UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to section 13 or 15(d) of the securities
exchange act of 1934 for the year ended December 31, 1998
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[ ] Transition report pursuant to section 13 or 15(d) of the
securities exchange act of 1934
Commission file number 1-13157
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JSB FINANCIAL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 11-3000874
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
303 Merrick Road, Lynbrook, New York 11563
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(Address of principal executive offices)
Registrant's telephone number, including area code: (516) 887-7000
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock $.01 par value (Title of each class)
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New York Stock Exchange (Name of each exchange on which registered)
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Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not considered herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form
10-K or any amendment to this Form 10-K. ( X )
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 4, 1999: Common stock par value $.01 per share,
$449,047,144. This figure is based on the closing price by the New York
Stock Exchange for a share of the registrant's common stock on March 4,
1999, which was $56.00 as reported in the Wall Street Journal on March 5,
1999.
The number of shares of the registrant's Common Stock outstanding as of
March 15, 1999 was 9,288,963 shares.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 11, 1999
and portions of the 1998 Annual Report to Stockholders are incorporated
herein by reference - Parts I, II and III.
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FORM 10-K CROSS-REFERENCE INDEX
PART I Page
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ITEM 1. BUSINESS.............................................................. 3
ITEM 2. PROPERTIES............................................................ 33
ITEM 3. LEGAL PROCEEDINGS..................................................... 33
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................... 33
ADDITIONAL ITEM. EXECUTIVE OFFICERS............................................ 34
PART II
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ITEM 5. MARKET FOR JSB FINANCIAL INC.'S COMMON EQUITY AND
RELATED STOCKHOLDERS' MATTERS........................................ 35
ITEM 6. SELECTED FINANCIAL DATA............................................... 35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................. 35
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.......................................................... 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................... 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................................. 36
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY....................... 37
ITEM 11. EXECUTIVE COMPENSATION................................................ 37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT....................................................... 37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................ 37
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.......................................................... 38
SIGNATURES...................................................................... 41
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PART I
ITEM 1. BUSINESS
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DESCRIPTION OF BUSINESS
General
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JSB Financial, Inc. ("JSB Financial", "Company" or the "Holding Company") is a
Delaware corporation. The Company, which was incorporated on February 6, 1990,
acquired all of the stock of Jamaica Savings Bank FSB ("Jamaica Savings" or the
"Bank") upon the Bank's conversion from a federally chartered mutual savings
bank to a federally chartered stock savings bank. The Bank's stock conversion
was completed on June 27, 1990. The information presented in the financial
statements and in the Form 10-K reflect the financial condition and results of
operations of the Company, as consolidated with its wholly owned subsidiary, the
Bank.
In addition to the Company's investment in the Bank, the Company invests in U.S.
Government and agency securities and federal funds sold (through the Bank).
Jamaica Savings was organized in 1866 as a New York ("NY") state chartered
mutual savings bank. In 1983, the Bank converted to a federally chartered
savings bank, retaining the "leeway" investment authority and broader investment
powers available to a state chartered savings bank, and its Federal Deposit
Insurance Corporation ("FDIC") insurance.
The Bank's principal business consists of attracting deposits from the general
public and investing those deposits, together with funds generated from
operating, investing and financing activities, primarily in first mortgage loans
secured by multi-family properties, cooperative apartment buildings, one-to
four-family residential real estate and, to a lesser extent, commercial real
estate loans, U.S. Government and federal agency securities, collateralized
mortgage obligations ("CMOs"), and consumer loans.
Since 1990, the Company has maintained stock repurchase programs and paid
quarterly cash dividends to stockholders. During 1998, the Company repurchased
620,100 shares of its outstanding common stock at an average price of $50.74 per
share, and paid total cash dividends of $15.7 million, or $1.60 per common
share.
Market Area and Competition
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Market Area. Headquartered in Lynbrook, NY, the Bank conducts business from 13
full service branch offices, 10 of which are located in the New York City
borough of Queens, one in the borough of Manhattan and one each in suburban
Nassau (the headquarters) and Suffolk counties.
Management considers Jamaica Savings a community-oriented financial institution,
serving its market area with a wide selection of loan products and retail
financial services. Management believes that the Bank's retail branch network,
quality customer service, community bank orientation and reputation for
financial strength are the key attributes that attract and retain customers for
the Bank. The Bank's long term relationships with its depositors are considered
a valuable resource for the future, as the Bank continues to expand products and
services it offers.
Local Economy. The primary market area for the Bank is concentrated in the
neighborhoods surrounding its thirteen full service offices. Management believes
that its branch offices are primarily located in communities that can generally
be characterized as stable, residential neighborhoods of predominantly one-to
four-family residences and middle income families.
The favorable economy of the New York metropolitan area has benefited the Bank
for the past several years. Unemployment and real estate values have been
healthy, as the economy expanded on a broad base. New York City benefited from
the resurgence and growth in employment and profitability experienced by
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national securities and investment banking firms, many of which are domiciled in
Manhattan, as well as the growth and profitability of other financial service
companies, such as money center banks. The strength of the national economy and
of the United States equities markets contributed significantly to the growth
and increased profitability of Wall Street securities and investment banking
firms. During 1998, New York City reported positive job creation, a trend of
declining crime, lower tax rates and an overall improved image as a place to
live and work. Industries such as tourism, media and professional services have
been viewed as strong.
While the third quarter of 1998 was a volatile period in the financial markets,
with Wall Street and investment banks in general initiating job cuts, Wall
Street rebounded and reached record highs during the first quarter of 1999.
Uncertainty regarding the duration of the overseas recessions and their impact
on the financial markets are likely to influence the economic environment in
which the Bank operates over time. Forecasts for 1999 and beyond vary
significantly. The financial press has forecasted scenarios ranging from
moderate growth to a recession. In general, a weakness or deterioration in the
economic conditions within the Bank's primary lending areas generally result in
the Bank experiencing increases in non-performing loans. Such increases
generally result in higher provisions for possible loan losses, reduced levels
of interest earning assets, which over time lower the level of net interest
income and result in higher levels of expense associated with other real estate
("ORE").
There are numerous warning indications that the strength and direction of the
United States economy is surrounded with uncertainty. The demand for U.S exports
has slowed in a number of countries. To respond to signs of a weakening U.S.
economy, during 1998, the Federal Reserve adjusted the discount rate, reducing
it each time, which influenced the direction of market interest rates. During
1998, nation wide refinancing reached record levels, as mortgage rates reached
30-year lows. As a result, loan pricing has been aggressive. The Bank, like most
other financial institutions in the region, experienced growth in mortgage loans
and increased satisfaction and refinancing activity in the portfolio.
Highly Competitive Industry and Geographic Area. The Bank faces significant
competition for mortgage and consumer loan originations and in attracting and
retaining deposits. The New York City metropolitan and Long Island areas have a
high concentration of financial institutions, many of which are significantly
larger and have greater financial resources than the Bank, all of which are
competitors of the Bank to varying degrees. The Bank's competition for loans and
deposits comes principally from savings and loan associations, savings banks,
commercial banks, mortgage banking companies, insurance companies and credit
unions. The most direct competition for deposits has historically come from
savings and loan associations, savings banks, commercial banks and credit
unions. In addition, products offered by the securities industry have created
alternative investments, including money market accounts, mutual funds and
annuities, available to the general public. The Bank competes for deposits
through pricing, service and by offering a variety of deposit accounts and other
services. Management competes for loans principally through pricing, efficiency
and the quality of its services provided to borrowers, real estate and mortgage
brokers. Competition may also increase as a result of the lifting of
restrictions on interstate operations of financial institutions.
Lending Activities and Risk
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General. The Bank offers a variety of loans to serve the credit needs of the
communities in which it operates. The Bank's loan portfolio is comprised
primarily of first mortgage loans secured by: multi-family rental properties;
cooperative apartment buildings; one-to four-family residences (which is almost
entirely comprised of mortgages secured by one and two family residences);
commercial property and to a lesser extent, construction loans. The Bank also
offers other consumer type loans. (See "Other Lending", page 8, herein.) At
December 31, 1998, the loan portfolio was $1.170 billion, net of allowances of
$5.9 million and unearned fees and discounts of $2.7 million. At December 31,
1998, net loans represented 72.1% of the Company's total assets. During 1998,
mortgage loans originated for portfolio were $261.2 million, compared to $205.2
million during 1997. The Bank does not offer any loans that provide for negative
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amortization. (See "LOAN PORTFOLIO", page 24, herein, SUMMARY OF LOAN LOSS
EXPERIENCE, page 30, herein, and "Maturities and Sensitivities of Loans to
Changes in Interest Rates", page 25, herein.) Management monitors the economy
and real estate market in which the Bank operates and may modify the Bank's
lending policies as it considers appropriate.
Pursuant to the New York City Housing Partnership/HPD Homeownership Program, the
Bank provides funding for two New York construction projects, one in Queens and
one in Brooklyn, New York, whereby the Bank holds the first mortgage on the
premises and obtains personal guarantees from the builders. Advances for each of
these projects are based on executed contracts of sale prior to construction and
construction progress on a per unit/house basis. These projects are as follows:
(1) East New York Homes in Brooklyn, NY - In February, 1997, the Bank entered
into an agreement to finance the construction of 45 2-family houses. The Bank's
commitment, as amended, is for $6.9 million, with no more than $4.3 million
outstanding at any one time; (2) Bayswater Village in Far Rockaway, Queens, NY -
In December, 1996, the Bank entered into an agreement to finance the
construction of 16 two-family houses, having a total development cost of $3.5
million, with no more than $1.9 million outstanding at any one time. This
project was substantially complete as of December 31, 1998, with a balance of
$62,000 owed to the Bank and one unit left to close.
In addition, the Bank makes construction loans, which generally have a six-month
term, to one builder who constructs one and two-family houses in low to moderate
income areas within the Bank's market area. The loans are approved on a per
building basis and the Bank holds the first mortgage on the premises and obtains
a personal guarantee from the builder. At December 31, 1998, all construction
loans held by the Bank totaled $5.2 million.
The Bank continues to emphasize lending on multi-family and underlying
cooperative properties. Lending on these types of properties poses significant
additional risks to the lender as compared with one-to four-family mortgage
lending. These loans generally are made to single borrowers or realty
corporations controlled by an individual or group of individuals and involve
substantially higher loan balances than one-to four-family residential mortgage
loans. Moreover, the repayment of such loans is typically dependent on the
successful operation of the property, which in turn is dependent upon the
expertise and ability of the borrower to properly manage and maintain the
property. In addition, management recognizes that repayment of commercial and
multi-family loans is subject to adverse changes in the real estate market or
the economy, to a far greater extent than is repayment of one-to four-family
mortgage loans.
Multi-family, Underlying Cooperative and Commercial Real Estate Lending. The
Bank originates mortgage loans secured by multi-family dwellings, primarily of
50 units or more, cooperative buildings and income producing properties such as
shopping centers. At December 31, 1998, 60.8% of total gross mortgage loans were
secured by multi-family rental properties, 26.2% by cooperative buildings and
6.0% by commercial real estate. At that date, the Bank's ten largest loans
totaled $116.3 million. These ten mortgage loans were comprised of: six loans
totaling $72.0 million secured by multi-family rental properties; one $11.8
million mortgage loan secured by the land underlying a luxury Manhattan hotel;
one $11.1 million loan secured by a commercial office building; one $10.8
million loan secured by a shopping center and one loan totaling $10.6 million
secured by underlying cooperative buildings;. At December 31, 1998, the Bank's
largest loan was an $18.5 million mortgage loan secured by a 684 unit apartment
complex.
The Bank's mortgage loans on income producing properties are primarily secured
by properties located within the Bank's market area. Mortgages currently offered
on income producing properties are underwritten for terms that generally do not
exceed 10 years. Since amortization (if any) on multi-family rental, underlying
cooperative and commercial mortgage loans is over significantly longer periods
than the terms to maturity, balloon payments are due at maturity. In
establishing terms for these types of loans, management considers current market
conditions, competition and the risks associated with the property securing the
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loan. The interest rates on such loans are linked to the five to ten year U.S.
Treasury Constant Maturity Index, plus a spread to reflect the term of the loan
and associated credit risk.
