SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20459
FORM 10-K
Annual report pursuant to Section 13 or 15(d)of
the Securities Exchange Act of 1934
For the fiscal year ended September 30, 1996
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Commission file number 0 - 16825
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BFS BANKORP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13 - 3475050
------------------------------- ----------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
110 William Street NY, NY 10038
- ---------------------------- -----------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 212-227-4040
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
--------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained 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 this 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, computed by reference to the last reported sales price of such stock
on the NASDAQ National Market system on November 30, 1996 was approximately
$30,259,000.
The number of shares outstanding of the registrant's Common Stock, the
registrant's only class of outstanding capital stock, as of November 30, 1996,
was 1,647,237 (net of treasury stock).
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement for the 1996 Annual Meeting of Stockholders (Part III).
BFS BANKORP, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Item No. Description Page
- -------- ----------- ----
Part I
1 Business 1
2 Properties 24
3 Legal Proceedings 24
4 Submission of Matters to a Vote of Security Holders 24
Part II
5 Market for Registrant's Common Equity
and Related Stockholder Matters 25
6 Selected Financial Data 26
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 27
8 Financial Statements and Supplementary Data 38
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 61
Part III
10 Directors and Executive Officers of the Registrant 61
11 Executive Compensation 61
12 Security Ownership of Certain
Beneficial Owners and Management 61
13 Certain Relationships and Related Transactions 61
Part IV
14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 62
PART I
Item 1 - BUSINESS
General
- -------
BFS BANKORP, Inc. (the "Company"), a Delaware business corporation, is a
holding company whose principal subsidiary is Bankers Federal Savings FSB, (the
"Bank"), a federally-chartered savings bank, headquartered in New York City, New
York. The Bank's deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") through the Savings Association Insurance Fund ("SAIF").
The Company was organized at the direction of the Bank in connection with the
Bank's conversion from mutual to stock form of organization. The conversion was
completed on May 11, 1988. The primary activity of the Company at this time is
its ownership of all the outstanding capital stock of the Bank. At September
30, 1996, the Company had consolidated total assets of $643.2 million and
stockholders' equity of $50.2 million.
On December 3, 1996, BFS Bankorp, Inc. announced it had entered into a
definitive merger agreement with Dime Bancorp Inc., the holding company for The
Dime Savings Bank of New York, FSB. Under the terms of the agreement, approved
by the boards of director of both institutions, Dime Bancorp Inc. agreed to pay
$52.00 cash for each share of stock of BFS Bankorp, Inc. subject to upward
adjustment under certain circumstances. The transaction is subject to the
approval of the stockholders of BFS Bankorp, Inc. as well as federal banking
regulators.
The Bank is a capital stock savings bank organized in 1890 and
headquartered in New York City, New York. The Bank conducts its business through
five full-service banking offices in Manhattan, Queens and Brooklyn, with its
executive office located in Manhattan. At September 30, 1996, the Bank had total
assets of $641.9 million, deposits of $412.0 million and stockholders' equity of
$47.3 million.
The Bank is principally engaged in the business of attracting retail
deposits from the general public and investing those funds in multi-family
residential mortgage loans. The Bank's operating strategy is designed to enhance
the profitability of its operations by emphasizing rate sensitive mortgage loans
secured by multi-family residences and to better match the interest rate
sensitivities of its assets and liabilities, thereby reducing the Bank's
exposure to interest rate risk.
The Bank's results of operations depend primarily upon the level of its net
interest income, which is the difference between the interest income earned on
its interest-earning assets and the interest expense incurred on its interest-
bearing liabilities. The Bank's interest-earning assets consist primarily of
first mortgage loans, mortgage-backed securities, investment securities, and
federal funds. The Bank's interest-bearing liabilities consist primarily of
deposits, Federal Home Loan Bank advances, and collateralized mortgage
obligations. As part of its interest rate risk management policy, the Bank
emphasizes the origination of adjustable rate and balloon multi-family mortgage
loans and attempts to match any lending with savings and borrowings of a similar
maturity or duration.
The Bank generates non-interest income primarily through fees charged for
services rendered. The Bank has instituted a program to maximize fee income on
current services and to offer new services which will generate additional fees.
Fee income has been enhanced over the past few fiscal years by increasing usage
of automated teller machines at the Bank's branches, and introducing credit
cards and telephone banking as additional fee-based services. In addition, the
Bank's wholly-owned subsidiary, Bankers Federal Service Corporation, makes
available for sale mutual funds in addition to tax deferred annuities.
Non-interest expense consists primarily of those expenses associated with
operating the Bank, such as compensation and benefits, office occupancy, data
processing and SAIF deposit insurance premiums.
1
The consolidated stockholders' equity to assets ratio of the Company at
September 30, 1996 was 7.81%. The Bank's core or leverage capital to assets
ratio was 7.38% at September 30, 1996.
Ratios. The following table sets forth certain ratios regarding the
------
profitability of the Company for the years indicated:
Years ended September 30, 1996 1995 1994 1993 1992
- --------------------------- ------ ------ ------ ------ ------
Return on assets (net
income/loss divided by
average total assets) 1.81% 1.53% 1.23% 1.08% (0.69)%
Return on equity (net
income/loss divided by
average equity) 23.10% 22.24% 19.67% 22.92% (16.04)%
Equity-to-assets ratio
(average equity
divided by average
total assets) 7.81% 6.88% 6.27% 4.69% 4.30%
2
Lending Activities
- ------------------
The Bank concentrates its lending activities in residential 1-4 and multi-
family first mortgage loans, in particular ARM and balloon loans. The following
table sets forth the composition of the Bank's total loan portfolio by loan type
at the dates indicated:
At September 30, 1996 1995 1994 1993 1992
- ---------------- ---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
By type of loan:
Real Estate:
1-4 family $ 10,704 1.81% $ 19,391 3.87% $ 35,885 11.12% $ 47,712 18.34% $ 86,641 25.71%
Multi-family 561,495 95.09% 465,545 93.02% 282,803 87.62% 209,313 80.46% 246,573 73.18%
Commercial 17,393 2.95% 14,375 2.87% 2,755 0.85% 1,293 0.50% 1,421 0.42%
-------- -------- -------- ------ -------- ------ -------- ------ -------- ------
Total first mortgage loans 589,592 99.85% 499,311 99.76% 321,443 99.59% 258,318 99.30% 334,635 99.31%
Other Loans:
Home equity 585 0.10% 744 0.15% 915 0.28% 1,413 0.54% 1,494 0.45%
Student 177 0.03% 234 0.05% 223 0.07% 161 0.06% 304 0.09%
Loans on deposit accounts 126 0.02% 202 0.04% 165 0.05% 229 0.09% 481 0.14%
Consumer --- --- 4 0.00% 19 0.01% 29 0.01% 45 0.01%
-------- -------- -------- ------ -------- ------ -------- ------ -------- ------
Total other loans 888 0.15% 1,184 0.24% 1,322 0.41% 1,832 0.70% 2,324 0.69%
-------- -------- -------- ------ -------- ------ -------- ------ -------- ------
Total Loans 590,480 100.00% 500,495 100.00% 322,765 100.00% 260,150 100.00% 336,959 100.00%
======== ====== ====== ====== ======
Allowance for loan losses (6,032) (5,359) (4,684) (4,651) (4,364)
Deferred fees (3,950) (2,174) (1,176) (558) (818)
Unearned income (1,671) (2,075) --- --- ---
-------- -------- -------- -------- --------
Loans, net $578,827 $490,887 $316,905 $254,941 $331,777
======== ======== ======== ======== ========
3
The following table sets forth first mortgage loan originations, purchases,
securitizations and sales activity of the Bank during the years presented.
Years ended September 30, 1996 1995 1994
- ------------------------- --------- --------- ---------
(Dollars In Thousands)
Beginning principal balance of real
estate loans $495,062 $320,267 $257,760
Real estate loans de-securitized:
Multi-family --- 102,711 ---
-------- -------- --------
Real estate loans originated:
Multi-family 179,888 112,799 83,201
One-to-four family 60 719 6,390
Commercial 4,775 4,250 ---
-------- -------- --------
184,723 117,768 89,591
------- -------- --------
Real estate loans purchased:
Multi-family 2,166 3,248 ---
One-to-four family --- 2,662 ---
-------- -------- --------
2,166 5,910 ---
-------- -------- --------
Total real estate loans de-securitized,
originated and purchased 186,889 226,389 89,591
-------- -------- --------
Real estate loans sold:
One-to-four family 7,106 13,997 6,865
Multi-family 593 668 ---
-------- -------- --------
Total real estate loans sold 7,699 14,665 6,865
-------- -------- --------
Satisfactions, principal 84,660 32,680 19,043
reductions and foreclosures -------- -------- --------
Total real estate loans sold, satisfactions,
principal reductions and foreclosures 92,359 47,345 25,908
-------- -------- --------
Ending principal balance of real estate loans 589,592 499,311 321,443
Unearned income and deferred fees (5,621) (4,249) (1,176)
-------- -------- --------
Net principal balance of real estate loans $583,971 $495,062 $320,267
======== ======== ========
The following table sets forth mortgage loans at September 30, 1996 by weighted
average annual yield and as a percent of the Bank's total mortgage portfolio.
Weighted
Average
Annual
Yield Range Amount Percent Yield
- ------------------------ -------- ------- -----
(Dollars in Thousands)
11.00% and higher $ 16,395 2.78% 11.40%
10.00% to 10.99% 122,527 20.78% 10.43%
9.00% to 9.99% 139,433 23.65% 9.21%
8.00% to 8.99% 289,786 49.15% 8.35%
7.99% and below 21,451 3.64% 7.71%
-------- ------- -----
Total $589,592 100.00% 9.05%
======== ======= =====
Loan Maturity and Repricing
- ---------------------------
The following table sets forth the estimated maturity/repricing of the Bank's
loan portfolio, assuming amortization and prepayments. (A discussion of the
assumptions used may be found in "Item 7 - Management's Discussion and Analysis
of Financial Condition - Asset/Liability Management".) Loans which have
adjustable rates or prime based rates are shown as being due in the period
during which the interest rates are next subject to change.
4
1-4 Multi- Other
At September 30, 1996 Family Family Commercial Loans Total
- --------------------- ------ ------ ---------- ----- -----
(Dollars In thousands)
Amount due:
Within 1 year $ 7,075 $215,474 $ --- $ 888 $223,437
After 1 year (1):
1 to 3 years 1,582 168,241 --- --- 169,823
3 to 5 years 274 157,974 17,393 --- 175,641
5 to 10 years 762 15,748 --- --- 16,510
Over 10 years 1,011 4,058 --- --- 5,069
------- -------- ------- ----- --------
Total after 1 year 3,629 346,021 17,393 --- 367,043
------- -------- ------- ----- --------
Total amounts due $10,704 $561,495 $17,393 $ 888 $590,480
======= ======== ======= ===== --------
Less:
Deferred loan fees and unearned income (5,621)
Allowance for loan losses (6,032)
--------
Total loans, net $578,827
========
(1) Of the $367,043 in loans due after one year, $320,051 are adjustable rate
and balloon loans and $46,992 are fixed rate loans.
Residential Mortgage Lending
- ----------------------------
In fiscal 1993, the Bank made the determination that it would no longer
participate in the 1-4 family mortgage market. This determination was made
because sufficient volume could not be achieved in order to generate an
acceptable rate of return for this particular product. As a result of this
decision, the 1-4 family origination and secondary market areas were disbanded
during fiscal 1994, after previous commitments of approximately $6 million of
1-4 family originations were fulfilled
Multi-family Lending
- --------------------
The Bank has emphasized the origination of ARM and balloon loans secured by
multi-family residential real estate, such as apartment buildings, most of which
are located in the New York Metropolitan Area. Multi-family loans are made in
amounts up to 15% of the Bank's unimpaired capital.
The Bank's multi-family residential mortgage loans generally do not exceed 75%
of the loan-to-value ratio at the time granted and generally have a minimum debt
coverage requirement of 1.25 times. Properties securing the loan are appraised
by an independent appraiser. Title insurance is required on all loans and a
credit report is obtained as to all borrowers and the major principals of any
corporate or partnership entity. All multi-family residential mortgage loans
require the approval of the Loan Committee. The Loan Committee consists of two
Outside Directors, the Chief Executive Officer, the Chief Financial Officer, the
Chief Lending Officer and the Chief Underwriter.
The majority of multi-family loan originations are adjustable rate balloon
loans. These loans adjust after four or five years to a rate based on the
Federal Home Loan Bank ("FHLB") four or five year index and continue to adjust
at the same frequency over the term of the loan. The loans generally amortize
based upon a twenty to thirty year term, with the remaining principal balance
due at the balloon maturity date. Balloon maturity dates are generally set at
ten or twelve years. An origination fee of 1% is usually charged. There is no
cap on how high the interest rate on these loans may go and the floor is the
initial rate when the loan is originated.
Other Lending
- -------------
The Bank offers Government Guaranteed Educational Loans and loans on savings
accounts.
5
Loan Origination and Other Fees
- -------------------------------
The Bank also receives income in the form of loan origination and other fees.
The Bank had approximately $3,950,000 in deferred origination fees at September
30, 1996.
Loan origination fees and direct loan origination costs are deferred and
subsequently recognized in interest income as a yield adjustment using the level
yield method over the contractual loan term, adjusted for actual prepayments in
certain circumstances.
Loan Delinquencies
- ------------------
When a borrower fails to make a payment on a loan, the Bank takes immediate
steps to have the borrower cure the delinquency and restore the loan to current
status. If the loan continues to be delinquent, the Bank will proceed as
quickly as possible with the foreclosure process until title to the property is
taken. In general all mortgage and other loans which are delinquent 90 days or
more are placed on non-accrual status.
The following table sets forth information with respect to loans delinquent 90
days or more at the dates indicated.
At September 30, 1996 1995 1994 1993 1992
- ---------------- ---- ---- ---- ---- ----
(Dollars in Thousands)
Multi-Family $5,216 $11,101 $16,785 $18,329 $18,144
1-4 Family 1,192 1,732 2,152 3,781 5,848
Other Loans --- --- 65 444 262
------ ------- ------- ------- -------
Total loans delinquent 90
days or more $6,408 $12,833 $19,002 $22,554 $24,254
====== ======= ======= ======= =======
Percent of loans 90 days or
more delinquent to total loans 1.10% 2.59% 5.89% 8.69% 7.22%
====== ======= ======= ======= =======
Percent of loans 90 days or
more delinquent to total
assets 1.00% 2.31% 3.94% 4.83% 5.03%
====== ======= ======= ======= =======
The effect of non-accrual loans on interest income for the years ended
September 30, 1996, 1995 and 1994 was a reduction of approximately $664,000,
$1,746,000 and $1,473,000, respectively.
The Bank actively pursues prompt collection on all delinquencies and, since
fiscal 1991, has had in place a department to deal specifically with delinquent
and non-performing loans.
Allowance for Loan Losses
- -------------------------
The following sets forth the activity in the Bank's allowance for loan losses
for the years indicated:
Years ended September 30, 1996 1995 1994 1993 1992
- ------------------------- ---- ---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of the year $ 5,359 $4,684 $ 4,651 $4,364 $ 3,701
Provision charged to operations --- 1,041 1,071 1,206 2,167
Recoveries/(charge-offs), net 673 (366) (1,038) (919) (1,504)
------- ------ ------- ------ -------
Balance at end of the year $ 6,032 $5,359 $ 4,684 $4,651 $ 4,364
======= ====== ======= ====== =======
Allowance for loan losses as a
percentage of total loans
outstanding 1.03% 1.08% 1.45% 1.79% 1.30%
======= ====== ======= ====== =======
Ratio of (recoveries)/charge-offs
to average loans (0.13)% 0.09% 0.36% 0.33% 0.42%
======= ====== ======= ====== =======
6
The following table sets forth the allocation of the Bank's allowance for loan
loss by property type for the years indicated:
Years ended September 30, 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
1-4 family $ 283 $ 419 $ 544 $ 375 $ 494
Multi-Family 5,749 4,940 4,140 4,276 3,870
------ ------ ------ ------ ------
Total Allowance for loan losses $6,032 $5,359 $4,684 $4,651 $4,364
====== ====== ====== ====== ======
1-4 family loans as
a percent of total loans 1.81% 3.88% 11.12% 18.34% 25.68%
====== ====== ====== ====== ======
Multi-family loans as
a percent of total loans 95.09% 93.50% 87.62% 80.46% 74.32%
====== ====== ====== ====== ======
The following table sets forth (recovery)/charge-off activity against the Bank's
allowance for loan losses by type for the years indicated:
Years ended September 30, 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
1-4 family $ 23 $ 12 $ 321 $ 225 $ 178
Multi-family (696) 354 717 694 1,326
----- ----- ------ ----- ------
Total (recoveries)/charge-offs $(673) $ 366 $1,038 $ 919 $1,504
===== ===== ====== ===== ======
Real Estate Acquired through Foreclosure
- ----------------------------------------
Properties acquired through foreclosure are initially recorded at the lower of
cost or fair value less selling costs at the date of acquisition. The carrying
value of the property is subsequently adjusted to the extent it exceeds fair
value. A reserve is provided for these subsequent adjustments to fair value
through a provision for losses on real estate owned.
The amounts the Bank could ultimately recover from real estate acquired
through foreclosure could differ from the amounts used in arriving at the net
carrying value of the asset because of future market factors beyond the Bank's
control or changes in the Bank's strategy for recovering its investment.
The following table sets forth the composition of real estate acquired through
foreclosure:
At September 30, 1996 1995 1994
- ---------------- ---- ---- ----
(Dollars in thousands)
Real estate acquired through foreclosure
1-4 family $ 266 $ 265 $ 848
Multi-family --- 104 ---
----- ----- -----
Total real estate acquired through foreclosure $ 266 $ 369 $ 848
===== ===== =====
The Bank made provisions for real estate losses of $-0-, $211,000, and
$994,000 and had write-downs/charge-offs of $-0-, $418,000, and $1,454,000 for
the fiscal years ended September 30, 1996, 1995 and 1994, respectively.
7
Securities Activities
- ---------------------
The following table sets forth, as of September 30, 1996, an analysis of the
maturity distribution, carrying value, market value and average yield of the
securities held by the Bank, all of which mature in less than five years.
Less than One Year One to Three Years Three to Five Years Total
------------------- ----------------------- ------------------- ----------------------------
Average Estimated
Carrying Average Carrying Average Carrying Average Life in Carrying Market Average
Value Yield Value Yield Value Yield Years Value Value Yield
--------- -------- ----------- ---------- -------- -------- ------- -------- ------- ---------
Securities held to
maturity:
Notes:
U.S. Government
and Agency Obligations $2,000 6.88% $1,998 6.05% $10,500 6.55% 3.41 $14,498 $14,394 6.52%
Other 149 5.35% --- --- --- --- 0.04 149 149 5.35%
------ ------ ------ ---------- -------- -------- ---- ------- ------- -----
Total bonds and notes $2,149 6.77% $1,998 6.05% $10,500 6.55% 3.38 $14,647 $14,543 6.51%
------ ------ ------ ---------- -------- -------- ---- ------- ------- -----
FHLB of New York Stock 7,313 7,313 6.50%
------- ------- -----
Total securities held to
maturity, at amortized cost $2,149 6.77% $1,998 6.05% $10,500 6.55% 3.38 $21,960 $21,856 6.51%
------ ------ ------ ---------- -------- -------- ---- ------- ------- -----
Securities Available for
Sale:
Marketable equity securities, net 1,364 1,364 1.90%
------- ------- -----
Total investment portfolio $2,149 6.77% $1,998 6.05% $10,500 6.55% 3.38 $23,324 $23,220 6.24%
====== ====== ====== ========== ======== ======= ==== ======= ======= =====
Securities held to maturity are recorded at cost (as adjusted by any discounts
and premiums) because the Bank has the ability and intent to hold such
securities until maturity. Securities available for sale are recorded at fair
value, with unrealized appreciation and depreciation, net of tax, reported as a
separate component of shareholders' equity. FHLB stock is carried at cost and
not considered a marketable security because the sale of said stock is
restricted as part of the membership requirements of the FHLB.
