Selected Financial Data
(In Thousands, Except Per Share Amounts)
Set forth below are selected consolidated financial data of the Company. This
financial data is derived in part from, and should be read in conjunction with,
the Consolidated Financial Statements of the Company.
Selected Financial Condition Data:
At December 31, 1997 1996 1995 1994 1993
- --------------- ---- ---- ---- ---- ----
Total assets $1,535,031 $1,516,016 $1,548,301 $1,565,095 $1,635,870
Securities held-to-maturity/held-
for-investment, net 352,967 460,509 592,060 728,630 859,909
Loans receivable, net 999,745 854,774 768,245 711,295 668,376
Deposits 1,121,203 1,144,393 1,163,446 1,204,424 1,273,917
Employee Stock Ownership
Plan (ESOP) obligation - - - - 1,045
Retained income 311,436 289,588 276,317 266,361 251,959
Total stockholders' equity 367,514 335,299 340,107 327,634 325,207
Selected Operating Data:
Years Ended December 31, 1997 1996 1995 1994 1993
- ------------------------ ---- ---- ---- ---- ----
Interest income $ 107,742 $ 107,611 $ 107,726 $ 103,027 $ 108,205
Interest expense 39,874 40,217 40,707 36,619 39,740
---------- ---------- ---------- ---------- ---------
Net interest income 67,868 67,394 67,019 66,408 68,465
Provision for possible
loan losses 648 640 636 608 600
(Recovery of) provision for
possible other credit losses - (2,040) 2,040 - -
---------- --------- ---------- ---------- ---------
Net interest income after
provision for possible
credit losses 67,220 68,794 64,343 65,800 67,865
Non-interest income 21,929 5,081 3,995 6,752 2,239
Non-interest expense 27,434 27,598 29,561 30,937 33,657
---------- ---------- --------- ---------- ---------
Income before provision for
income taxes and cumulative
effect of accounting changes 61,715 46,277 38,777 41,615 36,447
Provision for income taxes 24,625 19,552 16,603 18,018 15,798
---------- ---------- ---------- ---------- ---------
Income before cumulative effect
of accounting changes 37,090 26,725 22,174 23,597 20,649
Cumulative effect of accounting
changes, net _-___ - - - 7,688
---------- ---------- ---------- ---------- --------
Net income $ 37,090 $ 26,725 $ 22,174 $ 23,597 $ 28,337
========== ========== ========== ========== ========
Basic earnings per common share
before cumulative effect of
accounting changes $3.76 $2.66 $2.09 $2.13 $1.65
Cumulative effect of accounting
changes, net -__ - - - .62
----- ----- ----- ----- -----
Basic earnings per common share $3.76 $2.66 $2.09 $2.13 $2.27
===== ===== ===== ===== =====
Diluted earnings per common share
before cumulative effect of
accounting changes $3.64 $2.56 $2.01 $2.04 $1.58
Cumulative effect of accounting
changes, net -__ - - - .59
----- ----- ----- ----- -----
Diluted earnings per common share $3.64 $2.56 $2.01 $2.04 $2.17
===== ===== ===== ===== =====
Cash dividends per common share $1.40 $1.20 $1.00 $ .72 $ .60
===== ===== ===== ===== =====
Quarterly Results
(In Thousands, Except Per Share Amounts and Yields)
1997 Quarter Ended
------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
Interest income $26,683 $26,993 $26,796 $27,270
Interest expense 9,738 9,932 10,094 10,110
------- ------- ------- -------
Net interest income 16,945 17,061 16,702 17,160
Provision for possible loan losses 160 161 162 165
------- ------- ------- -------
Net interest income after provision
for possible loan losses 16,785 16,900 16,540 16,995
Non-interest income 1,114 1,536 4,513 14,766
Non-interest expense 6,884 6,751 7,063 6,736
------- ------- ------- -------
Income before provision for income taxes 11,015 11,685 13,990 25,025
Provision for income taxes 4,567 4,576 5,436 10,046
------- ------- ------- -------
Net income $ 6,448 $ 7,109 $ 8,554 $14,979
======= ======= ======= =======
Basic earnings per common share $ .66 $ .72 $ .87 $1.51
===== ===== ===== ======
Diluted earnings per common share $ .63 $ .70 $ .84 $1.46
===== ===== ===== =====
Stock prices, Dividends and Yields:
High $44.00 $47.00 $49.69 $50.63
Low $36.00 $40.00 $39.75 $46.31
Close $42.50 $43.25 $48.94 $50.06
Cash dividends per common share $ .35 $ .35 $ .35 $ .35
Dividend yield1 3.50% 3.22% 3.13% 2.89%
1996 Quarter Ended
------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
Interest income $26,905 $26,958 $26,948 $26,800
Interest expense 10,147 10,041 10,060 9,969
------- ------- -------- -------
Net interest income 16,758 16,917 16,888 16,831
Provision for possible loan losses 161 160 160 159
Recovery of possible other credit losses - - - (2,040)
------- ------- ------- -------
Net interest income after provision
for possible credit losses 16,597 16,757 16,728 18,712
Non-interest income 1,215 1,135 1,646 1,085
Non-interest expense 7,266 6,062 6,965 7,305
------- ------- ------- -------
Income before provision for income taxes 10,546 11,830 11,409 12,492
Provision for income taxes 4,468 5,032 4,847 5,205
------- ------- ------- -------
Net income $ 6,078 $ 6,798 $ 6,562 $ 7,287
======= ======= ======= =======
Basic earnings per common share $ .58 $ .66 $ .67 $ .75
===== ===== ===== =====
Diluted earnings per common share $ .56 $ .64 $ .65 $ .72
===== ===== ===== =====
Stock prices, Dividends and Yields:
High $34.00 $35.00 $37.13 $38.38
Low $31.50 $32.25 $32.75 $35.63
Close $33.63 $33.13 $36.13 $38.00
Cash dividends per common share $ .30 $ .30 $ .30 $ .30
Dividend yield1 3.66% 3.57% 3.43% 3.24%
<FN>
1 Dividend yield is calculated by annualizing the quarterly dividend per share
and dividing by an average of the high and low price for the quarter.
</FN>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
- -------
1997 marked the seventh full year of operations for JSB Financial, Inc. as
a publicly held company. Net income for the year was $37.1 million, or $3.64 per
diluted share. The Company paid cash dividends on its common stock which totaled
$1.40 per share, or 38.5% of diluted earnings per common share.
The Company's results of operations are most significantly affected by the
results of operations of its wholly owned subsidiary, Jamaica Savings Bank. The
Bank's results of operations are affected by general economic and competitive
conditions, particularly changes in market interest rates, as well as government
policies and actions of regulatory authorities. The Bank's core earnings are
provided by its net interest income. The operating results of the Bank are also
affected, generally to a lesser extent, by the amount of its non-interest income
and non-interest expense. Items comprising non-interest income are, results of
real estate operations, gains or losses on the sale of equity securities, if
any, loan servicing income and various other items comprising miscellaneous
income. The principal non-interest expense of the Bank includes compensation and
employee benefits, occupancy costs and other general and administrative
expenses.
Asset/Liability Management
- --------------------------
Management aims at maintaining a stable net interest margin and minimizing
the effects of market interest rate fluctuations on net interest income through
its asset/liability structure. Rates offered on interest bearing deposits are
established to influence changes in levels of deposits. Assets increased by
$19.0 million, or 1.3%, to $1.535 billion during 1997, compared to assets of
$1.516 billion at December 31, 1996, while liabilities decreased by $13.2
million, or 1.1%, to $1.168 billion from $1.181 billion over the same period.
The Company maintains asset quality through its investment and loan underwriting
policies.
At December 31, 1997, net mortgage loans were $970.7 million, comprising
63.2% of total assets, investments in U.S. Government and federal agency
securities were $244.9 million and investments in CMOs were $104.0 million,
representing 16.0% and 6.8% of total assets, respectively. During 1997, all
investments in U.S. Government and federal agency securities, CMOs, and
mortgage-backed securities (MBS), were designated held-to-maturity and carried
at amortized cost. Unrealized gains and losses in these portfolios are not
expected to impact future results of operations, as these securities are
intended to be held until maturity. Marketable equity securities are designated
as available-for-sale and carried at estimated fair value. At December 31, 1997,
these securities, which had a cost basis of $10.9 million, were carried at their
aggregated fair value of $62.2 million. 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, investments in CMOs decreased, as payments of $106.5 million
were received from maturities and amortization and purchases of $55.0 million
were made. All of the Bank's CMOs are First Tranche - Planned Amortization Class
Bonds that are collateralized by Federal National Mortgage Association (FNMA),
Federal Home Loan Mortgage Corporation (FHLMC), or Government National Mortgage
Association (GNMA), mortgage-backed securities which are collateralized by whole
loans. At December 31, 1997, the Bank did not have any CMOs that would be
classified as "high risk" securities as defined by a policy statement by the
Federal Financial Institutions Examination Council. At December 31, 1997, the
estimated average remaining maturity of the CMO portfolio was approximately
twenty months. Management plans to continue to purchase CMOs which meet its
investment guidelines, when available.
The Bank offers fixed-rate and adjustable-rate mortgage loans secured by
one-to four-family properties, apartment buildings, underlying cooperative
properties, commercial real estate and offers various other consumer type loans.
During 1997, the Bank sold $1.6 million of single family mortgage loans,
originated for sale, to government agencies. Loans held-for-sale are carried at
the lower of cost or market, in the aggregate. At December 31, 1997, there were
no mortgage loans held-for-sale.
Non-performing loans to total loans at December 31, 1997 was 1.32%,
compared to 1.64% at December 31, 1996. Non-performing loans at December 31,
1997 and 1996 included a $12.8 million underlying cooperative mortgage loan on
which the Bank has commenced foreclosure proceedings. This one mortgage loan
comprised 96.1% of non-performing loans and 92.8% of non-performing assets at
December 31, 1997. The mortgage is secured by a 148 unit cooperative apartment
building, located in Manhattan, New York. No specific valuation allowances have
been established against this loan, as management believes that the mortgage is
adequately secured. 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 will be 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 $1.1 million from the borrower, through February
16, 1998, comprised of a $1.0 million payment which could be applied against any
portion of the indebtedness other than principal and, $98,000 for interim
interest, which is due monthly. The borrower is seeking to refinance the
mortgage elsewhere.
In addition to non-performing loans, non-performing assets include Other
Real Estate (ORE) and any other investment not performing in accordance with
contractual terms. ORE represents real estate properties owned by the Bank or
transferred to a subsidiary corporation as a result of foreclosure or obtained
by receiving a deed in lieu of foreclosure. At December 31, 1997 the Bank held
shares to 31 residential cooperative apartments attributable to one property,
that comprised the Bank's ORE of $473,000. Management closely monitors the value
of properties that are obtained through foreclosure actions. (See Note 12 to the
Consolidated Financial Statements.)
Non-performing assets to total assets at December 31, 1997 was .90%,
compared to .98% at December 31, 1996. The decrease in this ratio primarily
reflected the foreclosure and subsequent sale of a single family house with a
mortgage of $450,000 which was not performing at December 31, 1996.
Deposits at December 31, 1997, decreased by $23.2 million, or 2.0%,
compared to deposits at December 31, 1996. While interest rates on the various
accounts offered by the Bank remained competitive with those of other depository
institutions in the Bank's market, customers have continued to withdraw funds to
invest in alternative instruments and shift funds into certificate accounts,
both of which offered higher yields. Management attributes this deposit outflow
and shift in deposit composition to the relatively low interest rate environment
that has prevailed over the last several years. The Bank influences deposit
levels and composition through its interest rate structure. While the highest
percentage of deposits has historically been in passbook and lease security
accounts, the trend of deposit shifts has continued towards certificate
accounts. (See Liquidity and Capital Resources, herein.) Management has
maintained an interest rate structure that has allowed deposits to continue to
shift and decline in a controlled fashion, rather than offering interest rates
that would result in significantly reducing net interest margins and interest
rate spreads or necessitate modifying the existing asset structure and
investment guidelines.
Interest rate spread, net interest margin, liquidity, and related asset
quality are some of the key measures of financial performance that management
focuses on. The Bank's assets are structured such that gradual declines in
deposits, such as continuance of the current trend, is not expected to have a
material adverse affect on the Company within the foreseeable future. However,
if, as is the current trend, the Company's deposits continue to decline,
interest earning assets may also decline, resulting in a decrease in net
interest income, the Company's primary component of net income.
The Bank's liquidity ratios continue to exceed all short and long term
minimum regulatory requirements. Management is focused on providing quality
customer service as its main strategy for maintaining its relationships with its
customers. Within recent years, the Bank has expanded services offered to its
depositors, including automated telephone banking 24 hours a day, 365 days a
year. The Bank also offers credit cards, which are issued and owned by an
unrelated bank that manages and bears all credit risk.
Interest Rate Sensitivity Analysis
- ----------------------------------
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest earning assets
maturing or repricing within a specific time period and the amount of interest
bearing liabilities maturing or repricing within that time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income while a positive
gap would tend to result in an increase in net interest income. During a period
of falling interest rates, a negative gap would tend to result in an increase in
net interest income while a positive gap would tend to adversely affect net
interest income.
At December 31, 1997, the Company had a negative short-term gap. In
general, the lower the level of market interest rates (on a relative basis), the
shorter (term) the Company's investments. The Company generally invests in
securities with maturities ranging from three months to two years. As interest
rates increase the Company purchases securities with longer terms, and may
purchase securities with maturities of up to three years. While management
regularly reviews the Company's gap analysis, the gap is considered an
analytical tool which has limited value. Management has long followed
short-term, high quality standards for the Company's interest-earning asset
portfolios, resulting in high liquidity. This strategy enables the Company
flexibility to reprice assets and liabilities over a relatively short period of
time.
The following prepayment rate assumptions for mortgage loans are based
upon historical performance. Prepayment rate assumptions for fixed rate one-to
four-family mortgage loans and MBS based upon the remaining term to contractual
maturity were as follows: (a) 27% if less than six months; (b) 11% if six months
to one year and for five to ten years; (c) 8% if one to three years; (d) 9% if
three to five years and for ten to twenty years; and (e) 17% if beyond 20 years.
Adjustable-rate mortgages are assumed to prepay at 15% and second mortgages at
18%. All other fixed rate first mortgage loans are assumed to prepay at 3%. All
deposit accounts, which are subject to immediate withdrawal/repricing, except
certificates, are assumed to reprice in the earliest period presented.
Securities available-for-sale, which are comprised entirely of marketable equity
securities which do not have a fixed maturity date, are reflected as repricing
in the five to ten year category.
The following table sets forth, as of December 31, 1997, repricing
information on earning assets and interest bearing liabilities. The data
reflects estimated principal amortization and prepayments on mortgage loans, and
estimated attrition of deposit accounts as previously discussed. The table does
not necessarily indicate the impact of general interest rate movements on the
Bank's net interest income because the repricing of certain categories of assets
and liabilities is beyond the Bank's control. As a result, certain assets and
liabilities indicated as repricing within a stated period may in fact reprice at
different times and at different rate levels.