In underwriting mortgage loans secured by income producing properties, including
multi-family rental, underlying cooperative and commercial real estate, the
Bank's mortgage officers engage in detailed analysis to ensure that the
property's anticipated cash flow is sufficient to cover operating expenses and
debt service. Under the Bank's current policy, at origination, loan-to-value
ratios generally do not exceed 75% on loans secured by multi-family rental and
commercial real estate properties and 40% on underlying cooperatives. The Bank
requires that properties securing such loans be appraised by a member of the
Bank's appraisal staff or a qualified independent appraiser. The Bank requires
borrowers to obtain title insurance and hazard insurance in an amount sufficient
to cover the mortgage naming the Bank as loss payee. All loans secured by income
producing property must be approved by two members of the Bank's Mortgage
Committee, which is comprised of five members of the Board of Directors and the
Chairman of the Board "ex officio", or one member of the Mortgage Committee and
the senior lending officer.
Underlying cooperative loans are first liens on the cooperative building and the
land and are senior to cooperative share loans. Cooperative share loans are
secured by the proprietary leases on the individual units. Consequently, when
the amount of an underlying loan is related to the market value of a cooperative
building, including the value of the individual units, the resulting
loan-to-value ratio generally is in the range of 15% to 30%.
Concentrations of Credit At December 31, 1998, the largest concentration of
loans to any one borrower consisted of six mortgage loans with an aggregate
balance of $30.6 million, of which five loans totaling $22.6 million were
secured by multi-family apartment buildings and one loan for $8.0 million was
secured by a multi-family apartment building with retail stores.
Management monitors the loan portfolios on a regular basis in order to identify
trends that may affect future collectibility. Specific attention is given to
concentrations of credit based on the loan collateral and concentrations to any
one borrower or category of borrower. (See "Delinquencies and Classified Assets"
and related discussions, pages 26 through 29, herein.)
One-to Four-Family Lending. The Bank offers first mortgage loans secured by
one-to four-family residences and condominium units in complexes which are at
least 90% sold and cooperative apartment share loans where at least 65% of the
total cooperative shares are sold. While three-to four-family mortgages are
offered by the Bank, minimal demand has been experienced. At December 31, 1998,
one-to four-family mortgages totaled $75.8 million, of which $69.5 million were
fixed rate mortgage loans and $6.3 million were adjustable rate mortgage ("ARM")
loans. Loan applications are received from existing customers and are primarily
generated by referrals, branch offices and newspaper advertising. One-to
four-family mortgage loans are generally underwritten according to Fannie Mae
and State of New York Mortgage Association ("SONYMA") guidelines, except as to
limitations on loan amount.
For a loan secured by one-to four-family residential real estate, upon receipt
of a completed loan application, disclosures are sent to the applicant(s).
Income and certain other information is verified, a credit report is ordered,
and, if necessary, additional financial information is requested. If the
mortgage applicant's credit is verified and approved, an appraisal and flood
certification for the property are ordered. In addition to utilizing the Bank's
appraisal staff, some appraisals on one-to four-family properties are prepared
by independent appraisers, who are approved as qualified by the Bank's Mortgage
Committee. Appraisals of properties secured by one-to four-family homes must be
approved by at least two senior officers of the Mortgage, Consumer Loan or Real
Estate Departments. It is the Bank's policy to require title insurance and
hazard insurance prior to closing on all real estate first mortgage loans.
Borrowers are generally required to advance funds on a monthly basis to a
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mortgage escrow account, together with each payment of principal and interest.
Disbursements are made from escrow accounts for real estate taxes and insurance
premiums.
The Bank offers fixed rate mortgages and ARMs, with interest rates and other
terms that are competitive with those available in its market area. The interest
rate on ARMs are adjusted based on a spread above an agreed upon index, such as
a United States Treasury Index. The Bank's ARM loan interest rates are generally
subject to annual rate change limitations of 2.00%, up or down. In addition, ARM
loans offered by the Bank provide for a lifetime cap on the adjustment in the
interest rate of 6.00% from the initial rate. These limits help to reduce the
interest rate sensitivity of such loans during periods with significant changes
in interest rates. During periods of rising interest rates, the increase in the
required monthly payment for ARM loans may increase the likelihood of
delinquencies. The ARM loans originated by the Bank reprice each year, on the
loan's anniversary date and do not provide for negative amortization.
The Bank currently requires that one-to four-family residential mortgage loans,
excluding cooperative apartment loans, not exceed the lesser of 80% of appraised
value of the property securing the loan or purchase price at origination. Up to
95% financing is available with the purchase of private mortgage insurance
("PMI"), provided that the loan qualifies for sale in the secondary market.
Loans secured by cooperative apartments (cooperative share loans) generally
require a down payment equal to 20% of the purchase price and are not offered
with PMI. The Bank offers one-to four-family mortgages with various terms.
Mortgage loans in the Bank's portfolio ordinarily include due-on-sale clauses,
which provide the Bank with the contractual right to deem the loan immediately
due and payable in the event that the borrower transfers ownership of the
property without the Bank's consent. It is the Bank's policy to enforce
due-on-sale provisions or to require that the interest rate be adjusted to the
current market rate when ownership is transferred. Management monitors various
economic indicators and competitive conditions in its lending area, and, in
connection therewith, may modify underwriting standards based on their
assessments.
During 1998, the Bank originated for sale and subsequently sold, without
recourse, $4.8 million of mortgage loans, on which the Bank retained servicing.
The loans sold include $4.3 million of mortgages to Fannie Mae and $501,000 to
the SONYMA. As part of the Bank's agreement with the government agencies, the
Bank offers mortgage loans, for up to 95% of the lower of the purchase price or
appraised value, on single family principal residences to credit qualified home
buyers. In addition, the borrower must have not had income greater than 115
percent of the area family median income as published by the U.S. Department of
Housing and Urban Development annually in the report, "Estimated Median Family
Incomes". The Bank has an agreement with Fannie Mae whereby Fannie Mae purchases
qualifying mortgages and Federal Housing Administration ("FHA") Title I loans
that the Bank originates. Loans sold to SONYMA were originated pursuant to a
program aimed at assisting first time homebuyers with low to moderate incomes.
The Bank plans to originate and sell, without recourse, other mortgage loans in
the secondary market and retain servicing. The Bank does not presently have any
recorded servicing assets.
The Bank offers FHA Home Improvement Loans on owner occupied, one family homes
in amounts up to $25,000. While no equity is required, inspections are required
on all loans in excess of $7,500 or if the borrower fails to submit a completion
certificate. The Bank sells these loans, without recourse, to Fannie Mae, and
retains servicing.
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Other Lending. The Bank offers a variety of other loan products, including: home
equity; home improvement; deposit account; student; personal and automobile
loans. At December 31, 1998, total gross other loans was $22.9 million, or 1.9%
of total gross loans. At December 31, 1998, the other loan portfolio was
comprised as follows: property improvement loans of $10.7 million, or 46.5% of
the other loan portfolio; deposit account loans, which are 100% secured, of $8.2
million, or 35.6% of the other loan portfolio; and various consumer type loans
of $3.8 million, or 16.4% of the other loan portfolio. The remainder of the
other loan portfolio was comprised of student loans and overdraft lines of
credit. Student loans are federally guaranteed to varying degrees. During 1998,
the Bank sold the $5.1 million student loan portfolio to Sallie Mae, realizing a
pre-tax gain of $64,000. As part of the sale transaction, Sallie Mae agreed to
purchase all future student loans originated by the Bank on which repayment by
the student has not begun. This allows the Bank to continue to receive interest
and special allowances (or rate subsidies) while the student is in school and
eliminates the high cost of servicing the loan once repayment begins. Student
loans, which had a balance of $153,000 at December 31, 1998, are carried at fair
value in the aggregate.
The Bank offers fixed rate home equity loans, which are reported combined with
property improvement loans. Home equity loans originated by the Bank are
disbursed at closing, and range from $10,100, to a maximum of $50,000 on one and
two-family owner-occupied residences only. Financing is available up to 75% of
the property's appraised value less any outstanding mortgage balance. In
connection with originating these loans, the Bank charges fees incurred to
perfect the lien on the property. At December 31, 1998, the Bank had $9.4
million of home equity loans, with interest rates ranging from 5.5% to 12.0%.
Loan Origination and Other Fees. In addition to interest earned on loans, the
Bank charges fees for originating loans, certain loan prepayments and
modifications. The income realized from such fees varies with the volume of
loans made or repaid, the availability of funds, and competitive conditions in
the lending market.
Investment Activities
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General. Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various agencies of the federal government, certain certificates
of deposit of insured depository institutions, certain banker's acceptances,
repurchase agreements and federal funds sold. Subject to various restrictions,
federally chartered savings institutions may also invest their assets in
commercial paper, investment grade corporate debt securities and mutual funds
whose assets conform to the investments that a federally chartered savings
institution is authorized to make directly. At December 31, 1998, the Company's
securities and the other investment portfolio combined, totaled $301.0 million,
or 18.6% of total assets, of which $110.0 million were in U.S. Government and
federal agency securities. (See "INVESTMENT PORTFOLIO", page 23, herein.)
Management formulates the investment policies, subject to approval by the Board
of Directors. The Chief Executive Officer, or his designated alternate, makes
investment decisions on a day-to-day basis while the Board of Directors acts in
an advisory capacity. The Bank's investments in securities have been primarily
in CMOs and short-term U.S. Government and federal agency securities with an
average term to maturity of less than three years at the time of purchase. In
response to the low interest rate environment that has prevailed during most of
the 1990's, the Bank's purchases of investment securities generally include
those maturing in one to two years. The Bank's investment policy allows
investment in corporate debt securities rated AA or higher. The Bank classifies
all securities, other than marketable equity securities, as "held-to-maturity".
The marketable equity securities portfolio is designated as "available-for-sale"
and carried at estimated fair value. Unrealized gains and losses on
available-for-sale securities are excluded from earnings and reported as a net
amount in a separate component of stockholders' equity, until realized. There
were no sales of securities during 1998. Activity in the held-to-maturity
portfolio included, purchases of $379.0 million and maturities of $514.0 million
9
of U.S. Government and federal agency securities and purchases of $57.1 million
and maturities and amortization of $65.4 million in the CMO portfolio, during
1998.
The Company, excluding activities of the Bank, invests in U.S. Government and
federal agency securities and, through the Bank, invests in money market
instruments. By investing in short term securities and maintaining funds in cash
and cash equivalents (investments with an original maturity of less than three
months), the Company is able to meet its liquidity needs. In the past, the
Company has held mortgage loans, which were received in the form of a dividend
from the Bank. As of December 31, 1998, the Company held no mortgage loans.
CMOs are mortgage-backed bonds secured by the cash flow of a pool of mortgages.
In a CMO, scheduled principal and interest payments received from borrowers are
separated into different payment streams, creating several bonds that repay
invested capital at different rates. A given pool generally secures several
different classes of CMO bonds. CMOs pay the bondholder on a schedule that is
different from the mortgage pool as a whole, and includes fast pay, medium pay,
and slow pay bonds to suit the needs of different investors. The common
arrangements include: (i) a fast-pay bond with a maturity much shorter than the
total pool; (ii) a bond paying interest only for the period that may be
contingent on how prior CMOs perform, before payment of principal begins; (iii)
a bond paying variable interest based on an index, typically the London
Interbank Offered Rate ("LIBOR"), even though the mortgages themselves may be
fixed rate loans. CMOs manage the prepayment risk associated with
mortgage-related securities by splitting the pools of mortgage loans into
different categories of classes.
The Bank purchases Planned Amortization Class ("PAC") (also referred to as
Planned Principal Class) bond CMOs. PACs are designed to receive principal
payments using a predetermined principal balance schedule derived by assuming
two constant prepayment rates for the underlying mortgage-backed securities
("MBS"). All of the Bank's CMOs are backed by Freddie Mac, Fannie Mae or
Government National Mortgage Association ("Ginnie Mae") MBS, which are backed by
whole loans. Management believes these securities represent attractive and
limited risk alternatives relative to other investments. During the past few
years, the availability of CMOs that met the Bank's CMO investment guidelines
was limited. At December 31, 1998, $95.8 million, or 5.9% of total assets, was
invested in CMOs. At December 31, 1998, the Bank's CMO portfolio had an
estimated average maturity of twenty-six months. (See "Contractual Maturity
Distribution", page 23, herein.)
