SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report pursuant to Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended September 30, 1996
Commission File No.: 0-18126
FINANCIAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1391814
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
42-25 Queens Boulevard, Long Island City, New York 11104
(Address of principal executive offices)
Registrant's telephone number, including area code: (718) 729-5002
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $0.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) 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 |_|
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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates of
the registrant was $25,341,447, based upon the last sales price as quoted on the
Nasdaq National Market for December 3, 1996.
The number of shares outstanding of the registrant's Common Stock as of
December 20, 1996 was 1,747,686.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended September
30, 1996 are incorporated by reference into Part II of this Form 10-K.
Portions of the Proxy Statement for the 1997 Annual Meeting of
Stockholders to be held on January 22, 1997 are incorporated by reference into
Parts II and III of this Form 10-K.
<PAGE>
INDEX
Part I
Page
Item 1. Business 1-35
Item 2. Properties 35-36
Item 3. Legal Proceedings 36
Item 4. Submission of Matters to a Vote of Securities Holders 36
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder 36
Matters
Item 6. Selected Financial Data 36
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 37
Item 8. Financial Statements and Supplementary Data 37
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 37
Part III
Item 10. Directors and Executive Officers of the Registrant 37
Item 11. Executive Compensation 37
Item 12. Security Ownership of Certain Beneficial Owners and Management 37
Item 13. Certain Relationships and Related Transactions 37
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 38
<PAGE>
PART I
Item 1. BUSINESS OF THE COMPANY
General
Financial Bancorp, Inc. (the "Company"), was formed in February 1994 as
the holding company for Financial Federal Savings Bank (the "Bank") in
connection with the conversion of the Bank from mutual to stock form of
ownership on August 17, 1994. Effective October 20, 1994, the Bank changed its
name from Financial Federal Savings and Loan Association to Financial Federal
Savings Bank. The Company is headquartered in Long Island City, New York and its
principal business currently consists of the operations of the Bank. The
Company, as a savings and loan holding company, and the Bank are subject to the
regulation of the Office of Thrift Supervision ("OTS"), the Federal Deposit
Insurance Corporation ("FDIC") and the Securities and Exchange Commission
("SEC"). The Company is listed on the Nasdaq Stock Market under the symbol
"FIBC". The Company does not transact any material business other than through
its subsidiary, the Bank. The Bank's primary sources of funds are retail
deposits, loan repayments and borrowings. The principal business of the Bank is
attracting retail deposits from the areas surrounding its branch office. The
Bank may borrow funds from the Federal Home Loan Bank of New York ("FHLB") and
the Federal Reserve Bank of New York ("FRB") or through reverse repurchase
agreements. These funds are then primarily invested in fixed-rate and
adjustable-rate loans on one- to four-family residences, multi-family loans,
commercial real estate mortgage loans, and to a lesser extent construction loans
and other consumer loans. The Bank's revenues are derived principally from
interest on loans, mortgage-backed securities, interest and dividends on
investment securities and short-term investments, and other fees and service
charges.
Market Area and Competition
The Bank has been, and continues to be, a community-oriented savings
institution offering a variety of financial services to meet the needs of the
communities it serves. Its primary market areas are the areas surrounding its
offices, while its lending activities extend throughout the New York City
metropolitan area. In addition to its principal office in the Long Island City
section of Queens, the Bank operates four other retail offices, three in Queens
and one in Brooklyn.
The New York City metropolitan area has a high density of financial
institutions, most of which are significantly larger and have greater financial
resources than the Bank, and all of which are competitors of the Bank to varying
degrees. The Bank's competition for loans comes principally from mortgage
banking companies, commercial banks, savings banks and savings and loan
associations. The Bank's most direct competition for savings comes from
commercial banks, savings banks, savings and loan associations and credit
unions. The Bank also faces competition for savings from other financial
intermediaries such as brokerage firms and insurance companies.
1
<PAGE>
The Bank serves its market area with a wide selection of lending and
deposit products and other retail financial services. Management considers the
Bank's reputation for customer service and its strong branch network as its
major competitive advantages in attracting and retaining customers in its market
areas. The Bank also believes it benefits from its community orientation as well
as its established deposit base and significant levels of core deposits.
Lending Activities
Loan and Mortgage-Backed Securities Portfolio Composition. The Bank's loan
portfolio consists primarily of conventional fixed-rate and adjustable-rate,
first and second mortgage loans secured by one- to four-family owner-occupied
residences, multi-family real estate loans, commercial real estate loans, and to
a lesser extent construction/land loans, other consumer loans and commercial
business loans. At September 30, 1996, the Bank's total loans receivable
equalled $144.7 million, of which $115.5 million, or 79.8%, were one- to
four-family residential first mortgage loans. Of the one- to four-family
residential first mortgage loans outstanding at that date, $56.5 million, or
48.9% were adjustable-rate mortgage ("ARM") loans. At September 30, 1996, the
Bank's loan portfolio also included $2.8 million of one- to four-family
residential second mortgage loans, $5.6 million of multi-family loans, $15.3
million of commercial real estate loans, $4.9 million of construction/land loans
and $568 thousand of other consumer and commercial business loans.
The types of loans that the Bank may originate are regulated by federal
laws and regulations. Interest rates charged by the Bank on loans are affected
principally by the demand for such loans and market conditions. These factors
are, in turn, affected by general and economic conditions, monetary policies of
the federal government, legislative and tax policies and governmental budgetary
matters.
