U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark one)
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, for the fiscal year ended December 31,
1997, or
( ) TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (no fee required), for the
transition period from _______________ to ______________.
Commission file number:
JADE FINANCIAL CORP.
(Name of small business issuer in its charter)
Pennsylvania 233-002586
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Registrant's telephone number, including area code:(215)322-9000
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock ($0.01 par value)
Check whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No ____
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B is not 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-KSB or any amendment to this Form 10-KSB. (X)
The Registrant's revenues for its most recent fiscal year
were $12,516,000
The aggregate market value of common stock of the
Registrant held by nonaffiliates, based on the average between
the closing bid and the closing asked prices as of March 28,
2000 was $22,337,000. As of March 28, 2000, the Registrant had
1,872,923 shares of Common Stock outstanding.
Documents incorporated by reference. None
Transitional Small Business Disclosure Format (check one):
Yes _____ No X
JADE FINANCIAL CORP.
Table of Contents
Page No.
PART I
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of
Securities Holders
Part II
Item 5. Market for Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations
Item 8. Financial Statements
Item 9. Changes In and Disagreements With
Accountants on Accounting and
Financial Disclosure
Part III
Item 10. Directors, Executive Officers,
Promoters and Control Persons;
Compliance With Section 16(a)
of the Exchange Act
Item 11. Executive Compensation
Item 12. Security Ownership of Certain
Beneficial Owners and Management
Item 13. Certain Relationships and Related
Transactions
Item 14. Exhibits and Reports on Form 8-K
Part I
Item 1
BUSINESS OF JADE FINANCIAL CORP.
General
JADE FINANCIAL CORP. ("Jade") was organized at the
direction of the Board of Directors of IGA Federal Savings Bank
("IGA")for the purpose of becoming a holding company to own all
of the outstanding capital stock of IGA. Upon completion of the
stock conversion on October 4, 1999, IGA became a wholly-owned
subsidiary of JADE. JADE is engaged primarily in the business
of directing, planning and coordinating the business activities
of IGA, and has two other operating subsidiaries, JADE Abstract,
and JADE Insurance Agency.
BUSINESS OF IGA
History
IGA originally was established in 1975 as IGA Federal
Credit Union. The credit union initially served the Independent
Group Association, a labor organization comprised of employees
of PECO Energy, Inc., the electric utility serving the
Philadelphia metropolitan area. Over time, IGA's membership grew
to include other employee groups. However, as a credit union,
IGA was legally restricted to serve only customers who shared a
"common bond" such as a common employer. However, members that
were employees of PECO or its affiliates (or retirees or family
members of PECO or its affiliates) continued to be a large
majority of IGA's members.
As a credit union, IGA did not experience membership growth
in recent years due to a reduction in the number of PECO
employees from approximately 12,500 to 6,500. Moreover, IGA
anticipated that membership would decline in the future due to
the nationwide consolidation of the electric utility industry
and the 1996 deregulation of the electric utility industry in
Pennsylvania. Therefore, after receiving the approval of the
National Credit Union Administration and IGA's members, on July
1, 1998, IGA converted from a credit union to IGA Federal
Savings, a federal mutual savings bank. IGA was then able to
serve the general public, rather than being limited to serving
only distinct employee groups.
On October 12, 1999, JADE completed an initial public
offering of 1,872,923 shares of common stock and used the
proceeds to acquire all the stock of IGA Federal Savings thereby
converting IGA Federal Savings from a federal mutual savings
bank to a federal stock savings bank.
IGA is primarily engaged in the business of attracting
deposits from the general public and originating consumer loans,
including home equity, auto, credit card and personal loans, and
residential real estate loans secured by first mortgages on
owner-occupied, one-to-four family residences in our market
area. IGA also originates a limited amount of commercial loans
and invests in investment and mortgage-related securities.
IGA's revenues are derived principally from interest on
mortgage loans, consumer loans and investment and mortgage-
related securities.
IGA offers a variety of deposit accounts having a wide
range of interest rates and terms, which generally include
passbook and statement savings accounts, money market deposit
accounts, NOW and non-interest bearing checking accounts and
certificates of deposit with varied terms ranging from 91 days
to 60 months. IGA only solicits deposits in its market areas
and it has not accepted brokered deposits. Our deposits are
insured by the Savings Association Insurance Fund of the FDIC up
to applicable limits.
Market Areas and Competition
IGA has its main office located in Feasterville, Bucks
County, Pennsylvania and four branch offices located in Center
City, Philadelphia, Pennsylvania, Grays Ferry in southwest
Philadelphia, Pennsylvania, the Chesterbrook Village Shopping
Center in Chester County, Pennsylvania, and the Media Shopping
Center in Delaware County, Pennsylvania.
In addition, IGA participates in MAC, a regional automatic
teller machine network. IGA owns and operates four teller
machines.
IGA's market area consists of the Philadelphia metropolitan
area, which is comprised of Philadelphia and the surrounding
Pennsylvania counties of Bucks, Chester, Delaware and
Montgomery. IGA also has a number of out-of-market customers
who are retirees or PECO employees at out-of-market locations.
IGA's five-county market area is included in the Philadelphia
Metropolitan Statistical Area. The Philadelphia Metropolitan
Statistical Area, which also includes three New Jersey counties,
is the nation's fourth largest metropolitan area in terms of
total population. Based on 1998 census data, the Pennsylvania
counties in the Philadelphia Metropolitan Statistical Area had
an estimated population of 3.7 million, which is one-third of
Pennsylvania's total population.
IGA faces strong competition, in the consumer and
commercial loan business, commercial real estate and residential
real estate loans and in attracting deposits. The Philadelphia
Metropolitan Statistical Area has become a center for financial
services, and IGA competes with a number of very large financial
institutions that are either headquartered or maintain offices
in southeastern Pennsylvania. Some of the larger commercial
banks operating in our market area include First Union National
Bank, PNC Bank and Mellon Bank. IGA also competes with a number
of larger thrifts that maintain branches in, or are
headquartered in, southeastern Pennsylvania including Sovereign
Bank, Commonwealth Bank, Firstrust Savings Bank, and Beneficial
Mutual Savings Bank. Competition in originating residential
real estate loans comes primarily from other savings
institutions, commercial banks, credit unions and mortgage
bankers. Competition for commercial business loans and
commercial real estate loans comes primarily from commercial
banks and savings institutions. Other savings institutions,
commercial banks, credit unions and finance companies provide
vigorous competition in consumer lending.
Competition for deposits is principally from other savings
institutions, commercial banks and credit unions located in the
same region, as well as mutual funds. IGA competes for these
deposits by offering a variety of deposit accounts at
competitive rates.
Business Strategy
Our strategy is to be an independent, consumer oriented
financial institution that provides retail loan and deposit
products to individuals and small businesses. Highlights of
this strategy include the following:
- Consumer Lending - Historically we have concentrated on
the origination of consumer loans as our primary loan product,
including home equity, automobile, credit card and personal
loans. At December 31, 1999, consumer loans totaled $68.9
million, or 59.75% of our loan portfolio.
- Home Mortgage Lending - In recent years, residential
first mortgage loans have become an increasingly important
component of our lending activities. We expect this trend to
continue. At December 31, 1999, residential first mortgage
loans totaled $43.4 million, or 37.66% of our loan portfolio.
- Commercial Real Estate and Commercial Business Loans -
We have slowly increased our commercial real estate and
commercial business lending with a focus on small and medium-
sized borrowers. We have hired an experienced commercial lender
to manage our expansion in this area. We are funding this
product expansion with locally gathered deposits. We believe a
cautious and prudent expansion in these areas will diversify our
loan portfolio and increase the average yield of our interest
earning assets. We do recognize, however, that commercial real
estate and commercial business loans both involve a higher
degree of risk than single-family residential lending due to a
variety of factors, including generally larger loan balances,
the dependency on successful operation of a project, or the
income stream of a borrower for repayment, and greater oversight
efforts compared to mortgage loans. At December 31, 1999, we
have $3.0 million in commercial real estate loans and $1.5
million in commercial business loans.
- Expanded Customer Base - Prior to June 30, 1998, under
our federal credit union charter, we were limited in the
customers that we could service. The cornerstone of our
strategy as a savings bank is to maintain our base of customers
who were credit union members and expand our customer base by
marketing to the communities served by our branches. We believe
our original customer base has continued to increase their
banking relationships with us. In addition, our deposit and
loan accounts have grown by the acquisition of new customers
from area banks and thrifts.
Supervision and Regulation
The Bank is chartered as a federal savings bank under the
Home Owners' Loan Act, as amended (the "HOLA") which is
implemented by regulations adopted and administered by the OTS.
As a federal savings bank, the Bank is subject to regulation,
supervision and regular examination by the OTS. The OTS also
has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and
the Company. Federal banking laws and regulations control, among
other things, the Bank's investments, loans, required reserves,
mergers and consolidations, payment of dividends and other
aspects of the Bank's operations. The deposits of the Bank are
insured by the Savings Association Insurance Fund ("SAIF")
administered by the FDIC to the maximum extent provided by law
($100,000 for each depositor). In addition, the FDIC has
certain regulatory and examination authority over OTS-regulated
savings institutions and may recommend enforcement actions
against savings institutions to the OTS. The supervision and
regulation of the Bank is intended primarily for the protection
of the SAIF and the Bank's depositors rather than the Company or
its shareholders.
As a savings and loan holding company, JADE Financial Corp.
is registered with the OTS and is also subject to OTS regulation
and supervision under the HOLA.
The following discussion is intended to be a summary of
certain statutes, rules and regulations affecting the Bank and
the Company. A number of other statutes and regulations have an
impact on their operations. The following summary of applicable
statutes and regulations does not purport to be complete and is
qualified in its entirety by reference to relevant statutes and
regulations.
New Legislation
Landmark legislation in the financial services area was
signed into law on November 12, 1999. The Gramm-Leach-Bliley
Act dramatically changes certain banking laws that have been in
effect since the early part of the 20th century. The most
radical changes are that the separation between banking and the
securities businesses mandated by the Glass-Steagall Act has now
been removed, and the provisions of any state law that prohibits
affiliation between banking and insurance entities have been
preempted. Accordingly, the new legislation now permits firms
engaged in underwriting and dealing in securities, and insurance
companies, to own banking entities, and permits bank holding
companies (and in some cases, banks) to own securities firms and
insurance companies. The provisions of federal law that
preclude banking entities from engaging in non-financially
related activities, such as manufacturing, have not been
changed. For example, a manufacturing company cannot own a bank
and become a bank holding company, and a bank holding company
cannot own a subsidiary that is not engaged in financial
activities, as defined by the regulators.
The new legislation creates a new category of bank holding
company called a "financial holding company." In order to avail
itself of the expanded financial activities permitted under the
new law, a bank holding company must notify the Federal Reserve
that it elects to be a financial holding company. A bank
holding company can make this election if it, and all its bank
subsidiaries, are well capitalized, well managed, and have at
least a satisfactory Community Reinvestment Act rating, each in
accordance with the definitions prescribed by the Federal
Reserve and the regulators of the subsidiary banks. Once a bank
holding company makes such an election, and provided that the
Federal Reserve does not object to such election by such bank
holding company, the financial holding company may engage in
financial activities (i.e, securities underwriting, insurance
underwriting, and certain other activities that are financial in
nature as to be determined by the Federal Reserve) by simply
giving a notice to the Federal Reserve within thirty days after
beginning such business or acquiring a company engaged in such
business. This makes the regulatory approval process to engage
in financial activities much more streamlined than it was under
prior law.
It is too early to tell what effect the Gramm-Leach-Bliley
Act may have on the Bank. The intent and scope of the act is
positive for the financial services industry, and is an attempt
to modernize federal banking laws and make U. S. institutions
competitive with those from other countries. While the
legislation makes significant changes in U. S. banking law, such
changes may not directly affect the Bank's business unless it
decides to avail itself of new opportunities available under the
new law. The Bank does not expect any of the provisions of the
new Act to have a material adverse effect on the Bank's existing
operations, or to significantly increase its costs.
Regulation of the Bank
Business Activities - The bank derives its lending and
investment powers from the HOLA and the regulations of the OTS
thereunder. Under these laws and regulations, the Bank may
invest in mortgage loans secured by residential and commercial
real estate, commercial and consumer loans, certain types of
commercial paper and debt securities, and certain other assets.
The Bank may also establish service corporations that may engage
in activities reasonably related to the business of financial
institutions but not otherwise permissible for the Bank,
including certain real estate equity investments and securities
and insurance brokerage. These investment powers are subject to
various limitations.
Branching - Subject to certain limitations, OTS regulations
currently permit a federally chartered savings institution like
a Bank to establish branches in any state of the United States,
provided that the federal savings institution qualifies as a
"domestic building and loan association" under the Internal
Revenue Code of 1986, as amended ("the Code"), or is a
"qualified thrift lender" under HOLA. See "-Qualified Thrift
Lender Test." The Bank has no current plans to establish any
branch outside of Pennsylvania although its authority to
establish interstate branches could facilitate a geographic
diversification in the future.
Regulatory Capital - The OTS has adopted capital adequacy
regulations that require savings institutions such as the Bank
to meet three minimum capital standards: a "core" capital
requirement of 3% of adjusted total assets, a "tangible" capital
requirement of 1.5% of adjusted total assets, and a "risk-based"
capital requirement of 8% of total risk-based capital to total
risk-weighted assets. In addition, the OTS has adopted
regulations imposing certain restrictions on savings
institutions that have a total risk-based capital ratio of less
than 8%, a ratio of Tier 1 capital to risk-weighted assets of
less than 4% or a ratio of Tier 1 capital to total assets of
less than 4% (or 3% if the institution is rated Composite 1
under the CAMEL examination rating system). See "- Prompt
Corrective Regulatory Action."
The core capital, or "leverage ratio," requirement mandates
that a savings institution maintain core capital equal to at
least 3% of its adjusted total assets. "Core capital" includes
common shareholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus,
minority interests in the equity accounts of fully consolidated
subsidiaries and certain nonwithdrawable accounts and pledged
deposits. Core capital is generally reduced by the amount of
the savings institution's intangible assets, with limited
exceptions for permissible mortgage servicing rights ("MSRs"),
purchased credit card relationships and certain intangible
assets arising from prior regulatory accounting practices. Core
capital is further reduced by the amount of a savings
institution's investments in and loans to subsidiaries engaged
in activities not permissible for national banks. At
December 31, 1999, the Bank has no such investments.
The risk-based capital standards of the OTS require
maintenance of core capital equal to at least 4% of risk-
weighted assets and total capital equal to at least 8% of risk-
weighted assets. For purposes of the risk-based capital
requirement, "total capital" included core capital plus
supplementary capital up to the amount of core capital.
Supplementary capital includes preferred stock that does not
qualify as core capital, nonwithdrawable accounts and pledged
deposits to the extend not included in core capital, perpetual
and mandatory convertible subordinated debt and maturing capital
instruments meeting specified requirements and a portion of the
institution's loan and lease loss allowance.
The risk-based capital requirement is measured against
risk-weighted assets, which equal the sum of each asset and the
credit-equivalent amount of each off-balance sheet item after
the dollar amount of each such asset and item is multiplied by
an assigned risk weight, which ranges from 0% to 100% as
assigned by the OTS capital regulations based on the risks the
OTS believes are inherent in the type of asset or off-balance
sheet item.
The OTS risk-based capital regulation also included an
interest rate risk ("IRR") component that requires savings
institutions with greater than normal IRR, when determining
compliance with the risk-based capital requirements, to maintain
additional total capital. The OTS has, however, indefinitely
deferred enforcement of its IRR requirements.
Prompt Corrective Regulatory Action - Under the Federal
Deposit Insurance Corporation Improvement Act ("FDICIA"), the
federal banking regulators are required to take prompt
corrective action in respect of depository institutions that no
not meet certain minimum capital requirements, including a
leverage limit and a risk-based capital requirement. All
institutions, regardless of their capital levels, are restricted
from making any capital distributions or paying any management
fees that would cause the institution to become
undercapitalized. As required by FDICIA, banking regulators,
including the OTS, have issued regulations that classify insured
depository institutions by capital levels and provide that the
applicable agency will take various prompt corrective actions to
resolve the problems of any institution that fails to satisfy
the capital standards.
Under the joint prompt corrective action regulations, a
"well-capitalized" institution is one that is not subject to any
regulatory order or directive to meet any specific capital level
and that has or exceeds the following capital levels: a total
risk-based capital ratio of 10%, a Tier 1 risk-based capital
ratio of 6%, and a ratio of tier 1 capital to total assets
("leverage ratio") of 5%. An "adequately capitalized"
institution is one that does not qualify as "well capitalized"
but meets or exceeds the following capital requirements: a total
risk-based capital of 8%, a Tier 1 risk-based capital ratio of
4%, and a leverage ratio of either (i) 4% or (ii) 3% if the
institution has the highest composite examination rating. An
institution not meeting these criteria is treated as
"undercapitalized," "significantly undercapitalized," or
"critically undercapitalized" depending on the extent to which
its capital levels are below these standards. An institution
that falls within any of the three "undercapitalized" categories
will be subject to certain severe regulatory sanctions required
by FDICIA and the implementing regulations. As of December 31,
1999, the Bank was "well-capitalized" as defined by the
regulations, with a total risk-based capital ratio of 20.35%, a
Tier 1 risk-based capital ratio of 19.26% and a leverage ratio
of 19.26%.
Insurance of Accounts and Regulation by the FDIC - The Bank
is a member of the Savings Association Insurance Fund, which is
administered by the FDIC. Deposits are insured up to the
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
Savings Association Insurance Fund or Bank Insurance Fund. The
FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the Office of Thrift
Supervision 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 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 classification of all insured institutions is
made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a
semi-annual basis, if it determines that the reserve ratio of
the Savings Association Insurance Fund will be less than the
designated reserve ratio of 1.25% of Savings Association
Insurance fund 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 Savings Associations Insurance Fund members to
repay amounts borrowed from the United States Treasury or for
any other reason deemed necessary by the FDIC.
Effective January 1, 1999, the premium schedule for Bank
Insurance Fund and Savings Association Insurance Fund insured
institutions ranged from 0 to 27 basis points. IGA is in the
category of institutions that pay no deposit insurance premiums.
However, all insured institutions are required to pay a
Financing Corporation assessment, in order to fund the interest
on bonds issued to resolve thrift failures in the 1980's. The
current rate for Savings Association Assurance Fund insured
institutions is 6.1 basis points for each $100 in domestic
deposits, while Bank Insurance Fund insured institutions pay an
assessment equal to 1.22 basis points for each $100 in domestic
deposits. After January 1, 2000, Savings Association Insurance
Fund and Bank Insurance Fund insured institutions will be the
same. These assessments, which may be revised based upon the
level of Bank Insurance Fund and Savings Association Insurance
Fund deposits, will continue until the bonds mature in the year
2017.
