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 SEPTEMBER 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 NOVEMBER 9, 1998
- --------------------- -------------------------------
$.01 PAR VALUE 9,575,731
2
INDEX
PART I - FINANCIAL INFORMATION
Page
Number
ITEM 1. Financial Statements - Unaudited
Consolidated Statements of Financial Condition
at September 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations for the Three
Months and Nine Months Ended September 30, 1998
and September 30, 1997 4
Consolidated Statements of Comprehensive Income for
the Three Months and Nine Months Ended September 30, 1998
and September 30, 1997 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and September 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 11-22
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 23-25
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 26
ITEM 2. Changes in Securities 26
ITEM 3. Defaults Upon Senior Securities 26
ITEM 4. Submission of Matters to a Vote of Security Holders 26
ITEM 5. Other Information 26
ITEM 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Exhibit Index 28
Exhibit 11.00 Computation of Earnings Per Share 29
Exhibit 27.00 Financial Data Schedule for the Nine Months Ended September 30, 1998 30
Exhibit 27.01 Restated Financial Data Schedule for the Nine Months Ended September 30, 1997 31
3
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
1998 1997
---- ----
ASSETS
- ------
Cash and due from banks $ 12,035 $ 12,924
Federal funds sold 50,500 62,000
---------- ---------
Cash and cash equivalents 62,535 74,924
Securities available-for-sale, at estimated fair value 67,284 62,243
Securities held-to-maturity, net (estimated fair value of
$241,865 and $353,996, respectively) 241,008 352,967
Other investments 8,923 7,645
Mortgage loans, net 1,111,232 970,737
Other loans, net 23,713 29,008
Premises and equipment, net 18,264 17,029
Interest due and accrued 9,055 9,278
Real estate held for sale and Other real estate ("ORE") 1,322 3,450
Other assets 9,100 7,750
---------- ----------
Total Assets $1,552,436 $1,535,031
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits $1,109,613 $1,121,203
Advance payments for real estate taxes and insurance 21,728 10,322
Official bank checks outstanding 7,625 10,405
Deferred tax liability, net 17,500 15,628
Accrued expenses and other liabilities 14,676 9,959
----------- ----------
Total Liabilities 1,171,142 1,167,517
----------- ----------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
- --------------------
Preferred stock ($.01 par value, 15,000,000 shares authorized;
none issued) -- --
Common stock ($.01 par value, 65,000,000 shares authorized;
16,000,000 issued; 9,759,239 and 9,919,927
outstanding, respectively) 160 160
Additional paid-in capital 168,023 165,112
Retained income, substantially restricted 331,891 311,436
Accumulated other comprehensive income:
Net unrealized gain on securities available-for-sale, net of tax 31,706 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 (6,240,761 and 6,080,073
shares, respectively) (146,018) (133,464)
---------- ----------
Total Stockholders' Equity 381,294 367,514
---------- ----------
Total Liabilities and Stockholders' Equity $1,552,436 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------------------------
1998 1997 1998 1997
----------------------------------------------------------------
Interest Income
- ---------------
Mortgage loans, net $22,157 $18,431 $64,518 $54,650
Debt & equity securities, net 2,514 4,919 9,195 15,193
Collateralized mortgage obligations ("CMOs"), net 1,636 1,893 4,704 6,175
Other loans, net 426 528 1,436 1,539
Mortgage-backed securities ("MBS"), net 75 119 252 390
Federal funds sold 773 906 3,151 2,525
------- ------- ------- -------
27,581 26,796 83,256 80,472
------- ------- ------- -------
Interest Expense
- ----------------
Deposits 9,714 10,094 29,098 29,764
------- ------- ------- -------
Net Interest Income 17,867 16,702 54,158 50,708
Provision for Possible Loan Losses 13 162 41 483
------- ------- ------- -------
Net Interest Income After Provision for
Possible Loan Losses 17,854 16,540 54,117 50,225
------- ------- ------- -------
Non-Interest Income
- -------------------
Real estate operations, net 172 260 287 1,096
Loan fees and service charges 1,967 1,024 4,559 2,746
Recovery of prior period expenses & unaccrued
interest on troubled loans - - 4,346 -
Gain on sale of investments, net - 2,874 - 2,874
Miscellaneous income 1,359 355 1,766 447
------- ------- ------- -------
3,498 4,513 10,958 7,163
------- ------- ------- -------
Non-Interest Expense
- --------------------
Compensation and benefits 4,167 4,049 11,941 11,962
Occupancy and equipment expenses, net 1,195 1,181 3,378 3,443
Federal deposit insurance premiums 36 37 108 112
Advertising 266 269 835 838
ORE expense, net 8 1 25 56
Other general and administrative 1,479 1,526 4,531 4,287
------- ------- ------- -------
7,151 7,063 20,818 20,698
------- ------- ------- -------
Income Before Provision for Income Taxes 14,201 13,990 44,257 36,690
Provision for Income Taxes 2,824 5,436 10,030 14,579
------- ------- ------- -------
Net Income $11,377 $ 8,554 $34,227 $22,111
======= ======= ======= =======
Earnings and Cash Dividends Per Common Share:
- ---------------------------------------------
Basic earnings per common share $1.16 $ .87 $3.47 $ 2.25
===== ===== ===== ======
Diluted earnings per common share $1.13 $ .84 $3.37 $ 2.17
===== ===== ===== ======
Basic weighted average common shares 9,830 9,871 9,864 9,840
===== ===== ===== =====
Diluted weighted average common & dilutive
potential shares 10,093 10,215 10,159 10,191
====== ====== ====== ======
