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, 1997
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) 850-2500
(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 $180,478,564 and is
based upon the last sales price as quoted on Nasdaq Stock Market
for March 27, 1998.
The registrant had 8,835,588 shares outstanding as of March 27,
1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended
December 31, 1997, are incorporated by reference into Parts I and
II of this Form 10-K.
Portions of the Proxy Statement for the 1998 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 - 53
Business ....................................... 1 - 2
Market Area and Competition .................... 2 - 3
Lending Activities ............................. 3 - 12
Delinquencies and Classified Assets ............ 12 - 16
Allowances for Loan and REO Losses ............. 16 - 19
Investment Activities .......................... 19 - 22
Mortgage-Backed Securities ..................... 23 - 28
Sources of Funds ............................... 28 - 31
Borrowings ..................................... 32 - 33
Subsidiary Activities .......................... 34 - 35
Personnel ...................................... 35
Regulation and Supervision ..................... 35 - 48
Federal and State Taxation ..................... 48 - 50
Item 2. Properties ....................................... 51 - 52
Item 3. Legal Proceedings ................................ 52 - 53
Item 4. Submission of Matters to a Vote of Security Holders 53
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters ...................... 53 - 54
Item 6. Selected Financial Data .......................... 54
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............. 54
Item 7a. Quantitative and Qualitative Disclosures
about Market Risk ................................ 54
Item 8. Financial Statements and Supplementary Data ...... 54
Item 9. Change In and Disagreements with Accountants on
Accounting and Financial Disclosure .............. 54
PART III
Item 10. Directors and Executive Officers of the Registrant 54
Item 11. Executive Compensation ........................... 55
Item 12. Security Ownership of Certain Beneficial
Owners and Management ............................ 55
Item 13. Certain Relationships and Related Transactions ... 55
PART IV
Item 14. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K .............................. 55 - 57
EXHIBIT INDEX
Exhibit 11.0 Computation of earnings per share
Exhibit 13.0 1997 Annual Report to Stockholders
Exhibit 23.0 Consent of Independent Auditors
Exhibit 27.0 Financial Data Schedule
Exhibit 99 Proxy Statement for 1998 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 CFS Bank, formerly Columbia Federal Savings Bank
("CFS" 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 Federal Deposit Insurance
Corporation ("FDIC") and the Securities and Exchange Commission
("SEC"). 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, 1997, the
Company had consolidated total assets of $2.0 billion and
stockholders' equity of $112.9 million.
Currently, the Company does not transact any material business
other than through its subsidiary, the Bank.
The Bank 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. The Bank changed
its name to CFS Bank in 1997. 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, 1997,
the Bank had total assets of $2.0 billion and stockholders'
equity of $128.5 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
1
of funds, which consists 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.
The Bank's primary market area is concentrated in the
neighborhoods surrounding its eight full service banking and
thirty-nine supermarket banking facilities (seven of which opened
in the first quarter of 1998) located in Queens, Brooklyn,
Manhattan, Staten Island, Nassau, Suffolk, Rockland and
Westchester counties, northern New Jersey and Connecticut.
During 1997, the Bank opened twenty-eight supermarket branches.
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 five years, the Bank's expanded loan work-
out/resolution efforts have successfully contributed toward
reducing non-performing assets to manageable levels. Although
there are 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 large 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
2
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 1997, loan originations and
purchases totaled $471.3 million (comprised of $322.4 million of
residential one-to four-family mortgage loans, $133.6 million of
commercial and multi-family real estate loans, $3.8 million of
construction loans and $11.5 million of consumer loans). One-to
four-family mortgage loan originations included $200.9 million of
loans purchased in the secondary market during 1997.
At December 31, 1997, the Bank had total mortgage loans
outstanding of $1.1 billion, of which $805.7 million were one-to
four-family residential mortgage loans, or 69.9% of the Bank's
total loans. At that same date, multi-family residential
mortgage loans totaled $143.6 million, or 12.5% of total loans.
The remainder of the Bank's mortgage loans, which totaled $170.6
million, or 14.8% of total loans at December 31, 1997, included
$148.7 million of commercial real estate loans, or 12.9% of total
loans, $19.6 million of cooperative apartment loans, or 1.7% of
total loans and $2.3 million of construction and land loans, or
0.2% of total loans. Other loans in the Bank's portfolio
principally consisted of home equity lines of credit and consumer
loans and totaled $32.3 million, or 2.8% of total loans at
December 31, 1997.
3
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,
---------------
1997 1996 1995 1994 1993
--------------- --------------- --------------- --------------- ---------------
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 $805,690 69.93% $556,818 65.63% $325,050 57.03% $258,698 49.34% $211,946 31.07%
Multi-family 143,559 12.46 105,341 12.42 79,008 13.86 94,259 17.98 124,566 18.26
Commercial 148,745 12.91 127,956 15.08 111,038 19.48 102,415 19.54 126,059 18.48
Cooperative 19,596 1.70 19,936 2.35 10,187 1.79 24,369 4.65 183,403 26.88
Construction and land 2,263 0.20 4,227 0.50 5,737 1.01 3,491 0.67 2,347 0.34
--------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total mortgage loans 1,119,853 97.20 814,278 95.98 531,020 93.17 483,232 92.17 648,321 95.03
Other loans:
Home equity lines of
credit 15,449 1.34 15,677 1.85 16,454 2.89 17,802 3.39 17,032 2.50
Property improvement
loans 4,392 0.38 6,957 0.82 10,248 1.80 11,814 2.26 7,794 1.14
Loans on deposit
accounts 895 0.08 809 0.10 821 0.14 940 0.18 1,143 0.17
Commercial loans 453 0.04 351 0.04 479 0.08 605 0.12 693 0.10
Guaranteed student loans 882 0.08 985 0.12 1,181 0.21 1,761 0.34 2,357 0.35
Unsecured consumer loans 450 0.04 809 0.10 1,950 0.34 2,366 0.45 1,659 0.24
Other loans 9,770 0.84 8,506 0.99 7,834 1.37 5,737 1.09 3,220 0.47
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total other loans 32,291 2.80 34,094 4.02 38,967 6.83 41,025 7.83 33,898 4.97
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans 1,152,144 100.00% 848,372 100.00% 569,987 100.00% 524,257 100.00% 682,219 100.00%
====== ====== ====== ====== ======
Less:
Unearned discounts,
premiums and deferred
loan fees, net (1,363) (786) (1,029) (1,375) (805)
Allowance for loan
losses (12,528) (10,704) (8,573) (10,847) (21,606)
--------- ------- ------- ------- -------
Loans, net $1,138,253 $836,882 $560,385 $512,035 $659,808
========= ======= ======= ======= =======
4
The following table shows the estimated contractual maturity of
the Bank's loan portfolio at December 31, 1997, assuming no
prepayments.
At December 31, 1997
Mortgage Other Total
Loans Loans Loans
-------- ----- -------
(In thousands)
Amounts due:
Within one year $ 54,756 $ 850 $ 55,606
------- ------ -------
After one year:
One to three years 56,879 2,969 59,848
Three to five years 40,501 2,140 42,641
Five to ten years 179,844 20,415 200,259
Ten to twenty years 278,252 5,474 283,726
Over twenty years 509,621 443 510,064
--------- ------ ---------
Total due after one year 1,065,097 31,441 1,096,538
--------- ------ ---------
Total loans $1,119,853 $32,291 $1,152,144
========= ====== =========
The following table sets forth at December 31, 1997, the dollar
amount of all loans due after December 31, 1998, and whether such
loans have fixed interest rates or adjustable interest rates.