Limitations on Dividends and Other Capital Distributions -
OTS regulations impose various restrictions on savings banks
with respect to their ability to make distributions of capital,
which include dividends, stock redemptions or repurchases, cash-
out mergers and other transactions charged to the capital
account. OTS regulations also prohibit a savings bank from
declining or paying any dividends or from repurchasing any of
its stock if, as a result, the regulatory capital of the bank
would be reduced below the amount required to be maintained for
the liquidation account established in connection with its
mutual to stock conversion.
Generally, savings banks, such as IGA, that before and
after the proposed distribution meet their capital requirements,
may make capital distributions during any calendar year equal to
the greater of 100% of net income for the year-to-date plus 50%
of the amount by which the lesser of the bank's tangible, core
or risk-based capital exceeds its capital requirement for such
capital component, as measured at the beginning of the calendar
year, or 75% of their 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 by the OTS. We may pay dividends in
accordance with this general authority.
Savings banks proposing to make any capital distribution
need only submit written notice to the OTS 30 days prior to such
distribution. Savings banks that do not, or would not meet
their current minimum capital requirements following a proposed
capital distribution, however, must obtain OTS approval prior to
making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety
and soundness concerns.
The OTS has proposed regulations that would revise the
current capital distribution restrictions. Under the proposal a
savings bank 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 of
supervisory concern, and would remain adequately capitalized (as
defined in the OTS prompt corrective action regulations)
following the proposed distribution. Savings banks 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 bank 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 banks, including IGA, 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 short-term borrowings
(borrowings payable in one year or less). For a discussion of
what we include in liquid assets, see "Management's Discussion
and Analysis Of Financial Condition and Results of Operations --
Liquidity." 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 banks. At the
present time, the minimum liquid asset ratio is 4%. Penalties
may be imposed upon banks for violations of the liquid asset
ratio requirement. At December 31, 1999 (the latest available
date), we were in compliance with this requirement with an
overall regulatory liquidity ratio of 30.98%.
Qualified Thrift Lender Test - All savings banks, including
IGA, are required to meet a qualified thrift lender ("QTL") test
to avoid certain restrictions on their operations. This test
requires a savings bank 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. As an alternative, the savings bank may
maintain 60% of its assets in those assets specified in
Section 7701(a)(19) of the Internal Revenue Code. Under either
test, such assets primarily consist of residential housing
related loans and investments. At December 31, 1999, we met the
test.
Any savings bank 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 a bank 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 investments and activities are limited to
those permissible for both a savings bank and a national bank
and it is limited to national bank branching rights in its home
state. In addition, the bank is immediately ineligible to
receive any new FHLB borrowings and is subject to national bank
limits for payment of dividends. If such bank 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
bank 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.
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 IGA, 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 IGA. 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, IGA may be required to devote additional funds for
investment and lending in its local community. We were examined
for CRA compliance in April, 1999 and received a rating of
"satisfactory."
Transactions with Affiliates - Generally, transactions
between a savings bank 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 IGA
include the Company and any company which is under common
control with IGA. In addition, a savings bank may not lend to
any affiliate engaged in activities not permissible for a bank
holding company or acquire the securities of most affiliates.
The OTS has the discretion to treat subsidiaries of savings
banks 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 generally be made on terms substantially
the same as for loans to unaffiliated individuals or as offered
to all employees in a company-wide benefit program.
Federal Securities Law - The stock of the Company is
registered under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The Company is subject to the
information, proxy solicitation, insider trading restrictions
and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Company
may not be resold without registration or unless sold in
accordance with certain resale restrictions. If the Company
meets specified current public information requirements, each
affiliate of the Company 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 noninterest bearing
reserves at specified levels against their transaction accounts
(primarily checking, NOW and Super NOW checking accounts). At
December 31, 1999, we were 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 banks are authorized to borrow from the Federal
Reserve "discount window," but Federal Reserve Board regulations
require banks to exhaust other reasonable alternative sources of
funds, including FHLB borrowings, before borrowing from the
Federal Reserve Association.
Federal Home Loan Bank System - We are a member of the FHLB
of Pittsburgh, which is one of 12 regional FHLBS, that
administers the home financing credit function of savings banks.
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.
As a member, we are required to purchase and maintain stock
in the FHLB of Pittsburgh. On August 11, 1998, we made our
initial purchase of $833,500 in FHLB stock, which was in
compliance with this requirement. We receive dividends on our
FHLB stock on a quarterly basis.
Under federal law the FHLBs are required to provide funds
for the resolution of troubled savings banks 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 our FHLB
stock may result in a corresponding reduction in our capital.
Employees - At December 31, 1999, IGA had a total of 77
employees, including 10 part-time employees. IGA's employees
are not represented by any collective bargaining group.
Management considers its employee relations to be good.
Subsidiaries of JADE
JADE Abstract is a licensed title insurance agency founded
for the purpose of originating title insurance to the customers
of IGA, other financial institutions, attorneys, accountants,
real estate brokers, builders, and the private consumer. The
market area includes southeastern Pennsylvania, primarily, the
Philadelphia five county region. JADE Abstract has a three
person board of directors and employs a full time licensed title
agent. Title insurance protects the lender and the home buyer
against any title defects when a new home is purchased.
Premiums for title insurance are traditionally paid by the
borrower and are a cost of obtaining financing secured by real
estate. It also provides protection to the lender when a
borrower refinances a home. Title insurance may be required on
both residential and commercial transactions.
JADE Insurance Agency, a Pennsylvania Corporation and a
wholly owned subsidiary of JADE (the "Agency"), was formed for
the purpose of providing a diverse set of insurance products to
meet the needs of existing and potential customers of IGA, as
well as to provide products to other financial institutions such
as credit unions and community banks. The products outlined in
the business plan generate fee income to the agency, and also
provide comprehensive service to existing IGA customers and the
general public. Insurance products such as accidental death &
dismemberment (AD&D), term life, long-term care, auto,
homeowner, whole life, universal life, health, collateral
protection and mortgage life will be marketed through a direct
mail program as well as a point of sale program. The Agency has
enlisted the help of strategic partners in the development and
marketing of the insurance products. As of December 31, 1999,
there was no income or expenses related to this subsidiary.
Item 2
Properties
IGA conducts its business through IGA's branch offices.
All property is owned or leased by IGA. IGA believes that its
current facilities are adequate to meet the present and
foreseeable needs of IGA and JADE FINANCIAL. The total net book
value of IGA's premises and equipment (including land, building
and leasehold improvements and furniture, fixtures and
equipment) at December 31, 1999 was $1.89 million.
IGA owns the branch office located at 213 West Street Road,
Feasterville, Pennsylvania. This facility is approximately
23,000 square feet and also serves as IGA and JADE FINANCIAL's
executive offices. IGA also owns the branch office located at
1501 S. Newkirk Street, Philadelphia, Pennsylvania. This
facility is approximately 1,000 square feet.
IGA leases a space of approximately 2,500 square feet for
the branch office located at 521 East Baltimore Pike, Media,
Pennsylvania. IGA's annual lease expense in calendar year 1999
was $30,938. IGA's lease is for a term of 5 years at an annual
cost of $45,000.
IGA leases a space of approximately 1,800 square feet for
the branch office located at 2301 Market Street, Philadelphia,
Pennsylvania. IGA's annual Lease expense in calendar year 1998
was $22,644, and will be $22,644 in calendar year 2000.
IGA leases a space of approximately 1,800 square feet for
the branch office located at 500 Chesterbrook Boulevard, Wayne,
Pennsylvania. IGA's annual lease expense in calendar year 1999
was $34,867, and will be $35,124 in calendar year 2000. This
Lease has a five year term expiring on March 31, 2003.
Item 3
Legal Proceedings
From time to time IGA is involved as plaintiff or defendant
in various legal actions arising in the normal course of
business. Presently, IGA is not involved as a defendant in any
legal proceedings.
Item 4
Submission of Matters to a Vote of Security Holders
None.
Part II
Item 5
Market for Registrant's Common Equity and Related
Stockholder Matters
JADE Financial Corp. consummated an initial public offering
of its Common Stock, par value $0.01 per share, in September
1999 with the final closing on October 4, 1999. The Company's
common stock is traded on the NASDAQ Stock Market under the
symbol "IGAF". As of December 31, 1999, there were
approximately 1,125 beneficial owners of the Company's Common
Stock. The following chart gives the high and low sale prices
for the Common Stock of Jade for the year ended December 31,
1999:
Quarter ended
December 31, 1999
High: $8.8125
Low: $8.00
SELECTED CONSOLIDATED FINANCIAL INFORMATION
In 1998, IGA Federal Savings changed its fiscal year from a
period ending June 30 to a period ending December 31.
Accordingly, the summary information presented below under
"Selected Financial Condition Data" and "Selected Operations
Data" for, and as of the end of, each of the years ended June 30
and the twelve months ended December 31, 1999 and the six months
ended December 31, 1998 is derived from JADE's or IGA's audited
financial statements as the case may be. The selected
consolidated financial data set forth below is qualified in its
entirety by, and should be read in conjunction with the
Consolidated Financial Statements, the related Notes thereto and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this report.
Selected Financial Condition
<TABLE>
<CAPTION>
At Dec. 31, At Dec 31, At June 30,
1999 1998 1998 1997
(In Thousands)
<S> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $199,576 $171,091 $159,852 $164,752
Cash and cash equivalents 13,242 18,351 12,981 16,587
Loans receivable, net 114,081 102,900 98,096 100,371
Mortgage-backed securities:
Held-to-maturity 4,314 6,635 9,071 14,320
Available-for-sale 8,859 10,176 14,267 13,724
Investment securities:
Held-to-maturity 0 0 500 7,731
Available-for-sale 40,783 28,726 19,340 7,199
Deposits 156,124 154,888 143,934 149,846
Borrowings 15,000 0
Equity 27,240 15,276 15,080 14,246
Total investments held-to-maturity 4,314 6,635 9,571 22,051
Total investments available-for-sale 49,642 38,902 33,607 20,923
</table?
Selected Operations Data
</TABLE>
<TABLE>
<CAPTION>
12 mth. Dec. 6 mth. Dec. Year Ended June 30,
1999 1998 1998 1997
(In Thousands)
<S> <C> <C> <C> <C>
Selected Operations Data:
Total interest income $12,516 $5,789 $11,476 $11,660
Total interest expense 5,496 2,762 5,475 5,655
Net interest income 7,020 3,027 6,001 6,005
Provision for loan losses 520 300 1,038 847
Net interest income after
provision for loan losses 6,500 2,727 4,963 5,158
Service fees 566 338 887 767
Gain (loss) on sales of
investment securities 0 198 0 (7)
Other non-interest income 573 268 71 91
Total non-interest income 1,139 804 958 851
Total non-interest expense 7,239 3,119 5,258 4,983
Income tax expense 107 146 0
Net income $293 $266 $663 $1,026
</TABLE>
Selected Financial Ratios
<TABLE>
<CAPTION>
Dec. 31, Dec. 31, Year Ended June 30,
1999 1998 1998 1997
<S> <C> <C> <C> <C>
Selected Financial Condition Data:
Performance Ratios:
Return on assets (ratio of net income to average total assets) 0.16% 0.32% 0.42% 0.64%
Return on equity (ratio of net income to average equity) 1.68% 3.46% 4.52% 7.55%
Interest rate spread 3.99% 3.75% 3.66% 3.64%
Net interest margin 4.07% 3.90% 3.93% 3.86%
Operating expenses to average total assets 3.87% 3.77% 3.33% 3.10%
Average interest-earning assets to average
interest-bearing liabilities 102.55% 104.13% 107.58% 106.17%
Quality Ratios:
Non-performing assets to total assets at end of period 0.11% 0.10% 0.14% 0.49%
Allowance for loan losses to non-performing assets 608.53% 631.76% 419.47% 124.69%
Allowance for loan losses to gross loans receivable 1.11% 1.03% 0.96% 0.99%
Capital Ratios:
Equity to total assets at end of period 13.65% 8.93% 9.43% 8.65%
Average equity to average assets 9.34% 9.30% 9.29% 8.45%
Other Data:
Number of full service offices 5 5 5 5
</TABLE>
Item 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of the Company's consolidated
financial condition and results of operations and capital
resources and liquidity should be read in conjunction with the
Consolidated Financial Statements and related Notes included
elsewhere herein. Statements regarding the Company's
expectations as to financial results and other aspects of its
business set forth herein or otherwise made in writing or orally
by the Company may constitute forward looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. Although the Company believes that its expectations are
based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no
assurance that actual results will not differ materially from
its expectations. Factors that might cause or contribute to such
differences include, but are not limited to, uncertainty of
future profitability, changing economic conditions and monetary
policies, uncertainty of interest rates, risks inherent in
banking transactions, competition, extent of government
regulations, and delay in or failure in obtaining regulatory
approvals.
General
We are primarily engaged in the business of attracting
deposits from the general public and originating consumer loans,
including home equity, auto, credit card and personal loans, and
residential real estate loans secured by first mortgages on
owner-occupied, one- to four-family residences in our market
area. IGA originates a limited amount of commercial loans. IGA
also invests in investment and mortgage related securities.
Our net income is dependent primarily on our net interest
income, which is the difference between interest earned on loans
and investments and the interest paid on our deposits and
borrowings. IGA's interest rate spread is also affected by
regulatory, economic and competitive factors that influence
interest rates, loan demand and deposit flows. Our net income
is also affected by the generation of non-interest income, which
primarily consists of fees and service charges. In addition,
net income is affected by the level of operating expenses and
provisions for loan losses.
The operations of financial institutions, including IGA,
are significantly affected by prevailing economic conditions,
competition and regulatory policies, and the monetary and fiscal
policies of the U.S. Government. 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 rates of interest primarily on competing
investments, account maturities and the levels of personal
income and savings in our market area.
RESULTS OF OPERATIONS
General
The Bank's results of operations depend primarily on its
net interest income, which is the difference between interest
income on interest-earning assets, and interest expense on its
interest-bearing liabilities. Its interest-earning assets
consist primarily of loans receivable and investment securities,
while its interest-bearing liabilities consist primarily of
deposits and borrowings. The Bank's net income is also affected
by its provision for loan losses and its level of non-interest
income as well as by its non-interest expense, such as salary
and employee benefits, occupancy costs and charges relating to
non-performing and other classified assets. In 1998, the Bank's
fiscal year was changed from June 30 to December 31. The results
of operations in this section are being presented as a
comparison between December 31, 1999 and June 30, 1998 in order
to provide a comparison between twelve month operational
periods.
Net Income
The Bank's net income totaled $293,000 and $663,000 for the
years ended December 31, 1999 and June 30, 1998 respectively.
Results of operations for the year-end December 31, 1999 reflect
a non-recurring, contribution to the IGA Charitable Foundation.
Excluding the effect of this contribution, net income for the
year was $812,000. This increase was due largely to the
increase in net interest income discussed below.
Net Interest Income and Average Balances
Net interest income is the key component of the Bank's
profitability structure and is managed in coordination with the
Bank's interest rate sensitivity position.
The following table sets forth a summary of average
balances with corresponding interest income and interest expense
as well as average yield and rate information for the periods
presented. Average balances are derived from daily balances
during the indicated periods, except where noted otherwise.
<TABLE>
<CAPTION>
12 months ended December 31, 6 months ended December 31, Year ended June 30,
1999 1998 1998
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $110,824 $8,947 8.07% $100,915 $4,275 8.47% $99,342 $8,734 8.79%
Investments 61,505 3,569 5.80% 54,501 1,514 5.56% 53,456 2,742 5.13%
Total earning assets 172,329 12,516 7.26% 155,416 5,789 7.45% 152,798 11,476 7.51%
Non-interest earning assets 14,678 10,026 5,007
.
Total assets $187,007 $165,442 $157,805
Interest-bearing liabilities:
Savings deposits $74,180 1,540 2.08% $68,852 834 2.42% $63,361 1,682 2.65%
NOW accounts 10,159 0 0.00% 9,277 0 0.00% 8,661 0 0.00%
Money market accounts 10,767 337 3.13% 9,038 160 3.54% 8,298 316 3.81%
Certificates of deposit 66,938 3,501 5.23% 62,082 1,767 5.69% 61,713 3,477 5.63%
Other Notes Pay - FHLB 6,000 116 1.93% 0 0
Total interest-bearing liabilities 168,044 5,494 3.27% 149,249 2,761 3.70% 142,033 5,475 3.85%
Non-interest bearing liabilities 1,503 799 1,109
Total liabilities 169,547 150,048 143,142
Equity 17,460 15,394 14,663
Total liabilities and equity $187,007 $165,442 $157,805
Net interest-earning assets $4,285 $6,167 $10,765
Net interest spread $7,022 3.99% $3,028 3.75% $6,001 3.66%
Net interest margin 4.07% 3.90% 3.93%
Ratio of average interest-earning assets
to average interest-bearing liabilities 102.55% 104.13% 107.58%
</TABLE>
Net interest income of $7.0 million in 1999 was 16.67%
higher than June 30, 1998's net interest income of $6.0 million.
The Bank's net interest margin, net interest income divided by
total average interest-earning assets, increased 14 basis points
to 4.07% for the year ended December 31, 1999 compared to 3.93%
for the year ended June 30, 1998. The Bank's net interest
spread, the difference between the yield on interest-earning
assets and the rates paid on interest-bearing liabilities,
increased 33 basis points to 3.99% for the year ended December
31, 1999, from 3.66% for the year ended June 30, 1998. The
improvement in net interest margin reflected an increase in the
Bank's interest earning assets and a lower cost of funds. The
increase in the net interest spread is due to a decrease in the
rates paid on interest-bearing liabilities, and a smaller
decrease in the yield on interest-earning assets.
The Bank's yield on average interest-earning assets
decreased to 7.26% for the year ended December 31, 1999 compared
to 7.51% for the year ended June 30, 1998. Average loans of
$111.0 million at December 31, 1999, represented 64.31% of total
average interest-earning assets, and provided a 1999 yield of
8.07%, compared to average loans of $99.3 million for the year
ended June 30, 1998, representing 65% of total average interest-
earning assets, and providing a 1998 yield of 8.79%. The
decrease in yield is the result of a decrease in the interest
rate charged for loans made in 1999 as a result of a general
decrease in interest rates in the economy. Average investments
and interest bearing deposits with banks increased $8.0 million
or 15% to $61.5 million at December 31, 1999, from $53.5 million
for the year ended June 30, 1998. These assets provided a yield
of 5.80% in 1999 compared to 5.13% in 1998.
Total average interest-bearing liabilities increased
$26.0 million or 18.31% to $168.0 million for the year ended
December 31, 1999, from $142.0 million for the year ended June
30, 1998. This increase resulted from IGA's ability to attract
new deposits from customers other than credit union members.
However, total interest expense increased a modest $21,000 to
$5.49 million for the year ended December 31, 1999 from
$5.47 million for the year ended June 30, 1998 because the
Bank's cost of funds decreased to 3.27% for the year ended
December 31, 1999 from 3.85% for the year ended June 30, 1998.