Cash dividends per common share $ .40 $ .35 $1.20 $1.05
===== ===== ===== =====
<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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------------------------
1998 1997 1998 1997
------------------------------------------------------------
Net Income $11,377 $ 8,554 $34,227 $22,111
Other Comprehensive Income, Net of Tax:
Unrealized Gain on Securities:
Unrealized holding (losses)/gains arising
during period (2,206) (512) 3,237 6,423
-------- ------- ------- -------
Comprehensive Income $ 9,171 $ 8,042 $37,464 $28,534
======== ======= ======= =======
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
6
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
Cash flows from operating activities 1998 1997
- ------------------------------------ ----------------------------------------
Net income $ 34,227 $ 22,111
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for possible loan losses 41 483
Net gain on sale/redemption of equity securities - (2,874)
Decrease in deferred loan fees and discounts, net (576) (330)
Accretion of discount in excess of amortization
of premium on MBS and CMOs (47) (265)
Accretion of discount in excess of amortization of
premium on debt securities (90) (256)
Depreciation and amortization on premises and equipment 1,544 1,385
Mortgages loans originated for sale (4,249) (1,240)
Proceeds from sale of mortgage loans originated for sale 4,229 1,259
Gains on sale of mortgage and other loans (45) (27)
Tax benefit for stock plans credited to capital 2,430 571
Decrease (increase) in interest due and accrued 223 (1,160)
Net gain on sale of other real estate - (1)
Decrease in official bank checks outstanding (2,780) (2,171)
Other, net 3,524 10,580
-------- --------
Net cash provided by operating activities 38,431 28,065
-------- --------
Net cash flow from investing activities
- ---------------------------------------
Loans originated:
Mortgage loans (208,769) (120,249)
Other loans (12,282) (15,452)
Purchases of CMOs held-to-maturity (46,701) (55,035)
Purchases of debt securities held-to-maturity and securities
available-for-sale (279,000) (389,920)
Principal payments on:
Mortgage loans 68,849 46,741
Other loans 12,469 14,046
CMOs 47,686 82,597
MBS 1,111 1,198
Proceeds from maturities of U.S. Government and
federal agency securities 389,000 390,000
Proceeds from sale of other loans 5,133 388
Purchases of Federal Home Loan Bank stock (1,277) (786)
Proceeds from sale/redemption of equity securities - 3,016
Purchases of premises and equipment, net of disposals (2,779) (1,632)
Net decrease in real estate held for sale 2,128 984
Proceeds from sale of ORE - 7
-------- --------
Net cash used by investing activities (24,432) (44,097)
-------- --------
(CONTINUED)
7
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------------
1998 1997
----------------------------------------
Net cash flow from financing activities
- ---------------------------------------
Net decrease in deposits (11,590) (21,595)
Increase in advance payments for real estate
taxes and insurance 11,406 2,016
Proceeds from common stock option exercises 1,531 1,350
Cash dividends paid to common stockholders (11,862) (10,335)
Proceeds from stock offering for operating subsidiary 161 --
Payments to repurchase common stock (16,034) --
-------- --------
Net cash used by financing activities (26,388) (28,564)
-------- --------
Decrease in cash and cash equivalents (12,389) (44,596)
Cash and cash equivalents at beginning of year 74,924 99,394
-------- --------
Cash and cash equivalents at end of quarter $ 62,535 $ 54,798
========= ========
<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 and the Form's 10-Q for the periods ended March 31, 1998 and
June 30, 1998.
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.
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. The accounting
for changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. 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.
9
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. When implemented, hedging
relationships must be designated anew and documented pursuant to the provisions
of Statement 133. 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.
4. Debt and Equity Securities
The following tables set forth information regarding the Company's debt
and equity securities as of:
September 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 $134,993 $135,078 $244,903 $245,367
CMOs, net 103,102 103,640 104,040 104,270
MBS, net 2,913 3,147 4,024 4,359
-------- -------- -------- --------
Total Securities held-to maturity $241,008 $241,865 $352,967 $353,996
======== ======== ======== ========
Estimated Estimated
Cost Fair Value Cost Fair Value
--------------------------- ------------------------------
(In Thousands)
Available-for-Sale
- ------------------
Marketable equity securities $ 10,869 $ 67,284 $ 10,869 $ 62,243
======== ======== ======== ========
10
5. Subsequent Events
a. On October 13, 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 November 18, 1998, to stockholders of record on November 4, 1998, and
will total approximately $3.9 million.
b. On October 13, 1998, the Company's Board of Directors approved the
Company's eleventh stock repurchase program of up to 900,000 shares of
common stock. The shares will be purchased from time to time on the open
market.
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 Company's assets, including the assets of the Bank, totaled $1.55
billion at September 30, 1998. In addition to the Company's investment in the
Bank, at September 30, 1998, the Company had $11.9 million in money market
investments and $65.0 million in short-term federal agency securities.
