 shares of treasury stock for options exercised during 1996, 1995 and
1994, respectively. There were 6,216,969 and 5,495,225 shares of common stock in
the treasury at December 31, 1996 and 1995, respectively.
NOTE (3) SECURITIES
The following tables set forth information regarding the Company's
securities as of December 31:
1996
----
Securities Available-for-Sale:
- ------------------------------
Estimated Gross Unrealized
Cost Fair Value Gains Losses
---- ---------- ----- ------
(In Thousands)
Marketable equity securities $ 11,692 $ 51,021 $39,368 $ 39
======== ======== ======= =======
Securities Held-to-Maturity:
- ----------------------------
Estimated
Amortized Fair Gross Unrealized
Cost Value Gains Losses
---- ----- ----- ------
(In Thousands)
U.S. Government and Federal
Agency securities $299,645 $300,262 $ 617 $ -
CMOs, net 155,272 155,421 436 287
MBS:
GNMA 4,999 5,455 456 -
FNMA 152 166 14 -
FHLMC 441 480 39 -
-------- -------- ------- -------
Total MBS, net 5,592 6,101 509 -
-------- -------- ------- -------
Total $460,509 $461,784 $ 1,562 $ 287
======== ======== ======= =======
1995
----
Securities Available-for-Sale:
- ------------------------------
Estimated Gross Unrealized
Cost Fair Value Gains Losses
---- ---------- ----- ------
(In Thousands)
Marketable equity securities $ 11,650 $ 40,071 $28,488 $ 67
======== ======== ======= =======
Securities Held-to-Maturity:
- ----------------------------
Estimated
Amortized Fair Gross Unrealized
Cost Value Gains Losses
---- ----- ----- ------
(In Thousands)
U.S. Government and Federal
Agency securities $439,896 $441,183 $ 1,311 $ 24
CMOs, net 144,607 144,404 212 415
MBS:
GNMA 6,667 7,428 761 -
FNMA 235 260 25 -
FHLMC 655 716 61 -
-------- -------- ------- -------
Total MBS, net 7,557 _8,404 847 -
-------- -------- ------- -------
Total $592,060 $593,991 $ 2,370 $ 439
======== ======== ======= =======
<FN>
GNMA - Government National Mortgage Association
FNMA - Federal National Mortgage Association
FHLMC - Federal Home Loan Mortgage Corporation
</FN>
CMOs represent participating interests in pools of long-term first mortgage
loans originated and serviced by the issuers of the securities. All of the CMOs
held by the Company consist of First Tranche-Planned Amortization Class Bonds
collateralized by FNMA, FHLMC and GNMA mortgage-backed securities which in turn
are collateralized by whole loans. MBS represent securities issued by
governmental mortgage agencies and collateralized by mortgage loans.
During 1996, the Bank sold or redeemed marketable equity securities
totaling $30,000, realizing gross gains of $4,000 and gross losses of $2,000.
There were no sales of securities during the years ended December 31, 1995 or
1994.
Presented in the table below is the contractual maturity distribution, for
debt securities held-to-maturity at December 31, 1996:
Estimated
Amortized Fair
Cost Value
---- -----
(In Thousands)
Within 1 year $179,829 $179,918
After 1 year through 5 years 177,617 178,374
After 5 years through 10 years 99,623 99,769
After 10 years 3,440 3,723
-------- --------
Total $460,509 $461,784
======== ========
Actual maturities of CMOs and MBS may differ substantially from the
presentation, due to prepayment activity. The table reflects the balance of the
entire security in the category in which the final contractual payment is due.
The Bank loans securities to specified brokerage houses. These loaned
securities are collateralized at a minimum of 102% of their fair value with
government securities and/or cash. To protect the Bank's investment, the
agreements contain provisions to increase the collateral obtained, should the
fair value of the collateral decline or the fair value of the security loaned
increase. Upon termination of the agreement, securities loaned are returned to
the Bank. The following table reflects the carrying value of securities loaned
and their estimated fair value and the estimated fair value of the collateral at
December 31:
1996 1995
---- ----
(In Thousands)
Amortized cost - Securities loaned $ - $ 18,500
======== ========
Estimated fair value - Securities loaned $ - $ 18,557
======== ========
Estimated fair value - Collateral $ - $ 19,256
======== ========
NOTE (4) OTHER INVESTMENTS
Other investments at December 31, 1996 and 1995 were as follows:
1996 1995
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
(In Thousands)
Investment required by law* $ 6,829 $ 6,829 $ 6,272 $ 6,272
Other stock 30 30 30 30
-------- -------- -------- --------
Total other investments $ 6,859 $ 6,859 $ 6,302 $ 6,302
======== ======== ======== ========
<FN>
* The Bank is required to hold shares of the Federal Home Loan Bank of New York.
</FN>
NOTE (5) LOANS
Loans are summarized as follows:
December 31,
------------
1996 1995
---- ----
(In Thousands)
Mortgage loans:
One-to four-family $ 76,848 $ 82,391
Multi-family 433,224 344,337
Underlying cooperative* 262,221 263,972
Commercial 61,829 55,662
Construction 1,836 1,492
-------- --------
Total mortgage loans 835,958 747,854
-------- --------
Deferred loan fees and unearned
discounts (3,730) (4,242)
Allowance for possible loan losses (5,176) (4,575)
-------- --------
Total mortgage loans, net $827,052 $739,037
======== ========
Other loans:
Student $ 6,204 $ 7,466
Consumer 4,350 4,092
Loans secured by deposit accounts 8,328 8,489
Overdraft loans 237 220
Property improvement 8,775 9,165
-------- --------
Total other loans 27,894 29,432
-------- --------
Unearned discounts (21) (102)
Allowance for possible loan losses (151) (122)
-------- --------
Total other loans, net $ 27,722 $ 29,208
======== ========
<FN>
* Underlying cooperative loans are first liens on cooperative property and are
senior to loans on the individual units commonly called cooperative share loans.
