SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
Commission File No.: 0-21628
HAVEN BANCORP, INC.
(exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
11-3153802
(I.R.S. Employer I.D. No.)
93-22 Jamaica Avenue, Woodhaven, New York 11421
(Address of principal executive offices)
(718) 847-7041
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $0.01 per share
(Title of class)
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
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 the voting stock held by non-
affiliates of the registrant, i.e., persons other than directors
and executive officers of the registrant is $141,737,049 and is
based upon the last sales price as quoted on Nasdaq Stock Market
for March 25, 1997.
The registrant had 4,329,624 shares outstanding as of March 25,
1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended
December 31, 1996, are incorporated by reference into Parts I and
II of this Form 10-K.
Portions of the Proxy Statement for the 1997 Annual Meeting of
Stockholders are incorporated by reference into Part III of this
Form 10-K.
INDEX
PART I Page
Item 1. Description of Business .......................... 1 - 57
Business ....................................... 1 - 2
Market Area and Competition .................... 2 - 3
Lending Activities ............................. 3 - 15
Delinquencies and Classified Assets ............ 16 - 21
Allowances for Loan and REO Losses ............. 21 - 25
Investment Activities .......................... 26 - 29
Mortgage-Backed Securities ..................... 30 - 36
Sources of Funds ............................... 36 - 39
Borrowings ..................................... 39 - 41
Subsidiary Activities .......................... 42
Personnel ...................................... 42
Regulation and Supervision ..................... 43 - 54
Federal and State Taxation ..................... 54 - 57
Item 2. Properties ....................................... 57 - 58
Item 3. Legal Proceedings ................................ 59
Item 4. Submission of Matters to a Vote of Security Holders 59
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters ...................... 59 - 60
Item 6. Selected Financial Data .......................... 60
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............. 60
Item 8. Financial Statements and Supplementary Data ...... 60
Item 9. Change In and Disagreements with Accountants on
Accounting and Financial Disclosure .............. 60
PART III
Item 10. Directors and Executive Officers of the Registrant 60
Item 11. Executive Compensation ........................... 61
Item 12. Security Ownership of Certain Beneficial
Owners and Management ............................ 61
Item 13. Certain Relationships and Related Transactions ... 61
PART IV
Item 14. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K .............................. 61 - 63
EXHIBIT INDEX
Exhibit 11.0 Computation of earnings per share
Exhibit 13.0 1996 Annual Report to Stockholders
Exhibit 23.0 Consent of Independent Auditors
Exhibit 27.0 Financial Data Schedule
Exhibit 99 Proxy Statement for 1997 Annual Meeting
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS
Haven Bancorp, Inc. ("Haven Bancorp" or the "Company") was
incorporated under Delaware law on March 25, 1993 as the holding
company for Columbia Federal Savings Bank ("Columbia" or the
"Bank") in connection with the Bank's conversion from a federally
chartered mutual savings bank to a federally chartered stock
savings bank. The Company is a savings and loan holding company
and is subject to regulation by the Office of Thrift Supervision
("OTS"). The Company is headquartered in Woodhaven, New York and
its principal business currently consists of the operation of its
wholly owned subsidiary, the Bank. At December 31, 1996, the
Company had consolidated total assets of $1.6 billion and
stockholders' equity of $99.4 million.
Currently, the Company does not transact any material business
other than through its subsidiary, the Bank.
Columbia was established in 1889 as a New York-chartered building
and loan association. The Bank converted to a New York-chartered
savings and loan association in 1940. The Bank subsequently
converted to a federal savings and loan association and in 1983
the Bank converted to a federal savings bank under its current
name. The Bank is a member of the Federal Home Loan Bank
("FHLB") System, and its deposit accounts are insured to the
maximum allowable amount by the Federal Deposit Insurance
Corporation ("FDIC"). At December 31, 1996, the Bank had total
assets of $1.6 billion and stockholders' equity of $97.8 million.
The Bank's principal business has been and continues to be
attracting retail deposits from the general public and investing
those deposits, together with funds generated from operations and
borrowings, primarily in one-to four-family, owner-occupied
residential mortgage loans. Since 1994, the Bank has gradually
increased its activity in multi-family and commercial real estate
lending. In addition, in times of low loan demand, the Bank will
invest in debt, equity and mortgage-backed securities to
supplement its lending portfolio. The Bank also invests, to a
lesser extent, in home equity loans, home equity lines of credit
and other marketable securities.
The Bank's results of operations are dependent primarily on its
net interest income, which is the difference between the interest
income earned on its loan and securities portfolios and its cost
of funds, which consist of the interest paid on its deposits and
borrowed funds. The Bank's net income also is affected by its
provision for loan losses as well as non-interest income and
operating expenses consisting primarily of compensation and
benefits, occupancy and equipment, real estate operations, net,
federal deposit insurance premiums and other general and
administrative expenses. The earnings of the Bank are
significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, and to
a lesser extent by government policies and actions of regulatory
authorities.
MARKET AREA AND COMPETITION
The Bank has been, and continues to be, a community oriented
savings institution offering a variety of traditional financial
services to meet the needs of the communities in which it
operates. Management considers the Bank's reputation and
customer service as its major competitive advantage in attracting
and retaining customers in its market area. In order to better
serve its customers, the Bank has installed ATMs in all of its
branches.
The Bank's primary market area is concentrated in the
neighborhoods surrounding its nine full service banking and nine
supermarket banking facilities (five of which opened in the first
quarter of 1997) located in the New York City Boroughs of Queens
and Brooklyn and in Nassau and Suffolk Counties, New York.
During 1996, the Bank opened four supermarket branches and
announced plans to open approximately 44 full-service branches in
Pathmark Supermarkets throughout New York City, Long Island,
Westchester and Rockland counties. Management believes that
supermarket branching is a cost effective way to extend the
Bank's franchise and put its sales force in touch with more
prospective customers than possible through conventional bank
branches. Management believes that all of its branch offices are
located in communities that can generally be characterized as
stable, residential neighborhoods of predominantly one-to four-
family residences and middle income families.
During the past three years, the Bank's expanded loan work-
out/resolution efforts have successfully contributed toward
reducing non-performing assets to manageable levels. Although
there are a number of encouraging signs in the local economy and
the Bank's real estate markets, it is unclear how these factors
will affect the Bank's asset quality in the future. See
"Delinquencies and Classified Assets."
The New York City metropolitan area has a high number of
financial institutions, many of which are significantly larger
and have greater financial resources than the Bank, and 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. In
addition, the Bank faces increasing competition for deposits from
non-bank institutions such as brokerage firms and insurance
companies in such areas as short-term money market funds,
corporate and government securities funds, mutual funds and
annuities and insurance. Competition may also increase as a
result of the lifting of restrictions on the interstate
operations of financial institutions.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio consists
primarily of conventional first mortgage loans secured by owner
occupied one-to four-family residences, and, to a lesser extent,
multi-family residences, commercial real estate and construction
and land loans. Also, the Bank's loan portfolio includes
cooperative loans, which the Bank has not originated since 1990
except to facilitate the sale of real estate owned ("REO") or to
restructure a problem asset. During 1996, loan originations and
purchases totalled $363.6 million (comprised of $271.1 million of
residential one-to four family mortgage loans, $83.8 million of
commercial and multi-family real estate loans and $8.7 million of
consumer loans). One-to four-family mortgage loan originations
included $172.3 million of loans purchased in the secondary
market during 1996. During the fourth quarter of 1996, $10.6
million of cooperative apartment loans previously transferred to
loans held for sale were returned to the loan portfolio at their
estimated market value.
At December 31, 1996, the Bank had total mortgage loans
outstanding of $814.3 million, of which $556.8 million were one-
to four-family residential mortgage loans, or 65.6% of the Bank's
total loans. At that same date, multi-family residential
mortgage loans totalled $105.3 million, or 12.4% of total loans.
The remainder of the Bank's mortgage loans, which totalled $152.2
million, or 18% of total loans at December 31, 1996, included
$128.0 million of commercial real estate loans, or 15.1% of total
loans, $19.9 million of cooperative apartment loans, or 2.4% of
total loans and $4.2 million of construction and land loans, or
0.5% of total loans. Other loans in the Bank's portfolio
principally consisted of home equity lines of credit and consumer
loans and totalled $34.1 million, or 4.0% of total loans at
December 31, 1996.
The following table sets forth the composition of the Bank's loan
portfolio, excluding loans held for sale, in dollar amounts and
in percentages of the respective portfolios at the dates
indicated.
At December 31,
---------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
Percent Percent Percent Percent Percent
of of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Mortgage loans:
One-to four-family $556,818 65.63% $325,050 57.03% $258,698 49.34% $211,946 31.07% $134,920 20.87%
Multi-family 105,341 12.42 79,008 13.86 94,259 17.98 124,566 18.26 135,352 20.94
Commercial 127,956 15.08 111,038 19.48 102,415 19.54 126,059 18.48 131,497 20.34
Cooperative 19,936 2.35 10,187 1.79 24,369 4.65 183,403 26.88 198,653 30.73
Construction and land 4,227 0.50 5,737 1.01 3,491 0.67 2,347 0.34 4,887 0.75
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total mortgage loans 814,278 95.98 531,020 93.17 483,232 92.17 648,321 95.03 605,309 93.63
Other loans:
Home equity lines of
credit 15,677 1.85 16,454 2.89 17,802 3.39 17,032 2.50 18,587 2.88
Property improvement
loans 6,957 0.82 10,248 1.80 11,814 2.26 7,794 1.14 8,488 1.31
Loans on deposit
accounts 809 0.10 821 0.14 940 0.18 1,143 0.17 1,550 0.24
Commercial loans 351 0.04 479 0.08 605 0.12 693 0.10 1,114 0.17
Guaranteed student loans 985 0.12 1,181 0.21 1,761 0.34 2,357 0.35 2,560 0.40
Unsecured consumer loans 809 0.10 1,950 0.34 2,366 0.45 1,659 0.24 1,918 0.30
Other loans 8,506 0.99 7,834 1.37 5,737 1.09 3,220 0.47 6,947 1.07
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total other loans 34,094 4.02 38,967 6.83 41,025 7.83 33,898 4.97 41,164 6.37
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans 848,372 100.00% 569,987 100.00% 524,257 100.00% 682,219 100.00% 646,473 100.00%
====== ====== ====== ====== ======
Less:
Unearned discounts,
premiums and deferred
loan fees, net (786) (1,029) (1,375) (805) (1,356)
Allowance for loan
losses (10,704) (8,573) (10,847) (21,606) (21,027)
------- ------- ------- ------- -------
Loans, net $836,882 $560,385 $512,035 $659,808 $624,090
======= ======= ======= ======= =======
The following table shows the estimated contractual maturity of
the Bank's loan portfolio at December 31, 1996, assuming no
prepayments.
At December 31, 1996
Mortgage Other Loans,
Loans Loans Net
-------- ----- ------
(In thousands)
Amounts due:
Within one year $ 39,684 $ 1,031 $ 40,715
------- ------ -------
After one year:
One to three years 43,547 4,071 47,618
Three to five years 98,126 2,306 100,432
Five to ten years 80,429 21,944 102,373
Ten to twenty years 266,979 4,232 271,211
Over twenty years 285,513 510 286,023
------- ------ -------
Total due after one year 774,594 33,063 807,657
------- ------ -------
Total loans $814,278 $34,094 $848,372
======= ====== =======
The following table sets forth at December 31, 1996, the dollar
amount of all loans due after December 31, 1997, and whether such
loans have fixed interest rates or adjustable interest rates.
Due After December 31, 1997
Fixed Adjustable Total
----- ---------- -----
(In thousands)
Mortgage loans:
One-to four-family $352,251 $201,890 $554,141
Multi-family 50,993 40,968 91,961
Commercial real estate 83,122 25,770 108,892
Cooperative 4,813 14,787 19,600
Other loans 15,259 17,804 33,063
------- ------- -------
Total loans $506,438 $301,219 $807,657
======= ======= =======
The following table sets forth the Bank's loan origination, loan
purchases, sales and principal repayments for the periods
indicated:
Years Ended December 31,
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(In thousands)
Mortgage loans (gross):
At beginning of year $531,020 $483,232 $648,321 $605,309 $685,681
Mortgage loans originated:
One-to four-family 98,783 64,139 77,499 121,812 30,368
Multi-family 46,310 11,726 - 4,667 12,841
Commercial real estate 35,886 26,047 4,688 7,386 6,071
Cooperative (1) - 63 499 362 1,828
Construction and land loans 1,562 4,367 1,000 176 936
------- ------- ------- ------- -------
Total mortgage loans
originated 182,541 106,342 83,686 134,403 52,044
Mortgage loans purchased 172,300 26,241 - - -
Transfer of mortgage loans
to REO (3,470) (4,638) (10,998) (22,042) (12,861)
Transfer of mortgage loans to MBSs - - - - (32,741)
Transfer of mortgage loans from/
(to) loans held for sale 10,594 (12,038) - - -
Principal repayments (78,209) (67,274) (64,686) (60,315) (66,708)
Sales of mortgage loans (2) (498) (845) (173,091) (9,034) (20,106)
------- ------- ------- ------- -------
At end of year $814,278 $531,020 $483,232 $648,321 $605,309
======= ======= ======= ======= =======
Other loans (gross):
At beginning of year $ 38,967 $ 41,025 $ 33,898 $ 41,164 $ 53,462
Other loans originated 8,735 10,746 21,533 12,237 11,639
Principal repayments (13,608) (12,804) (14,406) (19,503) (23,937)
------- ------- ------- ------- -------
At end of year $ 34,094 $ 38,967 $ 41,025 $ 33,898 $ 41,164
======= ======= ======= ======= =======
(1) Cooperative loan originations in the four years ended 1995
were done solely to facilitate the restructuring and the sale of
delinquent cooperative loans and cooperative units held by the
Bank as REO.
(2) As part of the major bulk sales program in 1994, the Bank
sold $170.5 million of loans.
ONE-TO FOUR-FAMILY MORTGAGE LENDING. The Bank offers both fixed-
rate and ARM loans secured by one-to four-family residences
located in the Bank's primary market area. The majority of such
loans are secured by property located on Long Island (in Queens,
and Nassau and Suffolk Counties), and, to a lesser extent,
Manhattan, Brooklyn, Staten Island, and Westchester Counties, and
typically serve as the primary residence of the owner. Loan
originations are generally obtained from existing or past
customers, members of the local communities and local real-estate
brokers and attorney referrals. The substantial majority of the
Bank's loans are originated through efforts of Bank employed
sales representatives who solicit loans from the communities
served by the Bank by visiting real estate attorneys, brokers and
individuals who have expressed an interest in obtaining a
mortgage loan. The Bank also originates loans from its customer
base in its branch offices. Beginning in 1995, the Bank also
purchased loans on a flow basis from correspondent mortgage
bankers in New York, New Jersey and Connecticut in order to
supplement one-to four-family loan originations.
The Bank generally originates one-to four-family residential
mortgage loans in amounts up to 90% of the lower of the appraised
value or selling price of the property securing the loan.