Asset Quality
- -------------
The Bank generally includes in non-performing assets: (1) loans which
are 90 days or more in arrears; (2) loans which have been placed on non-accrual
status; (3) ORE; and (4) any other investments, if any, on which the collection
of contractual principal and interest is questionable. At September 30, 1998,
the Bank's non-performing assets, which totaled $850,000, included:
non-performing loans of $461,000 and ORE of $389,000. The ratio of
non-performing assets to total assets was .05% and .90% at September 30, 1998
and December 31, 1997, respectively. The ratio of non-performing loans to total
loans was .04% and 1.32% at September 30, 1998 and December 31, 1997,
respectively. The significant reduction in non-performing assets and
non-performing loans reflects the satisfaction of the $12.8 million underlying
cooperative mortgage loan, that was under foreclosure and on non-accrual status
at December 31, 1997. This loan was satisfied during the second quarter of 1998.
(See Non-performing/Non-accrual Table, herein.)
Year 2000 Issues
- ----------------
The following discussion and tables contain certain forward-looking
information with respect to management's expectations for implementation and
compliance with year 2000 ("Y2K") issues and requirements for the Company's
internal and outsourced computer hardware, operating systems and applications
for both information technology systems and non-information technology systems,
such as telephone systems, air conditioning, electrical, etc. The actual
readiness of these systems may differ materially from what is presented below.
Factors that may cause differences between anticipated Y2K readiness and actual
Y2K readiness include failure of outside vendors to provide upgrades on a timely
basis, failure of the Bank's hardware, operating systems and applications to
meet Y2K readiness requirements as planned. In addition, the actions of
depositors and borrowers in anticipation of Y2K complications may adversely
impact the Company, regardless of the Company's actual state of Y2K readiness.
In the early 1990's, the Bank's existing staff began converting its
mainframe computer system to be Y2K compliant. As of September 30, 1997, 100% of
the Bank's mainframe programs were believed to be Y2K compliant. However the
existing mainframe has not been tested for Y2K compliance, as the Bank is in the
process of converting to a new Windows NT(R) Client/Server system (the "New
System"). The existing teller system is not and is not expected to be made Y2K
compliant, as the New System will incorporate the teller system functions.
12
The New System was designed with Y2K issues considered as part of its
design. Once the New System is operational the Bank will perform user acceptance
tests to validate that the application is functioning correctly. The Bank's
internal auditors completed their review of the New System manufacturer's Y2K
test results, which indicate that the New System is Y2K compliant. The Bank will
independently test the Y2K script established by the software developer. Reports
will be generated to verify the results of the test. Management expects the New
System to be fully operational and tested for Y2K compliance during the first
quarter of 1999.
The Company completed the assessment of all critical computer systems as
of September 30, 1997, which include both information technology systems and
non-information technology systems. All of the Bank's system upgrades and/or
programming changes made to date, have been made within the normal course of
business, therefore, no material costs specific to the Y2K upgrades have been
incurred. In accordance with Y2K disclosure requirements, the Company has
analyzed the cost impact of Y2K compliance issues and does not expect related
future costs to be material to the Company's future results of operations or
financial condition.
The Bank has many non-critical applications, which will be tested for
Y2K compliance during 1999. The applications will be loaded and the dates used
for the tests will include the majority of the dates outlined by the Federal
Financial Institutions Examination Council. A member of the Bank's senior
management has inventoried the Bank's hardware and software programs and has
contacted all outside vendors inquiring as to the status of Y2K compliance.
Management is not aware of any vendor who does not expect to be Y2K compliant
and will continue to require updates from all vendors who are not yet Y2K
compliant.
The Company believes it is on schedule for the required upgrades and
testing that will ensure completion of the Y2K project by September 1999.
However, given the broad spectrum of potential Y2K problems, including the
ultimate state of readiness of the Company's local utilities and other third
parties, including governmental and quasi-governmental agencies on which the
Company relies, a vast amount of uncertainty remains with respect to the actual
affect of Y2K. Like all other financial institutions, a failure to correct a
material Y2K problem could result in an interruption in, or a failure of,
certain normal business activities or operations of the Company. Such failures
could materially and adversely affect the Company's results of operations and
financial condition. In addition, the long term effect of poorly managing Y2K
problems that may arise, or failure of critical computer systems to be Y2K
compliant could result in a decline in business, depositors and confidence in
the Company. The Company's Y2K project is expected to significantly reduce the
Company's level of uncertainty about internal and external Y2K implications.
Should the Company face Y2K liability, the Company's Directors and Officers
Errors and Omissions Insurance Policy may provide some relief.
13
The following table presents the Company's Y2K renovation and testing
status indicating the Company's state of readiness regarding its critical
computer systems, as they pertain to the Company at September 30, 1998.
Hardware Operating Systems Application
-------- ----------------- -----------
System Renovated Tested Renovated Tested Renovated Tested
- -------- -------------------------- --------------------------- --------------------------
Mainframe (1) Yes Yes Yes Yes Yes No
Teller System (1) No No No No No No
New System(2) Yes Yes Yes No Yes No
Accounting Systems Yes Yes Yes Yes Yes Yes
Federal Reserve
Wire System No No No No No No
Check Processing Yes No Yes No Yes No
ATMs* No No No No No No
NYCE* No No No No No No
<FN>
(1) These systems will be replaced by the New System.
(2) This system is expected to be fully operational and Y2K tested during the
first quarter of 1999.
* ATMs - Automated Teller Machines ("ATMs").
NYCE - New York Cash Exchange ("NYCE").
</FN>
The following table presents the Company's Y2K contingency plan for the
Bank's critical systems should they fail to meet Y2K compliance deadlines.
