UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to section 13 or 15(d) of the securities
exchange act of 1934 for the year ended December 31, 1997
[ ] Transition report pursuant to section 13 or 15(d) of the
securities exchange act of 1934
Commission file number 1-13157
JSB FINANCIAL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 11-3000874
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
303 Merrick Road, Lynbrook, New York 11563
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(Address of principal executive offices)
Registrant's telephone number, including area code: (516) 887-7000
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock $.01 par value (Title of each class)
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New York Stock Exchange (Name of each exchange on which registered)
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Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes ______ No __X___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not considered herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form
10-K or any amendment to this Form 10-K. (X)
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 4, 1998: Common stock par value $.01 per share,
$450,467,434. This figure is based on the closing price by the New York
Stock Exchange for a share of the registrant's common stock on March 4,
1998, which was $53.3125 as reported in the Wall Street Journal on March 5,
1998.
The number of shares of the registrant's Common Stock outstanding as of
March 16, 1998 was 9,882,547 shares.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 12, 1998
and portions of the 1997 Annual Report to Stockholders are incorporated
herein by reference Parts I, II and III.
2
FORM 10-K CROSS-REFERENCE INDEX
PART I Page
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Item 1. Business ..................................................... 3
Item 2. Properties.................................................... 32
Item 3. Legal Proceedings............................................. 32
Item 4. Submission of Matters to a Vote of Security Holders........... 32
Additional Item. Executive Officers.................................... 33
PART II
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Item 5. Market for JSB Financial Inc.'s Common Equity
and Related Stockholders' Matters........................... 34
Item 6. Selected Financial Data....................................... 34
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 34
Item 8. Financial Statements and Supplementary Data .................. 34
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 34
PART III
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Item 10. Directors and Executive Officers.............................. 35
Item 11. Executive Compensation........................................ 35
Item 12. Security Ownership of Certain Beneficial Owners
and Management.............................................. 35
Item 13. Certain Relationships and Related Transactions................ 35
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................... 36
SIGNATURES.............................................................. 39
3
PART I
ITEM 1. BUSINESS
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DESCRIPTION OF BUSINESS
General
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JSB Financial, Inc. ("JSB Financial", "Company" or the "Holding
Company") is a Delaware corporation, incorporated on February 6, 1990, which
acquired all of the stock of Jamaica Savings Bank FSB ("Jamaica Savings" or the
"Bank") upon the Bank's conversion from a federally chartered mutual savings
bank to a federally chartered stock savings bank. The stock conversion was
completed on June 27, 1990. The information presented in the financial
statements and in the Form 10-K reflect the financial condition and results of
operations of the Company, as consolidated with its wholly owned subsidiary, the
Bank.
In addition to the Company's investment in the Bank, the Company invests
in U.S. Government and agency securities, federal funds sold (through the Bank)
and holds first mortgage loans. The Company received the mortgage loans as a
dividend from the Bank. (See Note 27 to the Consolidated Financial Statements,
included on pages 42 and 43 in the 1997 Annual Report to Stockholders.)
Jamaica Savings was organized in 1866 as a New York state chartered
mutual savings bank. In 1983, the Bank converted to a federally chartered
savings bank, retaining the "leeway" investment authority and broader investment
powers available to a state chartered savings bank, and its Federal Deposit
Insurance Corporation ("FDIC") insurance.
The Bank's principal business consists of attracting deposits from the
general public and investing those deposits, together with funds generated from
operations, in first mortgage loans secured by real estate, collateralized
mortgage obligations ("CMOs"), U.S. Government and federal agency securities,
and to a lesser extent, various other consumer loans and federal funds sold. The
Bank has a number of wholly-owned subsidiary corporations primarily for the
purpose of owning, operating and disposing of real estate properties.
Since 1990, the Company has maintained stock repurchase programs and
paid quarterly cash dividends to stockholders. During 1997, the Company did not
repurchase any of its outstanding common stock and paid total cash dividends of
$13.8 million, or $1.40 per common share.
Market Area and Competition
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Market Area Headquartered in Lynbrook, New York, the Bank conducts
business from 13 full service branch offices, 10 of which are located in the New
York City borough of Queens, one in the borough of Manhattan and one each in
suburban Nassau (the headquarters) and Suffolk counties.
Jamaica Savings is a community-oriented financial institution serving
its market area with a wide selection of residential loans, consumer loans and
retail financial services. Management considers the Bank's retail branch
network, reputation for financial strength and quality customer service as its
major competitive advantages in attracting and retaining customers. Management
believes that the Bank benefits from its community bank orientation. The Bank's
long term relationships with its depositors are considered a valuable resource
for the future, as the Bank continues to expand services offered to customers.
Local Economy The primary market area for the Bank is concentrated in
the neighborhoods surrounding its thirteen full service offices. Management
believes that its branch offices are primarily located in communities that can
generally be characterized as stable, residential neighborhoods of predominantly
one- to four-family residences and middle income families. During the late
1980's to the early 1990's, the New York metropolitan area experienced reduced
employment as a result of the general decline in the local economy and other
factors. The area experienced a general decline in real estate values and a
decline in home sales and construction and, sharp decreases in the value of
commercial properties, land, as well as cooperatives and condominiums.
4
During the last four years, unemployment and real estate values have
been relatively stable in the New York metropolitan area. New York City has
benefited from the resurgence and growth in employment and profitability
experienced by national securities and investment banking firms, many of which
are domiciled in Manhattan, as well as the growth and profitability of other
financial service companies, such as money center banks. The strength of the
national economy and of the United States equities markets has contributed
significantly to the recent growth and increased profitability of Wall Street
securities and investment banking firms, which has benefited the Bank's market
area.
A weakness or deterioration in the economic conditions of the Bank's
primary lending area in the future could result in the Bank experiencing
increases in non-performing loans. Such increases would likely result in higher
provisions for possible loan losses, reduced levels of interest earning assets
which would lower the level of net interest income and possibly result in higher
levels of other real estate owned expense.
Highly Competitive Industry and Geographic Area The Bank faces
significant competition for mortgage and consumer loan originations and in
attracting and retaining deposits. The New York City metropolitan and Long
Island areas have a high concentration of financial institutions, many of which
are significantly larger and have greater financial resources than the Bank, all
of which are competitors of the Bank to varying degrees. The Bank's competition
for loans and deposits comes principally from savings and loan associations,
savings banks, commercial banks, mortgage banking companies, insurance companies
and credit unions. The most direct competition for deposits has historically
come from savings and loan associations, savings banks, commercial banks and
credit unions. In addition, products offered by the securities industry have
created alternative investments, including money market accounts, mutual funds
and annuities, available to the general public. The Bank competes for deposits
through pricing, service and by offering a variety of deposit accounts and other
services. Management competes for loans principally through pricing, efficiency
and the quality of its services provided to borrowers, real estate and mortgage
brokers. Competition may also increase as a result of the lifting of
restrictions on interstate operations of financial institutions.
Lending Activities and Risk
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General
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The Bank offers a variety of loans to serve the credit needs of the
communities in which it operates. The Bank's loan portfolio is comprised
primarily of first mortgage loans secured by: multi-family rental properties;
cooperative buildings; one-to four-family residences (which is almost entirely
comprised of mortgages secured by one and two family residences); commercial
property and to a lesser extent, construction loans. The Bank also offers other
loans, including: property improvement; home equity loans; loans secured by
deposit accounts; student loans; automobile loans and personal loans. At
December 31, 1997, the loan portfolio was $999.7 million, net of allowances of
$5.9 million and unearned fees and discounts of $3.3 million. At December 31,
1997, net loans represented 65.1% of the Company's total assets. During 1997,
mortgage loans originated for portfolio were $205.2 million compared to $136.2
million during 1996. The Bank does not offer any loans that provide for negative
amortization. (See "Loan Portfolio" and "Maturities and Sensitivities of Loans
to Changes in Interest Rates", pages 23 and 24, herein.) Management monitors the
economy and real estate market in which the Bank operates and modifies its
lending policies as considered appropriate.
Pursuant to the New York City Housing Partnership/HPD Homeownership
Program, the Bank provides funding for two New York construction projects, one
in Queens and one in Brooklyn, New York, whereby the Bank holds the first
mortgage on the premises and obtains personal guarantees from the builders.
Advances for each of these projects are based on executed contracts of sale
prior to construction and construction progress on a per unit/house basis. These
projects are as follows: (1) East New York Homes - In February, 1997, the Bank
entered into an agreement to finance the construction of 45 2-family houses in
East New York, Brooklyn. The Bank commitment is for $6.9 million with no more
than $3.5 million outstanding at any one time. (2) Bayswater Village in Far
Rockaway, Queens, New York - In December, 1996, the Bank entered into an
agreement to finance the construction of 16 two-family houses with a total
development cost of $3.5 million with no more than $1.9 million outstanding at
any one time.
5
In addition, the Bank makes six month construction loans to a builder
who constructs one and two-family houses in low to moderate income areas within
the Bank's market area. The loans are approved on a per building basis and the
Bank holds the first mortgage on the premises and obtains a personal guarantee
from the builder. At December 31, 1997, the Bank held a total $3.1 million in
construction loans.
The Bank continues to emphasize lending on multi-family and underlying
cooperative properties. Lending on these types of properties poses significant
additional risks to the lender as compared with one-to four-family mortgage
lending. These loans generally are made to single borrowers or realty
corporations controlled by an individual or group of individuals and involve
substantially higher loan balances than one-to four-family residential mortgage
loans. Moreover, the repayment of such loans is typically dependent on the
successful operation of the property, which in turn is dependent upon the
expertise and ability of the borrower to properly manage and maintain the
property. In addition, management recognizes that repayment of commercial and
multi-family loans is subject to adverse changes in the real estate market or
the economy, to a far greater extent than is repayment of one-to four-family
mortgage loans.
Multi-family, Underlying Cooperative and Commercial Real Estate Lending
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The Bank originates mortgage loans secured by multi-family dwellings of 50
units or more, cooperative buildings and income producing properties such as
shopping centers. At December 31, 1997, 57.5% of total gross mortgage loans were
secured by multi-family rental properties, 27.3% by cooperative buildings and
7.3% by commercial real estate. At that date, the Bank's ten largest loans
totaled $121.0 million. These ten mortgage loans were comprised of: five loans
totaling $62.9 million secured by multi-family rental properties; two loans
totaling $23.4 million secured by underlying cooperative buildings; one $12.8
million mortgage loan secured by the land underlying a luxury Manhattan hotel;
one $11.1 million loan secured by a commercial office building; and one $10.8
million loan secured by a shopping center. At December 31, 1997, the Bank's
largest loan was an $18.5 million mortgage loan secured by a 684 unit apartment
complex. The Bank's largest underlying cooperative loan, which had a balance of
$12.8 million at December 31, 1997, was non-performing. Subsequent to December
31, 1997, the Bank entered into a settlement agreement with the borrower. (See
"Delinquencies and Classified Assets", page 25 and "Potential Problem Loans and
Other Assets and Subsequent Developments", page 28, herein.)
Substantially all of the Bank's mortgage loans on income producing
properties are secured by properties located within the Bank's market area.
Mortgages currently offered on income producing properties are underwritten for
terms that generally do not exceed 10 years. Since amortization (if any) on
multi-family rental, underlying cooperative and commercial mortgage loans is
over significantly longer periods than the terms to maturity, balloon payments
are due at maturity. In establishing interest rates, origination fees and
amortization terms for these types of loans, management considers current market
conditions, competition and the risks associated with the property securing the
loan. The interest rates on such loans are based on the five to ten year U.S.
Treasury Constant Maturity Index, plus a spread to reflect the term of the loan
and associated credit risk.
In underwriting mortgage loans secured by income producing properties,
including multi-family rental, underlying cooperative and commercial real
estate, the Bank's mortgage officers engage in detailed analysis to ensure that
the property's anticipated cash flow is sufficient to cover operating expenses
and debt service. Under the Bank's current policy, at origination, loan-to-value
ratios generally do not exceed 75% on loans secured by multi-family rental and
commercial real estate properties and 40% on underlying cooperatives. The Bank
requires that properties securing such loans be appraised by a member of the
Bank's appraisal staff or a qualified independent appraiser. The Bank requires
borrowers to obtain title insurance and hazard insurance in an amount sufficient
to cover the mortgage naming the Bank as loss payee. All loans secured by income
producing property must be approved by two members of the Bank's Mortgage
Committee, which is comprised of five members of the Board of Directors and the
Chairman of the Board "ex officio", or one member of the Mortgage Committee and
the senior lending officer.