Due After December 31, 1998
Fixed Adjustable Total
----- ---------- -----
(In thousands)
Mortgage loans:
One-to four-family $374,410 $425,800 $ 800,210
Multi-family 44,185 91,026 135,211
Commercial real estate 47,047 63,472 110,519
Cooperative 5,058 14,099 19,157
Other loans 12,807 18,634 31,441
------- ------- ---------
Total loans $483,507 $613,031 $1,096,538
======= ======= =========
5
The following table sets forth the Bank's loan originations, loan
purchases, sales and principal repayments for the periods
indicated:
Years Ended December 31,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(In thousands)
Mortgage loans (gross):
At beginning of year $814,278 $531,020 $483,232 $648,321 $605,309
Mortgage loans originated:
One-to four-family 121,498 98,783 64,139 77,499 121,812
Multi-family 64,181 46,310 11,726 - 4,667
Commercial real estate 69,495 35,886 26,047 4,688 7,386
Cooperative (1) - - 63 499 362
Construction and land loans 3,773 1,562 4,367 1,000 176
------- ------- ------- ------- -------
Total mortgage loans
originated 258,947 182,541 106,342 83,686 134,403
Mortgage loans purchased 200,900 172,300 26,241 - -
Transfer of mortgage loans
to REO (1,695) (3,470) (4,638) (10,998) (22,042)
Transfer of mortgage loans from/
(to) loans held for sale - 10,594 (12,038) - -
Principal repayments (151,215) (78,209) (67,274) (64,686) (60,315)
Sales of mortgage loans (2) (1,362) (498) (845) (173,091) (9,034)
--------- ------- ------- ------- -------
At end of year $1,119,853 $814,278 $531,020 $483,232 $648,321
========= ======= ======= ======= =======
Other loans (gross):
At beginning of year $ 34,094 $ 38,967 $ 41,025 $ 33,898 $ 41,164
Other loans originated 11,491 8,735 10,746 21,533 12,237
Principal repayments (13,294) (13,608) (12,804) (14,406) (19,503)
------- ------- ------- ------- -------
At end of year $ 32,291 $ 34,094 $ 38,967 $ 41,025 $ 33,898
======= ======= ======= ======= =======
(1) Cooperative loan originations in the five years ended
December 31, 1997 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 a 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 adjustable rate mortgage ("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, Rockland,
Westchester counties, northern New Jersey and Connecticut 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
6
sales representatives who solicit loans from the communities
served by the Bank by calling on 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. In 1995, the Bank also began
purchasing loans on a flow basis from correspondent mortgage
bankers in New York, New Jersey and Connecticut to supplement its
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. 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 Fannie Mae ("FNMA")
Community Home Buyers Program, which targets low to low/moderate
income borrowers. Residential condominium loans are originated
in amounts up to a maximum of 90% of the appraised value of the
condominium unit. Private mortgage insurance is required
whenever loan-to-value ratios exceed 80% of the price or
appraised value of the property securing the loan. Loan amounts
generally conform to Federal Home Loan Mortgage Corporation
("FHLMC") limits. Mortgage loans originated by the Bank
generally include due-on-sale clauses that 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 on fixed-rate loans
typically 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, 1997, the discount offered by the
7
Bank on the one year ARM loan ranged from 280 basis points (with
0% origination fees) to 330 basis points (with 2% origination
fees) below the fully-indexed rate, which was 8.30% as of such
date. The discount offered by the Bank on the three-year ARM
loan ranged from 180 basis points (with 0% origination fees) to
230 basis points (with 2% origination fees) below the fully-
indexed rate, which was 8.30% as of December 31, 1997. The
discount offered by the Bank on the five year ARM loan ranged
from 167 basis points (with 0% origination fees) to 217 basis
points (with 2% origination fees) below the fully-indexed rate,
which was 8.30% as of December 31, 1997. As of December 31,
1997, the discount offered by the Bank on the seven year ARM loan
ranged from 142 basis points (with 0% origination fees) to 192
basis points (with 2% origination fees) below the fully-indexed
rate, which was 8.30% as of such date. Finally, as of December
31, 1997, the discount offered by the Bank on the fifteen year
ARM loan ranged from 105 basis points (with 0% origination fees)
to 155 basis points (with 2% origination fees) below the fully-
indexed rate which was 8.30%. As of December 31, 1997, 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 2.0% 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. During 1997, the
Bank originated or purchased $180.0 million of one-to four-family
ARM loans.
The Bank originates 30 year fixed-rate loans for immediate sale
to the FHLMC or FNMA while retaining 10, 15, 20 year and 15 and
30 year bi-weekly fixed-rate loans for portfolio. 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, 1997, the Bank
did not emphasize the origination of 30 year fixed-rate loans
and, accordingly, sold only 12 loans totaling $1.4 million to the
FNMA and other lenders.
During 1997, the Bank purchased $200.9 million of one-to four-
family mortgage loans from correspondent mortgage bankers and
bulk whole loan purchases to supplement retail originations.
8
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 $93.5 million of bulk
residential whole loan packages during the year. The Bank
performs due diligence procedures on the credit quality of the
loans and the servicing operations of the servicer, if
applicable, before purchasing the loans.
On March 11, 1998 the Bank signed a definitive purchase agreement
with Resource Bancshares Mortgage Group, Inc. ("RBMG") under
which it will purchase the production franchise of RBMG's
subsidiary, Intercounty Mortgage, Inc. ("IMI"). The transaction
is subject to the approval of the OTS. IMI primarily originates
agency-eligible residential mortgages and in 1997 had loan
production of approximately $740 million from six retail offices
in New York, New Jersey and Pennsylvania. The Bank intends to
supplement IMI's present product mix, which is primarily thirty-
year, fixed-rate product with the Bank's wider range of mortgage
products, including adjustable rate and jumbo mortgages. The
Bank intends to retain a portion of IMI's ongoing loan production
in its portfolio.
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 1997, the Bank did not originate any cooperative 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 (commercial 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, 1997, $143.6 million, or 12.5% of the Bank's total
loan portfolio, consisted of multi-family residential loans.
9
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. The Bank originates
multi-family, commercial real estate and construction and land
loans on a conservative 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 for terms of up to 15 years 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. 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 1.30x and also generally
requires personal guarantees from the borrowers or the principals
of the borrowing entity. At December 31, 1997, the Bank's
commercial real estate loan portfolio totaled $148.7 million, or
12.9% of the Bank's total loan portfolio.
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/development loans may generally be
made in amounts up to 70% of the value when completed for
commercial properties and 75% for multi-family. The Bank
generally requires personal guarantees and evidence that the
borrower has invested an amount equal to and not less than 20% of
the estimated cost of the land and improvements. Construction
loans generally are made on a floating rate basis (subject to
10
daily adjustment) 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, 1997, the Bank had $2.3 million, or 0.2% of its
total loan portfolio invested in construction and land loans.
OTHER LOANS. The Bank also offers home equity loans, equity
lines of credit, business lines of credit and Government-
guaranteed student loans. As of December 31, 1997, other loans
totaled $32.3 million, or 2.8% 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 $500,000. The Bank also offers Equity
Plus, a line of credit for $10,000 which closes with the first
mortgage loan. This line is offered to all newly approved first
mortgages. 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 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. Unsecured loans
are offered up to $10,000 for terms up to four years. 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.
LOAN APPROVAL PROCEDURES AND AUTHORITY. For one-to four-family
real estate loans each loan is reviewed and approved by an
underwriter and another departmental officer with credit
authority appropriate for the loan amount and type 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. Commercial loans up to $3,000,000
must be approved by the Officers Loan Committee, whereas, loans
between $3,000,000 and $5,000,000 must be approved by the Board
of Directors - Loan Committee. Loans exceeding $5,000,000 must
11
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 and Flood and Private Mortgage Insurance ("PMI")
where required. 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, 1997, the Bank's loans-to-one borrower limit was
$21.1 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.
12
CLASSIFIED ASSETS. Federal regulations and the Bank's
Classification of Assets Policy provide for the classification of
loans and other assets considered by the Bank 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.
Non-performing loans (consisting of non-accrual loans and
restructured loans) decreased from $63.9 million at December 31,
1993 to $28.3 million at December 31, 1994, $16.9 million at
December 31, 1995, $13.9 million at December 31, 1996 and $12.5
million at December 31, 1997. 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, 1997 from
$17.9 million at December 31, 1993 (net of an allowance for REO
of $2.2 million) to $7.8 million at December 31, 1994 (net of an
allowance for REO of $717,000), $2.0 million at December 31, 1995
(net of an allowance for REO of $178,000), $1.0 million at
December 31, 1996 (net of an allowance for REO of $81,000) to a
balance at December 31, 1997 of $455,000 (net of an allowance for
REO of $87,000). 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
13
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.
At December 31, 1997, the Bank had 15 restructured loans with
aggregate principal balances of $2.3 million. Of this amount,
48.6% were residential loans (including cooperative apartment
loans) and 51.4% were multi-family loans. Management is able to
avoid the costs of foreclosing on loans that it has restructured.
