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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: NOVEMBER 30, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission File Number 0-17709
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RCSB FINANCIAL, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 16-1484699
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(State or other jurisdiction (I.R.S. employer identification
of incorporation or organization) number)
235 EAST MAIN STREET, ROCHESTER, NEW YORK 14604
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(Address of principal executive offices) (Zip Code)
(716) 423-7270
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(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $1.00
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK, PAR VALUE $1.00
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant on December 31, 1996 was $400.5 MILLION based on the closing price of
the registrant's common stock as reported by the Nasdaq National Market.
Number of shares of common stock outstanding on January 31, 1997: 14,876,380
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for fiscal 1996 (Parts I, II).
Portions of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 9, 1997 (Part III).
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RCSB FINANCIAL, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business............................................. 3
Item 2. Properties........................................... 11
Item 3. Legal Proceedings.................................... 11
Item 4. Submission of Matters to a Vote of Security Holders.. 11
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters......................... 14
Item 6. Selected Financial Data.............................. 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 14
Item 8. Financial Statements and Supplementary Data.......... 14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 14
PART III
Item 10. Directors and Executive Officers of the Registrant... 15
Item 11. Executive Compensation............................... 15
Item 12. Security Ownership of Certain Beneficial Owners and
Management.......................................... 15
Item 13. Certain Relationships and Related Transactions....... 15
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................. 16
Signatures........................................... 19
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PART I
ITEM 1. BUSINESS
General
Virtually all of the operations of RCSB Financial, Inc. (the parent company) are
conducted through its subsidiary Rochester Community Savings Bank and certain
subsidiaries of the bank. The consolidated group's primary lines of business
are retail banking, mortgage banking and automobile lending. Retail banking is
conducted primarily through 35 full service banking offices in western New York,
while mortgage origination activities encompass 61 offices located mainly in the
eastern third of the United States. Automobile loans are originated through
auto dealers located in most areas of New York and Florida and in parts of
Connecticut, New Jersey and Pennsylvania. The following discussion provides
information about the parent company and its subsidiaries on a consolidated
basis (collectively referred to as RCSB or the Company). The bank and its
subsidiaries are collectively referred to herein as the Bank.
RCSB generates net interest income by accepting deposits from the general public
and investing those deposits, together with funds from borrowings and ongoing
operations, in a variety of residential mortgage, automobile and other consumer
loans and mortgage-backed securities. Net interest income, representing the
difference between interest earned on asset portfolios and interest paid on
liabilities, is the most significant component of the Company's revenue. RCSB
also generates significant noninterest revenues primarily by providing retail
banking services to its customers and by originating and servicing loans through
the Company's mortgage banking subsidiary. RCSB's earnings are affected by
general economic and competitive conditions, changes in market interest rates,
conditions in the real estate market, government policies and the actions of
federal and state regulatory authorities.
Retail Banking
RCSB conducts its retail banking business in the Rochester and Buffalo, New York
metropolitan areas where the Bank held deposits totaling $2.4 billion as of
November 30, 1996. The Bank's deposits are insured by the Federal Deposit
Insurance Corporation (FDIC). In the Rochester (Monroe County) area, the Bank
does business with approximately 45% of the households, and management believes
that RCSB presently has a larger share of consumer deposits than any of its
competitors. However, the planned late February 1997 merger of a thrift and a
commercial bank operating in Rochester is expected to place the merged
institution ahead of RCSB in terms of share of consumer deposits. The pending
merger is also expected to provide RCSB with opportunities to attract new
customers. RCSB has 21 retail banking offices in the Rochester area as of
November 30, 1996, declining by one during the preceding twelve months due to
the consolidation of two pre-existing offices. Rochester is the third largest
city in the state.
RCSB has operated retail banking offices in the Buffalo, New York area since
1990, and maintains 14 offices there as of November 1996. Two of the offices
were opened during 1996, five in 1995, and the Company plans to open additional
branches in the western New York area in 1997. Buffalo is the second largest
city in New York and traditionally has been a strong market for thrifts. Buffalo
has the largest deposit market in New York outside New York City.
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Deposit inflows and outflows are significantly influenced by interest rates,
money market conditions, the rate of consumer savings and other economic and
competitive factors. As part of its effort to be competitive with other
financial institutions and to attract low-cost deposits, the Company offers a
wide variety of banking and other financial services which encourage customers
to meet their financial needs through RCSB. Aiding deposit growth during 1996
and 1995 were the introduction of new checking account products and various
promotional activities, such as "One Day CD Sales." The Company also markets
term accounts nationally through major investment banking firms when such
deposits represent the most cost effective source of incremental funds.
In September 1996, RCSB reorganized its securities brokerage and insurance
sales activities. As part of the reorganization, the Company contracted with an
independent third party to provide securities services and products through
RCSB's retail banking offices. Previously, a subsidiary of the bank had
offered full service securities brokerage services. RCSB also contracts
with an independent third party to provide marketing and sales support services
in connection with a bank subsidiary insurance sales activities.
The contractual arrangements are intended to facilitate continuing sales
of annuity, mutual fund and insurance products.
In addition to offering many different types of deposit accounts, the retail
banking unit offers customers a variety of consumer loan products, including
home equity loans and lines of credit, automobile loans and leases, guaranteed
student loans, personal and savings account loans, and unsecured lines of
credit. RCSB also offers customers the ability to bank and pay bills by
telephone through its QuickService and Pay-By-Phone services. Telephone
services have been enhanced in recent years to utilize voice response technology
to provide RCSB's customers with 24-hour information, transaction and bill-
paying capabilities. The Bank also provides convenient banking access through
43 proprietary automatic teller machines (ATMs) and its affiliation with
numerous national and regional ATM networks.
Mortgage Banking
RCSB's residential mortgage banking subsidiary, American Home Funding, Inc.
(AHF), originates, sells and services a complete line of first mortgage, one-to-
four family residential loans, including conventional fixed and government-
backed loans, as well as adjustable rate mortgages and jumbo loans. AHF sells
virtually all of the loans it originates to unrelated investors but retains
servicing assets on a major portion, 80.1% in 1996, of the loans. AHF expanded
its loan origination capabilities in 1996 by taking over six loan offices in
five states that were formerly operated by another entity and opening 19 loan
offices in eight states. AHF's 47 loan origination offices and 14 satellite
offices are located in Alabama, Connecticut, Florida, Indiana, Kansas,
Louisiana, Maryland, Mississippi, Missouri, New Jersey, New York, North
Carolina, Ohio, Pennsylvania, South Carolina, Texas and Virginia. AHF
continually reviews the productivity of its existing offices, and during 1996,
several underperforming offices were closed. A wholesale lending division was
established by AHF in 1996 whereby loans are purchased from smaller lenders,
pooled and resold in the secondary market. Such lending was conducted through a
Florida office in 1996, and in early 1997, a second office was opened in
Arizona. Loans originated through AHF's wholesale operation totaled $29.7
million in 1996.
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AHF also introduced several new products and product enhancements during 1996,
including expanded offerings to low and moderate income home buyers and a
program providing loans to first-time home buyers through state housing finance
agencies in several states. Through a department established in 1996, AHF
began offering services via telemarketing to existing customers and selected
groups of potential customers. Individuals are able to arrange payoffs,
refinance existing mortgages and obtain various loan information by utilizing
the telephone services provided.
In its loan origination business, AHF derives income from gains or losses on the
sale of loans, from origination and other fees relating to the loans and
potentially from the sale of servicing rights. In its loan servicing business,
AHF earns fees on its portfolio of loans serviced for others and interest on (a)
mortgage loans held for sale, (b) insurance premiums and tax payments paid
into escrow by borrowers and (c) loan payments held by AHF before being remitted
to investors. In connection with the adoption of Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights,"
effective on the first day of fiscal 1995, AHF began in mid-1995 retaining
servicing rights on increased volumes of loans it originated, rather than
selling the rights as had previously been the company's general practice. AHF
also routinely purchases mortgage servicing rights, either in bulk transactions
or through monthly flow contracts. At November 30, 1996, AHF's loan servicing
portfolio totaled $9.27 billion, of which $224.5 million was serviced for RCSB.
In originating loans, AHF must compete with other mortgage companies, savings
banks, savings and loan associations, and commercial banks. In addition, the
loan origination activities of AHF are heavily influenced by economic trends
affecting general interest rate levels and the availability of funds.
Furthermore, the condition of the construction industry and the demand for
housing directly affect the origination volumes of AHF. Residential mortgage
originations at AHF totaled $1.51 billion in 1996, compared to $1.03 billion in
1995. Generally lower market interest rates during 1996 and the expansion of
AHF's loan origination network were the main factors in achieving the year-over-
year increase. Industry-wide residential mortgage originations grew to $791
billion in 1996, up 23.8% from the prior year.
Automobile Lending
Most of RCSB's automobile loans and leases are purchased by American Credit
Services, Inc. (ACSI), the Company's automobile finance subsidiary, from auto
dealers who market the loans and leases to their customers. Automobile
financings are originated through a network of approximately 1,300 dealers
located in New York State and Florida, and in 1996, also in Connecticut, New
Jersey and Pennsylvania. ACSI does not originate loans in New York City. In
December 1996, ACSI opened a regional office in Baltimore, Maryland to assist
the company in servicing the mid-Atlantic states. ACSI competes for indirect
originations primarily with other banks and with finance companies, including
those owned by automobile manufacturers. RCSB also originates automobile and
other installment loans directly through its retail banking branches.
ACSI achieved a 55.9% increase in auto loan originations in 1996 as the result
of growth in existing markets and geographic expansion. On an industry-wide
basis, 1996 sales of new automobiles increased approximately 2% from the prior
year's level.
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All loans and leases originated through auto dealers are evaluated individually
in relation to ACSI's underwriting standards based on a review by ACSI of
information contained in a loan application and an independent credit report.
Since new motor vehicles depreciate rapidly subsequent to purchase, ACSI focuses
primarily on the creditworthiness of the borrower rather than the collateral
value of the automobile in making its credit decision. The collateral value of
the automobiles financed generally increases as a percent of the loan balance
over the term of the loan. Based on the credit profiles of borrowers and the
interest rates charged, ACSI considers its lending business to be in the "prime"
segment rather than the "non-prime" or "sub-prime" segments of the auto lending
market, as those terms are generally defined. While spreads above the cost of
funds are somewhat lower for lenders in the prime segment, credit losses are
also expected to be lower. RCSB's management takes into account the risks
associated with automobile financing in establishing and evaluating its
allowance for loan losses.
Collection activities with respect to delinquent automobile loans and leases in
RCSB's portfolio are performed by ACSI personnel. Collection procedures
include, but are not limited to, formal and informal demands for overdue
payments, prompt investigation and evaluation of causes for delinquency, and the
use of acceleration and repossession remedies. Upon the repossession and
disposition of vehicles, any remaining deficiencies are pursued to the extent
deemed economically practicable. Losses may occur on delinquent contracts from
several causes, including inability to locate the vehicle for repossession.
The relative levels of net interest income and noninterest income generated each
year from RCSB's automobile lending business are dependent to a significant
degree upon the Company's asset/liability management strategies. In light of
the generally favorable characteristics of automobile loan products in relation
to the Company's asset/liability management objectives, RCSB has retained all
loans originated by ACSI since mid-1992. This strategy is expected to continue
in 1997. In early 1992 and certain prior years, ACSI securitized and sold its
auto loan originations while retaining rights to service the loans. All
remaining ACSI securitizations matured during 1996, and no auto loans were being
serviced for others at the end of the year. RCSB monitors the effects of
interest rates and competition on an ongoing basis in the management of its
automobile lending business.
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Financial Data
The following financial data is incorporated herein by reference to portions of
RCSB's 1996 Annual Report to Shareholders (1996 Annual Shareholders' Report),
included in Exhibit 13.1 of this Annual Report on Form 10-K.
Description of Financial Data Page
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Selected Financial Data 10
Average Balances, Yields and Rates 12
Changes in Interest Income and Interest
Expense 13
Interest-Rate Sensitivity Gap 22
Loans Receivable by Type 23
Loan Types as Percent of Total Loans 23
Mortgage Loans by Type and State 24
Composition of Securities 25
Deposits 26
Borrowings 27
Discussion of Nonaccrual Loan Policy 27
Nonperforming Assets 28
Allowance for Loan Losses 29
Allocation of Allowance for Loan Losses 29
Maturities of Securities 44
Interest Not Accrued 44
Contractual Maturity of Term Accounts
of $100,000 or More 47
Competition
RCSB has substantial competition, both locally and nationally, in connection
with its various business activities. RCSB's most direct competition for
deposits historically has come from other savings banks, savings and loan
associations and commercial banks located in the Company's principal market
areas. These types of financial institutions, including RCSB, operate in a
highly regulated environment and must compete with other providers of financial
services that are not similarly regulated. Additional competition for deposits
has been encountered in the local and national markets from credit unions and
from various investment vehicles available to consumers, such as short-term
money market securities, money market funds, equity securities, mutual funds and
other corporate and government securities.
RCSB faces competition for loans in its primary market areas and nationwide
principally from other savings banks, savings and loan associations, commercial
banks, mortgage banking companies, finance companies, insurance companies,
credit unions and other institutional lenders. The Company competes for deposits
and loans principally through interest rates and fee structures and by
emphasizing the quality and unique features of services provided to its
customers.
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Regulation and Supervision
General RCSB Financial, Inc. is incorporated under Delaware law as a holding
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company for Rochester Community Savings Bank, a state-chartered savings bank
under the laws of New York. While most of the Bank's deposits are insured by
the Bank Insurance Fund (BIF) administered by the FDIC, a small percentage of
deposits, which relate to a branch acquired in 1994, are insured by the FDIC's
Savings Association Insurance Fund (SAIF). The parent company, a unitary savings
and loan holding company, is subject to regulation, examination and supervision
by the Office of Thrift Supervision (OTS), while the Bank is regulated by the
FDIC and the New York State Banking Department.
Examination and Supervision To facilitate the supervision and examination of
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the Bank and the parent company by their respective regulators, the New York
State Banking Department, FDIC and OTS promulgate regulations and require the
filing of reports describing the activities and financial condition of the
entities under their jurisdiction. The regulators monitor the operations of the
entities and conduct periodic examinations to test compliance with various
regulatory requirements. The agencies have the power to sanction entities they
supervise and to require advance approval of certain transactions, such as
mergers, consolidations, branch openings and changes in branch locations.
Capital Requirements As a holding company regulated by the OTS, RCSB Financial,
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Inc. is not subject to any specific capital requirement. The Bank, however, is
required to meet capital standards established by the FDIC.
Under the FDIC's current minimum leverage capital requirements, the most highly-
rated state nonmember banks in terms of safe and sound operations that are not
anticipating or experiencing significant growth are required to maintain tier 1
capital of at least 3% of three-month average assets. Most are required to
maintain levels at least 1% to 2% higher based upon their particular
circumstances. The Bank's tier 1 leverage capital ratio was 7.57% as of
December 31, 1996, the most recent FDIC reporting date.
The Bank must also meet a measure of capital adequacy based on ratios of
qualifying capital to risk-weighted assets. Under FDIC risk-based capital
requirements, the ratio of total capital (tier 1 plus tier 2 capital) to risk-
weighted assets must be at least 8% and the ratio of tier 1 capital to risk-
weighted assets must be at least 4%. The Bank has calculated its total risk-
based capital ratio to be 12.21% and its tier 1 risk-based capital ratio to be
11.15% as of December 31, 1996.
The FDIC defines five categories of bank capitalization, from well capitalized
to critically undercapitalized, depending on an institution's capital levels and
certain other factors. Under FDIC classifications, the Bank was deemed to be
well capitalized as of December 31, 1996.
Insurance of Deposits The Bank Insurance Fund (BIF) and Savings Association
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Insurance Fund (SAIF) administered by the FDIC are separately maintained, and
insurance premiums paid by banks and savings associations are used to support
only their respective funds. Deposits in the Bank are insured mainly by the BIF
and to a minor extent (with respect to certain deposits acquired in 1994) by the
SAIF, up to applicable limits, generally $100,000 per insured depositor. The
FDIC is authorized to terminate deposit insurance for insured depository
institutions under certain conditions and may temporarily suspend deposit
insurance for an institution.
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Effective in June 1995, the FDIC lowered deposit insurance premium rates for BIF
institutions to a range of .04% to .31% of total deposits from .23% to .31%
previously, and in January 1996, further reduced premiums for such institutions
to a range of zero to .27%. Partially offsetting the 1996 effect of lower
premiums was a one-time assessment to recapitalize the SAIF. Approximately $89
million of the Bank's SAIF insured deposits were subject to the assessment which
totaled $0.4 million. Annually from 1997 through 1999, the Bank will be
assessed .013% of BIF-insured deposits and .065% of SAIF-insured deposits to
fund debt service on government bonds issued in prior years to assist troubled
depository institutions. Assessments for debt service from 2000 until
retirement of the bonds in 2019 will be equal with respect to BIF and SAIF
deposits. Deposit insurance assessments are charged in addition to amounts
billed for debt service.
Federal Home Loan Bank of New York As a member of the Federal Home Loan Bank of
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New York (FHLB), the Bank is required to own stock in the FHLB in an amount at
least equal to the greater of one percent of the unpaid principal balance of its
residential mortgage loans, 5% of its FHLB borrowings, or 0.3% of total assets.
The Bank held $34.7 million of such stock at November 30, 1996 and received
dividends of $2.5 million from the FHLB during fiscal 1996.
Federal Reserve System Under Federal Reserve regulations, the Bank is required
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to maintain reserves against its transaction accounts (primarily checking and
NOW accounts) generally in the form of cash or non-interest-bearing balances
with the Federal Reserve. Transactions between RCSB Financial, Inc. (the parent
company) and the Bank are generally subject to affiliate transaction rules which
apply to bank holding companies and state member banks regulated by the Federal
Reserve.
Taxation
Federal Taxation RCSB files consolidated federal income tax returns that
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include the income and expenses of the parent company and all wholly owned
subsidiaries under the accrual method of accounting. The fiscal year ending
November 30 is utilized for consolidated income tax reporting purposes. A 99%-
owned real estate investment trust formed in 1996 files a separate return as of
each December 31, but is expected to have minimal taxable income since dividends
by the subsidiary, which are deductible for tax purposes, are expected to
approximate the entity's other taxable income. Dividends received by RCSB from
the subsidiary are included in the consolidated group's federal tax return.
Except for the special bad debt reserve rules discussed below, the RCSB
consolidated group is subject to federal income tax under the rules of the
Internal Revenue Code of 1986, as amended (the Code), in the same general manner
as other corporations. The Company's statutory federal income tax rate is 35%.
RCSB has historically used the special rules of Section 593 of the Code to
calculate its allowable bad debt reserve deduction, and has a fiscal 1988 base
year reserve of $31.3 million. As a result of federal legislation enacted in
August 1996, the circumstances under which RCSB would be subject to taxes on its
base year reserve are generally limited to stock redemptions by the Bank
subsidiary and failure to qualify as a banking institution.
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RCSB's federal tax returns have been audited by the Internal Revenue Service
(IRS) through 1992 and all asserted deficiencies have been satisfied. In the
opinion of management, any examination of still open returns which have not been
examined by the IRS would not result in a deficiency that would have a
materially adverse effect on the financial condition of the Company.
State and Local Taxation RCSB is subject to an annual New York State Franchise
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Tax equal to the greater of 9% of net income allocable to New York State or a
capital-based tax. Under procedures for computing the capital-based tax, the
Company may incur a tax liability in New York State even though it has no
taxable income or has a loss for the year under federal law. RCSB is also
subject to income tax in certain other states in which it has operations, the
most significant being Virginia where the rate of tax is 6%.
Personnel
As of November 30, 1996, RCSB had 1,516 full-time and 233 part-time employees,
all of whom are employed by wholly owned subsidiaries of the parent company.
Employment entirely within the subsidiaries will continue until such time as
conditions warrant maintaining independent employees in the parent company.
RCSB employees are not represented by any collective bargaining unit, and the
Company maintains a favorable relationship with its employees.
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ITEM 2. PROPERTIES
The headquarters facility for RCSB is located at 235 East Main Street,
Rochester, New York in a building owned by the Company. The Bank conducts its
retail banking business through 21 offices located in the Rochester area and 14
offices in the Buffalo, New York area. At November 30, 1996, the Bank owned
five of these banking facilities and leased the remainder. The Company also
leases three facilities in the Rochester area for non-banking subsidiaries and
other administrative purposes.
In addition to its office in Rochester, New York, ACSI conducts business
elsewhere in New York and in Connecticut, Florida, New Jersey and
Pennsylvania. An ACSI office was opened in Maryland in
December 1996. AHF conducts its business through 47 loan origination
offices and 14 satellite offices located in Alabama, Connecticut,
Florida, Indiana, Kansas, Louisiana, Maryland, Mississippi, Missouri, New
Jersey, New York, North Carolina, Ohio, Pennsylvania, South
Carolina, Texas and Virginia. Its headquarters are located in
Richmond, Virginia. All ACSI and AHF offices are in leased facilities.
All properties are in good condition and are appropriate for their intended use.
ITEM 3. LEGAL PROCEEDINGS
An SEC investigation of insider trading in the securities of the Company during
1993 has resulted in civil complaints against several individuals, including two
former directors and one former officer of the Company. The civil complaints
against the former directors were concluded through the entry of a consent
decree, in one case, and summary judgment in favor of the SEC, in the other.
One of the former directors also pled guilty to certain criminal violations in
connection with his activities and was sentenced in June of 1996. The civil
action against the former officer remains pending and the SEC has indicated that
its investigation is continuing with respect to trading in RCSB securities.
RCSB is a plaintiff or defendant in various legal actions incidental to its
business. Although events cannot be predicted with certainty, management does
not believe that the resolution of any of these matters, individually or in the
aggregate, will have a materially adverse impact on RCSB's consolidated
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no matter
was submitted to a vote of RCSB security holders.
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* * * * * * * * * * * *
Nondirector Executive Officers of the Registrant or its subsidiary:
Age at
November 30, 1996 Title
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Stephen B. Albright 49 Senior Vice President/Controller
Paula D. Dolan 42 Senior Vice
President/Administration
J. Michael Holloway 45 Senior Vice President, Consumer
Lending and President and Chief
Executive Officer, American
Credit Services, Inc.
Robert N. Mahany 41 Senior Vice President and
Treasurer
Edward J. Pettinella 45 Executive Vice President
Michael S. Pope 51 Senior Vice President, Retail
Banking
Paul S. Reid 48 President and Chief Executive
Officer, American Home Funding,
Inc.
Paul R. Wuest 45 Senior Vice President and Chief
Financial Officer
Stephen B. Albright has been Senior Vice President/Controller since 1987 and
served as Vice President/Controller in 1986. He directs the corporate
accounting, financial reporting, budgeting and analysis, and income tax
functions of RCSB. Previously, he was employed in the Audit Division of Price
Waterhouse where he held the position of Senior Audit Manager. Mr. Albright is
a Certified Public Accountant and holds B.S. and M.B.A. degrees from Cornell
University.
Paula D. Dolan was appointed Senior Vice President/Administration in September
1994. In this position, she directs Human Resources, Facilities, Management
Information Systems and Bank Operations. Ms. Dolan also has responsibility for
the Audit function which reports to the Board of Directors. She joined RCSB in
1984 and was previously a Senior Vice President and Vice President in Human
Resources. She was employed in Human Resources at Jones & Laughlin Steel
Corporation from 1976 to 1984. Ms. Dolan holds a B.A. degree from Allegheny
College and an M.B.A. from the University of Rochester.
J. Michael Holloway was appointed Senior Vice President, Consumer Lending and
President and Chief Executive Officer of American Credit Services, Inc. in 1994.
Previously, Mr. Holloway was President and Chief Executive Officer of American
Realty Finance Corporation (ARFC), the Bank's commercial real estate lending
subsidiary, from 1993. From 1988 until 1993, he was President and Chief
Operating Officer of ARFC. Before joining the Bank in 1986 as a Senior Vice
President, Mr. Holloway had 13 years of experience with a commercial bank. He
holds a B.S. degree from Cornell University.
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Robert N. Mahany has been Treasurer since 1989 and a Senior Vice President since
1988. From 1987 to 1988, Mr. Mahany was Vice President of Investments. Mr.
Mahany joined the Company in 1982 as an Investment Analyst and was appointed
Investment Officer in 1983. Mr. Mahany received a B.S. degree from the
Rochester Institute of Technology and holds an M.B.A. degree in
Finance/Economics from the University of Rochester.
Edward J. Pettinella has been Executive Vice President since 1989 and assumed
responsibility for the Consumer Financial Services Group in 1994. The group
includes the operating divisions of the Company engaged in retail banking,
automobile lending and mortgage banking as well as the Company's treasury
function. Mr. Pettinella was Chief Financial Officer from 1987 to 1994 and
headed the Investment Banking Division from 1985 to 1987. He joined the Company
in 1973 and served in the retail banking branch system and Investment Department
before being appointed Investment Officer in 1980. Mr. Pettinella is a graduate
of Geneseo State University College and holds an M.B.A. degree from Syracuse
University.
Michael S. Pope was appointed Senior Vice President, Retail Banking in 1994.
From 1989 to 1994, Mr. Pope held the position of Senior Vice President,
Operations and was responsible for the Company's management information systems
and operations units. Mr. Pope joined the Company in 1986 as Senior Vice
President in the Retail Banking Division with responsibility for branches,
branch operations, retail bank operations and product development. Prior to
joining RCSB, Mr. Pope held several management and executive positions with
commercial banking and savings institutions. He holds a B.S. degree from
Heidelberg College and a Master of Science degree from the Air Force Institute
of Technology.
Paul S. Reid has been President and Chief Executive Officer of American Home
Funding, Inc., the Company's residential mortgage banking subsidiary, since
1988. Mr. Reid is responsible for all residential mortgage lending and
servicing activities of the Company. From 1981 to 1988, he was President of
Investors Home Mortgage Corporation which was acquired by RCSB in 1988. Prior
to 1981, Mr. Reid had 10 years of mortgage banking-related experience with
various entities. Mr. Reid is a Certified Mortgage Banker and holds B.A. and
M.Ed. degrees from the University of Virginia. He was President of the Mortgage
Bankers Association of America in 1996.
Paul R. Wuest was appointed Chief Financial Officer in 1994 and has been a
Senior Vice President of the Company since 1987. Mr. Wuest's responsibilities
include directing the financial functions of the Company including the Corporate
Accounting, Financial Analysis and Corporate and Investor Relations departments.
He joined the Company in 1981 after eight years' experience at a commercial
bank. At RCSB, his previous positions were Assistant Controller, Vice President
and Controller, Senior Financial Analysis Officer, Vice President of
Asset/Liability Management, and Senior Vice President - Financial Management.
Mr. Wuest holds a B.S. degree from Brockport State University College and is a
graduate of The School for Bank Administration at the University of Wisconsin.
Information regarding Leonard S. Simon, Chairman of the Board, President, Chief
Executive Officer and Director appears in RCSB's Definitive Proxy Statement for
the Annual Meeting of Shareholders to be held on April 9, 1997 (Proxy Statement)
and is incorporated herein by reference.
-13-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information required by this item is contained in the following disclosures
included in the 1996 Annual Shareholders' Report, which disclosures are
incorporated herein by reference in Exhibit 13.1 of this Annual Report on Form
10-K.
Page
----
Market for the Company's Common Stock
and Related Matters 32
Discussion of dividend restrictions
presented in Shareholders' Equity
note to the consolidated financial
statements 49
ITEM 6. SELECTED FINANCIAL DATA
A five-year summary of selected financial data is included in the 1996 Annual
Shareholders' Report on page 10 thereof, incorporated herein by reference in
Exhibit 13.1 of this Annual Report on Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations is included in the 1996 Annual Shareholders' Report on pages 11
through 32 thereof, incorporated herein by reference in Exhibit 13.1 of this
Annual Report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated statements of condition of RCSB Financial, Inc. and
subsidiaries as of November 30, 1996 and 1995 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the years in the three-year period ended November 30, 1996 together with the
related notes and the report of KPMG Peat Marwick LLP, independent auditors, all
contained in the Company's 1996 Annual Shareholders' Report on pages 33 to 56
thereof, are incorporated herein by reference in Exhibit 13.1 of this Annual
Report on Form 10-K. The report of KPMG Peat Marwick LLP refers to changes in
accounting for mortgage servicing rights in 1995.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
-14-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
10 (a) Identification of Directors
The information with respect to Directors required by Item 10 is
contained in RCSB's Proxy Statement and is incorporated herein by
reference. RCSB expects to file its Proxy Statement on or about March
10, 1997.
10 (b) The information pertaining to RCSB's nondirector executive officers is
included in Part I of this Annual Report on Form 10-K following Item 4
hereof, as permitted by Instruction 3 to Item 401(b) of Regulation S-K.
10 (c) There are no family relations between any director, executive officer,
or any person nominated or chosen by the Company to become a director
or executive officer. Officers of the Company serve a term of office
from the date of election to the next organization meeting of the Board
of Directors and until their respective successors are elected and
qualified, except in the case of death, resignation or removal.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation appears on pages 8 through 15 of
RCSB's Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management appears on pages 2 through 4 of RCSB's Proxy Statement and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions appears on
pages 13 and 16 of RCSB's Proxy Statement and is incorporated herein by
reference.
-15-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
--------------------
The following financial statements and the report of independent
auditors are incorporated by reference in Item 8 from the 1996 Annual
Shareholders' Report:
. Report of Independent Auditors
. Consolidated Statements of Condition as of November 30, 1996 and 1995
. Consolidated Statements of Income for each of the years in the three-
year period ended November 30, 1996
. Consolidated Statements of Changes in Shareholders' Equity for each
of the years in the three-year period ended November 30, 1996
. Consolidated Statements of Cash Flows for each of the years in the
three-year period ended November 30, 1996
. Notes to Consolidated Financial Statements
(a) 2. FINANCIAL STATEMENT SCHEDULES
-----------------------------
Financial statement schedules for the registrant have been omitted since
the required information is not applicable.