6
Underlying cooperative loans are first liens on the cooperative building
and the land. Underlying cooperative mortgages are senior to cooperative share
loans. Cooperative share loans are secured by the proprietary leases on the
individual units. Consequently, when the amount of an underlying loan is related
to the market value of a cooperative building, including the value of the
individual units, the resulting loan-to-value ratio generally is in the range of
15% to 30%.
Mortgage lending on multi-family, cooperative, and commercial properties
poses significant additional risks to the lender as compared with one-to
four-family mortgage lending. At December 31, 1997, the largest concentration of
loans to any one borrower consisted of two mortgage loans with an aggregate
balance of $29.6 million, which were secured by a multi-family garden apartment
complex and a commercial office tower.
Management monitors the loan portfolios on a regular basis in order to
identify trends that may affect future collectibility. Specific attention is
given to concentrations of credit based on the loan collateral and
concentrations to any one borrower or category of borrower. (See "Delinquencies
and Classified Assets" and "Potential Problem Loans and Subsequent
Developments", page 25 through 28, herein.)
One-to Four-Family Lending
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The Bank offers first mortgage loans secured by one-to four-family
residences and condominium units in complexes which are at least 90% sold and
cooperative apartment share loans where at least 65% of the total cooperative
shares are sold. While three-to four-family mortgages are offered by the Bank,
minimal demand has been experienced. At December 31, 1997, one-to four-family
mortgages totaled $73.8 million, of which $66.0 million were fixed rate mortgage
loans and $7.8 million were adjustable rate mortgage ("ARM") loans. Loan
applications are received from existing customers and generated by referrals,
branch and newspaper advertising. One-to four-family mortgage loans are
generally underwritten according to Federal National Mortgage Association
("Fannie Mae") and State of New York Mortgage Association ("SONYMA") guidelines,
except as to limitations on loan amount.
For a loan secured by one-to four-family residential real estate, upon
receipt of a completed loan application, disclosures are sent to the
applicant(s). Income and certain other information is verified, a credit report
is ordered, and, if necessary, additional financial information is requested. If
the mortgage applicant's credit is verified and approved, an appraisal and flood
certification for the property are ordered. In addition to utilizing the Bank's
appraisal staff, some appraisals on one-to four-family properties are prepared
by independent appraisers, who are approved as qualified by the Bank's Mortgage
Committee. It is the Bank's policy to require title insurance and hazard
insurance prior to closing on all real estate first mortgage loans. Borrowers
are generally required to advance funds on a monthly basis to a mortgage escrow
account, together with each payment of principal and interest. Disbursements are
made from escrow accounts for real estate taxes and insurance premiums.
The Bank offers fixed rate mortgages and ARMs, with interest rates and
other terms that are competitive with those available in its market area. The
interest rate on ARMs are adjusted based on a spread above an agreed upon index,
such as a United States Treasury Index. The Bank's ARM loan interest rates are
generally subject to annual rate change limitations of 2.00%, up or down. In
addition, ARM loans offered by the Bank provide for a lifetime cap on the
adjustment in the interest rate of 6.00% from the initial rate. These limits
help to reduce the interest rate sensitivity of such loans during periods with
significant changes in interest rates. During periods of rising interest rates,
the increase in the required monthly payment for ARM loans may increase the
likelihood of delinquencies. The ARM loans originated by the Bank reprice each
year, on the loan's anniversary date and do not provide for negative
amortization.
The Bank currently requires that one-to four-family residential mortgage
loans, excluding cooperative apartment loans, not exceed the lesser of 80% of
appraised value of the property securing the loan or purchase price at
origination. Up to 95% financing is available with the purchase of private
mortgage insurance ("PMI"), provided that the loan qualifies for sale in the
secondary market. Loans secured by cooperative apartments (cooperative share
loans) generally require a down payment equal to 20% of the purchase price and
are not offered with PMI. The Bank offers one-to four-family mortgages with
various terms. One-to four-family loans must be approved by at least two senior
officers of the Mortgage, Consumer Loan or Real Estate Departments. Mortgage
loans in the Bank's portfolio ordinarily include due-on-sale clauses, which
provide the Bank with the contractual right to deem the loan immediately due and
payable in the event that the borrower transfers ownership of the property
without the Bank's consent. It is the Bank's policy to enforce due-on-sale
provisions or to require that the interest rate be adjusted to the current
market rate when ownership is transferred. Management monitors various economic
indicators and competitive conditions in its lending area, and, in connection
therewith, may modify underwriting standards based on their assessments.
7
During 1997, the Bank originated for sale and subsequently sold, without
recourse, $1.6 million of mortgage loans, on which the Bank retained servicing.
Included in loan sales were mortgage loans of $703,000 to the State of New York
Mortgage Association, originated and sold pursuant to a program aimed at
prospective first time home buyers with low to moderate income. As part of the
Bank's agreement with the government agencies, the Bank offers mortgage loans,
for up to 95% of the lower of the purchase price or appraised value, on single
family principal residences to credit qualified home buyers. In addition, the
borrower must have not had income greater than 115 percent of the area family
median income as published by the U.S. Department of Housing and Urban
Development annually in the report, "Estimated Median Family Incomes". During
1996, the Bank entered into an agreement to originate and sell qualifying
mortgages and FHA Title I loans to Fannie Mae. During 1997, the Bank sold
$907,000 mortgage loans to Fannie Mae. The Bank plans to originate and sell,
without recourse, other mortgage loans in the secondary market and retain
servicing.
During 1996, the Bank began offering FHA Home Improvement Loans, under
which the maximum loan amount for one-to four-family properties is $25,000 with
a repayment term of five or ten years. Loan amounts in excess of $7,500 must be
secured, however, no equity is required on owner occupied properties. Equity
equal to the loan amount is required for properties that are: non-owner
occupied; income producing; and, not completed structures occupied for less than
six months. Loans over $15,000 must have an appraisal. Inspections are required
on all loans in excess of $7,500 or if the borrower fails to submit a completion
certificate. The Bank sells these loans, without recourse, to Fannie Mae, and
retains servicing.
Other Lending
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The Bank offers a variety of other loan products, including: home equity
loans, home improvement loans; loans secured by deposit accounts; student loans;
personal and automobile loans. At December 31, 1997, total gross other loans was
$29.1 million, or 2.9% of total gross loans. At December 31, 1997, the other
loan portfolio was comprised as follows: property improvement loans of $10.7
million, or 36.9% of the other loan portfolio; loans secured by deposit
accounts, which are 100% secured, of $8.2 million, or 28.1% of the other loan
portfolio; and student loans, of $5.2 million, or 17.9% of the other loan
portfolio. Student loans are federally guaranteed to varying degrees. Management
is reviewing student loan origination programs packaged by Sallie Mae and Nellie
Mae, under which future originations of student loans would be funded and owned
by the Bank, but servicing would be provided by others. The student loan
portfolio existing at December 31, 1997, is carried at the lower of cost or
estimated fair value, in the aggregate, as these loans are expected to be sold.
At December 31, 1997, the $5.2 million student loan portfolio had an estimated
fair value of $5.3 million. The remainder of the other loan portfolio was
comprised of various consumer type loans and overdraft lines of credit.
The Bank offers fixed rate home equity loans, which are reported herein
with property improvement loans. Home equity loans originated by the Bank are
disbursed at closing, and range from $10,100, to a maximum of $50,000 on one and
two-family owner-occupied residences only. Financing is available up to 75% of
the property's appraised value less any outstanding mortgage balance. In
connection with originating these loans, the Bank charges fees incurred to
perfect the lien on the property. At December 31, 1997, the Bank had $9.2
million of home equity loans, with interest rates ranging from 5.5% to 12.0%.
Loan Origination and Other Fees
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In addition to interest earned on loans, the Bank charges fees for
originating loans, certain loan prepayments and modifications. The income
realized from such fees varies with the volume of loans made or repaid, the
availability of funds, and competitive conditions in the lending market.
8
Investment Activities
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General Federally chartered savings institutions have the authority to
invest in various types of liquid assets, including United States Treasury
obligations, securities of various agencies of the federal government, certain
certificates of deposit of insured depository institutions, certain banker's
acceptances, repurchase agreements and federal funds sold. Subject to various
restrictions, federally chartered savings institutions may also invest their
assets in commercial paper, investment grade corporate debt securities and
mutual funds whose assets conform to the investments that a federally chartered
savings institution is authorized to make directly. At December 31, 1997,
securities and the other investment portfolio combined, totaled $422.9 million,
or 27.5% of total assets, of which $244.9 million were in U.S. Government and
federal agency securities. (See "Investment Portfolio", page 22, herein.)
Management formulates the investment policies, subject to approval by
the Board of Directors. The Chief Executive Officer, or his designated
alternate, makes investment decisions on a day-to-day basis while the Board of
Directors acts in an advisory capacity. The Bank's investments in securities
have been primarily in CMOs and short-term U.S. Government and federal agency
securities with an average term to maturity of less than three years. In
response to the low interest rate environment, beginning during 1992, the Bank's
purchases of investment securities generally include those maturing in one to
two years. The Bank's investment policy allows investment in corporate debt
securities rated AA or higher. The Bank classifies all securities, other than
marketable equity securities, as "held-to-maturity". The marketable equity
securities portfolio is designated as "available-for-sale" and carried at
estimated fair value. Unrealized gains and losses on available-for-sale
securities are excluded from earnings and reported as a net amount in a separate
component of stockholders' equity, until realized. During 1997, the Company sold
marketable equity securities with a cost of $823,000, realizing gross gains of
$7.0 million and no losses. Activity in the held-to-maturity portfolio included,
purchases of $499.9 million and maturities of $555.0 million of U.S. Government
and federal agency securities and purchases of $55.0 million and maturities and
amortization of $106.5 million in the CMO portfolio, during 1997.
The Company, excluding activities of the Bank, invests in U.S.
Government and federal agency securities and, through the Bank, invests in money
market instruments. By investing in short term securities and maintaining funds
in cash and cash equivalents (investments with an original maturity of less than
three months), the Company is able to meet its liquidity needs. In addition, at
December 31, 1997, the Company held mortgage loans of $15.2 million, that were
received as a dividend from the Bank during 1994.
CMOs are mortgage-backed bonds secured by the cash flow of a pool of
mortgages. In a CMO, scheduled principal and interest payments received from
borrowers are separated into different payment streams, creating several bonds
that repay invested capital at different rates. A given pool generally secures
several different classes of CMO bonds. CMOs pay the bondholder on a schedule
that is different from the mortgage pool as a whole, and includes fast pay,
medium pay, and slow pay bonds to suit the needs of different investors. The
common arrangements include: (i) a fast-pay bond with a maturity much shorter
than the total pool; (ii) a bond paying interest only for the period that may be
contingent on how prior CMOs perform, before payment of principal begins; (iii)
a bond paying variable interest based on an index, typically the London
Interbank Offered Rate ("LIBOR"), even though the mortgages themselves may be
fixed rate loans. CMOs manage the prepayment risk associated with
mortgage-related securities by splitting the pools of mortgage loans into
different categories of classes.
The Bank purchases Planned Amortization Class ("PAC") (also referred to
as Planned Principal Class) bond CMOs. PACs are designed to receive principal
payments using a predetermined principal balance schedule derived by assuming
two constant prepayment rates for the underlying mortgage-backed securities. All
of the Bank's CMOs are backed by Freddie Mac, Fannie Mae or Government National
Mortgage Association ("Ginnie Mae") mortgage-backed securities, which are backed
by whole loans. Management believes these securities represent attractive and
limited risk alternatives relative to other investments. During the past few
years, the availability of CMOs that met the Bank's CMO investment guidelines
was limited. At December 31, 1997, $104.0 million, or 6.8% of total assets, was
invested in CMOs. At December 31, 1997, the Bank's CMO portfolio had an
estimated average maturity of twenty months. (See "Contractual Maturity
Distribution", page 22, herein.)
9
Sources of Funds
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General
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The Bank's primary sources of funds are deposits, principal payments from
maturities on debt securities, CMOs and principal payments on mortgage and other
loans. Deposit flows and mortgage prepayments are greatly influenced by general
interest rate changes, economic conditions and competition. The Bank has not
directly borrowed any funds since 1984. (See "Borrowings", page 32, herein and
"Liquidity and Capital Resources" included on pages 12 through 13 in the 1997
Annual Report to Stockholders.)
