December 27, 1996
VIA MESSENGER
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Yonkers Financial Corporation - File No. 0-27716
Dear Sir/Madam:
On behalf of our client, Yonkers Financial Corporation (the "Company"),
attached herewith for filing via EDGAR is the Company's annual report for the
year ended September 30, 1996 on Form 10-K under the Securities Exchange Act of
1934. The filing fee of $250 has been wired to the Securities and Exchange
Commission by the Company.
Pursuant to General Instruction C.3. to Form 10-K, please note that,
based on our discussions with KPMG Peat Marwick LLP, it is our understanding
that the financial statements in the Form 10-K do not reflect any change from
the preceding year in any accounting principles or practices or in the methods
of application of such principles or practices, with the exception of the
Company's adoption of SFAS No. 114 and 118, and SOP 94-6 during fiscal 1996.
Concurrently herewith, three complete copies of the Form 10-K are being
filed with the National Association of Securities Dealers, Inc.
<PAGE>
Kindly acknowledge receipt of the enclosures by stamping and returning
to our messenger the attached copy of this letter.
Very truly yours,
Gary A. Lax, P.C.
Enclosures
cc: NASD, Inc.
Mr. Joseph Roberto
Mr. Thomas W. Canfarotta
<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
Commission file number 0-27716
YONKERS FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3870836
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6 Executive Plaza, Yonkers, New York 10701
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 965-2500
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
twelve months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such requirements for the past
90 days. YES [X] NO [ ]
Indicate by check mark if there is no disclosure of delinquent filers
in response to Item 405 of Regulation S-K contained in this form, and no
disclosure will be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
As of December 23, 1996, there were issued and outstanding 3,172,250
shares of the Registrant's Common Stock. The aggregate market value of the
voting stock held by non-affiliates of the Registrant, computed by reference to
the average of the closing bid and asked price of such stock on the Nasdaq
National Market System as of December 23, 1996, was approximately $34.4 million.
(The exclusion from such amount of the market value of the shares owned by any
person shall not be deemed an admission by the Registrant that such person is an
affiliate of the Issuer.)
DOCUMENTS INCORPORATED BY REFERENCE
PARTS II and IV of Form 10-K--Annual Report to Stockholders for the fiscal year
ended September 30, 1996.
PART III of Form 10-K--Proxy Statement for the Annual Meeting of Stockholders
for the fiscal year ended September 30, 1996.
================================================================================
<PAGE>
YONKERS FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K
SEPTEMBER 30, 1996
Table of Contents
Part I Page
Item 1 Business.......................................................... 3
Item 2 Properties........................................................ 39
Item 3 Legal Proceedings................................................. 40
Item 4 Submission of Matters to a Vote of Security Holders............... 40
Part II
Item 5 Market for Registrant's Common Equity and
Related Shareholder Matters..................................... 40
Item 6 Selected Financial Data........................................... 40
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 40
Item 8 Financial Statements and Supplementary Data....................... 41
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................ 41
Part III
Item 10 Directors, Executive Officers, Promoters and Control Persons; 41
Compliance with Section 16(a) of the Exchange Act..............
Item 11 Executive Compensation............................................ 42
Item 12 Security Ownership of Certain Beneficial Owners
and Management................................................. 42
Item 13 Certain Relationships and Related Transactions.................... 42
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................... 43
Signatures........................................................ 45
2
<PAGE>
PART I
Item 1. Business
General
Yonkers Financial Corporation (the "Holding Company") was formed at the
direction of The Yonkers Savings and Loan Association, FA ("Yonkers Savings" or
the "Association") in December 1995 for the purpose of owning all of the
outstanding stock of the Association issued in the Association's conversion from
the mutual to stock form of organization (the "Conversion"). The Conversion was
completed on April 18, 1996. Concurrent with the Conversion, the Holding Company
sold 3,570,750 shares of its common stock for net proceeds of $34.6 million. The
Holding Company and the Association are collectively referred to herein as the
"Company."
The Holding Company is incorporated under the laws of the State of
Delaware (and qualified to do business in the State of New York) and generally
is authorized to engage in any activity that is permitted by the Delaware
General Corporation Law. The assets of the Holding Company consist of the stock
of the Association, certain short-term and other investments, and a loan to its
Employee Stock Ownership Plan (the "ESOP").
As a community-oriented financial institution, the Association offers a
variety of financial services to meet the needs of communities in its market
area. The Association attracts deposits from the general public and uses such
deposits, together with borrowings, to originate primarily one- to four-family
residential mortgage loans (including home equity lines of credit) and, to a
lesser extent, multi-family and commercial real estate, consumer, land,
construction and commercial business loans in the Association's primary market
area. The Association also invests in mortgage-backed and other securities
permissible for a federally-chartered savings association. As a member of the
Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC"), the Association's deposits are insured up to applicable
limits.
The executive offices (corporate headquarters) of the Company are
located at 6 Executive Plaza, Yonkers, New York 10701, and its telephone number
at that address is (914) 965-2500.
Market Area
The Company conducts its banking operations through its main office
located at One Manor House Square, Yonkers, New York and three branch offices
located in Yonkers, New York. A corporate headquarters office is also maintained
in Yonkers, New York. The Company's market area for deposits includes the City
of Yonkers and surrounding communities. The Company's primary market area for
its lending activities consists of communities within Westchester County and
portions of Rockland, Putnam and Dutchess Counties, New York.
Yonkers is located in Westchester County approximately 10 miles north
of the Borough of Manhattan in New York City. Yonkers and the surrounding
communities include a diverse population of low- and moderate-income
neighborhoods as well as middle class and more affluent neighborhoods. The
housing in the low- and moderate-income neighborhoods consists mainly of
apartments while other areas consist primarily of single-family residences. The
Company's market area also includes substantial commercial areas containing
shopping areas, office and medical facilities and small- and medium-size
manufacturing and industrial facilities.
3
<PAGE>
Lending Activities
General. Historically, the Company originated 30-year, fixed-rate
mortgage loans secured by one- to four-family residences. Since the mid-1980s,
in order to reduce its vulnerability to changes in interest rates, the Company
has also originated adjustable-rate mortgage ("ARM") loans and home equity lines
of credit. Currently, the Company sells all of its conforming new 30-year,
fixed-rate loan originations in the secondary market. The Company also offers
multi-family and commercial real estate, consumer, construction and land loans.
4
<PAGE>
The following table sets forth the composition of the loan portfolio,
by category, in dollar amounts and as a percentage of the total portfolio at the
dates indicated.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family(1)(2)... $62,283 70.6% $63,282 74.4% $64,078 80.7% $67,633 85.1% $72,577 86.7%
Multi-family................ 5,471 6.2 5,647 6.6 4,483 5.7 2,281 2.9 1,264 1.5
Commercial.................. 9,117 10.3 6,575 7.7 3,176 4.0 2,704 3.4 2,392 2.9
Construction................ 2,175 2.5 2,205 2.6 2,138 2.7 1,472 1.9 1,784 2.1
Land........................ 1,934 2.2 2,112 2.5 814 1.0 914 1.1 1,199 1.4
------- ------ ------- ------ -------- ------ -------- ------ ------- ------
Total real estate loans.. 80,980 91.8 79,821 93.8 74,689 94.1 75,004 94.4 79,216 94.6
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Other Loans:
Consumer loans:
Home equity................. 2,911 3.3 2,389 2.8 1,872 2.4 1,881 2.4 1,815 2.2
Personal.................... 1,632 1.8 1,734 2.0 1,704 2.2 1,589 2.0 1,475 1.7
Automobile.................. 367 0.4 409 0.5 473 0.6 381 0.5 480 0.6
Home improvement............ 153 0.2 209 0.2 279 0.3 326 0.4 455 0.5
Other....................... 790 0.9 474 0.6 273 0.3 81 0.1 73 0.1
-------- ------ ------- ------ -------- ------ --------- ------ -------- ------
Total consumer loans..... 5,853 6.6 5,215 6.1 4,601 5.8 4,258 5.4 4,298 5.1
Commercial business loans..... 1,413 1.6 56 0.1 92 0.1 175 0.2 226 0.3
-------- ------ -------- ------ --------- ------ -------- ------ ------- ------
Total other loans........ 7,266 8.2 5,271 6.2 4,693 5.9 4,433 5.6 4,524 5.4
-------- ------ ------- ------ -------- ------ -------- ------ ------- ------
Total loans.............. 88,246 100.0% 85,092 100.0% 79,382 100.0% 79,437 100.0% 83,740 100.0%
===== ===== ===== ===== =====
Less:
Construction loans in process. (171) (293) (943) (215) (260)
Allowance for loan losses..... (937) (719) (311) (295) (490)
Net deferred loans fees....... (472) (401) (304) (294) (288)
------- -------- ------ ------- -------
Total loans, net..........$86,666 $83,679 $77,824 $78,633 $82,702
======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Includes advances under home equity lines of credit of $7.3 million, $9.1
million, $10.1 million, $11.2 million and $11.5 million, respectively, at
September 30, 1996, 1995, 1994, 1993 and 1992.
(2) Includes cooperative apartment loans of $5.5 million, $5.8 million, $5.9
million, $6.7 million and $7.3 million, respectively, at September 30,1996,
1995, 1994, 1993 and 1992.
5
<PAGE>
The following table sets forth the composition of the loan portfolio,
by category and by type of interest rate (fixed or adjustable), in dollar
amounts and as a percentage of the total portfolio at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans
Real estate loans:
One- to four-family........... $11,805 13.4% $11,805 13.9% $ 8,352 10.5% $10,094 12.7% $12,985 15.5%
Multi-family.................. 47 0.1 715 0.8 539 0.7 550 0.7 29 ---
Commercial.................... 131 0.1 396 0.5 194 0.2 230 0.3 19 ---
Land.......................... 49 0.1 49 0.1 49 0.1 49 0.1 49 0.1
-------- ----- -------- ------ -------- ------- ------- ------- ------- ------
Total real estate loans.... 12,032 13.7 12,965 15.3 9,134 11.5 10,923 13.8 13,082 15.6
Consumer loans.................... 5,853 6.6 5,215 6.1 4,601 5.8 4,258 5.3 4,298 5.1
-------- ------ ------- ------ ------- ------ -------- ------ -------- ------
Total fixed-rate loans..... 17,885 20.3 18,180 21.4 13,735 17.3 15,181 19.1 17,380 20.7
-------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Adjustable-Rate Loans
Real estate loans:
One- to four-family(1)(2)..... 50,478 57.2 51,477 60.5 55,726 70.2 57,539 72.4 59,592 71.2
Multi-family.................. 5,424 6.1 4,932 5.8 3,944 5.0 1,731 2.2 1,235 1.5
Commercial.................... 8,986 10.2 6,179 7.2 2,982 3.7 2,474 3.1 2,373 2.8
Construction.................. 2,175 2.5 2,205 2.6 2,138 2.7 1,472 1.9 1,784 2.1
Land.......................... 1,885 2.1 2,063 2.4 765 1.0 865 1.1 1,150 1.4
-------- ------ ------- ------- ------- ------ -------- ------ -------- ------
Total real estate loans.... 68,948 78.1 66,856 78.5 65,555 82.6 64,081 80.7 66,134 79.0
Commercial business loans......... 1,413 1.6 56 0.1 92 0.1 175 0.2 226 0.3
-------- ------ -------- -------- ------ ------ -------- ------ -------- ------
Total adjustable-rate loans 70,361 79.6 66,912 78.7 65,647 82.7 64,256 80.9 66,360 79.3
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans....................... 88,246 100.0% 85,092 100.0% 79,382 100.0% 79,437 100.0% 83,740 100.0%
===== ===== ===== ===== =====
Less:
Construction loans in process. (171) (293) (943) (215) (260)
Allowance for loan losses..... (937) (719) (311) (295) (490)
Net deferred loan fees........ (472) (401) (304) (294) (288)
------- -------- -------- -------- --------
Total loans, net........... $86,666 $83,679 $77,824 $78,633 $82,702
======= ======= ======= ======= =======
</TABLE>
- -------------
(1) Includes advances under home equity lines of credit of $7.3 million, $9.1
million, $10.1 million, $11.2 million and $11.5 million, respectively, at
September 30, 1996, 1995, 1994, 1993 and 1992.
(2) Includes cooperative apartment loans of $5.5 million, $5.8 million, $5.9
million, $6.7 million and $7.3 million, respectively, at September 30, 1996,
1995, 1994, 1993 and 1992.
6
<PAGE>
The following table sets forth the contractual maturity of the
Company's loans at September 30, 1996. The table reflects the entire unpaid
principal balance of a loan in the maturity period that includes the final
payment date and, accordingly, does not give effect to periodic principal
repayments or possible prepayments. Principal repayments and prepayments
totalled $11.8 million, $11.0 million and $15.4 million for the years ended
September 30, 1996, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
At September 30, 1996
---------------------------------------------------------------------------------
Commercial
One- to Four-Family(1) Multi-Family Real Estate Construction
--------------------------- --------------- --------------- -----------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Contractual maturity:
One year or less(2)............. $ 1,204 9.25% $ --- ---% $ 229 10.51% $1,826 10.25%
------ ------- ----- -----
After one year:
More than 1 year to 2 years... 1,446 9.44 103 9.13 55 8.50 349 10.25
More than 2 years to 3 years.. 1,403 9.61 2 8.25 --- --- --- ---
More than 3 years to 5 years.. 2,837 9.69 7 8.25 39 9.50 --- ---
More than 5 years to 10 years. 4,706 9.06 43 8.00 508 9.00 --- ---
More than 10 years to 20 years 13,986 7.94 5,014 8.62 7,291 8.72 --- ---
More than 20 years............ 36,701 7.92 302 8.35 995 8.68 --- ---
------- ------ ------ -------
Total after one year.......... 61,079 8.17 5,471 8.61 8,888 8.73 349 10.25
------- ------ ------ -------
Total amount due................... $62,283 8.19 % $5,471 8.61% $9,117 8.78% $2,175 10.25%
======= ====== ====== ======
------------------------------------------------------------
Consumer and
Land Commercial Business Total
---- ------------------- -----
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Contractual maturity:
One year or less(2)............. $1,314 10.43% $ 240 13.97% $ 4,813 10.25%
----- ----- ------
After one year:
More than 1 year to 2 years... --- --- 417 11.35 2,370 9.86
More than 2 years to 3 years.. --- --- 679 11.01 2,084 10.06
More than 3 years to 5 years.. 620 10.25 2,318 9.61 5,821 9.71
More than 5 years to 10 years. --- --- 3,494 10.00 8,751 9.43
More than 10 years to 20 years --- --- 118 8.84 26,409 8.29
More than 20 years............ --- --- --- --- 37,998 7.94
-------- ------- -------
Total after one year.......... 620 10.25 7,026 10.03 83,433 8.44
------- ------ -------
Total amount due................... $1,934 10.37% $7,266 10.16% $88,246 8.54%
======= ======= =======
</TABLE>
- -----------
(1) Includes $7.3 million of advances under home equity lines of credit which
require minimum interest-only payments for the first five to ten years the
advance is outstanding, followed by a balloon payment thereafter.
(2) Includes demand loans, loans having no stated maturity, and overdraft loans.
7
<PAGE>
The following table sets forth the dollar amounts in each loan category
at September 30, 1996 that are contractually due after September 30, 1997, and
whether such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due After September 30, 1997
---------------------------------------
Fixed Adjustable Total
----- ---------- -----
(In Thousands)
<S> <C> <C> <C>
Real estate loans:
One- to four-family...................... $11,746 $49,333 $61,079
Multi-family............................. 47 5,424 5,471
Commercial............................... 131 8,757 8,888
Construction............................. --- 349 349
Land..................................... --- 620 620
-------- -------- --------
Total real estate loans............... 11,924 64,483 76,407
Consumer and commercial business loans....... 5,613 1,413 7,026
-------- ------- -------
Total loans........................... $17,537 $65,896 $83,433
======= ======= =======
</TABLE>
Pursuant to Federal law, the aggregate amount of loans that the Company
is permitted to make to any one borrower or a group of related borrowers is
generally limited to 15% of the Association's unimpaired capital and surplus
(25% if the security for such loan has a "readily ascertainable" value or 30%
for certain residential development loans). At September 30, 1996, based on the
15% limitation, the Company's loans-to-one borrower limit was approximately $5.2
million. On the same date, the Company had no borrowers with outstanding
balances in excess of this amount. As of September 30, 1996, the largest dollar
amount outstanding to one borrower, or group of related borrowers, was a $1.4
million commercial business loan secured by an assignment to the Company of a
note and leasehold mortgage on a research and development facility located in
Yonkers, New York. The Company's next largest loan to one borrower or group
outstanding totaled $1.1 million at September 30, 1996 and was secured by an
office building located in Yonkers, New York. These loans were performing in
accordance with their terms at September 30, 1996.
The Company's lending is subject to its written underwriting standards
and to loan origination procedures. Decisions on loan applications are made on
the basis of detailed applications submitted by the prospective borrower and
property valuations (consistent with the Company's appraisal policy) prepared by
independent appraisers. The loan applications are designed primarily to
determine the borrower's ability to repay, and the more significant items on the
application are verified through use of credit reports, financial statements,
tax returns and/or confirmations.
Under the Company's loan policy, the individual processing an
application is responsible for ensuring that all documentation is obtained prior
to the submission of the application to a loan officer for approval. In
addition, the loan officer verifies that the application meets the Company's
underwriting guidelines described below. Also, each application file is reviewed
to assure its accuracy and completeness.
The Company's lending officers have approval authority for one- to
four-family residential loans, other than cooperative apartment ("co-op") loans,
up to $250,000. One- to four-family residential loans over $250,000 to $500,000
require the approval of the Company's President or its Vice President and
8
<PAGE>
Chief Lending Officer. Co-op loans up to $500,000 require the approval and/or
review of the Chief Lending Officer. The Company's Chief Lending Officer has
approval authority for multi-family and commercial real estate loans up to
$500,000 and for land loans up to $250,000. Loans in excess of these amounts
require the approval of the Company's Executive Committee or Board of Directors.
Various officers have approval authority ranging from $2,000 on secured consumer
loans, up to $50,000 on fixed-rate home equity loans and up to $30,000 on
commercial business loans. Approval authorities on unsecured consumer loans
range from $2,000 to $10,000.
Generally, the Company requires title insurance or abstracts on its
mortgage loans as well as fire and extended coverage casualty insurance in
amounts at least equal to the principal amount of the loan or the value of
improvements on the property, depending on the type of loan. The Company also
requires flood insurance to protect the property securing its interest when the
property is located in a flood plain.
One- to Four-Family Residential Real Estate Lending. The cornerstone of
the Company's lending program is the origination of loans secured by mortgages
on owner-occupied one- to four-family residences. At September 30, 1996, $62.3
million, or 70.6%, of the Company's loan portfolio consisted of mortgage loans
on one- to four-family residences (including $7.3 million of advances under home
equity lines of credit and $5.5 million of co-op loans). Substantially all of
the residential loans originated by the Company are secured by properties
located in the Company's primary lending area. A majority of the mortgage loans
originated by the Company are retained and serviced by it. At September 30,
1996, approximately $6.3 million of the Company's one- to four-family
residential real estate loans were secured by non-owner occupied properties. At
that date, the average outstanding residential loan balance was approximately
$72,000.
Since the mid-1980s, the Company has offered ARM loans at rates and on
terms determined in accordance with market and competitive factors. The Company
offers one-year ARMs for terms of up to 30 years at a margin (generally 275
basis points) over the yield on the Average Weekly One Year U.S. Treasury
Constant Maturity Index. The one-year ARM loans currently offered by the Company
generally provide for a 200 basis point annual interest rate change cap and a
lifetime cap of 600 basis points over the initial rate. The Company also offers
a three-year ARM loan which adjusts based on a margin (generally 275 basis
points) over the yield on the three-year Treasury Note. The Company's three-year
ARM loans have a 200 basis point interest rate cap per adjustment period and a
lifetime cap of 500 basis points over the initial rate. The Company also offers
ARM loans which are fixed for the first five-, seven- or ten-year period of the
loan term and adjust annually thereafter based on a specified margin over the
yield on the Average Weekly One Year U.S. Treasury Constant Maturity Index for
the remaining loan term. These loans currently provide for an annual interest
rate cap not to exceed 300 basis points for the initial adjustment period (and
200 basis points thereafter) and a lifetime cap of 500 basis points.
The Company's ARM loans typically do not adjust below the initial rate.
Initial interest rates offered on the Company's ARMs may be 100 to 350 basis
points below the fully indexed rate. Although borrowers on such loans are
generally qualified at the fully indexed rate, the risk of default on these
loans may increase as interest rates increase. See "- Delinquencies and
Non-Performing Assets." The Company's ARMs do not permit negative amortization
of principal, do not contain prepayment penalties and are not convertible into
fixed-rate loans. At September 30, 1996, one- to four-family ARMs (including
ARMs earning a fixed rate of interest for an initial period of up to 10 years)
totaled $50.5 million, or 57.2% of the Company's total loan portfolio.
9
<PAGE>
The Company also originates home equity lines of credit secured by a
lien on the borrower's residence. The Company's home equity lines are generally
limited to $250,000. The Company uses the same underwriting standards for home
equity lines as it uses for one- to four-family residential mortgage loans. The
interest rates for home equity lines of credit float at a stated margin over the
lowest prime rate published in The Wall Street Journal and may not exceed 15.75%
over the life of the loan. The Company currently offers home equity lines for
terms of up to 30 years with interest only paid for the first 10 years of the
loan term. At September 30, 1996, the Company had $7.3 million of outstanding
advances under home equity lines and an additional $5.0 million of funds
committed, but undrawn, under home equity lines of credit.
The Company also offers conventional fixed-rate loans with maximum
terms of up to 30 years, although the Company has recently emphasized
originations of fixed-rate loans with terms of 10 to 15 years. The interest rate
on such loans is generally based on competitive factors. The Company typically
underwrites its fixed-rate one- to four-family loans in accordance with Federal
Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage
Association ("FNMA") standards to permit their sale in the secondary market. The
Company currently sells in the secondary market all of the conforming fixed-rate
residential loans it originates with maturities of 30 years.
The Company also originates loans secured by co-ops and condominiums
located in its market area. Condominium and co-op loans are made on
substantially the same terms as one- to four-family loans, except that co-op
loans are made only at adjustable rates of interest. At September 30, 1996, the
Company had $7.4 million of condominium and co-op loans.
In underwriting one- to four-family residential real estate loans, the
Company evaluates the borrower's ability to make principal, interest and escrow
payments, as well as the value of the property that will secure the loan and
debt-to-income ratios. The Company currently originates residential mortgage
loans with loan-to-value ratios of up to 80% for owner-occupied homes (90% with
private mortgage insurance to reduce the Company's exposure to 80% or less); up
to 65% for non-owner occupied homes; and up to 75% for co-op loans. The
Company's home equity lines of credit are originated in amounts which, together
with the amount of the first mortgage, generally do not exceed 75% of the
appraised value of the property securing the loan.
The Company's residential mortgage loans customarily include
due-on-sale clauses giving the Company the right to declare the loan immediately
due and payable in the event that, among other things, the borrower sells or
otherwise disposes of the property subject to the mortgage and the loan is not
repaid.
Multi-family and Commercial Real Estate Lending. The Company has
increased its emphasis on the origination of permanent multi-family and
commercial real estate loans since fiscal 1994, in order to increase the
interest rate sensitivity and yield of its loan portfolio and to complement
residential lending opportunities. The Company's multi-family and commercial
real estate loan portfolio includes loans secured by apartment buildings, office
buildings, strip shopping centers and other income producing properties located
in its market area. At September 30, 1996, the Company had $9.1 million in
commercial real estate loans, representing 10.3% of the total loan portfolio,
and $5.5 million in multi-family loans, or 6.2% of the total loan portfolio.
The Company's permanent multi-family and commercial real estate loans
generally carry a maximum term of 20 years and have adjustable rates generally
based on a specific index, plus a margin. These loans are generally made in
amounts of up to 75% of the lesser of the appraised value or the purchase price
of the property, with a projected debt service coverage ratio of at least 125%.
Appraisals on properties securing multi-family and commercial real estate loans
are performed by an independent
10
<PAGE>
appraiser designated by the Company at the time the loan is made. All appraisals
on multi-family or commercial real estate loans are reviewed by the Company's
management. In addition, the Company's underwriting procedures require
verification of the borrower's credit history, income and financial statements,
banking relationships, references and income projections for the property. Where
feasible, the Company seeks to obtain personal guarantees on these loans.
The table below sets forth, by type of security property, the number
and amount of the Company's multi-family and commercial real estate loans at
September 30, 1996. Substantially all of the loans referred to in the table
below are secured by properties located in the Company's market area. See "-
Delinquencies and Non-Performing Assets" for a discussion of the non-performing
commercial real estate loan at September 30, 1996.
<TABLE>
<CAPTION>
Outstanding Amount
Number of Principal Non-Performing
Loans Balance or of Concern
----- ------- -------------
(Dollars in Thousands)
<S> <C> <C> <C>
Commercial real estate:
Small business facilities............................... 25 $ 6,034 $214
Office buildings........................................ 5 2,150 ---
Health care facilities.................................. 4 801 ---
Industrial real estate.................................. 1 132 ---
Multi-family................................................ 31 5,471 ---
-- -------- ------
Total multi-family and commercial real estate loans..... 66 $14,588 $214
== ======= ====
</TABLE>
At September 30, 1996, the Company's largest commercial real estate
loan had an outstanding balance of $1.1 million. This loan was originated in
September 1995 and is secured by an office building located in Yonkers. Also at
September 30, 1996, the largest multi-family loan had a balance of $438,000 and
was secured by a 33-unit apartment building located in Eastchester, New York.
Multi-family and commercial real estate loans generally present a
higher level of risk than loans secured by one- to four-family residences. This
greater risk is due to several factors, including the concentration of principal
in a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties, and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family and commercial real estate is typically dependent
upon the successful operation of the related real estate project. If the cash
flow from the project is reduced (for example, if leases are not obtained or
renewed), the borrower's ability to repay the loan may be impaired.
Construction and Land Lending. The Company originates a modest amount
of construction loans to individuals and builders for the construction of
residential real estate. At September 30, 1996, the Company's construction loan
portfolio totaled $2.2 million, or 2.5% of the total loan portfolio. The Company
also currently originates a limited number of land loans primarily for the
purpose of developing residential subdivisions. At September 30, 1996, the
Company's land loan portfolio totaled $1.9 million, or 2.2% of the total loan
portfolio. At September 30, 1996, all of the Company's land loans were made for
the purpose of developing residential lots except for two loans totaling
$299,000 which were secured by commercial real estate.
Construction loans to individuals for the construction of their
residences are structured to convert to permanent loans at the end of the
construction phase, which typically runs up to one year. These construction
loans have rates and terms comparable to one- to four-family loans then offered
by the
11
<PAGE>
Company, except that during the construction phase, the borrower pays interest
only at a specified margin over the prime rate. The maximum loan-to-value ratio
of owner-occupied single-family construction loans is 75%. Residential
construction loans are generally underwritten pursuant to the same guidelines
used for originating permanent residential loans. At September 30, 1996, there
were $200,000 of construction loans outstanding to persons intending to occupy
the premises upon the completion of the construction.
The Company also originates construction loans to builders of one- to
four-family residences. Such loans generally carry terms of up to two years and
require the payment of interest only for the loan term. The maximum
loan-to-value ratio on loans to builders for the construction of residential
real estate is 75%. When practical, the Company seeks to obtain personal
guarantees on such loans. The Company generally limits loans to builders for the
construction of homes on speculation for sale to two homes per builder. At
September 30, 1996, the Company had $2.0 million of construction loans
outstanding to builders of one- to four-family residences.
The Company's construction loan agreements generally provide that loan
proceeds are disbursed in increments as construction progresses. The Company
reviews the progress of the construction of the dwelling before disbursements
are made.
The Company also makes loans to builders and developers for the
development of one- to four-family lots in the Company's market area. All of the
Company's land loans have been originated with adjustable rates of interest tied
to the prime rate of interest and have terms of five years or less. Land loans
are generally made in amounts up to a maximum loan-to-value ratio of 65% on raw
land and up to 75% on developed building lots based upon an independent
appraisal. When feasible, the Company obtains personal guarantees for its land
loans.
The table below sets forth, by type of security property, the number
and amount of the Company's construction and land loans at September 30, 1996,
all of which are secured by properties located in the Company's market area. See
"- Delinquencies and Non-Performing Assets" for a discussion of certain of the
non-performing loans and other loans of concern at September 30, 1996.