Company Y2K Contingency Plan
----------------------------
System Contingency Plan
- ------ ----------------
Mainframe None - system to be replaced.
Teller System None - system to be replaced.
New System Run old mainframe or run on back-up site.
Accounting systems Use manual system.
Federal Reserve
Wire System Use off-line system.
Check Processing Manual processing.
ATMs Customers to use branches.
NYCE Customers to use the Bank's ATM's or branches.
14
Loan Delinquency Table
- ----------------------
At September 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 September 30, 1998:
Delinquent loans:
Guaranteed(1) 8 $ 195 19 $ 244
Non-guaranteed 3 5 6 217
-- ------ -- -------
11 $ 200 25 $ 461
== ====== == =======
Ratio of delinquent loans
to total loans .02% .04%
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>
15
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
the dates indicated:
September 30, December 31,
1998 1997
---- ----
(In Thousands)
Mortgage loans:
- ---------------
Non-accrual loans $ 213 $12,754(1)
------- -------
Accruing loans 90 or more days overdue:
VA and FHA mortgages (2) 21 335
------- -------
Other loans:
- ------------
Non-accrual loans -- --
Accruing loans 90 or more days overdue:
Student loans 23 165
Consumer loans 4 15
------- -------
27 180
------- -------
Total non-performing loans:
- ---------------------------
Non-accrual 213 12,754
Accruing loans 90 days or more overdue 248 515
------- -------
$ 461 $13,269
======= =======
Non-accrual loans to total loans .02% 1.26%
Accruing loans 90 or more days overdue
to total loans .02 .06
Non-performing loans to total loans .04 1.32
<FN>
(1) Comprised of an 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 seasoned loans, which are guaranteed.
Management does not believe that these loans, including those in arrears,
present any significant collection risk to the Bank, and therefore are
presented separately.
</FN>
Information regarding impaired loans at or for the year to date periods
indicated is as follows:
September 30, September 30, December 31,
1998 1997 1997
-----------------------------------------------
Impaired loans
- --------------
Number of loans 1 1 1
Balance of impaired loans 213 12,754 12,754
Average balance for the year to date period ended 6,891 12,754 12,754
Interest income recorded for the year to date periods ended 387 - -
Unrecorded interest on impaired loans 9 885(1) 1,180(1)
<FN>
(1) Represents interest on the $12,754,000 impaired loan which was recovered
during the second quarter of 1998.
</FN>
There were no loans included in the above table that were modified in a
trouble debt restructure ("TDRs"). TDRs other than those classified as impaired
and/or non-accrual loans, were $1,833,000 and $1,840,000 at September 30, 1998
and December 31, 1997, respectively. Interest forfeited attributable to these
loans was $52,000 and $47,000 for the nine months ended September 30, 1998 and
1997, respectively.
16
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 nine months
ended September 30, 1998 and the year ended December 31, 1997, as follows:
September 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 .52 .59
Allowance for possible loan losses to
mortgage loans delinquent 90 days or more 13.23 x .44 x
Other Loan Portfolio Loss Allowance:
- ------------------------------------
Balance at beginning of period $ 139 $ 151
Provision for possible loan losses 41 48
Loans charged off (24) (72)
Recoveries of loans previously charged off 15 12
-------- ------
Balance at end of period $ 171 $ 139
======== ======
Ratios for Other Loan Portfolio:
- --------------------------------
Net charge-offs to average other loans .03% .21%
Allowance for possible loan losses to
net other loans .72 .48
Allowance for possible loan losses to
other loans delinquent 90 days or more 6.33 x .77 x
<FN>
* Is less than .01%.
</FN>
17
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. Liquidity is provided
by proceeds from maturities of debt securities, principal and interest payments
on mortgage loans, CMOs and other loans. During the nine months ended September
30, 1998, the $279.0 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
were at fixed rates, for the nine months ended September 30, 1998 were $208.8
million, compared to $120.2 million for the nine months ended September 30,
1997. CMO purchases for the nine months ended September 30, 1998 were $46.7
million, compared to $55.0 for the nine months ended September 30, 1997. During
the first nine months of 1998, maturities of U.S. Government and federal agency
securities generated $389.0 million, the most significant cash inflow from
investing activities, followed by principal payments on mortgage loans and CMOs
of $68.8 million and $47.7 million, respectively. The $16.0 million cost of
repurchasing the Company's common stock represents the most significant use of
funds in financing activities for the first nine months of 1998. The increase in
dividend payments reflects the increase in dividends paid per share to $1.20 for
the nine months ended September 30, 1998, compared to $1.05 per share for the
nine months ended September 30, 1997.
The net decrease in deposits of $11.6 million to $1.110 billion at
September 30, 1998, compared to deposits at December 31, 1997, reflects
decreases in demand deposit accounts, passbook accounts and negotiable order of
withdrawal ("NOW") accounts of $16.2 million, $14.4 million and $1.7 million,
respectively, partially offset by a $17.9 million increase in certificate
accounts, a $1.9 million increase in lease security accounts and an $885,000
increase in money market accounts. Interest rates offered on passbook accounts
remained relatively low compared to short-term certificates of deposit offered
by the Bank and other non-bank products available through various investment
firms. Management believes these factors have fueled the trend causing deposits
to shift from passbook accounts to short-term certificate accounts and deposit
run-off to continue. Management monitors 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 the
gradual decline in deposits has not materially adversely affected the Company.