</FN>
NOTE (6) LOAN DELINQUENCIES
Information regarding loans delinquent 90 days or more at December 31, 1996
and 1995 is summarized as follows:
1996 1995
---- ----
Number Principal Number Principal
of balance of balance
loans of loans loans of loans
----- -------- ----- --------
(Dollars in Thousands)
Delinquent loans:
Guaranteed* 144 $ 692 132 $ 751
Non-guaranteed 15 13,459 8 324
--- ------- --- ------
Total delinquencies
over 90 days 159 $14,151 140 $1,075
=== ======= === ======
Ratio of loans 90 days
or more past due to
total gross loans 1.64% .14%
==== ===
<FN>
*These loans are guaranteed by the Federal Housing Administration, the Veterans
Administration or New York State Higher Education Services Corporation.
</FN>
At December 31, 1996, there was one mortgage loan with a balance of
$12,754,000 on non-accrual status. At December 31, 1995 there were two loans
totaling $20,903,000 on non-accrual status comprised of a $12,754,000 underlying
cooperative mortgage which was 60 days in arrears and an $8,149,000 multi-family
property mortgage which was current and being accounted for on a cash basis, as
payments were received through the bankruptcy court. Net interest income was
reduced by approximately $1,180,000, $197,000 and $150,000 for the years ended
December 31, 1996, 1995 and 1994 in connection with non-accrual loans.
The following table summarizes information regarding the Company's impaired
loans at December 31:
1996
----
Allowance
Recorded for Loan Net
Investment Losses Investment
---------- ------ ----------
(In Thousands)
Underlying Cooperative:
With a related allowance $ - $ - $ -
Without a related allowance 12,754 - 12,754
------- ------- -------
Total Impaired Loans $12,754 $ - $12,754
======= ======= =======
There were no impaired loans at December 31, 1995.
There were no loans included in the above table which were modified in a
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.
NOTE (7) ALLOWANCE FOR POSSIBLE LOAN LOSSES
Activity in the allowance for possible loan losses for the years ended
December 31, 1996, 1995 and 1994 is summarized as follows:
Mortgage loans Other loans
-------------- -----------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
(In Thousands)
Balance at beginning of period $4,575 $3,976 $4,000 $122 $109 $136
Provision for possible loan losses 600 600 600 40 36 8
Loans charged off - (1) (624) (33) (43) (40)
Recoveries of loans previously
charged off 1 - - 22 20 5
------ ------ ------ ---- ---- ----
Balance at end of period $5,176 $4,575 $3,976 $151 $122 $109
====== ====== ====== ==== ==== ====
NOTE (8) MORTGAGE LOAN SERVICING
A summary of principal balances, servicing income and the number of loans
serviced for others by the Bank at and for the years ended December 31, 1996,
1995 and 1994 were as follows:
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
Principal balances $16,016 $18,381 $21,605
======= ======= =======
Servicing income $ 39 $ 47 $ 81
======= ======= =======
Number of loans 1,494 2,023 2,623
===== ===== =======
The balance of loans sold with full recourse was $7,366,000 and $10,330,000
at December 31, 1996 and 1995, respectively. The Bank has not sold any loans
with recourse since 1985. The Bank sold, without recourse, $1,715,000 and
$1,792,000 of mortgage loans to FNMA and/or the State of New York Mortgage
Association (SONYMA) during 1996 and 1995, respectively. The Bank retained
servicing for these loans, which did not result in any servicing assets.
NOTE (9) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1996 and 1995 consisted of the
following:
1996 1995
---- ----
(In Thousands)
Banking houses and land $21,493 $20,542
Furniture, fixtures and equipment 15,086 14,179
Safe deposit vaults 1,016 1,016
------- -------
37,595 35,737
Less accumulated depreciation and
amortization 20,766 20,580
------- -------
Premises and equipment, net $16,829 $15,157
======= =======
Depreciation and amortization expense for the years ended December 31,
1996, 1995 and 1994 was $1,826,000, $1,920,000 and $1,847,000, respectively.
NOTE (10) INTEREST DUE AND ACCRUED
Interest due and accrued at December 31, 1996 and 1995 consisted of the
following:
1996 1995
---- ----
(In Thousands)
U.S. Government and Agencies $ 2,655 $ 6,455
CMOs 739 641
MBS 51 71
Mortgage and other loans 5,865 5,740
------- -------
$ 9,310 $12,907
======= =======
NOTE (11) REAL ESTATE HELD FOR INVESTMENT
Through its wholly-owned subsidiaries, the Bank has investments in real
estate. At December 31, 1996 and 1995, components of the net asset amounts of
real estate held for investment were as follows:
1996 1995
---- ----
(In Thousands)
Buildings, net $ 4,000 $ 4,033
Land 1,561 1,561
Accrued interest and other assets 1,385 1,708
Other liabilities (864) (907)
------- -------
Net assets $ 6,082 $ 6,395
======= =======
The summarized statements of income of the Bank's wholly-owned subsidiaries
that comprise real estate held for investment, for the years ended December 31,
1996, 1995 and 1994 were as follows:
1996 1995 1994
---- ---- ----
(In Thousands)
Rental income $ 4,020 $ 4,236 $ 4,040
Net interest income 4 5 4
Other income 652 210 317
------- ------- -------
Total income 4,676 4,451 4,361
------- ------- -------
Real estate taxes 566 574 576
Operating and other expenses 3,087 3,376 3,640
------ ------- -------
Total expenses 3,653 3,950 4,216
------ ------- -------
Income from real estate held
for investment $1,023 $ 501 $ 145
====== ======= ========
NOTE (12) REAL ESTATE HELD FOR SALE AND OTHER REAL ESTATE
Real Estate Held for Sale
Condominium Property: The Bank, through its wholly-owned subsidiary Sher
Park Realty Corp. (Sher Park), was originally a 50% partner with a general
contractor in Jade Associates (Jade). Jade was a joint venture formed to
construct and subsequently sell an 84 unit condominium complex in Flushing, New
York. During 1993, Jamlyn Realty Corp., another of the Bank's wholly owned
subsidiaries, acquired the general contractor's ownership share. During 1996, 12
units were sold, resulting in deferred gains of $104,000, as sales in this
property are being accounted for under the cost recovery method. At December 31,
1996, of the remaining 49 units, 42 were rented and 7 were vacant. On a
consolidated basis, for the years ended December 31, 1996, 1995 and 1994, this
investment generated pretax income of $173,000, $137,000 and $240,000,
respectively. At December 31, 1996 and 1995, the net investment in the property
was $4,589,000 and $6,111,000, respectively.
