<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
Commission file number 0-27782
DIME COMMUNITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3297463
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
209 HAVEMEYER STREET, BROOKLYN, NEW YORK 11211
(Address of principal executive offices) (Zip Code)
(718) 782-6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) YES X NO ___
---
(2) YES ___ NO X
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASSES OF COMMON STOCK NUMBER OF SHARES OUTSTANDING, MAY 31, 1996
----------------------- ------------------------------------------
$.01 Par Value None
Documents Incorporated by Reference:
Annual Report on Form 10-K of Conestoga Bancorp, Inc.
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PART I - FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Consolidated Statements of Condition at March 31, 1996
(Unaudited) and June 30, 1995............................. 3
Consolidated Statements of Operations for the Three Months
and the Nine Months Ended March 31, 1996 and 1995
(Unaudited)............................................... 4
Consolidated Statements of Changes in Equity for the
Nine Months Ended March 31, 1996 (Unaudited).............. 5
Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 1996 and 1995 (Unaudited)................. 6
Notes to Consolidated Financial Statements (Unaudited).... 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 10-17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings......................................... 18-19
Item 2. Changes in Securities..................................... 19
Item 3. Defaults Upon Senior Securities........................... 19
Item 4. Submission of Matters to a Vote of Security Holders....... 19
Item 5. Other Information......................................... 20
Item 6. Exhibits and Reports on Form 8-K.......................... 20
Signatures................................................ 21
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THE DIME SAVINGS BANK OF WILLIAMSBURGH
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(IN THOUSANDS)
MARCH 31,
1996 JUNE 30,
(UNAUDITED) 1995
-------------------
ASSETS:
Cash and due from banks $ 6,913 $ 6,807
Investment securities held to maturity (estimated
market value of $40,984 and $51,254 at March 31, 1996
and June 30, 1995 respectively) 40,996 51,475
Investment securities available for sale:
Bonds and notes (amortized cost of $45,723
and $42,350 at March 31, 1996 and June 30, 1995
respectively) 45,701 42,349
Marketable equity securities (historical cost of $2,971
and $3,304 at March 31, 1996 and June 30, 1995
respectively) 3,108 3,070
Mortgage-backed securities held to maturity (estimated
market value of $55,919 and $54,172 at March 31, 1996
and June 30, 1995 respectively) 55,397 53,815
Mortgage-backed securities available for sale (amortized
cost of $37,156 and $36,728 at March 31, 1996 and
June 30, 1995 respectively) 37,856 37,733
Federal funds sold 24,247 17,809
Loans:
Real estate 439,223 425,965
Other loans 3,988 3,751
Less allowance for loan losses (6,146) (5,174)
-------------------
Total loans 437,065 424,542
===================
Loans held for sale 468 138
Premises and fixed assets 6,138 5,921
Federal Home Loan Bank of New York capital stock 4,923 4,801
Other real estate owned 1,814 4,466
Other assets 11,549 9,813
-------------------
TOTAL ASSETS $ 676,175 $662,739
===================
LIABILITIES AND EQUITY
LIABILITIES:
Due to depositors $ 561,026 $554,841
Escrow and other deposits 11,515 12,109
Securities sold under agreements to repurchase 2,026 2,110
Federal Home Loan Bank of New York Advances 15,710 15,710
Accrued postretirement benefit obligation 2,080 -
Other liabilities 2,182 902
-------------------
TOTAL LIABILITIES 594,539 585,672
===================
COMMITMENTS AND CONTINGENCIES
EQUITY:
Retained earnings 81,196 76,651
Unrealized gain on securities available for sale,
net of deferred taxes 440 416
TOTAL EQUITY 81,636 77,067
-------------------
TOTAL LIABILITIES AND EQUITY $ 676,175 $662,739
===================
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THE DIME SAVINGS BANK OF WILLIAMSBURGH
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In Thousands)
For the Three Months For the Nine Months
Ended March 31, Ended March 31,
--------------------------------------------
1996 1995 1996 1995
------- -------- -------- ---------
Interest income:
Loans secured by real estate $ 9,862 $ 9,551 $ 29,394 $ 28,770
Other loans 85 66 249 230
Investment securities 1,246 975 4,154 3,194
Mortgage backed securities 1,484 1,354 4,491 4,017
Federal funds sold 297 136 962 332
-------------------------------------------
Total interest income 12,974 12,082 39,250 36,543
-------------------------------------------
Interest expense:
Deposits and escrow 5,554 4,431 17,035 12,581
Borrowed funds 249 250 754 762
-------------------------------------------
Total interest expense 5,803 4,681 17,789 13,343
Net interest income 7,171 7,401 21,461 23,200
Provision for loan losses 900 738 1,850 2,213
-------------------------------------------
Net interest income after
provision for loan losses 6,271 6,663 19,611 20,987
--------------------------------------------
Non-interest income:
Service charges and other fees 245 262 663 783
Net gain (loss) on sales and
redemptions of securities
and other assets 27 64 (54) 66
Net gain (loss) on sales of loans (6) 15 17 21
Other 113 124 354 400
------------------------------------------
Total non-interest income 379 465 980 1,270
------------------------------------------
Non-interest expense:
Salaries and employee benefits 1,992 1,830 5,534 5,124
Occupancy and equipment 469 394 1,269 1,206
Federal deposit insurance
premiums 23 304 86 941
Data processing costs 147 126 392 362
Other 1,270 937 3,020 2,500
-------------------------------------------
Total non-interest expense 3,901 3,591 10,301 10,133
-------------------------------------------
Income before income taxes
and cumulative effect of
changes in accounting
principles 2,749 3,537 10,290 12,124
Income tax expense 1,266 1,638 4,713 5,430
-------------------------------------------
Income before cumulative
effect of changes in
accounting principles 1,483 1,899 5,577 6,694
Cumulative effect on prior years
of changes to a different
method of accounting for:
Post-Retirement benefits
other than pensions - - (1,032) -
-------------------------------------------
Net income $ 1,483 $ 1,899 $ 4,545 $ 6,694
===========================================
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THE DIME SAVINGS BANK OF WILLIAMSBURGH
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
Unrealized
Gain on
Securities
Retained Available for
Earnings Sale Total
---------------------------------
BALANCE, JULY 1, 1995 $ 76,651 $ 416 $ 77,067
Net income 4,545 - 4,545
Change in unrealized gain on securities
available for sale during the period,
net of deferred taxes - 24 24
--------------------------------
BALANCE, MARCH 31, 1996 $ 81,196 $ 440 $ 81,636
================================
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THE DIME SAVINGS BANK OF WILLIAMSBURGH
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
Nine Months Ended
March 31,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,545 $ 6,694
Adjustments to reconcile net income to net
cash provided by operating activities:
Net gain on investment and mortgage-backed
securities called (56) -
Net loss on investment and mortgage-backed
securities sold 164 11
Net gain on sale of loans held for sale (17) (21)
Depreciation and amortization 563 1,248
Provision for loan losses 1,850 2,213
Decrease (increase) in loans held for sale (314) 351
Decrease in other assets and other real estate owned 898 2,641
Increase in accrued postretirement benefit obligation 2,080 -
Increase in other liabilities 1,279 1,543
-------------------
Net cash provided by operating activities 10,992 14,680
-------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in Federal funds sold (6,438) (10,221)
Proceeds from maturities of investment securities
held to maturity 3,035 2,030
Proceeds from maturities of investment securities
available for sale 64,490 12,300
Proceeds from calls of investment securities held
to maturity 9,056 -
Proceeds from calls of investment securities
available for sale 8,300 -
Proceeds from sale of investment securities
available for sale 500 -
Proceeds from sale of mortgage-backed securities
held to maturity 2,555 1,067
Purchases of investment securities held to maturity (14,525) (1,000)
Purchases of investment securities available for sale (63,543) (8,369)
Purchases of mortgage-backed securities held to
maturity (11,714) -
Purchases of mortgage-backed securities available
for sale (11,554) (4,045)
Principal collected on mortgage-backed
securities held to maturity 7,202 6,353
Principal collected on mortgage-backed securities
available for sale 11,315 4,571
Net increase in loans (14,373) (907)
Purchases of fixed assets (576) (104)
Sale (purchase) of Federal Home Loan Bank capital
stock (123) 188
---------------------
Net cash (used in) provided by investing activities (16,393) 1,863
---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in due to depositors 6,185 (13,010)
Decrease in and other deposits (594) (2,985)
Decrease in repurchase agreements (84) (24)
---------------------
Net cash (used in) provided by financing activities 5,507 (16,019)
INCREASE IN CASH AND DUE FROM BANKS 106 524
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 6,807 5,776
---------------------
CASH AND DUE FROM BANKS, END OF PERIOD $ 6,913 $ 6,300
=====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 4,165 $ 4,149
=====================
Cash paid for interest $ 17,822 $13,338
=====================
Transfer of investment and mortgage-backed
securities held-to-maturity to available for sale $ 3,300 $70,000
=====================
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Dime Community Bancorp, Inc.
As discussed in Item 5, Dime Community Bancorp, Inc. (the "Company") was
incorporated on December 12, 1995 to become the holding company for The Dime
Savings Bank of Williamsburgh (the "Bank") upon completion of the conversion of
the Bank from a mutual savings bank to a stock savings bank (the "Conversion").
The Company is located in Brooklyn, New York and its principal business, upon
completion of the Conversion, will be the operation of its wholly-owned
subsidiary, the Bank. In connection with the Conversion, the Company has filed
a Registration Statement on Form S-1 with the Securities and Exchange Commission
with respect to the issuance and sale of up to 14,547,500 shares, which was
declared effective on May 13, 1996. The Company has offered 12,650,000 shares of
Common Stock (subject to increase to 14,547,500 shares under certain
circumstances) to certain eligible depositors and members of the Bank in a
subscription offering and to certain members of the general public in a
community offering (together, the "Offerings"). Shortly after consummation of
the Conversion, the Bank will acquire (the "Acquisition") Conestoga Bancorp,
Inc. ("CBI") and its wholly-owned financial institution subsidiary, Pioneer
Savings Bank, F.S.B. ("Pioneer"), pursuant to an Agreement and Plan of Merger,
dated as of November 2, 1995. Until the consummation of the Conversion, the
Company will have no operations other than those of an organizational nature.
Accordingly, all financial and other information set forth herein refers to the
Bank or CBI.
The financial statements of the Company have been omitted because the
Company has not yet issued any stock and has not yet conducted any business
other than that of an organizational nature. In addition, as of March 31, 1996,
the Company had no assets or liabilities. The financial statements of the Bank
included herein should be read in conjunction with the financial statements and
notes thereto included in the Prospectus of the Company dated May 14, 1996.
The Dime Savings Bank of Williamsburgh and Subsidiaries
Notes to Consolidated Financial Statements
Nature of Operations - The Dime Savings Bank of Williamsburgh (the "Bank")
operates seven branches throughout the New York City boroughs of Bronx, Brooklyn
and Queens and Nassau County. The Bank is a community-oriented financial
institution providing financial services and loans for housing within its market
area.
Summary of Significant Accounting Policies - The accounting and reporting
policies of the Bank conform to generally accepted accounting principles. The
following is a description of the significant policies:
Principles of Consolidation - The consolidated financial statements include the
accounts of the Bank and its wholly-owned subsidiaries, Havemeyer Equities
Corp.("HEC"), Boulevard Funding Corp. ("BFC") and Havemeyer Brokerage Corp.
("HBC"). HBC is currently engaged in the sale of insurance and annuity products
primarily to the Bank's customers and members of the local community. BFC and
HEC were established in order to invest in real estate joint ventures and other
real estate assets. BFC and HEC had no investments in real estate at March 31,
1996 and are currently inactive. All significant intercompany accounts and
transactions have been eliminated in consolidation.
<PAGE>
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Cash and Due from Banks - Cash and due from banks includes amounts representing
cash held in escrow on behalf of the Bank's mortgagors.
Investment Securities and Mortgage-Backed Securities - Investment and mortgage-
backed securities are accounted for in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Investments in Debt and Equity
Securities" ("SFAS 115"). SFAS 115 requires that debt and equity securities
that have readily determinable fair values be carried at fair value unless they
are held to maturity. Debt securities are classified as held to maturity and
carried at amortized cost only if the reporting entity has a positive intent and
ability to hold these securities to maturity. If not classified as held to
maturity, such securities are classified as securities available for sale or as
trading securities. Unrealized holding gains or losses on securities available
for sale are excluded from earnings and reported net of income taxes as a
separate component of equity.
Loans Held for Sale - Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of aggregate cost or estimated market
value.
Allowance for Loan Losses - It is the policy of the Bank to provide a valuation
allowance for estimated losses on loans based on the Bank's past loan loss
experience, known and inherent risks in the portfolio, adverse situations which
may affect the borrower's ability to repay, estimated value of underlying
collateral and current economic conditions in the Bank's lending area. The
allowance is increased by provisions for loan losses charged to operations and
is reduced by charge-offs, net of recoveries. Management's periodic evaluation
of the adequacy of the allowance is based on the Bank's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions. While management uses
available information to estimate losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions beyond
management's control. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Bank's allowance for
loan losses. Such agencies may require the Bank to recognize additions to the
allowance based on judgments different from those of management. Management
believes, based upon all relevant and available information, that the allowance
for loan losses is adequate to absorb losses inherent in the portfolio.
On July 1, 1995, the Bank adopted Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). The
Statement requires all creditors to account for impaired loans, except those
loans that are accounted for at fair value or at the lower of cost or fair
value, at the present value of expected future cash flows discounted at the
loan's effective interest rate. As an expedient, creditors may account for
impaired loans at the fair value of the collateral or at the observable market
price of the loan if one exists. The adoption of SFAS No. 114, as amended by
SFAS No. 118, did not have a material effect on the Bank's financial condition
or results of operations.
Loan Fees - Loan origination fees and certain direct loan origination costs are
deferred and amortized as a yield adjustment over the contractual loan terms.
Other Real Estate Owned - Properties acquired through foreclosure, or a deed in
lieu of foreclosure, are recorded at the lower of fair value less estimated
costs to sell, or cost.
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Prior to July 1, 1995, the Bank was required to include in other real estate
owned loans which have been in substance foreclosed. Effective July 1, 1995,
the Bank adopted SFAS 114. The provisions of this Statement eliminated the
Bank's requirement to include in substance foreclosed loans in other real
estate, except where the Bank has physical possession of the collateral. In
substance foreclosed real estate is not material to the financial condition or
results of operations of the Bank.
Premises and Fixed Assets - Land is stated at original cost. Buildings and
furniture and equipment are stated at cost less accumulated depreciation.
Depreciation is computed by the straight-line method over the estimated useful
lives of the properties as follows:
Buildings 2.22% to 2.50% per year
Furniture and equipment 10% per year
Leasehold improvements are amortized over the remaining noncancelable terms of
the related leases.
Income Taxes - Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires that deferred taxes be provided for temporary differences between the
book and tax basis of assets and liabilities.
Cash Flows - For purposes of the Consolidated Statement of Cash Flows, the Bank
considers cash and due from banks to be cash equivalents.
Recently Issued Accounting Standards - On July 1, 1995, the Bank adopted
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." This Statement requires accrual
of postretirement benefits (such as health care benefits) during the years an
employee provides services. The cumulative effect of the adoption of this
standard on prior years was approximately $1,032 (after reduction for income
taxes of $879). As permitted by the Statement, the Bank elected to record the
full liability at the time of adoption.
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights." The Statement which amends Statement of Financial Accounting Standards
No. 65, "Accounting for Certain Mortgage Banking Activities," requires separate
capitalization of the costs of rights to service mortgage loans for others
regardless of whether these rights are acquired through a purchase or loan
origination activity. Adoption of this Statement is required for fiscal years
beginning after December 15, 1995. Given the current level of the Bank's
mortgage banking activities, adoption of this Standard is not expected to have a
material effect upon the Bank's financial condition or results of operations.
Use of Estimates in the Preparation of Financial Statements - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Areas in the accompanying financial statements where
estimates are significant include the allowance for loan losses and the carrying
value of other real estate.
<PAGE>
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Comparison of Financial Condition at March 31, 1996 and June 30, 1995
Asset growth amounted to $13.4 million in the nine months ended March
31, 1996, increasing assets to $676.2 million, as compared to $662.7 million at
June 30, 1995. The growth was concentrated in the Bank's loan portfolio, which
increased by $13.8 million to $443.7 million at March 31, 1996, or 65.5% of
total assets. Management continued its strategy of emphasizing multi-family
lending as loans secured by multi-family and underlying cooperative apartment
buildings increased as a percentage of total loans, rising $23.8 million during
the period to $276.2 million, or 62.1% of gross loans. Growth in this segment of
the portfolio was attributable to the Bank's more competitive loan pricing
during the period. During the nine months ended March 31, 1996, the Bank
originated over $61.4 million, at an average rate of 8.38%, in new multi-family
and underlying cooperative building loans, as compared to $36.3 million for all
of fiscal year 1995.
The Bank's portfolio of other residential mortgage loans, which are
mostly adjustable-rate loans, continued to decline. The Bank's holdings of one-
to four-family and cooperative apartment loans declined by an aggregate of $11.3
million during the period, including repayments of principal. Substantially all
of the loans originated by the Bank in the one- to four-family and cooperative
apartment markets were fixed-rate loans. These loans were sold to the secondary
mortgage market as part of the Bank's overall interest rate risk management
strategy which focuses in part on selling fixed-rate loans in the secondary
market and retaining adjustable-rate loans in the Bank's portfolio.
The Bank's portfolio of investment securities declined slightly between
June 30, 1995 and March 31, 1996. Mortgage-backed securities, which totaled
$93.3 million at March 31, 1996, increased by $1.7 million during the period.
Substantially all of the increase was attributable to new purchases of
adjustable-rate and short term fixed-rate mortgage-backed securities backed by
various federal agency issuers. Other securities, however, declined by $7.0
million, the difference earmarked for new loan originations later in the year.
Federal funds sold totaled $24.2 million at March 31, 1996, an increase of $6.4
million from June 30, 1995.
Total asset growth during the nine-month period was funded primarily by
growth in the Bank's deposits and by retained earnings. Total deposits were
$561.0 million at March 31, 1996, as compared to $554.8 million at June 30,
1995, an increase of $6.2 million. The increase was attributable to the combined
effect of interest paid on deposits totaling $17.0 million and net deposit
outflows of $10.8 million during the period. The composition of the Bank's
deposits continued to change, as reflected in the shift of deposits out of
savings accounts and into certificates of deposit. The Bank's savings accounts,
which totaled $238.2 million at June 30, 1995, declined by $7.1 million during
the nine month period ended March 31, 1996. Certificates of deposit, on the
other hand, increased by $13.2 million during the period to $288.4 million, or
51.4% of total deposits. This shift is at least partly attributable to the
Bank's deposit pricing strategy which, by paying competitive interest rates on
certificates of deposit with maturities beyond one year, has encouraged deposito
rs to extend the average maturity of their deposit liabilities.
<PAGE>
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Total equity of the Bank was $81.6 million at March 31, 1996, or 12.07%
of total assets, an increase of $4.6 million from June 30, 1995. The increase
was attributable to net income of $4.5 million during the period and a $24,000
increase in the component recognizing the net unrealized gain on the Bank's
available for sale securities portfolio, net of taxes, as required by SFAS No.
115.
Comparison of Operating Results for the Three Months Ended March 31, 1996 and
March 31, 1995
Net income for the three months ended March 31, 1996 was $1.5 million,
compared to $1.9 million for the same period in 1995. The decrease was primarily
attributable to a $310,000 increase in non-interest expenses, a $230,000
reduction in the Bank's net interest income, and a $162,000 increase in the
provision for loan losses.
Total interest income and interest expense were both higher in the
current quarter, despite a significant decrease in interest rates between 1995
and 1996. Interest income was $13.0 million during the three months ended March
31, 1996, an increase of $892,000 from the same period in 1995. The increase in
interest income reflects an increase in the Bank's average interest earning
assets from $602.0 million during the quarter ended March 31, 1995, to $651.1
million during the comparable 1996 period, the effect of which was partially
offset by a period to period decrease from 8.03% to 7.97% in the yield on the
Bank's interest earning assets. The resulting increase in interest income was
less than the increase in total interest expense, however, as both the level of
deposit liabilities and the Bank's cost of funds increased during the period.