8
The Bank is required to maintain regulatory liquidity at or above minimum levels
which vary from time to time. The current minimum regulatory requirement is 5%.
The Bank increases or decreases its level of liquid investments as they mature
depending on the availability of funds and comparative yields on liquid
investments in relation to the return on loans. The Bank's liquid investments
primarily include United States Government securities, overnight federal funds
and triple A corporate obligations. The Bank monitors the credit worthiness and
financial condition of the institutions with which the Bank places federal funds
and other investments. Historically, the Bank has maintained its liquid assets
at levels significantly above the minimum requirements of normal banking
activities. The Bank's daily average liquidity ratio was 6.73% for fiscal 1996.
The following table sets forth the composition of the investment portfolio at
the dates indicated:
At September 30, 1996 1995 1994
- ---------------- ---- ---- ----
(Dollars In Thousands)
Short-term investments:
Federal funds sold $ 5,000 $14,000 $ 5,000
Securities held to maturity:
U.S. Government and agency obligations 14,498 10,993 7,998
Other 149 144 150
FHLB of New York Stock 7,313 4,998 4,173
------- ------- -------
Total securities held to maturity 21,960 16,135 12,321
------- ------- -------
Securities available for sale:
Marketable equity securities 1,364 --- ---
------- ------- -------
Total securities portfolio $28,324 $30,135 $17,321
======= ======= =======
Subsidiaries of the Bank
- ------------------------
The Bank has six wholly-owned subsidiaries. One subsidiary, John Street
Service Corporation, is an inactive company.
BFED I Corp. is a limited-purpose finance subsidiary authorized to issue and
sell collateralized mortgage obligations (CMOs), which are debt securities
issued with individual classes of bonds containing stated maturities ranging
from five to thirty years. At September 30, 1996, approximately $12,594,000
(net of unamortized discount of approximately $1,010,000) of CMOs were
outstanding with a coupon interest rate of 8.25%. The CMOs are collateralized
by mortgage-backed securities with unpaid principal balances of approximately
$14,203,000 (net of unamortized discounts of approximately $21,000) and by
short-term investments of approximately $149,000 at September 30, 1996. Such
collateral consists of GNMA and FHLMC certificates having interest rates ranging
from 5.50% to 9.00%. The repayments of bond principal and interest are directly
related to the amounts of principal and interest received on the mortgage-backed
securities collateralizing the CMOs.
Bankers Federal Service Corporation ("BFSC") offers tax-deferred annuities
through various legal reserve life insurance companies. At September 30, 1996,
BFSC had assets of approximately $119,000 and pre-tax losses of approximately
$23,000 for the fiscal year ended September 30, 1996.
Fayette Properties, Inc. ("FPI") is a real estate asset disposal corporation
set up to manage, market and sell real estate acquired through foreclosure. In
addition, FPI, through its subsidiaries, acquires delinquent loans from the Bank
through the assignment of the mortgage and note and manages the properties
through an assignment of rents until the delinquent status is resolved. At
September 30, 1996, FPI had assets of $6,379,000 and pre-tax income of
approximately $495,000.
BFS Credit Corporation and BFS Finance Corporation were established in
November, 1995 for the purpose of granting mortgage loans and letters of credit
to private developers who engage in special
9
purpose projects. Such projects include public housing authority turnkey
developments, low-to-moderate housing developments, construction of multi-family
housing projects involving Federal Low Income Housing Tax Credits and bond
financing of special use facilities. $4.8 million of loans were originated
during fiscal 1996. The mortgages were assigned to and will be serviced by the
Bank.
Sources of Funds
- ----------------
The Bank's lending and investment activities are predominantly funded by
savings deposits, interest and principal repayments on loans and other
investments, FHLB advances, and proceeds from the maturities of securities.
Deposits
- --------
The Bank offers a variety of deposit accounts having a wide range of interest
rates and terms. The Bank's deposits consist of regular savings, NOW, money
market and certificate of deposit accounts. The Bank solicits deposits from its
market area and issued wholesale CD's for the first time in fiscal 1996. The
Bank relies primarily on competitive pricing policies, advertising and customer
service to attract and retain these deposits. The flow of deposits is
influenced significantly by general economic conditions, changes in money market
and prevailing interest rates and competition.
At September 30, 1996, the Bank had the following market-rate certificates in
amounts of $100,000 or more outstanding which mature as follows:
Weighted
Average
Amount Rate
------- ------
(Dollars In Thousands)
3 months or less $3,005 5.08%
4 to 6 months 4,055 5.63%
7 to 12 months 9,435 5.81%
13 to 36 months 5,052 5.74%
Over 36 months 452 6.40%
-------- -----
$ 21,999 5.67%
======== =====
10
The following table shows the distribution of the Bank's deposits along with
the weighted average rates:
At September 30, 1996 1995 1994
- ---------------- ---- ---- ----
Percent Weighted Percent Weighted Percent Weighted
of Average of Average of Average
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ -------- -------- ------ -------- -------- ------ -------- --------
(Dollars in thousands)
Regular savings $108,382 26.4% 2.50% $115,606 29.8% 2.50% $139,551 38.4% 2.50%
NOW accounts 45,819 11.2% 2.53% 44,840 11.5% 2.73% 46,824 12.9% 2.69%
Money market accounts 23,104 5.6% 3.23% 24,526 6.3% 3.22% 26,777 7.4% 2.85%
-------- ----- ---- -------- ----- ---- -------- ----- ----
Total 177,305 43.2% 2.60% 184,972 47.6% 2.65% 213,152 58.7% 2.62%
-------- ----- ---- -------- ----- ---- -------- ----- ----
Certificate accounts by
contractual maturity:
Less than 6 months 11,164 2.7% 4.20% 4,231 1.1% 4.07% 5,554 1.5% 2.90%
6 to 12 months 61,749 15.0% 5.06% 54,206 14.0% 5.24% 40,666 11.2% 3.47%
13 to 24 months 102,051 24.9% 5.58% 93,275 24.0% 5.75% 67,738 18.7% 4.35%
25 to 36 months 36,742 9.0% 6.42% 35,342 9.1% 6.26% 18,366 5.1% 5.47%
Over 36 months 21,313 5.2% 5.96% 16,536 4.2% 6.10% 17,396 4.8% 6.24%
-------- ----- ---- -------- ----- ---- -------- ----- ----
Total certificate
accounts 233,019 56.8% 5.54% 203,590 52.4% 5.69% 149,720 41.3% 4.42%
-------- ----- ---- -------- ----- ---- -------- ----- ----
Total deposits $410,324 100.0% 4.27% $388,562 100.0% 4.25% $362,872 100.0% 3.36%
======== ===== ==== ======== ===== ==== ======== ===== ====
11
The following table sets forth the amount of certificate accounts, stratified
by rate, as a percent of total certificate accounts at September 30, 1996.
Weighted
Average
Rate Range Amount Percent Cost
- ---------- ------ ------- ----
(Dollars in thousands)
4.99% or less $ 42,693 18.32% 4.21%
5.00% to 5.99% 124,482 53.42% 5.54%
6.00% to 6.99% 57,437 24.65% 6.32%
7.00% to 7.99% 8,379 3.60% 7.13%
8.00% and over 28 0.01% 8.80%
-------- -------- -----
Total certificates by rate $233,019 100.00% 5.54%
======== ======== =====
The following table sets forth the maturity schedule for certificate accounts
at September 30, 1996.
Weighted
Average
Maturity Period Amount Percent Cost
- --------------- ------ ------- ----
(Dollars in thousands)
3 months or less $ 37,840 16.24% 4.98%
4 to 6 months 43,818 18.81% 5.31%
7 to 12 months 87,180 37.41% 5.68%
13 to 36 months 54,095 23.22% 5.79%
37 to 60 months 9,656 4.14% 6.25%
Over 60 months 430 0.18% 2.76%
-------- ------- -----
$233,019 100.00% 5.54%
======== ======= =====
Borrowings
- ----------
As part of its asset/liability management, the Bank has, on various occasions,
borrowed funds from the FHLB of New York. These borrowings are made to cover
mortgage originations which the Bank chooses not to cover by savings growth.
The borrowing is matched to the mortgage maturities, when possible. At
September 30, 1996 the Bank had borrowings of $146.3 million from the FHLB of
New York.
On May 7, 1993, the Company entered into an agreement with Gould Investors LP
("Gould") to sell to Gould a $1,850,000 adjustable rate non-convertible senior
debenture which matured on April 3, 1996. The interest rate on the debenture was
Prime plus 2.00% and the interest was payable on a quarterly basis. $1,250,000
of the funds received were used to increase the Bank's regulatory capital, with
the remaining $400,000 staying at the Company. Gould owns 54.9% of the net
outstanding common shares of the Company as of November 30, 1996.
12
The following table sets forth certain information regarding advances from the
FHLB of New York at the dates indicated and the senior debt to Gould Investors,
LP:
Outstanding at September 30, 1996 1995
---- ----
(Dollars in thousands)
Advances from Federal Home Loan Bank of New York
Variable rate overnight line of credit $ 13,500 $---
7.28% due 1996 20,000 20,000
5.87% due 1997 5,000 ---
6.96% due 1997 12,950 12,950
7.17% due 1998 10,000 10,000
7.20% due 1998 5,000 5,000
6.47% due 1999 5,000 ---
6.89% due 1999 15,000 15,000
6.65% due 1999 5,000 ---
7.44% due 2000 10,000 10,000
6.76% due 2001 5,000 ---
6.90% due 2001 5,000 ---
6.75% due 2002 20,000 20,000
6.95% due 2003 5,000 ---
7.07% due 2003 5,000 ---
7.38% due 2011--Amortizing 808 ---
7.34% due 2011--Amortizing 3,995 ---
Senior Debt
Prime plus 2% due 1996 --- 1,650
-------- -------
Total Borrowed Funds $146,253 $94,600
======== =======
For the years ended September 30, 1996, 1995 and 1994, the weighted average
interest rates for borrowings were 6.88%, 7.06%, and 7.50%, respectively.
The maximum amount of borrowings outstanding at any month-end during fiscal
1996, 1995 and 1994 was $146,253,000, $94,600,000, and $52,665,000,
respectively. The average outstanding balance and associated average cost of
borrowings for fiscal 1996, 1995 and 1994 was $110,700,000 and 6.92%,
$80,724,000 and 7.31%, and $41,935,000 and 8.11%, respectively.
Competition
- -----------
The Bank faces significant competition both in making mortgages and in
attracting deposits. The New York City metropolitan area has a high density of
financial institutions, many of which are substantially 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 comes principally from
savings banks, mortgage banking companies (many of which are subsidiaries of
major commercial banks), insurance companies and other institutional lenders.
Its most direct competition for deposits has historically come from savings
banks, commercial banks, credit unions, and other financial institutions.
The Bank faces additional competition for deposits from short-term money market
funds and other corporate and government securities funds. Many of the Bank's
competitors in the New York metropolitan area, whether traditional financial
institutions or otherwise, have much greater financial and marketing resources
than those of the Bank.
The Bank competes for loans principally through competitive pricing and the
efficiency and quality of services it provides borrowers and their real estate
brokers. It competes for deposits through pricing, service and by offering a
variety of deposit accounts.
13
Personnel
- ---------
As of September 30, 1996, the Bank had 148 employees, of which 124 were full-
time and 24 were part-time. The employees are not represented by a collective
bargaining unit, and the Bank considers its relationship with its employees to
be excellent.
REGULATION AND SUPERVISION
General
The Bank is subject to extensive regulation, examination and supervision by
the Office of Thrift Supervision ("OTS"), as its chartering agency, and the
Federal Deposit Insurance Corporation ("FDIC"), as the deposit insurer. The
Bank is a member of the FHLB System and its deposit accounts are insured up to
applicable limits by the Savings Association Insurance Fund ("SAIF") managed by
the FDIC. The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other financial institutions. There are periodic examinations
by the OTS and the FDIC to test the Bank's compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or through legislation,
could have a material adverse impact on the Company, the Bank and their
operations. The Company, as a savings and loan holding company, is required to
file certain reports with, and otherwise comply with the rules and regulations
of the OTS and of the Securities and Exchange Commission ("SEC") under the
federal securities laws. Certain of the regulatory requirements applicable to
the Bank and to the Company are referred to below or elsewhere herein.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
- --------------------
governed by the Home Owner's Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDI Act"). The HOLA and the FDI
Act were amended by the Financial Institution Reform, Recovery and Enforcement
Act of 1989 ("FIRREA") and the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"). FIRREA was enacted for the purpose of resolving problem
savings institutions, establishing a new thrift insurance fund, reorganizing the
regulatory structure applicable to savings institutions, and imposing bank-like
standards on savings institutions. FDICIA, among other things, requires that
federal banking regulators intervene promptly when a depository institution
experiences financial difficulties, mandates the establishment of a risk-based
deposit insurance assessment system and requires imposition of numerous
additional safety and soundness operational standards and restrictions. FIRREA
and FDICIA both contain provisions affecting numerous aspects of the operations
and regulations of federally-insured savings banks and empower the OTS and the
FDIC, among other agencies, to promulgate regulations implementing their
provisions. The description of statutory provisions and regulations applicable
to savings institutions set forth in this document do not purport to be a
complete description of such statutes and regulations and their effects on the
Bank.
Loans to One Borrower. Under the HOLA, savings institutions are generally
- ----------------------
subject to the national bank limits on loans to one borrower. Unless an
exception applies, savings institutions may not make a loan or extend credit to
a single or related group of borrowers in excess of 15.0% of the Bank's
unimpaired capital and surplus. An additional amount may be lent, equal to 10.0%
of unimpaired capital and surplus, if such loan is secured by readily-marketable
collateral, which is defined to include certain securities and bullion, but does
not include real estate. At September 30, 1996, the Bank's largest aggregate
amount of loans to one borrower consisted of $7.8 million, and the second
largest borrower had an aggregate
14
balance of $7.2 million, which were below the Bank's loans to one borrower limit
of $8.0 million at such date. At September 30, 1996, both of these borrowers
were current.
QTL Test. The HOLA requires savings institutions to meet a qualified thrift
- ---------
lender ("QTL") test. Under the QTL test, as modified by FDICIA, a savings bank
is required to maintain at least 65.0% of its "portfolio assets" (total assets
less (I) specified liquid assets up to 20.0% 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)
on a monthly basis in 9 out of every 12 months.
A savings institution that fails the QTL test must either convert to a bank
charter or operate under certain restrictions. If the savings institution does
not convert to a bank charter, generally it will be prohibited from: (i)
engaging in any new activity not permissible for a national bank, (ii) paying
dividends not permissible under national bank regulations, (iii) obtaining
advances from any FHLB, and (iv) establishing any new branch office in a
location not permissible for a national bank in the institution's home state. In
addition, beginning three years after the institution failed the QTL test, the
institution would be prohibited from engaging in any activity not permissible
for a national bank and would have to repay any outstanding advances from an
FHLB as promptly as possible. As of September 30, 1996, the Bank maintained
95.9% of its portfolio assets in qualified thrift investments and, therefore,
met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations upon
- -----------------------------------
all capital distributions by a savings institution, 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 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 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) 75.0% of its net earnings for the previous four quarters. Any additional
capital distributions would require prior regulatory approval. In the event the
Bank's capital fell below its fully phased-in requirement 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. Furthermore, under the OTS prompt
corrective action regulations, the Bank would be prohibited from making any
capital distribution if, after the distribution, the Bank would have (i) a total
risk-based capital ratio of less than 8.0%, (ii) a Tier 1 risk-based capital
ratio of less than 4.0% or (iii) a leverage ratio of less than 4.0%.
The Bank is also subject to a prior agreement with the OTS that restricted the
Bank from paying cash dividends to the Company in excess of 50% of its net
income since the conversion, without prior OTS approval. In either event, the
Bank is required to give 30 days prior notice to the OTS of the intention to pay
a dividend and there can be no assurance that the OTS will not prohibit the
payment of the dividend.
Liquidity. The Bank is required to maintain an average daily balance of liquid
- ----------
assets (cash, certain time deposits, bankers' acceptances, specified United
States Government, state or federal agency obligations, shares of certain mutual
funds and certain corporate debt securities and commercial paper) equal to a
monthly average of not less than a specified percentage of its net withdrawable
deposit accounts plus short-term borrowings. This liquidity requirement may be
changed from time to time by the OTS to any amount within the range of 4.0% to
10.0% depending upon economic conditions and the savings flows of member
institutions, and is currently 5.0%. OTS regulations also require each savings
institution to maintain an average daily balance of short-term liquid assets at
a specified percentage (currently 1.0%) of the total of its net withdrawable
deposit accounts and borrowings payable in one year or less. Monetary penalties
may be imposed for failure to meet these liquidity requirements. The Bank's
average
15
liquidity and short-term liquidity ratios for September 30, 1996 were 6.19% and
3.26%, respectively, which exceeded the applicable requirements. The Bank has
never been subject to monetary penalties for failure to meet its liquidity
requirements.
Assessments. Savings institutions are required to pay assessments to the OTS to
- ------------
fund the agency's operations. The general assessment, paid on a semi-annual
basis, is computed as a percentage 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 fiscal year
ended September 30, 1996, totaled $124,000.
Branching. The OTS regulations authorize federally chartered savings
- ----------
associations to branch nationwide. This permits federal savings and loan
associations with interstate networks to diversify more easily their loan
portfolios and lines of business geographically. The OTS authority preempts
any state law purporting to regulate branching by federal savings institutions.
The branching powers afforded federal savings banks are broader than the
branching authority currently available to national banks and state chartered
institutions, which generally lack the authority to branch outside their state
of domicile. However, national banks and state chartered banks and savings banks
will have increased authority under 1995 legislation to establish interstate
branches beginning no later than June 1997.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
- -----------------------
implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Bank received a "satisfactory" CRA rating
in its most recent examination.