Sources of Funds
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General. The Bank's primary sources of funds are deposits. Cash flows are
provided from interest and maturities on debt securities and CMOs, principal and
interest payments on mortgage and other loans. Deposit flows and mortgage
prepayments are greatly influenced by general interest rate changes, economic
conditions and competition. During 1998, the Bank took a $50.0 million 10 year
fixed rate advance from the Federal Home Loan Bank of New York ("FHLB-NY"). (See
"BORROWINGS", page 33, herein and "Liquidity and Capital Resources" included on
page 10 in the 1998 Annual Report to Stockholders.)
Deposits. The Bank offers a variety of deposit accounts having a range of
interest rates and terms. The Bank's deposits consist of the following types of
accounts: passbook/statement and lease security; certificate; money market;
negotiable order of withdrawal ("NOW") and non-interest bearing demand. As of
December 31, 1998, passbook/statement and lease security accounts represented
48.4% of the Bank's total deposits. The flow of deposits is influenced
significantly by changes in market interest rates, general economic conditions
and competition. The Bank's deposits are obtained primarily from the communities
in which its branches are located. The Bank does not use brokers to obtain
deposits, relying primarily on customer service and long-standing relationships
with customers to attract and retain these deposits. Certificate accounts in
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excess of $100,000 are not actively solicited by the Bank nor does the Bank pay
preferential interest rates on such accounts. (See Note 16 to the Consolidated
Financial Statements, included on page 35 in the 1998 Annual Report to
Stockholders.)
The Bank influences deposit levels and composition through its interest rate
structure. Management believes that the relatively low level of interest rates
and the strong performance and growth of the capital markets that have prevailed
are the primary contributors for the continued decline in deposits over the past
several years. Management chose to allow deposits to decline, rather than pay
rates that would result in a lower net income or necessitate modifying of the
Bank's existing investment structure and guidelines. Rates offered on the Bank's
deposit accounts are competitive with those rates offered by other financial
institutions in its market area. While the highest percentage of deposits has
remained in passbook/statement and lease security accounts, the trend of deposit
shifts has moved away from passbook/statement accounts and towards certificate
accounts. Deposits at December 31, 1998, increased by $3.0 million, or .3%,
compared to deposits at December 31, 1997. During 1998, the decrease in the
Bank's passbook/statement accounts of $23.8 million, or 4.4%, represented the
most significant decrease of any deposit category offered by the Bank. During
1998, money market accounts decreased by $14.7 million or 19.0%, while
certificate accounts increased by $24.0 million, or 5.9%. (See "DEPOSITS", page
31, herein.)
Subsidiaries of the Bank
- ------------------------
General. At December 31, 1998, the Bank had eighteen wholly owned subsidiary
corporations and a majority owned subsidiary, which operated as a real estate
investment trust that was liquidated on January 4, 1999. Many of the
corporations formed partnerships that are, or were, active in the ownership or
operation of real estate, ("the Real Estate Subsidiaries"). At December 31,
1998, the Bank's net investment in the Real Estate Subsidiaries was $785,000,
which included ORE of $277,000. In addition, six subsidiary corporations were
inactive at December 31, 1998.
The subsidiaries were primarily formed in the 1970's, at which time the Bank was
state regulated, pursuant to the New York State leeway investment authority.
(See "Grandfathered Savings Bank Authority", pages 19 through 20, herein.) The
Real Estate Subsidiaries were originally formed to: (i) operate properties
acquired through foreclosure actions, which were primarily comprised of
multi-family apartment buildings, until such time as the highest and best use
was achieved, at which time the property would be sold; (ii) take "equity
interests" in the construction of income producing properties on which the Bank
made loans; or (iii) invest in commercial properties in which the Bank
established branch offices. The aggregate amount of properties held by the Real
Estate Subsidiaries has continued to decrease since the early 1990's, as real
estate has not been purchased or developed since the late 1980's. However, the
Bank continues to transfer properties acquired through foreclosure to the Real
Estate Subsidiaries to manage, until sold. Effective June 30, 1997, management
reclassified all real estate previously classified as held-for-investment to
held-for-sale. (See Notes 1(g), 11, 12 and 13 to the Consolidated Financial
Statements, on pages 29, 32 and 33, respectively, in the 1998 Annual Report to
Stockholders.)
During the third quarter of 1998, the Bank sold two of its subsidiary
corporations, Pendex Realty Corp. ("Pendex") and Sutdex Realty Corp. ("Sutdex"),
realizing gains of $963,000. Pendex and Sutdex were equal partners in D & D
Associates, a partnership which owned shares representing cooperative
apartments. Prior to the sale, the cooperative apartment shares were transferred
to two other subsidiaries of the Bank, Jascove Corp. and Avre Corp., each a
partner of LeHavre Associates. (See "D & D Associates" and "LeHavre Associates",
on page 12, herein.)
11
The cyclical nature of real estate markets and interest rates influence the
level of financial risk to property owners and the Bank, as mortgagor. As a
result of these cycles, from time to time, the Bank has acquired real estate
through foreclosure actions. The Real Estate Subsidiaries have been used to
mitigate the risk of loss that generally accompany the acquisition of real
estate through foreclosure actions. The Real Estate Subsidiaries, with the
backing of the Bank, have the financial ability to carry properties until their
perceived optimal use and value is achieved, at which time the property is sold.
Management believes that the Real Estate Subsidiaries provide the most efficient
means to monitor, manage, maintain and operate significant properties acquired
through foreclosure actions.
The activities of each of the Bank's subsidiary corporations and the
partnerships they formed are described below. Real Estate Subsidiaries that have
converted properties to cooperative residences have done so under New York State
non-eviction plans. Non-eviction plans provide that rent-stabilized tenants may
remain tenants in their units after a building has been sold to a cooperative
association. Due to the uncertainty of timing and future sales value of the
unsold cooperative shares, for financial statement purposes, unsold shares
acquired as a result of converting these properties, are carried at zero value.
Gains on the sale of these shares are included in income upon sale. However, for
income tax purposes, the value of all cooperative shares, sold and unsold, in
excess of the Bank's investment in the property prior to conversion to
cooperative, was included in taxable income at the time of the sale to the
cooperative. The tax basis of these cooperative shares is depreciated for tax
purposes.
Forty-Second & Park Corp. At December 31, 1998, Forty-Second & Park Corp. owned
cooperative shares representing 16 units in a six-story cooperative apartment
building containing 57 residential units and 4 professional offices located in
Forest Hills, Queens, NY. The shares, relating to the unsold units, are carried
at zero value. The building was originally acquired by obtaining the deed in
lieu of foreclosure in 1979. This building, which had been poorly maintained
prior to acquisition, was renovated. In 1982, the property was converted to a
cooperative and sold to Barclay Plaza North Owner's, Inc. During 1998, one unit
was sold, resulting in a net gain, before taxes, of $80,000. Rents received
during 1998, on the unsold apartments totaled $134,000 and maintenance charges
paid to the cooperative association totaled $141,000. For 1998, Forty-Second &
Park Corp. had net income of $63,000, after eliminating intercompany
transactions. The Bank's net investment in Forty-Second & Park Corp. was $6,000
at December 31, 1998.
Parkway Associates. Parkway Associates ("Parkway") is a partnership between two
of the Bank's subsidiary corporations, Grandcet Realty Corp. and Litneck Realty
Corp., each of which has a 50% partnership interest. At December 31, 1998,
Parkway owned shares, representing 69 unsold apartment units plus parking spaces
in a 400 unit cooperative garden apartment complex located in Floral Park,
Queens County, NY. The shares, relating to the unsold units, are carried at zero
value. The property was originally acquired through foreclosure in 1979 and
initially operated as a rental property. In the early 1980's, these apartments,
which had been poorly maintained, were substantially renovated. In 1989, the
property was converted to a cooperative and sold to Floral Park Owners, Inc.
During 1998, four units were sold, resulting in a net gain, before taxes, of
$180,000. Rents received during 1998, from the unsold apartments and garage
spaces totaled $528,000 and maintenance charges paid to the cooperative
association and costs for maintenance employees totaled $488,000. For 1998,
Parkway Associates had a net operating income of $154,000, after eliminating
intercompany transactions. The Bank's net investment in Parkway was $41,000 at
December 31, 1998.
Elmback Associates. Elmback Associates ("Elmback") is a partnership between two
of the Bank's subsidiary corporations, Before Real Estate, Inc. and Afta Real
Estate, Inc., each of which has a 50% partnership interest. At December 31,
1998, Elmback owned cooperative shares representing 10 unsold apartment units in
12
a six story cooperative apartment building with 61 units, located in Jamaica,
Queens County, NY. The property, originally acquired by deed in lieu of
foreclosure in 1980, was subsequently renovated and operated as a rental
property. In 1988, the property was converted to a cooperative and sold to 87-46
Chelsea Owners, Inc. The shares, relating to the unsold units, are carried at
zero value. During 1998, 3 units were sold resulting in a net gain, before
taxes, of $111,000. Rents received during 1998, on the unsold apartment units
totaled $66,000 essentially covering the $67,000 of maintenance charges paid to
the cooperative association.
In addition, as part of a 1994 mortgage loan workout between the Bank and an
unrelated borrower, Elmback took title to cooperative shares representing 57
unsold cooperative apartments in an 82 unit cooperative property, located in
Brooklyn, New York. During 1998, 2 units were sold and $76,000 of gains was
deferred. At December 31, 1998, 29 units remained, which comprised the entire
$277,000 in ORE. This property generated a net loss of $30,000 for 1998. (See
"Other Real Estate", page 29, herein.) For 1998 Elmback Associates had net
operating income of $31,000, after eliminating intercompany transactions. The
Bank's net investment in Elmback was $310,000 at December 31, 1998.
D & D Associates. During 1998, the Bank sold two of its subsidiary corporations,
Pendex and Sutdex, realizing pre-tax gains of $963,000. Prior to the sale of
Pendex and Sutdex, each held a 50% partnership interest in D & D Associates
("D&D"), which interests were assigned to Jas Cove Corp. ("Jas Cove") and Avre
Realty Corp. ("Avre"), each a subsidiary of the Bank.
At December 31, 1998, D&D owned shares representing 31 unsold units in two
six-story cooperative apartment buildings with 176 units. These buildings,
located in Jamaica, Queens County, NY, were originally acquired through
foreclosure proceedings in 1981. Subsequent to foreclosure, the buildings were
renovated and operated as rental properties. During 1985, one of the buildings
was converted to a cooperative and sold to the Tyler Towers Owners Corp. During
1988, the second building was converted to a cooperative and sold to the Park
Sanford Owners Corp. The shares, relating to the unsold apartment units, are
carried at zero value. During 1998, 4 units were sold, resulting in a net gain
before taxes of $68,000. Rental income from the buildings for 1998 totaled
$190,000 covering the maintenance charges of $145,000 paid to the cooperative
associations. For 1998, D&D Associates had a net operating income of $94,000,
after eliminating intercompany transactions. The Bank's net investment in D&D
was $39,000 at December 31, 1998.
Bay Hill Gardens. Bay Hill Gardens ("Bay Hill") is a partnership between 110-11
72nd Ave., Corp. and Yalcrab Real Estate, Inc., two of the Bank's subsidiary
corporations, each of which holds a 50% interest. During 1998, this subsidiary
had no operations. At December 31, 1998, the Bank had a negative investment in
Bay Hill of $54,000, reflecting an accounts payable related to the operation of
the 684 unit apartment complex previously owned by Bay Hill, that was sold
during 1994.
1995 Associates. 1995 Associates is a partnership between Jamsab Realty Corp.
and Jasthree Inc., two subsidiary corporations of the Bank, holding 99% and 1%
interests in the partnership, respectively. During 1998, this partnership
continued to collect past due rents and incur legal expenses in connection
therewith, from tenants of the 18 story commercial building that was sold during
1997. For 1998, 1995 Associates had a net loss, before taxes of $9,000, after
eliminating intercompany transactions. At December 31, 1998, the Bank had a zero
investment in this subsidiary.
Lefmet Corp. Lefmet Corp., a subsidiary corporation of the Bank, owns and
operates commercial property consisting of seven stores located in Kew Gardens,
Queens County, NY, one of which the Bank occupies as a branch office. During
1998, the property generated net income, before federal taxes, of $62,000, after
eliminating intercompany transactions. The Bank's net investment in Lefmet Corp.
was $211,000 at December 31, 1998.
13
LeHavre Associates. LeHavre Associates is a partnership between Jas Cove and
Avre, each a subsidiary of the Bank. During 1998, Jas Cove and Avre received
shares representing 31 cooperative apartments from Pendex and Sutdex, which
shares are carried at zero cost. The Bank's net investment in LeHavre at
December 31, 1998, was zero.