(a) 3. EXHIBITS
--------
Exhibit
Number Document
------- --------
2.1 Agreement and Plan of Reorganization, dated as of
March 3, 1995, among Rochester Community Savings
Bank, Registrant, and RCSB Interim Savings Bank (a)
3.1 Restated Certificate of Incorporation of
Registrant (a)
3.2 Bylaws of Registrant, as amended, incorporated by
reference from the Company's Annual Report on Form
10-K for the year ended November 30, 1995, wherein
such exhibit is designated Exhibit 3.2
4.1 Rights Agreement, dated as of May 23, 1990,
between Rochester Community Savings Bank
(predecessor in interest of Registrant) and
Manufacturers Hanover Trust Company (predecessor
in interest of State Street Bank) (a)
-16-
<PAGE>
Exhibit
Number
-------- Document
--------
* * * * * * * * * * *
Compensatory plans or arrangements:
10.1 Retirement Savings Plan of Rochester
Community Savings Bank (a)
10.2 1986 Stock Option Plan of Rochester
Community Savings Bank (predecessor in
interest of Registrant) (a)
10.3 1992 Stock-Based Compensation Plan of
Rochester Community Savings Bank
(predecessor in interest of Registrant)
(a)
10.4 Amendment to the 1992 Stock-Based
Compensation Plan of Rochester
Community Savings Bank, dated November
22, 1995, incorporated by reference
from the Company's Quarterly Report on
Form 10-Q for the quarterly period
ended May 31, 1996, wherein such
exhibit is designated Exhibit 10.3
10.5 Non-Employee Director Deferred
Compensation Plan of RCSB Financial,
Inc., incorporated by reference from
the Company's Quarterly Report on Form
10-Q for the quarterly period ended May
31, 1996, wherein such exhibit is
designated Exhibit 10.2
10.6 1987 Stock Appreciation Rights Plan of
Rochester Community Savings Bank (a)
10.7 Supplemental Executive Retirement Plan
of Rochester Community Savings Bank (a)
10.8 Senior Executive Severance Plan of
Rochester Community Savings Bank,
incorporated by reference from the
Company's Quarterly Report on Form 10-Q
for the quarterly period ended August
31, 1996, wherein such exhibit is
designated Exhibit 10.1
10.9 1997 Guidelines for Management
Committee Executive Compensation Plan
of Rochester Community Savings Bank
10.10 1997 Key Manager Plan of Rochester
Community Savings Bank
10.11 Employee Investment and Stock Ownership
Plan of Rochester Community Savings
Bank (a)
10.12 Directors' Retirement Program of
Rochester Community Savings Bank (a)
-17-
<PAGE>
Exhibit
Number Document
-------- --------
10.13 Form of Salary Continuation Agreement
between Rochester Community Savings
Bank and certain officers, incorporated
by reference from the Company's
Quarterly Report on Form 10-Q for the
quarterly period ended August 31, 1996,
wherein such exhibit is designated
Exhibit 10.2
10.14 Non-Employee Director Stock Plan of
RCSB Financial, Inc., incorporated by
reference from the Company's Quarterly
Report on Form 10-Q for the quarterly
period ended May 31, 1996, wherein such
exhibit is designated Exhibit 10.1
10.15 Amendment to the Non-Employee Director
Stock Plan of RCSB Financial, Inc.,
dated September 25, 1996, incorporated
by reference from the Company's
Quarterly Report on Form 10-Q for the
quarterly period ended August 31, 1996,
wherein such exhibit is designated
Exhibit 10.3
* * * * * * * * * * *
13.1 Portions of RCSB's Annual Report to
Shareholders for the fiscal year ended
November 30, 1996
21.1 Subsidiaries of the registrant
23.1 Consent of KPMG Peat Marwick LLP,
independent auditors, for Registration
Statements No. 33-96490, 33-96492,
33-96494, 333-10825 and 333-10827 on
Form S-8
27 Article 9 Financial Data Schedule
(a) Incorporated by reference to exhibits filed with Current Report
on Form 8-K, dated September 1, 1995.
(b) REPORTS ON FORM 8-K
None.
-18-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RCSB FINANCIAL, INC.
- --------------------
(Registrant)
By: /s/ Leonard S. Simon
--------------------
Leonard S. Simon
Chairman of the Board, President
and Chief Executive Officer
February 20, 1997
-----------------
Date
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints LEONARD S. SIMON, EDWARD J. PETTINELLA, and PAUL R.
WUEST, and any one of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and re-substitution for him or her, and in his
or her name, place and stead, in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K and to file the same, with all
exhibits thereto and other documents in connection therewith, with the United
States Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
By: /s/ Leonard S. Simon Chairman of the Board, President February 20, 1997
---------------------------- Chief Executive Officer; Director -----------------
Leonard S. Simon
/s/ Edward J. Pettinella Executive Vice President February 17, 1997
---------------------------- -----------------
Edward J. Pettinella
/s/ Paul R. Wuest Senior Vice President and February 17, 1997
---------------------------- Chief Financial Officer -----------------
Paul R. Wuest
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Stephen B. Albright February 24, 1997
- ----------------------------- -----------------
Stephen B. Albright Senior Vice President/Controller
/s/ Matthew Augustine February 14, 1997
- ----------------------------- -----------------
Matthew Augustine Director
/s/ Bruce B. Bates February 17, 1997
- ----------------------------- -----------------
Bruce B. Bates Director
/s/ Karen Noble Hanson February 16, 1997
- ----------------------------- -----------------
Karen Noble Hanson Director
/s/ George G. Kaufman February 14, 1997
- ----------------------------- -----------------
George G. Kaufman Director
/s/ Salvatore R. Martoche February 17, 1997
- ----------------------------- -----------------
Salvatore R. Martoche Director
/s/ Michael P. Morley February 17, 1997
- ----------------------------- -----------------
Michael P. Morley Director
/s/ Karen D. Petrou February 17, 1997
- ----------------------------- -----------------
Karen D. Petrou Director
/s/ Ronald F. Poe February 16, 1997
- ----------------------------- -----------------
Ronald F. Poe Director
/s/ Leonard Schutzman February 17, 1997
- ----------------------------- -----------------
Leonard Schutzman Director
/s/ John P. Tierney February 23, 1997
- ----------------------------- -----------------
John P. Tierney Director
</TABLE>
-20-
<PAGE>
EXHIBIT INDEX
-------------
Regulation
S-K Exhibit
Number Document
- ------------ --------
2.1 Agreement and Plan of Reorganization,
dated as of March 3, 1995, among
Rochester Community Savings Bank,
Registrant, and RCSB Interim Savings
Bank (a)
3.1 Restated Certificate of Incorporation
of Registrant (a)
3.2 Bylaws of Registrant, as amended,
incorporated by reference from the
Company's Annual Report on Form 10-K
for the year ended November 30, 1995,
wherein such exhibit is designated
Exhibit 3.2
4.1 Rights Agreement, dated as of May 23,
1990, between Rochester Community
Savings Bank (predecessor in interest
of Registrant) and Manufacturers
Hanover Trust Company (predecessor in
interest of State Street Bank) (a)
10.1 Retirement Savings Plan of Rochester
Community Savings Bank (a)
10.2 1986 Stock Option Plan of Rochester
Community Savings Bank (predecessor in
interest of Registrant) (a)
10.3 1992 Stock-Based Compensation Plan of
Rochester Community Savings Bank
(predecessor in interest of Registrant)
(a)
10.4 Amendment to the 1992 Stock-Based
Compensation Plan of Rochester
Community Savings Bank, dated November
22, 1995, incorporated by reference
from the Company's Quarterly Report on
Form 10-Q for the quarterly period
ended May 31, 1996, wherein such
exhibit is designated Exhibit 10.3
10.5 Non-Employee Director Deferred
Compensation Plan of RCSB Financial,
Inc., incorporated by reference from
the Company's Quarterly Report on Form
10-Q for the quarterly period ended May
31, 1996, wherein such exhibit is
designated Exhibit 10.2
10.6 1987 Stock Appreciation Rights Plan of
Rochester Community Savings Bank (a)
10.7 Supplemental Executive Retirement Plan
of Rochester Community Savings Bank (a)
10.8 Senior Executive Severance Plan of
Rochester Community Savings Bank (a)
10.9 1997 Guidelines for Management
Committee Executive Compensation Plan
of Rochester Community Savings Bank
-21-
<PAGE>
Regulation
S-K Exhibit
Number Document
- ----------- --------
10.10 1997 Key Manager Plan of Rochester
Community Savings Bank
10.11 Employee Investment and Stock Ownership
Plan of Rochester Community Savings
Bank (a)
10.12 Directors' Retirement Program of
Rochester Community Savings Bank (a)
10.13 Form of Salary Continuation Agreement
between Rochester Community Savings
Bank and certain officers, incorporated
by reference from the Company's
Quarterly Report on Form 10-Q for the
quarterly period ended August 31, 1996,
wherein such exhibit is designated
Exhibit 10.2
10.14 Non-Employee Director Stock Plan of
RCSB Financial, Inc., incorporated by
reference from the Company's Quarterly
Report on Form 10-Q for the quarterly
period ended May 31, 1996, wherein such
exhibit is designated Exhibit 10.1
10.15 Amendment to the Non-Employee Director
Stock Plan of RCSB Financial, Inc.,
dated September 25, 1996, incorporated
by reference from the Company's
Quarterly Report on Form 10-Q for the
quarterly period ended August 31, 1996,
wherein such exhibit is designated
Exhibit 10.3
13.1 Portions of RCSB's Annual Report to
Shareholders for the fiscal year ended
November 30, 1996
21.1 Subsidiaries of the registrant
23.1 Consent of KPMG Peat Marwick LLP,
Independent Auditors, for Registration
Statements No. 33-96490, 33-96492,
33-96494, 333-10825 and 333-10827 on
Form S-8
27 Article 9 Financial Data Schedule
(a) Incorporated by reference to exhibits filed with Current Report on Form 8-
K, dated September 1, 1995.
-22-
<PAGE>
EXHIBIT 10.9
GUIDELINES FOR VARIABLE COMPENSATION
PAULA D. DOLAN, FOR 1997
PURPOSE
- -------
This plan is designed to focus attention on the absolute and relative results
necessary to improve the performance of RCSB.
ROLE OF THE BOARD OF DIRECTORS
- ------------------------------
The Board of Directors has complete discretion to set performance criteria,
interpret performance, approve or amend award amounts, and to determine or alter
the terms of the plan. The analysis and review of this plan is presented to the
Board of Directors through the Human Resources Committee of the Board.
PERFORMANCE CRITERIA
- --------------------
The primary areas of performance affecting the award level, in order of
importance, are:
1. Earnings Per Share against 1997 plan and as compared to Peers (60%),
2. Accomplishment of 1997 individual objectives (attached) (20%), and
3. CEO evaluation of your contribution through the Management Committee to
the achievement of the level of earnings attained (20%).
The peer group will be composed of publicly-traded thrifts between $1-5 billion
as reported in the SNL data base as well as all publicly-traded thrifts.
TARGET LEVEL AND RANGE OF AWARDS
- --------------------------------
The target level of award when performance criteria are met (but not exceeded)
is 25% of annual salary.
No award will normally be made when RCSB's EPS falls below 85% of plan.
However, a small discretionary award may be authorized in this circumstance if
performance against personal objectives and/or ROAA performance against peers
exceeds expectations.
This plan allows for a payment at the end of the incentive plan year up to a
maximum of 80% of current base annual salary. Any incentive earned above the
80% current year limitation will be deferred and paid out in 33 1/3% annual
installments just following the beginning of each of the three subsequent fiscal
years. Deferred amounts earn interest based on the one year treasury bill as
determined on or about January 1st of each calendar year.
1
<PAGE>
GUIDELINES FOR VARIABLE COMPENSATION
PAUL S. REID, FOR 1997
PURPOSE
- -------
This plan is designed to focus attention on the absolute and relative results
necessary to improve the performance of AHF Operations and its contribution to
overall RCSB performance.
ROLE OF THE BOARD OF DIRECTORS
- ------------------------------
The Board of Directors has complete discretion to set performance criteria,
interpret performance, approve or amend award amounts, and to determine or alter
the terms of the plan. The analysis and review of this plan is presented to the
Board of Directors through the Human Resources Committee of the Board.
PERFORMANCE CRITERIA
- --------------------
The most significant responsibilities of the incumbent are in managing the
operations of AHF. The three principal performance factors (and their weights
in calculating the overall award) are:
1. Pre-Tax Income from AHF Operations (50%),
2. Cost Per Loan - Servicing (10%), and
3. Performance against individual objectives (attached) as evaluated by the
CEO (20%).
In addition to the foregoing responsibility, the incumbent is a member of the
Management Committee with accountability for the overall direction and
performance of RCSB; thus, a fourth performance award factor and its weight is:
4. RCSB Earnings Per Share Against 1997 Plan and as Compared to Peers
(20%)
TARGET LEVEL AND RANGE OF AWARDS
- --------------------------------
The target level of award when performance criteria are met (but not exceeded)
is 57% of annual salary.
No award will be made for performance factors 1, 2 and 3 when AHF Pre-Tax Income
falls below 75% of plan. No award will be made for factor 4 when RCSB EPS falls
below 85% of plan.
This plan allows for a payment at the end of the incentive plan year up to a
maximum of 80% of current base annual salary. Any incentive earned above the
80% current year limitation will be deferred and paid out in 33 1/3% annual
installments just following the beginning of each of the three subsequent fiscal
years. Deferred amounts earn interest based on the one year treasury bill as
determined on or about January 1st of each calendar year.
2
<PAGE>
GUIDELINES FOR VARIABLE COMPENSATION
EDWARD J. PETTINELLA, FOR 1997
PURPOSE
- -------
This plan is designed to focus attention on the absolute and relative results
necessary to improve the performance of Retail Banking Operations (including the
Treasury function) and its contribution to the overall performance of RCSB.
ROLE OF THE BOARD OF DIRECTORS
- ------------------------------
The Board of Directors has complete discretion to set performance criteria,
interpret performance, approve or amend award amounts, and to determine or alter
the terms of the plan. The analysis and review of this plan is presented to the
Board of Directors through the Human Resources Committee of the Board.
PERFORMANCE CRITERIA
- --------------------
The most significant responsibilities of the incumbent are in managing the
Retail Banking Operation. The two principal performance factors (and their
weights in calculating the overall award) are:
1. Pre-Tax Income from Consumer Financial Services Operations (60%), and
2. Individual Operational Objectives (attached) (15%)
In addition to the foregoing responsibility, the incumbent is a member of the
Management Committee with accountability for the overall direction and
performance of RCSB; thus, a third performance award factor and its weight is:
3. RCSB Earnings Per Share Against 1997 Plan and as Compared to Peers
(25%)
TARGET LEVEL AND RANGE OF AWARDS
- --------------------------------
The target level of award when performance criteria are met (but not exceeded)
is 30% of annual salary.
No award will be made for performance factors 1 and 2 when Retail Operations
Pre-Tax Income falls below 75% of plan. No award will be made for factor 3 when
RCSB EPS falls below 85% of plan.
This plan allows for a payment at the end of the incentive plan year up to a
maximum of 80% of current base annual salary. Any incentive earned above the
80% current year limitation will be deferred and paid out in 33 1/3% annual
installments just following the beginning of each of the three subsequent fiscal
years. Deferred amounts earn interest based on the one year treasury bill as
determined on or about January 1st of each calendar year.
3
<PAGE>
GUIDELINES FOR VARIABLE COMPENSATION
PAUL R. WUEST, FOR 1997
PURPOSE
- -------
This plan is designed to focus attention on the absolute and relative results
necessary to improve the performance of RCSB.
ROLE OF THE BOARD OF DIRECTORS
- ------------------------------
The Board of Directors has complete discretion to set performance criteria,
interpret performance, approve or amend award amounts, and to determine or alter
the terms of the plan. The analysis and review of this plan is presented to the
Board of Directors through the Human Resources Committee of the Board.
PERFORMANCE CRITERIA
- --------------------
The primary areas of performance affecting the award level, in order of
importance, are:
1. Earnings Per Share against 1997 plan and as compared to peers (60%),
2. Accomplishment of 1997 individual objectives (attached) (20%), and
3. CEO evaluation of your contribution through the Management Committee to
the achievement of the level of earnings attained (20%).
The peer group will be composed of publicly-traded thrifts between $1-5 billion
as reported in the SNL data base as well as all publicly-traded thrifts.
TARGET LEVEL AND RANGE OF AWARDS
- --------------------------------
The target level of award when performance criteria are met (but not exceeded)
is 25% of annual salary.
No award will normally be made when RCSB's EPS falls below 85% of plan.
However, a small discretionary award may be authorized in this circumstance if
performance against personal objectives and/or ROAA performance against peers
exceeds expectations.
This plan allows for a payment at the end of the incentive plan year up to a
maximum of 80% of current base annual salary. Any incentive earned above the
80% current year limitation will be deferred and paid out in 33 1/3% annual
installments just following the beginning of each of the three subsequent fiscal
years. Deferred amounts earn interest based on the one year treasury bill as
determined on or about January 1st of each calendar year.
4
<PAGE>
GUIDELINES FOR VARIABLE COMPENSATION
LEONARD S. SIMON, FOR 1997
PURPOSE
- -------
This plan is designed to focus attention on the absolute and relative results
necessary to improve the performance of RCSB.
ROLE OF THE BOARD OF DIRECTORS
- ------------------------------
The Board of Directors has complete discretion to set performance criteria,
interpret performance, approve or amend award amounts, and to determine or alter
the terms of the plan. The analysis and review of this plan is presented to the
Board of Directors through the Human Resources Committee of the Board.
PERFORMANCE CRITERIA
- --------------------
The primary areas of performance affecting the award level, in order of
importance, are:
1. Earnings Per Share Against 1997 Plan and Budget
2. Accomplishment of 1997 Individual Objectives, and
3. ROA and ROE Compared With Peer Group ROA and ROE.
The peer group will be composed of publicly-traded thrifts between $1-5 billion
as reported in the SNL data base as well as all publicly-traded thrifts.
TARGET LEVEL AND RANGE OF AWARDS
- --------------------------------
The target level of award when performance criteria are met (but not exceeded)
is 40% of annual salary.
No award will normally be made when RCSB's EPS falls below 85% of plan.
However, a small discretionary award may be authorized in this circumstance if
performance against personal objectives and/or ROAA performance against peers
exceeds expectations.
This plan allows for a payment at the end of the incentive plan year up to a
maximum of 80% of current base annual salary. Any incentive earned above the
80% current year limitation will be deferred and paid out in 33 1/3% annual
installments just following the beginning of each of the three subsequent fiscal
years. Deferred amounts earn interest based on the one year treasury bill as
determined on or about January 1st of each calendar year.
5
<PAGE>
EXHIBIT 10.10
1997 KEY MANAGER PLAN
PURPOSE
This incentive plan is intended to focus the attention of key officers on the
projects, plans and management actions which will maximize the net income goals
of RCSB and, if applicable, the goals of a subsidiary unit. The plan's purpose
is to provide a simple and flexible approach to meaningful, results-based
incentives.
ELIGIBILITY
"Key Managers" are Officers who:
. have managerial responsibilities for a section or department of the
company,
. have been nominated to the program based on their responsibilities,
. make a significant direct contribution to the profitability of the
corporation (or subsidiary unit), and who
. are actively employed on the date payments are made. (Termination, for any
reason other than retirement, forfeits all rights to payments from the
current plan year as well as deferred payments from previous years.) (If
approved in advance, an award may be pro-rated for a partial year of service
due to a start date other than December 1.) Payments are normally made as
soon as practical following the end of the fiscal year and following the
approval of management and/or the HR Committee of the Board.
Eligibility for the Key Manager Incentive Plan is approved annually by the CEO
and/or SVP, Administration after nominations are received from Senior Vice
Presidents and Business Heads. Participation in one year does not guarantee
participation in subsequent years.
Participants in the Key Manager Incentive Plan are not eligible for Corporate
Performance Awards (profit sharing).
FUNDING CRITERIA
An incentive "pool" is created by (a) targeting a payment level based on a
percentage of participant base salaries on the last day of the fiscal year
(November 30), and then (b) multiplying incentive levels according to
performance against plan on two criteria:
. Corporate Net Income
. Divisional/Individual Contribution to Income
"Corporate Net Income" is measured on an after-tax basis.
"Divisional/Individual Contribution to Income" is measured by establishing one
or more targets which are based on (or directly support):
. divisional before-tax income (for divisional personnel), or
. individual/departmental goals (for corporate personnel).
-1-
<PAGE>
Business Heads (and Sr. Vice Presidents) annually recommend the appropriate
weighting of Corporate vs. Divisional/Individual goals.
Funding normally begins when actual results are at least 85% of plan. However,
when RCSB's Return on Assets (ROA) exceeds that of "peer banks" (thrifts with
assets between $1-5 billion), corporate funding may begin when net income is as
low as 50% of plan. This allows a minimal level of funding when corporate
performance is comparatively good despite a difficult banking environment.
Charts are supplied to participants to correlate plan funding with plan
performance - both when RCSB outperforms its peers and when it does not.
PAYMENT OF THE FUNDING POOL
Allocation of the funding "pool" depends on the results of individual objectives
established at the beginning of the year. After the plan's funding is
determined (as explained on the previous page), individual performance against
objectives is determined. Individual payments from the funding pool are
adjusted by each Division President for performance against objectives which is
comparatively better or worse than others in the organization.
Positions designated as "direct profit producers" are eligible for payment at
the end of the incentive plan year up to a maximum of 80% of their current base
annual salary. Any incentive earned above the 80% current year limitation will
be deferred and paid out in 33 1/3% annual installments just following the
beginning of each of the three subsequent fiscal years. Deferred amounts earn
interest based on the one year Treasury Bill as determined on or about January
1st of each calendar year.
All positions not designated as "direct profit producers" will have a maximum of
40% of their current year annual salary. Any incentive earned above 40% is
deferred over three years and described in the paragraph above.
Note:
Management has complete discretion to amend the terms of this plan.
Management's discretion includes, but is not limited to, interpretation of
performance measures and funding/allocating the award pool. For example:
. Performance interpretation may be affected by externalities which were beyond
the control of participants - such as tax effects or extraordinary events.
. Funding may be reduced, postponed or eliminated by extreme shortfalls in
corporate performance which were beyond the control of participants but which
nonetheless influence the corporation's ability to pay awards.
Management will also review the choice of performance measures in future plan
years.
-2-
<PAGE>
EXHIBIT 13.1
SELECTED FINANCIAL DATA
RCSB FINANCIAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
At or For The Year Ended November 30, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------
(dollars and shares in millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net interest income $ 129.4 $ 123.5 $ 127.5 $ 110.8 $ 92.7
Provision for loan losses 13.6 7.6 16.1 13.0 14.4
-------------------------------------------------------
Net interest income after loan loss provision 115.8 115.9 111.4 97.8 78.3
-------------------------------------------------------
Noninterest income:
Mortgage banking 49.7 35.9 40.2 67.6 57.8
Retail banking 9.7 9.7 15.0 19.5 17.3
Automobile loan banking 3.7 2.4 2.4 (3.8) 6.7
Net securities sale gains 1.9 0.4 3.8 3.1 21.3
Gain on sale of subsidiary -- -- 23.3 -- --
Other 0.1 0.1 -- 0.1 5.0
-------------------------------------------------------
Total noninterest income 65.1 48.5 84.7 86.5 108.1
-------------------------------------------------------
Operating expenses 123.4 114.1 140.4 247.6 167.6
-------------------------------------------------------
Income (loss) before taxes 57.5 50.3 55.7 (63.3) 18.8
Income tax provision (benefit) 17.8 12.5 11.4 (3.9) 7.8
-------------------------------------------------------
Net income (loss) $ 39.7 $ 37.8 $ 44.3 $ (59.4) $ 11.0
=======================================================
PER COMMON SHARE:
Net Income (loss):
Primary $ 2.67 $ 2.32 $ 2.81 $ (4.50) $ 0.80
Fully diluted 2.36 2.02 2.39 (4.50) --
Cash dividends declared 0.51 0.42 0.10 -- --
Book value (fully diluted) 21.12 20.11 18.62 16.85 21.82
PERFORMANCE RATIOS:
Net interest margin 3.50% 3.64% 3.56% 3.32% 2.77%
Interest rate spread 3.19 3.26 3.34 3.32 2.95
Equity as a percent of assets: Average 8.65 9.96 8.55 8.19 7.63
Year end 8.07 9.71 10.13 7.46 7.87
Dividend payout ratio 19.10 18.10 3.56 -- --
Return on average assets 1.00 1.04 1.15 (1.58) 0.29
Return on average equity 11.55 10.48 13.48 (19.30) 3.74
ASSET QUALITY RATIOS:
Percent of assets nonperforming 0.76% 0.73% 0.83% 2.33% 7.33%
Percent of loans nonperforming 1.18 1.23 1.22 1.89 4.44
Allowance for loan losses as percent of:
Nonperforming loans 116.7 106.6 113.9 53.3 34.6
Nonperforming assets 92.8 91.7 92.0 26.7 13.6
AVERAGE BALANCES:
Assets $ 3,975.3 $ 3,618.2 $ 3,843.8 $ 3,759.1 $ 3,874.2
Interest-earning assets 3,701.1 3,398.0 3,583.5 3,335.1 3,345.1
Interest-bearing liabilities 3,468.0 3,130.9 3,383.2 3,333.7 3,454.6
Shareholders' equity 343.8 360.2 328.8 307.9 295.5
YEAR-END BALANCES:
Assets 4,014.3 3,871.4 3,426.0 4,189.3 3,829.3
Securities available for sale 18.8 84.1 4.9 270.2 169.6
Securities held to maturity 1,639.0 1,398.1 1,287.5 890.1 571.9
Loans receivable, net 2,020.7 1,971.0 1,856.6 2,549.6 2,438.1
Nonperforming assets 30.4 28.4 28.5 97.5 280.6
Allowance for loan losses 28.2 26.1 26.2 26.0 38.1
Goodwill and core deposit premium 8.4 10.5 12.5 16.1 19.0
Deposits 2,368.7 2,223.0 2,076.8 2,690.1 2,759.7
Borrowings 1,107.8 969.4 836.9 879.2 565.5
Shareholders' equity 323.9 375.9 347.0 312.3 301.4
Common shares outstanding,
net of treasury shares 15.3 14.0 14.0 13.9 13.8
Preferred shares outstanding -- 3.0 3.0 3.0 --
</TABLE>
-10-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
- --------
Virtually all of the operations of RCSB Financial, Inc. (the parent company)
are conducted through its subsidiary Rochester Community Savings Bank and
certain subsidiaries of the bank. The consolidated group's principal lines of
business are retail banking, mortgage banking and automobile lending. Retail
banking is conducted primarily through 35 full service banking offices in
western New York, while mortgage origination activities encompass 61 offices
located mainly in the eastern third of the United States. Automobile loans are
originated through auto dealers located in most areas of New York and Florida
and in parts of Connecticut, New Jersey and Pennsylvania. The discussion and
analysis included in this section of the annual report provides information
about the financial condition and results of operations of the parent company
and its subsidiaries on a consolidated basis (RCSB or the Company) and should be
read in conjunction with the accompanying consolidated financial statements and
notes. The bank and its subsidiaries are collectively referred to herein as the
Bank.
Adjusted Pre-Tax Income
(Bar chart in non-EDGAR version)
(millions) 1994 1995 1996
----------------------------
Adjusted pre-tax income $ 39.4 $ 50.3 $ 57.5
Excludes certain unusual items:
- gain on sale of subsidiary (1994)
- write-down of mortgage servicing asset (1994)
Some of the key results of the Company's 1996 efforts include the following:
. Earnings per fully diluted share improved by 16.8% to $2.36.
. Return on shareholders' equity grew to 11.5% from 10.5% in the prior
year.
. Nonperforming asset levels remained low at 0.76% of year-end assets.
. The Company's net interest margin percent for the year, at 3.50%,
exceeded the average for all publicly-held thrifts (as of September 30,
1996) by 15%.
. Residential mortgage loan originations increased 47% over the prior year
level to $1.5 billion.
. Automobile loan originations grew to $610 million, 56% higher than in
1995.
. The Company's pretax income rose by 14.3% during 1996. Net income
increased 5.2% despite an increase in the effective rate of income
taxes to 31.0% in 1996 from 25.0% for the prior year.
. The Bank expanded its retail customer base by opening two new banking
offices in the Buffalo market.
. Common stock dividends were increased by 25% in September 1996 to $.15
per share.
The geographic expansion of RCSB's lines of business accomplished or begun in
1996 bodes well for the future prospects of the the Company. In addition,
balance sheet management actions such as the 1996 repurchase of 3.5 million
common shares should further strengthen key financial measures like earnings per
share and return on equity. Near-term challenges for the Company will include
continuing to manage growth efficiently, overcoming further increases in the
effective tax rate and responding quickly if economic conditions change.
DISCUSSION OF RESULTS OF OPERATIONS
- -----------------------------------
NET INTEREST INCOME
Net interest income, RCSB's principal source of earnings, is significantly
affected by the Company's interest rate spread, interest-earning asset volumes
and by the relative size of interest-earning asset and interest-bearing
liability portfolios. These factors are, in turn, influenced by competitive
pressures, the pricing and maturity of interest-earning assets and interest-
bearing liabilities, current economic conditions and United States monetary
policy.
Net Interest Income
(Bar chart in non-EDGAR version)
(millions) 1994 1995 1996
---------------------------------
Net interest income $ 109.6 $ 123.5 $ 129.4
Excludes net interest income earned in 1994 by former subsidiary, Shadow Lawn.
RCSB's net interest income grew by 4.7% to $129.4 million in 1996. Purchases
of mortgage-backed securities during 1996 and the latter half of 1995 and a 20%
increase in average automobile loans outstanding produced greater amounts of net
interest income, more than offsetting the effect of a .07% narrower average
interest rate spread in the Company's portfolios. Average interest-earning
assets grew by $303.1 million in 1996, funded with cash flow from earnings,
increased borrowings and higher levels of customer deposits at the bank.
Interest expense on $48.8 million in average borrowings utilized to repurchase
common shares during 1996 and late 1995 lessened growth in net interest income.
-11-
<PAGE>
The decrease in interest rate spread to 3.19% in 1996 from 3.26% in 1995 was
the result of a greater decline in the average yield on the Company's interest-
earning assets than in the average rate on interest-bearing liabilities. Since
RCSB's assets tend to be of longer term or duration than its liabilities, the
reduction experienced during 1995 and the first quarter of 1996 in general
marketplace spreads between short-term instruments and longer-term instruments
has placed downward pressure on the average interest rate spread achieved by the
Company's portfolios. The use of borrowings and term deposits to fund asset
growth also contributed to the slightly lower spread. Term deposits and
borrowings accounted for 70% of average interest-bearing liabilities in 1996
compared to 66% in 1995. RCSB's spread for the second half of 1996 improved,
however, from levels experienced earlier in the year due to a widening in
marketplace spreads between short-term and intermediate-term rates.
Net interest income decreased $4.0 million in 1995 due to the absence of
Shadow Lawn Savings Bank's $17.9 million contribution in 1994, partially offset
by a $296.9 million increase in average earning assets. RCSB's interest rate
spread fell by 8 basis points in 1995 due to the market conditions discussed
above. Shadow Lawn, a wholly-owned subsidiary, was sold by the Company in
August 1994.
The following table presents average balances, interest income and expense,
and average yields earned or average rates paid on the major categories of
assets and liabilities held by the Company during the three most recent years.
No tax equivalent adjustments have been made for minor amounts of tax-exempt
income earned by RCSB.