Average deposit liabilities rose $34.9 million from year earlier levels to
$558.2 million for the three months ended March 31, 1996. Within total deposit
liabilities, the continued shift of deposits out of savings accounts into higher
cost certificates of deposit had the effect of increasing the Bank's average
cost of funds, which rose to 4.09% from 3.51% the year before. This shift
reflects, in part, management's strategy of paying competitive interest rates on
certificates of deposit with maturities beyond one year in order to encourage
depositors to extend the average maturity of their deposits. The result of the
increases in both interest income and interest expense was a $229,000 decrease
in net interest income.
The Bank's provision for loan losses totaled $900,000 for the three
months ended March 31, 1996, as compared to $738,000 for the same period in
1995, an increase of $162,000. Between these two periods, the level of non-
performing loans in the Bank's portfolio decreased, mitigating against loan loss
reserve provisions in excess of loan charge-offs. Management continued to
provide reserves, however, in light of the Bank's continued emphasis on multi-
family lending and management's evaluation of the adequacy of the reserve in the
context of the Bank's historical loan loss experience. Between March 31, 1995
and March 31, 1996, the Bank's loan portfolio increased by $11.2 million, with
new multi-family loans accounting for virtually all of the increase. At March
31, 1996, the allowance for loan losses totaled 109.5% of non-performing loans
and 1.39% of total loans, up from 77.6% and 1.09%, respectively, at March 31,
1995.
Non-interest expense was $3.9 million in the three months ended March
31, 1996, as compared to $3.6 million in the comparable 1995 quarter. Non-
interest expense was higher in the 1996 quarter due primarily to a $178,000
provision for losses attributable to the Bank's portfolio of other real estate
owned, necessitated by a reduction in the value of a portion of such portfolio,
and a $171,000 increase in the provision for losses related to Nationar, a
failed check-clearing and
<PAGE>
-12-
trust company. See "Part II Item 1. Legal Proceedings." Other significant
changes in the Bank's operating expenses included a $281,000 decrease in the
insurance premiums paid to the Federal Deposit Insurance Corporation ("FDIC")
resulting from the FDIC's decision to lower the insurance premiums paid by Bank
Insurance Fund-insured institutions to the legal minimum effective January 1,
1996, and a $162,000 increase in compensation and benefits expense, attributable
to an increase in employee bonuses and normal salary increases.
Comparison of Operating Results for the Nine Months Ended March 31, 1996 and
March 31, 1995
Net income for the nine months ended March 31, 1996 was $4.5 million as
compared to $6.7 million for the nine months ended March 31, 1995. Income before
cumulative effect of change in accounting principles for the nine month period
ended March 31, 1996 was $5.6 million, a decrease of $1.1 million from $6.7
million for the same period of the prior year. An increase in the average yield
on interest earning assets, which rose to 8.06% from 7.99%, during the period,
was offset by a greater increase in the Bank's average cost of funds, which rose
to 4.18% from 3.29% the year before.The result was a decrease of 82 basis points
in the Bank's net interest rate spread, reducing net interest income by $1.7
million. This was offset, in part, by an $855,000 savings in insurance premiums
paid to the FDIC, a result of the FDIC's decision to lower premiums paid by well
capitalized BIF-insured institutions from $0.23 to $0.04 per $100 of insured
deposits, effective June 1, 1995.
Interest income amounted to $39.2 million for the nine months ended
March 31, 1996, representing an increase of $2.7 million from the comparable
period ended March 31, 1995. The increase was the result of the combined effect
of a $39.9 million increase in average interest-earning assets and a 7 basis
point increase in the average yield on earning assets. The increase in the
average interest rate on interest earning assets was primarily due to the higher
interest rate environment which affected both repricing assets, mostly
adjustable-rate investment securities and whole loans, and new investments. The
increase in average interest-earning assets is reflected primarily in the growth
in investment securities and federal funds sold, consistent with the Bank's
supplemental strategy of seeking investments that provide a stable source of
liquidity and earnings.
Interest-bearing liabilities averaged $567.6 million for the nine months
ended March 31, 1996, representing an increase of $27.0 million, or 4.99%, over
the comparable period ended March 31, 1995. Total interest expense of $17.8
million represented a $4.4 million increase from the nine months ended March 31,
1995, as the average rate paid on interest-bearing liabilities increased 89
basis points, from 3.29% to 4.18%. The increase in the average rate paid on
interest-bearing liabilities resulted from the higher interest rate environment
and from a steady shift of deposits out of savings accounts and into higher
costing certificates of deposit. Management's strategy of paying competitive
interest rates on certificates of deposit with maturities in excess of one year,
which management believes should help to stabilize the Bank's cost of funds over
the longer term, contributed to a higher cost of funds in the current period.
Average savings account balances decreased by $41.3 million from $272.5 million
for the nine months ended March 31, 1995 to $231.2 million for the nine months
ended March 31, 1996, at the same time the average certificates of deposit
balance increased by $71.7 million from $212.8 million for the nine months ended
March 31, 1995 to $284.5 million for the nine months ended March 31, 1996. The
average rate paid on certificates of deposit increased by 138 basis points over
the same period.
<PAGE>
-13-
The provision for loan losses totaled $1.85 million for the nine-month
period ended March 31, 1996 as compared to $2.2 million in the comparable period
ended March 31, 1995. At June 30, 1994 the Bank's allowance for loan losses as a
percentage of total loans was 0.84%. By March 31, 1996, the allowance for loan
losses represented 1.39% of total loans, reflecting the fact that from July 1,
1994 to March 31, 1996 loan loss provisions consistently exceeded loan charge-
offs. In management's judgment, it was prudent to continue to increase the loan
loss allowance based upon an evaluation of the adequacy of the reserve in the
context of the Bank's historical loan loss experience and the Bank's continuing
emphasis on multi-family lending. At March 31, 1996, the Bank's allowance for
loan losses as a percentage of total non-performing loans was 109.5%, as
compared to 77.6% at March 31, 1995.
Non-interest income was $980,000 in the nine months ending March 31,
1996, a decrease of $290,000 from the comparable period ended March 31, 1995.
This change reflects a period to period increase of $98,000 in gains on bonds
called and bonds sold, offset by a $195,000 loss attributable to the sale of
preferred stock during the nine months ended March 31, 1996, and a $120,000
decline in income provided by service charges, primarily due to a change in the
way the Bank accounts for income from the rental of safe deposit boxes.
Overall, non-interest expense was $10.3 million during the nine months
ended March 31, 1996, an increase of $168,000 from the comparable period ended
March 31, 1995. A reduction in the rate paid by the Bank to the FDIC for deposit
insurance premiums, combined with a refund from the FDIC for premiums previously
paid in the amount of $319,000, lowered non-interest expense by $855,000 during
the period. This was offset by a $410,000 increase in compensation and benefits
expense, which was attributable to an increase in employee bonuses and normal
salary increases, a $428,000 provision for losses attributable to the Bank's
holding of OREO, necessitated by a reduction in the value of a portion of such
portfolio, and a $171,000 increase in the provision for losses related to
Nationar, a failed check clearing and trust company.
Tax expense totaled $4.7 million for the nine months ended March 31,
1996, versus $5.4 million for the nine months ended March 31, 1995. The decrease
was attributable to lower pre-tax income, which fell from $12.1 million in the
nine months ended March 31, 1995 to $10.3 million in nine months ended March 31,
1996, and to the application of tax loss carryforwards to capital gains totaling
$183,000 in 1994, which effectively lowered the Bank's tax rate for that year.
On July 1, 1995, the Bank adopted SFAS No. 106, which requires accrual
of post-retirement benefits, such as health care benefits, during the years an
employee provides services. The cumulative effect of the adoption of SFAS No.
106 on prior years was $1,032,000, after a reduction for income taxes of
$879,000. As permitted by the Standard, the Bank elected to record this
liability at the time of adoption.
<PAGE>
-14-
The following table sets forth certain asset quality ratios and other data at
and for the nine months ended March 31, 1996 and 1995.
At or For the Three and Nine
Months Ended March 31,
----------------------------
1996 1995
------------ ------------
(Dollars in thousands)
Non-accrual loans............................... $5,614 $6,028
Accruing loans past due ninety days or more..... - -
------ ------
Total non-performing loans...................... 5,614 6,028
Real estate owned, net.......................... 1,814 4,865
Ratios (1):
Non-accrual loans to total loans.............. 1.27% 1.40%
Non-performing loans to total loans........... 1.27 1.40
Non-performing loans and real estate owned to
total assets................................ 1.10 1.71
Allowance for loan losses to (2):
Non-performing loans........................ 109.48 77.64
Total loans................................. 1.39 1.09
(1) Ratios are end of period ratios.
(2) Loans, net represents gross loans less deferred loan fees and allowance for
loan losses. The allowance for loan losses at March 31, 1996 and March 31,
1995 was $6.1 million, and $4.7 million, respectively.
The Bank is negotiating an agreement with a third party to sell a $2.2
million non-performing loan. The underlying property, a 60 unit, 6 story
cooperative apartment building located in Brooklyn, New York, has been in the
process of foreclosure since November, 1994, and is currently classified as
substandard by the Bank. Based on these negotiations, the Bank would sell the
loan for $1.6 million. No assurance can be given that the loan will be sold, or
as to the ultimate terms of any such sale. The Bank believes that its allowance
for loan losses as of March 31, 1996 is adequate after taking into consideration
the proposed sale of the loan and expected charge to the allowance for loan
losses.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, proceeds from
principal and interest payments on loans, mortgage-backed securities and
investments, and, to a lesser extent, proceeds from the sale of fixed-rate
mortgage loans to the secondary mortgage market. While maturities and
<PAGE>
-15-
scheduled amortization of loans and investments are a predictable source of
funds, deposit flows, mortgage prepayments and mortgage loan sales are
influenced by general interest rates, economic conditions and competition.
The Bank is required to maintain an average daily balance of liquid
assets and short-term liquid assets as a percentage of net withdrawable deposit
accounts plus short-term borrowings as defined by OTS regulations. The minimum
required liquidity and short-term liquidity ratios are currently 5.0% and 1.0%,
respectively. At March 31, 1996, the Bank's liquidity ratio and short-term
liquid asset ratios were 20.12% and 13.02%, respectively. The levels of the
Bank's short-term liquid assets are dependent on the Bank's operating, financing
and investing activities during any given period.
The primary investing activities of the Bank are the origination of
multi-family and single-family mortgage loans, and the purchase of mortgage-
backed and other securities. During the nine months ended March 31, 1996 and the
fiscal years ended June 30, 1995, 1994 and 1993, the Bank's loan originations
totaled $68.5 million, $47.4 million, $64.7 million and $64.4 million,
respectively. Purchases of mortgage-backed and other securities totaled $101.3
million, $55.4 million, $101.3 million and $120.5 million for the nine months
ended March 31, 1996 and the fiscal years ended June 30, 1995, 1994, and 1993,
respectively. These activities were funded primarily by principal repayments on
loans, mortgage-backed securities and other securities. Loan sales provided
additional liquidity to the Bank, totaling $5.2 million, $2.8 million, $19.9
million and $38.4 million for the nine months ended March 31, 1996 and the
fiscal years ended June 30, 1995, 1994 and 1993, respectively. During fiscal
year 1993, the Bank consummated the sale of its Huntington, New York branch, and
the purchase of its Avenue M branch in Brooklyn, New York. The net deposit
increase provided by these two transactions during the 1993 fiscal year was
$11.8 million.
The Bank experienced a net increase in total deposits of $6.2 million
and $8.1 million in the nine months ended March 31, 1996 and the fiscal year
ended June 30, 1995, respectively, while fiscal years 1994 and 1993 produced
decreases in total deposits of $17.3 million and $410,000, respectively. Deposit
flows are affected by the level of interest rates, the interest rates and
products offered by local competitors, and other factors.
The Bank closely monitors its liquidity position on a daily basis.
Excess short-term liquidity is invested in overnight federal funds sales and
various money market investments. In the event that the Bank should require
funds beyond its ability to generate them internally, additional sources of
funds are available through the use of the Bank's $98.5 million borrowing limit
at the Federal Home Loan Bank of New York ("FHLBNY"). At March 31, 1996, the
Bank had $15.7 million in medium term borrowings outstanding at the FHLBNY and
additional overall borrowing capacity from the FHLBNY of $82.8 million.
The Bank expects to fund the Acquisition through existing liquidity, the
proceeds of the Offerings and, if necessary, short-term borrowings. Upon
completion of the Acquisition the Bank will receive Pioneer's liquid assets and
upon completion of the Conversion the Bank will receive not less than 50% of the
net conversion proceeds. See "Item 5. Other Information."
Loan commitments totaled $44.8 million at March 31, 1996, comprised of
$43.9 million in multi-family commitments and residential mortgage loan
commitments totaling $919,000. Management of the Bank anticipates that it will
have sufficient funds available to meet its current
<PAGE>
-16-
loan commitments. Certificates of deposit which are scheduled to mature in one
year or less from March 31, 1996 totaled $204.3 million. From October 1, 1994 to
December 31, 1995, the Bank experienced an 80.2% retention rate of funds from
maturing certificates of deposit. Based upon this experience and the Bank's
current pricing strategy, management believes that a significant portion of such
deposits will remain with the Bank.
At March 31, 1996, the Bank was in compliance with all applicable
regulatory capital requirements. Tangible capital totaled 12.01% of total
tangible assets, compared to a 1.50% regulatory requirement; core capital, at
12.03%, exceeded the required 3.0% regulatory minimum, and total risk-based
capital, at 22.22% of risk weighted assets, exceeded the 8.0% regulatory
requirement.
Proposed Acquisition of Conestoga Bancorp, Inc.
On November 2, 1995, the Bank entered into an Agreement and Plan of
Merger (the "Merger Agreement") with CBI pursuant to which CBI and its wholly-
owned financial institution subsidiary Pioneer will be acquired by the Bank. The
Merger Agreement provides that each share of CBI's common stock, par value of
$.01 per share (the "Conestoga Common Stock"), outstanding as of the effective
time of the Acquisition (the "Effective Time") (other than shares held as
treasury stock, unallocated shares held by CBI's Recognition and Retention Plans
and Trusts and any shares as to which dissenters' rights may be exercised under
applicable law) will be converted into the right to receive $21.25 in cash
without interest (the "Merger Consideration"). The Bank will increase the Merger
Consideration by $0.07 per share for each month, pro rated on a daily basis,
commencing on June 1, 1996 until completion of the transaction. The Conversion
and the Acquisition are anticipated to be consummated in late June of 1996.
Information relating to CBI required to be contained herein is
incorporated by reference to the following sections contained in CBI's Annual
Report on Form 10-K for the fiscal year ended March 31, 1996 (the "CBI 10-K").
Part I Item 3
Part II Item 7
Part II Item 8
Part IV Item 14
The selected pro forma consolidated financial data of the Company set
forth below is determined on a basis consistent with the Unaudited Pro Forma
Condensed Combined Financial Statements of the Company (the "Pro-Forma") and
notes thereto presented in the Prospectus, and is qualified in its entirety by
references thereto. In deriving the amounts in the tables below, the Acquisition
reflected in the ''Purchase Adjustments'' to the Pro Forma is assumed to have
occurred; while the issuance of Common Stock reflected in the ''Conversion
Adjustments'' to the Pro Forma is not assumed to have occurred. In deriving the
amounts for the Selected Financial Condition Data, the Acquisition was assumed
to have been consummated at March 31, 1996. In deriving the amounts for the
Selected Operating Data, the Acquisition was assumed to have been consummated on
January 1, 1996 and July 1, 1995, respectively, for the three months ended March
31, 1996 and the nine months ended March 31, 1996.
<PAGE>
-17-
At
March 31, 1996
(In thousands)
Selected Financial Condition Data:
Total assets 1,093,601
Loans, net 554,196
Mortgage-backed securities 224,700
Investment securities 277,837
Federal funds sold 64,047
Goodwill 24,914
Deposits 958,172
Equity 81,632
For the Three For the Nine
Months Ended Months Ended
March 31, 1996 March 31, 1996
(In Thousands)
Selected Operating Data:
Interest income $ 20,685 $ 63,432
---------- ----------
Interest expense on deposits and borrowings 10,191 31,882
Net interest income 10,494 31,550
Provision for loan losses 967 1,954
---------- ----------
Net interest income after provision for loan
losses 9,527 29,596
Non-interest income 1,447 3,149
Non-interest expense 6,478 17,641
---------- ----------
Income before income tax expense and cumulative
effect of changes in accounting principle 4,496 15,104
Income tax expense 2,433 7,844
---------- ----------
Income before cumulative effect of changes in
accounting principle $ 2,063 $ 7,260
========== ==========
<PAGE>
-18-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Bank is involved in various legal actions arising in the ordinary
course of its business which, in the aggregate, involve amounts which are
believed to be immaterial to the financial condition and results of operations
of the Bank.
On February 6, 1995, the Superintendent of Banks of the State of New
York took possession of Nationar, a check-clearing and trust company, freezing
all of Nationar's assets. Subsequently, the Bank filed claims of, as adjusted,
approximately $2.2 million for demand accounts (including federal funds),
$77,829 for the recovery on certain forged checks, $130,688 for a debt security,
and interest earned thereon, held for payment of the Nationar capital
debentures, $4,346 for bond coupon collections and $384,000 for capital
debentures and revolving capital debentures. The Bank's SBLI Department filed a
claim of $3,600 for a demand account. The Bank also filed proofs of interest for
147 shares of Nationar common stock and 372 shares of preferred stock, which had
a value on the Bank's books of $66,000.
The Superintendent has submitted four Interim Status Reports regarding
the business and affairs of Nationar to the Supreme Court of the State of New
York in accordance with the relevant provisions of the Banking Law of the State
of New York ("Banking Law"), including an Unaudited Statement of the Net Assets
and Liabilities in Liquidation for Nationar as of February 6, 1996 ("Unaudited
Statement") prepared for the Superintendent. The Unaudited Statement showed
total assets of $266,238,000, of which $229,787,000 were reported as cash and
cash equivalents, and total liabilities of $280,624,000, of which $118,545,000
were reported as entitled to a priority of payment or comparable special
treatment. The Superintendent also stated that the net deficit shown in the
Unaudited Statement may differ materially from that actually realized in the
liquidation of Nationar as a result of, among other things, the results of the
claims reconciliation process, litigation over rejected claims, resolution of
objections to claims, and the Court's determinations regarding priority of
payment of claims. Under the Banking Law, there may be certain preferences that
might affect the percentage recovery of any particular institution. Section 621
of the Banking Law accords a preference to the deposits, within the meaning of
that statute, of mutual savings banks with Nationar.
Based upon the information set forth in these documents, management, as
advised by legal counsel, believes that there is a reasonable likelihood that
the Bank will not realize a full recovery from the liquidation of Nationar.
Although it is too early to determine the amount that ultimately will not be
recovered, management has established reserves for potential losses associated
with Nationar investments and deposits. As of December 31, 1995 the Bank had a
reserve of $565,000 relating to its investments in Nationar's capital and
preferred stocks and subordinated capital debentures and had a reserve of
$75,000 relating to its federal funds of $360,000 with Nationar. In addition,
during February 1996, the Bank increased its reserves for potential losses
associated with Nationar by $285,000 in order to fully reserve its federal funds
sold position at Nationar. In connection with its normal procedures for
monitoring asset quality, management continues to assess the adequacy of its
reserves for potential losses associated with Nationar. This assessment is based
upon management's evaluation of the Interim Reports and will be reevaluated
throughout the claims process. For the nine months ended March 31, 1996, no
additional provisions were considered necessary.
<PAGE>
-19-
By letters dated February 2 and April 24, 1996, the Superintendent
notified the Bank that he will accept the Bank's claims in the amounts of
$384,000 for the capital debentures, of $60,104 for the debt security, and
interest thereon, held for payment of the Nationar capital debentures, of
$2,231,811 for demand accounts, including the federal funds, of $4,346 for the
bond coupon claim, and of $3,600 for the SBLI Department's demand account claim.
The Superintendent also rejected $70,584 of the claim for the debt security, and
the interest earned thereon, held for payment of the Nationar capital
debentures. The Bank has received payment of the $77,829 claimed for the
recovery of the forged checks. The Superintendent also informed the Bank that he
intends to recommend to the Court that such accepted claims be treated as claims
entitled to priority of payment, except to the extent that the demand account
claim is for federal funds. Based on the various reports and communications from
the Superintendent, the Bank expects that accepted claims for which a priority
is granted will be paid in full, and other accepted but nonpriority claims will
be paid at a substantial fraction of the claim, with the rate of such recovery
dependent on the factors described above. The Superintendent has also obtained
judicial approval to pay in full the claims entitled to priority and to pay 40%
of the amount of accepted nonpriority claims. Subject to the satisfaction of
certain conditions, the Superintendent will make such payment on June 27, 1996.
