1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
COMMISSION FILE NUMBER 1-13157
JSB FINANCIAL, INC.
-------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED ON ITS CHARTER)
DELAWARE 11-3000874
-------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
303 MERRICK ROAD, LYNBROOK, NEW YORK 11563
------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(516) 887-7000
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] YES [ ] NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OF COMMON STOCK OUTSTANDING AT AUGUST 5, 1998
- --------------------- -----------------------------
$.01 PAR VALUE 9,853,669
2
INDEX
PART I - FINANCIAL INFORMATION
Page
Number
ITEM 1. Financial Statements - Unaudited
Consolidated Statements of Financial Condition
at June 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations for the Three
Months and Six Months Ended June 30, 1998
and June 30, 1997 4
Consolidated Statements of Comprehensive Income for
the Three Months and Six Months Ended June 30, 1998
and June 30, 1997 5
Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 1998 and June 30, 1997 6- 7
Notes to Consolidated Financial Statements 8-10
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-21
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 22
ITEM 2. Changes in Securities 22
ITEM 3. Defaults Upon Senior Securities 22
ITEM 4. Submission of Matters to a Vote of Security Holders 22
ITEM 5. Other Information 23
ITEM 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Exhibit Index 25
Exhibit 11.00 Computation of Earnings Per Share 26
Exhibit 27.00 Financial Data Schedule for the Six Months Ended June 30, 1998 27
Exhibit 27.01 Restated Financial Data Schedule for the Six Months Ended June 30, 1997 28
3
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
ASSETS
Cash and due from banks $ 14,826 $ 12,924
Federal funds sold 110,500 62,000
---------- ---------
Cash and cash equivalents 125,326 74,924
Securities available-for-sale, at estimated fair value 71,209 62,243
Securities held-to-maturity, net (estimated fair value of
$236,393 and $353,996, respectively) 235,754 352,967
Other investments 8,922 7,645
Mortgage loans, net 1,058,772 970,737
Other loans, net 23,960 29,008
Premises and equipment, net 17,993 17,029
Interest due and accrued 8,974 9,278
Real estate held for sale and Other real estate ("ORE") 2,237 3,450
Other assets 10,313 7,750
---------- ----------
Total Assets $1,563,460 $1,535,031
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $1,121,696 $1,121,203
Advance payments for real estate taxes and insurance 15,496 10,322
Official bank checks outstanding 16,093 10,405
Deferred tax liability, net 19,432 15,628
Accrued expenses and other liabilities 10,732 9,959
---------- -----------
Total Liabilities 1,183,449 1,167,517
---------- -----------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value, 15,000,000 shares authorized;
none issued) -- --
Common stock ($.01 par value, 65,000,000 and 30,000,000
shares authorized, respectively; 16,000,000 issued; 9,832,590
and 9,919,927 outstanding, respectively) 160 160
Additional paid-in capital 167,675 165,112
Retained income, substantially restricted 324,755 311,436
Accumulated other comprehensive income:
Net unrealized gain on securities available-for-sale, net of tax 33,912 28,469
Common stock held by Benefit Restoration Plan Trust, at cost
(193,723 and 188,323 shares, respectively) (4,468) (4,199)
Common stock held in treasury, at cost (6,167,410 and 6,080,073
shares, respectively) (142,023) (133,464)
---------- ----------
Total Stockholders' Equity 380,011 367,514
---------- ----------
Total Liabilities and Stockholders' Equity $1,563,460 $1,535,031
========== ==========
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
4
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
-----------------------------------------------
Interest Income
- ---------------
Mortgage loans, net $21,820 $18,262 $42,361 $36,219
Debt & equity securities, net 3,076 5,261 6,681 10,274
Collateralized mortgage obligations ("CMOs"), net 1,622 2,131 3,068 4,282
Other loans, net 502 515 1,010 1,011
Mortgage-backed securities ("MBS"), net 84 130 177 271
Federal funds sold 1,173 694 2,378 1,619
------- ------- ------- -------
Total Interest Income 28,277 26,993 55,675 53,676
------- ------- ------- -------
Interest Expense
- ----------------
Deposits 9,742 9,932 19,384 19,670
------- ------- ------- -------
Net Interest Income 18,535 17,061 36,291 34,006
Provision for Possible Loan Losses 14 161 28 321
------- ------- ------- -------
Net Interest Income After Provision for
Possible Loan Losses 18,521 16,900 36,263 33,685
------- ------- ------- -------
Non-Interest Income
- -------------------
Real estate operations, net 38 480 115 836
Loan fees and service charges 2,065 1,015 2,592 1,722
Recovery of prior period expenses & unaccrued
interest on troubled loans 3,346 - 4,346 -
Miscellaneous income 355 41 407 92
------- ------- ------- -------
Total Non-Interest Income 5,804 1,536 7,460 2,650
------- ------- ------- -------
Non-Interest Expense
- --------------------
Compensation and benefits 3,980 3,970 7,774 7,913
Occupancy and equipment expenses, net 1,057 1,117 2,183 2,262
Federal deposit insurance premiums 36 37 72 75
Advertising 279 268 569 569
ORE (income)/expense, net (1) 22 17 55
Other general and administrative 1,530 1,337 3,052 2,761
------- ------- ------- -------
Total Non-Interest Expense 6,881 6,751 13,667 13,635
------- ------- ------- -------
Income Before Provision for Income Taxes 17,444 11,685 30,056 22,700
Provision for Income Taxes 2,258 4,576 7,206 9,143
------- ------- ------- -------
Net Income $15,186 $ 7,109 $22,850 $13,557
======= ======= ======= =======
Earnings and Cash Dividends Per Common Share:
- ---------------------------------------------