Rate/Yield Analysis
Net interest income is effected by changes in both average
interest rates and average volumes of interest-earning assets
and interest-bearing liabilities. The following table presents,
on a tax equivalent basis, the average daily balances of assets,
liabilities and shareholders' equity and the respective interest
earned or incurred on interest-earning assets and interest-
bearing liabilities, as well as average rates for the period
indicated (in thousands):
The following table presents the extent to which changes in
interest rates and changes in the volume of interest-earning
assets and interest-bearing liabilities have affected the Bank's
interest income and interest expense during the periods
indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate), (ii) changes
attributable to changes in rate (changes in rate multiplied by
prior volume), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the
changes due to rate (in thousands):
<TABLE>
<CAPTION>
For or at the Year ended For or at the Year ended
December 1999 vs. December 1998 June 1998 vs. June 1997
------------------------------- --------------------------
Increase (decrease) due to Increase (decrease) due to
Total Total
Rate/ Increase Rate/ Increase
Rate Volume Volume (Decrease) Rate Volume Volume (Decrease
------ ----------------------------- ------ ----------------------------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable ($491) $903 ($52) $360 $109 ($25) ($1) $83
Investments 296 391 41 728 (149) (124) 6 (267)
Total earning assets (195) 1,294 (11) 1,088 (40) (149) 5 (184)
Interest-bearing liabilities
Savings deposits (297) 142 (24) (179) 8 33 1 42
NOW accounts 0 0 0 0 0 0 0 0
Money market accounts (45) 73 (10) 18 17 (1) 0 16
Certificates of deposit (236) 369 (26) 107 80 (311) (7) (238)
Borrowings 0 0 116 116 _____ _____ _____ ______
Total interest-bearing (578) 584 56 62 105 (279) (6) (180)
liabilities ------ ----- ----- ----- ----- ----- ----- -----
Change in net interest $383 $710 ($67) 1,026 ($145) $130 $11 ($4)
income ===== ===== ===== ===== ====== ==== ===== =====
</TABLE>
Provision for Loan Losses
For the year ended December 31, 1999, the provision for
loan losses was $520,000 compared to $1,038,000 for the fiscal
year ended June 30, 1998. The provision decreased in 1999 due
to an adjustment of $350,000 taken in the first six months of
1998 to bring the allowance for loan loss within OTS guidelines
in preparation for the conversion of the Bank from a credit
union to a federal savings bank. On a quarterly basis, the
Company's Board of Directors and management perform a detailed
analysis of the adequacy of the allowance for loan losses. This
analysis includes an evaluation of credit risk concentration,
delinquency trends, past loss experience, current economic
conditions, composition of the loan portfolio, classified loans,
and other relevant factors. The loan growth experienced by the
Company has not resulted in significant percentage increases in
delinquencies or an increase in the chargeoffs incurred by the
Company. Net chargeoffs by the Company for the fiscal years
ended December 31, 1999, and June 30, 1998 were $310,000 and
$1,095,000 respectively.
Non-Interest Income
Non-interest income increased $181,000 or 18.89% to
$1,139,000 for 1999 compared to $958,000 for June 30, 1998. The
primary reason for this increase is due to an increase in
service fee income and income generated from the use of our
debit and credit card products. Management anticipates non-
interest income will increase significantly in the near future
primarily from the income generated on the bank owned life
insurance placed in December, 1999.
Non-Interest Expense
The following table provides a summary of non-interest
expense, by category of expense, for the two years ended
December 31, 1999 and June 30, 1998. (in thousands):
Year Ended Year Ended
Dec. 31, June 30,
1999 1998
Salaries and employment benefits $3,182 $2,612
Office and occupancy expense 1,210 942
Professional fees 183 165
Printing and postage 240 246
Loan Servicing 180 183
Bank and Mac Charges 726 642
Advertising, marketing 170 104
Insurance Expense 112 155
Foundation Expense 725 0
Other operating expense 511 209
Total $7,239 $5,258
Total non-interest expense increased 35.85% or
$1.9 million, to $7.2 million in 1999 compared to $5.3 million
in 1998. This increase was primarily due to a non-recurring
charge of $725,000 related to the initial contribution to the
IGA Charitable Foundation, an increase of $570,000 in
compensation and benefits, a $268,000 increase in office and
occupancy costs, and $302,000 in other operating costs related
to debit and credit card processing. Compensation and benefits
reflects a full year's advance contribution to the Employee
Stock Ownership Plan ("ESOP")that the Company elected to make in
1999.
Income Taxes
The Company had an income tax expense of $107,000 for
fiscal year ended December 31, 1999 and no income tax expense as
of June 30, 1998 because of its tax exempt status as a Federal
Credit Union.
Liquidity and Capital Resources
Pursuant to federal regulations, financial institutions
must maintain liquidity to meet day-to-day requirements of
depositor and borrower customers, take advantage of market
opportunities, and provide a cushion against unforeseen needs.
Liquidity needs can be met by either reducing assets or
increasing liabilities. Sources of asset liquidity are provided
by investments in U.S. Government and agency securities, time
deposits with banks and federal funds sold. These assets
totaled $13.24 million at December 31, 1999, compared to
$18.35 million at December 31, 1998. Maturing and prepayment of
loans as well as the monthly cash flow associated with certain
mortgage-backed securities are other sources of asset liquidity.
Sources of liability liquidity are provided by attracting
deposits with competitive rates, using repurchase agreements,
buying federal funds or utilizing the facilities of the Federal
Home Loan Bank System. We historically have relied exclusively
on deposits. However, we expect that the influx of capital from
the conversion will cause us to begin to borrow funds in order
to increase earning assets and achieve an acceptable return on
equity for our shareholders.
We believe that IGA maintains and has maintained sufficient
short-term and liquid assets (including securities available-
for-sale) to meet liquidity requirements of its operations.
Market Risk Analysis
We derive our income primarily from the excess of interest
collected over interest paid. The rates of interest we earn on
assets and pay on liabilities generally are established
contractually for a period of time. Market interest rates
change over time. Accordingly, our results of operations, like
those of many financial institutions, are affected by changes in
interest rates and the interest rate sensitivity of our assets
and liabilities.
In an attempt to manage our exposure to changes in interest
rates and comply with applicable regulations, we monitor IGA's
interest rate risk. In monitoring interest rate risk, we
continually analyze and manage assets and liabilities based on
their payment streams and interest rates, the timing of their
maturities, and their sensitivity to actual or potential changes
in market interest rate.
An asset or liability is interest-rate sensitive within a
specific time period if it will mature or reprice within that
time period. If our assets mature or reprice more rapidly or to
a greater extent than our liabilities, then net portfolio value
and net interest income would tend to increase during periods of
rising interest rates and decrease during periods of falling
interest rates. Conversely, if our assets mature or reprice
more slowly or to a lesser extent than our liabilities, then net
portfolio value and net interest income would tend to decrease
during periods of rising interest rates and increase during
periods of falling interest rates. Our policy has been to
address the interest rate risk inherent in the historical
savings institution business of originating long-term loans
funded by short-term deposits by maintaining sufficient liquid
assets for material and prolonged changes in interest rates.
Management regularly reviews our asset and liability
position including our interest rate risk and trends, liquidity
and capital ratios and related regulatory requirements. In
addition, management reviews simulations of the effect of
changes in interest rates on IGA's capital, net interest income
and net income.
Net Portfolio Value
In order to encourage savings associations to reduce their
interest rate risk, the Office of Thrift Supervision adopted a
rule incorporating an interest rate risk ("IRR") component into
the risk-based capital rules. The IRR component is a dollar
amount that will be deducted from total capital for the purpose
of calculating an institution's risk-based capital requirement
and is measured in terms of the sensitivity of its net portfolio
value ("NPV") to changes in interest rates. NPV is the
difference between incoming and outgoing discounted cash flows
from assets, liabilities, and off-balance sheet contracts. An
institution's IRR is measured by the change to its NPV as result
of a hypothetical 200 basis point ("bp") change in market
interest rates. A resulting change in NPV of more than 2% of
the estimated present value of total assets ("PV") will require
the institution to deduct from its capital 50% of that excess
change. Based on IGA's asset size and risk-based capital, we
have been informed by the Office of Thrift Supervision that IGA
is exempted from this rule. Nevertheless, the following table
presents an estimate of the change in our NPV at December 31,
1999 as calculated by our personnel, based on quarterly
financial information.
<TABLE>
<CAPTION>
Change in Interest Estimated Ratio of NPV Estimated Increase
Rates NPV to (Decrease) in NPV
(Basis Points) Amount Total Assets Amount Percent
- - ------------------ --------- ------------ --------- -------
(Dollars in Thousands)
<C> <C> <C> <C> <C>
+300 17,459 9.09% (5,325) -23.00%
+200 19,193 9.87% (3,591) -16.00%
+100 20,991 10.67% (1,794) -8.00%
0 22,785 11.45% --
-100 24,266 12.07% 1,483 7.00%
-200 25,492 12.57% 2,708 12.00%
-300 26,532 12.98% 3,748 49.00%
</TABLE>
In the above table, the first column on the left presents
the basis point increments of yield curve shifts. The second
column presents the overall dollar amount of NPV at each basis
point increment. The third column presents IGA's ratio of NPV
to total assets. The remaining columns present IGA's actual
position in dollar change and percentage change in NPV at each
basis point increment.
Were IGA subject to the IRR component at December 31, 1999,
it would not have been considered to have had a greater than
normal level of interest rate exposure and a deduction from
capital would not have been required. Although we have been
advised by the Office of Thrift Supervision that IGA is not
subject to the IRR component discussed above, it is still
subject to interest rate risk and, as can be seen above, rising
interest rates will reduce IGA's NPV. The Office of Thrift
Supervision has the authority to require otherwise exempt
institutions to comply with the rule concerning interest rate
risk. See "Regulation - Regulatory Capital Requirements."
Computations of prospective effects of hypothetical
interest rate changes are based on numerous assumptions,
including interest rates, loan prepayment rates, deposit decay
rates, and the market values of certain assets under the
various interest rate scenarios and should not be relied upon as
indicative of actual results. Certain shortcomings are inherent
in the method of analysis presented in the computation of NPV.
Although certain assets and liabilities may have similar
maturities or periods within which they reprice, they may react
differently to changes in market interest rates. The interest
rates on certain types of assets and liabilities may fluctuate
in advance of changes in market interest rates, while interest
rates on other types may lag behind changes in market rates. In
the event of a change in interest rates, prepayments and early
withdrawal levels could deviate significantly from those assumed
in making the calculations set forth above.
Financial Condition
General
Total assets at December 31, 1999 were $199.6 million, an
increase of $28.5 million or 16.66% from $171.1 million at
December 31, 1998. This increase was mainly due to the increase
in net loans of $11.2 million or 10.88%; an increased in
investment securities of $8.5 million or 11.76%, and a $10.0
million purchase of bank owned life insurance. The increase in
total assets was funded primarily by an increase of $15.0
million in borrowed funds and the net proceeds received in the
conversion.
Shareholders' equity totaled $27.2 million at December 31,
1999 compared to $15.3 million at December 31, 1998. The $11.9
million increase was primarily due to the net proceeds of $14.1
received from the conversion and an increase of $1.4 million in
the accumulated other comprehensive income account. At the time
of conversion, the Employee Stock Ownership Plan ("ESOP") of the
Bank purchased 145,000 shares utilizing the proceeds of a $1.2
million loan form the Company. Tangible book value per share
was $14.04 and the tangible equity to asset ratio was 13.04% at
December 31, 1999. The Bank's capital ratios are well in excess
of all regulatory requirements at year end December 31, 1999.
Lending Activities
IGA is primarily engaged in the business of attracting
deposits from the general public and originating consumer loans,
including home equity, auto, credit card and personal loans and
residential real estate loans, secured by first mortgages on
owner-occupied , one-to-four family residences in our market
area. IGA also originates a limited amount of commercial loans.
Net loans receivable increased by $11.2 million or 10.88%
from $102.9 million at December 31,1998 to $114.1 million at
December 31, 1999. This increase was due primarily to strong
first mortgage demand and a strong demand for consumer loans,
particularly automobile loans.
The following table sets forth the composition of IGA's
loan portfolio at December 31, 1999 and 1998 and June 30, 1998,
1997 and 1996. For the periods presented, there is no
significant concentration of loans in any one industry. No
loans have been made to borrowers outside the United States.
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1999 1998 1998 1997 1996
------------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One-to four-family $43,434 37.66% $40,114 38.57% $35,799 36.15% $31,429 31.02% $31,722 33.33%
Commercial 2,996 2.60% 1,408 1.35% 256 0.26% 0 0.00% 0 0.00%
Total real estate loans 46,430 40.25% 41,522 39.93% 36,055 36.41% 31,429 31.02% 31,722 33.33%
Consumer Loans:
Home equity 24,172 20.96% 22,421 21.56% 23,174 23.40% 24,154 23.84% 21,264 22.34%
Automobile 24,406 21.16% 18,748 18.03% 18,844 19.03% 20,470 20.20% 17,869 18.78%
Credit cards 10,955 9.50% 10,920 10.50% 10,269 10.37% 10,700 10.56% 9,555 10.04%
Signature loans 5,414 4.69% 6,329 6.09% 6,577 6.64% 9,307 9.19% 9,917 10.42%
Other 2,498 2.17% 3,658 3.52% 3,871 3.91% 5,264 5.20% 4,840 5.09%
Commercial 1,469 1.27% 400 0.38% 237 0.24%
Total consumer loans 68,914 59.75% 62,474 60.07% 62,972 63.59% 69,895 68.98% 63,445 66.67%
Total loans 115,344 100.00% 103,996 100.00% 99,027 100.00% 101,324 100.00% 95,167 100.00%
======= ======= ====== ====== =======
Less:
Deferred fees and discounts 21 (22) 17 52 62
Allowance for losses (1,284) (1,074) (948) (1,005) (558)
Total loans receivable, $114,081 $102,900 $98,096 $100,371 $94,671
net ======== ======== ======= ======== ========
</TABLE>
The following table shows the composition of IGA's loan
portfolio by fixed and adjustable rate at December 31, 1999 and
1998, (to reflect the recent change in IGA's fiscal year-end
from June 30 to December 31) and June 30, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
December December 31, June 30,
1999 1998 1998 1997 1996
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family $42,419 36.78% $38,446 36.97% $34,011 34.43% $28,675 28.30% $28,653 30.11%
Home equity 19,450 16.86% 17,054 16.40% 17,164 17.37% 16,818 16.60% 13,285 13.96%
Commercial $2,996 2.60% $1,408 1.35%
Automobile and truck 24,406 21.16% 18,746 18.03% 18,844 19.07% 20,470 20.20% 17,869 18.78%
Signature loans 5,163 4.48% 6,329 6.09% 6,577 6.66% 9,307 9.19% 9,917 10.42%
Commercial 871 0.76% 0 0.00%
Other 2,157 1.87% 3,284 3.16% 3,078 3.12% 4,466 4.41% 4,241 4.46%
Total fixed-rate loans 97,462 84.50% 85,267 81.99% 79,674 80.65% 79,736 78.69% 73,965 77.72%
Adjustable-Rate Loans:
Real estate:
One- to four-family 1,015 0.88% 1,668 1.60% 2,044 2.07% 2,754 2.72% 3,069 3.22%
Home equity 4,722 4.09% 5,367 5.16% 6,010 6.08% 7,336 7.24% 7,979 8.38%
Credit cards 10,955 9.50% 10,920 10.50% 10,269 10.39% 10,700 10.56% 9,555 10.04%
Commercial 598 0.52% 400 0.38%
Other/Signature 592 0.51% 374 0.36% 793 0.80% 798 0.79% 599 0.63%
Total adjustable-rate loans 17,882 15.50% 18,729 18.01% 19,116 19.35% 21,588 21.31% 21,202 22.28%
Total loans 115,344 100.00% 103,996 100.00% 98,790 100.00% 101,324 100.00% 95,167 100.00%
Less:
Deferred fees and discounts 0 (22) 17 52 62
Allowance for losses (1,074) (1,074) (948) (1,005) (558)
Total loans receivable, net $114,270 $102,900 $97,859 $100,371 $94,671
</TABLE>
Residential Mortgage Loans
IGA originates substantially all of its mortgage loans
through its retail branch network. IGA generally underwrites
one-to-four family loans based on the applicant's employment,
credit history and appraised value of the subject property.
Presently, IGA lends up to 95% of the lesser of the appraised
value or purchase price for one-to-four-family residential
loans. For loans with a loan-to-value ratio in excess of 80%,
IGA requires the borrowers to obtain private mortgage insurance.
As a result, IGA has not experienced any material loss with
respect to residential mortgage loans having a loan-to-value
ratio greater than 80%. All first mortgage loans require title
and hazard insurance, and flood insurance, if necessary, in an
amount not less than the value of the property improvements.
IGA also requires title insurance on properties securing
mortgage loans, in accordance with local practice. All mortgage
loans must be approved by the Senior Vice President of Lending
and loans exceeding $250,000 must be approved by the President.
In order to approve a property as security for a loan, IGA
requires a satisfactory appraisal by an approved independent
appraiser. Independent appraisers must abide by IGA's appraisal
policies and must be approved by IGA's Board of Directors.
IGA currently originates one-to-four family mortgage loans
on either a fixed or adjustable basis, as consumer demand
dictates. IGA's pricing strategy for mortgage loans includes
setting interest rates that are competitive with Fannie Mae and
Freddie Mac, other local financial institutions, and IGA's
internal needs. Adjustable rate mortgage ("ARM") loans are
offered with either a one-year or three-year term to the initial
repricing date. After the initial period, the interest rate for
each ARM loan generally adjusts annually for the remainder of
the term of the loan. IGA uses the United States Treasury
Constant Maturity Index to reprice ARM loans. At December 31,
1999, IGA had $43.4 million or 37.66% of our gross loan
portfolio in one -to-four family mortgage loans.
Commercial Loans
IGA recently took steps to expand its commercial real
estate and commercial business lending program by adopting a
commercial lending policy and hiring staff experienced in this
area. IGA believes there is significant opportunity in small
business lending due to the consolidation of financial
institutions in IGA's market area.
IGA offers a variety of multi-family and commercial real
estate loans. These loans are secured primarily by multi-family
dwellings, small retail establishments and small office
buildings located in IGA's market areas. IGA may, from time to
time, participate in commercial real estate construction loans
with other lenders. At December 31, 1999 multi-family and
commercial real estate loans totaled $3.0 million or 2.60% of
IGA's gross loan portfolio.
IGA offers commercial business loans in the form of lines
of credit and fixed or adjustable rate term loans. These loans
are generally secured by commercial assets, the borrower's
personal guarantees and/or personal assets. Commercial business
loans typically require monthly payments and have maximum
maturities of ten years. At December 31, 1999 commercial
business loans totaled $1.5 million or 1.27% of our gross loan
portfolio.
Consumer Loans
IGA offers a variety of consumer loans, including home
equity loans, auto loans, credit card loans, unsecured personal
loans, and loans secured by a deposit account. At December 31,
1999, consumer loans accounted for $68.9 million or 59.75% of
IGA's total loan portfolio. Of this amount, approximately $24.1
million or 20.96% consisted of home equity loans, $24.4 million
or 21.16% consisted of automobile loans, $10.9 million or 9.5%
consisted of credit card loans and $7.8 million or 6.86%
consisted of unsecured personal loans.