Transactions with Related Parties. The Bank's authority to engage in certain
- ----------------------------------
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any 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" (including extension of credit to, purchases of assets
from or the issuance of a guarantee, acceptance or letter of credit on behalf of
affiliate) with any individual affiliate to 10.0% of the capital and surplus of
the savings institution and also limits the aggregate amount of transactions
with all affiliates to 20.0% 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 provides that
certain transactions with affiliates, (including loan, asset sales or purchases,
and any servicing, leases or other agreements) must be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to the institution as those prevailing at the time for
comparable transactions with nonaffiliated companies. In the absence of
comparable transactions, such transactions may only occur under terms and
circumstances, including credit standards, that in good faith would be offered
to or would apply to nonaffiliated 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 executive officers, directors and
principal shareholders (generally considered to be those owners controlling or
having the power to vote ten percent or more of any class of the Company's
stock) as well as entities controlled by such persons, are currently governed by
Sections 22(g) and 22(h) of the FRA, and the Federal Reserve Board's ("FRB")
Regulation O thereunder. Among other things, these regulations require such
loans to be made on terms substantially
16
the same as those offered to unaffiliated individuals and may not involve more
than the normal risk of repayment. Such regulations also place 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 require certain Board approval
procedures to be followed. Loans to executive officers are subject to additional
restrictions. The OTS regulations, with certain minor variances, apply
Regulation O to savings institutions.
Enforcement. Under the FDI Act, the OTS has primary enforcement responsibility
- ------------
over savings institutions and has the authority to bring enforcement action
against all "institution-affiliated parties," including officers, directors and
controlling stockholders and other parties participating in the control of the
affairs of the institution. Civil penalties cover a wide range of violations
and actions and range up to $25,000 per day unless a finding of reckless
disregard is made, in which case penalties may be as high as $1 million per day.
Criminal penalties for most financial institution crimes include fines of up to
$1 million and imprisonment for up to 30 years. In addition, regulators have
substantial discretion to impose enforcement action on an institution that
fails to comply with its regulatory requirements, particularly with respect to
the capital requirements, or engages in unsafe and unsound practices. Possible
enforcement action ranges from the imposition of a capital plan, capital
directive or cease and desist order to receivership, conservatorship or the
termination of deposit insurance. Under the FDI Act, the FDIC has the authority
to recommend to the Director of OTS that enforcement action be taken with
respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances.
Standards for Safety and Soundness. FDICIA as amended, required each federal
- -----------------------------------
banking agency to prescribe for all insured depository institutions and their
holding companies standards relating to 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. In
February, 1995, the OTS, together with the other federal bank regulatory
agencies, adopted guidelines prescribing safety and soundness standards pursuant
to FDICIA, as amended. The guidelines establish general standards relating to
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth and
employee compensation. In general, the guidelines require, among other things,
appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines. The guidelines prohibit excessive compensation as
an unsafe and unsound practice and described compensation as excessive when the
amounts paid are unreasonable or disproportionate to the services performed by
an executive officer, employee, director or principal shareholder. Additional
guidelines to establish general standards for asset quality and earnings were
recently finalized. In addition, regulations were adopted pursuant to FDICIA to
require a savings association that is given notice by the OTS that it is not
satisfying any of such safety and soundness standards to submit a compliance
plan to the OTS. If, after being so notified, a savings association fails to
submit an acceptable compliance plan or fails in any material respect to
implement an accepted compliance plan, the OTS may issue an order directing
corrective actions including certain types of restrictions which a significantly
undercapitalized institution is subject to under the "prompt corrective action"
provisions of FDICIA.
Capital Requirements. The OTS capital regulations require savings
- ----------------------
institutions to meet three minimum capital standards: a 1.5% tangible capital
standard, a 3.0% leverage ratio (or core capital ratio) and an 8.0% risk-based
capital standard. Core capital is defined as common stockholder's equity
(including retained earnings), certain noncumulative perpetual preferred stock
and related surplus, minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain qualifying supervisory goodwill
and certain mortgage servicing rights ("MSR's") and purchased credit card
relationships. The OTS regulations require that, in meeting the leverage ratio,
tangible and risk-based capital standards, institutions must deduct investments
in and loans to subsidiaries engaged in activities as principal not permissible
for a national bank. The OTS also has the authority to establish higher
individual capital requirements for specific institutions which have been deemed
by the OTS to pose an unusual risk. In addition, the OTS prompt corrective
action regulation provides that a savings institution that has a leverage
capital ratio of less than 4.0% (3.0% for institutions receiving the highest
CAMEL examination
17
rating) will be deemed to be "undercapitalized" and may be subject to certain
restrictions unless the institution has received the highest examination rating.
See "Prompt Corrective Regulatory Action".
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk weighted assets of 4.0% and 8.0%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks OTS
believes are inherent in the type of asset. The components of Tier 1 (core)
capital are equivalent to those discussed earlier under the 3.0% leverage ratio
standard. The components of supplementary capital currently include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and allowance for
loan and lease losses. Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25%. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
FDICIA required that the OTS (and other federal banking agencies) revise the
risk-based capital standards, with appropriate transition rules, to ensure that
such standards take account of interest rate risk, concentration of risk and the
risks of nontraditional activities. The OTS regulations set forth the
methodology for calculating an interest rate risk component that would be
incorporated into the OTS risk-based capital regulations. A savings institutions
with "above normal" interest rate risk exposure must deduct from total capital a
portion of its capital to cover such interest rate risk for purposes of
calculating their risk-based capital requirements. A savings institution'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
(except when the 3-month Treasury bond equivalent yield falls below 4.0%, then
the decrease will be equal to one-half of that Treasury rate) divided by the
estimated economic value of the institution's assets, as calculated in
accordance with guidelines set forth by the OTS. A savings institution whose
measured interest rate risk exposure exceeds 2.0% 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 2.0%,
multiplied by the estimated economic value of the bank's assets. That dollar
amount is deducted from an institution's total capital in calculating
compliance with its risk-based capital requirement. For the present time, the
OTS has deferred implementation of the interest-rate risk component. If the Bank
had been subject to an interest-rate risk component as of September 30, 1996,
the Bank would not have been subject to any deduction from capital as a result
of its interest rate risk position.
The Bank's capital, determined in accordance with existing regulations, at
September 30, 1996 is as follows:
Risk-
GAAP Tangible Core Based
Capital Capital Percent Capital Percent Capital Percent
------- ------- ------- ------- ------- ------- -------
(Dollars in Thousands)
Balance as reported to the OTS $47,351 $47,351 7.38% $47,351 7.38% $47,351 12.37%
Additional capital items:
General valuation allowance - limited --- --- --- --- 4,803 1.25%
------- ----- ------- ----- ------- -------
Regulatory capital 47,351 7.38% 47,351 7.38% 52,154 13.62%
Minimum capital requirement 9,629 1.50% 19,258 3.00% 30,642 8.00%
------- ----- ------- ----- ------- -------
Regulatory capital-excess $37,722 5.88% $28,093 4.38% $21,512 5.62%
======= ===== ======= ===== ======= =======
The Bank meets and exceeds all regulatory capital requirements and is deemed
to be a "well capitalized" financial institution.
Prompt Corrective Regulatory Action. FDICIA establishes a system of prompt
- ------------------------------------
corrective action to resolve the problems of undercapitalized institutions.
Under this system, the banking regulators are required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon
18
the institution's degree of undercapitalization. Generally, subject to a narrow
exception, FDICIA requires the banking regulator to appoint a receiver or
conservator for an institution that is critically undercapitalized. FDICIA
authorizes the banking regulators to specify the ratio of tangible capital to
assets at which an institution becomes critically undercapitalized and requires
that ratio to be no less than 2.0% of assets.
Under the OTS final rule implementing FDICIA, a savings institution that has a
ratio of total risk-based capital to risk-based assets of less than 8.0% or a
leverage ratio or a Tier 1 capital to risk-based assets ratio that is less than
4.0% is considered to be "undercapitalized". A savings institution that has a
total risk-based capital ratio of less than 6.0%, a Tier I 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." Generally, a capital restoration plan must be
filed with the OTS within 45 days of the date an institution receives notice
that it is "undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, capital distributions and management fees. 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. Pursuant to FDICIA, the FDIC established a risk-
- ------------------------------
based assessment system for insured depository institutions that takes into
account the risks attributable to different categories and concentrations of
assets and liabilities and other criteria relevant to each institution's risk
profile as in regard to the insurance fund. Under this 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 conditions and the risk posed to the
deposit insurance funds (which may include, if applicable, information provided
by the institution's state supervisor). An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned. There
are nine assessment risk classifications (i.e., combinations of capital groups
and supervisory subgroups) to which different assessment rates are applied.
Assessment rates range from 0 basis points for an institution in the highest
category (i.e., well-capitalized and healthy) to 27 basis points for an
institution in the lowest category (i.e., undercapitalized and substantial
supervisory concern). The Bank's assessment rate for fiscal year 1996 was .23%
of deposits. The Bank paid $914,000 for federal insurance premiums to the SAIF
for the fiscal year ended September 30, 1996.
The FDI Act requires that the SAIF and BIF funds each be recapitalized until
reserves are at least 1.25% of insured deposits. Upon reaching the 1.25%
reserve ratio, the assessment rates for that fund could be reduced. The FDIC had
concluded that the BIF had attained the 1.25% reserve ratio, but that the SAIF
was not likely to reach the 1.25% reserve ratio until sometime after the year
2000, at the earliest. The FDIC has issued final regulations to reduce the
assessment rates for the BIF. Currently, over 90% of BIF members pay only the
statutory annual minimum of $2,000 for deposit insurance. Under the
regulations, BIF-insured institutions would pay an average of $0.04 per $100 of
insured deposits. The reduction in the BIF assessment rates occurred during the
latter half of calendar year 1995. The resulting disparity in deposit insurance
assessments between SAIF members and BIF members provided BIF-insured
institutions with certain competitive advantages in the pricing of loans and
deposits, because of lowered operating costs and may cause other competitive
inequities. SAIF-insured institutions continued to pay assessments at the
current SAIF assessment rates. Consequently, the Bank was adversely affected in
comparison to BIF-insured institutions.
To recapitalize the SAIF, legislation was passed by Congress and signed into
law by the President of the United States on September 30, 1996 to assess a one
time special assessment of 65.7 basis points of the deposit base of SAIF insured
institutions. Included in the Company's operating results for the
19
fiscal year ended September 30, 1996 is a $2.5 million one-time charge to
recapitalize the SAIF fund. It is expected that the Bank will be assessed at the
rate of .065% of deposits beginning January 1, 1997 and may be eligible for a
rebate on the .23% premium paid for the period October 1, 1996 through December
31, 1996.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional FHLBs.
The FHLB provides a central credit facility primarily for member institutions.
The Bank, as a member of the FHLB, is required to acquire and hold shares of
capital stock in that FHLB in an amount at least equal to 1.0% 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 September 30, 1996, of $7.3
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 year ended September 30, 1996, dividends
from the FHLB to the Bank amounted to $374,000 or 2.2% of pre-tax earnings. 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 FDICIA and the FIRREA on the FHLBs will not also
cause a decrease in the value of the FHLB stock held by the Bank.
Federal Reserve System
The FRB regulations require savings institutions to maintain non-
interest-earning reserves against their transaction accounts (primarily NOW and
regular checking accounts). The FRB regulations generally require that reserves
be maintained against aggregate transaction accounts as follows: For accounts
aggregating $52.0 million or less (subject to adjustment by the FRB) the reserve
requirement is 3.0%; and for accounts greater than $52.0 million, the reserve
requirement is $1.6 million plus 10.0% (subject to adjustment by the FRB between
8.0% and 14.0%) against that portion of total transaction accounts in excess of
$52.0 million. The first $4.3 million of otherwise reservable balances (subject
to adjustments by the FRB) are exempted from the reserve requirements. The Bank
is in compliance with the foregoing requirements. The balances maintained to
meet the reserve requirements imposed by the FRB may be used to satisfy
liquidity requirements imposed by the OTS. Because required reserves must be
maintained in the form of either vault cash, a non-interest-bearing account
at a FRB or a pass-through account as defined by the FRB, 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 FRB 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 amended. As such, the Company has 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
20
holding company's subsidiary savings institution. The Bank must notify the OTS
30 days before declaring any dividend to the Company.
The HOLA prohibits a savings and loan holding company, directly or indirectly,
or through one or more subsidiaries, from acquiring more than 5.0% of the voting
stock of another savings institution or holding company without prior written
approval of the OTS; acquiring or retaining, with certain exceptions, more than
5% of 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.
As a unitary savings and loan holding company (i.e. one that controls only one
thrift subsidiary), the Company generally will not be restricted under existing
banking 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 or
savings bank that meets the QTL test and is deemed to be a savings institution
by OTS, the Company would become a multiple savings and loan holding company (if
the acquired institution is held as a separate subsidiary) and would be subject
to limitations on the types of business activities in which it could engage.
The HOLA limits the activities of a multiple savings and loan holding company
and its non-insured institution subsidiaries primarily to activities permissible
for bank holding companies under Section 4(c)(8) of the Bank Holding Company
Act, subject to the prior approval of the OTS, and certain other activities
authorized by OTS regulation.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. Certain
states do not authorize interstate acquisitions under any circumstances;
however, federal law authorizing acquisitions in supervisory cases would preempt
such state law.
Federal law generally provides that no "person," acting directly or indirectly
or through or in concert with one or more other persons, may acquire "control,"
as that term is defined in OTS regulations, of a federally-insured savings
institution without giving at least 60 days written notice to the OTS and
providing the OTS an opportunity to disapprove of the proposed acquisition. Such
acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person. This requirement would apply to acquisitions of the
Company's stock.
Federal Securities Laws
The Company's Common Stock is registered with the SEC under the Exchange Act
of 1934, as amended (the "Exchange Act"). The Company and its officers and
directors are subject to periodic reporting, proxy solicitation regulations,
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
21
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) 1.0% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
FEDERAL, STATE AND LOCAL TAXATION
Federal Taxation
General. The Company and the Bank will 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,
including particularly the Bank's reserve for bad debts discussed below. 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 is being audited by the Internal Revenue Service
("IRS") for the calendar years 1988, 1989 and 1990.
Tax Bad Debt Reserves. For calendar years ended December 31, 1995 and 1994, the
- ----------------------
Bank was allowed a special bad debt deduction based on the greater of the amount
calculated under the experience method or the percentage of taxable income
method. The statutory percentage under the latter method was 8% for 1995 and
1994. The percentage of taxable income method was allowable only if the Bank
maintained at least 60% of its total assets in qualifying assets, as defined. If
qualifying assets fell below 60%, the Bank would have been required to recapture
its tax bad debt reserve into taxable income over a four-year period. The Bank's
qualifying assets as a percentage of total assets exceeded the 60% limitation as
of and during the fiscal years ended September 30, 1996, 1995 and 1994. The Bank
used the percentage of taxable income method in its 1994 and 1995 tax return.
Under legislation recently enacted, the Bank will no longer be able to use the
percentage of taxable income method for federal tax purposes, but will be
permitted to deduct bad debts only as they occur and will additionally be
required to recapture (that is, take into taxable income) the excess balance of
its bad debt reserves as of December 31, 1995 over the balance of such reserves
as of December 31, 1987. However, such recapture requirements would be suspended
for each of two successive taxable years beginning January 1, 1996 in which the
Bank originates a minimum amount of certain residential loans based upon the
average of the principal amounts of such loans made by the Bank during its six
taxable years preceding January 1, 1996. As a result of this legislation, the
Bank will incur additional federal tax liability, but with no impact on the
Bank's results of operations. The New York State tax law has been amended to
prevent a similar recapture of the Bank's bad debt reserve, and to permit
continued future use of the bad debt reserve methods, for purposes of
determining the Bank's New York State tax liability. No amendments to the New
York City law have been made; therefore, the Company cannot predict whether such
changes to New York City law will be adopted and, if so, in what form.
Distributions. To the extent that (I) the Bank's tax bad debt reserve for
- --------------
losses on qualifying real property loans exceeds the amount that would have been
allowed under the experience method and (ii) the Bank makes "nondividend
distributions" to the Company that are considered to have been made from the
excess bad debt reserve, i.e., that portion, if any, of the balance of the
reserve for qualifying real property loans attributable to certain deductions
under the percentage of taxable income method, or the supplemental reserve for
losses on loans ("Excess Distributions"), then an amount based on the
distribution will be included in the Bank's taxable income. Nondividend
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. Thus, any dividends to the Company that would
reduce amounts appropriated to the Bank's bad debt reserves and deducted for
federal income tax purposes would create a tax liability for the Bank.
22
The amount of additional taxable income created from an Excess Distribution is
an amount that when reduced by the tax attributable to the income is equal to
the amount of the distribution. Thus, if after the Conversion, the Bank makes a
"nondividend distribution", approximately one and one-half times the amount so
used would be includable in gross income for federal income tax purposes,
assuming a 35.0% corporate income tax rate (exclusive of state and city taxes).
See "Regulation and Supervision-Limitations on Capital Distributions" for limits
on the payment of dividends by the Bank. The Bank does not intend to pay
dividends that would result in a recapture of any portion of its tax bad debt
reserves.
Corporate Alternative Minimum Tax. The Internal Revenue Code (the "Code")
- ----------------------------------
imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20.0%.
The excess of the tax bad debt reserve deduction using the percentage of taxable
income method over the deduction that would have been allowable under the
experience method is treated as a preference item for purposes of computing the
AMTI. Only 90.0% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75.0% of the amount by which the Bank's adjusted
current earnings exceeds its AMTI (determined without regard to this preference
and prior to reduction for net operating losses). In addition, an environmental
tax of .12% of the excess of AMTI (with certain modifications) over $2.0 million
is imposed on corporations, including the Bank, whether or not an Alternative
Minimum Tax ("AMT") is paid. The Bank does not expect to be subject to the AMT.
The Bank was subject to an environmental tax liability for the tax year ended
December 31, 1995, which liability was not material.
Dividends Received Deduction and Other Matters. The Company may exclude from
- -----------------------------------------------
its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70.0% 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 and the Bank own more than 20.0% of the stock of a
corporation distributing a dividend, 80.0% of any dividends received may be
deducted.
State and Local Taxation
New York State and New York City Taxation. The Bank is subject to the New York
- ------------------------------------------
State Franchise Tax on Banking Corporations in an amount equal to the greater of
(i) 9.0% of "entire net income" allocable to New York State, during the taxable
year, or (ii) the applicable alternative minimum tax. The alternative minimum
tax is generally the greater of (a) 3.0% of "alternative entire net income"
allocable to New York State, (b) 0.01% of the value of the Bank's assets
allocable to New York State with certain modifications, or (C) $250. Entire net
income is similar to federal taxable income, subject to certain modifications
(including the addition of interest income on state and municipal obligations,
the partial exclusion of interest income on certain United States Treasury, New
York State, and New York City obligations, and an additional New York State bad
debt deduction). Alternative entire net income is equal to entire net income
without certain deductions which are allowable for the calculation of entire net
income. New York State also imposes several surcharges on the Franchise Tax on
Banking Corporations including a 17.0% Metropolitan Transportation Business Tax
Surcharge and an additional 7.5% surcharge which currently apply to the Bank.
The Bank is also subject to the New York City Financial Corporation Tax
calculated, subject to a New York City income and expense allocation, on a
similar basis as the New York State Franchise Tax. Currently, New York City does
not impose surcharges applicable to the Bank.
Delaware Taxation. As a Delaware holding company not earning income in
- ------------------
Delaware, the Company is exempt 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.
23
Item 2 - Properties
The Bank conducts its business through its executive office and five full-
service offices located in New York, New York. The following table sets forth
certain information relating to each of the Bank's offices.