Basic earnings per common share $1.54 $ .72 $2.31 $ 1.38
===== ===== ===== ======
Diluted earnings per common share $1.49 $ .70 $2.24 $ 1.33
===== ===== ===== ======
Basic weighted average common shares 9,878 9,839 9,882 9,824
===== ===== ===== =====
Diluted weighted average common & dilutive
potential shares 10,184 10,194 10,193 10,177
====== ====== ====== ======
Cash dividends per common share $ .40 $ .35 $ .80 $ .70
===== ===== ===== =====
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
5
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
-------------------------------------
Net Income $15,186 $ 7,109 $22,850 $13,557
Other Comprehensive Income, Net of Tax:
Unrealized Gain on Securities:
Unrealized holding gains arising during period 881 6,579 5,443 6,935
------- ------- ------- -------
Comprehensive Income $16,067 $13,688 $28,293 $20,492
======= ======= ======= =======
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
6
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
1998 1997
------------------
Cash flows from operating activities
Net income $ 22,850 $ 13,557
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for possible loan losses 28 321
Decrease in deferred loan fees and discounts, net (480) (218)
Accretion of discount in excess of amortization
of premium on MBS and CMOs (38) (214)
Accretion of discount in excess of amortization of
premium on debt securities (78) (171)
Depreciation and amortization on premises and equipment 978 909
Mortgages loans originated for sale (1,199) (359)
Proceeds from sale of mortgage loans originated for sale 1,192 365
Gains on sale of mortgage and other loans (58) (14)
Tax benefit for stock plans credited to capital 2,082 342
Decrease (increase) in interest due and accrued 304 (566)
Increase in official bank checks outstanding 5,688 1,969
Other, net (1,421) 5,546
-------- --------
Net cash provided by operating activities 29,848 21,467
-------- --------
Net cash flow from investing activities Loans originated:
Mortgage loans (135,904) (78,526)
Other loans (8,990) (10,090)
Purchases of CMOs held-to-maturity (34,987) (29,977)
Purchases of debt securities held-to-maturity and securities
available-for-sale (154,000) (244,920)
Principal payments on:
Mortgage loans 48,348 37,637
Other loans 9,033 9,332
CMOs 35,593 55,971
MBS 724 767
Proceeds from maturities of U.S. Government and
federal agency securities 270,000 250,000
Proceeds from sale of other loans 5,043 365
Purchases of Federal Home Loan Bank stock (1,277) (786)
Purchases of premises and equipment, net of disposals (1,942) (1,169)
Net decrease in investment in real estate holdings 1,214 223
-------- -------
Net cash provided by (used by) investing activities 32,855 (11,173)
-------- -------
<FN>
(CONTINUED)
</FN>
7
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
1998 1997
------------------
Net cash flow from financing activities
Net increase (decrease) in deposits 493 (11,759)
Increase (decrease) in advance payments for real estate
taxes and insurance 5,174 (1,178)
Proceeds from common stock option exercises 1,302 616
Cash dividends paid to common stockholders (7,921) (6,878)
Proceeds from stock offering for operating subsidiary 161 --
Payments to repurchase common stock (11,510) --
-------- --------
Net cash used by financing activities (12,301) (19,199)
-------- --------
Increase (decrease) in cash and cash equivalents 50,402 (8,905)
Cash and cash equivalents at beginning of year 74,924 99,394
-------- --------
Cash and cash equivalents at end of quarter $125,326 $ 90,489
======== ========
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
8
JSB FINANCIAL, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The financial information for JSB Financial, Inc. (the "Company") as
consolidated with its wholly owned subsidiary Jamaica Savings Bank FSB (the
"Bank") is prepared in conformity with generally accepted accounting principles
for interim financial statements and with instructions to Form 10-Q and Article
10 of Regulation S-X. Such principles are applied on a basis consistent with
those reflected in the 1997 Annual Report filed with the Securities and Exchange
Commission. The financial information included herein, other than the
consolidated statement of financial condition as of December 31, 1997, has been
prepared by management without an audit by independent certified public
accountants who do not express an opinion thereon. The consolidated statement of
financial condition as of December 31, 1997, has been derived from, but does not
include all the disclosures contained in, the audited consolidated financial
statements for the year ended December 31, 1997. The information furnished
includes all adjustments and accruals consisting only of normal recurring
accrual adjustments which are in the opinion of management, necessary for a fair
presentation of results for the interim periods. The foregoing interim results
are not necessarily indicative of the results of operations for the full year
ending December 31, 1998.
These consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto, included
in the Annual Report to Stockholders for JSB Financial, Inc. for the year ended
December 31, 1997.
2. Impact of New Accounting Standards
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income"
("Statement 130"). Comprehensive income represents the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. Statement 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements.
Effective January 1, 1998, the Company addressed SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information"
("Statement 131"). The Company determined that it has no reportable segments
pursuant to the criteria presented in Statement 131, however if such reportable
segments should be determined to exist in the future, the disclosure as required
by Statement 131 would be provided.