Consumer loans generally have shorter terms to maturity,
which reduces IGA's exposure to changes in interest rates, and
carry higher rates of interest than do one-to-four family
residential mortgage loans. In addition, management believes
that offering consumer loan products helps to expand and create
stronger ties to our existing customer base by increasing the
number of customer relationships and providing cross-marketing
opportunities.
We do not originate any consumer loans on an indirect
basis. Indirect loans are contracts purchased from retailers of
goods or services which have extended credit to their customers.
The underwriting standards employed by IGA for consumer
loans include a determination of the applicant's payment history
on other debts and an assessment of the ability to meet existing
obligations and payments on the proposed loan. Although
creditworthiness of the applicant is a primary consideration,
with respect to any secured consumer loan the underwriting
process also includes a comparison of the value of the security
in relation to the proposed loan amount.
Loan Originations, Sales and Repayments
IGA originates loans through referrals from real estate
brokers and builders, its marketing efforts, and its existing
and walk-in customers. While IGA originates both adjustable-
rate and fixed-rate loans, its ability to originate loans is
dependent upon the relative customer demand for loans in its
market. Demand is affected by local competition and the
interest rate environment. Competition from other lenders in
our market area limits, to a certain extent, the volume of loans
IGA has been able to originate and place in its portfolio. IGA
sells a limited amount of loans and, as a result, loans are
originated according to secondary market guidelines.
Furthermore, during the past few years, IGA, like many other
financial institutions, has experienced significant prepayments
on loans and mortgage-backed and related securities due to the
sustained low interest rate environment prevailing in the United
States.
In periods of economic uncertainty, the ability of
financial institutions, including IGA, to originate large dollar
volumes of loans may be substantially reduced or restricted,
with a resultant decrease in related interest income.
The following table shows the loan origination, sale and
repayment activities of IGA for the twelve months ended December
31, 1999 and the six months ended December 31, 1998 and the
twelve months ended June 30, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Dec. 31, Dec. 31, Year Ended June 30,
1999 1998 1998 1997 1996
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate one- to four-family $0 $0 $229 $0 $0
Total adjustable rate 0 0 229 0 0
Fixed rate:
Real estate one- to four-family 8,439 7,000 13,574 3,927 17,801
Commerical 1,686 1,408
Consumer 30,221 12,656 20,379 31,869 23,767
Total fixed-rate 40,346 21,064 33,953 35,796 41,568
Total loans originated 40,346 21,064 34,182 35,796 41,568
Principal repayments (28,813) (16,140) (31,606) (27,566) (29,538)
Loans sold 0 0 (4,873) (2,073) (1,677)
Increase (decrease) in other items, net (131) (77) 22 (457) 360
Net increase $11,402 $4,847 ($2,275) $5,700 $10,713
</TABLE>
Asset Quality
Loan Delinquencies
When a borrower fails to make a payment on a loan on or
before default date, a late charge notice is mailed 15 days
after the due date. When the loan is 30 days past due, IGA mails
a delinquent notice to the borrower. All delinquent accounts
are reviewed by a collection officer, who attempts to cause the
delinquency to be cured by contacting the borrower. If the loan
becomes 60 days delinquent, the collection officer will
generally send a personal letter to the borrower requesting
payment of the delinquent amount in full, or the establishment
of an acceptable repayment pan to bring the loan current within
the next 90 days. If the account becomes 90 days delinquent,
and an acceptable repayment plan has not been agreed upon, the
collection officer will generally refer the account to legal
counsel, with instructions to prepare a notice of intent to
foreclose with respect to real estate loans or to a collection
agency with respect to other loans. The notice if intent to
foreclose allows the borrower up to 30 days to bring the account
current. During this 30 day period, the collection officer may
accept a written repayment plan from the borrower which would
bring the account current within the next 90 days. Once the
loan becomes 120 days delinquent, and an acceptable repayment
plan has not been agreed upon, the collection officer, after
receiving approval from the appropriate officer as designed by
IGA's board of directors, will turn over the account to IGA's
counsel with instructions to initiate foreclosure.
The following table sets forth the Bank's loan
delinquencies by type, by amount and by percentage of type at
December 31, 1999.
<TABLE>
<CAPTION>
Loans Delinquent For:
60-89 Days 90 Days and Over Total Delinquent Loans
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One-to four-family 0 $0 0.00% 2 $73 0.17% 2 $73 0.17%
Consumer:
Home equity 2 11 0.05% 2 55 0.23% 4 66 0.27%
Automobile and truck 2 15 0.06% 5 21 0.09% 7 36 0.15%
Credit card loans 14 39 0.36% 2 11 0.10% 16 50 0.46%
Commercial 0 0 0.00% 1 32 2.18% 1 32 2.18%
Signature loans 5 9 0.17% 1 2 0.04% 6 11 0.20%
Total 23 $74 0.06% 13 $194 0.17% 36 $268 0.23%
</TABLE>
Non-performing assets are comprised of non-accrual loans,
accruing loans that are 90 days or more past due which are
insured for credit loss, foreclosed real estate (assets acquired
in foreclosures), and restructured loans. It is IGA's policy to
classify a loan, other than a loan insured for credit loss, as
non-accrual after the loan becomes 90 days past due for either
principal or interest. Accrual of interest is discontinued for
those loans which are 90 days or more delinquent, or sooner if
IGA believes, after considering economic and business conditions
and collection efforts, that the borrower's financial condition
is such that collection of interest is doubtful. Upon
discontinuance of interest accrual, all unpaid accrued interest
is reversed.
The following table sets forth the amounts and categories
of non-performing assets at December 31, 1999 and 1998 and June
30, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1999 1998 1998 1997 1996
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family 73 16 $16 $0 $0
Home equity 55 64 110 294 194
Automobile 21 39 40 42 32
Credit cards 11 41 39 174 163
Signature loans 2 10 21 296 149
Commercial 32 0
Other 0 0 0 0 12
Total 194 170 226 806 550
Accruing loans delinquent more
than 90 days:
One- to four-family 0 0 0 0 0
Home equity 0 0 0 0 0
Automobile 0 0 0 0 0
Credit cards 0 0 0 0 0
Signature loans 0 0 0 0 0
Other 0 0 0 0 0
Total 0 0 0 0 0
Foreclosed assets 17 0 0 0 0
Renegotiated loans 0 0 0 0 0
Total non-performing assets $211 $170 $226 $806 $550
Non-performing assets as a percent of total loans 0.18% 0.16% 0.23% 0.80% 0.58%
Non-performing assets as a percent of total assets 0.11% 0.10% 0.14% 0.49% 0.34%
</TABLE>
Allowance for Loan Losses
IGA makes a quarterly determination as to an appropriate
provision for earnings necessary to maintain an allowance for
loan losses that is adequate for probable and reasonably
estimated losses. The amount charged to earnings is based upon
several factors including a continuing review of delinquent,
classified and non-accrual loans, large loans, and overall
portfolio quality, regular examination and review of the loan
portfolio by regulatory authorities, analytical review of loan
charge-off experience, delinquency rates, other relevant
historical and peer statistical ratios and IGA's judgment with
respect to local and general economic conditions and their
impact on the existing loan portfolio.
Assessing the adequacy of the allowance for loan losses is
inherently subjective because it requires making material
estimates, including the amount and timing of future cash flows
expected to be received on impaired loans, that may be
susceptible to significant change. In the opinion of management,
the allowance when taken as a whole, is adequate to absorb
reasonable estimated loan losses inherent in IGA's loan
portfolio.
The following table sets forth activity in the Bank's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Dec. 31, Dec. 31,
12 MONTHS 6 MONTHS Year Ended June 30,
1999 1998 1998 1997 1996
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,074 $948 $1,005 $558 $915
Charge-offs:
Real estate 15 27 36 0 0
Credit cards 216 137 479 208 260
Other consumer loans 212 90 757 282 561
443 254 1,272 490 821
Recoveries:
Real estate 0 0 0 0 0
Credit cards 52 0 0 0 0
Other consumer loans 81 80 177 90 109
133 80 177 90 109
Net charge-offs (310) (174) (1,095) (400) (712)
Additions charged to operations 520 300 1,038 847 355
Balance at end of period $1,284 $1,074 $948 $1,005 $558
Ratio of net charge-offs during the period
to average loans outstanding during the period 0.28% 0.17% 1.10% 0.40% 0.81%
Ratio of net charge-offs during the period
to average non-performing assets 146.92% 102.35% 212.21% 59.00% 138.93%
</TABLE>
The following table sets forth the distribution of IGA's
allowance for loan losses for the years ended December 31, 1999,
1998, and June 30, 1998, 1997 and 1996 .
<TABLE>
<CAPTION>
December December
1999 1998
Percent Percent
of Loans of Loans
Amount Loan in Each Amount Loan in Each
of Loan Amounts Category of Loan Amounts Category
Loss by to Total Loss by to Total
Allowance Category Loans Allowance Category Loans
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family $342 $43,434 37.66% $7 $40,114 38.57%
Commercial Real Estate $ 30 $ 2,996 2.60% $0 $ 1,408 1.35
Home equity 193 24,172 20.96% 211 $22,421 21.56
Automobile 239 24,406 21.16% 36 $18,746 18.03
Credit cards 196 10,955 9.50% 128 $10,920 10.50
Signature loans 103 5,414 4.69% 276 $ 6,329 6.09
Other 16 2,498 2.17% 0 $ 3,658 3.52
Commercial 121 1,469 1.27% 0 $ 400 0.38
Unallocated 44 0 0.00% 416 $ 0 0.00
Total $1,284 $115,344 100.00% $1,074 $103,996 100.00
======== ====== ======== ======
<CAPTION>
June June
1998 1997
Percent Percent
of Loans of Loans
Amount Loan in Each Amount Loan in Each
of Loan Amounts Category of Loan Amounts Category
Loss by to Total Loss by to Total
Allowance Category Loans Allowance Category Loans
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family $ 11 $35,799 36.33% $5 $31,429 31.02%
Commercial R/E 0 0 1.35% $0 $ 0 0.00
Home equity 59 23,174 23.52% 198 $24,154 23.84
Automobile 26 18,844 19.12% 34 $20,470 20.20
Credit cards 69 10,269 10.42% 120 $10,700 10.56
Signature loans 35 6,577 6.67% 258 $ 9,307 9.19
Other 0 3,871 3.93% 0 $ 5,264 5.20
Commercial 0 0 0.38% 0 $ 0 0.00
Unallocated 748 0 0.00% 390 $ -- 0.00
Total $ 984 $98,534 100.00% $1,005 $101,324 100.00
======== ====== ======== ======
</TABLE>
Investment Securities
The Company utilizes its investment securities portfolio to
manage its liquidity and interest rate risk. For this reason,
the company's investment securities portfolio is classified as
both available for sale and held to maturity.
The investment policy of the Company and classification of
securities are established by its Board of Directors. It is
based on its asset and liability management goals and is
designed to provide for a portfolio of high quality liquid
investments which optimize interest income. All or a portion of
the Company's investment securities portfolio may be utilized to
collateralize borrowings from the FHLB or repurchase agreements.
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
Carrying % of Carrying % of
Value Total Value Total
<S> <C> <C> <C> <C>
Federal funds $6,565 10.69% $8,726 15.49%
Securities held to maturity
Mid-Atlantic Corporate Federal
Credit Union:
Daily share accounts 0 0.00% 0 0.00%
Permanent capital account 0 0.00% 0 0.00%
Federal Home Loan Bank-IOD 47 0.08% 1,237 2.20%
Mortgage-backed securities 4,314 7.03% 6,634 11.78%
Municipal securities 4,760 7.75% 4,902 8.70%
FHLB Stock 834 1.36% 834 1.48%
Securities available for sale
U.S. Government and agency 36,023 58.67% 23,824 42.29%
obligations
Mortgage-backed securities 8,859 14.43% 10,176 18.06%
Total investments and
Federal funds $61,402 100.00% $56,333 100.00%
======= ====== ======= ======
<CAPTION>
June 30, June 30,
1998 1997
Carrying % of Carrying % of
Value Total Value Total
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Federal funds $5,134 9.99% $15,714 26.78%
Securities held to maturity
Mid-Atlantic Corporate Federal
Credit Union:
Daily share accounts 1,994 3.88% 6,144 10.47%
Permanent capital account 1,111 2.16% 1,587 2.70%
Federal Home Loan Bank-IOD
Mortgage-backed securities 9,570 18.61% 14,320 24.40%
Municipal securities
FHLB Stock
Securities available for sale
U.S. Government and agency 17,457 33.95% 7,199 12.27%
obligations
Mortgage-backed securities 16,150 31.41% 13,724 23.38%
Total investments and
Federal funds $51,416 100.00% $58,688 100.00%
======= ======% ======= ======%
<CAPTION>
December 31, December 31,
1999 1998
Carrying % of Carrying % of
Value Total Value Total
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Mortgage-backed securities held to maturity
GNMA $1,954 11.68% $2,480 12.81%
FNMA 363 2.17% 537 2.77%
FHLMC 0 0.00% 0 0.00%
CMOs 1,997 11.94% 3,617 18.69%
4,314 25.79% 6,634 34.28%
Mortgage-backed securities available for sale
FNMA $3,765 22.51% $5,826 30.10%
FHLMC 620 3.71% 1,270 6.56%
GNMA 2,156 12.89% 0 0.00%
CMOs 2,318 13.86% 3,081 15.92%
8,859 67.25% 10,177 60.54%
Total mortgage-backed securities $13,173 100.00% $16,811 100.00%
======= ====== ======= ======
<CAPTION>
June 30, June 30,
1998 1997
Carrying % of Carrying % of
Value Total Value Total
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Mortgage-backed securities held to maturity
GNMA $2,971 11.55% $3,709 13.23%
FNMA 1,112 4.32% 1,458 5.20%
FHLMC 0 0.00% 0 0.00%
CMOs 5,487 21.33% 9,153 32.64%
9,570 37.21% 14,320 51.06%
Mortgage-backed securities available for sale
FNMA $7,846 30.51% $8,148 29.05%
FHLMC 2,604 10.12% 5,576 19.88%
GNMA 0 0.00% 0 0.00%
CMOs 3,898 15.16% 0 0.00%
14,348 59.99% 13,724 48.94%
Total mortgage-backed securities $23,918 100.00% $28,044 100.00%
======= ====== ======= ======
</TABLE>
The following table sets forth the contractual maturities
and weighted average yield of IGA's investment securities at
December 31, 1999.
<TABLE>
<CAPTION>
Less Than 1 to 3 3 to 10 Over 10
1 Year Years Years Years Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Federal funds and
other investments $6,612 $0 $0 $0 $6,612
Securities held to
maturity 2,219 697 952 446 4,314
Securities available-
for-sale 6,341 8,902 34,013 386 49,642
Total $15,172 $9,599 $34,965 $832 $60,568
======= ====== ======= ==== =======
Weighted average yield 6.10% 6.09% 5.97% 6.17% 5.99%
======= ====== ======= ==== =======
</TABLE>
On December 14, 1999, the Holding Company invested
$2,500,000 in a two year convertible debenture issued by
BankZip.com, a start-up internet banking company for community
banks. The debenture is convertible into 1 million shares of
common stock upon the earlier of an initial public offering by
BankZip or the day prior to the maturity date. The company,
which spun off in December 1999 from Patriot Bank of Pottstown,
is building a national network of community banks through which
BankZip would offer an end-to-end internet services, such as
opening an account, account balances and transferring funds. In
addition to software, BankZip is proposing to give participating
community institutions access to customer service through a call
center it would operate and marketing that would be conducted on
a national scale. Alliance Partners (community banks), also
offer a national portfolio of BankZip.com co-branded financial
service products, including brokerage and insurance. Once an
Alliance Partner is signed up, the service can be deployed in as
few as thirty days. Currently, BankZip.com is enabling Alliance
Partners in the Northeast to support their launch in the
Philadelphia market in May 2000. Fully developed, BankZip.com
expects to support approximately 500 banks with as many as 4,000
branches and 5,000 ATMs across the nation within five years.
Sources of Funds
IGA's sources of funds are deposits, payment of principal
and interest on loans, interest earned on or maturation of other
investment securities and short-term investments, and funds
provided from operations.
IGA offers a variety of deposit accounts having a wide
range of interest rates and terms. IGA's deposits consist of
savings accounts, money market deposit accounts, NOW accounts
and certificate of deposit accounts currently ranging in terms
from 91 days to five years. IGA only solicits deposits from its
market area and does not use brokers to obtain deposits. IGA
primarily relies on competitive pricing policies, advertising
and customer service to attract and retain these deposits.
The flow of deposits is influenced significantly by general
economic conditions, changes in money market and prevailing
interest rates, and competition.
IGA attracts deposits from new customers primarily by
offering a wide variety of services and accounts, competitive
interest rates and convenient service hours. IGA has become
more susceptible to short-term fluctuations in deposit flow, as
customers have become more interest rate conscious. IGA
endeavors to manage the pricing of its deposits in keeping with
its asset/liability management, liquidity and profitability
objectives, Based on IGA's experience, management believes that
IGA's savings and checking accounts are relatively stable
sources of funds. However, IGA's ability to attract and
maintain certificates of deposit and the rates paid on these
deposits has been and will continue to be significantly affected
by market conditions.
The following table sets forth the deposit flows at IGA for
the twelve months ended December 31, 1999, six months ended
December 31, 1998 and (to reflect the recent change in IGA's
fiscal year-end from June 30 to December 31,) the years ended
June 30, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
12 months 6 months
Dec. 31, Dec. 31, Year Ended June 30,
1999 1998 1998 1997 1996
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance $154,888 $143,934 $149,846 $145,818 $144,016
Net increase (decrease) before
interest credited (4,144) 8,192 (11,387) (1,627) (3,903)
Interest credited 5,380 2,762 5,475 5,655 5,705
Ending balance $156,124 $154,888 $143,934 $149,846 $145,818
======== ======== ======== ======== ========
Net increase (decrease) $1,236 $10,954 ($5,912) $4,028 $1,802
======== ======== ======== ======== ========
</TABLE>
The following table sets forth the dollar amount of savings
deposits in the various type of deposit programs IGA offered at
December 31, 1999.