Properties securing such loans are primarily owner-occupied
principal residences. Residential condominium loans are
originated in amounts up to a maximum of 90% of the appraised
value of the condominium unit. One-to four-family mortgage loans
may be originated with loan-to-value ratios of up to 97% of the
appraised value of the property under the Federal National
Mortgage Association ("FNMA") Community Home Buyers Program,
which targets low to moderate income borrowers. Private mortgage
insurance is required whenever loan-to-value ratios exceed 80% of
the appraised value of the property securing the loan. Loan
amounts generally conform to FNMA/Federal Home Loan Mortgage
Corporation ("FHLMC") limits. Mortgage loans originated by the
Bank generally 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. Due-on-sale clauses are an
important means of enabling the Bank to redeploy funds at current
rates thereby causing the Bank's loan portfolio to be more
interest rate sensitive. The Bank has generally exercised its
rights under these clauses.
The Bank currently offers fixed-rate loans up to $750,000 on one-
to four-family residences with terms up to 30 years. During
1996, the Bank introduced 30 year and 15 year fixed-rate bi-
weekly loans. Interest rates charged on fixed-rate mortgage
loans are competitively priced based on market conditions and the
Bank's cost of funds. Origination fees generally range from 0%
to 3% of the principal amount of the loan. Generally, the Bank's
standard underwriting guidelines conform to the FNMA/FHLMC
guidelines.
The Bank currently offers ARM loans up to $750,000 which adjust
either annually, or in 3, 5, 7 or 15 years with maximum loan
terms of 30 years. The Bank's ARM loans typically carry an
initial interest rate below the fully-indexed rate for the loan.
For one year ARMs the Bank qualifies borrowers based upon a rate
of 2% over the initial rate. The initial discounted rate is
determined by the Bank in accordance with market and competitive
factors and, as of December 31, 1996, the discount offered by the
Bank on the one year adjustable ARM loan ranged from 289 basis
points (with 0% origination fees) to 339 basis points (with 2%
origination fees) below the fully-indexed rate, which was 8.26%
as of such date. The discount offered by the Bank on the three-
year adjustable ARM loan ranged from 211 basis points (with 0%
origination fees) to 261 basis points (with 2% origination fees)
below the fully-indexed rate, which was 8.73% as of December 31,
1996. The discount offered by the Bank on the five year
adjustable ARM loan ranged from 190 basis points (with 0%
origination fees) to 240 basis points (with 2% origination fees)
below the fully-indexed rate, which was 8.90% as of December 31,
1996. As of December 31, 1996, the discount offered by the Bank
on the seven year adjustable ARM loan ranged from 101 basis
points (with 0% origination fees) to 151 basis points (with 2%
origination fees) below the fully-indexed rate, which was 8.26%
as of such date. Finally, as of December 31, 1996, the discount
offered by the Bank on the fifteen year adjustable ARM loan
ranged from 39 basis points (with 0% origination fees) to 89
basis points (with 2% origination fees) below the fully indexed
rate which was 8.26%. As of December 31, 1996, the Bank's ARM
loans, with the exception of the five, seven and fifteen year ARM
loans, adjust by a maximum of 2.0% each adjustment period, with a
life-time cap of 6% over the initial note rate. The maximum
periodic rate adjustment on the five year ARM loan is 2.5% and
the maximum periodic rate adjustment on the seven year and
fifteen year ARM loans for the first adjustment period are 5%
which defaults to 2% for all adjustment periods thereafter. The
Bank currently charges origination fees ranging from 0% to 2.0%
for its one-to four-family ARM loans. ARM loans generally pose a
risk that as interest rates rise, the amount of a borrower's
monthly loan payment also rises, thereby increasing the potential
for delinquencies and loan losses. This potential risk is
mitigated by the Bank's policy of originating ARM loans with
annual and lifetime interest rate caps that limit the amount that
a borrower's monthly payment may increase. However, interest
rates and the resulting cost of funds increases in a rapidly
increasing interest rate environment could exceed the cap levels
on these loans and negatively impact net interest income. During
1996, the Bank originated or purchased $205.1 million of
adjustable-rate mortgage loans.
In the past, the Bank originated most 30 year fixed-rate loans
for immediate sale to the FHLMC or FNMA. The Bank retains 10,
15, 20 year and 15 and 30 year bi-weekly fixed-rate loans while
continuing to originate 30-year fixed-rate loans for immediate
sale. The Bank arranges for the sale of such loans at the
acceptance of the commitment by the applicant to FHLMC or FNMA
through forward purchase commitments. The Bank retains the
servicing on the loans it sells. For the year ended December 31,
1996, the Bank did not emphasize the origination of 30-year
fixed-rate loans and, accordingly, sold only 11 loans totalling
$0.5 million to the FNMA and other lenders.
During 1996, the Bank purchased $172.3 million of one-to four-
family mortgage loans from correspondent mortgage bankers and
bulk whole loan purchases to supplement retail originations.
Purchases of one-to four-family mortgage loans on a flow basis
are limited to the New York, New Jersey and Connecticut
metropolitan area to approved correspondents. Credit packages
submitted to the Bank by a correspondent are underwritten by the
Bank and are subject to the Bank's quality control procedures.
The Bank purchased approximately $70.0 million of bulk
residential whole loan packages during the year. The Bank
performed due diligence procedures on the credit quality of the
loans and the servicing operations of the servicer, if
applicable, before purchasing the loans.
MULTI-FAMILY LENDING. The Bank originates multi-family loans
with contractual terms ranging from 5 to 15 years with interim
interest rate repricing tied to matching U.S. Treasury Notes plus
a margin. These loans are generally secured by apartment and
mixed-use (business and residential, with the majority of income
coming from the residential units) properties, located in the
Bank's primary market area and are made in amounts of up to 75%
of the appraised value of the property. In making such loans,
the Bank bases its underwriting decision primarily on the net
operating income generated by the real estate to support the debt
service, the financial resources credit history and ownership/
management experience of the principals/guarantors, and the
marketability of the property. The Bank generally requires a
debt service coverage ratio of at least 1.20x and sometimes
requires personal guarantees from borrowers. As of December 31,
1996, $105.3 million, or 12.4% of the Bank's total loan
portfolio, consisted of multi-family residential loans. At
December 31, 1996, the Bank's largest multi-family loan had an
outstanding balance of $4.6 million and is secured by a mixed use
building containing 110 residential units and 5,400 square feet
of ground floor retail space. The appraised value of the
property securing this loan at July, 1996, the date of the most
recent appraisal, exceeded the outstanding loan balance.
Multi-family, commercial real estate and construction and land
lending are generally believed to involve a higher degree of
credit risk than one-to four-family lending because such loans
typically involve higher principal amounts and the repayment of
such loans generally is dependent on income produced by the
property sufficient to cover operating expenses and debt service.
Economic events that are outside the control of the borrower or
lender could adversely impact the value of the security for the
loan or the future cash flows from the borrower's property. In
recognition of these risks, the Bank applies stringent
underwriting criteria for all of its loans and originates multi-
family, commercial real estate and construction and land loans on
a selective basis. See "Commercial Real Estate Lending" and
"Construction and Land Lending".
COMMERCIAL REAL ESTATE LENDING. The Bank originates commercial
real estate loans that are generally secured by properties used
exclusively for business purposes such as retail stores, mixed-
use properties (residential and retail combined where the
majority of the income from the property comes from the
commercial business) and, light industrial and small office
buildings located in the Bank's primary market area. The Bank's
commercial real estate loans are generally made in amounts up to
the lesser of 70% of the appraised value of the property or 65%
for owner occupied properties. Commercial real estate loans are
made on a negotiated basis where the interest rate generally
reprices during the term of the loan and is tied to the prime
rate or the U.S. Treasury Note rate matched to the repricing
frequency of the loan and are made as 10 year balloon loans. The
Bank's underwriting standards and procedures are similar to those
applicable to its multi-family loans, whereby the Bank considers
the net operating income of the property and the borrower's
expertise, credit history and profitability. The Bank generally
requires that the properties securing commercial real estate
loans have debt service coverage ratios of not less than 1.20x
and also generally requires personal guarantees from the
borrowers or the principals of the borrowing entity. At December
31, 1996, the Bank's commercial real estate loan portfolio
totalled $128.0 million, or 15.1% of the Bank's total loan
portfolio. The largest commercial real estate loan in the Bank's
portfolio was a loan secured by an office building in Brooklyn,
New York, which, as of December 31, 1996, had an outstanding
balance of $15.9 million and was performing.
COOPERATIVE APARTMENT LOANS. Until 1990, the Bank originated
loans secured by cooperative units. Since 1990, the Bank has not
originated any loans secured by cooperative units with the
exception of loans to facilitate the restructuring of a
classified asset or sale of REO. In 1994, the Bank was approved
as a seller/servicer in a FNMA pilot program, enabling it to
originate cooperative apartment loans for immediate sale to FNMA.
During 1996, the Bank did not originate any cooperative loans.
In addition, during 1996, the Bank returned $10.6 million of
performing cooperative apartment loans previously transferred to
loans held for sale to the loan portfolio at their estimated
market value.
CONSTRUCTION AND LAND LENDING. The Bank's construction loans
primarily have been made to finance the construction of one-to
four-family residential properties, multi-family residential
properties and retail properties. The Bank's policies provide
that construction and land loans may generally be made in amounts
up to 70% of the value when completed. The Bank currently does
not actively solicit land loans. The Bank generally requires
personal guarantees and evidence that the borrower has invested
an amount equal to not less than 20% of the estimated cost of the
land and improvements. Construction loans generally are made
with adjustable rates and a maximum term of 18 months, subject to
renewal. Construction loans are generally made based on pre-
sales or pre-leasing. Loan proceeds are disbursed in increments
as construction progresses and as inspections warrant. As of
December 31, 1996, the Bank had $4.2 million, or 0.5% of its
total loan portfolio invested in construction and land loans. At
December 31, 1996, the Bank's largest construction and land loan
had an outstanding balance of $3.0 million for the construction
of 108 senior citizen residential apartment units in Bay Port,
New York. The loan has been performing since origination.
Construction and land loans involve additional risks attributable
to the uncertainties inherent in estimating construction and land
development costs as well as the market value on the completed
project and the effects of governmental regulation of real
property. It is relatively difficult to evaluate accurately the
total funds required to complete a project and the related loan-
to-value ratio to mitigate these risks. The Bank generally
engages professional engineers and appraisers at the borrower's
expense, to evaluate project costs and value upon completion. As
a result of the foregoing, construction and land loans often
involve the disbursement of substantial funds with repayment
dependent, in part, on the success of the ultimate project rather
than the ability of the borrower or guarantor to repay principal
and interest. If the Bank is forced to foreclose on a project
prior to or at completion due to a default, there can be no
assurance that the Bank will be able to recover all of the unpaid
balance of, and accrued interest on, the loan as well as related
foreclosure and holding costs. In addition, the Bank may be
required to fund additional amounts to complete the project and
may have to hold the property for an unspecified period of time.
OTHER LOANS. The Bank also offers home equity loans, equity
lines of credit, business loans-lines of credit and Government-
guaranteed student loans. As of December 31, 1996 other loans
totalled $34.1 million, or 4.0% of the Bank's total loan
portfolio. Home equity loans are offered as fixed-rate loans
with a maximum term of 15 years, as adjustable-rate loans with a
15 year term or as fixed-variable loans which are fixed for the
first 5 years and then become adjustable for the remaining 15
years. The maximum amount is $50,000 and principal and interest
amortize over the life of the loan. The Bank also offers equity
lines of credit with a term of 25 years on which interest only is
due for the first 10 years and thereafter principal and interest
payments sufficient to liquidate the line are required for the
remaining term not to exceed 15 years. The maximum amount for a
equity line of credit is $200,000. All products are underwritten
pursuant to the standards applicable to one-to four-family loans
which include a determination of the applicant's payment history
on other debts and an assessment of the borrower's ability to
meet payments on the proposed loan in addition to the borrower's
existing obligations. In addition to the credit worthiness of
the applicant, the underwriting process also includes a
comparison of the value of the security, if any, to the proposed
loan amount. The Bank also offers secured and unsecured business
loans and lines of credit whose term and rate are negotiable
based on the credit standing and financial position of the
customer. The Bank's other loans tend to have higher interest
rates and shorter maturities than one-to four-family mortgage
loans, but also tend to have a higher risk of default than such
loans. Although the level of delinquencies in the Bank's other
loan portfolio has generally been low ($375,000, or approximately
1.1% of the other loan portfolio, at December 31, 1996 was 90
days or more delinquent), there can be no assurance that
delinquencies will not increase in the future. During the fourth
quarter of 1995, the Bank stopped offering all other consumer
loans, including personal secured and unsecured loans.
LOAN APPROVAL PROCEDURES AND AUTHORITY. For one-to four-family
real estate loans each loan is reviewed and approved by an
underwriter and the department head in accordance with the
policies approved by the Board of Directors. Multi-family,
commercial and construction loans are approved by designated
lending officers within lending authorities approved by the Board
of Directors. Loans greater than $750,000 up to $1,500,000 must
be approved by the Officers Loan Committee, whereas, loans over
$1,500,000 must be approved by the Board of Directors - Loan
Committee. Loans exceeding $2,500,000 must be approved by the
Board. Loans not secured by real estate and unsecured other
loans, depending on the amount of the loan and the loan to value
ratio, where applicable, require the approval of at least one
lending officer and/or underwriter designated by the Board.
For all loans originated by the Bank, upon receipt of a completed
loan application from a prospective borrower, a credit report is
ordered and certain other information is verified by the Bank's
loan underwriters and, if necessary, additional financial
information is required. An appraisal of the real estate
intended to secure the proposed loan is required which currently
is performed by either the staff appraisers of the Bank or by an
independent appraiser designated and approved by the Bank. The
Board annually approves the independent appraisers used by the
Bank and approves the Bank's appraisal policy. It is the Bank's
policy to obtain title insurance on all real estate first
mortgage loans. Borrowers must also obtain hazard insurance
prior to closing. Borrowers generally are required to advance
funds on a monthly basis together with each payment of principal
and interest to a mortgage escrow account from which the Bank
makes disbursements for items such as real estate taxes, and in
some cases, hazard insurance premiums.
LOAN CONCENTRATIONS. As a result of OTS regulations, the Bank
may not extend credit to a single borrower or related group of
borrowers in an amount greater than 15% of the Bank's unimpaired
capital and surplus. An additional amount of credit may be
extended, equal to 10% of unimpaired capital and surplus, if the
loan is secured by readily marketable collateral, which does not
include real estate.
At December 31, 1996, the Bank's loans-to-one borrower limit was
$16.2 million. There was no one borrower which exceeded this
limit in accordance with applicable regulatory requirements.
DELINQUENCIES AND CLASSIFIED ASSETS
DELINQUENT LOANS. The Bank's collection procedures for mortgage
loans include sending a reminder notice to the borrower if the
loan is 10 days past due, another notice at 16 days and a late
notice after payment is 30 days past due. In the event that
payment is not received after the late notice, the loan is
referred to the collection department and letters are sent or
phone calls are made to the borrower by the collection
department. When contact is made with the borrower at any time
prior to foreclosure, the Bank attempts to obtain full payment or
work out a repayment schedule with the borrower to avoid
foreclosure. Generally, foreclosure procedures are initiated
when a loan is over 90 days delinquent. Property foreclosed upon
is held by the Bank as REO at the lower of its estimated fair
value or cost less selling costs at the time of foreclosure. The
Bank ceases to accrue interest on all loans 90 days or more past
due.