However, restructured loans have a higher probability of becoming
delinquent than loans that have no previous history of
delinquency. 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, 1997, the
Bank had 14 restructured loans with principal balances of $2.1
million that were on accrual status. 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, 1997, the Bank's classified assets consisted of
$11.2 million of loans and REO of which $750,000 was classified
as doubtful. The Bank's assets classified as substandard at
December 31, 1997 consisted of $9.6 million of loans and $534,000
of gross REO. Classified assets in total declined $4.1 million,
or 26.8% since December 31, 1996. At December 31, 1997, the Bank
also had loans aggregating $4.1 million that it had designated
special mention. Of those assets, 37% were multi-family loans
and 63% were commercial real estate loans. The loans were
performing in accordance with their terms at December 31, 1997
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.
14
At December 31, 1997, 1996, and 1995, delinquencies in the Bank's
loan portfolio were as follows:
At December 31, 1997 At December 31, 1996
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 8 $ 1,339 42 $ 3,534 9 $ 950 47 $ 4,083
Multi-family - - 9 2,362 - - 6 1,463
Commercial 1 33 9 3,305 - - 11 4,321
Cooperative 3 128 8 699 5 281 9 431
Construction and
land loans - - 1 100 - - 1 60
Other loans 26 452 19 396 26 171 21 375
-- ------ --- ------ --- ------ --- ------
Total loans 38 $ 1,952 88 $10,396 40 $ 1,402 95 $10,733
== ====== === ====== === ====== === ======
Delinquent loans
to total loans (1) 0.17% 0.90% 0.17% 1.27%
==== ==== ==== ====
At December 31, 1995
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 18 $ 1,215 42 $ 3,800
Multi-family - - 5 967
Commercial - - 8 2,411
Cooperative 12 580 15 871
Construction and
land loans - - 4 1,067
Other loans 10 53 38 689
--- ------ --- ------
Total loans 40 $ 1,848 112 $ 9,805
=== ====== === ======
Delinquent loans
to total loans (1) 0.32% 1.72%
==== ====
(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
15
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 approximately $736,000, $688,000 and $889,000 for the
years ended December 31, 1997, 1996 and 1995, respectively,
compared to $146,000, $220,000 and $280,000, which was recognized
on non-accrual loans for such periods, respectively. If all
restructured loans, as of December 31, 1997, 1996 and 1995, 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 approximately $197,000,
$305,000 and $714,000 for the years ended December 31, 1997, 1996
and 1995, respectively.
At December 31,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
Non-accrual mortgage loans $ 10,000 $ 10,358 $ 9,116 $ 18,474 $ 43,170
Restructured mortgage loans 2,136 3,160 7,072 9,550 20,398
Non-accrual other loans 396 375 689 275 299
------- ------- ------- ------- -------
Total non-performing loans 12,532 13,893 16,877 28,299 63,867
Real estate owned, net of
related reserves 455 1,038 2,033 7,844 17,887
------- ------- ------- ------- -------
Total non-performing assets $ 12,987 $ 14,931 $ 18,910 $ 36,143 $ 81,754
======= ======= ======= ======= =======
Non-performing loans to total loans 1.09% 1.64% 2.97% 5.41% 9.37%
Non-performing assets to total assets 0.66 0.94 1.28 2.85 6.65
Non-performing loans to total assets 0.63 0.88 1.15 2.23 5.20
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". 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.
16
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 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 such periods. During 1994,
the Bank established additional loan loss provisions totaling
$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. During 1997, the Bank took
charge-offs of $1.7 million against its loan portfolio. The
reduction in charge-offs for 1997 and 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 1.09% at December 31, 1997 compared to 9.37%
at December 31, 1993. The allowance as a percentage of non-
performing loans was 99.97% at December 31, 1997 compared to
33.83% at December 31, 1993.
The Bank's provisions for loan losses varied significantly in
1993 and 1994, whereas the provision has not changed
significantly over the last three years. Specifically, the Bank
made provisions for loan losses of $6.4 million, $13.4 million,
$2.8 million, $3.1 million and $2.8 million for the five years
ended December 31, 1997, respectively. 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 1993 the Bank booked a loan provision of $6.4 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. 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, 1996 and 1997, the Bank provided provisions of $2.8
million, $3.1 million and $2.8 million, respectively, to maintain
the allowance at an adequate level.
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 that it considers adequate to
provide for potential losses, there can be no assurance that such
losses will not exceed the estimated amounts.
17
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,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
Balance at beginning of year $10,704 $ 8,573 $10,847 $21,606 $21,027
Charge-offs:
One-to four-family (964) (771) (472) (264) (353)
Cooperative (370) (524) (2,142) (8,747) (3,028)
Multi-family - (30) (1,299) (7,932) (1,174)
Non-residential and other (352) (560) (1,541) (7,798) (1,651)
------ ------ ------ ------ ------
Total charge-offs (1) (1,686) (1,885) (5,454) (24,741) (6,206)
Recoveries 760 891 405 582 385
------ ------ ------ ------ ------
Net charge-offs (926) (994) (5,049) (24,159) (5,821)
Provision for loan losses 2,750 3,125 2,775 13,400 6,400
------ ------ ------ ------ ------
Balance at end of year $12,528 $10,704 $ 8,573 $10,847 $21,606
====== ====== ====== ====== ======
Ratio of net charge-offs during
the year to average loans out-
standing during the year (2) 0.09% 0.15% 0.93% 3.83% 0.90%
Ratio of allowance for loan
losses to total loans at
the end of year (3) 1.09 1.26 1.51 2.07 3.17
Ratio of allowance for loan
losses to non-performing loan
at the end of the year (4) 99.97 77.05 50.80 38.33 33.83
(1) 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.
(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.
18
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,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
% of % of % of % of % of
Loans in Loans in Loans in Loans in Loans in
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
Mortgage loans:
Residential (1) $7,039 84.09% $5,929 80.40% $3,838 72.67% $5,685 71.97% $12,189 76.20%
Commercial 5,201 12.91 4,340 15.08 4,175 19.48 4,308 19.53 8,646 18.47
Construction - 0.20 - 0.50 69 1.00 248 0.66 258 0.34
Other loans 288 2.80 435 4.02 491 6.85 606 7.84 515 4.99
------ ------ ------ ------ ----- ------ ------ ------ ------ ------
Total allowance for
loan losses (2) $12,528 100.00% $10,704 100.00% $8,573 100.00% $10,847 100.00% $21,606 100.00%
====== ====== ====== ====== ===== ====== ====== ====== ====== ======
(1) Includes one-to four-family, multi-family and cooperative
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 five-year period
ended December 31, 1997. 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 U.S. Treasury obligations, securities of
various federal agencies, certain certificates of deposit of
19
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, 1997, the Bank had money market investments and debt
and equity securities in the aggregate amount of $4.6 million and
$185.2 million (including $118.8 million of debt and equity
securities available for sale) with a fair value of $4.6 million
and $185.2 million, respectively.
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, 1997, the securities available for sale portfolio
totaled $499.4 million of which $250.5 million were adjustable-
rate securities and $248.9 million were fixed-rate securities.
At December 31, 1997, the held to maturity portfolios totaled
$229.5 million, comprised of $59.1 million of adjustable-rate
securities and $170.4 million of fixed-rate securities. The
estimated fair value of the Company's debt securities and MBSs
held to maturity portfolios was $237,000 above the carrying value
of the portfolios at December 31, 1997. 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.
20
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,
1997 1996 1995
------ ------ ------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- ------ -------- ------ ------- ------
(In thousands)
Debt and Equity Securities:
U.S. Government and
agency obligations $135,672 $135,715 $170,709 $169,849 $142,383(2) $142,281(2)
Corporate debt securities 45,390 45,315 45,350 45,227 45,320 44,437
Preferred stock 4,123 4,123 27,329 27,329 - -
------- ------- ------- ------- ------- -------
Subtotal 185,185 185,153 243,388 242,405 187,703 186,718
------- ------- ------- ------- ------- -------
Adjustable-rate MBS-
Mutual Fund - - - - 3,976 3,976
Federal Funds sold - - 5,000 5,000 5,000 5,000
FHLB-NY stock 12,885 12,885 9,890 9,890 8,138 8,138
Money market investments 4,561 4,561 1,869 1,869 4,064 4,064
------- ------- ------- ------- ------- -------
Total $202,631(1) $202,599(1) $260,147(1) $259,164(1) $208,881(1) $207,896
======= ======= ======= ======= ======= =======
(1) Includes debt and equity securities available for sale
totaling $118.8 million, $146.1 million and $63.9 million, at
December 31, 1997, 1996 and 1995, 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.