The Bank intends that the reserves established for potential losses will not be
reduced until, and to the extent, the Bank has received payment of the claim
against which the reserves were established. The foregoing events will not have
any material effect on the Company's or the Bank's liquidity needs. Management
is continuing to take all steps necessary to recover the amounts owed to the
Bank by Nationar.
On December 4, 1995, a purported class action complaint was filed in the
Delaware Chancery Court, New Castle County, on behalf of the stockholders of CBI
by Jeffrey Simon ("Plaintiff") against CBI, each of the members of the CBI
Board, and Dime. The Plaintiff alleges that each of the members of CBI's Board
breached his fiduciary duties to CBI stockholders by, among other things,
agreeing to accept the Merger Consideration, which Plaintiff alleges is
inadequate. Dime is alleged to have aided and abetted this breach. Plaintiff
seeks various remedies, including an injunction to prevent the consummation of
the Acquisition and compensatory damages in an unspecified amount. On February
9, 1996, CBI and the director defendants filed an answer which denied the
allegations of liability raised in the complaint and raised affirmative
defenses, as well as a motion to dismiss the complaint. On February 12, 1996,
Dime filed a motion to dismiss the complaint. On or about March 12, 1996,
Plaintiff served a motion for leave to file an amended complaint. In his
proposed amended complaint, Plaintiff asserts, among other things, that the
Proxy Statement distributed to CBI's stockholders did not provide sufficient
disclosure, and that the Acquisition is unfair to CBI's stockholders and
disproportionately benefits CBI's Board and Dime. CBI and Dime each intend to
vigorously defend against the respective claims against them, but there can be
no assurance that CBI and/or Dime will be successful.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
<PAGE>
-20-
Item 5. Other Information
On November 1, 1995, the Bank adopted a Plan of Conversion (the "Plan")
whereby the Bank will convert from the mutual form to the stock form of
ownership. In connection therewith, the Bank filed an Application for Conversion
on Form AC to the Office of Thrift Supervision, which application was approved
on May 14, 1996. The Plan was approved by members of the Bank by a vote taken on
June 21, 1996. Pursuant to the Plan, the Company was organized at the direction
of the Bank for the purpose of holding the stock of the Bank upon the Conversion
and issuing shares of the common stock, par value $.01 per share (the "Common
Stock"), of the Company. The Company filed a Registration Statement on Form S-1
with the Securities and Exchange Commission registering up to 14,547,500 shares
of the Common Stock. On May 13, 1996, the Company's Registration Statement on
Form S-1 was declared effective by the Securities and Exchange Commission. The
Company has offered 12,650,000 shares of Common Stock (subject to increase to
14,547,500 shares under certain circumstances) to certain eligible depositors
and members of the Bank in a subscription offering and to certain members of the
general public in a community offering. The Offerings concluded on June 17, 1996
and subscription orders received from eligible depositors, who have priority
subscription rights, exceeded the 12,650,000 shares offered.
On November 2, 1995, the Bank entered into an Agreement and Plan of
Merger with CBI pursuant to which CBI and its wholly-owned financial institution
subsidiary Pioneer will be acquired by the Bank. The Merger Agreement provides
that each share of Conestoga Common Stock outstanding as of the Effective Time
(other than shares held as treasury stock, unallocated shares held by CBI's
Recognition and Retention Plans and Trusts and any shares as to which
dissenters' rights may be exercised under applicable law) will be converted into
the right to receive $21.25 in cash without interest. The Bank will increase the
Merger Consideration by $0.07 per share for each month, pro rated on a daily
basis, commencing on June 1, 1996 until completion of the transaction. The
Conversion and the Acquisition are anticipated to be consummated in late June of
1996.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule (EDGAR only).
Exhibit 99.1 The following sections of the Annual Report
on Form 10-K of Conestoga Bancorp, Inc. for
the fiscal year ended March 31, 1996
incorporated by reference herein:
Part I Item 3
Part II Item 7
Part II Item 8
Part IV Item 14
(b) Reports on Form 8-K
-------------------
Not applicable.
<PAGE>
-21-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
Dime Community Bancorp, Inc.
Dated: June 25, 1996 By: /s/ Vincent F. Palagiano
---------------------------------------
Vincent F. Palagiano
Chairman of the Board, President and
Chief Executive Officer
Dated: June 25, 1996 By: /s/ Kenneth J. Mahon
----------------------------------------
Kenneth J. Mahon
SeniorVice President and Chief Financial
Officer
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
------- ----------- --------
<S> <C> <C>
27 Financial Data Schedule
99.1 Certain Sections of Annual Report on Form 10-K of
Conestoga Bancorp, Inc. for the fiscal year ended
March 31, 1996
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated condensed statements of financial condition and the consolidated
condensed statement of income and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUN-30-1995
<PERIOD-END> MAR-31-1996
<CASH> 6,913
<INT-BEARING-DEPOSITS> 549,952
<FED-FUNDS-SOLD> 24,247
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 86,665
<INVESTMENTS-CARRYING> 96,393
<INVESTMENTS-MARKET> 96,903
<LOANS> 437,065
<ALLOWANCE> 6,146
<TOTAL-ASSETS> 676,175
<DEPOSITS> 561,026
<SHORT-TERM> 2,026
<LIABILITIES-OTHER> 2,182
<LONG-TERM> 15,710
0
0
<COMMON> 0
<OTHER-SE> 81,636
<TOTAL-LIABILITIES-AND-EQUITY> 676,175
<INTEREST-LOAN> 29,643
<INTEREST-INVEST> 8,645
<INTEREST-OTHER> 962
<INTEREST-TOTAL> 39,250
<INTEREST-DEPOSIT> 17,035
<INTEREST-EXPENSE> 17,789
<INTEREST-INCOME-NET> 21,461
<LOAN-LOSSES> 1,850
<SECURITIES-GAINS> (108)
<EXPENSE-OTHER> 3,020
<INCOME-PRETAX> 10,290
<INCOME-PRE-EXTRAORDINARY> 5,577
<EXTRAORDINARY> 0
<CHANGES> (1,032)
<NET-INCOME> 4,545
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 8.06
<LOANS-NON> 5,614
<LOANS-PAST> 0
<LOANS-TROUBLED> 5,238
<LOANS-PROBLEM> 9,124
<ALLOWANCE-OPEN> 5,174
<CHARGE-OFFS> 889
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 6,146
<ALLOWANCE-DOMESTIC> 6,146
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Exhibit 99.1 Certain Sections of Annual Report on Form 10-K of
Conestoga Bancorp, Inc. for the fiscal year ended
March 31, 1996
</TABLE>
<PAGE>
PART I
ITEM 3. LEGAL PROCEEDINGS
-----------------
On February 6, 1995, the Superintendent of Banks for the State of New York
seized Nationar, a check-clearing and trust company, freezing all of Nationar's
assets. On that date, the Bank had demand accounts of approximately $2.2
million. On April 5, 1995, the Bank received $739,000 from the New York State
Banking Department representing a partial release of its funds with Nationar.
On April 26, 1995, the Superintendent submitted an Interim Status Report
("Interim Report") regarding the business and affairs of Nationar to the
Supreme Court of the State of New York, in accordance with the relevant
provisions of the Banking Law of the State of New York. Attached to the
Interim Report was a preliminary Statement of the Net Assets and Liabilities in
Liquidation for Nationar as of February 6, 1995 ("Preliminary Statement"),
which showed a net deficit of liabilities in excess of assets of approximately
$29.4 million. The Superintendent indicated in the Interim Report that the
review of potential claims against Nationar is not yet complete and that any
estimate of the net deficit of Nationar (and potential creditor recoveries) may
differ materially from the amounts shown in the Preliminary Statement as a
result of, among other things, the ultimate realization on the assets of the
estate, the total amount of claims presented, the results of the claims
reconciliation process, the valuation of collateral and the review and
classification of priority claims. Under the Banking Law, there may be certain
preferences that might affect the percentage recovery of any particular
institution. The Interim Report did not indicate whether or the extent to
which the Bank or a similarily situated institution would recover amounts owed
by Nationar. Based upon information set forth in these documents, which by
their terms are preliminary, management, as advised by legal counsel, believes
that there is a reasonable likelihood that the Bank will not recover all of its
deposits owed by Nationar. Although it is too early to determine the amount
that ultimately will not be recovered, management has provided $197,000 as a
reserve against the possibility of loss in accordance with the Company's normal
procedures for monitoring asset quality. Adjustments to this allowance may be
made as the claims process progresses. The foregoing events will not have any
material effect on the Company's or the Bank's ability to meet their liquidity
needs. Management is taking all steps necessary to recover the amounts owed
the Bank by Nationar.
On December 4, 1995, a purported class action complaint was filed in the
Delaware Chancery Court, New Castle County, on behalf of the stockholders of
Conestoga by Jeffrey Simon ("Plaintiff") against Conestoga, each of the members
of the Conestoga Board, and Dime. The Plaintiff alleges that each of the
members of Conestoga's Board breached his fiduciary duties to Conestoga
stockholders by, among other things, agreeing to accept the Merger
Consideration, which Plaintiff alleges is inadequate. Dime is alleged to have
aided and abetted this breach. Plaintiff seeks various remedies, including an
injunction to prevent the consummation of the Acquisition and compensatory
damages in an unspecified amount. On February 9, 1996, Conestoga and the
director defendants filed an answer which denied the allegations of liability
raised in the complaint and raised affirmative defenses, as well as a motion to
dismiss the complaint. On February 12, 1996, Dime filed a motion to dismiss
the complaint. On or about March 12, 1996, Plaintiff served a motion for leave
to file an amended complaint. In his proposed amended complaint, Plaintiff
asserts, among other things, that the Proxy Statement distributed to
Conestoga's shareholders did not provide sufficient disclosure, and that the
Acquisition is unfair to Conestoga's stockholders and disproportionately
benefits Conestoga's Board and Dime. Conestoga and Dime each intend to
vigorously defend against the respective claims against them, but there can be
no assurance that Conestoga and/or Dime will be successful.
42
<PAGE>
The Bank is not involved in any other pending legal proceedings other than
legal proceedings incident to the Bank's business, which involve amounts in the
aggregate which management believes are immaterial to the financial condition
and results of operations of the Bank.
43
<PAGE>
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Conestoga Bancorp, Inc. (the "Company"), was formed in November of
1993, the holding company for Pioneer Savings Bank, F.S.B. (the "Bank") in
connection with the conversion of the Bank from mutual to stock form of
ownership. The Company is headquartered in Roslyn, New York and principal
business currently consists of operations of its wholly owned subsidiary, the
Bank. The Company had no operations prior to March 30, 1994 and accordingly,
the results of operations prior to that date reflect only those of the Bank.
The Bank's results of operations are dependent primarily on net interest income,
which is the difference between the income earned on its loan, mortgage-backed
and mortgage-related securities and investment securities portfolios, and its
cost of funds, consisting of the interest paid on its deposits and borrowings.
The Bank's results of operations are also affected by its provision for loan
losses. The Bank's non-interest expenses principally consist of employee
compensation and benefits, occupancy and equipment expenses, federal deposit
insurance premiums and other general and administrative expenses. The Bank's
results of operations are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities.
MANAGEMENT STRATEGY
The Bank operates a traditional savings institution and seeks to
achieve profitability while maintaining a relatively strong capital position by
emphasizing one- to four- family residential mortgage lending, managing interest
rate risk, and controlling expenses by improving operating efficiency.
The Bank has emphasized, and plans to continue to emphasize,
originating for its portfolio traditional one- to four- family residential
mortgage loans in its primary market area of Brooklyn, Queens, Nassau, Suffolk
and Westchester counties in the New York City metropolitan area. One-to four-
family residential mortgage loans have exceeded 90% of the Bank's total loan
portfolio in each of the five years ended March 31, 1996 and totalled $109.5
million, or 94.87% of the Bank's total loan portfolio at March 31, 1996. As a
result of the Bank's long-term policy of originating loans secured by one-to
four-family, owner-occupied, primary residences that meet the Bank's
underwriting standards, the Bank has maintained high asset quality. The Bank's
ratio of non-performing loans and real estate owned to total assets did not
exceed .34% at any fiscal year end during the past five fiscal years. At March
31, 1996, this ratio was .16%.
The Bank's allowance for loan losses as a percent of total loans was
.18% at March 31, 1996. The Bank originates primarily ARM loans and 10-15 year
fixed-rate loans as part of its strategy to reduce its exposure to interest rate
risk. However, 30 year fixed rate mortgage loans are offered although they may
not be at the most competitive rates. The Bank's total net loan portfolio as a
percentage of total assets has decreased from 25.8% at March 31, 1995 to 23.2%
at March 31, 1996, due to a declining interest rate environment which placed
one- to- four family ARMs in less demand.
46
<PAGE>
ASSET/LIABILITY MANAGEMENT
- --------------------------
In an effort to manage the Bank's vulnerability to interest rate
changes, management closely monitors interest rate risk on an on-going basis.
The Bank's overall asset/liability management policy is designed to maintain a
balance between interest-earning assets and interest-bearing liabilities such
that the Bank's cumulative one-year gap ratio is within a range which the Board
believes is conducive to maintaining profitability without incurring undue risk.
However, large fluctuations in market interest rates are neither predictable nor
controllable and may have a materially adverse impact on the operations and
financial condition of the Bank.
The Bank has limited its exposure to interest rate risk, in part,
through its emphasis on the origination of ARM loans and shorter-term fixed rate
loans. At March 31, 1996, 29% of the Bank's one- to four-family residential
mortgage loans were ARM loans. Management believes that, although investment in
ARM loans may reduce short-term earnings below amounts obtainable through
investments in fixed-rate mortgage loans, an ARM loan portfolio reduces the
Bank's exposure to adverse interest rate fluctuations and enhances longer term
profitability. In recent periods, overall loan originations have decreased in
the Bank's market area. Although the Bank originates 10, 15 and 30 year fixed-
rate, one- to four- family residential mortgage loans, its emphasis in recent
periods has been on the origination of shorter-term fixed-rate loans. The Bank
believes that originating a longer term, fixed-rate loan product for retention
in its portfolio would subject the Bank to undue exposure to fluctuations in
interest rates but attempts to off-set this exposure to fluctuating interest
rates with shorter-term securities. There is no assurance that any substantial
amount of ARM loans meeting the Bank's underwriting standards will be available
for origination in the future.
The Bank has increased its investments in low risk mortgage-backed and
mortgage-related securities and investment securities with short and
intermediate average lives. The investment policy of the Bank is designed to
manage the interest rate sensitivity of its overall assets and liabilities, to
generate a favorable return without incurring undue interest rate risk, to
supplement the Bank's lending activities, and to provide and maintain liquidity.
At March 31, 1996, the Bank's mortgage-backed and mortgage-related securities
portfolio, including those available for sale, consisted of $50.3 million with
fixed rates and $79.7 million with adjustable rates. Included in this total
were $6.1 million of CMOs and REMICs, a type of CMO. All of the Bank's CMOs and
REMICs had adjustable rates and $5.9 million were insured or guaranteed by the
Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal National Mortgage
Association ("FNMA") or the Government National Mortgage Association ("GNMA").
At March 31, 1996, the Bank's investment securities included $119.0 million of
securities maturing in one year or less and $163.4 million of securities
maturing in five years or less. These investments are consistent with the
Bank's objective of controlling interest rate risk through investments in
instruments with shorter terms to maturity or average lives to better match the
repricing of liabilities.
The Bank closely monitors its operating expenses and seeks to control
operating expense ratios while maintaining the necessary staff and facilities to
serve its customers. The Bank's ratio of operating expenses to average assets
was 2.11%, 2.03%, 1.93%, 1.83% and 1.92% for the fiscal years ended March 31,
1996, 1995, 1994, 1993 and 1992, respectively. The Bank has maintained low
operating costs primarily through controlling the growth in personnel, the
absence of large loan origination and servicing staffs and an efficient and
effective product delivery
47
<PAGE>
system. The Bank's expenses have increased as a result of its conversion from
mutual to stock form because of increased regulatory and reporting requirements.
Management will continue to monitor all expenses and attempt to control such
expenses.
INTEREST RATE SENSITIVITY ANALYSIS
- ----------------------------------
The matching of the repricing characteristics of assets and
liabilities may be analyzed by examining the extent to which such assets and
liabilities are "interest rate sensitive" and by monitoring an institution's
interest rate sensitivity "gap." An asset or liability is said to be interest
rate sensitive within a specific time period if it will mature or reprice within
that same time period. The interest rate sensitivity gap is defined as the
difference between the amount of interest-earning assets anticipated, based upon
certain assumptions, to mature or reprice within a specific time period and the
amount of interest-bearing liabilities anticipated, based upon certain
assumptions, to mature or reprice within that same time period. A gap is
considered positive when the amount of interest rate sensitive assets maturing
or repricing within a specific time frame exceeds the amount of interest rate
sensitive liabilities maturing or repricing within that same time frame. A gap
is considered negative when the amount of interest rate sensitive liabilities
maturing or repricing within a specific time frame exceeds the amount of
interest rate sensitive assets maturing or repricing within that same time
frame. Accordingly, in a rising interest rate environment, an institution with
a positive gap would be in a better position to invest in higher yielding
assets, which would result in the yield on its assets increasing at a pace
closer to the cost of its interest-bearing liabilities, than would be the case
if it had a negative gap. During a period of falling interest rates, an
institution with a positive gap would tend to have its assets repricing at a
faster rate than one with a negative gap, which would tend to restrain the
growth of its net interest income.
In an effort to minimize interest rate risk exposure, the Bank has
concentrated its efforts on investing in adjustable-rate mortgage-backed
securities; however, in the current interest rate environment the Bank has
invested in shorter-term, fixed-rate products which produce a greater yield
while minimizing interest rate risk exposure. As a result of this strategy, at
March 31, 1996, net interest-earning assets maturing or repricing within one
year exceeded its total interest-bearing liabilities maturing or repricing
within the same time period by $86.8 million, representing a positive cumulative
one-year gap of 17.56% of total assets. The Bank is currently attempting to
maintain a positive gap position; however, there can be no assurances that the
Bank will be able to maintain its positive gap position or that the Bank's
strategies will not result in a negative gap in the future.
The Bank has recently attempted to increase deposits by maintaining
interest rates in line with those of its competitors. The Bank has also
attempted to encourage long-term depositors to maintain their accounts with the
Bank through expanded customer service and establishing branch offices in new
market areas. This policy has resulted in the Bank's core deposits to total
deposits ratio of at least 44.22% at any fiscal year end during the past five
fiscal years. However, to the extent the Bank's core deposits are reduced at a
more rapid rate than the Bank's decay assumptions on such deposits, the Bank's
current positive gap position could be negatively impacted.
48
<PAGE>
The following table sets forth the amount of interest-earning assets
and interest-bearing liabilities outstanding at March 31, 1996, which are
anticipated by the Bank based upon certain assumptions described below, to
reprice or mature in each of the future time periods shown. Except as stated
below, the amounts of assets and liabilities shown which reprice or mature
during a particular period were determined in accordance with the earlier of
term to repricing or the contractual terms of the asset or liability. The Bank
utilized the Office of Thrift Supervision's ("OTS") most recent national deposit
decay rate assumptions, which were published as of December 31, 1992, of 17% for
passbook accounts and 79% for money market deposit accounts. Those assumptions
may not be indicative of actual withdrawals experienced by the Bank.