Cooperative Apartments: Several of the Bank's wholly owned subsidiaries
own cooperative apartments in various buildings, which are carried at zero cost.
At December 31, 1996 and 1995, 158 and 183 cooperative apartments remained
available for sale, respectively.
Other Real Estate
ORE at December 31, 1996 and 1995 totaled $647,000 and $1,203,000,
respectively. The aggregate (income from)/cost of ORE operations was ($772,000),
$209,000 and $200,000 for the years ended December 31, 1996, 1995, and 1994,
respectively. During 1996, two ORE properties were sold, generating a net gain
of $688,000, comprised of a $705,000 gain and a $17,000 loss. There were no
sales of ORE during 1995 or 1994. There were no provisions established against
ORE during the years ended December 31, 1996, 1995 or 1994.
During 1994, as part of the workout of a $1,877,000 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. At December 31, 1996
and 1995, the balance of the additional loan was $386,000 and $491,000,
respectively. In addition, the mortgage loan was extended for an additional five
years at 7.25% on February 1, 1994, the scheduled maturity.
In connection with this transaction, $1,622,000, representing the
proportionate share of the Bank's interest in the $2,379,000 cooperative
indebtedness to the Bank, was reclassified from mortgage loans to ORE on the
Company's consolidated financial statements as of December 31, 1994. The amount
included in ORE is based on the percentage of cooperative shares owned by the
Bank's subsidiary to the total cooperative shares outstanding. The amount that
remained included in mortgage loans was $1,311,000 and $1,092,000 at December
31, 1996 and 1995, respectively. The carrying amount of this property is
increased by capitalized improvements, not to exceed net fair value, and
reported net of deferred gains. At December 31, 1996, cumulative gains of
$347,000 on the sale of 24 units were deferred. At December 31, 1996, 33 units
were owned by the Bank's subsidiary, of which 32 were rented and 1 was vacant
and being marketed for sale. This property accounted for $607,000 of the
$647,000 in ORE at December 31, 1996.
NOTE (13) REAL ESTATE OPERATIONS, NET
Results of real estate operations for the years ended December 31, 1996,
1995 and 1994 were as follows:
1996 1995 1994
---- ---- ----
(In Thousands)
Income from real estate held
for investment, net (See Note 11.) $1,023 $ 501 $ 145
------ ------ ------
Real estate held for sale:
Rental income 173 137 615
Gain on sale1 571 587 2,737
------ ------ ------
744 724 3,352
------ ------ ------
Real estate operations, net $1,767 $1,225 $3,497
====== ====== ======
<FN>
1 Includes gains on the sale of cooperative apartments, owned by various
of the Bank's wholly-owned subsidiaries, which are carried at zero cost. During
1994, the Company sold a 684 apartment complex, known as Bay Hill Gardens,
recognizing a pre-tax gain of $2,609,000.
</FN>
NOTE (14) CLAIMS RECEIVABLE, NET
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 stock. Therefore, during the
fourth quarter of 1996, the Bank fully recovered the $2,040,000 reserve.
NOTE (15) INCOME TAXES
The 1996, 1995 and 1994 provisions for income tax were comprised of the
following amounts:
1996 1995 1994
---- ---- ----
(In Thousands)
Current:
Federal $12,870 $11,657 $12,724
State and local 5,630 5,344 5,379
------- ------- -------
18,500 17,001 18,103
------- ------- -------
Deferred:
Federal 703 (133) (57)
State and local 349 (265) (28)
------- ------- -------
1,052 (398) (85)
------- ------- -------
Provision for income taxes $19,552 $16,603 $18,018
======= ======= =======
For the years ended December 31, 1996, 1995 and 1994, the Company
recognized tax benefits relating to its stock option and other stock benefit
plans of $599,000, $1,645,000 and $994,000, respectively, which were credited
directly to stockholders' equity.
A reconciliation of the statutory U.S. federal income tax provision and
rate, to the actual tax provision and effective rate for the years ended
December 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994
---- ---- ----
% of % of % of
pre tax pre tax pre tax
Amount earnings Amount earnings Amount earnings
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Statutory rate $16,197 35.00% $13,572 35.00% $14,565 35.00%
Dividends received
exclusion (235) (.51) (218) (.56) (201) (.48)
State and local income
taxes, net of Federal
income tax benefit 3,886 8.40 3,301 8.51 3,478 8.36
Other, net (296) (.64) (52) (.13) 176 .42
------- ----- ------- ----- ------- -----
Provision for income taxes $19,552 42.25% $16,603 42.82% $18,018 43.30%
======= ===== ======= ===== ======= =====
At December 31, 1996 and 1995, deferred tax assets and liabilities were
comprised of the following:
1996 1995
---- ----
(In Thousands)
Deferred Tax Assets:
Deferred profits on unsold cooperative shares $ 2,308 $ 2,775
Allowance for possible loan losses 2,375 2,094
Benefit plan costs 1,877 1,898
Loan fees and mortgage discounts 517 699
Other 485 1,297
-------- -------
Deferred tax assets 7,562 8,763
-------- -------
Deferred Tax Liabilities:
Securities available-for-sale (17,534) (12,671)
Depreciation (46) (102)
Cash basis mortgages (144) (237)
-------- -------
Deferred tax liabilities (17,724) (13,010)
-------- -------
Deferred tax liability, net $(10,162) $(4,247)
======== =======
Recently Enacted Tax Legislation
--------------------------------
Federal legislation regarding bad debt recapture was enacted into law on
August 20, 1996. The legislation requires recapture of reserves accumulated
after 1987 (the base year). The recapture tax on post 1987 reserves must be paid
over a six year period starting in 1996. The payment of the tax can be deferred
in each of 1996 and 1997 if an institution originated at least the same average
annual principal amount of mortgage loans that it originated in the six years
prior to 1996. The base year reserves and supplemental reserve are frozen, not
forgiven. These reserves continue to be segregated as they are subject to
recapture penalty if used for purposes other than to absorb losses on loans.