Average Balances, Yields and Rates
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994
- ---------------------------------- ------------------------------------------------------------------------------------------------
(dollars in millions) Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------- ---------- -------- --------- ---------- -------- --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Federal funds sold and
interest-bearing deposits $ 12.5 $ 0.7 5.79% $ 16.2 $ 1.0 6.58% $ 64.6 $ 2.4 3.66%
Securities 1,686.7 115.9 6.87 1,458.6 101.8 6.98 1,319.4 85.1 6.45
Mortgage loans 1,013.1 83.9 8.28 1,083.8 91.5 8.44 1,429.0 104.8 7.34
Automobile loans and leases 938.1 86.6 9.22 784.5 71.3 9.09 696.9 57.4 8.24
Other loans 50.7 6.5 12.86 54.9 7.1 12.94 73.6 9.1 12.33
-------- --------- -------- --------- ---------- -------- --------- ---------- ------
Total loans 2,001.9 177.0 8.84 1,923.2 169.9 8.83 2,199.5 171.3 7.79
-------- --------- -------- --------- ---------- -------- --------- ---------- ------
Total interest-earning assets 3,701.1 $ 293.6 7.93% 3,398.0 $ 272.7 8.03% 3,583.5 $ 258.8 7.22%
--------- -------- ---------- -------- ---------- ------
Noninterest-earning assets 274.2 220.2 260.3
-------- -------- ---------
Total assets $3,975.3 $3,618.2 $3,843.8
======== ======== =========
Liabilities and
Shareholders' Equity:
Checking and NOW deposits $ 290.5 $ 2.7 0.94% 262.8 $ 2.6 0.99% $ 349.0 $ 4.6 1.32%
Money market deposits 260.6 9.4 3.60 274.1 9.8 3.59 314.9 10.0 3.17
Savings deposits 506.3 12.9 2.54 536.7 13.6 2.52 758.7 19.2 2.53
-------- --------- -------- --------- ---------- ------- --------- ---------- -------
Total transaction, money
market and savings deposits 1,057.4 25.0 2.36 1,073.6 26.0 2.42 1,422.6 33.8 2.37
Term deposits 1,334.8 76.9 5.76 1,129.4 66.7 5.91 1,162.0 58.6 5.04
-------- --------- -------- ---------- ---------- ------- --------- ---------- ------
Total deposits 2,392.2 101.9 4.26 2,203.0 92.7 4.21 2,584.6 92.4 3.58
-------- --------- -------- ---------- ---------- ------- --------- ---------- ------
FHLB borrowings:
Repurchase agreements 333.2 18.5 5.54 -- -- -- -- -- --
Other 308.6 18.8 6.10 655.1 39.6 6.05 662.0 33.4 5.05
-------- --------- ------ ----------- ---------- ------- --------- ---------- -------
Total FHLB borrowings 641.8 37.3 5.81 655.1 39.6 6.05 662.0 33.4 5.05
Other repurchase agreements
and borrowings 434.0 25.0 5.77 272.8 16.9 6.19 136.6 5.5 4.03
-------- --------- ------ ----------- ---------- ------- --------- ---------- -------
Total interest-bearing
liabilities 3,468.0 $ 164.2 4.74% 3,130.9 $ 149.2 4.77% 3,383.2 $ 131.3 3.88%
--------- ----- ---------- ------- ---------- -------
Noninterest-bearing
liabilities 163.5 127.1 131.8
-------- ------------- ---------
Total liabilities 3,631.5 3,258.0 3,515.0
Shareholders' equity 343.8 360.2 328.8
-------- ------------- ------------
Total liabilities and
shareholders' equity $3,975.3 $ 3,618.2 $ 3,843.8
======== ============= ============
Net interest income $ 129.4 $ 123.5 $ 127.5
======== ========== ==========
Excess of interest-earning
assets over interest-bearing
liabilities $ 233.1 $ 267.1 $ 200.3
Interest rate spread 3.19% 3.26% 3.34%
Net interest margin 3.50 3.64 3.56
</TABLE>
(a) Average balances were calculated on a daily basis.
(b) Average loan balances are net of allowance for loan losses and include
nonaccrual loans.
(c) Net interest margin represents net interest income divided by average
interest-earning assets.
-12-
<PAGE>
[INSERT INTINC.XLS]
<TABLE>
<CAPTION>
Changes in Interest Income and Interest Expense
1996 Compared to 1995 1995 Compared to 1994
------------------------------------ ---------------------------------------
Change Due to Change Due to
Change in ------------------------- Change in ----------------------------
Interest Volume Rate Interest Volume Rate
- ----------------------------------- ------------------------------------------------------------------------------
(millions)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold and
interest-bearing deposits $ (0.3) $ (0.2) $ (0.1) $ (1.4) $ (2.5) $ 1.1
Securities 14.1 15.7 (1.6) 16.7 9.4 7.3
Loans 7.1 7.0 0.1 (1.4) (22.9) 21.5
-------------------------------------- ---------------------------------------
Total change in interest income 20.9 22.5 (1.6) 13.9 (16.0) 29.9
--------------------------------------- --------------------------------------
Interest-bearing liabilities:
Transaction, money market and
savings deposits (1.0) (0.4) (0.6) (7.8) (8.4) 0.6
Term deposits 10.2 11.9 (1.7) 8.1 (1.7) 9.8
FHLB borrowings and
repurchase agreements (2.3) (0.8) (1.5) 6.2 (0.4) 6.6
Other repurchase agreements
and borrowings 8.1 9.4 (1.3) 11.4 7.4 4.0
--------------------------------------- --------------------------------------
Total change in interest expense 15.0 20.1 (5.1) 17.9 (3.1) 21.0
--------------------------------------- --------------------------------------
Change in net interest income $ 5.9 $ 2.4 $ 3.5 $ (4.0) $ (12.9) $ 8.9
======================================= ======================================
</TABLE>
The table above presents changes in interest income and interest expense
attributable to changes in volume (change in volume multiplied by prior year
rate), and changes in rate (change in rate multiplied by prior year volume).
The remaining change amount is allocated to volume and rate in proportion to the
absolute amounts of the specifically calculated change in each. A discussion of
changes in interest income and interest expense follows.
Interest Income
- ---------------
The $20.9 million increase in interest income during 1996 was the result of a
volume-related increase of $22.5 million and a rate-related decrease of $1.6
million. The average yield on interest-earning assets decreased 0.10% in 1996
due to the effect of lower market rates on RCSB's adjustable-rate assets and on
mortgage-backed securities purchased during the latter part of 1995 and in 1996.
General interest rate levels in the financial markets declined during most of
1995 and the first quarter of 1996, before increasing somewhat in the last three
quarters of 1996. Changes in the mix of interest-earning assets partially
offset the effect of lower interest rates. Automobile loans as a percentage of
RCSB's average interest-earning assets increased to 25.3% in 1996 from 23.1% in
1995, while the average yield on auto loans was 9.22% in 1996, compared to 9.09%
in 1995.
<TABLE>
<CAPTION>
U.S. Treasury Spreads
10 Year vs. 6 Month Yields
(Plot point graph in non-EDGAR
version)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11/93 2/94 5/94 8/94 11/94 2/95 5/95 8/95 11/95 2/96 5/96 8/96 11/96
--------------------------------------------------------------------------------------------
U.S. treasury spreads 2.57% 2.79% 2.43% 2.30% 1.91% 1.04% 0.56% 0.74% 0.47% 1.26% 1.49% 1.59% 0.88%
</TABLE>
Changes in marketplace spreads affect the profitability of assets
funded with shorter-term liabilities.
The average yield on the Company's residential mortgage loans, including
loans held for sale, declined 12 basis points to 8.14% in 1996. RCSB's portfolio
of residential mortgage loans consists primarily of adjustable-rate loans that
float at a designated spread mainly above an index of U.S. Treasury securities
for a one-year term. Virtually all of RCSB's adjustable-rate residential loans
as of November 30, 1996 carry interest rates reflecting full contractual margins
over the specified indices. The yield on securities, mainly fixed-rate mortgage-
backed securities, decreased to 6.87% in 1996 from 6.98% in 1995 as the result
of securities purchases during both years.
The 1996 volume-related increase in interest income was the result of
investing $228.1 million more, on average, in mortgage-backed and other
securities and a 20% increase in average automobile loans outstanding. RCSB's
portfolio of residential mortgage loans averaged $960.4 million in 1996, down
from $1.0 billion in the prior year. Only $0.1 million of residential mortgage
loans were purchased during 1996 due to a narrowing of interest rate spreads
over the cost of incremental funds.
Interest income grew by $13.9 million during 1995 from $258.8 million in the
prior year, due to a rate-related increase and volume-related decrease. The
rate-related increase was caused by the effects of the changing interest rate
environment on RCSB's asset portfolios, while the volume-related decrease
resulted from the sale of Shadow Lawn, partially offset by purchases of loans
and mortgage-backed securities.
-13-
<PAGE>
Interest Expense
- ----------------
RCSB's interest expense rose 10.1% during 1996 as the net result of a volume-
related increase of $20.1 million and a rate-related decrease of $5.1 million.
The Company's average cost of funds declined to 4.74% in 1996 from 4.77% in 1995
due to lower market interest rates, partially offset by a shift in the
composition of deposits and borrowings toward higher cost funds. Average
balances of transaction, money market and savings deposits fell by $16.2 million
during 1996, while average local and national term account balances increased by
$205.4 million. Nationally marketed term accounts, which the Company has
utilized as a cost effective source of additional funds, averaged $79.0 million
and $1.0 million during 1996 and 1995, respectively. RCSB also made greater use
of borrowings in 1996 to fund mortgage-backed securities purchases, automobile
loan originations and common stock repurchases. Borrowings from the Federal
Home Loan Bank of New York (FHLB) and other sources increased to 31.0% of
average interest-bearing liabilities in 1996 from 29.6% in 1995.
Interest expense increased by 13.6% in 1995, as the net result of a rate-
related increase of $21.0 million and a volume-related decrease of $3.1 million.
Higher average market interest rate levels during 1995 contributed to much of
the rate-related increase, as RCSB's cost of funds rose to 4.77% in 1995 from
3.88% in 1994. The volume-related decrease was caused by the Shadow Lawn sale,
offset by borrowings to fund 1995 purchases of mortgage-backed securities and
residential mortgage loans.
PROVISION FOR LOAN LOSSES
The provision for loan losses represents a charge against current earnings
designed to maintain the related allowance at a level sufficient to cover
potential losses inherent in the loan portfolios. RCSB's provision was $13.6
million in 1996, compared to $7.6 million in 1995 and $16.1 million in 1994.
The 1996 increase was primarily due to 23.2% growth in the automobile loan
portfolio, which produced a corresponding requirement for a larger loan loss
allowance. The 1995 reduction compared to the prior year was influenced by
improvements in credit quality. The provision for loan losses represented 0.68%
of average loans for the year ended November 30, 1996, compared to 0.40% and
0.73% for the years ended November 30, 1995 and 1994, respectively.
MORTGAGE BANKING NONINTEREST INCOME
The Company's mortgage banking subsidiary, American Home Funding, Inc. (AHF),
generates revenue from two major activities: originating residential mortgage
loans for sale in the secondary market and servicing loans for other investors.
Net revenues from the origination and sale portion of AHF's business are derived
from loan fees charged to borrowers, gains or losses on the sale of the loans
and gains or losses from the sale of loan servicing assets. AHF sells virtually
all of the loans it originates to unrelated investors but retains servicing
assets on a major portion, 80.1% in 1996, of the loans. The RCSB subsidiary
also purchases servicing assets from others to fuel its servicing business,
which administered $9.0 billion of loans at the end of 1996. Revenues from the
servicing function include monthly fees charged to investors and also certain
fees such as late charges billed to borrowers. Asset values representing the
cost of purchased or originated servicing are amortized as expense in proportion
to and over the period of net servicing income.
Mortgage Banking Noninterest Income
(Bar chart in non-EDGAR version)
(millions) 1994 1995 1996
-----------------------
Mortgage banking noninterest income $40.2 $35.9 $49.7
Noninterest income from mortgage banking increased by 38.5% in 1996.
The following tables summarize net revenues from mortgage banking activities
and the volumes of loans involved in such activities.
Mortgage Banking Noninterest Income
- -----------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994
- -----------------------------------------------------------------------------
(millions)
Loan origination revenues $ 34.4 $ 21.3 $ 42.3
Loan servicing revenues 32.4 24.1 18.6
Amortization of mortgage loan
servicing assets (14.2) (9.5) (20.7)
Amortization of servicing asset hedge (2.9) - -
--------- --------- ---------
Total $ 49.7 $ 35.9 $ 40.2
========= ========= =========
Mortgage Loans Originated, Sold and Serviced
- --------------------------------------------------------------------------------
At or For The Year Ended November 30, 1996 1995 1994
- --------------------------------------------------------------------------------
(billions)
Residential mortgage loans:
Originated during the year $ 1.5 $ 1.0 $ 1.8
Sold during the year 1.5 0.9 2.0
Serviced for others 9.0 8.0 5.5
Industry-wide residential
mortgage originations* 791.0 639.0 768.7
* Source: Mortgage Bankers Association of America for the years ended
December 31. The 1996 amount includes a forecast for the fourth quarter.
-14-
<PAGE>
Mortgage banking noninterest income grew by 38.5% in 1996 after decreasing by
10.7% in 1995. The 1996 increase resulted from 46.6% higher levels of loan
originations and a 36.6% increase in the average balance of loans serviced for
others. Generally lower market interest rates during the latter part of 1995
and particularly the first half of 1996 created a more favorable consumer
environment for new loans and the refinancing of existing loans. Origination
growth was also aided by AHF's geographic expansion into new markets and the
introduction of new products and product enhancements.
Residential Mortgage Loan Originations
(Bar chart in non-EDGAR version)
(billions) 1994 1995 1996
----------------------
Residential mortgage loan origination $1.8 $1.0 $1.5
Higher loan originations in 1996 resulted from favorable interest rates
and business expansion.
AHF expanded its loan origination capabilities in 1996 by taking over six
loan offices formerly operated by another entity in the states of Alabama,
Kansas, Missouri, North Carolina and Texas and opening 19 loan offices in
Connecticut, Indiana, Louisiana, Mississippi, New Jersey, New York, North
Carolina and Ohio. Current year activity has expanded the scope of AHF's loan
origination operations to encompass 61 offices in 17 states, compared to 41
offices in 10 states at the end of 1995. AHF continually reviews the
productivity of its existing loan offices and during 1996, several
underperforming offices were closed. New products included expanded offerings
to low and moderate income home buyers and a program providing loans to first-
time home buyers through state housing finance agencies in several states.
Mortgage Servicing Portfolio at Year End
(Bar chart in non-EDGAR version)
(billions) 1993 1994 1995 1996
---------------------
Mortgage servicing portfolio at year end $3.7 $5.5 $8.0 $9.0
RCSB has added to its servicing portfolio through loan
originations and purchases of servicing.
The 34.3% increase in loan servicing revenues during 1996 was a direct result
of growth in the average balances of loans serviced by AHF. In addition, such
revenues included a $2.1 million gain produced by an August 1996 sale of
servicing on $1.5 billion of residential mortgage loans. As changes in interest
rates occur, AHF monitors the level and composition of its servicing portfolio
in order to maximize its contribution to profitability. Higher loan balances
produced correspondingly higher levels of servicing asset amortization in 1996.
In early 1996 and again in the latter part of the year, AHF purchased call
options on U.S. Treasury securities to hedge a possible decrease in servicing
asset value in the event interest rates fell and loan prepayment rates
accelerated. Since interest rates have generally been higher since early 1996
when the first group of options was acquired, the hedged exposure has not
materialized and the options have not gained value. Accordingly, the $3.1
million purchase price is being amortized as expense over the 12 month terms of
the options, which expire through February 1997. The options acquired in late
1996, at a cost of $0.8 million, expire in November 1997.
Residential mortgage originations at AHF declined 37.3% in 1995 from the
prior year. Rising and then generally higher market interest rates during 1994
and much of 1995 reduced consumer demand for new loans and the refinancing of
existing loans. Partially offsetting the reduction in income from originating
loans was a 29.6% increase in AHF's loan servicing revenues.
Expenses associated with the amortization of mortgage loan servicing assets
totaled $9.5 million in 1995 compared to $20.7 million in 1994. A significant
reduction in prepayments on serviced loans, attributable to higher market
interest rates during 1995 and lower average rates on loans serviced, resulted
in lower amortization expense in 1995 as compared with the prior year. In
addition, 1994 amortization included a $7.0 million writedown in the carrying
value of AHF's servicing assets.
RETAIL BANKING NONINTEREST INCOME
Earnings in this category are generated by Rochester Community Savings Bank
from fees and service charges collected for various deposit-related activities,
as well as revenues from the bank's securities brokerage and insurance sales
units. Prior to the sale of Shadow Lawn Savings Bank in 1994, fee, service
charge and commission revenues generated by Shadow Lawn were also included in
this category. The following table shows the components of retail banking
noninterest income for the three most recent years.
Retail Banking Noninterest Income
- --------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994
- --------------------------------------------------------------------------
(millions)
Deposit-related fees and service charges $ 6.4 $ 5.9 $ 8.0
Insurance agency commissions 1.0 1.8 2.7
Securities brokerage commissions 2.3 2.0 4.3
----- ----- -----
Total $ 9.7 $ 9.7 $15.0
===== ===== =====
-15-
<PAGE>
Deposit-related fees and service charges grew by $0.5 million in 1996 due to
a 4% increase in the number of deposit accounts attributable to the opening of
two new branches in the Buffalo area during 1996 and five in 1995. Additional
branch offices are planned for the western New York area in 1997. Securities
commissions earned during 1996 increased as a result of heightened consumer
interest in variable annuity products, while insurance agency commissions were
negatively affected by reduced demand for fixed annuities. The decrease in
retail banking noninterest income in 1995 resulted from reduced sales of annuity
products and the sale of Shadow Lawn which, in 1994, earned deposit-related fees
totaling $2.3 million and commissions of $1.3 million.
Deposits at Year End
(Stacked area graph in non-EDGAR version)
(billions) 1993 * 1994 1995 1996
---------------------------------
Nationally marketed term accounts $0.000 $0.000 $0.023 $0.141
Buffalo $0.415 $0.537 $0.629 $0.697
Rochester $1.551 $1.540 $1.571 $1.531
* Excludes deposits of subsidiary sold in 1994
In September 1996, RCSB reorganized its securities brokerage and insurance
sales activities. As part of the reorganization, the bank contracted with an
independent third party to provide securities services and products through
RCSB's retail banking offices. Previously, a subsidiary of the bank had offered
full service securities brokerage services. RCSB has also contracted with an
independent third party to provide marketing and sales support services in
connection with a bank subsidiary's insurance sales activities. The new
structure is intended to facilitate continuing sales of annuity, mutual fund and
insurance products. While the reorganization did not have a material effect on
operating results, commencing in the fourth quarter of 1996 the bank began
recording expense reimbursements rather than commission revenues for certain
securities and insurance sales activities.
AUTOMOBILE LOAN BANKING NONINTEREST INCOME
RCSB's automobile lending activities are conducted through its subsidiary,
American Credit Services, Inc. (ACSI). Automobile loan banking noninterest
income represents revenues generated from pools of sold auto loans serviced by
ACSI for others, net of amortization of capitalized excess loan servicing fees.
No such loans have been sold since mid-1992 and there were no remaining loans
being serviced for others at November 30, 1996. The Company's automobile
lending business in recent years has focused mainly on originating and servicing
loans for RCSB's auto loan portfolio, which totaled $994.8 million at November
30, 1996, compared to $807.6 million at November 30, 1995. Noninterest revenues
from the sold loan pools included $3.0 million in 1996 and $1.1 million in 1995
generated from reductions in allowances carried to cover estimated losses under
recourse obligations. There were no similar allowance reductions in 1994.
Earnings from RCSB's portfolio of owned automobile loans are included in
interest income, and allowances for credit losses on the owned portfolio are
established through charges to the provision for loan losses.
Automobile Loans at Year End
(Bar chart in non-EDGAR version)
(millions) 1993 1994 1995 1996
----------------------------------
Automobile loans at year end $ 560.1 $ 748.7 $ 807.6 $ 994.8
A 55.9% increase in loan originations during 1996 produced
substantial growth in RCSB's auto loan portfolio.
The following tables present the components of automobile loan banking
noninterest income, as well as loan balances and originations for the three most
recent years.
Automobile Loan Banking Noninterest Income
- --------------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994
- --------------------------------------------------------------------------------
(millions)
Automobile loan servicing fees $ 3.5 $ 4.2 $ 9.3
Amortization of capitalized excess
loan servicing assets (0.1) (1.9) (7.1)
Other 0.3 0.1 0.2
----- ----- -----
Total $ 3.7 $ 2.4 $ 2.4
===== ===== =====
Auto Loans Owned, Originated and Serviced
- --------------------------------------------------------------------------------
At or For The Year Ended November 30, 1996 1995 1994
- --------------------------------------------------------------------------------
(millions)
Automobile loans and leases:
Owned $ 994.8 $ 807.6 $ 748.7
Originated during the year 609.6 391.1 466.1
Serviced for others - 19.2 84.3
Number of new automobiles sold
in the United States* 15.1 14.8 15.1
* Source: AUTOMOTIVE NEWS for the years ended December 31.
-16-
<PAGE>
ACSI originates fixed and variable-rate automobile loans and leases through
dealer networks in New York State and Florida and in 1996, also in Connecticut,
New Jersey and Pennsylvania. A regional office was opened in Maryland in early
1997 to assist the company in servicing the mid-Atlantic states. ACSI does not
originate loans in New York City. Based on the credit profiles of borrowers and
the interest rates charged, ACSI considers its lending business to be in the
"prime" segment rather than the "non-prime" or "sub-prime" segments of the auto
lending market, as those terms are generally defined. While spreads above the
cost of funds are somewhat lower for lenders in the prime segment, credit losses
are also expected to be lower.
The 55.9% increase in auto loan originations in 1996 resulted from growth in
existing markets and geographic expansion. On an industry-wide basis, new car
sales increased approximately 2.0% in 1996 as compared to the prior year.
NET SECURITIES SALE GAINS
All of the gains from selling securities in 1994 through 1996 were generated
from the available-for-sale portfolio in response to interest rate-related
market opportunities. Virtually all sales were of mortgage-backed securities
except in 1996, when a gain of $0.7 million resulted from the sale of preferred
stock. The sales involved $97.1 million of securities in 1996, $184.1 million
in 1995 and $281.1 million in 1994.
GAIN ON SALE OF SUBSIDIARY
The 1994 gain on sale of subsidiary resulted from the August 1994 sale of
Shadow Lawn Savings Bank for $78.4 million in cash.
OPERATING EXPENSES
The Company's operating efficiency ratio improved to 62.5% in 1996 from 65.4%
in 1995 and 71.3% in 1994, excluding the effect of securities sale gains,
amortization of intangibles, the Shadow Lawn sale gain and other real estate
expenses in all three years. The ratio is a measure of a financial services
entity's cost effectiveness derived by dividing expenses by revenues, excluding
certain items in both cases as mentioned.
Expenses as Percent of Revenues (Efficiency Ratios*)
(Plot point graph in non-EDGAR version)
1994 1995 1996
---------------------
Total Company 71.34% 65.36% 62.48%
* Represents relationship of operating expenses to total revenues,
excluding amortization of intangibles, other real estate expenses, securities
gains and gain on sale of subsidiary.
While improvement has been achieved during the past two years, in evaluating
RCSB's operating efficiency ratio it is necessary to consider the large size of
the Company's mortgage banking business in relation to its total operations.
Since mortgage loans originated by AHF are generally sold within 60 to 90 days,
that subsidiary's expenses vary significantly based on changes in origination
volumes. Expense-to-revenue relationships are generally higher in mortgage
banking than in many other thrift and banking businesses. A national survey by
the Mortgage Bankers Association of America, for instance, shows that in 1995
and 1994, expenses represented 89% and 93%, respectively, of the average
residential mortgage banker's revenues. The following table lists the various
components of RCSB's operating expenses for the three most recent years.
Operating Expenses
- -------------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994
- -------------------------------------------------------------------------------
(millions)
Salaries and benefits $ 60.6 $ 53.2 $ 62.0
Occupancy 19.0 18.3 17.9
Commissions 11.6 8.5 12.7
Professional fees 7.5 7.4 8.7
Marketing 3.8 3.1 3.8
Telephone and communications 3.5 2.6 2.9
Postage and delivery 2.7 2.3 2.5
Office supplies and printing 2.2 1.8 2.0
Amortization of goodwill and
core deposit premium 2.0 2.2 2.7
Other real estate, net 1.1 (0.4) 5.6
Deposit insurance premiums 0.7 3.0 6.7
Provision for allowance for losses (recovery)
on investment in and assets held by a
liquidating trust company (1.4) 4.5 -
All other expenses 10.1 7.6 12.9
------- ------- -------
Total $123.4 $114.1 $140.4
======= ======= =======
The operating expense increase in 1996 was primarily attributable to higher
variable expenses associated with loan origination and servicing volumes at AHF
and ACSI and expenses resulting from recently opened retail banking and mortgage
lending offices. These costs were partially offset by reduced deposit insurance
premiums and recoveries in 1996 relating to a liquidating trust company in which
RCSB formerly held an interest. Corporate-wide benchmarking efforts relating to
operations have resulted in reorganizations and other actions in recent years
which have also favorably affected the Company's operating expense levels. In
1995, operating expenses declined $26.3 million from prior year levels,
primarily due to the 1994 sale of Shadow Lawn and lower mortgage loan
origination costs. Expenses directly attributable to Shadow Lawn totaled $15.5
million in 1994.
Salaries and benefits expenses rose by $7.4 million or 13.8% in 1996,
following a decline of $8.8 million in 1995. The 1996 increase was largely due
to higher staffing levels at AHF and ACSI to support the expansion of loan
origination and servicing activities. The number of full-time equivalent
employees at November 30, 1996 was 13% greater than at the end of the prior
year. The remainder of the increase in 1996 was due to the effect of normal
compensation increases based on merit, offset in part by the Company's cost
reduction initiatives. Shadow Lawn accounted for $6.0 million of salaries and
benefits costs in 1994. Commissions expense also increased during 1996, after a
decline in 1995, as a result of higher levels of mortgage originations.
-17-
<PAGE>
Occupancy expense increased $0.7 million in 1996 after rising $0.4 million in
1995, due to several factors, including (a) the cost of opening two new retail
banking branches in the Buffalo area in 1996 and five in 1995, (b) expenses
associated with establishing 25 additional AHF loan offices during 1996 and (c)
costs related to various information technology enhancement projects such as the
continuing automation of retail banking operations and a new mortgage
origination system at AHF. RCSB's capital expenditures in 1996 and 1995 totaled
$15.8 million and $13.5 million, respectively. A $1.8 million write down in the
carrying value of one of RCSB's older retail and operating facilities increased
occupancy expense in 1995, while the sale of Shadow Lawn produced expense
savings.
Deposit insurance premiums of $0.7 million in 1996 were down significantly
from $3.0 million in 1995 and $6.7 million in 1994, as the result of a decrease
in premium rates for the Federal Deposit Insurance Corporation's (FDIC) Bank
Insurance Fund (BIF), the insurer for most of the Bank's deposits. Effective in
June 1995, the FDIC lowered deposit insurance premium rates for BIF institutions
to a range of .04% to .31% of total deposits from .23% to .31% previously, and
in January 1996, further reduced premiums for such institutions to a range of
zero to .27%. Partially offsetting the 1996 effect of the lower premiums was a
one-time assessment to recapitalize the FDIC's Savings Association Insurance
Fund (SAIF). Approximately $89 million of the Bank's deposits insured through
SAIF were subject to the assessment which totaled $0.4 million. Under federal
legislation enacted in 1996, BIF and SAIF deposits will be assessed .0130% and
.0648%, respectively, to finance annual interest costs on government bonds
issued to assist in recapitalizing certain thrift institutions in prior years.
The assessments will begin on January 1, 1997 and are expected to continue at
that level through December 1999.
Other real estate expense represents costs and revenues relating to the
Company's foreclosed residential and commercial real estate and in 1994,
included costs and revenues of RCSB's joint venture investments and real estate
held for development. Expenses in 1996 were incurred primarily to maintain
foreclosed residential properties prior to sale. Net revenues from other real
estate in 1995 resulted from declining levels of nonperforming commercial real
estate assets, which produced a corresponding reduction in the related valuation
allowance. Expenses in 1994 include the carrying costs of Shadow Lawn's other
real estate.
Also affecting operating expenses in 1996 and 1995 were provisions for losses
and recoveries on the Bank's investment in and assets held by a liquidating
trust company that formerly provided check processing and securities custodial
services to the Bank. While a larger volume of RCSB's securities and cash were
previously withheld by authorities who are supervising the liquidation, only
$0.7 million of such assets were retained by the authorities at November 30,
1996 and the Bank maintained a 100% allowance for potential losses. RCSB's $2.4
million investment in the trust company was written off in 1995.
INCOME TAXES
RCSB's income tax provisions vary primarily with the level of pretax income
or loss and with changes in limitations on the Company's deferred tax assets.
Under FASB Statement 109 which was adopted by RCSB in fiscal 1994, deferred tax
assets may be included in the Company's statement of condition only to the
extent RCSB is able to conclude that it is more likely than not that the assets
will be realized. A valuation allowance is maintained for any deferred tax
assets for which it is not possible to reach such a conclusion. In general,
deferred tax assets represent future tax return savings resulting from financial
statement expenses deductible in later periods or tax return income recordable
in a subsequent period. In evaluating the realizability of individual items,
the Company considers the number of years until realization, estimates of
taxable income in future years, carryback provisions within federal and state
tax laws and other relevant factors.
The Company's sizable valuation allowance at the start of fiscal 1994 related
mainly to commercial real estate loan and related asset charge-offs recorded in
1993 and to the operating loss in that year. The generation of income in 1994
through 1996 and the ability to more reliably estimate future income has enabled
the Company to reduce the allowance through credits to the income tax provision.
The reductions have resulted in a substantially lower percentage relationship
between RCSB's income tax provisions and pretax income than would otherwise have
been the case.
While the adoption of FASB Statement 109 in 1994 produced no immediate
financial statement effect, the pronouncement established standards for
evaluating deferred tax assets as described in the preceding paragraphs. Key
information relating to the Company's income tax position is presented in the
table below.
Income Tax Rates / Deferred Tax Asset
- --------------------------------------------------------------------------------
November 30, 1996 1995 1994
- --------------------------------------------------------------------------------
(dollars in millions)
For the year:
Income tax provision as percent
of pretax income 31.0% 25.0% 20.5%
Normal rate of federal and state
income taxes for RCSB * 41.0 41.0 41.0
Federal statutory rate 35.0 35.0 35.0
At year-end:
Deferred tax assets less liabilities $ 27.4 $ 29.0 $ 27.8
Valuation allowance (4.8) (10.3) (18.7)
------ ------ ------
Net deferred tax asset $ 22.6 $ 18.7 $ 9.1
====== ====== ======
* Exclusive of required valuation allowance adjustments.