Jade Associates. Prior to December 1993, Jade Associates ("Jade") was a joint
venture between Sher Park Realty Corp., ("Sher Park") a subsidiary of the Bank
and an unrelated general contractor, each with a 50% interest. The joint venture
was formed to fund, construct and subsequently sell an 84 unit condominium
complex in Flushing, New York.
As a result of the region's decline in real estate values in the late 1980's,
the units did not sell, the property became troubled and the Bank ultimately
attained 100% ownership of the unsold units. Sales of the units are accounted
for under the full cost recovery method. During 1998, 28 units were sold, which
resulted in the full investment recovery, and gains of $299,000 were realized.
At December 31, 1998, the 6 units held-for-sale were carried at zero cost.
Concerned Management Concerned Management is a subsidiary of the Bank, which was
formed in 1979 to manage and operate the real estate acquired by the Bank's
other subsidiary corporations and partnerships. Concerned Management operates
from a leased office, located in Flushing, Queens County, NY.
Other Subsidiaries. Of the Bank's remaining five subsidiary corporations at
December 31, 1998, three are nominee corporations used in the conduct of the
Bank's business, one (Jam-Ser Corp.) acts as an agent to sell life insurance as
permitted by New York State law, and one (Tier Inc.), a real estate investment
trust, was liquidated during the first quarter of 1999 due to a realignment of
operations.
Savings Bank Life Insurance
- ---------------------------
The Bank is a customer of the Savings Bank Life Insurance ("SBLI") Department,
which is a separate legal mutual entity owned by its policyholders. The Bank,
through the SBLI Department offers SBLI to its customers up to the legal maximum
of $50,000 per insured individual and, as a trustee bank, offers an additional
$350,000 in group coverage per insured under the SBLI Department's Financial
Institution Group Life Insurance policy. The SBLI Department's activities are
segregated from the Bank and while they do not directly affect the Bank's
earnings, management believes that offering SBLI is beneficial to the Bank's
relationships with its depositors and the general public. The SBLI Department
pays its own expenses and reimburses the Bank for expenses incurred on its
behalf.
New York State passed legislation on June 18, 1998, which was subsequently
signed into law, enabling the SBLI Departments of all Banks issuing SBLI to
combine with the SBLI Fund to become a single mutual insurance company. Pursuant
to the new law, a plan of conversion and transfer describing the formation of
the new combined company must be prepared by the SBLI Fund and is subject to a
75% approval vote by SBLI Issuing Banks. If such approval is obtained, the plan
will be submitted for the approval of the Superintendent of Banks and
Superintendent of Insurance, both of whom urged that the change be made.
Management is not aware of and cannot predict the timing or what changes will
ultimately occur with respect to the structure of the Bank's SBLI Department or
the SBLI Fund. As such, the ultimate effect on the Company of the pending SBLI
conversion and transfer is uncertain at the present time.
14
Personnel
As of December 31, 1998, the Bank had 305 full-time employees and 124 part-time
employees. The employees are not represented by a collective bargaining unit and
the Bank considers its relationship with its employees to be good.
Regulation and Supervision
- --------------------------
The description of statutory provisions and regulations applicable to savings
institutions and their holding companies set forth in the Form 10-K does not
purport to be a complete description of such statutes and regulations and their
effects on the Bank and the Company.
General. The Company, as a unitary savings and loan holding company, is required
to file certain reports with, and otherwise comply with the rules and
regulations of the Office of Thrift Supervision ("OTS") under the Home Owners'
Loan Act, as amended (the "HOLA") and as a publicly held company, is subject to
the periodic disclosure and other requirements under the federal securities
laws. In addition, the activities of savings institutions, such as the Bank, are
governed by the HOLA and the Federal Deposit Insurance Act ("FDI Act"). Certain
regulatory requirements applicable to the Bank and the Company are referred to
below or elsewhere herein.
The Bank is subject to extensive regulation, examination and supervision by the
OTS, as its primary federal regulator, and the FDIC, as the deposit insurer. The
Bank is a member of the FHLB-NY and its deposit accounts are insured up to
applicable limits by the Bank Insurance Fund ("BIF") managed by the FDIC. The
Bank must file reports with the OTS and the FDIC concerning its activities and
financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other savings institutions. The OTS and the FDIC conduct periodic examinations
to test the Bank's compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulatory
requirements and policies, whether by the OTS, the FDIC or the Congress could
have a material adverse impact on the Company, the Bank and their operations.
Certain of the regulatory requirements applicable to the Bank and to the Company
are referred to below or elsewhere herein.
Holding Company Regulations. The Company is a nondiversified unitary savings and
loan holding company within the meaning of the HOLA. As a unitary savings and
loan holding company, the Company generally is not restricted under existing
laws as to the types of business activities in which it may engage, provided
that the Bank continues to be a qualified thrift lender ("QTL"). (See "Qualified
Thrift Lender Test", pages 17 through 18, herein.) Upon any non-supervisory
acquisition by the Company of another savings institution or savings bank that
meets the QTL test and is deemed to be a savings institution by the OTS, the
Company would become a multiple savings and loan holding company (if the
acquired institution is held as a separate subsidiary) and would be subject to
extensive limitations on the types of business activities in which it could
engage. The HOLA limits the activities of a multiple savings and loan holding
company and its non-insured institution subsidiaries primarily to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Holding
Company Act ("BHC Act"), subject to the prior approval of the OTS, and
activities authorized by OTS regulation.
The HOLA prohibits a savings and loan holding company, directly or indirectly,
or through one or more subsidiaries, from acquiring more than 5% of the voting
stock of another savings institution or holding company thereof, without prior
written approval of the OTS; or acquiring or retaining control of a depository
15
institution that is not insured by the FDIC. In evaluating applications by
holding companies to acquire savings institutions, the OTS must consider the
financial and managerial resources and future prospects of the company and
institution involved, the effect of the acquisition on the risk to the insurance
funds, the convenience and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific capital
requirements or specific restrictions on the payment of dividends or other
capital distributions, the HOLA does prescribe such restrictions on subsidiary
savings institutions, as described below. The Bank must notify the OTS 30 days
before declaring any dividend to the Company. In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the OTS and the OTS has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
Federal Savings Institution Regulation
- --------------------------------------
Capital Requirements. The OTS capital regulations require savings institutions
to meet three capital standards: a 1.5% tangible capital ratio; a 3.0% leverage
(core) capital ratio; and an 8.0% risk-based capital ratio. In addition, the
prompt corrective action standards discussed below establish, in effect, a
minimum 2% tangible capital ratio, a 4% leverage (core) capital ratio (3% for
institutions receiving the highest rating on the CAMEL financial rating system),
and together with the risk-based capital standard itself, a 4% Tier I risk based
capital standard. Core capital is defined as common stockholders' equity
(including retained earnings), certain noncumulative perpetual preferred stock
and related surplus and minority interests in the equity accounts of
consolidated subsidiaries, less intangibles other than certain purchased
mortgage servicing rights and credit card relationships. The OTS regulations
also require that, in meeting the leverage (core) ratio, tangible and risk-based
capital standards, institutions must generally deduct investments in and loans
to subsidiaries engaged in activities not permissible for a national bank and
investments in equity securities.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of 4% and 8%, respectively.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, as
assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. The components of Tier I (core) capital are
equivalent to those discussed earlier. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the allowance for loan and lease losses, limited to a
maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary
capital included as part of total capital cannot exceed 100% of core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the OTS has deferred implementation
of the interest rate risk component. At December 31, 1998, the Bank met each of
its capital requirements. A table presenting the Bank's capital position at
December 31, 1998 is presented in Note 26 to the Consolidated Financial
Statements, on page 42 in the 1998 Annual Report to Stockholders, and is
incorporated herein by reference.
16
A reconciliation between the Bank's regulatory capital and GAAP capital at
December 31, 1998 is presented below:
Tangible Capital
----------------
(In thousands)
GAAP capital-originally reported to regulatory authorities
and on the Bank's consolidated financial statements $320,994
Add:
Minority interest in includable consolidated subsidiary 161
Less:
Regulatory capital adjustments:
Investments in Non-includable Subsidiaries 3,920
Adjustment for net unrealized gains, net of tax 40,871
--------
Regulatory Capital $276,364
========
Prompt Corrective Regulatory Action. Under the OTS prompt corrective action
regulations, ("PCA Regulations") the OTS is required to take certain supervisory
actions against undercapitalized institutions, the severity of which depends
upon the institution's degree of undercapitalization.
The PCA Regulations define five capital categories and provide the minimum
numerical requirements, subject to certain exceptions, for each capital
category, as detailed below.
Total Risk- Tier I Leverage Tangible Capital
Capital Category Based Ratio (Core) Ratio to Assets Ratio
- ---------------- ---------------- --------------- ------------- -----------------
Well capitalized 10% or above 6% or above 5% or above N/A
Adequately capitalized 8% or above 4% or above 4% or above(1) N/A
Undercapitalized Less than 8% Less than 4% Less than 4%(1) N/A
Significantly undercapitalized Less than 6% Less than 3% Less than 3% N/A
Critically undercapitalized N/A N/A N/A 2% or less
<FN>
(1) 3% for institutions with the highest examination rating.
</FN>
Well capitalized institutions must meet or exceed each of the ratios shown in
the table and may not be subject to any order, written agreement, capital
directive, or prompt corrective action directive to meet and maintain a specific
capital level. Institutions failing to meet any one of the minimum capital
requirements will be considered undercapitalized, significantly undercapitalized
or critically undercapitalized, depending on the institution's capital
condition. An institution's capital category is determined on the basis of its
most recent Call Report, Thrift Financial Report, or Report of Examination.
Subject to narrow exception, the banking regulator is required to appoint a
receiver or conservator for an institution that is identified as "critically
undercapitalized". The regulation also provides that a capital restoration plan
must be filed with the OTS within 45 days of the date a savings institution
receives notice that it is "undercapitalized", "significantly undercapitalized"
or "critically undercapitalized". Compliance with such plan must be guaranteed
by any parent holding company. In addition, numerous mandatory supervisory
17
actions become immediately applicable to the institution, including, but not
limited to, increased monitoring by regulators, restrictions on growth, capital
distributions and expansion. The OTS may also take any one of a number of
discretionary supervisory actions, including the issuance of a capital directive
and the replacement of senior executive officers and directors.
Insurance of Deposit Accounts. Deposits of the Bank are insured by the BIF,
which is administered by the FDIC. The FDIC currently imposes an assessment rate
schedule from 0 to 27 basis points. Pursuant to the Deposit Insurance Funds Act
of 1996 (the "Funds Act"), the obligations for payment of the Financing
Corporation ("FICO") bonds is spread across all BIF and Savings Association
Insurance Fund ("SAIF") members. Effective January 1, 1997, BIF deposits have
been assessed for the FICO obligation of 1.3 basis points, while SAIF deposits
are assessed 6.48 basis points. Full pro-rata sharing of the FICO payments
between BIF and SAIF members will occur on the earlier of January 1, 2000 or the
date the BIF and SAIF are merged. The Funds Act provided that the BIF and SAIF
be merged on January 1, 1999, provided no savings associations existed at that
time. (See "Thrift Rechartering Legislation", below.)
The Bank paid $142,000 in FDIC insurance premiums during 1998. BIF and SAIF
members will continue to pay assessments, as described above, to fund the FICO
obligation. Management cannot predict the level of FDIC insurance assessments on
an on-going basis, whether the savings association charter will be eliminated or
whether the BIF and SAIF will eventually be merged.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. Management of the Bank does not know of any practice, condition or
violation that might lead to termination of the Bank's deposit insurance.
Thrift Rechartering Legislation. Legislation enacted in 1996 provided that the
BIF and SAIF were to have merged on January 1, 1999 if there were no more saving
associations as of that date. Various proposals to eliminate the federal savings
association charter, create a uniform financial institutions charter, abolish
the OTS and restrict savings and loan holding company activities have been
introduced in Congress. The Bank is unable to predict whether such legislation
will be enacted or the extent to which the legislation would restrict or disrupt
its operations.