<TABLE>
<CAPTION>
Outstanding Amount
Number Loan Principal Non-Performing
Of Loans Commitment Balance or of Concern
-------- ---------- ------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Single-family construction...................... 11 $2,175 $2,004 $1,180
Residential land................................ 5 1,635 1,635 201
Other land...................................... 2 299 299 299
-- ------- ------- -------
Total construction and land loans.......... 18 $4,109 $3,938 $1,680
== ====== ====== ======
</TABLE>
Construction and land loans are obtained principally through referrals
from the Company's and management's contacts in the business community as well
as existing and walk-in customers. The application process includes a submission
to the Company of accurate plans, specifications and costs of the project to be
constructed/developed. These items are used as a basis to determine the
appraised value of the subject property. Loans are based on the lesser of
current appraised value and/or the cost of construction (land plus building).
Construction and land lending generally affords the Company an
opportunity to receive interest at rates higher than those obtainable from
permanent residential loans and to receive higher origination and other loan
fees. In addition, construction and land loans are generally made with
adjustable rates of interest or for relatively short terms. Nevertheless,
construction and land lending is generally considered
12
<PAGE>
to involve a higher level of credit risk than one- to four-family residential
lending due to the concentration of principal in a limited number of loans and
borrowers, as well as the effects of general economic conditions on development
properties and on real estate developers and managers. In addition, the nature
of these loans is such that they are more difficult to evaluate and monitor.
Finally, the risk of loss on construction and land loans is dependent largely
upon the accuracy of the initial estimate of the individual property's value
upon completion and the estimated cost (including interest) of construction. If
the cost estimate proves to be inaccurate, the Company may be required to
advance funds beyond the amount originally committed to permit completion of the
property.
Consumer Lending. In order to increase the interest rate sensitivity of
the loan portfolio and provide a broader range of loan products to its retail
customers, the Company originates a variety of consumer loans, including
automobile, home equity, deposit account and other loans for household and
personal purposes. At September 30, 1996, consumer loans totaled $5.9 million,
or 6.6% of total loans outstanding. The Company intends to emphasize its
consumer lending in the future and to consider hiring an additional consumer
lending officer in order to increase volume.
Consumer loan terms vary according to the type of loan and value of
collateral, length of contract and creditworthiness of the borrower. The
Company's consumer loans are made at fixed interest rates, with terms of up to
10 years. Home equity loans are made at fixed rates up to a maximum loan amount
of $50,000.
The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's payment history on other debts and
the ability to meet existing obligations and payments on the proposed loan.
Although creditworthiness of the applicant is of primary consideration, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount.
Consumer loans may entail greater credit risk than residential mortgage
loans, particularly in the case of consumer loans which are unsecured or are
secured by rapidly depreciable assets, such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. At September 30, 1996, there were $43,000 of consumer loans
delinquent 90 days or more. There can be no assurance that delinquencies will
not increase in the future.
Commercial Business Lending. Federally chartered savings institutions,
such as the Company, are authorized to make secured or unsecured loans and
letters of credit for commercial, corporate, business and agricultural purposes
and to engage in commercial leasing activities, up to a maximum of 20% of total
assets, provided that amounts in excess of 10% relate to small business loans
(as defined). The Company may from time to time make a limited number of secured
and unsecured commercial loans to local businesses. At September 30, 1996, the
Company had $1.4 million of commercial business loans outstanding, representing
1.6% of the total loan portfolio.
The Company's commercial business lending policy includes credit file
documentation and analysis of the borrower's character and capacity to repay the
loan, the adequacy of the borrower's capital and collateral, and an evaluation
of conditions affecting the borrower. Analysis of the borrower's past, present
and future cash flows is also an important aspect of the Company's current
credit analysis.
13
<PAGE>
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income, and which are secured by real property whose value tends to be
more easily ascertainable, commercial business loans are of higher risk and
typically are made on the basis of the borrower's ability to make repayment from
the cash flow of the borrower's business. As a result, the availability of funds
for the repayment of commercial business loans may be substantially dependent on
the success of the business itself. Further, the collateral securing the loans
may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business.
Originations, Purchases and Sales of Loans
Loan applications are taken at each of the Company's offices.
Applications are processed and approved at the Company's Loan Center which is
located in one of the branch offices, except for consumer loans which are
processed and approved at the main office. The Company currently offers
incentives to employees for loan referrals. The Company also employs a
commissioned loan originator to assist in the process of obtaining loans.
While the Company originates both fixed- and adjustable-rate loans, its
ability to originate loans is dependent upon the relative customer demand for
loans in its market. Demand is affected by the local economy and the interest
rate environment.
Historically, most of the fixed-rate one- to four-family residential
loans originated by the Company were retained in its portfolio. However, in
order to reduce its vulnerability to changes in interest rates, the Company
currently sells in the secondary market all of the conforming fixed-rate
residential loans it originates with maturities of 30 years. When loans are
sold, the Company typically retains the responsibility for collecting and
remitting loan payments, making certain that real estate tax payments are made
on behalf of borrowers, and otherwise servicing the loans. At September 30,
1996, the Company serviced $14.0 million of mortgage loans for others.
From time to time, in order to supplement loan demand in the Company's
market area, the Company has acquired mortgage-backed securities which are held,
depending on the investment intent, in the "held to maturity" or "available for
sale" portfolios. See "- Investment Activities - Mortgage-Backed Securities"
and Note 2 of the Notes to Consolidated Financial Statements.
14
<PAGE>
The following table sets forth the Company's loan originations, sales,
repayments and other portfolio activity for the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended September 30,
--------------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Unpaid principal balances at beginning of year.............. $85,092 $79,382 $79,437
------- ------- -------
Loans originated:
Real estate loans
One- to four-family(1)................................ 9,142 7,787 11,767
Multi-family.......................................... 174 1,328 2,593
Commercial............................................ 2,740 3,548 600
Construction.......................................... 1,285 755 2,228
Land.................................................. --- 1,300 327
Consumer and commercial business loans.................. 4,415 2,732 3,015
-------- -------- --------
Total loans originated................................ 17,756 17,450 20,530
------- ------- -------
Loans sold:
One- to four-family real estate loans................... (1,886) (387) (5,148)
--------- -------- --------
Principal repayments:
Real estate loans....................................... (9,389) (8,807) (12,616)
Consumer and commercial business loans.................. (2,391) (2,154) (2,755)
--------- -------- --------
Total principal repayments............................ (11,780) (10,961) (15,371)
-------- ------- -------
Charge-offs................................................. (333) (89) (66)
Transfers to real estate owned.............................. (603) (303) ---
--------- -------- ---------
Unpaid principal balances at end of year.................... 88,246 85,092 79,382
Less:
Construction loans in process........................... (171) (293) (943)
Allowance for loan losses............................... (937) (719) (311)
Net deferred loan fees.................................. (422) (401) (304)
--------- -------- --------
Net loans at end of year.................................... $86,666 $83,679 $77,824
======= ======= =======
</TABLE>
- -------------
(1) Consists of (i) adjustable-rate loans of $5.6 million, $3.4 million and
$9.0 million, and (ii) fixed-rate loans of $3.5 million, $4.4 million
and $2.8 million for the years ended September 30, 1996, 1995 and 1994,
respectively.
Delinquencies and Non-Performing Assets
Delinquency Procedures. When a borrower fails to make a required
payment on a loan, the Company attempts to cure the delinquency by contacting
the borrower. A late notice is sent on all loans over 16 days delinquent.
Additional written and verbal contacts may be made with the borrower between 30
and 90 days after the due date. If the loan is contractually delinquent 60 days,
the Company usually sends a 30-day demand letter to the borrower and, after the
loan is contractually delinquent 91 days, institutes appropriate action to
foreclose on the property. If foreclosed, the property is sold at auction and
may be purchased by the Company. Delinquent consumer loans are generally handled
in a similar manner. The Company's procedures for repossession and sale of
consumer collateral are subject to various requirements under New York consumer
protection laws.
Real estate acquired by the Company as a result of foreclosure or by
deed in lieu of foreclosure is classified as real estate owned until it is sold.
When property is acquired or expected to be acquired
15
<PAGE>
by foreclosure or deed in lieu of foreclosure, it is recorded at estimated fair
value less the estimated cost of disposition, with the resulting write-down
charged to the allowance for loan losses. After acquisition, all costs incurred
in maintaining the property are expensed. Costs relating to the development and
improvement of the property, however, are capitalized.
The following table sets forth certain information with respect to loan
portfolio delinquencies at the dates indicated.
<TABLE>
<CAPTION>
At September 30, 1996 At September 30, 1995
-------------------------------------- -----------------------------------------
60 - 89 Days 90 Days or More 60 - 89 Days 90 Days or More
------------ --------------- ------------ ---------------
Number of Principal Number of Principal Number of Principal Number of Principal
Loans Balance Loans Balance Loans Balance Loans Balance
----- ------- ----- ------- ----- ------- ----- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family............ 12 $1,513 17 $1,757 13 $1,151 26 $2,759
Multi-family................... --- --- --- --- 1 214 2 389
Construction................... --- --- 3 511 --- --- 2 279
Land........................... --- --- 3 250 --- --- 1 49
Commercial..................... 1 383 1 214 --- --- --- ---
Consumer loans..................... 3 5 7 43 2 67 7 54
----- ------ ----- ------ ----- ----- --- --------
Total....................... 16 $1,901 31 $2,775 16 $1,432 38 $3,530
=== ====== === ====== === ====== === ======
Delinquent loans to total loans 2.15% 3.14% 1.68% 4.15%
==== ==== ==== ====
</TABLE>
Classification of Assets. Federal regulations require that each savings
institution classify its own assets on a regular basis. In addition, in
connection with examinations of savings institutions, OTS and FDIC examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: substandard,
doubtful, and loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the institution will sustain
some loss if the deficiencies are not corrected. Doubtful assets have the
weaknesses of substandard assets, with the additional characteristics that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset on the balance sheet of the
institution is not warranted. Assets classified as substandard or doubtful
require the institution to establish prudent general allowances for loan losses.
If an asset or portion thereof is classified as loss, the institution must
either establish specific allowances for loan losses in the amount of 100% of
the portion of the asset classified loss, or charge off such amount. If an
institution does not agree with an examiner's classification of an asset, it may
appeal this determination to the Regional Director of the OTS. On the basis of
management's review, at September 30, 1996, the Company had classified $2.2
million of loans and $603,000 of real estate owned as substandard, and $16,000
of loans as doubtful.
The Company's classified assets consist principally of non-performing
loans, real estate owned and certain other loans of concern discussed herein. As
of the date hereof, these asset classifications are substantially consistent
with those of the OTS and FDIC.
16
<PAGE>
Non-Performing Assets. The table below sets forth the amounts and
categories of the Company's non-performing assets at the dates indicated. Loans
are placed on non-accrual status when the collection of principal or interest
becomes doubtful. Real estate owned represents properties acquired in settlement
of loans.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans past due 90 days or more:
Real estate loans
One- to four-family............................ $1,757 $2,759 $2,229 $ 479 $ 514
Multi-family(1)................................ --- 389 389 399 878
Commercial..................................... 214 --- --- --- ---
Land........................................... 250 49 --- --- ---
Construction................................... 511 279 --- 217 379
Consumer loans.................................... 43 54 45 62 2
------- ------- ------- ------- --------
Total........................................ 2,775 3,530 2,663 1,157 1,773
Real estate owned, net................................ 603 227 73 242 ---
------- ------- ------- ------ ---------
Total non-performing assets........................... $3,378 $3,757 $2,736 $1,399 $1,773
====== ====== ====== ====== ======
Allowance for loan losses............................. $ 937 $ 719 $ 311 $ 295 $ 490
====== ====== ====== ====== =======
Ratios:
Non-performing loans to total loans............... 3.14% 4.15% 3.35% 1.46% 2.12%
Non-performing assets to total assets............. 1.30 1.80 1.40 0.77 1.05
Allowance for loan losses to:
Non-performing loans........................... 33.77 20.37 11.68 25.50 27.64
Total loans.................................... 1.06 0.84 0.39 0.37 0.59
</TABLE>
- ---------------
(1) Includes a participation loan classified as a troubled debt
restructuring of $309,000, $309,000, $312,000 and $462,000 at September
30, 1995, 1994, 1993 and 1992, respectively. Collections and
charge-offs in fiscal 1996 eliminated the recorded investment in this
loan.
For the year ended September 30, 1996, gross interest income of
$251,000 would have been recorded if the non-accruing loans at September 30,
1996 had remained current in accordance with their original terms. The amount of
interest income actually received on such loans in fiscal 1996 was $94,000. See
Note 3 of the Notes to Consolidated Financial Statements.
At September 30, 1996, the Company's non-performing loans consisted of
17 loans secured by one- to four-family real estate located in the Company's
market area which totaled $1.8 million, one loan for $214,000 secured by
commercial real estate, three loans for the construction of one- to four-family
real estate which totaled $511,000, three loans secured by land which totaled
$250,000 and seven consumer loans which totaled $43,000. At September 30, 1996,
real estate owned consisted of four single-family residences with a net carrying
value of $603,000.
As of September 30, 1996, the Company's non-accruing loans (other than
single-family permanent loans) to individual borrowers with a carrying value of
$200,000 or more were as follows:
The Company has two outstanding construction loans
to a development company for the purpose of constructing two
single-family residences in Yonkers, New York to be sold on
speculation. The Company also obtained a personal guarantee
from the owner of the company. These loans were placed on
non-accrual status due to cash flow
17
<PAGE>
problems experienced by the borrower in developing
the property. Although houses have been constructed on the
property, the road has not been finished due to the
borrower's cash flow problems. The borrower has recently
obtained financing from a third party to continue completion
of the road. At September 30, 1996, these loans had an
outstanding balance of $279,000. The Company also made a land
loan for $49,000 to the owner of the development company
secured by a parking lot. This loan was over 90 days
delinquent at September 30, 1996.
The Company also had a construction loan for
$232,000 on a two-family residence in Yonkers, New York,
which was over 90 days delinquent at September 30, 1996. In
April 1996, this loan was placed on non-accrual status due to
the borrower's inability to comply with the present loan
repayment terms. The house has been completed and is
currently being marketed for sale.
The only non-performing commercial real estate loan
at September 30, 1996 was a loan for $214,000 secured by a
store and five apartments located in Yonkers, New York. This
loan was placed on non-accrual status due to cash flow
problems experienced by the borrower on collecting rental
income on the subject property. If the borrower cannot bring
the account current, the Company will start legal action to
foreclose on the mortgage. In addition, the Company also has
a $113,000 home equity loan to the same borrower on a
personal residence which is also on non-accrual status.
Other Loans of Concern. In addition to the non-performing loans and
real estate owned set forth in the preceding table, as of September 30, 1996
there were $919,000 of "other loans of concern." These are loans with respect to
which known information about the possible credit problems of the borrowers or
the cash flows of the security properties have caused management to have
concerns as to the ability of the borrowers to comply with present loan
repayment terms and which may result in the future inclusion of such items in
the non-performing asset categories. Management has considered the Company's
non-performing loans and other loans of concern in establishing the allowance
for loan losses.
As of September 30, 1996, the Company had the following loans of
concern with carrying values in excess of $200,000:
The Company has a $250,000 land loan, secured by a
lot located in Paterson, New York, which was structured from
its inception to provide for payments of interest only during
the term of the loan with the principal payment to be made
upon maturity. The borrower intended to build a commercial
building on the security property. At September 30, 1996,
although this loan was performing, it was classified
substandard due to hazardous building materials on an
adjacent lot which may result in a decline in value of the
security property. Although a phase I environmental study
performed on the security property did not disclose any
contamination to the security property from the adjoining
lot, the contamination on the adjacent lot has prevented the
borrower from using the security property for its intended
purpose. As a result of the problems associated with the
adjacent lot, the loan was renewed at a market rate of
interest and its term was extended until January 1997. The
borrower is continuing to make interest payments on this loan
as required by the terms of the loan agreement and is waiting
for the resolution of the problem with the adjacent property.
The Company also has a development loan secured by
25 residential lots located in Dutchess County, New York.
Sales of lots have been slow, and the Company has
18
<PAGE>
renewed the loan several times at market rates and
terms. At September 30, 1996, six of the 15 lots in phase I
had been sold and construction of the homes completed. This
loan was performing and had an outstanding balance of
$314,000 at September 30, 1996. On such date, the Company
also had two construction loans to the same borrower totaling
$355,000 for the construction of two single-family homes in
this development. Although such loans were current at
September 30, 1996, the Company considers these loans to be
of concern due to the slow sales in the development.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses charged to operations based on management's
evaluation of the risk inherent in the loan portfolio. The allowance is
established as an amount that management believes will be adequate to absorb
probable losses on existing loans. Management's evaluation of the adequacy of
the allowance, which is subject to periodic review by the Company's regulators,
takes into consideration such factors as the historical loan loss experience,
known and inherent risks in the portfolio, changes in the nature and volume of
the loan portfolio, overall portfolio quality, review of specific problem loans,
estimated value of underlying collateral, and current economic conditions that
may affect borrowers' ability to pay. While management believes that it uses the
best information available to determine the allowance for loan losses,
unforeseen market conditions could result in adjustments to the allowance for
loan losses, and net earnings could be significantly affected, if circumstances
differ substantially from the estimates made in making the final determination.
The following table sets forth activity in the allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended September 30,
--------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year....................... $719 $311 $295 $490 $606
Provision for losses............................... 462 493 64 313 17
Charge-offs:
Real estate loans
One- to four-family......................... (97) (76) (64) (19) (7)
Multi-family(1)............................. (203) --- --- (477) (108)
Consumer and commercial business loans......... (33) (13) (2) (12) (18)
------ ---- ----- ----- -----
Total charge-offs........................... (333) (89) (66) (508) (133)
Recoveries......................................... 89 4 18 --- ---
------ ----- ----- ------ ------
Net charge-offs............................. (244) (85) (48) (508) (133)
------ ---- ----- ----- -----
Balance at end of year............................. $937 $719 $311 $295 $490
==== ==== ==== ==== ====
Ratio of net charge-offs to average total loans.... 0.29% 0.10% 0.06% 0.62% 0.16%
==== ==== ==== ==== ====
</TABLE>
- ------------
(1) Charge-offs in fiscal 1996, 1993 and 1992 relate to the Company's
purchased participation interests in three multi-family loans
originated by the Thrift Associations Service Corporation
("TASCO"). All such purchased participations have been collected
or charged-off at September 30, 1996.
19
<PAGE>
The following table sets forth the allowance for loan losses allocated
by loan category, the total loan amounts by category, and the percent of loans
in each category to total loans at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ------------------------------ -------------------------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Loan Each Loan Each Loan Each
Allowance Amounts by Category to Allowance Amounts by Category to Allowance Amounts by Category to
Amount Category Total Loans Amount Category Total Loans Amount Category Total Loans
------ -------- ----------- ------ -------- ----------- ------ -------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family. $538 $62,283 70.6% $ 302 $63,282 74.4% $ 188 $64,078 80.7%
Multi-family........ 11 5,471 6.2 64 5,647 6.6 64 4,483 5.7
Commercial.......... 91 9,117 10.3 66 6,575 7.7 20 3,176 4.0
Construction........ 74 2,175 2.5 75 2,205 2.6 16 2,138 2.7
Land(1)............. 166 1,934 2.2 171 2,112 2.5 8 814 1.0
Consumer and commer-
cial business loans. 57 7,266 8.2 41 5,271 6.2 15 4,693 5.9
----- ------- ------ -------- -------- ------ -------- -------- ------
Total................. $937 $88,246 100.0% $ 719 $85,092 100.0% $ 311 $79,382 100.0%
==== ======= ===== ======= ======= ===== ======= ======= =====
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------
1993 1992
------------------------------ -------------------------------------
Percent of Percent of
Loans in Loans in
Loan Each Loan Each
Allowance Amounts by Category to Allowance Amounts by Category to
Amount Category Total Loans Amount Category Total Loans
------ -------- ----------- ------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family. 183 $67,633 85.1%$ 225 $72,577 86.7%
Multi-family........ 61 2,281 2.9 197 1,264 1.5
Commercial.......... 17 2,704 3.4 12 2,392 2.9
Construction........ 12 1,472 1.9 19 1,784 2.1
Land(1)............. 9 914 1.1 12 1,199 1.4
Consumer and commer-
cial business loans. 13 4,433 5.6 25 4,524 5.4
--- -------- ------- ----- -------- ------
Total................. 295 $79,437 100.0% $ 490 $83,740 100.0%
=== ======= ===== ======= ======= =====
</TABLE>
- --------------
(1) The allowance at both September 30, 1996 and 1995 includes
$150,000 allocated to land loans "of concern." See "- Other Loans
of Concern."
20
<PAGE>
Investment Activities
General. The Company utilizes mortgage-backed and other securities in
virtually all aspects of its asset/liability management strategy. In making
investment decisions, the Board of Directors considers, among other things, the
Company's yield and interest rate objectives, its interest rate and credit risk
position, and its liquidity and cash flow.
Yonkers Savings must maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Cash flow projections are
regularly reviewed and updated to assure that adequate liquidity is maintained.
Generally, the investment policy of the Company is to invest funds
among categories of investments and maturities based upon the Company's
asset/liability management policies, investment quality, loan and deposit
volume, liquidity needs and performance objectives. Statement of Financial
Accounting Standards ("SFAS") No. 115 requires that securities be classified
into three categories: trading, held to maturity, and available for sale.
Securities that are bought and held principally for the purpose of selling them
in the near term are classified as trading securities and are reported at fair
value with unrealized gains and losses included in earnings. Debt securities for
which the Company has the positive intent and ability to hold to maturity are
classified as held to maturity and reported at amortized cost. All other
securities not classified as trading or held to maturity are classified as
available for sale. Available-for-sale securities are reported at fair value
with unrealized gains and losses included, on an after-tax basis, in a separate
component of equity. At September 30, 1996, the Company had no securities
classified as trading. At September 30, 1996, $58.6 million, or 38.1% of the
Company's mortgage-backed and other securities portfolio was classified as
available for sale. The remaining $95.0 million, or 61.9% of the Company's
securities portfolio, was classified as held to maturity.
Mortgage-Backed Securities. The Company invests in mortgage-backed
securities in order to supplement loan production and achieve its
asset/liability management goals. Substantially all of the mortgage-backed
securities owned by the Company are issued, insured or guaranteed either
directly or indirectly by a federal agency or are rated "AA" or higher. As of
September 30, 1996, the Company did not have any mortgage-backed securities of a
single issuer in excess of 10% of the Company's equity, except for federal
agency obligations. At September 30, 1996, the Company had $58.1 million and
$22.7 million, respectively, of mortgage-backed securities classified as held to
maturity and as available for sale.
Consistent with its asset/liability management strategy, at September
30, 1996, $48.8 million, or 60.4% of the Company's mortgage-backed securities
had adjustable interest rates. In addition, as discussed below, at September 30,
1996, the Company had $14.5 million of CMOs with anticipated average lives of
five years or less. For additional information regarding the Company's
mortgage-backed securities portfolio, see Note 2 of the Notes to Consolidated
Financial Statements.
CMOs are securities derived by reallocating the cash flows from
mortgage-backed securities or pools of mortgage loans in order to create
multiple classes, or tranches, of securities with coupon rates and average lives
that differ from the underlying collateral as a whole. The term to maturity of
any particular tranche is dependent upon the prepayment speed of the underlying
collateral as well as the structure of the particular CMO. As a result, the cash
flows (and hence the values) of certain CMOs are subject to substantial change.
21
<PAGE>
Management believes that CMOs at times represent attractive investment
alternatives relative to other investments due to the wide variety of maturity
and repayment options available through such investments. In particular, the
Company has from time to time concluded that short and intermediate duration
CMOs (seven-year or less estimated average life) represent a better combination
of rate and duration than adjustable rate mortgage-backed securities. At
September 30, 1996, the Company held $18.8 million of CMOs.
To assess price volatility, the Federal Financial Institutions
Examination Council ("FFIEC") adopted a policy in 1992 which requires an annual
"stress" test of mortgage derivative securities. This policy, which has been
adopted by the OTS, requires the Company to annually test its CMOs to determine
whether they are high-risk or nonhigh-risk securities. Mortgage derivative
products with an average life or price volatility in excess of a benchmark
30-year, mortgage-backed, pass-through security are considered high-risk
mortgage securities. Under the policy, savings institutions may generally only
invest in high-risk mortgage securities in order to reduce interest rate risk.
In addition, all high-risk mortgage securities acquired after February 9, 1992
which are classified as high risk at the time of purchase must be carried in the
institution's trading account or as assets held for sale. At September 30, 1996,
none of the Company's CMOs were classified as "high-risk."
The value of the Company's mortgage-backed securities, particularly
those carrying fixed rates, would decline significantly in the event of an
increase in interest rates. In addition, a decrease in interest rates could
result in an increase in prepayments on the fixed-rate portion of the Company's
mortgage-backed securities portfolio. Funds from such prepayments may be
reinvested at a lower yield. Similarly, a decline in interest rates would result
in the downward adjustment of the rates earned on the Company's adjustable-rate,
mortgage-backed securities portfolio resulting in lower yields and interest
income in future periods.
The following table sets forth the amortized cost and fair value of the
mortgage-backed securities portfolio, by accounting classification category and
by type of security, at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------
1996 1995 1994
--------------------- ---------------------- ---------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity
Pass-through securities(1).............. $41,493 $41,520 $35,586 $35,874 $32,216 $31,768
CMOs(2)................................. 16,646 16,478 17,025 16,880 16,965 16,148
-------- -------- ------- ------- ------- -------
Total................................ 58,139 57,998 52,611 52,754 49,181 47,916
-------- -------- ------- ------- ------- -------
Available for Sale
Pass-through securities(1).............. 20,679 20,572 4,151 4,170 5,555 5,514
CMOs(2)................................. 2,146 2,139 2,272 2,266 2,348 2,272
-------- -------- -------- -------- -------- --------
Total................................ 22,825 22,711 6,423 6,436 7,903 7,786
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities............ $80,964 $80,709 $59,034 $59,190 $57,084 $55,702
======= ======= ======= ======= ======= =======
</TABLE>
- --------------
(1) All pass-through securities are guaranteed by GNMA, FNMA or FHLMC, except
for privately issued securities with an amortized cost of $302,000, $422,000
and $548,000 at September 30, 1996, 1995 and 1994, respectively.
(2) All CMOs are guaranteed by GNMA, FNMA or FHLMC, except for privately issued
securities with an amortized cost of $65,000, $85,000 and $171,000 at
September 30, 1996, 1995 and 1994, respectively.
22
<PAGE>
The following table sets forth certain information regarding the
amortized cost, fair value and weighted average yield of the Company's
mortgage-backed securities at September 30, 1996. The entire amortized cost and
fair value of such securities are reflected in the maturity period that includes
the final security payment date and, accordingly, no effect has been given to
periodic repayments or possible prepayments. In addition, under the structure of
some of the Company's CMOs, the Company's short-and intermediate-tranche
interests have repayment priority over the longer term tranches of the same
underlying mortgage pool.