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1999 1998 1997
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
<S> <C> <C> <C> <C> <C> <C>
Transaction Accounts:
Savings accounts $68,615 43.95% $70,292 45.38% $63,790 46.59%
NOW accounts 9,600 6.15% 10,526 6.80% 8,929 6.51%
Money market accounts 9,757 6.25% 9,265 5.98% 9,581 6.98%
PECO 401k Employee Savings 0 0.00% 0 0.00% 0 0.00%
Plan
Total non-certificates 87,972 56.35% 90,073 58.15% 82,300 59.98%
Certificates:
3.00-3.99% 693 0.44% 1,622 1.05% 0 0.00%
4.00-4.99% 29,777 19.07% 11,171 7.21% 1,985 1.45%
5.00-5.99% 19,691 12.61% 41,900 27.05% 42,609 31.05%
6.00-6.99% 16,492 10.56% 8,608 5.56% 8,315 6.06%
7.00-7.99% 1,499 0.96% 1,514 0.98% 2,014 1.47%
Total certificates 68,152 43.65% 64,815 41.85% 54,923 40.02%
Total deposits $156,124 100.00% $154,888 100.00% $137,223 100.00%
======== ====== ======== ====== ======== ======
<CAPTION>
June 30,
1997 1996
Percent Percent
Amount of Total Amount of Total
<S> <C> <C> <C> <C>
Transaction Accounts:
Savings accounts $66,720 44.53% $68,976 47.30%
NOW accounts 8,162 5.45% 8,724 5.98%
Money market accounts 8,577 5.72% 8,058 5.53%
PECO 401k Employee savings 13,513 9.02% 14,082 9.66%
Plan
Total non-certificates 96,972 64.71% 99,840 66.47%
Certificates:
3.00-3.99% 0 0.00% 0 0.00%
4.00-4.99% 2,771 1.85% 12,734 8.73%
5.00-5.99% 41,170 27.47% 23,608 16.19%
6.00-6.99% 7,243 4.83% 7,891 5.41%
7.00-7.99% 1,690 1.13% 1,745 1.20%
Total certificates 52,874 35.29% 45,978 31.53%
Total deposits $149,846 100.00% $145,818 100.00%
======== ====== ======== ======
</TABLE>
The following table shows rate and maturity information for
IGA's Certificates of Deposit at December 31, 1999.
<TABLE>
<CAPTION>
Less Than 1 to 2 2 to 3 3 to 4 4 to 5
1 Year Years Years Years Years Total
(In thousands)
<C> <C> <C> <C> <C> <C> <C>
3.00-3.99% 693 $0 $0 $0 $0 1,622
4.00-4.99% 27,669 $23,090 $18 $0 $0 29,777
5.00-5.99% 16,610 912 1,133 1,036 0 19,691
6.00-6.99% 12,012 2,982 1,498 0 0 16,492
7.00-7.99% 1,499 0 0 1,499
Total certificates of deposit $58,483 $ 5,984 $2,649 $1,036 $0 68,152
======= ====== ====== ===== ===== ======
</TABLE>
The following table presents the amount of our certificates
of deposit of $100,000 or more by the time remaining until
maturity at December 31, 1999.
Maturity Amount
(In Thousands)
Three months or less $3,565
3 to 6 months 2,416
6 to 12 months 3,418
Over 12 months 602
Total $10,001
========
Borrowings
IGA is a member of the Federal Home Loan Bank of
Pittsburgh. As a member of the Federal Home loan Bank of
Pittsburgh, IGA is eligible to obtain advances from the Federal
Home Loan Bank of Pittsburgh upon the security of the FHLB of
Pittsburgh common stock IGA owns, provided certain standards
related to creditworthiness have been met. Such advances are
made pursuant to several different credit programs, each of
which has its won interest rate and range of maturities.
Federal Home Loan Bank of Pittsburgh advances are generally
available to meet seasonal demand and other withdrawals of
deposit accounts and to expand lending, as well as to aid the
efforts of member to establish better asset and liability
management through the extension of maturities of liabilities.
At December 31, 1999, FHLB borrowings totaled $15.0 million. In
all previous reporting periods, there were no borrowed funds.
Capital Adequacy
The Bank is required to maintain minimum ratios of Tier I
and risk based capital to total "risk weighted " assets and a
minimum Tier I leverage ratio, as defined by the banking
regulators. At December 31, 1999, the Bank was required to have
minimum Tier I and risk based capital ratios of 4.0% and 8.0%,
respectively, and a minimum Tier I leverage ratio of 4.0%. The
Bank's actual Tier I and risked based ratios at December 31,
1999 were 19.26% and 20.35%, respectively, and the Bank's Tier I
leverage ratio was 19.26%. These ratios exceed the requirements
for classification as a "well-capitalized" institution, the
industry's highest capital category. Following are the Bank's
risk based capital ratios at December 31, 1999 and December 31,
1998 (in 000's):
<TABLE>
<CAPTION>
To be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Capital Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Tangible capital
(to tangible assets) $22,691 11.4% $2,668 1.5% N/A N/A
Core capital
(to adjusted tangible
assets) 22,691 11.4 5,336 3.0 8,893 5.0%
Tier I Capital
(to risk-weighted
assets) 22,691 19.26 7,964 4.0 6,010 6.0
Risk-based capital
(to risk-weighted
assets) 23,975 20.35 9,425 8.0 10,117 10.0
As of December 31, 1998:
Tangible capital
(to tangible assets) 15,365 8.9% 2,567 1.5 N/A N/A
Core capital
(to adjusted tangible
assets) 15,365 8.9 5,135 3.0 8,559 5.0
Tier I Capital
(to risk-weighted
assets) 15,365 15.7 3,911 4.0 5,867 6.0
Risk-based capital
(to risk-weighted
assets) 16,439 16.8 7,822 8.0 9,778 10.0
</TABLE>
Impact of New Financial Accounting Standards
FASB Statement on Reporting Comprehensive Income. In
June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No.
130. SFAS No. 130 will require JADE FINANCIAL to classify items
of other comprehensive income by their nature in the financial
statements and display the accumulated balance of other
comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the
statement of equity. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The adoption of this
standard is not expected to have a material impact on JADE
FINANCIAL's consolidated financial statements.
FASB Statement on Disclosure of Information about Capital
Structure. In February 1997, the FASB issued SFAS No. 129.
SFAS No. 129 incorporates the disclosure requirements of APB
Opinion No. 15, Earnings per Share, and makes them applicable to
all public and nonpublic entities that have issued securities
addressed by the Statement. APB Opinion No. 15 requires
disclosure of descriptive information about securities that is
not necessarily related to the computation of earnings per
share. This statement continues the previous requirements to
disclose certain information about an entity's capital structure
found in APB Opinions No. 10, Omnibus Opinion-1966, and No. 15,
Earnings per Share, and FASB Statement No. 47, Disclosure of
Long-Term Obligations, for entities that were subject to the
requirements of those standards. SFAS No. 129 eliminates the
exemption of nonpublic entities from certain disclosure
requirements of Opinion 15 as provided by FASB Statement No. 21,
Suspension of the Reporting of Earnings per Share and Segment
Information by Nonpublic Enterprises. It supersedes specific
disclosure requirements of Opinions No. 10 and No. 15 and FASB
Statement No. 47 and consolidates them in this Statement for
ease of retrieval and for greater visibility to nonpublic
entities. FASB No. 129 is effective for financial statements
for periods ending after December 15, 1997. SFAS No. 129 will
be adopted by JADE FINANCIAL in the initial period following
consummation of the offering.
FASB Statement on Disclosures about Segments of an
Enterprise and Related Information. In June 1997, the FASB
issued SFAS No. 131. SFAS No. 131 establishes standards for the
way public enterprises are to report information about operating
segments in annual financial statements and requires those
enterprises to report selected information about operating
segments in interim financial reports. SFAS No. 131 is
effective for financial statements for periods beginning after
December 15, 1997. The adoption of this standard is not
expected to have a material impact on JADE FINANCIAL's
consolidated financial statements.
FASB Statement on Employers' Disclosures about Pensions and
Other Post-retirement Benefits. In February 1998, the FASB
issued SFAS No. 132. SFAS No. 132 revises employers'
disclosures about pension and other post-retirement benefit
plans. SFAS No. 132 does not change the measurement or
recognition of those plans and is effective for fiscal years
beginning after December 15, 1997. The adoption of this
standard is not expected to have a material impact on JADE
FINANCIAL's consolidated financial statements.
FASB Statement on Accounting for Derivative Instruments and
Hedging Activities. In June 1998, the FASB issued SFAS No. 133.
SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
imbedded in other contracts (collectively referred to as
"derivatives") and for hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and
measure those instruments at fair value. If certain conditions
are met, a derivative may be specifically designated as (i) a
hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm
commitment, (ii) a hedge of the exposure of variable cash flows
of a forecasted transaction, or (iii) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or
a foreign-currency-denominated forecasted transaction. The
accounting for changes in the fair value of a derivative (that
is, gains and losses) depends on the intended use of the
derivative and the resulting designation. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. JADE FINANCIAL has no activity subject to
SFAS 133.
FASB Statement on Accounting for Mortgage-backed Securities
Retained After the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise. In October 1998, the
FASB issued SFAS No. 134 which changes the way mortgage banking
firms account for certain securities and other interests they
retain after securitizing mortgage loans that were held for
sale. Under current practice, a bank that securitizes credit
card receivables has a choice in how it classifies any retained
securities based on its intent and ability to hold or sell those
investments. SFAS No. 134 gives mortgage banking firms the
opportunity to apply the same intent-based accounting that is
applied by other companies. SFAS No. 134 is effective for the
fiscal quarter beginning after December 15, 1998. The adoption
of SFAS No. 134 has not had a material impact on JADE
FINANCIAL's financial condition or results of operations.
Item 7
Financial Statements
The consolidated financial statements of Jade Financial
Corp. are set forth on Pages F-1 to F-__.
Item 8
Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.
None
Part III
Item 9
Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
The following table sets forth certain information
regarding the directors of JADE FINANCIAL.
<TABLE>
<CAPTION>
Term of
Position(s) Director Office
Name Age(1) Held with Jade(2) Since Expires
<S> <C> <C> <C> <C>
John J. O'Connell 64 Director, Chairman 1999 2002
of the Board, Chief
Executive Officer
Mario L. Incollingo, Jr. 61 Director, President
and Chief Operating 1999 2001
Officer
Frances J. Moran 60 Director 1999 2001
Edward D. McBride 48 Director 1999 2000
Dennis P. Wesley 47 Director 1999 2002
</TABLE>
__________________
(1) As of March 30, 2000
The following table sets forth certain information
regarding the executive officers of Jade Financial Corp. who are
not directors of the Company. Executive officers of Jade are
elected annually by the board of directors of Jade and serve at
the pleasure of the board of directors.
Position(s)
Name Age(1) Held with Jade
Dorothy M. Bourlier 40 Senior Vice President and Chief
Financial Officer
__________________
(1) As of March 30, 2000
The business experience of each director and executive
officer for at least the past five years is set forth below.
Mario L. Incollingo, Jr. Mr. Incollingo has served as
President and Chief Executive Office of IGA since 1992. In
1988, Mr. Incollingo joined IGA as Vice President of Lending.
Prior thereto, he served as Executive Vice President of
Pennsylvania Savings Bank from 1985 to 1988. Mr. Incollingo is
active in the local community with memberships in the
Feasterville Businessmen's Association and Rotary Club.
Mr. Incollingo serves as Treasurer of the Playwicki Foundation,
a local foundation dedicated to preservation of the Playwicki
Historic Farm.
Edward D. McBride. Mr. McBride has been employed since
1969 as the County Affairs Manager for Philadelphia County for
PECO Energy. Mr. McBride is Chairman of the Board of the
Variety Club, a Delaware Valley organization dedicated to
assisting handicapped children. He also is a member of the
Executive Board of the West Philadelphia Partnership, a
community organization dedicated to safety, education, and
economic development; the Executive Board of the Central
Philadelphia Development Corporation, whose goal is to improve
quality of life and economic development in the center city
area; and the Board of Directors of the Greater Northeast
Chamber of Commerce.
Francis J. Moran. Mr. Moran has worked as a self-employed
attorney since 1962. Mr. Moran has served as general counsel to
IGA since 1976.
John J. O'Connell. Mr. O'Connell was a founding member of
IGA Federal Credit Union in 1975. Mr. O'Connell was a
registered lobbyist and, until July 1, 1998, was employed as
Manager of State and Regional Governmental Affairs at PECO
Energy. Mr. O'Connell elected to accept early retirement from
PECO Energy, and as of July 1, 1998 he became the full-time
Chairman of the Board of IGA. Mr. O'Connell has been appointed
by Pennsylvania Governor Ridge to the Governor's Commission on
Economic Development through Labor Management Partnerships. He
also serves as Legislative Advisor to the American Cancer
Society of Southeastern Pennsylvania.
Dennis P. Wesley. Mr. Wesley was a founding member of IGA
Federal Credit Union in 1975. Since 1997, Mr. Wesley has been
employed by PECO Energy as Manager of Acquisition Integration.
From 1984 to 1997, Mr. Wesley was employed by PECO Energy as
Manager, Business Services, of the Limerick Generating Station.
Dorothy M. Bourlier. Ms. Bourlier served as Senior Vice
President and Chief Financial Officer of IGA since 1993.
Ms. Bourlier has been employed by IGA since 1981.
Pursuant to Securities and Exchange Commission regulations,
Jade is required to identify the names of persons who failed to
file or filed a late report required under Section 16(a) of the
Exchange Act of 1934, as amended. Generally, the reporting
regulations under Section 16(a) require directors and executive
officers to report changes in their ownership in Jade's stock.
Based on Jade's review of copies of such reports received or
written representations from certain directors and executive
officers, Jade believes that, during the fiscal year ended
December 31, 1999, all Section 16(a) filing requirements
applicable to its executive officers, directors and control
persons were complied with.
Item 10
Executive Compensation
The executive officers of JADE FINANCIAL have received no
compensation from JADE FINANCIAL since its formation. The
following table sets forth information regarding the
compensation of Mr. Incollingo, President and Chief Executive
Officer of IGA and Mr. John J. O'Connell, Chairman of the Board
of IGA, for each of the fiscal years ended December 31, 1999 and
1998 and June 30, 1998 and 1997. The amounts below represent
the aggregate compensation. No other executive officer of IGA
received compensation in excess of $100,000 for the fiscal year
ended December 31, 1999 and 1998 or June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Summary Compensation Table(1)
Annual
Compensation All Other
Salary Compensation
Name and Principal ($) ($)
Position Year(2) (3)(4) Bonus($) (5)(6)(7)(8)
<S> <C> <C> <C> <C>
John J. O'Connell December 31, 1999 $150,000 $ 0 $19,369
Chairman and CEO December 31, 1998 109,268 20,000 14,891
June 30, 1998 47,091 5,000 12,373
Mario L. Incollingo, Jr. December 31, 1999 $150,000 $35,000 $53,994
President and COO December 31, 1998 131,823 20,000 52,043
June 30, 1998 78,453 10,000 52,099
</TABLE>
(1) In 1998, IGA's fiscal year-end was changed from June 30 to
December 31. Accordingly, compensation for 1998 is
presented for the twelve-month period ended December 31,
1998 to reflect IGA's new fiscal year-end, and for the
prior fiscal years ended June 30, 1998 and 1997.
Compensation paid from January 1, 1998 through June 30,
1998 is included in the compensation reported for the
fiscal years ended December 31, 1998 and June 30, 1998.
(2) Compensation for all years reflected is compensation
received as executives of IGA only.
(3) Includes amounts which were deferred pursuant to IGA's
401(k) plan. Under the 401(k) plan, employees who elect to
participate may elect to have earnings reduced and to cause
the amount of such reduction to be contributed to the
401(k) plan's related trust in an amount up to 15% of
earnings. Any employee who has completed 1 year of service
and attained the age of 21 is eligible to participate in
the 401(k) plan.
(4) IGA provided other benefits to Messrs. Incollingo and
O'Connell in connection with their employment. The value
of such personal benefits, which is not directly related to
job performance, is not included in the table above because
the value of such benefits does not exceed the lesser of
$50,000 or 10% of the salary and bonus paid to them.
(5) Includes $0, $0, and $937 accrued by IGA for the
benefit of Mr. Incollingo under IGA's defined contribution
pension plan in fiscal years ended December 31, 1999,
1998 and June 30, 1998, respectively. Mr. O'Connell did
not participate in IGA's defined contribution pension plan
in the reported periods.
(6) Includes $5,500, $3,549, and $2,668 contributed by IGA
under IGA's 401(k) plan for the benefit of Mr. Incollingo
in fiscal years ended December 31, 1999, 1998 and June 30,
1998, respectively. IGA makes a matching contribution
equal to 100% of the employee's salary reduction up to a
maximum of 3% of the employee's salary. Mr. O'Connell
received a matching contribution $4,552 attributed to his
account in IGA's 401(k) for the fiscal year ended
December 31, 1999.
(7) Includes $36,494 of insurance premiums paid by IGA in the
three fiscal years ended December 31, 1999, 1998 and
June 30, 1998 with respect to a split dollar term life
insurance policy. Mr. O'Connell received $14,827, $14,891
and $12,373 for the fiscal years ended December 1999, 1998
and June 30, 1998 with respect to a term life insurance
policy.
(8) Includes $12,000 of deferred compensation paid by IGA in
each of the three fiscal years ended December 31, 1999,
1998 and June 30, 1998 under a deferred compensation
agreement for Mr. Incollingo.
Item 11
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information
furnished to Jade as of March 29, 2000, with respect to the
beneficial ownership of common stock by (i) each shareholder
known to Jade to be the beneficial owner of five percent (5%) or
more of the outstanding shares of common stock; (ii) each
director of Jade; (iii) the executive officers named in the
Summary Compensation Table and (iv) all current executive
officers and directors as a group. Except as indicated in the
footnotes to the table, the persons and entities named have sole
voting and investment power with respect to all shares of common
stock of which they are the respective beneficial owners.
<TABLE>
<CAPTION>
Name and Address(a) Amount and Nature Percent
of of of
Beneficial Owner(b) Beneficial Ownership Class(c)
<S> <C> <C>
5% Shareholders
Lawrence B. Seidman 138,750 7.42%
Seidman & Associates, LLC
100 Misty Lane
Parsippany, NJ 07504
Warren A. Mackey 187,200 9.99%
Arles Advisors, Inc.
767 5th Ave. 5th Floor
New York, NY 10155
Directors/Executive Officers
John J. O'Connell 37,500 2.00%
Mario L. Incollingo, Jr. 25,000 1.33%
Edward D. McBride 10,000 *
Francis J. Moran 9,375 *
Dennis P. Wesley 1,250 *
Dorothy M. Bourlier 10,550 *
All Current Directors
and Executive Officers
as a Group (6 persons)(i) 93,675 5.00%
*Less than 1%
</TABLE>
(a) The address for each of the named directors and executive
officer is c/o Jade Financial Corp., 213 West Street Road,
Feasterville, Pennsylvania 19053.
(b) A "beneficial owner" of a security includes any person or
group who, directly or indirectly, through any contract,
arrangement, understanding, relationship or otherwise has
or shares (i) voting power, which includes the power to
vote, or direct the voting of such security. Included in
the calculation of beneficial ownership is common stock
which such person or group has the right to acquire
beneficial ownership of within sixty (60) days, whether
from the exercise of options, warrants, rights, conversion
privileges or otherwise.
(c) Individual percentages have been rounded to the nearest
hundredth of a percent. Common stock which an individual
person or group has the right to acquire beneficial
ownership of within sixty (60) days pursuant to options,
warrants, conversion privileges or other rights, are deemed
to be outstanding for purposes of computing the percentage
of outstanding shares of common stock owned by such
individual or group, but are not deemed to be outstanding
for purposes of computing the percentage of common stock
Owned by any other individual.