The collection procedures for other loans, excluding student
loans, generally include telephone calls to the borrower after 10
days of the delinquency. At the 120th day and not later than 180
days past due, unsecured loans are written-off by the Bank and
secured loans may be foreclosed upon or negotiations with the
borrower continued. The collection procedures for student loans
follow those specified by federal and state guidelines.
CLASSIFIED ASSETS. Federal regulations and the Bank's
Classification of Assets Policy provide for the classification of
loans and other assets 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 and/or of
the collateral pledged, if any. Substandard assets include those
characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as doubtful have all of the
weaknesses inherent in those classified substandard with the
added characteristic that the weaknesses present make "collection
or liquidation in full", on the basis of currently existing
facts, conditions, and values, "highly questionable and
improbable." Assets classified as loss are those considered
"uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve is
not warranted. Pursuant to OTS guidelines, the Bank is no longer
required to classify assets as "special mention" if such assets
possess weaknesses but do not expose the Bank to sufficient risk
to warrant classification in one of the aforementioned
categories. However, the Bank continues to classify assets as
"special mention" for internal monitoring purposes.
When an insured institution classifies one or more assets, or a
portion thereof, as substandard or doubtful, it is required to
establish a general allowance 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 one or
more assets, or a portion thereof, as "loss", it is required
either to establish a specific allowance for losses equal to 100%
of the amount of the asset so classified or to charge off such
amount.
A savings 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. The OTS, in
conjunction with the other federal banking agencies, has adopted
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.
The Bank's policies provide that the Board of Directors regularly
review problem loans and review all classified assets. The Bank
believes its policies are consistent with the regulatory
requirements regarding classified assets.
The Bank generally obtains appraisals on all properties securing
loans in foreclosure and foreclosed real estate at or about the
time it obtains possession of the property and charges-off any
declines in value against the allowance for loan losses. The
Bank assesses the value of all REO periodically and charges off
any amounts carried in excess of the appraised value against the
allowance for REO.
Non-performing loans (consisting of non-accrual loans and
restructured loans) decreased from $72.8 million at December 31,
1992 to $63.9 million at December 31, 1993, and declined to $28.3
million at December 31, 1994, $16.9 million at December 31, 1995
and $13.9 million at December 31, 1996. The continued decline in
the balance of non-performing loans during the five year period
was due to the Bank's ongoing efforts to reduce non-performing
assets. The significant decrease in non-performing loans during
1994 was mainly due to the sale of $22.0 million of non-accrual
and restructured loans as part of the major bulk sales program
involving loans and REO completed during the year. REO decreased
each year during the five years ended December 31, 1996 from
$22.5 million at December 31, 1992 to $17.9 million at December
31, 1993 to $7.8 million at December 31, 1994 (net of an
allowance for REO of $717,000) to $2.0 million at December 31,
1995 (net of an allowance for REO of $178,000) to a balance at
December 31, 1996 of $1.0 million (net of an allowance for REO of
$81,000). During 1994, the Bank sold $12.0 million of
cooperative apartment REO in a bulk sale transaction. The Bank
intends to continue its efforts to reduce non-performing assets
in the normal course of business, but it may continue to seek
opportunities to dispose of its non-performing assets through
sales to investors or otherwise.
The Bank also has restructured loans, which has enabled the Bank
to avoid the costs involved with foreclosing on the properties
securing such loans while continuing to collect payments on the
loans under their modified terms. Troubled debt restructurings
("TDRs") are loans for which certain concessions, such as the
reduction of interest rates or the deferral of interest or
principal payments, have been granted due to the borrower's
financial condition. Interest on TDRs is recognized at the
reduced interest rates when the interest rate on the loan is
reduced. The Bank restructures loans when it determines that the
borrower has attempted to perform on his loan obligation and
would perform if the borrower was receiving sufficient income on
the property securing the loan to satisfy the borrower's debt
obligation. Further, the Bank must find that the insufficient
cash flow is most likely due to current market conditions and is
temporary, and that the borrower is taking reasonable steps to
increase the income generated from the property.
At December 31, 1996, the Bank had 23 restructured loans with
aggregate principal balances of $3.4 million. Of this amount,
47.0% were residential loans (including cooperative apartment
loans), 42.3% were multi-family loans and 10.7% were commercial
real estate loans. Management is able to avoid the costs of
foreclosing on loans that it restructures and avoids acquiring
the properties securing such loans as REO. However, restructured
loans have a higher probability of becoming delinquent than loans
that have no previous history of delinquency. As of December 31,
1996, 1 restructured loan for $77,000 was 90 days or more past
due. There can be no assurance that the remaining loans will
continue to perform in accordance with their modified terms. To
the extent that the Bank is unable to return these loans to
performing status, the Bank will have to foreclose on such loans,
which will increase the Bank's REO.
The Bank's policy is to recognize income on a cash basis for
restructured loans for a period of six months, after which such
loans are returned to an accrual basis if they are performing in
accordance with their modified terms. At December 31, 1996, the
Bank had 21 restructured loans with principal balances of $3.2
million that were on accrual status and 1 additional restructured
loan for $134,000 that was on non-accrual status because the loan
had not yet performed in accordance with its modified terms for
the required six-month seasoning period. For restructured loans
that are 90 days or more past due, the loan is returned to non-
accrual status and previously accrued but uncollected interest is
reversed.
At December 31, 1996, the Bank's classified assets consisted of
$13.5 million of loans and REO of which $1.1 million was
classified as doubtful. The Bank's assets classified as
substandard at December 31, 1996 consisted of $12.3 million of
loans and $1.2 million of gross REO. Classified assets in total
declined $4.6 million, or 25.4% since December 31, 1995. At
December 31, 1996, the Bank also had loans aggregating $6.5
million that it had designated special mention.
The Bank continues to use the special mention designation for
internal monitoring purposes although it is not required by OTS
guidelines. Of those assets, 50.6% were multi-family loans and
49.4% were commercial real estate loans. The loans were
performing in accordance with their terms at December 31, 1996
but were deemed to warrant close monitoring by management due to
one or more factors, such as the absence of current financial
information relating to the borrower and/or the collateral,
financial difficulties of the borrower or inadequate cash flow
from the security property.
At December 31, 1996, 1995, and 1994, delinquencies in the
Bank's loan portfolio were as follows:
At December 31, 1996 At December 31, 1995
60-89 Days 90 Days or More 60-89 Days 90 Days or More
Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans
------ -------- ------ --------- ------ -------- ------ ---------
(Dollars in thousands)
One-to four-family 9 $ 950 47 $ 4,083 18 $ 1,215 42 $ 3,800
Multi-family - - 6 1,463 - - 5 967
Commercial - - 11 4,321 - - 8 2,411
Cooperative 5 281 9 431 12 580 15 871
Construction and
land loans - - 1 60 - - 4 1,067
Other loans 26 171 21 375 10 53 38 689
-- ------ --- ------ --- ------ --- ------
Total loans 40 $ 1,402 95 $10,733 40 $ 1,848 112 $ 9,805
== ====== === ====== === ====== === ======
Delinquent loans
to total loans (1) 0.17% 1.27% 0.32% 1.72%
==== ==== ==== ====
At December 31, 1994
60-89 Days 90 Days or More
Number Principal Number Principal
of Balance of Balance
Loans of Loans Loans of Loans
------ --------- ------ ---------
(Dollars in thousands)
One-to four-family 15 $ 1,015 58 $ 5,995
Multi-family - - 13 5,088
Commercial 1 41 10 5,579
Cooperative 11 561 18 934
Construction and
land loans - - 2 878
Other loans 36 205 34 275
--- ------ --- ------
Total loans 63 $ 1,822 135 $18,749
=== ====== === ======
Delinquent loans
to total loans (1) 0.35% 3.58%
==== ====
(1) Restructured loans that have become seasoned for the
required six month period and are currently performing in
accordance with their restructured terms are not included in
delinquent loans. There was 1 restructured loan for $77,000 that
was included in loans delinquent 90 days or more at December 31,
1996 because it had not yet performed in accordance with its
modified terms for the required six month seasoning period.
NON-PERFORMING ASSETS. The following table sets forth
information regarding all non-accrual loans (which consists of
loans 90 days or more past due and restructured loans that have
not yet performed in accordance with their modified terms for the
required six-month seasoning period), restructured loans and REO.
The Bank does not accrue interest on loans 90 days past due and
restructured loans that have not yet performed in accordance with
their modified terms for at least six months. If non-accrual
loans had been performing in accordance with their original
terms, the Bank would have recorded interest income from such
loans of $489,000, $889,000 and $1.3 million for the years ended
December 31, 1996, 1995 and 1994, respectively, compared to
$220,000, $280,000 and $261,000, which was recognized on non-
accrual loans for such periods, respectively. If all
restructured loans, as of December 31, 1996, 1995 and 1994, had
been performing in accordance with their original loan terms
(prior to being restructured), the Bank would have recognized
interest income from such loans of $505,000, $714,000 and
$967,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
At December 31,
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in thousands)
Non-accrual mortgage loans $ 10,358 $ 9,116 $ 18,474 $ 43,170 $ 38,133
Restructured mortgage loans 3,160 7,072 9,550 20,398 33,821
Non-accrual other loans 375 689 275 299 816
------- ------- ------- ------- -------
Total non-performing loans 13,893 16,877 28,299 63,867 72,770
Real estate owned, net of
related reserves 1,038 2,033 7,844 17,887 22,473
------- ------- ------- ------- -------
Total non-performing assets $ 14,931 $ 18,910 $ 36,143 $ 81,754 $ 95,243
======= ======= ======= ======= =======
Non-performing loans to total loans 1.64% 2.97% 5.41% 9.37% 11.28%
Non-performing assets to total assets 0.94 1.28 2.85 6.65 8.15
Non-performing loans to total assets 0.88 1.15 2.23 5.20 6.23
ALLOWANCES FOR LOAN AND REO LOSSES
The allowance for loan losses is increased by charges to income
and decreased by charge-offs (net of recoveries). Impaired loans
and related reserves have been identified and calculated in
accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 114. On January 1, 1995, the
Company adopted, on a prospective basis, SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan" and the
amendment thereof, SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures". See
Note 1 of Notes to Consolidated Financial Statements in the
Registrant's 1996 Annual Report to Stockholders on page 31, which
is incorporated herein by reference. The total allowance for
loan losses has been determined in accordance with the provisions
of SFAS No. 5, "Accounting for Contingencies". The Bank's
allowance for loan losses is intended to be maintained at a level
sufficient to absorb all estimable and probable losses inherent
in the loan portfolio. The Bank reviews the adequacy of the
allowance for loan losses on a monthly basis taking into account
past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying
collateral, current and prospective economic conditions and
current regulatory guidance.
In response to the general decline in the economic conditions of
the Bank's primary market area and the national economy in
general, management increased the Bank's allowance for loan
losses in 1992 and 1993 to account for its evaluation of the
potential effects of such factors and in consideration of the
deterioration of real estate values experienced in recent
periods. During 1994, the Bank established additional loan loss
provisions totalling $7.5 million in connection with the bulk
sales. At December 31, 1995, the allowance for loan losses was
$8.6 million, or 1.51% of total loans compared to $10.8 million,
or 2.07% of total loans at December 31, 1994. The Bank took
charge-offs of $5.5 million in 1995 compared to $24.7 million in
1994, which included $14.4 million in connection with the bulk
sales. The allowance as a percentage of non-performing loans was
50.8% at December 31, 1995 compared to 38.3% at December 31,
1994. During 1996, the Bank took charge-offs of $1.9 million
against its loan portfolio compared to $5.5 million for 1995.
The reduction in charge-offs for 1996 when compared to 1995 is a
direct result of the ongoing decline in non-performing loans
during the last five years. Non-performing loans as a percentage
of total loans was 1.64% at December 31, 1996 compared to 11.28%
at December 31, 1992. The allowance as a percentage of non-
performing loans was 77.05% at December 31, 1996 compared to
50.8% at December 31, 1995.
The Bank's provisions for loan losses have varied significantly
over the past five years. Specifically, the Bank made provisions
for loan losses of $19.8 million, $6.4 million, $13.4 million,
$2.8 million and $3.1 million for the five years ended December
31, 1996, respectively. Beginning in 1991, it became apparent to
the Bank that given the decline in the local economy, increased
unemployment rates in the Bank's local market area, the
substantial deterioration in local real estate values as
evidenced by receipt of appraisals reflecting sharp decreases in
property values and increased vacancies in multi-family dwellings
as well as an increase in loan delinquencies, it was likely that
the Bank would sustain additional losses. It is the Bank's
policy to obtain appraisals on properties that the Bank acquires
as REO and charge-off that amount of the loan exceeding the
appraised value against the allowance for loan losses. The
decrease in real estate values that occurred in the early 1990s
in the New York metropolitan area resulted in substantial
decreases in the value of the collateral securing the Bank's non-
performing loans and resulted in an increase in the Bank's
charge-offs. Therefore, during 1992 the Bank booked a loan
provision of $19.8 million. This provision booked was deemed
adequate by management given the decline in the regional economy
and the deterioration of real estate values experienced in such
periods as evidenced by receipt of appraisals reflecting sharp
decreases in property values from prior years; increases in
unemployment rates in the Bank's local market areas and increased
vacancies in multi-family dwellings as well as an increase in
loan delinquencies. Regulatory criticism of the Bank's loan
portfolio in prior regulatory examinations was also a factor.
The Bank provided $6.4 million for loan losses during 1993 which
reflected management's review of the adequacy of the allowance on
an ongoing basis. The provision of $13.4 million provided during
1994 included additional provisions of $7.5 million that were
established in connection with the bulk sale transactions.
During 1995 and 1996, the Bank provided provisions of $2.8
million and $3.1 million, respectively, to maintain the allowance
at an adequate level.
The Bank also booked provisions for losses on its REO of $291,000
and $750,000, respectively, for the years ended December 31, 1996
and 1995. The significant decline in the provision from 1995 was
attributable to the REO portfolio which declined by $995,000, or
48.9% from the previous year. The $10.3 million provision for
1994 was significantly higher because that year's amount included
an additional provision of $7.7 million in connection with the
bulk sale of $12.0 million of cooperative apartment properties.
During 1996, the Bank sold 60 REO properties with a fair value of
$3.1 million. The contribution of REO sales and normal write-
downs over the past four years has reduced the amount of REO, net
from $22.5 million at December 31, 1992 to $1.0 million at
December 31, 1996.
The Bank will continue to monitor and modify its allowances for
loan and REO losses as conditions dictate. Although the Bank
maintains its allowance at a level which it considers adequate to
provide for potential losses, there can be no assurance that such
losses will not exceed the estimated amounts.
The following table sets forth the changes in the Bank's
allowance for loan losses at the dates indicated.