<TABLE>
<CAPTION>
At September 30, 1996
------------------------------------------------------------------------
Held to Maturity Available for Sale
--------------------------------- -------------------------------------
Weighted Weighted
Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield
---- ----- ----- ---- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Pass-through securities:
Due after 1 year but within 5 years...... $ 31 $ 33 10.25% $ --- $ --- ---%
Due after 5 years but within 10 years.... 169 169 6.85 189 198 9.37
Due after 10 years....................... 41,293 41,318 6.90 20,490 20,374 7.40
------- ------- ------- --------
Total................................. $41,493 $41,520 6.90 $20,679 $20,572 7.42
======= ======= ======= =======
CMOs:
Due after 1 year but within 5 years...... $ --- $ --- ---% $ 796 $ 796 6.96%
Due after 5 years but within 10 years.... 3,401 3,399 6.97 --- --- ---
Due after 10 years....................... 13,245 13,079 5.95 1,350 1,343 6.21
------- ------- ------- -------
Total................................. $16,646 $16,478 6.16 $ 2,146 $ 2,139 6.49
======= ======= ======= =======
</TABLE>
The following table sets forth the activity in the mortgage-backed
securities portfolio for the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended September 30,
----------------------------------------
1996 1995 1994
--- ---- ----
(In Thousands)
<S> <C> <C> <C>
Amortized cost at beginning of year.................... $59,034 $57,084 $61,295
------- ------- -------
Purchases:
Pass-through securities:
Adjustable rate.................................. 21,657 8,500 9,966
Fixed rate....................................... 10,264 1,000 ---
-------- -------- --------
Total pass-through securities.................. 31,921 9,500 9,966
CMOs............................................... --- 946 1,957
--------- -------- --------
Total purchases................................ 31,921 10,446 11,923
Sales of pass-through securities....................... --- (1,285) (2,289)
Principal repayments................................... (9,979) (7,210) (13,874)
Premium and discount amortization, net................. (12) (1) 29
--------- -------- ---------
Amortized cost at end of year.......................... $80,964 $59,034 $57,084
======= ======= =======
</TABLE>
Other Securities. To date, the Company's investment strategy has been
directed toward high-quality assets (primarily government and agency
obligations) with short and intermediate terms (typically seven years or less)
to maturity. At September 30, 1996, the Company did not own any investment
securities of a single issuer which exceeded 10% of the Company's equity, other
than U.S. Government
23
<PAGE>
or federal agency obligations. The Company also invests in high-grade,
medium-term (up to five years) corporate debt securities and a variety of mutual
funds which invest in adjustable-rate mortgage-backed securities, asset-backed
securities, and U.S. Treasury and Agency obligations. See Note 2 of the Notes to
Consolidated Financial Statements for additional information regarding the
Company's securities portfolio.
From time to time, the Company has invested in "step-up" securities
which provide for interest rate increases periodically if the security is not
redeemed by the issuer. Because of this "step-up" structure, the Company expects
most of these securities to be redeemed prior to maturity. Prior to investing in
these securities, the Company analyzes the yield on the security in comparison
to the option on the part of the issuer to redeem the security or pay a higher
interest rate. A majority of the Company's "step-up" securities have terms of
seven years or less and provide for increases in interest rates of 25 to 180
basis points within one to three years of issuance. At September 30, 1996, the
Company had $16.0 million of "step-up" securities with a weighted average yield
of 5.78%.
The following table sets forth the amortized cost and fair value of
other securities, by accounting classification category and by type of security,
at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- ---------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity
U.S. Government and Agency:
Step-up securities................... $12,966 $12,651 $20,960 $20,675 $22,432 $21,001
Other securities..................... 23,402 23,012 21,393 21,171 15,607 14,600
Corporate bonds......................... 500 501 500 500 500 503
-------- -------- -------- -------- --------- ---------
Total................................ 36,868 36,164 42,853 42,346 38,539 36,104
------- ------- ------- ------- ------- -------
Available for Sale
U.S. Government and Agency:
Step-up securities................... 3,000 2,969 2,000 1,985 2,501 2,424
Other securities..................... 26,960 27,023 6,951 6,921 3,899 3,783
Mutual fund investments................. 6,070 5,849 5,740 5,535 5,432 5,223
-------- -------- -------- -------- -------- --------
Total................................ 36,030 35,841 14,691 14,441 11,832 11,430
------- ------- ------- ------- ------- -------
Total other securities, net................. $72,898 $72,005 $57,544 $56,787 $50,371 $47,534
======= ======= ======= ======= ======= =======
</TABLE>
24
<PAGE>
The following table sets forth certain information regarding the
amortized cost, fair value and weighted average yield of other debt securities
at September 30, 1996, by remaining period to contractual maturity.
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
--------------------------------- --------------------------------
Weighted Weighted
Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield
---- ----- ----- ---- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and Agency:
Due within 1 year........................ $ 2,429 $ 2,437 6.40% $ --- $ --- ---%
Due after 1 year but within 5 years...... 12,976 12,733 5.32 5,000 4,996 6.47
Due after 5 years but within 10 years.... 14,973 14,760 7.06 13,000 13,004 7.47
Due after 10 years....................... 5,990 5,733 6.76 11,960 11,992 8.02
------- ------- ------- -------
Total................................. $36,368 $35,663 6.34 $29,960 $29,992 7.52
======= ======= ======= =======
Corporate:
Due within 1 year........................ $ 500 $ 501 5.96% $ --- $ --- ---%
======== ======== ======= ==========
</TABLE>
In addition to its securities portfolios, from time to time the Company
holds short-term liquid assets such as money market mutual funds, federal funds
sold and interest-bearing deposits. Short-term investments at September 30, 1996
primarily consisted of a $10.2 million investment in a money market mutual fund.
Sources of Funds
General. The Company's primary sources of funds are deposits, payments
(including prepayments) of loan principal, interest earned on loans and
securities, repayments of securities, borrowings and funds provided from
operations.
Deposits. The Company offers a variety of deposit accounts having a
wide range of interest rates and terms. The Company's deposits consist of
regular savings (passbook) accounts, transaction (NOW and checking) accounts,
money market accounts, club accounts and certificate accounts. The Company only
solicits deposits in its market area and does not accept brokered deposits. The
Company relies primarily on competitive pricing policies, advertising and
customer service to attract and retain these deposits and provides incentives to
employees who refer new deposit customers to the Company. The Company also has
ATMs located in two branch offices.
The variety of deposit accounts offered by the Company has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. As certain customers have become more interest rate
conscious, the Company has become more susceptible to short-term fluctuations in
deposit flows. The Company manages the pricing of its deposits in keeping with
its asset/liability management, profitability and growth objectives. For
instance, in fiscal 1993, the Company introduced a 30-month "advantage"
certificate account which provided the customer with a one-time increase in rate
during the term of the account. At September 30, 1996, the Company had $15.9
million of advantage certificate accounts.
Management believes that the "core" portion of the Company's regular
savings, transaction, money market and club accounts can have a lower cost and
be more resistant to interest rate changes than certificate accounts. These core
accounts decreased $17.7 million during fiscal 1995, but were relatively stable
during fiscal 1996. Management believes that the outflow in fiscal 1995
represented the most
25
<PAGE>
interest rate sensitive portion of such accounts and that the majority of the
remaining portion of the Company's regular savings, transaction, money market
and club accounts are relatively stable sources of deposits. The Company
continues to utilize customer service and marketing initiatives (including
newspaper advertisements) in an effort to maintain and increase the volume of
such deposits. However, the ability of the Company to attract and maintain these
accounts (as well as certificate accounts) has been and will continue to be
affected by market conditions.
The following table sets forth the deposit activity of the Company for
the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended September 30,
--------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of year.................. $188,009 $179,816 $169,508
Deposits...................................... 421,132 297,860 261,501
Withdrawals................................... (426,246) (296,569) (256,600)
Interest credited............................. 7,780 6,902 5,407
--------- --------- ---------
Balance at end of year........................ $190,675 $188,009 $179,816
======== ======== ========
Net increase during the year:
Amount.................................... $ 2,666 $ 8,193 $ 10,308
========= ========= =========
Percent................................... 1.4% 4.6% 6.1%
=== === ===
</TABLE>
The following table sets forth the distribution of the Company's
deposit accounts and the related weighted average interest rates at the dates
indicated.
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------------------------
1996 1995 1994
----------------------- --------------------------------- ---------------------------
Percent of Weighted Percent of Weighted Percent of Weighted
Total Average Total Average Total Average
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ -------- ---- ------ -------- ---- ------ -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Checking accounts............ $ 1,957 1.0% --% $ 2,680 1.4% ---% $ 2,454 1.4% ---%
NOW accounts................. 18,141 9.5 1.86 15,609 8.3 1.73 15,895 8.8 1.74
Money market accounts........ 16,599 8.7 2.91 12,484 6.7 2.91 12,722 7.1 2.43
Regular savings accounts .... 47,832 25.1 2.61 54,794 29.1 2.70 72,257 40.2 2.70
Club accounts................ 1,112 0.6 2.61 1,044 0.6 2.70 970 0.5 2.70
Savings certificate accounts. 105,034 55.1 5.24 101,398 53.9 5.61 75,518 42.0 4.25
-------- ----- ------ ----- -------- -----
Total.................... $190,675 100.0% 3.99% $188,009 100.0% 4.16% $179,816 100.0% 3.21%
======== ===== ======= ===== ======== =====
</TABLE>
26
<PAGE>
The following table sets forth, by interest rate ranges, the amount of
savings certificate accounts outstanding at the dates indicated and the period
to maturity of savings certificate accounts outstanding at September 30, 1996.
<TABLE>
<CAPTION>
At September 30, 1996
------------------------------------------------------------- Total at
Period to Maturity September 30,
------------------------------------------------------------- -----------------
Less than One to More than Percent
Interest Rate Range One Year Three Years Three Years Total of Total 1995 1994
- ----------------------------- --------- ------------ ----------- ----------- ----------- ----------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
4.00% and below.............. $ 39 $ --- $ --- $ 39 ---% $ 3,174 $ 44,716
4.01% to 5.00%............... 50,229 2,581 --- 52,810 50.3 18,252 17,442
5.01% to 6.00%............... 12,916 20,330 2,559 35,805 34.1 44,359 11,186
6.01% to 7.00%............... 7,236 3,070 5,987 16,293 15.5 34,282 755
7.01% and above.............. 87 --- --- 87 0.1 1,331 1,419
--------- --------- ---------- ---------- ----- --------- ---------
Total.................... $70,507 $25,981 $ 8,546 $105,034 100.0% $101,398 $ 75,518
======= ======= ======= ======== ===== ======== ========
</TABLE>
The following table sets forth the maturity distribution and related
weighted average interest rates for savings certificate accounts with balances
less than $100,000, accounts of $100,000 or more, and total savings certificates
at September 30, 1996.
<TABLE>
<CAPTION>
Less than $100,000 $100,000 or More Total
------------------------- ------------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Maturity Period Amount Rate Amount Rate Amount Rate
- ------------------------------------ -------------- ----------- ------------ ----------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Within three months..................... $ 18,191 4.97% $ 2,077 5.14% $ 20,268 4.99%
After three but within six months....... 18,360 4.88 1,772 4.94 20,132 4.88
After six but within 12 months.......... 27,316 5.11 2,791 5.23 30,107 5.12
-------- ------- ---------
Total within one year............... 63,867 5.00 6,640 5.13 70,507 5.02
After one but within two years.......... 17,023 5.47 1,732 5.75 18,755 5.49
After two but within three years........ 6,480 5.53 746 5.49 7,226 5.52
After three but within five years....... 7,113 6.25 1,433 6.44 8,546 6.28
-------- -------- ---------
Total............................... $94,483 5.22% $10,551 5.43% $105,034 5.24%
======= ======= ========
</TABLE>
Borrowings. The Company's other available sources of funds include
advances from the FHLB of New York and other borrowings, including repurchase
agreements. As a member of the FHLB of New York, the Company is required to own
capital stock in the FHLB of New York and is authorized to apply for advances
from the FHLB of New York. Each FHLB credit program has its own interest rate,
which may be fixed or variable, and range of maturities. The FHLB of New York
may prescribe the acceptable uses for these advances, as well as limitations on
the size of the advances and repayment provisions. At September 30, 1996, the
Company had $8.0 million of FHLB advances outstanding. On such date, the Company
had a collateral pledge arrangement with the FHLB of New York pursuant to which
the Company may borrow up to $61.2 million.
From time to time, the Company enters into repurchase agreements with
counterparties such as the FHLB of New York utilizing mortgage-backed and other
securities as collateral. At September 30, 1996, the Company had $10.3 million
of repurchase agreements outstanding which were collateralized by
mortgage-backed securities.
27
<PAGE>
See Note 7 of the Notes to Consolidated Financial Statements for
further information concerning the Company's FHLB advances and repurchase
agreements.
The following table sets forth information concerning the balances and
interest rates on borrowings at the dates and for the periods indicated.
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
---------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances:
Balance at end of year.............................. $ 8,000 $4,295 $ 295
Average balance during year......................... 2,356 920 295
Maximum outstanding at any month end................ 8,000 4,295 295
Weighted average interest rate at end of year....... 5.73% 6.26% 5.29%
Average interest rate during the year............... 5.52% 5.87% 5.29%
Repurchase agreements:
Balance at end of year.............................. $10,264 $ --- $ ---
Average balance during year......................... 1,214 1,250 ---
Maximum outstanding at any month end................ 10,264 4,000 ---
Weighted average interest rate at end of year....... 5.44% ---% ---%
Average interest rate during the year............... 5.35% 6.26% ---%
</TABLE>
Service Corporations
As a federally chartered savings and loan association, the Association
is permitted by OTS regulations to invest up to 2% of its assets in the stock
of, or loans to, service corporation subsidiaries, and may invest an additional
1% of its assets in service corporations where such additional funds are used
for inner-city or community development purposes. In addition to investments in
service corporations, federal institutions are permitted to invest an unlimited
amount in operating subsidiaries engaged solely in activities which a federal
savings association may engage in directly. At September 30, 1996, the
Association had no service corporations.
Competition
The Company faces extremely strong competition both in originating real
estate loans and in attracting deposits. Competition in originating loans comes
primarily from mortgage bankers, commercial banks, credit unions and other
savings institutions, which also make loans secured by real estate located in
the Company's market area. The Company competes for loans principally on the
basis of the interest rates and loan fees it charges, the types of loans it
originates and the quality of services it provides to borrowers.
Competition for deposits is intense given the size of the New York
market and the fact that it is the home state for many large regional and money
center banks. Competition for deposits is principally from money market and
mutual funds, securities firms, commercial banks, credit unions and other
savings institutions located in the same communities. The ability of the Company
to attract and retain deposits depends on its ability to provide an investment
opportunity that satisfies the requirements of investors as to rate of return,
liquidity, risk, convenient locations and other factors. The Company is
significantly smaller than most of its competitors which, due to their size and
economies of scale, generally offer a broader range of deposit products than the
Company. The Company competes for these deposits by offering deposit accounts at
competitive rates, convenient business hours, availability of
28
<PAGE>
ATMs and a customer oriented staff. As of June 30, 1996, the latest date such
information was available, there were 350 other thrift, commercial bank and
credit union offices in Westchester County which compete for deposits. As of
June 30, 1995, the Company held approximately 1.0% of total deposits in
Westchester County.
Employees
At September 30, 1996, the Company had a total of 43 full-time and 10
part-time employees. None of the Company's employees are represented by any
collective bargaining agreement. Management considers its employee relations to
be good.
Regulation
General. Yonkers Savings is a federally chartered savings and loan
association, the deposits of which are federally insured and backed by the full
faith and credit of the United States Government. Accordingly, Yonkers Savings
is subject to broad federal regulation and oversight extending to all its
operations. Yonkers Savings is a member of the FHLB of New York and is subject
to certain limited regulation by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"). Prior to December 1995, the Association was a
state-chartered savings and loan association and was subject to the regulation
of the State of New York Banking Department. Effective December 28, 1995, the
Association converted to a federal charter. As the savings and loan holding
company of Yonkers Savings, the Holding Company also is subject to federal
regulation and oversight. The purpose of holding company regulation is to
protect subsidiary savings associations. Yonkers Savings is a member of the SAIF
and the deposits of Yonkers Savings are insured by the FDIC. As a result, the
FDIC has certain regulatory and examination authority over Yonkers Savings.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, Yonkers Savings is required to file periodic reports with the OTS and
is subject to periodic examinations by the OTS and the FDIC. The last regular
OTS safety and soundness examination of Yonkers Savings was as of September 30,
1995. When these examinations are conducted by the OTS and the FDIC, the
examiners may require Yonkers Savings to provide for higher general or specific
loan loss reserves. All savings associations are subject to a semi-annual
assessment, based upon the savings association's total assets, to fund the
operations of the OTS. Yonkers Savings' OTS assessment for the fiscal year ended
September 30, 1996 was approximately $62,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including Yonkers Savings and the
Holding Company. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions. In general, these enforcement actions
may be initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of Yonkers
Savings is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property
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may not exceed 400% of total capital, except with approval of the OTS. Federal
savings associations are also generally authorized to branch nationwide. Yonkers
Savings is in compliance with the noted restrictions.
Yonkers Savings' general permissible lending limit for loans-to-one
borrower is equal to the greater of $500,000 or 15% of unimpaired capital and
surplus (except for loans fully secured by certain readily marketable
collateral, in which case this limit is increased to 25% of unimpaired capital
and surplus). At September 30, 1996, Yonkers Savings' lending limit under this
restriction was $5.2 million. Yonkers Savings is in compliance with the
loans-to-one borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure, and compensation and other employee benefits. Any
institution which fails to comply with these standards must submit a compliance
plan. A failure to submit a plan or to comply with an approved plan will subject
the institution to further enforcement action. The OTS and the other federal
banking agencies have also proposed additional guidelines on asset quality and
earnings standards. No assurance can be given as to whether or in what form the
proposed regulations will be adopted.
Insurance of Accounts and Regulation by the FDIC. Yonkers Savings is a
member of the SAIF, which is administered by the FDIC. Deposits are insured up
to applicable limits by the FDIC and such insurance is backed by the full faith
and credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the FDIC. The FDIC also has the authority to
initiate enforcement actions against savings associations, after giving the OTS
an opportunity to take such action, and may terminate the deposit insurance if
it determines that the institution has engaged in unsafe or unsound practices or
is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium, while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classifications of all insured
institutions are made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF-insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
On September 30, 1996, federal legislation was enacted that requires
the SAIF to be recapitalized with a one-time assessment on virtually all
SAIF-insured institutions, such as the Association, equal to 65.7 basis points
on SAIF-insured deposits maintained by those institutions as of March 31, 1995.
The SAIF special assessment applicable to the Association, which was paid to the
FDIC in November 1996,
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was approximately $1.2 million. This amount was accrued by the Company at
September 30, 1996 by a charge to earnings.
As a result of the SAIF recapitalization, the FDIC has proposed to
amend its regulation concerning the insurance premiums payable by SAIF-insured
institutions. For the period October 1, 1996 through December 31, 1996, the FDIC
has proposed that the SAIF insurance premium for all SAIF- insured institutions
that are required to pay the Financing Corporation (FICO) obligation, such as
the Association, be reduced to a range of 18 to 27 basis points from 23 to 31
basis points per $100 of domestic deposits. The FDIC has also proposed to
further reduce the SAIF insurance premium to a range of 0 to 27 basis points per
$100 of domestic deposits, effective January 1, 1997. Management cannot predict
whether or in what form the FDIC's final regulation may be promulgated.
Regulatory Capital Requirements. Federally insured savings
associations, such as Yonkers Savings, are required to maintain a minimum level
of regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained earnings, and certain
noncumulative perpetual preferred stock and related surplus. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights and credit card relationships, must be deducted from tangible capital for
calculating compliance with the requirement. At September 30, 1996, Yonkers
Savings had no intangible assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. Debt and equity
investments in excludable subsidiaries are deducted from assets and capital. At
September 30, 1996, Yonkers Savings had no subsidiaries.
At September 30, 1996, Yonkers Savings had tangible capital of $34.4
million, or 14.0% of adjusted total assets, which is $30.7 million above the
minimum requirement of 1.5% in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased mortgage
servicing rights and credit card relationships. At September 30, 1996, Yonkers
Savings had no intangible assets. In accordance with the prompt corrective
action provisions discussed below, however, a savings association must maintain
a core capital ratio of at least 4% to be considered adequately capitalized
unless its supervisory condition is such to allow it to maintain a 3% ratio.
At September 30, 1996, Yonkers Savings had core capital equal to $34.4
million, or 14.0% of adjusted total assets, which is $27.1 million above the
minimum leverage ratio requirement of 3% in effect on that date.
The OTS risk-based capital regulations require savings associations to
have total capital of at least 8% of risk-weighted assets. Total capital
consists of core capital, as defined above, and
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supplementary capital. Supplementary capital consists of certain permanent and
maturing capital instruments that do not qualify as core capital and general
valuation loan and lease loss allowances up to a maximum of 1.25% of
risk-weighted assets. Supplementary capital may be used to satisfy the risk-
based capital requirement only up to the amount of core capital. The OTS is also
authorized to require a savings association to maintain an additional amount of
total capital to account for concentration of credit risk and the risk of
non-traditional activities. At September 30, 1996, Yonkers Savings had no
capital instruments that qualify as supplementary capital and $937,000 of
general loan loss reserves, which was less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. Yonkers Savings had no
such exclusions from capital and assets at September 30, 1996.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, are multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
The OTS has adopted a final rule that requires every savings
association with more than normal interest rate risk exposure to deduct from its
total capital, for purposes of determining compliance with such requirement, an
amount equal to 50% of its interest-rate risk exposure multiplied by the present
value of its assets. This exposure is a measure of the potential decline in the
net portfolio value of a savings association, greater than 2% of the present
value of its assets, based upon a hypothetical 200 basis point increase or
decrease in interest rates (whichever results in a greater decline). Net
portfolio value is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The rule provides for a two quarter
lag between calculating interest rate risk and recognizing any deduction from
capital. The rule will not become effective until the OTS evaluates the process
by which savings associations may appeal an interest rate risk deduction
determination. It is uncertain as to when this evaluation may be completed. Any
savings association with less than $300 million in assets and a total risk-based
capital ratio in excess of 12% (such as the Association) is exempt from this
requirement unless the OTS determines otherwise.
At September 30, 1996, Yonkers Savings had total capital of $35.3
million (including $34.4 million in core capital and $937,000 in qualifying
supplementary capital) and risk-weighted assets of $94.9 million (including $4.2
million in converted off-balance sheet items), or total capital of 37.2% of
risk-weighted assets. This amount was $27.8 million above the 8% requirement in
effect on that date.
Under the prompt corrective action regulations, the OTS and the FDIC
are authorized (and, under certain circumstances, required) to take certain
actions against savings associations that fail to meet their capital
requirements. The OTS is generally required to take action to restrict the
activities of an "undercapitalized association" (generally defined as having
less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital ratio
or an 8% risk-based capital ratio). Any such association must submit a capital
restoration plan and until such plan is approved by the OTS may not increase its
assets, acquire another institution, establish a branch or engage in any new
activities, and generally may not make capital distributions. The OTS is
authorized to impose the additional restrictions that are applicable to
significantly undercapitalized associations.
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As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
The prompt corrective action regulations also provide that any savings
association that fails to comply with its capital plan or is "significantly
undercapitalized" (i.e., Tier 1 risk-based or core capital ratios of less than
3% or a risk-based capital ratio of less than 6%) must be made subject to one or
more of additional specified actions and operating restrictions which may cover
all aspects of its operations and include a forced merger or acquisition of the
association. An association that becomes "critically undercapitalized" (i.e., a
tangible capital ratio of 2% or less) is subject to further mandatory
restrictions on its activities in addition to those applicable to significantly
undercapitalized associations. In addition, the OTS must appoint a receiver (or
conservator with the concurrence of the FDIC) for a savings association, with
certain limited exceptions, within 90 days after it becomes critically
undercapitalized. Any undercapitalized association is also subject to the
general enforcement authority of the OTS and the FDIC, including the appointment
of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on
Yonkers Savings may have a substantial adverse effect on Yonkers Savings'
operations and profitability, and on the value of the Holding Company's common
stock. Holding Company shareholders do not have preemptive rights, and
therefore, if the Holding Company is directed by the OTS or the FDIC to issue
additional shares of common stock, such issuance may result in the dilution in
the percentage ownership of present shareholders.
Limitations on Dividends and Other Capital Distributions. OTS
regulations impose various restrictions on associations with respect to their
ability to make distributions of capital which include dividends, stock
redemptions or repurchases, cash-out mergers and transactions charged to the
capital account. OTS regulations prohibit an association from declaring or
paying any dividends or from repurchasing any of its stock if, as a result, the
regulatory capital of the association would be reduced below the amount required
to be maintained for the liquidation account established in connection with its
mutual to stock conversion.
Generally, associations (such as Yonkers Savings) that before and after
the proposed distribution meet their capital requirements, may make capital
distributions during any calendar year equal to the greater of (i) 100% of net
income for the year-to-date plus 50% of the amount by which the lesser of the
association's tangible, core or risk-based capital exceeds its fully phased-in
capital requirement for such capital component, as measured at the beginning of
the calendar year, or (ii) 75% of net income for the most recent four-quarter
period. However, an association deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted.
Associations proposing to make a capital distribution need only submit
written notice to the OTS 30 days prior to such distribution. Associations that
do not currently meet or would not after the proposed capital distribution meet
their minimum capital requirements must obtain OTS approval prior to making such
distribution. As a subsidiary of the Holding Company, Yonkers Savings will also
be required to give the OTS 30 days' notice prior to declaring any dividend on
its stock. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns.
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The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not in troubled
condition (as defined by regulation) and would remain adequately capitalized (as
defined in the OTS prompt corrective action regulations) following the proposed
distribution. Savings associations that would remain adequately capitalized
following the proposed distribution but do not meet the other noted requirements
must notify the OTS 30 days prior to declaring a capital distribution. The OTS
stated it will generally regard as permissible that amount of capital
distributions that do not exceed 50% of the institution's excess regulatory
capital plus net income to date during the calendar year. A savings association
may not make a capital distribution without prior approval of the OTS and the
FDIC if it is undercapitalized before, or as a result of, such a distribution.
As under the current rule, the OTS may object to a capital distribution if it
would constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity. All savings associations, including Yonkers Savings, are
required to maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. This liquid asset
ratio requirement may vary from time to time (between 4% and 10%) depending upon
economic conditions and savings flows of all savings associations. At the
present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of an association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either
liquid asset ratio requirement. At September 30, 1996, Yonkers Savings was in
compliance with both requirements, with an overall liquid asset ratio of 12.5%
and a short-term liquid asset ratio of 3.6%.
Accounting. An OTS policy statement applicable to all savings
associations clarifies and reemphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance with
GAAP. Under the policy statement, management must support its classification of
and accounting for loans and securities (i.e., whether held for investment, sale
or trading) with appropriate documentation. Yonkers Savings believes it is in
compliance with these amended rules.
The OTS has adopted an amendment to its accounting regulations, which
may be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
Qualified Thrift Lender Test. All savings associations, including
Yonkers Savings, are required to meet a qualified thrift lender ("QTL") test to
avoid certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. Such assets primarily consist of residential
housing related loans and investments. At September 30, 1996, Yonkers Savings
met the test and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new
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investments and activities are limited to those permissible for both a savings
association and a national bank, and it is limited to national bank branching
rights in its home state. In addition, the association is immediately ineligible
for additional FHLB borrowings and is subject to national bank limits for
payment of dividends. If such association has not requalified or converted to a
national bank within three years after the failure, it must divest of all
investments and cease all activities not permissible for a national bank. In
addition, it must repay promptly any outstanding FHLB borrowings, which may
result in prepayment penalties. If any association that fails the QTL test is
controlled by a holding company, then within one year after the failure, the
holding company must register as a bank holding company and become subject to
all restrictions on bank holding companies. See "- Holding Company Regulation."
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), every FDIC insured institution has a continuing and affirmative
obligation consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with the examination of Yonkers Savings, to
assess the institution's record of meeting the credit needs of its community and
to take such record into account in its evaluation of certain applications, such
as a merger or the establishment of a branch, by Yonkers Savings. An
unsatisfactory rating may be used as the basis for the denial of an application
by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, Yonkers Savings may be required to devote additional
funds for investment and lending in its local community. Yonkers Savings was
examined for CRA compliance by the OTS in September 1996 and received a rating
of satisfactory.
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of Yonkers
Savings include the Holding Company and any company which is under common
control with Yonkers Savings. In addition, a savings association may not lend to
any affiliate engaged in activities not permissible for a bank holding company
or acquire the securities of most affiliates. Subsidiaries of a savings
association are generally not deemed affiliates; however, the OTS has the
discretion to treat subsidiaries of savings associations as affiliates on a
case-by-case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation. The Holding Company is a unitary savings
and loan holding company subject to regulatory oversight by the OTS. As such,
the Holding Company is required to register and file reports with the OTS and is
subject to regulation and examination by the OTS. In addition, the OTS has
enforcement authority over the Holding Company and its non-savings association
subsidiaries (if any) which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association.
As a unitary savings and loan holding company, the Holding Company
generally is not subject to activity restrictions. If the Holding Company
acquires control of another savings association as a
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separate subsidiary, it would become a multiple savings and loan holding
company, and the activities of the Holding Company and any of its subsidiaries
(other than Yonkers Savings or any other SAIF-insured savings association) would
become subject to such restrictions unless such other associations each qualify
as a QTL and were acquired in a supervisory acquisition.