Loans to One Borrower. Under the HOLA, as amended, savings institutions are
subject to the national bank limits on loans to one borrower. Generally, savings
institutions may not make a loan to a single or related group of borrowers in an
amount greater than 15% of its unimpaired capital and surplus. An additional
amount may be lent, equal to 10% of unimpaired capital and surplus, if such loan
is secured by readily marketable collateral, which is defined to include certain
financial instruments and bullion. At December 31, 1998, the Bank was in
compliance with this limitation, with the highest aggregate loans to one
borrower of $30.6 million, or 9.5% of the Bank's capital. The Company, as a
unitary savings and loan holding company, is not subject to the loan to one
borrower limitation, nor did the Company have any mortgage loans at December 31,
1998. Management reviews the loans to one borrower limit at the time the loan is
made, however, subsequent changes in the Bank's capital position may cause
credit concentrations to exceed 15% of the Bank's capital. The Bank carefully
monitors the creditworthiness of borrowers with high concentrations of credit as
well as the properties that secure these loans.
Qualified Thrift Lender Test. The HOLA requires savings institutions to meet a
QTL test. Under the QTL test, a savings institution is required to maintain at
least 65% of its portfolio assets (defined as total assets, less: intangible
assets including goodwill; property used by the institution in conducting its
18
business and specified liquid assets up to 20% of total assets) in "qualified
thrift investments" (primarily residential mortgages and related investments,
including certain MBS) on a monthly basis in 9 out of every 12 months.
A savings institution that fails the QTL test is subject to certain operating
restrictions and may be required to convert to a bank charter. As of December
31, 1998, the Bank maintained 96.3% of portfolio assets in qualified thrift
investments and, therefore, met the QTL test.
Limitations on Capital Distributions. OTS regulations impose limitations upon
all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year or (ii) 75% of its net income for the previous
four quarters. Any additional capital distributions would require prior
regulatory approval. In the event a bank's capital falls below its regulatory
requirements or is notified by the OTS that it is in need of more than normal
supervision, an institution's ability to make capital distributions could be
restricted. Effective April 1, 1999, the OTS's capital distribution regulation
will change. Under the new regulation, an application to and the prior approval
of the OTS will be required prior to any capital distribution only if the
institution does not meet the criteria for "expedited treatment" of applications
under OTS regulations (i.e., generally, examination ratings in the two top
categories.), the total capital distributions for the calendar year exceed net
income for that year plus the amount of retained net income for the preceding
two years, the institution would be undercapitalized following the distribution
or the distribution would otherwise be contrary to a statute, regulation or
agreement with the OTS. If an application is not required, the institution must
still provide prior notice to the OTS of the capital distribution. In addition,
the OTS could prohibit a proposed capital distribution by any institution, which
would otherwise be permitted by regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice. At December 31,
1998, the Bank was a Tier 1 Bank, the highest rating.
Liquidity. Information regarding liquidity is included in Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the caption "Liquidity and Capital Resources", included on page 10 in the 1998
Annual Report to Stockholders.
Assessments. Savings institutions are required to pay assessments to the OTS, to
fund the operations of the OTS. The general assessments, to be paid on a
semiannual basis, is computed based upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the institution's latest
quarterly Thrift Financial Report. The Bank's total assessments for the year
ended December 31, 1998, were $266,000.
Branching. OTS regulations permit nationwide branching by federally chartered
savings institutions to the extent allowed by federal statute. This permits
federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (e.g., any company that
controls or is under common control with an institution), or to make loans to
certain insiders, is limited by Section 23A and 23B of the Federal Reserve Act
("FRA"). Section 23A limits the aggregate amount of covered transactions with
any individual affiliate to 10% of the capital and surplus of the savings
institution. The aggregate amount of transactions with all affiliates is limited
to 20% of the savings institution's capital and surplus. Certain transactions
19
with affiliates are required to be secured by collateral in an amount and of a
type described in Section 23A, and the purchase of low quality assets from
affiliates is generally prohibited. Section 23B provides that certain
transactions with affiliates, including loans and asset purchases, must be on
terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution, as those
prevailing at the time for comparable transactions with nonaffiliated
individuals or entities. In the absence of comparable transactions, such
transactions may only occur under terms and circumstances, including credit
standards, that in good faith would be offered to or would apply to
non-affiliated individuals or entities. In addition, savings institutions are
prohibited from lending to any affiliate that is engaged in activities that are
not permissible for bank holding companies under Section 4(c) of the Bank
Holding Company Act. Further, no savings institution may invest in the
securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors and 10%
shareholders (referred to as "insiders"), as well as entities such persons
control, is governed by Sections 22(g) and 22(h) of the FRA and Regulation O
thereunder. Among other things, such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and do not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. Regulation O also places individual
and aggregate limits on the amount of loans the Bank may make to insiders based,
in part, on the Bank's capital position and requires certain board approval
procedures to be followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement responsibility
over savings institutions and has the authority to bring actions against the
institution and all "institution-affiliated parties", including stockholders,
and any attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect on an insured
institution. Formal enforcement action may range from the issuance of a capital
directive, or cease and desist orders; the removal of officers and/or directors;
appointment of a receiver or conservator; or termination of deposit insurance.
Civil penalties cover a wide range of violations and an amount up to $25,000 per
day, or possibly $1 million per day in especially egregious cases. Under the FDI
Act, the FDIC has the authority to recommend to the Director of the OTS
enforcement action to be taken with respect to a particular savings institution.
If action is not taken by the Director of the OTS, then the FDIC has authority
to take such action under certain circumstances. Federal law also establishes
criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; and compensation, fees and benefits.
If the appropriate federal banking agency determines that an institution fails
to meet any standard prescribed by the Guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the Guidelines, as required by the FDI Act.
Grandfathered Savings Bank Authority. Until 1983, the Bank was a New York state
chartered savings bank with investment powers conferred by New York State law.
The Bank retained such power when it converted to a federally chartered savings
bank. The HOLA and OTS regulations empower the Bank to exercise all the powers
that its predecessor state chartered savings bank possessed under New York State
law, whether or not such powers had been exercised, subject to the authority of
the OTS and FDIC to limit such powers for safety and soundness reasons. These
powers, which were preserved in the FIRREA, are in addition to powers the Bank
20
possesses as a federally chartered savings bank. Where a "grandfathered" power
overlaps with a power authorized under federal law, the Bank may act under the
more favorable authority.
The grandfathered powers include the authority to invest in various types of
investment securities, including corporate bonds and stock, and in real estate
development. In addition, the Bank has grandfathered authority to make leeway
investments, which include, subject to certain specific exceptions, any
investment not otherwise authorized by the New York State Banking Law at the
time of the Bank's charter conversion, provided that any single investment does
not exceed 1% of the Bank's assets and that all such investments do not exceed
5% of its assets. At December 31, 1998, the Bank's capital investments, computed
for regulatory purposes, retained under the leeway provisions were $3.9 million,
or .2% of the Bank's assets. These powers allow the Bank to pursue diversified
acquisition opportunities and provide the Bank with flexibility in restructuring
its assets. The Bank intends to continue to utilize these powers as
opportunities arise and as permitted under applicable rules and regulations.
(See "Thrift Rechartering Legislation", page 17, herein.)
Federal Home Loan Bank System. The Bank is a member of the FHLB System which
consists of twelve (12) regional FHLBs. The FHLB provides a central credit
facility, primarily for member institutions. The Bank, as a member of the
FHLB-NY, is required to acquire and hold shares of capital stock in the FHLB-NY
in an amount at least equal to 1% of the aggregate principal amount of its
unpaid residential mortgage loans and similar obligations at the beginning of
each year, or 1/20 of its advances (borrowings) from the FHLB-NY, if any,
whichever is greater. The Bank was in compliance with this requirement, with an
investment in FHLB-NY stock at December 31, 1998 of $8.9 million.
On December 8, 1998, the Bank borrowed $50.0 million from the FHLB-NY at a fixed
rate of 5.62% for ten years. Interest expense on FHLB-NY advances for the year
ended December 31, 1998 was $185,000. Prior to 1998, the Bank had not borrowed
funds for its direct activities since 1984. Pursuant to a blanket collateral
agreement with the FHLB-NY, advances are secured by qualifying mortgage loans
owned by the Bank in an amount at least equal to 110% of the advances
outstanding. Should management so decide, additional advances may be taken in
the future. (See "Liquidity and Capital Resources", included on page 10 in the
1998 Annual Report to Stockholders.)
The FHLBs are required to provide funds for the resolution of insolvent thrifts
and to contribute funds for affordable housing programs. These requirements have
limited the FHLB-NY's ability to pay dividends to their members and could also
result in the FHLBs imposing higher interest rates on advances to their members.
Further, there can be no assurance that the impact of FIRREA on the FHLBs will
not also cause a decrease in the value of the FHLB-NY stock held by the Bank.
For the years ended December 31, 1998, 1997 and 1996, dividends from the FHLB-NY
to the Bank were $634,000, $496,000 and $438,000 respectively.
Federal Reserve System. The Federal Reserve Board ("FRB") regulations require
savings institutions to maintain non-interest earning reserves against their
transaction accounts (primarily NOW and regular checking accounts). The FRB
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $46.5 million or less
(subject to adjustment by the FRB) a reserve requirement of 3%; and for accounts
greater than $46.5 million, a reserve requirement of $1.25 million plus 10%
(subject to adjustment by the FRB between 8% and 14%) against that portion of
total transaction accounts in excess of $46.5 million. The first $4.9 million of
otherwise reservable balances (subject to adjustments by the FRB) were exempted
from the reserve requirements. During 1998, the Bank was in compliance with the
foregoing requirements and expects to continue to remain in compliance in the
future.
The balances maintained to meet the reserve requirements imposed by the FRB may
be used to satisfy liquidity requirements which may be imposed by the OTS.
Because required reserves must be maintained in the form of either vault cash, a
non-interest bearing account at a Federal Reserve Bank, or a pass-through
account as defined by the FRB, the effect of the reserve requirement is to
reduce the Bank's interest earning assets. FHLB System members are also
21
authorized to borrow from the Federal Reserve "discount window", but FRB
regulations require institutions to exhaust all FHLB sources before borrowing
from a Federal Reserve Bank.
Taxation
- --------
General. The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax rules
applicable to the Company. The Company was audited by the Internal Revenue
Service for taxable years 1990 through 1993 and by New York State for taxable
years 1994 through 1996. The Bank was audited by New York City for taxable years
1991 through 1993.
Federal. The Company is subject to the rules of federal income taxation
applicable to corporations. The Company computes taxable income, using the
accrual method of accounting, on a consolidated basis. The current maximum
federal corporate tax rate for all income, including capital gains, is 35%.
State and Local Taxation. The Company is subject to New York State ("NYS")
Franchise Tax on Banking Corporations and the Bank to the New York City ("NYC")
Banking Corporation Tax.
The NYS and NYC taxes on banking corporations are each imposed in an annual
amount equal to the greater of; (1) 9% of the Bank's "Entire Net Income"
allocable to NYS (and to NYC for purposes of the City tax) during the taxable
year, or (2) the applicable alternative minimum tax. The applicable alternative
minimum tax is generally the greater of (1) a percentage of the value of the
Bank's assets allocable to NYS (and to NYC for the City tax) with certain
modifications, (2) 3% of the Bank's "Alternative Entire Net Income" allocable to
NYS (and to NYC for the City tax) or (3) A minimum tax at applicable rates.
For purposes of the NYS and NYC taxes on banking corporations, "Entire Net
Income" is similar to federal taxable income, subject to certain modifications
(including the fact that net operating losses cannot be carried back or carried
forward), and "Alternative Entire Net Income" is similar to "Entire Net Income",
subject to certain further modifications.
Bad Debt Reserves. Under the Federal law that existed prior to 1996, the Bank
was generally allowed a special bad debt deduction in determining income for tax
purposes. The deduction was based on either an experience formula or a
percentage of taxable income before such deduction ("reserve method").
Legislation was enacted in August 1996 which repealed the reserve method for tax
purposes, and required Banks to recapture, (i.e. take into taxable income) over
a six year period, the excess of the balance of their bad debt reserves as of
December 31, 1995 (other than supplemental reserves, discussed below) over the
balance of such reserves as of December 31, 1987. The Bank neither had nor has
any excess reserves that would require recapture pursuant to this legislation.
The last tax year that the Bank used the reserve method in computing its bad
debt deduction for tax purposes was 1995, and has since used the direct
charge-off method to compute its bad debt deduction.