9
3. Impact of New Accounting Standard Not Yet Adopted
In June of 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("Statement 133"). Statement 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. Statement 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designed as (a) a hedge of
the exposure to changes in the fair value of a recognized asset or liability or
an unrecognized firm commitment, (b) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction.
The accounting for changes in the fair value of a derivative (that is,
gains and losses) depends on the intended use of the derivative and the
resulting designation.
Statement 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Initial application of this Statement should be
as of the beginning of an entity's fiscal quarter; on that date, hedging
relationships must be designated anew and documented pursuant to the provisions
of this Statement. Earlier application of all of the provisions of Statement 133
is encouraged, but it is permitted only as of the beginning of any fiscal
quarter that begins after the issuance of this Statement. Statement 133 should
not be applied retroactively to financial statements of prior periods.
The Company does not expect the adoption of Statement 133 to have a
material affect on its financial condition or results of operations.
10
4. Debt and Equity Securities
The following tables set forth information regarding the Company's debt
and equity securities as of:
June 30, 1998 December 31, 1997
--------------------------- ----------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------------------------- ----------------------------
(In Thousands)
Held-to-Maturity
- ----------------
U.S. Government and Federal
Agency Securities $128,981 $129,131 $244,903 $245,367
CMOs, net 103,472 103,668 104,040 104,270
MBS, net 3,301 3,594 4,024 4,359
-------- -------- -------- --------
Total Securities held-to maturity $235,754 $236,393 $352,967 $353,996
======== ======== ======== ========
Estimated Estimated
Cost Fair Value Cost Fair Value
--------------------------- ----------------------------
Available-for-Sale (In Thousands)
Equity securities:
Common stock $ 10,422 $ 47,386 $ 10,422 $ 41,216
SLM* stock 4 2,572 4 2,087
Freddie Mac stock 441 21,178 441 18,872
FNMA* stock 2 73 2 68
-------- -------- -------- ---------
Total equity securities $ 10,869 $ 71,209 $ 10,869 $ 62,243
======== ======== ======== =========
<FN>
* SLM Holding Corporation ("SLM"), formerly known as Student Loan Marketing
Association, Federal National Mortgage Association ("FNMA").
</FN>
5. Subsequent Events
On July 20, 1998, the Company's Board of Directors declared a $.40 per
share cash dividend on its common stock. The dividend is to be paid on August
19, 1998, to stockholders of record on August 5, 1998, and will total
approximately $3.9 million.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General/Financial Condition
- ---------------------------
JSB Financial, Inc. is a Delaware-chartered savings and loan holding
company, which owns 100% of the outstanding common stock of Jamaica Savings Bank
FSB (the "Bank"). The Company's assets, including the assets of the Bank,
totaled approximately $1.56 billion at June 30, 1998. In addition to the
Company's investment in the Bank, at June 30, 1998, the Company had $37.4
million in money market investments on deposit with the Bank and $45.0 million
in short-term federal agency securities.
Asset Quality
- -------------
The Bank generally includes in non-performing loans, loans which are 90
days or more in arrears and loans which have been placed on non-accrual status.
In addition to non-performing loans, non-performing assets include ORE, as well
as any other investments, if any, on which the collection of contractual
principal and interest is questionable. The ratio of non-performing loans to
total loans was .02% and 1.32% at June 30, 1998 and December 31, 1997,
respectively. Non-performing loans at December 31, 1997 included a $12.8 million
underlying cooperative mortgage loan that was under foreclosure and on
non-accrual status. (See Non-performing/Non-accrual Table, herein.)
At June 30, 1998, the Bank's non-performing assets, which totaled
$662,000, included: non-performing loans of $257,000 and $405,000 ORE. The ratio
of non-performing assets to total assets was .04% and .90% at June 30, 1998 and
December 31, 1997, respectively. The significant reduction in non-performing
assets resulted from the payoff on the $12.8 million mortgage loan, referred to
above, on which the Bank had entered into a settlement agreement on January 28,
1998. Upon satisfaction of this mortgage, the Bank received all contractual
principal, interest, legal and other fees due.
12
Loan Delinquency Table
At June 30, 1998 and December 31, 1997, delinquencies in the loan
portfolios were as follows:
61-90 Days 90 Days and Over
---------- ----------------
Number Principal Number Principal
of balance of balance
loans of loans loans of loans
----- -------- ----- --------
(Dollars in Thousands)
At June 30, 1998:
- -----------------
Delinquent loans:
Guaranteed(1) 12 $ 126 22 $ 250
Non-guaranteed 4 246 4 7
-- ------ -- -------
16 $ 372 26 $ 257
== ====== == =======
Ratio of delinquent loans
to total loans .03% .02%
At December 31, 1997:
- ---------------------
Delinquent loans
Guaranteed(1) 48 $ 221 82 $ 500
Non-guaranteed 5 10 5 12,769(2)
-- ------ -- -------
53 $ 231 87 $13,269
== ====== == =======
Ratio of delinquent loans
to total loans .02% 1.32%
<FN>
(1) Loans which are Federal Housing Administration ("FHA"), Veterans
Administration ("VA") or New York State Higher Education Services
Corporation guaranteed.
(2) Includes the $12,754,000 underlying cooperative mortgage loan,
which was satisfied during the second quarter of 1998. (See Asset
Quality, herein.)