Year Expiration
Facility Date of
Opened Owned/Leased Lease
-------- ------------ ----------
Executive Office:
- -----------------
110 William Street
New York, New York 1987 Leased 12/31/97
Branches:
- ---------
340 Avenue of Americas
New York, New York 1943 Owned N/A
130 Second Avenue
New York, New York 1952 Owned N/A
187-15 Union Turnpike
Flushing, New York 1958 Owned N/A
156-10 Northern Boulevard
Flushing, New York 1974 Leased 8/30/03
1764 Rockaway Parkway
Brooklyn, New York 1960 Owned N/A
Item 3 - Legal Proceedings
The Bank is involved in routine legal proceedings occurring in the ordinary
course of business, which in the aggregate are believed by management to be
immaterial to the financial condition of the Bank.
Item 4 - Submission of Matters to a Vote of Security Holders
(a) N/A
(b) N/A
(c) N/A
(d) N/A
24
PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters
The Company issued 1,437,500 shares of its Common Stock on May 11, 1988, in an
initial public offering in connection with the conversion of the Bank from
mutual to stock form of organization. The common stock is quoted on the NASDAQ
National Market System.
Set forth below is the high and low sales prices paid for the common stock for
each quarterly period within fiscal years 1996 and 1995, as reported on the
NASDAQ National Market System.
Year ended September 30, 1996 High Low
----------------------------- ------- ------
December 31, 1995 $36.25 $32.00
March 31, 1996 37.50 35.25
June 30, 1996 39.75 36.00
September 30, 1996 55.00 37.75
Year ended September 30, 1995
-----------------------------
December 31, 1994 $27.75 $22.25
March 31, 1995 25.75 23.00
June 30, 1995 26.75 23.00
September 30, 1995 33.50 22.25
At September 30, 1996, there were 307 shareholders of record and 1,695,428
shares issued and 1,635,488 outstanding.
The Company did not pay a cash dividend in either fiscal 1996 or 1995 and has
no intention of paying a cash dividend in the foreseeable future.
Subject to applicable law, the Board of Directors of the Bank and of the
Company may each provide for the payment of dividends. Future declarations of
cash dividends by the Company will depend upon dividend payments by the Bank to
the Company, which is the Company's primary source of income. The payment of
dividends by the Bank is subject to OTS regulations, as previously discussed in
the section on "Limitations on Capital Distributions".
Earnings allocated to bad debt reserves for losses and deducted for federal
income tax purposes are not available for dividends or other distributions with
respect to the Bank's capital stock, without the payment of tax at the then
current income tax rate.
25
Item 6 - Selected Financial Data
September 30, 1996 1995 1994 1993 1992
- ------------- ---- ---- ---- ---- ----
(Dollars in Thousands)
Financial Condition Data:
Total assets $643,180 $555,151 $482,947 $466,913 $482,275
Federal funds 5,000 14,000 5,000 5,000 2,000
Investment securities held
to maturity, net 21,960 16,135 12,321 13,430 27,417
Investment securities
available for sale, net 1,364 --- --- --- ---
Mortgage-backed
securities, net 14,203 17,194 123,259 145,337 86,053
Loans, net 578,827 490,887 316,905 254,941 331,777
Deposits 410,324 388,562 362,872 350,286 355,468
Borrowed funds 146,253 94,600 52,665 54,215 69,579
Collateralized mortgage
obligations 12,594 15,183 17,541 22,392 25,999
Stockholders' equity
(substantially restricted) $ 50,214 $ 40,812 $ 32,606 $ 26,612 $ 19,553
Years ended September 30, 1996 1995 1994 1993 1992
- ------------------------- ---- ---- ---- ---- ----
Operating data:
Interest income $ 54,933 $ 47,285 $ 37,845 $ 36,739 $ 40,186
Interest expense 25,738 21,636 16,651 19,581 26,504
-------- -------- -------- -------- --------
Net interest income 29,195 25,649 21,194 17,158 13,682
Provision for loan losses --- 1,041 1,071 1,206 2,167
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 29,195 24,608 20,123 15,952 11,515
-------- -------- -------- -------- --------
Other income:
Gain on sale of assets, net 1,384 557 549 1,359 471
Other 2,605 1,991 2,194 2,095 2,044
-------- -------- -------- -------- --------
Total other income 3,989 2,548 2,743 3,454 2,515
-------- -------- -------- -------- --------
Total other expenses 16,163 12,780 13,077 13,405 17,375
-------- -------- -------- -------- --------
Income (loss) before
provision for income tax
(benefit) and cumulative
effect of change in
accounting principle 17,021 14,376 9,789 6,001 (3,345)
Income tax expense (benefit) 7,785 6,355 4,043 2,540 (30)
Cumulative effect of change
in accounting principle --- --- --- 1,615 ---
-------- -------- -------- -------- --------
Net income (loss) $ 9,236 $ 8,021 $ 5,746 $ 5,076 $ (3,315)
======== ======== ======== ======== ========
26
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
- ------------
In May, 1988, Bankers Federal Savings, FSB (the "Bank") converted from a
federal mutual to a federal stock savings bank and formed the Bank's holding
company, BFS Bankorp, Inc. (the "Bankorp"). The Bankorp issued 1,437,500 shares
of stock at $7.00 per share, which resulted in approximately $8,312,500 in
capital. Concurrent with the conversion process, the Bankorp acquired all the
capital stock of the Bank and became a savings and loan holding company.
The Bank's results of operations depend primarily upon the level of its net
interest income, which is the difference between the interest earned on its
interest-earning assets and the interest expense on its interest-bearing
liabilities. The Bank's interest-earning assets consist primarily of first
mortgage loans, investment securities, federal funds, mortgage-backed securities
and other loans. The Bank's interest-bearing liabilities consist primarily of
deposits, Federal Home Loan Bank advances, and collateralized mortgage
obligations.
As part of its interest rate risk management policy, the Bank emphasizes the
origination of adjustable rate and balloon multi-family mortgage loans and
attempts to match lending with savings or borrowings of a similar maturity,
duration or repricing. The Bank no longer originates 1-4 family mortgage loans
since that product line cannot generate a sufficient rate of return. Total
assets increased this fiscal year by approximately $88.0 million as compared to
the previous fiscal year. The increase is the result of increased multi-family
mortgage originations. These originations were funded by an increase in FHLB
advances, an increase in deposits and by other internally generated cash flows.
The Bank meets and exceeds all Office of Thrift Supervision ("OTS")
requirements as of September 30, 1996 and would be deemed to be a "well
capitalized" institution as defined by FDICIA.
The Bank generates non-interest income primarily by fees charged for services
rendered. The Bank has instituted a program to maximize fee income on current
services and to offer new services which will generate additional fees. Fee
income has been enhanced over the past three fiscal years by increasing usage of
automated teller machines at its branches and servicing fees generated by the
sale or securitization of mortgage loans. During fiscal 1994, the Bank began
to offer credit cards and mutual funds (through its wholly owned subsidiary
Bankers Federal Service Corporation) to generate additional fees.
Non-interest expense consists primarily of those expenses associated with
operating the Bank. The Bank believes it was successful in the past fiscal year
in containing the non-interest expense items that it has direct control over.
1993 Agreement with Gould Investors, LP
- ---------------------------------------
On May 6, 1993, the Company entered into an agreement (the "Agreement") with
Gould Investors, LP and Fredric H. Gould (collectively referred to as "Gould"),
replacing an agreement entered into with Gould in 1990. Pursuant to the
Agreement, on May 7, 1993 Gould purchased from the Company $1,650,000 principal
amount of an adjustable rate non-convertible debenture due on April 3, 1996.
The Company convened a Special Meeting of Shareholders in August, 1993 and
obtained shareholder approval to amend the Certificate of Incorporation to
delete the limitation on voting shares owned in excess of 10% of the shares
outstanding. Following the receipt of regulatory approvals to own in excess of
25% of the Company's common stock, Gould purchased 150,000 shares of common
stock from the Company for an aggregate purchase price of $1,650,000. Until
April 3, 1995, Gould agreed not to acquire more than 50% of the shares of common
stock outstanding (exclusive of the shares purchased directly from the Company).
Gould was given the right to appoint, and has appointed, one director to the
Board of Directors of the Bank.
27
Until April 3, 1998, Gould agreed to vote all of its voting securities in
favor of any merger agreement approved by a majority of the Board, provided that
if Gould beneficially owns 75% or more of the common stock of the Company, the
merger agreement must offer shareholders a per share consideration in excess of
the per share consideration that Gould has offered and Gould shall be given
substantially the same opportunity to submit an offer as any other party has
been given. If Gould owns less than 75% of the common stock, then Gould is not
required to vote in favor of a merger unless the per share consideration being
offered by any third party is in excess of the per share consideration that
Gould is willing to offer as determined in an open bidding process.
The Agreement terminates on April 3, 1998. However, it shall terminate
earlier if any party, including Gould, acquires beneficial ownership of more
than 90% of the common stock then outstanding of the Company.
Gould owns 54.9% of the net outstanding common shares of the Company as of
November 30, 1996, including the shares Gould acquired directly from the Company
pursuant to the Agreement.
Asset/Liability Management
- --------------------------
As previously stated, the Bank's interest rate risk management policy has
been structured to reduce the sensitivity of its operating results to
fluctuations in interest rates. The characteristics of interest-earning assets
acquired by the Bank are such that they are generally either adjustable rate
instruments, fixed rate with a short term to maturity, or fixed rate with a long
term to maturity that is matched by a like-maturity interest-bearing liability.
The table on the next page summarizes the estimated contractual maturities of
the Bank's interest-earning assets and interest-bearing liabilities at September
30, 1996. The maturities are adjusted using assumptions for prepayments and
decay rates as developed by the Bank.
The assumptions for prepayments on mortgage loans ranged from 5% to 20%
dependent upon interest rate, type of rate (adjustable or fixed), type of
property (1-4 or multi-family) and type of lien (first or second). The
assumptions for deposits are that (i) certificate accounts are not withdrawn
prior to maturity and (ii) the decay rate for NOW accounts, money market and
regular savings accounts is approximately 20% per annum of the then outstanding
balance.
The effect of these assumptions is to quantify the dollar amounts of items
that are interest-sensitive and can be repriced within each of the periods
specified. Such repricing can occur in one of three ways: (i) the rate of
interest on an assets or liability may adjust periodically on the basis of an
index; (ii) an asset or liability may be amortized, thus permitting reinvestment
of cash flows at the then-prevailing interest rates; or (iii) an asset or
liability has a stated maturity at which time a new asset or liability will be
acquired at current market rates.
28
More More More
than than than More
1 Year 3 Years 5 Years than
1 Year to 3 to 5 to 10 10
At September 30, 1996 or less Years Years Years Years Total
- --------------------- ------- ----- ----- ----- ----- -----
(Dollars in Thousands)
Mortgage loans:
Balloon and adjustable rate $214,262 $155,727 $164,324 $ --- $ --- $534,313
Fixed rate 8,289 14,096 11,317 16,510 5,067 55,279
Mortgage-backed securities 2,364 4,247 3,678 3,914 --- 14,203
Other loans 888 --- --- --- --- 888
Cash, investments and federal funds 24,620 1,998 10,500 --- --- 37,118
-------- -------- -------- -------- -------- --------
Total interest-earning assets 250,423 176,068 189,819 20,424 5,067 641,801
-------- -------- -------- -------- -------- --------
Deposits:
Certificate accounts 168,838 54,094 10,087 --- --- 233,019
NOW accounts 8,768 14,028 8,417 14,606 --- 45,819
Money market accounts 4,539 7,262 4,357 6,946 --- 23,104
Regular savings 21,758 34,813 20,888 30,922 --- 108,382
Borrowed funds 51,450 15,000 45,000 34,803 --- 146,253
Collateralized mortgage obligations 1,266 2,866 3,378 5,084 --- 12,594
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 256,619 128,064 92,127 92,361 --- 569,171
-------- -------- -------- -------- -------- --------
Asset/liability gap per period $ (6,196) $ 48,004 $ 97,692 $(71,937) $ 5,067 $ 72,630
-------- -------- -------- -------- -------- ========
Cumulative gap $ (6,196) $ 41,808 $139,500 $ 67,563 $ 72,630
======== ======== ======== ======== ========
Percent of cumulative gap to total assets (0.96)% 6.50% 21.69% 10.50% 11.29%
Cumulative percentage of
interest-earning assets to
interest-bearing liabilities 97.59% 110.87% 129.26% 111.87% 112..76%
======== ======== ======== ======== ========
In general, falling interest rates will have a favorable effect on an
institution with a negative interest rate gap (i.e. with interest-earning assets
less than interest-bearing liabilities). The foregoing table does not
necessarily indicate the impact of general interest rate movements on the Bank's
net interest yield, because the repricing of various assets and liabilities is
discretionary and is subject to competitive and other pressures. As a result,
assets and liabilities indicated as repricing within the same period may, in
fact, reprice at different times and at different rate levels.
29
The following table sets forth adjustable rate mortgage (ARM) and fixed rate
mortgage loan originations, as well as the originations of other loans, during
the years indicated, and such originations as a percent of total loan
originations during the years indicated.
Years ended September 30, 1996 1995 1994 1993 1992
- ------------------------- ---- ---- ---- ---- ----
Percent Percent Percent Percent Percent
of of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
-------- -------- -------- -------- -------- ------- -------- ------- -------- -------
(Dollars in Thousands)
Loan originations:
Adjustable rate mortgages $171,203 92.68% $ 94,892 76.54% $76,910 85.60% $44,296 76.54% $40,793 67.58%
Fixed rate mortgages 13,520 7.32% 28,786 23.22% 12,681 14.11% 13,301 22.98% 19,145 31.72%
Other loans --- --- 302 0.24% 260 0.29% 277 0.48% 420 0.70%
-------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Total loan originations $184,723 100.00% $123,980 100.00% $89,851 100.00% $57,874 100.00% $60,358 100.00%
======== ====== ======== ====== ======= ====== ======= ====== ======= ======
The following table sets forth the composition of mortgage loans as well as
other loans in the Bank's portfolio at the dates indicated.
At September 30, 1996 1995 1994 1993 1992
- ---------------- ---- ---- ---- ---- ----
Percent Percent Percent Percent Percent
of of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
--------- -------- --------- -------- --------- ------- --------- ------- --------- -------
(Dollars in Thousands)
Loans outstanding at year end:
Adjustable rate mortgages $534,313 92.31% $443,219 90.29% $282,839 89.25% $213,263 83.65% $294,857 88.87%
Fixed rate mortgages 55,279 9.55% 56,092 11.43% 38,604 12.18% 45,055 17.67% 39,778 11.99%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans $589,592 101.86% $499,311 101.72% 321,443 101.43% 258,318 101.32% 334,635 100.86%
Other loans 888 0.15% 1,184 0.24% 1,322 0.42% 1,832 0.72% 2,324 0.70%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total gross loans 590,480 102.01% 500,495 101.96% 322,765 101.85% 260,150 102.04% 336,959 101.56%
Allowance for loan losses (6,032) (1.04)% (5,359) (1.09)% (4,684) (1.48)% (4,651) (1.82)% (4,364) (1.31)%
Deferred fees (3,950) (0.68)% (2,174) (0.44)% (1,176) (0.37)% (558) (0.22)% (818) (0.25)%
Unearned income (1,671) (0.29)% (2,075) (0.43)% --- ---% --- ---% --- ---%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans $578,827 100.00% $490,887 100.00% $316,905 100.00% $254,941 100.00% $331,777 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
ARM loans to total
mortgage loans 90.62% 88.77% 87.99% 82.56% 88.11%
ARM loans and other
loans to total gross loans 90.64% 88.79% 88.04% 82.68% 88.20%
30
Analysis of Net Interest Income
- -------------------------------
The following table sets forth for the years indicated, based on month end
average balances, the Bank's weighted average yields on its interest-earning
assets, the weighted average interest rates paid on its interest-bearing
liabilities, the yield spread, the ratio of interest-earning assets to interest-
bearing liabilities and the net yield on average interest earning assets.
Years Ended September 30, 1996 1995 1994
---- ---- ----
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost Balance Expense Cost
------- ------- ---- ------- ------- ---- ------- ------- ----
(Dollars in Thousands)
Interest Earning Assets:
Loans: (1,2) $532,932 $51,893 9.64% $392,737 $36,740 9.35% $285,295 $24,608 8.63%
Mortgage-backed securities 15,623 1,130 7.23% 92,060 8,585 9.33% 137,689 11,869 8.62%
Investment securities 25,461 1,448 5.69% 24,399 1,431 5.86% 25,102 1,151 4.59%
Federal funds 8,644 462 5.26% 9,317 529 5.60% 6,404 217 3.39%
-------- ------- ----- -------- ------- ---- -------- ------- -----
Total interest-earning assets 582,660 54,933 9.34% 518,513 47,285 9.12% 454,490 37,845 8.33%
-------- ------- ----- -------- ------- ---- -------- ------- -----
Interest-bearing liabilities:
Deposits 394,290 16,610 4.21% 366,645 14,074 3.84% 355,856 11,069 3.11%
Borrowed funds 110,700 7,665 6.92% 80,724 5,898 7.31% 41,935 3,399 8.11%
Collateralized mortgage
obligations 14,067 1,463 10.40% 17,586 1,664 9.46% 21,671 2,183 10.07%
-------- ------- ----- -------- ------- ---- -------- ------- -----
Total interest-bearing
liabilities 519,057 25,738 4.96% 464,955 21,636 4.65% 419,462 16,651 3.97%
-------- ------- ----- -------- ------- ---- -------- ------- -----
Net interest income/interest rate spread $29,195 4.38% $25,649 4.47% $21,194 4.36%
======= ===== ======= ==== ======= =====
Net average interest-earning
assets/ net yield on average
interest-earning assets $ 63,603 4.92% $ 53,558 4.95% $ 35,028 4.66%
======== ===== ======== ==== ======== =====
Ratio of average
interest-earning assets
to average interest-bearing
liabilities 112.25% 111.52% 108.35%
======= ======== ========
(1) Non-accrual loans are included in the average balance amount and interest
income has been reduced as it is the Bank's policy to generally exclude interest
income on loans that are contractually delinquent over 90 days.
(2) Loan fees considered to be an adjustment to yield of approximately
$486,000, $305,000, and $112,000 for the fiscal years ended September 30, 1996,
1995, and 1994, respectively, are included in interest income on first
mortgages. Approximately $525,000 has been excluded from the 1996 average yield
calculation as a result of non-recurring items
31
.Rate/Volume Analysis of Net Interest Income
-------------------------------------------
Net interest income can also be analyzed in terms of the impact of changing
rates and changing volumes. The following table describes the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to (i) changes attributable to changes in volume (changes
in volume multiplied by current rate), (ii) changes attributable to changes in
rates (changes in rates multiplied by prior volume), and (iii) the net change.
The change attributable to the combined impact of volume and rate has been
allocated proportionately to the change due to volume and the change due to
rate.