-18-
<PAGE>
COMMON STOCK REPURCHASES
Based on analyses of the levels of capital required to accomplish the
Company's business objectives, RCSB has embarked upon programs to purchase 5.0
million shares of its common stock since late 1995. The programs covered
approximately 27% of the common shares outstanding at inception, including
shares subsequently issued to holders of convertible preferred stock. Through
November 1996, 3.6 million shares have been repurchased and the Company is
continuing to acquire shares under the most recently announced program, subject
to pricing and other market considerations.
Effect of Common Stock Repurchases on 1996 Results
(Bar chart in non-EDGAR version)
Net Income Return on
per Share* Average Equity
-------------------------
Actual (with repurchases) $ 2.36 11.55%
Pro forma (without repurchases) $ 2.19 10.53%
* Fully Diluted
RCSB's stock repurchases have favorably affected key financial
performance measures.
In evaluating target capital levels, the Company considers a number of
sometimes competing factors. While high levels of capital protect the Company
from adverse changes in business conditions, excessive levels artificially
reduce returns to shareholders. The level of risk inherent in the Company's
businesses, plans for growth and regulatory requirements are specifically taken
into account in targeting the appropriate level of equity for RCSB during a
given period. Based upon ongoing consideration of all of the factors mentioned,
the Company has concluded during the past fifteen months that capital levels
should be reduced. Any further plans for adjusting capital levels in the future
will likewise be based upon reconsideration of these key factors.
While maintaining a considerable equity base far in excess of regulatory
requirements, RCSB's recent reductions in capital have increased overall returns
to the Company's shareholders. The table below highlights certain key results
from purchasing 3.5 million shares in programs executed through July 1996. The
1.5 million share program announced in late October 1996 remains in progress as
of December 1996, and the effects of that program will not be fully determinable
until it is completed.
Measures of most direct consequence to shareholders include net income per
share, return on equity and book value per share. As shown in the table that
follows, the favorable annualized effect of the 3.5 million share repurchase on
the first two measures is substantial. Achieving improvements in per share
earnings and return on equity were two major objectives of the program. The
third key measure, book value per share, decreased modestly (3.1%) because, as
expected, prices paid for the reacquired shares were somewhat higher than their
existing book value. Overall, the Company considers the significant improvement
in earnings per share and return on equity to far outweigh the effect on book
value per share.
The ratio of equity to assets remains strong, in the Company's view, at
fiscal year end. In addition, the Bank's regulatory leverage capital ratio of
7.57% at December 31, 1996 is significantly higher than the 5.0% level defined
by banking regulators as indicative of a well-capitalized institution.
Approximate Effect of 3.5 Million
Common Share Repurchase
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Assuming
At or For The Year Ended As No Share 1996 Annualized
November 30, 1996 Reported Repurchases Effect Effect (a)
- -------------------------------------------------------------------------------------------------------
(dollars and shares in millions, except per share)
Operating Measures
- ------------------
<S> <C> <C> <C> <C>
Net income per share (b) $ 2.36 $ 2.19 $+ 0.17 $+ 0.32
Return on average equity 11.55 % 10.53 % + 1.02 % + 1.99 %
Return on average assets 1.00 % 1.04 % - 0.04 % - 0.07 %
Net income $ 39.7 $ 41.4 $- 1.7 $- 3.0
Period-End Values
- -----------------
Book value per share $ 21.12 $ 21.80 - 0.68 (c)
Equity as percent of assets 8.07 % 10.23 % - 2.16 % (c)
Common shares 15.4 18.9 - 3.5 (c)
</TABLE>
(a) Various assumptions were required to compute the annualized effect of RCSB's
repurchases, including the continuation of interest rates, income tax rates
and other operating conditions similar to those experienced by the Company
in 1996. Actual results could differ materially from the estimates provided.
(b) Fully diluted.
(c) Not applicable since item is a period-end value.
1996 ACCOUNTING CHANGE
In December 1995, RCSB adopted FASB Statement No. 114 entitled "Accounting by
Creditors for Impairment of a Loan," as amended by Statement No. 118. The
statement requires that certain impaired loans be measured based on the present
value of expected future cash flows discounted at the loan's effective interest
rate, or as a practical expedient, based on the loan's observable market price
or the fair value of collateral if the loan is collateral dependent. For
purposes of Statement 114, a loan is impaired when, based on current information
and events, it is probable that a creditor will be unable to collect all
contractual interest and principal payments according to the terms of the loan
agreement.
Most of RCSB's loan portfolios are excluded from the scope of Statement 114
because the pronouncement is generally not applicable to large groups of
smaller-balance homogeneous loans such as residential mortgage, automobile and
other consumer loans. The pronouncement does apply to RCSB's commercial mortgage
loan portfolio, from which impaired loans are identified during reviews of loans
that (a) are delinquent, (b) have been classified as substandard or worse by
management or banking regulators or (c) are believed by management to involve
potential collectibility concerns.
In most cases, the Company measures impairment based on the fair value of
loan collateral minus estimated selling costs. If the measure of an impaired
loan is less than the recorded investment in the loan, a valuation allowance is
established with a corresponding charge to the provision for loan losses or
through an allocation from existing loss allowances.
-19-
<PAGE>
Charge-offs are recorded when definitive information indicates that collection
of the identified impaired amount is doubtful. Cash receipts on impaired loans
are added to the allowance for loan losses if a previously recorded charge-off
has not been recovered. Cash receipts in excess of prior charge-offs are used to
reduce the carrying value of the loan or are recognized as interest income,
depending upon management's judgment regarding the likelihood of collecting the
recorded loan balance. Implementing the provisions of Statement 114 had no
material impact on the Company's consolidated financial statements on the date
of adoption. The small-balance homogeneous loan categories excluded from the
scope of Statement 114 are evaluated collectively for impairment based on loss
estimates for each such portfolio as a whole.
OTHER RECENTLY ISSUED OR PROPOSED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121 entitled "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The statement requires that long-lived assets and certain identifiable
intangibles to be held and used by a company be reviewed for impairment whenever
events or changes in circumstances indicate the carrying amount of an asset may
not be recoverable. In performing the review for recoverability, companies are
required to estimate the future cash flows expected to result from the use of
the asset and its eventual disposition. Under Statement 121, an impairment loss
is recognized if the sum of the undiscounted future cash flows is less than the
carrying amount of the asset. The statement also establishes standards for
recording an impairment loss for certain assets subject to disposal. Excluded
from the scope of the statement are financial instruments, mortgage and other
loan servicing assets, deposit intangibles and deferred tax assets. As
required, RCSB adopted Statement 121 effective December 1, 1996 with no material
impact on the Company's consolidated financial statements on the date of
adoption.
In October 1995, the FASB issued Statement No. 123 entitled "Accounting for
Stock-Based Compensation." The statement permits, but does not require,
companies to use a fair-value-based method of accounting for stock-based
compensation plans including stock options and stock appreciation rights. Under
this method, compensation cost is measured as of the date stock awards are
granted based on the value of the awards, and expense is generally recognized
over the vesting period. If a company elects to continue using the intrinsic-
value-based method under Accounting Principles Board (APB) Opinion No. 25, pro
forma disclosures of net income and net income per share are required as if the
fair-value-based method had been applied. Under the intrinsic method,
compensation cost is the excess, if any, of the market price of the stock as of
the grant date over the amount employees must pay to acquire the stock or over
the price established for determining appreciation. Under RCSB's compensation
policies, there is no such excess on the dates of grant. In implementing
Statement 123 in fiscal 1997, RCSB has determined that it will continue to
account for its stock-based compensation plans under the provisions of APB
Opinion 25 and adopt the new pro forma disclosure requirements of Statement 123.
In June 1996, the FASB issued Statement No. 125 entitled "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which provides guidance for distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings. The statement requires
the application of a financial-components approach which, following a transfer,
results in recognizing in financial statements the assets an entity controls and
removing from financial statements assets it no longer controls. A transferor
has surrendered control, in general, only if the transferred assets have been
legally isolated from the transferor, the transferee obtains the right to pledge
or exchange the assets and there is no agreement that entitles or obligates the
transferor to repurchase the assets. Liabilities are eliminated from financial
statements only when they are extinguished. The new standard applies to all
transactions occurring after December 31, 1996, except those involving
collateral pledges and securities repurchase agreements for which the rule
change is delayed one year. Initial application of the pronouncement is not
expected to have a material effect on the consolidated financial position of
RCSB.
In January 1996, the FASB issued an exposure draft of a proposed statement
entitled "Reporting Disaggregated Information about a Business Enterprise." The
proposal would require publicly-held companies to report financial and other
information about key revenue-producing segments of the entity for which such
information is available and is utilized by the chief operating decision maker.
Specific information to be reported for individual segments includes profit or
loss, certain revenue and expense items, and total assets and liabilities. A
reconciliation of segment financial information to amounts reported in the
financial statements would be provided. If adopted in its present form, the
statement would be effective for RCSB's 1998 fiscal year.
In June 1996, the FASB issued an exposure draft of a proposed statement
entitled "Accounting for Derivative and Similar Financial Instruments and for
Hedging Activities." The statement would require entities to recognize the fair
value of all derivative financial instruments as either assets or liabilities in
the statement of condition. If certain conditions are met, a derivative
instrument would be designated as a hedge of either (a) the exposure to changes
in the fair value of a recognized asset or liability or a firm commitment, (b)
the exposure to variable cash flows associated with a forecasted transaction or
(c) the foreign currency exposure of a net investment in a foreign operation.
Gains and losses associated with hedges of fair value would be recognized in
earnings as they occur, together with the offsetting loss or gain on the hedged
item. Gains or losses from hedges of cash flows initially would be reported as
a component of other comprehensive income outside the statement of income and
subsequently, would be recognized in earnings on the projected date of the
forecasted transaction. For a derivative not designated as a hedge, gains or
losses would be recognized in earnings as they occur. If adopted by the FASB as
proposed, the statement would be effective for RCSB's 1999 fiscal year, and
previously issued financial statements would not be restated.
Under the procedures followed by the FASB for receiving comments on and
reconsidering its proposals, it is possible that final pronouncements, if
issued, would differ materially from the exposure drafts. RCSB has not
estimated the specific effects the proposed statements would have on its
financial statements.
-20-
<PAGE>
DISCUSSION OF FINANCIAL CONDITION
- ---------------------------------
INTEREST RATE RISK MANAGEMENT
The net interest income generated by RCSB's earning asset portfolios is
affected by interest rate changes and the degree that interest-bearing
liabilities mature or reprice more rapidly, more slowly, or on a different basis
than the asset portfolios being funded. Managing the Company's interest-earning
asset/interest-bearing liability position is the responsibility of management's
Treasury Strategies Committee and the Asset/Liability Committee of the Board of
Directors. The committees utilize three primary methods to evaluate the
sensitivity of net interest earnings to changes in interest rates: duration, gap
and simulation analyses.
The duration of a financial instrument represents the weighted average time
period to repricing or, if fixed rate, to maturity. Time periods are typically
weighted by the present value of each payment of principal or interest
associated with the financial instrument. While the duration of a zero coupon
instrument equals its term to maturity, for amortizing financial instruments
duration would always be less than term. In managing the interest sensitivity
of its balance sheet, RCSB considers the durations of individual categories of
assets and liabilities and also monitors the difference between the average
duration of total interest-earning assets and total interest-bearing
liabilities. To the extent there is such a difference, it may be quantified as
either positive or negative duration of equity. Positive duration of equity
indicates that, on average, an institution's assets reprice more slowly than its
liabilities and that, in the long run, falling interest rates would tend to
increase net interest income while rising rates would cause a decrease. The
longer the duration of equity, the more sensitive the Company is to longer-term
interest rate changes. Due to consumers' general preference for longer-term
fixed rate loans and shorter-term deposits, the natural tendency for many
financial institutions and for RCSB is to maintain a positive duration of
equity.
Assets
(Pie chart in non-EDGAR version)
November 30,
1996
------------
Mortgage-backed securities 41%
Residential mortgage loans* 19%
Automobile loans 25%
Commercial mortgage loans 1%
Other 14%
* Excluding loans held for sale.
The one-year interest-sensitivity gap is an indicator of the impact of
interest rate changes on near-term net interest earnings. It represents the
difference between the volumes of assets and liabilities repricing within the
ensuing 12 months, frequently expressed as a percentage of an institution's
total assets. A negative gap results when more liabilities than assets are
expected to reprice within the next year, and a positive gap reflects an excess
of assets repricing in that period. While a negative gap would tend to increase
net interest income in a period of falling rates and decrease net interest
income when rates are rising, a positive gap would tend to produce the opposite
effects. RCSB's one-year gap at the end of fiscal 1996 was negative to the
extent of 6.9% of total assets.
Liability Sources
(Pie chart in non-EDGAR version)
November 30,
1996
------------
Transaction, savings and money market deposits 27%
Term deposits 37%
Borrowings 30%
Other liabilities 6%
A third method utilized by the Company to evaluate the degree of interest
rate risk inherent in RCSB's portfolios is simulation analysis. Under this
procedure, the effect on net interest income of varying, immediate significant
increases and decreases in interest rates is estimated. Simulations also take
into account assumed shifts in the shape and slope of the yield curve, which
produce varying degrees of increase or decrease in interest rates for
instruments of differing maturities. Prior to implementing new asset or
liability strategies, simulation techniques are normally utilized to estimate
their effect on net interest income.
Once the need for a change in asset/liability strategy is determined, a
number of financial instruments are considered for achieving the desired
objectives. The Company may simply replace maturing assets and liabilities with
instruments of longer or shorter duration, or it may alter the characteristics
of selected portfolio segments synthetically through the use of derivative
instruments such as interest rate swaps, futures contracts or options.
Since derivative instruments are used by RCSB only for hedging purposes and
not for trading, the income or expense generated from such instruments is
recorded in earnings as interest over the term of the item being hedged.
Derivatives have assisted RCSB in reducing its duration of equity and one-year
gap, while continuing to meet the credit and deposit needs of customers. In
1996 for instance, the Company utilized interest rate swaps to effectively
convert short-term borrowings into intermediate-term instruments. Under swaps
outstanding at November 30, 1996, RCSB pays a fixed rate of interest and
receives variable rate interest, based on notional principal totaling $450.0
million. The swap agreements mature from 1997 to 1999.
In prior years, RCSB has also utilized U.S. Treasury bill futures contracts
to hedge the forecasted renewal or replacement of designated deposits and
borrowings. Accumulated gains or losses on the contracts were deferred and
amortized as an adjustment of interest expense over terms of the hedged
liabilities. Minor amounts of such amortization were recorded in 1995. The
objective of hedging with futures in this manner is to offset the effects of
possible interest rate changes during a period on the amount of interest
ultimately paid on an anticipated liability.
While the Company has not recently utilized options to hedge interest income
or expense, RCSB's asset/liability policies permit the use of exchange traded,
interest rate options for hedging purposes. In a manner similar to the
procedure utilized for futures, hedging gains and losses from outstanding and
closed option contracts would be deferred and amortized over the term of the
instrument being hedged.
-21-
<PAGE>
Interest-Rate Sensitivity Gap
<TABLE>
<CAPTION>
--------------------------------------------------------------
Maturity/Repricing Period at November 30, 1996
--------------------------------------------------------------
After One After Two
Within But Within But Within After
One Year Two Years Five Years Five Years Total
- -----------------------------------------------------------------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities $ 439.7 $ 277.7 $ 661.8 $ 313.3 $ 1,692.5
Mortgage loans 847.4 61.2 42.9 17.3 968.8
Automobile loans and leases 473.3 242.2 277.1 2.2 994.8
Consumer and other loans 41.9 24.2 17.8 1.4 85.3
Other 7.7 - - - 7.7
-------------------------------------------------------------
Total interest-earning assets 1,810.0 605.3 999.6 334.2 3,749.1
-------------------------------------------------------------
Interest-bearing liabilities:
Checking, NOW and savings deposits 140.4 282.8 282.8 - 706.0
Money market deposits 275.7 - - - 275.7
Term deposits 983.6 206.6 126.2 70.6 1,387.0
Mortgagors' deposits under escrow
agreements - - - 66.2 66.2
FHLB repurchase agreements and
borrowings 553.0 70.0 - - 623.0
Other repurchase agreements and
borrowings 484.4 - 0.2 0.2 484.8
-------------------------------------------------------------
Total interest-bearing liabilities 2,437.1 559.4 409.2 137.0 3,542.7
Interest rate swaps (350.0) 225.0 125.0 - -
-------------------------------------------------------------
Total interest-bearing liabilities, net
of hedging 2,087.1 784.4 534.2 137.0 3,542.7
-------------------------------------------------------------
Rate sensitivity gap $ (277.1) $ (179.1) $ 465.4 $ 197.2 $ 206.4
=============================================================
Cumulative gap $ (277.1) $ (456.2) $ 9.2 $ 206.4
=============================================================
Cumulative gap as percent of total assets:
NOVEMBER 30, 1996 (6.9%) (11.4%) (0.2%) 5.1%
=============================================================
November 30, 1995 (3.9%) (9.6%) 4.7% 6.8%
=============================================================
</TABLE>
(a) Fixed and adjustable rate loans maturing after one year totaled $616.0
million and $70.3 million, respectively.
(b) Loan balances are before deduction of allowances for loan losses.
In managing the Company's interest rate risk, RCSB selects the appropriate
technique and instrument to be utilized after considering the benefits, costs
and risks associated with the available alternatives. The table above summarizes
the interest sensitivity gaps inherent in the Company's asset and liability
portfolios at November 30, 1996 and 1995.
One-Year Interest-Sensitity Gap at Year End (percent of total assets)
(Plot point graph in non-EDGAR version)
1993 1994 1995 1996
----------------------------
One-year interest-sensitity gap 10.8% -4.7% -3.9% -6.9%
In evaluating the Company's exposure to interest rate risk, certain factors
inherent in the method of analysis presented in the table above must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, such instruments may react in
different degrees to changes in market interest rates. Further, certain assets,
such as adjustable-rate mortgages, have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. RCSB
considers the anticipated effects of these various factors in implementing its
interest rate risk management policies. It should also be noted that the
interest rate sensitivity levels shown in the table above could be changed by
external factors such as loan prepayments or by factors controllable by RCSB
such as asset sales.
For purposes of the table, the amounts indicated for all fixed-rate assets
other than collateralized mortgage obligations (CMOs) represent scheduled
amortization, adjusted for the Company's estimate of prepayments. Estimates for
CMOs, which are included with securities, were obtained from third party
specialists, who take into account the interest rate environment as well as each
security's unique structure. Checking, NOW, savings and money market deposits
are assigned repricing characteristics based on RCSB's assessment of expected
outflows. Since escrow deposit balances are continually replenished, such
deposits are assumed to mature when the underlying loans mature. Repurchase
agreements containing call provisions are assumed to mature on the call dates.
OTHER HEDGING ACTIVITIES
Within RCSB's mortgage banking business managed by AHF, asset/liability
management techniques include the use of derivative instruments to hedge AHF's
portfolio of loans held for sale and outstanding loan commitments expected to be
funded.
-22-
<PAGE>
Since AHF originates virtually all of its loans for sale in the secondary
market, the Company is exposed to changes in the market prices offered for
residential mortgage loans between the dates interest rates on its loans are
established and the dates the loans are ultimately sold. The main hedging
instruments utilized are forward contracts for the sale of mortgage-backed
securities, which involve the pooling and securitization of closed loans for
delivery to national securities firms at prices specified in the contracts. By
entering into forward contracts at the time loan interest rates are established,
the Company insulates the loans covered by particular forwards from the effects
of subsequent market price fluctuations.
Hedging loan commitments from the impact of market price fluctuations
requires consideration of the fact that potential borrowers are not obligated to
complete the loan transactions and many commitments typically expire unused.
Due to the uncertainty surrounding the volume of commitments ultimately
resulting in closed loans, AHF utilizes purchased put option contracts to hedge
a portion of its loan commitments. The contracts permit, but do not obligate,
the Company to deliver a security collateralized by AHF's loans at a specific
time and price. While hedging procedures employed by AHF are designed to
mitigate the effects of price changes on the Company's outstanding loan
commitments and portfolio of closed loans, rapid changes in interest rates
increase the uncertainty surrounding the determination of the optimum volume of
hedge contracts. AHF continuously monitors interest rate markets and makes
adjustments in its hedge position as appropriate. At November 30, 1996,
outstanding forward contracts covered $192.4 million of mortgage-backed
securities and put option contracts covered $20.0 million.
AHF also manages a large portfolio of residential mortgage loan servicing
rights that contribute significantly to RCSB's mortgage banking revenues. Since
the profitability and value of the portfolio depend on the speed at which
underlying loans are repaid before maturity, and interest rate movements affect
the rate of prepayment, AHF regularly evaluates the benefits and costs of
utilizing derivative financial instruments to hedge changes in the value of the
portfolio. Gains and losses from such hedges are deferred as adjustments to the
carrying value of the servicing rights, which value is reduced, if necessary, to
fair value by means of an allowance. At November 30, 1996, purchased call option
contracts on ten-year U.S. Treasury securities are carried as hedges of selected
segments of the company's mortgage servicing assets. Option contracts covering
$137.5 million of Treasury securities expire through February 1997 and contracts
covering $33.0 million expire through November 1997.
LOANS RECEIVABLE
Loans accounted for 54% of RCSB's interest-earning assets at November 30,
1996, compared to 57% at year-end 1995. The largest portfolio segments
consisted of residential mortgage loans and automobile loans which represented
45% and 49%, respectively, of total loans in 1996 and 52% and 40%, respectively,
in 1995. The remainder of the portfolio primarily includes loans secured by
commercial real estate and multi-family dwellings, and various types of consumer
loans offered by RCSB's retail banking branches. To reduce interest rate risk,
the loan portfolio consists predominately of loan products that mature or
reprice within a short or intermediate-term period.
The following tables set forth the composition of loans by type and the
percentage relationship of loans of each type to total loans for the five most
recent years.
<TABLE>
<CAPTION>
Loans Receivable by Type
- -----------------------------------------------------------------------------------------------
November 30, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------
(millions)
<S> <C> <C> <C> <C> <C>
Residential mortgage loans:
Adjustable-rate:
First mortgages $ 485.5 $ 621.5 $ 556.6 $ 836.8 $1,020.6
Home equity loans and advances
under lines of credit 223.4 227.9 236.8 313.6 273.1
Fixed-rate 54.2 61.5 59.9 126.2 167.1
-------------------------------------------------
Total residential mortgage loans 763.1 910.9 853.3 1,276.6 1,460.8
-------------------------------------------------
Automobile loans and leases:
Fixed-rate 872.1 637.0 590.8 421.0 198.2
Adjustable-rate 122.7 170.6 157.9 139.1 59.5
-------------------------------------------------
Total automobile loans and leases 994.8 807.6 748.7 560.1 257.7
-------------------------------------------------
Commercial mortgage loans 55.2 71.2 98.1 196.3 312.5
Residential mortgage loans held for sale 150.5 123.8 92.0 432.1 339.3
Consumer and other loans 49.9 55.3 63.1 93.6 104.2
Unamortized origination costs, fees,
discounts and premiums, net 35.4 28.3 27.6 16.9 1.7
-------------------------------------------------
Loans receivable $2,048.9 $1,997.1 $1,882.8 $2,575.6 $2,476.2
=================================================
</TABLE>
Loan Types as Percent of Total Loans
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
November 30, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loan Types:
Residential mortgage 44.6% 51.8% 50.2% 66.4% 72.7%
Automobile 48.6 40.4 39.8 21.7 10.4
Commercial mortgage 2.7 3.6 5.2 7.6 12.6
Consumer and other 4.1 4.2 4.8 4.3 4.3
-------------------------------------------------
Loans receivable 100.0% 100.0% 100.0% 100.0% 100.0%
=================================================
</TABLE>
-23-
<PAGE>
The Company's residential loan portfolio was acquired over a period of years
mainly through purchases in the secondary market and to a lesser extent, through
RCSB's own originations. Based on the limited yields available in 1996 in
relation to the cost of funds, no significant loans were added to the
residential mortgage portfolio. Purchases in the secondary market for 1995
totaled $181.1 million. While the Company's subsidiary, AHF, originates large
volumes of such loans, they are generally sold through the secondary market and
are not retained by RCSB. The Company does retain home equity loans and
advances under home equity lines of credit that are originated through its
retail banking network.
The interest rates on adjustable-rate residential mortgage loans held in
RCSB's portfolio generally float at a designated spread mainly above the yield
of a one year U.S. Treasury security. The loans are typically subject to annual
and lifetime caps on increases in the rate of interest and annual limits on
decreases in interest rates. By nature, adjustable-rate mortgage loans are
subject to additional default risks in a rising rate environment because certain
borrowers may be unable to comply with higher monthly payment requirements. At
the same time, the marketability of the underlying property may be adversely
affected by the higher rate environment.
Automobile loans and leases are the most significant portion of RCSB's loan
portfolio in 1996, growing 23.2% during the year. Due to the favorable
characteristics of automobile loan products in relation to the Company's
asset/liability management objectives, RCSB's automobile lending subsidiary,
ACSI, has expanded its origination capacity and broadened its dealer networks in
recent years. In December 1996, ACSI entered the mid-Atlantic portion of the
country through a regional office in Maryland.
While the majority of RCSB's auto loans are fixed rate, the relatively short
terms to maturity limit the Company's exposure to interest rate fluctuations.
The Company limits credit risk associated with originating and holding
automobile loans by focusing primarily on the creditworthiness of borrowers
rather than the collateral value of vehicles. Loan applications solicited by
auto dealers are underwritten by ACSI personnel prior to approving or declining
credit. While net losses during the past three years on RCSB's automobile loan
portfolio have averaged only 0.60% of average loans, losses in 1996 increased to
0.76%, consistent with an increasing national trend in losses on consumer debt.
Commercial mortgage loans outstanding decreased for the sixth consecutive
year to $55.2 million at November 30, 1996, from $71.2 million at November 30,
1995. The Company originated no significant commercial loans during the most
recent year. The portfolio consists primarily of loans secured by commercial
real estate and multi-family dwellings. Commercial mortgage loans entail
additional risks as compared with residential mortgage loans because commercial
mortgages typically involve large balances to individual borrowers or groups of
related borrowers. Nonperforming commercial loans have remained at minimal
levels in recent years, amounting to $1.5 million and $1.4 million at November
30, 1996 and 1995, respectively.
The following tables present the yields earned on RCSB's most significant
loan portfolios and the locations of properties underlying the Company's
mortgage loan portfolios.
Loan Yields
- --------------------------------------------------------------------------------
At Year End For the Year
1996 1995 1996 1995
- --------------------------------------------------------------------------------
Residential mortgage 8.68% 8.70% 8.85% 8.42%
Automobile 9.02 8.96 9.22 9.09
Commercial mortgage 10.82 11.35 10.87 10.82
Consumer and other 12.82 12.75 12.86 12.94
(a) Loans held for sale are excluded.
(b) Nonaccrual loans are included at 0% yield.
(c) Calculations are based on loan balances net of allowances for loan
losses.
Mortgage Loans by Type and State
November 30, 1996
- -----------------------------------------------------------------------
Percent
Residential(a) Commercial Total of Total
- -----------------------------------------------------------------------
(dollars in millions)
New York $359.4 $39.6 $399.0 48.8%
California 84.4 - 84.4 10.3
Florida 53.4 3.7 57.1 7.0
Virginia 51.0 3.0 54.0 6.6
New Jersey 42.3 - 42.3 5.2
Pennsylvania 32.6 0.2 32.8 4.0
Maryland 25.7 3.7 29.4 3.6
Texas 18.9 - 18.9 2.3
All other 95.4 5.0 100.4 12.2
-------------------------------------------
Total $763.1 $55.2 $818.3 100.0%
===========================================
(a) Excludes mortgage loans held for sale totaling $150.5 million.
SECURITIES
The following tables set forth the carrying values and the related weighted
average yields and weighted average lives of RCSB's portfolios of securities
held to maturity and available for sale at November 30, 1996 and 1995. Yields
on minor amounts of tax-exempt securities have not been adjusted to taxable
equivalents.
-24-
<PAGE>
Securities Held to Maturity
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
November 30, 1996 1995
- ----------------------------------------------------------------------------------------------------------------
Estimated Estimated
Estimated Weighted Estimated Weighted
Weighted Average Weighted Average
Carrying Average Life Carrying Average Life
Value Yield (years) Value Yield (years)
- ----------------------------------------------------------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Collateralized mortgage obligations:
Residential Funding $302.6 7.06% 2.6 $ 119.3 7.77% 2.9
Prudential Home Mortgage 260.0 6.99 4.3 277.4 7.13 4.0
FNMA 187.6 6.23 4.3 204.0 6.26 5.0
Independent National Mortgage 120.6 7.50 1.9 89.1 7.92 2.0
Countrywide Mortgage 118.4 6.82 4.6 141.0 7.11 3.8
FHLMC 114.5 6.42 4.3 114.6 6.33 3.6
GE Capital Mortgage 68.0 7.40 3.8 13.5 8.27 3.3
Saxon Mortgage 67.5 7.14 4.7 69.9 7.23 4.5
Citibank 60.4 7.29 3.2 62.2 7.44 3.0
Securitized Asset Sales Corp. 40.9 7.21 1.8 29.3 7.26 2.5
Structured Mortgage Corp. 39.3 8.24 4.5 - - -
Paine Webber 36.4 7.40 2.5 46.0 7.47 2.8
Other 95.1 7.36 4.3 84.1 7.49 3.9
-------- ---- ---- -------- ---- ----
Total CMOs 1,511.3 7.00 3.6 1,250.4 7.10 3.7
Structured Mortgage Corp. 60.3 7.75 4.9 71.3 7.65 5.2
FNMA 9.2 6.01 4.2 11.1 6.00 4.8
FHLMC 8.1 7.60 10.3 10.0 7.55 10.8
Other 50.0 7.85 13.7 55.2 8.00 13.1
-------- ---- ---- -------- ---- ----
Total mortgage-backed securities 1,638.9 7.05 4.0 1,398.0 7.16 4.2
Other securities:
U.S. Government and its agencies'
obligations 0.1 6.34 1.4 0.1 6.88 4.8
-------- ---- ---- -------- ---- ----
Total held to maturity $1,639.0 7.05% 4.0 $1,398.1 7.16% 4.2
======== ==== ==== ======== ==== ====
Fair value $1,634.4 $1,398.7
======== ========
</TABLE>
(a) Securities held to maturity are carried at amortized cost.
(b) Weighted average lives of mortgage-backed securities take estimated
prepayments into account.