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. The New York State bad debt deduction will no longer be predicated on the
Federal deduction.
Management has evaluated the new Federal and New York State tax
legislation, and does not expect a material adverse impact on the operations or
financial condition of the Company or the Bank as a result of these tax law
changes.
To date, New York City has not changed its law regarding taxation of thrift
reserves for loan losses and accordingly will follow the new federal law
discussed above.
NOTE (16) DUE TO DEPOSITORS
Due to depositors at December 31, 1996 and 1995 are summarized as follows:
1996 1995
------------------------------ ----------------------------
Stated Stated
rate Amount Percent rate Amount Percent
---- ------ ------- ---- ------ -------
(Dollars in Thousands)
Balance by interest rate:
Demand - % $ 31,940 2.79% - % $ 30,711 2.64%
N.O.W. 2.47 36,256 3.17 2.47 36,680 3.15
Money market 2.96 89,081 7.78 2.96 92,774 7.97
Passbook and lease
security 2.71 599,951 52.43 2.96 632,879 54.40
Certificates: - - - 3.70- 4.00 2,083 .18
4.14- 5.00 174,155 15.22 4.01- 5.00 135,386 11.64
5.01- 6.00 187,890 16.42 5.01- 6.00 203,054 17.45
6.01- 7.00 25,120 2.19 6.01- 7.00 29,016 2.49
7.01- 8.00 - - 7.01- 8.00 863 .08
---------- ------ ---------- ------
387,165 33.83 370,402 31.84
---------- ------ ---------- ------
Due to depositors $1,144,393 100.00% $1,163,446 100.00%
========== ====== ========== ======
At December 31, 1996 and 1995, the scheduled maturities of certificate
accounts were as follows:
1996 1995
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
12 months or less $323,788 83.63% $305,599 82.51%
13 to 24 months 34,452 8.90 31,738 8.57
25 to 36 months 13,939 3.60 14,039 3.79
37 to 48 months 14,969 3.87 10,270 2.77
49 to 60 months 17 - 8,756 2.36
-------- ------ -------- ------
$387,165 100.00% $370,402 100.00%
======== ====== ======== ======
At December 31, 1996 and 1995, certificate accounts in excess of
$100,000, were $32,676,000 and $27,039,000, respectively. The Federal Deposit
Insurance Corporation, an agency of the U.S. Government, generally insures each
depositor's savings up to $100,000, through the Bank Insurance Fund.
Interest expense on deposit balances is summarized as follows for the years
ended December 31, 1996, 1995 and 1994:
1996 1995 1994
---- ---- ----
(In Thousands)
Passbook and lease security $16,722 $19,063 $21,230
Certificates 19,777 17,649 10,995
Money market 2,819 3,051 3,397
N.O.W. 899 944 972
------- ------- -------
Total interest expense $40,217 $40,707 $36,594
======= ======= =======
NOTE (17) RETAINED INCOME, SUBSTANTIALLY RESTRICTED
In the unlikely event of a complete liquidation of the Bank (and only
in such an event) eligible depositors who continue to maintain accounts shall be
entitled to receive a distribution from the liquidation account, which was
established in connection with the Company's initial public stock offering. The
total amount of the liquidation account may be decreased if the balances of
eligible deposits decrease on the annual determination dates. The balance of the
liquidation account was $71,589,000 at December 31, 1996 and $80,230,000 at
December 31, 1995.
The Bank is not permitted to declare or pay a cash dividend on, or
repurchase any of its stock if the effect thereof would cause its net worth to
be reduced below either (i) the amount required for the liquidation account or
(ii) the amount of applicable regulatory capital requirements.
Retained income at December 31, 1996 and 1995 includes $85,107,000 and
$84,457,000, respectively, which has been segregated for federal income tax
purposes as a bad debt reserve. Any use of these amounts for purposes other than
to absorb losses on loans may result in taxable income, under federal
regulations, at current rates. The Bank recognized $661,000 in tax bad debt
deductions during the year ended December 31, 1996, $52,000 for 1995, and
$66,000 for 1994. (See Note 15, regarding recently enacted tax legislation.)
NOTE (18) COMMITMENTS AND CONTINGENCIES
Lease Commitments
-----------------
The Bank occupies premises covered by noncancelable leases with expiration
dates through June 24, 2002 (exclusive of renewal options). Rental expense under
these leases for the years ended December 31, 1996, 1995 and 1994 was $267,000,
$262,000 and $256,000, respectively. At December 31, 1996, the projected minimum
rental payments (exclusive of possible rent escalation charges and normal
recurring charges for maintenance, insurance and taxes) are as follows:
Years Ending
December 31, Amount
------------ ------
(In Thousands)
1997 $ 182
1998 147
1999 142
2000 115
2001 50
Thereafter 9
------
Total $ 645
======
Loan Commitments
----------------
At December 31, 1996 and 1995, commitments to originate mortgage loans at
fixed rates were $34,376,000 with stated rates ranging from 7.38% to 8.00% and
$41,678,000 with stated rates ranging from 6.50% to 8.38%, respectively. There
were no commitments to originate adjustable rate mortgages at December 31, 1996
and 1995. At December 31, 1996 and 1995, deposit account overdraft lines
available were $745,000 and $723,000, respectively, with stated rates ranging
from 10.00% to 12.00% and unused business lines of credit were $16,000 and
$14,000, respectively, with a stated rate of 15.00%. There were no loans held
for sale at December 31, 1996 and $94,000 at December 31, 1995.
Security Purchase Commitments
-----------------------------
At December 31, 1996, there were commitments to purchase $45,000,000 of
federal agency securities and no commitments to purchase equity securities, CMOs
or MBS.
Litigation
----------
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 Company's results of operations, business
operations or the consolidated financial condition of the Company.
NOTE (19) PENSION PLAN
Retirement Plan of Jamaica Savings Bank
---------------------------------------
The Bank sponsors a trusteed non-contributory defined benefit pension plan
(the Pension Plan) covering substantially all of its full-time employees. It is
the policy of the Bank to fund current and past service pension costs accrued.