Pursuant to Statement of Financial Accounting Standards Statement No. 109, the
Bank is generally not required to provide deferred taxes for the difference
between book and tax bad debt expense taken in years prior to, or ending at
December 31, 1987, the base year reserves. The base year reserves of $85.1
million and supplemental reserve are frozen, not forgiven. These reserves
continue to be segregated as they are subject to recapture penalty if one of the
following occurs: (a) the Bank's retained earnings represented by this reserve
are used for purposes other than to absorb losses on loans, including excess
dividends or distributions in liquidation; (b) the Bank redeems its stock; or
(c) the Bank fails to meet the Internal Revenue Code definition for a qualified
thrift. Management does not presently anticipate an event that would cause
recapture of the aforementioned reserves. However, future changes in the Federal
tax law could further affect the status of the base year reserve. (See Notes 14
and 18 to the Consolidated Financial Statements, included on pages 33 through 34
and page 36, respectively, in the 1998 Annual Report to Stockholders.)
22
New York State and the City of New York adopted legislation to reform the
franchise taxation of thrift reserves for loan losses. The legislation applies
to taxable years beginning after December 31, 1995. The legislation, among other
things, retains the reserve method for bad debt deductions. The New York State
and the City of New York bad debt deduction are no longer predicated on the
Federal deduction.
Delaware Taxation. As a Delaware holding company not earning income in Delaware,
the Company is exempted from Delaware corporate income tax but is required to
file an annual report with and pay an annual franchise tax of $150,000 to the
State of Delaware.
STATISTICAL DATA
The detailed statistical data which follows is presented in accordance with
Guide 3, prescribed by the SEC. This data should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations, which is included
in the 1998 Annual Report to Stockholders as Exhibit 13.01.
I. Distribution of Assets, Liabilities and Stockholders' Equity: Interest
Rates and Interest Differential
A, B. See page 14 of the Company's 1998 Annual Report to Stockholders (portions
of which are filed herewith as Exhibit 13.01) presents the distribution of
assets, liabilities and stockholders' equity and interest differential, under
the caption "Average Balance Sheet" and is incorporated herein by reference.
C. Interest Differential
See page 15 of the Company's 1998 Annual Report to Stockholders (portions
of which are included herewith as Exhibit 13.01) presents the interest
differential under the caption "Rate/Volume Analysis" and is incorporated herein
by reference.
Interest Rate Sensitivity Analysis
See pages 11 through 13 of the Company's 1998 Annual Report to
Stockholders (portions of which are filed herewith as Exhibit 13.01) presents
the interest rate sensitivity analysis, under the caption "Interest Rate
Sensitivity Analysis" and is incorporated herein by reference.
23
INVESTMENT PORTFOLIO
A. The following table sets forth certain information regarding the
Company's investment portfolio at the dates indicated:
At December 31,
-------------------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Securities Available-for-Sale:
------------------------------
Marketable equity securities, at fair value $ 83,592 $ 62,243 $ 51,021
======== ========= ========
Securities Held-to-Maturity:
----------------------------
U.S Government and federal agency securities $109,996 $244,903 $299,645
CMOs, net 95,790 104,040 155,272
MBS:
Ginnie Mae, net 2,464 3,640 4,999
Fannie Mae, net 53 106 152
Freddie Mac, net 154 278 441
-------- -------- --------
Total MBS 2,671 4,024 5,592
-------- -------- --------
Total Securities Held-to-Maturity $208,457 $352,967 $460,509
======== ======== ========
Other investments:
------------------
FHLB-NY stock (investment required by law) $ 8,892 $ 7,615 $ 6,829
Other stock 30 30 30
-------- -------- --------
Total other investments $ 8,922 $ 7,645 $ 6,859
======== ======== ========
Contractual Maturity Distribution
- ---------------------------------
The table below sets forth certain information regarding the carrying value,
weighted average yields and maturities of the Company's securities
held-to-maturity at December 31, 1998. The table does not reflect prepayments or
scheduled amortization on CMOs or MBS. For MBS, the maturities indicated are the
dates the final payments are due. For CMOs, the maturities reflect the "final
payment dates", which as defined by the issuer, represent the latest date by
which the CMO will be retired. The assumptions used by the issuer in calculating
the final payment dates are highly conservative, and the actual retirement may
occur earlier than its final payment date. The estimated actual average maturity
on the entire CMO portfolio at December 31, 1998 was twenty-six months. For
principal reduction on these securities, for the years ended December 31, 1998,
1997 and 1996: See the "Consolidated Statements of Cash Flows", included on
pages 25 and 26 in the 1998 Annual Report to Stockholders.
At December 31, 1998
--------------------
One Year or Less Over 1 to 5 Years Over 5 to 10 Years After 10 years
------------------- ------------------- -------------------- ---------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
---------- --------- -------- --------- -------- -------- ---------- ----------
(Dollars in Thousands)
Federal agency $100,000 5.03% $ - -% $ - -% $ - -%
U.S. Government 9,996 6.25 - - - - - -
CMOs - - 4,401 5.75 81,013 6.17 10,376 6.00
MBS 17 12.25 463 10.50 717 9.00 1,474 9.94
-------- ----- --------- ----- -------- ---- -------- ----
Total $110,013 5.14% $ 4,864 6.20% $ 81,730 6.19% $ 11,850 6.49%
======== ========= ======== ========
24
LOAN PORTFOLIO
A. The following table sets forth the composition of the mortgage and other loan
portfolios in dollar amounts:
At December 31,
---------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands)
Mortgage loans:
Multi-family $ 702,914 $ 563,205 $ 433,224 $ 344,337 $ 294,003
Underlying cooperative 302,494 267,942 262,221 263,972 251,580
One- to four-family 75,773 73,757 76,848 82,391 86,531
Commercial 69,001 71,839 61,829 55,662 58,070
Construction 5,176 3,067 1,836 1,492 2,518
---------- ---------- ---------- ---------- ----------
Total mortgage loans 1,155,358 979,810 835,958 747,854 692,702
---------- ---------- ---------- ---------- ----------
Other loans:
Student 153 5,213 6,204 7,466 9,656
Loans secured by deposit accounts 8,166 8,189 8,328 8,489 9,167
Property improvement 10,652 10,744 8,775 9,165 6,762
Consumer 3,754 4,775 4,350 4,092 1,821
Overdraft loans 202 227 237 220 224
---------- ---------- ---------- ---------- ----------
Total other loans 22,927 29,148 27,894 29,432 27,630
---------- ---------- ---------- ---------- ----------
Total loans receivable 1,178,285 1,008,958 863,852 777,286 720,332
---------- ---------- ---------- ---------- ----------
Less:
Unearned discounts, premiums
and deferred loan fees, net 2,702 3,333 3,751 4,344 4,952
Allowance for possible loan losses 5,924 5,880 5,327 4,697 4,085
---------- ---------- ---------- ---------- -----------
Loans receivable, net $1,169,659 $ 999,745 $ 854,774 $ 768,245 $ 711,295
========== ========== ========== ========== ==========
25
B. Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table shows the contractual maturity of the loan portfolios
at December 31, 1998. The table does not reflect prepayments, or scheduled
principal amortization or repricing of adjustable rate loans. (For
principal reduction on loans, for the years ended December 31, 1998, 1997
and 1996: See the "Consolidated Statements of Cash Flows", included on
pages 25 and 26 in the 1998 Annual Report to Stockholders.)
Other
Mortgage Loans Loans Total
---------------------------------------------------------- ------- -------
(In Thousands)
Under- One-to
Multi- lying- Four- Commer- Construct-
Family Co-op Family cial tion Other
------ ----- ------ ---- ---- -----
Amounts due:
Within 1 Year $ 25,249 $ 7,788 $ 6,514 $ 4,848 $ 5,176 $ 8,849 $ 58,424
-------- -------- -------- -------- -------- -------- -----------
After 1 Year:
1 to 2 years 39,594 22,750 38 1,764 - 1,435 65,581
2 to 3 years 41,634 20,410 456 4,561 - 1,576 68,637
3 to 5 years 102,158 54,414 1,050 13,283 - 3,301 174,206
5 to 10 years 430,796 162,670 21,481 40,990 - 7,766 663,703
10 to 20 years 63,216 34,462 19,187 3,555 - - 120,420
Over 20 years 267 - 27,047 - - - 27,314
-------- -------- -------- -------- -------- -------- ----------
Total due after 1 year 677,665 294,706 69,259 64,153 - 14,078 1,119,861
-------- -------- -------- -------- -------- -------- ----------
Total amounts due $702,914 $302,494 $ 75,773 $ 69,001 $ 5,176 $ 22,927 $1,178,285
======== ======== ======== ======== ======== ======== ----------
Less:
Unearned discounts,
premiums and deferred
loan fees, net 2,702
Allowance for possible
loan losses 5,924
----------
Loans receivable, net $1,169,659
==========
The following table sets forth at December 31, 1998, the dollar amount of all
loans due after December 31, 1999 and whether such loans have fixed interest
rates or adjustable interest rates.
Fixed Adjustable Total
----- ---------- -----
(In Thousands)
Mortgage loans:
Multi-family $ 677,665 $ - $ 677,665
Underlying cooperative 294,706 - 294,706
One-to four-family 62,955 6,304 69,259
Commercial 64,153 - 64,153
Construction - - -
Other loans:
Student 153 - 153
Loans secured by deposit accounts - - -
Property improvement 10,554 - 10,554
Consumer 3,371 - 3,371
Overdraft loans - - -
---------- ---------- ----------
Total loans receivable $1,113,557 $ 6,304 $1,119,861
========== ========== ==========
26
C. Delinquencies and Classified Assets
-----------------------------------
Delinquent loans are reviewed by management monthly and by the Board of
Directors quarterly. When a borrower fails to make a scheduled loan payment,
efforts are made to have the borrower cure the delinquency. The borrower is
notified of the delinquency in writing and by telephone by the Bank's collection
staff. For mortgage loans, under certain circumstances, a site inspection of the
property is required. Most delinquencies are cured within 90 days and no legal
action is taken. If a mortgage delinquency exceeds 90 days, the Bank institutes
measures to enforce its remedies, including commencing a foreclosure action. For
delinquent FHA and Veterans Administration ("VA") mortgage loans, the Bank
follows notification and foreclosure procedures prescribed by FHA and VA.
Property acquired by the Bank as a result of a foreclosure is classified as
"Other Real Estate". For uninsured non-mortgage loans, delinquent loans are
charged off after 120 days and are referred to the Bank's attorneys for
collection.
At December 31, 1998, 1997 and 1996, delinquencies in the loan portfolios
were as follows:
61-90 Days 90 Days and Over
Number Principal Number Principal
of balance of balance
loans of loans loans of loans
----- -------- ----- --------
(Dollars in Thousands)
At December 31, 1998
- --------------------
Delinquent loans:
Guaranteed(1) 11 $ 212 10 $ 233
Non-guaranteed 5 63 5 216
---- ------- ---- -------
16 $ 275 15 $ 449
==== ======= ==== =======
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%
=== ====
At December 31, 1996
- --------------------
Delinquent loans:
Guaranteed(1) 78 $ 390 144 $ 692
Non-guaranteed 9 20 15 13,459(2)
--- ------ --- -------
87 $ 410 159 $14,151
=== ====== === =======
Ratio of delinquent
loans to total loans .05% 1.64%
=== ====
<FN>
(1) Loans which are FHA, 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.
</FN>
27
The following table sets forth information regarding non-accrual, restructured
and impaired loans and loans which are 90 days or more delinquent but on which
the Bank is accruing interest at the dates indicated.
At December 31,
---------------
1998 1997 1996 1995 1994
---- ---- ----- ---- ----
(Dollars in Thousands)
Mortgage loans:
- ---------------
One-to four-family, multi-family
and commercial real estate loans:
Non-accrual loans (1) $ 213 $12,754 $12,754 $20,903 $ 500
--------- ------- ------- ------- ------
Accruing loans 90 or more days overdue:
Conventional mortgages - - 686 311 322
FHA and VA mortgages (2) 233 335 361 557 581
--------- ------- ------- ------- ------
Total 233 335 1,047 868 903
--------- ------- ------- ------- ------
Other loans:
- ------------
Non-accrual loans - - - - -
Accruing 90 or more days overdue:
Student loans - 165 331 194 379
Consumer loans 3 15 19 13 7
--------- ------- ------- ------- ------
Total 3 180 350 207 386
--------- ------- ------- ------- ------
Total non-performing loans:
Non-accrual 213 12,754 12,754 20,903 500
Accruing 90 days or more overdue 236 515 1,397 1,075 1,289
--------- ------- ------- ------- ------
Total $ 449 $13,269 $14,151 $21,978 $1,789
========= ======= ======= ======= ======
Non-accrual loans to total loans .02% 1.26% 1.48% 2.69% .07%
Accruing loans 90 or more days overdue
to total loans .02 .06 .16 .14 .18
Non-performing loans to total loans .04 1.32 1.64 1.78(3) .25
At December 31:
- ---------------
Restructured loans $ 1,842 $ 1,840 $ 1,874 $ 1,663 $1,828
For the years ended December 31:
- --------------------------------
Income forfeited due to
restructured loans $ 73 $ 62 $ 62 $ 62 $ 6
Income unrecorded due to
non-accrual/impaired loans $ 509 $ 1,180 $ 1,180 $ 226 $ 150
<FN>
(1) See "Financial Condition", included on pages 8 through 9 in the 1998 Annual
Report to Stockholders.