Deposits
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The Bank offers a variety of deposit accounts having a range of interest
rates and terms. The Bank's deposits consist of the following types of accounts:
passbook and lease security; certificate; money market; negotiable order of
withdrawal ("NOW") and non-interest bearing demand. As of December 31, 1997,
passbook and lease security accounts represented 50.4% of the Bank's total
deposits. The flow of deposits is influenced significantly by changes in market
interest rates, general economic conditions and competition. The Bank's deposits
are obtained primarily from the communities in which its branches are located.
The Bank does not use brokers to obtain deposits, relying primarily on customer
service and long-standing relationships with customers to attract and retain
these deposits. Certificate accounts in excess of $100,000 are not actively
solicited by the Bank nor does the Bank pay preferential interest rates on such
accounts. (See Note 16 to the Consolidated Financial Statements, included on
pages 34 and 35 in the 1997 Annual Report to Stockholders.)
The Bank influences deposit levels and composition through its interest
rate structure. Management believes that the relatively low level of interest
rates and the strong performance and growth of the capital markets that have
prevailed are the primary contributors for the continued decline in deposits
over the past several years. Management chose to allow deposits to decline,
rather than pay rates that would result in a lower net income or necessitate
modifying of the Bank's existing investment structure and guidelines. Rates
offered on the Bank's deposit accounts are competitive with those rates offered
by other financial institutions in its market area. While the highest percentage
of deposits has remained in passbook and lease security accounts, the trend of
deposit shifts has moved away from passbook accounts and towards certificate
accounts. Deposits at December 31, 1997, decreased by $23.2 million, or 2.0%,
compared to deposits at December 31, 1996. During 1997, the decrease in the
Bank's passbook and lease security accounts of $34.8 million, or 5.8%,
represented the most significant decrease of any deposit category offered by the
Bank. During 1997, money market accounts decreased by $10.1 million or 11.3%,
while certificate accounts increased by $22.4 million, or 5.8%. (See "Deposits",
pages 30 and 31, herein.)
Subsidiaries of the Bank
- ------------------------
General
- -------
At December 31, 1997, the Bank had 22 subsidiary corporations of which, 15
were active in the ownership or operation of real estate ("Real Estate
Subsidiaries"), one operates as a real estate investment trust, and 6 were
inactive. At December 31, 1997, the Bank's investment in Real Estate
Subsidiaries, including ORE of $473,000, was $3.5 million, or .2% of total
assets. The Real Estate Subsidiaries trace to the 1970's, when, under its New
York State leeway investment authority, the Bank organized a number of such
wholly-owned subsidiary corporations, many of which formed partnerships. (See
"Grandfathered Savings Bank Authority", page 18, herein.) The Real Estate
Subsidiaries: (i) took "equity interests" in the construction of income
producing properties on which the Bank made loans, (ii) acquired and operated,
primarily multi-family properties, as a result of foreclosure proceedings or by
obtaining deeds in lieu of foreclosure, and (iii) invested in commercial
properties in which the Bank established branch offices. (See Notes 11, 12 and
13 to the Consolidated Financial Statements, included on pages 32 and 33 in the
1997 Annual Report to Stockholders.) In the late 1980's, one Real Estate
Subsidiary, Jade Associates ("Jade"), entered into a joint venture with an
unrelated party to construct and sell 84 residential cooperative apartments, in
Flushing, New York. At December 31, 1997, the remaining investment in the
condominium building was $2.8 million, or 92.4% of the $3.0 million of real
estate held-for-sale. (See "Jade Associates" and "LeHavre Associates", below.)
10
During the past three years, the Bank's investment in the Real Estate
Subsidiaries has decreased substantially as a result of the sale of properties.
As of June 30, 1997, management reclassified all remaining real estate
held-for-investment to held-for-sale. All real estate held-for-sale is carried
at the lower of cost or net fair value.
The cyclical nature of real estate markets and interest rates influence
the level of financial risk to property owners. During these cycles, the Bank
and its Real Estate Subsidiaries have mitigated such risks through: (1) their
financial ability to carry properties until their perceived optimal use and
value can be achieved; (2) the use of internal property management to maintain
and operate the properties; and (3) monitoring the condition of significant
properties, on regular basis.
The activities of each of the Bank's wholly-owned subsidiary
corporations and the partnerships they formed are described below. Real Estate
Subsidiaries that have converted properties to cooperative residences have done
so under New York State non-eviction plans. Non-eviction plans provide that
rent-stabilized tenants may remain tenants in their units after a building has
been sold to a cooperative association. Due to the uncertainty of timing and
future sales value of the unsold cooperative shares, for financial statement
purposes, unsold shares acquired as a result of converting these properties, are
carried at zero value. Gains on the sale of these shares are included in income
upon sale. However, for income tax purposes, the value of all cooperative
shares, sold and unsold, in excess of the Bank's investment in the property
prior to conversion to cooperative, was included in taxable income at the time
of the sale to the cooperative. The tax basis of these cooperative shares is
depreciated for tax purposes.
Forty-Second & Park Corp.
- --------------------------
Forty-Second & Park Corp. is a wholly-owned subsidiary corporation of the
Bank. At December 31, 1997, the subsidiary owned 28.7% of the shares
representing 17 units in a six-story cooperative apartment building containing
57 residential units and 4 professional offices located in Forest Hills, Queens,
New York City ("NYC"). The shares, relating to the unsold units, are carried at
zero value. The building was originally acquired by obtaining the deed in lieu
of foreclosure in 1979. This building, which had been poorly maintained prior to
acquisition, was renovated. In 1982, the property was converted to a cooperative
and sold to Barclay Plaza North Owner's, Inc. During 1997, one unit was sold,
resulting in a net gain, before taxes, of $130,000. Rents received during 1997,
on the unsold apartments totaled $145,000 and maintenance charges paid to the
cooperative association totaled $150,000. For 1997, Forty-Second & Park Corp.
had net income of $117,000, after eliminating intercompany transactions. The
Bank's net investment in Forty-Second & Park Corp. was $10,000 at December 31,
1997.
Parkway Associates
- -------------------
Parkway Associates ("Parkway") is a partnership between two of the Bank's
wholly-owned subsidiary corporations, Grandcet Realty Corp. and Litneck Realty
Corp., each of which has a 50% partnership interest. At December 31, 1997,
Parkway owned 19.0% of the cooperative shares, representing 73 unsold apartment
units plus parking spaces in a 400 unit cooperative garden apartment complex
located in Floral Park, Queens County, NYC. The shares, relating to the unsold
units, are carried at zero value. The property was originally acquired through
foreclosure in 1979 and initially operated as a rental property. In the early
1980's, these apartments, which had been poorly maintained, were substantially
renovated. In 1989, the property was converted to a cooperative and sold to
Floral Park Owners, Inc. During 1997, 8 units were sold, resulting in a net
gain, before taxes, of $252,000. Rents received during 1997, from the unsold
apartments and garage spaces totaled $554,000 and maintenance charges paid to
the cooperative association and costs for maintenance employees totaled
$577,000. For 1997, Parkway Associates had a net operating income of $224,000,
after eliminating intercompany transactions. The Bank's net investment in
Parkway was $29,000 at December 31, 1997.
Elmback Associates
- -------------------
Elmback Associates ("Elmback") is a partnership between two of the Bank's
wholly-owned subsidiary corporations, Before Real Estate, Inc. and Afta Real
Estate, Inc., each of which has a 50% partnership interest. At December 31,
1997, Elmback owned 22.2% of the cooperative shares representing 13 unsold
apartment units in a six story cooperative apartment building with 61 units,
located in a low to moderate income area of Jamaica, Queens County, NYC. The
property, originally acquired by deed in lieu of foreclosure in 1980, was
subsequently renovated and operated as a rental property. In 1988, the property
was converted to a cooperative and sold to 87-46 Chelsea Owners, Inc. The
shares, relating to the unsold units, are carried at zero value. During 1997, 5
units were sold resulting in a net gain, before taxes, of $120,000. Rents
received during 1997, on the unsold apartment units totaled $91,000 covering the
$83,000 of maintenance charges paid to the cooperative association.
11
In addition, as part of a 1994 mortgage loan workout between the Bank
and an unrelated borrower, Elmback took title to cooperative shares representing
57 unsold cooperative apartments in an 82 unit cooperative property, located in
Brooklyn, New York. During 1997, 2 units were sold and $29,000 of gains was
deferred. At December 31, 1997, 31 units remained, which comprised the entire
$473,000 in ORE. This property generated a net loss of $54,000 for 1997. (See
"Other Real Estate", page 28, herein.)
For 1997 Elmback Associates had net operating income of $69,000, after
eliminating intercompany transactions. The Bank's net investment in Elmback was
$504,000 at December 31, 1997.
D & D Associates
- -----------------
D & D Associates ("D&D") is a partnership formed by Pendex Real Estate
Corp. and Sutdex Real Estate, Inc., two wholly-owned subsidiaries of the Bank,
each of which holds a 50% partnership interest. At December 31, 1997, D&D owned
23.1% of the shares representing 35 unsold units in two six-story cooperative
apartment buildings with 176 units. These buildings, located in Jamaica, Queens
County, NYC, were originally acquired through foreclosure proceedings in 1981.
Subsequent to foreclosure, the buildings were renovated and operated as rental
properties. During 1985, one of the buildings was converted to a cooperative and
sold to the Tyler Towers Owners Corp. During 1988, the second building was
converted to a cooperative and sold to the Park Sanford Owners Corp. The shares,
relating to the unsold apartment units, are carried at zero value. During 1997,
6 units were sold, resulting in a net gain before taxes of $52,000. Rental
income from the buildings for 1997 totaled $192,000 covering the maintenance
charges of $167,000 paid to the cooperative associations. For 1997, D&D
Associates had a net operating income of $20,000, after eliminating intercompany
transactions. The Bank's net investment in D&D was $45,000 at December 31, 1997.
Bay Hill Gardens
- ----------------
Bay Hill Gardens is a partnership between 110-11 72nd Ave., Corp. and
Yalcrab Real Estate, Inc., two of the Bank's wholly-owned subsidiary
corporations, each of which holds a 50% interest in the partnership. For 1997,
this subsidiary had net income before taxes of $1,000, which resulted from a
real estate tax refund from prior years. At December 31, 1997, the Bank had a
net liability for this subsidiary of $54,000, comprised primarily of accounts
payable.
1995 Associates
- ---------------
1995 Associates is a partnership between Jamsab Realty Corp. and Jasthree
Inc., two wholly-owned subsidiary corporations of the Bank, holding 99% and 1%
interests in the partnership, respectively. The partnership was formed in 1973
to construct and operate an 18 story commercial building at 1995 Broadway,
Manhattan, NYC, in which the Bank leased the main floor for a branch office.
During 1989, the Bank purchased the branch office space from the partnership
upon conversion of the property to a two-unit condominium consisting of the
branch office on the main floor and the commercial office tower. On October 29,
1997, the commercial office tower was sold, resulting in a pre-tax gain of $9.2
million. For 1997, this partnership had net income, before taxes of $10.0
million, after eliminating intercompany transactions. At December 31, 1997, the
Bank had a net liability for this subsidiary of $36,000, comprised primarily of
accounts payable.
Lefmet Corp.
- ------------
Lefmet Corp., a wholly-owned subsidiary corporation of the Bank, owns and
operates commercial property consisting of seven stores located in Kew Gardens,
Queens County, NYC, one of which the Bank occupies as a branch office. During
1997, the property generated net income, before federal taxes, of $38,000, after
eliminating intercompany transactions. The Bank's net investment in Lefmet Corp.
was $206,000 at December 31, 1997.
Jade Associates and LeHavre Associates
- ---------------------------------------
Prior to December 1993, Jade was a joint venture between Sher Park Realty
Corp., ("Sher Park") a wholly-owned subsidiary of the Bank and an unrelated
general contractor, each with a 50% interest. The joint venture was formed to
fund, construct and subsequently sell an 84 unit condominium complex in
Flushing, New York.
12
The project was initially funded through equal contributions from the
partners and an $11.6 million building loan from LeHavre Associates ("LeHavre"),
another wholly-owned subsidiary of the Bank. (LeHavre is a partnership between
Jas Cove Corp. and Avre Realty Corp., both wholly-owned subsidiary corporations
of the Bank.) Between 1989 and 1993, a total of $4.0 million of reserves were
established against the investment and the loan, related to a decline in the
value of the property.