49
<PAGE>
<TABLE>
<CAPTION>
As of March 31, 1996
------------------------------------------------------------------------------------------------
More than More than More than More than
3 Months 3 to 6 6 Months 1 Year to 3 Years to 5 Years to 10 Years to More than
or Less Months to 1 Year 3 Years 5 Years 10 Years 20 Years 20 Years Total
-------- ------ --------- --------- ---------- ---------- ----------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $2,525 $2,691 $11,082 $28,550 $13,645 $25,703 $26,834 $3,023 $114,053
Other loans 692 692 - - - - - - 1,384
Mortgage-backed securities
available for sale (1) 308 339 368 143 170 192 29 - 1,549
Investment securities held
to maturity (1) 101,104 20,903 14,999 12,480 11,959 17,990 - - 179,435
Mortgage-backed securities
held to maturity (1) 25,472 28,037 30,399 11,852 14,054 15,856 2,391 - 128,061
Interest-earning deposits 39,800 - - - - - - - 39,800
FHLB capital stock 2,681 - - - - - - - 2,681
-------- -------- -------- -------- -------- -------- ------- -------- --------
Total interest-earning assets 172,582 52,662 56,848 53,025 39,828 59,741 29,254 3,023 466,963
Less: loan loss reserves,
unearned discount &
deferred fees on loans (2) 340 104 112 104 78 118 58 5 919
-------- -------- -------- -------- -------- -------- ------- -------- --------
Net interest-earning assets 172,242 52,558 56,736 52,921 39,750 59,623 29,196 3,018 466,044
-------- -------- -------- -------- -------- -------- ------- -------- --------
Interest-bearing liabilities:
Passbook accounts 5,532 5,532 11,065 33,612 21,912 27,812 19,238 5,468 130,171
Money market accounts 5,930 5,930 11,859 3,303 1,573 1,206 218 5 30,024
Certificate accounts 48,199 31,818 63,636 56,157 23,138 - - - 222,948
Securities sold with agreement
to repurchase - 5,000 - 5,000 - - - - 10,000
Escrow deposits
(interest-bearing) 63 63 126 381 249 316 218 61 1,477
-------- -------- -------- -------- -------- -------- ------- -------- --------
Total interest-bearing
liabilities 59,724 48,343 86,686 98,453 46,872 29,334 19,674 5,534 394,620
-------- -------- -------- -------- -------- -------- ------- -------- --------
Interest rate sensitivity gap $112,518 $4,215 ($29,950) ($45,532) ($7,122) $30,289 $9,522 ($2,516) $71,424
======== ======== ======== ======== ======== ======== ======== ======== ========
Cumulative interest rate
sensitivity gap $112,518 $116,733 $86,783 $41,251 $34,129 $64,418 $73,940 $71,424
======== ======== ======== ======== ======== ======== ======== ========
Cumulative interest rate
sensitivity gap as a
percentage of total assets 22.77% 23.62% 17.56% 8.35% 6.91% 13.03% 14.96% 14.45%
======== ======== ======== ======== ======== ======== ======== ========
Cumulative net interest-earning
assets as a percentage of
interest-bearing liabilities 288.40% 208.02% 144.56% 114.07% 110.04% 117.44% 119.00% 118.10%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Net of unearned discount and deferred fees
(2) For purposes of the gap analysis, unearned discount and deferred fees are
pro-rated
50
<PAGE>
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as ARM loans, have
features which limit changes in interest rates on a short-term basis and over
the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of borrowers to
service their ARM loans may decrease in the event of an interest rate increase.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends upon the volume of interest-earning assets and interest-
bearing liabilities and the interest rates earned or paid on them.
The following table sets forth certain information relating to the
Company's average consolidated statement of financial condition and the
consolidated statement of operations for the fiscal years ended March 31, 1995,
1994 and 1993 and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods shown. Average balances are derived from month-
end balances. The average balance of loans receivable includes loans on which
the Bank has discontinued accruing interest. The yields and costs include fees
which are considered adjustments to yields.
51
<PAGE>
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Federal funds sold $36,092 $2,189 6.07% $35,942 $1,678 4.67% $33,100 $1,110 3.36%
Investment securities (1)(2) 136,293 9,266 6.80 94,562 6,611 6.99 67,132 4,466 6.65
Mortgage loans 112,990 8,964 7.93 107,317 8,454 7.88 99,822 8,374 8.39
Consumer and other loans 1,430 105 7.34 1,514 106 7.00 1,694 121 7.14
Mortgage-backed securities (2) 174,913 11,878 6.79 163,999 9,860 6.01 156,241 10,758 6.89
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-earning assets 461,718 32,402 7.02 403,334 26,709 6.62 357,989 24,829 6.94
------- ----- -------- ------- ----- -------- ------- -----
Non-interest-earning assets 25,644 24,081 22,919
-------- -------- --------
Total assets $487,362 $427,415 $380,908
======== ======== ========
Liabilities and stockholders'
equity:
Interest-bearing liabilities:
Securities sold with agreement
to repurchase $18,660 1,209 6.48 $4,522 261 5.77 - - -
Money market deposits 29,816 976 3.27 31,928 922 2.89 $35,647 921 2.58
Savings deposits (3) 130,589 3,236 2.48 145,198 3,678 2.53 146,067 3,728 2.55
Certificates of deposit 210,469 12,872 6.12 153,373 7,444 4.85 150,737 6,969 4.62
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing
liabilities 389,534 18,293 4.70 335,021 12,305 3.67 332,451 11,618 3.49
------- ----- -------- ------- ----- -------- ------- -----
Demand deposits 14,814 12,970 11,076
Other non-interest-bearing
liabilities 4,680 4,086 3,652
-------- -------- --------
Total liabilities 409,028 352,077 347,179
Stockholders' equity: 78,334 75,338 33,729
-------- -------- --------
Total liabilities
and stockholders' equity $487,362 $427,415 $380,908
======== ======== ========
Net interest income/net
interest rate spread (4) $14,109 2.32% $14,404 2.95% $13,211 3.45%
======= ===== ======= ===== ======= =====
Net interest-earning
assets/net interest margin (5) $72,184 3.06% $68,313 3.57% $25,538 3.69%
======== ===== ======== ===== ======== =====
Ratio of interest-earning
assets to average
interest-bearing liablilties 1.19 x 1.20 x 1.08 x
</TABLE>
- ---------------
(1) Includes interest-bearing deposits in other banks and FHLB stock
(2) Includes assets available for sale
(3) Includes advance payment from borrowers for taxes and insurance of $1.5
million and $1.9 million for the fiscal years ended March 31, 1996 and
1995, respectively, which earns interest at a 2% annual rate.
(4) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average yield on
interest-bearing liabilities
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets
52
<PAGE>
Rate/Volume Analysis
The following table presents 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
prior rate), (ii) changes attributable to changes in rate (changes in rate
multiplied by prior volume), and (iii) the net change. The changes attributable
to the combined impact of volume and rate have been allocated proportionately to
the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Year Ended March 31, 1996 Year Ended March 31, 1995
Compared to Compared to
Year Ended March 31, 1995 Year Ended March 31, 1994
--------------------------------- ---------------------------------
Increase (Decrease) Increase (Decrease)
in Net Interest Income in Net Interest Income
Due to Due to
---------------------- ----------------------
Volume Rate Net Volume Rate Net
--------- --------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Federal funds sold $9 $502 $511 $133 $435 $568
Investment securities 2,837 (182) 2,655 1,918 227 2,145
Mortgage loans 450 60 510 590 (510) 80
Consumer and other loans (6) 5 (1) (13) (2) (15)
Mortgage-backed securities 741 1,277 2,018 466 (1,364) (898)
--------- --------- --------- --------- --------- ---------
Total interest-earning assets 4,031 1,662 5,693 3,094 (1,214) 1,880
--------- --------- --------- --------- --------- ---------
Interest expense:
Securities sold with agreement to
repurchases 916 32 948 261 - 261
Money market deposits (69) 123 54 (107) 108 1
Savings deposits (362) (80) (442) (22) (28) (50)
Certificates of deposit 3,492 1,936 5,428 128 347 475
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities 3,977 2,011 5,988 260 427 687
--------- --------- --------- --------- --------- ---------
Net change in interest income $54 ($349) ($295) $2,834 ($1,641) $1,193
======== ======== ======== ======== ======== ========
</TABLE>
53
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED MARCH 31, 1996 AND
- -----------------------------------------------------------------------------
1995
- ----
GENERAL. For the twelve months ended March 31, 1996 and 1995, net income
was $3.2 million and $4.1 million, respectively. Comments regarding the
material changes in the components of net income are discussed below.
INTEREST INCOME. Interest income increased $5.7 million, or 21.3 percent,
to $32.4 million for the twelve months ended March 31, 1996, from $26.7 million
in the same period in 1995, primarily due to an increase in the average balance
of interest-earning assets of $58.4 million, or 14.5 percent, representing
investment of the proceeds from the increase in total deposits. Increases of
$509,000, $2.5 million, $2.2 million and $511,000 in interest income on loans,
mortgage-backed securities held to maturity, investment securities held to
maturity and federal funds sold, respectively, were offset by a decrease in
interest income on securities available for sale of $38,000.
INTEREST EXPENSE. Interest expense increased $6.0 million, or 48.7
percent, to $18.3 million for the twelve months ended March 31, 1996, from $12.3
million in the same period in 1995. The increase is primarily attributable to
the interest expense on the securities sold with agreement to repurchase coupled
with an increase in certificate rates, which resulted in the average cost of
interest-bearing liabilities increasing to 4.70 percent for the twelve months
ended March 31, 1996, from 3.67 percent for the same period in 1995. Securities
sold with agreement to repurchase reflect management's decision to leverage the
balance sheet in an effort to increase net interest income. The increase in the
average cost of interest-bearing liabilities was coupled with an increase in the
average balance of interest-bearing liabilities of $54.5 million, or 16.3
percent to $389.5 million from $335.0 million.
NET INTEREST INCOME. Net interest income declined $295,000, or 2.0
percent, to $14.1 million for the twelve months ended March 31, 1996, from $14.4
million in the same period in 1995. The net interest spread declined to 2.32
percent for the twelve months ended March 31, 1996, from 2.95 percent for the
same period in 1995. This is largely due to the increased cost of interest-
bearing liabilities discussed above. Due to the current interest rate
environment, although management cannot predict with certainty the effects of
changes, if any, in interest rates on future yields in the near term, it is
likely the net interest margin will continue to narrow.
PROVISION FOR LOAN LOSSES. The Bank maintains an allowance for loan losses
at a level considered adequate to absorb loan losses. Management of the Bank,
in determining the provision for loan losses, considers the risks inherent in
its loan portfolio and changes in the nature and volume of its loan activities,
along with the specific economic environment of the New York metropolitan area
and its impact on real estate market conditions in the Bank's market area. The
Bank maintains a loan review system which allows for a periodic review of its
loan portfolio and the early identification of potential problem loans. Such
system takes into consideration, among other things, delinquency status, size of
loan, type of collateral and financial condition of the borrower. Specific loan
loss allowances are established for identified loans based on a review of such
information and/or appraisals of the underlying collateral. General loan loss
allowances are based upon a combination of factors including, but not limited
to, actual loan loss experience, composition of loan portfolio and current
economic conditions. Although management believes that adequate general loan
losses are established, actual losses are dependent upon future events
54
<PAGE>
and, as such, further additions to the level of the general loan loss allowance
may be necessary. No specific reserves for loan losses were established for the
twelve months ended March 31, 1996 and 1995. The general and specific reserve
terms are used for regulatory and internal purposes only. In the calculation of
the risk-based capital ratio, the general valuation reserves are added back to
stockholders' equity.
For the twelve months ended March 31, 1996, the provision for loan
losses was $104,000 as compared to a net recovery for loan losses of $36,000 for
the same period in 1995. The Bank's history of loan losses has been minimal,
which it believes is a reflection of its conservative underwriting standards.
The ratio of allowance for loan losses as a percentage of total loans receivable
was .18% and .15% at March 31, 1996 and 1995, respectively.
NON-INTEREST INCOME. Non-interest income consists primarily of fee income
from service charges and gains on sales of mortgage-backed and investment
securities. Non-interest income totalled $2.6 million for the twelve months
ended March 31, 1996, an increase of $760,000, or 41.5 percent, from $1.8
million for the same period in 1995. The increase primarily reflects gains of
$1.7 million on sales of securities available for sale in 1996 as compared to
gains of $850,000 in 1995. The 1996 sales were undertaken as a result of
management's decision to reduce the available-for-sale portfolio and, in turn,
the accompanying gains were recorded in accordance with SFAS No. 115. The 1995
sales were a result of management's decision to eliminate higher-risk corporate
bonds from the Bank's securities portfolio as well as mortgage-backed securities
with high prepayment risk.
NON-INTEREST EXPENSE. For the twelve months ended March 31, 1996, non-
interest expense was $10.3 million, an increase of $1.6 million, or 18.5
percent, as compared to $8.7 million for the same period in 1995. The increase
was attributable to expenses of $842,000 incurred in connection with the merger
of the Company with Dime. The rise was also a result of an increase in
salaries and employee benefits of $294,000 primarily reflecting annual salary
increases and increased payroll taxes, as well as increases in ESOP/RRP benefits
and federal insurance premiums of $191,000 and $56,000, respectively.
INCOME TAX EXPENSE. Income taxes decreased $389,000 to $3.1 million for
the twelve months ended March 31, 1996, from $3.5 million for the same period in
1995. This decrease was a result of the decrease in pre-tax income for the
period.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED MARCH 31, 1995 AND
- -----------------------------------------------------------------------------
1994
- ----
GENERAL. For the twelve months ended March 31, 1995 and 1994, net income
was $4.1 million and $3.9 million, respectively. Comments regarding the
material changes in the components of net income are discussed below.
INTEREST INCOME. Interest income increased $1.9 million, or 7.6%, to $26.7
million for the twelve months ended March 31, 1995, from $24.8 million in the
same period in 1994, primarily due to an increase in the average balance of
interest-earning assets of $45.3 million, or 12.7%, representing investment of
the proceeds from the stock conversion. A decrease of $2.9 million in interest
income on mortgage-backed securities was offset by increases in interest income
of
55
<PAGE>
$65,000, $2.3 million, $1.8 million and $568,000 on loans, investment
securities, securities available for sale and federal funds sold, respectively.
The increase in interest income on securities available for sale and the related
decrease in interest income on mortgage-backed securities reflect the Bank's
adoption of SFAS No. 115 effective April 1, 1994, requiring the reclassification
of certain mortgage-backed securities from held to maturity to available for
sale. See "Impact of New Accounting Standards."
INTEREST EXPENSE. Interest expense increased $687,000, or 5.9%, to $12.3
million for the twelve months ended March 31, 1995, from $11.6 million in the
same period in 1994. The increase is primarily attributable to the interest
expense on the securities sold with agreement to repurchase coupled with an
increase in certificate rates, which resulted in the average cost of interest-
bearing liabilities increasing to 3.67% for the twelve months ended March 31,
1995, from 3.49% for the same period in 1994. Securities sold with agreement to
repurchase reflect management's decision to leverage the balance sheet in an
effort to increase net interest income. The increase in the average cost of
interest-bearing liabilities was coupled with an increase in the average balance
of interest-bearing liabilities of $2.5 million, or .8%, to $335.0 million from
$332.5 million.
NET INTEREST INCOME. Net interest income increased $1.2 million, or 9.0%,
to $14.4 million for the twelve months ended March 31, 1995, from $13.2 million
for the same period in 1994. However, the net interest spread declined to 2.95%
for the twelve months ended March 31, 1995, from 3.45% for the same period in
1994. This is indicative of a decreased yield of 32 basis points on interest-
earning assets due to increased investments in lower-risk, lower-yielding assets
such as mortgage-backed and investment securities, as well as the increased cost
of interest-bearing liabilities discussed above. Due to the current interest
rate enviroment, management cannot predict with certainty the effects of
changes, if any, in interest rates on future yields.
PROVISION FOR LOAN LOSSES. The Bank maintains an allowance for loan losses
at a level considered adequate to absorb loan losses. Management of the Bank,
in determining the provision for loan losses, considers the risks inherent in
its loan portfolio and changes in the nature and volume of its loan activities,
along with the specific economic environment of the New York metropolitan area
and its impact on real estate market conditions in the Bank's market area. The
Bank maintains a loan review system which allows for a periodic review of its
loan portfolio and the early identification of potential problem loans. Such
system takes into consideration, among other things, delinquency status, size of
loan, type of collateral and financial condition of the borrower. Specific loan
loss allowances are established for identified loans based on a review of such
information and/or appraisals of the underlying collateral. General loan loss
allowances are based upon a combination of factors including, but not limited
to, actual loan loss experience, composition of loan portfolio and current
economic conditions. Although management believes that adequate general loan
losses are established, actual losses are dependent upon future events and, as
such, further additions to the level of the general loan loss allowance may be
necessary. For the twelve months ended March 31, 1995, specific reserves for
loan losses totaling $14,000 were established. No specific reserves for loan
losses were established for the twelve months ended March 31, 1994. The general
and specific reserve terms are used for regulatory and internal purposes only.
In the calculation of the risk-based capital ratio, the general valuation
reserves are added back to stockholders' equity.
56
<PAGE>
Due to the Bank's historically low level of nonperforming loans, the
Bank was able to realize a net recovery for loan losses of $36,000 for the
twelve months ended March 31, 1995, as compared to a provision of $39,000 for
the same period in 1994. The Bank's history of loan losses has been minimal,
which it believes is a reflection of its conservative underwriting standards.
The ratio of allowance for loan losses as a percentage of total loans receivable
was .15% and .21% at March 31, 1995 and 1994, respectively.
NON-INTEREST INCOME. Non-interest income consists primarily of fee income
from service charges and gains on sales of mortgage-backed and investment
securities. Non-interest income totalled $1.8 million for the twelve months
ended March 31, 1995, an increase of $344,000, or 23.1%, from $1.5 million for
the same period in 1994. The increase primarily reflects gains of $850,000 on
sales of securities available for sale in 1995 as compared to gains of $620,000
on sales of mortgage-backed securities and investments and securities available
for sale in 1994. The 1995 sales were undertaken to reduce the available-for-
sale portfolio and, in an increasing interest rate environment, the accompanying
unrealized losses which would likely be required to be recorded in accordance
with SFAS No. 115. See "Impact of New Accounting Standards." The 1994 sales
were a result of management's decision to eliminate higher-risk corporate bonds
from the Bank's securities portfolio as well as mortgage-backed securities with
high prepayment risk.
NON-INTEREST EXPENSE. For the twelve months ended March 31, 1995, non-
interest expense was $8.6 million, an increase of $1.3 million, or 17.9%, as
compared to $7.3 million for the same period in 1994. The rise was primarily a
result of an increase in Employee Stock Ownership Plan ("ESOP") and Recognition
and Retention Plan ("RRP") benefits of $754,000, as well as increases of
$128,000 and $93,000, respectively, in legal and accounting fees and various
other increased costs associated with being a public company.
INCOME TAX EXPENSE. Income taxes increased $102,000 to $3.5 million for
the twelve months ended March 31, 1995, from $3.4 million for the same period in
1994. This increase was a result of the increase in pre-tax income for the
period.
CHANGES IN FINANCIAL CONDITION SINCE MARCH 31, 1995
- ---------------------------------------------------
Total assets increased $49.2 million, or 11.0 percent, to $494.3
million at March 31, 1996, primarily due to additional funds available for
investment as a result of a net increase in deposits of $46.7 million.
Mortgage-backed securities available for sale decreased by $16.3
million, or 91.3 percent, which reflects sales of U.S. agency mortgage-backed
securities and principal repayments and amortization of $85.2 million and $2.7
million, respectively, partially offset by a one-time reassessment and related
reclassification from the held to maturity category and purchases during the
period of Government National Mortgage Association ("GNMA") securities of
$63.6 million and $8.0 million, respectively. Investment securities available
for sale decreased by $51,000 to zero. This decrease was primarily due to sales
of U.S. government agency securities and corporate bonds of $7.9 million and
$15.0 million, respectively, coupled with calls of U.S. government agency
securities of $5.0 million. These were partially offset by a one-time
reassessment and related reclassification from the held to maturity category of
$28.0 million. The
57
<PAGE>
one-time reassessment and related reclassifications from the held to maturity
category discussed herein resulted from the Company's decision to utilize the
window allowed by the Financial Accounting Standards Board ("FASB") to
reclassify held-to-maturity portfolios pursuant to FASB Statement No. 115
without affecting the classification of the remaining portfolio (see "Impact of
New Accounting Standards").
The decreases in mortgage-backed securities and investment securities
available for sale were coupled with an increase in investment securities held
to maturity and partially offset by a decrease in mortgage-backed securities
held to maturity. Investment securities held to maturity increased by $77.8
million or 76.5 percent. This increase was primarily due to purchases of U.S.
agency securities and commercial paper of $109.8 million and $220.9 million,
respectively. This was partially offset by a one-time reassessment and
reclassification to available for sale and by calls and maturities of U.S.
agency securities and corporate bonds and sales of downgraded corporate bonds of
$28.0 million, $221.9 million and $4.0 million, respectively. The $4.0 million
of downgraded corporate bonds were sold because there was evidence of
significant deterioration of the issuer's creditworthiness, and were therefore
sold in accordance with paragraph 8 of SFAS No. 115.
Mortgage-backed securities held to maturity declined $20.5 million or
13.8 percent largely as a result of a one-time reassessment and reclassification
to available for sale and principal repayments of $63.6 million and $18.2
million, respectively. This was partially offset by purchases during the period
of Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") and
Resolution Trust Corporation ("RTC") securities of $20.3 million, $13.3 million,
$26.2 million and $1.5 million, respectively.