(2) These loans, including the past due loans, do not present any significant
collection risk to the Bank as they are guaranteed and therefore are presented
separately.
(3) Does not include an $8.2 million mortgage loan that was current on a cash
basis, but on non-accrual status, as payments were received through the
bankruptcy court.
</FN>
28
Impaired Mortgage Loans. At December 31, 1998, the Bank had one impaired
mortgage loan with a $213,000 balance and a $27,000 specific valuation
allowance. The Bank had a net investment in this loan of $186,000, which
comprised total non-accrual loans at December 31, 1998. At December 31, 1997,
the Bank had one impaired mortgage loan, secured by a cooperative apartment
building, with a balance of $12.8 million and no related valuation allowance.
This loan comprised the total balance of non-accrual loans at December 31, 1997.
If all non-accrual loans had been performing in accordance with their original
terms, the Company would have recorded interest income, with respect to such
loans, of $509,000, $1.2 million and $1.2 million for the years ended December
31, 1998, 1997 and 1996, respectively. This compares to $397,000 of actual
payments recorded for 1998, no interest income was recognized with respect to
such loans for 1997 and 1996.
On May 28, 1998, the $12.8 million underlying cooperative mortgage loan,
discussed above, was satisfied. Upon satisfaction, $4.3 million of previously
unrecorded prior years' interest and legal fees, as well as late charges, were
recovered and included in non-interest income. The average balance of impaired
loans for calendar 1998, 1997 and 1996 was $5.5 million, $12.8 million and $12.8
million, respectively.
At December 31, 1998 and 1997, loans restructured in a troubled debt
restructure, all of which are performing in accordance with their contractual
terms and therefore not considered impaired, were $1,842,000 and $1,840,000,
respectively. Interest forfeited attributable to restructured loans was $73,000,
$62,000 and $62,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Classified Assets. Federal regulations provide for the classification of loans
and other assets such as debt and equity securities considered by the OTS to be
of lesser quality as "substandard", "doubtful" or "loss" assets. An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
Substandard assets include those characterized by the distinct possibility that
the insured institution will sustain some loss if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard", with the added characteristic that the
weaknesses present make "collection or liquidation in full", on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable". Assets classified as "loss" are those considered "uncollectable"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Pursuant to OTS
rules, the Bank recently discontinued classifying assets as "special mention" if
such assets possessed weakness but do not expose the Bank to sufficient risk to
warrant classification in one of the aforementioned categories. However, the
Bank still maintains a "special mention" category under its internal asset
review system.
When an insured institution classifies problem assets as either "substandard" or
"doubtful", it is required to establish general allowances for loan losses in an
amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss", it is required to establish a specific allowance for
losses equal to 100% of the amount of the asset so classified or to charge off
such amount. An insured institution's determination as to the classification of
its assets and the amount of its valuation allowances is subject to review by
the OTS which can order the establishment of additional general or specific loss
allowances. In connection with the filing of its periodic reports with the OTS,
the Bank regularly reviews the problem loans in its portfolio to determine
whether any loans require classification in accordance with applicable
regulations.
Allowances for Possible Loan and Other Credit Losses. The allowances for
possible loan and other credit losses are established through provisions made,
based on management's evaluation of the risk inherent in its asset portfolios
and changes in the nature and volume of investment activity. Such evaluation,
which includes a review of all assets for which full collection may not be
29
reasonably assured, considers among other matters, the estimated fair value of
the underlying collateral, economic conditions, historical loss experience and
other factors that warrant recognition in providing for adequate credit
allowances. (For a more complete discussion of the Bank's problem assets see
"Asset Quality and Allowances", included on page 9 in the 1998 Annual Report to
Stockholders.)
The OTS, in conjunction with other federal banking agencies, has an interagency
policy statement on the allowance for loan and lease losses. The policy
statement provides guidance for financial institutions on both the
responsibilities of management for the assessment and establishment of adequate
allowances and guidance for banking agency examiners to use in determining the
adequacy of general valuation allowances. Generally, the policy statement
requires that: institutions have effective systems and controls to identify,
monitor and address asset quality problems; have analyzed all significant
factors that affect the collectibility of the portfolio in a reasonable manner;
and have established acceptable allowance evaluation processes that meet the
objectives set forth in the policy statement.
Potential Problem Loans and Other Assets and Subsequent Developments Management
has not identified any material potential problem loans or other asset, other
than previously discussed and presented in the accompanying tables.
Other Real Estate ORE represents real estate properties owned by the Bank, or a
subsidiary company, as a result of foreclosure or by obtaining a deed in lieu of
foreclosure. ORE is recorded at the lower of the net unpaid indebtedness, or the
property's net fair value at the time of acquisition. Subsequent valuation
adjustments are made if the net fair value decreases below the carrying amount.
Gains, if any, on the sale of ORE are deferred under the cost recovery method.
At December 31, 1998, ORE carried at $277,000 was comprised of 29 cooperative
apartments located within an 84 unit cooperative apartment building located in
Brooklyn, New York. The units were acquired during 1994, as part of a
restructuring agreement for the underlying cooperative loan. As part of the
agreement, the Bank extended the mortgage loan for an additional five years at
7.25%, made an additional five year building improvement/liquidity loan to the
cooperative and, through a subsidiary corporation, received cooperative shares
representing 57 apartments. As a result of the restructuring, $1.6 million (the
Bank's proportionate share of property ownership) of the cooperative
association's $2.4 million indebtedness to the Bank was reclassified from
mortgage loans to ORE on the Company's consolidated financial statements. At
December 31, 1998, the total indebtedness related to this property reported in
mortgage loans, including the building improvement loan, was $1.3 million. At
December 31, 1998, 29 units remained unsold and were rented. As of December 31,
1998, there were deferred gains of $453,000 on the 28 units that were sold, as
sales of ORE are accounted under the cost recovery method. During 1998, ORE
operations generated pre-tax losses of $33,000, of which $30,000 was
attributable to the property discussed above. There were no loss provisions
established against ORE during the year ended December 31, 1998.
30
SUMMARY OF LOAN LOSS EXPERIENCE
Activity in the allowance for loan losses for the mortgage loan portfolio is
summarized as follows, for the years ended December 31:
Mortgage Portfolio Loan Loss Allowance: 1998 1997 1996 1995 1994
- -------------------------------------- ---- ---- ---- ---- -----
(Dollars in Thousands)
Balance at beginning of period $5,741 $5,176 $4,575 $3,976 $4,000
Provision for loan losses - 600 600 600 600
Loans charged-off - (35) - (1) (624)
Recoveries of loans previously charged off - - 1 - -
------ ------ ------ ------ ------
Balance at end of period $5,741 $5,741 $5,176 $4,575 $3,976
====== ====== ====== ====== ======
Ratios:
Net charge-offs to average mortgages - % - % - % - % .10%
Allowance for loan losses to
net mortgage loans at December 31: .50% .59% .63% .62% .58%
Allowance for loan losses to mortgage
loans delinquent 90 days or more at December 31: 12.87x 43.86% 37.50% 5.27x 4.40x
Activity in the allowance for loan losses for the other loan portfolio is
summarized as follows, for the years ended December 31:
Other Loan Portfolio Loss Allowance: 1998 1997 1996 1995 1994
- ----------------------------------- ---- ---- ---- ---- -----
(Dollars in Thousands)
Balance at beginning of period $ 139 $ 151 $ 122 $ 109 $ 136
Provision for loan losses 51 48 40 36 8
Loans charged off (25) (72) (33) (43) (40)
Recoveries of loans previously charged off 18 12 22 20 5
------ ------ ------ ------ ------
Balance at end of period $ 183 $ 139 $ 151 $ 122 $ 109
====== ====== ====== ====== ======
Ratios:
Net charge-offs to average other loans .03% .21% .04% .08% .13%
Allowance for loan losses to
net other loans at December 31: .80% .48% .54% .42% .40%
Allowance for loan losses to other
loans delinquent 90 days or more at December 31: 61.00x 77.22% 43.14% 58.94% 28.24%
31
DEPOSITS
Deposit balances are summarized as follows at December 31:
1998 1997 1996
---- ---- ----
Stated Stated Stated
rate Amount rate Amount rate Amount
---- ------ ---- ------ ---- ------
(Dollars in Thousands)
Balance by interest rate:
Demand - % $ 47,152 - % $ 33,662 - % $ 1,940
NOW 1.24 37,005 2.47 35,401 2.47 36,256
Money market 2.32 62,747 2.96 77,477 2.96 89,081
Passbook/statement 2.22 522,671 2.71 546,447 2.71 582,808
Lease security 2.22 21,031 2.71 18,683 2.71 17,143
Certificates: 4.07- 5.00 200,635 4.67- 5.00 44,646 4.14- 5.00 174,155
5.01- 6.00 213,121 5.01- 6.00 343,864 5.01- 6.00 187,890
6.01- 6.82 19,804 6.01- 6.82 21,023 6.01- 6.82 25,120
---------- ---------- ----------
433,560 409,533 387,165
---------- ---------- ----------
Total deposits $1,124,166 $1,121,203 $1,144,393
========== ========== ==========
Time certificates in
excess of $100,000 $ 48,517 $ 41,551 $ 32,676
========== ========== ==========
The following table sets forth the maturity of certificate accounts in amounts
of $100,000 or more at December 31:
1998
----
(In Thousands)
Three months or less $20,893
Over three months through six months 11,384
Over six months through twelve months 10,347
Over twelve months 5,893
-------
$48,517
=======
32
The following table sets forth certain of the Bank's average interest bearing
deposit categories and the related average interest rates for the years ended
December 31:
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
Passbook/statement $ 536,617 2.45% $ 561,975 2.70% $ 598,929 2.72%
Lease security 19,661 2.42 18,075 2.72 16,662 2.73%
Certificates 421,359 5.21 397,832 5.22 383,215 5.16
Money Market 75,475 2.77 83,731 3.04 91,597 3.08
NOW 34,918 2.10 35,934 2.45 36,338 2.47
---------- ---------- ----------
$1,088,030 3.52% $1,097,547 3.63% $1,126,741 3.57%
========== ========== ==========
The FDIC, an agency of the U.S. Government, insures each depositor's savings up
to $100,000 through the BIF.
Financial Highlights
For the Years Ended December 31: 1998 1997 1996
- ------------------------------- ---- ---- ----
Return on average assets 2.84% 2.42% 1.74%
Return on average equity 11.86 10.64 8.05
Dividend payout ratio(1) 35.32 37.23 47.24
Average equity to average assets 23.97 22.72 21.65
Equity to total assets 23.59 23.94 22.12
Interest rate spread 4.08 3.88 3.90
Net interest margin 4.97 4.73 4.68
Non-interest expense to
average assets 1.76 1.79 1.80
Non-performing loans to total loans(2) .04 1.32 1.64
Non-performing assets to total assets(2) .04 .90 .98
Efficiency ratio(3) 35.10 38.27 40.40
Ratio of net interest income to
non-interest expense 2.63x 2.47x 2.44x
Average interest earning assets to
average interest bearing liabilities 1.33x 1.31x 1.28x
<FN>
(1) Dividend payout ratio is calculated by dividing dividends declared per share
by net income per share.
(2) See also "Asset Composition and Strategy", included on page 9 in the 1998
Annual Report to Stockholders.
(3) Efficiency ratio is calculated by dividing non-interest expense, excluding
ORE expense/(income), by net interest income plus loan fees and service charges.