Item 12
Certain Relationships and Related Transactions
In September, 1999, Mr. John J. O'Connell, Chairman of the
Board and Chief Executive Officer, borrowed $240,000 secured by
a first mortgage on his principal residence at a rate of 6.875%
for a term of 30 years. In June, 1999 and September 1998, Mr.
Mario L. Incollingo, Jr., President and Chief Operating Officer
borrowed the amounts of $40,000 at a rate of 6.95% for a term of
5 years and $62,000 at a rate of 7.50% for a term of 5 years
respectively. Both loans are home equity loans secured by liens
on Mr. Incollingo's personal residence. In June, 1999, Mr. and
Mrs. Jason Wainstein, daughter and son-in-law of Mario L.
Incollingo, borrowed $142,000 secured by a first mortgage on
their principal residence at a rate of 7.25% for a term of 30
years.
Item 13
Exhibits and Reports on Form 8-K
a. Exhibits
The following exhibits are filed herewith or incorporated
by reference herein as part of this Annual Report:
Exhibit Title
2.1 Plan of Conversion (incorporated by reference to the
Registration Statement on Form SB-2, File No. 333-
80183, filed on June 8, 1999.)
3.1 Articles of Incorporation of JADE FINANCIAL CORP.
(incorporated by reference to the Registration
Statement on Form SB-2, File No. 333-80183, filed on
June 8, 1999.)
3.2 Bylaws of JADE FINANCIAL CORP. (incorporated by
reference to the Registration Statement on Form SB-2,
File No. 333-80183, filed on June 8, 1999.)
4.1 Form of certificate evidencing shares of JADE
FINANCIAL CORP. (incorporated by reference to the
Registration Statement on Form SB-2, File No. 333-
80183, filed on June 8, 1999.)
10 JADE FINANCIAL CORP. - Employee Stock Ownership
Plan** (incorporated by reference to the Registration
Statement on Form SB-2, File No. 333-80183, filed on
June 8, 1999.)
21 Subsidiaries of Jade Financial Corp.*
23 Consent of Stockton Bates & Company, P.C.*
27 Financial Data Schedule*
---------------
* Filed herewith.
** Compensatory Plan
b. Reports on Form 8-K
None
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the Registrant has caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of
Feasterville, Commonwealth of Pennsylvania, on March 28,2000.
JADE FINANCIAL CORP.
By /s/ John J. O'Connell
John J. O'Connell
Chairman and Chief Executive
Officer
In accordance with the Exchange Act, this report has been
signed below by the following persons in the capacities and on
the dates indicated.
Signature Capacity Date
/s/ John J. O'Connell Director and March 28, 2000
John J. O'Connell Chairman of the
Board Chief
Executive Officer
(Principal Executive
Officer)
/s/ Mario L. Incollingo, Jr. Director, March 28, 2000
Mario L. Incollingo, Jr. President and
Chief Operating
Officer
/s/ Edward D. McBride Director March 28, 2000
Edward D. McBride
/s/ Francis J. Moran Director March 28, 2000
Francis J. Moran
____________________________ Director March 28, 2000
Dennis P. Wesley
/s/ Dorothy M. Bourlier Senior Vice March 28, 2000
Dorothy M. Bourlier President and
Chief Financial
Officer (Principal
Financial and
Accounting Officer)
EXHIBIT INDEX
Number Title
2.1 Plan of Conversion (incorporated by reference to the
Registration Statement on Form SB-2, File No. 333-
80183, filed on June 8, 1999.)
3.1 Articles of Incorporation of JADE FINANCIAL CORP.
(incorporated by reference to the Registration
Statement on Form SB-2, File No. 333-80183, filed on
June 8, 1999.)
3.2 Bylaws of JADE FINANCIAL CORP. (incorporated by
reference to the Registration Statement on Form SB-2,
File No. 333-80183, filed on June 8, 1999.)
4.1 Form of certificate evidencing shares of JADE
FINANCIAL CORP. (incorporated by reference to the
Registration Statement on Form SB-2, File No. 333-
80183, filed on June 8, 1999.)
10 JADE FINANCIAL CORP. - Employee Stock Ownership
Plan** (incorporated by reference to the Registration
Statement on Form SB-2, File No. 333-80183, filed on
June 8, 1999.)
21 Subsidiaries of Jade Financial Corp.*
23 Consent of Stockton Bates & Company, P.C.*
27 Financial Data Schedule*
---------------
* Filed herewith.
** Compensatory Plan
JADE FINANCIAL CORP.
AND SUBSIDIARIES
(Formerly IGA Federal Savings Bank)
Consolidated Financial Statements
December 31, 1999
CONTENTS
Page
Independent Auditors' Report 1
Financial Statements:
Consolidated Statement of Financial Condition,
December 31, 1999 and 1998 2
Consolidated Statement of Income
for the Year Ended December 31, 1999,
for the Six Months ended December 31, 1998 and
for the Year ended June 30, 1998 3-4
Consolidated Statement of Equity
for the Year Ended December 31, 1999,
for the Six Months Ended December 31, 1998 and
for the Year Ended June 30, 1998 5
Consolidated Statement of Cash Flows
for the Year Ended December 31, 1999,
for the Six Months Ended December 31, 1998 and
for the Year Ended June 30, 1998 6-7
Notes to Consolidated Financial Statements 8-34
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
JADE Financial Corp. and Subsidiaries
We have audited the accompanying consolidated statement of
financial condition of JADE Financial Corp. and Subsidiaries as
of December 31, 1999 and the related consolidated statements of
income, equity and cash flows for the year ended December 31,
1999 and the accompanying consolidated statement of financial
condition of IGA Federal Savings Bank and Subsidiary as of
December 31, 1998 and the related consolidated statements of
income, equity and cash flows for the six months ended December
31, 1998 and the year ended June 30, 1998. These consolidated
financial statements are the responsibility of JADE Financial
Corp. and the Savings Bank's management. Our responsibility is
to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audit 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 audit provides 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 JADE Financial Corp. and Subsidiaries as
of December 31, 1999 and the results of their operations and
their cash flows for the year then ended and the financial
position of IGA Federal Savings Bank and Subsidiary and the
results of their operations and their cash flows as of six
months ended December 31, 1998 and the year ended June 30, 1998,
in conformity with generally accepted accounting principles.
/s/ Certified Public Accountants
Philadelphia, Pennsylvania
February 4, 1999
JADE FINANCIAL CORP. AND SUBSIDIARIES
(Formerly IGA Federal Savings Bank)
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
Consolidated Statement Of Financial Condition
ASSETS
December 31: 1999 1998
(Dollars in Thousands)
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents
due from banks $ 6,630 $ 8,388
Interest bearing deposits in
other financial institutions 47 1,237
Federal funds 6,565 8,726
INVESTMENTS:
Investment securities available-
for-sale, at fair value 40,783 28,726
Mortgage-backed securities
available-for-sale,
at fair value 8,859 10,176
Mortgage-backed securities
held-to-maturity
(fair value of $4,208 and
$6,541) 4,314 6,635
BANKZIP.COM - Investment
(See Note 2) 2,500
LOANS RECEIVABLE, net 114,081 102,900
PROPERTY, EQUIPMENT AND
LEASEHOLD IMPROVEMENTS,
net of accumulated
depreciation 1,890 1,962
ACCRUED INTEREST RECEIVABLE 802 646
FEDERAL HOME LOAN BANK STOCK,
at cost 834 834
REORGANIZATION COSTS, net 162 195
DEFERRED TAX ASSET, net 1,177 44
BANK OWNED LIFE INSURANCE-
Cash Surrender Value 10,021
PREPAID EXPENSES AND OTHER ASSETS 911 622
TOTAL ASSETS $199,576 $171,091
See Accompanying Notes
LIABILITIES AND EQUITY
December 31: 1999 1998
(Dollars in Thousands)
LIABILITIES:
Deposits $156,124 $154,888
Advances from borrowers for
taxes and insurance 618 521
Note payable - FHLB 15,000
Accounts payable and accrued
expenses 594 406
Total liabilities 172,336 155,815
EQUITY:
Commitments and contingencies,
(See Note 15)
Common Stock, par value
1,872,923 shares authorized
1,742,423 shares issued and
outstanding for December 31, 1999 19
Additional Paid in Capital 14,130
Retained earnings,
(See Note 11 and 12) 15,853 15,560
ESOP ( 1,044)
Accumulated other comprehensive
income ( 1,718) ( 284)
Total equity 27,240 15,276
TOTAL LIABILITIES AND EQUITY $199,576 $171,091
Consolidated Statement Of Income
<TABLE>
<CAPTION>
Year Ended Six Months Ended Year Ended
December 31, December 31, June 30,
1999 1998 1998
(Dollars in Thousands)
<S> <C> <C> <C>
INTEREST INCOME:
Interest on loans $ 8,947 $ 4,275 $ 8,734
Investments and mortgage
-backed securities 3,077 1,210 2,002
Interest-earning deposits 75 51 430
Federal funds 291 253 310
Interest - Bankzip.com 9
Other 117
Total interest income 12,516 5,789 11,476
INTEREST EXPENSE:
Interest on borrowed funds 116
Interest on deposits 5,380 2,762 5,475
Net interest income 7,020 3,027 6,001
PROVISION FOR POSSIBLE LOAN
LOSSES 520 300 1,038
Net interest income after
provision for possible
loan losses 6,500 2,727 4,963
NONINTEREST INCOME:
Loan fees 121 80 295
Service charges 445 258 592
Other income 573 268 71
Gain on sale of securities 198
Total noninterest income 1,139 804 958
</TABLE>
Consolidated Statement Of Income
<TABLE>
<CAPTION>
Year Ended Six Months Ended Year Ended
December 31, December 31, June 30,
1999 1998 1998
(Dollars in Thousands)
<S> <C> <C> <C>
NONINTEREST EXPENSES:
Compensation and employee benefits $3,182 $1,496 $2,612
Office and occupancy costs 1,210 817 942
Printing and postage 240 28 246
Loan servicing 180 77 183
Professional fees 183 312 165
Bank and MAC charges 726 264 642
Advertising, marketing, and
promotions 170 102 104
Insurance expenses 112 23 155
Foundation Expense 725
Other 511 209
Total noninterest expenses 7,239 3,119 5,258
INCOME BEFORE PROVISION FOR INCOME
TAXES 400 412 663
Provision for federal and state
income taxes:
Current 355 190 N/A
Deferred ( 248) ( 44) N/A
Total income tax provision 107 146 N/A
NET INCOME $ 293 $ 266 $ 663
BASIC EARNINGS PER SHARE $ 0.17 N/A N/A
DILUTED EARNINGS PER SHARE $ 0.17 N/A N/A
</TABLE>
See Accompanying Notes
<TABLE>
<CAPTION>
Accumulated
Restricted, Other
Additional Regular Unrestricted Compre- Compre-
Common Paid in Reserve Undivided hensive Total hensive
Stock Capital Fund Earnings Income Equity Income
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1997 $ - $ - $3,680 $10,951 ($ 385) $14,246 $ -
Transfers to reflect provision
for loan losses (1,038) 1,038
Transfers to regular reserve fund in
accordance with Section 116 of the
Federal Credit Union Act 604 (604)
Net income 663 663 663
Change in unrealized loss on
investment and mortgage-backed
securities available-for-sale 171 171 171
Total Comprehensive Income $ 834
BALANCE, JUNE 30, 1998 3,246 12,048 ( 214) 15,080
Transfers of balance on 7/1/98 when
Credit Union converted to Savings Bank ( 3,246) 3,246
Net income 266 266 $ 266
Change in unrealized loss on
investment and mortgage-backed
securities available-for-sale,
net of taxes ( 70) ( 70) ( 70)
Total Comprehensive Income $ 196
BALANCE, DECEMBER 31, 1998 15,560 ( 284) 15,276
Net income 293 293 $ 293
Additional paid in capital 14,130 14,130
Common stock issuance-at par 19 19
ESOP ( 1,044) ( 1,044)
Change in unrealized loss on
investment and mortgage-backed
securities available-for-sale,
net of taxes ( 1,434) ( 1,434) ( 1,434)
Total Comprehensive Income (Loss) ($1,141)
BALANCE, DECEMBER 31, 1999 $ 19 $14,130 $ - $15,853 ($1,718) $27,240
</TABLE>
See Accompanying Notes
Consolidated Statement Of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Year Ended Six Months Ended Year Ended
December 31, December 31, June 30,
1999 1998 1998
(Dollars in Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 293 $ 266 $ 663
Adjustments to reconcile net
income to net cash used in
operating activities:
Amortization of premium/
discount on investments
and mortgage-backed
securities 82 82 90
Depreciation and
amortization 414 134 334
Write-down and expenses
of real estate owned 9
Gain on sale of investment
securities ( 198)
Discount on first mortgages 19
Loss on sale/disposal of asset 17
Provision for losses on loans 520 300 1038
Increase in deferred taxes 1,133) ( 44)
Change in operating assets
and liabilities:
Increase (decrease)
in accrued interest
receivable ( 156) 491 ( 135)
Increase in prepaid
expenses and other
assets ( 289) ( 204) ( 197)
Increase in accounts
payable and accrued
expenses 188 139 59
Net cash provided by
operating activities ( 81) 524 1,897
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of investment
securities, Bankzip.com ( 2,500)
Purchase of Bank owned Life
Insurance ( 10,021)
Purchase of investment
securities, available-for-
sale ( 19,020) ( 42,810) ( 15,500)
Purchase of FHLB Stock ( 834)
Sales of investment securities,
available-for-sale 27,000
Purchase of mortgage-backed
security, available-for-sale ( 2,486) ( 5,776)
Mortgage-backed security
maturities and principal
repayments, available-for-sale 2,842 3,632 4,875
Maturities and principal
repayments of mortgage-backed
securities, held-to-maturity 2,321 2,907 4,668
Maturities and principal
repayments of investment
securities, available-for-sale 6,143 7,278 3,881
Increase in total loans
receivable, net ( 11,402) ( 4,804) ( 3,848)
Capital expenditures ( 343) ( 478) ( 590)
Proceeds from sale of real
estate owned net of expense 203
Proceeds from sale of loans 4,854
Proceeds from sale of equipment 50
Increase in share insurance
fund 78
Net cash provided by
(used in) investing
activities ( 34,466) ( 6,818) ( 7,105)
</TABLE>
Consolidated Statement Of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Year Ended Six Months Ended Year Ended
December 31, December 31, June 30,
1999 1998 1998
(Dollars in Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Increase (decrease) in
deposits, net $ 1,236 $10,954 ($ 5,912)
Issuance of common stock 14,149
Increase in ESOP ( 1,044)
Increase in Notes Payable FHLB 15,000
Change in advances from
borrowers' for taxes and
insurance 97 ( 50) 119
Net cash provided by
(used in) financing activities 29,438 10,904 ( 5,793)
NET (INCREASE) DECREASE IN CASH
AND CASH EQUIVALENTS ( 5,109) 4,610 ( 11,001)
Cash and cash equivalents,
beginning of year 18,351 13,741 24,742
CASH AND CASH EQUIVALENTS,
END OF YEAR $13,242 $18,351 $13,741
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on borrowed funds $ 116 $ - $ -
Interest on deposits $ 5,380 $ 2,762 $5,475
Noncash activities:
Loans transferred to real
estate owned $ 16 $ - $ -
Increase (decrease) in
unrealized loss on investment
mortgage-backed securities
available-for-sale, net of
taxes $ 1,434 $ 70 ($ 171)
</TABLE>
See Accompanying Notes
Notes To Consolidated Financial Statements
December 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of Organization:
JADE Financial Corp. (the Company) is not an operating
company and has not engaged in any significant business to date.
It was formed as a Pennsylvania-chartered corporation and the
holding company for the Bank and other subsidiaries.
IGA Federal Savings Bank and Subsidiary (the Bank) was
organized as a federal mutual savings bank primarily serving
customers in Pennsylvania, counties in Philadelphia, Bucks,
Chester and Delaware counties. The Bank, through its five
branches, provide financial services to individuals, families
and small business. Historically emphasizing consumer loans,
including auto, credit card and personal loans, and residential
real estate loans, including home equity loans and one-to-four
family first mortgage loans, the bank is also starting to offer
a variety of commercial loan products.
IGA Federal Savings Bank, originally was established in
1975 as IGA Federal Credit Union. IGA Federal Credit Union on
July 1, 1998 converted from a credit union to IGA Federal
Savings Bank., a federal mutual savings bank.
Conversion to Capital Stock Form of Ownership:
On May 26, 1999, the Board of Directors of the Company
adopted a Plan of Conversion to convert from a federal mutual
savings bank to a federal capital stock savings bank. The
conversion was accomplished through the formation of the Holding
Company in July, 1999, the adoption of a federal stock charter,
and the sale of all of the Company's stock to the Holding
Company on October 4, 1999.
A subscription offering ("offering") of the shares of
common stock of the Holding Company was conducted whereby the
shares were offered initially to eligible account holders, the
Company's Employee Stock Ownership Plan ("ESOP"), supplemental
eligible account holders and other members of the Company.
The Holding Company issued 1,872,923 shares in connection
with the Conversion. Gross proceeds from the offering were
$14,983,384, which includes the $8 value of the 145,000 shares
issued to the IGA Employee Stock Ownership Plan and 60,420
shares sold to the Company for transfer to the IGA Charitable
Foundation.
Conversion cost of $835,000 was charged against proceeds
from the offering.
The Company issued all its outstanding capital stock to the
Holding Company in exchange for approximately one-half of the
net proceeds. The Holding Company accounted for the purchase in
a manner similar to a pooling of interests whereby assets and
liabilities of the Company maintain their historical cost basis
in the consolidated company.
JADE Financial Corp. was organized at the direction of the
Board of Directors of IGA for the purpose of becoming a holding
company to own all of the outstanding capital stock of IGA.
Upon completion of the stock conversion on October 4, 1999, IGA
became a wholly-owned subsidiary of JADE Financial Corp. JADE
Financial Corp. is engaged primarily in the business of
directing, planning and coordinating the business activities of
IGA, and has also organized two new operating subsidiaries, JADE
Abstract and JADE Insurance Agency.
JADE Abstract is a licensed title insurance agency founded
for the purpose of originating title insurance to the customers
of IGA Federal Savings Bank, other financial institutions,
attorneys, accountants, real estate brokers, builders, and the
private consumer. The market area includes southeastern
Pennsylvania, namely, the Philadelphia five county region. JADE
Abstract is operating with a three-person board of directors and
employs a full time licensed title agent. Title insurance
protects the lender and the homebuyer against any title defects
when a new home is purchased. Premiums for title insurance are
traditionally paid by the borrower and are a cost of obtaining
financing secured by real estate. It also provides protection
to the lender when a borrower refinances a home. Title
insurance may be required on both residential and commercial
transactions.
JADE Insurance Agency, a Pennsylvania Corporation and a
wholly-owned subsidiary of JADE Financial Corp., was formed for
the purpose of providing a diverse set of insurance programs to
meet the needs of existing and potential customers as well as to
provide programs to other financial institutions such as credit
unions and community banks. The products outlined in the
business plan will generate not only excellent fee income to the
agency, but will also provide comprehensive service to existing
IGA Federal Savings Bank customers and the general public.