The Bank's total deposit liabilities at March 31, 1996 were $399.7
million compared to $353.0 million at March 31, 1995. During the twelve months
ended March 31, 1996, new deposits before interest credited exceeded deposit
outflows by $29.7 million. Interest credited for the twelve months ended March
31, 1996 amounted to $17.0 million. The resulting net increase in deposits of
$46.7 million, or 13.2 percent, is attributable primarily to the Bank's decision
during the first quarter to raise interest rates on many time deposit products
in celebration of the Bank's 110th anniversary of serving the financial needs of
its communities and the Bank's expansion into the Westbury, New York community
with the grand opening of a full service branch and mortgage center. Management
has continued to monitor savings rates and has reduced time account rates to a
level management believes is still competitive with other institutions in its
market areas. At March 31, 1996, 32.6 percent of deposits were in savings
accounts, 55.8 percent of deposits were in time accounts, 7.5 percent were in
money market accounts and 4.1 percent were in demand accounts.
The Bank's securities sold with agreement to repurchase at March 31, 1996
were $10.0 million compared to $9.8 million at March 31, 1995, an increase of
$205,000 or 2.1 percent. These U.S. Government and agency and mortgage-backed
securities sold with agreement to repurchase mature during July of 1996 and July
of 1997. Borrowings under such reverse repurchase agreements involve the
delivery of securities to broker-dealers who arrange the transactions. The
securities remain registered in the name of the Bank, and are returned upon the
maturities of the agreements. Securities sold with agreement to repurchase
reflect management's decision to
58
<PAGE>
leverage the balance sheet in an effort to increase net interest income. Funds
to repay at maturity the Bank's securities sold with agreement to repurchase
will primarily be provided by cash received from maturing U.S. agency
securities.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Bank's primary sources of funds are deposits and principal and interest
payments on loans and mortgage-backed and mortgage-related securities and
investment securities. While maturities and scheduled amortization of loans and
mortgage-backed and mortgage-related securities and investment securities are
predictable sources of funds, deposit flows and mortgage prepayments are
strongly influenced by changes in general interest rates, economic conditions,
competition and regulatory changes.
The Bank is required to maintain an average daily balance of liquid assets
and short-term liquid assets as a percentage of net withdrawable deposit
accounts plus short-term borrowings as defined by OTS regulations. The minimum
required liquidity and short-term liquidity ratios, which vary periodically
depending upon economic conditions and deposit flows, are currently 5% and 1%,
respectively. The Bank's liquidity ratios were 44.65% and 22.76% at March 31,
1996, and March 31, 1995, respectively, which were significantly higher than
required, primarily due to the greater opportunity for deposit gathering than
for loan origination within the Bank's local market area. Liquid assets consist
of cash, cash equivalents and short-term and intermediate-term investments, such
as short and intermediate-term U.S. Government and government agency securities.
The maintenance of liquid assets allows for the possibility of disintermediation
when interest rates fluctuate. The level of these assets is dependent on the
Bank's operating, financing, lending and investing activities during any given
period. At March 31, 1996, and March 31, 1995, assets qualifying for short-term
liquidity, including cash and short-term investments, totalled $132.3 million
and $42.5 million, respectively.
The primary investment activity of the Bank is the origination of one-to-
four family mortgage loans as well as investing in mortgage-backed and mortgage-
related securities. During the twelve months ended March 31, 1996, the Bank's
one-to-four family mortgage loan originations totalled $10.5 million, while
purchases of mortgage-backed securities were $69.2 million of which $10.0
million is pledged at March 31, 1996 as collateral for reverse repurchase
agreements. Investments in U.S. Government and agency obligations totalled
$77.9 million and $66.8 million at March 31, 1996, and March 31, 1995,
respectively. Additionally, investments were maintained in corporate commercial
paper, notes and bonds which at March 31, 1996, and March 31, 1995, amounted to
$101.5 million and $34.9 million, respectively. These activities were primarily
funded by principal repayments on loans and mortgage-backed securities, coupled
with sales of securities available for sale.
The Bank's cash flows are comprised of three primary classifications: cash
flows from operating activities, investing activities and financing activities.
Cash flows provided by operating activities, which consisted primarily of
interest and dividends received less interest paid on deposits, were $5.2
million and $2.0 million for the twelve months ended March 31, 1996 and 1995,
respectively. Net cash used in investing activities, which consisted primarily
of mortgage-backed and mortgage-related securities purchases, disbursement of
loan originations and investment purchases, offset by principal collections on
and proceeds from the sale of loans,
59
<PAGE>
mortgage-backed and mortgage-related securities, securities available for sale,
and investment securities, was $51.8 million and $68.9 million for the twelve
months ended March 31, 1996 and 1995, respectively. Net cash provided by
financing activities, which consisted primarily of net activity in deposits and
borrowings, was $44.6 million and $11.8 million for the twelve months ended
March 31, 1996 and 1995, respectively.
The Bank has other sources of liquidity, including short term investments in
bank and/or thrift certificates of deposit, commercial paper and federal funds.
While the Bank has not had a need to borrow such funds, advances from the FHLB
are available. If needed, the Bank could increase liquidity through the sale of
unencumbered mortgage-backed securities, which are readily marketable, and its
corporate debt portfolio. In that connection, the Bank has identified a portion
of its investment and mortgage-backed securities portfolio as available for
sale.
At March 31, 1996, the Bank had outstanding loan commitments of
$83,000. The Bank will have sufficient funds available to meet its current loan
origination commitments. Certificates of deposit that are scheduled to mature
in one year or less at March 31, 1996 totalled $143.7 million. Management
believes that a significant portion of such deposits will remain with the Bank.
60
<PAGE>
At March 31, 1996, the Bank met each of its capital requirements, in
each case on a fully phased-in-basis. The following table presents the Bank's
capital position at March 31, 1996 relative to fully phased-in regulatory
requirements.
<TABLE>
<CAPTION>
ACTUAL REQUIRED EXCESS ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
------- -------- ------ ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible $57,845 $7,130 $50,715 12.2% 1.5%
Leverage 57,845 14,260 43,585 12.2 3.0
Risk-based 58,057 16,759 41,298 27.7 8.0
</TABLE>
61
<PAGE>
Tangible capital and core capital were $57.8 million at March 31,
1996. The Bank's risk-based capital increased to $58.1 million at March 31,
1996. The Bank exceeded its tangible, core and risk-based capital requirements
by $50.7 million, $43.6 million, and $41.3 million, respectively.
IMPACT OF INFLATION AND CHANGING PRICES
- ---------------------------------------
The Consolidated Financial Statements and Notes thereto presented
herein have been prepared in accordance with GAAP, 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 due to inflation. The impact of inflation is reflected in the increased
cost of the Bank's operations. Unlike industrial companies, nearly all of the
assets and liabilities of the Bank are monetary in nature. 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 Financial Accounting Standards Board issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This Statement 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. The pronouncement is
effective for fiscal years beginning after December 15, 1995, although earlier
implementation is encouraged. In management's opinion, when adopted SFAS No.
121 will not have a material effect on the Bank's financial position or results
of operations.
In May 1995, the Financial Accounting Standards Board issued SFAS No.
122, "Accounting for Mortgage Servicing Rights," which is an amendment to SFAS
No. 65, "Accounting for Certain Mortgage Banking Activities." This Statement
requires the recognition as separate assets rights to service mortgage loans for
others, however those servicing rights are acquired. The pronouncement is
effective for fiscal years beginning after December 15, 1995, although earlier
implementation is permitted. In management's opinion, when adopted Statement
No. 122 will not have a material effect on the Bank's financial position or
results of operations.
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation." This Statement establishes
financial accounting and reporting standards for stock-based employee
compensation plans. The pronouncement is effective for transactions entered
into for fiscal years that begin after December 15, 1995, though they may be
adopted on issuance. In management's opinion, when adopted SFAS No. 123 will
not have a material effect on the Bank's financial position or results of
operations.
On November 15, 1995, the FASB issued a special report entitled, "A
Guide to Implementation of Statement No. 115 on Accounting for Certain
Investments in Debt and Equity Securities, Questions and Answers" ("the Guide").
The Guide permitted a one-time reassessment and related reclassifications from
the held to maturity category (no later than December 31, 1995) that will not
call into question the intent of the enterprise to hold other debt securities at
maturity
62
<PAGE>
in the future. In November 1995, the Bank performed a reassessment of its
investment and mortgage-backed securities portfolio which resulted in a
reclassification of approximately $91.5 million of investment securities from
held to maturity into available for sale. There was no impact on the Bank's
results from operations resulting from this transfer.
In December 1994, the AICPA issued Statement of Position No. 94-6,
"Disclosure of Certain Significant Risks and Uncertainties" ("SOP 94-6") which
is effective for fiscal years ending after December 15, 1995. SOP 94-6 requires
disclosure in the financial statements about certain risks and uncertainties
that could significantly affect the amounts reported in the financial statements
in the near term and relate to: (i) the nature of operations; (ii) the necessary
use of estimates in the preparation of financial statements, and; (iii)
significant concentrations in certain aspects of operations. Management does
not anticipate that the adoption of SOP 94-6 will have a material impact upon
the financial condition or results of operations of the Bank.
63
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included on pages F-1 through
F-36 of this report.
64
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
a)(1) Financial Statements:
- Independent Auditors' Report, page F-2
- Consolidated Statements of Financial Condition as of March 31, 1996
and 1995, page F-3
- Consolidated Statements of Income for each of the years in the three-
year period ended March 31, 1996, page F-4
- Consolidated Statements of Changes in Stockholders' Equity for each
of the years in the three-year period ended March 31, 1996, page F-5
- Consolidated Statements of Cash Flows for each of the years in the
three-year period ended March 31, 1996, page F-6
- Notes to Consolidated Financial Statements, pages F-7 through F-36
(2) Financial Statement Schedule
All other schedules are not submitted because they are not applicable or
they are not required.
b) Reports on Form 8-K
None.
c) Exhibits
The following exhibits are filed as part of this report:
3.1 Certificate of Incorporation of Conestoga Bancorp, Inc.*
3.2 Bylaws of Conestoga Bancorp, Inc.*
4.0 Stock Certificate of Conestoga Bancorp, Inc.*
10.1 (a) Pioneer Savings and Loan Association Recognition and Retention Plan
for Officers and Employees**
10.1 (b) Pioneer Savings and Loan Association Recognition and Retention Plan
for Outside Directors**
10.2 Conestoga Bancorp, Inc. 1994 Incentive Stock Option Plan**
10.3 Conestoga Bancorp, Inc. 1994 Stock Option Plan for Outside
Directors**
10.4 Pioneer Savings Bank, F.S.B. Employee Stock Ownership Plan and Trust*
10.5 Form of Employment Agreements between Pioneer Savings Bank, F.S.B.
and Certain Executive Officers
10.6 Form of Employment Agreements between Conestoga Bancorp, Inc. and
Certain Executive Officers
10.7 Pioneer Savings Bank, F.S.B. Severance Compensation Plan***
65
<PAGE>
10.8 Form of Change in Control Agreements between Pioneer Savings Bank,
F.S.B. and Certain Executive Officers
10.9 Form of Change in Control Agreements between Conestoga Bancorp, Inc.
and Certain Executive Officers
10.10 Pioneer Savings Bank, F.S.B. Directors' Deferred Fee Stock Unit Plan**
10.11 Pioneer Savings Bank, F.S.B. Outside Directors' Consultation and
Retirement Plan*
10.12 Pioneer Savings Bank, F.S.B. Supplemental Executives' Retirement Plan*
11.0 Computation of earnings per share, incorporated herein by reference
to Note 1 of Notes to the Consolidated Financial Statements
21.0 Subsidiary information is incorporated herein by reference to
"Subsidiaries"
23.0 Consent of Arthur Andersen LLP
99.0 Proxy Statement for 1995 Annual Meeting
____________________
* Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement and amendments thereto, initially filed
on December 21, 1993, Registration No. 33-73246.
** Incorporated herein by reference into this document from the Proxy
Statement for the July 20, 1995 Annual Meeting of Stockholders filed on
June 20, 1995.
*** Incorporated herein by reference into this document from Form 10-K for the
fiscal year ended March 31, 1994.
<PAGE>
CONESTOGA BANCORP, INC. AND SUBSIDIARY
--------------------------------------
INDEX
-----
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION AS OF MARCH 31, 1996 AND 1995 F-3
CONSOLIDATED STATEMENTS OF INCOME FOR
EACH OF THE THREE YEARS IN THE PERIOD F-4
ENDED MARCH 31, 1996
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY FOR EACH OF THE F-5
THREE YEARS IN THE PERIOD ENDED MARCH
31, 1996
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE F-6
PERIOD ENDED MARCH 31, 1996
NOTES TO CONSOLIDATED FINANCIAL F-7
STATEMENTS
</TABLE>
F-1
<PAGE>
[Letterhead of Arthur Andersen LLP]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders and Board of Directors of
Conestoga Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Conestoga Bancorp, Inc. and subsidiary (the "Company") as of March 31, 1996
and 1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 audits 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 financial statements referred to above present fairly, in
all material respects, the financial position of Conestoga Bancorp, Inc. and
subsidiary as of March 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1996, in conformity with generally accepted accounting principles.
As explained in Note 4 to the consolidated financial statements, effective April
1, 1994, the Company changed its method of accounting for certain investments in
debt and equity securities.
/s/ Arthur Andersen LLP
New York, New York
April 24, 1996
F-2
<PAGE>
CONESTOGA BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
(In thousands except share and per share amounts)
-------------------------------------------------
<TABLE>
<CAPTION>
March 31,
---------------------
ASSETS 1996 1995
------ --------- ---------
<S> <C> <C>
CASH AND DUE FROM BANKS $ 9,834 $ 7,566
FEDERAL FUNDS SOLD 9,900 14,200
INTEREST-BEARING DEPOSITS WITH BANKS 29,900 18,885
SECURITIES AVAILABLE FOR SALE -
Investment securities - 51
Mortgage-backed securities 1,549 17,897
-------- --------
Total securities available for sale 1,549 17,948
-------- --------
SECURITIES HELD TO MATURITY -(market
values of $308,542 and $245,734,
respectively)
Investment securities 179,435 101,669
Mortgage-backed securities 128,061 148,605
-------- --------
Total securities held to maturity 307,496 250,274
-------- --------
LOANS, net 114,518 114,651
ACCRUED INTEREST RECEIVABLE 2,920 3,655
PREMISES AND EQUIPMENT, net 12,629 12,526
OTHER ASSETS:
Federal Home Loan Bank of New York -- 2,681 2,681
capital stock
Other Real Estate Owned 524 -
Other 2,397 2,795
-------- --------
TOTAL ASSETS $494,348 $445,181
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
DEPOSITS:
Savings deposits $130,171 $132,668
Time deposits 222,948 177,285
Money market accounts 30,024 29,526
Demand deposits 16,582 13,526
-------- --------
399,725 353,005
-------- --------
SECURITIES SOLD WITH AGREEMENT TO 10,000 9,795
REPURCHASE
ADVANCES FROM BORROWERS FOR TAXES AND 1,477 1,927
INSURANCE
INCOME TAXES PAYABLE 2,400 2,273
ACCRUED EXPENSES AND OTHER LIABILITIES 782 719
-------- --------
TOTAL LIABILITIES 414,384 367,719
-------- --------
COMMITMENTS, CONTINGENCIES AND OTHER
INFORMATION (Note 17)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value;
2,000,000 shares authorized; none
issued - -
Common stock, $.01 par value,
11,000,000 shares authorized;
4,813,900 shares issued 48 48
Additional paid-in capital 46,030 45,845
Employee stock ownership plan (2,803) (3,240)
Recognition and retention plan (1,111) (1,481)
Treasury stock, at cost (71,965 shares
and 19,369 shares, respectively) (1,062) (271)
Retained earnings - subject to 38,844 36,579
restrictions
Unrealized appreciation (depreciation)
on securities available for sale, net 18 (18)
-------- --------
Total stockholders' equity 79,964 77,462
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $494,348 $445,181
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
CONESTOGA BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(In thousands except per share amounts)
---------------------------------------
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
INTEREST INCOME:
Loans $ 9,069 $ 8,560 $ 8,495
Mortgage-backed securities 10,364 7,868 10,758
Investment securities 8,761 6,546 4,253
Securities available for sale 2,019 2,057 213
Federal funds sold 2,189 1,678 1,110
------- ------- -------
Total interest income 32,402 26,709 24,829
------- ------- -------
INTEREST EXPENSE:
Deposits 17,053 12,017 11,594
Escrow 31 27 24
Securities sold with agreement to
repurchase 1,209 261 -
------- ------- -------
Total interest expense 18,293 12,305 11,618
------- ------- -------
Net interest income before
provision (recoveries)
for loan losses 14,109 14,404 13,211
PROVISION (RECOVERIES) FOR LOAN LOSSES 104 (36) 39
------- ------- -------
Net interest income after
provision (recoveries)
for loan losses 14,005 14,440 13,172
------- ------- -------
NON-INTEREST INCOME:
Recoveries on investment securities - - 100
Fee income from service charges 568 617 522
Net gain on sale of mortgage-backed 73 - 409
and investment securities
Net gain on sale of other assets 3 3 -
Net gain on sale of securities
available for sale 1,695 850 211
Other 251 360 244
------- ------- -------
Total non-interest income 2,590 1,830 1,486
------- ------- -------
NON-INTEREST EXPENSE:
Salaries and employee benefits 3,792 3,498 3,587
ESOP and RRP benefits 1,045 854 100
Premises and equipment 1,454 1,309 1,298
Advertising 146 184 176
Federal insurance premiums 938 882 829
Merger related expenses 842 - -
Other 2,049 1,933 1,353
------- ------- -------
Total non-interest expense 10,266 8,660 7,343
------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES 6,329 7,610 7,315
PROVISION FOR INCOME TAXES 3,119 3,508 3,406
------- ------- -------
Net income $ 3,210 $ 4,102 $ 3,909
======= ======= =======
Primary earnings per common
share $0.71 $0.93 $.01
======= ======= =======
Fully diluted earnings per
common share $0.71 $0.92 $.01
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
CONESTOGA BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
(In thousands except share amounts)
-----------------------------------
<TABLE>
<CAPTION>
Unrealized
Appreciation
(Depreciation)
Additional Unallocated Unearned on Securities
Common Stock Paid-in Common Stock Comon Stock Treasury Retained Available
Shares Amount Capital Held by ESOP Held by RRPs Stock Earnings for Sale, Net Total
------ ------ ---------- ------------ ------------ -------- -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1993 - $ - $ - $ - $ - $ - $28,568 $ - $28,568
Net proceeds from common
stock issued in stock
conversion 4,813,900 48 45,844 - - - - - 45,892
Purchase of common stock
by ESOP (370,300 shares) - - (3,703) - - - - (3,703)
Purchase of common stock
by RRPs (185,150 shares) - - - (1,852) - - - (1,852)
Compensation amortized to
expense - 7 93 - - - - 100
Net income - - - - - 3,909 - 3,909
--------- --- ------- ------- ------- ------ ------- ------ -------
BALANCE, March 31, 1994 4,813,900 48 45,851 (3,610) (1,852) - 32,477 - 72,914
Change in accounting for
certain investments in
debt and equity
securities - - - - - - 989 989
Payments for conversion
costs - (75) - - - - - (75)
Compensation amortized to
expense - 113 370 371 - - - 854
Net income - - - - - 4,102 - 4,102
Change in unrealized
depreciation on
securities available for
sale, net - - - - - - (1,007) (1,007)
Acquisition of treasury
stock (22,500) - - - - (315) - - (315)
Exercise of stock options 3,131 - (44) - - 44 - - -
--------- --- ------- ------- ------- ------ ------- ------ -------
BALANCE, March 31, 1995 4,794,531 48 45,845 (3,240) (1,481) (271) 36,579 (18) 77,462
Compensation amortized to
expense - 305 370 370 - - - 1,045
Net income - - - - - 3,210 - 3,210
Cash dividends declared
on common stock - - - - - (945) - (945)
Cash dividends received
on common stock - - 67 - - - - 67
Change in unrealized
appreciation on
securities available for
sale, net - - - - - - 36 36
Acquisition of treasury
stock (105,000) - - - - (1,548) - - (1,548)
Exercise of stock options 52,404 - (248) - - 757 - - 509
Tax benefit of stock
options - 128 - - - - - 128
--------- --- ------- ------- ------- ------ ------- ------ -------
BALANCE, March 31, 1996 4,741,935 $48 $46,030 $(2,803) $(1,111) $(1,062) $38,844 $ 18 $79,964
========= === ======= ======= ======= ======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
CONESTOGA BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
--------------
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,210 $ 4,102 $ 3,909
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 483 797 614
Provision (recoveries) for loan
losses 104 (36) 39
Recoveries on investment securities - - (100)
(Increase) decrease in assets-
Accrued interest receivable 735 (810) 64
Other assets 398 (2,068) (69)
Increase (decrease) in liabilities-
Income taxes payable 225 279 (295)
Accrued expenses and other
liabilities 63 (288) 265
--------- -------- --------
Net cash provided by 5,218 1,976 4,427
operating activities --------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of premises and equipment (626) (941) (1,556)
Sale (purchase) of Federal Home Loan
Bank of New York capital stock - (309) 47
Purchases of investment securities (330,738) (63,560) (57,857)
Purchases of securities available for
sale (7,998) (49) (42,995)
Sales of investment securities 3,995 - 8,335
Maturities of investment securities 221,938 17,000 41,415
Sales of securities available for sale 108,256 54,737 37,079
Maturities of securites available for
sale 5,000 - -
Net (purchases) maturities of
interest-bearing deposits with banks (11,015) (18,192) 297
Loans made to customers (11,493) (26,750) (17,524)
Principal collected on loans 11,126 12,018 19,758
Purchases of mortgage-backed securities (61,210) (58,347) (69,601)
Sales of mortgage-backed securities - - 4,940
Principal collected on mortgage-backed
securities and mortgage-backed
securities available for sale 20,957 15,538 49,390
Net decrease in other investments - - 213
--------- -------- --------
Net cash used in investing
activities (51,808) (68,855) (28,059)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in securities sold with
agreement to repurchase 205 9,795 -
Net increase in demand deposits 3,056 687 2,947
Net increase (decrease) in money
market accounts 498 (3,373) (4,311)
Net increase (decrease) in advances
from borrowers for taxes and insurance (450) 166 45
Net increase (decrease) in savings
deposits (2,497) (23,138) 16,627
Net increase in time deposits 45,663 28,076 987
Acquisition of treasury stock (1,548) (315) -
Exercise of stock options 509 - -
Cash dividends paid (945) - -
Cash dividends received on common
stock held by ESOP 67 - -
Payments for conversion costs - (75) (2,247)
Purchase of common stock by ESOP - - (3,703)
Purchase of common stock by RRPs - - (1,852)
Proceeds from issuance of common stock - - 48,139
--------- -------- --------
Net cash provided by
financing activities 44,558 11,823 56,632
--------- -------- --------
Net (decrease) increase in
cash and cash equivalents (2,032) (55,056) 33,000
CASH AND CASH EQUIVALENTS, beginning of
period 21,766 76,822 43,822
--------- -------- --------
CASH AND CASH EQUIVALENTS, end of period $ 19,734 $ 21,766 $ 76,822
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
CONESTOGA BANCORP, INC. AND SUBSIDIARY
--------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(In thousands except share and per share amounts)
-------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
The following is a description of the significant accounting and reporting
policies followed in preparing and presenting the accompanying consolidated
financial statements:
Basis of Presentation
- ---------------------
The accounting and financial reporting policies of the Company are in conformity
with generally accepted accounting principles and general practices within the
banking industry. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported assets and liabilities as of the date of the consolidated statements of
condition. The same is true of revenues and expenses reported for the period.