At or For the Years Ended December 31,
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in thousands)
Balance at beginning of year $ 8,573 $10,847 $21,606 $21,027 $11,059
Charge-offs:
One-to four-family (771) (472) (264) (353) (361)
Cooperative (524) (2,142) (8,747) (3,028) (3,266)
Multi-family (30) (1,299) (7,932) (1,174) (616)
Non-residential and other (560) (1,541) (7,798) (1,651) (5,809)
------ ------ ------ ------ ------
Total charge-offs (1) (1,885) (5,454) (24,741) (6,206) (10,052)
Recoveries 891 405 582 385 177
------ ------ ------ ------ ------
Net charge-offs (994) (5,049) (24,159) (5,821) (9,875)
Provision for loan losses 3,125 2,775 13,400 6,400 19,843
------ ------ ------ ------ ------
Balance at end of year $10,704 $ 8,573 $10,847 $21,606 $21,027
====== ====== ====== ====== ======
Ratio of net charge-offs during
the year to average loans out-
standing during the year (2) 0.15% 0.93% 3.83% 0.90% 1.45%
Ratio of allowance for loan
losses to total loans at
the end of year (3) 1.26 1.51 2.07 3.17 3.26
Ratio of allowance for loan
losses to non-performing loan
at the end of the year (4) 77.05 50.80 38.33 33.83 28.90
(1) Total charge-offs for 1992 were attributable to the
substantial increase in non-performing assets that occurred in
1990 and continued into 1992 and the Bank's recognition that
given the national recession and the economic conditions in the
New York metropolitan area, it was likely that, contrary to the
Bank's past experience, the Bank would incur losses on its non-
performing assets into the future. Moreover, poor economic
conditions resulted in a decrease in the value of the collateral
securing the Bank's non-performing loans, which necessitated
charge-offs. Total charge-offs for the year ended 1994 were
attributable to the bulk sale transactions.
(2) The ratio of net charge-offs during the year to average
loans outstanding during the year increased significantly in 1994
due to substantial charge-offs taken during the year as a result
of the bulk sale transaction and the decrease in average loans
outstanding due to the bulk sale transactions.
(3) The steady decline in the ratio of allowance for loan losses
to total loans is attributable to a decline in non-performing
loans as previously mentioned coupled with growth in the Bank's
total loans outstanding. Specifically, the Bank's total loans
increased from $522.9 million at December 31, 1994 to $569.0
million at December 31, 1995 to $847.6 million at December 31,
1996.
(4) The ratio of allowance for loan losses to non-performing
loans has increased significantly over the last five years as
non-performing loans have declined.
The following table sets forth the Bank's allocation of its
allowance for loan losses to the total amount of loans in each of
the categories listed.
At December 31,
1996 1995 1994
------ ------ ------
% of % of % of
Loans in Loans in Loans in
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ --------
(Dollars in thousands)
Mortgage loans:
Residential (1) $5,929 80.90% $3,838 72.67% $ 5,685 71.97%
Commercial 4,340 15.08 4,175 19.48 4,308 19.53
Construction - - 69 1.00 248 .66
Other loans 435 4.02 491 6.85 606 7.84
----- ------ ------ ------ ------ ------
Total allowance for
loan losses (2) $10,704 100.00% $8,573 100.00% $10,847 100.00%
====== ====== ===== ====== ====== ======
(1) Includes one-to four-family, cooperative and multi-family
loans.
(2) In order to comply with certain regulatory reporting
requirements, management has prepared the above allocation of the
Bank's allowance for loan losses among various categories of the
loan portfolio for each of the years in the three-year period
ended December 31, 1996. In management's opinion, such
allocation has, at best, a limited utility. It is based on
management's assessment as of a given point in time of the risk
characteristics of each of the component parts of the total loan
portfolio and is subject to changes as and when the risk factors
of each such component changes. Such allocation is not
indicative of either the specific amounts or the loan categories
in which future charge-offs may be taken, nor should it be taken
as an indicator of future loss trends. In addition, by
presenting such allocation, management does not mean to imply
that the allocation is exact or that the allowance has been
precisely determined from such allocation.
INVESTMENT ACTIVITIES
The investment policy of the Bank, which is established by the
Board of Directors and implemented by the Bank's Asset/ Liability
Committee, is designed primarily to provide and maintain
liquidity, to generate a favorable return on investments without
incurring undue interest rate and credit risk, and to complement
the Bank's lending activities. Federally chartered savings
institutions have the authority to invest in various types of
liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of
deposit of insured banks and savings institutions, certain
bankers' acceptances, repurchase agreements and federal funds.
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 otherwise authorized to make directly.
Additionally, the Bank must maintain minimum levels of
investments that qualify as liquid assets under OTS regulations.
See "Regulation and Supervision-Federal Savings Institution
Regulation-Liquidity." Historically, the Bank has maintained
liquid assets above the minimum OTS requirements and at a level
believed to be adequate to meet its normal daily activities. At
December 31, 1996, the Bank had money market investments and debt
and equity securities in the aggregate amount of $6.9 million and
$243.4 million (including $146.1 million of debt and equity
securities available for sale) with a fair value of $6.9 million
and $242.4 million, respectively.
On January 1, 1994 the Company adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". Under
SFAS No. 115, debt and mortgage-backed securities ("MBSs") which
the Company has the positive intent and ability to hold until
maturity are carried at cost, adjusted for amortization of
premiums and accretion of discounts using the level yield method
over the remaining period to contractual maturity, adjusted, in
the case of MBSs, for actual prepayments. Debt and equity
securities and MBSs to be held for indefinite periods of time and
not intended to be held to maturity are classified as available
for sale securities and are recorded at fair value, with
unrealized gains (losses), net of taxes, reported as a separate
component of stockholders' equity.
In November, 1995, the Financial Accounting Standards Board
("FASB") issued an implementation guide for SFAS No. 115. The
implementation guide provided guidance in the form of a question
and answer format and allowed an opportunity from mid-November
1995 to December 31, 1995 for companies to reclassify securities
in the held to maturity portfolio to securities in the available
for sale portfolio without tainting the remainder of the
portfolio. In connection with the implementation guide for SFAS
No. 115, the Company reclassified $41.9 million of debt
securities and $405.3 million of MBSs previously classified as
held to maturity to securities available for sale. The carrying
value of the MBSs was adjusted to their market value, which
resulted in increasing the carrying value by $3.9 million, and
increasing stockholders' equity by $2.1 million, which was net of
taxes of $1.8 million. The carrying value of the debt securities
approximated market value at the time of the reclassification.
At December 31, 1996, the securities available for sale portfolio
totalled $370.1 million of which $166.2 million were adjustable-
rate securities and $203.9 million were fixed-rate securities.
At December 31, 1996, the held to maturity portfolios totalled
$295.2 million, comprised of $60.4 million of adjustable-rate
securities and $234.8 million of fixed-rate securities. The
estimated fair value of the Company's debt securities and MBSs
held to maturity portfolios was $3.2 million below the carrying
value of the portfolios at December 31, 1996. It is the
Company's intent to hold these securities until maturity and
therefore the Company does not expect to realize the current
unrealized losses brought about by the current market
environment.
The following table sets forth certain information regarding the
carrying and market values of the Company's money market
investments, debt and equity securities and Federal Home Loan
Bank ("FHLB") of New York stock at the dates indicated:
At December 31,
1996 1995 1994
------ ------ ------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- ------ -------- ------ ------- ------
(In thousands)
Debt and Equity Securities:
U.S. Government and
agency obligations $170,709 $169,849 $142,383(2) $142,281(2) $111,430(3) $105,938(3)
Corporate debt securities 45,350 45,227 45,320 44,437 31,571 31,129
Preferred stock 27,329 27,329 - - - -
------- ------- ------- ------- ------- -------
Subtotal 243,388 242,405 187,703 186,718 143,001 137,067
------- ------- ------- ------- ------- -------
Adjustable-rate MBS-
Mutual Fund - - 3,976 3,976 4,757 4,757
Federal Funds sold 5,000 5,000 5,000 5,000 1,725 1,725
FHLB-NY stock 9,890 9,890 8,138 8,138 6,888 6,888
Money market investments 1,869 1,869 4,064 4,064 5,129 5,129
------- ------- ------- ------- ------- -------
Total $260,147(1) $259,164(1) $208,881(1) $207,896(1) $161,500(1) $155,566(1)
======= ======= ======= ======= ======= =======
(1) Includes debt and equity securities available for sale
totalling $146.1 million, $63.9 million and $17.1 million, at
December 31, 1996, 1995 and 1994, respectively, carried at fair
value.
(2) Included in U.S. Government and agency obligations at
December 31, 1995 are federal government agency and FHLB multiple
step-up callable notes available for sale with a carrying value
and estimated fair value of $42.0 million. These notes are
callable periodically at the option of the issuer, but, if not
called, have a pre-determined upward adjustment of the interest
rate. The notes at December 31, 1995 had contractual maturities
between February 1999 and April 2004, and a weighted average rate
of 5.75%. During 1996, $40.0 million of the notes were sold and
$2.0 million were called.
(3) Included in U.S. Government and agency obligations at
December 31, 1994 are federal government agency and FHLB multiple
step-up callable notes held to maturity with an amortized cost
and estimated fair value of $80.0 million and $75.2 million,
respectively. These notes are callable periodically at the
option of the issuer, but, if not called, have a pre-determined
upward adjustment of the interest rate. The notes at December
31, 1994 had contractual maturities between May 1997 and April
2009, and a weighted average rate of 5.99%. During 1995, $38.0
million of the multiple step-up callable notes were called.
The table below sets forth certain information regarding the
carrying value, weighted average yields and maturities of the
Company's money market investments and debt and equity securities
at December 31, 1996.
At December 31, 1996
----------------------------------------------------------------------------------------------------------------
Total Money Market Investments
More than More than Five and Debt and Equity Securities
One Year or Less One to Five Years to Ten Years Due After 10 Years ---------------------------------------
----------------- ----------------- --------------- ------------------ Average
Weighted Weighted Weighted Weighted Remaining Estimated Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Years to Carrying Fair Average
Value Yield Value Yield Value Yield Value Yield Maturity Value Value Yield
-------- -------- -------- -------- -------- -------- -------- -------- --------- -------- -------- --------
(Dollars in thousands)
U.S. Government
securities and
agency
obligations $ - - % $ 38,473 6.03% $ 74,203 7.10% $ 58,033 7.38% 9.7 $170,709 $169,849 6.95%
Corporate debt
securities - - 45,350 5.76 - - - - 2.2 45,350 45,227 5.76
Federal Funds 5,000 5.50 - - - - - - - 5,000 5,000 5.50
Money market
investments 1,869 5.39 - - - - - - - 1,869 1,869 5.39
------- ------- ------- ------- ------- ------- -----
Total $ 6,869 5.47% $ 83,823 5.88% $ 74,203 7.10% $ 58,033 7.38% 5.6 $222,928(1) $221,945(1) 6.67%
======= ===== ======= ===== ======= ===== ======= ===== === ======= ======= =====
Preferred Stock $ 27,329 $ 27,329 6.46%
FHLB-NY stock $ 9,890 $ 9,890 6.41%
======= ======= =====
(1) Includes U.S. Government and agency obligations available
for sale totalling $118,752.
MORTGAGE-BACKED SECURITIES
The Bank also invests in MBSs. At December 31, 1996, total MBSs,
net, aggregated $422.0 million (including MBSs available for sale
with a fair value of $224.0 million, net), or 26.7% of total
assets. At December 31, 1996, 77.5% of the MBS portfolio,
including Collateralized Mortgage Obligations ("CMOs") and Real
Estate Mortgage Investment Conduits ("REMICs"), were insured or
guaranteed by either FNMA, FHLMC or the Government National
Mortgage Association ("GNMA"). At December 31, 1996, $176.2
million, or 41.8% of total MBSs were adjustable-rate and $245.8
million, or 58.2% of total MBSs were fixed-rate.
The following table sets forth the carrying amount of the
Company's MBS portfolio in dollar amounts and in percentages at
the dates indicated.
At December 31,
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Percent Percent Percent Percent Percent
Carrying of Carrying of Carrying of Carrying of Carrying of
Value Total Value Total Value Total Value Total Value Total
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
MBSs(1):
CMOs and REMICS -
Agency-backed(2) $117,969 27.96% $220,284 34.97% $111,076 21.11% $101,245 22.46% $ 47,348 13.12%
CMOs and REMICS -
Non-agency(2) 94,877 22.48 69,109 10.97 65,984 12.54 59,370 13.17 12,261 3.40
FHLMC 97,953 23.21 172,770 27.43 183,874 34.94 166,876 37.01 222,073 61.56
FNMA 110,182 26.12 153,793 24.42 165,314 31.41 123,376 27.36 79,102 21.92
GNMA 983 0.23 13,933 2.21 - - - - - -
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Net MBSs $421,964 100.00% $629,889 100.00% $526,248 100.00% $450,867 100.00% $360,784 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
(1) Includes MBSs available for sale of $224.0 million, $439.2
million, $31.1 million, $38.2 million and $94.2 million at
December 31, 1996, 1995, 1994, 1993 and 1992, respectively.
Effective January 1, 1994, the Company's MBSs available for sale
are carried at estimated fair value with the resultant net
unrealized gain or loss reflected as a separate component of
stockholders' equity, net of related income taxes. Prior to the
adoption of SFAS No. 115, the Company carried MBSs held for sale
at the lower of amortized cost or estimated fair value.
(2) Included in total MBSs are CMOs and REMICs, which, at
December 31, 1996, had a gross carrying value of $212.8 million.
A CMO is a special type of pass-through debt in which the stream
of principal and interest payments on the underlying mortgages or
MBSs is used to create classes with different maturities and, in
some cases, amortization schedules, as well as a residual
interest, with each such class possessing different risk
characteristics. The Bank has in recent periods increased its
investment in REMICs and CMOs because these securities generally
exhibit a more predicable cash flow than mortgage pass-through
securities. The Bank's policy is to limit its purchases of
REMICs to non high-risk securities as defined by the OTS.
The following tables set forth certain information regarding the
carrying and market values and percentage of total carrying
values of the Bank's mortgage-backed and related securities
portfolio.
At December 31,
1996 1995 1994
------ ------ ------
Carrying % of Market Carrying % of Market Carrying % of Market
Value Total Value Value Total Value Value Total Value
-------- ----- ------ -------- ----- ------ -------- ----- ------
(Dollars in thousands)
Held to maturity:
MBSs:
FHLMC $ 39,889 9.45% $ 39,594 $ 41,222 6.54% $ 41,352 $162,607 30.90% $157,082
FNMA 71,460 16.94 69,914 78,995 12.54 78,114 165,314 31.41 154,008
------- ----- ------- ------- ----- ------- ------- ----- -------
Total MBSs 111,349 26.39 109,508 120,217 19.09 119,466 327,921 62.31 311,090
------- ----- ------- ------- ----- ------- ------- ----- -------
Mortgage-related securities:
CMOs and REMICS-Agency
backed 24,449 5.79 24,142 22,969 3.65 22,476 101,206 19.23 94,710
CMOs and REMICS-
Non-agency 62,142 14.73 62,032 47,528 7.55 47,609 65,984 12.54 61,100
------- ----- ------- ------- ----- ------- ------- ----- -------
Total mortgage-related
securities 86,591 20.52 86,174 70,497 11.20 70,085 167,190 31.77 155,810
------- ----- ------- ------- ----- ------- ------- ----- -------
Total mortgage-backed and
related securities
held to maturity 197,940 46.91 195,682 190,714 30.29 189,551 495,111 94.08 466,900
------- ----- ------- ------- ----- ------- ------- ----- -------
Available for sale:
MBSs:
GNMA 983 0.23 983 13,933 2.21 13,933 - - -
FHLMC 58,064 13.76 58,064 131,548 20.88 131,548 21,267 4.04 21,267
FNMA 38,722 9.18 38,722 74,798 11.87 74,798 - - -
------- ----- ------- ------- ----- ------- ------- ----- -------
Total MBSs 97,769 23.17 97,769 220,279 34.96 220,279 21,267 4.04 21,267
------- ----- ------- ------- ----- ------- ------- ----- -------
Mortgage-related securities:
CMOs and REMICs-Agency
backed 93,520 22.16 93,520 197,315 31.32 197,315 9,870 1.88 9,870
CMOs and REMICs-
Non-agency 32,735 7.76 32,735 21,581 3.43 21,581 - - -
------- ----- ------- ------- ----- ------- ------- ----- -------
Total mortgage-related
securities 126,255 29.92 126,255 218,896 34.75 218,896 9,870 1.88 9,870
------- ----- ------- ------- ----- ------- ------- ----- -------
Total available for sale
securities 224,024 53.09 224,024 439,175 69.71 439,175 31,137 5.92 31,137
------- ----- ------- ------- ----- ------- ------- ----- -------
Total mortgage-backed and
related securities $421,964 100.00% $419,706 $629,889 100.00% $628,726 $526,248 100.00% $498,037
======= ====== ======= ======= ====== ======= ======= ====== =======
The table below sets forth certain information regarding the
carrying value, weighted average yields and maturities of the
Company's mortgage-backed and related securities at December
31, 1996.