</FN>
13
Non-performing/Non-accrual Table
- --------------------------------
The following table sets forth information regarding non-accrual loans
and loans which were delinquent 90 days or more on which the Bank was accruing
interest at June 30, 1998 and December 31, 1997:
June 30, December 31,
1998 1997
-------- ------------
(In Thousands)
Mortgage loans:
- ---------------
Non-accrual loans (1) $ -- $12,754
------- -------
Accruing loans 90 or more days overdue:
VA and FHA mortgages (2) 222 335
------- -------
Total 222 335
------- -------
Other loans:
- ------------
Non-accrual loans -- --
Accruing loans 90 or more days overdue:
Student loans 28 165
Consumer loans 7 15
------- -------
Total 35 180
------- -------
Total non-performing loans:
Non-accrual -- 12,754
Accruing loans 90 days or more overdue 257 515
------- -------
Total $ 257 $13,269
======= =======
Non-accrual loans to total loans --% 1.26%
Accruing loans 90 or more days overdue
to total loans .02 .06
Non-performing loans to total loans .02 1.32
<FN>
(1) Represents the $12.8 million underlying cooperative mortgage loan,
which was satisfied on May 28, 1998. (See Asset Quality, page 11,
herein.)
(2) The Bank's FHA and VA loans are guaranteed, seasoned loans. It is
management's belief that these loans, including those in arrears, do
not present any significant collection risk to the Bank, and therefore,
are presented separately.
There were no loans included in the above table that were modified in a
trouble debt restructure. There were no impaired loans at June 30, 1998 and the
one $12,754,000 impaired loan which was on non-accrual status at December 31,
1997 was satisfied on May 28, 1998. The average balance of impaired loans was
$10,358,221 and $12,754,000 for the six months ended June 30, 1998 and June 30,
1997, respectively. Interest-income recorded for the impaired loan for the six
months ended June 30, 1998 was $387,000. No income was recorded on the impaired
loan for the quarter ended and six months ended June 30, 1997; however, all
contractual interest which was not previously accrued was received during the
second quarter of 1998. The $4,346,000 recorded for the recovery of prior period
expenses and unaccrued interest on troubled loans includes $2,752,600
contractual interest for the period from October 1, 1995 through February 10,
1998, when the borrower resumed making interest payments pursuant to a
settlement agreement. For the six months ended June 30, 1997, the impaired loan
resulted in unrecorded interest of $590,000, which was fully recovered, as
discussed above. Loans restructured in a trouble debt restructure, other than
those classified as impaired and/or non-accrual loans, were $1,814,000 and
$1,840,000 at June 30, 1998 and December 31, 1997, respectively. Interest
forfeited attributable to these loans was $33,000 and $31,000 for the six months
ended June 30, 1998 and 1997, respectively.
</FN>
14
Loan Loss Activity Table
- ------------------------
Activity in the allowance for possible loan losses for the mortgage
loan portfolio and the other loan portfolio are summarized for the six months
ended June 30, 1998 and the year ended December 31, 1997, as follows:
June 30, December 31,
1998 1997
-------- ------------
(Dollars in Thousands)
Mortgage Portfolio Loan Loss Allowance:
- ---------------------------------------
Balance at beginning of period $5,741 $5,176
Provision for possible loan losses -- 600
Loans charged off -- (35)
Recoveries of loans previously charged off -- --
------ ------
Balance at end of period $5,741 $5,741
====== ======
Ratios for Mortgage Portfolio:
- ------------------------------
Net charge-offs to average mortgages --% --%*
Allowance for possible loan losses to
net mortgage loans .54 .59
Allowance for possible loan losses to
mortgage loans delinquent 90 days or more ** 43.86
Other Loan Portfolio Loss Allowance:
- ------------------------------------
Balance at beginning of period $ 139 $ 151
Provision for possible loan losses 28 48
Loans charged off (21) (72)
Recoveries of loans previously charged off 7 12
------ ------
Balance at end of period 153 $ 139
====== ======
Ratios for Other Loan Portfolio:
- --------------------------------
Net charge-offs to average other loans .04% .04%
Allowance for possible loan losses to
net other loans .64 .48
Allowance for possible loan losses to
other loans delinquent 90 days or more ** 77.22
<FN>
* Is less than .01%.
** Is greater than 100%.
</FN>
15
Liquidity and Capital Resources
- -------------------------------
The Company's funds are primarily obtained through dividends paid by
the Bank. The Bank's primary source of funds are deposits, proceeds from
maturities of debt securities, principal and interest payments on CMOs, mortgage
and other loans. During the six months ended June 30, 1998, the $154.0 million
of purchases of U.S. Government and federal agency securities represented the
most significant use of funds in investing activities. Mortgage originations for
the portfolio, substantially all of which are at fixed rates, for the six months
ended 1998 were $135.9 million, compared to $78.5 million for the first half of
1997. CMO purchases for the six months ended June 30, 1998 were $35.0 million,
compared to $30.0 for the six months ended June 30, 1997. During the first half
of 1998, maturities of U.S. Government and federal agency securities generated
$270.0 million, the most significant cash inflow from investing activities,
followed by principal payments on mortgage loans and CMOs of $48.3 million and
$35.6 million, respectively. The $11.5 million cost of repurchasing the
Company's common stock represents the largest use of funds in financing
activities for the first six months of 1998. The increase in dividend payments
reflects the increase in dividends paid per share to $.80 for the first half of
1998, compared to $.70 per share for the first half of 1997.