If Yonkers Savings fails the QTL test, the Holding Company must obtain
the approval of the OTS prior to continuing after such failure, directly or
through its other subsidiaries, any business activity other than those approved
for multiple savings and loan holding companies or their subsidiaries. In
addition, within one year of such failure the Holding Company must register as,
and will become subject to, the restrictions applicable to bank holding
companies. The activities authorized for a bank holding company are more limited
than are the activities authorized for a unitary or multiple savings and loan
holding company. See "- Qualified Thrift Lender Test."
The Holding Company must obtain approval from the OTS before acquiring
control of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law. The stock of the Holding Company is registered
with the SEC under the Exchange Act. The Holding Company is subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
Holding Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Holding Company may not
be resold without registration or unless sold in accordance with certain resale
restrictions. If the Holding Company meets specified current public information
requirements, each affiliate is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At September 30, 1996, Yonkers Savings was in compliance
with these reserve requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements that may be imposed by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. Yonkers Savings is a member of the FHLB
of New York, which is one of 12 regional FHLBs that administer the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the board of directors of the FHLB, which
are subject to the oversight of the Federal Housing Finance Board. All advances
from the FHLB are required to be fully secured by sufficient collateral as
determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
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As a member, Yonkers Savings is required to purchase and maintain stock
in the FHLB of New York. At September 30, 1996, Yonkers Savings had $1.1 million
in FHLB stock, which was in compliance with this requirement. For the fiscal
year ended September 30, 1996, dividends paid by the FHLB of New York to Yonkers
Savings totaled $72,000 compared to $84,000 for fiscal 1995. Over the past five
calendar years (1991-1995) such dividends have averaged 8.6% and were 6.5% for
calendar year 1995.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately-priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of Yonkers Savings' FHLB stock may result in a corresponding
reduction in Yonkers Savings' capital.
Taxation
Federal. The Association and the Holding Company currently file
separate federal income tax returns. These returns are filed on a fiscal year
basis, as of September 30, using the accrual method of accounting.
Savings associations such as the Association are permitted to establish
reserves for bad debts and to make annual additions thereto which may, within
specified formula limits, be taken as a deduction in computing taxable income
for federal income tax purposes. The amount of the bad debt reserve deduction
for "non-qualifying loans" is computed under the experience method. The amount
of the bad debt reserve deduction for "qualifying real property loans"
(generally loans secured by improved real estate) is also computed under the
experience method. A percentage of taxable income method was also available in
computing the qualifying loan bad debt deduction for tax years ended on or prior
to December 31, 1995.
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
Since 1987, the percentage of specially-computed taxable income that
was used to compute a savings association's bad debt reserve deduction under the
percentage of taxable income method (the "percentage bad debt deduction") was
8%. The percentage bad debt deduction thus computed was reduced by the amount
permitted as a deduction for non-qualifying loans under the experience method.
The availability of the percentage of taxable income method permitted qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction). Under changes in federal tax law enacted
in August 1996, the percentage bad debt deduction has been eliminated for tax
years beginning after December 31, 1995. Accordingly, this method will not be
available to the Association for its tax years ending September 30, 1997 and
thereafter.
Under the percentage of taxable income method, the percentage bad debt
deduction could not exceed the amount necessary to increase the balance in the
reserve for qualifying real property loans to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for non-qualifying loans equals the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the
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year. Through September 30, 1996, the 6% and 12% limitations did not restrict
the percentage bad debt deduction available to the Association.
The federal tax legislation enacted in August 1996 also imposes a
requirement to recapture into taxable income the portion of the qualifying and
non-qualifying loan reserves in excess of the "base-year" balances of such
reserves. For the Association, the base-year reserves are the balances as of
September 30, 1988. Recapture of the excess reserves will occur over a six-year
period which could begin for the Association as early as the tax year ending
September 30, 1997 (commencement of the recapture period may be delayed,
however, for up to two years provided the Association meets certain residential
lending requirements). The Association previously established, and will continue
to maintain, a deferred tax liability with respect to its federal tax bad debt
reserves in excess of the base-year balances; accordingly, the legislative
changes will have no effect on total income tax expense for financial reporting
purposes.
Also, under the August 1996 legislation, the Association's base-year
federal tax bad debt reserves are "frozen" and subject to current recapture only
in very limited circumstances. Generally, recapture of all or a portion of the
base-year reserves will be required if the Association pays a dividend in excess
of the greater of its current or accumulated earnings and profits, redeems any
of its stock, or is liquidated. The Association has not established a deferred
federal tax liability under SFAS No. 109 for its base-year federal tax bad debt
reserves, as it does not anticipate engaging in any of the transactions that
would cause such reserves to be recaptured.
In addition to the regular income tax, corporations generally are
subject to a minimum tax. An alternative minimum tax is imposed at a minimum tax
rate of 20% on alternative minimum taxable income, which is the sum of a
corporation's regular taxable income (with certain adjustments) and tax
preference items, less any available exemption. The alternative minimum tax is
imposed to the extent it exceeds the corporation's regular income tax, and net
operating losses can offset no more than 90% of alternative minimum taxable
income. For taxable years beginning after 1986 and before 1996, corporations
were also subject to an environmental tax equal to 0.12% of the excess of
alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
The Association has been audited by the IRS with respect to federal
income tax returns through September 30, 1991, and all deficiencies have been
satisfied. In the opinion of management, any examination of still open returns
would not result in a deficiency which could have a material adverse effect on
the financial condition of the Company.
New York State. The Association and the Holding Company currently file
combined New York State tax returns on a fiscal year basis. The Company is
subject to the New York State Franchise Tax on Banking Corporations in an annual
amount equal to the greater of (i) 9% of "entire net income" allocable to New
York State during the taxable year, or (ii) the applicable alternative minimum
tax. The alternative minimum tax is generally the greater of (a) 0.01% of the
value of assets allocable to New York State with certain modifications, (b) 3%
of "alternative entire net income" allocable to New York State, or (c) $250. In
addition, New York also imposes a general surtax on the applicable tax described
above. The surtax is scheduled to be reduced to 2.5% for taxable years ending
after June 30, 1996 and before July 1, 1997, and to expire thereafter. Entire
net income is similar to federal taxable income, subject to certain
modifications (including the fact that net operating losses cannot be carried
back or carried forward). In addition, New York also imposes a Metropolitan
Commuter Transportation District surcharge of 17% that is assessed on the New
York State Franchise tax before the general surtax.
38
<PAGE>
In July 1996, New York State enacted legislation to preserve the use of
the percentage of taxable income bad debt deduction for thrift institutions such
as the Association. In general, the legislation provides for a deduction equal
to 32% of the Association's New York State taxable income, which is comparable
to the deductions permitted under the prior tax law. The legislation also
provides for a floating base year, which will allow the Association to switch
from the percentage of taxable income method to the experience method without
recapture of any reserve. Previously, the Association had established a deferred
New York State tax liability for the excess of its New York State tax bad debt
reserves over the amount of its base-year New York State reserves. Since the new
legislation effectively eliminated the reserves in excess of the base-year
balances, the Company reduced its deferred tax liability by $100,000 (with a
corresponding reduction in income tax expense) during the quarter ended
September 30, 1996.
Generally, New York State tax law has requirements similar to federal
requirements regarding the recapture of base-year tax bad debt reserves. One
notable exception is that, after the recent legislation, New York continues to
require that at least 60% of the Association's assets consist of specified
assets (generally, loans secured by residential real estate or deposits,
educational loans, cash and certain government obligations). The Association
expects to continue to meet the 60% requirement and does not anticipate engaging
in any of the transactions which would require recapture of its base-year
reserves. Accordingly, under SFAS No. 109, it has not provided any deferred tax
liability on such reserves.
Delaware. As a Delaware company, the Holding Company is exempted from
Delaware corporate income tax but is required to file an annual report with and
pay an annual fee to the State of Delaware. The Holding Company is also subject
to an annual franchise tax imposed by the State of Delaware.
Item 2. Properties
The following table sets forth information concerning the Company's
properties at September 30, 1996. The Company's premises had an aggregate net
book value of approximately $346,000 at that date.
<TABLE>
<CAPTION>
Year Net Book Value at
Location Acquired/Leased Owned or Leased September 30, 1996
-------- --------------- --------------- ------------------
(In Thousands)
<S> <C> <C> <C>
Corporate Headquarters:
6 Executive Plaza 1996 Leased $ 5
Yonkers, New York 10701-9858
Main Office:
One Manor House Square 1976 Owned 123
Yonkers, New York 10701-2701
Full Service Branches:
780 Palisade Avenue 1989 Leased 60
Yonkers, New York 10703
1759 Central Park Avenue 1977 Leased 75
Yonkers, New York 10710-2828
2320 Central Park Avenue 1986 Leased 83
Yonkers, New York 10710-1216
</TABLE>
39
<PAGE>
The Company believes that its current facilities are adequate to meet
present needs. In the future, the Company intends to continue to explore
branching opportunities to the extent they develop, although no specific
proposals are currently under consideration.
The Company's depositor and borrower customer files are maintained by
an independent data processing company. The net book value of the computer
equipment utilized by the Company at September 30, 1996 was approximately
$100,000.
Item 3. Legal Proceedings
The Company is involved as plaintiff or defendant in various legal
proceedings arising in the normal course of its business. While the ultimate
outcome of these various legal proceedings cannot be predicted with certainty,
it is the opinion of management that the resolution of these legal actions
should not have a material effect on the Company's financial position, results
of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
(a) On October 30, 1996, the Company held a Special Meeting of
Stockholders.
(b) At the meeting, stockholders voted on the following matters:
(i) The approval of the 1996 Stock Option and Incentive Plan; and
BROKER
VOTES: FOR AGAINST ABSTAIN NON-VOTES
------ --- ------- ------- ---------
2,234,609 215,554 187,454 4,001
(ii) The approval of the 1996 Management Recognition Plan.
BROKER
VOTES: FOR AGAINST ABSTAIN NON-VOTES
------ --- ------- ------- ---------
2,119,974 330,760 190,884 0
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Page 53 of the attached 1996 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Selected Financial Data
Pages 1 and 2 of the attached 1996 Annual Report to Stockholders are
herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Pages 3 through 20 of the attached 1996 Annual Report to Stockholders
are herein incorporated by reference.
40
<PAGE>
Item 8. Financial Statements and Supplementary Data
Pages 21 through 52 of the attached 1996 Annual Report to Stockholders
are herein incorporated by reference.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors
Information concerning directors of the Registrant is incorporated
herein by reference from the Holding Company's definitive Proxy Statement for
the Annual Meeting of Stockholders to be held in 1997, a copy of which will be
filed not later than 120 days after the close of the fiscal year.
Executive Officers Who Are Not Directors
The following are the Company's executive officers who are not also
directors as of September 30, 1996.
Joseph L. Macchia. Mr. Macchia, age 45, has been Vice President and
Secretary to the Association since 1991, and Vice President and Secretary of the
Holding Company since its formation. Mr. Macchia is responsible for the
Association's branch administration, consumer lending and savings operations. He
is also responsible for the Association's Bank Secrecy Act compliance. Prior to
such time, Mr. Macchia served as the Association's Vice President. Mr. Macchia
has been employed by the Association since 1972.
Joseph D. Roberto. Mr. Roberto, age 44, is the Vice President,
Treasurer and Chief Financial Officer of the Holding Company, a position he has
held since its formation, and is Vice President, Treasurer and Chief Financial
Officer of the Association. Mr. Roberto was appointed the Association's Vice
President and Treasurer in 1991 and Chief Financial Officer in 1995. Mr. Roberto
is responsible for the Association's Accounting Department, interest rate risk
and asset/liability management as well as the Association's financial reporting.
Prior to 1991, Mr. Roberto served as the Association's Secretary and Treasurer.
Mr. Roberto has been employed by the Association since 1973.
Philip Guarnieri. Mr. Guarnieri, age 39, is the Vice President and
Chief Lending Officer of the Association. Mr. Guarnieri was appointed Vice
President and Chief Lending Officer in July 1996. Prior to joining the
Association, Mr. Guarnieri was the Vice President for loan origination at Home
Federal Savings Bank, Queens, New York. Mr. Guarnieri is responsible for the
administration of the Association's real estate lending programs.
41
<PAGE>
Compliance with Section 16(a)
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Holding Company's equity securities, to file with the SEC reports of
ownership and reports of changes in ownership of common stock and other equity
securities of the Holding Company. Officers, directors and greater than 10%
stockholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended September 30, 1996, the
Registrant complied with all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10 percent beneficial owner were complied
with.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997, a copy of which will be filed not later than
120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1997, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1997, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
42
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements
The following information appearing in the Company's 1996 Annual Report
to Stockholders is herein incorporated by reference:
Item Pages in Annual Report
---- ----------------------
Independent Auditors' Report Page 21
Consolidated Balance Sheets as of September 30, 1996
and 1995 Page 22
Consolidated Statements of Income for the Years
Ended September 30, 1996, 1995 and 1994 Page 23
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended September 30, 1996, 1995
and 1994 Page 24
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1996, 1995 and 1994 Page 25
Notes to Consolidated Financial Statements Pages 26 through 52
43
<PAGE>
<TABLE>
<CAPTION>
(a) (2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is not applicable or has been included in the Consolidated Financial
Statements.
(a) (3) Exhibits
Sequential Page
Reference to Number Where
Prior Filing Attached Exhibits
Regulation S-K or Exhibit are Located in this
Exhibit Number Attached Form 10-K
Number Document Hereto Report
------ -------- ------ ------
<S> <C> <C> <C>
3(a) Certificate of Incorporation * Not applicable
3(b) By-Laws * Not applicable
4 Instruments defining the rights of security holders, * Not applicable
including debentures
9 Voting Trust Agreement None Not applicable
10 Material Contracts
Employment Contract * Not applicable
Management Recognition Plan and Stock
Option and Incentive Plan * Not applicable
Change-in-Control Severance Agreements ** Not applicable
11 Statement re: computation of per share earnings Not required Not applicable
12 Statement re: computation of ratios Not required Not applicable
13 Annual Report to Security Holders 13 Page ___
16 Letter re: change in certifying accountants None Not applicable
18 Letter re: change in accounting principles None Not applicable
19 Previously unfiled documents None Not applicable
21 Subsidiaries of Registrant 21 Page ___
22 Published report regarding matters submitted to vote None Not applicable
of security holders
23 Consents of Experts and Counsel Not required Not applicable
24 Power of Attorney Not required Not applicable
27 Financial Data Schedule Not required Not applicable
28 Information from reports furnished to state insurance None Not applicable
regulatory authorities
99 Additional Exhibits None Not applicable
</TABLE>
- ----------------
* Filed as exhibits to the Company's Form S-1 registration statement
filed on December 29, 1995 (File No. 33-81013) pursuant to Section 5 of the
Securities Act of 1933, as amended. All of such previously filed documents are
hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-K.
** Filed as exhibits to the Company's Pre-effective Amendment No.1 to
its Form S-1 registration statement filed on February 6, 1996 (File No.
33-81013) pursuant to Section 5 of the Securities Act of 1933, as amended. All
of such previously filed documents are hereby incorporated herein by reference
in accordance with Item 601 of Regulation S-K.
(b) Reports on Form 8-K
During the quarter ended September 30, 1996, no current reports on Form
8-K were filed by the Holding Company.
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
YONKERS FINANCIAL CORPORATION
By: /s/ Richard F. Komosinski
Richard F. Komosinski, President and Director
(Duly Authorized Representative)
<TABLE>
<CAPTION>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
<S> <C>
/s/ Richard F. Komosinski /s/ William G. Bachop
Richard F. Komosinski, President and Director William G. Bachop, Chairman
(Principal Executive and Operating Officer)
Date: December 30, 1996 Date: December 30, 1996
/s/ Michael J. Martin /s/ Charles D. Lohrfink
Michael J. Martin, Director Charles D. Lohrfink, Director
Date: December 30, 1996 Date: December 30, 1996
/s/ Donald R. Angelilli /s/ Eben T. Walker
Donald R. Angelilli, Director Eben T. Walker, Director
Date: December 30, 1996 Date: December 30, 1996
/s/ P. Anthony Sarubbi /s/ Joseph D. Roberto
P. Anthony Sarubbi, Director Joseph D. Roberto,
Vice President and Treasurer
(Principal Financial and Accounting Officer)
Date: December 30, 1996 Date: December 30, 1996
</TABLE>
45
Exhibit 13
1996 ANNUAL REPORT
YONKERS FINANCIAL CORPORATION
<PAGE>
TABLE OF CONTENTS
President's Message............................................ ii
Selected Consolidated Financial Information.................... 1
Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 3
Management's Report............................................ 20
Independent Auditors' Report................................... 21
Consolidated Financial Statements.............................. 22
Stockholder Information........................................ 53
Corporate Information.......................................... 54
i
<PAGE>
[YONKERS FINANCIAL CORPORATION LETTERHEAD]
December 30, 1996
To Our Stockholders:
It is with a great deal of pride that I present you with our first
Annual Report following our public offering. Our stock conversion was an
overwhelming success. To our customers, friends and associates who invested in
the Company, we will endeavor to protect and reward your investment. To the
directors, officers and staff, we thank you. Our first year as a public company
has been a year of transition from our long tradition of operating as a mutual
savings and loan association to operating as a stock savings and loan
association. This year has been challenging, and on behalf of our directors,
officers and employees, it is my pleasure to report to you the fiscal 1996
financial results of Yonkers Financial Corporation, the parent corporation of
The Yonkers Savings and Loan Association, FA.
In 1996, we continued to see growth in assets. Assets of the Company
increased to $259.5 million compared to $208.3 million at September 30, 1995, a
25% increase. Asset growth was funded primarily through proceeds from the stock
offering, borrowings and deposit inflows.
Earnings for the year were $1.5 million as compared to $1.4 million for
the year ended September 30, 1995. Net earnings for the 1996 fiscal year were
reduced by a one-time federal deposit insurance assessment imposed by Congress
to recapitalize the Savings Association Insurance Fund ("SAIF") of $1.2 million,
or approximately $700,000 after taxes. Excluding the one-time SAIF special
assessment, net earnings would have been approximately $2.2 million for the
fiscal year ended September 30, 1996.
The Company's Board of Directors declared its first cash dividend of
$.05 per share, which was paid on September 9, 1996.
We look forward to 1997 with great optimism. We continue to make every
effort to provide our customers with the very best service by being a
community-oriented financial institution and striving to meet their needs. I
know I speak for every Yonkers Savings employee when I say we are all dedicated
to maximizing shareholder value while offering the finest hometown financial
services.
Our new Internet address is "http://www.yonkers.com."
Once again, it has been an exciting year for our directors, officers
and employees and we look forward to the challenges which lie ahead.
Sincerely,
/s/ Richard F. Komosinski
Richard F. Komosinski
President
ii
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
--------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data
Total assets......................................... $259,534 $208,283 $194,862 $182,717 $169,169
Loans, net(1)........................................ 86,666 83,679 77,824 78,633 82,702
Mortgage-backed securities(2):
Held to maturity................................. 58,139 52,611 49,181 --- ---
Available for sale............................... 22,711 6,436 7,786 --- ---
Held for investment.............................. --- --- --- 61,295 59,083
Other securities(2):
Held to maturity................................. 36,868 42,853 38,539 --- ---
Available for sale............................... 35,841 14,441 11,430 --- ---
Held for investment.............................. --- --- --- 31,510 16,432
Cash and cash equivalents............................ 12,500 3,261 5,818 7,083 7,239
Deposits............................................. 190,675 188,009 179,816 169,508 158,427
Borrowings........................................... 18,264 4,295 295 295 ---
Stockholders' equity(3).............................. 48,999 15,765 14,156 12,163 10,129
Selected Operating Data
Interest and dividend income......................... $16,376 $14,063 $12,460 $12,372 $12,905
Interest expense..................................... 7,975 7,004 5,422 5,623 7,357
------- -------- -------- -------- --------
Net interest income.............................. 8,401 7,059 7,038 6,749 5,548
Provision for loan losses............................ 462 493 64 313 17
-------- -------- --------- -------- ---------
Net interest income after provision for loan
losses......................................... 7,939 6,566 6,974 6,436 5,531
Non-interest income:
Service charges and fees......................... 680 640 529 412 371
Other............................................ 22 46 96 247 93
Non-interest expense(4).............................. 6,204 4,779 4,272 3,716 3,301
-------- -------- -------- -------- --------
Income before income tax expense and cumulative
effect of change in accounting principle....... 2,437 2,473 3,327 3,379 2,694
Income tax expense................................... 917 1,033 1,356 1,338 960
-------- -------- -------- -------- --------
Income before cumulative effect of change in
accounting principle........................... 1,520 1,440 1,971 2,041 1,734
Cumulative effect of change in accounting for income
taxes............................................ --- --- 326 --- ---
--------- --------- -------- --------- ---------
Net income....................................... $ 1,520 $ 1,440 $ 2,297 $ 2,041 $ 1,734
======= ======= ======= ======= =======
</TABLE>
(footnotes located on following page)
1
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
--------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data
Performance Ratios:
Return on assets (ratio of net income to average total
assets)(5)........................................... 0.66% 0.72% 1.22% 1.16% 1.09%
Return on equity (ratio of net income to average
equity)(5)........................................... 4.60 9.61 17.31 17.78 18.29
Average interest rate spread(5)(6)...................... 3.13 3.34 3.58 3.68 3.34
Net interest margin(5)(7)............................... 3.73 3.61 3.80 3.90 3.57
Efficiency ratio(8)..................................... 57.12 58.18 55.31 50.16 53.55
Net interest income to non-interest expense............. 135.41 147.71 164.75 181.62 168.07
Non-interest expense to average total assets............ 2.70 2.39 2.27 2.11 2.08
Average interest-earning assets to average
interest-bearing liabilities(5)....................... 117.07 107.70 107.45 106.84 105.31
Earnings per share, from date of conversion............. $ 0.22 --- --- --- ---
Capital Ratios and Other Data:
Average equity to average assets(5)..................... 14.41 7.50 7.04 6.53 5.97
Equity to total assets at end of period................. 18.88 7.57 7.26 6.66 5.99
Book value per share(9)................................. $13.72 --- --- --- ---
Total risk-based capital(10)............................ 37.19% 18.66 18.67 16.02 14.40
Asset Quality and Other Data:
Non-performing loans.................................... $ 2,775 $3,530 $2,663 $1,157 $1,773
Real estate owned, net.................................. 603 227 73 242 ---
-------- ------ ------- ------- --------
Total non-performing assets............................. $ 3,378 $3,757 $2,736 $1,399 $1,773
======= ====== ====== ====== ======
Asset quality ratios:
Non-performing loans to total loans................... 3.14% 4.15% 3.35% 1.46% 2.12%
Non-performing assets to total assets................. 1.30 1.80 1.40 0.77 1.05
Allowance for loan losses to:
Non-performing loans.................................. 33.77 20.37 11.68 25.50 27.64
Total loans........................................... 1.06 0.84 0.39 0.37 0.59
Number of full-service banking offices.................. 4 4 4 4 4
</TABLE>
- ------------
(1) Loans, net, represents total loans less net deferred loan fees,
construction loans in process and the allowance for loan losses. The
allowance for loan losses at September 30, 1996, 1995, 1994, 1993 and
1992 was $937,000, $719,000, $311,000, $295,000 and $490,000,
respectively.
(2) The Company has classified its securities as "held to maturity" or
"available for sale" since September 30, 1994, when it adopted Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." See Notes 1 and 2 of
the Notes to Consolidated Financial Statements.
(3) Includes additional capital of $31.8 million at September 30, 1996 from
the sale of the Holding Company's common stock (other than ESOP shares)
in connection with the Association's conversion to stock form on April
18, 1996.
(4) For the year ended September 30, 1996, includes $1.2 million for the
special assessment to recapitalize the Savings Association Insurance
Fund. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Comparison of Operating Results for the
Years Ended September 30, 1996 and 1995" and Note 6 of the Notes to
Consolidated Financial Statements.
(5) Ratio is based on average monthly balances during the indicated periods.
(6) The interest rate spread represents the difference between the
weighted-average yield on interest-earning assets and the
weighted-average cost of interest-bearing liabilities.
(7) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(8) The efficiency ratio represents non-interest expense (other than the
special assessment in 1996 and certain loss provisions in each year)
divided by the sum of net interest income and non-interest income (other
than net security gains).
(9) Represents stockholders' equity divided by total common shares outstanding
at the end of the period.
(10) For definitions and further information relating to the Association's
regulatory capital requirements, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources" and Note 11 of the Notes to Consolidated Financial Statements."
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Yonkers Financial Corporation (the "Holding Company") is the unitary
savings association holding company for The Yonkers Savings and Loan
Association, FA (the "Association"), a federally chartered savings and loan
association and a wholly-owned subsidiary of the Holding Company. Collectively,
the Holding Company and the Association are referred to herein as the "Company."
On April 18, 1996, the Association converted from a mutual savings and loan
association to a stock savings and loan association (the "Conversion").
Concurrent with the Conversion, the Holding Company sold 3,570,750 shares of its
common stock in a subscription and community offering at a price of $10.00 per
share, for net proceeds of $34.6 million.
The Company's primary market area consists of Westchester County, New
York, and portions of Putnam, Rockland and Dutchess Counties, New York. Business
is conducted from its executive offices as well as four full-service banking
offices located in Yonkers, New York. The Association is a community- oriented
savings institution whose business primarily consists of accepting deposits from
customers within its market area and investing those funds in mortgage loans
secured by one-to four-family residences. To a lesser extent, funds are invested
in multi-family and commercial real estate, construction, land, consumer and
commercial business loans. The Company also invests in mortgage-backed and other
securities. The Holding Company's business activities have been limited to its
ownership of the Association and certain short-term and other investments.
The Company's results of operations are primarily dependent on net
interest income, which is the difference between the interest income on its
interest-earning assets, such as loans and securities, and the interest expense
on its interest-bearing liabilities, such as deposits and borrowings. The
Company's results of operations are also affected by the provision for loan
losses, non-interest income and non-interest expense. Non-interest income
primarily consists of service charges and fees on deposit and loan products. The
Company's non-interest expenses primarily consist of employee compensation and
benefits, occupancy and equipment expenses, federal deposit insurance costs,
data processing service fees and other operating expenses.
The Company's results of operations are significantly affected by
general economic and competitive conditions (particularly changes in market
interest rates), government policies, changes in accounting standards and
actions of regulatory agencies. Future changes in applicable laws, regulations
or government policies may have a material impact on the Company. Lending
activities are influenced by the demand for and supply of housing, competition
among lenders, the level of interest rates and the availability of funds.
Deposit flows and costs of funds are influenced by prevailing market interest
rates (including rates on non-deposit investment alternatives), account
maturities, and the levels of personal income and savings in the Company's
market area.
Operating Strategy
The Company's basic mission is to maintain its focus as an independent,
community-oriented financial institution serving customers in its primary market
area. The Board of Directors has sought to accomplish this mission through an
operating strategy designed to maintain capital in excess of regulatory
requirements and manage, to the extent practical, the Company's loan
delinquencies and vulnerability to changes in interest rates. The key components
of the Company's operating strategy are to: (i) focus its
3
<PAGE>
lending operations on the origination of loans secured by one- to four-family
residential real estate; (ii) supplement its one- to four-family residential
lending activities with multi-family, commercial real estate, consumer,
construction and land loans; (iii) augment its lending activities with
investments in mortgage-backed and other securities; (iv) emphasize adjustable
rate and/or short and medium duration assets; (v) build and maintain its regular
savings, transaction, money market and club accounts; and (vi) increase, at a
managed pace, the volume of the Company's assets and liabilities.
Comparison of Financial Condition at September 30, 1996 and 1995
Total assets at September 30, 1996 increased $51.2 million, from $208.3
million at September 30, 1995 to $259.5 million at September 30, 1996. Asset
growth was funded primarily through proceeds from the stock offering, as well as
from borrowings and deposit inflows. Net proceeds received from the stock
offering, which was completed on April 18, 1996, totaled $31.8 million, while
borrowings increased $14.0 million and deposit liabilities increased $2.7
million.
Funds provided by the stock offering, borrowings and deposit growth
were primarily invested in securities, short-term investments and loans.
Securities increased $37.3 million from $116.3 million at September 30, 1995 to
$153.6 million at September 30, 1996. Short-term investments increased from
$100,000 at September 30, 1995 to $10.3 million at September 30, 1996,
reflecting a $10.2 million investment in a money market mutual fund. Net loans
increased $3.0 million from $83.7 million at September 30, 1995 to $86.7 million
at September 30, 1996.