At December 31, 1997
----------------------------------------------------------------------
More More More More More
Than Than Than Than Than
3 1 Year 3 Years 5 Years 10 Years More
0-3 Months to 3 to 5 to 10 to 20 Than
Months to 1 Year Years Years Years Years 20 Years Total
------- --------- ------ ------- ------- -------- -------- ------
(Dollars in Thousands)
Interest earning assets:
Mortgage loans, net 1.......... 24,354 $ 28,993 $ 118,719 $ 186,235 $482,160 $ 98,503 $ 37,514 $ 976,478
Debt and equity securities and
other investments, net 2....... 179,888 124,922 9,981 - - - - 314,791
CMOs, net...................... 3,287 16,969 77,250 6,534 - - - 104,040
MBS, net....................... - 196 959 - - 2,869 - 4,024
Other loans, net 1............. 63 640 12,741 4,142 11,561 - - 29,147
Federal funds sold............. 62,000 - - - - - - 62,000
-------- -------- -------- --------- -------- -------- -------- ----------
Total interest earning assets 269,592 171,720 219,650 196,911 493,721 101,372 37,514 1,490,480
-------- -------- -------- --------- -------- -------- -------- ----------
Interest bearing deposit accounts:
Passbook and lease
security accounts............. 565,130 - - - - - - 565,130
Certificate accounts........... 141,365 203,527 50,011 14,630 - - - 409,533
Money market accounts.......... 79,007 - - - - - - 79,007
Negotiable order of withdrawal3 35,401 - - - - - - 35,401
-------- -------- --------- --------- -------- -------- -------- ----------
Interest bearing liabilities. 820,903 203,527 50,011 14,630 - - - 1,089,071
-------- -------- --------- --------- -------- -------- -------- ----------
Interest sensitivity gap
per period.................... $(551,311) $(31,807)$ 169,639 $ 182,281 $493,721 $101,372 $ 37,514 $ 401,409
========= ======== ========= ========= ======== ======== ======== ==========
Cumulative interest
sensitivity gap............... $(551,311) $(583,118)$(413,479) $(231,198) $262,523 $363,895 $401,409 $ -
========= ========= ========= ========= ======== ======== ======== ==========
Percentage of gap per period to
total assets................. (35.92%) (2.07%) 11.05% 11.87% 32.16% 6.60% 2.44%
Percentage of cumulative gap to
total assets................ (35.92%) (37.99%) (26.94%) (15.07%) 17.09% 23.69% 26.13%
<FN>
1 Includes non-performing loans and excludes the allowance for possible loan
losses.
2 Securities available-for-sale are shown including the market value
appreciation of $51.4 million, before tax.
3 Negotiable order of withdrawal (NOW) accounts.
Note: Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as ARM loans, have features
which limit changes in interest rates on a short-term basis and over the life of
the asset. In the event of a change in interest rates, prepayment and early
withdrawal levels may deviate significantly from those assumed in calculating
the table.
</FN>
The Bank's interest rate sensitivity is also monitored by management
through the use of a model which internally generates estimates of the change in
the net portfolio value (NPV) over a range of interest rate change scenarios.
NPV is the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is
defined as the NPV in that scenario divided by the market value of assets in the
same scenario. The Office of Thrift Supervision (OTS) also produces a similar
analysis using its own model, based upon data submitted on the Bank's quarterly
Thrift Financial Reports, the results of which may vary from the Bank's internal
model primarily due to differences in assumptions utilized between the Bank's
internal model and the OTS model, including estimated loan prepayment rates,
reinvestment rates and deposit decay rates. For purposes of the NPV table,
prepayment speeds similar to those used in the Gap table were used, reinvestment
rates were those in effect for similar products currently being offered, and
rates on deposits were modified to reflect recent trends. The following table
sets forth the Bank's NPV as of December 31, 1997, as calculated by the Bank.
Rate Changes in Net Portfolio Value Portfolio Value of Assets
- --------------- ------------------- -------------------------
Basis Points Dollar Dollar Percent NPV Percent
(Rate Shock) Amount Change Change Ratio Change1
- --------------------------------------------------------- ------------------------------
(Dollars in Thousands)
+200 $317,949 $(42,954) (11.90)% 21.35% (3.10)%
+100 338,813 (22,090) (6.12) 22.40 (1.59)
0 360,903 - - 23.48 -
-100 391,417 30,514 8.45 24.94 2.14
-200 437,804 76,901 21.31 27.05 5.32
<FN>
1 Reflects the percentage change in the portfolio value of the Bank's assets for
each rate shock compared to the portfolio value of the Bank's assets under the
zero rate change scenario.
Note: As in the case with the Gap table, certain shortcomings are inherent in
the methodology used in the above interest rate risk measurements. Modeling
changes in NPV require certain assumptions which may or may not reflect the
manner in which actual yields and costs respond to changes in market interest
rates. In this regard, the NPV model presented assumes that the composition of
the Bank's interest sensitive assets and liabilities existing at the beginning
of a period remains constant over the period being measured and also assumes
that a particular change in interest rates is reflected uniformly across the
yield curve regardless of the duration to maturity or repricing of specific
assets and liabilities. Accordingly, although the NPV measurements and net
interest income models provide an indication of the Bank's interest rate risk
exposure at a particular point in time, such measurements are not intended to
and do not provide a precise forecast of the effect of changes in market
interest rates on the Bank's net interest income, as actual results will differ.
</FN>
Analysis of Net Interest Income
- -------------------------------
Net interest income represents the difference between income on interest
earning assets and expense on interest bearing liabilities. Net interest income
depends upon the relative amount of interest earning assets and interest bearing
liabilities and the interest rate earned or paid on them.
Average Balance Sheet
- ---------------------
The following table sets forth information relating to the Company's
Consolidated Statements of Financial Condition and the Consolidated Statements
of Operations for the years ended December 31, 1997, 1996 and 1995 and reflects
the average yield on assets and average cost of liabilities for the periods
indicated. Yields and costs are derived by dividing income or expense by the
average balance of the related assets or liabilities, respectively, for the
periods shown. Average balances are derived from average daily balances. The
yields and costs include fees which are considered adjustments to yields.
Average balances and yields include non-accruing loans.
Year Ended December 31,
---------------------------------------------------------------------------------
1997 1996 1995
-------------------------- -------------------------- -------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost Balance Expense Cost
(Dollars in Thousands)
Assets
Interest earning assets:
Mortgage loans, net...$ 878,697 $ 74,149 8.44% $ 792,579 $ 69,113 8.72% $ 702,252 $ 64,309 9.16%
Debt and equity
securities, net1..... 325,964 19,584 6.01 361,106 21,695 6.01 456,581 27,545 6.03
CMOs, net............. 133,418 7,937 5.95 179,336 10,063 5.61 209,537 9,572 4.57
MBS, net.............. 4,855 499 10.28 6,540 739 11.30 8,650 969 11.20
Other loans, net...... 28,119 2,070 7.36 28,393 2,138 7.53 28,977 2,299 7.93
Federal funds sold.... 64,345 3,503 5.44 72,221 3,863 5.35 52,432 3,032 5.78
---------- -------- ---------- -------- ---------- ---------
Total interest earning
assets1................ 1,435,398 107,742 7.51 1,440,175 107,611 7.47 1,458,429 107,726 7.39
Non-interest earning
assets................. 99,180 93,539 80,701
---------- ---------- ----------
Total assets.........$1,534,578 $1,533,714 $1,539,130
========== ========== ==========
Liabilities and stockholders' equity
Interest bearing
liabilities:
Passbook and other.....$ 699,715 $ 19,106 2.73% $ 743,526 $ 20,440 2.75% $ 797,445 $ 23,058 2.89%
Certificate accounts... 397,832 20,768 5.22 383,215 19,777 5.16 343,229 17,649 5.14
---------- -------- ---------- -------- ---------- --------
Total interest
bearing liabilities.... 1,097,547 39,874 3.63 1,126,741 40,217 3.57 1,140,674 40,707 3.57
Non-interest bearing
liabilities.......... 88,423 74,928 65,963
---------- ---------- ----------
Total liabilities.... 1,185,970 1,201,669 1,206,637
Total stockholders'
equity.............. 348,608 332,045 332,493
---------- ---------- ----------
Total liabilities
and stockholders'
equity..............$1,534,578 $1,533,714 $1,539,130
========== ========== ==========
Net interest income/
interest rate spread2.. $ 67,868 3.88% $ 67,394 3.90% $ 67,019 3.82%
======== ==== ======== ==== ======== ====
Net interest earning
assets/net interest
margin3................$ 337,851 4.73% $ 313,434 4.68% $ 317,755 4.60%
========== ==== ========== ==== ========== =====
Ratio of interest
earning assets to
interest bearing
liabilities............ 1.31x 1.28x 1.28x
==== ==== ====
<FN>
1 Average balances for debt and equity securities and total interest earning
assets, exclude the net market appreciation recognized in connection with
Statement 115 and is not included in deriving the yield.
2 Interest rate spread represents the difference between the average yield on
average interest earning assets and the average cost of average interest
bearing liabilities.
3 Net interest margin represents net interest income divided by average
interest earning assets.
</FN>
Rate Volume Analysis
- --------------------
The following table presents the extent to which changes in interest rates
and changes in the volume of interest earning assets and interest bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
Year Ended December 31, 1997 Year Ended December 31, 1996
Compared to Compared to
Year Ended December 31, 1996 Year Ended December 31, 1995
---------------------------- ----------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In Thousands)
Interest earning assets:
Mortgage loans, net .............. $ 7,313 $ (2,277) $ 5,036 $ 7,997 $(3,193) $ 4,804
Debt and equity securities ....... (2,111) - (2,111) (5,759) (91) (5,850)
CMOs, net......................... (2,705) 579 (2,126) (1,499) 1,990 491
MBS, net.......................... (177) (63) (240) (239) 9 (230)
Other loans, net ................. (21) (47) (68) (46) (115) (161)
Federal funds sold ............... (424) 64 (360) 1,070 (239) 831
------- -------- -------- ------- ------- -------
Total ...................... 1,875 (1,744) 131 1,524 (1,639) (115)
------- -------- -------- ------- ------- --------
Interest bearing liabilities:
Passbook and other ............... (1,186) (148) (1,334) (1,400) (1,218) (2,618)
Certificate accounts.............. 759 232 991 2,059 69 2,128
------- -------- -------- ------- ------- --------
Total....................... (427) 84 (343) 659 (1,149) (490)
------- -------- -------- -------- ------- -------
Net change in net interest income... $ 2,302 $(1,828) $ 474 $ 865 $ (490) $ 375
======= ======= ======== ======= ======= =======
Liquidity and Capital Resources
- -------------------------------
The Company's funds are primarily obtained through dividends paid by the
Bank. The Company is provided with the long-term liquidity resources of the Bank
as well as the liquidity provided by its own investments. The Bank's primary
sources of funds are deposits, proceeds from maturities of securities
held-to-maturity, amortization on and maturities of loans and cash flows from
operations. Overall liquidity is affected by activity in general interest rates,
economic conditions and competition.
The Company's investments, excluding investments made by the Bank, are
primarily in federal agency securities. The Company expects to utilize its funds
to continue investing in U.S. Government and federal agency securities,
repurchasing shares of the Company's common stock and paying dividends on its
common stock, as management deems appropriate. The Company presently has no
plans to expand its activities; however, should the Company decide to expand its
investment activities, the Bank may pay additional cash dividends to the
Company, subject to certain regulatory limitations, to fund such activities.
(See Note 26 to the Consolidated Financial Statements.)
During 1997, the net deposit outflows of $23.2 million and dividend
payments of $13.8 million, contributed to the net cash outflow from financing
activities. The most significant dollar change in deposit composition was
experienced in the Bank's passbook accounts, which decreased by $34.8 million,
or 5.8%, followed by a $10.1 million decrease in money market accounts and an
$855,000 decrease in NOW accounts. However, certificate accounts increased $22.4
million, or 5.8% and demand accounts increased $192,000.
During 1997, the most significant investing activities for which cash was
used included purchases of debt securities held-to-maturity and securities
available-for-sale, originations of mortgage loans and purchases of CMOs. The
most significant investing activities which provided cash were maturities of
debt securities and principal payments on CMOs.
The Bank is required to maintain minimum levels of liquid assets as defined
by the OTS regulations. This requirement, which may be varied at the direction
of the OTS, is based upon a percentage of deposits and short-term borrowings.
The required ratio at December 31, 1997 was 4.0%. The Bank's liquidity ratio is
significantly in excess of the required level. The Bank's average liquidity
ratios were 29.9% and 34.0% for the years ended December 31, 1997 and 1996,
respectively. The Bank's high liquidity reflects management's strategy of
investing funds in short-term CMOs and U.S. Government and federal agency
securities. Management has structured the assets and liabilities of the Company
to enable the Bank to meet its regulatory liquidity requirements. In addition,
the asset/liability structure serves to provide funds for operating, investing
and financing activities of the Company, while holding securities, other than
marketable equity securities, to maturity.
Liquidity management for the Bank is both a daily and a long-term function.
Management expects the Bank to be able to maintain high levels of liquidity in
the future due to its investment strategy and projected earnings. Excess funds
are generally invested in short-term investments such as federal funds sold.
Investments in the U.S. Government and federal agency securities portfolio had
an average remaining maturity of five months and the CMO portfolio had an
average anticipated remaining maturity of twenty months as of December 31, 1997.
The Bank's most liquid assets are cash and cash equivalents which include
investments in federal funds sold. The levels of these assets are dependent on
the Bank's operating, financing and investing activities during any given
period. (See the Consolidated Statements of Cash Flows which are part of the
Consolidated Financial Statements.)
Management monitors the deposit outflow and has taken a series of actions
aimed at curtailing the erosion of the Bank's deposit base. Management considers
the Bank's relationship with its long-term customers vital to enabling the
Company to continue to enhance future stockholder value. If the current trend of
deposit shifts and outflows were to continue in the long-term future, the
Company's future interest rate spreads, margins and net income will likely
decline. To address these concerns, management: (1) established a more
aggressive interest rate structure, in order to retain the Bank's customer
relationships; (2) has placed emphasis on expanding fee income as a means of
offsetting future decreases in net interest income; and (3) is focusing on the
use of available technology in order to continue to reduce banking staff, which
will be accomplished through attrition. To generate additional fee income, the
Bank participates in the New York Cash Exchange (NYCE) automated teller system,
and receives additional fee income for issuing credit cards. The credit cards
issued with the Bank's name are owned and managed by an unrelated financial
institution, which incurs all risk of loss.
In the event that the Bank should require funds beyond its internal
ability, it may take Federal Home Loan Bank (FHLB) of New York advances. The
Bank has not utilized FHLB advances to meet its liquidity needs.
Impact of Inflation and Changing Prices
- ---------------------------------------
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the Company's non-interest expense. Unlike most industrial
companies, nearly all the assets and liabilities of the Company are monetary. As
a result, interest rates have a greater impact on the Company's performance than
do the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the price of goods and
services.
Year 2000
- ---------
In the early 1990's, the Bank's existing staff began converting its
computer system to be Year 2000 compliant. At December 31, 1997, 100% of the
Bank's mainframe programs and 50% of other critical systems were year 2000
compliant, with the remainder expected to be compliant by the end of 1998. The
system upgrades and/or programming changes have been made within the normal
course of business, therefore, no material costs specific to the year 2000
upgrades have been incurred. Management does not expect implementation of the
remaining computer system upgrades to have a material affect on the Company's
financial condition or results of operations. Management has contacted all
outside vendors inquiring as to the status of year 2000 compliance. Management
will continue to require updates from all vendors who are not yet year 2000
compliant.
Impact of New Accounting Standards To Be Adopted
- ------------------------------------------------
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (Statement 125), except for
those transactions that are governed by SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of Financial Accounting Standards Board (FASB)
Statement 125" (Statement 127). Statement 127 was issued in December 1996 to
extend the effective date of the provisions of Statement 125, as they relate to
secured borrowings, collateral and repurchase agreements, dollar rolls,
securities lending and similar transactions for one year. Statement 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996
based on consistent application of a financial-components approach that focuses
on control. Under this approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. This statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. This statement supersedes SFAS
No. 76, "Extinguishment of Debt", and SFAS No. 77, "Reporting by Transferors for
Transfers of Receivables with Recourse," and SFAS No. 122, "Accounting for
Mortgage Servicing Rights," and amends SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," and SFAS No. 65, "Accounting for
Certain Mortgage Banking Activities." The adoption of Statement 125 had no
material effect on the consolidated financial statements of the Company, nor
does the Company expect the amendments to Statement 125 contained in Statement
127 to have a material effect on the financial statements.
In June of 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" (Statement 130). Statement 130 is effective for years beginning after
December 15, 1997 and requires reclassification of financial statements for
earlier periods provided for comparative purposes. The statement establishes
standards for reporting and display of comprehensive income and its components.