</FN>
33
BORROWINGS
On December 8, 1998, the Bank borrowed $50.0 million from the FHLB-NY at a fixed
rate of 5.62% for ten years. Interest expense on FHLB-NY advances for the year
ended December 31, 1998 was $185,000. Prior to 1998, the Bank had not borrowed
funds for its direct activities since 1984. Pursuant to a blanket collateral
agreement with the FHLB-NY, advances are secured by qualifying mortgage loans
owned by the Bank in an amount at least equal to 110% of the advances
outstanding.
ITEM 2. PROPERTIES
----------
The Bank conducts its business through 13 full-service branch offices, 10
located in the borough of Queens, one in the borough of Manhattan and one each
in Nassau and Suffolk counties. The Company believes that the Bank's current
facilities are adequate to meet the present and immediately foreseeable needs of
the Bank and the Company. (See Notes 9 and 19 to the Consolidated Financial
Statements, included on pages 32 and 36, respectively, in the 1998 Annual Report
to Stockholders.)
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Bank is a defendant in several lawsuits arising out of the normal conduct of
business. In the opinion of management, after consultation with legal counsel,
the ultimate outcome of these matters is not expected to have a material adverse
effect on the results of operations, business operations or the consolidated
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
34
ADDITIONAL ITEM. EXECUTIVE OFFICERS
------------------
The following table sets forth certain information with respect to each
executive officer of the Company who is not also a director of the Company. The
Board of Directors appoints or reaffirms the appointment of all of the Company's
Executive Officers each May. The term of each Executive Officer of the Company
is generally one year, or until a respective successor is elected (or
appointed).
Age at Position held
Name December 31, 1998 with the Company
- ---- ----------------- ----------------
John F. Bennett 64 Senior Vice President
Jack Connors 49 Senior Vice President
John Conroy 52 Senior Vice President
Bernice Glaz 57 Senior Vice President
Lawrence J. Kane 45 Executive Vice President
Thomas R. Lehmann 48 Executive Vice President - Chief Financial Officer
Joseph J. Hennessy 56 Asst. Treasurer/Comptroller
The following table sets forth certain information with respect to each
executive officer of the Bank who is not a director of the Bank.
Age at Position held
Name December 31, 1998 with the Bank
- ---- ----------------- -------------
John F. Bennett 64 Senior Vice President
Jack Connors 49 Senior Vice President
John Conroy 52 Senior Vice President
Bernice Glaz 57 Senior Vice President
Lawrence J. Kane 45 Executive Vice President
Thomas R. Lehmann 48 Executive Vice President - Chief Financial Officer and
Treasurer/Comptroller
35
PART II
ITEM 5. MARKET FOR JSB FINANCIAL INC.'S COMMON EQUITY AND RELATED
STOCKHOLDERS' MATTERS
---------------------------------------------------------
JSB Financial, Inc. common stock is traded on the New York Stock Exchange under
the symbol "JSB". Prior to August 7, 1997, the Company's common stock was traded
on the Nasdaq National Market under the symbol "JSBF".
Information regarding JSB Financial, Inc. common stock and its price for the
1998 calendar year appears on page 7 of the 1998 Annual Report to Stockholders,
portions of which are filed herewith as Exhibit 13.01, under the caption
"Quarterly Results" and is incorporated herein by reference.
As of February 18, 1999, JSB Financial, Inc. had approximately 2,044
shareholders of record, not including the number of persons or entities holding
stock in nominee or street name through various brokers and banks.
During 1998, the Company declared four cash dividends totaling $1.60 per share
on its common stock. Although the Company cannot guarantee dividend payments,
management expects to continue to pay cash dividends, provided that dividend
payments are in the best interest of the Company's stockholders. Certain
restrictions exist regarding the amount of dividends that the Company may
declare and pay. (See Note 18 to the Consolidated Financial Statements, included
on page 36 in the 1998 Annual Report to Stockholders.) Dividends were paid
during calendar 1998 to stockholders as follows:
Declaration Date Record Date Payment Date Dividend Per Share
-----------------------------------------------------------------------------------------------------
January 6, 1998 February 4, 1998 February 18, 1998 $.40
April 14, 1998 May 6, 1998 May 20, 1998 $.40
July 20, 1998 August 5, 1998 August 19, 1998 $.40
October 13, 1998 November 4, 1998 November 18, 1998 $.40
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
Selected financial data appears on pages 5 and 6, under the captions "Financial
Highlights" and "Selected Financial Data", respectively, of the Company's 1998
Annual Report to Stockholders, and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-----------------------------------------------------------
See pages 8 through 21, of the Company's 1998 Annual Report to Stockholders,
portions of which are filed herewith as Exhibit 13.01.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Information regarding quantitative and qualitative disclosures about market risk
appears on pages 11 through 13 of the Company's 1998 Annual Report to
Stockholders, under the caption "Interest Rate Sensitivity Analysis" and is
incorporated herein by reference.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
See pages 22 through 44, of the Company's 1998 Annual Report to Stockholders,
portions of which are filed herewith as Exhibit 13.01.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
------------------------------------------------------------
None.
37
PART III
Certain information required by Part III is omitted from this Report in that the
Registrant has filed a definitive proxy statement pursuant to Regulation 14A
(the "Proxy Statement"), and certain information included therein is
incorporated herein by reference. Only those sections of the Proxy Statement
which specifically address the items set forth herein are incorporated by
reference. Such incorporation does not include the Report of the Compensation
Committee or the Stock Performance Graph and information pertaining thereto,
included in the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
-----------------------------------------------
Information presented under the caption "Information With Respect to Nominees
and Continuing Directors" on pages 4 and 5 in the Company's Proxy Statement for
its Annual Meeting of Stockholders to be held on May 11, 1999, is incorporated
herein by reference. Information concerning Executive Officers who are not
Directors of the Company is contained herein on page 34, as an Additional Item
in Part I, under the caption Executive Officers, pursuant to paragraph (b) of
Item 401 of Regulation S-K in reliance on Instruction G.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Information included under the captions "Directors' Compensation" and "Executive
Compensation" on pages 8 through 11 (excluding the Report of the Compensation
Committee on pages 9 and 10) in the Company's Proxy Statement for its Annual
Meeting of Stockholders to be held on May 11, 1999, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Information included under the captions "Security Ownership of Certain
Beneficial Owners" and "Stock Ownership of Management" on pages 3 and 7 in the
Company's Proxy Statement for its Annual Meeting of Stockholders to be held on
May 11, 1999, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information included under the captions "Indebtedness of Management and
Transactions with Certain Related Persons" on page 17 in the Company's Proxy
Statement for its Annual Meeting of Stockholders to be held on May 11, 1999, is
incorporated herein by reference.
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) 1. Financial Statements
The following Consolidated Financial Statements of the Company its
subsidiary, Jamaica Savings Bank FSB, and the independent auditors' report
thereon, which are included on pages 22 through 44, of the Company's 1998 Annual
Report to Stockholders, are filed herewith.
- Consolidated Statements of Financial Condition at December 31, 1998
and 1997
- Consolidated Statements of Operations for each of the years in the
three year period ended December 31, 1998
- Consolidated Statements of Changes in Stockholders' Equity for each
of the years in the three year period ended December 31, 1998
- Consolidated Statements of Cash Flows for each of the years in the
three year period ended December 31, 1998
- Notes to the Consolidated Financial Statements
- Independent Auditors' Report
The remaining information appearing in the 1998 Annual Report to
Stockholders is not deemed to be filed as part of this report, except as
expressly provided herein.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or Notes thereto.
(b) Reports on Form 8-K filed during the last quarter of 1998: None
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K:
Exhibit No. Description
- ----------- -----------
3.01 Articles of Incorporation (1)
3.02 Bylaws (Amended and Restated) (2)
4.01 Stock Certificate of JSB Financial, Inc. (1)
Employment Agreement between the Company and:
10.01 Park T. Adikes (3)
10.02 Edward P. Henson (3)
10.05 Joanne Corrigan (3)
10.06 Supplemental Employment Agreement entered into on July 9, 1996
between the Company and:
Park T. Adikes (4)
Edward P. Henson (4)
Joanne Corrigan (4)
<FN>
Continued
</FN>
39
Exhibit No. Description
- ----------- -----------
Employment Agreement between the Bank and:
10.07 Park T. Adikes (3)
10.08 Edward P. Henson (3)
10.10 Joanne Corrigan (3)
10.11 John F. Bennett (3)
10.12 Jack Connors (5)
10.13 John J. Conroy (5)
10.14 Bernice Glaz (5)
10.15 Thomas R. Lehmann (5)
10.16 Lawrence J. Kane (2)
10.18 Supplemental Employment Agreement entered into on July 9, 1996
between the Bank and:
Park T. Adikes (4)
Edward P. Henson (4)
Joanne Corrigan (4)
John F. Bennett (4)
Jack Connors (4)
John J. Conroy (4)
Bernice Glaz (4)
Thomas R. Lehmann (4)
Lawrence J. Kane (4)
Special Termination Agreements between the Bank, guaranteed
by the Company and:
10.19 Teresa DiRe-Covello (3)
10.20 Joseph J. Hennessy (3)
10.21 Philip Pepe (6)
10.22 Supplemental Special Termination Agreements entered into on
July 9, 1996 between the Bank and:
Teresa DiRe-Covello (4)
Joseph J. Hennessy (4)
Philip Pepe (4)
<FN>
Continued
</FN>
40
Exhibit No. Description
- ----------- -----------
10.23 Jamaica Savings Bank FSB Benefit Restoration Plan
(Amended and Restated) (7)
10.24 JSB Financial, Inc. 1990 Incentive Stock Option Plan
(Amended and Restated) (8)
10.25 JSB Financial, Inc. 1990 Stock Option Plan
For Outside Directors (Amended and Restated) (8)
10.26 Jamaica Savings Bank FSB Employee Severance
Compensation Plan (1)
10.27 Jamaica Savings Bank FSB Outside Directors' Consultation
and Retirement Plan (9)
10.28 Incentive Savings Plan of Jamaica Savings Bank FSB (9)
10.29 The JSB Financial, Inc. 1996 Stock Option Plan (10)
11.01 Statement regarding computation of per share earnings, filed herewith
13.01 Portions of the 1998 Annual Report to Stockholders, filed herewith
23.01 Consent of KPMG LLP, filed herewith
27.00 Financial Data Schedule for the Period Ended December 31, 1998,
filed herewith
99.01 Form 11-K for calendar year 1998 for the Incentive Savings Plan of
Jamaica Savings Bank FSB (11)
<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.
(3) Incorporated herein by reference to Exhibits filed with the Form 10-K for the Year Ended December 31, 1990.
(4) Incorporated herein by reference to Exhibits filed with the Form 10-K for the Year Ended December 31, 1996.
(5) Incorporated herein by reference to Exhibits filed with the Form 10-Q for the Quarter Ended June 30, 1995.
(6) Incorporated herein by reference to Exhibits filed with the Form 10-K for the year ended December 31, 1993.
(7) Incorporated herein by reference to Exhibits filed with the Form 10-K for the Year Ended December 31, 1994.
(8) Incorporated herein by reference to Exhibits filed with the Form 10-K for the Year Ended December 31, 1992.
(9) Incorporated herein by reference to Exhibits filed with the Pre-Effective Amendment No.1 to Form S-1,
Registration No. 33-33821, filed on April 2, 1990.
(10) Incorporated herein by reference to Appendix A (pages 21 through 33) of the Proxy Statement, dated March 29, 1996.
(11) To be filed.
</FN>
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
JSB Financial, Inc.
-------------------
(Registrant)
/s/ Park T. Adikes 3/26/99
- ------------------------------ -------
Park T. Adikes
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
/s/ Park T. Adikes 3/26/99 /s/ Thomas R. Lehmann 3/26/99
- ----------------------------- ------- --------------------------------- -------
Park T. Adikes Thomas R. Lehmann
Chief Executive Officer Chief Financial Officer
Chairman of the Board (Principal Accounting Officer)
(Director)
/s/ Joseph C. Cantwell 3/26/99 /s/ Cynthia Gibbons 3/26/99
- ----------------------------- ------- --------------------------------- -------
Joseph C. Cantwell Cynthia Gibbons
Director Director
/s/ James E. Gibbons, Jr. 3/26/99 /s/ Edward P. Henson 3/26/99
- ----------------------------- ------- --------------------------------- -------
James E. Gibbons, Jr. Edward P. Henson
Director President and Director
/s/ Richard W. Meyer 3/26/99
- ----------------------------- -------
Richard W. Meyer
Director