2
<PAGE>
The following table sets forth the composition of the Bank's loan
portfolio and mortgage-backed securities portfolio in dollar amounts and in
percentages of the portfolio at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ---------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential one- to four-family:
First mortgages........... $115,300 79.68% $ 93,361 82.55% $72,669 85.29%
Second mortgages.......... 2,980 2.06 3,806 3.36 4,491 5.27
Multi-family................ 5,622 3.89 4,296 3.80 3,213 3.77
Commercial.................. 15,302 10.58 8,031 7.10 2,940 3.45
Construction/land loans..... 4,920 3.40 3,080 2.72 1,455 1.71
-------- ------ -------- ------ ------- ------
Total real estate loans 144,124 99.61 112,574 99.53 84,768 99.49
Consumer/commercial business:
Consumer.................... 400 0.27 404 0.36 400 0.47
Commercial business......... 168 0.12 123 0.11 35 0.04
-------- ------ -------- ------ ------- ------
Total consumer/commercial
business loans.......... 568 0.39 527 0.47 435 0.51
-------- ------ -------- ------ ------- ------
Total loans receivable.. 144,692 100.00% 113,101 100.00% 85,203 100.00%
====== ====== ======
Less:
Loans in process.......... 2,509 1,485 352
Unearned discounts and net
deferred loan fees...... 296 311 226
Allowance for loan losses 1,573 1,243 1,120
-------- -------- -------
4,378 3,039 1,698
-------- -------- -------
Total loans receivable, net $140,314 $110,062 $83,505
======== ======== =======
Mortgage-backed securities:
GNMA ........................ 27,106 49.41% $33,144 53.45% $26,749 53.67%
FHLMC (1).................... 23,015 41.96 22,979 37.06 15,816 31.74
FNMA......................... 2,697 4.92 3,388 5.46 4,368 8.76
Others....................... 2,035 3.71 2,497 4.03 2,906 5.83
-------- ------ ------- ------
Total mortgage-backed securities (2) $ 54,853 100.00% $62,008 100.00% $49,839 100.00%
======== ====== ======= ====== ======= ======
</TABLE>
At September 30,
------------------------------------------
1993 1992
------------------- ------------------
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
(Dollars in thousands)
Real estate loans:
Residential one- to four-family:
First mortgages........... $72,274 85.41% $80,695 84.75%
Second mortgages.......... 6,429 7.60 8,556 8.99
Multi-family................ 2,320 2.74 2,574 2.70
Commercial.................. 3,091 3.65 3,008 3.16
Construction/land loans..... 109 0.13 -- --
------- ------- ------- -------
Total real estate loans. 84,223 99.53 94,833 99.60
Consumer/commercial business:
Consumer.................... 332 0.40 344 0.36
Commercial business......... 62 0.07 32 0.04
------- ------- ------- -------
Total consumer/commercial
business loans.......... 394 0.47 376 0.40
------- ------- ------- -------
Total loans receivable.. 84,617 100.00% 95,209 100.00%
======= =======
Less:
Loans in process.......... 44 --
Unearned discounts and net
deferred loan fees...... 143 158
Allowance for loan losses. 1,005 343
------- -------
1,192 501
------- -------
Total loans receivable, net $83,425 $94,708
======= =======
Mortgage-backed securities:
GNMA ........................ $24,156 48.89% $17,354 42.47%
FHLMC (1).................... 16,065 32.52 15,456 37.82
FNMA......................... 5,741 11.62 4,052 9.92
Others....................... 3,446 6.97 4,000 9.79
------- ------- ------- -------
Total mortgage-backed securities (2) $49,408 100.00% $40,862 100.00%
======= ======= ======= =======
- ----------
(1) Includes $5.0 million in Mortgage-backed securities available for sale as
of September 30, 1996.
(2) Mortgage-backed securities are net of premiums and discounts.
3
<PAGE>
Loan and Mortgage-Backed Security Maturity and Repricing
The following table shows the maturity or period to repricing of the
Bank's loan and mortgage-backed security portfolio at September 30, 1996. Loans
and mortgage-backed securities that have adjustable rates are shown as being due
in the period during which the interest rates are next subject to change. The
table does not include prepayments or scheduled principal amortization.
Prepayments and scheduled principal amortization on mortgage loans and
mortgage-backed securities totaled $17.1 and $12.2 million respectively, for the
twelve months ended September 30, 1996.
<TABLE>
<CAPTION>
Mortgage Loans and Other Loans
------------------------------
At September 30, 1996
---------------------
1 - 4 Multi- Commercial Construction/ Commercial Total Mortgage-Backed
Family Family Real Estate Land Consumer Other Loans Securities
------- --------- ----------- ------------ ---------- ----------- ------- ----------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year ........... $ 32,206 $ -- $ 617 $4,920 $ 41 $ 49 $ 37,833 $29,081
After one year:
One to three years ...... 10,523 39 -- -- 182 -- 10,744 581
Three to five years ..... 14,794 651 1,168 -- 36 119 16,768 2,222
Five to ten years ....... 12,382 1,137 1,014 -- 62 -- 14,595 2,762
After ten years ......... 48,375 3,795 12,503 -- 79 -- 64,752 20,207
-------- ------ ------- ------ ---- ---- -------- -------
Total due or repricing
after one year ...... 86,074 5,622 14,685 -- 359 119 106,859 25,772
-------- ------ ------- ------ ---- ---- -------- -------
Total amounts due or
repricing, gross .......... $118,280 $5,622 $15,302 $4,920 $400 $168 $144,692 $54,853
======== ====== ======= ====== ==== ==== ======== =======
</TABLE>
The following table sets forth at September 30, 1996, the dollar amount of
all loans and mortgage-backed securities due after September 30, 1997 and
indicates whether such loans and mortgage-backed securities have fixed or
adjustable interest rates.
Due After September 30, 1997
--------------------------------------------
Fixed Adjustable Total
----------- ------------- ------------
(In thousands)
Mortgage loans:
One- to four-family ............. $59,913 $26,161 $ 86,074
Multi-family .................... 4,988 634 5,622
Commercial real estate .......... 13,031 1,654 14,685
Other loans ....................... 226 252 478
------- ------- --------
Total loans ....................... $78,158 $28,701 $106,859
======= ======= ========
Mortgage-backed securities ........ $25,772 $ -- $ 25,772
======= ======= ========
4
<PAGE>
Set forth below is a table showing the Bank's loan origination, purchase
and sales activity and activity in mortgage-backed security portfolio for the
periods indicated.