In December of 1993, an agreement was entered into with the joint
venture partner, whereby: (1) Jamlyn Realty Corp. ("Jamlyn"), a wholly-owned
subsidiary corporation of the Bank, acquired the joint ventures partner's 50%
interest; (2) the outside partner was forgiven the excess contributions of $1.5
million made by Sher Park; (3) Jamlyn paid the costs, which totaled $579,000,
incurred in connection with the transfer of the partnership interest and
property. The inter-company loan from LeHavre was eliminated during 1994.
During 1997, 15 units were sold, resulting in deferred gains of
$232,000, as sales are being accounted for under the cost recovery method. At
December 31, 1997, the Bank's net investment in Jade was $2.8 million, primarily
reflecting the 34 unsold units.
For 1997, this property generated pretax income of $74,000.
Concerned Management
- --------------------
Concerned Management is a wholly-owned subsidiary of the Bank, which was
formed in 1979 to manage and operate the real estate acquired by the Bank's
other subsidiary corporations and partnerships. Concerned Management operates
from a leased office, located in Flushing, Queens County, NYC.
Other Subsidiaries Of the Bank's remaining five wholly-owned subsidiary
corporations, three are nominee corporations used in the conduct of the Bank's
business. The fourth, Jam-Ser Corp., was formed to act as agent to sell life
insurance as permitted by New York State law. The fifth, Tier Inc., a real
estate investment trust, was formed during the second quarter of 1997. Tier Inc.
may, among other things, be utilized by the Bank to raise capital in the future.
Savings Bank Life Insurance
- ---------------------------
The Bank is a customer of the Savings Bank Life Insurance ("SBLI")
Department, which is a separate legal mutual entity owned by its policy holders.
The Bank, through the SBLI Department offers SBLI to its customers up to the
legal maximum of $50,000 per insured individual and, as a trustee bank, offers
an additional $350,000 in group coverage per insured under the SBLI Department's
Financial Institution Group Life Insurance policy. The SBLI Department's
activities are segregated from the Bank and while they do not directly affect
the Bank's earnings, management believes that offering SBLI is beneficial to the
Bank's relationships with its depositors and the general public. The SBLI
Department pays its own expenses and reimburses the Bank for expenses incurred
on its behalf.
Personnel
- ---------
As of December 31, 1997, the Bank had 311 full-time employees and 118
part-time employees. The employees are not represented by a collective
bargaining unit and the Bank considers its relationship with its employees to be
good.
Regulation and Supervision
- --------------------------
The description of statutory provisions and regulations applicable to
savings institutions and their holding companies set forth in the Form 10-K does
not purport to be a complete description of such statutes and regulations and
their effects on the Bank and the Company.
General
- -------
The Company, as a unitary savings and loan holding company, is required to
file certain reports with, and otherwise comply with the rules and regulations
of the Office of Thrift Supervision ("OTS") under the Home Owners' Loan Act, as
amended (the "HOLA") and as a publicly held company, is subject to the periodic
disclosure and other requirements under the federal securities laws. In
addition, the activities of savings institutions, such as the Bank, are governed
by the HOLA and the Federal Deposit Insurance Act ("FDI Act"). Certain
regulatory requirements applicable to the Bank and the Company are referred to
below or elsewhere herein.
13
The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer. The Bank is a member of the Federal Home Loan Bank ("FHLB")
System and its deposit accounts are insured up to applicable limits by the Bank
Insurance Fund ("BIF") managed by the FDIC. The Bank must file reports with the
OTS and the FDIC concerning its activities and financial condition in addition
to obtaining regulatory approvals prior to entering into certain transactions
such as mergers with, or acquisitions of, other savings institutions. The OTS
and the FDIC conduct periodic examinations to test the Bank's compliance with
various regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulatory requirements and policies, whether by the OTS, the
FDIC or the Congress could have a material adverse impact on the Company, the
Bank and their operations. Certain of the regulatory requirements applicable to
the Bank and to the Company are referred to below or elsewhere herein.
Holding Company Regulations
- -----------------------------
The Company is a nondiversified unitary savings and loan holding company
within the meaning of the HOLA. As a unitary savings and loan holding company,
the Company generally is not restricted under existing laws as to the types of
business activities in which it may engage, provided that the Bank continues to
be a qualified thrift lender ("QTL"). (See "Qualified Thrift Lender Test", pages
16 and 17, herein.) Upon any non-supervisory acquisition by the Company of
another savings institution or savings bank that meets the QTL test and is
deemed to be a savings institution by the OTS, the Company would become a
multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company Act ("BHC Act"),
subject to the prior approval of the OTS, and activities authorized by OTS
regulation.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS; or acquiring or retaining control of
a depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (i) the approval of
interstate supervisory acquisitions by savings and loan holding companies and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, the HOLA does prescribe such restrictions on
subsidiary savings institutions, as described below. The Bank must notify the
OTS 30 days before declaring any dividend to the Company. In addition, the
financial impact of a holding company on its subsidiary institution is a matter
that is evaluated by the OTS and the OTS has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
14
Federal Savings Institution Regulation
- --------------------------------------
Capital Requirements
- ----------------------
The OTS capital regulations require savings institutions to meet three
capital standards: a 1.5% tangible capital ratio; a 3.0% leverage (core) capital
ratio; and an 8.0% risk-based capital ratio. In addition, the prompt corrective
action standards discussed below establish, in effect, a minimum 2% tangible
capital ratio, a 4% leverage (core) capital ratio (3% for institutions receiving
the highest rating on the CAMEL financial rating system), and together with the
risk-based capital standard itself, a 4% Tier I risk based capital standard.
Core capital is defined as common stockholders' equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus
and minority interests in the equity accounts of consolidated subsidiaries, less
intangibles other than certain purchased mortgage servicing rights and credit
card relationships. The OTS regulations also require that, in meeting the
leverage (core) ratio, tangible and risk-based capital standards, institutions
must generally deduct investments in and loans to subsidiaries engaged in
activities not permissible for a national bank and investments in equity
securities.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of 4% and 8%, respectively.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, as
assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. The components of Tier I (core) capital are
equivalent to those discussed earlier. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the allowance for loan and lease losses, limited to a
maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary
capital included as part of total capital cannot exceed 100% of core capital.
The OTS has adopted an interest rate risk component as part of its
regulatory capital requirement. Implementation of such an interest rate risk
component has been deferred indefinitely by the OTS. If made applicable by the
OTS, such interest rate risk component would subject savings institutions with
"above normal" interest rate risk exposure to a deduction from total capital for
purposes of calculating their risk-based capital requirements. A savings
institution's interest rate risk would be measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of the
institution's assets. In calculating its total capital under the risk-based
capital rule, a savings institution whose measured interest rate risk exposure
exceeds 2% would have to deduct an amount equal to one-half of the difference
between the institution's measured interest rate risk and 2%, multiplied by the
estimated economic value of the institution's assets. The Director of the OTS
would have the authority to waive or defer a savings institution's interest rate
risk component on a case-by-case basis. A savings institution with assets of
less than $300 million and risk-based capital ratios in excess of 12% would not
be subject to the interest rate risk component, unless the OTS determines
otherwise. At December 31, 1997, the Bank met each of its capital requirements
in each case on a fully phased-in basis and it is anticipated that the Bank will
not be subject to the interest rate risk component. A table presenting the
Bank's capital position at December 31, 1997 is presented in Note 26 to the
Consolidated Financial Statements, contained on page 41 of the 1997 Annual
Report to Stockholders, and is incorporated herein by reference.
15
A reconciliation between the Bank's regulatory capital and GAAP capital
at December 31, 1997 is presented below:
Tangible Capital
(In thousands)
GAAP capital-originally reported to
regulatory authorities and on the Bank's
consolidated financial statements ............ $264,464
Less:
Regulatory capital adjustments:
Investments in Non-includable Subsidiaries ... 6,827
Adjustment for net unrealized gains,
net of tax .................................. 28,469
--------
Regulatory Capital........................... $229,168
========
Prompt Corrective Regulatory Action.
- ---------------------------------------
Under the OTS prompt corrective action regulations, ("PCA Regulations") the
OTS is required to take certain supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's degree of
undercapitalization.
The PCA Regulations define five capital categories and provide the
minimum numerical requirements, subject to certain exceptions, for each capital
category, as detailed below.
Total Risk- Tier I Leverage Tangible Capital
Capital Category Based Ratio (Core) Ratio to Assets Ratio
- ----------------------------------------------------------------------------------------------
Well capitalized 10% or above 6% or above 5% or above N/A
Adequately capitalized 8% or above 4% or above 4% or above(1) N/A
Undercapitalized Less than 8% Less than 4% Less than 4%(1) N/A
Significantly undercapitalized Less than 6% Less than 3% Less than 3% N/A
Critically undercapitalized N/A N/A N/A 2% or less
<FN>
(1) 3% for institutions with the highest examination rating.
</FN>
Well capitalized institutions must meet or exceed each of the ratios
shown in the table and may not be subject to any order, written agreement,
capital directive, or prompt corrective action directive to meet and maintain a
specific capital level. Institutions failing to meet any one of the minimum
capital requirements will be considered undercapitalized, significantly
undercapitalized or critically undercapitalized, depending on the institution's
capital condition. An institution's capital category is determined on the basis
of its most recent Call Report, Thrift Financial Report, or Report of
Examination. Subject to narrow exception, the banking regulator is required to
appoint a receiver or conservator for an institution that is identified as
"critically undercapitalized". The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date a savings
institution receives notice that it is "undercapitalized", "significantly
undercapitalized" or "critically undercapitalized". Compliance with such plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, increased monitoring by regulators, restrictions
on growth, capital distributions and expansion. The OTS may also take any one of
a number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.
16
Insurance of Deposit Accounts
- ------------------------------
Deposits of the Bank are insured by the BIF. The BIF is administered by the
FDIC. The FDIC currently imposes an assessment rate schedule from 0 to 27 basis
points. On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the
"Funds Act") was signed into law. The Funds Act spreads the obligations for
payment of the Financing Corporation ("FICO") bonds across all BIF and Savings
Association Insurance Fund ("SAIF") members. Effective January 1, 1997, BIF
deposits are assessed for the FICO obligation of 1.3 basis points, while SAIF
deposits will pay 6.48 basis points. Full pro-rata sharing of the FICO payments
between BIF and SAIF members will occur on the earlier of January 1, 2000 or the
date the BIF and SAIF are merged. The Funds Act specifies that the BIF and SAIF
will be merged on January 1, 1999, provided no savings associations exist at
that time.
The Bank paid $149,000 in FDIC insurance premiums during 1997. BIF and
SAIF members will continue to pay assessments, as described above, to fund the
FICO obligation. Management cannot predict the level of FDIC insurance
assessments on an on-going basis, whether the savings association charter will
be eliminated or whether the BIF and SAIF will eventually be merged.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. Management of the Bank does not know of any practice, condition or
violation that might lead to termination of the Bank's deposit insurance.
Thrift Rechartering Legislation
- -------------------------------
The Funds Act provides that the BIF and SAIF will merge on January 1, 1999
if there are no more savings associations as of that date. Various proposals to
eliminate the federal thrift charter, create a uniform financial institutions
charter and abolish the OTS have been introduced in Congress. Some bills would
require federal savings institutions to convert to a national bank or some type
of state charter by a specified date or they would automatically become national
banks. Under some proposals, converted federal thrifts would generally be
required to conform their activities to those permitted for the charter selected
and divestiture of nonconforming assets would be required over a two year
period, subject to two possible one year extensions. State chartered thrifts
would become subject to the same federal regulation as applies to state
commercial banks. A more recent bill passed by the Banking Committee of the
House of Representatives, would allow savings institutions to continue to engage
in activities being conducted when they convert to a bank. Holding companies for
savings institutions would become subject to the same regulation as holding
companies that control commercial banks, with limited grandfather provisions.
The Bank is unable to predict whether such legislation will be enacted, the
extent to which legislation would restrict or disrupt its operations or whether
the BIF and SAIF funds will eventually merge.