The following table sets forth the Pension Plan's funded status and amounts
recognized in the Company's consolidated financial statements at December 31:
1996 1995
---- ----
(In Thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $24,451,000 and
$24,962,000 at December 31, 1996 and 1995,
respectively $(26,001) $(25,976)
======== ========
Projected benefit obligation for services
rendered to date (36,701) (36,374)
Plan assets at fair value, primarily listed
stocks and U.S. bonds 52,873 47,322
-------- --------
Plan assets in excess of projected benefit
obligation 16,172 10,948
Unrecognized net gain from past experience
different from that assumed and effects of
changes in assumptions (9,801) (4,980)
Unrecognized prior service cost 1,721 1,867
Unrecognized net asset being amortized over
18.35 years (3,794) (4,248)
-------- --------
Prepaid pension cost $ 4,298 $ 3,587
======== ========
The components of net periodic pension income for the years ended
December 31, 1996, 1995, and 1994, are as follows:
1996 1995 1994
---- ---- ----
(In Thousands)
Service cost-benefits earned $ 1,078 $ 619 $ 913
Interest cost on projected
benefit obligation 2,239 2,066 1,962
Actual return on plan assets (7,140) (10,631) 1,184
Net amortization and deferral 3,112 7,184 (4,719)
-------- -------- -------
Net periodic pension (income) $ (711) $ (762) $ (660)
======== ======== =======
The expected long-term rate of return on assets was 8.00% for the years
ended December 31, 1996, 1995 and 1994. The following actuarial assumptions have
been made to determine the actuarial present value of the projected benefit
obligation for the years ended December 31:
1996 1995 1994
---- ---- ----
Rate of increase in future compensation 6.50% 6.50% 6.50%
Weighted average discount rate 6.50% 6.00% 8.00%
Jamaica Savings Bank Benefit Restoration Plan-Pension
-----------------------------------------------------
The Bank sponsors a pension benefit restoration plan (Pension Restore Plan)
to provide retirement benefits which would have been provided under the Pension
Plan except for limitations imposed by Section 415 of the Internal Revenue Code.
Payments under the Pension Restore Plan will be paid out of the general assets
of the Bank.
The following sets forth the Pension Restore Plan's status and amounts
recognized in the Company's consolidated financial statements at December 31:
1996 1995
---- ----
(In Thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $3,936,000 and $3,468,000
at December 31, 1996 and 1995, respectively $(3,936) $(3,468)
Projected benefit obligation for service
rendered to date (4,607) (4,204)
Plan assets at fair value - -
------- -------
Projected benefit obligations in excess of
plan assets (4,607) (4,204)
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions 1,003 1,092
Unrecognized prior service cost (4) (4)
Additional minimum liability (328) -
------- -------
Accrued pension cost $(3,936) $(3,116)
======= =======
The components for the net periodic Pension Restore Plan cost for the years
ended December 31, 1996, 1995 and 1994, are as follows:
1996 1995 1994
---- ---- ----
(In Thousands)
Interest cost on projected benefit obligation $ 274 $ 264 $ 232
Net amortization and deferral 252 41 184
------- ------- -------
Net periodic Pension Restore Plan cost $ 526 $ 305 $ 416
======= ======= =======
The following actuarial assumptions have been made to determine the
projected benefit obligation for the years ended December 31:
1996 1995 1994
---- ---- ----
Rate of increase in future compensation 6.50% 6.50% 6.50%
Weighted average discount rate 6.50% 6.00% 8.00%
NOTE (20) POST RETIREMENT BENEFITS, OTHER THAN PENSIONS
The Bank's life insurance benefit plan provides for continued coverage for
retirees with fifteen years of credited service. The coverage at the time of
retirement is reduced by 20% per year over a five year period to a minimum
coverage of $5,000, which remains in force until death. The retiree has the
option each time the coverage is reduced to convert all or part of the reduction
to regular life insurance at the retiree's cost based on his/her attained age
and without medical examination.
The net periodic cost, before income taxes, related to the Bank's
postretirement life insurance benefits for the years ended December 31, 1996,
1995 and 1994, was $70,000, $64,000 and $74,000, respectively. This periodic
cost is included in the current cost of compensation and benefits.
NOTE (21) INCENTIVE SAVINGS PLAN
The Incentive Savings Plan (the Savings Plan) is a defined contribution and
thrift savings plan. Prior to the suspension of the Savings Plan during 1990,
all full-time employees were eligible for voluntary participation after one year
of continuous service. The Savings Plan continues to earn income on the Savings
Plan's investments. It is subject to the provisions of the Employee Retirement
Income Security Act of 1974 (ERISA), as amended. The Bank bears the costs of
administering the Savings Plan.
In connection with the Bank's adoption of an ESOP during 1990, in order to
comply with the limitations set forth by the Internal Revenue Code regarding
qualified plans, no further contributions have been made to the Savings Plan.
During 1994, management determined to continue the ESOP and that contributions
to the Savings Plan would remain suspended indefinitely.
NOTE (22) STOCK OPTION PLANS
Effective upon the conversion of the Bank in 1990 from mutual to stock form
of ownership (the Conversion), the Company adopted the Incentive Stock Option
Plan (the Stock Option Plan) and the Option Plan for Outside Directors (the
Directors' Option Plan).
Stock Option Plan Under the Stock Option Plan, 1,430,000 common stock
options (which expire ten years from the date of grant, June 27, 1990) were
granted to the executive officers and employees of the Company and its
subsidiary, the Bank. Each option entitles the holder to purchase one share of
the Company's common stock at an exercise price equal to $10.00 per share (the
initial public offering price). Options became exercisable on a cumulative basis
in equal installments at a rate of 20% per year commencing one year from the
date of grant. Simultaneously with the grant of these options, "limited rights"
with respect to the shares covered by the options were granted. Limited rights
granted are subject to terms and conditions and can be exercised only in the
event of a change in control of the Company. Upon exercise of a limited right,
the holder shall receive from the Company a cash payment equal to the difference
between the exercise price of the option ($10.00) and the fair market value of
the underlying shares of common stock. During the years ended December 31, 1996,
1995 and 1994, 121,256, 161,860 and 128,604 options granted under the Stock
Option Plan were exercised, respectively. At December 31, 1996, the remaining
446,786 options granted under the Stock Option Plan were exercisable.