At December 31, 1996
Over One to Over Five to Mortgage-Backed
One Year or Less Five Years Ten Years Over Ten Years and Related Securities Totals
---------------- ----------- ------------ -------------- -----------------------------
Average
Weighted Weighted Weighted Weighted Remaining Estimated Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Years to Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Maturity Value Value Yield
-------- -------- -------- -------- -------- -------- -------- -------- --------- -------- --------- --------
(Dollars in thousands)
Held to maturity:
FNMA $ - - % $ 5,131 7.29% $ 9,793 5.75% $56,536 6.45% 15.2 $71,460 $69,914 6.41%
FHLMC 6,405 6.93 2,013 7.00 7,232 6.30 24,239 6.77 14.4 39,889 39,594 6.72
CMOs and Remics 37 6.87 4,339 5.69 - - 82,215 6.72 22.9 86,591 86,174 6.67
------ ---- ------ ---- ------ ---- ------- ---- ---- ------- ------- ----
Total mortgage-
backed and
related
securities held
to maturity 6,442 6.93 11,483 6.63 17,025 5.98 162,990 6.63 18.4 197,940 195,682 6.58
------ ---- ------ ---- ------ ---- ------- ---- ---- ------- ------- ----
Available for sale:
FNMA - - - - - - 38,722 6.98 25.3 38,722 38,722 6.98
FHLMC - - 329 5.47 3,588 7.12 54,147 7.85 23.8 58,064 58,064 7.79
GNMA - - - - - - 983 7.85 27.3 983 983 7.85
CMOs and Remics - - - - - - 126,255 6.69 25.0 126,255 126,255 6.69
------ ---- ------ ---- ------ ---- ------- ---- ---- ------- ------- ----
Total mortgage-
backed and
related
securities
available
for sale - - 329 5.47 3,588 7.12 220,107 7.03 24.8 224,024 224,024 7.03
------ ---- ------- ---- ------- ---- ------- ---- ---- ------- ------- ----
Total mortgage-
backed and
related
securities $ 6,442 6.93% $11,812 6.60% $20,613 6.18% $383,097 6.86% 21.8 $421,964 $419,706 6.82%
====== ==== ====== ==== ====== ==== ======= ==== ==== ======= ======= ====
The following table shows the carrying value, maturity or period
to repricing of the Company's mortgage-backed and related
securities portfolio at December 31, 1996.
At December 31, 1996
Total
Mortgage
Fixed Backed
Fixed Rate ARM Rate ARM and Related
MBSs MBSs CMOs CMOs Securities(1)
---------- ---------- ----- ---- -----------
(In thousands)
Amounts due:
Within one year $ 6,402 74,843 37 98,193 179,475
------- ------- ------ ------- -------
After one year:
One to three years 7,141 814 - - 7,955
Three to five years 307 - 4,333 - 4,640
Five to 10 years 20,505 - - - 20,505
10 to 20 years 68,888 - 30,880 - 99,768
Over 20 years 27,487 - 80,924 - 108,411
------- ------- ------- ------- -------
Total due or repricing
after one year 124,328 814 116,137 - 241,279
------- ------- ------- ------- -------
Total 130,730 75,657 116,174 98,193 420,754
Adjusted for:
Unamortized yield
adjustment 675 329 (1,591) 757 170
Unrealized gain/loss 285 1,442 (528) (159) 1,040
------- ------- ------- ------- -------
Total mortgage-backed and
related securities $131,690 77,428 114,055 98,791 421,964
======= ======= ======= ======= =======
At December 31, 1996, the weighted average contractual maturity
of the Bank's mortgage-backed and related securities portfolio
was 21.8 years.
(1) Includes $224.0 million of mortgage-backed and related
securities available for sale at December 31, 1996, carried at
fair value.
The following table sets forth the carrying value and the
activity in the Company's mortgage-backed and related securities
portfolio during the periods indicated.
For the Years Ended December 31,
1996 1995 1994
------ ------ ------
(In thousands)
Mortgage-backed and related
securities:
At beginning of period $629,889 $526,248 $450,867
MBSs purchased 41,647 68,990 145,468
MBSs sold (101,604) - (51,888)
CMOs and Remics purchased 158,654 123,835 95,831
CMOs and Remics sold (205,760) (17,465) (4,909)
Amortization and repayments (97,969) (78,086) (106,753)
Change in unrealized gain (loss) (2,893) 6,367 (2,368)
-------- ------- -------
Balance of mortgage-backed and
related securities at end
of period (1) $421,964 $629,889 $526,248
======= ======= =======
(1) Includes $224.0 million, $439.2 million and $31.1 million of
mortgage-backed and related securities available for sale at
December 31, 1996, 1995 and 1994, respectively, carried at fair
value.
Effective February 10, 1992, the OTS adopted the Federal
Financial Institutions Examination Council "Statement of Policy
on Securities Activities" through its Thrift Bulletin 52
("Bulletin"). The Bulletin requires depository institutions to
establish prudent policies and strategies for securities
transactions, describes securities trading and sales practices
that are unsuitable when conducted in an investment portfolio and
sets forth certain factors that must be considered when
evaluating whether the reporting of an institution's investments
is consistent with its intent and ability to hold such
investments. The Bulletin also establishes a framework for
identifying when certain mortgage derivative products are high-
risk mortgage securities that must be reported in a "trading" or
"available for sale" account. Purchases of high-risk mortgage
securities prior to the effective date of the Bulletin generally
will be reviewed in accordance with previously-existing OTS
supervisory policies. The Bank believes that it currently holds
and reports its securities and loans in a manner consistent with
the Bulletin.
The Asset/Liability Committee determines when to make substantial
changes in the MBS portfolio. During 1994, the Bank purchased
$145.6 million of adjustable rate MBSs which repriced upward due
to an increase in rates during 1995. In 1995, the Company
purchased $192.8 million of MBSs, of which $160.8 million were
adjustable-rate which are expected to help protect the net
interest margin during periods of rising interest rates as was
experienced during the second half of 1996. The Company
completed a $75.0 million leverage transaction in the second
quarter of 1995 which utilized short-term borrowings to purchase
floating rate, prime-based CMOs. In 1996, the Company purchased
$199.5 million of MBSs, of which $49.3 million were adjustable-
rate and $150.2 million were fixed-rate primarily to supplement
weak loan demand in the first half of 1996. Total adjustable
rate securities as a percentage of total MBSs was 46% at December
31, 1995 compared to 42% at December 31, 1996. At December 31,
1996, $327.1 million, or 77.5% of the Bank's MBS portfolio, was
directly insured or guaranteed by the FNMA, FHLMC or GNMA. FNMA
and FHLMC provide the certificate holder a guarantee of timely
payments of interest and scheduled principal payments, whether or
not they have been collected. The GNMA MBSs provide a guarantee
to the holder of timely payments of principal and interest and is
backed by the full faith and credit of the U.S. government. The
privately-issued CMOs and REMICs contained in the Bank's held to
maturity portfolio and available for sale portfolio totalling
$94.9 million, or 22.5% of MBSs have generally been underwritten
by large investment banking firms with the timely payment of
principal and interest on these securities supported (credit
enhanced) in varying degrees by either insurance issued by a
financial guarantee insurer, letters of credit or subordination
techniques. Substantially all such securities are rated AAA by
one or more of the nationally recognized securities rating
agencies. These securities are subject to certain credit-related
risks normally not associated with U.S. Government and agency
MBSs. Among such risks is the limited loss protection generally
provided by the various forms of credit enhancements as losses in
excess of certain levels are not protected. Furthermore, the
credit enhancement itself is subject to the credit-worthiness of
the enhancer. Thus, in the event a credit enhancer does not
fulfill its obligations, the MBS holder could be subject to risk
of loss similar to the purchaser of a whole loan pool.
Management believes that the credit enhancements are adequate to
protect the Bank from losses, and therefore the Bank has not
provided an allowance for losses on its privately issued MBSs.
MBSs generally yield less than the loans that underlie such
securities, because of the cost of payment guarantees or credit
enhancements that result in nominal credit risk. The MBS
portfolio had a weighted average yield of 6.90% at December 31,
1996. In addition, MBSs are more liquid than individual mortgage
loans and may be used to collateralize obligations of the Bank.
In general, MBSs issued or guaranteed by FNMA and FHLMC and
certain AA-rated mortgage-backed pass-through securities are
weighted at no more than 20% for risk-based capital purposes, and
MBSs issued or guaranteed by GNMA are weighted at 0% for risk-
based capital purposes, compared to an assigned risk weighting of
50% to 100% for whole residential mortgage loans. These types of
securities thus allow the Bank to optimize regulatory capital to
a greater extent than non-securitized whole loans.
While MBSs carry a reduced credit risk as compared to whole
loans, such securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors
such as the geographic distribution of the underlying mortgage
loans, may alter the prepayment rate of such mortgage loans and
so affect both the prepayment speed, and value, of such
securities. In contrast to MBSs in which cash flow is received
(and, hence, prepayment risk is shared) pro rata by all
securities holders, the cash flows from the mortgages or MBSs
underlying REMICs or CMOs are segmented and paid in accordance
with a predetermined priority to investors holding various
tranches of such securities or obligations. A particular tranche
of REMICs or CMOs may therefore carry prepayment risk that
differs from that of both the underlying collateral or other
tranches.
SOURCES OF FUNDS
GENERAL. Deposits, loan, mortgage-backed and debt securities
repayments, retained earnings and, to a lesser extent, Federal
Home Loan Bank ("FHLB") advances are the primary source of the
Company's and the Bank's funds for use in lending, investing and
for other general purposes.
DEPOSITS. The Bank offers a variety of deposit accounts having a
range of interest rates and terms. The Bank's deposits consist
of passbook, NOW, checking, money market and certificate
accounts. The flow of deposits is influenced significantly by
general economic conditions, changes in money market rates,
prevailing interest rates and competition.
During 1996, the Bank implemented its supermarket banking
program. In May, the Bank opened its first supermarket branch in
an Edwards Super Food Store in Medford, Long Island. During
July, the Bank opened its second supermarket branch in a ShopRite
store in Uniondale, Long Island. During September, the Bank and
Pathmark Stores, Inc. entered into an agreement to open
approximately 44 full-service bank branches in Pathmark
supermarkets throughout New York City, Long Island, Westchester
and Rockland counties by early 1998. The cost of opening a
supermarket branch is approximately one-fifth the cost of a
traditional branch, and in the typical store the branch is
visible to approximately 20,000 people each week. The Bank
believes that supermarket branching is a cost-effective way to
extend its franchise and put its sales force in touch with a
significant number of prospective customers. During the fourth
quarter of 1996, two additional supermarket locations opened, one
at an Edwards Super Food Store in West Babylon, Long Island and
one at a Pathmark Store in Brooklyn, New York. The branches will
be open seven days a week and will provide a broad range of
traditional banking services, as well as the full package of
financial services offered by CIS, Inc.
The Bank's deposits are obtained primarily from the areas in
which its branch offices are located. The Bank relies primarily
on customer service and long-standing relationships with
customers to attract and retain these deposits. Certificate
accounts in excess of $100,000 are not actively solicited by the
Bank nor does the Bank use brokers to obtain deposits. During
1996, the Bank continued to offer competitive rates without
jeopardizing the value of existing core deposits. During 1996,
the Bank continued to experience a transfer of deposits from
passbook accounts into certificates of deposit. Certificates of
deposit increased from 49.2% of deposits at December 31, 1995 to
52.8% of deposits at December 31, 1996. The Company has been
able to maintain a substantial level of core deposits which the
Company believes helps to limit interest rate risk by providing a
relatively stable, low cost long-term funding base. At December
31, 1996 core deposits represented 47.2% of deposits compared to
50.8% of deposits at December 31, 1995. The Company expects to
attract a higher percentage of core deposits from its supermarket
branch locations as these locations continue to grow and mature.
The following table presents the deposit activity of the Bank for
the periods indicated.
Years Ended December 31,
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(In thousands)
Deposits $2,441,295 2,055,132 1,810,714 1,671,964 1,508,024
Withdrawals 2,428,315 2,041,495 1,816,309 1,682,613 1,584,433
--------- --------- --------- --------- ---------
Net deposits (withdrawals) 12,980 13,637 (5,595) (10,649) (76,409)
Deposits acquired - 17,024 - - -
Interest credited on deposits 41,362 39,623 31,997 33,691 41,270
--------- --------- --------- --------- ---------
Total increase (decrease)
in deposits $ 54,342 70,284 26,402 23,042 (35,139)
========= ========= ========= ========= =========
Time deposits by maturity at December 31, 1996 over $100,000 are
as follows:
Maturity Period Amount
--------------- ------
(In thousands)
Six months or less $21,703
Over six through 12 months 10,950
Over 12 months 9,038
------
Total $41,691
======
The following table sets forth the distribution of the Bank's
deposit accounts for the periods indicated and the weighted
average nominal interest rates for each category of deposits
presented.
Years Ended December 31,
1996 1995 1994
------ ------ ------
Percent Weighted Percent Weighted Percent Weighted
of Average of Average of Average
Average Total Nominal Average Total Nominal Average Total Nominal
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
------- -------- ------ ------- -------- ------ ------- -------- ------
(Dollars in thousands)
Passbook accounts $373,337 33.46% 2.49% $405,932 38.60% 2.49% $499,326 50.63% 2.49%
Interest earning checking 99,089 8.88 0.90 84,544 8.04 .98 84,643 8.58 1.04
Non-interest earning accounts 12,336 1.11 - 11,698 1.11 - 4,534 .46 -
------- ----- ---- ------- ----- ----- ------- ----- -----
Total passbook and checking
accounts 484,762 43.45 2.13 502,174 47.75 2.21 588,502 59.67 2.27
------- ----- ---- ------- ----- ----- ------- ----- -----
Money market accounts 58,108 5.21 3.32 45,472 4.32 3.49 30,502 3.09 2.47
------- ----- ---- ------- ----- ----- ------- ----- -----
Certificate accounts:
91 days 7,783 0.70 3.92 11,125 1.06 4.61 8,859 .90 3.20
6 months 85,768 7.69 5.12 75,616 7.19 5.47 70,942 7.19 3.96
7 months 2,228 .20 2.99 3,894 .37 2.94 8,219 .83 2.95
One year 203,259 18.22 5.51 166,956 15.88 5.91 77,790 7.89 4.17
13 months 11,036 0.99 5.12 5,784 .55 3.60 8,708 .88 3.38
18 months 23,407 2.10 5.98 40,453 3.85 6.03 10,477 1.06 4.99
2 to 4 years 131,931 11.82 5.87 88,054 8.37 5.66 72,882 7.39 4.89
Five years 101,690 9.11 6.30 106,366 10.11 6.40 103,278 10.48 6.40
7 to 10 years 5,666 0.51 6.28 5,742 .55 6.25 6,152 .62 6.22
--------- ------ ---- -------- ------ ---- ------- ------ ----
Total certificates 572,768 51.34 5.66 503,990 47.93 5.84 367,307 37.24 4.86
--------- ------ ---- --------- ------ ---- ------- ------ ----
Total deposits $1,115,638 100.00% 4.00% $1,051,636 100.00% 4.00% $986,312 100.00% 3.24%
========= ====== ==== ========= ====== ==== ======= ====== ====
The following table presents, by various rate categories, the
amount of certificate accounts outstanding at December 31, 1996,
1995 and 1994 and the periods to maturity of the certificate
accounts outstanding at December 31, 1996.