The securities portfolio at September 30, 1996 reflected a $37.7
million increase in available-for-sale securities and a $457,000 decrease in
held-to-maturity securities, compared to a year earlier. The decrease in
held-to-maturity securities primarily reflected $22.9 million in principal
payments, maturities and calls, substantially offset by purchases of $22.1
million. The increase in available-for-sale securities primarily reflected
purchases of $45.0 million, partially offset by $7.3 million in principal
payments, maturities and calls. Available-for-sale securities represented 38.1%
of the total securities portfolio at September 30, 1996, compared to 17.9% at
September 30, 1995. Management has increased the level of available-for-sale
securities to enhance the Company's overall financial flexibility, including the
ability to reposition the portfolio in response to changes in interest rates and
other market conditions.
The overall increase in net loans reflects increases of $2.5 million in
commercial real estate loans, $1.4 million in commercial business loans and
$638,000 in consumer loans. These increases were partially offset by decreases
of $1.0 million in one- to four-family mortgage loans, $178,000 in land loans,
$176,000 in multi-family real estate loans and a net increase of $218,000 in the
allowance for loan losses.
Total borrowings of $18.3 million at September 30, 1996 reflected a
$3.7 million increase in FHLB advances, compared to September 30, 1995, and
$10.0 million borrowed under a securities repurchase agreement. The Company
began to utilize repurchase agreements during the quarter ended September 30,
1996 as a means of leveraging available capital to support further asset growth
and increase net interest income.
Stockholders' equity increased $33.2 million, from $15.8 million at
September 30, 1995 to $49.0 million at September 30, 1996. The increase was
primarily attributable to capital of $31.8 million raised in the stock offering
(net offering proceeds of $34.6 million less Employee Stock Ownership Plan
("ESOP") shares of $2.8 million) and net income of $1.5 million. The ratio of
stockholders' equity to
4
<PAGE>
total assets at September 30, 1996 was 18.88%, as compared to 7.57% at September
30, 1995. The book value per share was $13.72 at September 30, 1996.
Total non-performing assets decreased $379,000 from $3.8 million at
September 30, 1995 to $3.4 million at September 30, 1996 as a result of a
$755,000 reduction in nonaccrual loans past due ninety days or more, partially
offset by a $376,000 increase in net real estate owned. The ratio of
non-performing assets to total assets decreased to 1.30% at September 30, 1996
from 1.80% at September 30, 1995. The allowance for loan losses increased from
$719,000 at September 30, 1995 to $937,000 at September 30, 1996 as a result of
additional loan loss provisions of $462,000 less net charge-offs of $244,000.
The ratio of the allowance for loan losses to non-performing loans increased to
33.77% at September 30, 1996 from 20.37% at September 30, 1995, and the ratio of
the allowance to total loans increased to 1.06% at September 30, 1996 from 0.84%
at September 30, 1995. See "Asset Quality" for further information.
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 is affected by the relative amounts of interest-earning assets
and interest-bearing liabilities, and the interest rates earned or paid on them.
The following table sets forth average balance sheets, average yields
and costs, and certain other information for the years ended September 30, 1996,
1995 and 1994. The average yields and costs were derived by dividing interest
income or expense by the average balance of the related assets or liabilities.
Average balances were computed based on month-end balances. Management believes
that the use of average monthly balances rather than average daily balances did
not have a material effect on the information presented. The yields include the
effect of deferred fees, discounts and premiums which are included in interest
income. No tax-equivalent yield adjustments were made for tax-exempt securities,
as the effect thereof was not material.
5
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended September 30,
--------------------------------------------------------------------------------------
1996 1995 1994
--------------------------------------------------------------------------------------
Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest
------- ------------------- ------- -------- ---------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans(1)................................. $ 85,479 $ 7,471 8.74$ 80,027 $ 6,937 8.67$ 78,244 $ 6,292
Mortgage-backed securities(2)............ 66,778 4,346 6.51 58,662 3,813 6.50 55,592 3,465
Other securities(2)...................... 60,567 3,807 6.29 51,136 2,988 5.84 43,913 2,381
Other earning assets..................... 12,367 752 6.08 5,670 325 5.73 7,375 322
--------- -------- -------- -------- -------- --------
Total interest-earning assets.......... 225,191 $16,376 7.27 195,495 $14,063 7.19 185,124 $12,460
======= ======= =======
Allowance for loan losses................... (841) (414) (356)
Non-interest-earning assets................. 5,062 4,817 3,619
--------- --------- ----------
Total assets........................... $229,412 $199,898 $188,387
======== ======== ========
Liabilities and Equity
Interest-bearing liabilities:
NOW, club and money market accounts..... $ 32,606 $ 788 2.42 $ 28,910 $ 710 2.46$ 28,626 $ 652
Regular savings accounts(3).............. 51,564 1,336 2.59 60,173 1,610 2.68 74,274 2,003
Savings certificate accounts............. 104,613 5,656 5.41 90,270 4,582 5.08 69,094 2,752
--------- -------- -------- -------- -------- --------
Total deposits......................... 188,783 7,780 4.12 179,353 6,902 3.85 171,994 5,407
Borrowings............................... 3,570 195 5.46 2,170 102 4.70 295 15
--------- -------- -------- -------- -------- ---------
Total interest-bearing liabilities..... 192,353 $ 7,975 4.14 181,523 $ 7,004 3.85 172,289 $ 5,422
======= ======= ========
Non-interest-bearing liabilities............ 3,996 3,389 2,830
--------- --------- ----------
Total liabilities...................... 196,349 184,912 175,119
Equity...................................... 33,063 14,986 13,268
--------- --------- ---------
Total liabilities and equity........... $229,412 $199,898 $188,387
======== ======== ========
Net interest income......................... $ 8,401 $ 7,059 $ 7,038
======= ======= =======
Average interest rate spread(4)............. 3.13% 3.34%
Net interest margin(5)...................... 3.73% 3.61%
Net interest-earning assets(6).............. $ 32,838 $ 13,972 $ 12,835
======== ======== ========
Ratio of total interest-earning assets to
total interest-bearing liabilities......... 117.07% 107.70%
<PAGE>
Average
Yield/Cost
----------
Assets
Interest-earning assets:
Loans(1)................................. 8.04%
Mortgage-backed securities(2)............ 6.23
Other securities(2)...................... 5.42
Other earning assets..................... 4.37
Total interest-earning assets.......... 6.73
Allowance for loan losses...................
Non-interest-earning assets.................
Total assets...........................
Liabilities and Equity
Interest-bearing liabilities:
NOW, club and money market accounts..... 2.28%
Regular savings accounts(3).............. 2.70
Savings certificate accounts............. 3.98
Total deposits......................... 3.14
Borrowings............................... 5.08
Total interest-bearing liabilities..... 3.15
Non-interest-bearing liabilities............
Total liabilities......................
Equity......................................
Total liabilities and equity...........
Net interest income.........................
Average interest rate spread(4)............. 3.58%
Net interest margin(5)...................... 3.80%
Net interest-earning assets(6)..............
Ratio of total interest-earning assets to
total interest-bearing liabilities....... 107.45%
</TABLE>
- ------------
(1) Balance is net of deferred loan fees and construction loans in process.
Non-accrual loans are included in the balances.
(2) Average balance represents amortized cost.
(3) Includes mortgage escrow accounts.
(4) Average interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities.
(5) Net interest margin represents net interest income divided by average total
interest-earning assets.
(6) Net interest-earning assets represents total interest-earning assets less
total interest-bearing liabilities.
6
<PAGE>
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 Company'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>
Fiscal 1996 Compared to Fiscal 1995 Fiscal 1995 Compared to Fiscal 1994
-----------------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Net Due to Net
Volume Rate Change Volume Rate Change
------ ---- ------ ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans..................................... $ 473 $ 61 $ 534 $ 146 $ 499 $ 645
Mortgage-backed securities................ 528 5 533 194 154 348
Other securities.......................... 560 259 819 394 213 607
Other earning assets...................... 413 14 427 (79) 82 3
------- ------- ------- ------- ------- --------
Total................................... 1,974 339 2,313 655 948 1,603
------- ------- ------ ------- ------- ------
Interest-bearing liabilities:
NOW, club and money market accounts....... 89 (11) 78 6 52 58
Regular savings accounts.................. (230) (44) (274) (378) (15) (393)
Savings certificate accounts.............. 736 338 1,074 925 905 1,830
Borrowings................................ 62 31 93 88 (1) 87
------- ------ -------- --------------- -------
Total................................... 657 314 971 641 941 1,582
------- ------- -------- ------- ------- ------
Net change in net interest income............ $ 1,317 $ 25 $ 1,342 $ 14 $ 7 $ 21
======= ======= ======= ======= ======= =======
</TABLE>
Comparison of Operating Results for the Years Ended September 30, 1996 and 1995
General. Net income was $1.5 million for the year ended September 30,
1996 compared to $1.4 million for the year ended September 30, 1995. The $80,000
increase in net income was primarily attributable to a $1.3 million increase in
net interest income and a $116,000 decrease in income tax expense, substantially
offset by a $1.4 million increase in non-interest expense. Net income for the
year ended September 30, 1996 was reduced by a one-time special assessment of
$1.2 million (approximately $700,000 after taxes) imposed by federal legislation
to recapitalize the Savings Association Insurance Fund ("SAIF"). Excluding this
special assessment, net income would have been approximately $2.2 million for
the year ended September 30, 1996.
Net Interest Income. Net interest income increased $1.3 million from
$7.1 million for the year ended September 30, 1995 to $8.4 million for the year
ended September 30, 1996. This increase was primarily attributable to the
positive effect of an increase in average earning assets, partially offset by a
21 basis point decrease in the interest rate spread to 3.13% for the year ended
September 30, 1996 from 3.34% for the prior year. The increase in average
earning assets for the current fiscal year reflects reinvestment of the stock
offering proceeds for the period from April 18, 1996 to September 30, 1996, as
well as reinvestment of proceeds from borrowings and deposit growth.
Compared to fiscal 1995, market interest rates remained relatively flat
in fiscal 1996. The Company realized slightly higher average yields on its
interest-earning assets primarily as a result of the reinvestment of principal
payments, maturities and calls into higher yielding intermediate term
securities, and the increase in the proportion of the Company's assets
consisting of non-residential loans. However,
7
<PAGE>
a shift from generally lower rate regular savings accounts to generally higher
rate certificate accounts had a negative impact on the Company's average
interest-rate spread in fiscal 1996 compared to fiscal 1995.
Interest and Dividend Income. Interest and dividend income totaled
$16.4 million for the year ended September 30, 1996, an increase of $2.3 million
as compared to interest and dividend income of $14.l million for the year ended
September 30,1995. This increase reflects a $29.7 million increase in total
average interest-earning assets and an 8 basis point increase in the average
yield on such assets to 7.27% for the year ended September 30, 1996 from 7.19%
for the prior year. Interest income on loans increased by $534,000 to $7.5
million for the year ended September 30, 1996 from $6.9 million for the year
ended September 30, 1995, reflecting a $5.5 million increase in the average
balance of loans and a 7 basis point increase in the average yield. The increase
in the average balance of loans was primarily attributable to increases in
commercial real estate and commercial business loans. On a combined basis,
interest and dividend income on mortgage-backed and other securities increased
$1.4 million to $8.2 million for the year ended September 30, 1996 from $6.8
million for the year ended September 30, 1995. This combined increase consisted
of (i) an $819,000 increase in interest on other securities, attributable to a
$9.4 million increase in the average balance and a 45 basis point increase in
the average yield and (ii) a $533,000 increase in interest on mortgage-backed
securities, primarily attributable to an $8.1 million increase in the average
balance. Interest and dividend income on other earning assets increased
$427,000, primarily due to the reinvestment of a portion of the stock offering
proceeds in short-term liquid assets.
Interest Expense. Interest expense totaled $8.0 million for the year
ended September 30, 1996, an increase of $1.0 million as compared to interest
expense of $7.0 million for the year ended September 30, 1995. Interest expense
on deposits increased $878,000 to $7.8 million for the year ended September 30,
1996 from $6.9 million for the year ended September 30, 1995. This increase
reflects a $9.4 million increase in the average balance of interest-bearing
deposits and a 29 basis point increase in the average rate to 4.14% for the year
ended September 30, 1996 from 3.85% for the prior year. The increase in average
interest-bearing deposits consisted of a $14.3 million increase in average
savings certificate accounts (to $104.6 million from $90.3 million) and a $3.7
million increase in average NOW, money market and club accounts, partially
offset by an $8.6 million decrease in average regular savings accounts (to $51.6
million from $60.2 million). The overall increase in the average rate paid
reflects the continuing shift from generally lower rate regular savings accounts
to generally higher rate certificate accounts. Interest expense on borrowings
increased $93,000 to $195,000 for the year ended September 30, 1996 from
$102,000 for the year ended September 30, 1995. This increase primarily reflects
a $1.4 million increase in average borrowings to $3.6 million for the year ended
September 30, 1996 from $2.2 million for the prior year, as the Company
increased its borrowings to leverage available capital and support further asset
growth.
Provision for Loan Losses. The provision for loan losses was $462,000
for the year ended September 30, 1996, compared to $493,000 for prior year. Net
loan charge-offs were $244,000 for the year ended September 30, 1996, compared
to $85,000 for the year ended September 30, 1995. Non-performing loans totaled
$2.8 million at September 30, 1996, down from $3.5 million at September 30,
1995. The allowance for loan losses was $937,000 or 1.06% of total loans at
September 30, 1996, compared to $719,000 or 0.84% of total loans at September
30, 1995. The ratio of the allowance for loan losses to non-performing loans was
33.77% at September 30, 1996, compared to 20.37% a year earlier. Management
maintains the allowance for loan losses based on the analysis of various
factors, including the market value of the underlying collateral, growth and
composition of the loan portfolio, the relationship of the allowance for loan
losses to outstanding loans, historical loss experience, delinquency trends and
prevailing economic conditions.
8
<PAGE>
Charge-offs for the year ended September 30, 1996 include $203,000 for
the settlement of the Company's non-performing interest in a participation loan,
as well as $97,000 for three single-family properties that were transferred into
real estate owned. The participation loan was originated by the Thrift
Association Service Corporation ("TASCO") in 1986 and was secured by a co-op
located in Kew Gardens, New York. Management decided to replenish the allowance
for the net charge-offs recognized during the year ended September 30,1996 and
to further increase the allowance as a result of loan growth and changes in the
portfolio mix. Subject to market conditions in the future, the Company intends
to continue to expand its multi-family and commercial real estate lending. As a
result, these loan categories may represent a larger percentage of the total
loan portfolio in the future. Since such loans are generally thought to carry a
higher degree of credit risk than one-to four-family residential loans, such a
change in the loan portfolio mix would probably result in a further increase in
the allowance for loan losses. Although the Company maintains its allowance for
loan losses at a level it considers adequate to absorb probable losses, there
can be no assurance that such losses will not exceed the estimated amounts or
that additional substantial provisions for loan losses will not be required in
future periods. See "Asset Quality."
Non-Interest Income. Non-interest income for the year ended September
30, 1996 increased $16,000 to $702,000 from $686,000 for the year ended
September 30, 1995. This increase was primarily attributable to a $40,000
increase in service charges and fee income, reflecting higher transaction
volume, partially offset by a $29,000 decrease in the net gain on sales of
securities.
Non-Interest Expense. Non-interest expense for the year ended September
30, 1996 increased $1.4 million to $6.2 million from $4.8 million for the prior
year. The increase was primarily attributable to the one-time SAIF special
assessment of $1.2 million (discussed in the next paragraph), an increase of
$339,000 in compensation and benefits expense and an increase of $82,000 in
occupancy and equipment expense, partially offset by a decrease of $241,000 in
other non-interest expense. The increase in compensation and benefits expense
primarily reflects recognition of $147,000 in current-year expense associated
with the ESOP; merit and performance-based increases for management and staff
members; and an increase in the number of employees. The increase in occupancy
and equipment expense primarily reflects the leasing of additional space for
corporate offices. The decrease in other non-interest expense was primarily
attributable to adjustments related to the Company's claim against Nationar, a
check-clearing and trust company which failed in February 1995. At that time,
the Company had a check clearing balance of $841,000 due from Nationar. Based on
management's concerns about the probability of fully collecting this balance, a
provision for losses of $168,000 was recognized in other non-interest expense
for the year ended September 30, 1995, which reduced the net carrying amount of
the claim to $673,000. In June 1996, the Company collected $835,000 in
settlement of the claim. The difference of $162,000 between the amount collected
and the net carrying amount was reflected as a credit to other non-interest
expense for the year ended September 30, 1996. The ratio of non-interest expense
to average total assets (excluding the one-time SAIF special assessment)
decreased to 2.20% for the year ended September 30, 1996 from 2.39% for the
prior year.
The deposits of savings associations such as the Association are
insured by the SAIF which, together with the Bank Insurance Fund ("BIF"),
comprise the deposit insurance funds administered by the Federal Deposit
Insurance Corporation ("FDIC"). BIF-insured institutions have been assessed
premiums at lower rates since 1995, when the BIF achieved the ratio of reserves
to deposits required by statute. In response to this premium disparity, the
Deposit Insurance Funds Act ("Act") was enacted into law on September 30, 1996.
Among other things, the Act requires depository institutions to pay a one-time
special assessment of 65.7 basis points on their SAIF-assessable deposits as of
March 31, 1995, in order to recapitalize the SAIF to the reserve level required
by statute. Accordingly, the Company's consolidated statement of income for the
year ended September 30, 1996 reflects a separate expense charge of
approximately $1.2 million for the accrual of this special assessment which was
paid in
9
<PAGE>
November 1996. In view of the recapitalization of the SAIF, the FDIC has
reduced the ongoing premium rates and, accordingly, the Company expects to incur
substantially lower deposit insurance costs in the year ending September 30,
1997 compared to recent years.
Income Tax Expense. Income tax expense for the year ended September 30,
1996 decreased $116,000 as compared to the prior year although pre-tax income
was substantially the same for the two periods. The current-year decrease was
primarily attributable to a $100,000 tax benefit recognized in the quarter ended
September 30, 1996, due to a decrease in deferred tax liabilities caused by an
amendment to the New York State tax law enacted in July 1996. The amendment
changed the base-year for tax bad debt reserves to December 31, 1995, and
eliminated the need for a deferred tax liability previously recognized for
reserves in excess of the base-year amount. See Note 8 of the Notes to
Consolidated Financial Statements for a further discussion of this amendment and
the Association's tax bad debt reserves.
Comparison of Operating Results for the Years Ended September 30, 1995 and 1994
General. Net income for the year ended September 30, 1995 was $1.4
million, compared to $2.3 million for the year ended September 30, 1994. The
$857,000 decrease was primarily attributable to a $429,000 increase in the
provision for loan losses, a $507,000 increase in non-interest expense and the
absence in fiscal 1995 of a $326,000 credit to earnings which had been
recognized in fiscal 1994 as a result of a change in accounting for income
taxes. These factors were partially offset by a $323,000 decrease in income tax
expense.
Net Interest Income. Net interest income, or the difference between
interest and dividend income and interest expense, was substantially unchanged
at $7.0 million for each of the years ended September 30, 1995 and 1994. The
positive effect of an increase in average net interest-earning assets was
substantially offset by a 24 basis point decrease in the average interest rate
spread to 3.34% for the 1995 fiscal year from 3.58% for the 1994 fiscal year.
The Company's net interest margin declined by 19 basis points to 3.61% for the
year ended September 30, 1995 from 3.80% for the year ended September 30, 1994.
Compared to fiscal 1994, market interest rates were higher in fiscal
1995 across the entire U.S. Treasury yield curve. The Company realized higher
average yields on its interest-earning assets primarily as a result of upward
rate repricings on adjustable-rate assets, the addition of new assets in the
higher rate environment and the increase in the proportion of the Company's
assets consisting of non-residential loans. However, the Company's
interest-bearing liabilities, particularly its savings certificate accounts
which had increasing average balances, repriced more quickly in fiscal 1995 than
its interest-earning assets. This had a negative impact on the Company's average
interest rate spread and net interest margin in fiscal 1995 compared to fiscal
1994.
Interest and Dividend Income. Interest and dividend income totaled
$14.1 million for the year ended September 30, 1995, compared to $12.5 million
for the year ended September 30, 1994. This increase reflects a $10.4 million
increase in total average interest-earning assets in fiscal 1995 compared to the
prior fiscal year, and a 46 basis point increase in the average yield on such
assets over the same period. Interest income on loans increased by $645,000 to
$6.9 million for fiscal 1995 from $6.3 million in the prior year, reflecting a
$1.8 million increase in the average balance of loans and a 63 basis point
increase in the average yield to 8.67%. The increase in the average balance of
loans was primarily due to an increase in commercial real estate, multi-family
and land loans. On a combined basis, interest and dividend income on
mortgage-backed and other securities increased $955,000 to $6.8 million for
fiscal 1995 from $5.8 million for fiscal 1994. The increase was primarily due to
a $607,000 increase in
10
<PAGE>
interest on other securities, attributable to a $7.2 million increase in the
average balance to $51.1 million and a 42 basis point increase in the average
yield to 5.84%. Interest income on mortgage-backed securities increased $348,000
to $3.8 million for fiscal 1995, reflecting a $3.1 million increase in the
average balance in a period of modest loan growth and a 27 basis point increase
in the average yield due to an increase in market rates of interest.
Interest Expense. Interest expense on deposits increased $1.5 million
to $6.9 million for the year ended September 30, 1995, compared to $5.4 million
for the year ended September 30, 1994. This increase reflects both a $7.4
million increase in the average balance of interest-bearing deposits in fiscal
1995 compared to fiscal 1994, and a 70 basis point increase in the average rate
paid on such liabilities over the same period. The increase in average
interest-bearing deposits was primarily attributable to an increase in the
average balance of savings certificate accounts to $90.3 million for fiscal 1995
from $69.1 million for fiscal 1994. This increase occurred during a period of
generally higher interest rates resulting in the average rate paid on
certificate accounts increasing 110 basis points to 5.08%. The combined effect
of the higher average balance and rate was an increase of $1.8 million in
interest expense on certificates of deposit. The overall increase in interest
expense on deposits also reflects a shift from generally lower rate regular
savings accounts, the average balance of which declined by $14.0 million from
fiscal 1994 to fiscal 1995, to generally higher rate certificate accounts.
Interest expense on borrowings increased $87,000 in fiscal 1995 compared to
fiscal 1994 due to management's decision to use borrowings to fund a portion of
the Company's asset growth.
Provision for Loan Losses. The provision for loan losses increased to
$493,000 for the year ended September 30, 1995 from $64,000 for the year ended
September 30, 1994. This increase was primarily attributable to an increase in
non-performing loans to $3.5 million at September 30, 1995 from $2.7 million at
September 30, 1994, and a combined increase of $5.9 million in multi-family,
commercial real estate and land loans, which are generally believed to carry
higher levels of credit risk than one- to four-family residential loans.
At September 30, 1995, the allowance for loan losses as a percentage of
non-performing loans was 20.37%, representing an increase from 11.68% at
September 30, 1994. The allowance for loan losses, as a percentage of total
loans, rose to 0.84% at September 30, 1995 from 0.39% at September 30, 1994. The
percentage of non-performing loans to total loans increased to 4.15% at
September 30, 1995 from 3.35% at September 30, 1994. See "Asset Quality."
Non-Interest Income. Non-interest income for the year ended September
30, 1995 increased $61,000 to $686,000 from $625,000 for the year ended
September 30, 1994. This increase was primarily attributable to a $111,000
increase in service charges and fees, reflecting an increase in the number of
transaction accounts, partially offset by a $49,000 decrease in other
non-interest income.
Non-Interest Expense. Non-interest expense increased $507,000 to $4.8
million for the year ended September 30, 1995 from $4.3 million for the year
ended September 30, 1994. The Company's ratio of non-interest expenses to
average assets increased to 2.39% in fiscal 1995 from 2.27% in fiscal 1994. The
increase in non-interest expense primarily reflects an increase in compensation
and benefits, and in other non-interest expenses. Compensation and benefits
expense increased $94,000 to $2.2 million for fiscal 1995 compared to $2.1
million for fiscal 1994. This increase was primarily attributable to annual
salary increases and an increase in the number of employees. Other non-interest
expenses increased $259,000 to $1.2 million for fiscal 1995 compared to $990,000
for fiscal 1994 primarily due to the inclusion in fiscal 1995 of a $168,000
provision for losses on the Company's claim filed in connection with the failure
of Nationar, as previously discussed.
11
<PAGE>
Income Tax Expense. Income tax expense decreased $323,000, or 23.8%, to
$1.0 million for the year ended September 30, 1995 from $1.3 million for the
year ended September 30, 1994. This decrease was primarily due to the decrease
of $854,000, or 25.7%, in pre-tax income.
Cumulative Effect of Accounting Change. SFAS No. 109, "Accounting for
Income Taxes," required a change from the deferred method to the asset and
liability method of accounting for income taxes. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the estimated
future tax consequences of the differences between the tax bases and financial
reporting bases of existing assets and liabilities. The Company adopted SFAS No.
109 effective October 1, 1993, which resulted in a cumulative credit to earnings
of $326,000.
Asset Quality
Non-performing assets consist of non-accruing loans past due 90 days or
more and real estate owned properties that have been acquired by foreclosure.
Loans are placed on non-accrual status when the collection of principal or
interest becomes doubtful. Management and the Board of Directors perform a
monthly review of all non-performing loans. The actions taken by the Company
with respect to delinquencies (workout, settlement or foreclosure) vary
depending on the nature of the loan, length of delinquency and the borrower's
past credit history. The classification of a loan as non-performing does not
necessarily indicate that the principal and interest ultimately will be
uncollectible. Historical experience indicates that a portion of non-performing
assets will eventually be recovered. Real estate owned properties are carried at
the lower of cost or fair value less sales costs.
The following table sets forth the amounts and categories of the
Company's non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans past due 90 days or more:
Real estate loans
One- to four-family............................ $1,757 $2,759 $2,229 $ 479 $ 514
Multi-family(1)................................ --- 389 389 399 878
Commercial..................................... 214 --- --- --- ---
Land........................................... 250 49 --- --- ---
Construction................................... 511 279 --- 217 379
Consumer loans.................................... 43 54 45 62 2
------- ------- ------- ------- --------
Total........................................ 2,775 3,530 2,663 1,157 1,773
Real estate owned, net................................ 603 227 73 242 ---
------- ------- ------- ------ ---------
Total non-performing assets........................... $3,378 $3,757 $2,736 $1,399 $1,773
====== ====== ====== ====== ======
Allowance for loan losses............................. $ 937 $ 719 $ 311 $ 295 $ 490
====== ====== ====== ====== =======
Ratios:
Non-performing loans to total loans............... 3.14% 4.15% 3.35% 1.46% 2.12%
Non-performing assets to total assets............. 1.30 1.80 1.40 0.77 1.05
Allowance for loan losses to:
Non-performing loans........................... 33.77 20.37 11.68 25.50 27.64
Total loans.................................... 1.06 0.84 0.39 0.37 0.59
</TABLE>
- ------------
(1) Includes a loan classified as a troubled debt restructuring of
$309,000, $309,000, $312,000 and $462,000 at September 30, 1995, 1994,
1993 and 1992, respectively. Collection and charge-offs in fiscal 1996
eliminated the recorded investment in this loan.
12
<PAGE>
For the year ended September 30, 1996, gross interest income of
$251,000 would have been recorded if the non-accruing loans at September 30,
1996 had remained current in accordance with their original terms. The amount of
interest income actually received on such loans in fiscal 1996 was $94,000. See
Note 3 of the Notes to the Consolidated Financial Statements.
The allowance for loan losses is established through a provision for
loan losses charged to operations based on management's evaluation of the risk
inherent in the loan portfolio. The allowance is established as an amount that
management believes will be adequate to absorb losses on existing loans that may
become uncollectible, based on the evaluation of the collectibility of loans and
prior loan loss experience. Management's evaluation of the adequacy of the
allowance takes into consideration such factors as the historical loan loss
experience, known and inherent risks in the portfolio, changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, estimated value of underlying collateral, and current economic
conditions that may affect borrowers' ability to pay.
While management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen market conditions could
result in adjustments to the allowance for loan losses, and net earnings could
be significantly affected, if circumstances differ substantially from the
assumptions used in making the final determination.