21
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, 1997.
At December 31, 1997
----------------------------------------------------------------------------------------------------------------
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 $ - - % $ 25,788 5.94% $ 22,867 6.60% $ 87,017 7.47% 13.3 $135,672 $135,715 7.03%
Corporate debt
securities 8,609 5.73 36,781 5.70 - - - - 1.2 45,390 45,315 5.71
Money market
investments 4,561 5.68 - - - - - - - 4,561 4,561 5.68
------- ------- ------- ------- ------- ------- -----
Total $ 13,170 5.71% $ 62,569 5.80% $ 22,867 6.60% $ 87,017 7.47% 10.0 $185,623(1) $185,591(1) 6.67%
======= ===== ======= ===== ======= ===== ======= ===== ==== ======= ======= =====
Preferred Stock $ 4,123 $ 4,123 6.27%
FHLB-NY stock $ 12,885 $ 12,885 6.63%
======= ======= =====
(1) Includes U.S. Government and agency obligations available
for sale totaling $114.7 million.
22
MORTGAGE-BACKED SECURITIES
The Bank also invests in MBSs. At December 31, 1997, total MBSs,
net, aggregated $543.7 million (including MBSs available for sale
with a fair value of $380.6 million, net), or 27.5% of total
assets. At December 31, 1997, 68.8% 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, 1997, $259.3
million, or 47.7% of total MBSs were adjustable-rate and $284.4
million, or 52.3% 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,
1997 1996 1995
------ ------ ------
Percent Percent Percent
Carrying of Carrying of Carrying of
Value Total Value Total Value Total
-------- ------- -------- ------- -------- -------
(Dollars in thousands)
MBSs(1):
CMOs and REMICS - Agency-backed(2) $174,707 32.14% $117,969 27.96% $220,284 34.97%
CMOs and REMICS - Non-agency(2) 169,480 31.17 94,877 22.48 69,109 10.97
FHLMC 91,110 16.76 97,953 23.21 172,770 27.43
FNMA 107,377 19.75 110,182 26.12 153,793 24.42
GNMA 982 0.18 983 0.23 13,933 2.21
------- ------ ------- ------ ------- ------
Net MBSs $543,656 100.00% $421,964 100.00% $629,889 100.00%
======= ====== ======= ====== ======= ======
(1) Includes MBSs available for sale of $380.6 million, $224.0
million and $439.2 million at December 31, 1997, 1996 and 1995,
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.
(2) Included in total MBSs are CMOs and REMICs, which, at
December 31, 1997, had a gross carrying value of $344.2 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
23
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,
1997 1996 1995
------ ------ ------
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 $ 27,472 5.05% $ 27,769 $ 39,889 9.45% $ 39,594 $ 41,222 6.54% $ 41,352
FNMA 61,492 11.31 61,093 71,460 16.94 69,914 78,995 12.54 78,114
------- ----- ------- ------- ----- ------- ------- ----- -------
Total MBSs 88,964 16.36 88,862 111,349 26.39 109,508 120,217 19.09 119,466
------- ----- ------- ------- ----- ------- ------- ----- -------
Mortgage-related securities:
CMOs and REMICS-Agency
backed 21,217 3.90 21,101 24,449 5.79 24,142 22,969 3.65 22,476
CMOs and REMICS-
Non-agency 52,876 9.73 53,363 62,142 14.73 62,032 47,528 7.55 47,609
------- ----- ------- ------- ----- ------- ------- ----- -------
Total mortgage-related
securities 74,093 13.63 74,464 86,591 20.52 86,174 70,497 11.20 70,085
------- ----- ------- ------- ----- ------- ------- ----- -------
Total mortgage-backed and
related securities
held to maturity 163,057 29.99 163,326 197,940 46.91 195,682 190,714 30.29 189,551
------- ----- ------- ------- ----- ------- ------- ----- -------
Available for sale:
MBSs:
GNMA 982 0.18 982 983 0.23 983 13,933 2.21 13,933
FHLMC 63,638 11.71 63,638 58,064 13.76 58,064 131,548 20.88 131,548
FNMA 45,885 8.44 45,885 38,722 9.18 38,722 74,798 11.87 74,798
------- ----- ------- ------- ----- ------- ------- ----- -------
Total MBSs 110,505 20.33 110,505 97,769 23.17 97,769 220,279 34.96 220,279
------- ----- ------- ------- ----- ------- ------- ----- -------
Mortgage-related securities:
CMOs and REMICs-Agency
backed 153,490 28.23 153,490 93,520 22.16 93,520 197,315 31.32 197,315
CMOs and REMICs-
Non-agency 116,604 21.45 116,604 32,735 7.76 32,735 21,581 3.43 21,581
------- ----- ------- ------- ----- ------- ------- ----- -------
Total mortgage-related
securities 270,094 49.68 270,094 126,255 29.92 126,255 218,896 34.75 218,896
------- ----- ------- ------- ----- ------- ------- ----- -------
Total available for sale
securities 380,599 70.01 380,599 224,024 53.09 224,024 439,175 69.71 439,175
------- ----- ------- ------- ----- ------- ------- ----- -------
Total mortgage-backed and
related securities $543,656 100.00% $543,925 $421,964 100.00% $419,706 $629,889 100.00% $628,726
======= ====== ======= ======= ====== ======= ======= ====== =======
24
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, 1997.
At December 31, 1997
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 $ 1,788 6.44% $ 1,992 7.02% $ 8,066 5.66% $49,646 6.67% 14.5 $61,492 $61,093 6.54%
FHLMC 637 7.00 345 7.00 5,623 6.61 20,867 7.00 16.7 27,472 27,769 6.92
CMOs and Remics - - 3,997 5.94 - - 70,096 6.77 22.0 74,093 74,464 6.73
------ ---- ------ ---- ------ ---- ------- ---- ---- ------- ------- ----
Total mortgage-
backed and
related
securities held
to maturity 2,425 6.59 6,334 6.34 13,689 6.05 140,609 6.77 18.3 163,057 163,326 6.69
------ ---- ------ ---- ------ ---- ------- ---- ---- ------- ------- ----
Available for sale:
FNMA - - - 45,885 7.04 26.1 45,885 45,885 7.04
FHLMC 1 5.50 127 7.84 2,342 6.39 61,168 7.07 25.1 63,638 63,638 7.04
GNMA - - - 982 7.18 26.3 982 982 7.18
CMOs and Remics - - - 270,094 6.78 25.1 270,094 270,094 6.78
------ ---- ------ ---- ------ ---- ------- ---- ---- ------- ------- ----
Total mortgage-
backed and
related
securities
available
for sale 1 5.50 127 7.84 2,342 6.39 378,129 6.86 25.3 380,599 380,599 6.86
------ ---- ------- ---- ------- ---- ------- ---- ---- ------- ------- ----
Total mortgage-
backed and
related
securities $ 2,426 6.59% $ 6,461 6.37% $16,031 6.10% $518,738 6.84% 23.2 $543,656 $543,925 6.81%
====== ==== ====== ==== ====== ==== ======= ==== ==== ======= ======= ====
At December 31, 1997, the weighted average contractual maturity
of the Bank's mortgage-backed and related securities portfolio
was 23.2 years.
25
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, 1997.
At December 31, 1997
Total
Mortgage
Fixed Backed
Fixed Rate ARM Rate ARM and Related
MBSs MBSs CMOs CMOs Securities(1)
---------- ---------- ----- ---- -----------
(In thousands)
Amounts due or repricing:
Within one year $ 2,414 55,494 - 157,398 215,306
------- ------- ------ ------- -------
After one year:
One to three years 2,337 43,246 - - 45,583
Three to five years 130 - 3,997 - 4,127
Five to 10 years 15,954 - - - 15,954
10 to 20 years 62,848 - 50,384 - 113,232
Over 20 years 14,252 - 132,244 - 146,496
------- ------- ------- ------- -------
Total due or repricing
after one year 95,521 43,246 186,625 - 325,392
------- ------- ------- ------- -------
Total 97,935 98,740 186,625 157,398 540,698
Adjusted for:
Unamortized yield
adjustment 877 864 (877) (1,299) (435)
Unrealized gain/loss (84) 1,137 (117) 2,457 3,393
------- ------- ------- ------- -------
Total mortgage-backed and
related securities $ 98,728 100,741 185,631 158,556 543,656
======= ======= ======= ======= =======
(1) Includes $380.6 million of mortgage-backed and related
securities available for sale at December 31, 1997, carried at
fair value.