For the Years Ended September 30,
---------------------------------
1996 1995 1994
--------- --------- --------
(In thousands)
Loans receivable at beginning of period ..... $ 113,101 $ 85,203 $ 84,617
Originations:
First mortgages .......................... 21,241 19,344 9,523
Second mortgages ......................... 342 354 --
Multi-family ............................. 2,058 1,136 1,200
Commercial ............................... 7,491 5,187 100
Construction/land ........................ 2,870 4,364 1,455
Consumer loans ........................... 212 279 184
Student loans ............................ 54 49 127
Commercial business ...................... 69 120 21
Loan purchases ........................... 14,848 9,045 --
--------- --------- --------
Total originations and purchases ....... 49,185 39,878 12,610
--------- --------- --------
Transfer of mortgage loans to
foreclosed real estate .................... (100) (682) (568)
Loans charged-off ........................... (327) (219) (70)
Repayments .................................. (17,167) (11,079) (11,386)
Loan sales .................................. -- -- --
--------- --------- --------
Total reductions ......................... (17,594) (11,980) (12,024)
--------- --------- --------
Total loans receivable at end of period ..... $ 144,692 $ 113,101 $ 85,203
========= ========= ========
Mortgage-backed securities
at beginning of period .................... $ 62,008 $ 49,839 $ 49,408
Purchases ................................ 5,068 19,294 8,082
Repayments ............................... (12,214) (7,169) (7,536)
Discount (premium) amortization .......... (19) 44 (115)
Unrealized gain .......................... 10 -- --
--------- --------- --------
Mortgage-backed securities at
end of period ............................. $ 54,853 $ 62,008 $ 49,839
========= ========= ========
5
<PAGE>
One- to Four-Family Residential Mortgage Lending. The Bank offers first
mortgage loans primarily secured by one- to four-family residences. Loan
originations are obtained from existing customers, referrals from real estate
brokers and builders and through advertising and general solicitations. The Bank
originates both ARM loans and fixed-rate loans. At September 30, 1996, first
mortgage loans secured by residential one- to four-family real estate totalled
$115.5 million, or 80.14% of total real estate loans at such date. Of the Bank's
first mortgage loans secured by one- to four- family residences, $56.5 million,
or 48.89% were ARM loans.
The Bank has, from time to time, purchased one- to four-family mortgage
loans which generally include loans secured by properties located outside the
Bank's market area. All loans purchased by the Bank must generally meet the same
underwriting criteria as loans originated by the Bank. At September 30, 1996,
the Bank had $27.2 million in one- to four-family purchased mortgage loans and
single-family loan participations serviced by others.
The Bank underwrites all mortgage loans generally in conformance with
secondary market guidelines and internally generated policies and procedures.
Upon receipt of a completed loan application from a prospective borrower, a
credit report is ordered, income and certain other information is verified, and
additional financial information is requested, if deemed necessary. An
independent appraisal of the real estate intended to secure the loan is
undertaken by an independent appraiser previously approved by the Board. It is
the Bank's policy to obtain title insurance on all real estate mortgage loans.
Borrowers must also obtain hazard/flood insurance prior to closing. Borrowers
generally are required to advance funds on a monthly basis to a mortgage escrow
account, from which the Bank makes disbursements for items such as real estate
taxes, hazard/flood insurance premiums and private mortgage insurance premiums
as they become due.
The Bank generally makes mortgage loans secured by owner-occupied one- and
two-family residences in amounts up to 95% of the appraised value or sales price
of the property on loans that do not exceed $300,000. Mortgage loans originated
under the Bank's First Time Home Buyers' Program may be in amounts of up to 89%
of property values, with additional monthly principal repayments required for a
specified time in lieu of private mortgage insurance coverage. Except for the
loans originated under the Bank's First Time Home Buyers' Program, mortgage
loans on one- to four-family, owner-occupied residences are originated for up
to 95% of the property value provided that mortgage insurance on the amount in
excess of 80% is obtained. The Bank's one- to four-family residential mortgage
loans do not provide for negative amortization. When the information is obtained
and an appraisal is completed, loans are presented for approval to the Bank's
Loan Committee. The Loan Committee consists of two outside directors, the Chief
Executive Officer and the Chief Operating Officer.
The Bank offers adjustable-rate first mortgage loans with interest rates
which adjust periodically based upon a spread above an agreed upon index, such
as a U.S. Treasury constant maturity index. ARM loans may carry an initial
interest rate which is less than the fully indexed rate for the loan. Borrowers
of ARM loans, that reset every twelve months, or less are qualified at the
lesser of the first rate adjustment or the fully indexed rate in an effort to
reduce the risk
6
<PAGE>
of default as the interest rate and underlying payments increase. ARM loans have
periodic caps ranging from 1.0% to 2.5% per adjustment period and lifetime caps
of 5.0% to 6.0% over the initial rate. The Bank has two additional ARM loan
products: a 10/1 mortgage loan which provides for an initial 10 year fixed rate
period, thereafter adjusting each year, and a 6 month ARM which provides for
interest rate adjustments every six months.
Equity and Second Mortgage Loans. The Bank originates equity and second
mortgage loans on one- to four-family residences. These loans generally are
originated as either fixed-rate or adjustable-rate loans secured by
owner-occupied one- to four-family residences with terms from 10 to 25 years.
The Bank offers equity and second mortgage loans with maximum combined
loan-to-value ratios of up to 80%, or 85% if the borrower has the first mortgage
with the Bank. At September 30, 1996, the Bank had $3.0 million, or 2.06% of
total one- to four-family loans in equity and second mortgage loans, including
$1.9 million of purchased second mortgage loans, which are subject to recourse
against the seller.
Multi-Family and Commercial Real Estate Loans. The Bank also originates
multi-family and commercial real estate loans. As of September 30, 1996, the
Bank's total loan portfolio contained $5.6 million, or 3.89% of multi-family
loans, and $15.3 million, or 10.58% of commercial real estate loans. The
commercial real estate and multi-family loans in the Bank's portfolio consist of
both fixed-rate and adjustable-rate loans which were originated at prevailing
market rates. The Bank's policy has been to originate commercial real estate and
multi-family loans primarily in its market area. In making commercial real
estate and multi-family loans, the Bank considers the ability of net operating
income generated by the real estate to support the debt, the financial
resources, income level and managerial expertise of the borrower, the
marketability of the property and the Bank's lending experience with the
borrower.