Actual results could differ from those estimates.
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of
Conestoga Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, Pioneer
Savings Bank, F.S.B. (the "Bank"), a federally chartered stock savings bank.
All significant intercompany accounts and transactions are eliminated in
consolidation.
As more fully discussed in Note 2, the Company, a Delaware corporation, was
organized by the Bank for the purpose of acquiring all of the capital stock of
the Bank pursuant to the conversion of the Bank from a federally chartered
mutual savings and loan association to a federally chartered stock savings bank.
The Company is subject to the financial reporting requirements of the Securities
Exchange Act of 1934, as amended.
Cash and Cash Equivalents
- -------------------------
The Company generally considers short-term instruments, with original maturities
of three months or less, measured from their acquisition date, and highly liquid
instruments readily convertible to known amounts of cash, to be cash
equivalents.
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and federal funds sold. Generally, federal funds
are sold for one-day periods.
The following is a supplemental disclosure of cash flow information and noncash
financing activities:
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Interest paid $18,338 $12,141 $11,656
======= ======= =======
Income taxes paid $ 2,826 $ 3,229 $ 3,550
======= ======= =======
Reclassification from held to maturity to
available for sale $91,541
=======
</TABLE>
F-7
<PAGE>
Securities Available for Sale
- -----------------------------
Effective April 1, 1994, the Company adopted Statement of Financial Accounting
Standards (''SFAS'') No. 115, ''Accounting for Certain Investments in Debt and
Equity Securities''. Debt securities, mortgage-backed securities and equity
securities used as part of the Company's asset/liability management that may be
sold in response to changes in interest rates, prepayments, and other factors
have been classified as available for sale. Such securities are reported at
fair value, with unrealized gains and losses excluded from earnings and reported
in a separate component of stockholders' equity (on an after-tax basis). Gains
and losses on the disposition of securities are recognized on the specific
identification method in the period in which they occur.
On November 15, 1995, the FASB issued a special report entitled, "A Guide to
Implementation of Statement No. 115 on Accounting for Certain Investments in
Debt and Equity Securities, Questions and Answers" (the "Guide"). The Guide
permitted a one-time reassessment and related reclassifications from the held to
maturity category that will not call into question the intent of the Company to
hold other debt securities to maturity in the future. In November 1995, the
Company performed a reassessment of its investment and mortgage-backed
securities portfolio which resulted in a reclassification of approximately $91.5
million of securities from held to maturity into available for sale. This
transfer resulted in an increase to stockholders' equity of $423, net of income
taxes.
Securities Held to Maturity
- ---------------------------
Held to maturity investment securities are stated at cost adjusted for accretion
of discount or amortization of premium. Mortgage-backed securities are stated
at the unpaid principal amount net of unearned discount and unamortized
premiums. Discounts are accreted and premiums are amortized using the interest
method. The Company has the intent and ability to hold such securities until
maturity.
Loans
- -----
Loans are stated at the principal amount outstanding, net of unearned income.
Loan origination fees are recognized in interest income as an adjustment to
yield over the life of the loan. Loans are placed on nonaccrual status when
management has determined that the borrower will be unable to meet contractual
principal or interest obligations. When a loan is classified as nonaccrual, the
recognition of interest income ceases.
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures" on April 1, 1995. Both
pronouncements establish the accounting by creditors for impairment of certain
loans with the latter adding as to how a creditor recognizes interest income
related to those impaired loans. Both pronouncements require that certain
impaired loans be measured based on the present value of expected future cash
flows discounted at the loan's original effective interest rate. As a practical
expedient, impairment may be measured based on the loan's observable market
price or the fair value of the collateral if the loan's collateral dependent.
Based upon the current loan portfolio, SFAS No. 114, as amended by SFAS No. 118,
did not have a material effect on the carrying value of the Company's loan
portfolio.
F-8
<PAGE>
The Company previously measured the allowance for loan losses on impaired loans
using methods similar to those prescribed in SFAS No. 114 and SFAS No. 118. As
a result of adopting these statements, no additional allowance for loan losses
was required as of April 1, 1995.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses is established by management to absorb future
charge-offs of loans that may be uncollectible. The allowance is increased by
charges to operations and reduced by net charge-offs. The amount of the
allowance is based on estimates and the ultimate losses may vary from the
current estimates. These estimates are evaluated periodically and, as
adjustments become necessary, they are reflected in operations in the periods in
which they become known. Considerations in this evaluation include past and
anticipated loss experience, real estate collateral, as well as current and
anticipated economic conditions and maintenance of the allowance at a level
adequate to absorb unforeseeable losses, but which are inherent losses in the
loan portfolio at the reporting date.
While management uses available information to recognize provisions for loan
losses as of the date of the statement of financial condition, future additions
to the allowance may be necessary based on changes in the borrowers' economic
conditions and the composition of the loan portfolio. In addition, the
Company's regulators, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such regulators
may require the Company to provide additions to the allowance based on judgments
different from those of management.
Other Real Estate Owned
- -----------------------
Other Real Estate Owned ("OREO") includes properties that have been acquired by
the Company through foreclosure. OREO is recorded at the lower of: 1) the fair
market value of the properties less estimated costs to sell or 2) the recorded
investment in the related loan at the date of foreclosure. Subsequent reserves
and adjustments to the carrying value of the properties to reflect declines in
fair market value after the date of foreclosure as well as carrying and disposal
costs are charged to operating expenses.
Loan Origination Fees
- ---------------------
Nonrefundable loan fees net of certain direct origination costs are deferred,
and recognized to income, using the level-yield method, as a yield adjustment,
over the contractual lives of the related loans adjusted for estimated
prepayments.
Premises and Equipment
- ----------------------
Land is stated at original cost. Buildings and equipment are stated at cost
less accumulated depreciation. Depreciation is computed by the straight-line
method over the estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
Years
-------
<S> <C>
Buildings 40
Furniture and equipment 10
On-line savings equipment 5
Other Various
</TABLE>
Building improvements on leased property are amortized over the remaining terms
of the respective lease.
F-9
<PAGE>
Income Taxes
- ------------
SFAS No. 109 "Accounting for Income Taxes", requires the use of the asset and
liability approach in accounting for income taxes. Under this method, the
Company is required to establish deferred tax assets and liabilities for
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities at the enacted tax rates expected to be in
effect when such amounts are realized or settled.
Earnings Per Common Share
- -------------------------
Earnings per common share is computed based upon the weighted average number of
common shares outstanding during the period plus the effect of common shares
contingently issuable, primarily from the exercise of stock options using the
treasury stock method.
Fully diluted earnings per common share reflects additional dilution related to
common shares contingently issuable due to the use of the market price at the
end of the period, when higher than the average market price for the period.
Earnings per common share reflect the operations for the twelve months ended
March 31, 1996 and 1995, divided by 4,497,660 and 4,403,761 shares, respectively
(primary); and 4,523,704 and 4,472,651 shares, respectively (fully diluted),
which represent the weighted average number of common shares and common share
equivalents outstanding during the period.
Employee Stock Ownership Plan
- -----------------------------
Statement of Position 93-6 "Employers' Accounting for Employee Stock Ownership
Plans" ("SOP 93-6") requires that the issuance or sale of treasury shares to the
ESOP be reported when the issuance or sale occurs, and that compensation expense
be recognized for shares committed to be released to directly compensate
employees equal to the fair value of the shares committed. The difference
between the fair value of the shares committed to be released and the cost of
such shares should be charged or credited to additional paid in capital.
Additionally, ESOP shares that have been committed to be released should be
considered outstanding for earnings per share computations. In addition, SOP
93-6 requires that leveraged ESOP debt and related interest expense be reflected
in the employer's financial statements. The Company adopted SOP 93-6 on April
1, 1994.
2. CONVERSION TO STOCK FORM OF OWNERSHIP
-------------------------------------
On September 29, 1993, the Board of Directors of the Bank adopted a Plan of
Conversion to convert from mutual to stock form. As part of the conversion, the
Company was incorporated under Delaware law, for the purpose of acquiring and
holding all of the outstanding stock of the Bank. On March 30, 1994, the
Company completed its initial public offering and issued 4,258,450 shares of
common stock (par value $.01 per share) at a price of $10.00 per share, 370,300
shares were acquired by the ESOP and 185,150 shares were acquired by the RRPs,
resulting in net proceeds of approximately $45,892. The Company retained
approximately $22,946 of the net proceeds and used the remaining net proceeds to
purchase all of the outstanding stock of the Bank. Costs related to the
conversion were charged against the Company's proceeds from the sale of the
stock.
F-10
<PAGE>
At the time of conversion, the Bank established a liquidation account in an
amount equal to the retained earnings of the Bank as of the date of the most
recent financial statements contained in the final conversion prospectus. The
liquidation account will be reduced annually to the extent that eligible account
holders have reduced their qualifying deposits as of each anniversary date.
Subsequent increases will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each eligible
account holder will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held.
The Company may not declare or pay cash dividends on or repurchase any of its
shares of common stock if the effect thereof would cause stockholders' equity to
be reduced below applicable regulatory capital maintenance requirements, the
amount required for the liquidation account, or if such declaration and payment
would otherwise violate regulatory requirements.
3. PROPOSED ACQUISITION
--------------------
On November 2, 1995, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with The Dime Savings Bank of Williamsburgh (the
"Dime") pursuant to which the Company and the Bank will be merged into the Dime
(the "Acquisition"). The Merger Agreement provides that each share of the
Company's common stock, par value $.01 per share (the "Conestoga Common Stock")
outstanding as of the effective time of the Merger (the "Effective Time") (other
than shares held as treasury stock, unallocated shares held by the Company's
Recognition and Retention Plans and Trusts and any shares as to which
dissenters' rights may be exercised under applicable law) will be converted into
the right to receive $21.25 in cash without interest (the "Merger
Consideration"). In the event the transaction is not completed on or prior to
May 31, 1996, the Dime will be required to increase the Merger Consideration by
$.07 per share for each month, pro rated on a daily basis, commencing on June 1,
1996 until completion of the transaction. Based on the total number of shares
of the Company's Common Stock outstanding as of December 31, 1995 and the
consideration to be paid in respect of options of the Company's Common Stock
outstanding on that date, assuming all such options are converted into the right
to receive cash, the Company estimates that total cash consideration to be paid
to the Company's shareholders and option holders in the Merger is approximately
$105 million.
The Acquisition is subject to (i) approval by the requisite number of
shareholders of the Company of the Merger Agreement, (ii) the receipt of all
necessary consents, waivers, clearances, approvals and authorizations from
regulators or governmental bodies, including the OTS, (iii) the occurrences of
all material steps necessary to complete the Dime's Conversion and (iv) the
satisfaction or waiver of certain other conditions.
On March 22, 1996, the Company announced that its shareholders, at a special
meeting, approved the above agreement.
F-11
<PAGE>
4. ACCOUNTING CHANGES
------------------
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities". SFAS No. 115 requires that debt and equity
securities that have readily determinable fair values be carried at fair value
unless they are classified as held to maturity. Securities can be classified as
held to maturity and carried at amortized cost only if the reporting entity has
a positive intent and ability to hold those securities to maturity. If not
classified as held to maturity, such securities must be classified as trading
securities or securities available for sale. Unrealized holding gains or losses
for securities available for sale are to be excluded from earnings and reported
as a net amount as a separate component of stockholders' equity. Unrealized
holding gains and losses for trading securities are to be included in earnings.
On April 1, 1994, the Company adopted SFAS No. 115 which resulted in an increase
in stockholders' equity of $989, on an after tax basis, which represents the net
unrealized appreciation on securities available for sale.
SFAS No. 123, "Accounting for Stock-Based Compensation" was issued in October
1995 and must be adopted by the Company effective April 1, 1996. SFAS No. 123
establishes financial accounting and reporting standards for stock-based
employee compensation plans. Adoption of the disclosure requirements of this
new accounting standard will not have an impact on the Company's results of
operations or financial condition.
5. INTEREST-BEARING DEPOSITS WITH BANKS
------------------------------------
Interest-bearing deposits with banks generally represent short-term liquid
investments with maturities of one year or less. They are recorded at cost,
which approximates market value, and are generally held to maturity.
The components of interest-bearing deposits with banks as of March 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Federal Home Loan Bank (FHLB) overnight $29,900 $ 6,900
deposits
FHLB term deposits - 10,500
Certificates of deposit - 1,485
------- -------
$29,900 $18,885
======= =======
</TABLE>
F-12
<PAGE>
6. INVESTMENT SECURITIES
---------------------
The amortized cost and estimated market values of investment securities at March
31, 1996 and 1995 were as follows:
SECURITIES HELD TO MATURITY
- ---------------------------
Securities held to maturity are summarized below:
<TABLE>
<CAPTION>
March 31, 1996
--------------------------------------
Gross
Unrealized Estimated
Amortized ---------------- Market
Cost Gains Losses Value
--------- ----- -------- ---------
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury notes $ 4,959 $208 $ - $ 5,167
Government agencies 72,950 38 (172) 72,816
Corporate notes and bonds 101,526 401 (17) 101,910
-------- ---- ------- --------
Totals $179,435 $647 $ (189) $179,893
======== ==== ======= ========
</TABLE>
<TABLE>
<CAPTION>
March 31, 1995
--------------------------------------
Gross
Unrealized Estimated
Amortized ---------------- Market
Cost Gains Losses Value
--------- ----- -------- ---------
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury notes $ 4,948 $ 61 $ - $ 5,009
Government agencies 61,835 - (1,246) 60,589
Corporate notes and bonds 34,886 - (522) 34,364
-------- ---- ------- --------
Totals $101,669 $ 61 $(1,768) $ 99,962
======== ==== ======= ========
</TABLE>
The amortized cost and estimated market value of investment securities held to
maturity at March 31, 1996, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
March 31, 1996
--------------------
Estimated
Amortized Market
Cost Value
--------- ---------
<S> <C> <C>
Within 1 year $119,012 $118,994
After 1 year through 5 years 44,430 44,964
After 5 years through 10 years 15,993 15,935
After 10 years - -
-------- --------
Total investment securities $179,435 $179,893
======== ========
</TABLE>
F-13
<PAGE>
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------
1996 1995 1994
------ ----- ------
<S> <C> <C> <C>
Proceeds received from sales of
investment securities held to maturity $3,995 $ - $8,335
====== ===== ======
Gross realized gains from sales of
investment securities held to maturity $ 94 $ - $ 399
====== ===== ======
Gross realized losses from sales of
investment securities held to maturity $ 21 $ - $ -
====== ===== ======
</TABLE>
Sales of investment securities held to maturity for the year ended March 31,
1996 approximated $4.0 million and reflects sales of downgraded corporate bonds.
The $4.0 million of downgraded corporate bonds were sold because there was
evidence of significant deterioration of the issuer's creditworthiness, and were
therefore sold in accordance with SFAS No. 115.
SECURITIES AVAILABLE FOR SALE
- -----------------------------
Securities available for sale are summarized below:
<TABLE>
<CAPTION>
March 31, 1995
---------------------------------------
Gross
Unrealized Estimated
Amortized ----------------- Market
Cost Gains Losses Value
--------- ------- -------- ---------
<S> <C> <C> <C> <C>
Marketable equity securities:
Government agencies $ 49 $ 2 $ - $ 51
------- ------- -------- ---------
Total securities available for
sale $ 49 $ 2 $ - $ 51
======= ======= ======== =========
</TABLE>
The Company did not have investment securities available for sale at March
31, 1996.