This statement requires that all items that are required to be recognized as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income is defined as all changes in equity during a period except those
resulting from investments by owners and distributions to owners. The Company
has not yet determined the impact of Statement 130 on its financial statements.
In June of 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (Statement 131). Statement 131 is effective
for financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is to be
restated. The statement requires that a public business enterprise report
financial and descriptive information about its reportable operating segments.
The Company has not yet determined the impact of Statement 131 on its financial
statements.
Private Securities Litigation Reform Act Safe Harbor Statement
- --------------------------------------------------------------
In addition to historical information, this Annual Report may include
certain forward looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Bank's loan
and investment portfolios, changes in accounting principles, policies or
guidelines, and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices. Further description of the risks and uncertainties to the business are
included in detail in Item 1, "Business" of the Company's 1997 Form 10-K.
Comparison of Operating Results for the Years Ended December 31, 1997 and 1996
- ------------------------------------------------------------------------------
General
Net income for the year ended December 31, 1997 was $37.1 million, or $3.64
per diluted share, compared with $26.7 million, or $2.56 per diluted share, for
1996. In comparing the results of operations for 1997 to 1996, it must be noted
that both the 1997 and 1996 results of operations were significantly improved by
items of a non-recurring nature. During 1997, sales of real estate generated
pre-tax gains of $9.3 million, which, net of tax, increased net income by $5.4
million and contributed $.53 to diluted earnings per share. Gains on the sale of
equity securities during 1997 generated pre-tax gains of $7.0 million, which,
net of tax, increased net income by $3.9 million and contributed $.39 to diluted
earnings per share. The 1996 results included a pre-tax recovery of a $2.0
million credit valuation allowance against the Bank's investments with Nationar
Trust Company, which increased net income for 1996 by $1.2 million, or $.11 per
diluted share. Additional comments regarding the components of net income are
detailed in the following paragraphs.
Interest Income
Income on mortgage loans increased by $5.0 million, or 7.3%, to $74.1
million, from $69.1 million. The average investment in mortgage loans increased
by $86.1 million, or 10.9%, to $878.7 million for 1997, from $792.6 million for
1996. The amount invested in mortgage loans has continued to increase over the
past eight years in both dollar amount and as a percentage of assets. Mortgages
originated for the Bank's portfolio during 1997 increased by $69.0 million, or
50.6%, to $205.2 million, from $136.2 million during 1996. The mortgage
portfolio yield decreased to 8.44% for 1997 from 8.72% for 1996.
Income on debt and equity securities decreased $2.1 million, or 9.7%, to
$19.6 million for 1997, compared to $21.7 million for 1996. The decrease in
income reflected a $35.1 million, or 9.7%, decrease in the average investment in
this portfolio while the yield remained unchanged at 6.01% for 1997 and 1996.
During 1997, activity in the investment securities portfolio included purchases
of $499.9 million and maturities of $555.0 million. At December 31, 1997, the
$244.9 million debt securities portfolio had unrealized gains of $464,000, which
are not expected to impact future income as these securities are designated as
held-to-maturity. The marketable equity securities portfolio is designated as
available-for-sale and was carried at its aggregate market value of $62.2
million at December 31, 1997, exceeding its cost of $10.9 million. During 1997
the Bank sold marketable equity securities having a cost of $823,000, realizing
gains of $7.0 million. During 1996, the Bank sold or redeemed marketable equity
securities totaling $30,000, and realized gross gains of $4,000 and gross losses
of $2,000.
Income on CMOs decreased by $2.1 million or 21.1%, to $7.9 million for
1997, from $10.1 million for 1996. Purchases of CMOs for 1997, totaled $55.0
million, compared with $124.3 million for 1996. The average investment in CMOs
decreased by $45.9 million, or 25.6%, to $133.4 million for 1997, from $179.3
million for 1996. Principal payments on CMOs decreased to $106.5 million during
1997 from $114.1 million during 1996. During 1997, the CMO portfolio yielded
5.95% compared with 5.61% for 1996. At December 31, 1997, the $104.0 million CMO
portfolio had net unrealized gains of $230,000 (comprised of unrealized gains of
$295,000 and unrealized losses of $65,000), which are not expected to impact
future results of operations, as CMOs are designated as held-to-maturity.
Income on other loans remained relatively stable during 1997 compared to
1996, decreasing by $68,000, or 3.2% to $2.1 million for 1997. Management has
determined to sell the student loan portfolio, which at December 31, 1997, had a
balance of $5.2 million and comprised 17.9% of the other loan portfolio. At
December 31, 1997, the portfolio, which had an estimated market value of $5.3
million will continue to be carried at the lower of cost or estimated market
value, in the aggregate, until sold. Management is reviewing student loan
origination programs packaged by the Student Loan Marketing Association (Sallie
Mae) and Nellie Mae under which the Bank would fund and own the loans, but
servicing would be provided by others.
During 1997, MBS continued and will continue to amortize without
replacement. Income earned on MBS decreased to $499,000 during 1997 from
$739,000 during 1996, reflecting the amortizing balance. There were no sales of
MBS during 1997 or 1996. At December 31, 1997, there were unrealized gains of
$335,000 in the $4.0 million MBS portfolio, which are not expected to impact
future results of operations, as MBS securities are designated as
held-to-maturity.
Income from federal funds sold decreased to $3.5 million for 1997 from $3.9
million for 1996. The average balance invested in federal funds sold decreased
to $64.3 million during 1997, compared to $72.2 million during 1996. The average
yield on federal funds sold increased to 5.44% during 1997 from 5.35% during
1996. Investments in federal funds sold provide the liquidity of an interest
bearing cash equivalent necessary to fund: mortgage and other loan originations;
deposit withdrawals; dividend payments on and repurchases (if any) of the
Company's common stock and to meet non-interest operating expense.
Interest Expense
Interest expense on deposits decreased .9% to $39.9 million for 1997 from
$40.2 million for 1996. This decrease reflected a decrease in average interest
bearing deposits of $29.2 million, or 2.6%, to $1.098 billion for 1997, from
$1.127 billion for 1996. Market interest rates generally declined during 1997
and the Bank's deposits continued to decrease and to shift primarily from
passbook accounts into certificate accounts. (See Asset/Liability Management,
herein.)
Net Interest Income
The Bank's profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest income on interest
earning assets and its interest expense on interest bearing deposits. The Bank,
like most savings institutions, will continue to be affected by general changes
in levels of interest rates, government regulations and other economic factors
beyond its control.
Net interest income increased by $474,000, to $67.9 million for 1997, from
$67.4 million for 1996. For 1997, the net interest margin increased to 4.73%
from 4.68% for 1996. The interest rate spread decreased to 3.88% for 1997 from
3.90% for 1996. The yield on interest earning assets increased slightly to 7.51%
for 1997 from 7.47% for 1996. The average balance of interest earning assets
decreased by $4.8 million or .3% for 1997, compared to 1996. Reflecting the
shift in deposits from lower yielding passbook deposit accounts to certificate
accounts, the cost of interest bearing deposits increased to 3.63% from 3.57%.
The average balance of interest bearing deposits decreased by $29.2 million, as
the trend of deposit outflows continued. The slight increase in the net interest
margin during 1997, reflected an increase in the ratio of interest earning
assets funded by interest bearing liabilities, accompanied by a decrease in the
interest rate spread. Average interest earning assets as a percentage of
interest bearing liabilities increased to 131% for 1997, compared to 128% for
1996.
Provision For Possible Loan Losses
The provision for possible loan losses for 1997 increased slightly to
$648,000 compared to $640,000 for 1996. During 1997 and 1996 management made
general mortgage loan provisions of $600,000, while provisions made against the
other loan portfolio increased to $48,000 for 1997, compared to $40,000 for
1996. Effective January 1, 1998, management discontinued making additions to the
general valuation mortgage allowance, and therefore does not currently expect to
make any provisions for possible loan losses for the mortgage portfolio during
1998. However, future additions to or recoveries of the loan loss allowances
will be based on management's continuing evaluations of the loan portfolios and
assessments of economic conditions, changes in portfolio value and loan
performance.
Provision For Possible Other Credit Losses
During 1997 and 1996, no provisions were made for any investments, other
than for possible loan losses. However, during 1996, the Bank recovered the
entire $2.0 million allowance (established during 1995) in connection with
investments with and in Nationar, a check clearing and trust company. Nationar
was seized by the Superintendent of Banks for the State of New York during 1995.
At the time of Nationar's seizure, the Bank had invested with Nationar $10.0
million of federal funds sold, cash in demand accounts of $200,000 and owned
$38,000 of Nationar's capital stock. In accordance with the Company's internal
procedures for monitoring asset quality, in 1995 the $38,000 stock investment
was written off and a provision for possible other credit losses of $2.0
million, or 20% of the remaining investment, was made. The Bank received
payments totaling $10.2 million from the Nationar estate during 1996, allowing
the Bank to recapture the entire allowance.
Non-Interest Income
Non-interest income for 1997 increased by $16.8 million, or 331.6%, to
$21.9 million compared to $5.1 million in 1996. The increase in income from real
estate operations comprised $8.7 million or 51.5% of the total increase, while
the increase in gains realized on the sale of investments of $7.0 million
comprised 41.5% of the total increase. The increase of $1.1 million for loan
fees and service charges primarily reflected an increase in mortgage prepayment
penalties.
As required, the marketable equity securities (MES) portfolio is designated
as available-for-sale and carried at estimated fair value, with changes in the
fair value of the portfolio recorded to a separate component of stockholders'
equity. During 1997, the Bank sold MES with a cost of $823,000, realizing gross
gains of $7.0 million. Significant sales of MES have been rare in recent years,
as management generally considers these securities as long-term investments.
Management reviews many factors in determining whether to sell or hold MES.
Among other things, these factors include: the anticipated future performance of
individual securities, the overall stock market and economy; actual and
anticipated direction of interest rates; the percentage of MES comprising
interest-earning assets; the availability of alternative investments; liquidity,
tax and other regulatory considerations. Future gains and/or losses (if either)
on the sale of MES may be recognized; however, management can provide no
assurance as to the timing, amount or resulting gains or losses from future
sales, if any, from the MES portfolio.
The increase in income from real estate operations of $8.7 million includes
a pre-tax gain of $9.2 million realized on the sale of a commercial office tower
located at 1995 Broadway, Manhattan, New York. The Bank retained ownership of
the first floor of the building which houses a branch office. During the second
quarter of 1997, management reclassified all real estate from
held-for-investment to available-for-sale. The improving real estate market
during 1997 in the New York metropolitan area impacted management's decision to
consider offers received on properties previously held-for-investment.
Non-Interest Expense
Non-interest expense decreased $164,000, or .6%, to $27.4 million for 1997,
compared to $27.6 million for 1996. Included in non-interest expense are the
costs of compensation and benefits, occupancy and equipment expense, federal
deposit insurance premiums, advertising, ORE and other general and
administrative expense.
Compensation and benefits decreased by $491,000 or 3.0% to $15.9 million
for 1997, compared to $16.4 million for 1996. The $491,000 decrease in
compensation and benefits expense resulted primarily from the Bank realizing
income from the pension plan of $1.5 million for 1997, compared to $711,000 for
1996, or an increase of $754,000. The Bank's pension plan is fully funded, which
has resulted in the Bank recording income from the pension plan. The amount of
future income, if any, will be impacted by the rate of return on the pension
plan assets and various other factors. During 1996, a non-recurring expense of
$330,000 was recognized in connection with the 1996 Stock Option Plan for the
difference between the option price set on the date of grant and the stock price
on the date of stockholder approval. The cost of dental and medical insurance
premiums increased by $419,000 to $1.5 million for 1997 from $1.1 million for
1996. During 1996, the Bank received $564,000 in premium refunds due to excess
insurance fund reserves for the dental and medical plans. Salaries and bonuses
increased $206,000, or 1.6% to $13.0 million for 1997, from $12.8 million for
1996. At December 31, 1997 the Bank had 311 full-time and 118 part-time workers,
compared to 315 full-time and 117 part-time workers at December 31, 1996.
Federal deposit insurance premiums, which rates are established by law,
were increased by $147,000 to $149,000 for 1997, compared with $2,000 for 1996,
when the Bank Insurance Fund (BIF) became fully funded and excess premiums were
refunded to the Bank. During 1997, BIF members were assessed a 1.3 basis point
charge per $100 of insurable deposits to meet the Financing Corporation (FICO)
bond obligations, which assessments will continue through 1999. Provided that
the BIF remains fully funded, no additional charges will be assessed.
ORE operations generated income of $59,000 for 1997 compared with income of
$772,000 for 1996. Included in the 1997 results from ORE operations are net
gains of $144,000 on the sale of ORE, while during 1996 net gains of $688,000
were recognized on the sale of ORE. Gains on the sale of ORE properties are
recognized under the cost recovery method. During 1997 and 1996, $29,000 and
$148,000 of gains on sales of cooperative shares held in ORE were deferred,
respectively. At December 31, 1997 and 1996, ORE, net of deferred gains, was
$473,000 and $647,000, respectively.
Occupancy and equipment expense decreased $651,000, to $4.6 million for
1997 from $5.2 million for 1996. During 1996, the Company completed the
renovations to the Company's headquarters. The project, which began during 1995
and continued through 1996, was the first major capital improvement since
completion of the building in 1974.
Other general and administrative expense increased by $453,000, or 8.4%, to
$5.9 million for 1997, from $5.4 million for 1996. This increase was primarily
related to consulting fees incurred in connection with the formation of the
Bank's real estate investment trust subsidiary, Tier, Inc., during 1997, while
various other administrative expenses decreased.
Provision for Income Taxes
Income taxes increased by $5.1 million, or 26.0%, to $24.6 million for 1997
from $19.6 million for 1996. This increase is reflective of the $15.4 million
increase in pre-tax income, partially offset by the decrease in the Company's
effective tax rate from 42.3% for 1996, to 39.9% for 1997. The decrease in the
effective tax rate for 1997, compared to 1996 reflects certain tax benefits
attributable to the Bank's real estate investment trust, which was formed during
1997. (See Note 14 to the Consolidated Financial Statements.)
Comparison of Operating Results for the Years Ended December 31, 1996 and 1995
- ------------------------------------------------------------------------------
General
Net income for the year ended December 31, 1996 was $26.7 million, or $2.56
per diluted share, compared with $22.2 million, or $2.01 per diluted share, for
1995. Comments regarding the components of net income are detailed in the
following paragraphs.
Interest Income
Income on mortgage loans increased by $4.8 million, or 7.5%, to $69.1
million for 1996, from $64.3 million for 1995. The average investment in
mortgage loans increased by $90.3 million, or 12.9%, to $792.6 million for 1996,
from $702.3 million for 1995. The amount invested in mortgage loans has
continued to increase over the past seven years in both dollar amount and as a
percentage of assets. Mortgages originated for the Bank's portfolio during 1996
increased by $58.4 million, or 75.0%, to $136.2 million, from $77.8 million
during 1995. The mortgage portfolio yield decreased to 8.72% for 1996 from 9.16%
for 1995.
Income on debt and equity securities decreased $5.9 million, or 21.2%, to
$21.7 million for 1996, compared to $27.5 million for 1995. The decrease in
income reflected a $95.5 million, or 20.9%, decrease in the average investment
in this portfolio and a minimal decrease in the yield to 6.01% for 1996, from
6.03% for 1995. During 1996, activity in the investment securities portfolio
included purchases of $534.6 million and maturities of $675.0 million. During
1996, the Bank sold or redeemed marketable equity securities totaling $30,000,
realizing gross gains of $4,000 and gross losses of $2,000. There were no sales
of debt or equity securities during 1995. At December 31, 1996, the $299.6
million debt securities portfolio had net unrealized gains of $617,000, which
are not expected to impact future income, as these securities are designated as
held-to-maturity. The equity portfolio, which is designated as
available-for-sale, was carried at fair value of $51.0 million, which exceeded
its cost of $11.7 million.