Securities Available for Sale
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
November 30, 1996 1995
- ------------------------------------------------------------------------------------------------------------------
Estimated Estimated
Estimated Weighted Estimated Weighted
Weighted Average Weighted Average
Carrying Average Life Carrying Average Life
Value Yield (years) Value Yield (years)
- ------------------------------------------------------------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Collateralized mortgage obligations:
FHLMC $ 7.1 5.92% 2.3 $ 8.2 5.88% 2.7
Prudential Home Mortgage - - - 46.3 7.82 3.1
------- ---- ---- ------ ---- ----
Total CMOs 7.1 5.92 2.3 54.5 7.52 3.0
Other 9.3 7.50 14.8 27.2 7.71 10.7
------- ---- ---- ------ ---- ----
Total mortgage-backed securities 16.4 6.82 9.4 81.7 7.59 5.8
------- ---- ---- ------ ---- ----
Other securities:
Corporate obligations 1.3 5.27 5.0 1.3 5.27 6.1
Preferred stock 1.1 0.29 - 1.1 0.36 -
------- ---- ---- ------ ---- ----
Total other securities 2.4 3.00 2.8 2.4 3.11 3.4
------- ---- ---- ------ ---- ----
Total available for sale $ 18.8 6.34% 8.6 $ 84.1 7.46% 5.7
======= ==== ==== ====== ==== ====
Amortized cost $ 21.1 $ 85.3
======= ======
</TABLE>
(a) Securities available for sale are carried at estimated fair value.
(b) Weighted average lives of mortgage-backed securities take estimated
prepayments into account.
-25-
<PAGE>
RCSB's securities portfolio consists mainly of mortgage-backed investments,
including collateralized mortgage obligations, that are classified as held to
maturity. The desirability of mortgage-backed securities for the Company's
portfolio depends on their estimated duration and also their yield in relation
to the cost of incremental funds. While yields on mortgage-backed securities
are generally lower than on loans, carrying costs are also lower. Credit risk
on such securities held by the Company is limited by government agency
guarantees, insurance or issuer subordination techniques. Of privately-issued
mortgage-backed securities held by RCSB, 98% are rated AA or better while the
remaining 2% have not been evaluated by one of the major rating agencies.
Securities held to maturity represented 44.1% of total interest-earning
assets at November 30, 1996, compared to 39.9% in 1995. In fiscal 1996, RCSB
purchased $480.6 million mainly of privately issued mortgage-backed securities
for the held-to-maturity portfolio, compared to $493.8 million in 1995.
Private-issue securities are often selected over government agency issues due to
their generally higher yields and considering the Company's ability to manage
possible incremental credit risk.
The Company also maintains a portfolio of securities available for sale
consisting primarily of mortgage-backed securities. RCSB's objectives for this
portfolio include generating additional investment income, enhancing liquidity
and providing flexibility with respect to the volume and composition of the
Company's earning assets. Available-for-sale securities are carried in the
financial statements at fair value, and any unrealized gain or loss considered
to be temporary is offset by an equivalent amount carried, net real of taxes, in
a separate component of shareholders' equity. RCSB sold $97.1 million of
available-for-sale securities in 1996, compared to $184.1 million in 1995.
Mortgage-backed securities are subject to the risk that mortgages
collateralizing the securities may prepay more rapidly or slowly than expected,
thereby affecting yields and future cash flows. RCSB attempts to limit this
risk by generally holding fixed-rate securities with shorter estimated lives.
It should also be noted that, under financial accounting standards, sales of
securities classified as held to maturity may call into question the Company's
intent with respect to the remainder of the portfolio. If such a sale were to
occur, which is not expected, RCSB may be required to reclassify the remaining
portfolio as available for sale. In November 1995, the Company reclassified
$263.2 million of mortgage-backed securities from its held-to-maturity portfolio
to available for sale as permitted by the FASB in conjunction with the initial
implementation of certain accounting guidance.
DEPOSITS
Deposits are RCSB's primary source of funding, representing 66.9% of interest
bearing liabilities at November 30, 1996, compared to 70.3% at November 30,
1995. Retail deposits grew in several major categories during 1996, with
checking and NOW accounts increasing $14.2 million and savings and money market
accounts increasing $21.0 million. Term accounts declined $8.2 million during
1996. Contributing to deposit growth were the opening of two new branch offices
in the Buffalo, New York area in 1996 and five new offices in 1995. RCSB plans
to open additional branches in the western New York market during 1997. The
Company also achieved deposit growth during 1996 and 1995 through the
introduction of new checking account products and various promotional
activities, such as "One Day CD Sales."
Nationally marketed term accounts on deposit at RCSB increased to 6% of total
deposits as of November 30, 1996 compared with less than 1% at November 30,
1995. The Company plans to continue utilizing nationally marketed term
accounts, which are offered through major investment banking firms, when such
deposits represent the most cost effective source of incremental funds. The
national deposits outstanding at November 30, 1996 have a weighted average rate
of 5.44% and original terms ranging from 3 to 24 months.
The following table provides an analysis of RCSB's deposits at November 30,
1996, 1995 and 1994.
Deposits
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
November 30, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
- ----------------------------------------------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing checking
accounts $ 30.6 -% $ 25.0 -% $ 19.8 -%
NOW accounts 180.7 1.45 172.1 1.48 160.1 1.48
Savings accounts 494.7 2.54 503.8 2.53 584.6 2.53
Money market accounts 275.7 3.75 245.6 3.58 330.5 3.52
Term accounts 1,245.7 5.69 1,253.9 5.96 981.8 5.26
Nationally marketed
term accounts 141.3 5.44 22.6 5.37 - -
-------- ---- -------- ---- -------- ----
Total $2,368.7 4.39% $2,223.0 4.50% $2,076.8 3.87%
======== ==== ======== ==== ======== ====
</TABLE>
-26-
<PAGE>
BORROWINGS
In addition to deposits, sources of funding utilized by RCSB include advances
from the FHLB and borrowings in the form of collateralized repurchase agreements
with the FHLB and large investment banking firms. The exact composition of
borrowings at any given time is primarily dependent on market pricing and other
terms of potential borrowing arrangements. New borrowings funded a substantial
portion of earning asset growth and common stock repurchases during 1996 and
1995.
RCSB significantly expanded its utilization of borrowings under securities
repurchase agreements in 1996 due to the comparatively favorable terms
available. Repurchase agreements with the FHLB represented 35% of total
borrowings at November 30, 1996, while there were no such borrowings outstanding
at November 30, 1995. Repurchase agreements through investment banking firms
represented 44% of total borrowings at November 30, 1996 compared to 30% at the
end of 1995.
As a member of the FHLB, the Bank is authorized to apply for borrowings
secured by certain of its residential mortgage loans and other assets, provided
standards relating to creditworthiness have been met. Borrowings from the FHLB
under these arrangements represented 21% of total borrowed funds, at November
30, 1996, compared to 70% in 1995. Included were overnight advances totaling
$6.2 million and $3.1 million at November 30, 1996 and 1995, respectively. The
following table sets forth additional information regarding RCSB's outstanding
borrowings for the years ended November 30, 1996, 1995 and 1994.
Borrowings
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
At or For The Year Ended November 30, 1996 1995 1994
- --------------------------------------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C>
FHLB repurchase agreements:
Amount outstanding at year end $ 390.6 $ - $ -
Average outstanding for the year 333.1 - -
Maximum outstanding at any month end 549.0 - -
Weighted average rate for the year 5.54% - -
Weighted average rate at year end 5.48 - -
Weighted average maturity at year end (years) 0.5 - -
- --------------------------------------------------------------------------------------------
Other FHLB borrowings:
Amount outstanding at year end $ 232.4 $ 674.3 $ 789.9
Average outstanding for the year 308.6 655.1 662.0
Maximum outstanding at any month end 602.1 786.8 814.2
Weighted average rate for the year 6.10% 6.05% 5.05%
Weighted average rate at year end 6.19 6.17 5.47
Weighted average maturity at year end (years) 1.6 0.4 0.8
- --------------------------------------------------------------------------------------------
Other repurchase agreements and borrowings:
Amount outstanding at year end $ 484.8 $ 295.1 $47.0
Average outstanding for the year 434.1 272.8 136.6
Maximum outstanding at any month end 491.1 466.2 276.6
Weighted average rate for the year 5.77% 6.19% 4.03%
Weighted average rate at year end 5.45 6.12 5.90
Weighted average maturity at year end (years) 0.4 0.4 0.1
</TABLE>
NONPERFORMING ASSETS
RCSB's nonperforming asset disclosures encompass nonaccrual loans, loans past
due 90 days and accruing, troubled debt restructurings and other real estate.
It is the Company's policy to discontinue the accrual of interest and reverse
previously accrued interest when a residential real estate or commercial real
estate loan becomes 90 days delinquent. Thereafter, interest income is
recognized only to the extent interest is received in cash and is not applied as
a reduction in carrying value. Automobile and other consumer loans which are not
guaranteed by government agencies are charged off after delinquency of 120 or
180 days, depending upon the nature of the loan, or, in the case of automobile
loans, upon the sale of repossessed collateral. Interest accruals on automobile
loans are discontinued at time of repossession or after 120 days if no
repossession is in process.
Percent of Assets Nonperforming at Year End
(Plot point graph in non-EDGAR version)
1993 1994 1995 1996
----------------------------
RCSB 2.33% 0.83% 0.73% 0.76%
Industry * 2.72% 1.82% 1.51% 1.34%
* Represents data for all publicly-held thrifts. 1996 data
as of September 30.
Other real estate (ORE), consisting of properties acquired through
foreclosure of residential and commercial mortgage loans, is carried in the
financial statements at the lower of fair value less selling expenses, or cost.
ORE properties are managed internally by RCSB staff who may be assisted in
particular instances by outside real estate sales and management firms. The
time periods to market and sell foreclosed real estate vary and are dependent
upon the price range, type and location of the property. The amounts the
Company will ultimately recover from other real estate may differ from the net
carrying value because of changes in economic conditions beyond RCSB's control,
or changes in the Company's strategy for the properties.
The following table presents summarized information regarding the nature of
RCSB's nonperforming assets at the end of the five most recent years.
-27-
<PAGE>
Nonperforming Assets (NPAs)
<TABLE>
<CAPTION>
November 30, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------
(dollars in millions)
NPAs by Category
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 19.6 $ 21.7 $ 21.1 $ 44.7 $ 100.9
Loans past due 90 days and accruing 4.6 2.7 1.9 1.6 1.4
Restructured loans - - - 2.4 7.7
--------------------------------------------------
Total nonperforming loans 24.2 24.4 23.0 48.7 110.0
--------------------------------------------------
Other (foreclosed) real estate 13.1 10.9 13.7 67.3 192.1
Allowance for losses (6.9) (6.9) (8.2) (18.5) (21.5)
--------------------------------------------------
Other real estate, net 6.2 4.0 5.5 48.8 170.6
--------------------------------------------------
Total nonperforming assets $ 30.4 $ 28.4 $ 28.5 $ 97.5 $ 280.6
==================================================
<CAPTION>
- --------------------------------------------------------------------------------------------------
NPAs by Type
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans:
Residential mortgage $ 18.1 $ 20.3 $ 18.4 $ 33.4 $ 40.0
Automobile 4.4 2.5 1.6 0.7 0.4
Commercial mortgage 1.5 1.4 2.7 13.9 68.3
Consumer and other 0.2 0.2 0.3 0.7 1.3
--------------------------------------------------
Total nonperforming loans 24.2 24.4 23.0 48.7 110.0
--------------------------------------------------
Other real estate:
Residential 6.6 3.9 6.5 15.8 9.1
Commercial 6.5 7.0 7.2 51.5 182.9
Allowance for losses (6.9) (6.9) (8.2) (18.5) (21.4)
--------------------------------------------------
Other real estate, net 6.2 4.0 5.5 48.8 170.6
--------------------------------------------------
Total nonperforming assets $ 30.4 $ 28.4 $ 28.5 $ 97.5 $280.6
==================================================
<CAPTION>
- --------------------------------------------------------------------------------------------------
NPA and Allowance Percentages
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans as percent
of total loans 1.18% 1.23% 1.22% 1.89% 4.44%
Nonperforming assets as percent
of total assets 0.76 0.73 0.83 2.33 7.33
Allowance for loan losses as percent of:
Nonperforming loans 116.7 106.6 113.9 53.3 34.6
Nonperforming assets 92.8 91.7 92.0 26.7 13.6
==================================================
</TABLE>
RCSB's nonperforming assets related primarily to residential loans in 1996
and, in total, increased by only 0.03% of total assets during the year.
Residentially based NPAs made up 80.7% of total NPAs at the end of 1996 while
the next largest category, automobile loans, accounted for 14.6%.
RCSB adopted FASB Statement No. 114, entitled "Accounting by Creditors for
Impairment of a Loan," as amended by Statement No. 118, on December 1, 1995. At
November 30, 1996, RCSB's recorded investment in loans considered impaired
totaled $2.8 million, and no allowance for losses on the identified loans was
required under the provisions of Statement 114. During 1996, the average
recorded investment in impaired loans totaled $4.2 million, and interest income
recognized on impaired loans was $0.1 million, none of which was recognized
solely on the basis of cash receipts.
Reserves as a Percent of NPAs and NPLs at Year End
(Bar chart in non-EDGAR version)
Loan Loss Loan Loss
Allowance/NPAs Allowance/NPLs
------------------------------
RCSB as of 11/30/96 92.8% 116.7%
All public thrifts (SNL Thrift
Datasource as of 9/30/96) 50.9% 65.6%
NPAs: Nonperforming assets
NPLs: Nonperforming loans
The Company's allowance for loan losses was 1.38% of loans receivable at
November 30, 1996, compared to 1.31% at November 30, 1995. Net charge-offs on
loans amounted to $11.5 million in 1996 versus $7.7 million in 1995 and $11.2
million in 1994. During 1996, a 23.2% increase in the automobile loan portfolio
and a slowing experienced nationally in the repayment of consumer debt resulted
in an increase in automobile loan charge-offs. The following tables summarize,
for the last five years, activity in the allowance for loan losses and the
allocation of the allowance by major loan categories.
-28-
<PAGE>
Allowance for Loan Losses
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
At or For The Year Ended November 30, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Beginning balance $ 26.1 $ 26.2 $ 26.0 $ 38.1 $ 41.3
Provision for loan losses 13.6 7.6 16.1 13.0 14.4
Allowance of subsidiary sold -- -- (4.7) -- --
Loan charge-offs:
Residential mortgage (2.2) (2.7) (4.8) (4.4) (2.5)
Automobile (11.0) (6.6) (4.7) (2.4) (2.2)
Commercial mortgage (2.8) (3.0) (4.1) (19.1) (14.4)
Consumer and other (1.2) (1.4) (1.6) (3.2) (2.0)
Loan recoveries:
Residential mortgage 0.4 0.9 0.8 0.5 0.7
Automobile 3.8 2.3 1.7 1.1 1.0
Commercial mortgage 1.0 2.2 1.0 2.2 1.5
Consumer and other 0.5 0.6 0.5 0.2 0.3
----------------------------------------------------
Net charge-offs (11.5) (7.7) (11.2) (25.1) (17.6)
----------------------------------------------------
Ending balance $ 28.2 $ 26.1 $ 26.2 $ 26.0 $ 38.1
====================================================
Net charge-offs as a percent
of average loans:
Residential mortgage 0.18% 0.17% 0.30% 0.24% 0.09%
Automobile 0.76 0.55 0.44 0.31 0.77
Commercial mortgage 2.82 0.92 1.92 6.12 3.59
Consumer and other 1.28 1.47 1.40 3.25 1.86
-----------------------------------------------------
Total 0.56% 0.40% 0.50% 1.03% 0.69%
=====================================================
</TABLE>
Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
November 30, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses
--------------------------------------------------------------------------------------------------------
As As As As As
Percent Percent Percent Percent Percent
of of of of of
Related Related Related Related Related
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- -------------------- ---------------- ----------------- ----------------- ----------------- ----------------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgage $ 4.3 0.48% $ 2.9 0.28% $ 2.3 0.24% $ 2.1 0.12% $ 2.4 0.13%
Automobile 11.3 1.13 8.4 1.04 7.8 1.05 5.8 1.03 4.1 1.59
Commercial mortgage 11.2 20.26 13.0 18.28 13.8 14.10 14.9 0.08 28.5 9.10
Consumer and other 1.4 1.63 1.8 2.14 2.3 2.48 3.2 2.96 3.1 2.95
--------------------------------------------------------------------------------------------------------
Total $ 28.2 1.38% $ 26.1 1.31% $ 26.2 1.39% $ 26.0 1.01% $ 38.1 1.54%
======================================================================================================
</TABLE>
In evaluating the adequacy of the allowance for loan losses, consideration is
given to the status of particular loans and specific borrower situations,
general risk characteristics of the loan portfolio, historical charge-offs and
recoveries, the regulatory environment, current appraisals and economic and
market conditions. While management uses all currently available information to
determine the adequacy of the allowance, additions to the allowance for loan
losses in future years may be necessary based on changes in conditions and
possible changes in strategies for resolving problem loan situations. In
addition, various regulatory agencies, as an integral part of the examination
process, periodically review the Company's allowance for losses on loans. Such
agencies may require the Company to recognize additions to the allowance based
on their judgments about information available at the time of their
examinations. RCSB's allowance for loan losses, at 116.7% of nonperforming
loans and 92.8% of nonperforming assets on November 30, 1996, was in excess of
the averages of approximately 66% and 51%, respectively, for all publicly-held
thrifts as of September 30, 1996, the most recent date for which such
information is available.
-29-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
RCSB utilizes various sources to satisfy its funding requirements for items
such as maturities of borrowings, loan commitments, withdrawals of deposits and
deposit reserves. Primary sources have consisted of deposits, borrowings, loan
repayments and cash flow from ongoing operations. At November 30, 1996, the
Bank had available a line of credit from the FHLB of New York equal to 25% of
its total assets or 50% of the FHLB of New York's net worth, whichever is less,
net of amounts currently outstanding and subject to FHLB capital stock
requirements and available eligible collateral.
Shareholders' equity amounted to 8.07% of total assets at November 30, 1996,
compared to 9.71% at November 30, 1995, reflecting RCSB's net income for the
year, repurchases of RCSB common stock, the exercise of stock options, dividend
declarations and other activity as noted in the statement of changes in
shareholders' equity. An earlier section entitled "Common Stock Repurchases"
discusses the rationale for and results of actions taken during 1996 to reduce
RCSB's equity position.
In May 1996, the Company announced it would redeem all outstanding
convertible preferred stock at the close of business on July 15, 1996 for
$26.225 per share plus accrued dividends. Alternatively, preferred shareholders
had the option of converting their stock to common shares at any time prior to
the redemption at a ratio of 1.5625 shares of common for each preferred share.
Due to the excess of the market price for RCSB's common shares over the
announced redemption price, 3.0 million preferred shares were converted to
common and only 652 shares were redeemed. The Company reissued 3.5 million
common shares held as treasury stock and issued 1.2 million new common shares to
those who elected to convert preferred stock to common.
Liquidity requirements of the parent company, RCSB Financial, Inc., result
primarily from dividend declarations, the repurchase of stock and general
corporate expenses, and are principally met through regular dividends from the
Bank. New York State Banking Law and regulations promulgated by the FDIC and
other agencies limit the amount of dividends a bank subsidiary may pay without
prior regulatory approval. Additional information on factors affecting the
payment of dividends is provided in the note to consolidated financial
statements entitled "Shareholders' Equity."
RCSB considers its current sources of liquidity sufficient to satisfy
foreseeable requirements for funds.
REGULATORY MATTERS
- ------------------
As a savings and loan holding company, RCSB Financial, Inc. is regulated by
the Office of Thrift Supervision. The Bank is regulated by the FDIC and the New
York State Banking Department (NYSBD). Each of the agencies issues regulations
and requires the filing of reports describing the activities and financial
condition of the entities under its jurisdiction, and examinations are conducted
on a recurring basis to test compliance with various regulatory requirements.
The NYSBD commenced a regular supervisory examination in November 1996 which has
not been completed.
The FDIC requires banks under its jurisdiction to maintain certain minimum
levels of capital defined as leverage and risk-based capital. As shown in the
following table, the Bank exceeded the three requirements at December 31, 1996,
the most recent FDIC reporting date. The Bank's capital ratios also exceeded
FDIC criteria for well-capitalized institutions.
Regulatory Capital Ratios
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
FDIC Definition for
RCSB Capital Ratios --------------------------
(Bank Subsidiary) Adequately Well
------------------- Capitalized Capitalized
December 31, 1996 1995 Institutions Institutions
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Leverage capital (tier 1) as percent
of three-month average assets 7.57% 9.24% 4.0% 5.0%
As percent of risk-weighted,
period-end assets:
Core capital (tier 1) 11.15 14.08 4.0 6.0
Total capital (tiers 1 and 2) 12.21 15.09 8.0 10.0
</TABLE>
-30-
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
- ---------------------------------
Selected quarterly financial data for RCSB covering the fiscal years ended
November 30, 1996 and 1995 is summarized below.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Quarter Ended
---------------------------------------
2/29/96 5/31/96 8/31/96 11/30/96
- ----------------------------------------------------------------------------------
(millions, except per share amounts)
<S> <C> <C> <C> <C>
Interest income $ 71.2 $ 74.5 $ 74.5 $ 73.4
Interest expense 39.5 41.5 41.8 41.4
---------------------------------------
Net interest income 31.7 33.0 32.7 32.0
Provision for loan losses 2.7 3.5 3.1 4.2
---------------------------------------
Net interest income after
provision for loan losses 29.0 29.5 29.6 27.8
Noninterest income 13.1 17.0 18.0 17.0
Operating expenses 27.2 31.9 31.6 32.7
---------------------------------------
Income before income taxes 14.9 14.6 16.0 12.1
Income tax provision 5.2 5.1 5.0 2.5
---------------------------------------
Net income $ 9.7 $ 9.5 $ 11.0 $ 9.6
=======================================
Net income per common share:
Primary $ 0.61 $ 0.63 $ 0.80 $0.62
Fully diluted (b) 0.53 0.54 0.69 0.62
=======================================
<CAPTION>
- ----------------------------------------------------------------------------------
Quarter Ended
---------------------------------------
2/28/95 5/31/95 8/31/95 11/30/95
- ----------------------------------------------------------------------------------
(millions, except per share amounts)
<S> <C> <C> <C> <C>
Interest income $ 62.4 $ 65.8 $ 72.2 $ 72.3
Interest expense 32.1 35.9 40.8 40.4
---------------------------------------
Net interest income 30.3 29.9 31.4 31.9
Provision for loan losses 1.4 1.7 2.1 2.5
---------------------------------------
Net interest income after
provision for loan losses 28.9 28.2 29.3 29.4
Noninterest income 9.4 10.7 13.9 14.5
Operating expenses 27.0 26.2 30.4 30.5
---------------------------------------
Income before income taxes 11.3 12.7 12.8 13.4
Income tax provision 3.0 3.4 3.1 3.0
---------------------------------------
Net income $ 8.3 $ 9.3 $ 9.7 $ 10.4
=======================================
Net income per common share:
Primary $ 0.50 $ 0.57 $ 0.60 $ 0.65
Fully diluted 0.44 0.50 0.52 0.56
=======================================
</TABLE>
(a) As a result of rounding, the sum of four quarterly amounts may vary from
the full year amount.
(b) Due to the significant reduction in fully diluted shares outstanding in
the last half of 1996, the sum of the four per share amounts does not
equal net income per share for the full year.
-31-
<PAGE>
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED MATTERS
- ---------------------------------------------------------
RCSB common stock is traded on The Nasdaq Stock Market and prices are quoted
under the symbol "RCSB" in Nasdaq National Market listings. Until it was
redeemed on July 15, 1996, RCSB's Series B Preferred Stock traded on The Nasdaq
Stock Market under the symbol "RCSBP." The following table summarizes for the
five most recent years and eight most recent quarters, market prices for the
Company's common stock, dividends declared and fully diluted book value per
share. Additional information on factors affecting the payment of dividends is
provided in the note to the consolidated financial statements entitled
"Shareholders' Equity." The approximate number of common shareholders on
January 31, 1997 was 16,000.
<TABLE>
<CAPTION>
Closing Market Prices Per Common Share
------------------------------------ ---------------------------
Ending
Period Dividends Book
High Low End Declared Value (a)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Full Year: 1996 $30 1/2 $21 9/16 $30 1/16 $0.51 $21.12
1995 25 3/8 15 1/4 23 7/8 0.42 20.11
1994 20 1/8 14 7/8 16 3/4 0.10 18.62
1993 21 1/2 9 1/4 14 7/8 - 16.85
1992 10 1/8 5 1/2 9 3/4 - 21.82
- ---------------------------------------------------------------------------------------------------
Quarter ended:
NOVEMBER 1996 $30 1/2 $26 3/8 $30 1/16 $0.15 $21.12
AUGUST 1996 27 3/4 23 3/4 26 7/8 - (b) 20.63
MAY 1996 24 1/4 22 1/2 23 5/8 0.24 (b) 20.47
FEBRUARY 1996 24 1/8 21 9/16 23 1/2 0.12 20.42
November 1995 25 3/8 22 1/4 23 7/8 0.12 20.11
August 1995 25 1/8 19 24 3/8 0.10 19.62
May 1995 21 3/8 16 5/8 20 1/2 0.10 19.21
February 1995 19 15 1/4 17 1/2 0.10 18.81
</TABLE>
(a) Represents fully diluted shareholders' equity per share.
(b) To facilitate redemption of RCSB's preferred shares, declaration of the
1996 third quarter common stock dividend was accelerated to May 1996, one
month earlier than the Company's usual timing.
-32-
<PAGE>
REPORT OF MANAGEMENT
The management of RCSB Financial, Inc. is responsible for the preparation and
integrity of the consolidated financial statements and related financial
information contained in this annual report, including the determination of
amounts necessarily based on judgments and estimates. It is the belief of
management that the consolidated financial statements have been prepared in
conformity with generally accepted accounting principles appropriate in the
circumstances and that the financial information appearing throughout the annual
report is consistent with the information contained in the financial statements.
Management is further responsible for maintaining a system of internal
control, designed to provide reasonable assurance that the books and records
appropriately reflect the transactions of the Company and that established
policies and procedures are followed. Because of inherent limitations in any
system, there can be no absolute assurance that errors or irregularities will
not occur. Nevertheless, management believes the system of internal control
provides reasonable assurance that assets are safeguarded and financial
information is objective and reliable.
The Board of Directors pursues its oversight role relating to the
consolidated financial statements through the Audit Committee, which consists
solely of outside directors. The Audit Committee meets periodically with the
Company's management, internal auditors and independent auditors, KPMG Peat
Marwick LLP, to review matters relating to the quality of financial reporting,
the internal control system, and the nature, extent and results of audit
efforts. The internal and independent auditors have unrestricted access to the
Audit Committee, with and without the presence of management, to discuss
accounting, auditing, and financial reporting matters. The Audit Committee also
recommends the appointment of the Company's independent auditors.
/s/ Leonard S. Simon /s/ Paul R. Wuest
Leonard S. Simon Paul R. Wuest
Chairman of the Board, President Senior Vice President and
and Chief Executive Officer Chief Financial Officer
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and the Board of Directors of RCSB Financial, Inc.:
We have audited the accompanying consolidated statements of condition of
RCSB Financial, Inc. and subsidiaries as of November 30, 1996 and 1995, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the years in the three-year period ended November 30,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of RCSB
Financial, Inc. and subsidiaries as of November 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended November 30, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1995,
the Company changed its method of accounting to adopt the provisions of
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights."