26
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,
1997 1996 1995
------ ------ ------
(In thousands)
Mortgage-backed and related
securities:
At beginning of period $421,964 $629,889 $526,248
MBSs purchased 56,941 41,647 68,990
MBSs sold (18,932) (101,604) -
CMOs and Remics purchased 365,002 158,654 123,835
CMOs and Remics sold (206,901) (205,760) (17,465)
Amortization and repayments (76,771) (97,969) (78,086)
Change in unrealized gain (loss) 2,353 (2,893) 6,367
-------- ------- -------
Balance of mortgage-backed and
related securities at end
of period (1) $543,656 $421,964 $629,889
======= ======= =======
(1) Includes $380.6 million, $224.0 million and $439.2 million
of mortgage-backed and related securities available for sale at
December 31, 1997, 1996 and 1995, respectively, carried at fair
value.
The Asset/Liability Committee determines when to make substantial
changes in the MBS portfolio. 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. In 1997, the Company purchased $421.9 million of
MBSs, of which $136.7 million were adjustable-rate and $285.2
million were fixed-rate securities. During 1997, the Bank placed
a greater emphasis on MBSs reflecting management's strategy to
improve duration and yield of the AFS portfolio with MBSs rather
than debt and equity securities. Adjustable-rate securities as a
percentage of total MBSs was 48%, 42% and 46% at December 31,
1997, 1996 and 1995, respectively. At December 31, 1997, $374.2
27
million, or 68.8% 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 totaling
$169.5 million, or 31.2% 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.
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 6.79% for the year
ended December 31, 1997. 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.
SOURCES OF FUNDS
GENERAL. Deposits, loan, mortgage-backed and debt securities
repayments, retained earnings and, to a lesser extent, 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. During September of 1996, the Bank and Pathmark Stores,
28
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. By the end of 1996, the Bank had opened four
supermarket branches with deposits totaling $12.1 million.
During 1997, the Bank opened twenty-eight supermarket branches
resulting in a total of thirty-two locations at December 31, 1997
with deposits totaling $157.2 million. The supermarket branches
are located in Queens, Brooklyn, Manhattan, Staten Island,
Nassau, Suffolk, Rockland and Westchester counties and Northern
New Jersey. At December 31, 1997, the Bank had 25 branches in
Pathmark Stores, Inc., 3 in ShopRite Supermarket, Inc., 3 in
Edward Super Food Stores, and 1 mini-branch in The Grand Union
Co. Core deposits equaled 32.5% of total in-store branch
deposits, compared to 45.3% in traditional branches. Overall
core deposits represented 42.7% of total deposits at December 31,
1997 compared to 47.2% at December 31, 1996. 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. The branches are open seven
days a week and provide a broad range of traditional banking
services, as well as the full package of financial services
offered by CFS Investments, Inc. ("CFSI"). In 1998, the Bank
plans to open an additional 28 supermarket branches, 13 of which
will be in Pathmark. The Bank has recently established a
relationship with Big Y Foods, Inc. to open 2 branches in
Connecticut in 1998 and with ShopRite to open 8 branches in
southern New Jersey and 5 branches in Connecticut during 1998.
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
1997, the Bank continued to offer competitive rates without
jeopardizing the value of existing core deposits. During 1997,
the Bank continued to experience a transfer of deposits from
passbook accounts into certificates of deposit. Certificates of
deposit increased from 52.8% of deposits at December 31, 1996 to
57.3% of deposits at December 31, 1997. 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. The Company
expects to attract a higher percentage of core deposits from its
supermarket branch locations as these locations continue to grow
and mature.
29
The following table presents the deposit activity of the Bank for
the periods indicated.
Years Ended December 31,
1997 1996 1995
------ ------ ------
(In thousands)
Deposits $3,208,355 2,441,295 2,055,132
Withdrawals 3,031,457 2,428,315 2,041,495
--------- --------- ---------
Net deposits (withdrawals) 176,898 12,980 13,637
Deposits acquired - - 17,024
Interest credited on deposits 50,326 41,362 39,623
--------- --------- ---------
Total increase (decrease)
in deposits $ 227,224 54,342 70,284
========= ========= =========
Time deposits by maturity at December 31, 1997 over $100,000 are
as follows:
Maturity Period Amount
--------------- ------
(In thousands)
Three months or less $11,563
Over three through six months 15,659
Over six through 12 months 21,678
Over 12 months 15,644
------
Total $64,544
======
30
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,
1997 1996 1995
------ ------ ------
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 $371,872 30.01% 2.51% $373,337 33.46% 2.49% $405,932 38.60% 2.49%
Checking accounts 134,546 10.86 1.31 111,425 9.99 1.01 96,242 9.15 1.11
------- ----- ---- ------- ----- ----- ------- ----- -----
Total passbook and checking
accounts 506,418 40.87 2.07 484,762 43.45 2.13 502,174 47.75 2.21
------- ----- ---- ------- ----- ----- ------- ----- -----
Money market accounts 54,107 4.37 3.37 58,108 5.21 3.32 45,472 4.32 3.49
------- ----- ---- ------- ----- ----- ------- ----- -----
Certificate accounts:
91 days 5,799 0.47 3.83 7,783 0.70 3.92 11,125 1.06 4.61
6 months 85,558 6.90 5.37 85,768 7.69 5.12 75,616 7.19 5.47
7 months 13,116 1.06 5.26 2,228 0.20 2.99 3,894 0.37 2.94
One year 265,891 21.45 5.69 203,259 18.22 5.51 166,956 15.88 5.91
13 months 21,314 1.72 5.79 11,036 0.99 5.12 5,784 0.55 3.60
18 months 34,321 2.77 5.79 23,407 2.10 5.98 40,453 3.85 6.03
2 to 4 years 145,081 11.71 6.04 131,931 11.82 5.87 88,054 8.37 5.66
Five years 101,972 8.23 6.23 101,690 9.11 6.30 106,366 10.11 6.40
7 to 10 years 5,547 0.45 6.31 5,666 0.51 6.28 5,742 0.55 6.25
--------- ------ ---- -------- ------ ---- ------- ------ ----
Total certificates 678,599 54.76 5.79 572,768 51.34 5.66 503,990 47.93 5.84
--------- ------ ---- --------- ------ ---- --------- ------ ----
Total deposits $1,239,124 100.00% 4.16% $1,115,638 100.00% 4.00% $1,051,636 100.00% 4.00%
========= ====== ==== ========= ====== ==== ========= ====== ====
The following table presents, by various rate categories, the
amount of certificate accounts outstanding at December 31, 1997,
1996 and 1995 and the periods to maturity of the certificate
accounts outstanding at December 31, 1997.
Period of Maturity from December 31, 1997
Within One to Two to Over
At December 31, One Two Three Three
1997 1996 1995 Year Years Years Years Total
------ ------ ------ ------ ------ ------ ----- -------
(In thousands)
Certificate accounts:
3.99% or less $ 6,682 10,396 10,425 6,237 39 - 406 6,682
4.00% to 4.99% 6,942 18,545 55,732 3,725 1,564 1,307 346 6,942
5.00% to 5.99% 548,849 456,789 267,113 489,729 45,469 3,931 9,720 548,849
6.00% to 6.99% 211,302 104,732 175,183 93,129 58,331 18,905 40,937 211,302
7.00% to 7.99% 7,808 10,637 24,557 2,887 500 4,421 - 7,808
------- ------- ------- ------- ------- ------ ------ -------
Total $781,583 601,099 533,010 595,707 105,903 28,564 51,409 781,583
======= ======= ======= ======= ======= ====== ====== =======
31
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, 1997, the Bank had
$247.0 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, 1997, the Bank had $193.0 million
of reverse repurchase agreements outstanding.
On February 12, 1997, Haven Capital Trust I, a trust formed under
the laws of the State of Delaware, issued $25 million of 10.46%
capital securities. The Company is the owner of all the
beneficial interests represented by common securities of the
Trust. See Note 8 of Notes to Consolidated Financial Statements
in the Registrant's 1997 Annual Report to Stockholders on page 38
which is incorporated herein by reference.