Income on CMOs increased by $491,000, or 5.1%, to $10.1 million, from $9.6
million. During 1996 an increased number of CMOs meeting the Bank's investment
guidelines became available on the secondary market, resulting in an increase of
CMOs purchased. Purchases of CMOs for 1996 totaled $124.3 million, compared with
$67.9 million for 1995. The average investment in CMOs decreased by $30.2
million, or 14.4%, to $179.3 million for 1996. Principal payments on CMOs
decreased to $114.1 million during 1996 from $237.1 million during 1995. During
1996, the CMO portfolio yielded 5.61% compared with 4.57% for 1995. At December
31, 1996, the $155.3 million CMO portfolio had net unrealized gains of $149,000,
which are not expected to impact future results of operations, as these
securities are designated as held-to-maturity.
During 1996, MBS continued to amortize without replacement, as the Bank
discontinued purchasing MBS during the 1980's. Income earned on MBS decreased to
$739,000 during 1996 from $969,000 during 1995, reflecting the amortizing
balance. There were no sales of MBS during 1996 or 1995. At December 31, 1996,
there were unrealized gains of $509,000 and no unrealized losses in the $5.6
million MBS portfolio. These gains are not expected to impact future results of
operations, as MBS securities are designated as held-to-maturity.
Income from federal funds sold increased to $3.9 million for 1996 from $3.0
million for 1995. The average balance invested in federal funds sold increased
to $72.2 million during 1996, compared to $52.4 million during 1995. The average
yield on federal funds sold decreased to 5.35% during 1996 from 5.78% during
1995. Liquidity, provided by federal funds sold, is necessary to fund: mortgage
lending; deposit withdrawals; dividend payments on and repurchases of the
Company's common stock and to meet obligations for non-interest expense.
Interest Expense
Interest expense on deposits decreased to $40.2 million, or 1.2%, for 1996
from $40.7 million for 1995. This decrease reflected a decrease in average
interest bearing deposits of $13.9 million, or 1.2%, to $1.127 billion for 1996,
from $1.141 billion for 1995. Market interest rates fluctuated during 1996 and
the Bank's deposits continued to shift from passbook accounts into certificate
accounts.
Management monitors deposit levels and interest rates offered by competitors.
Net Interest Income
The Bank's profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest income on interest
earning assets, such as loans and investments, and its interest expense on
interest bearing deposits. The Bank, like most savings institutions, will
continue to be affected by general changes in levels of interest rates,
government regulations and other economic factors beyond its control.
Net interest income increased by $375,000, to $67.4 million, from $67.0
million for 1995. For 1996, the net interest margin increased to 4.68% from
4.60% for 1995, and the net interest rate spread increased to 3.90% from 3.82%
for 1995. The yield on interest earning assets increased to 7.47% for 1996 from
7.39% for 1995. The cost of interest bearing deposits remained unchanged at
3.57% for 1996 and 1995. The average balance of interest earning assets and
interest bearing deposits decreased by $18.3 million and $13.9 million,
respectively.
Provision For Possible Loan Losses
The provision for possible loan losses for 1996 remained stable at $640,000
compared to $636,000 for 1995. During 1996 and 1995 management made general
mortgage loan provisions of $600,000. Provisions of $40,000 and $36,000 were
made against the other loan portfolio during 1996 and 1995, respectively. Future
additions to the loan loss allowances will be based on management's continuing
evaluations of the loan portfolios and assessments of economic conditions.
Material changes in portfolio value, performance and/or general economic
conditions, would further affect the amount of any such loan provisions.
Provision For Possible Other Credit Losses
The Bank recovered the entire $2.0 million allowance that was established
during 1995 in connection with the seizure of Nationar (a check clearing and
trust company) by the Superintendent of Banks for the State of New York. The
Bank received two payments from the Nationar estate during 1996. The first
payment of $4.1 million was received during the second quarter and the final
distribution of $6.1 million, received during the fourth quarter, resulted in
the Bank recapturing the allowance.
Non-Interest Income
Non-interest income for 1996 increased by $1.1 million, or 27.2%, to $5.1
million compared to $4.0 million in 1995. Loan fees and service charges
increased by $553,000, or 24.3%, primarily reflecting increases of $525,000 in
prepayment penalties; $67,000 in mortgage loan late charges and $51,000 in NYCE
fees; partially offset by decreases of $32,000 each in NOW account service
charges and regular account fees. During 1995, the Bank began to offer VISA(R)
and Mastercard(R) credit cards resulting in related fee income of $38,000 for
1996. The Bank has an agreement with an unrelated financial institution, which
bears all costs and credit risk associated with originating and owning the
credit card portfolio originated from the Bank's customer list. In general, the
Bank receives a fee for each new account opened or renewed and a percentage of
all finance charges paid by the cardholders.
The $542,000 net increase in income from real estate operations primarily
reflected a $437,000 retroactive property tax refund received for a property
that was sold during 1994. During 1996, gains of $571,000 were realized from the
sale of 25 cooperative apartments owned by the Bank's real estate subsidiaries.
During 1995, $587,000 of gains were realized from the sale of 31 cooperative
apartments. At December 31, 1996, 158 cooperative apartments, which are carried
at a zero basis, remained available-for-sale.
Non-Interest Expense
Non-interest expense decreased $2.0 million, or 6.6%, to $27.6 million for
1996, compared to $29.6 million for 1995. Included in non-interest expense are
the costs of compensation and benefits, occupancy and equipment, federal deposit
insurance corporation premiums, advertising, ORE and other general and
administrative expense.
Federal deposit insurance premiums, which rates are established by law,
were $2,000, the statutory minimum, for 1996, compared to $1.5 million for 1995.
During 1995, the Federal Deposit Insurance Corporation (FDIC) announced that the
BIF was recapitalized as of May 31, 1995, and issued refunds of deposit
insurance overpayments from June 1 through September 30, 1995. In connection
with federal legislation, BIF members will be assessed a 1.3 basis point charge
per $100 of insurable deposits to meet the FICO bond obligations beginning in
1997 and continuing through 1999. Assuming that the BIF remains fully funded, no
additional charges will be assessed.
ORE operations generated income of $772,000 for 1996 compared to an expense
of $209,000 for 1995. This income reflected a pre-tax gain of $705,000
recognized on the sale of a property acquired through foreclosure during the
first quarter of 1996. Gains on the sale of ORE properties are recognized under
the cost recovery method. During 1996, $148,000 of gains on sales of ORE were
deferred.
Occupancy and equipment expenses increased $254,000, to $5.2 million for
1996 from $5.0 million for 1995. This increase reflected increased costs as a
result of the renovations at the Company's headquarters. The renovations, which
began during 1995 and continued through 1996, were the first major capital
improvements since completion of the building in 1974.
Other general and administrative expense increased by $208,000, or 4.0%,
reflecting increased legal fees in connection with foreclosure actions for
problem loans and the Nationar claim.
Compensation and benefit expense decreased by $167,000, to $16.4 million
from $16.6 million, or 1.0%. Salaries increased overall by $326,000, or 2.5%.
During 1995, the final vesting for the Bank Recognition and Retention Plans
(BRRPs) occurred, resulting in the Bank recognizing an expense of $594,000.
Since the BRRPs were terminated after the final vesting in 1995, no expense was
incurred for the BRRPs during 1996. A non-recurring expense of $330,000 was
recognized during 1996 in connection with the 1996 Stock Option Plan, for the
difference between the option price set on the date of grant and the stock price
on the date of stockholder approval. During 1996, the Bank realized savings of
$564,000 for dental and medical insurance premiums resulting from excess
insurance fund reserves. The Bank does not expect such savings in the future.
Provision for Income Taxes
Income taxes increased by $2.9 million, or 17.8%, to $19.6 million for 1996
from $16.6 million for 1995. The provision for income taxes increased due to the
increase in pretax income, as the effective tax rate remained relatively stable
at 42.3% for 1996 compared to 42.8% for 1995. (See Note 14 to the Consolidated
Financial Statements.)
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1997 and 1996 (In Thousands, Except Share and Per Share Amounts)
ASSETS 1997 1996
- ------ ---- ----
Cash and due from banks $ 12,924 $ 12,894
Federal funds sold 62,000 86,500
---------- ---------
Cash and cash equivalents 74,924 99,394
Securities available-for-sale, at estimated fair value 62,243 51,021
Securities held-to-maturity, net (estimated fair value
of $353,996 and $461,784, respectively) 352,967 460,509
Other investments 7,645 6,859
Mortgage loans, net 970,737 827,052
Other loans, net 29,008 27,722
Premises and equipment, net 17,029 16,829
Interest due and accrued 9,278 9,310
Real estate held-for-investment, net - 6,082
Real estate held-for-sale and Other real estate 3,450 5,236
Other assets 7,750 6,002
---------- ----------
Total Assets $1,535,031 $1,516,016
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $1,121,203 $1,144,393
Advance payments for real estate taxes and insurance 10,322 8,265
Official bank checks outstanding 10,405 9,644
Accrued expenses and other liabilities 25,587 18,415
---------- ----------
Total Liabilities 1,167,517 1,180,717
---------- ----------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value, 15,000,000 shares
authorized; none issued) - -
Common stock ($.01 par value, 30,000,000 shares
authorized; 16,000,000 issued; 9,919,927 and
9,783,031 outstanding, respectively) 160 160
Additional paid-in capital 165,112 163,500
Retained income, substantially restricted 311,436 289,588
Net unrealized gain on securities available-for-sale,
net of tax 28,469 21,795
Common stock held by Benefit Restoration Plan Trust,
at cost (188,323 and 166,848 shares, respectively) (4,199) (3,275)
Common stock held in treasury, at cost (6,080,073
and 6,216,969 shares, respectively) (133,464) (136,469)
---------- ----------
Total Stockholders' Equity 367,514 335,299
---------- ----------
Total Liabilities and Stockholders' Equity $1,535,031 $1,516,016
========== ==========
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1997, 1996 and 1995
(In Thousands, Except Per Share Amounts)
1997 1996 1995
---- ---- ----
Interest Income:
Mortgage loans, net $ 74,149 $ 69,113 $ 64,309
Debt & equity securities, net 19,584 21,695 27,545
Collateralized mortgage obligations(CMOs), net 7,937 10,063 9,572
Other loans, net 2,070 2,138 2,299
Mortgage-backed securities(MBS), net 499 739 969
Federal funds sold 3,503 3,863 3,032
--------- --------- ---------
Total Interest Income 107,742 107,611 107,726
--------- --------- ---------
Interest Expense:
Deposits 39,874 40,217 40,707
--------- -------- ---------
Net Interest Income 67,868 67,394 67,019
Provision for Possible Loan Losses 648 640 636
(Recovery of) Provision for Possible Other Credit Losses - (2,040) 2,040
--------- --------- ---------
Net Interest Income After Provision
for Possible Credit Losses 67,220 68,794 64,343
--------- --------- ---------
Non-Interest Income:
Real estate operations, net 10,442 1,767 1,225
Loan fees and service charges 3,969 2,833 2,280
Gain on sale of investments, net 6,991 2 -
Miscellaneous income 527 479 490
--------- --------- ---------
Total Non-Interest Income 21,929 5,081 3,995
--------- --------- ---------
Non-Interest Expense:
Compensation and benefits 15,921 16,412 16,579
Occupancy and equipment expenses (net of rental
income of $1,287, $1,126 and $1,199, respectively) 4,560 5,211 4,957
Federal deposit insurance premiums 149 2 1,477
Advertising 1,005 1,340 1,142
Other real estate (income) expense, net (59) (772) 209
Other general and administrative 5,858 5,405 5,197
--------- --------- ---------
Total Non-Interest Expense 27,434 27,598 29,561
--------- --------- ---------
Income Before Provision for Income Taxes 61,715 46,277 38,777
Provision for Income Taxes 24,625 19,552 16,603
--------- --------- ---------
Net Income $ 37,090 $ 26,725 $ 22,174
========= ========= =========
Earnings and Cash Dividends per Common Share
Basic earnings per common share $ 3.76 $ 2.66 $ 2.09
Diluted earnings per common share $ 3.64 $ 2.56 $ 2.01
Cash dividends per common share $ 1.40 $ 1.20 $ 1.00
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995 (In Thousands, Except Per Share Amounts)
1997 1996 1995
---- ---- ----
Common Stock (Par value: $.01)
Balance at beginning and end of year $ 160 $ 160 $ 160
-------- -------- --------
Additional Paid-in Capital
Balance at beginning of year 163,500 162,566 160,962
Net allocation (distribution) of common stock
for Benefit Restoration Plan 924 5 (199)
Tax benefit for stock plans 688 599 1,645
Reallocation of forfeited Bank Recognition and
Retention Plans shares - - 158
Compensation expense for 1996 stock option plan - 330 -
-------- -------- --------
Balance at end of year 165,112 163,500 162,566
-------- -------- --------
Retained Income, Substantially Restricted
Balance at beginning of year 289,588 276,317 266,361
Net income 37,090 26,725 22,174
Loss on reissuance of treasury stock (1,437) (1,364) (1,602)
Cash dividends on common stock ($1.40, $1.20, $1.00,
respectively) (13,805) (12,090) (10,616)
------- ------- -------
Balance at end of year 311,436 289,588 276,317
------- ------- -------
Net Unrealized Gain on Securities Available-for-Sale, Net of Tax
Balance at beginning of year 21,795 15,750 8,892
Change in net unrealized gains on securities available-
for-sale (net of tax change of $5,371, $4,863 and
$5,517, respectively) 6,674 6,045 6,858
-------- -------- --------
Balance at end of year 28,469 21,795 15,750
-------- -------- --------
Unearned Common Stock Held by Bank Recognition and
Retention Plans
Balance at beginning of year - - (516)
Earned during the period - - 516
-------- -------- --------
Balance at end of year - - -
-------- -------- --------
Common Stock Held by Benefit Restoration Plan Trust, at Cost
Balance at beginning of year (3,275) (3,270) (3,469)
Common stock acquired (934) (11) (9)
Common stock distributed 10 6 208
-------- ------- --------
Balance at end of year (4,199) (3,275) (3,270)
-------- ------- --------
Common Stock Held in Treasury, at Cost
Balance at beginning of year (136,469) (111,416) (104,756)
Common stock reacquired - (27,650) (9,881)
Common stock reissued for options exercised 3,005 2,597 3,221
-------- -------- --------
Balance at end of year (133,464) (136,469) (111,416)
-------- -------- --------
Total Stockholders' Equity $367,514 $335,299 $340,107
======== ======== ========
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995 (In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1996 1995
---- ---- ----
Net income $ 37,090 $ 26,725 $ 22,174
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 648 640 636
(Recovery of) provision for possible other credit losses - (2,040) 2,040
Loss on Nationar capital stock - - 38
Net gain on sale/redemption of equity securities (6,991) (2) -
Decrease in deferred loan fees and discounts, net (418) (593) (608)
Accretion of discount (in excess of) less than
amortization of premium on MBS and CMOs (300) (578) 320
Accretion of discount in excess of amortization
of premium on debt securities (337) (249) (248)
Depreciation and amortization of premises and equipment 1,891 1,826 1,920
Mortgage loans originated for sale (1,612) (1,621) (1,792)
Proceeds from sale of mortgage loans originated for sale 1,636 1,737 1,818
Gain on sale of mortgage and other loans (35) (53) (61)
Expense recognized for Bank Recognition and Retention Plans - - 675
Tax benefit for stock plans credited to capital 688 599 1,645
Gain on sale of real estate held for sale (9,992) (571) (587)
Decrease in interest due and accrued 32 3,597 752
Transfer of federal funds sold to Nationar to
claims receivable - - (10,205)
Payments received against Nationar claim - 10,205 -
Net gain on sale of other real estate (144) (688) -
Increase (decrease) in official bank checks outstanding 761 (14,748) 3,986
Other 137 1,547 (1,389)
--------- --------- ---------
Net cash provided by operating activities 23,054 25,733 21,114
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated:
Mortgage loans (205,174) (136,218) (77,826)
Other loans (21,010) (19,032) (25,718)
Purchases of CMOs held-to-maturity (55,035) (124,275) (67,889)
Purchases of debt securities held-to-maturity and
securities available-for-sale (499,920) (534,569) (300,047)
Principal payments on:
Mortgage loans 60,833 46,506 22,672
Other loans 19,025 19,656 22,556
CMOs 106,545 114,105 237,060
MBS 1,590 2,047 2,324
Proceeds from maturities of U.S. Government and
federal agency securities 555,000 675,000 265,000
Proceeds from sale of other loans 681 934 1,372
Purchases of Federal Home Loan Bank stock (786) (557) (188)
(Continued)
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31, 1997, 1996 and 1995 (In Thousands)
1997 1996 1995
---- ---- ----
Proceeds from sale/redemption of equity securities 7,813 30 -
Purchases of premises and equipment, net of disposals (2,091) (3,498) (2,647)
Net decrease in real estate held-for-investment,
excluding transfers to held-for-sale - 313 168
Proceeds from sale of real estate held-for-sale 17,703 571 587
Proceeds from sale of Other real estate 688 2,759 -
Net (increase) decrease in real estate holdings,
excluding sales (16) 1,522 1,995
-------- ------- -------
Net cash (used by) provided by investing activities (14,154) 45,294 79,419
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits (23,190) (19,053) (40,978)
Increase (decrease) in advance payments for real
estate taxes and insurance 2,057 34 (79)
Proceeds upon exercise of common stock options 1,568 1,233 1,619
Cash dividends paid to common stockholders (13,805) (12,090) (10,616)
Payments to repurchase common stock - (27,650) (9,881)
--------- --------- ---------
Net cash used by financing activities (33,370) (57,526) (59,935)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (24,470) 13,501 40,598
Cash and cash equivalents at beginning of year 99,394 85,893 45,295
--------- --------- ---------
Cash and cash equivalents at end of year $ 74,924 $ 99,394 $ 85,893
========= ========= =========
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest on deposits $ 39,881 $ 40,215 $ 40,721
========= ========= =========
Income taxes $ 32,036 $ 22,370 $ 18,216
========= ========= =========
Supplemental Disclosures of Noncash Investing and
Financing Activities
Real estate acquired through foreclosure $ 540 $ 8,190 $ -
========= ========= =========
Transfer of real estate held-for-investment
to held-for-sale $ 6,145 $ - $ -
========= ========= =========
Mortgage originated upon sale of real estate
from the held-for-sale portfolio and other real
estate $ 33 $ 6,675 $ -
========= ========= =========
Deferred tax liability on securities available-for-sale $ 22,905 $ 17,534 $ 12,671
========= ========= =========
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
JSB FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS
JSB Financial, Inc.(the Company or the Parent) is a unitary savings and
loan holding company. The Company holds all of the outstanding common stock of
its subsidiary, Jamaica Savings Bank FSB (the Bank or the Subsidiary). The
Company is subject to the financial reporting requirements of the Securities
Exchange Act of 1934.