Period of Maturity from December 31, 1996
Within One to Two to Over
At December 31, One Two Three Three
1996 1995 1994 Year Years Years Years Total
------ ------ ------ ------ ------ ------ ----- -------
(In thousands)
Certificate accounts:
3.99% or less $ 10,396 10,425 50,373 9,940 46 38 372 10,396
4.00% to 4.99% 18,545 55,732 89,735 15,064 1,874 1,378 229 18,545
5.00% to 5.99% 456,789 267,113 143,698 380,083 63,515 3,489 9,702 456,789
6.00% to 6.99% 104,732 175,183 134,733 38,221 48,588 8,389 9,534 104,732
7.00% to 7.99% 10,637 24,557 16,515 2,862 2,959 529 4,287 10,637
8.00% to 8.99% - - 2,835 - - - - -
------- ------- ------- ------- ------ ------ ------ -------
Total $601,099 533,010 437,889 446,170 116,982 13,823 24,124 601,099
======= ======= ======= ======= ====== ====== ====== =======
BORROWINGS
Although deposits are the Bank's primary source of funds, the
Bank has from time to time utilized borrowings as an alternative
or less costly source of funds. The Bank's primary source of
borrowing is advances from the FHLB-NY. These advances are
collateralized by the capital stock of the FHLB-NY held by the
Bank and certain of the Bank's MBSs. See "Regulation and
Supervision-Federal Home Loan Bank System." Such advances are
made pursuant to several different credit programs, each of which
has its own interest rate and range of maturities. The maximum
amount that the FHLB-NY will advance to member institutions,
including the Bank, for purposes other than meeting withdrawals,
fluctuates from time to time in accordance with the policies of
the OTS and the FHLB-NY. At December 31, 1996, the Bank had
$178.4 million of advances outstanding from the FHLB-NY.
In addition, the Bank may, from time to time, enter into sales of
securities under agreements, generally for up to 30 days, to
repurchase ("reverse repurchase agreements") with nationally
recognized investment banking firms. Reverse repurchase
agreements are accounted for as borrowings by the Bank and are
secured by designated securities. The proceeds of these
transactions are used to meet cash flow or asset/liability needs
of the Bank. At December 31, 1996, the Bank had $142.9 million
of reverse repurchase agreements outstanding.
The Bank had additional borrowings outstanding in the form of a
CMO, which was issued by the Bank's subsidiary, CFSB Funding.
The CMO is secured by MBSs that are held by an unaffiliated
commercial bank as trustee. The original issuance aggregated
$91.7 million, and the Bank received cash of $86.7 million. The
outstanding aggregate balance of the CMO at December 31, 1996 was
$3.0 million and the book value of the MBSs collateralizing the
CMO was $12.2 million. The CMO was originally issued in four
tranches, the fourth being a zero coupon tranche. The first
three tranches have been paid out and principal and interest
payments are now being received by holders of the fourth tranche.
The original maturity of the bond issue was structured over 30
years. The estimated remaining life of the CMO as of December
31, 1996 was one year. The funds derived from the issuance of
the CMO were used to purchase investment securities.
The Bank has an ESOP loan from an unrelated third party lender
with an outstanding balance of $2.1 million and an interest rate
of 7.91% at December 31, 1996. See Note 11 of Notes to
Consolidated Financial Statements in the Registrant's 1996 Annual
Report to Stockholders on page 45 which is incorporated herein by
reference. The loan, as amended on December 29, 1995, is payable
in thirty-two equal quarterly installments beginning December
1995 through September 2003. The loan bears interest at a
floating rate based on the federal funds rate plus 250 basis
points.
The following table sets forth certain information regarding
borrowed funds for the dates indicated:
At or For the Years Ended December 31,
1996 1995 1994
------ ------ ------
(Dollars in thousands)
FHLB-NY advances:
Average balance outstanding $152,005 $ 95,775 $ 83,147
Maximum amount outstanding at any
month-end during the period 195,000 134,175 110,775
Balance outstanding at end of period 178,450 134,175 86,000
Weighted average interest rate
during the period 5.54% 5.59% 4.55%
Weighted average interest rate
at end of period 4.72% 4.21% 5.05%
Securities Sold under Agreements to
Repurchase:
Average balance outstanding $128,677 $ 94,375 $ 47,581
Maximum amount outstanding at any
month-end during the period 142,906 150,249 67,538
Balance outstanding at end of period 142,906 126,032 23,003
Weighted average interest rate
during the period 5.65% 5.98% 4.45%
Weighted average interest rate
at end of period 5.09% 4.47% 6.27%
Other Borrowings (1):
Average balance outstanding $ 7,667 $ 13,293 $ 20,775
Maximum amount outstanding at any
month-end during the period 10,725 16,162 27,135
Balance outstanding at end of period 5,077 10,376 16,078
Weighted average interest rate
during the period 6.38% 5.49% 6.92%
Weighted average interest rate
at end of period 9.63% 7.03% 8.86%
Total Borrowings:
Average balance outstanding $288,349 $203,443 $151,503
Maximum amount outstanding at any
month-end during the period 348,631 270,583 199,213
Balance outstanding at end of period 326,433 270,583 125,081
Weighted average interest rate
during the period 5.84% 6.50% 5.64%
Weighted average interest rate
at end of period 5.11% 4.83% 5.82%
(1) Includes the CMO and ESOP loan.
SUBSIDIARY ACTIVITIES
COLUMBIA RESOURCES CORP. Columbia Resources is a wholly owned
subsidiary of the Bank and was formed in 1984 for the sole
purpose of acting as a conduit for a partnership to acquire and
develop a parcel of property in New York City. Columbia
Resources acquired the property, but never developed it. The
property was later sold. During 1996, two REO commercial
properties totalling $524,000 were transferred from the Bank to
Columbia Resources to limit exposure to the Bank from unknown
creditors. By December 31, 1996 the properties were written down
to a combined value of $440,000.
CFSB FUNDING CORP. CFSB Funding is a limited purpose wholly
owned finance subsidiary of the Bank that was established in 1986
for the issuance and sale of a CMO collateralized by FHLMC
Participation Certificates. The Bank transferred to CFSB Funding
FHLMC Participation Certificates having a market value of $91.2
million and $10,000 in cash. See "Borrowings." Upon repayment
of the CMO bond, CFSB Funding will have served its limited
purpose as a finance subsidiary of the Bank.
COLUMBIA INVESTMENT SERVICES, INC. ("CIS") CIS is a wholly owned
subsidiary of the Bank organized in 1989 that is engaged in the
sale of tax deferred annuities, securities brokerage activities
and insurance. CIS participates with MDS/Bankmark, which is
registered as a broker-dealer with the SEC and state securities
regulatory authorities. All employees of CIS engaged in
securities brokerage activities are dual employees of
MDS/Bankmark. Products offered through MDS/Bankmark include debt
and equity securities, mutual funds, unit investment trusts and
fixed and variable annuities. Fixed annuities, life and health
insurance, and long term nursing care products are offered
through CIS; a licensed general agent with the New York State
Department of Insurance. In January 1997, CIS changed its
broker/dealer relationship from MDS to BHC Securities, Inc.
Management believes that BHC will enhance CIS's distribution of
investment products by providing superior technology support, and
the ability to offer enhanced product lines.
HAVEN CAPITAL TRUST I. On February 12, 1997, Haven Capital Trust
I, a statutory business trust fund formed under the laws of the
State of Delaware issued $25 million of 10.46% capital
securities. See Note 17 of Notes to Consolidated Financial
Statements in the Registrant's 1996 Annual Report to Stockholders
on page 53 which is incorporated herein by reference.
PERSONNEL
As of December 31, 1996, the Bank had 346 full-time employees and
60 part-time employees. Even though the employees are not
represented by a collective bargaining unit, the Bank considers
its relationship with its employees to be good.
REGULATION AND SUPERVISION
GENERAL
The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its chartering agency, and the FDIC,
as the deposit insurer. The Bank is a member of the FHLB System
and its deposit accounts are insured up to applicable limits by
the Savings Association Insurance Fund ("SAIF") 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
financial institutions. There are periodic examinations by the
OTS and the FDIC 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 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. The
description of statutory provisions and regulations applicable to
savings associations set forth herein do not purport to be
complete descriptions of such statutes and regulations and their
effects on the Bank.
FEDERAL SAVINGS INSTITUTION REGULATION
Business Activities. The activities of federal savings
institutions are governed by the Home Owners' Loan Act, as
amended (the "HOLA") and, in certain respects, the Federal
Deposit Insurance Act ("FDI Act") and the regulations issued by
the agencies to implement these statutes. These laws and
regulations delineate the nature and extent of the activities in
which federal associations may engage. In particular, many types
of lending authority for federal associations, e.g., commercial,
non-residential real property loans, consumer loans, are limited
to a specified percentage of the institutions's capital or
assets.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one
borrower. Generally, this limit is 15% of the Bank's unimpaired
capital and surplus plus an additional 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, 1996, the Bank's
unimpaired capital and surplus was $108.2 million and its limit
on loans to one borrower was $16.2 million. At December 31,
1996, the Bank's largest aggregate amount of loans to one
borrower had an aggregate balance of $8.2 million.
QTL Test. The HOLA requires savings institutions to meet a
Qualified Thrift Lender ("QTL") test. Under the QTL test, a
savings association is required to maintain at least 65% of its
"portfolio assets" (total assets less: (i) specified liquid
assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct
business) in certain "qualified thrift investments" (primarily
residential mortgages and related investments, including certain
mortgage-backed and related securities) in at least 9 months out
of each 12 month period. A savings association that fails the
QTL test must either convert to a bank charter or operate under
certain restrictions. As of December 31, 1996, the Bank
maintained 83.1% of its portfolio assets in qualified thrift
investments and had more than 65% of its portfolio assets in
qualified thrift investments in each of the prior 12 months.
Therefore, the Bank met the QTL test.
Limitation 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 shareholders 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
regulatory 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 to, but without the 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 earnings for the previous four
quarters. Any additional capital distributions would require
prior OTS approval. In the event the Bank's capital fell below
its capital requirements or the OTS notified it that it was in
need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS
could prohibit a proposed capital distribution by any
institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. During 1996, the Bank
paid dividends of $2.0 million to the Holding Company.
The OTS has proposed regulations that would simplify the existing
procedures governing capital distributions by savings
associations. Under the proposed regulations, the approval of
the OTS would be required only for an association that is deemed
to be in troubled condition or that is undercapitalized or would
be undercapitalized after the capital distribution. A savings
association would be able to make a capital distribution without
notice to or approval of the OTS if it is not held by a saving
and loan holding company, is not deemed to be in troubled
condition, has received either of the two highest composite
supervisory ratings and would continue to be adequately
capitalized after such distribution. Notice would have to be
given to the OTS by an association that is held by a savings and
loan holding company or that had received a composite supervisory
rating below the highest two composite supervisory ratings. An
association's capital rating would be determined under the prompt
corrective action regulations. See "-Prompt Corrective
Regulatory Action."
Liquidity. The Bank is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of
not less than a specified percentage (currently 5%) of its net
withdrawable deposit accounts plus short-term borrowings. OTS
regulations also require each savings institution to maintain an
average daily balance of short-term liquid assets at a specified
percentage (currently 1%) of the total of its net withdrawable
deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet these
liquidity requirements. The Bank's average liquidity and short-
term liquidity ratios for December 31, 1996 were 14.99% and
2.80%, respectively, which exceeded the then applicable
requirements. The Bank has never been subject to monetary
penalties for failure to meet its liquidity requirements.
Assessments. Savings institutions are required by regulation to
pay assessments to the OTS to fund the agency's operations. The
general assessment, paid on a semi-annual basis, is computed upon
the savings institution's total assets, including consolidated
subsidiaries, as reported in the Bank's latest quarterly Thrift
Financial Report. The assessments paid by the Bank for the years
ended December 31, 1995 and 1996, totalled $241,000 and $262,000,
respectively.
Branching. OTS regulations permit federally chartered savings
associations to branch nationwide under certain conditions.
Generally, federal savings associations may establish interstate
networks and geographically diversify their loan portfolios and
lines of business. The OTS authority preempts any state law
purporting to regulate branching by federal savings associations.
Transactions with Related Parties. The Bank's authority to
engage in transactions with related parties or "affiliates"
(i.e., any company that controls or is under common control with
an institution, including the Company and its non-savings
institution subsidiaries) is limited by Sections 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 and also limits the aggregate amount of transactions
with all affiliates to 20% of the savings institution's capital
and surplus. Certain transactions with affiliates are required
to be secured by collateral in an amount and of a type described
in Section 23A, and the purchase of low quality assets from
affiliates is generally prohibited. Section 23B generally
requires that certain transactions with affiliates, including
loans and asset purchases, must be on terms and under
circumstances, including credit underwriting standards, that are
substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable
transactions with non-affiliated companies. Notwithstanding
Sections 23A and 23B, 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 ("BHC Act"). Further, no savings
institution may purchase the securities of any affiliate other
than a subsidiary.
The Bank's authority to extend credit to its executive officers,
directors and 10% shareholders, as well as to entities controlled
by such persons, is currently governed by Sections 22(g) and
22(h) of the FRA, and Regulation O thereunder. Among other
things, these regulations require that such loans to be made on
terms and conditions, including credit underwriting standards,
substantially the same as those offered to unaffiliated
individuals and not involve more than the normal risk of
repayment. Regulation O also places individual and aggregate
limits on the amount of loans the Bank may make to such persons
based, in part, on the Bank's capital position, and requires that
certain board approval procedures be followed. HOLA and the OTS
regulations, with certain minor variances, apply Regulation O to
savings institutions.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties,"
including controlling stockholders, and any stockholders,
attorneys, appraisers and accountants who knowingly or recklessly
participate in any violation of applicable law or regulation or
breach of fiduciary duty or certain other wrongful actions that
causes or is likely to cause a more than a minimal loss or other
significant adverse effect on an insured savings association.
Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of
officers or directors, receivership, conservatorship or
termination of deposit insurance. Civil penalties cover a wide
range of violations and can amount to $5,000 per day for less
serious violations, and up to $1 million per day in more
egregious cases. Under the FDI Act, the FDIC has the authority
to recommend to the Director of the OTS that enforcement action
be taken with respect to a particular savings institution. If
action is not taken by the Director of the OTS, 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 FDI Act requires each
federal banking agency to prescribe for all insured depository
institutions standards relating to, among other things, internal
controls, information systems and audit systems, loan
documentation, credit underwriting, interest rate risk exposure,
asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems
appropriate. The OTS and the federal banking agencies have
adopted a final rule and Interagency Guidelines Prescribing
Standards for Safety and Soundness ("Guidelines") to implement
these safety and soundness standards. 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
Guidelines address internal controls and information systems;
internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; asset quality;
earnings 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 standard, as required by the
FDI Act. The final rule establishes deadlines for the submission
and review of such safety and soundness compliance plans, when
such plans are required.
Capital Requirements. The OTS capital regulations require
savings institutions to meet three minimum capital standards: a
tangible capital ratio requirement of 1.5% of total assets as
adjusted under the OTS regulations, a leverage ratio requirement
of 3.0% of core capital to such adjusted total assets, and a
risk-based capital ratio requirement of 8.0% of core and
supplementary capital to total risk-based assets. Tangible
capital is defined, generally, as common stockholders' equity
(including retained earnings), certain noncumulative perpetual
preferred stock and related earnings, minority interests in
equity accounts of fully consolidated subsidiaries, less
intangibles other than certain mortgage servicing rights and
investments in and loans to subsidiaries engaged in activities
not permissible for a national bank. Core capital (also called
"Tier 1" capital) is defined similarly to tangible capital, but
core capital also includes certain qualifying supervisory
goodwill and certain purchased credit card relationships. In
addition, the OTS prompt corrective action regulation provides
that a savings institution that has a leverage capital ratio of
less than 4% (3% for institutions receiving the highest CAMEL
examination rating) will be deemed to be "undercapitalized" and
may be subject to certain restrictions. See "- Prompt Corrective
Regulatory Action."
The risk-based capital standard for savings institutions requires
the maintenance of total capital (which is defined as core
capital and supplementary capital) to risk-weighted assets of at
least 8%. 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 core capital are
equivalent to those discussed earlier under the 3% leverage
standard. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible debt securities, subordinated debt
and intermediate preferred stock and, within specified limits,
the allowance for loan and lease losses. Overall, the amount of
supplementary capital included as part of total capital cannot
exceed 100% of core capital.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. The final interest rate risk rule also
adjusts the risk-weighting for certain mortgage derivative
securities. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a
deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's
interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between
incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result
from a hypothetical 200-basis point increase or decrease in
market interest rates divided by the estimated economic value of
the association's assets, as calculated in accordance with
guidelines set forth by the OTS. A savings association whose
measured interest rate risk exposure exceeds 2% must deduct an
interest rate component in calculating its total capital under
the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by
the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in
calculating compliance with its risk-based capital requirement.
Under the rule, there is a two quarter lag between the reporting
date of an institution's financial data and the effective date
for the new capital requirement based on that data. A savings
association with assets of less than $300 million and risk-based
capital ratios in excess of 12% is not subject to the interest
rate risk component, unless the OTS determines otherwise. The
rule also provides that the Director of the OTS may waive or
defer an association's interest rate risk component on a
case-by-case basis. The OTS has not implemented the regulatory
requirement for savings associations to deduct an interest-rate
risk component in calculating their risk-based capital. If the
Bank had been subject to an interest rate risk capital component
as of December 31, 1996, there would have been no material effect
on the Bank's risk-weighted capital.
At December 31, 1996, the Bank met each of its capital
requirements, in each case on a fully phased-in basis. A chart
which sets forth the Bank's compliance with its capital
requirements appears in Note 13 to Notes to Consolidated
Financial Statements in the Registrant's 1996 Annual Report to
Stockholders on page 49, and is incorporated herein by reference.
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS prompt corrective action regulations, the OTS is
required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon
the institution's degree of capitalization. Generally, a savings
institution that has a total risk-based capital of less than 8.0%
or either a leverage ratio or a Tier 1 risk-based capital ratio
that is less than 4.0% is considered to be undercapitalized. A
savings institution that has a total risk-based capital less than
6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a
leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2.0%
is deemed to be "critically undercapitalized." Subject to a
narrow exception, the banking regulator is required to appoint a
receiver or conservator for an institution that is critically
undercapitalized. The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the
date an association receives notice that it is "under-
capitalized", "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed
by any parent holding company. In addition, numerous mandatory
supervisory actions become immediately applicable to the
institution depending upon its category, including, but not
limited to, increased monitoring by regulators, restrictions on
growth,and capital distributions and limitations on expansion.
The OTS could 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
The FDIC has adopted a risk-based insurance assessment system.
The FDIC assigns an institution to one of three capital
categories based on the institution's financial information, as
of the reporting period ending seven months before the assessment
period, consisting of (1) well capitalized, (2) adequately
capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory
subgroup to which an institution is assigned is based on a
supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information which the FDIC
determines to be relevant to the institution's financial
condition and the risk posed to the deposit insurance funds. An
institution's assessment rate depends on the capital category and
supervisory category to which it is assigned.
On September 30, 1996, as part of the omnibus appropriations
bill, Congress passed and President Clinton signed the Deposit
Insurance Funds Act of 1996 ("Act"). The Act significantly
reduced and should eventually end the premium disparity that has
existed between banks insured by the BIF and thrifts insured by
the SAIF. The Act required SAIF-insured institutions to pay a
special one-time assessment to recapitalize the SAIF. The Bank's
special one-time insurance assessment amounted to $6.8 million.
As a result of the special assessment, the SAIF was capitalized
at the required Designated Reserve Ratio (DDR) of 1.25% of
estimated insured deposits. Section 7 of the Federal Deposit
Insurance Act, as amended by the Funds Act, requires the FDIC to
set assessments in order to maintain the target DDR. The Board
has, therefore, lowered the rates on deposit insurance
assessments paid to the SAIF, while simultaneously widening the
spread between the lowest and highest rates to improve the
effectiveness of the FDIC's risk-based premium system. The Board
has established a process, similar to that which has applied to
the Bank Insurance Fund (BIF), for adjusting the rate schedules
for both the SAIF and the BIF within a limited range without
notice and comment to maintain each of the fund balances at the
target DDR. Effective with the semi-annual period beginning on
January 1, 1997, the rates of assessments for both BIF-assessable
and SAIF-assessable deposits were the same, ranging from 0 to 27
basis points.
The Funds Act also separates, effective January 1, 1997, the
Financing Corporation ("FICO") assessment to service the interest
on its bond obligations from the SAIF assessment. The amount
assessed on individual institutions by the FICO will be in
addition to any amount paid for deposit insurance pursuant to the
FDIC's risk-related assessment rate schedules. However, between
October 1, 1996, and January 1, 1997, the amount required by the
FICO was deducted from the amounts the FDIC was authorized to
assess SAIF-member savings associations, and must not be assessed
against Sasser and BIF-member Oakar institutions. FICO
assessment rates for the first semi-annual period of 1997 were
set at 1.30 basis points annually for BIF-assessable deposits and
6.48 basis points annually for SAIF-assessable deposits. (These
rates may be adjusted quarterly to reflect changes in assessment
bases for the BIF and the SAIF. By law, the FICO rate on BIF-
assessable deposits must be one-fifth the rate on SAIF-assessable
deposits until the insurance funds are merged or until January 1,
2000, whichever occurs first.) Beginning January 1, 2000, or the
date at which no thrift institution continues to exist, BIF-
insured institutions will be required to pay their full pro-rate
share of FICO payments. The Bank's annual assessment rate for
the first three quarters of 1996 was 23 basis points and was 18
basis points for the last quarter of 1996.
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. The management of the Bank does not know of any practice,
condition or violation that might lead to termination of deposit
insurance.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12
regional FHLBs. The FHLB provides a central credit facility
primarily for member institutions. The Bank, as a member of the
FHLB of New York, is required to acquire and hold shares of
capital stock in the FHLB 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, whichever is
greater. The Bank was in compliance with this requirement with
an investment in FHLB stock at December 31, 1996 of $9.9 million.
FHLB advances must be secured by specified types of collateral,
and all long-term advances may only be obtained for the purpose
of providing funds for residential housing finance.
The FHLBs are required to provide funds for the resolution of
insolvent thrifts and to contribute funds for affordable housing
programs. These requirements could reduce the amount of
dividends that the FHLBs pay to their members and could also
result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended December 31,
1996, 1995 and 1994, dividends from the FHLB to the Bank amounted
to $571,000, $496,000 and $545,000, respectively. If dividends
were reduced or interest on future FHLB advances increased, the
Bank's net interest income would likely also be reduced.
Further, there can be no assurance that the impact of recent
legislation on the FHLBs will not also cause a decrease in the
value of the FHLB stock held by the Bank.
Federal Reserve System
The Federal Reserve Board regulations require savings
institutions to maintain non-interest-earning reserves against
their transaction accounts (primarily NOW and regular checking
accounts). The Federal Reserve Board regulations generally
require that reserves be maintained against aggregate transaction
accounts as follows: for accounts aggregating $49.3 million or
less (subject to adjustment by the Federal Reserve Board) the
reserve requirement is 3%; and for accounts greater than $49.3
million, the reserve requirement is $1.5 million plus 10%
(subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in
excess of $49.3 million. The first $4.4 million of otherwise
reservable balances (subject to adjustments by the Federal
Reserve Board) are exempted from the reserve requirements. The
Bank is in compliance with the foregoing requirements. 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 Federal Reserve Board,
the effect of this reserve requirement is to reduce the Bank's
interest-earning assets. FHLB System members are also authorized
to borrow from the Federal Reserve "discount window," but Federal
Reserve Board regulations require institutions to exhaust all
FHLB sources before borrowing from a Federal Reserve Bank.
HOLDING COMPANY REGULATION
The Company is a non-diversified unitary savings and loan holding
company within the meaning of the HOLA. As such, the Company is
required to be registered with the OTS and is subject to OTS
regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority
over the Company and its non-savings institution subsidiaries.
Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to
the subsidiary savings institution. The Bank must notify the OTS
30 days before declaring any dividend to the Company.
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 QTL. See "- Federal Savings Institution
Regulation - QTL Test" for a discussion of the QTL requirements.
Upon any non-supervisory acquisition by the Company of another
savings association, 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 BHC Act, subject to the prior
approval of the OTS, and to other activities authorized by OTS
regulation. Legislation has been proposed in the past to
restrict the activities of unitary savings and loan holding
companies to those permissible for multiple savings and loan
holding companies. See "Legislative Developments".
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; and from acquiring or retaining, with
certain exceptions, more than 5% of a non-subsidiary holding
company, or a non-subsidiary company engaged in activities other
than those permitted by the HOLA; or acquiring or retaining
control of a depository institution that is not insured by the
FDIC. In evaluating applications by holding companies to acquire
savings institutions, the OTS must consider the financial and
managerial resources and future prospects of the company and
institution involved, the effect of the acquisition on the risk
to the insurance funds, the convenience and needs of the
community and competitive factors.
The OTS is prohibited from approving any acquisition that would
result in a multiple savings and loan holding company controlling
savings institutions in more than one state, except: (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.
LEGISLATIVE DEVELOPMENTS
The 1996 Funds Act requires the Secretary of the Treasury to
conduct a study of the relevant factors with respect to the
development of a common charter for all insured depository
institutions and to the abolition of separate charters for banks
and thrifts, and the Secretary of the Treasury is to report his
conclusions and findings to the Congress on or before March 31,
1997. Proposals to eliminate the thrift charter are included in
two bills that have been introduced in Congress to remove
statutory restrictions on the operations and activities of
financial institutions, including proposed amendments to
eliminate the federal thrift charter. One bill would require a
federal thrift to convert to a bank charter and the other bill
would give the federal thrift the option to convert to a national
or state chartered bank or to a state savings and loan
association. Existing thrift holding companies, such as the
Company, would be grandfathered and continue to be able to engage
in the same activities as were permissible for it before the
enactment of the new law. Other proposed statutory changes would
permit (a) depository institutions to engage in a wider range of
securities and insurance activities and (b) affiliations between
depository institutions and insurance, securities and other
financial companies. The outcome of these efforts to eliminate
the thrift charter and to change the regulation of depository
institutions and their holding companies is uncertain.
Therefore, the Company is unable to determine the extent to which
any such legislation, if enacted, would affect the Company's
business.
FEDERAL SECURITIES LAWS
The Company's Common Stock is registered with the Securities and
Exchange Commission under Section 12(g) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The
Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements under the
Exchange Act.
The registration under the Securities Act of 1933 (the
"Securities Act") of shares of the Common Stock issued in the
Conversion does not cover the resale of such shares. Shares of
the Common Stock purchased by persons who are not affiliates of
the Company may be resold without registration. Shares purchased
by an affiliate of the Company will be subject to the resale
restrictions of Rule 144 under the Securities Act. If the
Company meets the current public information requirements of Rule
144 under the Securities Act, each affiliate of the Company who
complies with the other conditions of Rule 144 (including those
that require the affiliate's sale to be aggregated with those of
certain other persons) would be able to sell in the public
market, without registration, a number of shares not to exceed,
in any three-month period, the greater of (i) 1% of the
outstanding shares of the Company or (ii) the average weekly
volume of trading in such shares during the preceding four
calendar weeks. Shares acquired through the Company's option
plans have been registered under the Securities Act and,
therefore, are not subject to resale restrictions. Provision may
be made in the future by the Company to permit affiliates to have
their shares registered for sale under the Securities Act under
certain circumstances.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Company and the Bank report their income on a
calendar year basis using the accrual method of accounting and
will be subject to federal income taxation in the same manner as
other corporations with some exceptions. 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 Bank or the Company. The Bank and the Company
have not been audited by the Internal Revenue Service during the
last five fiscal years.
The Company and its subsidiaries file a consolidated Federal
income tax return on a calendar-year basis. Under Section 593 of
the Internal Revenue Code of 1986, as amended ("Code"), prior to
January 1, 1996 thrift institutions such as the Bank which met
certain definitional tests primarily relating to their assets and
the nature of their business, were permitted to establish a tax
reserve for bad debts. Such thrift institutions were also
permitted to make annual additions to the reserve, to be deducted
in arriving at their taxable income within specified limitations.
The Bank's deduction was computed using an amount based on the
Bank's actual loss experience ("experience method"), or a
percentage equal to 8% of the Bank's taxable income ("PTI
method"). Similar deductions for additions to the Bank's bad
debt reserve were also permitted under the New York State Bank
Franchise Tax and the New York City Banking Corporation Tax;
however, for purposes of these taxes, the effective allowable
percentage under the PTI method was 32% rather than 8%.