Construction and Land Loans. The Bank originates loans, on a selected
basis, to finance the construction of one- to four-family homes and other
properties in its market areas. As of September 30, 1996, the Bank's portfolio
contained $4.9 million, or 3.4% of construction loans. Construction loans
generally provide for interest-only payments and are originated for a
short-term. Borrowers must contribute equity in the construction projects to
establish acceptable loan-to-value ratios. The Bank generally requires personal
guarantees from the principals of the borrowing entity. Loan proceeds are
disbursed in stages as construction progresses and as inspections warrant.
Consumer/Commercial Business Lending. The Bank also offers secured and
unsecured personal loans and commercial business loans. At September 30, 1996,
the Bank's consumer and commercial business loans totalled $568 thousand, or
.39% of the Bank's total loan portfolio. Of that amount, $400 thousand consisted
of home improvement, personal, passbook and student loans; and $168 thousand of
commercial business loans.
Mortgage-backed Securities. The Bank invests in a variety of
mortgage-backed securities, 96.28% of which were insured or guaranteed by the
FHLMC, GNMA or FNMA at September 30, 1996. The remaining 3.72% was invested in a
privately issued mortgage pass-through
7
<PAGE>
security. At September 30, 1996, mortgage-backed securities totalled $54.9
million, or 20.56% of total assets, $5.0 million of which are classified by the
Bank as available for sale. Of the $54.9 million in mortgage-backed securities,
$29.1 million, or 53.0% were adjustable-rate and will reprice within one year.
During the year ended September 30, 1996, the Bank purchased $5.1 million of
mortgage-backed securities and received prepayments and scheduled principal
amortization of $12.2 million.
Asset Quality
Loan Collection. When a borrower fails to make a required payment, the
Bank generally takes immediate steps to induce the borrower to cure the
delinquency and restore the loan to a current status. The Bank will send a late
notice and contact the borrower in order to determine the reason for the
delinquency and to effect a cure. In most cases delinquencies are cured
promptly; however, if a loan has been delinquent for more than 60 days, the Bank
reviews the loan status more closely and, where appropriate, appraises the
condition of the property and the financial circumstances of the borrower. Based
upon the results of any such investigation, the Bank may: (1) accept a repayment
program for the arrearage from the borrower; (2) seek evidence, in the form of a
listing contract, of efforts by the borrower to sell the property if the
borrower has stated that he is attempting to sell; (3) request a deed in lieu of
foreclosure; or (4) initiate foreclosure proceedings.
When a loan payment is delinquent for three or more monthly installments,
the Bank may initiate foreclosure proceedings. The Bank continues to accrue
interest until foreclosure proceedings have commenced, at which time the accrual
is excluded from income by an offsetting increase in a special reserve account.
Under certain circumstances prior to commencement of foreclosure proceedings or
prior to the loan becoming 90 days delinquent, when recovery of interest is
doubtful, the Bank will immediately offset such interest in a special reserve
account. If such interest is ultimately collected, it is credited to income in
the period of recovery.
At September 30, 1996, the Bank had 19 loans delinquent 90 days or more
totalling $2.0 million, of which $1.7 million are attributed to one- to
four-family mortgage loans and $2.5 million in participation loans on which the
FDIC is disputing the original servicing agreement which call for current
payment on principal and interest. At September 30, 1996, the Bank's real estate
owned totalled $378 thousand.
8
<PAGE>
TASCO Loan Participations. TASCO was a service corporation which was
formed by 36 savings banks and savings and loan associations located in the
State of New York. Member institutions participated in loans through TASCO in
various projects, including condominium and cooperative projects, construction
of new condominiums and hotel renovations. TASCO provided a means by which
smaller institutions could invest in larger projects. TASCO was dissolved on
November 11, 1994. The Bank presently has $922,000 or .64% of its total loan
portfolio invested in one TASCO project. The Bank has established loss reserves
of $504,000 on this loan participation. As of September 30, 1996, the Bank's net
exposure on the existing TASCO loan participation was $418 thousand. This loan
was restructured pursuant to which the interest rate on the loan was reduced to
2.0% (currently 4.0%) based upon the loan balance of $922,000. At September 30,
1996, the loan was performing under the restructured terms, and therefore, is no
longer classified as non-performing. The Bank has not participated in a new
TASCO project since the mid-1980s.
9
<PAGE>
Delinquent and Non-Performing Loans. At September 30, 1996, 1995 and 1994,
delinquencies in the Bank's loan portfolio were as follows:
<TABLE>
<CAPTION>
At September 30, 1996 At September 30, 1995
------------------------------------------------- -----------------------------------------------
60 - 89 Days 90 Days or More 60 - 89 Days 90 Days or More
---------------------- ---------------------- --------------------- ----------------------
Principal Principal Principal Principal
Number of Balance of Number of Balance of Number of Balance of Number of Balance of
Loans Loans Loans Loans Loans Loans Loans Loans
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential one- to
four-family:
First mortgages ......... 1 $ 175 16 $3,955(1) 1 $ 2 13 $1,216
Second mortgages ........ -- -- 1 200 2 55 -- --
Multi-family residential .. -- -- 2 350 -- -- 3 677
Commercial real estate .... -- -- -- -- -- -- 1 38
Consumer loans ............ -- -- 4 11 -- -- 4 11
Commercial Business ....... -- -- 1 45 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total loans ...... 1 $ 175 24 $4,561 3 $ 57 21 $1,942
====== ====== ====== ====== ====== ====== ====== ======
Delinquent loans and non-
performing loans to total 0.12% 3.15% 0.05% 1.72%
</TABLE>
At September 30, 1994
---------------------------------------------
60 - 89 Days 90 Days or More
--------------------- ---------------------
Principal Principal
Number of Balance of Number of Balance of
Loans Loans Loans Loans
----- ----- ----- -----
(Dollars in thousands)
Residential one- to four-family:
First mortgages ................ -- $ -- 12 $1,199
Second mortgages ............... 2 34 2 29
Multi-family residential ......... -- -- 3 426
Commercial real estate ........... -- -- -- --
Consumer loans ................... -- -- 4 5
Commercial Business .............. -- -- -- --
------ ------ ------ ------
Total loans ............. 2 $ 34 21 $1,659
====== ====== ====== ======
Delinquent and non-performing
loans to total loans ........... 0.04% 1.95%
- ----------
(1)Includes $2.5 million loan participation certificates at September 30, 1996.