Fiscal 1996 Compared to Fiscal 1995 Compared to Fiscal 1994 Compared
Fiscal 1995 Increase Fiscal 1994 Increase Fiscal 1993 Increase
(Decrease) Due to (Decrease) Due to (Decrease) Due to
Volume Rate Net Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- --- ------ ---- ---
(Dollars In Thousands)
Interest income on interest-earning assets:
First mortgage and other loans $13,640 $1,513 $15,153 $ 9,267 $2,865 $12,132 $ 457 $ 754 $ 1,211
Mortgage-backed securities (7,128) (327) (7,455) (3,933) 649 (3,284) (439) 287 (152)
Investment securities 62 (45) 17 (32) 312 280 14 (12) 2
Federal funds (37) (30) (67) 97 215 312 9 36 45
------- ------ ------- ------- ------ ------- ------- ------- -------
Total interest income 6,537 1,111 7,648 5,399 4,041 9,440 41 1,065 1,106
------- ------ ------- ------- ------ ------- ------- ------- -------
Interest expense on interest-bearing liabilities:
Deposits 1,061 1,475 2,536 336 2,669 3,005 170 (1,510) (1,340)
Borrowed funds 2,190 (423) 1,767 3,144 (645) 2,499 (1,302) 11 (1,291)
Collateralized mortgage obligations (333) 132 (201) (462) (57) (519) (455) 156 (299)
------- ------ ------- ------- ------ ------- ------- ------- -------
Total interest expense 2,918 1,184 4,102 3,018 1,967 4,985 (1,587) (1,343) (2,930)
------- ------ ------- ------- ------ ------- ------- ------- -------
Net interest income $ 3,619 $ (73) $ 3,546 $ 2,381 $2,074 $ 4,455 $ 1,628 $ 2,408 $ 4,036
======= ====== ======= ======= ====== ======= ======= ======= =======
32
Operating Results
Interest Income
- ---------------
Total interest income increased by $7.6 million, or 16% in fiscal 1996 and
increased by $9.4 million, or 25% in fiscal 1995 , each as compared to the
relative prior fiscal year. The increase in fiscal 1996 was primarily the
result of an increase in average interest earnings assets of $64.1 million and
an increase in the average yield of 22 basis points. The increase in average
interest earning assets was primarily from an increase in the amount of multi-
family mortgage loans originated during fiscal 1996 at interest rates that
exceed the portfolio yield. The increase in fiscal 1995 was primarily the
result of an increase in average interest earning assets of $64.0 million and an
increase in the average yield of 79 basis points. The increase in average
interest earning assets was primarily from the increased amount of multi-family
mortgage loans originated during fiscal 1995 at favorable interest rates.
During fiscal 1995, the Bank de-securitized approximately $100 million of its
own privately issued mortgage-backed securities and re-classified the underlying
collateral as multi-family mortgage loans. This decrease in the balance of
mortgage-backed securities is the primary reason for the $7.5 million decrease
in mortgage-backed interest income in 1996. Specific information regarding
average balances, average yields and rate and volume variances can be found in
the tables on the previous two pages titled "Analysis of Net Interest Income"
and "Rate/Volume Analysis of Net Interest Income".
Increased competition for multi-family mortgage loans in the metropolitan area
of New York City is expected to adversely affect the Bank's ability to originate
these types of loans at the fiscal 1996 level without more competitive pricing,
which will adversely affect interest income from new originations. The Bank's
strength in its tradition of personal service will be augmented by new mortgage
products in an attempt to combat said competition.
Interest Expense
- ----------------
Total interest expense increased by $4.1 million, or 19% in fiscal 1996 and
increased by $5.0 million, or 30% in fiscal 1995, each as compared to the
relative prior fiscal year. The increase in fiscal 1996 was primarily a result
of an increase in average interest bearing liabilities of $54.1 million and an
increase in the average cost of funds of 31 basis points. The increase in the
average balance came from increases to both deposits and FHLB advances to fund
the net growth in multi-family mortgage loans. The increase in the average cost
of funds was a result of utilizing higher cost certificates of deposit and FHLB
advances to fund the growth in mortgage loans. The increase in 1995 was
primarily the result of an increase in interest bearing liabilities of $45.5
million and an increase in the average cost of funds of 68 basis points. The
increase in the average balance was primarily the result of increased borrowing
from the Federal Home Loan Bank to fund multi-family mortgage originations. The
increase in the average cost of funds was primarily from the increased cost of
deposits as certificates of deposit rates rose and balances were transferred
from low cost passbook accounts to higher costing certificates of deposit.
Specific information regarding average balances, average yields and rate and
volume variances can be found in the tables on the previous two pages titled
"Analysis of Net Interest Income" and "Rate/Volume Analysis of Net Interest
Income".
It is expected that future funding of mortgage originations is expected to
come from a combination of borrowed funds and certificates of deposit.
Alternative fund methods will continue to be explored to ensure a steady flow of
cash for planned originations.
Net Interest Income
- -------------------
Net interest income increased by $3.5 million, or 14% in fiscal 1996 and
increased by $4.5 million, or 21.0% in fiscal 1995, each as compared to the
relative prior fiscal year. Net interest income is the difference between total
interest income and total interest expense and is the primary source of revenue
for the Company and the Bank. The interest rate spread decreased to 4.38% in
fiscal 1996 as compared to 4.47% in fiscal 1995 and 4.36% in fiscal 1994. The
net interest margin decreased to 4.92% in fiscal 1996 as compared to 4.95% in
fiscal 1995. The ratio of average interest earning assets to average
33
interest bearing liabilities increased to 112.3% in fiscal 1996 as compared to
111.5% in fiscal 1995 and 108.4% in fiscal 1994.
Provision for Loan Losses
- -------------------------
The Company made no provision for loan losses in fiscal 1996, $1.0 million in
fiscal 1995, and $1.1 million in fiscal 1994. The calculation of the
provision, which is performed on a quarterly basis, is a function of both the
change in value and balance of non-performing loans in addition to the change in
balance of the performing portion of the Company's loan portfolio. The analysis
of the portfolio along with the recommended provision is prepared by management
for review and approval by both the Loan Committee and the Board of Directors.
Other Income
- ------------
Other income increased by $1.4 million, or 57% in fiscal 1996 and decreased by
$0.2 million, or 2% in fiscal 1995, each as compared to the relative prior
fiscal year. The increase in fiscal 1996 was primarily the result of an
increase in gains on sale of real estate owned, net income from real estate
owned, higher loan prepayment fees and increased ATM fees. The decrease in
fiscal 1995 was primarily the result of lower gains on sale on loans and real
estate owned. Loan prepayment fees are a function of the level of prepayments
of multi-family loans and can not be counted upon to provide a steady source of
recurring income. The Bank continues to add additional automated teller
machines in certain high traffic locations. These machines are primarily used
by non-bank customers and generate service fee income.
Other Expenses
- --------------
Other expenses increased by $3.4 million, or 26% in fiscal 1996 and decreased
by $0.3 million, or 1.1% in fiscal 1995, each as compared to the relative prior
fiscal year. $2.5 million of the increase in fiscal 1996 was a direct result of
the one-time charge associated with the recapitalization of the FDIC SAIF
insurance fund.
Compensation and benefits increased by $0.5 million, or 7% in fiscal 1996 and
$0.4 million or 6% in fiscal 1995, primarily as a result of merit increases and
higher bonus provisions due to the Company's above average financial performance
in each of the fiscal years.
Occupancy and equipment expense increased by $0.2 million, or 10% in fiscal
1996 and $0.1 million, or 4% in fiscal 1995, primarily as a result of increased
depreciation from renovated facilities and computer equipment.
SAIF deposit insurance premiums were relatively unchanged in fiscal 1996 and
decreased by $0.08 million, or 8.0% in fiscal 1995. The decrease was a result
of paying the lowest premium possible (23 basis points) due to the Bank's
superior capital position. It is expected that the recapitalization will lower
the Bank's insurance premium from 0.23% to 0.064%, a 72% reduction. Based upon
the amount paid in fiscal 1996, the Bank's premium expense would be reduced by
$0.6 million per annum on a going forward basis.
Professional fees, services and marketing increased by $0.4 million, or 44% in
fiscal 1996, primarily as a result of increased legal expenses associated with
the foreclosure process. This category increased by $0.1 million, or 14%, in
fiscal 1995, primarily as a result of increased marketing expenses relative to
the mortgage origination process.
Data processing costs increased by $0.05 million, 8% in fiscal 1996 and
increased by $0.07 million, or 13.9% in fiscal 1995, primarily as a result of
new product offerings and increased third party provider costs. The Bank
established a website at http://www.bankersfed.com, providing information to
depositors and borrowers with respect to their accounts as well as current
interest rate information. It is
34
expected that this website will be expanding in the future to include
transaction processing and third party payment processing.
There was no provision for real estate losses in fiscal 1996 as none was
necessary. This category decreased by $0.78 million, or 78.8%, in fiscal 1995
primarily as a result of lower levels of real estate owned and in-substance
foreclosures.
Other expenses decreased by $0.1 million, or 7% in fiscal 1996 and decreased
by $0.1 million, or 7% in fiscal 1995, primarily as a result of lower
foreclosure and mortgage-related expenses.
Income Taxes
- ------------
Income tax expense increased to $7.8 million for fiscal 1996 as compared to
$6.4 million for fiscal 1995 and $4.0 million in fiscal 1994, primarily from
increased pre-tax income. The Company used the percentage method for bad debt
deduction in fiscal 1996 and the experience method in fiscal 1995 and 1994.
Legislation recently passed and signed into law will require that the Company
use the experience method for Federal purposes, but still have the option of the
experience or percentage method for New York State purposes. At the time of
this writing, it is unclear which method will be allowed for New York City.
Net Income
- -----------
Net income increased to $9.2 million in fiscal 1996 as compared to $8.0
million in fiscal 1995 and $5.7 million in fiscal 1994. The increase is
primarily the result of increased multi-family mortgage originations, the
continuing downward trend in non-performing assets and well planned interest
rate risk management strategies. The level of net income achieved in fiscal 1996
is the highest on record for the Company, which was formed in 1988, and the
Bank, which was founded in 1890.
Liquidity and Capital Resources
The Bank is required by the OTS to maintain average daily balances of liquid
assets and short-term liquid assets (as defined) in amounts equal to 5% and 1%,
respectively, of net withdrawable deposits and borrowings payable in one year or
less to assure its ability to meet demands for withdrawals and repayment of
short-term borrowings. The Bank currently intends to maintain a minimum level
of liquid assets in excess of the requirement. The Bank's average daily
liquidity was 6.73% for the fiscal year ended September 30, 1996, compared to
7.64% for the preceding year. The liquidity of the Bank at September 30, 1996
was 6.19%, which exceeded the then applicable 5% liquidity requirement. Its
short-term liquidity ratio at September 30, 1996 was 3.26%.
The Bank's primary sources of funds are deposits, amortization and repayment
of loan and mortgage-backed security principal, FHLB advances, maturities of
investment securities and short-term investments, and funds provided from
operations. While scheduled loan amortization and maturing investment
securities and short-term investments are a relatively predictable source of
funds, deposit flows and loan prepayments are greatly influenced by general
interest rates, economic conditions and competition. The Bank manages the
pricing of its deposits to maintain a steady deposit balance. The Bank uses its
capital resources principally to meet its ongoing commitments to fund maturing
certificates of deposit and deposit withdrawals, repay borrowings, fund existing
and continuing loan commitments, maintain its liquidity and meet operating
expenses. In the normal course of business, there are outstanding commitments
and contingent liabilities which are not reflected in the accompanying
consolidated financial statements. At September 30, 1996, the Bank had
commitments to originate loans of approximately $8.5 million and unused lines of
credit of approximately $0.2 million. In July, 1996, the Bank renewed a $28.2
million overnight line of credit with the Federal Home Loan Bank of New York
which expires in July, 1997. In management's opinion, the Bank had adequate
resources to fund existing commitments at September 30, 1996.
35
Impact of Inflation and Changing Prices
The financial statements and notes thereto presented herein have been prepared
in accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the changes in the relative purchasing power of
money over time and inflation. The impact of inflation is reflected in the
increased cost of the Bank's operations. Unlike most industrial companies,
nearly all the assets and liabilities of the Bank are monetary. As a result,
interest rates have a greater impact on the Bank's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.
Impact of New Accounting Standards
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long Lived Assets to be Disposed of." SFAS No. 121
establishes accounting standards for recognizing and measuring impairment of
long-lived assets and certain identifiable intangibles to be disposed of. SFAS
No. 121 requires that long-lived assets and certain identifiable intangibles to
be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. SFAS No. 121 is effective for financial statements for fiscal
years beginning after December 15, 1995. SFAS No. 121, when adopted, is not
expected to have a material adverse effect on the Company's financial condition.
In June 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights." SFAS No. 122 amends SFAS No. 65, "Accounting for Certain Mortgage
Banking Activities" to eliminate the accounting distinction between rights to
service mortgage loans that are acquired through loan origination and those
acquired through purchase. Thus, if mortgage loans are sold or securitized but
the rights to service those loans are retained, the total cost of such loans
(whether originated or acquired) should be allocated to (1) the mortgage
servicing rights, and (2) the loan themselves based on their relative fair
value. SFAS 122 is effective for fiscal years beginning after December 15, 1995
to loan origination or securitization of mortgage servicing rights and to
impairment evaluations of all mortgage servicing rights, including those
purchased prior to the effective date of SFAS No. 122. SFAS No. 122, when
adopted, is not expected to have a material adverse effect on the Company's
financial condition.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 applies to all transactions in
which an entity acquires goods or services by issuing equity instruments or by
incurring liabilities where the payment amounts are based on the entity's common
stock price, except for employee stock ownership plans. SFAS No. 123 established
a fair value based method of accounting for stock-based compensation arrangement
with employees, rather then the intrinsic value based method that is contained
in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). SFAS No. 123 does not require an entity to adopt the
new fair value based method for purposes of preparing its basic financial
statements. While the SFAS No. 123 fair value based method is considered by the
FASB to be preferable to the APB No. 25 method, entities are allowed to continue
to use the APB No. 25 method for preparing its basic financial statements.
Entities not adopting the fair value based method under SFAS No. 123 are
required to present pro forma net income and earnings per share information, in
the notes to the financial statements, as if the fair value based method had
been adopted.
The accounting requirements of SFAS No. 123 are effective for transactions
entered into during fiscal years that begin after December 15, 1995, but may
also be adopted upon the issuance of SFAS No. 123. The disclosure requirements
are effective for financial statements for fiscal years beginning after December
15, 1995, or for an earlier fiscal year for which SFAS No. 123 is initially
adopted for recognizing compensation cost. Pro forma disclosures required for
entities that elect to continue to measure compensation cost using the APB No.
25 method must include the effects of all awards granted in fiscal years that
begin after December 15, 1994. Pro forma disclosures for awards granted in the
first fiscal year beginning after December 15, 1994 need not be included in
financial statements for that fiscal year but should be presented subsequently
whenever financial statements for that fiscal year are
36
presented for comparative purposes with financial statements for a later fiscal
year. The Company currently does not intend to adopt the provisions of this
statement early.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125"). SFAS No. 125 establishes accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial components approach that focuses on
control. Under this approach, an entity, subsequent to a transfer of financial
assets, must recognize the financial and servicing assets it controls and the
liabilities it has incurred, derecognize financial assets when control has been
surrendered, and derecognize liabilities when extinguished. Standards for
distinguishing transfers of financial assets that are sales from those that are
secured borrowings are provided in SFAS No. 125. A transfer not meeting the
criteria for a sale must be accounted for as a secured borrowing with pledge of
collateral.
SFAS No. 125 requires that liabilities and derivatives incurred or obtained by
transferors as part of a transfer of financial assets be initially measured at
fair value, if practicable. It additionally requires that servicing assets and
other retained interests in transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of transfer.
Servicing assets and liabilities must be subsequently measured by amortization
in proportion to and over the period of estimated net servicing income or loss
and assessed for asset impairment, or increased obligation, based on their fair
value.
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is not permitted. The
Company is currently reviewing the impact of the implementation of SFAS No. 125
on its consolidated financial statements.
37
Item 8 - Financial Statements and Supplementary Data
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
Financial Statements
- --------------------
BFS Bankorp, Inc. is responsible for the preparation, integrity and fair
presentation of its published financial statement as of September 30, 1996, and
the year then ended. The financial statements have been prepared in accordance
with generally accepted accounting principles, and as such, include amounts,
some of which are based on judgments and estimates of management.
Internal Control Structure Over Financial Reporting
- ---------------------------------------------------
Management of BFS Bankorp, Inc. is responsible for establishing and maintaining
an effective internal control structure over financial reporting presented in
conformity with both generally accepted accounting principles and the Office of
Thrift Supervision instructions for Thrift Financial Reports (TFRs). The
structure contains monitoring mechanisms, and actions are taken to correct
deficiencies identified.
There are inherent limitations in the effectiveness of any internal control
structure, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurances with respect to financial
statement preparation. Further, because of changes in conditions, the
effectiveness of an internal control structure may vary over time.
Management assessed the Company's internal control structure over financial
reporting presented in conformity with both generally accepted accounting
principles and TFR instructions as of September 30, 1996. This assessment was
based on criteria for effective control over financial reporting described in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that, as of September 30, 1996, the Company maintained an effective
internal control structure over financial reporting presented in conformity with
both generally accepted accounting principles and TFR instructions.
Compliance With Laws And Regulations
- ------------------------------------
Management is also responsible for compliance with the federal and state laws
and regulations concerning dividend restrictions and federal laws and
regulations concerning loans to insiders designated by the FDIC as safety and
soundness laws and regulations.
Management assessed its compliance with federal and state laws and regulations
concerning dividend restrictions and federal laws and regulations relating to
safety and soundness. Based on this assessment, management believes that BFS
Bankorp, Inc. complied in all significant respects, with the designated laws and
regulations relating to safety and soundness for the year ended September 30,
1996.
/s/ James A. Randall /s/ Gerard A. Perri
- ----------------------------- -------------------------------
James A. Randall Gerard A. Perri
Chief Executive Officer Chief Financial Officer
December 17, 1996
38
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
BFS Bankorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of BFS Bankorp, Inc. and Subsidiaries (the "Company") as of September 30, 1996
and 1995, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended September 30, 1996. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of BFS Bankorp, Inc.
and Subsidiaries as of September 30, 1996 and 1995 and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1996, in conformity with generally accepted accounting
principles.
As discussed in note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 114 "Accounting by
Creditors for Impairment of a Loan" as amended by Statement of Financial
Accounting Standards No. 118 "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosure" effective October 1, 1995 and Statement of
Financial Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," effective October 1, 1994.