Under the Small Business Job Protection Act of 1996 ("1996 Act"),
signed into law in August 1996, the special rules for bad debt
reserves of thrift institutions no longer apply and the Bank will
be unable to make additions to the tax bad debt reserves but will
be permitted to deduct bad debts as they occur. Additionally,
under the 1996 Act, the Bank will be required to recapture (that
is, include in taxable income) the excess of the balance of its
bad debt reserves as of December 31, 1995 over the balance of
such reserves as of December 31, 1987 ("base year"). The Bank's
federal tax bad debt reserves at December 31, 1995 exceeded its
base year reserves by $2.7 million which will be recaptured into
taxable income ratably over a six year period. This recapture
will be suspended for 1997 since the Bank satisfies the
residential loan requirement. A taxpayer meets the residential
loan requirement if the principal amount of residential loans
made by the taxpayer during the year is not less than its base
amount. The "base amount" means the average of the principal
amounts of the residential loans made by the taxpayer during the
six most recent tax years beginning before January 1, 1996. The
base year reserves will be subject to recapture, and the Bank
could be required to recognize a tax liability, if (i) the Bank
fails to qualify as a "bank" for Federal income tax purposes;
(ii) certain distributions are made with respect to the stock of
the Bank (see "Distributions"); (iii) the Bank uses the bad debt
reserves for any purpose other than to absorb bad debt losses;
and (iv) there is a change in Federal tax law. Management is not
aware of the occurrence of any such event.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to stockholders, such distributions will be
considered as made from the Bank's base year reserve to the
extent thereof, and then from the supplemental reserve for losses
on loans and an amount based on the amount distributed will be
included in the Bank's taxable income. Non-dividend
distributions include distributions in excess of the Bank's
current and accumulated earnings and profits, distributions in
redemption of stock, and distributions in partial or complete
liquidation. However, dividends paid out of the Bank's current
or accumulated earnings and profits, as calculated for federal
income tax purposes, will not be considered to result in a
distribution from the Bank's bad debt reserves.
The amount of additional taxable income created from a non-
dividend distribution is an amount that when reduced by the tax
attributable to the income is equal to the amount of the
distribution. Thus, if the Bank makes a non-dividend
distribution, approximately one and one-half times the amount so
used would be includable in the Bank's gross income for federal
income tax purposes, assuming a 34% corporate income tax rate
(exclusive of state taxes). See "Regulation and Supervision" and
"Dividend Policy" for limits on the payment of dividends by the
Bank. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserves.
Corporate Alternative Minimum Tax. The Internal Revenue
Code (the "Code") imposes a tax on alternative minimum taxable
income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset
by net operating loss carryovers. AMTI is increased by an amount
equal to 75% of the amount by which a corporation's adjusted
current earnings exceeds its AMTI (determined without regard to
this adjustment and prior to reduction for net operating losses).
In addition, pending legislative proposals would retroactively
reinstate an environmental tax of .12% of the excess of AMTI
(with certain modifications) over $2.0 million is imposed on
corporations, including the Bank, whether or not an Alternative
Minimum Tax ("AMT") is paid. The Bank was subject to an
environmental tax liability for tax year ended December 31, 1992,
which was not material.
Dividends Received Deduction and Other Matters. The Company may
exclude from its income 100% of dividends received from the Bank
as a member of the same affiliated group of corporations. The
corporate dividends received deduction is generally 70% in the
case of dividends received from unaffiliated corporations with
which the Company and the Bank will not file a consolidated tax
return, except that if the Company or the Bank owns more than 20%
of the stock of a corporation distributing a dividend, 80% of any
dividends received may be deducted. Under pending legislative
proposals, the 70% dividends received deduction would be reduced
to 50%.
STATE AND LOCAL TAXATION
New York State and New York City Taxation. The Bank and the
Company are subject to New York State and City franchise taxes on
net income or one of several alternative bases, whichever results
in the highest tax. "Net income" means federal taxable income
with adjustments. The Company's annual tax liability for each
year is the greatest of a tax on allocated entire net income;
allocated alternative entire net income; allocated assets to New
York State and/or New York City; or a minimum tax. Operating
losses cannot be carried back or carried forward for New York
State or New York City tax purposes. The Bank is also subject to
a surcharge (at the rate of 2.5% of the New York State Franchise
Tax for calendar 1996) on its New York State tax and the 17%
Metropolitan Commuter District Surcharge on its New York State
tax after the deduction of credits.
In response to the 1996 Act, the New York State and New York City
tax laws have been amended to prevent the recapture of existing
tax bad debt reserves and to allow for the continued use of the
PTI method to determine the bad debt deduction in computing New
York State tax liability.
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 to the State of Delaware.
ITEM 2. PROPERTIES
The Bank conducts its business through nine full-service banking
and nine supermarket banking facilities (five of which were
opened during the first quarter of 1997) located in the New York
City Boroughs of Queens and Brooklyn and in Nassau and Suffolk
counties, New York. The Bank also maintains an office for data
processing and other property for possible future expansion. The
total net book value of the Bank's premises and equipment was
$8.8 million at December 31, 1996, which included four
supermarket branches. During 1996, the Bank opened four
supermarket branches and announced plans to open approximately 44
full-service branches in Pathmark supermarkets throughout New
York City, Long Island, Westchester and Rockland 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.
Net Book Value
of Property or
Leasehold
Improvements
Leased or Leased or Date of Lease at December 31,
Location Description Owned Acquired Expiration(1) 1996
-------- ----------- --------- --------- ------------- ---------------
93-22/93-30 & 94-09/ Main Office Owned 1957 - $2,806
94-13 Jamaica Avenue Complex
& 87-14/86-35 94th St.
Woodhaven, NY 11421
Forest Parkway Branch Owned 1979 - 344
80-35 Jamaica Avenue
Woodhaven, NY 11421
Howard Beach Branch Owned 1971 - 879
82-10 153rd Avenue
Howard Beach, NY 11414
Ozone Park Branch Owned 1976 - 579
98-16 101st Avenue
Ozone Park, NY 11416
Bellerose (2) Branch Leased 1973 2003 152
244-19 Braddock Avenue
Bellerose, NY 11426
Forest Hills Branch Leased 1959 1999 51
106-17 Continental Ave.
Forest Hills, NY 11375
Snug Harbor Branch Leased 1977 2001 459
343 Merrick Road
Amityville, NY 11701
Clock Tower(3) Branch Leased 1985 2000 303
91-20 Atlantic Avenue
Ozone Park, NY 11417
Rockaway Beach Branch Leased 1996 1998 42
104-08 Rockaway Beach Blvd.
Rockaway Beach, NY 11693
Medford (Edwards Super Branch Leased 1996 2001 216
Food Stores)
700-60 Patchogue-Yaphank Road
Medford, NY 11763
Uniondale (ShopRite Branch Leased 1996 2001 243
Supermarket)
1121 Jerusalem Avenue
Uniondale, NY 11553
Mineola Office Leased 1996 1998 6
242 & 250 Old Country Road
Mineola, NY 11501
Bayshore (Edwards Super Branch Leased 1996 2001 340
Food Stores)
533 Montauk Highway
Bayshore, NY 11708
Atlantic Terminal (Pathmark Branch Leased 1996 2001 267
Supermarket)
625 Atlantic Avenue
Brooklyn, NY 11217
(1) Rent expense for the year ended December 31, 1996 was
$404,000.
(2) Includes land that is adjacent to the branch office that was
acquired by the Bank in 1973.
(3) The Bank expects to close this branch in April 1997 and
consolidate its operations in a branch located at a Pathmark
Supermarket, 92-10 Atlantic Avenue, Ozone Park, New York 11416
which opened in March 1997.
ITEM 3. LEGAL PROCEEDINGS
On February 6, 1995, Nationar, the entity that provided check
collection services for the Bank was seized by the Superintendent
of Banks of the State of New York ("Superintendent"). Checks in
process of collection for the Bank totalling $8.9 million were
held by Nationar at the time it was seized. In April 1995, $3.9
million of these funds were remitted to the Bank. On June 27,
1996, the Bank received a partial payment of its claims against
Nationar totalling $4,987,000, at which time $389,000 of a
$430,000 reserve previously established was taken into income.
On November 20, 1996, the Supreme Court of the State of New York
entered an order authorizing the Superintendent to pay a final
payment to creditors of Nationar whose claims or accounts payable
have been accepted by the Superintendent, reduced by any previous
partial payments on such claims or account payable. The Bank
received $33,000, which represents the final aggregate payment on
the remaining claims totaling $54,000.
In February, 1983, a burglary of the contents of safe deposit
boxes occurred at a branch office of the Bank. At December 31,
1996, the Bank has a class action lawsuit related thereto
pending, whereby the plaintiffs are seeking recovery of
approximately $12,900,000 in actual damages and an additional
$12,900,000 of unspecified damages. The Bank's ultimate
liability, if any, which might arise from the disposition of
these claims cannot presently be determined. Management believes
it has meritorious defenses against these actions and has and
will continue to defend its position. Accordingly, no provision
for any liability that may result upon adjudication has been
recognized in the accompanying consolidated financial statements.
The Company is involved in various other legal actions arising in
the ordinary course of business, which in the aggregate, are
believed by management to be immaterial to the financial position
of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Information relating to the market for Registrant's common equity
and related stockholder matters appears under "Common Stock
Information" in the Registrant's 1996 Annual Report to
Stockholders on page 56, and is incorporated herein by reference.
Information relating to the payment of dividends by the
Registrant appears in "Note 13 to Notes to Consolidated Financial
Statements" in the Registrant's Annual Report on page 48 and is
incorporated herein by reference.
The Company initiated a quarterly cash dividend of $0.10 per
share in the third quarter of 1995 paid on October 20, 1995. The
following schedule summarizes the cash dividends paid for 1995
and 1996:
Dividend Payment Dividend Paid
Date Per Share Record Date
---------------- ------------- -----------
October 20, 1995 .10 October 2, 1995
January 19, 1996 .10 January 2, 1996
April 29, 1996 .10 April 8, 1996
July 12, 1996 .15 June 27, 1996
October 28, 1996 .15 October 7, 1996
ITEM 6. SELECTED FINANCIAL DATA
The above-captioned information appears in the Registrant's 1996
Annual Report to Stockholders on pages 12 and 13 and is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The above-captioned information appears under "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" in the Registrant's 1996 Annual Report to
Stockholders on pages 14 through 26 and is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Haven Bancorp, Inc. and
its subsidiaries, together with the report thereon by KPMG Peat
Marwick LLP appears in the Registrant's 1996 Annual Report to
Stockholders on pages 27 through 54 and are incorporated herein
by reference.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to Directors and Executive Officers of
the Registrant is incorporated herein by reference to the
Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 23, 1997, on pages 4 through 8.
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation is
incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on
April 23, 1997, on pages 8 through 20 (excluding the Report of
the Compensation Committee on pages 11 through 13 and the Stock
Performance Graph on page 14).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information relating to security ownership of certain
beneficial owners and management is incorporated herein by
reference to the Registrant's Proxy Statement for the Annual
Meeting of Stockholders to be held on April 23, 1997, on pages 3
and 5 through 7.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related
transactions is incorporated herein by reference to the
Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 23, 1997, on pages 20 and 21.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company are
incorporated by reference to the following indicated pages of the
1996 Annual Report to Stockholders.
Pages
Consolidated Statements of Financial Condition
as of December 31, 1996 and 1995 ................... 27
Consolidated Statements of Operations for the Years
Ended December 31, 1996, 1995 and 1994 ............. 28
Consolidated Statements of Changes In Stockholders'
Equity for the Three Years Ended December 31, 1996 . 29
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994 ............. 30
Notes to Consolidated Financial Statements ......... 31 - 53
Independent Auditors' Report ....................... 54
The remaining information appearing in the Annual Report to
Stockholders is not deemed to be filed as part of this report,
except as expressly provided herein.
(2) All schedules are omitted because they are not required or
applicable, or the required information is shown in the
consolidated financial statements or the notes thereto.
(3) Exhibits (filed herewith unless otherwise noted)
(a) The following exhibits are filed as part of this
report:
3.1 Amended Certificate of Incorporation of Haven Bancorp,
Inc.*
3.2 Certificate of Designations, Preferences and Rights of
Series A Junior Participating Preferred Stock**
3.3 Bylaws of Haven Bancorp, Inc.*
4.0 Rights Agreement between Haven Bancorp, Inc. and
Chemical Bank**
10.1 Employment Agreement between Haven Bancorp, Inc. and
Philip S. Messina****
10.2 (a) Form of Change in Control Agreement between
Columbia Federal Savings Bank and certain executive
officers, as amended****
10.2 (b) Form of Change in Control Agreement between Haven
Bancorp, Inc. and certain executive officers, as
amended****
10.3 Consultation Agreement between Haven Bancorp, Inc. and
George S. Worgul***
10.4 (a) Amended and Restated Columbia Federal Savings Bank
Recognition and Retention Plans and Trusts for
Officers and Employees***
10.4 (b) Amended and Restated Recognition and Retention
Plan and Trusts for Outside Directors***
10.5 Haven Bancorp, Inc. 1993 Incentive Stock Option
Plan***
10.6 Haven Bancorp, Inc. 1993 Stock Option Plan for Outside
Directors***
10.7 Columbia Federal Savings Bank Employee Severance
Compensation Plan, as amended****
10.8 Columbia Federal Savings Bank Consultation and
Retirement Plan for Non-Employee Directors***
10.9 Form of Supplemental Executive Retirement Plan*
10.10 Haven Bancorp, Inc. 1996 Stock Incentive Plan****
11.0 Computation of earnings per share (filed herewith)
13.0 1996 Annual Report to Stockholders (filed herewith)
21.0 Subsidiary information is incorporated herein by
reference to "Part I - Subsidiaries"
23.0 Consent of Independent Auditors (filed herewith)
27.0 Financial Data Schedule (filed herewith)
99 Proxy Statement for 1997 Annual Meeting (filed
herewith)
________________
* Incorporated herein by reference into this document from the
Exhibits to Form S-1, Registration Statement and any amendments
thereto, filed on April 14, 1993, Registration No. 33-61048.
** Incorporated herein by reference into this document from the
Exhibits to Form 8-K, Current Report, filed on January 30, 1996.
*** Incorporated herein by reference into this document from the
Exhibits to Form 10-K for the year ended December 31, 1994, filed
on March 30, 1995.
**** Incorporated herein by reference into this document from the
Exhibits to Form 10-K for the year ended December 31, 1995, filed
on March 29, 1996.
(b) Reports on Form 8-K.
One report on Form 8-K was filed by the Company dated
September 25, 1996 relating to its agreement with Pathmark
Stores, Inc. No financial statements were filed as a part of
such report.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly
authorized.
HAVEN BANCORP, INC.
By: /s/ George S. Worgul
--------------------
George S. Worgul
Dated: March 28, 1997 Chairman of the Board
Pursuant to the requirements of the Securities and Exchange Act
of 1934, this report has been signed by the following persons in
the capacities and on the dates indicated.
Name Title Date
/s/ George S. Worgul Chairman of the Board March 28, 1997
- --------------------------
George S. Worgul
/s/ Philip S. Messina President and Chief March 28, 1997
- -------------------------- Executive Officer
Philip S. Messina
/s/ Robert L. Koop Director March 28, 1997
- --------------------------
Robert L. Koop
/s/ Robert M. Sprotte Director March 28, 1997
- --------------------------
Robert M. Sprotte
/s/ Joseph A. Ruggiere Director March 28, 1997
- --------------------------
Joseph A. Ruggiere
/s/ Michael J. Fitzpatrick Director March 28, 1997
- --------------------------
Michael J. Fitzpatrick
/s/ William J. Jennings II Director March 28, 1997
- --------------------------
William J. Jennings II
/s/ Michael J. Levine Director March 28, 1997
- --------------------------
Michael J. Levine
/s/ Catherine Califano Senior Vice President and March 28, 1997
- -------------------------- Chief Financial Officer
Catherine Califano