Loans to One Borrower
- ---------------------
Under the HOLA, as amended, savings institutions are subject to the
national bank limits on loans to one borrower. Generally, savings institutions
may not make a loan to a single or related group of borrowers in an amount
greater than 15% of its unimpaired capital and surplus. An additional amount may
be lent, equal to 10% of unimpaired capital and surplus, if such loan is secured
by readily marketable collateral, which is defined to include certain financial
instruments and bullion. At December 31, 1997, the Bank was in compliance with
this limitation, with the highest aggregate loans to one borrower of $29.6
million, or 11.2 % of the Bank's capital. The Company, as a unitary savings and
loan holding company, is not subject to the loan to one borrower limitation.
Management reviews the loans to one borrower limit at the time the loan is made,
however, subsequent changes in the Bank's capital position may cause credit
concentrations to exceed 15% of the Bank's capital. The Bank carefully monitors
the creditworthiness of borrowers with high concentrations of credit as well as
the properties that secure these loans.
Qualified Thrift Lender Test
- ----------------------------
The HOLA requires savings institutions to meet a QTL test. Under the QTL
test, a savings institution is required to maintain at least 65% of its
portfolio assets (defined as total assets, less: intangible assets including
goodwill; property used by the institution in conducting its business and
specified liquid assets up to 20% of total assets) in "qualified thrift
investments" (primarily residential mortgages and related investments, including
certain mortgage-backed securities) on a monthly basis in 9 out of every 12
months.
17
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
December 31, 1997, the Bank maintained 91.4% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test.
Limitations on Capital Distributions
- ------------------------------------
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, which are based primarily on an
institution's capital level. An institution that exceeds all fully phased-in
capital requirements before and after a proposed capital distribution ("Tier 1
Bank") and has not been advised by the OTS that it is in need of more than
normal supervision, could, after prior notice but without obtaining approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net earnings to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year or (ii) 75% of its net income for the previous four quarters. Any
additional capital distributions would require prior regulatory approval. In the
event a bank's capital falls below its regulatory requirements or is notified by
the OTS that it is in need of more than normal supervision, an institution's
ability to make capital distributions could be restricted. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice. In December 1994,
the OTS proposed amendments to its capital distribution regulation that would
generally authorize the payment of capital distributions without OTS approval,
provided the payment does not make the institution undercapitalized within the
meaning of the prompt corrective action regulation. However, institutions in a
holding company structure would still have a prior notice requirement. At
December 31, 1997, the Bank was a Tier 1 Bank.
Liquidity
- ---------
Information regarding liquidity appears under the caption "Liquidity and
Capital Resources" included on pages 12 and 13 in the 1997 Annual Report to
Stockholders.
Assessments
- -----------
Savings institutions are required to pay assessments to the OTS, to fund
the operations of the OTS. The general assessments, to be paid on a semiannual
basis, is computed based upon the savings institution's total assets, including
consolidated subsidiaries, as reported in the institution's latest quarterly
Thrift Financial Report. The Bank's total assessments for the year ended
December 31, 1997, was $261,000.
Branching OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute. This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
Transactions with Related Parties
- ------------------------------------
The Bank's authority to engage in transactions with related parties or
"affiliates" (e.g., any company that controls or is under common control with an
institution), or to make loans to certain insiders, is limited by Section 23A
and 23B of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate
amount of covered transactions with any individual affiliate to 10% of the
capital and surplus of the savings institution. The aggregate amount of
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A, and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution, as those prevailing at the time for comparable transactions with
nonaffiliated individuals or entities. In the absence of comparable
transactions, such transactions may only occur under terms and circumstances,
including credit standards, that in good faith would be offered to or would
apply to non-affiliated individuals or entities. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies under Section
4(c) of the Bank Holding Company Act. Further, no savings institution may invest
in the securities of any affiliate other than a subsidiary.
18
The Bank's authority to extend credit to executive officers, directors
and 10% shareholders (referred to as "insiders"), as well as entities such
persons control, is governed by Sections 22(g) and 22(h) of the FRA and
Regulation O thereunder. Among other things, such loans are required to be made
on terms substantially the same as those offered to unaffiliated individuals and
do not involve more than the normal risk of repayment. Recent legislation
created an exception for loans made pursuant to a benefit or compensation
program that is widely available to all employees of the institution and does
not give preference to insiders over other employees. Regulation O also places
individual and aggregate limits on the amount of loans the Bank may make to
insiders based, in part, on the Bank's capital position and requires certain
board approval procedures to be followed.
Enforcement
- -----------
Under the FDI Act, the OTS has primary enforcement responsibility over
savings institutions and has the authority to bring actions against the
institution and all "institution-affiliated parties", including stockholders,
and any attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect on an insured
institution. Formal enforcement action may range from the issuance of a capital
directive, or cease and desist orders; the removal of officers and/or directors;
appointment of a receiver or conservator; or termination of deposit insurance.
Civil penalties cover a wide range of violations and an amount to $25,000 per
day, or possibly $1 million per day in especially egregious cases. Under the FDI
Act, the FDIC has the authority to recommend to the Director of the OTS
enforcement action to be taken with respect to a particular savings institution.
If action is not taken by the Director, the FDIC has authority to take such
action under certain circumstances. Federal law also establishes criminal
penalties for certain violations.
Standards for Safety and Soundness
- ----------------------------------
The federal banking agencies have adopted Interagency Guidelines
Prescribing Standards for Safety and Soundness ("Guidelines") and a final rule
to implement safety and soundness standards required under the FDI Act. The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. The standards set forth in the Guidelines
address internal controls and information systems; internal audit system; credit
underwriting; loan documentation; interest rate risk exposure; asset growth; and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the Guidelines, as required by the
FDI Act. The final rule establishes deadlines for the submission and review of
such safety and soundness compliance plans when such plans are required.
Grandfathered Savings Bank Authority
- ------------------------------------
Until 1983, the Bank was a New York state chartered savings bank with
investment powers conferred by New York State law. The Bank retained such power
when it converted to a federally chartered savings bank. The HOLA and OTS
regulations empower the Bank to exercise all the powers that its predecessor
state chartered savings bank possessed under New York State law, whether or not
such powers had been exercised, subject to the authority of the OTS and FDIC to
limit such powers for safety and soundness reasons. These powers, which were
preserved in the FIRREA, are in addition to powers the Bank possesses as a
federally chartered savings bank. Where a "grandfathered" power overlaps with a
power authorized under federal law, the Bank may act under the more favorable
authority.
The grandfathered powers include the authority to invest in various
types of investment securities, including corporate bonds and stock, and in real
estate development. In addition, the Bank has grandfathered authority to make
leeway investments, which include, subject to certain specific exceptions, any
investment not otherwise authorized by the New York State Banking Law at the
time of the Bank's charter conversion, provided that any single investment does
not exceed 1% of the Bank's assets and that all such investments do not exceed
5% of its assets. At December 31, 1997, the Bank's capital investments, computed
for regulatory purposes, retained under the leeway provisions were $6.8 million,
or .5% of the Bank's assets. These powers allow the Bank to pursue diversified
acquisition opportunities and provide the Bank with flexibility in restructuring
its assets. The Bank intends to continue to utilize these powers as
opportunities arise and as permitted under applicable rules and regulations.
(See "Thrift Rechartering Legislation", page 16, herein.)
19
Federal Home Loan Bank System
- -------------------------------
The Bank is a member of the FHLB System which consists of twelve (12)
regional FHLBs. The FHLB provides a central credit facility, primarily for
member institutions. The Bank, as a member of the FHLB-New York ("FHLB-NY"), is
required to acquire and hold shares of capital stock in the FHLB-NY in an amount
at least equal to 1% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or 1/20 of
its advances (borrowings) from the FHLB-NY, if any, whichever is greater. The
Bank was in compliance with this requirement, with an investment in FHLB-NY
stock at December 31, 1997 of $7.6 million. Should the Bank obtain FHLB
advances, these advances must be secured by specified types of collateral and
may be obtained primarily for the purpose of providing funds for residential
housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements have limited the FHLB-NY's ability to pay dividends to their
members and could also result in the FHLBs imposing higher interest rates on
advances to their members. Further, there can be no assurance that the impact of
FIRREA on the FHLBs will not also cause a decrease in the value of the FHLB-NY
stock held by the Bank. For the years ended December 31, 1997, 1996 and 1995,
dividends from the FHLB-NY to the Bank were $496,000, $438,000 and $481,000
respectively.
Federal Reserve System
- ------------------------
The Federal Reserve Board ("FRB") regulations require savings institutions
to maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). During 1997, the FRB regulations
generally required that reserves be maintained against aggregate transaction
accounts as follows: for accounts aggregating $49.3 million or less (subject to
adjustment by the FRB) a reserve requirement of 3%; and for accounts greater
than $49.3 million, a reserve requirement of $1.35 million plus 10% (subject to
adjustment by the FRB between 8% and 14%) against that portion of total
transaction accounts in excess of $49.3 million. The first $4.4 million of
otherwise reservable balances (subject to adjustments by the FRB) were exempted
from the reserve requirements. During 1997, the Bank was in compliance with the
foregoing requirements and expects to continue to remain in compliance in the
future. For 1998, the FRB has decreased from $49.3 million to $47.8 million, the
amount of transaction accounts subject to the 3% reserve requirement and has
increased the amount of exempt reservable balances, from $4.4 million to $4.7
million.
The balances maintained to meet the reserve requirements imposed by the
FRB may be used to satisfy liquidity requirements which may be imposed by the
OTS. Because required reserves must be maintained in the form of either vault
cash, a non-interest bearing account at a Federal Reserve Bank, or a
pass-through account as defined by the FRB, the effect of the reserve
requirement is to reduce the Bank's interest earning assets. FHLB System members
are also authorized to borrow from the Federal Reserve "discount window", but
FRB regulations require institutions to exhaust all FHLB sources before
borrowing from a Federal Reserve Bank.
Taxation
- --------
General
- -------
The following discussion of tax matters is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to the Company. The Bank was audited by: the Internal Revenue Service for
taxable years 1990 through 1993; New York State for taxable years 1994 through
1996 and; New York City for taxable years 1991 through 1993.
Federal
- -------
The Bank is subject to the rules of federal income taxation applicable to
corporations. The Bank computes taxable income, using the accrual method of
accounting, on a consolidated basis. The current maximum federal corporate tax
rate for all income, including capital gains, is 35%.
State and Local Taxation
- ------------------------
The Bank is subject to New York State ("NYS") Franchise Tax on Banking
Corporations and to the NYC Banking Corporation Tax.
The NYS and NYC taxes on banking corporations are each imposed in an
annual amount equal to the greater of; (1) 9% of the Bank's "Entire Net Income"
allocable to NYS (and to NYC for purposes of the City tax) during the taxable
year, or (2) the applicable alternative minimum tax. The applicable alternative
minimum tax is generally the greater of (1) a percentage of the value of the
Bank's assets allocable to NYS (and to NYC for the City tax) with certain
modifications, (2) 3% of the Bank's "Alternative Entire Net Income" allocable to
NYS (and to NYC for the City tax) or (3) A minimum tax of $325 ($300 in the case
of the NYC tax).
20
For purposes of the NYS and NYC taxes on banking corporations, "Entire
Net Income" is similar to federal taxable income, subject to certain
modifications (including the fact that net operating losses cannot be carried
back or carried forward), and "Alternative Entire Net Income" is similar to
"Entire Net Income", subject to certain further modifications.
Bad Debt Reserves
- -----------------
Under the Federal law that existed prior to 1996, the Bank was generally
allowed a special bad debt deduction in determining income for tax purposes. The
deduction was based on either an experience formula or a percentage of taxable
income before such deduction ("reserve method"). The reserve method was used in
preparing the income tax returns for 1995. Legislation was enacted in August
1996 which repealed the reserve method for tax purposes. As a result, the Bank
must instead use the direct charge-off method to compute its bad debt deduction.
Pursuant to Statement of Financial Accounting Standards Statement No.
109, the Bank is generally not required to provide deferred taxes for the
difference between book and tax bad debt expense taken in years prior to, or
ending at December 31, 1987, the base year reserves. The base year reserves of
$85.1 million and supplemental reserve are frozen, not forgiven. These reserves
continue to be segregated as they are subject to recapture penalty if one of the
following occurs: (a) the Bank's retained earnings represented by this reserve
are used for purposes other than to absorb losses on loans, including excess
dividends or distributions in liquidation; (b) the Bank redeems its stock; (c)
the Bank fails to meet the definition provided by the Code for a Bank. Future
changes in the Federal tax law, could further affect the status of the base year
reserve. (See Notes 14 and 17 to the Consolidated Financial Statements, included
on pages 33 through 35 in the 1997 Annual Report to Stockholders.)