The Bank has an ESOP loan from an unrelated third party lender
with an outstanding balance of $1.8 million and an interest rate
of 8.70% at December 31, 1997. See Note 11 of Notes to
Consolidated Financial Statements in the Registrant's 1997 Annual
Report to Stockholders on page 43 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.
32
The following table sets forth certain information regarding
borrowed funds for the dates indicated:
At or For the Years Ended December 31,
1997 1996 1995
------ ------ ------
(Dollars in thousands)
FHLB-NY advances:
Average balance outstanding $191,550 $152,005 $ 95,775
Maximum amount outstanding at any
month-end during the period 247,000 195,000 134,175
Balance outstanding at end of period 247,000 178,450 134,175
Weighted average interest rate
during the period 5.69% 5.54% 5.59%
Weighted average interest rate
at end of period 5.86% 4.72% 4.21%
Securities Sold under Agreements to
Repurchase:
Average balance outstanding $172,310 $128,677 $ 94,375
Maximum amount outstanding at any
month-end during the period 229,280 142,906 150,249
Balance outstanding at end of period 193,028 142,906 126,032
Weighted average interest rate
during the period 5.68% 5.65% 5.98%
Weighted average interest rate
at end of period 5.94% 5.09% 4.47%
Other Borrowings (1):
Average balance outstanding $ 25,231 $ 7,667 $ 13,293
Maximum amount outstanding at any
month-end during the period 30,120 10,725 16,162
Balance outstanding at end of period 26,766 5,077 10,376
Weighted average interest rate
during the period 8.15% 6.38% 5.49%
Weighted average interest rate
at end of period 10.29% 9.63% 7.03%
Total Borrowings:
Average balance outstanding $389,091 $288,349 $203,443
Maximum amount outstanding at any
month-end during the period 466,794 348,631 270,583
Balance outstanding at end of period 466,794 326,433 270,583
Weighted average interest rate
during the period 5.86% 5.84% 6.50%
Weighted average interest rate
at end of period 6.15% 5.11% 4.83%
(1) Includes the CMO, ESOP loan and Holding Company Obligated
Mandatorily Redeemable Capital Securities.
33
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 totaling $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. The properties were
subsequently sold during 1997.
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. 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 fourth and final tranche was paid out
during the fourth quarter of 1997. Therefore, CFS Funding was
dissolved since it served its limited purpose as a finance
subsidiary of the Bank. See "Borrowings."
CFS INVESTMENTS, INC. ("CFSI") CFSI 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. CFSI participates with FISERV Investor Services,
Inc., which is registered as a broker-dealer with the SEC, NASD,
and state securities regulatory authorities. All employees of
CFSI engaged in securities brokerage activities are dual
employees of FISERV. Products offered through FISERV include
debt and equity securities, mutual funds, unit investment trusts
and variable annuities. Fixed annuities, life and health
insurance, and long term nursing care products are offered
through CFSI; a licensed general agent with the New York State
Department of Insurance.
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 8 of Notes to Consolidated Financial
Statements in the Registrant's 1997 Annual Report to Stockholders
on page 38 which is incorporated herein by reference.
34
COLUMBIA PREFERRED CAPITAL CORPORATION. On June 9, 1997, the
Bank established a real estate investment trust ("REIT")
subsidiary, Columbia Preferred Capital Corporation ("CPCC"). At
December 31, 1997, the REIT held $427.4 million of the Bank's
residential loan portfolio. The establishment of the REIT will
enable the Bank to achieve certain business goals including
providing the Bank with a contingency funding mechanism without
disrupting its investment policies and enhancing the Bank's
ability to track and manage the mortgage portfolio transferred to
CPCC since the transferred portion of its mortgage loan portfolio
is segregated into a separate legal entity.
CFS TRAVEL. The Company, through its wholly owned subsidiary,
CFS Travel Services, Inc. ("CFS Travel"), established February
21, 1998, offers customers and their families and friends, and
any other program participant, organized, escorted daylong
excursions and overnight trips. These trips include one-day bus
tours, cruises, air travel, and other vacation tours that are
contracted for and by CFS Travel with a specific tour company or
travel agency. The program has been renamed the "GoodFriends,
GreatTimes Club" and is marketed to the public through the use of
brochures, statement stuffers and branch posters, as well as
through a page on the Bank's Internet site.
PERSONNEL
As of December 31, 1997, the Bank had 514 full-time employees and
72 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. Periodic examinations by the OTS and the
FDIC monitor 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.
35
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, 1997, the Bank's
unimpaired capital and surplus was $140.8 million and its limit
on loans to one borrower was $21.1 million. At December 31,
1997, the Bank's largest aggregate amount of loans to one
borrower had an aggregate balance of $19.2 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, 1997, the Bank
maintained 78.1% 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
36
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. The OTS has proposed
amendments of its capital distribution regulations to reduce
regulatory burdens on savings associations. If adopted as
proposed, certain savings associations will be permitted to pay
capital distributions within the amounts described above for Tier
1 institutions without notice to, or the approval of, the OTS.
However, a savings association subsidiary of a savings and loan
holding company, such as the Association, will continue to have
to file a notice unless the specific capital distribution
requires an application.
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 4%) of its net
withdrawable deposit accounts plus short-term borrowings.
Monetary penalties may be imposed for failure to meet the
liquidity requirements. The Bank's average liquidity ratio for
December 31, 1997 was 8.94% which exceeded the then applicable
requirement. 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, 1997 and 1996, totaled $285,000 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
37
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.
Proposed legislation would subject thrifts to the same
restrictions applicable to the interstate branching of national
banks. See "-Legislative Developments."
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
38
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
39
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. The OTS and
the federal banking regulators have proposed amendments to their
minimum capital regulations to provide that the minimum leverage
capital ratio for a depository institution that has been assigned
the highest composite rating of 1 under the Uniform Financial
Institutions Ratings System will be 3% and that the minimum
leverage capital ratio for any other depository institution will
be 4%, unless a higher leverage capital ratio is warranted by the
particular circumstances or risk profile of the depository
institution. 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 rating under the Uniform Financial
Institutions Rating System 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
40
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 indefinitely deferred the
implementation of the interest rate risk component in the
computation of an institution's risk-based capital requirement.
The OTS continues to monitor the interest rate risk of individual
institutions and retains the right to impose additional capital
on individual institutions. If the Bank had been subject to an
interest rate risk capital component as of December 31, 1997,
there would have been no material effect on the Bank's
risk-weighted capital.
At December 31, 1997, 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 14 to Notes to Consolidated
Financial Statements in the Registrant's 1997 Annual Report to
Stockholders on page 47, 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
41
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.
Assessment rates currently range from 0.0% of deposits for an
institution in the highest category (i.e., well-capitalized and
financially sound, with no more than a few minor weaknesses) to
0.27% of deposits for an institution in the lowest category
(i.e., undercapitalized and substantial supervisory concern).
The FDIC is authorized to raise the assessment rates as necessary
to maintain the required reserve ratio of 1.25%. As a result of
the Deposit Insurance Funds Act of 1996 (the "Funds Act"), both
the BIF and the SAIF currently satisfy the reserve ratio
requirement. If the FDIC determines that assessment rates should
be increased, institutions in all risk categories could be
affected. The FDIC has exercised this authority several times in
42
the past and could raise insurance assessment rates in the
future. If such action is taken by the FDIC, it could have an
adverse effect on the earnings of the Bank.
The Funds Act also amended the FDIA to expand the assessment base
for the payments on the Financing Corporation ("FICO")
obligations. Beginning January 1, 1997, the assessment base
included the deposits of both BIF- and SAIF-insured institutions.
Under December 31, 1999, or any earlier date on which the last
savings association ceases to exist, the rate of assessment for
BIF-assessable deposits shall be one-fifth of the rate imposed on
SAIF-assessable deposits. Under proposed legislation, the BIF
and the SAIF will be merged on January 1, 2000, and the savings
association charter will be continued. See "-Legislative
Developments." The annual rate of assessments for the payments
on the FICo obligations for the semi-annual period beginning on
January 1, 1997 was 0.0130% for BIF-assessable deposits and
0.0648% for SAIF-assessable deposits. For the semi-annual period
beginning on July 1, 1997, the rates of assessment for the FICO
obligations are 0.0126% for BIF-assessable deposits and 0.0630%
for SAIF-assessable deposits. Accordingly, as a result of the
Funds Act, the Bank has seen a decrease in the deposit
assessments paid to the FDIC.