The following table sets forth activity in the allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended September 30,
---------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year....................... $719 $311 $295 $490 $606
Provision for losses............................... 462 493 64 313 17
Charge-offs:
Real estate loans
One- to four-family......................... (97) (76) (64) (19) (7)
Multi-family(1)............................. (203) --- --- (477) (108)
Consumer loans................................. (33) (13) (2) (12) (18)
------ ----- ----- ----- -----
Total charge-offs........................... (333) (89) (66) (508) (133)
Recoveries(2)...................................... 89 4 18 --- ---
------ ------ ----- ------ ------
Net charge-offs............................. (244) (85) (48) (508) (133)
------ ------ ----- ----- -----
Balance at end of year............................. $937 $719 $311 $295 $490
==== ==== ==== ==== ====
Ratio of net charge-offs to average total loans.... 0.29% 0.10% 0.06% 0.62% 0.16%
==== ==== ==== ==== ====
</TABLE>
- ------------
(1) Charge-offs in fiscal 1996, 1993 and 1992 relate to the Company's
purchased participation interests in three multi-family loans
originated by TASCO. All such purchased participations have been
collected or charged-off at September 30, 1996.
(2) Recoveries in fiscal 1996 primarily relate to one of the TASCO participation
loans which had been partially charged- off in a prior year.
13
<PAGE>
Interest Rate Risk Management
The principal objectives of the Company's interest rate risk management
activities are to: (i) define an acceptable level of risk based on the Company's
business focus, operating environment, capital and liquidity requirements, and
performance objectives; (ii) quantify and monitor the amount of interest rate
risk inherent in the asset/liability structure; and (iii) modify the Company's
asset/liability structure, as necessary, to manage interest rate risk and
maintain net interest margins in changing rate environments. Management seeks to
reduce the vulnerability of the Company's operating results to changes in
interest rates and to manage the ratio of interest rate sensitive assets to
interest rate sensitive liabilities within specified maturities or repricing
periods. The Company does not currently engage in trading activities or use
off-balance sheet derivative instruments to control interest rate risk. Even
though such activities may be permitted with the approval of the Board of
Directors, management does not intend to engage in such activities in the
immediate future.
Notwithstanding the Company's interest rate risk management activities,
the potential for changing interest rates is an uncertainty that could have an
adverse effect on the earnings of the Company. When interest-bearing liabilities
mature or reprice more quickly than interest-earning assets in a given period, a
significant increase in market interest rates could adversely affect net
interest income. Similarly, when interest-earning assets mature or reprice more
quickly than interest-bearing liabilities, falling interest rates could result
in a decrease in net interest income. Finally, a flattening of the "yield curve"
(i.e., a narrowing of the spread between long- and short-term interest rates),
could adversely impact net interest income to the extent that the Company's
assets have a longer average term than its liabilities.
In managing the Company's asset/liability position, the Board and
management attempt to manage the Company's interest rate risk while enhancing
net interest margins. However, the Board of Directors continues to believe that
the increased net interest income resulting from a mismatch in the maturity of
the Company's asset and liability portfolios can, during periods of declining or
stable interest rates and periods in which there is a substantial positive
difference between long and short-term interest rates (i.e., a "positively
sloped yield curve"), provide high enough returns to justify the increased
exposure to sudden and unexpected increases in interest rates. As a result, the
Company's results of operations and net portfolio values remain significantly
vulnerable to increases in interest rates and to fluctuations in the difference
between long- and short-term interest rates.
Consistent with its asset/liability management philosophy, the Company
has taken several steps to manage its interest rate risk. First, the Company
maintains a significant portfolio of interest rate sensitive adjustable-rate
loans. At September 30, 1996, adjustable-rate loans represented $70.4 million,
or 79.7% of the total loan portfolio. Second, most of the mortgage-backed
securities purchased by the Company in recent years had adjustable interest
rates and/or short or intermediate effective terms to maturity. At September 30,
1996, the Company had $48.8 million of adjustable-rate mortgage-backed
pass-through securities and $14.5 million of collateralized mortgage obligations
("CMOs") with expected weighted average lives of five years or less. Third, a
significant portion of the Company's other debt securities (primarily U.S.
Government and agency securities) are short- or intermediate-term instruments
with $12.4 million of such securities contractually maturing within five years
of September 30, 1996. In addition, at September 30, 1996, the Company had $16.0
million of "step-up" securities, a substantial portion of which would likely be
redeemed within five years, if interest rates remain at current levels. Fourth,
the Company has a substantial amount of regular savings, transaction, money
market and club accounts which may be less sensitive to changes in interest
rates than certificate accounts. At September 30, 1996, the Company had $47.8
million of regular savings accounts, $16.6 million of money market accounts and
$21.2 million of NOW, checking and club accounts. Overall, these accounts
comprised 44.9% of the Company's total deposit base.
14
<PAGE>
One approach used by management to quantify interest rate risk is the
net portfolio value ("NPV") analysis. In essence, this approach calculates the
difference between the present value of liabilities and the present value of
expected cash flows from assets and off-balance sheet contracts. Under OTS
regulations, an institution's "normal" level of interest rate risk (in the event
of an assumed change in interest rates) is a decrease in the institution's NPV
in an amount not exceeding 2% of the present value of its assets. Thrift
institutions with greater than "normal" interest rate exposure must make a
deduction from total capital available to meet risk-based capital requirements.
The amount of that deduction is one-half of the difference between (i) the
institution's actual calculated exposure to a 200 basis point interest rate
increase or decrease (whichever results in the greater pro forma decrease in
NPV) and (ii) its "normal" level of exposure which is 2% of the present value of
its assets. The rule will not become effective until the OTS evaluates the
process by which savings associations may appeal an interest rate risk deduction
determination. It is uncertain as to when this evaluation may be completed.
Savings institutions, however, with less than $300 million in assets and a total
risk-based capital ratio in excess of 12%, such as the Association, are
generally not subject to this requirement. If the Association had been subject
to this requirement at September 30, 1996, its interest rate risk would have
been considered "normal" and no adjustment to its risk-based capital would have
been required.
The following table sets forth, at September 30, 1996, an analysis of
the Association's interest rate risk as measured by the estimated changes in NPV
resulting from instantaneous and sustained parallel shifts in the yield curve
(+/-400 basis points, measured in 100 basis point increments).
Change in Interest Rates Estimated NPV Estimated Increase (Decrease) in NPV
(Basis Points) Amount Amount Percent
-------------- ------ ------ -------
(Dollars in Thousands)
+400 $21,838 $(17,333) (44)%
+300 26,545 (12,626) (32)
+200 31,191 (7,980) (20)
+100 35,393 (3,778) (10)
--- 39,171 --- ---
-100 42,275 3,104 8
-200 44,957 5,786 15
-300 48,453 9,282 24
-400 52,659 13,488 34
Certain assumptions utilized by the OTS in assessing the interest rate
risk of thrift institutions were employed in preparing the preceding table.
These assumptions relate to interest rates, loan prepayment rates, deposit decay
rates, and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates change in the designated amounts, there
can be no assurance that the Association's assets and liabilities would perform
as set forth above. In addition, a change in U.S. Treasury rates in the
designated amounts accompanied by a change in the shape of the Treasury yield
curve would cause significantly different changes to the NPV than indicated
above.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and
interest payments on loans and securities and, to a lesser extent, borrowings
and proceeds from the sale of loans and securities. While maturities and
scheduled amortization of loans and securities provide an indication of the
timing
15
<PAGE>
of the receipt of funds, other sources of funds such as loan prepayments and
deposit inflows are less predictable due to the effects of changes in interest
rates, economic conditions and competition.
The primary investing activities of the Company are the origination of
real estate and other loans, and the purchase of mortgage-backed and other
securities. During the years ended September 30, 1996, 1995 and 1994, the
Company's disbursements for loan originations totaled $17.6 million, $17.2
million and $20.3 million, respectively. For the years ended September 30, 1996,
1995 and 1994, purchases of mortgage-backed securities totaled $31.9 million,
$10.4 million and $11.9 million, respectively, and purchases of other securities
totaled $35.3 million, $9.3 million and $24.0 million, respectively. These
activities were funded primarily by net deposit inflows, borrowings and
principal repayments on loans and securities.
For the years ended September 30, 1996, 1995 and 1994, the Company
experienced net increases in deposits (including the effect of interest
credited) of $2.7 million, $8.2 million and $10.3 million, respectively. The
increase in fiscal 1996 reflects relatively flat market interest-rates, customer
preference for alternative investments, and deposits withdrawn to purchase stock
in the Conversion. The increase in fiscal 1995 reflects the general increase in
market interest rates which made deposit products (particularly shorter term
certificates of deposit) a more attractive investment alternative for the
Company's customers. The increase in fiscal 1994 reflects increased marketing
efforts by the Company as well as the effect of two branch office closings by
one of the Company's larger competitors in its market area. Proceeds from FHLB
advances were $8.0 million in fiscal 1996, $4.0 million in fiscal 1995 and none
in fiscal 1994. FHLB advances of $4.3 million were repaid in fiscal 1996.
Short-term borrowings outstanding under repurchase agreements were $10.3 million
at September 30, 1996, and average borrowings under these agreements were $1.2
million for the year. The Company expects to continue to increase its
utilization of repurchase agreements as a source of funds in fiscal 1997.
Financing cash flows for fiscal 1996 also include $31.8 million in net proceeds
from the sale of common stock in the offering (other than ESOP shares).
The Company may borrow funds from the FHLB of New York subject to
certain limitations. Based on the level of qualifying collateral available to
secure advances at September 30, 1996, the Company's borrowing limit from the
FHLB of New York was approximately $61.2 million, with unused borrowing capacity
of $53.2 million at that date.
The Company 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 September 30, 1996, the Company's liquidity ratio was 12.5% and
its short-term liquidity ratio was 3.6%.
The Company's most liquid assets are cash and cash equivalents, which
include highly liquid short-term investments (such as money market mutual funds)
that are readily convertible to known amounts of cash. The level of these assets
is dependent on the Company's operating, financing and investing activities
during any given period. At September 30, 1996 and 1995, cash and cash
equivalents totaled $12.5 million and $3.3 million, respectively.
At September 30, 1996, the Company had outstanding loan origination
commitments of $1.5 million, undisbursed construction loans in process of
$171,000, and unadvanced lines of credit extended to customers of $5.0 million.
The Company anticipates that it will have sufficient funds available to meet its
current loan origination and other commitments. Certificates of deposit
scheduled to mature in one year or less from September 30, 1996 totaled $70.5
million. Based on the Company's most recent
16
<PAGE>
experience and pricing strategy, management believes that a significant portion
of such deposits will remain with the Company.
The main sources of liquidity for the Holding Company are net proceeds
from the sale of stock and dividends received from the Association, if any. The
main cash outflows are payments of dividends to shareholders and any repurchases
of the Holding Company's common stock. In November 1996, the Holding Company
completed the repurchase of 10% of its shares under a repurchase program and 4%
of its shares for awards under its management recognition plan. A total of
499,905 shares were repurchased at a cost of $6.4 million which reduced
consolidated stockholders' equity. On a pro forma basis, giving effect to these
repurchases as if they had been completed at September 30, 1996, the Company's
ratio of stockholders' equity to assets would decrease to 16.81% from the actual
ratio of 18.88% at that date.
The Association may not declare or pay cash dividends on or repurchase
any of its shares of common stock if the effect thereof would cause equity to be
reduced below applicable regulatory capital requirements or the amount required
to be maintained for the liquidation account established in connection with the
Conversion. Unlike the Association, the Holding Company is not subject to OTS
regulatory restrictions on the payment of dividends to its shareholders;
however, it is subject to the requirements of Delaware law. Delaware law
generally limits dividends to an amount equal to the excess of the net assets of
the Holding Company (the amount by which total assets exceed total liabilities)
over its statutory capital, or if there is no such excess, to its profits for
the current and/or immediately preceding fiscal year.
The OTS regulations require savings associations, such as the
Association, to meet three minimum capital standards: a tangible capital ratio
requirement of 1.5% of total assets as adjusted under the OTS regulations; a
leverage ratio requirement of 3% of core capital to such adjusted total assets;
and a risk-based capital ratio requirement of 8% of core and supplementary
capital to total risk-based assets. The Association satisfied these minimum
capital standards at September 30, 1996 with tangible and leverage capital
ratios of 14.0% and a total risk-based capital ratio of 37.2%. In determining
the amount of risk-weighted assets for purposes of the risk-based capital
requirement, a savings association must compute its risk-based assets by
multiplying its assets and certain off-balance sheet items by risk-weights,
which range from 0% for cash and obligations issued by the United States
Government or its agencies to 100% for consumer and commercial loans, as
assigned by the OTS capital regulations. These capital requirements, which are
applicable to the Association only, do not consider additional capital held at
the Holding Company level, and require certain adjustments to stockholder's
equity to arrive at the various regulatory capital amounts.
17
<PAGE>
The following table sets forth a reconciliation of the Association's
capital under generally accepted accounting principles ("GAAP") and its
regulatory capital at September 30, 1996, and a comparison of the Association's
regulatory capital amounts and ratios to the related OTS requirements.
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
GAAP capital................................................................ $34,350 $34,350 $34,350
Net unrealized loss on available-for-sale debt securities, net of taxes..... 59 59 59
Allowance for loan losses includable in supplementary capital............... --- --- 937
---------- --------- -------
Regulatory capital (actual)................................................. 34,409 34,409 35,346
Regulatory capital (requirement)............................................ 3,673 7,346 7,591
-------- -------- -------
Excess................................................................... $30,736 $27,063 $27,755
======= ======= =======
Capital ratios:
Actual(1)................................................................ 14.0% 14.0% 37.2%
Requirement.............................................................. 1.5 3.0 8.0
Excess................................................................... 12.5 11.0 29.2
- ------------
(1) Based on tangible assets, total adjusted assets and risk-weighted
assets, respectively.
</TABLE>
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 Company's operations. Unlike industrial companies, nearly all of the
assets and liabilities of the Company are monetary in nature. As a result,
interest rates have a greater impact on the Company'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 Accounting Standards
As more fully discussed in Note 14 of the Notes to Consolidated
Financial Statements, during fiscal 1997 the Company will adopt the following
accounting pronouncements which have been issued by the Financial Accounting
Standards Board.
Accounting for the Impairment of Long-Lived Assets. SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," requires the recognition of an impairment loss when the
estimate of total undiscounted future cash flows attributable to the asset is
less than the asset's carrying amount. Measurement of the impairment loss is
based on the fair value of the asset. SFAS No. 121 applies to a limited portion
of the Company's assets (primarily office properties). Management anticipates
that the prospective adoption of this standard will not have a material impact
on the Company's financial condition or results of operations.
Accounting for Stock-Based Compensation. SFAS No. 123, "Accounting for
Stock-Based Compensation," addresses accounting for stock-based employee
compensation arrangements such as the Holding Company's stock option and
incentive plan and the management recognition plan which became effective on
October 30, 1996, upon ratification by the stockholders. Under SFAS No. 123,
entities can
18
<PAGE>
recognize stock-based compensation expense in the basic financial statements
using either (i) the approach set forth in Accounting Principles Board ("APB")
Opinion No. 25 or (ii) the fair value based method introduced in SFAS No. 123.
Under APB Opinion No. 25, compensation expense is measured at the option's
intrinsic value, or the excess (if any) of the market price of the underlying
stock at the measurement date over the amount the employee is required to pay.
Under the fair value based method introduced in SFAS No. 123, compensation
expense is measured at the option's estimated fair value on the grant date.
The Company will adopt the provisions of APB Opinion No. 25 in
accounting for the stock option and incentive plan and the management
recognition plan. No compensation expense will be recognized for the stock
option and incentive plan since the exercise price of the options will equal the
market price of the underlying stock at the grant date. The cost of the shares
awarded under the management recognition plan will be recognized as expense on a
straight-line basis over the five-year vesting period. In accordance with SFAS
No. 123, beginning in the year ending September 30, 1997, the Company will make
pro forma disclosures of net income and earnings per share as if it had adopted
the fair value method of accounting.
Accounting for Transfers and Servicing of Financial Assets. SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," affects the accounting for transactions such as
loan securitizations, sales of partial interests in financial assets, repurchase
agreements, securities lending, pledges of collateral, loan syndications and
partcipations, sales of receivables with recourse, servicing of mortgage and
other loans, and in-substance defeasances of debt.
SFAS No. 125 applies a financial-components approach that focuses on
the entity's control over a financial asset to determine the proper accounting
for financial asset transfers. Under that approach, after financial assets are
transferred, an entity recognizes on the balance sheet all assets it controls
and all liabilities it has incurred. The entity would remove from the balance
sheet those assets it no longer controls and liabilities it has satisfied. If
the entity has surrendered control over the transferred assets, the transaction
is accounted for as a sale. SFAS No. 125 also requires recognition of servicing
rights as an asset when loans are sold or securitized with servicing retained.
As required, the Company will adopt SFAS No. 125 effective January 1, 1997 on a
prospective basis. Management anticipates that the implementation of SFAS No.
125 will not have a materials impact on the Company's financial condition or
results of operations.
19
<PAGE>
MANAGEMENT'S REPORT
Management is responsible for the preparation and integrity of the
consolidated financial statements and other information presented in this annual
report. The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles and reflect management's judgments
and estimates with respect to certain events and transactions.
Management is responsible for maintaining a system of internal control.
The purpose of the system is to provide reasonable assurance that transactions
are recorded in accordance with management's authorization; that assets are
safeguarded against loss or unauthorized use; and that underlying financial
records support the preparation of financial statements. The system includes the
communication of written policies and procedures, selection of qualified
personnel, appropriate segregation of responsibilities, and the ongoing internal
audit function.
The Board of Directors meets periodically with Company management, the
internal auditor, and the independent auditors, KPMG Peat Marwick LLP, to review
matters relative to the quality of financial reporting, internal control, and
the nature, extent and results of the audit efforts.
The independent auditors conduct an annual audit to enable them to
express an opinion on the Company's consolidated financial statements. In
connection with the audit, the independent auditors consider the system of
internal controls in order to determine the nature, timing and extent of their
auditing procedures.
Richard F. Komosinski Joseph D. Roberto
President Vice President, Treasurer and
Chief Financial Officer
20
<PAGE>
KPMG Peat Marwick LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Yonkers Financial Corporation:
We have audited the accompanying consolidated balance sheets of Yonkers
Financial Corporation and subsidiary (the "Company") as of September 30, 1996
and 1995, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended September 30, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Yonkers
Financial Corporation and subsidiary as of September 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1996 in conformity with generally accepted
accounting principles.
As discussed in notes 1 and 2 to the consolidated financial statements, the
Company changed its method of accounting for securities, effective September 30,
1994, to adopt Statement of Financial Accounting Standards No. 115. As discussed
in notes 1 and 8 to the consolidated financial statements, the Company changed
its method of accounting for income taxes, effective October 1, 1993, to adopt
Statement of Financial Accounting Standards No. 109.
Stamford, Connecticut
November 8, 1996
21
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
September 30,
--------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks...................................................... $ 2,152 $ 3,161
Short-term investments....................................................... 10,348 100
Securities (note 2):
Held-to-maturity, at amortized cost (fair value of $94,162
in 1996 and $95,100 in 1995).......................................... 95,007 95,464
Available-for-sale, at fair value (amortized cost of $58,855
in 1996 and $21,114 in 1995).......................................... 58,552 20,877
---------- ----------
Total securities............................................... 153,559 116,341
---------- ----------
Loans, net (note 3):
Real estate mortgage loans............................................... 80,337 79,127
Consumer and commercial business loans................................... 7,266 5,271
Allowance for loan losses................................................ (937) (719)
---------- ----------
Total loans, net............................................... 86,666 83,679
---------- ----------
Accrued interest receivable (note 4)......................................... 2,449 1,801
Federal Home Loan Bank stock................................................. 1,065 1,112
Office properties and equipment, net (note 5)................................ 947 797
Deferred income taxes (note 8)............................................... 1,010 78
Other assets................................................................. 1,338 1,214
---------- ----------
Total assets................................................... $ 259,534 $ 208,283
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 6)........................................................ $ 190,675 $ 188,009
Borrowings (note 7)...................................................... 18,264 4,295
Other liabilities........................................................ 1,596 214
---------- ----------
Total liabilities.............................................. 210,535 192,518
---------- ----------
Commitments and contingencies (notes 3 and 12)
Stockholders' equity (notes 10 and 11):
Preferred stock (par value $0.01 per share; 100,000 shares
authorized; none issued or outstanding)............................... - -
Common stock (par value $0.01 per share; 4,500,000 shares
authorized; 3,570,750 shares issued and outstanding).................. 36 -
Additional paid-in capital............................................... 34,596 -
Common stock (271,377 shares) held by employee stock
ownership plan ("ESOP")............................................... (2,714) -
Retained income, substantially restricted................................ 17,263 15,907
Net unrealized loss on available-for-sale securities,
net of taxes (note 2)................................................. (182) (142)
---------- ----------
Total stockholders' equity..................................... 48,999 15,765
---------- ----------
Total liabilities and stockholders' equity..................... $ 259,534 $ 208,283
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income:
Loans............................................................. $ 7,471 $ 6,937 $ 6,292
Securities........................................................ 8,153 6,801 5,846
Other earning assets.............................................. 752 325 322
--------- -------- ---------
Total interest and dividend income............................. 16,376 14,063 12,460
--------- -------- ---------
Interest expense:
Deposits.......................................................... 7,780 6,902 5,407
Borrowings........................................................ 195 102 15
--------- -------- ---------
Total interest expense......................................... 7,975 7,004 5,422
--------- -------- ---------
Net interest income......................................... 8,401 7,059 7,038
Provision for loan losses (note 3).................................... 462 493 64
--------- -------- ---------
Net interest income after provision for loan losses......... 7,939 6,566 6,974
--------- -------- ---------
Non-interest income:
Service charges and fees.......................................... 680 640 529
Net gain on sales of securities (note 2).......................... - 29 30
Other............................................................. 22 17 66
--------- -------- ---------
Total non-interest income...................................... 702 686 625
--------- -------- ---------
Non-interest expense:
Compensation and benefits (note 10)............................... 2,525 2,186 2,092
Occupancy and equipment........................................... 653 571 536
Federal deposit insurance costs:
Special assessment (note 6).................................... 1,166 - -
Regular premiums............................................... 435 406 346
Data processing service fees...................................... 417 367 308
Other (note 9).................................................... 1,008 1,249 990
--------- -------- ---------
Total non-interest expense..................................... 6,204 4,779 4,272
--------- -------- ---------
Income before income tax expense and cumulative
effect of change in accounting principle ............... 2,437 2,473 3,327
Income tax expense (note 8)........................................... 917 1,033 1,356
--------- -------- ---------
Income before cumulative effect of change in
accounting principle.................................... 1,520 1,440 1,971
Cumulative effect of change in accounting for income
taxes (note 8).................................................... - - 326
--------- -------- ---------
Net income.................................................. $ 1,520 $ 1,440 $ 2,297
========= ======== =========
Earnings per share, from date of conversion (note 1).................. $ 0.22
=========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Net
Additional Common Unrealized Total
Common Paid-in Stock Held Retained Loss on Stockholders'
Stock Capital by ESOP Income Securities Equity
----- ------- ------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993................. $ - $ - $ - $ 12,170 $ (7) $ 12,163
Net income................................ - - - 2,297 - 2,297
Reversal of net unrealized loss on
equity securities...................... - - - - 7 7
Net unrealized loss on available-for-
sale securities at September 30, 1994,
net of taxes........................... - - - - (311) (311)
------ --------- ------- ---------- ------- --------
Balance at September 30, 1994................. - - - 14,467 (311) 14,156
Net income................................ - - - 1,440 - 1,440
Net decrease in net unrealized loss on
available-for-sale securities, net
of taxes............................... - - - - 169 169
------ --------- -------- ---------- ------- --------
Balance at September 30, 1995................. - - - 15,907 (142) 15,765
Net income................................ - - - 1,520 - 1,520
Dividend paid ($0.05 per share)........... - - - (164) - (164)
Issuance of common stock.................. 36 34,592 - - - 34,628
Shares purchased by ESOP.................. - - (2,857) - - (2,857)
ESOP shares released for allocation ...... - 4 143 - - 147
Net increase in net unrealized loss on
available-for-sale securities, net
of taxes............................... - - - - (40) (40)
------ --------- ---------- ---------- ------- ---------
Balance at September 30, 1996................. $ 36 $ 34,596 $ (2,714) $ 17,263 $ (182) $ 48,999
====== ========= ========== ========== ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................. $ 1,520 $ 1,440 $ 2,297
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses.......................................... 462 493 64
Amortization of deferred fees, discounts and premiums, net ........ (479) (517) (269)
Depreciation and amortization expense.............................. 196 169 238
Net gain on sales of securities.................................... - (29) (30)
Cumulative effect of change in accounting for income taxes ........ - - (326)
Other adjustments, net............................................. 227 (476) (58)
-------- -------- --------
Net cash provided by operating activities ...................... 1,926 1,080 1,916
-------- -------- --------
Cash flows from investing activities:
Purchases of securities:
Available-for-sale................................................... (45,036) (3,804) -
Held-to-maturity..................................................... (22,142) (15,938) -
Held-for-investment.................................................. - - (35,934)
Proceeds from principal payments, maturities and calls of securities:
Available-for-sale................................................... 7,334 2,023 -
Held-to-maturity..................................................... 22,895 6,687 -
Held-for-investment.................................................. - - 20,065
Proceeds from sales of securities:
Available-for-sale................................................... - 438 -
Held-to-maturity..................................................... - 847 -
Held-for-investment.................................................. - - 2,289
Disbursements for loan originations.................................... (17,571) (17,213) (20,350)
Principal collections on loans......................................... 11,780 10,961 15,371
Proceeds from sales of loans........................................... 1,883 383 5,166
Other investing cash flows, net........................................ (72) (214) (96)
-------- -------- --------
Net cash used in investing activities ........................... (40,929) (15,830) (13,489)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits............................................... 2,666 8,193 10,308
Proceeds from Federal Home Loan Bank advances.......................... 8,000 4,000 -
Repayments of Federal Home Loan Bank advances.......................... (4,295) - -
Net increase in short-term borrowings.................................. 10,264 - -
Net proceeds from sale of common stock................................. 34,628 - -
Common stock purchased by ESOP......................................... (2,857) - -
Dividend paid.......................................................... (164) - -
-------- -------- -------
Net cash provided by financing activities ....................... 48,242 12,193 10,308
-------- -------- -------
Net increase (decrease) in cash and cash equivalents ...................... 9,239 (2,557) (1,265)
Cash and cash equivalents at beginning of year ............................ 3,261 5,818 7,083
-------- -------- -------
Cash and cash equivalents at end of year................................... $ 12,500 $ 3,261 $ 5,818
======== ======== ========
Supplemental cash flow information:
Interest paid.......................................................... $ 7,956 $ 7,004 $ 5,422
Income taxes paid...................................................... 1,331 1,520 1,073
Loans transferred to real estate owned................................. 603 303 -
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995, and 1994
(1) Summary of Significant Accounting Policies
On December 28, 1995, The Yonkers Savings and Loan Association
converted from a New York State chartered mutual savings and loan
association to a federally chartered mutual savings and loan association
under the new name The Yonkers Savings and Loan Association, FA (the
"Association"). As discussed in note 11, on April 18, 1996 Yonkers
Financial Corporation (the "Holding Company") became the holding company
for the Association upon completion of the conversion of the Association
from a mutual to a stock savings and loan association (the "Conversion").
Collectively, the Holding Company and the Association are referred to
herein as the "Company".
The Company's primary market area consists of Westchester County, New
York and portions of Putnam, Rockland and Dutchess Counties, New York.
Business is conducted from four full-service banking offices located in
Yonkers, New York. The Association is a community-oriented savings
institution whose business primarily consists of accepting deposits from
customers within its market area and investing those funds in mortgage
loans secured by one- to four-family residences. To a lesser extent,
funds are invested in multi-family and commercial real estate loans,
construction and land loans, consumer loans and commercial business
loans. The Company also invests in mortgage-backed and other securities.
Deposits are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation
("FDIC" ). The Company's primary regulator is the Office of Thrift
Supervision ("OTS").
Basis of Presentation
The consolidated financial statements include the accounts of the
Holding Company and its wholly-owned subsidiary, the Association. All
significant intercompany accounts and transactions have been eliminated
in the consolidated financial statements. Prior to the Conversion, the
Holding Company had no operations other than those of an organizational
nature. Subsequent thereto, the Holding Company's business activities
have been limited to its ownership of the Association and certain
short-term and other investments. All financial information and other
disclosures included herein for periods prior to the Conversion pertain
to the Association.