/s/ KPMG Peat Marwick LLP
Rochester, New York
December 13, 1996
-33-
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CONDITION
RCSB FINANCIAL, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------------------------------------
November 30, 1996 1995
- --------------------------------------------------------------------------------------------------------------
(amounts in millions, except par value per share)
<S> <C> <C>
ASSETS
Cash and due from banks $ 56.6 $ 78.9
Interest-bearing deposits in banks 7.7 15.9
Securities available for sale, at fair value (cost $21.1 in 1996
and $85.3 in 1995) 18.8 84.1
Securities held to maturity, at amortized cost (fair value $1,634.4 in 1996
and $1,398.7 in 1995) 1,639.0 1,398.1
Loans receivable:
Residential mortgage 763.1 910.9
Automobile 994.8 807.6
Commercial mortgage 55.2 71.2
Consumer and other 85.3 83.6
Residential mortgage held for sale 150.5 123.8
---------- ----------
Total loans receivable 2,048.9 1,997.1
Allowance for loan losses (28.2) (26.1)
---------- ----------
Net loans receivable 2,020.7 1,971.0
Premises and equipment 39.6 28.9
Federal Home Loan Bank stock 34.7 38.5
Loan servicing assets 118.4 106.5
Other real estate 6.2 4.0
Other assets 72.6 145.5
---------- ----------
Total assets $ 4,014.3 $ 3,871.4
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 2,368.7 $ 2,223.0
Federal Home Loan Bank:
Repurchase agreements 390.6 -
Other borrowings 232.4 674.3
Other repurchase agreements and borrowings 484.8 295.1
Mortgagors' deposits under escrow agreements 66.2 77.1
Other liabilities 147.7 226.0
---------- ----------
Total liabilities 3,690.4 3,495.5
---------- ----------
Commitments and contingent liabilities (see notes 23 and 24)
Shareholders' equity:
Preferred stock, 7% noncumulative, par value $1.00; 50.000 shares
authorized; 2.989 issued and outstanding in 1995. - 3.0
Common stock, par value $1.00; 50.000 shares authorized; 15.388
and 14.067 issued and outstanding in 1996 and 1995, respectively 15.4 14.1
Paid-in capital in excess of par value 159.5 241.4
Surplus fund 51.1 51.1
Undivided profits 106.9 76.7
Loans to employee stock plan (3.2) (4.4)
Net unrealized holding loss on securities, net of taxes (4.2) (5.0)
Treasury stock, at cost (.057 and .044 shares in 1996 and 1995,
respectively) (1.6) (1.0)
---------- ----------
Total shareholders' equity 323.9 375.9
---------- ----------
Total liabilities and shareholders' equity $ 4,014.3 $ 3,871.4
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-34-
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
RCSB FINANCIAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
(millions, except per share amounts)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 177.0 $ 169.9 $ 171.3
Interest on mortgage-backed and other securities 115.9 101.8 85.1
Other interest income 0.7 1.0 2.4
---------- ---------- ----------
Total interest income 293.6 272.7 258.8
---------- ---------- ----------
Interest expense:
Interest on deposits 101.9 92.7 92.4
Interest on Federal Home Loan Bank borrowings 37.3 39.6 33.4
Interest on other borrowed funds 25.0 16.9 5.5
---------- ---------- ----------
Total interest expense 164.2 149.2 131.3
---------- ---------- ----------
Net interest income 129.4 123.5 127.5
Provision for loan losses 13.6 7.6 16.1
---------- ---------- ----------
Net interest income after provision for loan losses 115.8 115.9 111.4
---------- ---------- ----------
Noninterest income:
Mortgage banking 49.7 35.9 40.2
Retail banking 9.7 9.7 15.0
Automobile loan banking 3.7 2.4 2.4
Net securities sale gains 1.9 0.4 3.8
Gain on sale of subsidiary -- -- 23.3
Other 0.1 0.1 --
---------- ---------- ----------
Total noninterest income 65.1 48.5 84.7
---------- ---------- ----------
Operating expenses:
Salaries, commissions and benefits 72.2 61.7 74.7
Occupancy 19.0 18.3 17.9
Deposit insurance 0.7 3.0 6.7
Other real estate 1.1 (0.4) 5.6
Other 30.4 31.5 35.5
---------- ---------- ----------
Total operating expenses 123.4 114.1 140.4
---------- ---------- ----------
Income before income taxes 57.5 50.3 55.7
Provision for income taxes 17.8 12.5 11.4
---------- ---------- ----------
Net income $ 39.7 $ 37.8 $ 44.3
========== ========== ==========
Net income per common share (fully diluted) $ 2.36 $ 2.02 $ 2.39
========== ========== ==========
Net income applicable to common shares $ 37.1 $ 32.6 $ 39.1
========== ========== ==========
Net income per common share (primary) $ 2.67 $ 2.32 $ 2.81
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-35-
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
RCSB FINANCIAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Net
Unrealized
Paid-in Holding
Capital in Loans to Gain
Preferred Common Excess of Surplus Undivided Employee (Loss) on
Stock Stock Par Value Fund Profits Stock Plan Securities (a)
- ---------------------------------------------------------------------------------------------------------------------
(millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at November 30, 1993 $ 3.0 $ 13.9 $ 239.2 $ 51.1 $ 12.3 $ (7.2) $ --
Effect of change in accounting
for investments in debt and
equity securities, net of
taxes of $0.3 -- -- -- -- -- -- 2.5
Net income for the year -- -- -- -- 44.3 -- --
Stock options exercised -- 0.1 1.0 -- -- -- --
Cash dividends declared on
preferred stock at
$1.75 per share -- -- -- -- (5.2) -- --
Cash dividends declared on
common stock at
$0.10 per share -- -- -- -- (1.4) -- --
Loan repayments from employee
stock plan -- -- -- -- -- 1.4 --
Change in net unrealized holding
gain (loss) on securities -- -- -- -- -- -- (8.0)
- ---------------------------------------------------------------------------------------------------------------------
Balance at November 30, 1994 3.0 14.0 240.2 51.1 50.0 (5.8) (5.5)
Net income for the year -- -- -- -- 37.8 -- --
Repurchase of RCSB common stock -- -- -- -- -- -- --
Stock options exercised -- 0.1 1.1 -- -- -- --
Cash dividends declared on
preferred stock at
$1.75 per share -- -- -- -- (5.2) -- --
Cash dividends declared on
common stock at
$0.42 per share -- -- -- -- (5.9) -- --
Loan repayments from employee
stock plan and tax benefit of
dividends paid to plan -- -- 0.1 -- -- 1.4 --
Change in net unrealized holding
loss on securities, net of
taxes of $0.4 -- -- -- -- -- -- 0.5
- ---------------------------------------------------------------------------------------------------------------------
Balance at November 30, 1995 3.0 14.1 241.4 51.1 76.7 (4.4) (5.0)
Net income for the year -- -- -- -- 39.7 -- --
Repurchase of RCSB common stock -- -- -- -- -- -- --
Conversion of preferred stock
to common (3.0) 1.2 (84.0) -- -- -- --
Stock options exercised -- 0.1 2.0 -- -- -- --
Cash dividends declared on
preferred stock at
$0.875 per share -- -- -- -- (2.6) -- --
Cash dividends declared on
common stock at
$0.51 per share -- -- -- -- (6.9) -- --
Loan repayments from employee
stock plan and tax benefit of
dividends paid to plan -- -- 0.1 -- -- 1.2 --
Change in net unrealized holding
loss on securities, net of
taxes of $0.5 -- -- -- -- -- -- 0.8
- ---------------------------------------------------------------------------------------------------------------------
Balance at November 30, 1996 $ -- $ 15.4 $ 159.5 $ 51.1 $ 106.9 $ (3.2) $ (4.2)
=====================================================================================================================
- --------------------------------------------------------------------------
<CAPTION>
Treasury
Stock Total
- --------------------------------------------------------------------------
(millions, except per share amounts)
<S> <C> <C>
Balance at November 30, 1993 $ -- $ 312.3
Effect of change in accounting
for investments in debt and
equity securities, net of
taxes of $0.3 -- 2.5
Net income for the year -- 44.3
Stock options exercised -- 1.1
Cash dividends declared on
preferred stock at
$1.75 per share -- (5.2)
Cash dividends declared on
common stock at
$0.10 per share -- (1.4)
Loan repayments from employee
stock plan
Change in net unrealized holding -- 1.4
gain (loss) on securities -- (8.0)
- --------------------------------------------------------------------------
Balance at November 30, 1994 -- 347.0
Net income for the year -- 37.8
Repurchase of RCSB common stock (1.0) (1.0)
Stock options exercised -- 1.2
Cash dividends declared on
preferred stock at
$1.75 per share -- (5.2)
Cash dividends declared on
common stock at
$0.42 per share -- (5.9)
Loan repayments from employee
stock plan and tax benefit of
dividends paid to plan -- 1.5
Change in net unrealized holding
loss on securities, net of
taxes of $0.4 -- 0.5
- --------------------------------------------------------------------------
Balance at November 30, 1995 (1.0) 375.9
Net income for the year -- 39.7
Repurchase of RCSB common stock (86.4) (86.4)
Conversion of preferred stock
to common 85.8 --
Stock options exercised -- 2.1
Cash dividends declared on
preferred stock at
$0.875 per share -- (2.6)
Cash dividends declared on
common stock at
$0.51 per share -- (6.9)
Loan repayments from employee
stock plan and tax benefit of
dividends paid to plan -- 1.3
Change in net unrealized holding
loss on securities, net of
taxes of $0.5 -- 0.8
- ---------------------------------------------------------------------------
Balance at November 30, 1996 $ (1.6) $ 323.9
===========================================================================
</TABLE>
(a) Balances at November 30, 1996, 1995 and 1994 include unamortized unrealized
losses totaling $2.7 million, $4.2 million and $5.3 million, respectively, on
mortgage-backed securities transferred in 1994 from the available-for-sale
category to held to maturity.
See accompanying notes to consolidated financial statements.
-36-
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
RCSB FINANCIAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 39.7 $ 37.8 $ 44.3
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 13.6 7.6 16.1
Amortization of loan servicing rights 14.3 11.4 27.8
Gains on sales of loans, securities, loan servicing rights
and other real estate (4.1) (0.3) (3.7)
Gain on sale of subsidiary -- -- (23.3)
Amortization of intangible assets, hedging gains or losses,
and securities premiums or discounts 4.4 (0.3) 5.5
Depreciation and other amortization 6.1 6.1 4.7
Provision for foreclosed real estate and other
problem assets -- (2.4) 2.7
Deferred income tax provision (benefit) (3.4) (9.1) 5.4
(Increase) decrease in residential mortgage loans held for sale (26.7) (31.7) 340.1
(Increase) decrease in other assets, net 72.9 (88.5) 16.8
Increase (decrease) in accrued expenses (2.5) 5.8 5.3
Decrease in loans to employee stock plan 1.2 1.5 1.4
--------------------------------------
Net cash provided (used) by operating activities 115.5 (62.1) 443.1
--------------------------------------
INVESTING ACTIVITIES:
Decrease in interest-bearing deposits in banks 8.2 4.5 50.1
Purchases of:
Securities available for sale (37.9) -- (133.8)
Securities held to maturity (480.6) (493.8) (781.9)
Loans (0.1) (181.1) (1.1)
Premises and equipment, net (16.8) (13.4) (4.4)
Loan servicing rights, including those originated in 1996 and 1995 (49.9) (41.1) (36.9)
Proceeds from sales of:
Securities available for sale 99.0 184.5 284.9
Loans -- -- 2.3
Loan servicing rights 25.8 -- --
Other real estate 7.4 9.8 31.0
Principal repayments on:
Securities available for sale 4.4 0.1 32.3
Securities held to maturity 241.6 125.9 132.4
Loan originations, net of repayments and other reductions (46.1) 83.4 (29.4)
Proceeds from sale of subsidiary, net of cash balances -- -- 61.4
Payment of deposit acquisition premium -- -- (6.6)
(Increase) decrease in FHLB stock 3.8 1.0 (4.0)
--------------------------------------
Net cash used by investing activities (241.2) (320.2) (403.7)
--------------------------------------
FINANCING ACTIVITIES:
Increase in deposits 145.7 146.2 14.7
Deposits of acquired branch -- -- 102.6
Increase (decrease) in FHLB borrowings and repurchase agreements (51.3) (115.5) 229.7
Increase (decrease) in other repurchase agreements and borrowings 189.7 248.1 (272.0)
Increase (decrease) in mortgagors' escrow deposits (10.9) 8.3 13.1
Increase (decrease) in other liabilities (74.7) 121.3 (161.6)
Net proceeds from exercise of stock options 2.1 1.2 1.1
Repurchase of RCSB common stock (86.4) (1.0) --
Dividends paid on preferred stock (3.9) (5.2) (5.2)
Dividends paid on common stock (6.9) (5.9) (1.4)
--------------------------------------
Net cash provided (used) by financing activities 103.4 397.5 (79.0)
--------------------------------------
Increase (decrease) in cash and cash equivalents (22.3) 15.2 (39.6)
Cash and cash equivalents at beginning of year 78.9 63.7 103.3
--------------------------------------
Cash and cash equivalents at end of year $ 56.6 $ 78.9 $ 63.7
======================================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during year for:
Interest $ 162.0 $ 147.8 $ 129.4
Income taxes 22.6 18.3 5.7
Non-cash activities:
Additions to other real estate through foreclosure 9.6 7.1 8.3
Issuance of common shares to converting preferred shareholders:
From treasury 85.8 -- --
New shares 17.8 -- --
======================================
</TABLE>
See accompanying notes to consolidated financial statements.
-37-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RCSB FINANCIAL, INC. AND SUBSIDIARIES
November 30, 1996, 1995 and 1994
1. ACCOUNTING POLICIES
The accounting policies and practices followed by RCSB Financial, Inc. and
subsidiaries (the Company or RCSB) conform with generally accepted accounting
principles and predominant banking industry practices. Preparation of the
consolidated financial statements requires management of the Company to make
estimates and assumptions affecting reported amounts. Since actual outcomes may
vary from management's estimates, certain reported amounts may subsequently
require adjustment. A description of significant accounting policies employed
by RCSB follows.
Nature of Operations and Basis of Presentation
Virtually all of the operations of RCSB Financial, Inc. (the parent company)
are conducted through its subsidiary Rochester Community Savings Bank and
certain subsidiaries of the bank. The bank and its subsidiaries are
collectively referred to herein as the Bank. The consolidated group's principal
lines of business are retail banking, mortgage banking and automobile lending.
Retail banking is conducted primarily through 35 full service banking offices in
western New York, while mortgage origination activities encompass 61 offices
located mainly in the eastern third of the United States. Automobile loans are
originated through auto dealers located in most areas of New York and Florida
and in parts of Connecticut, New Jersey and Pennsylvania.
RCSB Financial, Inc. is incorporated under Delaware law and was established
as a holding company for Rochester Community Savings Bank effective September 1,
1995. Under the reorganization, all outstanding common and preferred shares of
the Bank were converted into RCSB common and preferred shares on a one-for-one
basis. The reorganization was accounted for by carrying forward the assets,
liabilities and shareholders' equity of the Bank in the consolidated financial
statements of RCSB.
All significant intercompany balances and transactions have been eliminated.
For consistency among the periods presented, certain amounts in the prior years'
financial statements have been reclassified to conform with the 1996
presentation.
Securities
RCSB classifies its securities, which are mainly mortgage-backed, as either
held to maturity or available for sale. Securities held to maturity are stated
at the principal amount outstanding, adjusted for unearned discounts and
unamortized premiums. RCSB has the ability and positive intent to hold these
securities to maturity and, accordingly, adjustments are not made for increases
or temporary declines in fair value above or below amortized carrying value.
Discounts and premiums, other than those relating to bonds with call provisions,
are accreted and amortized, respectively, over the estimated lives of the
securities to achieve a level yield. Premiums on bonds which are callable are
amortized to the call date.
Securities available for sale in 1996 and 1995 consist mainly of mortgage-
backed securities and corporate bonds which management has determined may not
necessarily be held until maturity.
Securities classified as available for sale are carried at fair value with
unrealized gains and losses excluded from earnings and reported, net of related
income taxes, as a separate component of shareholders' equity until realized.
RCSB's investment in Federal Home Loan Bank stock is carried at cost.
Loans Receivable
Loans held for investment are stated at the principal amount outstanding,
adjusted for unearned discounts, unamortized premiums and certain deferred fees
and costs. Loans held for sale are carried at the lower of aggregate cost or
market value.
Interest is credited to income to achieve a level yield on outstanding
principal balances during the periods particular interest rates are in effect.
When a residential or commercial real estate loan becomes 90 days delinquent,
the accrual of interest is discontinued and previously accrued interest is
reversed. Thereafter, interest income is recognized only to the extent interest
is received in cash and is not applied as a reduction in carrying value.
Automobile and other consumer loans not guaranteed by government agencies are
charged off after delinquency of 120 or 180 days depending upon the nature of
the loan, or, in the case of automobile loans, upon the sale of repossessed
collateral. Interest accruals on automobile loans are discontinued at time of
repossession or after 120 days if no repossession is in process. Discounts and
premiums on purchased loans are accreted and amortized, respectively, over the
terms of the loans to achieve a level yield. Gains or losses on the sale of
loans are determined under the specific identification method.
On December 1, 1995, RCSB adopted Statement of Financial Accounting Standards
No. 114 entitled "Accounting by Creditors for Impairment of a Loan," as amended
by Statement 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures." The statement requires that certain impaired
loans be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or as a practical expedient,
based on the loan's observable market price or the fair value of collateral if
the loan is collateral dependent. For purposes of Statement 114, a loan is
impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all contractual interest and principal
payments according to the terms of the loan agreement.
Most of RCSB's loan portfolios are excluded from the scope of Statement 114
because the pronouncement is generally not applicable to large groups of
smaller-balance homogeneous loans such as residential mortgage, automobile and
other consumer loans. The pronouncement does apply to RCSB's commercial
mortgage loan portfolio, from which impaired loans are identified during reviews
of loans that (a) are delinquent, (b) have been classified as substandard or
worse by management or banking regulators or (c) are believed by management to
involve potential collectibility concerns.
-38-
<PAGE>
In most cases, the Company measures impairment based on the fair value of
loan collateral, minus estimated selling costs. If the measure of an impaired
loan is less than the recorded investment in it, a valuation allowance is
established with a corresponding charge to the provision for loan losses or
through an allocation from existing loan loss allowances. Charge-offs are
recorded when definitive information indicates that collection of the identified
impaired amount is doubtful. Cash receipts on impaired loans are added to the
allowance for loan losses if a previously recorded charge-off has not been
recovered. Cash receipts in excess of prior charge-offs are used to reduce the
carrying value of the loan or are recognized as interest income, depending upon
management's judgment regarding the likelihood of collecting the recorded loan
balance. Implementing the provisions of Statements 114 and 118 had no material
impact on the Company's consolidated financial statements on the date of
adoption. The small balance homogeneous loan categories excluded from the scope
of Statement 114 are evaluated collectively for impairment based on loss
estimates for each such portfolio as a whole.
Loan Origination and Commitment Fees
Nonrefundable fees and certain direct costs relating to loans originated and
purchased for the Company's portfolio are deferred, and the net amount is
amortized to income over the lives of the related loans as an adjustment of
yield. When a loan is paid off or sold, or if a commitment expires unexercised,
any unamortized net deferred amount is credited or charged to income as
appropriate. Amortization of net deferred fees is discontinued for loans placed
on nonaccrual status.
Allowance for Loan Losses
The determination of the allowance for loan losses is based on an analysis of
the loan portfolio and reflects an amount which, in management's judgment, is
adequate to provide for potential losses. While management uses available
information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic and market conditions, and specific
borrower situations. In addition, various regulatory agencies, as an integral
part of the examination process, periodically review the Company's allowance for
loan losses. Such agencies may require the Company to recognize additions to
the allowance based on their judgments regarding information available at the
time of their examinations.
Premises and Equipment
Land is carried at cost, while buildings and equipment are carried at cost
less accumulated depreciation determined using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are carried at cost
less accumulated amortization determined on a straight-line basis. Such
amortization is recorded over the terms of applicable leases, including options
to extend, or over useful lives of the improvements, whichever is less.
In March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121 entitled "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The statement requires that long-lived
assets and certain identifiable intangibles to be held and used by a company be
reviewed for impairment whenever events or changes in circumstances indicate the
carrying amount of the asset may not be recoverable. In performing the review
for recoverability, companies are required to estimate the future cash flows
expected to result from the use of the asset and its eventual disposition.
Under Statement 121, an impairment loss is recognized if the sum of the
undiscounted future cash flows is less than the carrying amount of the asset.
The Statement also establishes standards for recording an impairment loss for
certain assets subject to disposal. Excluded from the scope of the statement
are financial instruments, mortgage and other loan servicing rights, deposit
intangibles and deferred tax assets. As required, RCSB adopted Statement 121
effective December 1, 1996 with no material effect on the Company's consolidated
financial statements on the date of adoption.
Loan Servicing Assets
Loan servicing assets represent (a) the cost of purchasing rights to service
loans, (b) the allocated cost of servicing rights on loans originated for sale
and (c) capitalized excess servicing fees on sold loans being serviced by RCSB.
In 1996 and 1995, virtually all such recorded assets relate to residential
mortgage loans. Servicing assets are presented in the consolidated statement of
condition net of accumulated amortization, which is recorded in proportion to,
and over the period of, net servicing income. Capitalized excess servicing fees
on loans sold to others represent the present value of estimated future
servicing fees in excess of normal amounts. This excess amount is capitalized
at the time loans are sold as an adjustment of the sale proceeds and the
reported gain or loss.
In June 1995, RCSB adopted Statement of Financial Accounting Standards No.
122 entitled "Accounting for Mortgage Servicing Rights," effective on the first
day of fiscal 1995. The statement requires that the cost of mortgage loans
originated or purchased with a definite plan to sell the loans and retain the
servicing assets, be allocated between the loans and the servicing assets based
on their relative fair values at the time of purchase or origination. Under
prior rules, the entire cost of originating mortgage loans was attributed to the
loans; when the loans were sold the cost was written off and the value of
retained servicing assets was excluded from the statement of condition. Under
Statement 122, mortgage servicing assets are capitalized separately and are
subsequently amortized as a reduction of future servicing income.
The statement also requires capitalized servicing assets to be stratified
based on predominant risk characteristics of underlying loans for the purpose of
evaluating impairment. An allowance is then established in the event the
recorded value of an individual stratum exceeds fair value. The adoption of
Statement 122 had no material net effect on the Company's 1995 financial
statements because revenues under Statement 122 from selling originated loans
with servicing assets retained are estimated to approximate revenues under the
Company's prior practice of generally selling loans and servicing assets at the
same time. Further, the 1995 adoption of new procedures for evaluating
impairment did not result in a material change in net carrying value of RCSB's
servicing assets.
-39-
<PAGE>
Other Real Estate
Other real estate (ORE) includes properties acquired through foreclosure or
deed in lieu of foreclosure. The initial cost basis of ORE is the lower of the
carrying value of the foreclosed loan or fair value of the property.
Subsequently, ORE held for sale is carried at the lower of fair value less
estimated selling expenses or cost by means of a valuation allowance. Changes
in the valuation allowance are charged or credited to operations in the period
in which the changes occur. The amounts the Company will ultimately recover
from ORE may differ from the amounts used in arriving at the net carrying value
of the properties because of changes in future economic and market conditions
beyond RCSB's control or changes in the Company's strategy for the properties.
In addition, as a result of future examinations, regulatory agencies may require
further writedowns based on their judgments about information available at the
time of their examinations.
Other real estate expense represents costs, net of certain minor revenues,
relating primarily to the Company's foreclosed residential and commercial real
estate assets and, prior to 1995, also with respect to real estate joint venture
investments and real estate held for development.
Goodwill and Core Deposit Premium
Goodwill is amortized as expense on a straight-line basis over a period of 15
years. Core deposit premium is amortized on an accelerated basis over
approximately 10 years, the estimated life of depositor relationships acquired.
The amortization periods are monitored to determine if events and circumstances
require such periods to be reduced.
Derivative Financial Instruments
Derivatives are utilized by the Company for hedging purposes and not for
trading. Futures and option contracts may be used by RCSB for the purpose of
hedging interest-rate fluctuations associated with certain deposits and
borrowings and for hedging the prices of certain loans and securities held or
available for sale. Gains and losses on contracts used in this manner are
deferred and amortized over the holding period of hedged deposits and borrowings
or are recorded as adjustments to the carrying value of hedged loans and
securities. Amortization of gains and losses on contracts designated as hedges
of deposits and borrowings is included with interest expense in the statement of
income.
RCSB's residential mortgage banking subsidiary, American Home Funding, Inc.
(AHF), enters into forward contracts for the sale of mortgage-backed securities
for the purpose of hedging its portfolio of closed loans held for sale and its
pipeline of loans expected to close. As loans are closed, they are typically
pooled and securitized with the resulting security delivered to national
securities firms at prices specified in the forward contracts. Gains or losses
may arise if the yields of the loans delivered vary from those specified in the
forward contracts. Unrealized gains and losses on the contracts are included in
cost values used in adjusting the carrying value of loans held for sale to the
lower of cost or market value. Realized gains and losses and adjustments to the
lower of cost or market value are included in mortgage banking noninterest
income in the statement of income.
AHF also purchases put options for the sale of mortgage-backed securities to
hedge a selected portion of its loan commitments for which interest rates have
been established. Under the terms of the options, AHF may deliver at a
specified time and for an agreed upon price a security collateralized by loans
originated by AHF. Amounts paid for the options are included in cost values
used in adjusting the carrying value of loans held for sale to the lower of cost
or market value. Realized and unrealized gains and losses attributable to the
options are classified as mortgage banking noninterest income in the statement
of income.
In early 1996 and again in the latter part of the year, AHF acquired call
options for the purchase of U.S. Treasury securities to hedge the value of
mortgage loan servicing assets that would be affected negatively by a
significant decrease in interest rates. Under RCSB's policy, gains or losses on
the hedge instruments adjust the carrying value of the servicing assets, which
are, in turn, evaluated for impairment in relation to fair value. Since
interest rates have generally been higher since early 1996 when the first group
of options was acquired, the hedged exposure has not materialized and the
options have not gained value. Accordingly, AHF is amortizing the cost of
options acquired early in the year over their twelve-month terms. The
amortization is categorized with mortgage banking noninterest income.
Interest rate swaps are used to hedge interest rate exposure on certain
deposits and borrowings which have shorter terms to repricing than the assets
being funded. Such hedging results in a closer matching of the interest rate
duration of assets and liabilities. Net amounts received or paid under the
contracts are recorded during the periods the amounts are earned or incurred as
an adjustment of interest expense.
Income Taxes
Certain income and expense items reported in one period for financial
statement purposes are reported in another period for income tax purposes. The
tax effects of such items are carried in the financial statements as deferred
tax assets or liabilities after they have been recognized for one purpose but
before they are recognized for the other. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which these temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income during the period that includes the enactment
date.
Deferred tax assets are included in the Company's statement of condition for
all temporary differences except as discussed in the next paragraph. A
valuation allowance is maintained for any deferred tax asset for which it is not
possible to conclude that it is more likely than not that it will be realized.
In determining valuation allowance requirements, the Company takes into account,
as appropriate, the following possible sources of taxable income that may be
available to facilitate realization of its deferred tax assets: future reversals
of deferred tax liabilities, future income exclusive of deferred tax reversals,
taxable income in prior carryback years and tax planning strategies.
-40-
<PAGE>
Under Accounting Principles Board Opinion No. 23, deferred income tax
liabilities are not provided for the Company's fiscal 1988 base year real
estate-related bad debt reserves for income tax reporting purposes since it is
not considered likely that the Company will be subject to such taxes.
Furthermore, federal legislation enacted in August 1996 reduced the
circumstances under which RCSB would be subject to taxes on the $31.3 million
reserve. Those remaining circumstances generally include stock redemptions by
the Bank subsidiary and failure to qualify as a banking institution.
Retirement Plan and Postretirement Benefits
Retirement plan costs are accrued and funded under the terms of the Company's
defined contribution pension plan. In addition, RCSB maintains a program that
provides postretirement medical and life insurance benefits to retirees meeting
age and service requirements. Employees retiring after December 1, 1993 must be
at least 55 years of age and have at least 15 years of RCSB service at the time
of retirement to be eligible for such benefits. Retirees are required to
contribute to the cost of providing coverage in varying degrees depending on the
year of retirement.
In connection with adopting FASB Statement 106 in fiscal 1994, the Company
began accruing estimated costs of retiree health care and life insurance
benefits over the years employees render the services necessary to earn those
benefits. In fiscal 1993 and prior years, RCSB recognized the cost of providing
such benefits by recording the annual premiums or claims as expense. The
Company elected to recognize the accumulated postretirement benefit obligation
existing on the date Statement 106 was adopted (transition obligation) over a
period of 20 years.
Stock-Based Compensation
RCSB maintains compensation plans which provide for grants of stock options,
stock appreciation rights and restricted stock to employees and directors. As
described in the note entitled Stock-Based Compensation Plans, the Company
currently follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for its plans. In October 1995, the
FASB issued Statement of Financial Accounting Standards No. 123 entitled
"Accounting for Stock-Based Compensation," which permits, but does not require,
companies to use a fair-value-based method of accounting for stock-based
employee compensation plans. Under this method, compensation cost is measured
as of the date stock awards are granted based on the fair value rather than the
intrinsic value of the award, and such cost is recognized over the service
period, which is usually the vesting period.
If a company elects to continue using the intrinsic-value-based method under
Opinion 25, pro forma disclosures of net income and net income per share are
required, as if the fair-value-based method had been applied. Under the
intrinsic method presently utilized by RCSB, compensation cost is the excess, if
any, of the quoted market price of the stock as of the grant date over the
amount employees must pay to acquire it, or over the price established for
determining stock appreciation. Under RCSB's compensation policies, there is no
such excess on the dates of grant. In adopting Statement 123 in December 1996,
the Company is continuing to follow the provisions of Opinion 25 and will adopt
the pro forma disclosure requirements of Statement 123.
Transfers and Servicing of Financial Assets
In June 1996, the FASB issued Statement No. 125 entitled "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which provides guidance for distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings. The statement requires
the application of a financial-components approach which, following a transfer,
results in recognizing in financial statements the assets an entity controls and
removing from financial statements assets it no longer controls. A transferor
has surrendered control, in general, only if the transferred assets have been
legally isolated from the transferor, the transferee obtains the right to pledge
or exchange the assets and there is no agreement that entitles or obligates the
transferor to repurchase the assets. Liabilities are eliminated from financial
statements only when they are extinguished. The new standard applies to all
transactions occurring after December 31, 1996, except those involving
collateral pledges and securities repurchase agreements for which the rule
change is delayed one year. Initial application of the pronouncement is not
expected to have a material effect on the consolidated financial position of
RCSB.
Mortgage Banking Noninterest Income
This income statement category includes revenue from originating loans for
sale and net revenue from servicing loans for others. Loan origination revenues
include fees charged to borrowers, gains or losses on the sale of loans in the
secondary market and gains or losses from the sale of loan servicing assets.
Loan servicing revenues include monthly fees charged to investors and certain
fees such as late charges billed to borrowers. Amortization of loan servicing
assets offsets gross servicing fee revenue.
Automobile Loan Banking Noninterest Income
This income statement category represents servicing fees on sold automobile
loans, net of amortization relating to capitalized excess servicing rights. No
auto loans were being serviced for others at November 30, 1996.
Net Income Per Common Share
Primary net income per common share is computed by dividing net income,
reduced by preferred stock dividends, by the weighted average number of common
shares outstanding during the periods. The weighted number of common shares
outstanding during 1996, 1995 and 1994 amounted to 13,920,621, 14,006,693, and
13,893,162, respectively. Dividends declared on preferred stock totaled $2.6
million in 1996 and $5.2 million in both 1995 and 1994.
Fully diluted net income per common share is computed by dividing net income
by the sum of the weighted average number of common shares outstanding and the
common shares issuable if all outstanding preferred shares were converted to
common at the beginning of the periods. The weighted average number of shares
utilized in this computation totaled 16,811,699, 18,678,056 and 18,565,037 for
1996, 1995 and 1994, respectively.
-41-
<PAGE>
Had the preferred stock conversions occurring in mid-1996 taken place at the
beginning of the year, primary net income per share for 1996 would have been
equal to the amount presented as fully diluted. There were no materially
dilutive common stock equivalents during any of the three years ended November
30, 1996.
2. ACQUISITION AND DISPOSITION
On June 3, 1994, RCSB acquired $102.6 million in deposits through the
purchase of a Rochester-area branch of the former Columbia Banking Federal
Savings Association. A premium of $6.5 million was paid to the Resolution Trust
Corporation, the seller, for the deposits.
On August 5, 1994, RCSB completed the sale of its New Jersey banking
subsidiary, Shadow Lawn Savings Bank, SLA (Shadow Lawn) for approximately $78.4
million in cash. A gain of $23.3 million was recorded on the sale.
3. CASH AND INTEREST-BEARING DEPOSITS
RCSB is required under Federal Reserve Board regulations to maintain
reserves, generally consisting of cash and noninterest-earning accounts, equal
to certain percentages of outstanding transaction deposits (primarily checking
and NOW accounts). Balances maintained in order to meet Federal Reserve Board
requirements totaled $28.2 million and $30.6 million at November 30, 1996 and
1995, respectively.
Under servicing arrangements relating to certain residential mortgage loans
securitized and sold in previous years, RCSB is required to maintain restricted
interest-bearing cash accounts as collateral. In 1995 and prior years, there
were also similar arrangements relating to sold automobile loans. Total
cash balances restricted for these purposes amounted to $7.5 million and $13.2
million at November 30, 1996 and 1995, respectively.
4. SECURITIES
A summary follows of securities being held to maturity and securities
available for sale at November 30, 1996 and 1995.