Management has analyzed borrowings as an alternative financing vehicle. In the
future, the Bank may borrow from the Federal Home Loan Bank of New York (FHLB -
NY) to provide liquidity and mitigate the interest rate risk related to the
fixed rate mortgage portfolio. The Bank's liquidity ratios continue to exceed
all short and long term minimum regulatory requirements. Management remains
focused on providing quality customer service as its primary strategy for
maintaining its relationships with its depositors.
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 decided to allow deposits to decline, rather than
offer rates that would result in lowering net income or necessitate modifying
the Bank's existing investment structure and credit quality criteria. Rates
offered on the Bank's deposit accounts are competitive with those rates offered
by other financial institutions in its market area. Historically the highest
percentage of the Bank's deposits have been in passbook accounts; however, the
trend of deposit shifts has continued to be out of passbook accounts and into
certificate accounts. At September 30, 1998, deposits were comprised as follows:
passbook accounts 48.0%, certificate accounts 38.5%, money market accounts 7.2%,
NOW accounts 3.0%, lease security accounts 1.9% and demand deposits 1.4%. While
the Company cannot predict the future direction of deposits, management expects
the current trend to continue provided that, among other factors, the low
interest rate environment continues.
18
The Company repurchased 315,600 shares of its common stock during the
nine months ended September 30, 1998, pursuant to its tenth stock repurchase
program (the "Tenth Program"), which began on June 12, 1996. Under the Tenth
Program, 730,600 of the 900,000 shares targeted for repurchase were acquired at
an aggregate cost of $29.7 million, or an average price of $40.69 per share
through September 30, 1998. On October 16, 1998, the Company completed the Tenth
Program and commenced repurchasing shares pursuant to the Company's board
approved eleventh stock repurchase program. The Company reissued 153,112 shares
of treasury stock for common stock options exercised and reissued 1,800 shares
of treasury stock for Director's compensation during the nine months ended
September 30, 1998.
On July 20, 1998, the Company's Board of Directors declared a cash
dividend of $.40 per share to stockholders of record on August 5, 1998. The
dividend payment, which totaled $3.9 million, was made on August 19, 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 4.00% (pursuant
to the OTS Prompt Corrective Action Regulations), and a risk-based assets
capital ratio of 8.00%. The Bank's capital ratios at September 30, 1998 were as
follows:
Percentage Dollars
---------- -------
(In Thousands)
TANGIBLE CAPITAL
Required 1.50% $ 21,541
Actual 18.50 265,621
----- --------
Excess 17.00% $244,080
===== ========
CORE CAPITAL
Required 4.00% $ 57,443
Actual 18.50 265,621
----- --------
Excess 14.50% $208,178
===== ========
RISK BASED CAPITAL
Required 8.00% $ 94,876
Actual 23.97 284,274
----- --------
Excess 15.97% $189,398
===== ========
19
Comparison of Operating Results for the Three Months Ended
September 30, 1998 and 1997
- ----------------------------------------------------------
Net income for the three months ended September 30, 1998, was $11.4
million, or $1.13 per diluted share ($1.16 per basic share), compared with $8.6
million, or $.84 per diluted share ($.87 per basic share) for the three months
ended September 30, 1997.
Net interest income for the three months ended September 30, 1998, was
$17.9 million, compared to $16.7 million for the three months ended September
30, 1997. The increase in net interest income reflects a $785,000 increase in
interest income and a $380,000 decrease in interest expense. The annualized
yield on interest earning assets increased to 7.60%, compared to 7.51%, for the
quarters ended September 30, 1998 and 1997, respectively; average interest
earning assets increased by $22.7 million. The annualized cost of interest
bearing deposits decreased to 3.59% from 3.69% for the quarters ended September
30, 1998 and 1997, respectively. Average interest bearing deposits were $1.081
billion for the quarter ended September 30, 1998 compared to $1.095 billion for
the quarter ended September 30, 1997. For the quarter ended September 30, 1998,
the interest rate spread and net interest margin increased to 4.01% and 4.93%,
respectively, compared to 3.82% and 4.68%, respectively for the quarter ended
September 30, 1997.
Income earned on mortgage loans increased by 20.2%, to $22.2 million for
the three months ended September 30, 1998, compared to $18.4 million for the
quarter ended September 30, 1997, reflecting continued growth in the mortgage
loan portfolio. This increase was partially offset by a decrease in the yield to
8.08% for the quarter ended September 30, 1998, from 8.39% for the quarter ended
September 30, 1997.
For the three months ended September 30, 1998, income from debt and
equity securities, decreased by $2.4 million, or 48.9%, to $2.5 million from
$4.9 million for the three months ended September 30, 1997. This decrease was
the result of a decrease in the average investment in U.S. Government and
federal agency securities and other investments of $159.9 million, or 49.1%, to
$165.6 million, compared to $325.5 million for the three months ended September
30, 1997. The annualized yield on the debt and equity security portfolio
increased slightly to 6.07% for the three months ended September 30, 1998 from
6.05% for the three months ended September 30, 1997. The debt and equity
securities portfolio activity for the current period included purchases of
$125.0 million and maturities of $119.0 million, compared with purchases of
$145.0 million and maturities of $140.0 million for the quarter ended September
30, 1997. During the quarter ended September 30, 1997, the Bank sold $3.0
million of equity securities with a cost basis of $142,000 from its
available-for-sale portfolio, realizing a gain of $2.9 million. Net of taxes,
this gain increased net income for the 1997 period by $1.6 million, or $.16 per
diluted share. There were no sales of equity securities during the three months
ended September 30, 1998.