(a) Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities and disclosures of
contingent assets and liabilities as of the dates of the consolidated statements
of financial condition and revenues and expenses for the periods presented.
Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowances for credit losses and the
valuation of real estate held-for-sale and other real estate (referred to
collectively as real estate holdings). These estimates are primarily reactive to
actual and anticipated changes in the real estate market, the economy in the
Bank's market area and debtors' financial condition. In connection with the
determination of allowances, management reviews: loan performance; historical
trends; appraisals of real estate holdings and properties securing significant
mortgages; investment ratings for equity securities; and capital and liquidity
levels for correspondent banks, on an ongoing basis.
The ultimate collection of the Bank's loan portfolio and the recovery of
its various real estate holdings is affected by economic conditions in the
Bank's market area and changes thereto. The Bank's mortgage loans are secured
primarily by properties located in the New York-metropolitan area. In addition,
all real estate holdings are located in the same market area.
Management believes that the allowances for loan losses as presented in
these consolidated financial statements are adequate. Future additions to the
allowances could be necessary based on changes in debtors' financial condition,
economic conditions or if economic conditions differ from management's previous
assessments. Various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowances for losses. Such
agencies may require the Bank to recognize additions to the allowances based on
their judgments about information available to them at the time of their
examination.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, the Bank, as consolidated with the Bank's
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(c) Consolidated Statements of Cash Flows
For the purposes of reporting cash flows, the Company considers all
short-term investments with a maturity of less than three months from the date
of purchase to be cash equivalents.
(d) Securities
The Company is required to report debt, readily-marketable equity, and
mortgage-backed securities in one of the following categories: (i)
"held-to-maturity" (when management has a positive intent and ability to hold to
maturity) which are reported at amortized cost; (ii) "trading" (when held for
current resale) which are to be reported at estimated fair value, with
unrealized gains and losses included in earnings; and (iii) "available-for-sale"
(all other debt and equity securities not designated as held-to-maturity or
trading) which are reported at estimated fair value, with unrealized gains and
losses excluded from earnings and reported, net of tax, as a separate component
of stockholders' equity. The designation of a security as held-to-maturity or
available-for-sale is made at the time of acquisition.
Discounts on debt securities are accreted to income and premiums are
amortized against income over the life of the security using a method which
approximates the level yield method. Gains and losses on the sales of
securities, if any, are recognized upon realization, using the specific
identification method.
(e) Loans
Loans are carried at unpaid principal balances net of any deferred loan
fees and unearned discounts. Discounts are accreted to income using a method
which approximates the level yield method, over the composite average life of
the loans. Loan fees received for commitments to make or purchase loans are
deferred and accreted into income over the life of the loan using the level
yield method.
Interest is accrued monthly on the outstanding balances of loans.
Mortgages 90 days in arrears and/or loans where full collection of principal and
interest is questionable are placed on nonaccrual status, at which time loan
interest due and accrued is reversed against interest income of the current
period. A nonaccrual loan is restored to accrual status when principal and
interest payments are current and full payment of principal and interest is
expected. Cash receipts on an impaired loan are applied to principal and
interest in accordance with the contractual terms of the loan unless full
payment of principal is not expected, in which case both principal and interest
payments received are netted against the loan balance. The Bank continues to
accrue interest income on non-insured other loans up to 120 days delinquent,
beyond which time the loan balance is written off.
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 114, "Accounting by Creditors for Impairment of a Loan" (Statement 114), and
the amendment thereof, SFAS No. 118, "Accounting by Creditors for Impairment of
a Loan - Income Recognition Disclosures" (Statement 118), the Company considers
a loan impaired if it is probable that, based upon current information, a
creditor will be unable to collect all amounts due according to the contractual
terms of a loan agreement. Statement 114 does not apply to large groups of
smaller-balance homogeneous loans that are collectively evaluated for impairment
including the Company's one-to four-family mortgage loans and consumer loans
other than those modified in a troubled debt restructure (TDR). The Company
generally does not consider a loan impaired when the delay in the timing of
payments is three months or less or the shortfall in the amount of payments is
the lower of $10,000 or 1.0% of the loan amount.
Loans individually reviewed for impairment by the Company are limited to
loans secured by multi-family, commercial, construction and underlying
cooperative properties, loans modified in TDRs and selected large one-to
four-family loans. Examples of measurement techniques utilized by the Company
include present value of expected future cash flows, the loan's market price if
one exists and the estimated fair value of the collateral. Reserves are
established against impaired loans in amounts equal to the difference between
the recorded investment in the asset and either the present value of the cash
flows expected to be received, or the fair value of the underlying collateral if
foreclosure is deemed probable or if the loan is considered collateral
dependent. The Company's impaired loan identification and measurement process is
conducted in conjunction with the Company's review of the adequacy of its
allowance for loan losses.
A loan is deemed a TDR by the Company when concessionary modifications to
the original contractual terms are made for economic or legal reasons related to
the debtor's financial difficulties. Loans modified in a TDR subsequent to the
1995 adoption of Statement 114 are considered impaired, unless in periods
subsequent to restructuring the loan is performing in accordance with the new
terms of the agreement and such terms reflect those that would be offered by the
Bank for a new credit. Valuation allowances associated with such impaired loans
are measured in accordance with Statement 114 throughout the loan term.
Modifications made to loans in TDRs prior to the adoption of Statement 114 that
are not considered impaired based on the terms of the restructuring agreement
continue to be accounted for under Statement 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructurings", and are not included in the
Company's impaired loan statistics.
Loans originated for sale are carried at the lower of unpaid principal
balance, net of any discounts and deferred fees or estimated fair value, in the
aggregate.
(f) Allowance for Possible Loan Losses
The allowance for possible loan losses is available for future charge-offs
of loans. The allowance is increased by the provision for possible loan losses
made and recoveries of loans previously charged off. The allowance is reduced by
charge-offs, in whole or in part, of problem loans. The allowance for possible
loan losses is based on continuous analysis of the loan portfolio and reflects
an amount which in management's judgment is adequate to provide for possible
loan losses in the existing portfolio. In evaluating the portfolio, management
considers numerous factors, such as the Bank's loan growth, prior loss
experience, present and potential risks of the loan portfolio and current
economic conditions and entails management's review of delinquency reports, loan
to value ratios, collateral condition and debt coverage ratios.
(g) Premises and Equipment
Depreciation is computed on the straight-line method over the estimated
useful life of the related assets. Estimated lives are 15 to 60 years for
buildings and 5 to 8 years for furniture and fixtures. Amortization for
leasehold improvements is computed on the straight-line method over the lesser
of the term of the lease or the asset's estimated useful life. Premises and
equipment are carried at cost, net of accumulated depreciation.
(h) Real Estate Holdings
Real estate held-for-investment represents real estate properties financed,
owned and operated by the Bank's subsidiaries. Significant improvements have
been made to the properties, thereby increasing the amount invested in
individual properties. The properties were initially recorded at the lower of
cost or fair value at acquisition (if foreclosed property) or cost (if
purchased) and subsequently increased by capital improvements and decreased by
depreciation. Management monitors each investment on a continuous basis.
Valuation allowances for estimated losses on real estate held-for-investment are
provided when a significant and permanent decline in value occurs.
In the event of a change in classification from "held-for-investment" to
"held-for-sale", the property's carrying value is compared to fair value less
estimated selling costs (i.e. net fair value). If the carrying value exceeds net
fair value, the investment is adjusted down through a valuation allowance, and
subsequently carried at the lower of the carrying value or net fair value. As of
June 30, 1997, management reclassified all real estate held-for-investment to
held-for-sale. (See Notes 11, 12 and 13.)
Real estate held-for-sale is carried at lower of cost or net fair value.
Gains on the sale, if any, are accounted for using the cost recovery method.
Revenues and expenses from the operations are reflected, as incurred, in the
Company's operating results. (See Note 12.)
Real estate properties acquired through foreclosure, known as other real
estate (ORE), are recorded at the lower of the net unpaid loan balance at the
foreclosure date plus related costs, or net fair value. Subsequent valuation
adjustments are made if the net fair value decreases below the carrying amount.
Gains, if any, on the sale of ORE are accounted for using the cost recovery
method.
(i) Income Taxes
The Company follows SFAS No. 109, "Accounting for Income Taxes" (Statement
109), which requires the asset/liability method of accounting for income taxes.
Under the asset/liability method, deferred income taxes are recognized for the
tax consequences of "temporary differences" by applying enacted statutory tax
rates, applicable to future years, to differences between the financial
statement carrying amounts and the tax basis of existing assets and liabilities.
Under Statement 109, deferred tax assets are recognized if it is more likely
than not that a future benefit will be realized. It is management's position, as
currently supported by the facts and circumstances, that no valuation allowance
is necessary against any of the Company's deferred tax assets (See Note 14.)
(j) Stock Based Compensation
In October, 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, "Accounting for Stock-Based Compensation" (Statement 123).
Statement 123 applies to all transactions in which an entity acquires goods or
services by issuing equity instruments or by incurring liabilities where the
payment amounts are based on the entity's common stock price, except for
employee stock ownership plans.
Statement 123 established a fair value based method of accounting for
stock-based compensation arrangements with employees rather than the intrinsic
value based method that is contained in Accounting Principles Board Opinion No.
25 (Opinion 25). Statement 123 does not require an entity to adopt the new fair
value based method for purposes of preparing its basic financial statements.
While the Statement 123 fair value based method is considered by the FASB to be
preferable to the Opinion 25 method, entities may opt to continue to use the
method prescribed by Opinion 25. Entities not adopting the fair value based
method under Statement 123 are required to present pro forma net income and
earnings per share, in the notes to the financial statements, as if the fair
value based method had been adopted.
The accounting requirements of Statement 123 are effective for transactions
entered into during fiscal years that begin after December 15, 1995. The
disclosure requirements became effective for financial statements for fiscal
years beginning after December 15, 1995, or for any earlier fiscal year for
which Statement 123 was initially adopted for recognizing compensation cost. Pro
forma disclosures required for entities that elect to continue to measure cost
using the Opinion 25 method must include the effects of all awards granted in
fiscal years that begin after December 15, 1994. Pro forma disclosures for
awards granted in the first fiscal year, beginning after December 15, 1994, need
not be included in financial statements for that fiscal year but should be
presented subsequently whenever financial statements for that fiscal year are
presented for comparative purposes with financial statements for a later year.
During 1996, the Company adopted the disclosure provisions of Statement 123 and
continues to measure cost using the Opinion 25 method for purposes of preparing
its consolidated financial statements, therefore, the adoption of Statement 123
had no impact on the Company's financial condition or results of operations.
(See Note 22.)
(k) Earnings Per Share
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings
Per Share" (Statement 128). Statement 128 establishes standards for computing
and presenting earnings per share (EPS) and applies to entities with publicly
held common stock or potential common stock. Statement 128 simplifies the
standards for computing EPS previously found in Accounting Principles Board
Opinion No. 15, "Earnings Per Share" (Opinion 15), and makes them comparable to
international EPS standards. Statement 128 replaces the presentation of primary
EPS with a presentation of basic EPS and replaces fully diluted EPS with diluted
EPS. Statement 128 requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
(See Note 15.)
Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to Opinion 15. This Statement required
restatement of all prior-period EPS data presented.
(l) Treasury Stock
Repurchases of common stock are accounted for under the cost method,
whereby shares repurchased are recorded in a contra-equity account. (See Note
2.)
(m) Reclassification
Reclassifications have been made to prior year financial statements to
conform with the 1997 presentation.
NOTE (2) STOCK REPURCHASE PROGRAMS
The Company did not repurchase any of its outstanding common stock during
1997. For the years ended December 31, 1996 and 1995, the Company repurchased
845,000 and 339,485 shares at an average price of $32.72 and $29.11 per share,
respectively. The Company issued 136,896, 123,256 and 161,860 shares of treasury
stock for options exercised during 1997, 1996 and 1995, respectively. There were
6,080,073 and 6,216,969 shares of common stock in the treasury at December 31,
1997 and 1996, respectively.