October 25, 1996, except as to Note 22, which is as of December 3, 1996
New York, New York
39
BFS BANKORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1996 1995
- -------------- ---- ----
Assets: (Dollars In Thousands)
Cash and due from banks $ 8,794 $ 5,978
Federal funds 5,000 14,000
Securities held to maturity, net (estimated market value of $21,856
and $16,163 at September 30, 1996 and 1995, respectively)-(notes
5,9 and 10) 21,960 16,135
Securities available for sale, net (note 5) 1,364 ---
Mortgage-backed securities held to maturity, net (estimated
market value of $13,999 and $17,426 at September 30, 1996 and
1995, respectively)-(notes 2,9 and 10) 14,203 17,194
Loans, net (notes 3,4 and 9)
First mortgage loans and other loans 584,859 496,246
Allowance for loan losses (6,032) (5,359)
-------- --------
Loans, net 578,827 490,887
-------- --------
Premises and equipment, net (note 7) 3,178 2,671
Accrued interest receivable:
Loans 4,274 3,780
Securities 251 271
Mortgage-backed securities 172 208
Other assets (note 6 and 11) 5,157 4,027
-------- --------
Total assets $643,180 $555,151
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 8) $410,324 $388,562
Borrowed funds (note 9) 146,253 94,600
Collateralized mortgage obligations, net (note 10) 12,594 15,183
Mortgagors' escrow payments 11,676 10,237
Accrued expenses and other liabilities (notes 11 and 12) 12,119 5,757
-------- --------
Total liabilities 592,966 514,339
-------- --------
Stockholders' equity (notes 14,15,16,17,18 and 19):
Preferred stock, $.01 par value, 2,000,000 shares
authorized, none issued --- ---
Common stock, $.01 par value, 6,000,000 shares authorized,
1,695,428 and 1,694,567 shares issued and 1,635,488 and 1,634,627
outstanding at September 30, 1996 and 1995, respectively 17 17
Additional paid-in capital 10,742 10,711
Retained earnings, substantially restricted 39,906 30,670
Unrealized gain on available for sale securities, net of tax of $121 133 ---
Common stock acquired for Management Recognition Plan (MRP) (19) (21)
Treasury stock, at cost; 59,940 shares at September 30, 1996 and 1995 (565) (565)
-------- --------
Total stockholders' equity 50,214 40,812
-------- --------
Commitments and contingencies (note 13)
Total liabilities and stockholders' equity $643,180 $555,151
======== ========
See accompanying notes to consolidated financial statements.
40
BFS BANKORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 1996 1995 1994
- ------------------------- ---- ---- ----
(Dollars In Thousands)
Interest income:
First mortgage and other loans (note 3) $51,893 $36,740 $24,608
Mortgage-backed securities 1,130 8,585 11,869
Securities 1,448 1,431 1,151
Federal funds 462 529 217
-------- -------- ---------
Total interest income 54,933 47,285 37,845
-------- -------- ---------
Interest expense:
Deposits (note 8) 16,610 14,074 11,069
Borrowed funds 7,665 5,898 3,399
Collateralized mortgage obligations 1,463 1,664 2,183
-------- -------- ---------
Total interest expense 25,738 21,636 16,651
-------- -------- ---------
Net interest income 29,195 25,649 21,194
Provision for loan losses (note 4) --- 1,041 1,071
-------- -------- ---------
Net interest income after provision for loan losses 29,195 24,608 20,123
-------- -------- ---------
Other income:
Loan fees and service charges 1,395 1,112 1,285
Other fees, services charges and other income 1,056 976 855
Gain on sale of real estate owned, net 1,334 165 475
Gain on sale of securities available for sale 50 --- ---
Gain on sales of loans and mortgage-backed securities --- 392 74
Income (loss) from real estate operations, net 154 (97) 54
-------- -------- ---------
Total other income 3,989 2,548 2,743
-------- -------- ---------
Other expenses:
Compensation and benefits (note 12) 7,296 6,797 6,404
FDIC SAIF Special assessment 2,507 --- ---
Occupancy and equipment (notes 7 and 13) 2,343 2,123 2,038
Marketing, professional fees and services 1,278 887 781
FDIC/SAIF deposit insurance premiums 914 892 970
Data processing service fees 637 590 518
Provision for real estate losses (note 6) --- 211 994
Other 1,188 1,280 1,372
-------- -------- ---------
Total other expenses 16,163 12,780 13,077
-------- -------- --------
Income before provision for income taxes 17,021 14,376 9,789
Provision for income taxes (note 11) 7,785 6,355 4,043
-------- -------- ---------
Net income $ 9,236 $ 8,021 $ 5,746
======== ======== =========
Primary earnings per share $ 5.27 $ 4.66 $ 3.37
======== ======== =========
Fully diluted earnings per share $ 5.23 $ 4.65 $ 3.34
======== ======== =========
See accompanying notes to consolidated financial statements.
41
BFS BANKORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended September 30, 1996, 1995 and 1994
- ---------------------------------------------
Unrealized
Common Gain on
Additional Stock Securities
Common Paid-in Retained Acquired Treasury Available
Stock Capital Earnings for MRP Stock For Sale Total
-------- -------- -------- --------- -------- ---------- -------
(Dollars In Thousands)
Balance at September 30, 1993 $ 17 $ 10,313 $ 16,903 $ (56) $(565) $--- $26,612
Net income for the year --- --- 5,746 --- --- --- 5,746
Stock options exercised (20,062 shares) --- 224 --- --- --- --- 224
Amortization of ESOP and MRP stock --- --- --- 24 --- --- 24
-------- -------- -------- --------- -------- ---------- -------
Balance at September 30, 1994 17 10,537 22,649 (32) (565) --- 32,606
Net income for the year --- --- 8,021 --- --- --- 8,021
Stock options exercised (20,214 shares) --- 174 --- --- --- --- 174
Amortization of MRP stock --- --- --- 11 --- --- 11
-------- -------- -------- --------- -------- ---------- -------
Balance at September 30, 1995 17 10,711 30,670 (21) (565) --- 40,812
-------- -------- -------- --------- -------- ---------- -------
Net income for the year --- --- 9,236 --- --- --- 9,236
Incentive stock plan issuance (861 shares) --- 31 --- --- --- --- 31
Unrealized gain on securities --- --- --- --- --- 133 133
Amortization of MRP stock --- --- --- 2 --- --- 2
-------- -------- -------- --------- -------- ---------- -------
Balance at September 30, 1996 $ 17 $ 10,742 $ 39,906 $ (19) $(565) $133 $50,214
======== ======== ======== ========= ======== ========== =======
See accompanying notes to consolidated financial statements.
42
BFS BANKORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1996 1995 1994
- --------------------------- ---- ---- ----
(Dollars In Thousands)
Net cash flows from operating activities:
Net income $ 9,236 $ 8,021 $ 5,746
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of MRP and ESOP 2 11 24
Accretion of discounts, net of amortization of premiums (1,652) (505) (202)
(Increase) decrease in other assets (1,354) (99) 13,318
Increase (decrease) in accrued expenses and other liabilities 6,362 (2,795) 2,690
Increase in accrued interest receivable (438) (910) (155)
Provision for loan and real estate losses --- 1,252 2,065
Gain on sale of assets, net (1,384) (557) (549)
Incentive stock plan issuance 31 31 31
Depreciation and amortization 749 626 574
--------- --------- --------
Net cash provided by operating activities 11,552 5,075 23,542
--------- --------- --------
Cash flows from investing activities:
Principal payments on mortgage and other loans 84,325 44,142 28,742
Principal payments on mortgage-backed securities 2,978 10,524 22,078
Mortgage and other loans sold 7,699 15,222 7,414
Real estate owned sold 8,064 --- ---
Investments in mortgage and other loans (184,723) (123,980) (89,851)
Investments in mortgage-backed securities --- (7,170) ---
Maturities of securities held to maturity 21,337 15,603 8,189
Sale of securities available for sale 390 --- ---
Purchases of securities held to maturity (27,157) (19,417) (7,080)
Purchase of securities available for sale (1,450) --- ---
Net additions to premises and equipment (1,256) (513) (565)
--------- --------- --------
Net cash used in investing activities (89,793) (65,589) (31,073)
--------- --------- --------
Cash flows from financing activities:
Increase in deposits, net of interest credited 21,762 25,690 12,586
Increase (decrease) in other borrowings 51,653 41,935 (1,550)
Principal payments on collateralized mortgage obligations (2,797) (2,547) (5,240)
Stock options exercised --- 143 193
Increase in advance payments by borrowers 1,439 1,526 1,165
--------- --------- --------
Net cash provided by financing activities 72,057 66,747 7,154
--------- --------- --------
Net (decrease) increase in cash and cash equivalents (6,184) 6,233 (377)
--------- --------- --------
Cash and cash equivalents at beginning of the year 19,978 13,745 14,122
--------- --------- --------
Cash and cash equivalents at ending of the year $ 13,794 $ 19,978 $ 13,745
========= ========= ========
Supplemental disclosure of cash flow information:
Cash paid during year for:
Income taxes $ 6,996 $ 7,552 $ 4,387
Interest on deposits and borrowed money $ 25,738 $ 21,636 $ 16,651
Non-cash transactions:
Transfer from loans to real estate owned $ 7,000 $ 1,902 $ 6,289
Transfer of mortgage-backed securities held for
sale, net to mortgage-backed securities held to
maturity, net $ --- $ 103,354 $ ---
Transfer of mortgage-backed
securities held to maturity,
net to first mortgages and other loans, net $ --- $ 102,711 $ ---
See accompanying notes to consolidated financial statements.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 Summary of Significant Accounting Policies
(a) Principles of Consolidation and Basis of Presentation
- ---------------------------------------------------------
The accompanying consolidated financial statements are prepared using the
accrual basis of accounting and include the accounts of BFS Bankorp and its
subsidiary, Bankers Federal Savings FSB and its wholly owned subsidiaries
(collectively the "Company"). All material intercompany transactions and
balances have been eliminated in consolidation. Certain amounts in the 1995 and
1994 financial statements have been reclassified to conform to the 1996
financial statement presentation.
(b) Loans, net
- --------------
Loans are carried at unpaid principal balances plus unamortized premiums
less unearned discounts, deferred loan origination fees and the allowance for
loan losses. Discounts (premiums) on mortgage loans purchased are deferred and
accreted (amortized) to income over the estimated life of the loans, using the
level-yield method. Loan origination fees and direct loan origination costs are
deferred and subsequently recognized in interest income as a yield adjustment
using the level-yield method over the contractual loan term, adjusted for
estimated prepayments in certain circumstances. Interest on loans is recognized
on the accrual basis. Interest on conventional mortgages and other loans
contractually delinquent over 90 days is generally excluded from interest
income. Interest is subsequently recognized on non-accrual loans only to the
extent that cash is received. Loans are returned to accrual status when
management deems that collection is reasonable. Provisions for loan losses on
mortgages and other loans are charged to operations under the reserve method,
based on management's periodic review and evaluation, which considers the Bank's
past loan loss experience, known and inherent risks in the loan portfolio,
adverse situations which may affect the borrowers' ability to repay, overall
portfolio quality, and an assessment of current and prospective economic
conditions. Regulatory examiners may require the Bank to recognize additions to
the allowance based upon their judgments about information available to them at
the time of their examination.
Effective October 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS No. 114") as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of Loan-Income Recognition and
Disclosures" (SFAS No. 118"). SFAS No. 114 applies to all loans except for
large groups of smaller balance homogenous loans collectively evaluated for
impairment and certain other loans. Under SFAS No. 114 and SFAS No. 118, a loan
is considered impaired when, based upon current information and events, it is
probable that a creditor will be unable to collect all amounts due including
principal and interest, according to the contractual terms of the loan
agreement. These statements require that impaired loans that are within their
scope be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or as a practical expedient, at
the loan's current observable market price, or the fair value of the collateral
if the loan is collateral dependent. The amount by which the recorded
investment of an impaired loan exceeds the measurement value is recognized by
creating a valuation allowance through a charge to the provision for loan
losses. In connection with the adoption of SFAS No. 114, the Company has, for
all years prior to adoption, reclassified in-substance loans, net of the related
allowance for losses, if any, from real estate acquired through foreclosure to
Loans, net in the Company's statement of condition. Interest income received on
impaired loans is recognized on a cash basis. The adoption of SFAS No. 114 and
SFAS No. 118 had no impact on fiscal 1996 net income.
(c) Money Market Investments
------------------------
Money market investments represent short-term instruments (generally ninety
days or less), which are generally held to maturity. These investments are
carried at cost or, if applicable, at cost adjusted for accretion of discount or
amortization of premium using a method which approximates the level-yield method
over the period to maturity. At September 30, 1996 and 1995, this category
consisted only of Federal Funds, all of which were sold to the Federal Home Loan
Bank of New York.
44
(d) Investment and Mortgage-Backed Securities
-----------------------------------------
Effective October 1, 1994 the Bank adopted Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investment in Debt and Equity
Securities" ("SFAS No. 115"). Under SFAS No. 115, investment and mortgage-
backed securities which the Bank has the positive intent and ability to hold
until maturity are carried at cost, adjusted for amortization of premiums and
accretion of discounts on a level yield method adjusted for actual prepayments.
Investment and mortgage-backed securities to be held for indefinite periods of
time and not intended to be held to maturity and marketable equity securities
are now classified as available for sale securities and are recorded at fair
value, with unrealized appreciation and depreciation, net of tax, reported as a
separate component of shareholders' equity. Gains and losses on the sale of
securities are determined using the specific identification method.
(e) Premises and Equipment, net
- -------------------------------
Premises and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation of buildings, furniture, fixtures and equipment
is accumulated on a straight-line basis over the estimated useful lives of the
assets. Amortization of leasehold improvements is accumulated on a straight-line
basis over the shorter of their estimated useful lives or the terms of the
lease. Maintenance, repairs, and minor improvements are charged to operating
expense as incurred.
(f) Real Estate Acquired Through Foreclosure, net
- -------------------------------------------------
Properties acquired through foreclosure are initially recorded at the lower
of cost or fair value less estimated selling costs at the date of acquisition.
The carrying value of the property is subsequently adjusted to the extent it
exceeds fair value. Valuation allowances for subsequent losses are established
on individual properties to the extent of further deterioration in values
through a provision for losses on real estate which is charged to operations.
Routine carrying costs, primarily real estate taxes and property insurance are
charged to operations as incurred.
(g) Income Taxes
- ----------------
SFAS No. 109, Accounting for Income Taxes, requires a change to the asset
and liability method of accounting for income taxes from the deferred method of
accounting for income taxes previously followed. Deferred income tax expense
(benefit) under SFAS No. 109 is determined by recognizing deferred tax assets
and liabilities for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. The realization of deferred tax
assets is assessed and a valuation allowance provided for that portion of the
asset for which it is more likely than not that it will not be realized.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The holding company and its
subsidiaries file calendar year federal, state and local income tax returns on a
consolidated basis.
(h) Primary and Fully Diluted Earnings Per Common Share
- --------------------------------------------------------
Primary earnings per common share is computed based on net income for the
year divided by the weighted average number of shares of common stock
outstanding. The weighted average number of shares of common stock used in the
computation of primary earnings per share was 1,754,167, 1,722,358 and
1,702,856, for the fiscal years ended September 30, 1996, 1995 and 1994,
respectively.
Fully diluted earnings per common share is computed based on net income for
the year divided by the weighted average number of shares of common stock and
dilutive common stock equivalents outstanding. The weighted average number of
shares of common stock and dilutive common stock equivalents used in the
computation of fully diluted earnings per share was 1,764,804, 1,723,160 and
1,722,857 for the fiscal years ended September 30, 1996, 1995 and 1994,
respectively.
45
(j) Cash and Cash Equivalents
- -----------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks and federal funds.
2 Mortgage-backed Securities Held to Maturity, net
Mortgage-backed securities held to maturity, net are summarized as follows:
Estimated
Principal Unearned Carrying market
September 30, 1996 Balance Discounts value value
- ------------------ --------- --------- -------- -----------
(Dollars In Thousands)
GNMA $ 324 $--- $ 324 $ 320
FHLMC 13,900 (21) 13,879 13,679
------- ---- ------- -------
Total mortgage-backed
securities, net $14,224 $(21) $14,203 $13,999
======= ==== ======= =======
Estimated
Principal Unearned Carrying market
September 30, 1995 Balance Discounts value value
- ------------------ --------- --------- -------- -----------
(Dollars In Thousands)
GNMA $ 454 $--- $ 454 $ 457
FHLMC 16,748 (27) 16,721 16,950
REMIC 19 --- 19 19
------- ---- ------- -------
Total mortgage-backed
securities, net $17,221 $(27) $17,194 $17,426
======= ==== ======= =======
Gross unrealized gains on mortgage-backed securities as of September 30, 1996
and 1995 were approximately $95,000 and $285,000. Gross unrealized losses on
mortgage-backed securities as of September 30, 1996 and 1995 were approximately
$299,000 and $53,000.
3 Loans, net
Loans, net are summarized as follows:
September 30, 1996 1995
- ------------- ---- ----
(Dollars In Thousands)
First mortgage loans:
1-4 family $ 10,704 $ 19,391
Multi-family 561,495 465,545
Commercial 17,393 14,375
Deferred loan origination fees (3,950) (2,174)
Unearned income (1,671) (2,075)
-------- --------
583,971 495,062
Other loans:
Home equity 585 744
Student 177 234
Loans on deposit accounts 126 202
Consumer --- 4
-------- --------
888 1,184
-------- --------
584,859 496,246
Allowance for loan losses (6,032) (5,359)
-------- --------
Loans, net $578,827 $490,887
======== ========
Loans on non-accrual status totaled approximately $6,408,000, $12,833,000 and
$19,002,000 as of September 30, 1996, 1995 and 1994, respectively. The effect of
non-accrual loans on interest income for the years ended September 30, 1996,
1995 and 1994 was approximately $664,000, $1,746,000, and $1,473,000
respectively.
46
The Bank follows SFAS No. 114 which applies to all loans, except large groups
of smaller balance homogeneous loans that are collectively evaluated for
impairment. The Bank's impaired loans under SFAS No. 114 includes the separate
evaluation of all multi-family loans. As of September 30, 1996, the Bank's
recorded investment in impaired loans was $6,408,000 with a related allowance of
$910,000. During the year ended September 30, 1996, the Bank's recorded
investment in impaired loans averaged $9,543,000 and interest income of $135,000
was recognized on impaired loans.
Loans serviced by the Bank for the benefit of others totaled approximately
$45,262,000 and $56,591,000 as of September 30, 1996 and 1995, respectively.
The Bank's primary concentration of loans is located in the downstate New York
area. At September 30, 1996, the major concentrations by collateral type are as
follows: (i) one-to-four family residential, 1.81%; (ii) multi-family, 95.09%;
(iii) commercial, 2.95%; and (iv) other, 0.15%. Substantially all of the Bank's
business activity is through originations of loans secured by real estate with
customers located in the New York metropolitan area. The risk inherent in this
portfolio is dependent not only upon regional and general economic stability
which affects property values, but also financial well-being and
creditworthiness of the borrowers. In order to minimize the credit risk related
to this concentration, the Company utilizes prudent underwriting standards as
well as diversifying the type and locations of real estate projects underwritten
in the area.