10
<PAGE>
The following table sets forth information regarding non-accrual mortgage
loans, loans delinquent 90 days or more and still accruing interest, investments
in real estate, real estate owned ("REO") and in-substance foreclosure loans.
The Bank continues to accrue interest on loans delinquent 90 days or more until
commencement of foreclosure proceedings or until recovery of interest is
considered by the Bank to be doubtful based on the value of the property and
other considerations. During the years ended September 30, 1996, 1995 and 1994,
the amounts of additional interest income that would have been recorded on
non-accrual loans, had they been current, totalled $256,000, $171,000 and
$165,000, respectively. The Bank collected interest income on such non-accrual
loans in the amounts of $43,000, $24,000 and $17,000 during the years ended
September 30, 1996, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual delinquent mortgage
loans .............................. $4,380 $1,794 $1,624(1) $2,008(1) $3,904
Delinquent other loans ............... 56 11 5 11 24
Mortgage loans delinquent 90 days
or more and accruing ............. 125 137 30 166 550
------ ------ ------ ------ ------
Total non-performing loans ....... 4,561 1,942 1,659 2,185 4,478
Investment in real estate (2) ........ 3,308 3,531 2,789 3,153 --
In-substance foreclosures (3) ........ -- -- -- -- 148
Real estate owned .................... 378 591 620 650 185
------ ------ ------ ------ ------
Total non-performing assets ..... $8,247 $6,064 $5,068 $5,988 $4,811
====== ====== ====== ====== ======
Non-performing loans
to total loans ................... 3.15% 1.72% 1.95% 2.58% 3.07%
Total non-performing assets
to total assets .................. 3.09% 2.65% 2.95% 4.05% 4.70%
</TABLE>
- ----------
(1) A TASCO commercial loan with a balance of $922,000, which previously had
been delinquent, but was restructured in fiscal 1993.
(2) Investments in real estate through the Bank's subsidiaries are classified
as non-performing assets.
(3) Represents reclassification of delinquent TASCO projects, net of specific
reserves.
Impaired loans and related amounts recorded in the allowance for loan
losses at September 30, 1996 are summarized as follows in thousands:
Recorded investment in impaired loans:
With recorded allowance............... $922
Without recorded allowance ........... --
----
Total impaired loans 922
Recorded allowances for loan losses ...... 504
----
Net impaired loans ................... $418
====
For the year ended September 30, 1996, interest income that would have
been recognized for these loans had they been performing in accordance with the
original terms was approximately $78,000 and interest income recognized when
received was $31,000.
The average balance of impaired loans during the years approximated
$933,000.
11
<PAGE>
Classified Assets. Federal regulations and the Bank's Classification of
Assets Policy require the classification of loans and other assets, such as debt
and equity securities considered to be of lesser quality, as "Substandard,"
"Doubtful" or "Loss" assets. An asset is considered "Substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the distinct possibility that the institution will sustain some
loss if the deficiencies are not corrected. Assets classified as "Doubtful" have
all of the weaknesses inherent in those classified "Substandard," with the added
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions and values, highly
questionable and improbable. Assets classified as "Loss" are those considered
uncollectible and of such little value that their continuance as assets without
the establishment of a specific loss reserve is not warranted. Assets which do
not currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "Special Mention" or placed on an in-house "Watch
List" by management. When the Bank determines that an asset should be
classified, it generally does not establish a specific allowance for such asset
unless it determines that such asset may result in a loss. The Bank may,
however, increase its general valuation allowance in an amount deemed prudent.
The Bank believes that its policies are consistent with regulatory requirements
regarding classified assets.
At September 30, 1996, classified assets totalled $8.2 million, or 3.1% of
total assets, of which $1,000 classified as "Doubtful" and the remaining
classified as "Substandard" consisted of 14 one- to four-family loans totalling
$1.8 million, 2 multi-family loans totalling $350,000, 1 commercial real estate
loan totalling $418,000, 1 building loan for $598,000 and a participation in
one- to four-family loans totalling $2.5 million, 3 foreclosed real estate
properties totalling $378,000 and $2.2 million in investment real estate. Real
estate owned and investment in real estate are carried at the lower of cost or
fair value less costs of disposal. Assets classified as "Doubtful" include 1
consumer loan for $1,000. Assets designated as "Special Mention" totalled $1.2
million, of which represents single family loans.
Allowances for Losses on Loans, Investments in Real Estate and Real Estate
Owned.
The Bank's allowance for loan losses is maintained at a level considered
adequate to absorb future loan losses. Management of the Bank, in determining
the allowance for loan losses, considers the risks inherent in its loan
portfolio and changes in the nature and volume of its loan activities, along
with the general economic and real estate market conditions. The Bank utilizes a
two tiered approach in determining its allowance: (1) identification of problem
loans and establishment of appropriate loss allowances on such loans; and (2)
establishment of general valuation allowances on the remainder of its loan
portfolio. The Bank maintains a loan review system which allows for a periodic
review of its loan portfolio and the early identification of potential problem
loans. Such system takes into consideration, among other things, delinquency
status, amount, type of collateral and financial condition of the borrower. Loan
loss allowances are established for identified loans based on a review of such
data and/or estimates of the fair value of the underlying collateral. General
loan loss allowances are based upon a combination of
12
<PAGE>
factors including, but not limited to, actual loan loss experience, composition
of the loan portfolio, current economic conditions and management's judgment.
While the Bank believes it utilized the best information available and
that it has established an adequate allowance for loan losses, there can be no
assurance that regulators, in reviewing the Bank's loan portfolio, will not
request the Bank to materially increase its allowance for loan losses, thereby
negatively affecting the Bank's financial condition and earnings at that time.