The net increase in deposits of $493,000 to $1.122 billion at June 30,
1998, compared to deposits at December 31, 1997, reflects increases in
certificate accounts, demand deposit accounts and lease security accounts of
$14.8 million, $1.1 million and $784,000, respectively, partially offset by a
$11.4 million decrease in passbook accounts, a $3.9 million decrease in money
market accounts and an $821,000 decrease in negotiable order of withdrawal
("NOW") accounts. Interest rates offered on passbook accounts remained
relatively low compared to alternative short-term certificate of deposits
offered by the Bank and other non-bank products available through various
investment firms. This scenario has caused the trend of deposit shifts from
passbook accounts to short-term certificate accounts, which offer higher rates.
Management continues to monitor deposit levels and interest rates in conjunction
with asset structure and has evaluated and implemented various strategies to
provide for targeted objectives in various interest rate scenarios. Interest
rate spread, net interest margin, liquidity, and related asset quality are some
of the key measures of financial performance that management remains focused on.
The Bank's assets are structured such that a gradual decline in deposits will
not adversely affect the Company. The Bank's liquidity ratios continue to exceed
all short and long term minimum regulatory requirements. Management is focused
on providing quality customer service as its main strategy for maintaining its
relationships with its depositors. The Bank has expanded its range of services
to customers, including automated telephone banking and credit cards
The Bank attempts to influence deposit levels and composition through
its interest rate structure. Management believes that the relatively low level
of interest rates and the strong performance and growth of the capital markets
are the primary contributors for the continued decline in deposits over the past
several years. Management chose to allow deposits to decline, rather than pay
rates that would result in a lower net income or necessitate modifying the
Bank's existing investment structure and guidelines. Rates offered on the Bank's
deposit accounts are competitive with those rates offered by other financial
institutions in its market area. While the highest percentage of deposits has
remained in passbook and lease security accounts, the trend of deposit shifts
has moved away from passbook accounts and towards certificate accounts.
Management cannot predict the future direction of deposits. As deposits decline,
interest earning assets may also decline, resulting in a decrease in interest
income, the primary component in the Company's net income.
The Company repurchased 219,300 shares of its common stock during the
six months ended June 30, 1998, pursuant to its tenth stock repurchase program
(the "Current Program"), which began on June 12, 1996. As of June 30, 1998,
634,300 of the 900,000 shares targeted for repurchase under the Current Program
were repurchased at an aggregate cost of $25.2 million, or at an average price
of $39.74 per share. Pursuant to the Company's stock option plans, 130,163
shares of treasury stock were reissued for option exercises during the six
months ended June 30, 1998. During the six months ended June 30, 1998, the
Company issued 1,800 shares of treasury stock for directors compensation.
16
On April 14, 1998, the Company's Board of Directors declared a cash
dividend of $.40 per share to stockholders of record on May 6, 1997. The
dividend payment, which totaled $4.0 million, was made on May 20, 1998.
Regulations
- -----------
As a condition of deposit account insurance, Office of Thrift
Supervision ("OTS") regulations require that the Bank calculate three regulatory
net worth requirements on a quarterly basis, and satisfy each requirement at the
calculation date and throughout the ensuing quarter. The three requirements are:
tangible capital of 1.50%, leverage ratio (or "core capital") of 3.00%, and a
risk-based assets capital ratio of 8.00%. Although the minimum core capital
ratio is 3.00%, the OTS Prompt Corrective Action Regulation stipulates that an
institution with less than 4.00% core capital is deemed to be undercapitalized.
The Bank's capital ratios at June 30, 1998 were as follows:
Percentage Dollars
---------- -------
(In Thousands)
TANGIBLE CAPITAL
Required 1.50% $ 21,936
Actual 17.34 253,537
----- --------
Excess 15.84% $231,601
===== ========
CORE CAPITAL
Required 3.00% $ 43,872
Actual 17.34 253,537
----- --------
Excess 14.34% $209,665
===== ========
RISK BASED CAPITAL
Required 8.00% $ 91,459
Actual 21.56 246,461
----- --------
Excess 13.56% $155,002
===== ========
17
Comparison of Operating Results for the Three Months Ended
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
Net income, which included two non-recurring items, for the three months
ended June 30, 1998, was $15.2 million, or $1.49 per diluted share ($1.54 per
basic share), compared with $7.1 million, or $.70 per diluted share ($.72 per
basic share) for the three months ended June 30, 1997.
Non-Recurring Items:
Earnings for the second quarter ended June 30, 1998 were significantly
improved by two non-recurring items. In connection with the settlement on the
$12.8 million underlying mortgage loan, the Company recognized additional
pre-tax income of $3.3 million for the three months ended June 30, 1998.
Also, during the second quarter of 1998, the Company experienced a lower
effective tax rate principally related to a realignment of operations involving
an operating subsidiary of the Bank. As a result, net income increased by $5.0
million for the quarter ended June 30, 1998.
Net interest income for the three months ended June 30, 1998, was $18.5
million, compared to $17.1 million for the three months ended June 30, 1997. The
increase in net interest income reflects a $1.3 million increase in interest
income and a $190,000 decrease in interest expense. The annualized yield on
interest earning assets increased to 7.74%, compared to 7.51%, for the quarters
ended June 30, 1998 and 1997, respectively; average interest earning assets
increased by $24.6 million. The annualized cost of interest bearing deposits
decreased slightly to 3.58% from 3.60% for the quarters ended June 30, 1998 and
1997, respectively. Average interest bearing deposits were $1.088 million for
the quarter ended June 30, 1998 compared to $1.102 million for the quarter ended
June 30, 1997. For the quarter ended June 30, 1998, the interest rate spread and
net interest margin increased to 4.16% and 5.07%, respectively, compared to
3.91% and 4.75%, respectively for the quarter ended June 30, 1997.