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amounts of assets, liabilities, income and expense. A
material estimate that is particularly susceptible to near-term change
is the allowance for loan losses, which is discussed below.
Certain reclassifications have been made to prior-year amounts to
conform to the current-year presentation.
Cash Equivalents
For purposes of reporting cash flows, cash equivalents consist of
highly liquid short-term investments. At September 30, 1996, short-term
investments reported in the consolidated balance sheet were money market
mutual funds of $10.2 million and interest-bearing deposits of $0.1
million. Short-term investments at September 30, 1995 were
interest-bearing deposits of $0.1 million.
26
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Securities
The Company prospectively adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," as of September 30, 1994. Under SFAS No. 115,
individual securities are classified as held-to-maturity securities,
trading securities, or available-for-sale securities. Securities held to
maturity are limited to debt securities for which the entity has the
positive intent and ability to hold to maturity. Sales of
held-to-maturity securities will generally call into question the
entity's intent to hold other debt securities to maturity in the future
and, accordingly, may result in the reclassification of remaining
held-to-maturity securities to other categories. Trading securities are
debt and equity securities that are bought principally for the purpose of
selling them in the near term. All other debt and equity securities are
classified as available for sale.
Held-to-maturity securities are carried at amortized cost under SFAS
No. 115. Available-for-sale securities are carried at fair value with
unrealized gains and losses excluded from earnings and reported on a
net-of-tax basis as a separate component of equity. The Company has no
trading securities. Federal Home Loan Bank stock is considered a
restricted security under SFAS No. 115 and, accordingly, is carried at
cost.
Prior to the adoption of SFAS No. 115, debt securities held for
investment were carried at amortized cost and equity securities were
carried at the lower of aggregate cost or fair value. Net unrealized
losses on equity securities, if any, were reported as a charge to equity.
Premiums and discounts are amortized to interest income on a
level-yield basis over the expected term of the security. Realized gains
and losses on sales of securities are determined using the specific
identification method. Unrealized losses on held-to-maturity and
available-for-sale securities are charged to earnings when the decline in
fair value of a security is judged to be other than temporary.
Allowance for Loan Losses
Effective October 1, 1995, the Company prospectively adopted SFAS No.
114, "Accounting by Creditors for Impairment of a Loan," as amended by
SFAS No. 118. Under SFAS No. 114, a loan is considered to be impaired
when, based on current information and events, it is probable that the
creditor will be unable to collect all principal and interest
contractually due. Creditors are permitted to measure impaired loans
based on (i) the present value of expected future cash flows discounted
at the loan's effective interest rate, (ii) the loan's observable market
price or (iii) the fair value of the collateral if the loan is collateral
dependent. If the approach used results in a measurement that is less
than an impaired loan's recorded investment, an impairment loss is
recognized as part of the allowance for loan losses.
The allowance for loan losses is increased by provisions for losses
charged to operations. Loan losses and recoveries of loans previously
written-off are charged or credited to the allowance as incurred or
realized, respectively. Management estimates the allowance for loan
losses based on an evaluation of the Company's past loan loss experience,
known and inherent risks in the portfolio, estimated value of underlying
collateral, and current economic conditions. In management's judgment,
the allowance for loan losses is adequate to absorb probable losses in
the existing portfolio.
27
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Establishing the allowance for loan losses involves significant
management judgments utilizing the best information available at the time
of review. Those judgments are subject to further review by various
sources, including the Company's regulators. Future adjustments to the
allowance may be necessary based on changes in economic and real estate
market conditions, further information obtained regarding known problem
loans, the identification of additional problem loans, and other factors.
Interest and Fees on Loans
Interest is accrued monthly on outstanding principal balances unless
management considers the collection of interest or principal to be
doubtful. Loans on non-accrual status include all loans contractually
delinquent ninety days or more. Loans are returned to accrual status when
collectibility is no longer considered doubtful (generally, when all
payments have been brought current).
Loan origination fees and certain direct loan origination costs are
deferred, and the net fee or cost is amortized to interest income over
the contractual term of the loans using the level-yield method.
Unamortized fees and costs applicable to loans prepaid or sold are
recognized in income at the time of prepayment or sale.
Real Estate Owned
Real estate owned properties acquired through foreclosure are recorded
initially at fair value less estimated sales costs, with the resulting
writedown charged to the allowance for loan losses. Thereafter, an
allowance for losses on real estate owned is established by a charge to
expense to reflect any subsequent declines in fair value. Fair value
estimates are based on recent appraisals and other available information.
Costs incurred to develop or improve properties are capitalized, while
holding costs are charged to expense.
Office Properties and Equipment
Office properties and equipment are comprised of land (carried at
cost) and buildings, furniture, fixtures, equipment and leasehold
improvements (carried at cost less accumulated depreciation and
amortization). Depreciation is computed using the straight-line method
over the estimated useful lives of the related assets. Leasehold
improvements are amortized using the straight-line method over the
shorter of the lease term or the estimated useful life of the
improvement. Costs incurred to improve or extend the life of existing
assets are capitalized. Repairs and maintenance, as well as renewals and
replacements of a routine nature, are charged to expense.
Pension Benefits
The Company has a non-contributory defined benefit pension plan which
covers substantially all employees. Pension costs are funded on a current
basis in compliance with the requirements of the Employee Retirement
Income Security Act and are accounted for in accordance with SFAS No. 87,
"Employers' Accounting for Pensions."
28
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
Effective October 1, 1993, the Company changed its method of
accounting for income taxes to adopt SFAS No. 109. The cumulative effect
of the accounting change was reported in the consolidated statement of
income for the year ended September 30, 1994.
In accordance with the asset and liability method required by SFAS No.
109, deferred taxes are recognized for the estimated future tax effects
attributable to "temporary differences" between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. A deferred tax liability is recognized for all temporary
differences that will result in future taxable income. A deferred tax
asset is recognized for all temporary differences that will result in
future tax deductions, subject to reduction of the asset by a valuation
allowance in certain circumstances. This valuation allowance is
recognized if, based on an analysis of available evidence, management
determines that it is more likely than not that some portion or all of
the deferred tax asset will not be realized. The valuation allowance is
subject to ongoing adjustment based on changes in circumstances that
affect management's judgment about the realizability of the deferred tax
asset. Adjustments to increase or decrease the valuation allowance are
charged or credited, respectively, to income tax expense.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which the
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of an enacted change in tax rates
is recognized in income in the period that includes the enactment date.
Employee Stock Ownership Plan
Compensation expense is recognized equal to the fair value of ESOP
shares that are committed to be released for allocation to participant
accounts. To the extent that the fair value of these shares differs from
the original cost, the difference is charged or credited to stockholders'
equity (additional paid-in capital). The cost of unallocated ESOP shares
not yet committed to be released is reflected as a reduction of
stockholders' equity.
Earnings Per Share
Earnings per share is based on net income for the period following the
Conversion divided by the weighted average number of common shares
outstanding (net income of $729,000 and 3,291,698 shares for the
six-month period ended September 30, 1996). Unallocated ESOP shares that
have not been committed to be released to participants are excluded from
outstanding shares in computing earning per share.
(2) Securities
The Company prospectively adopted SFAS No. 115 effective September 30,
1994, and classified securities with amortized costs of $87.7 million as
held to maturity and $19.7 million as available-for-sale. As a result of
adoption, equity at September 30, 1994 was decreased by $311,000,
representing the net unrealized loss on available-for-sale securities
less applicable income taxes. At September 30, 1996, the net unrealized
loss on the available-for-sale portfolio was $303,000 ($182,000 after
taxes), compared to a net unrealized loss of $237,000 ($142,000 after
taxes) at September 30, 1995. This adjustment to equity will continue to
fluctuate in future periods to reflect changes in market conditions and
the composition of the available-for-sale portfolio.
29
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were no sales of securities during the year ended September 30,
1996. Sales of held-to-maturity securities during the year ended
September 30, 1995 resulted in gross realized gains of $24,000 and gross
realized losses of $1,400. The held-to-maturity securities sold were
mortgage-backed pass-through securities with a total amortized cost of
$824,000, for which the Company had collected more than 85% of the
principal purchased. Under SFAS No. 115, sales in these circumstances are
deemed to be equivalent to maturities and, accordingly, do not call into
question the intent to hold other debt securities to maturity in the
future. Sales of available-for-sale securities during the year ended
September 30, 1995 resulted in gross realized gains of $6,700 and gross
realized losses of $500. Sales of held-for-investment securities resulted
in gross realized gains of $37,200 and gross realized losses of $7,600
during the year ended September 30, 1994.
The Company's securities portfolio includes debt securities and, to a
much lesser extent, equity securities. Debt securities are principally
mortgage-backed securities, and U.S. Government and Agency securities.
Mortgage-backed securities consist of collateralized mortgage obligations
("CMOs") and pass-through securities, substantially all of which are
guaranteed by U.S. Government or government-sponsored entities (the
Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC")).
30
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of securities at September 30, 1996:
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ---------------- Fair
Cost Gains Losses Value
---- ----- ------ -----
(In Thousands)
<S> <C> <C> <C> <C>
Held-to-Maturity Securities
Mortgage-backed securities:
Pass-through securities ....... $ 41,493 $ 426 $ (399) $ 41,520
CMOs .......................... 16,646 132 (300) 16,478
------ --- ---- ------
Total ...................... 58,139 558 (699) 57,998
------ --- ---- ------
U.S. Government and Agency:
Step-up securities .......... 12,966 1 (316) 12,651
Other securities ............ 23,402 7 (397) 23,012
------ - ---- ------
Total ..................... 36,368 8 (713) 35,663
------ - ---- ------
Corporate bond ................ 500 1 - 501
--- - _ ---
Total held to maturity .... $ 95,007 $ 567 $ (1,412) $ 94,162
======= ==== ======= =======
Available-for-Sale Securities
Mortgage-backed securities:
Pass-through securities .... $20,679 $ 80 $ (187) $ 20,572
CMOs ....................... 2,146 - (7) 2,139
----- - -- -----
Total .................... 22,825 $ 80 (194) 22,711
------ ---- ---- ------
U.S. Government and Agency:
Step-up securities ........ 3,000 - (31) 2,969
Other securities .......... 26,960 116 (53) 27,023
------ --- --- ------
Total .................. 29,960 116 (84) 29,992
------ --- --- ------
Mutual fund investments .... 6,070 - (221) 5,849
----- - ---- -----
Total available for sale.. $ 58,855 $ 196 $ (499) $ 58,552
======= ==== ====== =======
</TABLE>
31
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of securities at September 30, 1995:
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ---------------- Fair
Cost Gains Losses Value
---- ----- ------ -----
(In Thousands)
<S> <C> <C> <C> <C>
Held-to-Maturity Securities
Mortgage-backed securities:
Pass-through securities..... $ 35,586 $ 520 $ (232) $ 35,874
CMOs ....................... 17,025 130 (275) 16,880
------ --- ---- ------
Total ................... 52,611 650 (507) 52,754
------ --- ---- ------
U.S. Government and Agency:
Step-up securities ........ 20,960 22 (307) 20,675
Other securities .......... 21,393 139 (361) 21,171
------ --- ---- ------
Total ................... 42,353 161 (668) 41,846
------ --- ---- ------
Corporate bond ............. 500 - - 500
--- - - ---
Total held to maturity.. $ 95,464 $ 811 $(1,175) $ 95,100
======= ==== ======= =======
Available-for-Sale Securities
Mortgage-backed securities:
Pass-through securities... $ 4,151 $ 70 $ (51) $ 4,170
CMOs ..................... 2,272 3 (9) 2,266
----- - -- -----
Total .................. 6,423 73 (60) 6,436
----- -- --- -----
U.S. Government and Agency:
Step-up securities ....... 2,000 1 (16) 1,985
Other securities ......... 6,951 18 (48) 6,921
----- -- --- -----
Total ................. 8,951 19 (64) 8,906
----- --- --- -----
Mutual fund investments.... 5,740 - (205) 5,535
----- - ---- -----
Total available for sale.. $ 21,114 $ 92 $ (329) $ 20,877
======= ==== ====== =======
</TABLE>
Mortgage-backed and other debt securities at September 30, 1996 consisted
of fixed-rate securities and adjustable-rate securities with amortized costs of
$77.2 million and $70.6 million, respectively, and weighted average yields of
7.20% and 6.52%, respectively. Fixed-rate and adjustable- rate debt securities
at September 30, 1995 totaled $46.6 million and $64.2 million, respectively,
with weighted average yields of 6.70% and 6.30%, respectively.
32
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mortgage-backed securities include securities guaranteed by FNMA, GNMA
and FHLMC with total amortized costs of $46.1 million, $18.6 million and
$15.9 million, respectively, at September 30, 1996 ($27.9 million, $10.0
million and $20.6 million, respectively, at September 30, 1995).
Privately-issued mortgage-backed securities had amortized costs of $0.4
million and $0.5 million at September 30, 1996 and 1995, respectively.
The Company's step-up securities are issued by U.S. Government
Agencies or government-sponsored enterprises and initially pay an
above-market yield for a short non-call period. If the securities are not
called, the interest rate "steps-up" to a higher coupon rate which would
be below then-current market rates. These securities had a weighted
average yield of 5.78% and 5.50% at September 30, 1996 and 1995,
respectively.
The following is a summary of the amortized cost and fair value of
debt securities, other than mortgage-backed securities, by remaining
period to contractual maturity at September 30, 1996 (ignoring earlier
call dates, if any). Actual maturities may differ from contractual
maturities because certain security issuers have the right to call or
prepay their obligations.
Held to Maturity Available for Sale
---------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(In Thousands)
U.S. Government and Agency
step-up securities:
Within one year....... $ 500 $ 501 $ - $ -
One to five years..... 6,976 6,867 1,000 992
Five to ten years..... 1,500 1,489 2,000 1,977
Over ten years ....... 3,990 3,794 - -
----- ----- -- --
$ 12,966 $ 12,651 $ 3,000 $ 2,969
======= ======= ======= =======
Other U.S. Government and
Agency securities:
Within one year....... $ 1,929 $ 1,936 $ - $ -
One to five years .... 6,000 5,866 4,000 4,004
Five to ten years..... 13,473 13,271 11,000 11,027
Over ten years........ 2,000 1,939 11,960 11,992
----- ----- ------ ------
$23,402 $23,012 $26,960 $27,023
======= ======= ======= =======
Corporate bond:
Within one year ....... $ 500 $ 501 $ - $ -
======= ======= ======= =======
Totals:
Within one year ....... $ 2,929 $ 2,938 $ - $ -
One to five years ..... 12,976 12,733 5,000 4,996
Five to ten years ..... 14,973 14,760 13,000 13,004
Over ten years ........ 5,990 5,733 11,960 11,992
----- ----- ------ ------
$ 36,868 $ 36,164 $ 29,960 $ 29,992
======= ======= ======= =======
33
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Loans
A summary of loans at September 30 follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
Real estate mortage loans:
Residential properties:
One- to four-family........................................ $ 62,283 $ 63,282
Multi-family............................................... 5,471 5,647
Commercial properties......................................... 9,117 6,575
Land loans.................................................... 1,934 2,112
Construction loans............................................ 2,175 2,205
Construction loans in process................................. (171) (293)
Deferred loan fees, net....................................... (472) (401)
--------- ---------
80,337 79,127
--------- ---------
Consumer loans:
Home equity................................................... 2,911 2,389
Personal...................................................... 1,632 1,734
Automobile.................................................... 367 409
Home improvement.............................................. 153 209
Other......................................................... 790 474
--------- ---------
5,853 5,215
Commercial business loans..................................... 1,413 56
--------- ---------
7,266 5,271
--------- ---------
Total loans................................................ 87,603 84,398
Allowance for loan losses......................................... (937) (719)
--------- ---------
Total loans, net........................................... $ 86,666 $ 83,679
========= =========
</TABLE>
The gross loan portfolio at September 30, 1996 consisted of
adjustable-rate loans of $70.4 million and fixed-rate loans of $17.9
million with weighted average yields of 8.44% and 8.92%, respectively.
Adjustable-rate and fixed-rate loans at September 30, 1995 totaled $67.0
million and $18.1 million, respectively, with weighted average yields of
9.11% and 8.89%, respectively. One- to four-family residential mortgage
loans at September 30, 1996 and 1995 include advances under home equity
lines of credit of $7.3 million and $9.1 million, respectively, and
cooperative apartment loans of $5.5 million and $5.8 million,
respectively.
The Company primarily originates real estate mortgage loans secured by
existing single-family residential properties. The Company also
originates multi-family and commercial real estate loans, land loans,
construction loans, consumer loans and commercial business loans. A
substantial portion of the loan portfolio is secured by real estate
properties located in Westchester County, New York. The ability of the
Company's borrowers to make principal and interest payments is dependent
upon, among other things, the level of overall economic activity and the
real estate market conditions prevailing within the Company's
concentrated lending area.
34
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The principal balances of non-accrual loans past due ninety days or more at
September 30 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Real estate mortgage loans:
One- to four-family....................................... $ 1,757 $ 2,759 $ 2,229
Multi-family.............................................. - 389 389
Commercial................................................ 214 - -
Land...................................................... 250 49 -
Construction.............................................. 511 279 -
Consumer loans................................................ 43 54 45
------- ------- -------
Total............................................... $ 2,775 $ 3,530 $ 2,663
======= ======= =======
</TABLE>
If interest payments on the foregoing non-accrual loans had been made
during the respective years in accordance with the loan agreements,
additional interest income of $157,000, $191,000 and $93,000 would have
been recognized in the years ended September 30, 1996, 1995 and 1994,
respectively.
Activity in the allowance for loan losses is summarized as follows for
the years ended September 30:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year................................... $ 719 $ 311 $ 295
Provision for losses........................................... 462 493 64
Charge-offs.................................................... (333) (89) (66)
Recoveries..................................................... 89 4 18
------ ------ ------
Balance at end of year......................................... $ 937 $ 719 $ 311
====== ====== ======
</TABLE>
As discussed in note 1, the Company prospectively adopted SFAS No. 114
during the year ended September 30, 1996. Adoption of the new standard did not
effect the overall allowance for loan losses. SFAS No. 114 applies to loans that
are individually evaluated for collectibility in accordance with the Company's
normal loan review procedures (principally loans in the multi-family, commercial
mortgage, land and construction loan categories). At September 30, 1996, the
recorded investment in impaired loans in these categories totaled $975,000, for
which an allowance for loan impairment was not required under SFAS No. 114
primarily due to the sufficiency of collateral values. The Company's average
recorded investment in impaired loans was approximately $700,000 for the year
ended September 30, 1996. Interest collections and income recognized on impaired
loans was insignificant for the period.
At September 30, 1996 and 1995, other assets includes single-family
real estate owned properties with net carrying values of $603,000 and $227,000,
respectively. Provisions for losses and other activity in the allowance for real
estate owned losses were insignificant during the years ended September 30,
1996, 1995 and 1994.
35
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has sold, with recourse, certain real estate mortgage
loans and retained the related servicing rights. The principal balances
of these serviced loans, which are not included in the accompanying
consolidated balance sheets, totaled $3.4 million, $4.3 million and $5.3
million at September 30, 1996, 1995 and 1994, respectively. The Company
is required to remit to the investors the monthly principal and interest
payments (less servicing fees) on these loans, including loans that are
delinquent or in foreclosure. No losses have been incurred through
September 30, 1996 as a result of this recourse obligation. The Company
also serviced real estate mortgage loans sold without recourse with total
principal balances of $10.6 million, $9.4 million and $9.5 million at
September 30, 1996, 1995 and 1994, respectively.
(4) Accrued Interest Receivable
A summary of accrued interest receivable at September 30 follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
Loans................................................ $ 764 $ 730
Securities:
Mortgage-backed securities....................... 433 325
Other securities................................. 1,252 746
-------- -------
Total............................................ $ 2,449 $ 1,801
======== =======
</TABLE>
(5) Office Properties and Equipment
A summary of office properties and equipment at September 30 follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
Land................................................. $ 45 $ 45
Buildings............................................ 207 189
Leasehold improvements............................... 582 541
Furniture, fixtures and equipment.................... 1,664 1,377
-------- --------
2,498 2,152
Less accumulated depreciation and amortization....... (1,551) (1,355)
-------- --------
Total office properties and equipment, net....... $ 947 $ 797
======== ========
</TABLE>
36
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Deposits
Deposit balances and weighted average stated interest rates at
September 30 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------- ----------------------
Amount Rate Amount Rate
------ ---- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Checking..................................... $ 1,957 $ 2,680
NOW.......................................... 18,141 1.86% 15,609 1.73%
Money market................................. 16,599 2.91 12,484 2.91
Regular savings.............................. 47,832 2.61 54,794 2.70
Club......................................... 1,112 2.61 1,044 2.70
----------- ---------
85,641 2.45 86,611 2.47
----------- ---------
Savings certificates by remaining term to
contractual maturity:
Within one year....................... 70,507 5.02 70,902 5.45
One to three years.................... 25,981 5.50 21,000 5.89
Over three years...................... 8,546 6.28 9,496 6.24
----------- ----------
105,034 5.24 101,398 5.61
----------- ----------
Total deposits........................ $ 190,675 3.99% $ 188,009 4.16%
=========== ==========
</TABLE>
Savings certificates issued in denominations of $100,000 or more
totaled $10.6 million and $9.2 million at September 30, 1996 and 1995,
respectively. The FDIC generally insures depositor accounts up to
$100,000, as defined in the applicable regulations.
The Deposit Insurance Funds Act of 1996 (the "Act") was signed into
law on September 30, 1996. Among other things, the Act required
depository institutions to pay a one-time special assessment of 65.7
basis points on their SAIF-assessable deposits as of March 31, 1995, in
order to recapitalize the SAIF to the reserve level required by law.
Accordingly, the consolidated statement of income for the year ended
September 30, 1996 reflects a separate expense charge of approximately
$1.2 million for the accrual of this special assessment which was paid in
November 1996.
37
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Borrowings
Borrowings at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------------- ------------------
Amount Rate Amount Rate
------ ---- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Federal Home Loan Bank ("FHLB") advances maturing
within one year:
Fixed rate....................................... $ 6,000 5.64% $ 1,295 5.83%
Adjustable rate.................................. 2,000 6.00 3,000 6.45
--------- --------
8,000 5.73 4,295 6.26
Repurchase agreement maturing
within one month..................................... 10,264 5.44 - -
--------- --------
Total borrowings................................. $ 18,264 5.57% $ 4,295 6.26%
========= ========
</TABLE>
The Company may borrow funds from the FHLB of New York subject to
certain limitations. Based on the level of qualifying collateral
available to secure advances at September 30, 1996, this borrowing limit
was $61.2 million, with unused borrowing capacity of $53.2 million at
that date. Advances are secured by the Company's investment in FHLB stock
and by a blanket security agreement. This agreement requires that the
Company maintain as collateral certain qualifying assets (such as
securities and single-family residential mortgage loans) with a fair
value, as defined, at least equal to 115% of the outstanding advances.
The Company satisfied this collateral requirement at September 30, 1996
and 1995.
Repurchase agreements represent funds borrowed on a short-term basis
through the sale of securities to the FHLB of New York, as counterparty,
under agreements to repurchase identical securities. The Company accounts
for these agreements as financing transactions; accordingly, the
transaction proceeds are recorded as borrowings and the underlying
securities continue to be carried in the Company's securities portfolio.
Repurchase agreements are collateralized by the securities sold which are
controlled by the counterparty during the term of the transaction. The
repurchase agreement outstanding at September 30, 1996 was collateralized
by mortgage-backed securities with a carrying amount of $10.8 million and
a fair value of $10.7 million. During the year ended September 30, 1996,
the average borrowings under these agreements amounted to $1.2 million;
the average interest rate was 5.35%; and the maximum month-ended balance
outstanding was $10.3 million.
(8) Income Taxes
As discussed in note 1, the Company adopted SFAS No. 109 effective
October 1, 1993. The cumulative effect of the change in accounting for
income taxes resulted in a credit to income of $326,000, which has been
reported separately in the consolidated statement of income for the year
ended September 30, 1994.
38
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of income tax expense are summarized as follows for the
years ended September 30:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Current tax expense:
Federal................................................ $ 1,155 $ 880 $ 917
State.................................................. 668 91 358
------ ------- --------
1,823 971 1,275
------ ------- --------
Deferred tax (benefit) expense:
Federal................................................ (410) (124) 44
State.................................................. (496) 186 37
------ ------- --------
(906) 62 81
------ ------- --------
Total income tax expense.................................. $ 917 $ 1,033 $ 1,356
====== ======= ========
</TABLE>
The following is a reconciliation of the expected income tax expense,
computed at the applicable Federal statutory rate of 34%, to the actual income
tax expense for the years ended September 30:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Tax at Federal statutory rate............................. $ 829 $ 841 $ 1,131
New York State income taxes, net of
Federal tax benefit................................... 114 183 261
Other reconciling items, net.............................. (26) 9 (36)
------- -------- --------
Actual income tax expense................................. $ 917 $ 1,033 $ 1,356
======= ======== ========
Effective income tax rate................................ 37.6% 41.8% 40.8%
======= ======== ========
</TABLE>
The tax effects of temporary differences that give rise to deferred
tax assets and liabilities are as follows at September 30:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses............................... $ 385 $ 288
Accrued SAIF special assessment......................... 479 -
Net unrealized loss on available-for-sale securities ... 121 95
Net deferred loan fees.................................. 194 166
Other deductible temporary differences.................. 46 48
------- ------
1,225 597
Deferred tax liabilities:
Bad debt reserves for income tax purposes and
other taxable temporary differences.................. (215) (519)
------- -------
Net deferred tax asset...................................... $ 1,010 $ 78
======= ======
</TABLE>
39
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Based on the Company's historical and anticipated future pre-tax
earnings, management believes that it is more likely than not that the
deferred tax asset will be realized.
As a thrift institution, the Association is subject to special
provisions in the Federal and New York State tax laws regarding its
allowable tax bad debt deductions and related tax bad debt reserves.
These deductions historically have been determined using methods based on
loss experience or a percentage of taxable income. Tax bad debt reserves
are maintained for qualifying real property loans and for nonqualifying
loans in amounts equal to the excess of allowable deductions over actual
bad debt losses and other reserve reductions. A supplemental reserve is
also maintained. The qualifying and nonqualifying loan reserves consist
of a defined base-year amount, plus additional amounts ("excess
reserves") accumulated after the base year. SFAS No. 109 requires
recognition of deferred tax liabilities with respect to such excess
reserves, as well as any portion of the base-year amount or the
supplemental reserve which is expected to become taxable (or
"recaptured") in the foreseeable future.
Certain amendments to the Federal and New York State tax bad debt
provisions were enacted in July and August 1996. The Federal amendments
include elimination of the percentage-of-taxable-income method for tax
years beginning after December 31, 1995 and imposition of a requirement
to recapture into taxable income (over a six-year period) the qualifying
and nonqualifying loan reserves in excess of the base-year amounts. The
Company previously established, and will continue to maintain, a deferred
tax liability with respect to such excess Federal reserves. The New York
State amendments redesignate the Association's State bad debt reserves at
September 30, 1996 as the base-year amount and also provide for future
additions to the base-year reserve using the percentage-of-taxable-income
method. This change effectively eliminated the excess New York State
reserves for which a deferred tax liability had been recognized and,
accordingly, the Company reduced its deferred tax liability by $100,000
(with a corresponding reduction in income tax expense) during the quarter
ended September 30, 1996.
In accordance with SFAS No. 109, deferred tax liabilities have not
been recognized with respect to the base-year and supplemental reserves,
since the Company does not expect that these amounts will become taxable
in the foreseeable future. Under the tax laws as amended, events that
would result in taxation of these reserves include (i) redemptions of the
Association's stock or certain excess distributions to the Holding
Company and (ii) failure of the Association to maintain a specified
qualifying-assets ratio or meet other thrift definition tests for New
York State tax purposes. The Company had an unrecognized deferred tax
liability of $1.6 million at September 30, 1996 with respect to the
base-year and supplemental tax bad debt reserves which totaled $3.0
million for Federal tax purposes and $7.7 million for State tax purposes.