For the quarter ended September 30, 1998, income on CMOs decreased by
13.6%, to $1.6 million, with an annualized yield of 6.12%, from income of $1.9
million with an annualized yield of 5.98% for the quarter ended September 30,
1997. During the third quarter of 1998, the Bank received principal payments of
$121.1 million on CMOs, compared with principal payments of $26.6 million for
the quarter ended September 30, 1997. CMO purchases during the quarter ended
September 30, 1998 totaled $11.7 million, compared to purchases of $25.1 million
for the quarter ended September 30, 1997. The Bank did not sell any CMOs during
either period.
Income on federal funds sold decreased by $133,000, or 14.7% to $773,000
for the quarter ended September 30, 1998, from $906,000 for the quarter ended
September 30, 1997. This decrease resulted from a decrease in the average
investment in federal funds of $9.7 million to $55.1 million for the current
quarter, compared with $64.8 million for the quarter ended September 30, 1997.
The annualized yield on federal funds sold was 5.61% for the current quarter,
compared to 5.59% for the quarter ended September 30, 1997.
20
Interest expense on deposits was $9.7 million for the quarter ended
September 30, 1998, compared to $10.1 million for the quarter ended September
30, 1997. Average interest bearing deposits decreased by $13.4 million, to
$1.081 billion for the three months ended September 30, 1998, compared to $1.095
billion for the three months ended September 30, 1997. The average rate paid on
interest bearing deposits decreased ten basis points to 3.59% for the quarter
ended September 30, 1998 from 3.69% from the comparative quarter in 1997.
The provision for possible loan losses for the quarter ended September
30, 1998 was $13,000, compared to $162,000 for the quarter ended September 30,
1997. The provision for the third quarter of 1997 included provisions of
$150,000 to increase the general valuation mortgage allowance. Based on
management's internal loan review analysis, no additions to the mortgage
allowance were considered necessary during the third quarter of 1998. Management
will continue to monitor the performance of the loan portfolios and may adjust
allowances accordingly.
Total non-interest income for the three months ended September 30, 1998,
decreased to $3.5 million from $4.5 million for the three months ended September
30, 1997, a net decrease of $1.0 million, or 22.5%. The 1997 quarter included a
$2.9 million profit on the sale of equity securities. During the current
quarter, the Bank realized a $963,000 gain on the sale of two of the Bank's
subsidiary corporations which is included in miscellaneous income. The Bank
experienced a $943,000 increase in loan fees and service charges reflecting the
accelerated accretion of deferred loan fees and prepayment penalties. Due to the
declining interest rate environment during the current quarter, mortgage
prepayment activity increased, resulting in increased prepayment fees.
Non-interest expense remained relatively flat, increasing by $88,000 or
only 1.2%, to $7.2 million for the quarter ended September 30, 1998 compared to
the same period last year. This slight increase reflects the $118,000 increase
in compensation and benefits expense.
The provision for income taxes decreased by $2.6 million, or 48.1%, to
$2.8 million for the three months ended September 30, 1998, from $5.4 million
for the three months ended September 30, 1997. This decrease is reflective of
the decrease in the Company's effective tax rate from 38.9% for the quarter
ended September 30, 1997, to 19.9% for the quarter ended September 30, 1998. The
significantly lower effective tax rate experienced during the third quarter of
1998 is primarily related to the 1998 second quarter 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.
Non-Recurring Items:
Earnings for the three months ended September 30, 1998 were
significantly improved, as discussed above, by the following non-recurring
items: (a) the Company experienced a lower effective tax rate during the quarter
ended September 30, 1998, principally related to the second quarter realignment
of operations involving an operating subsidiary of the Bank, resulting in tax
savings of $3.2 million; (b) during the third quarter of 1998, the Bank sold two
subsidiary corporations, realizing a pre-tax gain of $963,000, which increased
net income for the quarter by $541,000; and (c) prepayment penalties on mortgage
loans increased by $977,000 for the three months ended September 30, 1998,
compared to the three months ended September 30, 1997, increasing net income for
the 1998 period by $549,000. These items increased net income by $4.3 million or
$.42 per diluted share ($.43 per basic share) for the three months ended
September 30, 1998.
Comparison of Operating Results for the Nine Months Ended
September 30, 1998 and 1997
- ---------------------------------------------------------
Net income for the nine months ended September 30, 1998, was $34.2
million, or $3.37 per diluted share ($3.47 per basic share), compared with $22.1
million, or $2.17 per diluted share ($2.25 per basic share) for the nine months
ended September 30, 1997.
21
Net interest income for the nine months ended September 30, 1998, was
$54.2 million, compared to $50.7 million for the nine months ended September 30,
1997. The increase in net interest income reflects a $2.8 million increase in
interest income, and a $666,000 decrease in interest expense. The annualized
yield on interest earning assets increased to 7.64%, compared to 7.50%, for the
nine months ended September 30, 1998 and 1997, respectively, while average
interest earning assets increased by $20.4 million. The annualized cost of
interest bearing deposits decreased to 3.57% from 3.60% for the nine months
ended September 30, 1998 and 1997, respectively. Average interest bearing
deposits were $1.085 billion for the nine months ended September 30, 1998
compared to $1.101 billion for the nine months ended September 30, 1997. For the
year to date period ended September 30, 1998, the interest rate spread and net
interest margin increased to 4.07% and 4.98%, respectively, compared to 3.90%
and 4.73%, respectively for the nine months ended September 30, 1997.