<TABLE>
<CAPTION>
Securities Held to Maturity
- ------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Estimated Weighted
Carrying Holding Holding Fair Average
NOVEMBER 30, 1996 Value Gains Losses Value Yield
- ------------------------------------------------------------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Collateralized mortgage obligations:
Privately-issued $ 1,209.2 $ 5.2 $ (9.9) $ 1,204.5 7.18%
U.S. Government agencies 302.1 1.9 (3.1) 300.9 6.30
----------- ----------- ----------- ----------- -----------
Total CMOs 1,511.3 7.1 (13.0) 1,505.4 7.00
----------- ----------- ----------- ----------- -----------
Other mortgage-backed securities:
Privately-issued 103.9 1.4 (0.1) 105.2 7.83
U.S. Government agencies 23.7 0.3 (0.3) 23.7 6.90
----------- ----------- ----------- ----------- -----------
Total other MBSs 127.6 1.7 (0.4) 128.9 7.65
----------- ----------- ----------- ----------- -----------
Total mortgage-backed securities 1,638.9 8.8 (13.4) 1,634.3 7.05
Other securities 0.1 - - 0.1 6.34
----------- ----------- ----------- ----------- -----------
Total securities held to maturity $ 1,639.0 $ 8.8 $ (13.4) $ 1,634.4 7.05%
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Securities Held to Maturity
- ------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Estimated Weighted
Carrying Holding Holding Fair Average
November 30, 1995 Value Gains Losses Value Yield
- ------------------------------------------------------------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Collateralized mortgage obligations:
Privately-issued $ 931.8 $ 5.2 $ (4.2) $ 932.8 7.38%
U.S. Government agencies 318.6 2.4 (3.6) 317.4 6.29
----------- ----------- ----------- ----------- -----------
Total CMOs 1,250.4 7.6 (7.8) 1,250.2 7.10
----------- ----------- ----------- ----------- -----------
Other mortgage-backed securities:
Privately-issued 118.6 0.9 (0.1) 119.4 7.84
U.S. Government agencies 29.0 0.3 (0.3) 29.0 6.88
----------- ----------- ----------- ----------- -----------
Total other MBSs 147.6 1.2 (0.4) 148.4 7.65
----------- ----------- ----------- ----------- -----------
Total mortgage-backed securities 1,398.0 8.8 (8.2) 1,398.6 7.16
Other securities 0.1 - - 0.1 6.88
----------- ----------- ----------- ----------- -----------
Total securities held to maturity $ 1,398.1 $ 8.8 $ (8.2) $ 1,398.7 7.16%
=========== =========== =========== =========== ===========
</TABLE>
-42-
<PAGE>
<TABLE>
<CAPTION>
Securities Available for Sale
- ------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Estimated Weighted
Amortized Holding Holding Fair Average
NOVEMBER 30, 1996 Cost Gains Losses Value Yield
- ------------------------------------------------------------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Collateralized mortgage obligations:
of U.S. Government agencies $ 7.1 $ - $ - $ 7.1 5.92%
Other 11.5 - (2.2) 9.3 7.50
----------- ----------- ----------- ----------- -----------
Total mortgage-backed securities 18.6 - (2.2) 16.4 6.82
----------- ----------- ----------- ----------- -----------
Other securities:
Corporate obligations 1.4 - (0.1) 1.3 5.27
Preferred stock 1.1 - - 1.1 0.29
----------- ----------- ----------- ----------- -----------
Total other securities 2.5 - (0.1) 2.4 3.00
----------- ----------- ----------- ----------- -----------
Total securities available for sale $ 21.1 $ - $ (2.3) $ 18.8 6.34%
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Estimated Weighted
Amortized Holding Holding Fair Average
November 30, 1995 Cost Gains Losses Value Yield
- ------------------------------------------------------------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Collateralized mortgage obligations:
Privately-issued $ 45.4 $ 0.9 $ - $ 46.3 7.82%
U.S. Government agencies 8.3 - (0.1) 8.2 5.88
----------- ----------- ----------- ----------- -----------
Total CMOs 53.7 0.9 (0.1) 54.5 7.52
Other 29.1 0.4 (2.3) 27.2 7.71
----------- ----------- ----------- ----------- -----------
Total mortgage-backed securities 82.8 1.3 (2.4) 81.7 7.59
----------- ----------- ----------- ----------- -----------
Other securities:
Corporate obligations 1.4 - (0.1) 1.3 5.27
Preferred stock 1.1 - - 1.1 0.36
----------- ----------- ----------- ----------- -----------
Total other securities 2.5 - (0.1) 2.4 3.11
----------- ----------- ----------- ----------- -----------
Total securities available for sale $ 85.3 $ 1.3 $ (2.5) $ 84.1 7.46%
=========== =========== =========== =========== ===========
</TABLE>
Unrealized gains and losses on securities available for sale are reported,
net of related income taxes, as a separate component of shareholders' equity.
CMOs and mortgage-backed securities are generally subject to the risk that
mortgages collateralizing the securities may prepay more rapidly or more slowly
than expected, thereby affecting the yield of the securities and future cash
flows. RCSB attempts to limit this risk by holding CMOs that have shorter
estimated lives.
In November 1995, the FASB issued a special report entitled "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." Concurrent with the initial adoption of the
implementation guide, the FASB allowed companies to reassess the appropriateness
of the classifications of all securities among held-to-maturity, available-for-
sale and trading categories without calling into question an entity's intent to
hold designated securities to maturity. RCSB adopted the implementation
guidance in November 1995 and transferred mortgage-backed securities with an
amortized cost of $263.2 million from the held-to-maturity portfolio to the
available-for-sale category. The net unrealized gain on the securities,
amounting to less than $0.1 million, was recorded in the separate component of
shareholders' equity at the time of transfer.
Realized gains and losses on sales of securities are determined under the
specific identification method. The following table presents the total proceeds
from sales of securities available for sale during 1996, 1995 and 1994 and the
aggregate gains and losses on the sales.
- -------------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994
- -------------------------------------------------------------------------------
(millions)
Proceeds from sales $ 99.0 $ 184.5 $ 284.9
======= ======== ========
Gains $ 1.9 $ 0.9 $ 4.0
Losses - (0.5) (0.2)
------- -------- --------
Net gains from sales $ 1.9 $ 0.4 $ 3.8
======= ======== ========
There were no sales of securities classified as held to maturity during 1996,
1995 or 1994. The contractual maturities of debt securities held to maturity
and available for sale at November 30, 1996 are as follows.
-43-
<PAGE>
<TABLE>
<CAPTION>
Contractual Maturities
- --------------------------------------------------------------------------------------------------------------------------
November 30, 1996 Securities Held to Maturity Securities Available for Sale
- --------------------------------------------------------------------------------------------------------------------------
Estimated Estimated
Weighted Weighted
Carrying Estimated Average Amortized Estimated Average
Maturity Period by Type of Security Value Fair Value Yield Cost Fair Value Yield
- --------------------------------------------------------------------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Privately-issued mortgage-backed securities:
- -------------------------------------------
After 10 years $1,313.1 $1,309.7 7.23% $ 11.5 $ 9.3 7.50%
-------- -------- ------ ------- ------ ----
US Government and its agencies' obligations:
- -------------------------------------------
After 1 but within 5 years 0.4 0.4 6.08 - - -
After 5 but within 10 years 11.2 10.9 6.12 - - -
After 10 years 314.3 313.4 6.35 7.1 7.1 5.92
-------- -------- ------ ------- ------ ----
Total 325.9 324.7 6.35 7.1 7.1 5.92
-------- -------- ------ ------- ------ ----
Corporate obligations:
- ---------------------
Within 1 year - - - 0.2 0.2 6.00
After 1 but within 5 years - - - 0.8 0.7 5.11
After 5 but within 10 years - - - 0.4 0.4 5.21
-------- -------- ------ ------- ------ ----
Total - - - 1.4 1.3 5.27
-------- -------- ------ ------- ------ ----
Total debt securities:
- ---------------------
Within 1 year - - - 0.2 0.2 6.00
After 1 but within 5 years 0.4 0.4 6.08 0.8 0.7 5.11
After 5 but within 10 years 11.2 10.9 6.12 0.4 0.4 5.21
After 10 years 1,627.4 1,623.1 7.06 18.6 16.4 6.83
-------- --------- ------ ------- ------ ----
Total 1,639.0 1,634.4 7.05 20.0 17.7 6.71
Preferred stock - - - 1.1 1.1 0.29
-------- -------- ------ ------- ------ ----
Total securities $1,639.0 $1,634.4 7.05% $ 21.1 $ 18.8 6.34%
======== ======== ====== ======= ====== ====
</TABLE>
(a) Although mortgage-backed securities are reported at final maturity,
amortization is received regularly, substantially reducing weighted
average maturities.
(b) No tax equivalent adjustments have been made for minor amounts of tax
exempt securities held by RCSB.
Securities being held to maturity with a carrying value of $951.7 million
(market value, $946.8 million) at November 30, 1996 and $592.3 million (market
value, $588.8 million) at November 30, 1995 were pledged as collateral for
certain borrowings and in connection with certain mortgage loans sold with
partial recourse.
5. LOANS RECEIVABLE
A summary of loans receivable follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
November 30, 1996 1995
- -----------------------------------------------------------------------------------------------------------
(dollars in millions)
<S> <C> <C>
Residential mortgage loans:
First mortgages $ 523.0 $ 667.2
Home equity loans and advances under lines of credit 240.1 243.7
------------- --------------
Total residential mortgage loans 763.1 910.9
Automobile loans and leases 994.8 807.6
Commercial mortgage loans 55.2 71.2
Consumer and other loans 49.9 55.3
Residential mortgage loans held for sale 150.5 123.8
Unamortized origination costs, fees,
discounts and premiums, net 35.4 28.3
------------- --------------
Total $ 2,048.9 $ 1,997.1
============= ==============
Weighted average yield at end of year (a) 8.75% 8.80%
============= ==============
</TABLE>
(a) Balances used in yield calculations are before deduction of loan loss
allowances.
Loans included in the previous table that were not accruing interest totaled
$19.6 million and $21.7 million at November 30, 1996 and 1995, respectively. At
November 30, 1996 and 1995, there were no commercial or residential mortgage
loans with modified payment terms involving material concessions due to
borrowers' financial difficulties. If nonaccrual loans had been accruing
interest under the terms of the loan agreements, interest income on such loans
would have amounted to $1.7 million in 1996 and $1.9 million in 1995. No cash
basis interest income was recognized on the loans in 1996, while less than $0.1
million was recognized in 1995. RCSB is not committed to lend additional funds
to borrowers whose loans were on nonaccrual status at November 30, 1996.
Under the provisions of Statement 114, RCSB's recorded investment in loans
considered impaired at November 30, 1996 totaled $2.8 million, and no related
allowance for losses was required. During 1996, the average recorded investment
in impaired loans totaled $4.2 million, and interest income recognized on such
loans amounted to $0.1 million, none of which was recognized on a cash basis.
-44-
<PAGE>
A listing follows of the states in which properties securing RCSB's mortgage
loans are located as of November 30, 1996.
Residential mortgage loans: New York 47% New Jersey 6%
California 11% Pennsylvania 4%
Florida 7% Maryland 3%
Virginia 7% Other 15%
Commercial mortgage loans: New York 71% Georgia 4%
Florida 7% Ohio 4%
Maryland 7% Other 2%
Virginia 5%
The Company originates automobile loans through networks of dealers located
in New York State and Florida, and in certain parts of Connecticut, New Jersey
and Pennsylvania. Auto loans are not originated in New York City. At November
30, 1996, approximately 67% of the outstanding principal balance of the
Company's automobile loan portfolio had been originated through the New York
regional office and 33% had been originated in Florida. All underwriting,
credit review and collection activities are performed by personnel of American
Credit Services, Inc. (ACSI), the Company's automobile finance subsidiary.
Mortgage loans with a carrying value of $509.9 million at November 30, 1996
and $596.9 million at November 30, 1995 were pledged as collateral in connection
with RCSB's borrowings from the Federal Home Loan Bank.
6. ALLOWANCE FOR LOAN LOSSES
The following table summarizes activity in the allowance for loan losses for
the three years ended November 30, 1996.
- --------------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994
- --------------------------------------------------------------------------------
(millions)
Beginning balance $ 26.1 $ 26.2 $ 26.0
Provision charged to expense 13.6 7.6 16.1
Allowance of subsidiary sold - - (4.7)
Loans charged off:
Residential mortgage (2.2) (2.7) (4.8)
Automobile (11.0) (6.6) (4.7)
Commercial mortgage (2.8) (3.0) (4.1)
Consumer and other (1.2) (1.4) (1.6)
Loan recoveries:
Residential mortgage 0.4 0.9 0.8
Automobile 3.8 2.3 1.7
Commercial mortgage 1.0 2.2 1.0
Consumer and other 0.5 0.6 0.5
--------- --------- ---------
Ending balance $ 28.2 $ 26.1 $ 26.2
========= ======== =========
7. PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
- --------------------------------------------------------------------------------
November 30, 1996 1995
- --------------------------------------------------------------------------------
(millions)
Land $ 3.2 $ 2.6
Buildings 8.1 6.6
Leasehold improvements 14.9 10.3
Computer hardware and software 29.7 20.3
Furniture, fixtures and equipment 29.9 30.8
--------- ---------
85.8 70.6
Less: accumulated depreciation and amortization 46.2 41.7
--------- ---------
Total $ 39.6 $ 28.9
========= =========
8. LOAN SERVICING ASSETS
The following table displays, for the three most recent years, changes in
recorded loan servicing assets and the allocation of the assets and underlying
loans by type.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
At or For The Year Ended November 30, 1996 1995 1994
- ------------------------------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Changes in loan servicing assets:
Beginning balance $ 106.5 $ 76.8 $ 67.7
Originations 18.7 7.4 -
Purchases 31.2 33.7 36.9
Sales (23.7) - -
Amortization (14.3) (11.4) (27.8)
---------- ---------- ----------
Ending balance $ 118.4 $ 106.5 $ 76.8
========== ========== ==========
Loan servicing assets by type:
Residential mortgage $ 118.4 $ 106.4 $ 75.3
Automobile - 0.1 1.5
---------- ---------- ----------
Total loan servicing assets $ 118.4 $ 106.5 $ 76.8
========== ========== ==========
Loans serviced for others:
Residential mortgage $9,048.0 $7,958.5 $5,490.8
Automobile - 19.2 84.3
</TABLE>
The fair value of mortgage loan servicing assets totaled $134.1 million and
$112.6 million at November 30, 1996 and 1995, respectively. In determining fair
value, the assets are stratified according to characteristics of the underlying
loans. Strata utilized by RCSB are based on loan types, categorized mainly by
fixed or adjustable interest rates and the presence or absence of government
guarantees, and by interest rate levels, categorized as above or below a rate
estimated to produce normal prepayment activity. Utilizing loan repayment
assumptions based on industry and RCSB experience and expectations, fair values
are generally calculated as the present value of expected future cash flows
discounted at interest rates currently utilized by buyers and sellers of
mortgage loan servicing. Fair values are subject to change over time based on
movements in interest rates and prepayment expectations and other market
factors.
-45-
<PAGE>
While fair value encompasses both unrealized appreciation and depreciation of
the individual strata, FASB Statement 122 requires the Company to establish
valuation allowances for strata experiencing depreciation without permitting
recognition in the financial statements of net appreciation that may exist.
Changes in valuation allowances are recognized in earnings. RCSB's valuation
allowances for loan servicing rights totaled $0.2 million as of November 30,
1996, while no such allowances were required at November 30, 1995. In 1996,
aggregate increases in valuation allowances recognized in mortgage banking
noninterest income amounted to $0.2 million, while aggregate decreases were less
than $0.1 million.
9. OTHER REAL ESTATE
A summary of other real estate follows:
- -------------------------------------------------------------------------------
November 30, 1996 1995
- -------------------------------------------------------------------------------
(millions)
Real estate acquired through foreclosure, at cost $ 13.1 $ 10.9
Less: allowance for losses 6.9 6.9
---------- -------------
Total $ 6.2 $ 4.0
========== =============
The Company maintains a valuation allowance for other real estate to provide
for declines in the fair values of properties subsequent to foreclosure.
Changes in the allowance during the three most recent years were as follows:
- --------------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994
- --------------------------------------------------------------------------------
(millions)
Beginning balance $ 6.9 $ 8.2 $ 18.5
Provision charged (credited) to expense - (1.3) 1.4
Allowance of subsidiary sold - - (2.5)
Charge-offs, net of recoveries - - (9.2)
-------- ----------- -----------
Ending balance $ 6.9 $ 6.9 $ 8.2
======== =========== ===========
Proceeds from sales of other real estate during the years ended November 30,
1996, 1995 and 1994 were $7.4 million, $9.8 million and $31.0 million,
respectively.
10. OTHER ASSETS
A summary of other assets follows:
- ----------------------------------------------------------------------------
November 30, 1996 1995
- ----------------------------------------------------------------------------
(millions)
Net deferred tax asset $ 22.6 $ 18.7
Accrued interest receivable:
Loans 11.7 10.9
Securities 10.4 9.8
Goodwill and core deposit premium (a) 8.4 10.5
Due from brokers - 88.5
Other 19.5 7.1
---------- -------------
Total $ 72.6 $ 145.5
========== =============
(a) Net of accumulated amortization of $13.5 million and $11.4 million at
November 30, 1996 and 1995, respectively.
11. DEPOSITS
A summary of deposit balances and weighted average interest rates by category
at November 30, 1996 and 1995 follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
November 30, 1996 1995
- ----------------------------------------------------------------------------------------------
Amount Rate Amount Rate
- ----------------------------------------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C> <C>
Noninterest-bearing checking accounts $ 30.6 -% $ 25.0 -%
NOW accounts 180.7 1.45 172.1 1.48
Savings accounts 494.7 2.54 503.8 2.53
Money market accounts 275.7 3.75 245.6 3.58
Term accounts 1,245.7 5.69 1,253.9 5.96
Nationally marketed term accounts 141.3 5.44 22.6 5.37
----------- ----------- ------------ -----------
Total $ 2,368.7 4.39% $ 2,223.0 4.50%
=========== =========== ============ ===========
</TABLE>
Interest expense on deposits is summarized as follows:
- ------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994
- ------------------------------------------------------------------------
(millions)
NOW accounts $ 2.7 $ 2.6 $ 4.6
Savings accounts 12.9 13.6 19.2
Money market accounts 9.4 9.8 10.0
Term accounts 72.3 66.6 58.6
Nationally marketed term accounts 4.6 0.1 -
--------- --------- ---------
Total $101.9 $ 92.7 $ 92.4
========= ========= =========
-46-
<PAGE>
A summary follows of locally and nationally marketed term accounts by rate and
year of contractual maturity.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Weighted Term Deposit Interest Rates
Average Total -----------------------------------------------------------
Interest Term 5.00% and 5.01% to 6.01% to Over
November 30, 1996 Rate Deposits Under 6.00% 7.00% 7.00%
- -------------------------------------------------------------------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Term deposits (maturing in):
1997 5.44% $ 983.6 $ 178.7 $ 697.1 $ 52.1 $ 55.7
1998 5.91 206.6 6.3 127.6 62.5 10.2
1999 6.54 67.8 2.4 32.0 17.1 16.3
2000 6.33 20.0 2.6 6.8 5.3 5.3
2001 7.37 38.4 0.1 1.9 7.9 28.5
Thereafter 6.14 70.6 1.8 28.0 39.8 1.0
--------------------------------------------------------------------------------------
Total 5.67% $1,387.0 $ 191.9 $ 893.4 $ 184.7 $ 117.0
======================================================================================
</TABLE>
Term accounts of $100,000 or more totaled $121.6 million and $114.7 million
at November 30, 1996 and 1995, respectively. Maturities of such accounts as of
November 30, 1996 were (in millions): within three months $34.0, three to six
months $14.7, six to twelve months $31.8, and after twelve months $41.1.
12. BORROWINGS
RCSB borrows funds from the Federal Home Loan Bank of New York (FHLB) and
also enters into repurchase agreements with the FHLB and large investment
banking firms. The agreements to repurchase assets correspond with sales of the
Company's mortgage-backed securities treated as financings for financial
statement purposes. The securities subject to repurchase agreements were
delivered to the FHLB or brokers arranging the transactions who hold the
collateral until maturity of the agreements.
The first table below presents a summary of borrowings and repurchase
agreements by year of scheduled repayment. The second table presents
information regarding the carrying and fair values of assets sold under
agreements to repurchase, in addition to the amount and interest rates of the
related borrowings.
Scheduled Repayments of Borrowings
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank Other
------------------------------ Repurchase Weighted
Agreements Average
Repurchase Other and Total Interest
November 30, 1996 Agreements Borrowings Borrowings(a) Borrowings Rate
- --------------------------------------------------------------------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Scheduled maturity:
1997 overnight line of credit $ - $ 6.2 $ - $ 6.2 5.88%
1997 other 340.6 156.2 484.4 981.2 5.62
1999 50.0 20.0 - 70.0 5.45
2000 - - 0.1 0.1 9.00
2001 - 50.0 0.1 50.1 5.73
After 2001 - - 0.2 0.2 9.00
--------------------------------------------------------------------------------------
Total $ 390.6 $ 232.4 $ 484.8 $ 1,107.8 5.62%
======================================================================================
</TABLE>
(a) Repurchase agreements in this category total $484.3 million.
-47-
<PAGE>
<TABLE>
<CAPTION>
Repurchase Agreements
- ---------------------------------------------------------------------------------------------------------------------------------
FHLB Repurchase Agreements Other Repurchase Agreements
--------------------------------------------------- -----------------------------------------------
Assets Sold Assets Sold
------------------- --------------------
Weighted Weighted
Estimated Average Estimated Average
Carrying Fair Repurchase Interest Carrying Fair Repurchase Interest
November 30, 1996 Value Value Liability* Rate Value Value Liability* Rate
- ------------------------------------------------------------------------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Type of mortgage-backed
security and term of
borrowing:
Private issues:
Up to 30 days $ 249.9 $ 247.8 $ 238.2 5.40% $ 60.3 $ 59.0 $ 56.0 5.43%
30 to 90 days 26.2 26.9 25.6 5.40 - - - -
Over 90 days 137.3 136.7 126.8 5.65 183.9 183.2 178.2 5.44
---------------------------------------------------------------------------------------------------
Total private issues 413.4 411.4 390.6 5.48 244.2 242.2 234.2 5.44
---------------------------------------------------------------------------------------------------
U.S. Government agencies:
Up to 30 days - - - - 107.4 107.6 102.0 5.37
30 to 90 days - - - - 122.2 121.4 115.0 5.42
Over 90 days - - - - 35.6 34.9 33.1 5.90
---------------------------------------------------------------------------------------------------
Total U.S. Government
agencies - - - - 265.2 263.9 250.1 5.46
---------------------------------------------------------------------------------------------------
Total $ 413.4 $ 411.4 $ 390.6 5.48% $ 509.4 $ 506.1 $ 484.3 5.45%
===================================================================================================
</TABLE>
* Excludes accrued interest payable of $1.3 million on FHLB repurchase
agreements and $1.6 million on other repurchase agreements.
Additional information concerning RCSB's borrowings, by type, for the years
ended November 30, 1996, 1995 and 1994 is presented below.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
At or For The Year Ended November 30, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C>
FHLB repurchase agreements:
Amount outstanding at year end $ 390.6 $ - $ -
Average outstanding for the year 333.1 - -
Maximum outstanding at any month end 549.0 - -
Weighted average rate for the year 5.54% - -
Weighted average rate at year end 5.48 - -
- -----------------------------------------------------------------------------------------------------
Other FHLB borrowings:
Amount outstanding at year end $ 232.4 $ 674.3 $ 789.9
Average outstanding for the year 308.6 655.1 662.0
Maximum outstanding at any month end 602.1 786.8 814.2
Weighted average rate for the year 6.10% 6.05% 5.05%
Weighted average rate at year end 6.19 6.17 5.47
- -----------------------------------------------------------------------------------------------------
Other repurchase agreements and borrowings:
Amount outstanding at year end $ 484.8 $ 295.1 $ 47.0
Average outstanding for the year 434.1 272.8 136.6
Maximum outstanding at any month end 491.1 466.2 276.6
Weighted average rate for the year 5.77% 6.19% 4.03%
Weighted average rate at year end 5.45 6.12 5.90
</TABLE>
-48-
<PAGE>
13. OTHER LIABILITIES
A summary of other liabilities follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
November 30, 1996 1995
- ----------------------------------------------------------------------------------------------
(millions)
<S> <C> <C>
Amounts due investors on serviced loans $ 50.8 $ 63.5
Accrued expenses 34.6 37.7
Due to brokers 25.5 83.0
Due to banks 12.5 17.1
Income taxes payable 1.6 1.0
Other 22.7 23.7
------------- -------------
Total $ 147.7 $ 226.0
============= =============
</TABLE>
14. INCOME TAXES
Total income tax expense is allocated as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994
- --------------------------------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Allocation of income taxes to:
Income from operations $ 17.8 $ 12.5 $ 11.4
Paid-in capital for compensation
deductions in excess of expense
recognized for financial reporting
purposes (0.3) (0.1) -
Unrealized holding loss on securities (0.5) (0.4) -
--------- ------------ -----------
Total income tax expense $ 17.0 $ 12.0 $ 11.4
========= ============ ===========
</TABLE>
The components of income taxes attributable to operations are summarized
below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994
- --------------------------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Federal taxes:
Current $ 17.2 $ 17.0 $ 3.8
Deferred (2.5) (8.1) 5.4
--------- ----------- ------------
14.7 8.9 9.2
--------- ----------- ------------
State taxes:
Current 4.0 4.6 2.2
Deferred (0.9) (1.0) -
--------- ----------- ------------
3.1 3.6 2.2
--------- ----------- ------------
Provision for income taxes $ 17.8 $ 12.5 $ 11.4
========= =========== ============
</TABLE>
The Company's income tax provision attributable to operations differs, as
presented below, from the amount computed by applying the federal statutory rate
to income before taxes.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994
- -------------------------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C>
Tax at statutory rate of 35% applied
to income before taxes $ 20.1 $ 17.6 $ 19.5
State taxes, net of federal benefit 2.8 2.3 2.2
Amortization of goodwill 0.3 0.3 0.7
Tax basis difference on subsidiary sold - - (2.1)
Change in valuation allowance for
deferred tax assets (5.5) (8.3) (9.4)
Other 0.1 0.6 0.5
---------- --------- ----------
Income tax provision $ 17.8 $ 12.5 $ 11.4
========== ========= ==========
</TABLE>
The deferred tax effects of items producing temporary differences between
financial statement income and tax return income through November 30, 1996 and
1995 are presented as assets and liabilities in the table below. The net
amount, after deducting a valuation allowance, is included in the statement of
condition.
- -----------------------------------------------------------------------------
November 30, 1996 1995
- -----------------------------------------------------------------------------
(millions)
Deferred tax assets relating to:
Allowances for loan losses, other real
estate and uncollectible interest $ 15.8 $ 14.5
Loan servicing transactions 8.9 10.2
Accrued compensation and benefits 4.5 3.8
Net unrealized holding loss on securities
available for sale 0.9 0.4
Loan origination fees 1.0 1.4
Other 3.6 5.1
----------- -----------
Total deferred tax assets 34.7 35.4
Less: valuation allowance 4.8 10.3
----------- -----------
Net deferred tax assets 29.9 25.1
----------- -----------
Deferred tax liabilities relating to:
Leasing transactions 5.6 6.4
Subsidiary earnings taxable in following year 1.7 -
----------- -----------
Total deferred tax liabilities 7.3 6.4
----------- -----------
Net deferred tax asset $ 22.6 $ 18.7
=========== ===========
The Company's total deferred tax asset is reduced by a valuation allowance to
an amount for which realization is considered to be more likely than not. In
evaluating the realizability of deferred tax assets, the Company considers the
number of years until realization, estimates of taxable income in future years,
carryback provisions within the tax laws and other relevant factors. During
1996 and 1995, the Company decreased the valuation allowance relating to
deferred tax assets by $5.5 million and $8.3 million, respectively, based on
changes in the Company's circumstances and in the factors affecting the
likelihood of realization. The net deferred tax asset is categorized with
other assets in the consolidated statements of condition.
15. SHAREHOLDERS' EQUITY
In July 1996, RCSB completed programs to purchase 3.5 million shares of the
Company's common stock from market sources at a cost of $85.8 million. In
October 1996, the Board of Directors authorized the purchase of an additional
1.5 million common shares, of which 57,000 shares were purchased at a cost of
$1.6 million through November 30, 1996. Subsequently, 150,000 shares were
acquired in December 1996 for $5.0 million. Following completion of the
repurchase program authorized in October 1996, RCSB expects to continue to
exceed all applicable regulatory capital requirements.
-49-
<PAGE>
In May 1996, the Company announced it would redeem all outstanding
convertible preferred stock at the close of business on July 15, 1996 for
$26.225 per share plus accrued dividends. Alternatively, preferred shareholders
had the option of converting their stock to common shares at any time prior to
the redemption at a ratio of 1.5625 shares of common for each preferred share.
Due to the excess of the market price for RCSB's common shares over the pre-
established redemption price, 3.0 million preferred shares were converted to
common and only 652 shares were redeemed. The Company reissued 3.5 million
common shares held in treasury and issued 1.2 million new common shares to those
who elected to convert preferred stock to common.
At the time of RCSB's 1986 conversion from mutual to stock form, a
liquidation account was established within shareholders' equity for the benefit
of all account holders with over $100 on deposit at December 31, 1985. In the
event of complete liquidation of the Company, such account holders would be
entitled to their interest in the liquidation account prior to any payments to
common shareholders. The aggregate liquidation account is determined at the end
of each fiscal year and is reduced proportionately as eligible account holders
reduce their deposit balances. In no event may the liquidation account be
increased. The liquidation account amounted to $7.2 and $8.3 million at
November 30, 1996 and 1995, respectively.
RCSB's cash dividend on common stock was increased 25% to $0.15 per share in
the fourth quarter of 1996 following an increase of 20% in 1995. The payment of
dividends to holders of RCSB common stock is generally limited by certain
restrictions imposed on Delaware corporations and is contingent upon RCSB
Financial, Inc. generating sufficient cash flows, which arise primarily from
dividends paid by the Bank. Under Delaware law, dividends may be paid only out
of RCSB's undivided profits, or if there should be no undivided profits, its net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year.
The payment of dividends by the Bank to RCSB Financial, Inc. is subject to
various restrictions. Under New York State Banking Law, dividends may be
declared and paid only out of net profits of the Bank, determined under
regulatory accounting practices. The approval of the New York State Banking
Department is required if the total of all dividends declared in any calendar
year will exceed net profits for that year plus the retained net profits for the
preceding two years, less any required transfer to surplus. Since dividends from
the Bank were utilized by the parent company to fund significant common stock
repurchases during 1996, approval has been requested and received from the
Banking Department to exceed the normal limit on dividends. Subject to certain
conditions, Bank dividends were approved in an amount expected to be sufficient
to fund 1997 quarterly dividends to shareholders and completion of the 1.5
million common share repurchase program announced in late 1996.
According to Federal Deposit Insurance Corporation (FDIC) rules and
regulations, no dividends may be declared or paid if the Bank is not in
compliance with all applicable capital requirements, or if payment of such
dividends would cause the Bank's capital to fall below required levels. In
addition, no dividends may be declared or paid which would reduce shareholders'
equity below the amount required in the liquidation account.
Under the Company's shareholder rights plan, one preferred share purchase
right has been distributed for each share of the Company's common stock
outstanding on June 4, 1990 and for each share issued subsequent to that date.