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, 1997 of $12.9
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,
1997, 1996 and 1995, dividends from the FHLB to the Bank amounted
to $710,000, $571,000 and $496,000, 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.
43
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 $47.8 million or
less (subject to adjustment by the Federal Reserve Board) the
reserve requirement is 3%; and for accounts greater than $47.8
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 $47.8 million. The first $4.7 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
44
approval of the OTS, and to other activities authorized by OTS
regulation.
The HOLA prohibits a savings and loan holding company, directly
or indirectly, or through one or more subsidiaries, from
acquiring more than 5% of the voting stock of another savings
institution or holding company thereof, without prior written
approval of the OTS; 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. The Secretary of the
Treasury recommended to the Congress that the separate charter
for thrifts be eliminated only if other legislation is adopted
that permits bank holding companies to engage in such non-
financial activities. Absent legislation permitting bank holding
companies to engage in such-financial activities, the Secretary
of the Treasury recommended that the thrift charter be retain.
Proposed legislation agreed to in March 1998 by the House
Committee on Banking and Financial Services and the House
Committee on Commerce provides for the retention of the thrift
charter, subject to a requirement that a thrift invest at least
10% of its assets in home mortgages. The interstate branching
powers of thrifts would be changed so as to conform to the
restrictions applicable to the interstate branching of national
banks. The proposed legislation would grandfather unitary
savings and loan holding companies in the activities currently
45
permitted such holding companies and would expand significantly
the financial services that could be offered by the bank holding
companies that qualified as well capitalized and well managed and
had a CRA record of satisfactory or better. The Committees also
agreed that the BIF and the SAIF would be merged on January 1,
2000 and that the OTS would be made a division of the Office of
the Comptroller of the Currency. The outcome of such proposed
legislation 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.
THE YEAR 2000 PROBLEM
The "Year 2000 Problem" centers on the inability of computer
systems to recognize the Year 2000. Many existing computer
programs and systems were originally programmed with six digit
dates that provided only two digits to identify the calendar year
in the date field, without considering the upcoming change in the
century. With the impending millennium, these program and
computers will recognize "00" as the year 1900 rather than the
46
year 2000. Like most financial service providers, the Company
and its operations may be significantly affected by the Year 2000
Problem due to the nature of financial information. Software,
hardware, and equipment both within and outside the Company's
direct control and with whom the Company electronically or
operationally interfaces (e.g. third party vendors providing data
processing, information system management, maintenance of
computer systems, and credit bureau information) are likely to be
affected. Furthermore, if computer systems are not adequately
changed to identify the Year 2000, many computer applications
could fail or create erroneous results. As a result, many
calculations which rely on the date field information, such as
interest, payment or due dates and other operating functions,
will generate results which could be significantly misstated, and
the Company could experience a temporary inability to process
transactions, send invoices or engage in similar normal business
activities. In addition, under certain circumstances, failure to
adequately address the Year 2000 Problem could adversely affect
the viability of the Company's suppliers and creditors and the
creditworthiness of its borrowers. Thus, if not adequately
addressed, the Year 2000 Problem could result in a significant
adverse impact on the Company's products, services and
competitive condition.
Financial institution regulators have recently increased their
focus upon Year 2000 issues, issuing guidance concerning the
responsibilities of senior management and directors. The Federal
Financial Institutions Examination Council ("FFIEC") has issued
several interagency statements on Year 2000 Project Management
Awareness. These statements require financial institutions to,
among other things, examine the Year 2000 implications of
reliance on vendors, data exchange and potential impact on
customers, suppliers and borrowers. These statements also
require each federal regulated financial institution to survey
its exposure, measure its risk and prepare a plan in order to
solve the Year 2000 Problem. In addition, the FDIC and the other
federal banking regulators have issued safety and soundness
guidelines to be followed by insured depository institutions,
such as the Bank, to assure resolution of any Year 2000 problems.
The federal banking agencies have asserted that Year 2000 testing
and certification is a key safety and soundness issue in
conjunction with regulatory exams, and thus an institution's
failure to address appropriately the Year 2000 problem could
result in supervisory action, including such enforcement actions
as the reduction of the institution's supervisory ratings, the
denial of applications for approval of a merger or acquisition,
or the imposition of civil money penalties.
In order to address the Year 2000 issue and to minimize its
potential adverse impact, management has begun a process to
identify areas that will be affected by the Year 2000 Problem,
47
determine if outside consultants are needed to coordinate the
project and create a Year 2000 committee, assess its potential
impact on the operations of the Bank, develop a scheduled plan
for compliance on each item, monitor the progress of third party
software vendors in addressing the matter, test changes provided
by these vendors, and develop contingency plans for any critical
systems which are not effectively reprogrammed. The Company's
plan is divided into the five phases: (1) awareness; (2)
assessment; (3) renovation; (4) validation/testing; and (5)
implementation. The Bank has an internal Year 2000 committee
which meets monthly to monitor and discuss the plan.
The Company has substantially completed the first two phases of
the plan and is currently working internally and with external
vendors on the final three phases. Because the Company
outsources its data processing and item processing operations, a
significant component of the Year 2000 plan is working with
external vendors to test and certify their systems as Year 2000
compliant. Vendors have been asked to submit their Year 2000
plans, including target and compliance dates, which will be
monitored by the committee. Management believes the plan can be
realized by tracking those systems affected and the date on which
the Year 2000 Problem is expected to have an impact. Each
committee member is responsible for coordinating effects and
compliance within their respective areas. The committee now has
begun the task of developing testing programs. Each affected
systems area will be tested, including any associated computer
programs, to insure that the Year 2000 Problem will not have a
significant impact on the Bank's operations. The Company expects
to complete its timetable for carrying out its plans to address
Year 2000 issues by December 31, 1998.
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
48
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, therefore,
the Bank cannot make additions to the tax bad debt reserves but
is permitted to deduct bad debts as they occur. Additionally,
under the 1996 Act, the Bank is 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
was suspended for 1996 and 1997 since the Bank satisfies certain
residential loan requirement. Thus, the Bank will begin this
recapture in its current taxable year. 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; or (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.
Corporate Alternative Minimum Tax. The Internal Revenue
49
Code (the "Code") imposes a tax on alternative minimum taxable
income ("AMTI") at a rate of 20%. 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.
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.
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
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 City and 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.
50
ITEM 2. PROPERTIES
The Bank conducts its business through eight full-service banking
and thirty-nine supermarket banking facilities (seven of which
were opened during the first quarter of 1998) located in Queens,
Brooklyn, Manhattan, Staten Island, Nassau, Suffolk, Rockland
andWestchester counties, Northern New Jersey and Connecticut.
The Bank also maintains an office for data processing and other
property for possible future expansion. In December 1997, the
Bank purchased an office building on Long Island in Westbury, New
York for $7.3 million and entered into a lease agreement and
Payment-in-Lieu-of-Tax ("PILOT") agreement with the Town of
Hempstead Industrial Development Agency ("IDA"). The building
will be used for the Company's and the Bank's headquarters, and
occupancy is expected to occur in mid-1998. The total net book
value of the Company's and the Bank's premises and equipment was
$27.1 million at December 31, 1997, which included thirty-two
supermarket branches. 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.