Directors' Option Plan Each member of the Board of Directors, who is not
an officer or employee of the Company or the Bank, was granted nonstatutory
common stock options to purchase 25,000 shares of the common stock. In addition,
active Directors Emeritus were each granted nonstatutory common stock options to
purchase 10,000 shares of the common stock. In the aggregate, members of the
Board of Directors and active Directors Emeritus of the Company were granted
options to purchase 170,000 shares of the common stock of the Company at an
exercise price equal to $10.00 per share (the initial public offering price)
with limited rights. All options granted, including limited rights attached
thereto, under the Directors' Option Plan expire upon the earlier of 10 years
following the date of grant or one year following the date the optionee ceases
to be a director. There were 2,000 options exercised under the Directors' Option
Plan during 1996, no options exercised during 1995 and 2,500 options exercised
during calendar 1994, respectively. At December 31, 1996, 153,000 options
granted under the Directors' Option Plan were exercisable.
The 1996 Stock Option Plan On December 12, 1995, the Board of Directors
adopted the JSB Financial, Inc. 1996 Stock Option Plan (the 1996 Option Plan),
which became effective January 1, 1996, subject to stockholder approval, which
was obtained on May 14, 1996. The Company reserved 800,000 shares of common
stock of the Company for issuance upon the exercise of options. The 1996 Option
Plan provides for: (1) the grant of stock options to directors on an annual
basis pursuant to a specified formula; (2) the grant of stock options to
officers at the discretion of the Employee Benefits Committee of the Bank; (3)
if certain events, which are likely to lead to a change in control of the
Company or the Bank, should occur, stock options relating to any shares of the
Company reserved for issuance that were not previously made subject to options,
will be granted to all current directors and officers who were previously
granted stock options under the 1996 Option Plan; (4) the grant of limited
rights relating to all of the foregoing options, which shall be exercisable only
upon a change of control; and (5) the grant of dividend equivalent rights (DER)
relating to all of the foregoing options, which may provide for a cash payment
to the optionee upon exercise of the option, based on the difference between the
percentage of earnings per share paid by the Company as cash dividends compared
to the percentage of earnings per share paid as cash dividends by the
twenty-five largest stock owned thrift institutions in the United States,
calculated on an annual basis.
Under the 1996 Option Plan, each member of the Board of Directors, who
is not an officer or employee of the Company or the Bank, is granted
nonstatutory common stock options to purchase 4,000 shares of the common stock,
each active Director Emeritus is granted 2,000 options and individuals who
become directors are granted 5,000 options. In the aggregate, members of the
Board of Directors and the active Director Emeritus of the Company were granted
options, with limited rights, to purchase 39,000 shares and the Company's
officers were granted options to purchase 126,000 shares of the common stock of
the Company. All options granted on January 1, 1996, were granted at an exercise
price of $31.625, the market closing price of the Company's common stock on the
business day before grant. The option period during which an individual granted
options may exercise such option will commence six months after the date of
grant and will expire no later than ten years from the date of the grant. At
December 31, 1996, all 165,000 options granted under the 1996 Option Plan were
exercisable and had a remaining contractual life of 9 years, as none of these
options expired or were exercised or forfeited. Effective January 1, 1997, an
additional 160,000 options were granted at an exercise price of $38.00 per
share.
The following summarizes the pro forma net income as if the fair value
method of accounting for awards had been adopted for grants after January 1,
1995:
Net income (as reported) $26,725
Pro forma net income $26,188
Net income per share (as reported) $2.54
Pro forma net income per share $2.49
The pro forma results presented above may not be representative of the
effects reported in pro forma net income for future years.
The fair value of the 1996 option grant was estimated using the
Black-Scholes option pricing model on the date of grant, using the following
assumptions: dividend yield of 3.63%, expected volatility of 21.9%, risk-free
interest rate of 5.44% and an expected option term of six years.
The Company modified the 1996 Stock Option Plan, as originally adopted,
to allow for the cash payment for the DER to option holders; rather than have
the DER reduce the exercise price of the option. This change separated the cost
of the DER from the cost of the option, and is expected to result in less
expense volatility. During 1996, the Company recognized $330,000 in expense
related to the options (for the difference in market closing price between grant
date and subsequent stockholder approval) and $99,000 of compensation expense
related to the DER.
NOTE (23) STOCK PLANS
Employee Stock Ownership Plan In connection with the Conversion, the Bank
established an ESOP. The ESOP borrowed $12,800,000 from an unrelated third party
lender to purchase 1,280,000 shares of the Company's common stock. The final
payment of the ESOP loan was made during 1994, through the Bank's contributions.
Interest expense for the ESOP obligation was $25,000 for the year ended December
31, 1994.
During 1994, the Board of Directors adopted a resolution authorizing
additional contributions to the ESOP which commenced in 1995. Such additional
contributions to purchase shares are based on approximately 6.0% of employees'
base salary.
ESOP benefits generally become 20% vested after each year of credited
service, becoming 100% vested after five years of service with the Bank.
Forfeitures are reallocated among participating employees, in the same
proportion as contributions. Benefits are payable upon death, retirement, early
retirement, disability or separation from service and may be payable in cash or
stock. The Bank recorded a net expense of $550,000, $533,000 and $978,000
related to the ESOP for the years ended December 31, 1996, 1995 and 1994,
respectively. There were no unallocated shares at December 31, 1996 and 1995.
Dividends paid on the unallocated ESOP shares were $33,000 for the year ended
December 31, 1994, and were used to make principal payments on the obligation.
The trustee for the ESOP must vote all allocated stock held in the ESOP
trust in accordance with the instructions of the participants. Common stock
allocated to participants was 17,633, 21,583 and 104,472 for the years ended
December 31, 1996, 1995 and 1994, respectively. The Bank bears the cost of
administering the ESOP.