Although management believes that an adequate allowance for loan losses has been
established, actual losses are dependent upon future events and, as such,
further additions and/or adjustments to the specific and general loan loss
allowances may become necessary.
REO consists of real estate acquired by foreclosure or a deed in lieu of
foreclosure and is initially recorded at the lower of cost or fair value at the
date of acquisition or in-substance foreclosure. Real estate owned is carried at
the lower of cost or fair value less estimated selling costs. Loans foreclosed
in-substance consist of loans accounted for as foreclosed property even though
actual foreclosure has not taken place. Investments in real estate include
investments in non-consolidated joint ventures. These investments are recorded
at the lower of cost or fair value. The amounts ultimately recoverable from
investments in real estate could differ from the net carrying value of the
assets. See "Subsidiary and Joint Venture Activities -- FinFed Development
Corp."
The following table sets forth the Bank's allowances for loan losses at
the dates indicated:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Balance at beginning of period .............. $1,243 $1,120 $1,005 $ 343 $ 295
Charge-Offs:
One- to four-family .................... -- 31 51 50 26
Multi-family ........................... 213 189 -- -- --
Consumer and other loans ............... -- -- 19 20 1
------ ------ ------ ------ ------
Total charge-offs ........................... 213 220 70 70 27
Recoveries .................................. -- 1 2 -- --
Provision for loan losses ................... 543 342 183 732 75
------ ------ ------ ------ ------
Balance at end of period (1) ................ $1,573 $1,243 $1,120 $1,005 $ 343
====== ====== ====== ====== ======
Ratio of total charge-offs during the
period to average loans outstanding
during the period ......................... 0.17% 0.23% 0.08% 0.08% 0.03%
Ratio of allowance for loan losses to
total loans at the end of the period ...... 1.09% 1.10% 1.31% 1.20% 0.36%
Ratio of allowance for loan losses to
non-performing loans at the end of
the period ................................ 34.50% 63.97% 67.48% 46.00% 7.66%
</TABLE>
- ----------
(1) Includes $504,000, $717,000, $739,000 and $739,000, which are attributable
to TASCO loan participation(s), at September 30, 1996, 1995, 1994 and 1993.
13
<PAGE>
The following table sets forth the allocation of the allowance for loan
losses by loan category and the percent of loans in each category to total loans
receivable at the dates indicated. The portion of the allowance for loan losses
allocated to each loan category does not represent the total available for
future losses which may occur within the loan category since the total loan loss
reserve is a valuation reserve applicable to the entire loan portfolio.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ -------------------- ------------------ ------------------ ------------------
% of Loans % of Loans % of Loans % of Loans % of Loans
in each in each in each in each in each
category to category to category to category to category to
Amount total loans Amount total loans Amount total loans Amount total loans Amount total loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
Residential one- to
four-family ......... $ 650 81.74% $ 305 85.91% $ 293 90.56% $ 235 93.01% $ 254 93.75%
Multi-family ........ 53 3.89 218 3.80 278 3.77 250 2.74 79 2.70
Commercial .......... 757 10.57 686 7.10 529 3.45 500 3.65 -- 3.16
Commercial business
loans 57 0.12 12 0.11 4 0.04 -- 0.07 -- 0.03
Construction/land ..... 53 3.40 17 2.72 9 1.71 -- 0.13 -- --
Consumer .............. 3 0.28 5 0.36 7 0.4 20 0.40 10 0.36
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses (1) .... $1,573 100.00% $1,243 100.00% $1,120 100.00% $1,005 100.00% $ 343 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- ----------
(1) Includes $504,000, $717,000, $739,000 and $739,000, which are attributable
to TASCO loan participations at September 30, 1996, 1995, 1994 and 1993.
See "Asset Quality -- TASCO Loan Participations."
Investment Activities
The Bank is required to maintain liquid assets at minimum levels which
vary from time to time. The Bank increases or decreases its liquid investments
depending on the availability of funds and comparative yields on liquid
investments relative to the return on loans. The Bank's liquid investments
primarily include United States Government and agency securities, overnight
federal funds and repurchase agreements. Historically, the Bank has maintained
its liquid assets at levels above the minimum regulatory requirements. At
September 30, 1996, $23.8 million, or 8.9% of the Bank's total assets were
invested in investment securities and other short-term investments that mature
in five years or less.
14
<PAGE>
The following table sets forth certain information regarding the carrying
and market values of the Bank's portfolio of investment securities at the dates
indicated:
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ---------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities held to maturity:
U.S. Government and agency obligations ........ $51,122 $49,903 $38,921 $38,842 $16,509 $16,157
Common stock (1) .............................. -- -- 15 15 24 24
------- ------- ------- ------- ------- -------
Total investment securities held to maturity .. $51,122 $49,903 $38,936 $38,857 $16,533 $16,181
======= ======= ======= ======= ======= =======
Available for sale:
U.S. Treasury securities ...................... $ 2,908 $ 2,908 -- -- -- --
Equity securities ............................. 700 700 -- -- -- --
------- ------- ------- ------- ------- -------
Total investment securities available for sale $ 3,608 $ 3,608 -- -- -- --
======= ======= ======= ======= ======= =======
</TABLE>
- ----------
(1) Investment in TASCO common stock written down to estimated fair value.
The following table sets forth the carrying values, market values and
average yields for the Bank's debt security portfolio by maturity, call date or
repricing date, whichever is first, at September 30, 1996.
<TABLE>
<CAPTION>
Less than One Year One to Five Years Total Investment Portfolio
---------------------------- -------------------------- ----------------------------
Carrying Market Average Carrying Market Average Carrying Market Average
Value Value Yield Value Value Yield Value Value Yield
--------- ------- -------- -------- ------ ------- -------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government agency securities... $48,556 $47,428 7.33% $2,566 $2,475 8.05% $51,122 $49,903 7.37%
U.S. Government treasury securities. -- -- -- 2,908 2,908 6.35 2,908 2,908 6.35
------ ------ ------- -------
Total......................... $48,556 $47,428 7.33% $5,474 $5,383 7.15% $54,030 $52,811 7.32%
======= ======= ====== ====== ======= =======
</TABLE>
15
<PAGE>
Sources of Funds
General. The Bank's lending and investment activities are predominantly
funded by savings deposits, interest and principal payments on loans and other
investments, FHLB advances, other borrowings and proceeds from the maturities of
securities.