NOTE (3) SECURITIES
The following tables set forth information regarding the Company's
securities as of December 31:
1997
----
Securities Available-for-Sale:
- ------------------------------
Estimated Gross Unrealized
Cost Fair Value Gains Losses
---- ---------- ----- ------
(In Thousands)
Marketable equity securities $ 10,869 $ 62,243 $51,462 $ 88
======== ======== ======= =======
Securities Held-to-Maturity:
- ----------------------------
Amortized Estimated Gross Unrealized
Cost Fair Value Gains Losses
---- ---------- ----- ------
(In Thousands)
U.S. Government and Federal
Agency securities $244,903 $245,367 $ 464 $ -
CMOs, net 104,040 104,270 295 65
MBS:
GNMA* 3,640 3,944 304 -
FNMA* 106 115 9 -
Freddie Mac* 278 300 22 -
-------- -------- ------- -------
Total MBS, net 4,024 4,359 335 -
-------- -------- ------- -------
Total $352,967 $353,996 $ 1,094 $ 65
======== ======== ======= =======
1996
----
Securities Available-for-Sale:
- ------------------------------
Estimated Gross Unrealized
Cost Fair Value Gains Losses
---- ---------- ----- ------
(In Thousands)
Marketable equity securities $ 11,692 $ 51,021 $39,368 $ 39
======== ======== ======= =======
Securities Held-to-Maturity:
- ----------------------------
Amortized Estimated Gross Unrealized
Cost Fair Value Gains Losses
---- ---------- ----- ------
(In Thousands)
U.S. Government and Federal
Agency securities $299,645 $300,262 $ 617 $ -
CMOs, net 155,272 155,421 436 287
MBS:
GNMA 4,999 5,455 456 -
FNMA 152 166 14 -
Freddie Mac 441 480 39 -
-------- -------- ------- -------
Total MBS, net 5,592 6,101 509 -
-------- -------- ------- -------
Total $460,509 $461,784 $ 1,562 $ 287
======== ======== ======= =======
<FN>
* Definitions: GNMA - Government National Mortgage Association; FNMA -
Federal National Mortgage Association; Freddie Mac - Federal Home Loan
Mortgage Corporation
</FN>
CMOs represent participating interests in pools of long-term first mortgage
loans originated and serviced by the issuers of the securities. All of the CMOs
held by the Company consist of First Tranche-Planned Amortization Class Bonds
collateralized by FNMA, Freddie Mac and GNMA mortgage-backed securities which in
turn are collateralized by whole loans. MBS represent securities issued by
governmental mortgage agencies and collateralized by mortgage loans.
During 1997, the Bank sold or redeemed marketable equity securities with a
cost of $823,000, realizing gross gains of $6,991,000 and no losses. During
1996, the Bank sold or redeemed marketable equity securities totaling $30,000,
realizing gross gains of $4,000 and gross losses of $2,000. There were no sales
of securities during 1995.
Presented in the table below is the contractual maturity distribution, for
debt securities held-to-maturity at December 31, 1997:
Amortized Estimated
Cost Fair Value
---- ----------
(In Thousands)
Within 1 year $235,117 $235,515
After 1 year through 5 years 31,198 31,332
After 5 years through 10 years 83,783 84,051
After 10 years 2,869 3,098
-------- --------
Total $352,967 $353,996
======== ========
Actual maturities of CMOs and MBS may differ substantially from the
presentation, due to prepayment activity. The table reflects the balance of the
entire security in the category in which the final contractual payment is due.
The Bank loans securities to specified brokerage houses. These loaned
securities are collateralized at a minimum of 102% of their fair value with
government securities and/or cash. To protect the Bank's investment, the
agreements contain provisions to increase the collateral obtained, should the
fair value of the collateral decline or the fair value of the security loaned
increase. Upon termination of the agreement, securities loaned are returned to
the Bank. The following table reflects the carrying value of securities loaned
and their estimated fair value and the estimated fair value of the collateral at
December 31:
1997 1996
---- ----
(In Thousands)
Amortized cost - Securities loaned $ 79,970 $ -
======== ========
Estimated fair value - Securities loaned $ 80,188 $ -
======== ========
Estimated fair value - Collateral $ 82,069 $ -
======== ========
NOTE (4) OTHER INVESTMENTS
Other investments at December 31, 1997 and 1996 were as follows:
1997 1996
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
(In Thousands)
Investment required by law* $ 7,615 $ 7,615 $ 6,829 $ 6,829
Other stock 30 30 30 30
-------- -------- -------- --------
Total other investments $ 7,645 $ 7,645 $ 6,859 $ 6,859
======== ======== ======== ========
<FN>
* The Bank is required to hold shares of the Federal Home Loan Bank of New York.
</FN>
NOTE (5) LOANS
Loans are summarized as follows:
December 31,
------------
1997 1996
---- ----
(In Thousands)
Mortgage loans:
One-to four-family $ 73,757 $ 76,848
Multi-family 563,205 433,224
Underlying cooperative* 267,942 262,221
Commercial 71,839 61,829
Construction 3,067 1,836
-------- --------
Total mortgage loans 979,810 835,958
-------- --------
Deferred loan fees and unearned
discounts (3,332) (3,730)
Allowance for possible loan losses (5,741) (5,176)
-------- --------
Total mortgage loans, net $970,737 $827,052
======== ========
Other loans:
Student $ 5,213 $ 6,204
Consumer 4,775 4,350
Loans secured by deposit accounts 8,189 8,328
Overdraft loans 227 237
Property improvement 10,744 8,775
-------- --------
Total other loans 29,148 27,894
-------- --------
Unearned discounts (1) (21)
Allowance for possible loan losses (139) (151)
-------- --------
Total other loans, net $ 29,008 $ 27,722
======== ========
<FN>
* Underlying cooperative loans are first liens on cooperative property and are
senior to loans on the individual units commonly called cooperative share loans.
</FN>
NOTE (6) LOAN DELINQUENCIES
Information regarding loans delinquent 90 days or more at December 31, 1997
and 1996 is summarized as follows:
1997 1996
---- ----
Number Principal Number Principal
of balance of balance
loans of loans loans of loans
----- -------- ----- --------
(Dollars in Thousands)
Delinquent loans:
Guaranteed* 82 $ 500 144 $ 692
Non-guaranteed 5 12,769 15 13,459
--- ------- --- -------
Total delinquencies
over 90 days 87 $13,269 159 $14,151
=== ======= === =======
Ratio of loans 90 days
or more past due to
total gross loans 1.32% 1.64%
==== ====
<FN>
*These loans are guaranteed by the Federal Housing Administration, the Veterans
Administration or the New York State Higher Education Services Corporation.
</FN>
At December 31, 1997 and December 31, 1996, there was one mortgage loan
with a balance of $12,754,000 on non-accrual status. Net interest income was
reduced by approximately $1,180,000, $1,180,000 and $197,000 for the years ended
December 31, 1997, 1996 and 1995 in connection with non-accrual loans.
The following table summarizes information regarding the Company's impaired
loans at December 31:
1997
----
Allowance
Recorded for Loan Net
Investment Losses Investment
---------- ------ ----------
(In Thousands)
Underlying Cooperative:
With a related allowance $ - $ - $ -
Without a related allowance 12,754 - 12,754
------- ------- -------
Total Impaired Loans $12,754 $ - $12,754
======= ======= =======
1996
----
Allowance
Recorded for Loan Net
Investment Losses Investment
---------- ------ ----------
(In Thousands)
Underlying Cooperative:
With a related allowance $ - $ - $ -
Without a related allowance 12,754 - 12,754
------- ------- -------
Total Impaired Loans $12,754 $ - $12,754
======= ======= =======
There were no loans included in the above table which were modified in
a TDR. The entire balance of impaired loans at December 31, 1997 and December
31, 1996 represents one loan on non-accrual status. The average balance of
impaired loans for both 1997 and 1996 was $12,754,000 and for 1995 was $208,000.
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 $1,180,000. At December 31, 1997 and 1996, loans restructured in a
TDR, other than those classified as impaired loans and/or non-accrual loans,
were $1,840,000 and $1,874,000, respectively. Interest forfeited attributable to
these loans was $62,000, each for the years ended December 31, 1997, 1996 and
1995.
NOTE (7) ALLOWANCE FOR POSSIBLE LOAN LOSSES
Activity in the allowance for possible loan losses for the years ended
December 31, 1997, 1996 and 1995 is summarized as follows:
Mortgage loans Other loans
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
(In Thousands)
Balance at beginning of period $5,176 $4,575 $3,976 $151 $122 $109
Provision for possible loan losses 600 600 600 48 40 36
Loans charged off (35) - (1) (72) (33) (43)
Recoveries of loans previously
charged off - 1 - 12 22 20
------ ------ ------ ---- ---- ----
Balance at end of period $5,741 $5,176 $4,575 $139 $151 $122
====== ====== ====== ==== ==== ====
NOTE (8) MORTGAGE LOAN SERVICING
A summary of principal balances, servicing income and the number of loans
serviced for others by the Bank at and for the years ended December 31, 1997,
1996 and 1995 were as follows:
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
Principal balances $14,467 $16,016 $18,381
======= ======= =======
Servicing income $ 25 $ 39 $ 47
======= ======= =======
Number of loans 906 1,494 2,023
======= ===== =======
The balance of loans sold with full recourse was $5,441,000 and $7,366,000
at December 31, 1997 and 1996, respectively. The Bank has not sold any loans
with recourse since 1985. The Bank sold, without recourse, $1,612,000 and
$1,715,000 of mortgage loans to FNMA and/or the State of New York Mortgage
Association (SONYMA) during 1997 and 1996, respectively. The Bank retained
servicing for these loans, which did not result in the recording of any
servicing assets.
NOTE (9) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1997 and 1996 consisted of the
following:
1997 1996
---- ----
(In Thousands)
Banking houses and land $21,709 $21,493
Furniture, fixtures and equipment 16,911 15,086
Safe deposit vaults 1,016 1,016
39,636 37,595
Less accumulated depreciation and
amortization 22,607 20,766
Premises and equipment, net $17,029 $16,829
Depreciation and amortization expense for the years ended December 31,
1997, 1996 and 1995 was $1,891,000, $1,826,000 and $1,920,000, respectively.
NOTE (10) INTEREST DUE AND ACCRUED
Interest due and accrued at December 31, 1997 and 1996 consisted of the
following:
1997 1996
---- ----
(In Thousands)
U.S. Government and Federal Agencies $ 2,354 $ 2,655
CMOs 540 739
MBS 36 51
Mortgage and other loans 6,348 5,865
------- -------
Total interest due and accrued $ 9,278 $ 9,310
======= =======
NOTE (11) REAL ESTATE HELD-FOR-INVESTMENT
Through its wholly-owned subsidiaries, the Bank has investments in real
estate. On June 30, 1997, management reclassified all real estate
held-for-investment to held-for-sale. As of December 31, 1996, the components of
the net asset amounts of real estate held-for-investment were as follows:
1996
----
(In Thousands)
Buildings, net $ 4,000
Land 1,561
Accrued interest and other assets 1,385
Other liabilities (864)
-------
Net assets $ 6,082
=======
The summarized statements of operations for the Bank's wholly-owned
subsidiaries that comprise real estate held-for-investment, for the years ended
December 31, 1997, 1996 and 1995 were as follows:
1997 1996 1995
---- ---- ----
(In Thousands)
Rental income $1,478 $4,020 $4,236
Net interest income 2 4 5
Other income 17 652 210
------ ------ ------
Total income 1,497 4,676 4,451
------ ------ ------
Real estate taxes 246 566 574
Operating and other expenses 647 3,087 3,376
------ ------ ------
Total expenses 893 3,653 3,950
------ ------ ------
Income from real estate held-
for-investment 1 $ 604 $1,023 $ 501
====== ====== =======
<FN>
1 On June 30, 1997, management reclassified all real estate held-for-investment
to held-for-sale. In October, 1997, a commercial office tower located at 1995
Broadway, New York and previously classified held-for-investment was sold,
resulting in a pre-tax gain of $9,163,000.
</FN>
NOTE (12) REAL ESTATE HELD-FOR-SALE AND OTHER REAL ESTATE
The following summarizes real estate properties owned by the Bank through
its real estate subsidiaries at December 31:
1997 1996
---- ----
(In Thousands)
Real Estate Held-for-Sale1
Condominium Property $2,752 $4,589
Land 130 -
Buildings 140 -
Accrued interest and other assets 372 -
Liabilities (417) -
------ ------
Net Assets 2,977 4,589
------ ------
Other Real Estate
Cooperative apartments 473 647
------ ------
Total Real Estate Held-for-Sale and ORE $3,450 $5,236
====== ======
<FN>
1 During 1997, all real estate held-for-investment was reclassified to
held-for-sale. (See Note 11.) In addition to the cooperative apartments that
comprised ORE, several of the Bank's wholly owned subsidiaries own cooperative
apartments in various buildings, which are carried at zero cost and are included
in Real Estate Held-for-Sale. At December 31, 1997 and 1996, 138 and 158 such
cooperative apartments remained available-for-sale, respectively.
</FN>
NOTE (13) REAL ESTATE OPERATIONS, NET
Results of real estate operations for the years ended December 31, 1997,
1996 and 1995 were as follows:
1997 1996 1995
---- ---- ----
(In Thousands)
Income from real estate held
for investment, net (See Note 11.) $ 604 $1,023 $ 501
------- ------ ------
Real estate held for sale:
Rental income, net of expenses (154) 173 137
Gain on sale1 9,992 571 587
------- ------ ------
9,838 744 724
------- ------ ------
Real estate operations, net $10,442 $1,767 $1,225
======= ====== ======
<FN>
1 Includes gains on the sale of cooperative apartments, owned by various
of the Bank's wholly-owned subsidiaries, which are carried at zero cost, and for
1997, the $9,163,000 pre-tax gain on the sale of an office tower (see Note 11.)
</FN>
NOTE (14) INCOME TAXES
The 1997, 1996 and 1995 provisions for income tax were comprised of the
following amounts:
1997 1996 1995
---- ---- ----
(In Thousands)
Current:
Federal $18,877 $12,870 $11,657
State and local 5,652 5,630 5,344
------- ------- -------
24,529 18,500 17,001
------- ------- -------
Deferred:
Federal 66 703 (133)
State and local 30 349 (265)
------- ------- -------
96 1,052 (398)
------- ------- -------
Provision for income taxes $24,625 $19,552 $16,603
======= ======= =======
For the years ended December 31, 1997, 1996 and 1995, the Company
recognized tax benefits relating to its stock option and other stock benefit
plans of $688,000, $599,000 and $1,645,000, respectively, which were credited
directly to stockholders' equity.
A reconciliation of the statutory U.S. federal income tax provision and
rate, to the actual tax provision and effective rate for the years ended
December 31, 1997, 1996 and 1995 were as follows:
1997 1996 1995
---- ---- ----
% of % of % of
pre tax pre tax pre tax
Amount earnings Amount earnings Amount earnings
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Statutory rate $21,600 35.00% $16,197 35.00% $13,572 35.00%
Dividends received
exclusion (246) (.40) (235) (.51) (218) (.56)
State and local income
taxes, net of Federal
income tax benefit 3,693 5.98 3,886 8.40 3,301 8.51
Other, net (422) (.68) (296) (.64) (52) (.13)
------- ----- ------- ----- ------- -----
Provision for income taxes $24,625 39.90% $19,552 42.25% $16,603 42.82%
======= ===== ======= ===== ======= =====
At December 31, 1997 and 1996, deferred tax assets and liabilities were
comprised of the following:
1997 1996
---- ----
(In Thousands)
Deferred Tax Assets:
Deferred profits on unsold cooperative shares $ 1,955 $ 2,308
Allowance for possible loan losses 2,621 2,375
Benefit plan costs 1,830 1,877
Loan fees and mortgage discounts 415 517
Other 561 485
-------- -------
Deferred tax assets 7,382 7,562
-------- -------
Deferred Tax Liabilities:
Securities available-for-sale (22,905) (17,534)
Depreciation (21) (46)
Cash basis mortgages (84) (144)
-------- -------
Deferred tax liabilities (23,010) (17,724)
-------- -------
Deferred tax liability, net $(15,628) $(10,162)
======== ========
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 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, referred to as base year
reserves. The recapture tax on post 1987 reserves must be paid over a six year
period starting in 1996. The payment of the tax was deferred in 1996 and 1997,
as the Bank originated at least the same average annual principal amount of
mortgage loans that it originated in the six years prior to 1996. The base year
reserves of $85,107,000 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 of course further affect the
status of the base year reserve. (See Note 17.)
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, retained the reserve method for bad debt deductions. The New York State
and the City of New York bad debt deduction is no longer predicated on the
Federal deduction.
NOTE (15) EARNINGS PER SHARE
The following is a reconciliation of the denominators of basic and
diluted EPS computations for net income. The numerator for calculating both
basic and diluted earnings per share for the Company is net income.