New York State and the City of New York adopted legislation to reform
the franchise taxation of thrift reserves for loan losses. The legislation
applies to taxable years beginning after December 31, 1995. The legislation,
among other things, retains the reserve method for bad debt deductions. The New
York State and the City of New York bad debt deduction are no longer predicated
on the Federal deduction.
Delaware Taxation
- ------------------
As a Delaware holding company not earning income in Delaware, the Company
is exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual franchise tax of $150,000 to the State of
Delaware.
21
STATISTICAL DATA
The detailed statistical data which follows is presented in accordance
with Guide 3, prescribed by the SEC. This data should be read in conjunction
with the financial statements and related notes and Management's Discussion and
Analysis of Financial Condition and Results of Operations incorporated herein by
reference to the 1997 Annual Report to Stockholders as Exhibit 13.01.
I. Distribution of Assets, Liabilities and Stockholders' Equity: Interest
Rates and Interest Differential
A, B. Page 11 of the Company's 1997 Annual Report to Stockholders (portions of
which are filed herewith as Exhibit 13.01) presents the distribution of assets,
liabilities and stockholders' equity and interest differential, under the
caption "Average Balance Sheet" and is incorporated herein by reference.
C. Interest Differential
Page 12 of the Company's 1997 Annual Report to Stockholders (portions of
which are included herewith as Exhibit 13.01) presents the interest differential
under the caption "Rate/Volume Analysis" and is incorporated herein by
reference.
Interest Rate Sensitivity Analysis
Pages 8 through 10 of the Company's 1997 Annual Report to Stockholders
(portions of which are filed herewith as Exhibit 13.01) presents the interest
rate sensitivity analysis, under the caption "Interest Rate Sensitivity
Analysis" and is incorporated herein by reference.
22
INVESTMENT PORTFOLIO
A. The following table sets forth certain information regarding the Company's
investment portfolio at the dates indicated:
At December 31,
1997 1996 1995
---------------------------------
(In Thousands)
Securities Available-for-Sale:
Marketable equity securities, at fair value ..... $ 62,243 $ 51,021 $ 40,071
======== ======== ========
Securities Held-to-Maturity:
U.S Government and federal agency securities .... $244,903 $299,645 $439,896
CMOs, net ....................................... 104,040 155,272 144,607
Mortgage-backed securities:
Ginnie Mae, net ............................... 3,640 4,999 6,667
Fannie Mae, net ............................... 106 152 235
Freddie Mac, net .............................. 278 441 655
-------- -------- --------
Total ......................................... $352,967 $460,509 $592,060
======== ======== ========
Other investments:
FHLB-NY stock (investment required by law) ...... $ 7,615 $ 6,829 $ 6,272
Other stock...................................... 30 30 30
-------- -------- --------
Total other investments........................ $ 7,645 $ 6,859 $ 6,302
======== ======== ========
Contractual Maturity Distribution
- ---------------------------------
The table below sets forth certain information regarding the carrying
value, weighted average yields and maturities of the Company's securities
held-to-maturity at December 31, 1997. The table does not reflect prepayments or
scheduled amortization on CMOs or MBS. For MBS, the maturities indicated are the
dates the final payments are due. For CMOs, the maturities reflect the "final
payment dates", which as defined by the issuer, represent the latest date by
which the CMO will be retired. The assumptions used by the issuer in calculating
the final payment dates are highly conservative, and the actual retirement may
occur earlier than its final payment date. The estimated actual average maturity
on the entire CMO portfolio at December 31, 1997 was twenty months. For
principal reduction on these securities, for the years ended December 31, 1997,
1996 and 1995: See the "Consolidated Statements of Cash Flows", included on
pages 24 and 25 of the 1997 Annual Report to Stockholders.
At December 31, 1997
One Year or Less Over 1 to 5 Years Over 5 to 10 Years After 10 years
------------------- ------------------- -------------------- ---------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------------------------------------------------------------------------------------
(Dollars in Thousands)
Federal agency ...... $110,000 5.58% $ - - % $ - - % $ - - %
U.S. Government ..... 124,921 6.10 9,982 6.26 - - - -
CMOs ................ - - 20,257 5.43 83,783 6.41 - -
MBS ................. 196 11.60 959 10.65 - - 2,869 9.61
-------- -------- -------- -------
Total .......... $235,117 5.86% $ 31,198 5.86% $ 83,783 6.41% $ 2,869 9.61%
======== ======== ======== =======
23
LOAN PORTFOLIO
A. The following table sets forth the composition of the mortgage and other loan
portfolios in dollar amounts:
At December 31,
-------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
Mortgage loans:
Multi-family .......................... $563,205 $433,224 $344,337 $294,003 $238,756
Underlying cooperative ... ............ 267,942 262,221 263,972 251,580 253,460
One- to four-family ................... 73,757 76,848 82,391 86,531 95,357
Commercial ............................ 71,839 61,829 55,662 58,070 59,942
Construction .......................... 3,067 1,836 1,492 2,518 410
--------- -------- -------- -------- --------
Total mortgage loans ............... 979,810 835,958 747,854 692,702 647,925
--------- -------- -------- -------- --------
Other loans:
Student ............................... 5,213 6,204 7,466 9,656 11,132
Loans secured by deposit accounts ..... 8,189 8,328 8,489 9,167 9,340
Property improvement .................. 10,744 8,775 9,165 6,762 5,599
Consumer .............................. 4,775 4,350 4,092 1,821 1,516
Overdraft loans ....................... 227 237 220 224 210
--------- -------- -------- ------- --------
Total other loans .................. 29,148 27,894 29,432 27,630 27,797
--------- -------- -------- -------- --------
Total loans receivable ............. 1,008,958 863,852 777,286 720,332 675,722
--------- -------- -------- -------- --------
Less:
Unearned discounts, premiums and
deferred loan fees, net .............. 3,333 3,751 4,344 4,952 3,210
Allowance for possible loan losses .... 5,880 5,327 4,697 4,085 4,136
-------- -------- -------- -------- --------
Loans receivable, net .............. $999,745 $854,774 $768,245 $711,295 $668,376
======== ======== ======== ======== ========
24
B. Maturities and Sensitivities of Loans to Changes in Interest Rates
- ----------------------------------------------------------------------
The following table shows the contractual maturity of the loan portfolios
at December 31, 1997. The table does not reflect prepayments, or scheduled
principal amortization or repricing of adjustable rate loans. (For principal
reduction on loans, for the years ended December 31, 1997, 1996 and 1995: See
the "Consolidated Statements of Cash Flows", included on pages 24 and 25 in the
1997 Annual Report to Stockholders.)
Other
Mortgage Loans Loans Total
------------------------------------------------- -------- -----
(In Thousands)
Under- One-to
Multi- lying- Four- Commer- Construct-
Family Co-op Family cial tion Other
------ ----- ------ ---- ---- -----
Amounts due:
Within 1 Year ......... $ 11,095 $ 21,099 $ 7,951 $ 10,497 $ 402 $ 8,797 $ 59,841
-------- -------- -------- -------- --------- ------- ----------
After 1 Year:
1 to 2 years .......... 25,915 10,610 331 1,978 2,665 1,859 43,358
2 to 3 years .......... 42,195 35,458 79 1,763 - 2,789 82,284
3 to 5 years .......... 110,689 58,637 1,207 16,392 - 4,142 191,067
5 to 10 years ......... 326,876 113,800 17,611 38,472 - 11,561 508,320
10 to 20 years ........ 45,929 28,338 22,090 2,737 - - 99,094
Over 20 years ......... 506 - 24,488 - - - 24,994
-------- -------- -------- -------- --------- ------- ----------
Total due after 1 year .... $552,110 $246,843 $ 65,806 $ 61,342 $ 2,665 $20,351 $ 949,117
-------- -------- -------- -------- --------- ------- ----------
Total amounts due ... $563,205 $267,942 $ 73,757 $ 71,839 $ 3,067 $29,148 $1,008,958
======== ======== ========= ======== ========= ======= ----------
Less:
Unearned discounts,
premiums and deferred
loan fees, net ....... 3,333
Allowance for possible
loan losses .......... 5,880
----------
Loans receivable, net ... $ 999,745
==========
The following table sets forth at December 31, 1997, the dollar amount
of all loans due after December 31, 1998 and whether such loans have fixed
interest rates or adjustable interest rates.
Fixed Adjustable Total
----- ---------- -----
(In Thousands)
Due after December 31, 1998:
Mortgage loans:
Multi-family ........................ $ 552,110 $ - $ 552,110
Underlying cooperative .............. 246,843 - 246,843
One-to four-family .................. 57,975 7,831 65,806
Commercial .......................... 61,342 - 61,342
Construction ........................ 2,665 - 2,665
Other loans:
Student ............................. 2,235 2,710 4,945
Loans secured by deposit accounts ... 4 - 4
Property improvement ................ 10,619 - 10,619
Consumer ............................ 4,556 - 4,556
Overdraft loans ..................... 227 - 227
---------- ------- ----------
Total loans receivable ................ $ 938,576 $10,541 $ 949,117
========== ======= ==========
25
C. Delinquencies and Classified Assets
--------------------------------------
Delinquent loans are reviewed by management monthly and by the Board of
Directors quarterly. When a borrower fails to make a scheduled loan payment,
efforts are made to have the borrower cure the delinquency. The borrower is
notified of the delinquency in writing and by telephone by the Bank's collection
staff. For mortgage loans, under certain circumstances, a site inspection of the
property is required. Most delinquencies are cured within 90 days and no legal
action is taken. If a mortgage delinquency exceeds 90 days, the Bank institutes
measures to enforce its remedies, including commencing a foreclosure action. For
delinquent Federal Housing Administration ("FHA") and Veterans Administration
("VA") mortgage loans, the Bank follows notification and foreclosure procedures
prescribed by FHA and VA. Property acquired by the Bank as a result of a
foreclosure is classified as "Other Real Estate". For uninsured non-mortgage
loans, delinquent loans are charged off after 120 days and are referred to the
Bank's attorneys for collection.
At December 31, 1997, 1996 and 1995, delinquencies in the loan portfolios
were as follows:
61-90 Days 90 Days and Over
------------------------------------------
Number Principal Number Principal
of balance of balance
loans of loans loans of loans
----- -------- ----- --------
(Dollars in Thousands)
At December 31, 1997
- --------------------
Delinquent loans:
Guaranteed(1) 48 $ 221 82 $ 500
Non-guaranteed 5 10 5 12,769
--- ------ --- -------
53 $ 231 87 $13,269
=== ====== === =======
Ratio of delinquent
loans to total loans .02% 1.32%
=== ====
At December 31, 1996
- --------------------
Delinquent loans:
Guaranteed(1) 78 $ 390 144 $ 692
Non-guaranteed 9 20 15 13,459
--- ------ --- -------
87 $ 410 159 $14,151
=== ====== === =======
Ratio of delinquent
loans to total loans .05% 1.64%
=== ====
At December 31, 1995
- --------------------
Delinquent loans:
Guaranteed(1) 91 $ 476 132 $ 751
Non-guaranteed 10 8,165 8 324
--- ------ --- -------
101 $8,641 140 $ 1,075
=== ====== === =======
Ratio of delinquent
loans to total loans 1.11% .14%
===== ===
<FN>
(1) Loans which are FHA, VA or SLMA guaranteed.
</FN>
26
The following table sets forth information regarding non-accrual,
restructured and impaired loans and loans which are 90 days or more delinquent
but on which the Bank is accruing interest at the dates indicated.