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Proceeds received from sales of
securities available for sale $23,019 $14,500 $29,232
======= ======= ========
Gross realized gains from sales of
securities available for sale $ 206 $ - $ 75
======= ======== ========
Gross realized losses from sales of
securities available for sale $ 79 $ 685 $ -
======= ======= ========
</TABLE>
F-14
<PAGE>
7. MORTGAGE-BACKED SECURITIES
--------------------------
The amortized cost and estimated market values of mortgage-backed securities at
March 31, 1996 and 1995 were as follows:
MORTGAGE-BACKED SECURITIES HELD TO MATURITY
- -------------------------------------------
Mortgage-backed securities held to maturity are summarized below:
<TABLE>
<CAPTION>
March 31, 1996
--------------------------------------
Gross
Unrealized Estimated
Amortized --------------- Market
Cost Gains Losses Value
--------- ----- -------- ---------
<S> <C> <C> <C> <C>
Pass-through certificates guaranteed
by GNMA, FNMA and FHLMC $122,189 $602 $ - $122,791
Real estate mortgage investment
conduit obligations 5,872 - (14) 5,858
-------- ----- ------- --------
$128,061 $602 $ (14) $128,649
======== ===== ======= ========
</TABLE>
<TABLE>
<CAPTION>
March 31, 1995
--------------------------------------
Gross
Unrealized Estimated
Amortized --------------- Market
Cost Gains Losses Value
--------- ----- -------- ---------
<S> <C> <C> <C> <C>
Pass-through certificates guaranteed by
GNMA, FNMA and FHLMC $140,660 $ - $(2,566) $138,094
Real estate mortgage investment conduit
obligations 7,945 - (267) 7,678
-------- ----- ------- --------
$148,605 $ - $(2,833) $145,772
======== ===== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------
1996 1995 1994
----- ------ ------
<S> <C> <C> <C>
Proceeds received from sales of
mortgage-backed securities held to
maturity $ - $ - $4,940
===== ====== ======
Gross realized gains from sales of
mortgage-backed securities held to
maturity $ - $ - $ 17
===== ===== ======
Gross realized losses from sales of
mortgage-backed securities held to
maturity $ - $ - $ 7
===== ===== ======
</TABLE>
F-15
<PAGE>
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
- ---------------------------------------------
Mortgage-backed securities available for sale are summarized below:
<TABLE>
<CAPTION>
March 31, 1996
--------------------------------------
Gross
Unrealized Estimated
Amortized --------------- Market
Cost Gains Losses Value
--------- ----- -------- ---------
<S> <C> <C> <C> <C>
Pass-through certificates guaranteed by
GNMA, FNMA and FHLMC $ 1,323 $31 $ - $ 1,354
Real estate mortgage investment conduit
obligations 194 1 - 195
------- ----- ------ -------
$ 1,517 $32 $ - $ 1,549
======= ===== ====== =======
</TABLE>
<TABLE>
<CAPTION>
March 31, 1995
--------------------------------------
Gross
Unrealized Estimated
Amortized --------------- Market
Cost Gains Losses Value
--------- ----- -------- ---------
<S> <C> <C> <C> <C>
Pass-through certificates guaranteed by
GNMA, FNMA and FHLMC $15,934 $ - $(32) $15,902
Real estate mortgage investment conduit
obligations 2,000 - (5) 1,995
------- ----- ------ -------
$17,934 $ - $(37) $17,897
======= ===== ====== =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------
1996 1995 1994
-------- ------- ------
<S> <C> <C> <C>
Proceeds received from sales of
mortgage-backed securities available
for sale $85,237 $40,237 $7,847
======= ======= ======
Gross realized gains from sales of
mortgage-backed securities available
for sale $ 1,568 $ 1,535 $ 136
======= ======= ======
Gross realized losses from sales of
mortgage-backed securities available
for sale $ - $ - $ -
======== ======== =======
</TABLE>
F-16
<PAGE>
8. LOANS, NET
----------
Loans consist of the following:
<TABLE>
<CAPTION>
March 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Loans secured by mortgages on real estate:
Residential 1-4 family $107,293 $107,593
Nonresidential (non-participation multi-family
and mixed-use)
3,190 3,271
Participation investments in loans purchased 2,640 2,343
Partially guaranteed by Veterans Administration
(VA) or insured by Federal Housing Authority (FHA) 352 444
Land and building loans (net of loans in process) 350 275
Less: Discounts and fees, net (479) (590)
-------- ---------
Net loans secured by mortgages on real estate 113,346 113,336
-------- ---------
Other loans:
Passbook loans (secured by savings and time deposits) 1,384 1,467
Participation in loans fully guaranteed by Agency for
International Development (AID) - 22
-------- ---------
Net other loans 1,384 1,489
-------- ---------
Less: Allowance for loan losses (212) (174)
-------- ---------
Net loans $114,518 $114,651
======== =========
</TABLE>
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Balance, beginning $ 174 $ 210 $ 171
Provision charged (credited) to 104 (36) 39
operations
Loans charged off (66) - -
----- ----- -----
Balance, end $ 212 $ 174 $ 210
===== ===== =====
</TABLE>
As of March 31, 1996, the Company did not have any impaired loans in accordance
with SFAS No. 114 and 118.
Loans on a nonaccrual basis at March 31, 1996 and 1995 approximated $265 and
$351, respectively.
Interest income on nonaccrual loans that would have been recorded under the
original terms of such loans, net of interest income actually received, is
summarized as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Interest income which would have been
recognized on nonaccrual loans (net of
interest income received) $ 33 $ 36 $ 29
===== ===== =====
</TABLE>
F-17
<PAGE>
9. ACCRUED INTEREST RECEIVABLE
---------------------------
March 31,
----------------------
1996 1995
------- -------
Loans $ 825 $ 771
Investment securities 1,376 1,998
Securities available for sale 8 86
Mortgage-backed securities 711 790
Other - 10
------- -------
$ 2,920 $ 3,655
======= =======
10. PREMISES AND EQUIPMENT, NET
---------------------------
The following is a summary of premises
and equipment:
March 31,
----------------------
1996 1995
------- -------
Land $ 2,974 $ 2,974
Buildings and improvements 10,734 10,408
Furniture and equipment 2,211 1,941
On-line savings equipment 962 1,009
Other 109 109
------- -------
16,990 16,441
Less- Accumulated depreciation and (4,361) (3,915)
amortization ------- -------
$12,629 $12,526
======= =======
11. FEDERAL HOME LOAN BANK OF NEW YORK -- CAPITAL STOCK
---------------------------------------------------
The Bank is a member of the Federal Home Loan Bank of New York (FHLBNY).
Membership requires the purchase of shares of FHLBNY capital stock at $100 per
share, generally based on the value of the Bank's mortgage portfolio. As of
March 31, 1996 and 1995, the Bank owned 26,810 shares. The FHLBNY paid
dividends on the capital stock at the weighted averages of 7.27%, 7.65% and
8.80% for the fiscal years ended March 31, 1996, 1995 and 1994, respectively.
F-18
<PAGE>
12. DEPOSITS
--------
Deposits are summarized as follows:
<TABLE>
<CAPTION>
March 31,
-----------------------------------------
1996 1995
-----------------------------------------
Stated Stated
Rate Amount Rate Amount
------- ------ ----- ------
<S> <C> <C> <C> <C>
Interest bearing:
Savings accounts 2.50% $130,171 2.50% $132,668
Certificate accounts 4.34-5.70 222,948 4.58-7.13 177,285
Money market accounts 3.00 30,024 3.00 29,526
Demand deposits - 16,582 - 13,526
-------- --------
$399,725 $353,005
======== ========
</TABLE>
The remaining maturity of certificate accounts are as follows:
<TABLE>
<CAPTION>
March 31,
--------------------
1996 1995
--------- --------
<S> <C> <C>
12 months or less $ 143,674 $101,601
Over 12 months to 36 months 56,161 60,162
Over 36 months 23,113 15,522
---------- --------
$ 222,948 $177,285
========== ========
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100 was approximately $22,043 and $14,754 as of March 31, 1996 and 1995,
respectively.
Interest expense related to deposits is as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------
1996 1995 1994
------ ------ -------
<S> <C> <C> <C>
Savings accounts $ 3,205 $ 3,651 $ 3,698
Certificate and money market accounts 13,848 8,366 7,896
------- ------- -------
$17,053 $12,017 $11,594
======= ======= =======
</TABLE>
13. SECURITIES SOLD WITH AGREEMENT TO REPURCHASE
--------------------------------------------
Presented below is information concerning securities sold with agreement to
repurchase and the related weighted average interest rates for the years ended
March 31, 1996 and 1995:
<TABLE>
<CAPTION>
March 31,
-----------------
1996 1995
----- -----
<S> <C> <C>
Average amounts outstanding $18,660 $4,522
Total interest costs 1,209 261
Average interest rate paid 6.48% 5.77%
Maximum amount outstanding at any month 39,509 9,795
end
Ending balance 10,000 9,795
Weighted average interest rate on 5.73% 5.95%
balance outstanding
</TABLE>
F-19
<PAGE>
The underlying collateral, which consists of mortgage-backed securities, U.S.
Treasury notes and government agency securities, is held by a third-party
institution. As of March 31, 1996 and 1995, the market value of such collateral
was approximately $10,832 and $9,989, respectively.
There were no securities sold with agreement to repurchase for the year ended
March 31, 1994.
14. INCOME TAXES
------------
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $1,869 $2,141 $1,788
State and local 1,152 1,094 1,392
------ ------ ------
3,021 3,235 3,180
Deferred 98 273 226
------ ------ ------
$3,119 $3,508 $3,406
====== ====== ======
</TABLE>
The following table presents a reconciliation between the reported income taxes
and the income taxes which would be computed by applying the normal federal
income tax rate of 34% to income before income taxes:
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal income tax $2,152 $2,587 $2,487
Increases in income taxes resulting
from:
State and local income taxes, net of
federal tax benefit 779 918 966
Merger related expenses not deductible
for tax purposes 383 - -
Other items, net (195) 3 (47)
------ ------ ------
Effective federal income tax $3,119 $3,508 $3,406
====== ====== ======
Effective tax rate 49.3% 46.1% 46.6%
====== ====== ======
The following is a summary of the income tax liability:
March 31,
--------------
1996 1995
---- ----
<S> <C> <C>
Current taxes $ 690 $ 661
Deferred taxes 1,710 1,612
------ ------
$2,400 $2,273
====== ======
</TABLE>
F-20
<PAGE>
The components of the Company's deferred tax assets and liabilities at March 31,
1996 and 1995, are as follows:
<TABLE>
<CAPTION>
March 31,
---------------
1996 1995
---- ----
<S> <C> <C>
Deferred income tax assets:
Provision for losses on other assets $ 93 $ 93
Other 222 136
Valuation allowance - -
------- -------
Net deferred income tax assets 315 229
------- -------
Deferred income tax liabilities:
Tax over book depreciation (562) (515)
Bad debt deduction (1,463) (1,305)
Other - (21)
------- -------
Total deferred income tax (2,025) (1,841)
liabilities ------- -------
Net deferred income taxes $(1,710) $(1,612)
======= =======
</TABLE>
Income taxes are deferred as a result of the temporary differences in the timing
of the recognition of certain income and expenses for income tax and financial
reporting purposes. The primary sources of these differences are accelerated
tax depreciation and bad debt deductions.
Bad Debt Deduction
- ------------------
The Company has qualified under certain provisions of the Internal Revenue Code
("Section 593") which permit the deduction from taxable income of an allowance
for loan losses based upon a percentage of taxable income before such deduction.
The maximum deduction allowed under current law is 8% of taxable income provided
that certain minimum levels of qualifying assets are maintained. In accordance
with SFAS No. 109, the Company provides deferred taxes for this temporary
difference.
At March 31, 1996, surplus included approximately $4,535 which represents the
accumulation of such statutory bad debt deduction for which no federal income
taxes have been provided. If this portion of surplus is charged for any purpose
other than bad debt losses, if the Company fails to maintain minimum levels of
qualifying assets, or if the Company is liquidated, a tax liability will be
created from the recapture of previous bad debt deductions.
Management of the Company does not anticipate that surplus will be used or
qualifying asset levels will be reduced in such a way as to result in the
recapture of these deductions.
Pending Legislation Regarding Bad Debt Reserves
- -----------------------------------------------
Under pending legislative proposals, Section 593 would be repealed and the
Company would be unable to make additions to its tax bad debt reserve, would be
permitted to deduct bad debts only as they occur and would additionally be
required to recapture over a multi-year period the excess of the balance of its
bad debt reserve as of the date specified in the legislation (the "Specified
Date") over the balance of such reserves as of December 31, 1987, or a lesser
amount if the Company's loan portfolio has decreased since December 31, 1987.
However, such recapture requirements would be suspended for each of two
successive taxable years beginning after the Specified Date in which the Company
originates a minimum amount of certain residential loans based upon the average
of the principal amounts of such loans made by the Company during its six
taxable years ending on the Specified Date. Similar
F-21
<PAGE>
consequences would result under present law if the Company were to fail the
definitional tests except that, under present law, the Company would recapture
all of its bad debt reserves and not only the excess over the December 31, 1987
balance, and present law does not provide a two year suspension of the
recapture. In addition, if Section 593 of the Code is repealed, the Company
would be required under the New York State Bank Franchise Tax and New York City
Banking Corporation Tax to include in its entire net income, for the last
taxable year Section 593 of the Code applied, the excess of its New York State
and New York City reserves for losses on qualifying real property loans over its
reserve for losses on such loans maintained for federal income tax purposes (the
"Excess Reserves"). Accordingly, if the pending legislative proposals are
enacted in their present form, unless further legislation is adopted in New York
State and New York City, the Company will be required to take its Excess
Reserves into income in computing its New York State and City taxes for its
taxable year specified in the legislation. The enactment of such legislation,
in its present form, would result in aggregate tax liability of $2.3 million
associated with such recapture. This will result in an additional tax provision
and corresponding reduction in stockholders' equity of approximately $900.
15. BENEFIT PLANS
-------------
Retirement Plan
- ---------------
The Company is a participant in a defined benefit, noncontributory, multiple
employer pension plan (the "Plan") with the New York State Bankers Retirement
System covering substantially all employees. Pension benefits are based on
length of service, average annual compensation, and other benefits. The
Company's funding policy, the entry age normal cost-frozen initial liability
method is consistent with the funding requirements of federal law and
regulations. The Plan's assets consist principally of publicly traded stocks
and bonds.
The Company accounts for the Plan in accordance with SFAS No. 87, "Employers'
Accounting for Pensions."
The Company performs its pension valuation to coincide with the year-end of the
pension plan (September 30th). The Company estimates that its pension status is
not materially different at March 31, 1996 and 1995. The components of net
pension expense as determined by the Plan's actuary at the most recent September
30th valuation dates are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned during $ 183 $ 185 $ 163
the period
Interest cost on projected benefit 239 225 201
obligation
Actual return on plan assets (279) (238) (236)
Net amortization and deferral (5) 13 (15)
----- ----- -----
Net pension cost $ 138 $ 185 $ 113
===== ===== =====
</TABLE>
F-22
<PAGE>
A comparison of accumulated plan benefit obligation and plan net assets as of
the most recent actuarial valuation is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accumulated benefit obligation, including
vested benefits of $2,821 and $2,579 $ 2,841 $ 2,607
======= =======
Projected benefit obligation (3,455) (3,162)
Plan assets at fair value 3,800 3,355
------ -------
Excess (deficiency) of Plan assets over
projected benefit obligation 345 193
Unrecognized prior service cost (12) (13)
Unrecognized loss from experience different
from that assumed 497 510
Unrecognized net transition asset (131) (148)
------ -------
Projected prepaid pension cost at $ 699 $ 542
September 30, 1996 and 1995 ====== =======
Major assumptions utilized were as
follows:
1996 1995
---- ----
Discount rate 7.75% 8.0%
Rate of increase in compensation levels 5.0 5.0
Expected long-term rate of return on 8.5 8.5
Plan assets
</TABLE>
Savings Plan
- ------------
The Company maintains a retirement savings plan for its employees which allows
participants to make contributions by salary reduction pursuant to Section
401(k) of the Internal Revenue Code through July 31, 1994. After July 31, 1994,
no further contributions have been allowed due to the existence of the Employee
Stock Ownership Plan and Trust. The Company's contributions to the retirement
savings plan for the years ended March 31, 1996, 1995 and 1994 were $0, $12 and
$45, respectively.
Supplemental Executive Retirement Plan
- --------------------------------------
The Company adopted a Supplemental Executive Retirement Plan ("SERP") to provide
additional retirement benefits for certain employees who are participants in the
Company's qualified plans. For the years ended March 31, 1996 and 1995, $92 and
$78, respectively, of expenses related to the SERP are included in the
consolidated statements of income. No expenses related to the SERP are included
in the consolidated statement of income for the year ended March 31, 1994.
Outside Directors' Consultation and Retirement Plan
- ---------------------------------------------------
The Company adopted an Outside Directors' Consultation and Retirement Plan for
certain outside directors. For the years ended March 31, 1996 and 1995, $86 and
$75, respectively, of expenses related to the plan are included in the
consolidated statements of income. No expenses related to the plan are
included in the consolidated statement of income for the year ended March 31,
1994. The plan is unfunded at March 31, 1996.
F-23
<PAGE>
The components of net pension expense as determined by the Plan's actuary at the
most recent April 1st valuation date are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Service cost-benefits earned during the $ 21 $ 19
period
Interest cost on projected benefit 27 23
obligation
Actual return on plan assets - -
Net amortization and deferral 33 33
----- -----
Net pension cost $ 81 $ 75
===== =====
</TABLE>
A comparison of accumulated plan benefit obligat ion and plan net assets as of
the most recent actuarial valuation is as follow s:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Accumulated benefit obligation,
including vested benefits of $376 and
$316, respectively $ 398 $ 333
===== =====
Projected benefit obligation $ 398 $ 333
Plan assets at fair value - -
----- -----
Excess (deficiency) of plan assets over (398) (333)
projected benefit obligation
Unrecognized prior service cost (226) (258)
Unrecognized net loss (16) -
Adjustment required to recognize 242 258
minimum liability ----- -----
Projected accrued pension cost at March $(398) $(333)
31, 1996 and 1995 ===== =====
Major assumptions utilized as follows:
Discount rate 7.75% 8.0%
Rate of increase in compensation levels N/A N/A
Expected long-term rate of return on N/A N/A
plan assets
</TABLE>
16. STOCK BENEFIT PLANS
-------------------
The following plans became effective upon the conversion of the Bank from a
mutual to a stock form:
Employee Stock Ownership Plan and Trust
- ---------------------------------------
The Bank has established an Employee Stock Ownership Plan and Trust ("ESOP") for
eligible employees. Full-time employees employed with the Company or the Bank
after such date who have been credited with at least 1,000 hours during a
twelve-month period and who have attained age 21 are eligible to participate.
To fund the purchase of 370,300 shares of common stock issued in the conversion,
the ESOP borrowed funds from the Company. The loan to the ESOP will be repaid
principally from the Bank's contributions to the ESOP over a period of 10 years
and the collateral for the loan will be the common stock purchased by the ESOP.
At March 31, 1996 and 1995, the loan had an outstanding balance of $2,896 and
$3,333 and an interest rate of 8.25% and 9.00%, respectively. No contributions
were made to the ESOP for the years ended March 31, 1996, 1995 and 1994.
F-24
<PAGE>
Shares purchased by the ESOP will be held by a trustee for allocations among
participants as the loan is repaid. At March 31, 1996 and 1995, 83,318 shares
and 46,288 shares, respectively, are considered outstanding for the earnings per
common share calculation. $675, $483 and $100 of expenses related to the
release of the ESOP shares are included in the consolidated statements of income
for the years ended March 31, 1996, 1995 and 1994, respectively.
Incentive Stock Option Plan
- ---------------------------
The Company has adopted the 1994 Incentive Stock Option Plan (the "Stock Option
Plan"). Pursuant to the Stock Option Plan, 306,799 stock options (which expire
ten years from the date of grant, March 30, 1994) have been granted to officers
and employees of the Company and the Bank. Options granted under the Stock
Option Plan may be either options that qualify as incentive stock options, as
defined in Section 422 of the Internal Revenue Code of 1986, as amended, or non-
statutory options. Each option entitles the holder to purchase one share of the
common stock at an exercise price equal to $10.00 per share (the initial public
offering price). Options will be exercisable on a cumulative basis in equal
installments at a rate of 20% per year commencing one year from the date of
grant. All options granted will be exercisable in the event the optionee
terminates his employment due to death, disability or retirement, or in the
event of a change in control of the Bank or the Company. Simultaneously with
the grant of these options, the Board of Directors granted a "Limited Right"
with respect to the shares covered by the options. Limited rights granted are
subject to terms and conditions and can be exercised only in the event of a
change in control of the Company. Upon exercise of a limited right the holder
shall receive from the Company a cash payment equal to the difference between
the exercise price of the option ($10.00) and the fair market value of the
underlying shares of common stock. No options were exercised or exercisable
through March 31, 1994. At March 31, 1996 and 1995, 113,025 and 61,327 options,
respectively, were exercisable of which 46,323 options were exercised in 1996
and 8,958 options were exercised in 1995.
Activity for the Incentive Stock Option Plan is as follows:
<TABLE>
<CAPTION>
Shares Under Option
----------------------
Number Exercise
---------- --------
of Shares Price
---------- --------
<S> <C> <C>
BALANCE, March 31, 1993 - -
Granted 306,799 $10.00
Exercised - -
Forfeited - -
------- ------
BALANCE, March 31, 1994 306,799 10.00
Granted - -
Exercised (8,958) 10.00
Forfeited - -
------- ------
BALANCE, March 31, 1995 297,841 10.00
Granted - -
Exercised (46,323) 10.00
Forfeited - -
------- ------
BALANCE, March 31, 1996 251,518 $10.00
======= ======
</TABLE>
F-25
<PAGE>
Stock Option Plan for Outside Directors
- ---------------------------------------
The Board of Directors of the Company has adopted the 1994 Stock Option Plan for
Outside Directors (the "Directors' Option Plan") for non-employee directors of
the Company. The Directors' Option Plan provided for the granting of non-
statutory options totalling 156,076. Contemporaneously with the conversion,
outside directors received fixed awards of options, depending upon length of
Board service, aggregating 137,284 shares. The balance of 18,792 options in the
Directors' Option Plan are reserved for awards to future outside directors. The
exercise price per share of each currently outstanding option is $10.00 per
share (the initial public offering price). No options were exercised or
exercisable through March 31, 1994. At March 31, 1996 and 1995, 82,758 and
45,761 options, respectively, were exercisable of which 8,764 options were
exercised in 1996 and no options were exercised in 1995.