4 Allowance for Loan Losses
Activity in the allowance for loan losses is summarized as follows:
Years ended September 30, 1996 1995 1994
- ------------------------- ---- ---- ----
(Dollars In Thousands)
Balance at beginning of
year $ 5,359 $ 4,684 $ 4,651
Provision for loan losses --- 1,041 1,071
Recoveries/(charge offs), net 673 (366) (1,038)
------- ------- -------
Balance at end of year $ 6,032 $ 5,359 $ 4,684
======= ======= =======
5 Securities, net
Securities, net are summarized as follows:
September 30, 1996 1995
---- ----
Estimated Estimated
Carrying Market Carrying Market
Value Value Value Value
------- ------- ------- -------
(Dollars In Thousands)
Securities held to maturity
Notes at amortized cost:
U.S. Government and
agency obligations $14,498 $14,394 $10,993 $11,021
Other 149 149 144 144
------- ------- ------- -------
14,647 14,543 11,137 11,165
FHLB of New York stock, at
cost 7,313 7,313 4,998 4,998
------- ------- ------- -------
7,313 7,313 4,998 4,998
------- ------- ------- -------
Total Securities held to
maturity, net $21,960 $21,856 $16,135 $16,163
======= ======= ======= =======
Securities available for sale,
net Equity securities $ 1,364 $ 1,364 $ --- $ ---
======= ======= ======= =======
Gross unrealized gains on bonds and notes as of September 30, 1996 and 1995
were approximately $23,000 and $33,000. Gross unrealized losses as of
September 30, 1996 and 1995 were approximately $127,000 and $5,000. Of the
$14,500,000 face value of bonds and notes at September 30, 1996 $2,000,000
mature within one year, $2,000,000 mature within three years and $10,500,000
matures
47
within five years. FHLB stock is carried at cost and is not considered a
marketable equity security because the sale of said stock is restricted as part
of the membership requirements of the FHLB. Gross unrealized gains on securities
available for sale as of September 30, 1996 and 1995 were approximately $254,000
and $-0-. Realized gains on sale of securities available for sale $50,000 and
$-0- for the fiscal years ended September 30, 1996 and 1995. There were no
losses in either year.
6 Real Estate Acquired Through Foreclosure, net
Real estate acquired through foreclosure, net, which is included in other
assets, is summarized as follows:
September 30, 1996 1995
- ------------- ---- ----
(Dollars In Thousands)
Real estate acquired through foreclosure:
1-4 family $ 266 $ 265
Multi-family --- 104
----- -----
Total $ 266 $ 369
===== =====
Provisions of $-0-, $211,000, and $994,000 were added and write-downs/charge-
offs totaling $-0-, $418,000, and $1,454,000 were deducted during the fiscal
years ended September 30, 1996, 1995 and 1994, respectively.
7 Premises and Equipment, net
Premises and equipment is summarized as follows:
September 30, 1996 1995
- ------------- ---- ----
(Dollars In Thousands)
At cost
Land $ 223 $ 223
Office buildings 3,418 2,843
Leasehold improvements 1,121 1,071
Furniture, fixtures and equipment 4,010 3,489
------- -------
8,772 7,626
Accumulated depreciation and amortization (5,594) (4,955)
------- -------
Premises and equipment, net $ 3,178 $ 2,671
======= =======
Depreciation and amortization expense was approximately $749,000, $626,000,
and $574,000 for the years ended September 30, 1996, 1995, and 1994,
respectively.
48
8 Deposits
Deposits are summarized as follows:
September 30, 1996 1995
- ------------- ---- ----
Percent Weighted Percent Weighted
of Average of Average
Amount Total Rate Amount Total Rate
------ ------ --------- -------- -------- ---------
(Dollars In Thousands)
Regular savings $108,382 26.4% 2.50% $115,606 29.8% 2.50%
NOW accounts 45,819 11.2% 2.53% 44,840 11.5% 2.73%
Money market accounts 23,104 5.6% 3.23% 24,526 6.3% 3.22%
-------- ------ ----- -------- ------ -----
Total 177,305 43.2% 2.60% 184,972 47.6% 2.65%
-------- ------ ----- -------- ------ -----
Certificate accounts by contractual maturity:
6 months or less 11,164 2.7% 4.20% 4,231 1.1% 4.07%
7 to 12 months 61,749 15.0% 5.06% 54,206 14.0% 5.24%
13 to 24 months 102,051 24.9% 5.58% 93,275 24.0% 5.75%
25 to 36 months 36,742 9.0% 6.42% 35,342 9.1% 6.26%
Over 36 months 21,313 5.2% 5.96% 16,536 4.2% 6.10%
-------- ------ ----- -------- ------ -----
Total certificate accounts 233,019 56.8% 5.54% 203,590 52.4% 5.69%
-------- ------ ----- -------- ------ -----
Total deposits $410,324 100.0% 4.27% $388,562 100.0% 4.25%
======== ====== ===== ======== ====== =====
Included in the above are certificate accounts with denominations of $100,000
or more totaling approximately $21,999,000 and $15,885,000 as of September 30,
1996 and 1995, respectively.
Interest expense on deposits is summarized as follows:
Years Ended September 30, 1996 1995 1994
- ------------------------- ---- ---- ----
(Dollars In Thousands)
NOW accounts $ 1,038 $ 1,048 $ 1,170
Regular savings 2,786 3,129 3,827
Money market accounts 755 784 757
Certificate accounts 12,031 9,113 5,315
------- ------- -------
Total interest expense $16,610 $14,074 $11,069
======= ======= =======
To recapitalize the SAIF, legislation was passed by Congress and signed into
law by the President of the United States on September 30, 1996 to assess a one
time special assessment of 65.7 basis points of the deposit base of SAIF insured
institutions. Included in the Company's operating results for the fiscal year
ended September 30, 1996 is a $2.5 million one-time charge to recapitalize the
SAIF fund. It is expected that the Bank will be assessed at the rate of .065% of
deposits beginning January 1, 1997 and may be eligible for a rebate on the .23%
premium paid for the period October 1, 1996 through December 31, 1996.
49
9 Borrowed Funds
Borrowed funds are summarized as follows:
September 30, 1996 1995
---- ----
(Dollars In thousands)
Advances from Federal Home Loan Bank of New York
Variable rate overnight line of credit $ 13,500 $ ---
7.28% due 1996 20,000 20,000
5.87% due 1997 5,000 ---
6.96% due 1997 12,950 12,950
7.17% due 1998 10,000 10,000
7.20% due 1998 5,000 5,000
6.47% due 1999 5,000 ---
6.89% due 1999 15,000 15,000
6.65% due 1999 5,000 ---
7.44% due 2000 10,000 10,000
6.76% due 2001 5,000 ---
6.90% due 2001 5,000 ---
6.75% due 2002 20,000 20,000
6.95% due 2003 5,000 ---
7.07% due 2003 5,000 ---
7.38% due 2011--Amortizing 808 ---
7.34% due 2011--Amortizing 3,995 ---
Senior Debt
Prime plus 2% due 1996 --- 1,650
-------- -------
Total Borrowed Funds $146,253 $94,600
======== =======
Under the terms of a blanket collateral agreement with the Federal Home Loan
Bank of New York (FHLBNY), advances are collateralized by certain qualifying
assets not otherwise pledged (primarily first mortgage loans) in an amount at
least equal to 110% of the advances outstanding.
At September 30, 1996, 1995 and 1994 the weighted average interest rates
for borrowings were 6.89%, 7.06%, and 7.50%, respectively. The Bank has procured
a $28.2 million line of credit with the Federal Home Loan Bank of New York which
expires in July, 1997.
10 Collateralized Mortgage Obligations, net
BFED I Corp., a wholly owned limited-purpose finance subsidiary, is authorized
to issue and sell collateralized mortgage obligations (CMOs), which are debt
securities issued with individual classes of bonds containing stated maturities
ranging from five to thirty years.
At September 30, 1996 and 1995, CMOs of $12,594,000 and $15,183,000 (net of
amortized discount of approximately $1,010,000 and $1,217,000), respectively,
were outstanding with a coupon interest rate of 8.25%. The CMOs are
collateralized by mortgage-backed securities of approximately $14,203,000 and
$17,175,000 and by short-term investments of approximately $149,000 and $144,000
at September 30, 1996 and 1995, respectively. Such collateral consists of GNMA
and FHLMC certificates having interest rates ranging from 5.50% to 9.00%. The
repayments of bond principal and interest are directly related to the amounts of
principal and interest received on the mortgage-backed securities
collateralizing a particular class of CMOs.
11 Federal, State and City Taxes
The Company files Federal income tax returns on a calendar-year basis. If
certain definitional tests and other conditions are met, the Bank is allowed a
special bad debt deduction in determining its taxable income. The deduction may
be based either on specified experience formulas or a percentage of taxable
50
income after utilization of available net operating loss carryforwards. The
statutory percentage is 8% and will be allowable only if the Bank maintains at
least 60% of its total assets in qualifying assets, as defined. If total assets
are greater than $500,000,000 and qualifying assets fall below 60%, the Bank
would be required to recapture its bad debt reserve into taxable income over a
four-year period (in such a case, adverse state and local income tax
consequences will also result). However, if total assets are less than
$500,000,000 and qualifying assets fall below 60% then the Bank would not be
entitled to claim a bad debt tax deduction in that year as computed under the
percentage of taxable income method. At both September 30, 1996 and 1995, the
Bank's qualifying assets as a percentage of total assets were approximately 95%.
At December 31, 1995, the Bank's bad debt reserve on qualifying real property
loans for Federal income tax purposes approximated $4,827,000. Such reserve
reflects the cumulative Federal income tax deductions taken by the Bank to that
date. Any of these reserves used for other than a bad debt on a qualified real
property loan would create income for tax purposes only, which would be subject
to the corporate income tax rate in effect at that time. However, it is not
contemplated that amounts allocated to bad debt deductions will be used in any
manner that would create income tax liabilities.
The Tax Reform Act of 1986 replaced the add-on minimum tax with a new
alternative minimum tax ("AMT"). The AMT is generally the amount by which 20% of
alternative minimum taxable income ("AMTI") exceeds the regular tax which
otherwise would apply. AMTI is regular taxable income as modified by certain
adjustments and increased by certain tax preference items. In the computation of
AMTI, the net operating loss carry forward is permitted to offset only 90% of
AMTI. In addition, for taxable years beginning after December 31, 1986, an
environmental tax of 0.12% of the excess of AMTI excluding net operating loss
carry forwards (with certain modifications) over $2 million is imposed on
corporations.
Included in other assets at September 30, 1995 is a receivable from New York
State and New York City in the amount of approximately $687,000. Included in
accrued expenses and other liabilities at September 30, 1995 was a Federal
Income Tax payable for approximately $502,000.
The components of income tax expense are as follows:
Years Ended September 30, 1996 1995 1994
- ------------------------- ---- ---- ----
(Dollars in Thousands)
Federal income tax expense (benefit):
Current $6,175 $4,219 $2,611
Deferred (995) 52 (156)
------ ------ ------
Total 5,180 4,271 2,455
------ ------ ------
State and local tax expense (benefit):
Current 3,390 2,076 2,038
Deferred (785) 8 (450)
------ ------ ------
Total 2,605 2,084 1,588)
------ ------ ------
Total provision for income tax expense $7,785 $6,355 $4,043
====== ====== ======
Deferred income taxes are provided for certain revenues and expenses that are
recognized in different periods for financial accounting and tax reporting
purposes.
51
The components of deferred income tax expense (benefit) are as follows:
Years Ended September 30, 1996 1995 1994
- ------------------------- ---- ---- ----
(Dollars In Thousands)
SAIF special assessment $(1,197) $ --- $ ---
General valuation allowance, net (221) 3 (205)
Pension/FASB 106 expense (229) (184) (99)
REMIC tax loss (117) 194 (456)
Deferred loan origination fees 55 56 21
Other, net (71) (9) 133
------- ----- -----
$(1,780) $ 60 $(606)
======= ===== =====
The reconciliation between the statutory Federal income tax and the net
effective tax (including state and local taxes) is as follows:
Years Ended September 30, 1996 1995 1994
- ------------------------- ---- ---- ----
(Dollars In Thousands)
Tax at Federal statutory rate $5,957 $5,032 $3,426
State and local income taxes, net of Federal tax
benefit 1,693 1,355 1,032
Prior period tax refunds, net --- (400) (206)
Other, net 135 368 (209)
------ ------ ------
$7,785 $6,355 $4,043
====== ====== ======
The components of the net deferred tax asset are as follows:
September 30, 1996 1995
- ------------- ---- ----
(Dollars in Thousands)
Deferred Tax Assets:
SAIF special assessment $1,197 $ ---
General valuation allowance, net 2,559 2,338
Pension/FASB 106 expense 460 231
Deferred loan origination fees 178 233
Other, net 198 127
------ ------
Total deferred tax assets 4,592 2,929
------ ------
Deferred Tax Liability:
REMIC 1,367 1,484
------ ------
Net deferred tax asset $3,225 $1,445
====== ======
The net deferred tax asset included in other assets at September 30, 1996 and
1995 represents the anticipated Federal, state and local tax benefits expected
to be realized in future years upon the utilization of the underlying tax
attributes comprising this balance. The Company has paid income taxes in the
calendar years prior to December 31, 1995. Management believes it is more
likely than not that the results of future operations will generate sufficient
taxable income to realize the deferred tax asset. Accordingly, no valuation
allowance was deemed necessary for the net deferred tax asset at September 30,
1996 and 1995.
State and Local Taxes
- ---------------------
The Bank files state and local taxes on a calendar-year basis. The basis for
the determination of tax liability was changed to the greater of a tax based on
entire net income, as defined, taxable assets, or a minimum tax. The Bank's
provision for New York State and City taxes for the calendar years ended 1995,
1994 and 1993 was based on entire net income. The Bank anticipates that its
provision for such taxes for the calendar year ended 1996 will also be based on
entire net income. Further, the Bank is subject to a temporary surcharge based
upon New York State tax liability.
52
12 Retirement Plan
The Company has a defined benefit pension plan covering substantially all of
its employees. The benefits are based on years of service and the employee's
compensation during the last five years of employment. The Bank's funding policy
has been to contribute annually the maximum amount that can be deducted for
Federal income tax purposes. Contributions are intended to provide not only for
benefits attributed to service to date, but also for those expected to be earned
in the future.
The status of the pension plan at the measurement dates of September 30 is as
follows:
1996 1995
---- ----
Actuarial present value of benefit obligations: (Dollars In Thousands)
Vested benefit obligation $2,799 $2,613
Nonvested benefit obligation 100 115
------ ------
Accumulated benefit obligation 2,899 2,728
------ ------
Actuarial present value projected benefit
obligation for service rendered to date 3,939 4,032
Plan assets at fair value, primarily listed stocks,
U.S. Government obligations and short-term investments 3,422 3,145
------ ------
Projected benefit obligation in excess of plan assets (517) (887)
Unrecognized net asset being amortized over 20 years (237) (258)
Unrecognized net (gain) loss due to past
experience different from assumptions made (15) 661
------ ------
Accrued pension cost $ (769) $ (484)
====== ======
Pension expense was approximately $285,000, $167,000 and $267,000 for the
years ended September 30, 1996, 1995, and 1994, respectively.
Net pension expense for the years ended September 30 included the following:
1996 1995 1994
---- ---- ----
(Dollars In Thousands)
Service cost - benefits earned during the period $ 294 $ 185 $ 288
Interest cost on projected benefit obligation 257 234 220
Actual return on plan assets (526) (512) (249)
Deferred asset gain 281 281 29
Amortization (21) (21) (21)
----- ----- -----
Net pension expense $ 285 $ 167 $ 267
===== ===== =====
The weighted average discount rate was 7.00% for 1996 and 6.50% for 1995. The
rate of increase in future compensation levels was 6.0% for 1996 and 1995. These
rates are used to determine the actuarial present value of the projected benefit
obligation. The expected long-term rate of return on assets was 8.5% for 1996
and 1995.
The Bank adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits other than Pensions" effective October 1, 1994. The Bank, as part of
its overall benefits, provides to its eligible retirees health coverage.
Eligible participants are retired employees of the Bank who retire with a
minimum age of 55 and 25 years of service. The company has elected to defer and
amortize to expense over a twenty six year period the accumulated postretirement
benefit obligation of $1.0 million at the date of adoption.
53
The following table sets forth the plan's status and amounts recognized in the
Company's consolidated financial statements (in thousands):
September 30, 1996 1995
- ------------- ---- ----
Accumulated postretirement benefit obligation: (Dollars in thousands)
Retirees including covered dependents and beneficiaries $738 $726
Eligible active participants 47 119
Other active participants 247 174
------- -------
Total accumulated postretirement benefit obligation 1,032 1,019
Plan assets --- ---
------- -------
Accumulated benefit obligation in excess of plan assets (1,032) (1,019)
Unrecognized transition obligation 931 970
Unrecognized loss 21 12
------- -------
Accrued benefit obligation $(80) $(37)
======= =======
Net periodic postretirement benefit cost included the following components
(in thousands):
Year ended September 30, 1996 1995
- ------------------------ ---- ----
(Dollars in thousands)
Service cost $ 34 $ 32
Interest cost 69 75
Amortization of transition obligation of
$1.0 million over 26 years 39 39
------- -------
Total postretirement benefit expense $ 142 $ 146
======= =======
The above plan does not have any assets and the Company presently intends to
maintain the plan as unfunded. The assumed long-term care cost trend used to
measure the expected cost of benefits under the plan for 1996 and 1995 is 0% as
any future increase in cost will be passed on to the retirees.
13 Commitments and Contingencies
Commitments to originate first mortgage loans approximated $8,540,000 and
$36,920,000 and unused lines of credit on home equity loans approximated
$150,000 and $262,000 at September 30, 1996 and 1995, respectively. Of the
$8,540,000 in mortgage commitments outstanding at September 30, 1996,
approximately $6,665,000 are adjustable rate with expected rates between 8.75%
and 9.50% and approximately $1,875,000 are fixed rate with expected rates
between 9.00% and 10.50%.
At September 30, 1996, the Bank was obligated under non-cancelable operating
leases on properties used as office space. The leases contain renewal options
and escalation clauses which provide for increased rental payments based upon
increases in real estate taxes. Rental expense was approximately $555,000,
$537,000, and $525,000 for the years ended September 30, 1996, 1995 and 1994,
respectively.
The projected future minimum rentals, exclusive of the escalation clauses, under
the terms of the leases follow:
Projected Future
Minimum Rentals
----------------
(Dollars in thousands)
Years ending September 30,
1997 468
1998 162
1999 60
2000 60
2001 60
2002 and thereafter 130
----
Total $940
====
54
14 Regulatory Capital Requirements
Federal regulations require institutions to have a minimum regulatory capital
equal to 1.5% of total assets, a 3% core capital ratio and an 8% risk-based
capital ratio. The OTS prompt corrective action standards effectively establish
a minimum 2% tangible capital ratio, a minimum 4% leverage (core) capital ratio
and a minimum 8% risked-based capital ratio. As of September 30, 1996 and 1995,
the Bank was in compliance with the regulatory capital requirements.
Additionally, under prompt corrective action regulations, the regulators have
adopted rules which require them to take action against undercapitalized
institutions, based upon five categories of capitalization: "well capitalized",
"adequately capitalized", "undercapitalized", "significantly undercapitalized"
and "critically undercapitalized". The rules adopted generally provide that an
insured institution whose risk-based capital is 10% or greater, Tier 1 risk-
based capital is 6% or greater and leverage ratio is 5% or greater is considered
a "well capitalized" institution. As of September 30, 1996 and 1995, the Bank
is considered a "well capitalized" institution.