51
Net Book Value
of Property or
Leasehold
Date Improvements
Leased or Leased or Date of Lease at December 31,
Location Owned Acquired Expiration(1) 1997
-------- --------- --------- ------------- ---------------
(in thousands)
Main Office Complex:
93-22/93-30 & 94-09/94-13 Jamaica Avenue Owned 1957 - $2,387
& 87-14/86-35 94th St. Woodhaven, NY 11421
Traditional Branches:
80-35 Jamaica Avenue, Woodhaven, NY 11421 Owned 1979 - 276
82-10 153rd Avenue, Howard Beach, NY 11414 Owned 1971 - 579
98-16 101st Avenue, Ozone Park, NY 11416 Owned 1976 - 463
244-19 Braddock Avenue, Bellerose, NY 11426(2) Leased 1973 2003 123
106-17 Continental Ave, Forest Hills, NY 11375 Leased 1959 1999 31
343 Merrick Road, Amityville, NY 11701 Leased 1977 2001 440
104-08 Rockaway Beach Blvd., Rockaway
Beach, NY 11693 Leased 1996 1998 38
Administrative Office:
242 & 250 Old Country Road, Mineola, NY 11501 Leased 1996 1998 3
Supermarket Branches:
700-60 Patchogue Rd., Medford, NY 11763 Leased 1996 2001 193
1121 Jerusalem Avenue, Uniondale, NY 11553 Leased 1996 2001 217
533 Montauk Highway, Bayshore, NY 11708 Leased 1996 2001 252
625 Atlantic Avenue, Brooklyn, NY 11217 Leased 1996 2001 324
575 Montauk Highway, W. Babylon, NY 11704 Leased 1997 2002 226
2335 New Hyde Park Rd, New Hyde Park, NY 11040 Leased 1997 2002 245
1251 Deer Park Ave., N. Babylon, NY 11703 Leased 1997 2002 239
101 Wicks Road, Brentwood, New York 11717 Leased 1997 2002 244
3635 Hempstead Turnpike, Levittown, NY 11756 Leased 1997 2002 254
6070 Jericho Turnpike, Commack, NY 11726 Leased 1997 2002 250
2150 Middle Country Rd., Centereach, NY 11720 Leased 1997 2002 249
1897 Fron Street, East Meadow, NY 11554 Leased 1997 2002 253
8101 Jericho Turnpike, Woodbury, NY 11796 Leased 1997 2002 247
92-10 Atlantic Avenue, Ozone Park, NY 11416 Leased 1997 2002 256
395 Route 112, Patchogue, NY 11772 Leased 1997 2002 243
1764 Grand Avenue, Baldwin, NY 11510 Leased 1997 2002 228
5145 Nesconset Hwy., Port Jefferson, NY 11776 Leased 1997 2002 255
31-06 Farrington Street, Whitestone, NY 11357 Leased 1997 2002 248
5801 Sunrise Highway, Sayville, NY 11741 Leased 1997 2002 246
531 Montauk Highway, W. Babylon, NY 11776 Leased 1997 2002 249
155 Islip Avenue, Islip, NY 11751 Leased 1997 2002 255
800 Montauk Highway, Shirley, NY 11967 Leased 1997 2002 243
253-01 Rockaway Turnpike, Woodmere, NY 11422 Leased 1997 2002 246
227 Cherry Street, New York, NY 10002 Leased 1997 2002 228
45 Route 59 Monsey, NY 10952 Leased 1997 2002 225
Route 59, East Nanuet, NY 10954 Leased 1997 2002 228
1905 Sunrise Highway, Bayshore, NY 11708 Leased 1997 2002 272
941 Carmens Road, Massapequa, NY 11758 Leased 1997 2002 84
500 South River Street, Hackensack, NJ 07470 Leased 1997 2002 203
1 Pathmark Plaza, Mount Vernon, NY Leased 1997 2002 232
2875 Richmond Avenue, Staten Island, NY 10306 Leased 1997 2002 239
111-10 Flatlands Avenue, Brooklyn, NY 11230 Leased 1997 2002 232
Corporate Headquarters:
615 Merrick Avenue, Westbury, NY Owned 1997 - 7,300
(1) Rent expense for the year ended December 31, 1997 was $1.7
million.
(2) Includes land that is adjacent to the branch office that was
acquired by the Bank in 1973.
ITEM 3. LEGAL PROCEEDINGS
In February, 1983, a burglary of the contents of safe deposit
boxes occurred at a branch office of the Bank. At December 31,
52
1997, 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 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 1997 Annual Report to
Stockholders on page 54, and is incorporated herein by reference.
Information relating to the payment of dividends by the
Registrant appears in "Note 14 to Notes to Consolidated Financial
Statements" in the Registrant's Annual Report on page 47 and is
incorporated herein by reference.
The Company initiated a quarterly cash dividend of $0.05 per
share in the third quarter of 1995 paid on October 20, 1995. The
following schedule summarizes the cash dividends paid for 1995,
1996 and 1997:
Dividend Payment Dividend Paid
Date Per Share (1) Record Date
---------------- ------------- -----------
October 20, 1995 .05 October 2, 1995
January 19, 1996 .05 January 2, 1996
April 29, 1996 .05 April 8, 1996
July 12, 1996 .075 June 27, 1996
October 28, 1996 .075 October 7, 1996
January 17, 1997 .075 December 30, 1996
April 24, 1997 .075 April 4, 1997
July 18, 1997 .075 June 30, 1997
October 17, 1997 .075 September 29, 1997
(1) As adjusted to reflect the 2-for-1 stock split effective
November 1997 ("stock split").
53
The following schedule summarizes the dividend payout ratio
(dividends declared per share divided by net income per share)
Dividends Net income
Year Paid per share per share Payout ratio
------ -------------- ---------- ------------
1995 $0.05 $0.99 0.051%
1996 0.25 1.13 0.221
1997 0.30 1.32 0.227
ITEM 6. SELECTED FINANCIAL DATA
The above-captioned information appears in the Registrant's 1997
Annual Report to Stockholders on pages 10 and 11 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 1997 Annual Report to
Stockholders on pages 12 through 24 and is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The above-captioned information appears under "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Discussion of Market Risk" and "- Interest Rate
Sensitivity Analysis" in the Registrant's 1997 Annual Report to
Stockholders on pages 13 through 15 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 1997 Annual Report to
Stockholders on pages 25 through 52 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 22, 1998, on pages 5 through 8.
54
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 22, 1998, on pages 9 through 22 (excluding the Report of
the Compensation Committee on pages 11 through 14 and the Stock
Performance Graph on page 15).
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 22, 1998, on pages 4
and 6 through 8.
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 22, 1998, on pages 22 and 23.
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
1997 Annual Report to Stockholders.
Pages
Consolidated Statements of Financial Condition
as of December 31, 1997 and 1996 ................... 25
Consolidated Statements of Income for the Years
Ended December 31, 1997, 1996 and 1995 ............. 26
Consolidated Statements of Changes In Stockholders'
Equity for the Three Years Ended December 31, 1997 . 27
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995 ............. 28
Notes to Consolidated Financial Statements ......... 29 - 51
Independent Auditors' Report ....................... 52
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.
55
(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
Chase Manhattan Bank (formerly Chemical Bank)**
10.1(A) Employment Agreement between Haven Bancorp, Inc. and
Philip S. Messina****
10.1(B) Amendatory Agreement to the Employment Agreement
between Haven Bancorp, Inc. and Philip S. Messina
(filed herewith)
10.1(C) Employment Agreement between CFS Bank and Philip S.
Messina (filed herewith)
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 Amendment to Change in Control Agreement
between CFS Bank and certain executive officers
(filed herewith)
10.2(C) Form of Change in Control Agreement between Haven
Bancorp, Inc. and certain executive officers, as
amended****
10.2(D) Form of Amendment to Change in Control Agreement
between Haven Bancorp, Inc. and certain executive
officers (filed herewith)
10.2(E) Employment Agreement between Columbia Federal
Savings Bank and Andrew L. Kaplan (filed herewith)
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)
56
13.0 1997 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 1998 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
March 26, 1998 relating to the Bank's agreement to purchase
Intercounty Mortgage, Inc. No financial statements were filed as
a part of such report.
57
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 30, 1998 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 30, 1998
- - --------------------------
George S. Worgul
/s/ Philip S. Messina President and Chief March 30, 1998
- - -------------------------- Executive Officer
Philip S. Messina
/s/ Robert L. Koop Director March 30, 1998
- - --------------------------
Robert L. Koop
/s/ Robert M. Sprotte Director March 30, 1998
- - --------------------------
Robert M. Sprotte
/s/ Joseph A. Ruggiere Director March 30, 1998
- - --------------------------
Joseph A. Ruggiere
58
/s/ Michael J. Fitzpatrick Director March 30, 1998
- - --------------------------
Michael J. Fitzpatrick
/s/ William J. Jennings II Director March 30, 1998
- - --------------------------
William J. Jennings II
/s/ Michael J. Levine Director March 30, 1998
- - --------------------------
Michael J. Levine
/s/Msgr. Thomas J. Hartman Director March 30, 1998
- - --------------------------
Msgr. Thomas J. Hartman
/s/ Catherine Califano Senior Vice President and March 30, 1998
- - -------------------------- Chief Financial Officer
Catherine Califano
59