Insurance products such as Accidental Death & Dismemberment
(AD&D), Term life, Long-term Care, Auto, Homeowner, Whole Life,
Universal Life, Health, Collateral Protection and Mortgage Life
will be marketed through a direct mail program as well as a
point of sale program. The Agency has enlisted the help of
strategic partners in the development and marketing of the
insurance products. As of December 31, 1999, there had been no
income or expenses related to this subsidiary.
The Bank competes with other banking and financing
institutions in its primary markets. Commercial banks, savings
banks, savings and loan associations, mortgage bankers and
brokers, credit unions and money market funds actively compete
for deposits and loans in the Bank's market area. Such
institutions, as well as consumer finance, mutual funds,
insurance companies, and brokerage and investment banking firms,
may be considered competitors of the Bank with respect to one or
more of the services it renders.
Principles of Presentation:
The consolidated financial statements include the accounts
of JADE and its wholly-owned subsidiaries, IGA Federal Savings
Bank and Subsidiary (Cuiga), JADE Insurance Company and JADE
Abstract Inc. All significant intercompany accounts and
transactions have been eliminated.
Impact of Year 2000:
The Bank was well prepared to enter the new year at
midnight on January 1, 2000. Contingency and event plans were
in effect as the century rollover took place. No material
defects or problems were experienced with hardware, software,
equipment, or operations.
During 1999, the Bank utilized a comprehensive "Customer
Awareness" campaign to ensure that the customers and the general
public were themselves prepared for Y2K. Due to this campaign
and the efforts of our peers and regulators, the Bank
experienced no material impact to liquidity.
Cash and Cash Equivalents:
Cash and cash equivalents include cash on hand, demand
deposits maintained in depository institutions, other readily
convertible investments with original contractual terms to
maturity of three months or less.
Securities:
The Bank divides its securities portfolio into two
segments: (a) held-to-maturity and (b) available-for-sale.
Securities in the held-to-maturity category are accounted for at
cost, adjusted for amortization of premiums and accretion of
discounts, using the level yield method, based on the Bank's
intent and ability to hold the securities until maturity.
Marketable securities included in the available-for-sale
category are accounted for at fair value, with unrealized gains
or losses, net of taxes, being reflected as adjustments to
equity. The fair value of marketable securities available-for-
sale is determined from publicly quoted market prices.
Securities available for sale which are not readily marketable,
which include Federal Home Loan Bank of Pittsburgh stock, are
carried at cost which approximates liquidation value.
At the time of purchase, the Bank makes a determination of
whether or not it will hold the securities to maturity, based
upon an evaluation of the probability of future events.
Securities, which the Bank believes may be involved in interest
rate risk, liquidity, or other asset/liability management
decisions, which might reasonably result in such securities not
being held-to-maturity, are classified as available-for-sale.
If securities are sold, a gain or loss is determined by specific
identification method and is reflected in the operating results
in the period the trade occurs.
Gains and losses realized on sales of investment and
mortgage-backed securities represent differences between the net
proceeds and carrying values determined by the specific
identification method.
Loans and Allowance for Loan Losses:
Loans that the Bank has the intent and ability to hold for
the foreseeable future or until maturity or payoff are stated at
the amount of unpaid principal, reduced by deferred loan fees
and an allowance for possible loan losses and increased by
deferred loan origination costs. Interest on loans is
recognized over the term of the loan and is calculated using the
simple-interest method on principal amounts outstanding. The
allowance for possible loan losses is established through a
provision for possible loan losses charged to expense. Loans
are charged against the allowance for possible loan losses when
management believes that the collectibility of the principal is
unlikely. The allowance is an amount that management believes
will be adequate to absorb possible losses on existing loans
that may become uncollectible, based on evaluations of the
collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in
the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans and current economic
conditions that may affect the borrower's ability to pay.
Accrual of interest is discontinued for those loans which
are 90 days or more delinquent, or sooner if management
believes, after considering economic and business conditions and
collection efforts, that the borrower's financial condition is
such that the collection of interest is doubtful. When a loan
is placed on nonaccrual status, all uncollected interest is
charged off.
Loan Origination Fees and Loan Origination Costs:
Loan origination fees received in excess of loan
origination costs are deferred and amortized over the contract
lives of the loans, using a method which approximates the level
yield method. In the event that the related loans are sold,
such net deferred fees are recognized as income in the period of
sale. Deferred origination costs relating to consumer loans are
amortized over the estimated life of the consumer loan
portfolio.
Property, Equipment and Leasehold Improvements:
Land is carried at cost. Property, equipment and leasehold
improvements are stated at cost less accumulated depreciation
and amortization. Depreciation is computed based on cost using
the straight-line method over estimated useful lives of 35 years
for buildings and improvements, 2-15 years for office furniture,
equipment and leasehold improvements and 3 years for
transportation equipment. Improvements to leased property are
amortized over the lesser of the life of the lease or the
improvements.
Maintenance and repairs of property, equipment and
leasehold improvements are charged to operations and major
improvements are capitalized. Upon retirement, sale or other
disposition of property, equipment and leasehold improvements,
the cost and accumulated depreciation and amortization are
eliminated from the accounts and gain or loss is included in
operations.
Financial Statement Presentation:
Certain items in prior periods financial statements have
been reclassified to conform to the 1999 presentation.
Advertising:
Advertising costs are charged to operations when incurred
and amounted to $169,108, and $110,690 for the year ended
December 31, 1999 and six months ended December 31, 1998, and
$104,000 for the year ended June 30, 1998, respectively.
Reorganization Costs:
On April 24, 1998, the JADE Board of Directors approved a
resolution to convert to a Federal Mutual Savings Association.
Costs incurred with this conversion is capitalized and is being
amortized over 5 years using the straight-line method beginning
July 1, 1998, the date of conversion.
Use of Estimates:
The preparation of financial estimates in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
The principal estimate that is susceptible to significant
change in the near term relates to the allowance for loan
losses. The evaluation of the adequacy of the allowance for
loan losses includes an analysis of the individual loans and
overall risk characteristics and size of the different loan
portfolios, and takes into consideration current economic and
market condition, the capability of specific borrowers to pay
specific loan obligations, as well as current loan collateral
values. However, actual losses on specific loans, which also
are encompassed in the analysis, may vary from estimated losses.
Mortgage Servicing Rights:
The Bank recognizes mortgage servicing rights as assets,
regardless of how such assets were acquired. Impairment of
mortgage servicing rights is assessed based upon a fair market
valuation of those rights on a disaggregated basis. Impairment,
if any, is recognized in the statement of operations. There is
no impairment reflected in the mortgage servicing rights at
December 31, 1999 and 1998.
Cash Deposited in Financial Institutions:
JADE and its Subsidiaries maintains cash balances at other
financial institutions. Accounts at these financial
institutions are insured by the Federal Deposit Insurance
Corporation up to one hundred thousand dollars. In the normal
course of business, JADE may have deposits that exceed the
insured balance.
Effect of New Accounting Standards:
Statement of Financial Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income, is effective for the JADE and
its Subsidiaries for the period beginning July 1, 1998, and
establishes reporting and display of comprehensive income in the
financial statements. Comprehensive income represents net
earnings and certain amounts reported directly in stockholders'
equity, such as the net unrealized gain or loss on available-
for-sale securities. The Company adopted SFAS No. 130 effective
June 30, 1998.
SFAS No. 131, Disclosure About Segments of an Enterprise
and Related Information, is effective for the Company for the
period beginning July 1, 1998 and establishes disclosure
requirements for segment operations. The Company has adopted
SFAS No. 131.
SFAS No. 132, Employers' Disclosures about Pensions and
Other Postretirement Benefits, is effective for the Company for
the period beginning July 1, 1998, and revises the disclosure
requirements for pension and postretirement benefit plans. The
Company has adopted SFAS 132.
SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, will be effective for the Bank for years
beginning July 1, 1998. The Company has no activity subject to
SFAS 133. The Company expects to adopt SFAS 133 when required.
SFAS No. 134, in October 1998, the FASB issued SFAS NO.
134, Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held-for-Sale by a Mortgage
Banking Enterprise. SFAS No. 134 changes the way mortgage
banking firms account for certain securities and other interests
they retain after securitizing mortgage loans that were held for
sale. Under current practice, a bank that securities credit
card receivables has a choice in how it classifies any retained
securities based on its intent and ability to hold or sell those
investments. SFAS No. 134 gives the mortgage banking firms the
opportunity to apply the same intent-based accounting that is
applied by other companies. SFAS No. 134 is effective for the
fiscal quarter beginning after December 15, 1998. Management of
JADE and its Subsidiaries anticipates that the implementation of
SFAS No. 134 will not have a material impact on the its
financial condition or results of operations.
In June 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and hedging activities- an amendment of
FASB Statement No. 133, this FASB postpones the implementation
of FASB 133 to effective for years beginning after June 15,
2000. The Bank currently has no activity subject to SFAS 137.
Loans Available-For-Sale:
Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or market
calculated on an aggregate basis with any unrealized losses
reflected in the statement of operations. There were no loans
sold or available for sale during the year ended December 31,
1999 and 1998.
Income Taxes:
JADE and its Subsidiaries utilizes the asset and liability
method of accounting for income taxes. Under the asset and
liability method, deferred income taxes are recognized for the
tax consequences of "temporary differences" by applying enacted
statutory tax rates applicable to future years to difference
between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. The effect on
deferred taxes of a change in tax rates is recognized in income
in the period that includes the enactment date. Additionally,
the recognition of net deferred tax assets is based upon the
likelihood of realization of tax benefits in the future. A
valuation allowance would be provided for deferred tax assets
which are determined more than likely not to be realized.
Prior to July 1, 1998 IGA Credit Union was exempt, by
statute, from federal and state income taxes.
Cuiga Services Corporation, (The Company), d/b/a Member's
Edge, a wholly-owned subsidiary of IGA Federal Savings Bank , is
subject to federal and state income taxes. At December 31,
1999, net operating loss carryforwards approximately $69,836 are
available for federal income tax purposes. These carryforwards
are available to offset future federal taxable income of the
Company and expire in varying amounts between December 31, 2003
and June 30, 2013.
The Company incurred income of $15,538 for the year ended
December 31, 1999, $4,114 net loss for the six month period
ended December 31, 1998 and a $7,275 net loss for the year ended
June 30, 1998.
2. INVESTMENTS AND MORTGAGE-BACKED SECURITIES:
The following is a summary of the JADE and its Subsidiaries
investment in available-for-sale and held-to-maturity
securities:
<TABLE>
<CAPTION>
Available-for-Sale
December 31, 1999
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Investment Securities:
Debt:
FHLB Notes $28,862 $ - ($1,539) $27,323
FHLMC 500 ( 36) 464
Federal Farm Credit 5,000 ( 318) 4,682
Small Business Associations 3,590 ( 36) 3,554
Municipals 5,158 ( 398) 4,760
43,110 ( 2,327) 40,783
Mortgage-backed Securities:
Collateralized mortgage
obligations $ 2,401 $ - ($ 83) $ 2,318
FHLMC 631 ( 11) 620
GNMA 2,286 ( 130) 2,156
FNMA 3,817 ( 52) 3,765
9,135 ( 276) 8,859
Total available-for-sale
Securities 52,245 - ( 2,603) 49,642
<CAPTION>
Held-to-Maturity
December 31, 1999
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Investment Securities:
Mortgage-backed Securities:
Collateralized mortgage
obligations 1,997 ( 22) 1,975
FNMA 363 ( 9) 354
GNMA 1,954 ( 75) 1,879
Total Held-to-Maturity
Securities 4,314 ( 106) 4,208
TOTAL INVESTMENTS AND
MORTGAGE-BACKED
SECURITIES $56,559 $ - ($2,709) $53,850
</TABLE>
The following is a summary of the Bank's investment in
available-for-sale and held-to-maturity securities.
<TABLE>
<CAPTION>
Available-for-Sale
December 31, 1999
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Investment Securities:
Debt:
FHLB Notes $ 14,924 $ 11 ($125) $ 14,810
FHLMC 500 ( 4) 496
Federal Farm Credit 6,000 1 ( 25) 5,976
Small Business Associations 2,568 ( 26) 2,542
Municipals 4,908 ( 6) 4,902
28,900 12 ( 186) 28,726
Mortgage-backed Securities:
Collateralized mortgage
obligations 3,148 ( 68) 3,080
FHLMC 1,277 ( 6) 1,271
FNMA 5,861 ( 36) 5,825
10,286 ( 110) 10,176
Total available-for-sale
securities 39,186 12 ( 296) 38,902
<CAPTION>
Held-to-Maturity
December 31, 1999
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Investment Securities:
Mortgage-backed Securities:
Collateralized mortgage
obligations $ 3,617 $ 1 $ - $ 3,618
FNMA 538 ( 2) 536
GNMA 2,480 ( 93) 2,387
Total held-to-maturity
securities 6,635 1 ( 95) 6,541
TOTAL INVESTMENTS AND
MORTGAGE-BACKED
SECURITIES $45,821 $13 ($391) $45,443
</TABLE>
The amortized cost and estimated market values of
securities at December 31, 1999 and 1998 by contractual
maturities, are as follows:
Estimated
Amortized Market
Cost Value
(Dollars in Thousands)
December 31, 1999:
Due less than one year $ 500 $ 464
Due after one year through
five years 14,364 13,864
Due after five years through
ten years 22,201 20,666
Due after ten years 2,455 2,234
39,520 37,228
Mortgage-backed securities 17,039 16,622
$56,559 $53,850
December 31, 1998:
Due less than one year $ 500 $ 496
Due after one year through
five years 7,004 7,000
Due after five years through
ten years 15,678 15,540
Due after ten years 3,230 3,227
26,412 26,263
Mortgage-backed securities 19,439 19,209
$45,851 $45,472
Proceeds from sales and maturities of securities available-
for-sale during the year ended December 31, 1999 totaled
$8,984,886. Of the proceeds, $4,095,677 were from maturities,
and $4,889,209 were from principal repayments. No gains or
losses were realized from those transactions. Proceeds from
sales and maturities of securities available-for-sales during
the six months ended December 31, 1998 totaled $34,277,935. Of
the proceeds, $-0- were from maturities, $1,500,000 were from
security call options, and $3,326,316 were from principal
repayments. Gains of $198,000 were realized from those
transactions.
Investment in BankZip.com:
On November 16, 1999, JADE Financial Corp. purchased a
convertible debenture in the amount of $2.5 million with a rate
of interest of 5.45% from ZipFinancial.Com.Inc. (d/b/a/
BankZip.com). The investment is recorded at cost which
approximates fair value. The President of IGA Federal Savings
Bank is also a Director of ZipFinancial.Com.Inc.
3. LOANS RECEIVABLE:
Loans receivable consist of the following:
December 31: 1999 1998
(Dollars in Thousands)
Real Estate Loans:
One-to-four family $ 43,434 $ 40,114
Commercial loans 2,996 1,408
46,430 41,522
Consumer Loans:
Home equity loans 24,172 22,421
Automobile and truck loans 24,406 18,746
Signature loans 5,414 6,329
Credit card loans 10,955 10,920
Other 2,498 3,658
67,445 62,074
Commercial Loans 1,469 400
115,344 103,996
Less allowance for possible
loan losses ( 1,284) ( 1,074)
Plus deferred loan costs, net 21 ( 22)
$114,081 $102,900
Loans receivable at December 31, 1999 and 1998 includes
$97,462,685 and $85,667,043 of fixed rate loans and $17,882,315
and $18,329,158 of adjustable rate loans, respectively.
A summary of loan maturities at December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
Consumer
Commercial and
One to Four Real Home Commercial Total
Family Estate Equity Business Loans
<S> <C> <C> <C> <C> <C>
Amounts due:
Non-accrual $ 73 $ - $ 56 $ 65 $ 194
Within one year 388 195 12,365 12,948
After one year:
1 to 3 years 1,310 2,015 10,664 13,989
4 to 5 years 2,289 1,305 4,996 20,601 29,191
6 to 11 years 14,513 1,628 12,998 1,048 30,187
Over 11 years 24,861 63 3,912 28,836
Total due after one year 42,973 2,996 23,921 32,313 102,203
TOTAL AMOUNTS DUE $43,434 $2,996 $24,172 $44,743 $115,345
</TABLE>
A summary of changes in the allowance for possible loan
losses is as follows:
December 31: 1999 1998
(Dollars in Thousands)
BALANCE, BEGINNING OF YEAR $1,074 $ 948
Provision charged to operation 520 300
Recoveries of amounts charged off
and other 133 80
1,727 1,328
Amounts charged off ( 443) ( 254)
BALANCE, END OF YEAR $1,284 $1,074
The provision for loan losses charged to expense is based
upon past loan and loss experience and an evaluation of
potential losses in the current loan portfolio, including the
evaluation of impaired loans under SFAS Nos. 114 and 118. A
loan is considered to be impaired when, based upon current
information and events, it is probable that the Bank will be
unable to collect all amounts due according to the contractual
terms of the loan. As of December 31, 1999 and 1998, 100% of
the impaired loan balance was measured for impairment based on
the fair value of the loans' collateral. Impairment losses are
included in the provision for loan losses. SFAS Nos. 114 and
118 do not apply to large groups of smaller balance homogeneous
loans that are collectively evaluated for impairment, except for
those loans restructured under a trouble debt restructuring.
Loans collectively evaluated for impairment include consumer
loans and residential real estate loans. At December 31, 1999,
the Bank's impaired loans consisted of 13 loans with a total
recorded balance of $194,000 for which specific allowances of
$80,152 has been established. The average investment in
impaired loans for the year ended December 31, 1998 was
$171,000.
Loans on which the accrual of interest has been
discontinued amounted to $194,447 and $170,835 at December 31,
1999 and 1998, respectively. If interest on those loans had
been accrued, accrued interest would have increased by $3,528
and $2,988 at December 31, 1999 and December 31, 1998,
respectively.
Certain directors and officers of JADE have loans with JADE
and its Subsidiaries. Such loans were made in the ordinary
course of business and do not represent more than a normal risk
of collection. Loans to officers and directors amounted to
$1,217,995 and $1,203,636 at December 31, 1999 and 1998,
respectively. During the years ended December 31, 1999 and
1998, loans of $240,000 and $62,000, respectively, were
disbursed to executive officers and board of directors, while
principal repayments of $225,641 and $86,529 were received in
those years, respectively.
4. LOAN SERVICING:
Mortgage loans serviced for others are not included in the
accompanying statement of financial condition. The unpaid
principal balances of these loans are summarized as follows:
Mortgage Loan Servicing Portfolios:
1999 1998
(Dollars in
Thousands)
Federal National Mortgage Association $12,485 $14,025
First Nationwide 437 514
12,922 $14,539
Custodial escrow balances maintained in connection with the
foregoing loan servicing portfolio totaled $191,952 and $200,000
as of December 31, 1999 and December 31, 1998, respectively.