Each right will, upon the occurrence of certain events, entitle the holder
(other than certain persons who have acquired or have obtained the right to
acquire the beneficial ownership of at least 20% of the outstanding shares of
common stock (Acquiring Persons) and certain related persons or entities) to
purchase a unit consisting of one one-hundredth of a share of Series A Junior
Participating Preferred Stock, par value $1.00 per share, at a purchase price of
$100 per unit, subject to adjustment.
The rights plan further provides that in the event any person or group of
affiliated or associated persons is designated as an adverse person or becomes
the beneficial owner of 25% or more of the outstanding shares of common stock
(except pursuant to an offer for all outstanding shares of common stock that is
determined to be fair and in the best interest of shareholders), then holders of
rights not previously exercised or redeemed by the Company (other than rights
held by Acquiring Persons) will be entitled to receive, upon exercise, common
stock having a market value equal to two times the exercise price of the right.
In addition, in the event (a) the Company is acquired in a merger or other
business combination transaction with an Acquiring Person in which RCSB is not
the surviving corporation, or (b) 50% or more of the Company's assets or earning
power are sold or transferred to an Acquiring Person, each previously
unexercised right (other than rights held by Acquiring Persons and certain
related persons or entities) will entitle the holder to receive, upon exercise,
common stock of the acquiring company having a value equal to two times the
exercise price of the right.
The rights will expire on June 3, 2000, unless earlier redeemed. Subject to
certain limitations, the rights may be redeemed by the Board of Directors or, in
certain circumstances, by the shareholders of the Company.
16. REGULATORY MATTERS
As a savings and loan holding company, RCSB Financial, Inc. is regulated by
the Office of Thrift Supervision while the Bank is regulated by the FDIC and the
New York State Banking Department. All three agencies issue regulations and
require the filing of reports describing the activities and financial condition
of the entities under their jurisdiction and conduct examinations on a recurring
basis to test compliance with various regulatory requirements.
The FDIC requires banks within its jurisdiction to adhere to certain minimum
regulatory capital requirements. Failure to meet the capital requirements may
result in mandatory and discretionary actions by the banking regulators that
could have a material effect on RCSB's consolidated financial position. For
evaluating capital adequacy, the FDIC requires banks to determine capital and
assets under regulatory accounting practices. The leverage ratio requirement is
based on the relationship of period-end capital to average total assets during
the previous three months. Compliance with risk-based capital requirements is
evaluated by dividing regulatory capital by the sum of an institution's weighted
asset values. Weightings are established by the regulators for each asset
category according to the perceived degree of risk.
A comparison of the Bank's regulatory capital levels with minimum FDIC
requirements is presented in the following table. In addition, capital levels
considered by the FDIC to be representative of a well-capitalized institution
are indicated. The Bank remained in compliance with FDIC capital requirements
through November 30, 1996.
-50-
<PAGE>
<TABLE>
<CAPTION>
Regulatory Capital
- ---------------------------------------------------------------------------------------------------------------------------------
RCSB Minimum FDIC Well-Capitalized
(Bank) Capital Requirements as Defined by FDIC
------------------------ --------------------- ----------------------------
September 30, 1996 Amount Percent Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Leverage capital (tier 1) as percent
of three-month average assets $ 306.9 7.7% $ 159.5 4.0% (a) $ 199.3 5.0%
As percent of risk-weighted,
period-end assets:
Core capital (tier 1) 306.9 11.3 108.4 4.0 162.6 6.0
Total capital (tiers 1 and 2) 335.4 12.4 216.8 8.0 271.0 10.0
</TABLE>
(a) Although the minimum tier 1 capital requirement is 3% of total assets,
most FDIC-supervised banks are required to maintain levels at least 1% to
2% higher based upon their particular circumstances.
17. LOANS TO EMPLOYEE PLAN
In several years prior to 1991, the Company made loans to its Employee
Investment and Stock Ownership Plan to enable the plan to purchase RCSB common
stock from market sources. Subsequently, the plan has been allocating and
continues to allocate the purchased shares to plan participants over the terms
of the loans. The Company records expense associated with the principal portion
of the loans based on the percentage of the shares allocated to participants
each year. Loan repayments are funded by Company contributions to the plan and
by dividends on shares held by the plan. At November 30, 1996, the Plan held
1.3 million shares of the Company's common stock, of which 1.0 million shares
were allocated to participants. During 1996, outstanding loan balances were
consolidated into a single instrument bearing interest at 6.8% and maturing in
2000. The loan is presented as a reduction of shareholders' equity in the
Company's consolidated statement of condition.
Depending on the length of service, RCSB matches 50% or 100% of employees'
contributions to the plan, not to exceed 6% of eligible salary. Contribution
expense relating to the plan amounted to $0.7 million in 1996 and $1.0 million
in both 1995 and 1994. RCSB dividends received by the plan with respect to
unallocated shares and used for debt service totaled $0.2 million in 1996 and
1995, and less than $0.1 million in 1994.
18. STOCK-BASED COMPENSATION PLANS
RCSB's stock-based compensation plans provide for the award of incentive
stock options, nonqualified stock options, stock appreciation rights and
restricted stock to employees and, in certain instances, to Directors of the
Company. Under the terms of the stock option plans, 0.2 million shares remained
available for grant at November 30, 1996.
The exercise price for all options granted must equal or exceed market value
on the date of grant. No compensation expense is recorded by the Company when
options are granted or exercised; at exercise, proceeds are credited to the
capital stock accounts. The plans contain a provision under which each non-
officer member of the Board of Directors has received annual grants of
nonqualified options amounting to 1,000 shares during 1996 and 500 shares in
1995 and 1994. A summary follows of the changes in outstanding stock options
during the three most recent years.
-51-
<PAGE>
<TABLE>
<CAPTION>
Common Stock Options
- ------------------------------------------------------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Shares Exercise Shares Exercise Shares Exercise
Under Price Under Price Under Price
Option Per Share Option Per Share Option Per Share
- ------------------------------------------------------------------------------------------------------------------------
(shares in millions)
<S> <C> <C> <C> <C> <C> <C>
Beginning Balance 0.9 $ 7.27-20.73 1.0 $ 7.27-20.13 1.1 $ 7.27-20.13
Granted - * 22.29-23.39 - * 18.15-20.73 - -
Exercised (0.1) 7.27-20.13 (0.1) 7.27-15.13 (0.1) 7.27-14.00
Cancelled - * 15.13 - - - -
-----------------------------------------------------------------------------------------
Ending Balance 0.8 $ 7.27-23.39 0.9 $ 7.27-20.73 1.0 $ 7.27-20.13
=========================================================================================
</TABLE>
* While there was activity in this period, it amounted to less than 50,000
shares.
Through November 1996, outstanding options are vested for 0.4 million shares
based on the passage of time and 0.3 million based on achieving required market
price levels. Options on 0.1 million shares will become exercisable in November
2002 or, if earlier, when RCSB's closing common stock price increases to at
least $30.00 for 20 out of 30 business days.
Under the Company's plans, a stock appreciation right (SAR) represents the
right to receive cash equal to the excess of the market value of one share of
the Company's common stock on the date of exercise over a price specified at the
time of grant. Compensation expense recorded during 1996, 1995 and 1994 totaled
$0.6 million, $0.5 million and $0.6 million, respectively, to reflect the change
in value of outstanding SARs. At November 30, 1996 and 1995, 0.1 million SARs
were outstanding, at prices ranging from $7.50 to $22.29 in 1996.
Effective July 1996, shareholders approved a plan whereby 20% of fees earned
by non-employee Directors of the Company are paid in RCSB common shares of an
equivalent value. Directors may elect to receive a greater percentage in stock
and to defer receipt of any such shares through the Company's existing
Directors' deferred compensation plan. In the event of deferral, the shares are
not issued until selected future distribution dates. In the interim, deferral
accounts maintained for the Directors are valued based on changes in the market
price of RCSB's common stock. Deferrals elected prior to 1996 may also be
valued based on changes in the RCSB stock price, but are ultimately paid in
cash. Share equivalents utilized to value Directors' deferred balances totaled
0.1 million at November 30, 1996 and 1995.
19. RETIREMENT AND POSTRETIREMENT BENEFITS
The Company maintains a defined contribution retirement plan covering
substantially all of its employees. Contributions and costs are determined
based on age and length of service in amounts ranging from 2.5% to 15% of each
covered employee's wages. The Company also administers a Supplemental Executive
Retirement Plan (SERP) which is designed to ensure that its executive
participants maintain a retirement contribution percentage comparable to that of
other employee participants in the defined contribution plan. The SERP is a
nonqualified pension plan that provides for the accumulation of assets in a
retirement fund maintained by a trustee. Contribution expense for both plans
totaled $1.1 million in 1996, $0.8 million in 1995, and $1.3 million in 1994.
The Company also maintains an unfunded, non-qualified pension plan for
Directors who retire from active membership on the Board after serving at least
five years. Under the plan, Directors with more than ten years of service
receive an annual benefit equal to the average retainer for their last five
years of service. Directors retiring with five to ten years of service receive
one-half the normal amount. Benefits are payable for ten years and are reduced
if payments commence before age 62. Expense related to the plan totaled $0.4
million in 1996 and $0.2 million in each of the two prior years.
Expense, as determined under FASB Statement 106, for the Company's
postretirement medical and life insurance programs is summarized below for
fiscal 1996, 1995 and 1994.
- --------------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994
- --------------------------------------------------------------------------------
(millions)
Service cost for benefits earned $ 0.2 $ 0.3 $ 0.3
Interest cost on accumulated obligation 0.4 0.3 0.4
Amortization of transition obligation 0.3 0.3 0.4
Amortization of unrecognized gain - (0.1) -
-------- -------- --------
Total postretirement benefit expense $ 0.9 $ 0.8 $ 1.1
======== ======== ========
The following analysis presents the net liability included in the
consolidated statement of condition for postretirement medical and life
insurance benefits. The liability for these benefits is unfunded.
- --------------------------------------------------------------------------------
November 30, 1996 1995
- --------------------------------------------------------------------------------
(millions)
Accumulated postretirement benefit obligation relating to:
Retirees $ 2.7 $ 3.0
Fully eligible active employees 0.5 0.5
Other active employees 1.7 1.7
------- -------
Total accumulated postretirement benefit obligation 4.9 5.2
Unrecognized net gain 1.8 1.1
Unrecognized transition obligation (4.5) (4.8)
------- -------
Net recorded postretirement benefit liability $ 2.2 $ 1.5
======= =======
-52-
<PAGE>
At November 30, 1996, the accumulated postretirement benefit obligation was
determined using a discount rate of 8.0% and a health care cost trend rate
initially ranging from 7% to 11%, depending on the specific plan, and decreasing
to 5.5% in the year 2007 and thereafter. At November 30, 1995, the accumulated
postretirement benefit obligation was determined using a discount rate of 7.5%
and a health care cost trend rate decreasing from 12% initially to 5.5%
beginning in the year 2002. A one percentage point increase in the health care
cost trend rate would result in increases of approximately $0.7 million in the
November 30, 1996 accumulated postretirement benefit obligation and $0.1 million
in the aggregate service and interest components of 1996 postretirement benefit
expense.
20. RETAIL BANKING NONINTEREST INCOME
The following table presents the components of retail banking noninterest
income for the three most recent years.
- --------------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994
- --------------------------------------------------------------------------------
(millions)
Deposit-related fees and service charges $ 6.4 $ 5.9 $ 8.0
Insurance agency commissions 1.0 1.8 2.7
Securities brokerage commissions 2.3 2.0 4.3
------- ------- -------
Total $ 9.7 $ 9.7 $15.0
======= ======== =======
21. OTHER OPERATING EXPENSES
The following table shows the various components of other operating expenses
for the three most recent years.
- --------------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994
- --------------------------------------------------------------------------------
(millions)
Professional fees $ 7.5 $ 7.4 $ 8.7
Marketing 3.8 3.1 3.8
Telephone and communications 3.5 2.6 2.9
Postage and delivery 2.7 2.3 2.5
Office supplies and printing 2.2 1.8 2.0
Amortization of goodwill and
core deposit premium 2.0 2.2 2.7
Provision for allowance for losses (recovery)
on investment in and assets held by a
liquidating trust company (1.4) 4.5 -
Other 10.1 7.6 12.9
-------- -------- -------
Total $ 30.4 $ 31.5 $ 35.5
======== ======== =======
22. INTEREST RATE RISK MANAGEMENT
Changes in interest rates affect RCSB's net interest earnings and also affect
the carrying value of certain assets held for sale or maintained at the lower of
cost or fair value. To reduce the Company's exposure to interest rate changes,
derivative financial instruments are selectively utilized as summarized below.
Since the value to the Company of these derivatives results primarily from
changes in market interest rate levels or market prices, the associated credit
risk is typically limited to a small percentage of the nominal principal or
contract amounts used to express the volume of the transactions.
- --------------------------------------------------------------------------------
Contract or Nominal Amount at November 30, 1996 1995
- --------------------------------------------------------------------------------
(millions)
Interest rate swaps $ 450.0 $ 150.0
Forward sale commitments 192.4 175.5
Purchased call options 170.5 -
Purchased put options 20.0 11.0
Interest rate swaps involve the exchange of fixed and floating rate interest
payment obligations without exchanging the underlying principal obligations.
These agreements have been utilized by the Company to, in effect, convert
variable-rate liabilities into fixed-rate liabilities to more closely match the
interest rate sensitivity of assets and liabilities. Entering into interest
rate swaps involves not only the risk of default by the other party but also
interest rate risk if positions are not matched. The original terms to maturity
of swaps outstanding at November 30, 1996 ranged from one to three years and the
weighted average remaining term of the agreements was 1.6 years. Under the
agreements, the Company pays interest at a fixed rate and receives interest at
rates that vary according to the London Interbank Offered Rate. Interest
payments are exchanged at three or six month intervals. At November 30, 1996
and 1995, the weighted average fixed interest rates being paid by RCSB were
5.86% and 6.42%, respectively, and the weighted average variable interest rates
being received by RCSB were 5.58% and 5.80%, respectively.
To reduce the risk associated with a possible decline in the value of
residential mortgage loans originated for sale, American Home Funding, Inc.
executes forward contracts for the delivery of securitized loans, generally up
to 90 days thereafter, at a specified price and yield. Risks may arise from the
possible inability of AHF to originate loans to fulfill the contracts, in which
case securities would be purchased in the open market for delivery under the
terms of the contracts. AHF also hedges a selected portion of its pipeline of
loans expected to close by purchasing put options for the sale of securitized
loans generally up to 90 days after the option contracts are acquired.
During early 1996 and again in the latter part of the year, AHF purchased
call options on ten-year U. S. Treasury securities to hedge the carrying value
of its investment in mortgage loan servicing rights. Such value may decline if
interest rates fall and the underlying loans prepay more quickly than expected.
Outstanding options from the early 1996 purchase, which cost $3.1 million,
expire through February 1997. Options purchased in late 1996 at a cost of $0.8
million expire in November 1997.
-53-
<PAGE>
The carrying amounts and fair values of the derivatives discussed above are
presented in the note to the consolidated financial statements entitled
"Disclosures About Fair Value of Financial Instruments." The loss that would be
recognized if the counterparty to a derivative instrument failed completely to
perform according to the contract would generally be limited to the amount of
any positive carrying value.
23. CREDIT COMMITMENTS AND LOANS SOLD UNDER RECOURSE ARRANGEMENTS
Commitments to originate loans are agreements to advance funds to customers
provided there is no violation of conditions established in the underlying
contracts. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Lending commitments outstanding at November 30, 1996 and 1995 are summarized
below.
- --------------------------------------------------------------------------------
November 30, 1996 1995
- --------------------------------------------------------------------------------
Fixed Adjustable Fixed Adjustable
Rate Rate Rate Rate
- --------------------------------------------------------------------------------
(millions)
Loan commitments:
Residential mortgage $ 74.2 $ 18.3 $ 64.4 $ 12.3
Home equity - 128.8 - 122.8
Commercial mortgage - - - 0.5
Consumer 65.9 23.9 62.5 20.0
Other - 7.0 - 6.4
In prior years, RCSB sold certain residential mortgage and automobile loans
under arrangements that granted purchasers recourse to RCSB or to cash payments
due RCSB in the event the sold loans failed to perform according to terms
established in the underlying loan agreements. A summary of outstanding
balances under such arrangements is provided below.
- --------------------------------------------------------------------------------
November 30, 1996 1995
- --------------------------------------------------------------------------------
(millions) Extent of
Recourse
--------
Residential mortgage loans:
Underlying GNMA securities partial $563.8 $527.2
Underlying senior securities partial 28.8 37.5
Sold to FHLMC full 27.0 35.7
Other partial 22.9 27.7
Automobile loans partial - 19.2
American Home Funding, Inc. is subject to potential credit risk on certain
serviced residential mortgage loans guaranteed by the Department of Veterans
Affairs (VA) and included in pools of loans underlying GNMA mortgage-backed
securities. During foreclosure proceedings, AHF may incur credit loss to the
extent total indebtedness, including advances of delinquent principal, interest
and tax payments, exceeds the amount received under the VA guarantee plus
proceeds from a foreclosure sale.
In 1989 and 1988, AHF sold certain residential mortgage loans to various
trusts which issued senior and subordinated mortgage participation securities.
The subordinated securities are owned by AHF and are included in the
consolidated statements of condition as securities available for sale at
November 30, 1996 and 1995. To enhance the certainty of principal and interest
payments to holders of the senior securities presented in the above table, any
losses are first deducted from payments due holders of the subordinated
securities. Holders of the senior securities also have access, under certain
conditions, to restricted cash balances that AHF is required to maintain. At
November 30, 1996 and 1995, outstanding principal balances of the subordinated
securities amounted to $12.9 million and $13.7 million, respectively, and
restricted cash balances totaled $7.5 million and $7.1 million, respectively.
RCSB has retained credit risk on certain residential mortgage loans sold to
FHLMC with full recourse. Allowances for possible losses under the arrangements
totaling $0.5 million at November 30, 1996 and 1995, have been provided
separately from the Company's allowance for loan losses.
The Company has retained credit risk on other residential mortgage loans sold
with partial recourse. At November 30, 1996 and 1995, RCSB's maximum recourse
exposure on these residential mortgage loans totaled $4.6 million.
In prior years, investors in securities backed by automobile loans originated
and serviced by RCSB had recourse in certain circumstances to excess interest
amounts otherwise due RCSB. No such recourse exposure exists at November 30,
1996, however, because the Company has not securitized or sold automobile loans
since 1992 and remaining low-balance securities were repurchased by RCSB during
1996.
24. COMMITMENTS AND CONTINGENT LIABILITIES
In February 1995, a trust company providing check processing and securities
custodial services to the Bank and other financial institutions was seized by
state banking regulators due to the trust company's deteriorating financial
condition. Under liquidation proceedings that followed, RCSB was denied access
to certain cash balances and collateral in the form of securities that were held
by the trust company. Uncollected amounts as of November 30, 1996 were reduced
to $0.7 million, and the Company maintained a related allowance for losses of an
equivalent amount. The Bank's investments in stock and debentures issued by the
trust company, amounting to $2.4 million, were written off as expense in 1995.
AHF has executed contracts under which certain residential mortgage lenders
are committed to sell to AHF servicing rights on minimum volumes of newly
originated loans and AHF is committed to purchase servicing rights on such loans
up to a specified maximum volume. For contracts in force on November 30, 1996,
which expire during the ensuing twelve months, the aggregate committed minimum
is $435.0 million of underlying loans and the maximum is $578.0 million. At the
time of delivery, interest rates on the loans are required to be within a range
based on market rates for certain mortgage-backed securities. Contractual
prices for the servicing rights vary based on the annual servicing fee obtained
and the loan type and term.
-54-
<PAGE>
The Company and certain subsidiaries are involved in litigation arising in
the normal course of business. Although events cannot be predicted with
certainty, no liability which would be material to the financial condition of
the Company is expected to result from this litigation.
Most of RCSB's retail banking and loan production offices are operated in
leased facilities under contracts that require the lessee to pay utility and
maintenance costs. A summary of non-cancelable, long-term real property
operating lease commitments as of November 30, 1996 follows. No consideration
is given in the presentation to minor amounts of sublease income.
- ---------------------------------------------------------------
Gross Rent
Year Ending November 30, Obligation
- ---------------------------------------------------------------
(millions)
1997 $ 5.4
1998 4.1
1999 3.1
2000 2.4
2001 2.2
Thereafter 8.7
Rent expense incurred by the Company amounted to $5.6 million, $5.0 million
and $4.9 million in 1996, 1995 and 1994, respectively.
25. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement 107 requires disclosure of the fair value of all financial
instruments, whether recognized or not in the statement of financial position,
for which it is practicable to estimate fair value. The fair value disclosures
provided in the table that follows are based upon quoted market prices if
available. However, in most cases it is necessary to utilize discounted cash
flow calculations based on management's estimates of the timing of cash receipts
or payments and based on discount rates considered appropriate in relation to
the characteristics of the financial instruments and the risks involved. Due to
the significant effect of such estimates on the values derived, it is not
necessarily possible to reliably compare fair value disclosures among reporting
entities. Further, disclosed values are based on discount rates determined at a
point in time. Relatively modest changes in general interest rate levels produce
significant changes in the estimated values of many financial instruments.
Under the requirements of Statement 107, fair value disclosures omit amounts
representing the benefit of customer relationships mainly in the Company's
lending and deposit-generating businesses. Asset values attributable to core
deposits are likewise omitted. As a result of these omissions and the exclusion
of assets and liabilities that are not financial instruments, the disclosures do
not present the fair value of the institution as a whole.
The following table presents the carrying value and estimated fair value of
RCSB's recorded financial instruments and certain off-balance sheet items as of
November 30, 1996 and 1995. An explanation of the methods utilized to estimate
fair value follows the table.
<TABLE>
<CAPTION>
Fair Value of Financial Instruments
- -------------------------------------------------------------------------------------------------------------
November 30, 1996 1995
- -------------------------------------------------------------------------------------------------------------
Estimation Estimated Carrying Estimated Carrying
Method Fair Value Value Fair Value Value
- -------------------------------------------------------------------------------------------------------------
(millions)
<S> <C> <C> <C> <C> <C>
Recorded financial instruments:
Assets:
Cash and cash equivalents CV $ 56.6 $ 56.6 $ 78.9 $ 78.9
Interest-bearing deposits in banks CV 7.7 7.7 15.9 15.9
Securities available for sale QMP/DCF 18.8 18.8 84.1 84.1
Securities held to maturity QMP/DCF 1,634.4 1,639.0 1,398.7 1,398.1
Loans receivable DCF 2,026.1 2,020.7 1,976.8 1,971.0
Federal Home Loan Bank stock FHLB 34.7 34.7 38.5 38.5
Liabilities:
Demand and savings deposits CV 981.7 981.7 946.5 946.5
Term deposits DCF 1,383.9 1,387.0 1,280.5 1,276.5
Borrowings DCF 1,108.2 1,107.8 974.6 969.4
Escrow deposits CV 66.2 66.2 77.1 77.1
Due to banks CV 12.5 12.5 17.1 17.1
Off-balance sheet financial instruments:
Interest rate swaps QMP 0.4 0.7 (2.6) (0.1)
Forward commitments QMP (2.7) (2.7) (1.1) (1.1)
Purchased call options QMP 0.8 1.0 - -
Purchased put options QMP - - - -
</TABLE>
-55-
<PAGE>
Abbreviation Estimation Method
- ------------ -----------------
CV For financial instruments which are payable or collectible on
demand or within a very short timeframe, the stated or carrying
value is estimated to equal fair value. Deposit liabilities
without defined maturities are valued in this manner under the
requirements of Statement 107.
QMP Quoted market prices are utilized to determine fair value
disclosures when such prices are available. Dealer quotes are
obtained in the absence of published market prices.
DCF The estimated fair value of certain financial instruments of
longer duration is determined above by discounting expected
future cash flows at a rate considered appropriate based on the
term of the instrument and the degree of risk associated with the
cash flows. Assumptions regarding the prepayment of loans,
particularly residential mortgage loans, may have a substantial
effect on the resulting values.
FHLB The fair value of FHLB stock is considered to equal the price at
which it may be resold to the FHLB. The Company is contractually
prohibited from disposing of the stock in any other manner.
The fair value of loans receivable includes the estimated value of
commitments to originate residential mortgage loans, which amounted to gains of
$0.2 million and $0.1 million at November 30, 1996 and 1995, respectively. Fair
value of such commitments is estimated to equal the amount the Company would be
required to pay a third party to fulfill the commitments based on fees currently
charged, net of fees due from borrowers and taking into account the remaining
terms of the agreements and the creditworthiness of borrowers. For fixed-rate
loan commitments, fair value estimates also take into consideration the
difference between current interest rates and committed rates. The estimated
fair value, if any, of commitments to originate or purchase other types of loans
is not considered material to RCSB's financial condition at November 30, 1996 or
1995 and is omitted from the disclosures. Since there are no established markets
for sold loan recourse obligations, it is not practicable to estimate the fair
value of such RCSB commitments.
26. PARENT COMPANY FINANCIAL INFORMATION
For purposes of the condensed financial statements below, earnings of
Rochester Community Savings Bank are included in the financial results of its
parent company, RCSB Financial, Inc., under the equity method of accounting.
Accordingly, undistributed earnings of the Bank are recorded as an increase in
the parent company's investment in the Bank, and dividends by the Bank produce a
decrease. RCSB Financial, Inc. was formed as a holding company for the Bank on
September 1, 1995.
Condensed Statements of Condition
Parent Company Only
- --------------------------------------------------------------------------------
November 30, 1996 1995
- --------------------------------------------------------------------------------
(millions)
Assets
Cash on deposit with the Bank $ 1.9 $ 2.1
Investment in subsidiary 321.9 373.6
Other assets 0.4 0.2
--------- ---------
Total assets $ 324.2 $ 375.9
========= =========
Liabilities $ 0.3 $ -
Shareholders' Equity 323.9 375.9
--------- --------
Total liabilities and shareholders' equity $ 324.2 $ 375.9
========= ========
Condensed Statements of Income
Parent Company Only
- --------------------------------------------------------------------------------
Period Ended November 30, 1996 1995
- --------------------------------------------------------------------------------
(millions) (year) (three
months)
Dividends declared by subsidiary $ 93.6 $ 6.0
Interest income 0.1 -
Operating expenses 0.4 0.1
--------- ---------
Income before taxes and subsidiary income adjustment 93.3 5.9
Income tax benefit 0.1 -
--------- ---------
Income before subsidiary income adjustment 93.4 5.9
Subsidiary income adjustment to equity method (53.7) 4.5
--------- ---------
Net income $ 39.7 $ 10.4
========= =========
Condensed Statements of Cash Flows
Parent Company Only
- --------------------------------------------------------------------------------
Period Ended November 30, 1996 1995
- --------------------------------------------------------------------------------
(millions) (year) (three
months)
Operating Activities:
Net income $ 39.7 $ 10.4
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in earnings of subsidiary (39.9) (10.5)
Dividends received from subsidiary 94.9 6.0
Increase in other assets (net) (0.1) (0.1)
--------- ----------
Net cash provided by operating activities 94.6 5.8
--------- ----------
Financing Activities:
Net proceeds from exercise of stock options,
including income tax benefit 2.1 0.3
Purchase of RCSB common stock (86.4) (1.0)
Dividends paid on preferred stock (3.9) (1.3)
Dividends paid on common stock (6.9) (1.7)
Increase in liabilities 0.3 -
--------- ----------
Net cash used by financing activities (94.8) (3.7)
--------- ----------
Increase (decrease) in cash and cash equivalents (0.2) 2.1
Cash and cash equivalents at beginning of period 2.1 -
--------- ----------
Cash and cash equivalents at end of period $ 1.9 $ 2.1
========= ==========
-56-
<PAGE>
EXHIBIT 21.1
RCSB FINANCIAL, INC.
SUBSIDIARIES OF THE REGISTRANT
NOVEMBER 30, 1996
Jurisdiction of
Legal Name Incorporation or Organization
- ---------- -----------------------------
Rochester Community Savings Bank New York
American Credit Services, Inc. New York
American Home Funding, Inc. New York
AHF Securities, Ltd. New York
AHF Subordinated Securities, New York
Ltd.
Community Diversified Insurance New York
Agency, Inc.
American Realty Finance Corporation New York
PM&F Services, Inc. New York
RCSB Ventures, Inc. New York
National Leeway Corporation Delaware
R/WDOC, Inc. South Carolina
Rochester Fishkill, Inc. New York
Rochester Frenchman's Inc. Florida
RF Residential Funding, Inc. New York
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS CONSENT
The Board of Directors
RCSB Financial, Inc.:
We consent to incorporation by reference in registration statements 33-96490,
33-96492, 33-96494, 333-10825 and 333-10827 on Form S-8 of RCSB Financial, Inc.
of our report dated December 13, 1996 relating to the consolidated statements of
condition of RCSB Financial, Inc. and subsidiaries as of November 30, 1996 and
1995 and the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the years in the three-year period ended
November 30, 1996, which report has been incorporated by reference in the
November 30, 1996 annual report on Form 10-K of RCSB Financial, Inc. Our report
refers to changes in accounting for mortgage servicing rights in 1995.
/s/ KPMG Peat Marwick LLP
Rochester, New York
February 21, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM RCSB FINANCIAL, INC.'S ANNUAL REPORT ON FORM 10-K FOR
THE FISCAL YEAR ENDED NOVEMBER 30, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0000840068
<NAME> RCSB FINANCIAL, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> NOV-30-1996
<CASH> 56,639
<INT-BEARING-DEPOSITS> 7,654
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,797
<INVESTMENTS-CARRYING> 1,639,021
<INVESTMENTS-MARKET> 1,634,422
<LOANS> 2,048,861
<ALLOWANCE> 28,190
<TOTAL-ASSETS> 4,014,317
<DEPOSITS> 2,368,650
<SHORT-TERM> 987,393
<LIABILITIES-OTHER> 213,949
<LONG-TERM> 120,462
0
0
<COMMON> 15,331
<OTHER-SE> 308,532
<TOTAL-LIABILITIES-AND-EQUITY> 4,014,317
<INTEREST-LOAN> 176,978
<INTEREST-INVEST> 115,915
<INTEREST-OTHER> 725
<INTEREST-TOTAL> 293,618
<INTEREST-DEPOSIT> 101,913
<INTEREST-EXPENSE> 164,237
<INTEREST-INCOME-NET> 129,381
<LOAN-LOSSES> 13,548
<SECURITIES-GAINS> 1,900
<EXPENSE-OTHER> 123,442
<INCOME-PRETAX> 57,550
<INCOME-PRE-EXTRAORDINARY> 39,705
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,705
<EPS-PRIMARY> 2.67
<EPS-DILUTED> 2.36
<YIELD-ACTUAL> 3.5
<LOANS-NON> 19,545
<LOANS-PAST> 4,608
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 26,091
<CHARGE-OFFS> 17,193
<RECOVERIES> 5,744
<ALLOWANCE-CLOSE> 28,190
<ALLOWANCE-DOMESTIC> 28,190
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