Income earned on mortgage loans increased by 19.5%, to $21.8 million for
the three months ended June 30, 1998, compared to $18.3 million for the quarter
ended June 30, 1997, reflecting continued growth in the mortgage loan portfolio.
This increase was partially offset by a decrease in the yield to 8.38% for the
quarter ended June 30, 1998, from 8.51% for the quarter ended June 30, 1997.
For the three months ended June 30, 1998, income from debt and equity
securities, decreased by $2.2 million, or 41.5%, to $3.1 million from $5.3
million for the three months ended June 30, 1997. This decrease is the result of
a decrease in the average investment in U.S. Government and federal agency
securities and other investments of $153.9 million, or 43.9%, to $196.3 million,
compared to $350.2 million for the three months ended June 30, 1997. The
annualized yield on the debt and equity security portfolio increased to 6.27%
for the three months ended June 30, 1998 from 6.01% for the three months ended
June 30, 1997. The debt and equity securities portfolio activity for the current
period included purchases of $79.0 million and maturities of $160.0 million,
compared with purchases of $110.0 million and maturities of $155.0 million for
the quarter ended June 30, 1997.
For the quarter ended June 30, 1998, income on CMOs decreased by 23.9%,
to $1.6 million, with an annualized yield of 6.17%, from income of $2.1 million
with an annualized yield of 5.93% for the quarter ended June 30, 1997. During
the second quarter of 1998, the Bank received principal payments of $14.4
million on CMOs, compared with principal payments of $27.3 million for the
quarter ended June 30, 1997. CMO purchases during the quarter ended June 30,
1998 totaled $15.0 million. There were no purchases of CMOs during the quarter
ended June 30, 1997. The Bank did not sell any CMOs during either period.
18
Income on federal funds sold increased by $479,000, or 69.0% to $1.2
million for the quarter ended June 30, 1998 from $694,000 for the quarter ended
June 30, 1997. This increase resulted from an increase in the average investment
in federal funds of $35.4 million to $86.4 million for the current period,
compared with $51.0 million for the quarter ended June 30, 1997. The annualized
yield on federal funds sold was 5.43% for the current quarter, compared to 5.44%
for the quarter ended June 30, 1997.
Interest expense on deposits was $9.7 million for the quarter ended June
30, 1998, compared to $9.9 million for the quarter ended June 30, 1997. Average
interest bearing deposits decreased by $14.0 million, to $1.088 billion for the
three months ended June 30, 1998, compared to $1.102 billion for the three
months ended June 30, 1997. The average rate paid on interest bearing deposits
decreased two basis points to 3.58% for the quarter ended June 30, 1998 from
3.60% from the comparative quarter in 1997.
The provision for possible loan losses for the quarter ended June 30,
1998 was $14,000, compared to $161,000 for the quarter ended June 30, 1997. The
provision for the second quarter of 1997 included provisions of $150,000 for the
general valuation mortgage allowance. During the second quarter of 1998, there
were no provisions made for mortgage loan losses. Based on internal loan review
analysis, no additions to the mortgage allowance were considered necessary
during the period. Management will continue to monitor the performance of the
loan portfolios and may adjust allowances accordingly. During the quarter ended
June 30, 1998, the Bank received a final settlement on the $12.8 million
underlying cooperative mortgage loan, whereby all contractual principal,
interest, legal and other fees were recovered. This satisfaction resulted in the
ratio of non-performing loans to total loans decreasing to .02% at June 30,
1998, from 1.32% at December 31, 1997.
Total non-interest income for the three months ended June 30, 1998,
increased to $5.8 million from $1.5 million for the three months ended June 30,
1997, a net increase of $4.3 million, or 277.9%. The $3.3 million recovery of
prior period expenses and unaccrued interest on troubled loans resulted from the
final satisfaction on the $12.8 million mortgage loan (as previously discussed).
Due to the low interest rate environment, mortgage prepayment activity has
increased. As a result, loan fees and service charges increased by $1.1 million,
primarily reflecting prepayment penalties received by the Company during the
second quarter of 1998 on large mortgage loans. Real estate operations decreased
by $442,000, reflecting the decrease in real estate properties owned by the
Bank's subsidiaries. The $314,000 increase in miscellaneous income includes a
refund of $264,000 for real estate taxes from prior years on the Company's
headquarters and an increase of $53,000 in profits realized on the sale of
student loans.
Non-interest expense increased by $130,000, to $6.9 million during the
quarter ended June 30, 1998. The $193,000 increase in other general and
administrative expense primarily reflects an increase in consultation fees in
connection with the realignment of a Bank subsidiary.
The provision for income taxes decreased by $2.3 million, or 50.7%, to
$2.3 million for the three months ended June 30, 1998, from $4.6 million for the
three months ended June 30, 1997. This decrease is reflective of the decrease in
the Company's effective tax rate from 39.2% for the quarter ended June 30, 1997,
to 12.9% for the quarter ended June 30, 1998. The significantly lower effective
tax rate experienced during the second quarter of 1998 is principally related to
the realignment of operations involving an operating subsidiary of the Bank.