40
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Other Non-Interest Expense
The components of other non-interest expense are as follows for the
years ended September 30:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Supervisory exams and audits.............................. $ 150 $ 142 $ 131
Advertising............................................... 118 84 58
Correspondent bank fees................................... 114 95 97
(Credit) provision for loss on National claim............. (162) 168 -
Checking account expenses................................. 93 84 74
Telephone and postage..................................... 80 59 56
Insurance and surety bond premiums........................ 78 89 83
Stationery and printing................................... 68 77 73
Appraisal fees............................................ 50 55 48
Provision for litigation settlement....................... - 93 50
Other..................................................... 419 303 320
------ ------- -----
Total.......................................... $ 1,008 $ 1,249 $ 990
====== ======= =====
</TABLE>
In February 1995, the New York Superintendent of Banks took possession
of Nationar, a check clearing and trust company, freezing all of
Nationar's assets. At that time, the Company had a check clearing balance
of $841,000 due from Nationar. Based upon the information available at
September 30, 1995, management believed that there was at least a
reasonable likelihood that the Company would not recover its entire claim
against Nationar. As a result, the Company established a valuation
allowance of $168,000 against its claim, resulting in a net carrying
amount for the claim of $673,000, which was included in other assets at
September 30, 1995. The related provision for loss of $168,000 was
included in other non-interest expense for the year ended September 30,
1995. In June 1996, the Company collected $835,000 in settlement of the
claim. The difference of $162,000 between the amount collected and the
claim's net carrying amount was reflected as a credit to other
non-interest expense for the year ended September 30, 1996.
41
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Benefit and Stock Option Plans
Pension Benefits
All eligible Company employees are included in the New York State
Bankers' Retirement System, a trusteed non-contributory pension plan. The
benefits contemplated by the plan are funded through annual remittances
based on actuarially determined funding requirements. The following is a
reconciliation of the funded status of the plan and the amount of prepaid
pension cost included in other assets at September 30:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $1,136,000 in 1996 and $989,000 in 1995.................. $ (1,141) $ (1,004)
========= =========
Projected benefit obligation................................... $ (1,630) $ (1,420)
Plan assets at fair value (primarily debt and
equity securities)............................................. 1,844 1,521
-------- ---------
Plan assets in excess of projected benefit obligation ............ 214 101
Unrecognized net loss............................................. 103 170
-------- ---------
Prepaid pension cost................................... $ 317 $ 271
========= =========
</TABLE>
Pension expense consisted of the following for the years ended
September 30:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Service cost (benefits earned during the year)......... $ 96 $ 86 $ 84
Interest cost on projected benefit obligation.......... 111 100 88
Actual return on plan assets........................... (136) (114) (111)
Net amortization and deferral.......................... - 2 1
----- ----- ------
Net pension expense............................ $ 71 $ 74 $ 62
===== ====== ======
</TABLE>
The projected benefit obligations at September 30, 1996 and 1995 were
computed using discount rates of 7.75% and 8.0%, respectively, and a rate
of compensation increase of 5.0%. The expected long-term rate of return
on plan assets was 8.5%.
In connection with the Conversion, the Company entered into a
non-qualified Supplemental Executive Retirement Agreement with an
executive officer to provide retirement benefits in addition to the
benefits provided by the pension plan. The cost related to this agreement
was insignificant for the period through September 30, 1996.
42
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Savings Plan
The Company also maintains an employee savings plan under Section
401(k) of the Internal Revenue Code. Eligible employees may make
contributions to the plan of up to 15% of their compensation, subject to
a dollar limitation. The Company makes matching contributions of up to 2%
of the participant's compensation. Participants vest immediately in their
own contributions and over a five-year period with respect to Company
contributions. Savings plan expense was $28,000, $22,000 and $23,000 for
the years ended September 30, 1996, 1995 and 1994, respectively.
Employee Stock Ownership Plan
In connection with the Conversion, the Company established an employee
stock ownership plan ("ESOP") for eligible employees. The ESOP borrowed
approximately $2.9 million from the Holding Company and used the funds to
purchase 285,660 shares of the Holding Company's common stock sold in the
subscription and community offering described in note 11. The ESOP will
repay the loan over a ten-year period primarily from the Association's
contributions to the ESOP. The Association makes semi-annual
contributions equal to the debt service requirements less dividends
received by the ESOP.
Shares purchased by the ESOP are held in a suspense account until
allocated to participant accounts by the plan trustee. Shares are
allocated to participants on the basis of their relative compensation.
Participants become vested in the allocated shares over a period not to
exceed five years. Any forfeited shares are allocated to other
participants in the same proportion as contributions. A total of 14,283
shares were released for allocation to participants as of September 30,
1996. Compensation expense recognized with respect to these shares
amounted to $147,000, for the period from the Conversion through
September 30, 1996, based on the average fair value of the Holding
Company's common stock for the period. The cost of the 271,377 shares
which have not yet been committed to be released to participant accounts
is reflected as a reduction to stockholders' equity ($2.7 million at
September 30, 1996). The fair value of these shares was approximately
$3.4 million at that date.
Stock Option and Incentive Plan
On October 30, 1996, the stockholders approved the Yonkers Financial
Corporation 1996 Stock Option and Incentive Plan. Under the plan, 357,075
shares of authorized but unissued Holding Company common stock are
reserved for issuance to employees and non-employee directors upon option
exercises. Options under the plan may be either non-qualified stock
options or incentive stock options. Each option entitles the holder to
purchase one share of common stock at an exercise price equal to the fair
market value of the stock on the grant date. An initial grant of 264,951
options was made, effective October 30, 1996, at an exercise price of
$12.875 per share. These options have a ten-year term and vest ratably
over five years from the grant date.
Management Recognition Plan
On October 30, 1996, the stockholders also approved the Yonkers
Financial Corporation 1996 Management Recognition Plan. The purpose of
this plan is to provide directors, officers and employees with a
proprietary interest in the Company in a manner designed to encourage
such individuals to remain with the Company. Awards granted under this
plan vest ratably over five years from the date of grant. The Holding
Company completed the funding of the plan in November 1996 by purchasing
142,830 shares of common stock in the open market at a total cost
43
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of approximately $1.8 million which reduced consolidated stockholders'
equity. The cost of shares granted under the plan will be amortized to
compensation expense over the related vesting period. An initial grant of
101,405 shares was made in November 1996.
(11) Stockholders' Equity
Stock Conversion
Concurrent with the Conversion, on April 18, 1996 the Holding Company
sold 3,570,750 shares of its common stock in a subscription and community
offering at a price of $10 per share, for net proceeds of $34.6 million
after deducting conversion costs of $1.1 million. The Holding Company
used $17.3 million of the net proceeds to acquire all of the common stock
issued by the Association in the conversion.
In accordance with regulatory requirements, the Association
established a liquidation account at the time of the Conversion in the
amount of $15.8 million, equal to its equity at September 30, 1995. The
liquidation account is maintained for the benefit of eligible and
supplemental eligible account holders who continue to maintain their
accounts at the Association after the Conversion. The liquidation account
will be reduced annually to the extent that eligible and supplemental
eligible account holders have reduced their qualifying deposits as of
each anniversary date. Subsequent increases will not restore such account
holder's interest in the liquidation account. In the event of a complete
liquidation of the Association, each eligible account holder and
supplemental 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.
Capital Distributions
The Association may not declare or pay cash dividends on or repurchase
any of its shares of common stock if the effect thereof would cause its
stockholder's equity to be reduced below applicable regulatory capital
requirements or the amount required to be maintained for the liquidation
account. The OTS capital distribution regulations applicable to savings
institutions (such as the Association) that meet their regulatory capital
requirements, generally limit dividend payments in any year to the
greater of (i) 100% of year-to-date net income plus an amount that would
reduce surplus capital by one-half or (ii) 75% of net income for the most
recent four quarters. Surplus capital is the excess of actual capital at
the beginning of the year over the institution's minimum regulatory
capital requirement.
Unlike the Association, the Holding Company is not subject to OTS
regulatory restrictions on the payment of dividends to its shareholders.
However, the Holding Company is subject to Delaware law which generally
limits dividends to an amount equal to the excess of the net assets of
the Holding Company (the amount by which total assets exceed total
liabilities) over its statutory capital, or if there is no such excess,
to its net profits for the current and/or immediately preceding fiscal
year.
In September 1996, the Holding Company announced that it had received
approval from the OTS to repurchase up to 10% of its outstanding common
stock (in addition to the shares repurchased for purposes of the
management recognition plan described in note 10). This program was
completed in November 1996, with 357,075 shares repurchased at a total
cost of $4.6 million which reduced consolidated stockholders' equity.
44
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Regulatory Capital Requirements
OTS regulations require savings institutions to maintain minimum levels
of regulatory capital. Under the regulations in effect at September 30, 1996,
the Association was required to maintain a minimum ratio of tangible capital to
total adjusted assets of 1.5%; a minimum ratio of Tier I (core) capital to total
adjusted assets of 3.0%; and a minimum ratio of total (core and supplementary)
capital to risk-weighted assets of 8.0%.
Under its prompt corrective action regulations, the OTS is required to
take certain supervisory actions (and may take additional discretionary actions)
with respect to an undercapitalized institution. Such actions could have a
direct material effect on the institution's financial statements. The
regulations establish a framework for the classification of savings institutions
into five categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. Generally, an institution is considered well capitalized if it
has a Tier I (core) capital ratio of at least 5.0%; a Tier I risk-based capital
ratio of at least 6.0%; and a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the OTS about
capital components, risk weightings and other factors. These capital
requirements, which are applicable to the Association only, do not consider
additional capital at the Holding Company level.
Management believes that, as of September 30, 1996, the Association
meets all capital adequacy requirements to which it is subject. Further, the
most recent OTS notification categorized the Association as a well-capitalized
institution under the prompt corrective action regulations. There have been no
conditions or events since that notification that management believes have
changed the Association's capital classification.
The following is a summary of the Association's actual capital amounts
and ratios as of September 30, 1996 and 1995, compared to the OTS minimum
capital adequacy requirements and the OTS requirements for classification as a
well-capitalized institution:
September 30, 1996
--------------------------------------------------------
Minimum Capital For Classification
Association Actual Adequacy as Well Capitalized
------------------ -------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Tangible capital ..... $34,409 14.0% $3,673 1.5%
Tier I (core) capital. 34,409 14.0 7,346 3.0 $12,244 5.0%
Risk-based capital:
Tier I............. 34,409 36.3 5,693 6.0
Total ............. 35,346 37.2 7,591 8.0 9,488 10.0
====== ==== ===== === ===== ====
45
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
--------------------------------------------------------
Minimum Capital For Classification
Association Actual Adequacy as Well Capitalized
------------------ -------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Tangible capital...... $15,784 7.6% $3,124 1.5%
Tier I (core) capital.. 15,784 7.6 6,248 3.0 $10,413 5.0%
Risk-based capital:
Tier I.............. 15,784 17.9 5,306 6.0
Total .............. 16,503 18.7 7,077 8.0 8,844 10.0
====== ==== ===== === ===== ====
(12) Commitments and Contingencies
Off-Balance Sheet Financial Instruments
The Company's off-balance sheet financial instruments were limited to
outstanding commitments to originate loans of $1.5 million and unadvanced
lines of credit extended to customers of $5.0 million at September 30,
1996 ($2.5 million and $4.6 million, respectively, at September 30,
1995). Although these contractual amounts represent the Company's maximum
potential exposure to credit loss, they do not necessarily represent
future cash requirements since certain commitments and lines of credit
may expire without being funded and others may not be fully drawn upon.
Substantially all of these commitments and lines of credit have been
provided to customers within the Company's primary lending area described
in note 3 and relate to adjustable-rate loans. Commitments generally have
fixed expiration dates or other termination clauses and may require the
payment of a fee by the customer. Commitments and lines of credit are
subject to the Company's credit approval process, including a
case-by-case evaluation of the customer's creditworthiness and related
collateral requirements.
Lease Commitments
The Company is obligated under non-cancellable leases for certain of
its banking premises. Rental expense under these leases was $172,000,
$120,000 and $118,000 for the years ended September 30, 1996, 1995 and
1994, respectively. At September 30, 1996, the future minimum rental
payments under the lease agreements for the fiscal years ending September
30 are $189,000 in 1997; $130,000 in 1998; $127,000 in 1999; $82,000 in
2000; and $33,000 in 2001.
Legal Proceedings
In the normal course of business, the Company is involved in various
outstanding legal proceedings. In the opinion of management, after
consultation with legal counsel, the outcome of such legal proceedings
should not have a material effect on the Company's financial condition,
results of operations or liquidity.
46
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) Fair Values of Financial Instruments
SFAS No. 107 requires disclosures about the fair values of financial
instruments for which it is practicable to estimate fair value. The
definition of a financial instrument includes many of the assets and
liabilities recognized in the Company's balance sheet, as well as certain
off-balance sheet items. Fair value is defined in SFAS No. 107 as the
amount at which a financial instrument could be exchanged in a current
transaction between willing parties, other than in a forced or
liquidation sale.
Quoted market prices are used to estimate fair values when those
prices are available. However, active markets do not exist for many types
of financial instruments. Consequently, fair values for these instruments
must be estimated by management using techniques such as discounted cash
flow analysis and comparison to similar instruments. These estimates are
highly subjective and require judgments regarding significant matters,
such as the amount and timing of future cash flows and the selection of
discount rates that appropriately reflect market and credit risks.
Changes in these judgments often have a material effect on the fair value
estimates. In addition, since these estimates are made as of a specific
point in time, they are susceptible to material near-term changes. Fair
values disclosed in accordance with SFAS No. 107 do not reflect any
premium or discount that could result from the sale of a large volume of
a particular financial instrument, nor do they reflect possible tax
ramifications or estimated transaction costs.
The following is a summary of the carrying amounts and fair values of
the Company's financial assets and liabilities (none of which were held
for trading purposes) at September 30:
1996 1995
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In Millions)
Financial assets:
Cash and due from banks ......... $ 2.2 $ 2.2 $ 3.2 $ 3.2
Short-term investments .......... 10.3 10.3 0.1 0.1
Securities ..................... 153.6 152.7 116.3 116.0
Loans............................ 86.7 85.4 83.7 82.7
Accrued interest receivable ..... 2.4 2.4 1.8 1.8
Federal Home Loan Bank stock..... 1.1 1.1 1.1 1.1
Financial liabilities:
Savings certificate accounts .... 105.0 104.9 101.4 101.9
Other deposit accounts .......... 85.7 85.7 86.6 86.6
Borrowings ..................... 18.3 18.3 4.3 4.3
==== ==== === ===
The following is a description of the principal valuation methods used
by the Company to estimate the fair values of its financial instruments:
Securities
The fair values of securities were based on market prices or dealer
quotes.
47
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans
For valuation purposes, the loan portfolio was segregated into its
significant categories, such as residential mortgage loans and consumer
loans. These categories were further analyzed, where appropriate, into
components based on significant financial characteristics such as type of
interest rate (fixed or adjustable). Generally, management estimated fair
values by reference to current secondary market prices of similar loans
or by discounting the anticipated cash flows at current market rates for
loans with similar terms to borrowers of similar credit quality.
Deposit Liabilities
The fair values of savings certificate accounts represent contractual
cash flows discounted using interest rates currently offered on
certificates with similar characteristics and remaining maturities. In
accordance with SFAS No. 107, the fair values of deposit liabilities with
no stated maturity (checking, NOW, money market, regular savings and club
accounts) are equal to the carrying amounts payable on demand.
In accordance with SFAS No. 107, these fair values do not include the
value of core deposit relationships which comprise a significant portion
of the Company's deposit base. Management believes that the Company's
core deposit relationships provide a relatively stable, low-cost funding
source which has a substantial unrecognized value separate from the
deposit balances.
Other Financial Instruments
The other financial assets and liabilities set forth in the preceding
table have fair values that approximate the respective carrying amounts
because the instruments are payable on demand or have short-term
maturities and present relatively low credit risk and interest rate risk.
The fair values of the loan origination commitments and unadvanced
lines of credit described in note 12 were estimated based on an analysis
of the interest rates and fees currently charged to enter into similar
transactions, considering the remaining terms of the instruments and the
creditworthiness of the potential borrowers. At September 30, 1996 and
1995, the fair values of these financial instruments approximated the
related carrying amounts which were not significant.
(14) Recent Accounting Pronouncements
During the year ending September 30, 1997, the Company will adopt the
following accounting pronouncements which have been issued by the
Financial Accounting Standards Board ("FASB"):
Impairment of Long-Lived Assets
In March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS No. 121 establishes accounting standards for reviewing and
measuring the impairment of long-lived assets and certain identifiable
intangible assets. Various assets are excluded from the scope of SFAS No.
121, including financial instruments which constitute most of the
Company's assets.
48
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For assets included in the scope of SFAS No. 121, such as office
properties and equipment, an impairment loss must be recognized when the
estimate of total undiscounted future cash flows attributable to the
asset is less than the asset's carrying amount. Measurement of the
impairment loss is based on the fair value of the asset. SFAS No. 121 is
effective for fiscal years beginning after December 15, 1995. Management
anticipates that the prospective adoption of SFAS No. 121 in the year
ending September 30, 1997 will not have a material impact on the
Company's financial condition or results of operations.
Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which addresses accounting for stock-based
compensation arrangements such as the stock option and incentive plan and
the management recognition plan described in note 10. Under SFAS No. 123,
entities can recognize stock-based compensation expense in the basic
financial statements using either (i) the approach set forth in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees", or (ii) the fair value based method introduced in
SFAS No. 123. Under APB Opinion No. 25, compensation expense is measured
at the option's intrinsic value, or the excess (if any) of the market
price of the underlying stock at the measurement date over the amount the
employee is required to pay. Under the fair value based method introduced
in SFAS No. 123, compensation expense is measured at the option's fair
value on the grant date.
The Company will adopt the provisions of APB Opinion No. 25 in
accounting for the stock option and incentive plan and the management
recognition plan. No compensation expense will be recognized for the
stock option and incentive plan since the exercise price of the options
will equal the market price of the underlying stock at the grant date.
The cost of the shares awarded under the management recognition plan will
be recognized as expense on a straight-line basis over the five-year
vesting period. In accordance with SFAS No. 123, beginning in the year
ending September 30, 1997 the Company will make pro forma disclosures of
net income and earnings per share as if it had adopted the fair value
method of accounting.
Transfers and Servicing of Financial Assets
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities".
Transactions within the scope of SFAS No. 125 include loan
securitizations, sales of partial interests in financial assets,
repurchase agreements, securities lending, pledges of collateral, loan
syndications and participations, sales of receivables with recourse,
servicing of mortgage and other loans, and in-substance defeasances of
debt.
SFAS No. 125 applies a financial-components approach that focuses on
the entity's control over a financial asset to determine the proper
accounting for financial asset transfers. Under that approach, after
financial assets are transferred, an entity recognizes on the balance
sheet all assets it controls and all liabilities it has incurred. The
entity would remove from the balance sheet those assets it no longer
controls and liabilities it has satisfied. If the entity has surrendered
control over the transferred assets, the transaction is accounted for as
a sale. Under SFAS No. 125, control is considered to have been
surrendered only if (i) the assets are isolated from the transferor, (ii)
the transferee has the right to pledge or exchange the assets or is a
qualifying special-purpose entity, and (iii) the transferor does not
maintain effective control over the assets through an agreement to
repurchase or redeem them. If any of these conditions are not met, the
transfer is accounted for as a secured borrowing.
49
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 125 requires recognition of servicing rights as an asset when
loans are sold or securitized with servicing retained. Servicing rights
were previously recognized as an asset when acquired through a purchase
transaction, but not when acquired through loan origination activities.
SFAS No. 125 requires that capitalized servicing rights be evaluated for
impairment, by comparing the asset's carrying amount to its current fair
value. In making impairment evaluations, servicing rights must be
stratified based on one or more of the predominant risk characteristic of
the underlying loans. Impairment is recognized through a valuation
allowance for each impaired stratum.
As required, the Company will adopt SFAS No. 125 effective January 1,
1997 on a prospective basis. Management anticipates that the
implementation of SFAS No. 125 will not have a material impact on the
Company's financial condition or results of operations.
50
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) Parent Company Condensed Financial Information
Set forth below is the condensed balance sheet of Yonkers Financial
Corporation as of September 30, 1996, and its condensed statements of
income and cash flows for the period from April 18, 1996 (the Conversion
date) to September 30, 1996:
<TABLE>
<CAPTION>
September 30,
1996
-------------
(In Thousands)
<S> <C>
Condensed Balance Sheet
Assets:
Cash............................................................. $ 384
Short-term investments........................................... 10,248
Securities....................................................... 4,016
Investment in subsidiary......................................... 34,351
Other assets..................................................... 64
--------
Total assets............................................... $ 49,063
========
Liabilities and Stockholders' Equity:
Accrued expenses................................................. $ 64
Stockholders' equity............................................. 48,999
--------
Total liabilities and stockholders' equity................. $ 49,063
========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
From April 18, 1996
to September 30, 1996
---------------------
(In Thousands)
<S> <C>
Condensed Statement of Income
Interest income..................................................... $ 388
Non-interest expense................................................ (43)
--------
Income before income tax expense and equity in
undistributed earnings of subsidiary.......................... 345
Income tax expense.................................................. 146
--------
Income before equity in undistributed earnings of subsidiary .... 199
Equity in undistributed earnings of subsidiary...................... 530
--------
Net income................................................. $ 729
========
Condensed Statement of Cash Flows
Cash flows from operating activities:
Net income....................................................... $ 729
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiary ............ (530)
Accrued expenses........................................... 64
Other...................................................... (67)
---------
Net cash provided by operating activities.................. 196
---------
Cash flows from investing activities:
Purchase of subsidiary's common stock............................ (17,314)
Purchases of securities.......................................... (4,000)
Other............................................................ 143
---------
Net cash used in investing activities...................... (21,171)
---------
Cash flows from financing activities:
Net proceeds from sale of common stock, exclusive of ESOP shares. 31,771
Dividend paid.................................................... (164)
---------
Net cash provided by financing activities.................. 31,607
---------
Net increase in cash and cash equivalents........................... 10,632
Cash and cash equivalents at beginning of period.................... -
---------
Cash and cash equivalents at end of period.......................... $ 10,632
=========
</TABLE>
51
<PAGE>
YONKERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) Selected Quarterly Financial Data (Unaudited)
The following is a summary of unaudited quarterly financial data for
the fiscal years ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------
December 31 March 31 June 30 September 30
----------- -------- ------- ------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Fiscal 1996
Interest and dividend income.......... $ 3,821 $ 3,813 $ 4,267 $ 4,475
Interest expense...................... 2,024 2,001 1,954 1,996
-------- -------- -------- --------
Net interest income............... 1,797 1,812 2,313 2,479
Provision for loan losses............. 100 50 237 75
Non-interest income................... 166 165 173 198
SAIF special assessment............... - - - 1,166
Other non-interest expense............ 1,200 1,249 1,148 1,441
-------- -------- -------- --------
Income (loss) before income
taxes.......................... 663 678 1,101 (5)
Income tax expense (benefit) ......... 272 278 469 (102)
-------- -------- -------- --------
Net income........................ $ 391 $ 400 $ 632 $ 97
======== ======== ======== ========
Earnings per share................ $ 0.19 $ 0.03
======== ========
Fiscal 1995
Interest and dividend income.......... $ 3,299 $ 3,454 $ 3,574 $ 3,736
Interest expense...................... 1,509 1,631 1,895 1,969
-------- -------- -------- --------
Net interest income............... 1,790 1,823 1,679 1,767
Provision for loan losses............. 125 75 75 218
Non-interest income................... 150 158 198 180
Non-interest expense.................. 1,222 1,082 1,100 1,375
-------- -------- -------- --------
Income before income
tax expense.................... 593 824 702 354
Income tax expense.................... 268 349 283 133
-------- -------- -------- --------
Net income..................... $ 325 $ 475 $ 419 $ 221
======== ======== ======== ========
</TABLE>
52
<PAGE>
YONKERS FINANCIAL CORPORATION
STOCKHOLDER INFORMATION
ANNUAL MEETING
The annual meeting of stockholders will be held at 4:30 p.m., January 28, 1997,
at The Yonkers Savings and Loan Association, FA, located at One Manor House
Square, Yonkers, New York.
STOCK LISTING
The Company's stock is traded over the counter, on the NASDAQ National Market
under the symbol "YFCB".
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The table below shows the range of high and low bid prices and dividends paid in
fiscal 1996. These prices do not represent actual transactions and do not
include retail markups, markdowns or commissions.
QUARTER ENDED HIGH LOW DIVIDENDS
June 30, 1996............ $10 1/4 $9 1/4 $ ---
September 30, 1996....... 12 5/8 9 1/2 $0.05
The Board of Directors intends to continue the payment of cash dividends,
dependent on the results of operations and financial condition of the Company,
tax considerations, industry standards, economic conditions, general business
practices and other factors. Dividend payment decisions are made with
consideration of a variety of factors including earnings, financial condition,
market considerations and regulatory restrictions. Restrictions on dividend
payments are described in Note 11 of the Notes to Consolidated Financial
Statements included in this report.
As of September 30, 1996, the Company had approximately 607 stockholders of
record and 3,570,750 outstanding shares of common stock.
SHAREHOLDER AND GENERAL INQUIRIES TRANSFER AGENT
Joseph L. Macchia, Vice President Registrar & Transfer Co.
Yonkers Financial Corporation 10 Commerce Drive
6 Executive Plaza Cranford, New Jersey 07016
Yonkers, New York 10701 (800) 456-0596
(914) 965-2500
ANNUAL AND OTHER REPORTS
The Company is required to file an annual report on Form 10-K for its fiscal
year ended September 30, 1996, with the Securities and Exchange Commission.
Copies of the Form 10-K annual report and the Company's quarterly reports may be
obtained without charge by contacting:
Joseph L. Macchia, Vice President
Yonkers Financial Corporation
6 Executive Plaza
Yonkers, New York 10701
(914) 965-2500
53
<PAGE>
YONKERS FINANCIAL CORPORATION
CORPORATE INFORMATION
COMPANY AND BANK ADDRESS
6 Executive Plaza
Yonkers, New York 10701
Telephone (914) 965-2500
Fax (914) 965-2599
DIRECTORS OF THE BOARD
William G. Bachop
Retired professional engineer and President of
Herbert G. Martin, Inc.
P. Anthony Sarubbi
A consulting engineer and President of P. Anthony Sarubbi, Inc.
Donald R. Angelilli
A real estate broker employed by Prudential Ragette
Michael J. Martin
Vice President of Herbert G. Martin, Inc.
Eben T. Walker
President of Graphite Metallizing Corporation
Charles D. Lohrfink
Retired Public Affairs Director for Consolidated
Edison
YONKERS FINANCIAL CORPORATION
OFFICERS
Richard F. Komosinski
President
Joseph D. Roberto
Vice President, Treasurer and
Chief Financial Officer
Joseph L. Macchia
Vice President and Secretary
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
3001 Summer Street
Stamford, Connecticut 06905
SPECIAL COUNSEL
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Seventh Floor -- East Tower
Washington, D.C. 20005
54
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percentage of State of Incorporation
Parent Subsidiary Ownership or Organization
------ ---------- --------- ---------------
<S> <C> <C> <C>
Yonkers Financial The Yonkers Savings and 100% Federal
Corporation Loan Association, FA
The Yonkers Savings and Yonkers Financial Services 100% New York
Loan Association, FA Corporation
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30,1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 2,152
<INT-BEARING-DEPOSITS> 100
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 58,552
<INVESTMENTS-CARRYING> 95,007
<INVESTMENTS-MARKET> 94,162
<LOANS> 87,603
<ALLOWANCE> (937)
<TOTAL-ASSETS> 259,534
<DEPOSITS> 190,675
<SHORT-TERM> 18,264
<LIABILITIES-OTHER> 1,596
<LONG-TERM> 0
0
0
<COMMON> 34,632
<OTHER-SE> 14,367
<TOTAL-LIABILITIES-AND-EQUITY> 259,534
<INTEREST-LOAN> 7,471
<INTEREST-INVEST> 8,153
<INTEREST-OTHER> 752
<INTEREST-TOTAL> 16,376
<INTEREST-DEPOSIT> 7,780
<INTEREST-EXPENSE> 7,975
<INTEREST-INCOME-NET> 8,401
<LOAN-LOSSES> 462
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,204
<INCOME-PRETAX> 2,437
<INCOME-PRE-EXTRAORDINARY> 2,437
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,520
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
<YIELD-ACTUAL> 3.73
<LOANS-NON> 2,775
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 919
<ALLOWANCE-OPEN> (719)
<CHARGE-OFFS> 333
<RECOVERIES> (89)
<ALLOWANCE-CLOSE> (937)
<ALLOWANCE-DOMESTIC> (937)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