For the Year Ended December 31,
1997 1996* 1995*
-------------------------------
(In Thousands, Except EPS Amounts)
Numerator - Net Income $37,090 $26,725 $22,174
Basic EPS: Denominator
Weighted Average Shares 9,858 10,062 10,604
Basic EPS $3.76 $2.66 $2.09
===== ===== =====
Diluted EPS: Denominator
Weighted Average Shares 9,858 10,062 10,604
Incremental shares-options 332 374 449
------ ------ ------
10,190 10,436 11,053
Diluted EPS $3.64 $2.56 $2.01
===== ===== =====
<FN>
* Earnings per share for 1996 and 1995 have been restated, as required,
for the adoption of Statement 128. (See Note 1(k).)
</FN>
NOTE (16) DEPOSITS
Deposits at December 31, 1997 and 1996 are summarized as follows:
1997 1996
------------------------------ ----------------------------
Stated Stated
rate Amount Percent rate Amount Percent
---- ------ ------- ---- ------ -------
(Dollars in Thousands)
Balance by interest rate:
Demand - % $ 32,132 2.87% - % $ 31,940 2.79%
Negotiable order of
withdrawal (NOW) 2.47 35,401 3.16 2.47 36,256 3.17
Money market 2.96 79,007 7.05 2.96 89,081 7.78
Passbook and lease
security 2.71 565,130 50.40 2.71 599,951 52.43
Certificates: 4.67- 5.00 44,646 3.98 4.14- 5.00 174,155 15.22
5.01- 6.00 343,864 30.67 5.01- 6.00 187,890 16.42
6.01- 7.00 21,023 1.87 6.01- 7.00 25,120 2.19
---------- ------ ---------- ------
409,533 36.52 387,165 33.83
---------- ------ ---------- ------
Deposits $1,121,203 100.00% $1,144,393 100.00%
========== ====== ========== ======
At December 31, 1997 and 1996, the scheduled maturities of certificate
accounts were as follows:
1997 1996
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
12 months or less $344,893 84.22% $323,788 83.63%
13 to 24 months 35,437 8.65 34,452 8.90
25 to 36 months 14,573 3.56 13,939 3.60
37 to 48 months 14,630 3.57 14,969 3.87
49 to 60 months - - 17 -
-------- ------ -------- ------
$409,533 100.00% $387,165 100.00%
======== ====== ======== ======
At December 31, 1997 and 1996, certificate accounts in excess of
$100,000, were $41,551,000 and $32,676,000, respectively. The Federal Deposit
Insurance Corporation, an agency of the U.S. Government, generally insures each
depositor's savings up to $100,000, through the Bank Insurance Fund.
Interest expense on deposit balances is summarized as follows for the years
ended December 31, 1997, 1996 and 1995:
1997 1996 1995
---- ---- ----
(In Thousands)
Passbook and lease security $15,677 $16,722 $19,063
Certificates 20,768 19,777 17,649
Money market 2,549 2,819 3,051
NOW 880 899 944
------- ------- -------
Total interest expense $39,874 $40,217 $40,707
======= ======= =======
NOTE (17) RETAINED INCOME, SUBSTANTIALLY RESTRICTED
In the unlikely event of a complete liquidation of the Bank (and only
in such an event) eligible depositors who continue to maintain accounts shall be
entitled to receive a distribution from the liquidation account, which was
established in connection with the Company's initial public stock offering. The
total amount of the liquidation account may be decreased if the balances of
eligible deposits decrease on the annual determination dates. The balance of the
liquidation account was $63,709,000 at December 31, 1997 and $71,589,000 at
December 31, 1996.
The Bank is not permitted to declare or pay a cash dividend on, or
repurchase any of its stock if the effect thereof would cause its net worth to
be reduced below either (i) the amount required for the liquidation account or
(ii) the amount of applicable regulatory capital requirements.
Retained income at December 31, 1997 and 1996 includes $85,107,000, which
has been segregated for federal income tax purposes as a bad debt reserve. Any
use of this amount for purposes other than to absorb losses on loans may result
in taxable income, under federal regulations, at current rates. The Bank did not
recognize any tax bad debt deductions during the year ended December 31, 1997.
For the years ending December 31, 1996 and December 31, 1995, the Bank
recognized tax bad debt deductions of $661,000 and $52,000, respectively.
(See Note 14.)
NOTE (18) COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Bank occupies premises covered by noncancelable leases with expiration
dates through October 31, 2002 (exclusive of renewal options). Rental expense
under these leases for the years ended December 31, 1997, 1996 and 1995 was
$272,000, $267,000 and $262,000, respectively. At December 31, 1997, the
projected minimum rental payments (exclusive of possible rent escalation charges
and normal recurring charges for maintenance, insurance and taxes) are as
follows:
Years Ending
December 31, Amount
------------ ------
(In Thousands)
1998 $ 197
1999 191
2000 166
2001 100
2002 50
Thereafter -
------
Total $ 704
======
Loan Commitments
----------------
At December 31, 1997 and 1996, commitments to originate mortgage loans at
fixed rates were $54,810,000 with stated rates ranging from 7.05% to 7.68% and
$34,376,000 with stated rates ranging from 7.38% to 8.00%, respectively. There
were no commitments to originate adjustable rate mortgages at December 31, 1997
and 1996. At December 31, 1997 and 1996, deposit account overdraft lines
available were $821,000 and $745,000, respectively, with stated rates ranging
from 10.00% to 12.00% and unused business lines of credit were $16,000 and
$16,000, respectively, with a stated rate of 15.00%. At December 31, 1997 there
were $233,000 of student loans held for sale. There were no loans held for sale
at December 31, 1996.
Security Purchase Commitments
-----------------------------
At December 31, 1997, there were commitments to purchase $15,000,000
federal agency securities at par with a three month term to maturity and a
yield of 5.62%.
Litigation
----------
The Bank is a defendant in several lawsuits arising out of the normal
conduct of business. In the opinion of management, after consultation with legal
counsel, the ultimate outcome of these matters is not expected to have a
material adverse effect on the Company's results of operations, business
operations or the consolidated financial condition of the Company.
NOTE (19) PENSION PLAN
Retirement Plan of Jamaica Savings Bank
---------------------------------------
The Bank sponsors a trusteed non-contributory defined benefit pension plan
(the Pension Plan) covering substantially all of its full-time employees. It is
the policy of the Bank to fund current and past service pension costs accrued.
The following table sets forth the Pension Plan's funded status and amounts
recognized in the Company's consolidated financial statements at December 31:
1997 1996
---- ----
(In Thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $28,527,000 and
$25,451,000 at December 31, 1997 and 1996,
respectively $(29,190) $(26,001)
======== ========
Projected benefit obligation for services
rendered to date (42,405) (36,701)
Plan assets at fair value, primarily listed
stocks and U.S. bonds 63,711 52,873
-------- --------
Plan assets in excess of projected benefit
obligation 21,306 16,172
Unrecognized net gain from past experience
different from that assumed and effects of
changes in assumptions (13,779) (9,801)
Unrecognized prior service cost 1,576 1,721
Unrecognized net asset being amortized over
18.35 years (3,340) (3,794)
-------- --------
Prepaid pension cost $ 5,763 $ 4,298
======== ========
The components of net periodic pension income for the years ended
December 31, 1997, 1996, and 1995, are as follows:
1997 1996 1995
---- ---- ----
(In Thousands)
Service cost-benefits earned $ 998 $ 1,078 $ 619
Interest cost on projected
benefit obligation 2,295 2,239 2,066
Actual return on plan assets (12,475) (7,140) (10,631)
Net amortization and deferral 7,717 3,112 7,184
-------- -------- -------
Net periodic pension (income) $ (1,465) $ (711) $ (762)
======== ======== =======
The expected long-term rate of return on assets was 8.00% for the years
ended December 31, 1997, 1996 and 1995. The following actuarial assumptions have
been made to determine the actuarial present value of the projected benefit
obligation for the years ended December 31:
1997 1996 1995
---- ---- ----
Rate of increase in future compensation 6.50% 6.50% 6.50%
Weighted average discount rate 5.75% 6.50% 6.00%
Jamaica Savings Bank Benefit Restoration Plan-Pension
-----------------------------------------------------
The Bank sponsors a pension benefit restoration plan (Pension Restore Plan)
to provide retirement benefits which would have been provided under the Pension
Plan except for limitations imposed by Section 415 and 401(a)(17) of the
Internal Revenue Code. Payments under the Pension Restore Plan will be paid out
of the general assets of the Bank.
The following sets forth the Pension Restore Plan's status and amounts
recognized in the Company's consolidated financial statements at December 31:
1997 1996
---- ----
(In Thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, all of which
are vested $(4,036) $(3,936)
======= =======
Projected benefit obligation for service
rendered to date (4,728) (4,607)
Plan assets at fair value - -
------- -------
Projected benefit obligations in excess of
plan assets (4,728) (4,607)
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions 831 1,003
Unrecognized prior service cost (4) (4)
Additional minimum liability (135) (328)
------- -------
Accrued pension cost $(4,036) $(3,936)
======= =======
The components for the net periodic Pension Restore Plan cost for the years
ended December 31, 1997, 1996 and 1995, are as follows:
1997 1996 1995
---- ---- ----
(In Thousands)
Interest cost on projected benefit obligation $ 273 $ 274 $ 264
Net amortization and deferral 54 252 41
------- ------- -------
Net periodic Pension Restore Plan cost $ 327 $ 526 $ 305
======= ======= =======
The following actuarial assumptions have been made to determine the
projected benefit obligation for the years ended December 31:
1997 1996 1995
---- ---- ----
Rate of increase in future compensation 6.50% 6.50% 6.50%
Weighted average discount rate 5.75% 6.50% 6.00%
NOTE (20) POST RETIREMENT BENEFITS, OTHER THAN PENSIONS
The Bank's life insurance benefit plan provides for continued coverage for
retirees with fifteen years of credited service. The coverage at the time of
retirement is reduced by 20% per year over a five year period to a minimum
coverage of $5,000, which remains in force until death. The retiree has the
option each time the coverage is reduced to convert all or part of the reduction
to whole-life coverage at the retiree's cost based on his/her attained age and
without medical examination.
The net periodic cost, before income taxes, related to the Bank's
postretirement life insurance benefits for the years ended December 31, 1997,
1996 and 1995, was $69,000, $70,000 and $64,000, respectively. This periodic
cost is included in the current cost of compensation and benefits.
NOTE (21) INCENTIVE SAVINGS PLAN
The Incentive Savings Plan (the Savings Plan) is a defined contribution and
thrift savings plan. Prior to the suspension of the Savings Plan during 1990,
all full-time employees were eligible for voluntary participation after one year
of continuous service. The Savings Plan continues to earn income on the Savings
Plan's investments. It is subject to the provisions of the Employee Retirement
Income Security Act of 1974 (ERISA), as amended. The Bank bears the costs of
administering the Savings Plan.
In connection with the Bank's adoption of an Employee Stock Ownership Plan
(ESOP) during 1990, in order to comply with the limitations set forth by the
Internal Revenue Code regarding qualified plans, no further contributions have
been made to the Savings Plan. Management has determined to continue the ESOP
and that contributions to the Savings Plan will remain suspended indefinitely.
NOTE (22) STOCK OPTION PLANS
Effective upon the conversion of the Bank, in 1990, from mutual to stock
form of ownership (the Conversion), the Company adopted the Incentive Stock
Option Plan (the Stock Option Plan) and the Option Plan for Outside Directors
(the Directors' Option Plan).
Stock Option Plan
- ------------------
Under the Stock Option Plan, 1,430,000 common stock options (which expire
ten years from the date of grant, June 27, 1990) were granted to the executive
officers and employees of the Company and its subsidiary, the Bank. Each option
entitles the holder to purchase one share of the Company's common stock at an
exercise price equal to $10.00 per share (the initial public offering price).
Options became exercisable on a cumulative basis in equal installments at a rate
of 20% per year commencing one year from the date of grant. Simultaneously with
the grant of these options, "limited rights" with respect to the shares covered
by the options were granted. Limited rights granted are subject to terms and
conditions and can be exercised only in the event of a change in control of the
Company. Upon exercise of a limited right, the holder shall receive from the
Company a cash payment equal to the difference between the exercise price of the
option ($10.00) and the fair market value of the underlying shares of common
stock. During the years ended December 31, 1997, 1996 and 1995, 122,646, 121,256
and 161,860 options granted under the Stock Option Plan were exercised,
respectively. At December 31, 1997, the remaining 324,140 options granted under
the Stock Option Plan were exercisable.
Directors' Option Plan
- -----------------------
Each member of the Board of Directors, who is not an officer or employee of
the Company or the Bank, was granted nonstatutory common stock options to
purchase 25,000 shares of the common stock. In addition, active Directors
Emeritus were each granted nonstatutory common stock options to purchase 10,000
shares of the common stock. In the aggregate, members of the Board of Directors
and active Directors Emeritus of the Company were granted options to purchase
170,000 shares of the common stock of the Company at an exercise price equal to
$10.00 per share (the initial public offering price) with limited rights. All
options granted, including limited rights attached thereto, under the Directors'
Option Plan expire upon the earlier of 10 years following the date of grant or
one year following the date the optionee ceases to be a Director. During the
years ended December 31, 1997 and 1996, 6,250, and 2,000 options granted under
the Directors' Option Plan were exercised. There were no options exercised from
the Directors' Option Plan during 1995. At December 31, 1997, 146,750 options
granted under the Directors' Option Plan were exercisable.
The 1996 Stock Option Plan
- --------------------------
The JSB Financial, Inc. 1996 Stock Option Plan (the 1996 Option Plan),
became effective January 1, 1996, subject to stockholder approval, which was
obtained on May 14, 1996. The Company reserved 800,000 shares of common stock of
the Company for issuance upon the exercise of options. The 1996 Option Plan
provides for: (1) the grant of stock options to directors on an annual basis
pursuant to a specified formula; (2) the grant of stock options to officers at
the discretion of the Employee Benefits Committee of the Bank; (3) if certain
events, which are likely to lead to a change in control of the Company or the
Bank, should occur, stock options relating to any shares of the Company reserved
for issuance that were not previously made subject to options, will be granted
to all current directors and officers who were previously granted stock options
under the 1996 Option Plan; (4) the grant of limited rights relating to all of
the foregoing options, which shall be exercisable only upon a change of control;
and (5) the grant of dividend equivalent rights (DER) relating to all of the
foregoing options, which may provide for a cash payment to the optionee upon
exercise of the option, based on the difference between the percentage of
earnings per share paid by the Company as cash dividends compared to the
percentage of earnings per share paid as cash dividends by the twenty-five
largest stock owned thrift institutions in the United States, calculated on an
annual basis.
Under the 1996 Option Plan, each of the Company's Directors, who is
neither an officer nor an employee of the Company or the Bank, is granted
annually, nonstatutory common stock options to purchase 4,000 shares of the
common stock, each active Director Emeritus is granted 2,000 options and
individuals who become directors are granted 5,000 options. Options granted
under the 1996 Option Plan are granted at an exercise price equal to the market
closing price of the Company's common stock on the business day prior to grant.
The option period during which an individual granted options may exercise such
option will commence six months after the date of grant and will expire no later
than ten years from the date of the grant. During 1997, 8,000 options granted
from the 1996 Option Plan were exercised. At December 31, 1997, 326,000 of the
332,000 options outstanding under the 1996 Option Plan were exercisable.
Effective January 1, 1998, an additional 164,000 options were granted at an
exercise price of $50.0625 per share.
The following table presents option transactions summarized for all of
the Company's stock option plans for the years ended December 31, 1995, 1996 and
1997.
Weighted
Average
Number of Exercise
Shares Price
------ -----
Options outstanding at December 31, 1994 889,892 $10.00
1995 Grants - -
1995 Forfeitures (61) 10.00
1995 Exercises (161,860) 10.00
------- -----
Options outstanding at December 31, 1995 727,971 10.00
1996 Grants 165,000 31.63
1996 Forfeitures (4,929) 10.00
1996 Exercises (123,256) 10.00
------- -----
Options outstanding at December 31, 1996 764,786 14.67
1997 Grants 175,000 38.48
1997 Forfeitures - -
1997 Exercises (136,896) 11.45
------- -----
Options outstanding at December 31, 1997 802,890 $20.40
======= =====
Options exercisable at December 31, 1997 796,890 $20.20
======= =====
The range of exercise prices on options outstanding were $10.00 to
$47.88, $10.00 to $31.63, and all at $10.00, for the years ended December 31,
1997, 1996 and 1995, respectively. The weighted average remaining contractual
life for all stock options outstanding at December 31, 1997 was five years.