All options granted under the Directors' Option Plan are exercisable in three
equal annual installments commencing in March 1995 and expire upon the earlier
of ten years following the date of grant or one year following the date the
optionee ceases to be a director for any reason other than removal for cause.
When options are exercised, the excess of the option price over the par value is
credited to additional paid-in capital. The Directors' Option Plan does not
provide for the granting of stock appreciation rights in the event of a change
of control of the Company or the Bank as defined under the Directors' Option
Plan.
Activity for the Stock Option Plan for Outside Directors is as follows:
<TABLE>
<CAPTION>
Shares Under Option
---------------------
Number Exercise
---------- --------
of Shares Price
---------- --------
BALANCE, March 31, 1993 - -
<S> <C> <C>
Granted 137,284 $10.00
Exercised - -
Forfeited - -
------- ------
BALANCE, March 31, 1994 137,284 10.00
Granted - -
Exercised - -
Forfeited - -
------- ------
BALANCE, March 31, 1995 137,284 10.00
Granted - -
Exercised (8,764) 10.00
Forfeited - -
------- ------
BALANCE, March 31, 1996 128,520 $10.00
======= ======
</TABLE>
Recognition and Retention Plans and Trusts
- ------------------------------------------
The Bank has established the Recognition and Retention Plan for Outside
Directors and the Recognition and Retention Plan for Officers and Employees (the
"RRPs") as a method of providing officers, employees and non-employee directors
of the Bank and Company with a proprietary interest in the Company in a manner
designed to encourage such persons to remain with the Bank. The Bank
contributed funds from available liquid assets to the RRPs to enable the trusts
to acquire 185,150 shares of common stock. The RRPs acquired the shares at a
per share cost of $10.00. At March 31, 1996, 55,545 of the total 63,480 shares
have been awarded under the RRP for Outside Directors and all of the total
121,670 shares which were acquired by the RRP for Officers and Employees, have
been awarded.
F-26
<PAGE>
Under the RRPs, awards are granted in the form of shares of common stock held by
the RRPs. Awards to Outside Directors, Officers and Employees vest in five
equal annual installments commencing one year from the date of the grant of
awards. Awards will be 100% vested upon termination of employment due to death
or disability of the participant or following a change in the control of the
Bank or the Company, or in the case of Outside Directors mandatory retirement in
accordance with the Bank's bylaws. At March 31, 1996, 22,218 shares for
Outside Directors and 47,818 shares for Officers and Employees were vested.
$370, $371 and $0 of expenses related to the release of the RRP shares are
included in the consolidated statements of income for the years ended March 31,
1996, 1995 and 1994, respectively.
17. COMMITMENTS, CONTINGENCIES AND OTHER INFORMATION
------------------------------------------------
Loan Commitments and Line of Credit
- -----------------------------------
In the normal course of its business, the Company is party to various types of
financial instruments which involve potential credit, liquidity, and interest
rate risk in excess of the amounts recognized in its statements of financial
condition. These risks are generally monitored and controlled in conjunction
with the Company's on-balance sheet activities.
The Company's collateral for mortgage and commercial loans is primarily
concentrated in Brooklyn, Queens, Staten Island and Long Island.
In meeting its customers' financing needs, the Company issues commitments to
extend credit. Additionally, the Company issues commitments to purchase certain
securities. For these types of commitments, the contractual amounts of the
financial instruments represent the maximum potential credit risk in the event
of nonperformance by the counterparty. However, since not all such commitments
are drawn down prior to their expiration, the contractual amounts do not
necessarily represent actual future liquidity and credit risk. Moreover, the
actual credit risk related to these activities is controlled by the evaluation
of the customer's creditworthiness and the need for and extent of collateral
wherever it is deemed appropriate.
The Company was party to the following outstanding financial instruments
involving off-balance sheet risk:
<TABLE>
<CAPTION>
March 31, 1996
------------------------------------
Amount
Closing
Variable within
Fixed Rate Rate Total One Year
---------- ------- ----- --------
<S> <C> <C> <C> <C>
Loan originations $83 $ - $83 $83
========== ======== ===== ========
</TABLE>
The interest rate of the fixed-rate loan originations as of March 31, 1996 was
7.5%, with all originations closing within one year.
The Bank is a member of the Federal Home Loan Bank of New York, and has a credit
facility available (unused as of March 31, 1996) to meet deposit outflows and
mortgage commitments.
F-27
<PAGE>
Lease Commitments
- -----------------
As of March 31, 1996, minimum annual rental commitments on leases are as
follows:
<TABLE>
<CAPTION>
Fiscal year ended: Amount
------
<S> <C>
1997 $ 62
1998 64
1999 65
2000 67
2001 69
Thereafter 254
----
$581
====
</TABLE>
Rent expense for the fiscal years ended March 31, 1996, 1995, and 1994,
approximated $66, $32 and $43, respectively.
Other Non-Interest Expense
- --------------------------
Other non-interest expense amounts which exceed one percent of aggregate
interest and other non-interest expense are as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
1996 1995 1994
------ ----- -----
<S> <C> <C> <C>
Bank service fees $ 799 $ 803 $ 715
Insurance, general 193 198 208
Merger-related expenses 842 - -
</TABLE>
Contingency
- -----------
On February 6, 1995, the New York State Banking Department ("NYSBD") took
possession of Nationar, a trust company that served as a correspondent bank and
check processor for the Bank. In connection with the takeover of Nationar, at
March 31, 1995, the Bank had approximately $2,156, which is classified in other
assets, of funds with Nationar for which payment had been indefinitely suspended
by the NYSBD. It is currently uncertain as to the amount of loss, if any, that
will result from this event. At March 31, 1996 and 1995, the consolidated
financial statements include a $197 reserve against the possibility of loss.
While the ultimate amount of the loss may differ from the amount provided, the
current allowance is consistent with the Company's internal policy for
establishing valuation allowances. On April 5, 1995, the Bank received $739
from the NYSBD representing a partial release of its funds with Nationar. In
management's opinion, potential losses, if any, that may arise from this event
would not have a material effect on the Bank's results of operations.
Shareholders' Lawsuit
- ---------------------
On December 4, 1995, a purported class action complaint was filed in the
Delaware Chancery Court, New Castle County, on behalf of the stockholders of
Conestoga by Jeffrey Simon ("Plaintiff") against Conestoga, each of the members
of the Conestga Board, and Dime. The Plaintiff alleges that each of the members
of Conestoga's Board breached his fiduciary duties to Conestoga stockholders by,
among other
F-28
<PAGE>
things, agreeing to accept the Merger consideration, which Plaintiff alleges is
inadequate. Dime is alleged to have aided and abetted this breach. Plaintiff
seeks various remedies, including an injunction to prevent the consummation of
the Merger and compensatory damages in an unspecified amount. Conestoga and
Dime each intend to pursue vigorously their defenses in this action. The
Company does not believe that the likelihood of such a result is probable and
has not established any specific litigation reserves with respect to this
matter.
Recapitalization of Savings Association Insurance Fund ("SAIF")
- ---------------------------------------------------------------
The proposed Balanced Budget Act of 1995 ("Budget Act"), which was approved by
the Congress but vetoed by the President, included provisions that focused on a
recapitalization of the SAIF. Under the provisions of the Budget Act, all SAIF-
member institutions would have paid a special assessment to recapitalize the
SAIF, and the assessment base for the payments on the FICO bonds would have been
expanded to include the deposits of both Bank Insurance Fund ("BIF") and SAIF-
insured institutions. The amount of the special assessment required to
capitalize the SAIF was estimated to be approximately 80 basis points of the
SAIF-assessable deposits. The special assessment would have been imposed as of
the first business day of January 1996 or on such other date prescribed by the
FDIC not later than 60 days after enactment of the Budget Act, based on the the
amount of SAIF deposits on March 31, 1995. If an 80 basis point assessment were
assessed against the Company's deposits as of March 31, 1995, the Company's
aggregate SAIF assessment would be approximately $2.8 million.
18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Due from Banks, Federal Funds Sold and Interest-Bearing Deposits with
- ------------------------------------------------------------------------------
Banks
- -----
For those short-term instruments, the carrying amount is a reasonable estimate
of fair value.
Investment Securities Held to Maturity and Available for Sale
- -------------------------------------------------------------
For investment securities held to maturity and available for sale, fair values
are based on quoted market prices or dealer quotes. If a quoted market price is
not available, fair value is estimated using quoted market prices for similar
securities.
Mortgage-Backed Securities Held to Maturity and Available for Sale
- ------------------------------------------------------------------
Fair value is determined by reference to quoted market prices, if available. If
quoted market prices are not available, fair value is estimated using quoted
market prices for similar securities.
Loans
- -----
For certain homogeneous categories of loans, such as residential mortgages, fair
value is estimated using the quoted market prices for securities backed by
similar loans, adjusted for differences in loan characteristics.
F-29
<PAGE>
Accrued Interest and FHLB Stock
- -------------------------------
Carrying amount is a reasonable estimate of fair value.
Deposit Liabilities
- -------------------
The fair value of demand deposits and savings accounts is the amount payable on
demand at the reporting date. The fair value of fixed-maturity certificates of
deposit and money market deposits is estimated using the rates currently offered
for deposits of similar remaining maturities.
Securities Sold with Agreement to Repurchase and Advances from Borrowers for
- ----------------------------------------------------------------------------
Taxes and Insurance
- -------------------
Carrying amount is a reasonable estimate of fair value.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
March 31, 1996 March 31, 1995
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 9,834 $ 9,834 $ 7,566 $ 7,566
Federal funds sold 9,900 9,900 14,200 14,200
Interest-bearing deposits with banks 29,900 29,900 18,885 18,885
Securities available for sale-
Investment securities - - 51 51
Mortgage-backed securities 1,549 1,549 17,897 17,897
-------- -------- -------- --------
Total securities available for sale 1,549 1,549 17,948 17,948
-------- -------- -------- --------
Securities held to maturity-
Investment securities 179,435 179,893 101,669 99,962
Mortgage-backed securities 128,061 128,649 148,605 145,772
-------- -------- -------- --------
Total securities held to maturity 307,496 308,542 250,274 245,734
-------- -------- -------- --------
Loans 114,730 113,950 114,825 112,620
Less: Allowance for loan losses (212) - (174) -
Accrued interest receivable 2,920 2,920 3,655 3,655
FHLB stock 2,681 2,681 2,681 2,681
</TABLE>
<TABLE>
<CAPTION>
March 31, 1996 March 31, 1995
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- ----- -------- -----
<S> <C> <C> <C> <C>
Financial liabilities:
Savings and demand deposits 146,753 146,753 146,194 146,194
Time and money market deposits 252,972 255,434 206,811 203,772
Securities sold with agreement to 10,000 10,000 9,795 9,795
repurchase
Advances from borrowers for taxes and 1,477 1,477 1,927 1,927
insurance
Accrued interest payable 119 119 164 164
</TABLE>
F-30
<PAGE>
19. REGULATORY MATTERS
------------------
As required by the Office of Thrift Supervision ("OTS"), the Bank is required to
maintain minimum regulatory capital requirements which include a "leverage
limit", a "tangible capital requirement" and a "risk-based capital requirement".
The leverage limit requires a savings institution to maintain "core capital" in
an amount not less than 3% of the savings institution's "adjusted total assets".
The tangible capital requirements call for a savings institution to maintain
"tangible capital" in an amount not less than 1.5% of the savings institution's
"adjusted total assets". The ability to include qualifying supervisory goodwill
for purposes of the core capital requirement has been phased out as of January
1, 1995.
The risk-based capital requirement calls for a savings institution to maintain
capital in an amount equal to 8.0% of the value of its risk-weighted assets.
In December 1992, the prompt corrective action provision under the Federal
Deposit Insurance Corporation Improvement Act of 1991 became effective. These
regulations established capital standards in five categories ranging from
"critically undercapitalized" to "well capitalized", and defined "adequately
capitalized" as at least 4% for core (leverage) capital. Institutions with a
core capital level less than 4% or risk-based capital less than 8% are
considered "undercapitalized", and subject to increasingly stringent prompt
corrective action measures.
The Company's management believes that, under the current regulations, the Bank
will continue to meet its minimum capital requirements in the foreseeable
future. However, events beyond the control of the Company, such as increased
interest rates or a downturn in the economy in areas where the Company has most
of its loans, could adversely affect future earnings and, consequently, the
ability of the Bank to meet its future minimum capital requirements.
The information below is based upon the Bank's understanding of the applicable
regulations and related interpretations.
At March 31, 1996 and 1995, the Bank had the following capital ratios:
<TABLE>
<CAPTION>
March 31, 1996 March 31, 1995
---------------------------- -----------------------------
Actual % Required % Actual % Required %
------ --- -------- --- ------ --- -------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible capital $57,845 12.2% $ 7,130 1.5% $54,205 12.7% $ 6,380 1.5%
======= ==== ======= === ======= ==== ======= ===
Core capital $57,845 12.2% $14,260 3.0% $54,205 12.7% $12,759 3.0%
======= ==== ======= === ======= ==== ======= ===
Risk-based capital $58,057 27.7% $16,759 8.0% $54,365 39.5% $11,000 8.0%
======= ==== ======= === ======= ==== ======= ===
</TABLE>
F-31
<PAGE>
The following is a reconciliation of the Bank's stockholders' equity to
regulatory capital:
<TABLE>
<CAPTION>
March 31,
---------------
1996 1995
---- ----
<S> <C> <C>
Bank's stockholders' equity $57,863 $54,185
Add (subtract)-Unrealized losses
(gains) on securities available for sale (18) 20
------- -------
OTS tangible/core capital $57,845 $54,205
======= =======
OTS tangible/core capital $57,845 $54,205
Add- Allowable supplementary capital:
General loan loss reserves on loans 212 160
------- -------
OTS risk-based capital $58,057 $54,365
======= =======
</TABLE>
F-32
<PAGE>
20. CONESTOGA BANCORP, INC. - PARENT COMPANY ONLY FINANCIAL STATEMENTS
------------------------------------------------------------------
The following statements of financial condition as of March 31, 1996 and 1995,
the statements of income and cash flows for the years then ended, reflect the
Company's investment in its wholly-owned subsidiary, the Bank, using the equity
method of accounting.
CONESTOGA BANCORP, INC.
-----------------------
STATEMENTS OF FINANCIAL CONDITION
---------------------------------
(In thousands, except share and per share amounts)
--------------------------------------------------
<TABLE>
<CAPTION>
March 31,
------------------
ASSETS 1996 1995
-------- --------
<S> <C> <C>
Cash and cash equivalents $ 246 $ 121
Interest-bearing deposits with banks 11,900 5,600
Investment securities available for sale - 51
Investment securities held to maturity 6,999 13,862
Accrued interest receivable 116 365
Due from Pioneer Savings Bank, F.S.B. - -
ESOP loan to Pioneer Savings Bank, F.S.B. 2,896 3,333
Investment in Pioneer Savings Bank, F.S.B. 57,863 54,185
------- -------
TOTAL ASSETS $80,020 $77,517
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Income taxes payable $ 39 $ 55
Accrued expense & other liabilities 17 -
------- -------
TOTAL LIABILITIES 56 55
------- -------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued - -
Common stock, $.01 par value, 11,000,000 shares authorized; 4,813,900
shares issued 48 48
Additional paid-in capital 46,030 45,845
Employee stock ownership plan (2,803) (3,240)
Recognition and retention plan (1,111) (1,481)
Treasury stock, at cost (71,965 shares and 19,369 shares, respectively) (1,062) (271)
Retained earnings-subject to restrictions 38,844 36,579
Unrealized appreciation (depreciation) on securities available for sale, net 18 (18)
------- -------
Total stockholders' equity 79,964 77,462
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $80,020 $77,517
======= =======
</TABLE>
F-33
<PAGE>
CONESTOGA BANCORP, INC.
-----------------------
STATEMENTS OF INCOME
--------------------
(In thousands)
--------------
Year Ended March 31,
----------------------
1996 1995
------- --------------------
INTEREST INCOME:
- ----------------------------------------
ESOP loan to Pioneer Savings Bank, $ 285 $ 291
F.S.B.
Investment securities 638 733
Federal funds sold 503 316
------ ------
Total interest income 1,426 1,340
------ ------
INTEREST EXPENSE - -
------ ------
Net interest income before 1,426 1,340
provision for loan losses
PROVISION FOR LOAN LOSSES - -
------ ------
Net interest income after 1,426 1,340
provision for loan losses ------ ------
NON-INTEREST INCOME:
Net gains on sale of securities 10 -
available for sale
Equity in undistributed net income of 2,527 3,457
subsidiary bank ------ ------
Total non-interest income 2,537 3,457
------ ------
NON-INTEREST EXPENSE 182 146
------ ------
INCOME BEFORE INCOME TAXES 3,781 4,651
PROVISION FOR INCOME TAXES 571 549
------ ------
Net income $3,210 $4,102
====== ======
The Company had no results of operations for the year ended March 31, 1994.
F-34
<PAGE>
CONESTOGA BANCORP, INC.
-----------------------
STATEMENTS OF CASH FLOWS
------------------------
(In thousands)
--------------
<TABLE>
<CAPTION>
Year Ended March 31,
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,210 $ 4,102 $ -
Adjustments to reconcile net income to
net cash provided by operating
activities:
Undistributed earnings of subsidiary (2,527) (3,457) -
bank
Depreciation and amortization (38) (10) -
(Increase) decrease in assets-
Accrued interest receivable 249 (365) -
Due from Pioneer Savings Bank, F.S.B. - 19,233 (19,233)
Increase in liabilities-
Accrued expense and other liabilities 17 - -
Income taxes payable 112 55 -
-------- -------- --------
Net cash provided by (used in) 1,023 19,558 (19,233)
operating activities -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment made to purchase 100% of the - - (22,946)
outstanding stock of the Bank
Purchases of investment securities (12,000) (13,853) -
Purchases of securities available for - (49) -
sale
Net purchases of interest-bearing (6,300) (5,600) -
deposits with banks
Maturities of investment securities 18,900 - -
Sales of securities available for sale 49 - -
Decrease (increase) in ESOP loan 437 370 (3,703)
receivable -------- -------- --------
Net cash provided by (used in) 1,086 (19,132) (26,649)
investing activities -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of treasury stock (1,548) (315) -
Exercise of stock options 509 - -
Cash dividends paid (945) - -
Proceeds from issuance of common stock - - 45,892
-------- -------- --------
Net cash provided by (used in) (1,984) (315) 45,892
financing activities -------- -------- --------
Net increase in cash and cash 125 111 10
equivalents
CASH AND CASH EQUIVALENTS, beginning of 121 10 -
period -------- -------- --------
CASH AND CASH EQUIVALENTS, end of period $ 246 $ 121 $ 10
======== ======== ========
</TABLE>
F-35
<PAGE>
21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
-------------------------------------------
The following is a summary of the quarterly results of operations for the years
ended March 31, 1996 and 1995:
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, 1996 December 31, 1995 September 30, 1995 June 30, 1995
------------------- ----------------- ------------------ -------------
<S> <C> <C> <C> <C>
Total interest income $7,875 $8,315 $8,481 $7,731
Total interest expense 4,519 4,616 4,831 4,327
Net interest income 3,356 3,699 3,650 3,404
Provision for loan losses 67 15 22 -
Non-interest income 1,068 869 232 421
Non-interest expense and
provision for income taxes 3,615 3,637 3,050 3,083
Net income 742 916 810 742
Primary earnings per common
share 0.16 0.20 0.18 0.17
Fully diluted earnings per
common share 0.16 0.20 0.18 0.17
Three Months Ended
------------------
March 31, 1995 December 31, 1994 September 30, 1994 June 30, 1994
------------------ ----------------- ------------------ -------------
Total interest income $7,122 $6,826 $6,412 $6,349
Total interest expense 3,402 3,187 2,886 2,830
Net interest income 3,720 3,639 3,526 3,519
Provision for loan losses (46) - 10 -
Non-interest income 472 225 287 846
Non-interest expense and provision
for income taxes 3,292 2,858 2,860 3,158
Net income 946 1,006 943 1,207
Primary earnings per common share 0.21 0.23 0.21 0.28
Fully diluted earnings per common
share 0.20 0.23 0.22 0.27
</TABLE>
F-36