5. ACCRUED INTEREST RECEIVABLE:
A summary of accrued interest receivable is as follows:
1999 1998
(Dollars in Thousands)
Loans $397 $325
Mortgage-backed securities 120 119
Investment securities 285 202
$802 $646
6. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET:
The major classes of property, equipment and leasehold
improvements and the total accumulated depreciation and
amortization a December 31, 1999 and 1998 are as follows:
December 31: 1999 1998
(Dollars in Thousands)
Land $ 150 $ 150
Buildings and improvements 1,742 1,726
Office furniture, equipment and leasehold
improvements 1,911 1,661
Transportation equipment 143 99
3,946 3,636
Less accumulated depreciation and
Amortization 2,056 1,674
$1,890 $1,962
Bank-Owned Life Insurance (BOLI):
IGA Federal Savings Bank purchased $10 million of Bank-
Owned Life Insurance on December 16, 1999. The insurance
contract was issued by American General Insurance Company and
placement of invested funds is in a separate, segregated
account. Bancorp Services will provide administrative servicing
going forward. Bank-Owned Life Insurance ("BOLI") is specially
structured life insurance owned by the bank on a broad-base of
its employees. The Bank pays all the premiums and names itself
as beneficiary. BOLI is an alternate solution for funding
future obligated benefits and is classified as an "other asset"
on the balance sheet. This investment represents 36.79% of the
JADE financials total current equity.
7. DEPOSITS:
Deposits at December 31, 1999 and December 31, 1998 are
summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average 1999 1998
Interest Rate Amount % Amount %
<S> <C> <C> <C> <C> <C>
Types of Deposits:
Savings accounts:
1999 2.10% $ 68,615 43.95%
1998 3.18 $ 70,281 45.37%
Checking accounts:
1999 0.0 9,600 6.15
1998 0.0 10,526 6.80
Money market accounts:
1999 3.85 9,757 6.25
1998 3.83 9,265 5.98
$ 87,972 56.35 $ 90,072 58.15
Certificate of deposit:
3.00-3.99%
1999 3.93 $ 693 0.44
1998 3.83 $ 1,622 1.05
4.00-4.99%
1999 4.73 29,777 19.07
1998 4.71 11,171 7.21
5.00-5.99%
1999 5.42 19,691 12.61
1998 5.59 41,900 27.05
6.00-6.99%
1999 6.14 16,492 10.56
1998 6.21 8,608 5.56
7.00-7.99%
1999 7.16 1,499 0.97
1998 7.17 1,515 .98
Total of certificate
of deposit 68,152 43.65 64,816 41.85
TOTAL DEPOSITS $156,124 100.00% $154,888 100.00%
</TABLE>
Certificates of deposit have scheduled maturities as
follows:
1999 1998
(Dollars in Thousands)
Within one year $56,001 $46,455
One year through two years 9,092 13,218
Three years 487 2,953
Over three years 2,572 2,190
$68,152 $64,816
Interest expense on deposits is comprised of the following:
December 31: 1999 1998
(Dollars in Thousands)
Savings accounts 1,540 834
Money market accounts 339 160
Certificates of deposit 3,501 1,768
$5,380 $2,762
The aggregate amount of certificates of deposit accounts
exceeding $100,000 was approximately $10,001,000 and $7,964,000
at December 31, 1999 and 1998, respectively.
8. FEDERAL HOME LOAN BANK STOCK:
The Bank is a member of the Federal Home Loan Bank System.
As a member, the Bank maintains an investment in the capital
stock of the Federal Home Loan Bank of Pittsburgh in an amount
not less than 1% of its outstanding home loans or 1/20 of its
outstanding notes payable, if any, to the Federal Home Loan Bank
of Pittsburgh, whichever is greater, as calculated December 31
of each year.
9. INCOME TAX MATTERS:
The JADE and its subsidiaries files a consolidated federal
income tax return and separate state returns for the year ended
December 31, 1999.
The provision for income taxes for the consisted of the
following:
Currently Payable:
(Dollars in Thousands)
Year Ended Six Months Ended
December 31 December 31,
1999 1998
Federal $366 $170
State ( 11) 20
Deferred ( 248) ( 44)
TOTAL $107 $146
The reconciliation between the actual provision for federal
and state income taxes and the amount of income taxes which
would have been provided at statutory rates is as follows:
Year Ended December 31, 1999:
Expected income tax expense at federal
tax rate $136
Travel and entertainment 12
Exempt interest ( 83)
State tax net of federal benefit ( 11)
Disallowed interest expense 53
$107
Deferred taxes are included in the accompanying statement
of financial condition as of December 31, 1999 for the estimated
future tax effect of differences between the financial statement
and federal income tax basis of assets and liabilities given the
provisions of currently enacted tax laws.
The net deferred tax asset (liability) consists of the
following components:
December 31, December 31,
1999 1998
Deferred Tax Asset:
(Dollars in Thousands)
Unrealized loss on securities
available-for-sale $ 885 $ -
Foundation contribution 206
Deferred compensation 6 2
Allowance for loan loss 80 42
DEFERRED TAX ASSET $1,177 $44
The realization of deferred tax assets is dependent upon a
variety of factors, including the generation of future taxable
income, the existence of taxes paid and recoverable, the
reversal of deferred tax liabilities and tax planning
strategies. Based upon these and other factors, management
believes it is more likely than not that the Company will
realize the benefits of these deferred tax assets. The tax
effect from the unrealized loss on securities available-for-sale
has been offset by a valuation allowance.
10. DIFFERENCE BETWEEN FEDERAL DEPOSITORY INSURANCE CORPORATION
CALL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS:
There were no adjustments between Call Report and
Consolidated Financial Statement at December 31, 1998.
An adjustment has been make to the accounts which is
reflected in the consolidated financial statements but is not
reflected in the Bank's Federal Depository Insurance Corporation
Call Report. The adjustment and its effect on equity are as
follows:
December 31, December 31,
1999 1998
(Dollars in Thousands)
Equity per the Bank's December 1998
Office of Thrift Supervision
Call Report $26,039 $15,377
Decrease in federal income tax
provision set up
as deferred asset 1,177 44
Adjustment made to financial statement
for tax benefits on unrealized
losses on securities
available-for-sale 24 ( 145)
$27,240 $15,276
11. REGULATORY MATTERS:
The Bank is subject to various regulatory capital
requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary actions
by regulators that if undertaken, could have a direct material
effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance sheet items as
calculated under accounting practices. The Bank's capital
amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain certain minimum
amounts and ratios (set forth in the table below). Management
believes that the Bank meets, as of December 31, 1999, all
capital adequacy requirements to which it is subject.
As of June 30, 1999, the most recent notification from the
OTS categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum
ratios as set forth in the table. There are no conditions or
events since that notification that management believes have
changed the institution's category.
The Bank's actual capital amounts and ratios are presented
in the following table.
<TABLE>
<CAPTION>
To be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Capital Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Tangible capital
(to tangible assets) $22,691 11.4% $2,668 1.5% N/A N/A
Core capital
(to adjusted tangible
assets) 22,691 11.4 5,336 3.0 8,893 5.0%
Tier I Capital
(to risk-weighted
assets) 22,691 19.26 7,964 4.0 6,010 6.0
Risk-based capital
(to risk-weighted
assets) 23,975 20.35 9,425 8.0 10,117 10.0
As of December 31, 1998:
Tangible capital
(to tangible assets) 15,365 8.9% 2,567 1.5 N/A N/A
Core capital
(to adjusted tangible
assets) 15,365 8.9 5,135 3.0 8,559 5.0
Tier I Capital
(to risk-weighted
assets) 15,365 15.7 3,911 4.0 5,867 6.0
Risk-based capital
(to risk-weighted
assets) 16,439 16.8 7,822 8.0 9,778 10.0
</TABLE>
The following summary reconciles the Bank's equity capital
as reflected in the accompanying financial statements as of
December 31, 1999 with related amounts reported to the OTS:
Tangible Core Risk Based
(Dollars in Thousands)
Equity capital per financial
statements $26,355 $26,355 $26,355
Unrealized losses on
available-for-sale
securities, net of tax 1,718 1,718 1,718
Allowance for loan losses 1,284
Reconciling adjustment for
deferred taxes ( 24) ( 24) ( 24)
Regulatory Equity Capital $28,049 $28,049 $29,333
12. LEASE COMMITMENTS:
JADE and its Subsidiaries rents various equipment and
office space under various lease agreements. Lease expense for
these leases for the year ended December 31, 1999 was $66,505,
six months ended December 31, 1998 was $22,500 and year ended
June 30, 1998 $63,912, respectively.
Minimum annual rentals are as follows:
2000 80,896
2001 83,286
2002 88,224
2003 88,530
2004 57,408
13. RETIREMENT PLANS:
The Bank sponsors the following retirement plans:
A. Pension Plans:
The Bank has a profit-sharing plan and a 401(k) plan. Both
plans cover all employees who are 21 years of age and have
completed at least 1,000 hours of service during the plan year
and are employed on the last day of the plan year. The Bank
contributes a discretionary amount to the profit-sharing plan
based on year-to-date income at December 31. The Bank matches up
to 100% of the first 3% of salary elected to be deferred by the
employees under the 401(k) pension plan.
The Bank's contribution to the above plans amounted to
$58,199 for the year ended December 31, 1999, and $29,472 for
the six months ended December 31, 1998, and is reflected as an
operating expense.
B. Supplemental Deferred Compensation Plans:
The Bank adopted a nonqualified deferred compensation plan
for the benefit of one of its officers. This plan requires the
Bank to pay $12,000 into this plan annually beginning in 1995.
The deferred compensation accounts are shown as both assets and
liabilities on the Bank's financial statements. The balance of
the deferred compensation arrangement was $64,239 as of
December 31, 1999 and $64,239 as of December 31, 1998. Deferred
compensation was $12,000 for December 31, 1999 and 1998.
The Bank also has a life insurance policy on one of its
officers that provides for annuity payments to the insured party
upon retirement. Upon death of the insured party, the Bank will
receive refund of all premiums paid and the insured party's
designated beneficiary will receive the remainder of the
policy's face value. If the policy is canceled, the Bank will
receive the policy's cash surrender value only. The Bank shows
the cash surrender value of this policy as an asset in its
financial statements.
C. Employee Stock Ownership Plan (ESOP):
In conjunction with the Bank's conversion to stock
ownership, JADE Financial Corp. (the "Company") established an
ESOP for eligible employees. All employees of the Company as of
October 4, 1999 were eligible to participate immediately and
employees of the Company hired after October 4, 1999 are
eligible to participate after they attain age 21 and complete
one year of service during which they work at least 1,000 hours.
The ESOP borrowed funds in the amount of $1,160,000 to purchase
145,000 share of common stock issued in the conversion.
The Bank makes contribution to the ESOP equal to the ESOP's
debt service less dividends received by the ESOP. Dividends on
unallocated ESOP shares are used to pay debt service.
Contributions to the ESOP and shares released from the suspense
account in the amount proportional to the repayment of the ESOP
loan are allocated among ESOP participants on the basis of
compensation in the year of allocation. Benefits generally
become 100% vested after three years of credited service.
Forfeitures will be reallocated among remaining participating
employees, in the same proportion as contributions. Benefits
may be payable in the form of stock or cash upon termination of
employment. If the Company's stock is not traded on an
established market at the time of an ESOP participant's
termination, the terminated ESOP participant has the right to
require the Company to purchase the stock at its current fair
market value. JADE's management believes there is an
established market for the Company's stock and therefore,
management believes there is no potential repurchase obligation
at December 31, 1999.
As shares are released, the Company reports compensation
expense equal to the current market price of the shares.
Dividends on allocated ESOP shares are recorded as a reduction
of retained earnings. Dividends on unallocated ESOP shares are
recorded as a reduction of debt and accrued interest. ESOP
compensation expense was $127,781 for the year ended December
31, 1999.
Information with respect to the ESOP is as follows:
December 31, 1999:
Allocated shares $ 145,000
Committed shares 14,500
Uncommitted shares 130,500
Fair value of uncommitted
ESOP shares 1,044,000
Interest expense incurred 24,123
Dividends received N/A
14. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK:
The Bank grants mortgage and consumer loans primarily to
customers in Southeastern Pennsylvania. Although, the Bank has
a diversified loan portfolio, a substantial portion of its
customers' ability to honor their contracts is dependent upon
the local economy. The Bank's net investment in loans is
subject to a significant concentration of credit risk given that
the investment is primarily within a specific geographic area.
As of December 31, 1999, the Bank had a net investment of
$114,081,000 in loan receivable. The corresponding balance for
December 31, 1998 is $102,899,621. These loans possess an
inherent credit risk given the uncertainty regarding the
borrower's compliance with the terms of the loan agreement. To
reduce credit risk, the loans are secured by varying forms of
collateral, including first mortgages on real estate, liens on
personal property, share accounts, etc. It is generally the
Bank's policy to file liens on titled property taken as
collateral on loans. In the event of default, the Bank's policy
is to foreclose or repossess collateral on which it has filed
liens.
In the event that any borrower completely failed to comply
with the terms of the loan agreement and the related collateral
proved worthless, the Bank would incur a loss equal to the loan
balance.
15. COMMITMENTS AND CONTINGENCIES:
Loan Commitments and Contingencies:
In the normal course of business, the Bank makes various
commitments and incurs certain contingent liabilities which are
not reflected in the accompanying consolidated financial
statements. These commitments and contingent liabilities
include commitments to extend credit and open-end credit
available. At December 31, 1999 and 1998, open-end loan
commitments not utilized, and approved but unfunded loan
commitments totaled approximately $18,599,906 and $19,875,538,
respectively.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments" requires
the disclosure of the fair value of financial instruments, both
assets and liabilities recognized and not recognized in the
statement of financial position.
A financial instrument is defined as cash, evidence of an
ownership interest in an entity, or a contact that both imposes
on one entity a contractual obligation (1) to deliver cash or
another financial instrument to a second entity or (2) to
exchange other financial instruments on potentially unfavorable
terms with the second entity and, conveys to that second entity
a contractual right to receive (1) cash or another financial
instrument from the first entity or (2) to exchange other
financial instruments on potentially favorable terms with the
first entity.
The fair value of a financial instrument is the amount at
which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced sale or
liquidation. Quoted market prices should be used when
available, if not available management's best estimate of fair
value may be based on quoted market price of financial
instruments with similar characteristics or on valuation
techniques, such as using the present value of estimated future
cash flows using a discount rate commensurate with the
corresponding risk associated with those cash flows. These
techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows
and future economic conditions. In that regard, the fair value
estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate
settlement of the instrument. In addition, these estimates are
only indicative of individual financial instruments' values and
should not be considered an indication of the fair value of JADE
and its subsidiaries as a whole. Statement No. 107 excludes
certain financial instruments and all nonfinancial instruments
from its disclosure requirements.
The following tables represents the carrying value and fair
market value of financial instruments as of December 31, 1999:
Carrying Fair
Amount Value
(Dollars in Thousands)
Assets:
Cash and cash equivalents $ 13,242 $ 13,242
Investments securities
available-for-sale 43,110 40,783
Mortgage-backed securities
available-for-sale 9,134 8,859
Mortgage-backed securities
held-to-maturity 4,314 4,208
Loans receivable - net 114,081 113,758
FHLB stock 834 834
Liabilities:
NOW, Savings and Money Market
accounts 90,584 90,584
Certificate of deposits 68,152 68,233
The following table represents the carrying value and fair
market value of financial instruments as of December 31, 1998:
Carrying Fair
Amount Value
(Dollars in
Thousands)
Assets:
Cash and cash equivalents $ 18,351 $ 18,351
Investments securities
available-for-sale 28,980 28,805
Mortgage-backed securities
available-for-sale 10,236 10,127
Mortgage-backed securities
held-to-maturity 6,635 6,541
Loans receivable - net 102,900 102,612
FHLA stock 834 834
Liabilities:
NOW, Savings and Money Market
accounts 90,072 90,072
Certificate of deposits 64,816 64,894
The following methods and assumptions, where practical to
implement as noted, were used by JADE in estimating its fair
value for those assets.
Cash and Cash Equivalents:
The carrying amounts reported in the statement of financial
condition for cash and cash equivalents approximate the fair
value for those assets.
Investment Securities:
The fair value for investments are based on quoted market
prices.
Mortgage-backed Securities:
The fair value of mortgage-backed securities issued by
quasi-governmental agencies is based on quoted market prices.
Loans Receivable:
The Bank's fair value of loans is determined by calculating
the present value of forecasted cash flows. The Bank's real
estate loan portfolio was $46,430,080 and $41,521,544 at
December 31, 1999 and 1998, respectively with rates ranging from
5.50% to 10.0% and maturities through 30 years. The Bank's
consumer loan portfolio was $67,467,171 and $62,074,457 at
December 31, 1999 and 1998, respectively with rates ranging from
4.00% to 15.0% with maturities through 10 years. The Bank's
commercial loan portfolio was $1,478,425 and $399,206 at
December 31, 1999 and 1998, respectively with rate of 6.75% to
13.75% and maturities through one year and monthly repayment
terms.
Deposits:
The fair value of deposits with no stated maturity, such as
NOW accounts, savings accounts and money market accounts, is
equal to the amount payable on demand as of December 31, 1999.
Time deposits were $68,152,000 at December 31, 1999 and
$64,815,000 at December 31, 1998 with rates ranging from 4.00%
to 8.00%.
17. EARNINGS PER SHARE AND COMMON STOCK EQUIVALENTS:
In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No.
128 ("SFAS No. 128"), "Earnings Per Share" and Statement No. 129
("SFAS No. 129") "Disclosures of Information about Capital
Structure." SFAS No. 128, which superseded APB Opinion No. 15
("APB No. 15") specifies the computation, presentation and
disclosure requirements for earnings per share ("EPS") for
entities with publicly held common stock. It replaced the
presentation of primary EPS with basic EPS which, unlike primary
EPS, excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted EPS is
computed similarly to fully diluted EPS under APB No. 15. The
Bank adopted SFAS No. 128 as of December 31, 1999.
There were 1,742,423 weighted average number of shares of
common stock outstanding used for the basic EPS calculation for
the fiscal year ended December 31, 1999. There were no
securities which had a dilutive effect on the income available
to common shareholders and thus, the diluted EPS is the same as
Basic EPS or .17.
57
03/30/00/SL1 53240v3/30270.002
42
03/30/00/SL1 53240v3/30270.002
Exhibit 23.1
The Board of Directors
JADE Financial Corp., Inc. and Subsidiaries:
We consent to the inclusion herein of our report dated
February 4, 2000, which is as of December 31, 1999, relating to
the balance sheets of JADE Financial Corp., Inc. and
Subsidiaries as of December 31, 1998 and 1997 and the related
statements of operations, changes in shareholders equity, and
cash flows for each of the years in the three-year period ended
December 31, 1999, which report appears in the December 31, 1999
Form 10-KSB of JADE Financial Corp., Inc. and Subsidiaries. We
also consent to the reference included herein to our firm under
the heading "Experts."
/s/ Stockton Bates LLP
Philadelphia, Pennsylvania
March 30, 1999
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