Deposits. The Bank offers a variety of deposit accounts having a wide
range of interest rates and terms. The Bank's deposits consist of savings and
club accounts, interest-bearing and non-interest-bearing demand deposit
accounts, money market deposit accounts and certificates of deposit. In addition
to the standard certificate of deposit, the Bank has designed special flexible
certificates of deposit ("CDs") to accommodate its customers. The Bank's Golden
Advantage program pays a bonus rate of 1/8 of 1% (.125%) over the standard time
deposit rate for seniors who have direct deposit of their social security and/or
pension benefits to a Bank deposit account. The Bank also offers the Silver
Certificate of Deposit to all direct deposit customers 62 years of age or older.
This twelve month time deposit allows one withdrawal of principal per quarter
without an early withdrawal penalty. As of September 30, 1996, Silver
Certificates of Deposit represented $15.4 million, or 14.9% of certificates
outstanding. The Bank only solicits deposits from its market area and does not
use brokers to obtain deposits. The Bank relies primarily on competitive pricing
policies, advertising and customer service to attract new and retain existing
deposits.
On February 24, 1995, the Bank consummated the purchase of certain deposit
liabilities from the East New York Savings Bank and consolidated these deposit
liabilities into Financial Federal Savings Bank's Greenpoint, Brooklyn branch.
Deposits totalling $14.8 million were acquired, for which the Bank paid a
premium of $127,000. The transaction was accounted for under the purchase method
of accounting.
16
<PAGE>
The following table presents the deposit activity of the Bank for the
periods indicated.
For the Years Ended September 30,
--------------------------------------
1996 1995 1994
--------------------------------------
(In thousands)
Deposits ............................... $ 267,595 $ 264,455(1) $ 138,174
Withdrawals ............................ 258,815 224,272 138,546
--------- --------- ---------
Net increase (decrease) before interest
credited ............................... 8,780 40,183 (372)
Interest credited ...................... 7,612 6,127 3,916
--------- --------- ---------
Net increase (decrease) in deposits .... $ 16,392 $ 46,310 $ 3,544
========= ========= =========
- ----------
(1) Includes $14.8 million of deposits purchased in February 1995.
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by the time remaining until maturity as of September
30, 1996.
(In thousands)
Maturity Period:
Three months or less...................... $ 1,373
Over three through six months............. 1,252
Over six through 12 months................ 2,299
Over 12 months............................ 4,608
-------
Total............................... $ 9,532
=======
17
<PAGE>
The following table sets forth the distribution of the Bank's deposit
accounts for the periods indicated and the weighted average nominal interest
rates on each category of deposits presented at the dates indicated.
<TABLE>
<CAPTION>
For the year ended September 30,
--------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------- ---------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Percent Amount Rate Percent Amount Rate Percent Amount Rate
------- ------ ---- ------- ------ ---- ------- ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand 3.52% $ 7,156 0.00% 1.98% $ 3,688 0.00% 1.07% $ 1,495 0.00%
Interest-bearing demand.... 9.18 18,622 2.18 8.91 16,623 2.29 12.36 17,322 2.24
Savings and club........... 36.52 74,084 2.11 41.49 77,370 2.44 57.25 80,262 2.26
Certificates of deposit.... 50.78 103,022 5.85 47.62 88,811 5.98 29.32 41,103 4.41
------ -------- ------ -------- ------ --------
Total deposits........ 100.00% $202,884 3.94% 100.00% $186,492 4.06% 100.00% $140,182 2.86%
====== ======== ====== ======== ====== ========
</TABLE>
The following table presents the amount of the Bank's certificates of
deposit outstanding, based upon weighted-average rate categories, at September
30, 1996, 1995 and 1994, and based upon contractual periods to maturity, at
September 30, 1996.
<TABLE>
<CAPTION>
Period to Maturity from September 30, 1996 At September 30,
========================================================================= ==============================
Less Than One to Two to Three to Four to After
One Year Two Years Three Years Four Years Five Years Five Years 1996 1995 1994
-------- --------- ----------- ---------- ---------- ---------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
2.99% or less ...... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 416
3.00% to 3.99% ..... 163 -- -- -- -- -- 163 1,121 17,175
4.00% to 4.99% ..... 24,117 598 61 -- -- -- 24,776 10,896 13,689
5.00% to 5.99% ..... 25,549 17,782 5,191 616 1,165 165 50,468 36,702 4,893
6.00% to 6.99% ..... 2,418 4,373 677 1,548 989 680 10,685 23,712 2,939
7.00% to 7.99% ..... 930 415 -- 10,373 5,131 30 16,879 16,313 3
8.00% to 8.99% ..... -- -- -- -- 51 -- 51 67 1, 988
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total ........... $ 53,177 $ 23,168 $ 5,929 $ 12,537 $ 7,336 $ 875 $103,022 $ 88,811 $ 41,103
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
18
<PAGE>
Borrowings
Advances From Federal Home Loan Bank of New York. In the past and from
time to time, the Bank has obtained fixed-rate advances from the Federal Home
Loan Bank of New York ("FHLB") as a source of funding in order to take advantage
of favorable rates of interest in comparison to its other sources of funds. The
Bank's FHLB advances are generally secured by the Bank's mortgage loans and the
Bank's investment in the stock of the FHLB. In addition, the Bank has available
an overnight line of credit with the FHLB, subject to the terms and conditions
of the lender's overnight advance program, in the amount of $24.3 million.
Advances under this line of credit, which expires on December 22, 1996, are made
for one-day periods. As of September 30, 1996, advances were secured by stock of
Federal Home Loan Bank in the amount of $1.7 million and mortgage loans with an
unpaid balance of $25.2 million. Information concerning advances from FHLB are
summarized as follows:
September 30,
Interest ----------------------------
Maturity Rate 1996 1995
- ---------------------------- ------------ ------------ --------------
(In Thousands)
Overnight advances due
October 1995.............. 6.625% $ -- $5,375
Overnight advances due
October 1996.............. 6.125% 525 --
Notes maturing in
February 1997............. 5.133% 1,200 --
Notes maturing in
December 1997............. 5.597% 2,000 --
Notes maturing in
December 1998............. 5.670% 6,000 --
------ ------
$9,725 $5,375
====== ======
There were no borrowings from the FHLB during the year ended September 30, 1994.