This realignment may also positively impact (but to a lesser extent) the
effective tax rate during the remainder of 1998, although such impact is
currently uncertain.
19
Comparison of Operating Results for the Six Months Ended June 30, 1998 and 1997
- -------------------------------------------------------------------------------
Net income, which included two non-recurring items, for the six months
ended June 30, 1998, was $22.9 million, or $2.24 per diluted share ($2.31 per
basic share), compared with $13.6 million, or $1.33 per diluted share ($1.38 per
basic share) for the six months ended June 30, 1997.
Non-Recurring Items:
Earnings for the six months ended June 30, 1998 were significantly
improved by two non-recurring items. In connection with the settlement on the
$12.8 million underlying co-operative mortgage loan, the Company recognized
additional pre-tax income of $4.3 million for the six months ended June 30,
1998.
Also, during the six months ended June 30, 1998, the Company experienced
a lower effective tax rate principally related to the second quarter realignment
of operations involving an operating subsidiary of the Bank. As a result, net
income increased by $5.0 million for the six months ended June 30, 1998.
Net interest income for the six months ended June 30, 1998, was $36.3
million, compared to $34.0 million for the six months ended June 30, 1997. The
increase in net interest income reflects a $2.0 million increase in interest
income, and a $286,000 decrease in interest expense. The annualized yield on
interest earning assets increased to 7.67%, compared to 7.49%, for the six
months ended June 30, 1998 and 1997, respectively, while average interest
earning assets increased by $19.3 million. The annualized cost of interest
bearing deposits remained unchanged at 3.56% for the six months ended June 30,
1998 and 1997. Average interest bearing deposits were $1.088 million for the six
months ended June 30, 1998 compared to $1.104 million for the six months ended
June 30, 1997. For the year to date period ended June 30, 1998, the interest
rate spread and net interest margin increased to 4.11% and 5.00%, respectively,
compared to 3.93% and 4.75%, respectively for the six months ended June 30,
1997.
Income earned on mortgage loans increased by $6.1 million, or 17.0%, to
$42.4 million for the six months ended June 30, 1998, reflecting continued
growth in the mortgage loan portfolio. This increase was partially offset by a
decrease in the mortgage portfolio yield to 8.33% (which included increased
accretion of deferred fees from mortgage payments) for the six months ended June
30, 1998, from 8.54% for the six months ended June 30, 1997.
For the six months ended June 30, 1998, income on debt and equity
securities decreased by $3.6 million, or 35.0%, to $6.7 million from $10.3
million for the six months ended June 30, 1997. This decrease is the result of a
decrease in the average investment in U.S. Government and federal agency
securities and other investments of $129.8 million, or 37.6%, to $215.5 million
for the first half of 1998, compared to $345.3 million for the six months ended
June 30, 1997. The annualized yield on the debt and equity security portfolio
increased to 6.20% from 5.95% for the comparative six month periods. The debt
and equity securities portfolio activity for the current period included
purchases of $154.0 million and maturities of $270.0 million, compared with
purchases of $244.9 million and maturities of $250.0 million for the six months
ended June 30, 1997.
For the six months ended June 30, 1998, income on CMOs decreased by
28.4%, to $3.1 million, with an annualized yield of 6.17%, from income of $4.3
million with an annualized yield of 5.89% for the six months ended June 30,
1997. This decrease is reflective of the decrease in the average investment in
the CMO portfolio of $46.0 million, or 31.6% for the comparative six month
period. During the six months ended June 30, 1998, the Bank received principal
payments of $35.6 million on CMOs, compared with $56.0 million for the six
months ended June 30, 1997. CMO purchases during the first six months of 1998
totaled $35.0 million, compared to $30.0 million for the first half of 1997. The
Bank did not sell any CMOs during either period.
20
Income on federal funds increased by $759,000, or 46.9%, to $2.4 million
for the six months ended June 30, 1998, from $1.6 million for the six months
ended June 30, 1997. This increase resulted from an increase in the average
investment in federal funds of $27.3 million, to $88.0 million for the current
period, compared with $60.7 million for the six months ended June 30, 1997. The
annualized yield on federal funds sold increased to 5.40% for the current six
month period, compared to 5.34% for the six month period ended June 30, 1997.
Interest expense on deposits decreased by 1.5%, to $19.4 million for the
six months ended June 30, 1998, compared to $19.7 million for the six months
ended June 30, 1997. Average interest bearing deposits decreased by $16.6
million, or 1.5%, to $1.088 billion for the six months ended June 30, 1998,
compared to $1.104 billion for the six months ended June 30, 1997, while the
average rate paid on interest bearing deposits remained unchanged at 3.56% for
the comparative six month periods.
The provision for possible loan losses for the six months ended June 30,
1998 was $28,000, compared to $321,000 for the six months ended June 30, 1997.
The provision for the six month period ending June 30, 1997 included provisions
of $300,000 for the general valuation mortgage allowance. For the six month
period ended June 30, 1998, management made no additions to the mortgage
allowance. Management regularly evaluates the quality and performance of the
Company's asset portfolios, and thereby assesses the adequacy of loss
allowances, which are adjusted through the provisions. (See Asset Quality,
herein.)