Income earned on mortgage loans increased by $9.9 million, or 18.1%, to
$64.5 million for the nine months ended September 30, 1998, reflecting continued
growth in the mortgage loan portfolio. This increase was partially offset by a
decrease in the mortgage portfolio yield to 8.25% for the nine months ended
September 30, 1998, from 8.49% for the nine months ended September 30, 1997. It
should be noted that the 8.25% yield on the mortgage portfolio for the nine
months ended September 30, 1998 reflected the accelerated recognition of
deferred loan fees related to refinancing activity. Accelerated accretion of
deferred loan fees positively impacted the annualized nine month yield on
mortgage loans by .05%.
For the nine months ended September 30, 1998, income on debt and equity
securities decreased by $6.0 million, or 39.5%, to $9.2 million from $15.2
million for the nine months ended September 30, 1997. This decrease was the
result of a decrease in the average investment in U.S. Government and federal
agency securities and other investments of $139.8 million, or 41.3%, to $198.9
million for the nine months ended September 30, 1998, compared to $338.7 million
for the nine months ended September 30, 1997. The annualized yield on the debt
and equity security portfolio increased to 6.16% from 5.98% for the comparative
nine month periods. The debt and equity securities portfolio activity for the
current period included purchases of $279.0 million and maturities of $389.0
million, compared with purchases of $389.9 million and maturities of $390.0
million for the nine months ended September 30, 1997.
For the nine months ended September 30, 1998, income on CMOs decreased
by 23.8%, to $4.7 million, with an annualized yield of 6.15%, from income of
$6.2 million with an annualized yield of 5.92% for the nine months ended
September 30, 1997. This decrease is reflective of the decrease in the average
investment in the CMO portfolio of $37.2 million, or 26.8% for the comparative
nine month period. During the nine months ended September 30, 1998, the Bank
received principal payments of $47.7 million on CMOs, compared with $82.6
million for the nine months ended September 30, 1997. CMO purchases during the
first nine months of 1998 totaled $46.7 million, compared to $55.0 million for
the first nine months of 1997. The Bank did not sell any CMOs during either
period.
Income on federal funds increased by $626,000, or 24.8%, to $3.2 million
for the nine months ended September 30, 1998, from $2.5 million for the nine
months ended September 30, 1997. This increase resulted from an increase in the
average investment in federal funds of $15.0 million, to $77.0 million for the
current period, compared with $62.0 million for the nine months ended September
30, 1997. The annualized yield on federal funds sold increased to 5.45% for the
current nine month period, compared to 5.43% for the nine month period ended
September 30, 1997.
Interest expense on deposits decreased by 2.2%, to $29.1 million for the
nine months ended September 30, 1998, compared to $29.8 million for the nine
months ended September 30, 1997. Average interest bearing deposits decreased by
$15.5 million, or 1.4%, to $1.085 billion for the nine months ended September
30, 1998, compared to $1.101 billion for the nine months ended September 30,
1997. The average rate paid on interest bearing deposits decreased three basis
points to 3.57% for the nine months ended September 30, 1998 from 3.60% for the
nine months ended September 30, 1997.
22
The provision for possible loan losses for the nine months ended
September 30, 1998 was $41,000, compared to $483,000 for the nine months ended
September 30, 1997. The provision for the nine month period ending September 30,
1997 included provisions of $450,000 to increase the general valuation mortgage
allowance. For the nine month period ended September 30, 1998, no additions were
made 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 nine months ended September 30, 1998,
increased to $11.0 million from $7.2 million for the nine months ended September
30, 1997, a net increase of $3.8 million, or 53.0%. Non-interest income for the
first nine months of 1998 includes a $4.3 million recovery of prior period
expenses and unaccrued interest on troubled loans that resulted from the final
settlement on a $12.8 million underlying cooperative mortgage loan. (See Asset
Quality, herein.) The gain on sale of investments for the 1997 period reflects a
$2.9 million profit on the sale of equity securities. Loan fees and service
charges increased by $1.8 million, primarily reflecting an increase in
prepayment penalties on large mortgage loans. The $1.3 million increase in
miscellaneous income reflects gains of $963,000 on the sale of two of the Bank's
subsidiary corporations; a real estate tax refund of $264,000 on the Company's
headquarters; a $57,000 increase in profits on the sales of student loans and a
$41,000 increase in origination fees for mortgage loans sold. Income from real
estate operations decreased by $809,000, reflecting the continuing decrease in
real estate properties owned by the Bank; all of the Bank's real estate, other
than branch properties, are held for sale.
Non-interest expense for the nine months ended September 30, 1998,
increased by $120,000, to $20.8 million, from $20.7 million for the nine months
ended September 30, 1997. The increase in other general and administrative
expense primarily reflects increases in computer related expenses in connection
with newer equipment.
The provision for income taxes decreased by $4.6 million, or 31.2%, to
$10.0 million for the nine months ended September 30, 1998, from $14.6 million
for the nine months ended September 30, 1997. This decrease in taxes accompanied
by an increase in pre-tax income, reflects the decrease in the Company's
effective tax rate to 22.7% for the nine months ended September 30, 1998, from
39.7% for the nine months ended September 30, 1997. The lower effective tax rate
reflects tax benefits recognized from a realignment of operations involving an
operating subsidiary of the Bank during the second quarter of 1998. 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.