In accordance with Statement 123, the Company used the Black-Scholes
option-pricing model to determine the fair value of the 1996 and 1997 option
grants, using the following weighted average assumptions:
1997 1996
---- ----
Dividend yield 3.63% 3.63%
Expected volatility 20.93 21.92
Risk-free interest rate 6.28 5.44
Expected option lives 6 Years 6 Years
On a pro forma basis, had compensation expense for the Company's 1996
Stock Option Plan been determined based on the fair value at the grant dates for
awards made under that plan, in accordance with the expense method of Statement
123, the Company's net income and earnings per share would have been reduced as
follows for the years ended December 31:
1997 1996
---- ----
Net income (as reported) $37,090 $26,725
Pro forma net income $36,288 $26,188
Basic EPS (as reported) $3.76 $2.66
Pro forma Basic EPS $3.68 $2.60
Diluted EPS (as reported) $3.64 $2.56
Pro forma Diluted EPS $3.56 $2.51
The pro forma results presented above may not be representative of the
effects reported in pro forma net income for future years, because Statement 123
was not applied to all outstanding, non-vested awards, as Statement 123 does not
apply to awards prior to January 1, 1996.
The Company modified the 1996 Stock Option Plan, as originally adopted,
to allow for the cash payment for the DER to option holders; rather than have
the DER reduce the exercise price of the option. This change separated the cost
of the DER from the cost of the option, and is expected to result in less
expense volatility. The Company recognized $73,000 and $99,000 of expense
related to the DER for the years ended December 31, 1997 and 1996, respectively.
For 1996 the Company recognized $330,000 in expense for the difference in market
closing price between the option grant date and date of stockholder approval.
NOTE (23) STOCK PLANS
Employee Stock Ownership Plan
- ------------------------------
Since 1990 the Bank has maintained an ESOP. For 1995, 1996 and 1997, the
Board of Directors authorized contributions to the ESOP, to purchase shares,
based on approximately 6.0% of employees' base salary.
ESOP benefits generally become 20% vested after each year of credited
service, becoming 100% vested after five years of service with the Bank.
Forfeitures are reallocated among participating employees, in the same
proportion as contributions. Benefits are payable upon death, retirement, early
retirement, disability or separation from service and may be payable in cash or
stock. The Bank recorded a net expense of $566,000, $550,000 and $533,000
related to the ESOP for the years ended December 31, 1997, 1996 and 1995,
respectively. There were three unallocated shares in the ESOP Plan at December
31, 1997 and none at December 31, 1996 and 1995.
The trustee for the ESOP must vote all allocated stock held in the ESOP
trust in accordance with the instructions of the participants. Common stock
allocated to participants was 15,342, 17,633 and 21,583 for the years ended
December 31, 1997, 1996 and 1995, respectively. The Bank bears the cost of
administering the ESOP.
Directors' Stock Program
- ------------------------
To further align the outside Directors' interest with those of the
Company's stockholders, on December 9, 1997, the Board of Directors of the
Company authorized the issuance of up to 20,000 shares of the Company's common
stock to the Company's non-employee directors, pursuant to the Jamaica Savings
Bank FSB Directors' Stock Program (the Directors' Stock Program). Pursuant to
the Directors Stock Program, each year, non-employee Directors of the Bank will
receive shares of the Company's common stock having a fair market value equal to
approximately one-third of the annual directorship fees during such year. The
stock will be issued in lieu of a cash payment of such fees. Shares distributed
thereunder will be from the Company's treasury stock. The operation of the
Directors' Stock Program is automatic, with the determination of the appropriate
number of shares to be issued to each director based on the fair market value of
the common stock at the close of business prior to the date of issuance.
Directors do not have the option to receive cash rather than stock in payment of
the portion of their fees subject to the Directors' Stock Program. The maximum
number of shares to be issued to any eligible director during 1998 is not
expected to exceed 200 shares.
Bank Recognition and Retention Plans and Trusts
- ----------------------------------------------
In connection with the Company's initial public stock offering during 1990,
to provide employees, officers and directors of the Bank with a proprietary
interest in the Company and in a manner designed to retain such individuals, the
Bank established the Bank Recognition and Retention Plans (BRRPs). The Bank
contributed a total of $6.4 million to the BRRPs during 1990 to acquire an
aggregate of 640,000 shares of the Company's common stock in the Company's
initial public stock offering, all of which have been awarded. Awards vested 20%
per year commencing one year from the date of the award, and vested 100% upon
termination of employment due to death, disability or normal retirement.
Unvested amounts represented deferred compensation and were reflected as a
reduction of stockholders' equity. Awards under the BRRPs were fully vested and
the BRRPs were terminated during 1995. The Bank recorded an expense of $594,000,
for the BRRPs for the year ended December 31, 1995. Pursuant to the BRRPs,
51,631 shares of common stock were vested during the year ended December 31,
1995.
NOTE (24) BENEFIT RESTORATION PLAN
The Bank maintains a non-qualified Benefit Restoration Plan (the Restore
Plan), to compensate participants in the Bank's benefit plans that are limited
by Section 415 of the Internal Revenue Code. With certain exceptions, the
Restore Plan is unfunded. However, in connection with the ESOP, which entitles
participants to shares of the Company's common stock and the Savings Plan, which
entitles participants to direct amounts, if any, invested in the Company's
stock, the Bank established a trust. The purpose of this trust is to purchase,
on an ongoing basis, shares of the Company's common stock to which participants
of the Restore Plan are entitled. By establishing this trust, the Bank fixed the
amount of cash expended for amounts payable in shares of common stock of the
Company or its equivalent cash value at the time of payout. The shares of common
stock held by the trust are reflected as contra-equity and additional paid-in
capital on the Consolidated Statements of Financial Condition of the Company. At
December 31, 1997 and 1996, the trust held 188,323 and 166,848 shares of common
stock, respectively, at an aggregate cost of $4,199,000 and $3,275,000,
respectively. The expense recognized for the Restore Plan in connection with the
ESOP for 1997, 1996 and 1995 was $113,000, $105,000 and $35,000, respectively.
NOTE (25) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 "Disclosures about Fair Value of Financial Instruments"
(Statement 107) defines the fair value of a financial instrument as the amount
at which the instrument could be exchanged in a current transaction between
willing parties. Statement 107 provides limited guidance for calculating fair
value estimates when quoted prices are not available, therefore the Company has
disclosed the valuation approach and the material assumptions which have been
made. The relevance and reliability of the estimates of fair values presented
are limited, given the dynamic nature of market conditions, including changes in
interest rates, the real estate market, existing borrowers' financial condition
and numerous other factors over time.
The following methods and assumptions were utilized by management to
estimate the fair value of each class of financial instruments at December 31,
1997 and 1996:
Cash and cash equivalents, interest due and accrued: The carrying values
approximate fair value because of the short-term nature of these instruments.
Securities available-for-sale, securities held-to-maturity and other
investments: The estimated fair values are based on quoted market prices at the
reporting date for those or similar investments, except for Federal Home Loan
Bank stock, which is reflected at cost.
Mortgage and other loans: For certain homogeneous categories of loans, such
as some residential mortgages and student loans, fair value is estimated using
the quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. In addition, it is assumed that one-to
four-family fixed rate mortgage loans are FNMA qualifying, and could therefore
be packaged into a MBS. The estimated fair value for the remainder of the
mortgage and other loan portfolios was computed by discounting the contractual
future cash flows at rates offered by the Bank, which approximate market rates,
at December 31, 1997 and 1996 on loans with terms similar to the remaining term
to maturity and to borrowers with similar credit quality. The estimated fair
value of non-performing loans, if material, are calculated on an individual
basis, applying a discount commensurate with the credit risk.
Techniques for estimating fair value are extremely sensitive to the
assumptions and estimates used. While management has attempted to use
assumptions and estimates which it believes are most reflective of the loan
portfolio and the current market, a greater degree of subjectivity is inherent
in these values than those determined in formal trading marketplaces. As such,
readers are cautioned in using this information for purposes of evaluating the
financial condition and/or value of the Company in and of itself or in
comparison with any other company.
Deposits: All deposits, except certificates, are subject to rate changes at
any time, and therefore are considered to be carried at fair value. The
estimates of fair value for certificates reflect the present value of the
contractual future cash flow for each certificate. The present value rates
utilized were the rates offered by the Bank (which approximate market rates) at
December 31, 1997 and 1996, respectively, on a certificate with an initial term
to maturity equal to the remaining term to maturity of the existing
certificates.
Commitments: Commitments to originate loans and purchase securities are
derived by applying the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the present credit
worthiness of the counterparties. For fixed-rate loan commitments, estimated
fair value also considers the difference between interest rates on the reporting
date and the committed rates. The estimated fair value of lines of credit is
based on the fees charged for similar agreements or on the estimated cost to
terminate them or otherwise settle the obligations with the counterparties at
the reporting dates. The commitments existing at December 31, 1997 and 1996,
would have been offered at substantially the same rates and under substantially
the same terms that would have been offered at December 31, 1997 and 1996 to the
counterparties; therefore the estimated fair value of the commitments was zero
at those dates.
The following table presents carrying values and estimated fair values of
financial instruments at December 31:
1997 1996
------------------- --------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
(In Thousands)
Financial assets
Cash and cash equivalents $ 74,924 $ 74,924 $ 99,394 $ 99,394
Securities available-for-sale 62,243 62,243 51,021 51,021
Securities held-to-maturity 352,967 353,996 460,509 461,784
Other investments 7,645 7,645 6,859 6,859
Mortgage loans, gross 979,810 1,031,586 835,958 846,508
Other loans, gross 29,148 29,256 27,894 27,970
Interest due and accrued 9,278 9,278 9,310 9,310
Financial liabilities
Deposits $1,121,203 $1,121,903 $1,144,393 $1,144,690
NOTE (26) REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum capital amounts and ratios. The most recent
notification from the Office of Thrift Supervision (OTS), as of December 31,
1996, categorized the Bank as "well capitalized" under the regulatory framework
for prompt corrective action. There are no conditions or events since that
notification that management believes have changed the institution's category.
The following table sets forth the required ratios and amounts and the Bank's
actual capital amounts and ratios at December 31:
To be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-----------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
1997
Total risk-based capital
(to risk weighted assets) $224,444 21.66% $ 82,889 8.00% $103,612 10.00%
Tangible capital
(to tangible assets) 229,168 16.35 21,020 1.50 N/A N/A
Tier I leverage (core)
capital (to adjusted
tangible assets) 229,168 16.35 42,040 3.00 51,806 5.00
1996
Total risk-based capital
(to risk weighted assets) $182,345 19.96% $ 73,074 8.00% $ 91,343 10.00%
Tangible capital
(to tangible assets) 188,309 13.54 20,866 1.50 N/A N/A
Tier I leverage (core)
capital (to adjusted
tangible assets) 188,309 13.54 41,733 3.00 69,555 5.00
The OTS regulatory capital requirements incorporate an interest rate risk
(IRR) component. Savings institutions with "above normal" IRR exposure are
subject to a deduction from regulatory capital for purposes of calculating their
risk-based capital requirements. Implementation of the IRR component has been
delayed by the OTS.
OTS regulations generally require that institutions deduct from capital
their investment in and advances to subsidiaries engaged, as principal, in
activities not permissible for national banks, such as real estate development.
OTS regulations also require that all equity and direct investments including
all loans and advances in which a legally binding commitment existed at April
12, 1989 be deducted from capital for the purposes of computing regulatory
capital ratios. As a result of this regulation, the Bank excluded from its
regulatory capital $6,827,000 and $13,687,000 at December 31, 1997 and 1996,
respectively.
Distributions charged against an institution's capital accounts, such as,
the upstreaming of funds to holding companies are subject to certain limitations
under OTS regulations. An institution, such as the Bank, which meets its fully
phased-in capital requirements is able to pay dividends to the Company, upon 30
days notice to the OTS, in an amount that would reduce its surplus capital ratio
by one-half at the beginning of the year, plus all of its net income determined
on the basis of generally accepted accounting principles for that calendar year.
The institution must continue to meet all fully phased-in capital requirements
after the proposed capital distribution.
NOTE (27) PARENT ONLY FINANCIAL INFORMATION
The following condensed statements of financial condition at December 31,
1997 and 1996 and the condensed statements of operations and cash flows for the
years ended December 31, 1997, 1996 and 1995, for JSB Financial, Inc. (Parent
company only) present the Company's investment in its wholly-owned subsidiary,
the Bank, using the equity method of accounting.
Condensed Statements of Financial Condition
December 31, 1997 and 1996
(In Thousands)
1997 1996
---- ----
ASSETS
Cash and cash equivalents $ 17,164 $ 15,582
Securities held-to-maturity, net (estimated fair
value of $70,000 and $80,028, respectively) 70,000 80,007
Mortgage loans, net 15,195 15,239
Other assets, net 691 680
Investment in the Bank 264,464 223,791
-------- --------
Total Assets $367,514 $335,299
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities, net $ - $ -
Stockholders' equity 367,514 335,299
-------- --------
Total Liabilities and Stockholders' Equity $367,514 $335,299
======== ========
Condensed Statements of Operations
For the Years Ended December 31,
(In Thousands)
1997 1996 1995
---- ---- ----
Dividends from the Bank $ - $20,000 $43,000
Interest income 6,080 6,589 7,275
Other income 13 18 15
------- ------- -------
Total income 6,093 26,607 50,290
------- ------- -------
Expenses 531 451 437
------- ------- -------
Income Before Income Taxes and Equity in
Undistributed Earnings of the Bank 5,562 26,156 49,853
Provision for Income Taxes 1,781 2,100 2,557
------- ------- -------
Income Before Equity in Undistributed Earnings
of the Bank 3,781 24,056 47,296
Equity in Undistributed Earnings of the Bank,
Net of Provision for Income Taxes 33,309 2,669 (25,122)1
------- ------- -------
Net Income $37,090 $26,725 $22,174
======= ======= =======
<FN>
1 Represents excess of dividends over net income.
</FN>
Condensed Statements of Cash Flows
For the Years Ended December 31,
(In Thousands)
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 37,090 $ 26,725 $ 22,174
Adjustments to reconcile net income to cash
provided by operating activities:
(Equity in undistributed earnings) excess of
dividends over net income of the Bank (33,309) (2,669) 25,122
(Increase) decrease in other assets (11) 697 (247)
Other (2) - -
-------- --------- ---------
Net cash provided by operating activities 3,768 24,753 47,049
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities held-to-maturity (260,000) (205,021) (190,000)
Proceeds from maturities of securities held-
to-maturity 270,000 215,000 170,000
Principal payments on mortgage loans 44 40 38
Accretion of discount in excess of amortization of
premium on debt securities 7 14 -
-------- --------- ---------
Net cash provided (used) by investing activities 10,051 10,033 (19,962)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid to common stockholders (13,805) (12,090) (10,616)
Payments to repurchase common stock - (27,650) (9,881)
Proceeds upon exercise of common stock options 1,568 1,233 1,619
-------- --------- ---------
Net cash used by financing activities (12,237) (38,507) (18,878)
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents 1,582 (3,721) 8,209
Cash and cash equivalents at beginning of year 15,582 19,303 11,094
-------- --------- ---------
Cash and cash equivalents at end of year $ 17,164 $ 15,582 $ 19,303
======== ========= =========
KPMG Peat Marwick LLP
INDEPENDENT AUDITORS' REPORT
To The Stockholders
and The Board of Directors of JSB Financial, Inc.:
We have audited the accompanying consolidated statements of financial condition
of JSB Financial, Inc. and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the years in the three year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of JSB Financial, Inc.
and subsidiary at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Jericho, New York
January 29, 1998