Total non-interest income for the six months ended June 30, 1998,
increased to $7.5 million from $2.7 million for the six months ended June 30,
1997, a net increase of $4.8 million, or 181.5%. The $4.3 million recovery of
prior period expenses and unaccrued interest on troubled loans reflects payments
received during the first half of 1998 from the final settlement on a $12.8
million underlying cooperative mortgage loan. (See Asset Quality, herein.) Loan
fees and service charges increased by $870,000, primarily reflecting prepayment
penalties received by the Company during the second quarter of 1998 for three
large mortgage loans; partially offset by decreases of $130,000 in prepayment
penalties received by the Bank and $63,000 in personal check fees. Real estate
operations decreased by $721,000, primarily the result of a decrease in real
estate properties owned by the Bank. The $315,000 increase in miscellaneous
income reflects a refund of $264,000 for real estate taxes from prior years on
the Company's headquarters and a $50,000 increase in commissions on loaned
securities.
Non-interest expense remained relatively stable, increasing by $32,000,
or 0.23%, to $13.7 million for the first six months of 1998 compared to the
first six months of 1997. The $291,000 increase in other general and
administrative expense reflects increases in computer related expenses in
connection with the newer equipment. The $139,000 decrease in compensation and
benefits reflects an increase in income earned on excess pension fund assets.
The provision for income taxes decreased by $1.9 million, or 21.2%, to
$7.2 million for the six months ended June 30, 1998, from $9.1 million for the
six months ended June 30, 1997. This decrease in taxes accompanied by an
increase in pre-tax income, reflects a decrease in the Company's effective tax
rate to 24.0% for the six months ended June 30, 1998, from 40.3% for the six
months ended June 30, 1997. The lower effective tax rate resulted from a
realignment of operations involving an operating subsidiary of the Bank. This
realignment may also positively impact (but to a lesser extent) the effective
tax rate during the remainder of 1998, although such impact is currently
uncertain.
21
Private Securities Litigation Reform Act Safe Harbor Statement
- --------------------------------------------------------------
In addition to historical information, this Form 10-Q 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.
22
PART II - OTHER INFORMATION
ITEM 1. Legal proceedings
The Bank is a defendant in several lawsuits arising out of the
normal conduct of business. In the opinion of management, after
consultation with legal counsel, the ultimate outcome of these matters
is not expected to have a material adverse effect on the Company's
results of operations, business operations or the consolidated
financial condition of the Company.
ITEM 2. Changes in securities (Not Applicable)
ITEM 3. Defaults upon Senior Securities (Not Applicable)
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on May 12, 1998,
present in person or by proxy were 8,872,440 of 9,882,547 shares of
Common Stock of JSB Financial, Inc. entitled to vote at such meeting.
Resolution I. All nominees to serve as a Director on the
Company's Board were elected as follows*:
For Withheld
Park T. Adikes 8,576,595 295,845
Richard M. Cummins 8,560,130 312,310
Richard W. Meyer 8,581,538 290,902
Arnold B. Pritcher 8,568,130 304,310
*There were no broker non-votes.
The continuing directors were: Joseph C. Cantwell, Howard J. Dirkes, Jr., Cynthia Gibbons, James E.
Gibbons, Jr., Edward P. Henson, Alfred F. Kelly and Paul R. Screvane.
Resolution II. Ratification of the appointment of KPMG Peat
Marwick LLP, as independent auditors for the year ending December 31,
1998, as follows*:
For: 8,807,399
Against: 48,901
Abstain: 16,140
*There were no broker non-votes.
Resolution III. Approval of an amendment to the Company's
Certificate of Incorporation increasing the number of authorized shares
of Common Stock from 30,000,000 shares to 65,000,000 shares, as
follows*:
For: 7,820,594
Against: 1,014,588
Abstain: 37,258
*There were no broker non-votes.
23
ITEM 5. Other information (Not Applicable)
ITEM 6. Exhibits and Reports on Form 8-K
Page
Number
------
(a) Exhibits
3.01 Articles of Incorporation (1)
3.02 By-laws (2)
11.00 Computation of Earnings Per Share 26
27.00 Financial Data Schedule for the Six Months Ended June 30, 1998 27
27.01 Restated Financial Data Schedule for the Six Months Ended June 30, 1997 28
(b) Reports on Form 8-K (Not Applicable)
<FN>
(1) Incorporated herein by reference to Exhibits filed with
the Registration Statement on Form S-1, Registration No.
33-33821.
(2) Incorporated herein by reference to Exhibits filed with
the Form 10-K for the Year Ended December 31, 1997.
</FN>
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Quarterly Report on the Form
10-Q for the quarter ended June 30, 1998, to be signed on its behalf by the
undersigned, thereunto duly authorized.
JSB Financial, Inc.
(By)
/s/ Park T. Adikes
Park T. Adikes
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
DATE: August 6, 1998 /s/ Park T. Adikes
-------------- --------------
Park T. Adikes
Chief Executive Officer
DATE: August 6, 1998 /s/ Thomas R. Lehmann
-------------- -----------------
Thomas R. Lehmann
Chief Financial Officer
25
Exhibit Index
-------------
Exhibit
No. Identification of Exhibit
- ------- -------------------------
11.00 Statement Re: Computation of Per Share Earnings
27.00 Financial Data Schedule for the Six Months Ended June 30, 1998
27.01 Restated Financial Data Schedule for the Six Months Ended June 30, 1998