Bank Recognition and Retention Plans and Trusts In connection with the
Conversion, to provide employees, officers and directors of the Bank with a
proprietary interest in the Company and in a manner designed to retain such
individuals, the Bank established the Bank Recognition and Retention Plans
(BRRPs). The Bank contributed a total of $6.4 million to the BRRPs to enable
them to acquire an aggregate of 640,000 shares of the Company's common stock in
the Company's Conversion, all of which have been awarded. Awards vested at a
rate of 20% per year commencing one year from the date of the award. Awards
became 100% vested upon termination of employment due to death, disability or
normal retirement, or following a change in control of the Bank or the Company.
Unvested amounts represented deferred compensation and were reflected as a
reduction of stockholders' equity. Awards under the BRRPs were fully vested and
the BRRPs were terminated during 1995. The Bank recorded an expense of $594,000
and $835,000, for the BRRPs for the years ended December 31, 1995 and 1994,
respectively. Pursuant to the BRRPs, 51,631 and 98,815 shares of common stock
were vested during the years ended December 31, 1995 and 1994, respectively.
NOTE (24) BENEFIT RESTORATION PLAN
The Bank maintains a non-qualified Benefit Restoration Plan (the Restore
Plan), to compensate participants in the Bank's benefit plans that are limited
by Section 415 of the Internal Revenue Code. With certain exceptions, the
Restore Plan is unfunded. However, in connection with the ESOP, which entitles
participants to shares of the Company's common stock and the Savings Plan, which
entitles participants to direct amounts, if any, invested in the Company's
stock, the Bank established a trust. The purpose of this trust is to purchase,
on an ongoing basis, shares of the Company's common stock to which participants
of the Restore Plan are entitled. By establishing this trust, the Bank fixed the
amount of cash expended for amounts payable in shares of common stock of the
Company or its equivalent cash value at the time of payout. The shares of common
stock held by the trust are reflected as contra-equity and additional paid-in
capital on the Consolidated Statements of Financial Condition of the Company. At
December 31, 1996 and 1995, the trust held 166,848 shares of common stock, at an
aggregate cost of $3,275,000 and $3,270,000, respectively. The expense
recognized for the Restore Plan in connection with the ESOP for 1996, 1995 and
1994 was $105,000, $35,000 and $281,000, respectively.
NOTE (25) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS Statement No. 107 "Disclosures about Fair Value of Financial
Instruments" (Statement 107) defines the fair value of a financial instrument as
the amount at which the instrument could be exchanged in a current transaction
between willing parties. Statement 107 provides limited guidance for calculating
fair value estimates when quoted prices are not available, therefore the Company
has disclosed the valuation approach and the material assumptions which have
been made. The relevance and reliability of the estimates of fair values
presented are limited, given the dynamic nature of market conditions, including
changes in interest rates, the real estate market, existing borrowers' financial
condition and numerous other factors over time.
The following table presents carrying values and estimated fair values of
financial instruments at December 31:
1996 1995
----------------- --------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
(In Thousands)
Financial assets
Cash and cash equivalents $ 99,394 $ 99,394 $ 85,893 $ 85,893
Securities available-for-sale 51,021 51,021 40,071 40,071
Securities held-to-maturity 460,509 461,784 592,060 593,991
Other investments 6,859 6,859 6,302 6,302
Mortgage loans, gross 835,958 846,508 747,854 785,742
Other loans, gross 27,894 27,970 29,432 29,517
Interest due and accrued 9,310 9,310 12,907 12,907
Financial liabilities
Deposits $1,144,393 $1,144,690 $1,163,446 $1,164,354
The following methods and assumptions were utilized by management to estimate
the fair value of each class of financial instruments at December 31, 1996 and
1995:
Cash and cash equivalents, interest due and accrued: The carrying values
approximate fair value because of the short-term nature of these instruments.
Securities available-for-sale, securities held-to-maturity and other
investments: The estimated fair values are based on quoted market prices at the
reporting date for those or similar investments. (FHLB stock is recorded at
cost).
Mortgage and other loans: For certain homogeneous categories of loans, such
as some residential mortgages and student loans, fair value is estimated using
the quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. In addition, it is assumed that one-to
four-family fixed rate mortgage loans are FNMA qualifying, and could therefore
be packaged into a MBS. The estimated fair value for the remainder of the
mortgage and other loan portfolios was computed by discounting the contractual
future cash flows at rates offered by the Bank, which approximate market rates,
at December 31, 1996 and 1995 on loans with terms similar to the remaining term
to maturity and to borrowers with similar credit quality. The estimated fair
value of non-performing loans, if material, are calculated on an individual
basis, applying a discount commensurate with the credit risk.
Techniques for estimating fair value are extremely sensitive to the
assumptions and estimates used. While management has attempted to use
assumptions and estimates which it believes are most reflective of the loan
portfolio and the current market, a greater degree of subjectivity is inherent
in these values than those determined in formal trading marketplaces. As such,
readers are cautioned in using this information for purposes of evaluating the
financial condition and/or value of the Company in and of itself or in
comparison with any other company.
Deposits: All deposits, except certificates, are subject to rate changes at
any time, and therefore are considered to be carried at fair value. The
estimates of fair value for certificates reflect the present value of the
contractual future cash flow for each certificate. The present value rates
utilized were the rates offered by the Bank (which approximate market rates) at
December 31, 1996 and 1995, respectively, on a certificate with an initial term
to maturity equal to the remaining term to maturity of the existing
certificates.
Commitments: Commitments to originate loans and purchase securities are
derived by applying the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the present credit
worthiness of the counterparties. For fixed-rate loan commitments, estimated
fair value also considers the difference between interest rates on the reporting
date and the committed rates. The estimated fair value of lines of credit is
based on the fees charged for similar agreements or on the estimated cost to
terminate them or otherwise settle the obligations with the counterparties at
the reporting dates. The commitments existing at December 31, 1996 and 1995,
would have been offered at substantially the same rates and under substantially
the same terms that would have been offered at December 31, 1996 and 1995 to the
counterparties; therefore the estimated fair value of the commitments was zero
at those dates.