At December 31,
---------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
Mortgage loans:
- ---------------
One-to four-family, multi-family and
commercial real estate loans:
Non-accrual loans (1) ................... $12,754 $12,754 $20,903 $ 500 $ -
------- ------- ------- ------ ------
Accruing loans 90 or more days overdue:
Conventional mortgages .................... - 686 311 322 326
VA and FHA mortgages (2) .................. 335 361 557 581 937
------ ------ ------- ------ ------
Total ................................ 335 1,047 868 903 1,263
------ ------ ------- ------ ------
Other loans:
- ------------
Non-accrual loans ........................ - - - - -
Accruing 90 or more days overdue:
Student loans .......................... 165 331 194 379 429
Consumer loans ......................... 15 19 13 7 19
------ ------ ------- ------ ------
Total ................................ 180 350 207 386 448
------ ------ ------- ------ ------
Total non-performing loans:
Non-accrual .............................. 12,754 12,754 20,903 500 -
Accruing 90 days or more overdue ......... 515 1,397 1,075 1,289 1,711
------ ------ ------- ------ ------
Total ................................ $13,269 $14,151 $21,978 $1,789 $1,711
======= ======= ======= ====== ======
Non-accrual loans to total loans ........... 1.26% 1.48% 2.69% .07% - %
Accruing loans 90 or more days overdue
to total loans ........................... .06 .16 .14 .18 .25
Non-performing loans to total loans ........ 1.32 1.64 1.78(3) .25 .25
At December 31:
- ---------------
Restructured loans ......................... $ 1,840 $ 1,874 $1,663 $1,828 $ -
For the years ended December 31:
- --------------------------------
Income forfeited due to
restructured loans ........................ $ 62 $ 62 $ 62 $ 6 $ -
Income unrecorded due to
non-accrual/impaired loans ................ $ 1,180 $ 1,180 $ 226 $ 150 $ -
<FN>
(1) See "Asset/Liability Management", included on pages 7 and 8 in the 1997
Annual Report to Stockholders.
(2) The Bank's FHA and VA loans are guaranteed, seasoned loans. These
loans, including the past due loans, do not present any significant collection
risk to the Bank and therefore, are presented separately from conventional
mortgages.
(3) Does not include an $8.2 million mortgage loan that was current on a
cash basis, but on non-accrual status, as payments were received through the
bankruptcy court.
</FN>
27
There were no loans included in the preceding table which were modified
in a troubled debt restructuring ("TDR"). The entire balance of impaired loans
at December 31, 1997 represents loans on non-accrual status. The average balance
of impaired loans for both 1997 and 1996 was $12.8 million. There was no
interest income recorded for impaired loans (for the period in which the loans
were identified as impaired) during 1997 and 1996. For both years ended December
31, 1997 and 1996, impaired loans resulted in foregone interest of $1.2 million.
At December 31, 1997 and 1996, loans restructured in a TDR, other than those
classified as impaired loans and/or non-accrual loans, were $1.8 million and
$1.9 million, respectively. Interest forfeited attributable to these loans was
$62,000 for each of the years ended December 31, 1997, 1996 and 1995.
Classified Assets
- -----------------
Federal regulations provide for the classification of loans and other
assets such as debt and equity securities considered by the OTS to be of lesser
quality as "substandard", "doubtful" or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any. Substandard
assets include those characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected. Assets
classified as "doubtful" have all of the weaknesses inherent in those classified
"substandard", with the added characteristic that the weaknesses present make
"collection or liquidation in full", on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable". Assets classified
as "loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted. Pursuant to OTS rules, the Bank recently discontinued
classifying assets as "special mention" if such assets possessed weakness but do
not expose the Bank to sufficient risk to warrant classification in one of the
aforementioned categories. However, the Bank still maintains a "special mention"
category under its internal asset review system.
When an insured institution classifies problem assets as either
"substandard" or "doubtful", it is required to establish general allowances for
loan losses in an amount deemed prudent by management. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss", it is required to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge off such amount. An insured institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS which can order the establishment of
additional general or specific loss allowances. In connection with the filing of
its periodic reports with the OTS, the Bank regularly reviews the problem loans
in its portfolio to determine whether any loans require classification in
accordance with applicable regulations.
Allowances for Possible Loan and Other Credit Losses
- -----------------------------------------------------
The allowances for possible loan and other credit losses are established
through provisions made, based on management's evaluation of the risk inherent
in its asset portfolios and changes in the nature and volume of investment
activity. Such evaluation, which includes a review of all assets for which full
collection may not be reasonably assured, considers among other matters, the
estimated fair value of the underlying collateral, economic conditions,
historical loss experience and other factors that warrant recognition in
providing for adequate credit allowances. (For a more complete discussion of the
Bank's problem assets see "Provision For Possible Loan Losses" and "Provision
for Possible Other Credit Losses", included on page 16 in the 1997 Annual Report
to Stockholders.)
28
The OTS, in conjunction with other federal banking agencies, has an
interagency policy statement on the allowance for loan and lease losses. The
policy statement provides guidance for financial institutions on both the
responsibilities of management for the assessment and establishment of adequate
allowances and guidance for banking agency examiners to use in determining the
adequacy of general valuation allowances. Generally, the policy statement
requires that: institutions have effective systems and controls to identify,
monitor and address asset quality problems; have analyzed all significant
factors that affect the collectibility of the portfolio in a reasonable manner;
and have established acceptable allowance evaluation processes that meet the
objectives set forth in the policy statement.
Potential Problem Loans and Other Assets and Subsequent Developments
- ------------------------------------------------------------------------
Non-performing loans at December 31, 1997 included a $12.8 million
underlying cooperative mortgage loan which comprised 96.1% of non-performing
loans. This mortgage is secured by a 148 unit cooperative apartment building,
located in Manhattan, New York. On January 28, 1998, the Bank entered into a
settlement agreement with the borrower, that provides that the Bank be made
whole for unpaid principal, contractual interest, late charges and legal fees,
no later than May 28, 1998. In addition, the borrower is responsible for
interest, which will continue to accrue and for any additional legal fees that
the Bank incurs in connection with this credit. In accordance with the terms of
the agreement, the Bank received $1.2 million from the borrower, through March
13, 1998, comprised of a $1.0 million payment, which could be applied against
any portion of the indebtedness other than principal and $197,000 for interim
interest, which is due monthly. The borrower is seeking to refinance elsewhere.
Other Real Estate
- -----------------
ORE represents real estate properties owned by the Bank, or a subsidiary
company, as a result of foreclosure or by obtaining a deed in lieu of
foreclosure. ORE is recorded at the lower of the net unpaid indebtedness, or the
property's net fair value at the time of acquisition. Subsequent valuation
adjustments are made if the net fair value decreases below the carrying amount.
Gains, if any, on the sale of ORE are deferred under the cost recovery method.
At December 31, 1997, ORE carried at $473,000 was comprised of 31
cooperative apartments located within an 84 unit cooperative apartment building
located in Brooklyn, New York. The units were acquired during 1994, when the
Bank restructured an underlying cooperative loan. As part of the agreement, the
Bank extended the mortgage loan for an additional five years at 7.25%, made an
additional five year building improvement/liquidity loan to the cooperative and,
through a subsidiary corporation, received cooperative shares representing 57
apartments. As a result of the restructuring, $1.6 million (the Bank's
proportionate share of property ownership) of the cooperative association's $2.4
million indebtedness to the Bank was reclassified from mortgage loans to ORE on
the Company's consolidated financial statements. At December 31, 1997, the total
indebtedness related to this restructured loan reported in mortgage loans,
including the building improvement loan, was $1.3 million. At December 31, 1997,
of the original 57 units acquired; 26 units had been sold, resulting in deferred
gains of $376,000, 30 units were rented and, 1 unit was vacant and being
marketed for sale.
During 1997, ORE operations generated pre-tax income of $59,000, which
included net gains of $144,000 realized on the sale of ORE properties and the
net cost of operations of $85,000. There were no loss provisions established
against ORE during the year ended December 31, 1997.
29
SUMMARY OF LOAN LOSS EXPERIENCE
Activity in the allowance for possible loan losses for the mortgage loan
portfolio and the other loan portfolio are summarized as follows, respectively,
for the years ended December 31:
Mortgage Portfolio Loan Loss Allowance: 1997 1996 1995 1994 1993
- -------------------------------------- ---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of period $5,176 $4,575 $3,976 $4,000 $3,400
Provision for possible loan losses 600 600 600 600 600
Loans charged-off (35) - (1) (624) -
Recoveries of loans previously charged off - 1 - - -
------ ------ ------- ------ ------
Balance at end of period $5,741 $5,176 $4,575 $3,976 $4,000
====== ====== ====== ====== ======
Ratios:
- -------
Net charge-offs to average mortgages - % - % - % .10% - %
Allowance for possible loan losses to
net mortgage loans at December 31: .59% .63% .62% .58% .62%
Allowance for possible loan losses to mortgage
loans delinquent 90 days or more at December 31: 43.86% 37.50% 5.27x 4.40x 3.17x
Other Loan Portfolio Loss Allowance:
- ------------------------------------
Balance at beginning of period $ 151 $ 122 $ 109 $ 136 $ 154
Provision for possible loan losses 48 40 36 8 -
Loans charged off (72) (33) (43) (40) (33)
Recoveries of loans previously charged off 12 22 20 5 15
------ ------ ------ ------ -----
Balance at end of period $ 139 $ 151 $ 122 $ 109 $ 136
====== ====== ====== ====== =====
Ratios:
- -------
Net charge-offs to average other loans .21% .04% .08% .13% .06%
Allowance for possible loan losses to
net other loans at December 31: .48% .54% .42% .40% .49%
Allowance for possible loan losses to other
loans delinquent 90 days or more at December 31: 77.22% 43.14% 58.94% 28.24% 30.36%
30
DEPOSITS
Deposit balances are summarized as follows at December 31:
1997 1996 1995
---- ---- ----
Stated Stated Stated
rate Amount rate Amount rate Amount
---- ------ ---- ------ ---- ------
(Dollars in Thousands)
Balance by interest rate:
Demand - % $ 32,132 - % $ 31,940 - % $ 30,711
NOW 2.47 35,401 2.47 36,256 2.47 36,680
Money market 2.96 79,007 2.96 89,081 2.96 92,774
Passbook & lease
security 2.71 565,130 2.71 599,951 2.96 632,879
Certificates - - - - 3.70- 4.00 2,083
4.67- 5.00 44,646 4.14- 5.00 174,155 4.01- 5.00 135,386
5.01- 6.00 343,864 5.01- 6.00 187,890 5.01- 6.00 203,054
6.01- 7.00 21,023 6.01- 7.00 25,120 6.01- 7.00 29,016
7.01- 8.00 - 7.01- 8.00 - 7.01- 8.00 863
---------- ---------- ----------
409,533 387,165 370,402
---------- ---------- ----------
Total deposits $1,121,203 $1,144,393 $1,163,446
========== ========== ==========
Time certificates in
excess of $100,000 $ 41,551 $ 32,676 $ 27,039
========== ========== ==========
The following table sets forth the maturity of certificate accounts in
amounts of $100,000 or more at December 31:
1997
----
(In Thousands)
Three months or less $18,067
Over three months through six months 8,288
Over six months through twelve months 9,430
Over twelve months 5,766
$41,551
31
The following table sets forth certain of the Bank's average interest
bearing deposit categories and the related average interest rates for the years
ended December 31:
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
Passbook and lease
security $ 580,050 2.70% $ 615,591 2.72% $ 661,356 2.88%
Certificates 397,832 5.22 383,215 5.16 343,229 5.14
Money Market 83,731 3.04 91,597 3.08 99,016 3.08
NOW 35,934 2.45 36,338 2.47 37,073 2.55
---------- ---------- ----------
$1,097,547 3.63% $1,126,741 3.57% $1,140,674 3.57%
========== ========== ==========
<FN>
The FDIC, an agency of the U.S. Government, insures each depositor's
savings up to $100,000 through the BIF.
</FN>
Financial Highlights
For the Years Ended December 31: 1997 1996 1995
- ------------------------------- ---- ---- ----
Return on average assets 2.42% 1.74% 1.44%
Return on average equity 10.64 8.05 6.67
Dividend payout ratio(1) 37.23 47.24 50.25
Average equity to average assets 22.72 21.65 21.60
Equity to total assets 23.94 22.12 22.01
Interest rate spread 3.88 3.90 3.82
Net interest margin 4.73 4.68 4.60
Non-interest expense to
average assets 1.79 1.80 1.92
Non-performing loans to total loans(2) 1.32 1.64 1.78
Non-performing assets to total assets(2) 0.90 0.98 1.50
Efficiency ratio(3) 38.27 40.40 42.36
Ratio of net interest income to
non-interest expense 2.47x 2.44x 2.27x
Average interest earning assets to
average interest bearing liabilities 1.31x 1.28x 1.28x
<FN>
(1) Dividend payout ratio is calculated by dividing dividends declared per
share by net income per share.
(2) See also "Asset/Liability Management", included on pages 7 and 8 in the
1997 Annual Report to Stockholders.
(3) Amount is determined by dividing non-interest expense, excluding Other Real
Estate (income) expense, by net interest income plus loan fees and service
charges.