Non-Recurring Items:
Earnings for the nine months ended September 30, 1998 were significantly
improved, as discussed above, by the following non-recurring items: (a) in
connection with the settlement on a $12.8 million underlying co-operative
mortgage loan, additional pre-tax income of $4.3 million was realized, which
increased net income by $2.4 million; (b) the Company experienced a lower
effective tax rate, principally related to the second quarter realignment of
operations involving an operating subsidiary of the Bank, resulting in a tax
savings of $8.2 million; (c) the Bank sold two subsidiary corporations,
realizing gains of $963,000, which increased net income by $541,000; and (d) the
Company experienced a $2.3 million increase in prepayment penalties for the
first nine months of 1998, compared to the first nine months of 1997, which
increased net income by $1.3 million. These items increased net income by $12.5
million or $1.23 per diluted share ($1.27 per basic share) for the nine months
ended September 30, 1998.
23
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 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 same 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 September 30, 1998, the Company had a negative short-term gap. The
Company generally invests in securities with maturities ranging from three
months to two years. As market 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
historically applied short-term, high quality standards for the Company's
interest-earning asset portfolios, resulting in high liquidity. This strategy
enables the Company to have the flexibility to reprice assets and liabilities
over a relatively short period of time.
The following prepayment rate assumptions for mortgage loans are based
upon the Company's 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) 26% if less than six months; (b) 11%
if six months to one year, for three to five years and for five to ten years;
(c) 8% if one to three years; (d) 9% if 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 zero to three months category.
24
The following gap table sets forth, as of September 30, 1998, repricing
information on interest 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 September 30, 1998
---------------------
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, net1 $ 14,151 $ 36,111 $ 130,785 $ 176,805 $ 629,422 $ 104,414 $ 25,285 $1,116,973
Debt and equity
securities and other
investments, net2 201,207 9,993 - - - - - 211,200
CMOs, net - 26,372 62,120 14,610 - - - 103,102
MBS, net - 38 543 - 71 2,261 - 2,913
Other loans, net1 22 396 11,865 3,451 8,150 - - 23,884
Federal funds sold 50,500 - - - - - - 50,500
---------- --------- --------- ---------- ---------- --------- ---------- ----------
Total interest
earning assets 265,880 72,910 205,313 194,866 637,643 106,675 25,285 1,508,572
Interest bearing
deposit accounts:
Passbook 532,014 - - - - - - 532,014
Lease security 20,610 - - - - - - 20,610
Certificate 144,243 220,927 45,288 17,002 - - - 427,460
Money Market 79,892 - - - - - - 79,892
NOW3 33,672 - - - - - - 33,672
---------- --------- --------- ---------- ---------- --------- ---------- ----------
Interest bearing
liabilities 810,431 220,927 45,288 17,002 - - - 1,093,648
Interest sensitivity gap
per period $(544,551) $(148,017) $ 160,025 $ 177,864 $ 637,643 $ 106,675 $ 25,285 $ 414,924
Cumulative interest
sensitivity gap $(544,551) $(692,568) $(532,543) $ (354,679 $ 282,964 $ 389,639 $ 414,924 $ -
Percentage of gap per
period to total assets (35.08%) (9.53%) 10.31% 11.46% 41.07% 6.87% 1.63% -
Percentage of cumulative
gap to total assets (35.08%) (44.61%) (34.30%) (22.84%) 18.23% 25.10% 26.73% -
<FN>
1 Balance includes non-performing loans, as amount is immaterial, and is
not reduced for the allowance for possible loan losses.
2 Securities available-for-sale are shown including the market value
appreciation of $56.4 million, before tax.
3 NOW - negotiable order of withdrawal.
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. In addition, 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. Furthermore, 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>
25
The Bank's interest rate sensitivity is also monitored by management
through the use of an internal model which 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 September 30, 1998, as calculated by the Bank.
Net Portfolio Value Portfolio Value of Assets
Rate Changes in ------------------- -------------------------
Basis Points Dollar Dollar Percent NPV Percent
(Rate Shock) Amount Change Change Ratio Change1
- -------------------------------------------------------------------------------------------
(Dollars in Thousands)
+200 $324,373 $(67,740) (17.28)% 21.37% (4.58)%
+100 352,892 (39,221) (10.00) 22.78 (2.63)
0 392,113 - - 24.64 -
-100 442,781 50,668 12.92 26.93 3.35
-200 500,644 108,531 27.68 29.36 7.16
<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>
26
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 (Not Applicable)
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 29
27.00 Financial Data Schedule for the Nine Months Ended September 30, 1998 30
27.01 Restated Financial Data Schedule for the Nine Months Ended September 30, 1997 31
(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>
27
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 September 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: November 10, 1998 /s/ Park T. Adikes
----------------- --------------
Park T. Adikes
Chief Executive Officer
DATE: November 10, 1998 /s/ Thomas R. Lehmann
----------------- -----------------
Thomas R. Lehmann
Chief Financial Officer
28
Exhibit Index
-------------
Exhibit No. Identification of Exhibit
- ----------- -------------------------
11.00 Statement Re: Computation of Earnings Per Share
27.00 Financial Data Schedule for the Nine Months Ended September 30, 1998
27.01 Restated Financial Data Schedule for the Nine Months Ended September 30, 1997