NOTE (26) REGULATORY CAPITAL
The Office of Thrift Supervision (OTS) rules regarding stock repurchases
and redemptions, cash-out mergers, the upstreaming of funds to holding companies
and any other distributions charged against an institution's capital accounts,
are subject to certain limitations. An institution, such as the Bank, which
meets its fully phased-in capital requirements is able to pay dividends to the
Company, upon 30 days notice to the OTS, in an amount that would reduce its
surplus capital ratio by one-half at the beginning of the year, plus all of its
net income determined on the basis of generally accepted accounting principles
for that calendar year. The institution must continue to meet all fully
phased-in capital requirements after the proposed capital distribution.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum capital amounts and ratios. As of December
31, 1996, the most recent notification from the OTS categorized the Bank as
"well capitalized" under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management
believes have changed the institution's category. The following table sets forth
the required ratios and amounts and the Bank's actual capital amounts and ratios
at December 31:
To be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
1996
----
Total risk-based capital
(to risk weighted assets) $182,345 19.96% $ 73,074 8.00% $ 91,343 10.00%
Tangible capital
(to tangible assets) 188,309 13.54 20,866 1.50 N/A N/A
Tier I leverage (core)
capital (to adjusted
tangible assets) 188,309 13.54 41,733 3.00 69,555 5.00
1995
----
Total risk-based capital
(to risk weighted assets) $180,648 21.30% $ 67,834 8.00% $ 84,793 10.00%
Tangible capital
(to tangible assets) 187,202 13.16 21,344 1.50 N/A N/A
Tier I leverage (core)
capital (to adjusted
tangible assets) 187,202 13.16 42,688 3.00 71,147 5.00
The OTS regulatory capital requirements incorporate an interest rate risk
(IRR) component. Savings institutions with "above normal" IRR exposure are
subject to a deduction from regulatory capital for purposes of calculating their
risk-based capital requirements. Implementation of the IRR component has been
delayed by the OTS.
OTS regulations generally require that institutions deduct from capital
their investment in and advances to subsidiaries engaged, as principal, in
activities not permissible for national banks, such as real estate development.
OTS regulations also require that all equity and direct investments including
all loans and advances in which a legally binding commitment existed at April
12, 1989 be deducted from capital for the purposes of computing regulatory
capital ratios. At December 31, 1996, the Bank excluded from its regulatory
capital $13.7 million as a result of this regulation.
NOTE (27) PARENT ONLY FINANCIAL INFORMATION
The following condensed statements of financial condition at December 31,
1996 and 1995 and the condensed statements of income and cash flows for the
years ended December 31, 1996, 1995 and 1994, for JSB Financial, Inc. (parent
company only) present the Company's investment in its wholly-owned subsidiary,
the Bank, using the equity method of accounting.
Condensed Statements of Financial Condition
December 31, 1996 and 1995
(In Thousands)
ASSETS 1996 1995
---- ----
Cash and cash equivalents $ 15,582 $ 19,303
Securities held-to-maturity (estimated fair
value of $80,028 and $90,177, respectively) 80,007 90,000
Mortgage loans, net 15,239 15,279
Other assets, net 680 1,377
Investment in the Bank 223,791 214,148
-------- --------
Total Assets $335,299 $340,107
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities, net $ - $ -
Stockholders' equity 335,299 340,107
-------- --------
Total Liabilities and Stockholders' Equity $335,299 $340,107
======== ========
Condensed Statements of Income
For the Years Ended December 31,
(In Thousands)
1996 1995 1994
---- ---- ----
Dividends from the Bank $20,000 $43,000 $44,000
Interest income 6,589 7,275 4,337
Other income 18 15 51
------- ------- -------
26,607 50,290 48,388
------- ------- -------
Expenses 451 437 412
------- ------- -------
Income Before Income Taxes and Equity in
Undistributed Earnings of the Bank 26,156 49,853 47,976
Provision for Income Taxes 2,100 2,557 1,471
------- ------- -------
Income Before Equity in Undistributed Earnings
of the Bank 24,056 47,296 46,505
Equity in Undistributed Earnings of the Bank,
Net of Provision for Income Taxes 2,669 (25,122)(1) (22,908)(1)
------- ------- -------
Net Income $26,725 $22,174 $23,597
======= ======= =======
<FN>
(1) Represents excess of dividends over net income.
</FN>
Condensed Statements of Cash Flows
For the Years Ended December 31,
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES: 1996 1995 1994
---- ---- ----
Net income $ 26,725 $ 22,174 $ 23,597
Adjustments to reconcile net income to cash provided
by operating activities:
(Equity in undistributed earnings) excess of
dividends over net income of the Bank (2,669) 25,122 22,908
Non-cash dividends from the Bank (mortgage loans) - - (15,340)
Decrease (increase) in other assets 697 (247) (491)
Tax benefit for cash dividends paid to ESOP - - 11
Decrease in other liabilities - - (30)
-------- --------- ---------
Net cash provided by operating activities 24,753 47,049 30,655
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities held-to-maturity (205,021) (190,000) (160,000)
Proceeds from maturities of securities held-
to-maturity 215,000 170,000 165,000
Principal payments on mortgage loans 40 38 24
Accretion of discount in excess of amortization of
premium on debt securities 14 - -
-------- --------- ---------
Net cash provided (used) by investing activities 10,033 (19,962) 5,024
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid to common stockholders (12,090) (10,616) (7,996)
Payments to repurchase common stock (27,650) (9,881) (26,404)
Proceeds upon exercise of common stock options 1,233 1,619 1,311
-------- --------- ---------
Net cash used by financing activities (38,507) (18,878) (33,089)
-------- --------- ---------
Net (decrease) increase in cash and cash equivalents (3,721) 8,209 2,590
Cash and cash equivalents at beginning of year 19,303 11,094 8,504
-------- --------- ---------
Cash and cash equivalents at end of year $ 15,582 $ 19,303 $ 11,094
======== ========= =========
KPMG Peat Marwick LLP
INDEPENDENT AUDITORS' REPORT
To The Stockholders
and The Board of Directors of JSB Financial, Inc.:
We have audited the accompanying consolidated statements of financial condition
of JSB Financial, Inc. and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of JSB Financial, Inc.
and subsidiary at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in note 1(d) to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", effective
January 1, 1994.
KPMG Peat Marwick LLP
Jericho, New York
January 30, 1997