</FN>
32
BORROWINGS
The Bank has not directly borrowed funds since 1984, however, in the
event that the Bank should require funds beyond its internal ability, it may
take advances from the Federal Home Loan Bank, New York.
ITEM 2. PROPERTIES
- -------------------
The Bank conducts its business through 13 full-service branch offices,
10 located in the borough of Queens, one in the borough of Manhattan and one
each in Nassau and Suffolk counties. The Company believes that the Bank's
current facilities are adequate to meet the present and immediately foreseeable
needs of the Bank and the Company. (See Note 9 to the Consolidated Financial
Statements, included on page 32 in the 1997 Annual Report to Stockholders.)
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Bank is a defendant in several lawsuits arising out of the normal
conduct of business. In the opinion of management, after consultation with legal
counsel, the ultimate outcome of these matters is not expected to have a
material adverse effect on the results of operations, business operations or the
consolidated financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
33
ADDITIONAL ITEM. EXECUTIVE OFFICERS
- ------------------------------------
The following table sets forth certain information with respect to each
executive officer of the Company who is not also a director of the Company. The
Board of Directors appoints or reaffirms the appointment of all of the Company's
Executive Officers each April. The term of each Executive Officer of the Company
is generally one year, or until a respective successor is elected (or
appointed).
Age at Position held
Name December 31, 1997 with the Company
- ---- ----------------- ----------------
John F. Bennett 63 Senior Vice President
Ronald C. Spielberger 60 Senior Vice President
Jack Connors 48 Senior Vice President
John Conroy 51 Senior Vice President
Bernice Glaz 56 Senior Vice President
Lawrence J. Kane 44 Senior Vice President
Thomas R. Lehmann 47 Chief Financial Officer
Robert A. Neumuth 54 Senior Vice President
Joseph J. Hennessy 55 Asst. Treasurer/Comptroller
The following table sets forth certain information with respect to each
executive officer of the Bank who is not a director of the Bank.
Age at Position held
Name December 31, 1997 with the Bank
- ---- ----------------- -------------
John F. Bennett 63 Senior Vice President
Ronald C. Spielberger 60 Senior Vice President
Jack Connors 48 Senior Vice President
John Conroy 51 Senior Vice President
Bernice Glaz 56 Senior Vice President
Thomas R. Lehmann 47 Chief Financial Officer
Treasurer and Comptroller
Lawrence J. Kane 44 Senior Vice President
Robert A. Neumuth 54 Senior Vice President
34
PART II
ITEM 5. MARKET FOR JSB FINANCIAL INC.'S COMMON EQUITY AND RELATED
STOCKHOLDERS' MATTERS
---------------------------------------------------------
JSB Financial, Inc. common stock is traded on the New York Stock
Exchange under the symbol "JSB". Prior to August 7, 1997, the Company's common
stock was traded on the Nasdaq National Market under the symbol "JSBF".
Information regarding JSB Financial, Inc. common stock and its price for
the 1997 calendar year appears on page 6 of the 1997 Annual Report to
Stockholders, portions of which are filed herewith as Exhibit 13.01, under the
caption "Quarterly Results" and is incorporated herein by reference.
As of February 17, 1998, JSB Financial, Inc. had approximately 2,143
shareholders of record, not including the number of persons or entities holding
stock in nominee or street name through various brokers and banks.
During 1997, the Company declared four cash dividends totaling $1.40 per
share each on its common stock. Although the Company cannot guarantee dividend
payments, management expects to continue to pay cash dividends, provided that
dividend payments are in the best interest of the Company's stockholders.
Certain restrictions exist regarding the amount of dividends that the Company
may declare and pay. (See Note 17 to the Consolidated Financial Statements,
included on page 35 in the 1997 Annual Report to Stockholders.) Dividends were
paid during calendar 1997 to stockholders as follows:
Declaration Date Record Date Payment Date Dividend Per Share
---------------- ----------- ------------ ------------------
January 7, 1997 February 5, 1997 February 19, 1997 $.35
April 8, 1997 May 7, 1997 May 21, 1997 $.35
July 8, 1997 August 6, 1997 August 20, 1997 $.35
October 21, 1997 November 5, 1997 November 19, 1997 $.35
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
Information regarding selected financial data appears on pages 2 and 5
of the Company's 1997 Annual Report to Stockholders, and is incorporated herein
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-----------------------------------------------------------
Pages 7 through 19, of the Company's 1997 Annual Report to Stockholders,
are incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
Pages 21 through 43, of the Company's 1997 Annual Report to
Stockholders, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
-----------------------------------------------------------
None.
35
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant has filed a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement"), and certain information included therein
is incorporated herein by reference. Only those sections of the Proxy Statement
which specifically address the items set forth herein are incorporated by
reference. Such incorporation does not include the Report of the Compensation
Committee or the Stock Performance Graph included in the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
- ---------------------------------------------------------
Information presented under the heading "Information With Respect to
Nominees and Continuing Directors" on pages 4 and 5 in the Company's Proxy
Statement for its Annual Meeting of Stockholders to be held on May 12, 1998, is
incorporated herein by reference. Information concerning Executive Officers who
are not directors is contained in Part I of this report pursuant to paragraph
(b) of Item 401 of Regulation S-K in reliance on Instruction G.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Information included under the headings "Directors' Compensation" and
"Executive Compensation" on pages 9 through 12 (excluding the Report of the
Compensation Committee on pages 10 and 11) in the Company's Proxy Statement for
its Annual Meeting of Stockholders to be held on May 12, 1998, is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Information included under the headings "Security Ownership of Certain
Beneficial Owners" and "Stock Ownership of Management" on pages 3 and 8 in the
Company's Proxy Statement for its Annual Meeting of Stockholders to be held on
May 12, 1998, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Information included under the headings "Indebtedness of Management and
Transactions with Certain Related Persons" on page 18 in the Company's Proxy
Statement for its Annual Meeting of Stockholders to be held on May 12, 1998, is
incorporated herein by reference.
36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) 1. Financial Statements
The following Consolidated Financial Statements of the Company, its
subsidiary, Jamaica Savings Bank FSB, and the independent auditors' report
thereon, included on pages 21 through 43, of the Company's 1997 Annual Report to
Stockholders, are incorporated herein by reference:
- - Consolidated Statements of Financial Condition at December 31, 1997 and
1996 - Consolidated Statements of Operations for each of the years in the
three year period ended December 31, 1997
- - Consolidated Statements of Changes in Stockholders' Equity for each of the
years in the three year period ended December 31, 1997
- - Consolidated Statements of Cash Flows for each of the years in the three
year period ended December 31, 1997
- - Notes to the Consolidated Financial Statements
- - Independent Auditors' Report
The remaining information appearing in the 1997 Annual Report to
Stockholders is not deemed to be filed as part of this report, except as
expressly provided herein.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or Notes thereto.
(b) Reports on Form 8-K filed during the last quarter of 1997: None
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K:
Exhibit No. Description
----------- -----------
3.01 Articles of Incorporation (1)
3.02 Bylaws (Amended and Restated, filed herewith)
4.01 Stock Certificate of JSB Financial, Inc. (1)
Employment Agreement between the Company and:
10.01 Park T. Adikes (2)
10.02 Edward P. Henson (2)
10.04 Ronald C. Spielberger (2)
10.05 Joanne Corrigan (2)
10.06 Supplemental Employment Agreement entered into on
July 9, 1996 between the Company and:
Park T. Adikes (3)
Edward P. Henson (3)
Ronald C. Spielberger (3)
Joanne Corrigan (3)
Continued
37
Exhibit No. Description
----------- -----------
Employment Agreement between the Bank and:
10.07 Park T. Adikes (2)
10.08 Edward P. Henson (2)
10.09 Ronald C. Spielberger (2)
10.10 Joanne Corrigan (2)
10.11 John F. Bennett (2)
10.12 Jack Connors (4)
10.13 John J. Conroy (4)
10.14 Bernice Glaz (4)
10.15 Thomas R. Lehmann (4)
10.16 Lawrence J. Kane, filed herewith
10.17 Robert A. Neumuth (3)
10.18 Supplemental Employment Agreement entered into on
July 9, 1996 between the Bank and:
Park T. Adikes (3)
Edward P. Henson (3)
Ronald C. Spielberger (3)
Joanne Corrigan (3)
John F. Bennett (3)
Jack Connors (3)
John J. Conroy (3)
Bernice Glaz (3)
Thomas R. Lehmann (3)
Lawrence J. Kane (3)
Robert A. Neumuth (3)
Special Termination Agreements between the Bank, guaranteed
by the Company and:
10.19 Teresa DiRe-Covello (2)
10.20 Joseph J. Hennessy (2)
10.21 Philip Pepe (5)
10.22 Supplemental Special Termination Agreements entered into
on July 9, 1996 between the Bank and:
Teresa DiRe-Covello (3)
Joseph J. Hennessy (3)
Philip Pepe (3)
Continued
38
Exhibit No. Description
----------- -----------
10.23 Jamaica Savings Bank FSB Benefit Restoration Plan
(Amended and Restated) (6)
10.24 JSB Financial, Inc. 1990 Incentive Stock Option Plan
(Amended and Restated) (7)
10.25 JSB Financial, Inc. 1990 Stock Option Plan
For Outside Directors (Amended and Restated) (7)
10.26 Jamaica Savings Bank FSB Employee Severance
Compensation Plan (1)
10.27 Jamaica Savings Bank FSB Outside Directors' Consultation
and Retirement Plan (8)
10.28 Incentive Savings Plan of Jamaica Savings Bank FSB (8)
10.29 The JSB Financial, Inc. 1996 Stock Option Plan (9)
11.01 Statement regarding computation of per share
earnings, filed herewith
13.01 Portions of the 1997 Annual Report to Stockholders,
filed herewith
23.01 Consent of KPMG Peat Marwick LLP, filed herewith
27.00 Financial Data Schedule for the Period Ended December 31,
1997, filed herewith
27.01 Financial Data Schedule for the Period Ended December 31,
1996, Restated, filed herewith
99.01 Form 11-K for calendar year 1997 for the Incentive Savings
Plan of Jamaica Savings Bank FSB (10)
(1) Incorporated herein by reference to Exhibits filed with the Registration
Statement on Form S-1, Registration No. 33-33821.
(2) Incorporated herein by reference to Exhibits filed with the Form 10-K
for the Year Ended December 31, 1990.
(3) Incorporated herein by reference to Exhibits filed with the Form 10-K
for the Year Ended December 31, 1996.
(4) Incorporated herein by reference to Exhibits filed with the Form 10-Q
for the Quarter Ended June 30, 1995.
(5) Incorporated herein by reference to Exhibits filed with the Form 10-K
for the year ended December 31, 1993.
(6) Incorporated herein by reference to Exhibits filed with the Form 10-K
for the Year Ended December 31, 1994.
(7) Incorporated herein by reference to Exhibits filed with the Form 10-K
for the Year Ended December 31, 1992.
(8) Incorporated herein by reference to Exhibits filed with the Pre-Effective
Amendment No.1 to Form S-1, Registration No. 33-33821,
filed on April 2, 1990.
(9) Incorporated herein by reference to Appendix A (pages 21 through 33)
of the Proxy Statement, dated March 29, 1996.
(10) To be filed.
39
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
JSB Financial, Inc.
-------------------
(Registrant)
/s/ Park T. Adikes 3/20/98
- --- -------------- -------
Park T. Adikes
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
/s/ Park T. Adikes 3/20/98 /s/ Thomas R. Lehmann 3/23/98
- --- -------------- ------- --------------------- -------
Park T. Adikes Thomas R. Lehmann
Chief Executive Officer Chief Financial Officer
Chairman and Director (Principal Accounting Officer)
/s/ Joseph C. Cantwell 3/26/98 /s/ James E. Gibbons, Jr. 3/26/98
- --------------------------- ------- -------------------------- -------
Joseph C. Cantwell James E. Gibbons, Jr.
Director Director
/s/ Edward P. Henson 3/24/98 /s/ Richard W. Meyer 3/26/98
- --------------------------- ------- -------------------------- -------
Edward P. Henson Richard W. Meyer
President and Director Director
/s/ Arnold B. Pritcher 3/26/98 /s/ Paul R. Screvane 3/26/98
- --------------------------- ------- -------------------------- -------
Arnold B. Pritcher Paul R. Screvane
Director Director