The Bank's capital, determined in accordance with existing regulations, at
September 30, 1996 is as follows:
Risk-
GAAP Tangible Core Based
Capital Capital Percent Capital Percent Capital Percent
------- -------- -------- ------- -------- ------- --------
(Dollars in Thousands)
Balance as reported to the OTS $47,351 $47,351 7.38% $47,351 7.38% $47,351 12.37%
Additional capital items:
General valuation allowance - limited --- --- --- --- 4,803 1.25%
------- ---- ------- ---- ------- ------
Regulatory capital 47,351 7.38% 47,351 7.38% 52,154 13.62%
Minimum capital requirement 9,629 1.50% 19,258 3.00% 30,642 8.00%
------- ---- ------- ---- ------- ------
Regulatory capital-excess $37,722 5.88% $28,093 4.38% $21,512 5.62%
======= ===== ======= ===== ======= ======
15 Conversion to Stock Form of Ownership and Dividend Restrictions
In May 1988, BFS Bankorp issued 1,437,500 shares of its common stock (par
value $.01) at an initial public offering price of $7 per share.
The Bank established a liquidation account at the time of Conversion, in an
amount equal to its net worth at September 30, 1987. In the event of a future
liquidation of the converted Bank (and only in such event), eligible depositors
who continue to maintain accounts shall be entitled to receive a distribution
from the liquidation account. The total amount of the liquidation account will
be decreased (as the balances of eligible depositors are reduced) on annual
determination dates subsequent to the Conversion. The balance of the liquidation
account was approximately $650,000 at September 30, 1996.
Subject to applicable law, the Board of Directors of the Bank and of the
Company may each provide for the payment of dividends. Future declarations of
cash dividends by the Company will depend upon dividend payments by the Bank to
the Company, which is the Company's primary source of income. Under OTS
regulations, if the Bank satisfies all capital requirements applicable to it,
after giving effect to any proposed dividend, the Bank may pay a cash dividend
of up to 100% of its net income during a calendar year, plus up to one half of
its "surplus" capital at the beginning of the calendar year, provided it gives
the OTS thirty days advance notice. The OTS may nevertheless prohibit any such
proposed dividend payment. If the Bank fails to satisfy any of its capital
requirements, it may not pay a dividend to the Company without prior OTS
approval. The Bank is also subject to a prior agreement with the OTS that
restricts the Bank from paying cash dividends to the Company in excess of 50% of
its net income since conversion, without prior OTS approval. Earnings allocated
to bad debt reserves for losses and deducted for federal income tax purposes are
not available for dividends or other distributions with respect to the Bank's
capital stock, without the payment of tax at the then current income tax rate.
The Company has no intention of paying cash dividends in the foreseeable future.
55
16 Employee Stock Ownership Plan (ESOP) and Trust
Effective upon the Conversion, the Bank established an ESOP for employees who
have at least six months of credited service. The ESOP was funded by the Bank's
contributions made from proceeds of a third-party loan (which was invested in
common stock of the Company). The third-party loan was paid off in fiscal 1993.
Benefits will be paid in shares of common stock. Shares purchased with such
proceeds will be held in a suspense account for allocation among members as the
loan is paid. Contributions to the ESOP and shares released from the suspense
account will be allocated among participants on the basis of compensation in the
year of allocation. Benefits become 20% vested after three years of credited
service, increasing to 100% after seven years. Forfeitures will be reallocated
among remaining participating employees. Benefits are payable upon retirement,
early retirement, disability, or separation from service. There was no expense
in fiscal 1996, 1995 and 1994.
The ESOP Trustee must vote all allocated shares held in the ESOP in
accordance with the instructions of the participating employees. Unallocated
shares, and shares held in the suspense account, will be voted in accordance
with the instructions of the Administrative Committee of the Board of Directors
of the Company.
17 Management Recognition Plan (MRP) and Trust
Effective upon the Conversion, the Bank established the MRP as a method of
providing key management employees with a proprietary interest in the Company in
a manner designed to encourage such key employees to remain with the Bank. The
Bank contributed $402,500 to the MRP to enable it to acquire 57,500 shares of
common stock in the Conversion. Of this amount, approximately $2,000, $11,000,
and $24,000 has been amortized to expense during the years ended September 30,
1996, 1995 and 1994, respectively. The balance represents deferred compensation
and has been accounted for as reduction of stockholders' equity.
18 Incentive Stock Option Plan
The Company established the 1988 Incentive Stock Option Plan for employees of
the Company, whereby incentive stock options may be granted with respect to
102,403 shares of common stock, which are exercisable on a cumulative basis in
five equal installments over a multi-year period. As of September 30, 1996, of
the 62,355 remaining options, 60,355 options have been granted at prices ranging
from $7.00 to $11.00 and 60,355 are vested. During fiscal 1996, none of these
options were exercised.
In 1989, the Company established a 1989 Incentive Stock Option Plan for key
management employees. Under such a plan, incentive stock options may be granted
with respect to 100,000 shares of common stock. As of September 30, 1996, all
of the remaining 75,865 options have been granted at prices ranging from $7.00
to $14.00 and have been vested. During fiscal 1996, none of these options were
exercised.
In 1994, the Company established the 1994 Incentive Stock Option Plan for key
management employees. Under such a plan, incentive stock options may be granted
with respect to 30,000 shares of common stock. As of September 30, 1996, 23,000
of these options have been granted at a price of $18.375 and 23,000 of them are
vested. During fiscal 1996, none of these options were exercised.
19 Option Plan For Outside Directors
In 1988, the Company established an Option plan for outside Directors whereby
each outside Director was granted a single non-qualified stock option to
purchase 5,151 options of the common stock at an exercise price of $7.00 per
share. The plan expired in May, 1993 and there were 25,755 options exercised in
fiscal 1993 at $7.00 per share.
56
In 1989, the Company established an Option Plan for any new outside
Directors. It is the same as the 1988 plan, except the exercise price of the
options is equal to the market value of the stock at the time the option is
granted. There were 5,151 of these options granted at a price of $8.75 and
vested in 1990, all of which were exercised during fiscal 1995.
In 1994, the Company established the 1994 Incentive Stock Plan for Outside
Directors. Under this plan, each Outside Director of the Bank is awarded $4,500
worth of common stock and each Outside Director of the Company is awarded $3,000
worth of common stock based upon the fair market value of the common stock on
the date of the Annual Meeting of Stockholders. The Plan will terminate upon
the issuance of 10,000 shares of common stock. As of September 30, 1996, 5,918
shares of common stock are remaining in the Plan.
20 Computation of Fair Values
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires
the Company to disclose the estimated fair value of its on- and off-balance
sheet financial instruments. A financial instrument is defined in SFAS No. 107
as cash, evidence of ownership interest in an entity or a contract that creates
a contractual obligation or right to deliver to or receive cash or another
financial instrument from a second entity on potentially favorable or
unfavorable terms.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any possible tax ramifications, estimated transaction
costs or any premium or discount that could result from offering for sale at one
time the Company's entire holdings of a particular financial instrument.
Because no market exists for a certain portion of the Company's financial
instruments, fair value estimates are based on judgments regarding current
economic conditions, risk characteristics and other such factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment, and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
September 30, 1996 1995
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
-------- --------- -------- ---------
(Dollars In Thousands)
Financial Assets:
Cash and cash equivalents $ 13,794 $ 13,794 $ 19,978 $ 19,978
Securities held to maturity, net 21,960 21,856 16,135 16,163
Securities available for sale 1,364 1,364 --- ---
Mortgage-backed securities
held to maturity, net 14,203 13,999 17,194 17,426
Loans, net 578,827 588,992 490,887 507,555
Financial Liabilities:
Deposits 410,324 399,388 388,562 391,344
Borrowed funds 146,253 146,764 94,600 96,278
Collateralized mortgage obligations 12,594 12,373 15,183 16,572
The following methods and assumptions were utilized by the Company in
estimating the fair values of its on-balance sheet financial instruments at
September 30, 1996 and 1995:
Cash and cash equivalents are assumed equal to the carrying value as these
financial instruments are either due on demand or mature within 90 days.
Mortgage-backed securities available for investment were valued based upon
quoted market prices for similar instruments traded in the market, adjusted for
differences in interest rates, credit quality, maturity, servicing costs and
other unique characteristics.
57
Mortgage-backed securities held for sale were valued based upon discounting the
estimated cash flows to a present value using a discount rate which approximates
the current interest rate for these types of securities.
Loans, net were valued based upon discounting the estimated cash flows to a
present value using a discount rate which approximates the current interest rate
for these types of securities. Estimated cash flows are based upon contractual
cash flows, adjusted for prepayments. Prepayment factors are based on a variety
of factors including the Bank's experience with each loan type and the effect
of current economic and lending conditions. This technique of estimating fair
value is extremely sensitive to assumptions and estimates used. While
management has attempted to use assumptions and estimates which are reflective
of the loan portfolio and the current market, a greater degree of subjectivity
is inherent in these values than those determined in formal trading
marketplaces. As such, the readers are cautioned in using this information for
purposes of evaluating the financial condition and/or value of the Company in
and of itself or in comparison with any other company.
Deposits with no stated maturity, which includes demand deposits, NOW, money
market and passbook accounts are deemed to be equal to the amount payable upon
demand at the balance sheet date. The estimated fair value of fixed-maturity
certificates of deposit is calculated based on the discounted value of
contractual cash flows using interest rates currently offered for deposits of
similar remaining maturities.
Borrowed Funds were valued based on the discounted value of contractual cash
flows using interest rates currently in effect for borrowings with similar
maturities and collateral requirements.
Collateralized Mortgage Obligations were valued based on the discounted value of
contractual cash flows using interest rates currently in effect for CMOs with
similar maturities and collateral requirements.
The Company possesses other financial instruments for which the carrying
value either approximates or is equal to estimated fair value. Such assets and
liabilities include loan commitments, accrued interest receivable and payable,
mortgagors' escrow payments and miscellaneous accounts receivable and payable.
Most of these assets and liabilities are short term in nature with little or no
credit risk.
21 Parent Company Only Financial Information
BFS Bankorp, Inc. operates a wholly owned subsidiary, Bankers Federal Savings
FSB (the "Bank"). The earnings of the Bank are recognized by the Company using
the equity method of accounting. Accordingly, earnings of the Bank are recorded
as increases in the Company's investment and any dividends or losses would
reduce the Company's investment in the Bank. The following are the condensed
financial statements of BFS Bankorp, Inc.:
Condensed Statement of Financial Condition
September 30, 1996 1995
- ------------- ---- ----
(Dollars In thousands)
Assets:
Cash $ 1,634 $ 2,443
Investment in the Bank 47,351 40,060
Securities available for sale 1,364 ---
Other assets 3 3
------- -------
Total assets $50,352 $42,506
======= =======
Liabilities and Stockholders' Equity:
Senior debentures $ --- $ 1,650
Accrued expenses and other liabilities 121 44
Stockholders' equity 50,231 40,812
------- -------
Total liabilities and stockholders' equity $50,352 $42,506
======= =======
58
Condensed Statements of Income
Years ended September 30, 1996 1995 1994
- ------------------------- ---- ---- ----
(Dollars in thousands)
Income $ 119 $ 80 $ 69
Operating expenses (156) (237) 225
------- ------- -------
Loss before income tax benefit and equity in
earnings of the Bank (37) (157) (156)
Income tax benefit (17) (66) (66)
------- ------- -------
Loss before equity in earnings of the Bank (20) (91) (90)
Equity in earnings of the Bank 9,256 8,112 5,836
------- ------- -------
Net income $ 9,236 $ 8,021 $ 5,746
======= ======= =======
Condensed Statements of Cash Flow
Years ended September 30, 1996 1995 1994
- ------------------------- ---- ---- ----
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 9,236 $ 8,021 $ 5,746
Adjustments to reconcile net income to net cash
used in operating activities:
Equity in earnings of the Bank (9,256) (8,112) (5,836)
(Increase) decrease in other assets --- --- 15
Increase in other liabilities 77 6 6
Other (156) (66) (66)
------- ------- -------
Net cash used in operating activities (99) (151) (135)
------- ------- -------
Cash flows from investing activities:
Dividend received from Bank 2,000 --- ---
Purchases of securities available for sale (1,450) --- ---
Sales of securities available for sale 390 --- ---
------- ------- -------
Net cash used in investing activities 940 --- ---
------- ------- -------
Cash flows from financing activities:
Decrease in other borrowings (1,650) --- ---
Exercise of stock options --- 174 224
------- ------- -------
Net cash (used in) provided by financing
activities (1,650) 174 224
------- ------- -------
Net (decrease) increase in cash (809) 23 89
Cash at beginning of year 2,443 2,420 2,331
------- ------- -------
Cash at ending of year $ 1,634 $ 2,443 $ 2,420
======= ======= =======
22 Subsequent Event
On December 3, 1996, BFS Bankorp, Inc. announced it had entered into a
definitive merger agreement with Dime Bancorp Inc., the holding company for The
Dime Savings Bank of New York, FSB. Under the terms of the agreement, approved
by the boards of director of both institutions, Dime Bancorp Inc. agreed to pay
$52.00 cash for each share of stock of BFS Bankorp, Inc. subject to upward
adjustment under certain circumstances. The transaction is subject to the
approval of the stockholders of BFS Bankorp, Inc. as well as federal banking
regulators.
59
23 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table is a summary of net income by quarter for fiscal 1996 and
1995.
9/30 6/30 3/31 12/31 9/30 6/30 3/31 12/31
Quarters Ended 1996 1996 1996 1995 1995 1995 1995 1994
- -------------- ---- ---- ---- ---- ---- ---- ---- ----
(Dollars In Thousands Except Per Share Data)
Total interest income $14,943 $13,595 $13,454 $12,941 $12,784 $12,879 $11,246 $10,376
Total interest expense 7,072 6,404 6,099 6,163 6,078 5,579 5,206 4,773
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 7,871 7,191 7,355 6,778 6,706 7,300 6,040 5,603
Provision for loan losses --- --- --- --- 292 545 31 173
Other income 1,108 805 1,556 520 1,001 579 668 397
Other expense 5,947 3,464 3,477 3,275 3,379 3,062 3,388 3,048
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes 3,032 4,532 5,434 4,023 4,036 4,272 3,289 2,779
Income taxes 1,571 2,014 2,456 1,744 1,392 2,037 1,584 1,342
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 1,461 $ 2,518 $ 2,978 $ 2,279 $ 2,644 $ 2,235 $ 1,705 $ 1,437
======= ======= ======= ======= ======= ======= ======= =======
Primary earnings per share (1) $0.83 $1.44 $1.70 $1.30 $1.52 $1.30 $0.99 $0.83
===== ===== ===== ===== ===== ===== ===== =====
Fully diluted earnings per share (1) $0.83 $1.44 $1.70 $1.30 $1.52 $1.30 $0.99 $0.83
===== ===== ===== ===== ===== ===== ===== =====
Note: (1) Primary and fully diluted earnings per common share is calculated by
dividing net income applicable to common stock and equivalents by the weighted
average common shares and equivalents outstanding for each quarter.
Consequently, the sum of the quarters may not equal the total earnings per share
for the fiscal year.
60
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10 - Directors and Executive Officers of the Registrant
Reference is made to the Proxy Statement for the BFS Bankorp, Inc. Annual
Meeting of Stockholders to be held on March 11, 1997 for the incorporation of
information concerning directors and persons nominated to become directors. The
Executive Officers listed below, who are not also directors, are elected
annually by the Board of Directors. There are no family relationships among the
Officers.
Name Age Positions Held and Business Experience of Past Five (5) Years
- ---- --- -------------------------------------------------------------
Israel Rosenzweig 49 Executive Vice President and Chief Lending Officer since
October, 1994. Bank Director since November 1993. Mr. Rosenzweig
was employed as President and Chief Executive Officer
of BRT Realty Trust from 1984 to 1994.
Gerard A. Perri 41 Senior Vice President, Chief Financial Officer and Bank
Director. Mr. Perri has been with the Bank since August, 1990.
Edward Powers 59 Senior Vice President and Chief Retail Banking Officer. Mr. Powers
has been employed by the Bank since 1958.
Item 11 - Executive Compensation
Reference is made to the Proxy Statement of the Company's Annual Meeting of
Stockholders to be held on March 11, 1997 for incorporation of information
concerning executive compensation.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
Reference is made to the Proxy Statement for the Company's Annual Meeting of
Stockholders to be held on March 11, 1997 for incorporation of information
concerning security ownership.
Item 13 - Certain Relationships and Related Transactions
Reference is made to the Proxy Statement for the Company's Annual Meeting of
Stockholders to be held on March 11, 1997 for incorporation of information
concerning certain relationships and related transactions.
61
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(1) Financial Statement Schedules
-----------------------------
All schedules for which provision is made in the applicable accounting
regulations of the SEC are not required under the related instructions or are
inapplicable and therefore have been omitted.
(2) The following exhibits are either filed as part of this report or are
incorporated herein by reference to documents previously filed by the Company
with the SEC:
Exhibit
Number Description
- ------ -----------
3 Certificate of Incorporation and Bylaws (1)
10.1 BFS Bankorp, Inc. Employee Stock Ownership Plan (1)
10.2 Bankers Federal Savings, FSB Management Recognition Plan and Trust (2)
10.3 BFS Bankorp, Inc. 1988 Incentive Stock Option Plan (2)
10.4 BFS Bankorp, Inc. 1988 Option Plan for Outside Directors (2)
10.5 BFS Bankorp, Inc. 1989 Incentive Stock Option Plan (3)
10.6 BFS Bankorp, Inc. 1989 Option Plan for Outside Directors (3)
10.7 BFS Bankorp, Inc. 1994 Incentive Stock Option Plan (4)
10.8 BFS Bankorp, Inc. 1994 Incentive Stock Plan for Outside Directors (4)
10.9 Employment Agreements between the Bank and Gerard A.
Perri and Israel Rosenzweig.
10.10 Employment Agreements between the Bank and BFS Bankorp, Inc. and James
A. Randall
10.11 Agreement between the Company, Fredric H. Gould, BRT Realty Trust and
Gould Investors LP (5)
22 No Subsidiaries of BFS Bankorp, Inc., except Bankers Federal Savings,
FSB
(1) Incorporated by reference to Exhibits filed with Registration on Form S-1,
No. 33-16903.
(2) Incorporated by reference to Exhibits to the Company's Proxy Statement for
the Annual Meeting of the stockholders held on February 9, 1989.
(3) Incorporated by reference to Exhibits to the Company's Proxy statement for
the Annual Meeting of the stockholders held February 13, 1990.
(4) Incorporated by reference to Exhibits to the Company's Proxy statement for
the Annual Meeting of the stockholders held February 16, 1994.
(5) Incorporated by reference to Exhibit No. 28.1 filed with Form 8-K dated
May 25, 1993.
(b) Reports on Form 8-K
No Form 8-K was filed during the last quarter of the fiscal year ended
September 30, 1996.
(c) Exhibits to this Form 10-K are attached under separate cover.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BFS BANKORP, INC.
By: /s/ James A. Randall
--------------------------
James A. Randall
President and Chief Executive Officer
Date: December 27, 1996
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below on December 27, 1996, by the following persons on
behalf of the Registrant and in the capacities indicated.
/s/ James A. Randall
- ------------------------------
James A. Randall President, Chief Executive
Officer and Director
/s/ Gerard A. Perri
- ------------------------------
Gerard A. Perri Senior Vice President and
Chief Financial Officer
Principal Accounting Officer
Directors:
- ----------
/s/ Eldon C. Hanes /s/ Fredric H. Gould
- ------------------------------ -----------------------------
Eldon C. Hanes, Chairman Fredric H. Gould, Director
/s/ Todd M. Poland
- ------------------------------
Todd M. Poland, Director
Dated: December 27, 1996
63