19
<PAGE>
Securities Sold Under Agreements to Repurchase. Borrowings under reverse
repurchase agreements involve the delivery of investment securities to
broker-dealers who arrange the transactions. The securities remain registered in
the name of the Bank, and are returned to the Bank upon the maturities of the
agreements. Information concerning borrowings collateralized by securities sold
under agreements to repurchase are summarized as follows:
September 30,
Interest --------------------------
Maturity Rate 1996 1995
- ------------------- ----------- ------------- ------------
(In Thousands)
November 1995 5.78% $ -- $5,112
January 1996 5.75% -- 2,014
December 1996 5.44% 14,046 --
------- ------
$14,046 $7,126
There were no borrowings under reverse repurchase agreements during the
year ended September 30, 1994.
Information concerning borrowings collateralized by securities sold under
agreements to repurchase is summarized as follows:
Year Ended September 30,
---------------------------
1996 1995
--------- --------
(In Thousands)
Average balance during
the year.................... $8,228 $1,876
Average interest rate
during the year............. 5.70% 6.01%
Maximum month end
balance during the year.... 15,064 $9,229
Investment securities underlying
the agreement at year end:
Carrying value.......... $15,120 $6,988
Estimated market value.. $14,520 $7,047
20
<PAGE>
Treasury Tax and Loan Amount and Other Short Term Borrowings
At September 30, 1996, the Bank had borrowings from Federal Reserve Bank
of New York under Treasury and Depository program in the amount of $9,880,970 at
an interest rate of 5.20% per annum payable on demand. These borrowings are
secured by investment securities with a carrying value of $10,972,000 and fair
value of $10,570,000.
Subsidiary and Joint Venture Activities
The following is a description of the current subsidiaries (the
"Subsidiaries") of the Company and Bank. The Bank uses the equity method of
accounting to account for the Subsidiary's investment in the joint venture. The
Subsidiary's joint venture real estate development activity involves risks which
may adversely affect the profitability of the Bank. Real estate development
joint ventures generally incur substantial costs to acquire land, design
projects, install site improvements and engage in marketing activities prior to
commencement of development. Because the joint venture is unable to repay the
Subsidiary's loans and/or the Subsidiary's capital investments until the sales
of the lots are actually closed, there is negative cash flow in the early stages
of the project. In general, a Subsidiary's profit potential on any given project
may vary, if overruns are experienced, the underlying value of the property
declines or a combination of these factors occurs.
842 Manhattan Avenue Corp. 842 Manhattan Avenue, a wholly-owned subsidiary
of the Company, was incorporated in October, 1995, for the purpose of holding a
Bank owned property for lease. At September 30, 1996, this subsidiary's
investment consists of the building located at 842 Manhattan Avenue, Greenpoint,
Brooklyn.
FinFed Funding Ltd. FinFed Funding Ltd., a wholly-owned subsidiary of the
Bank, was incorporated in March 1985. It serves as a conduit for funding
investments through the Bank's real estate development subsidiary. As of
September 30, 1996, the subsidiary is inactive.
FinFed Development Corp. This wholly-owned subsidiary of the Bank was
incorporated in May 1985 for the purpose of participating as a general partner
in a real estate joint venture, AFT Associates, with another New York City
metropolitan area financial institution and a local real estate developer. In
May 1985, AFT Associates acquired a parcel of land for the development of
approximately 400 lots designated for both detached residences and condominiums.
In July 1996, AFT Associates received the required approvals necessary to
develop the land for resale. Development of this property may require additional
contributions by FinFed Development and its partners to the joint venture.
FinFed Development Corp. has invested $3.4 million, which represents 44.0% of
the capital of the joint venture at September 30, 1996. The subsidiary has a
one-third interest in any profits realized from the sale of the developed
property. The investment in AFT Associates has been classified as substandard.
Furthermore, based upon a current appraisal of the value of real estate owned by
the joint venture, an additional $298,000 in provisions for losses on investment
in real estate were established for the fiscal year ended September 30, 1996. It
is also expected that the Bank's
21
<PAGE>
subsidiary, FinFed Development Corp., will be contributing its share of the
normal operating costs of the joint venture.
FS Agency Inc. This wholly-owned subsidiary of the Bank was formed in
August 1988 as a conduit to the Bank for commissions on the sale of tax deferred
annuities and life insurance. As of September 30, 1996, its total assets were
$30,400.
FinFed Staten Island Corp. FinFed Staten Island Corp. was incorporated in
May 1985 for the purpose of developing for sale five acres of real estate on
Staten Island. It entered into a joint venture as a general partner, with
Salamander Associates, in May 1985, in which FinFed Staten Island Corp. had a
50% interest. This property was sold in December 1993, which resulted in an
allocated loss to FinFed Staten Island Corp. of $362,300. The corporation was
dissolved on September 30, 1994.
At September 30, 1996, the Bank's loans to and investments in one of its
wholly owned subsidiaries, FS Agency Inc., were not subject to the deduction
from capital in accordance with FIRREA. However, the Bank's other wholly owned
subsidiaries, FinFed Funding Ltd. and FinFed Development Corp. are, or have
been, engaged in real estate development activities that are not permitted for a
national bank, and thus are subject to the general rule requiring the Bank's
loans to and investments in the subsidiaries to be deducted from capital.
Personnel
As of September 30, 1996 the Bank had 55 full-time employees and 4
part-time employees.
REGULATION AND SUPERVISION
General
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
Office of Thrift Supervision ("OTS") under the Home Owners' Loan Act, as amended
(the "HOLA"). In addition, the activities of savings institutions, such as the
Bank, are governed by the HOLA and the Federal Deposit Insurance Act ("FDI
Act").
The Bank is subject to extensive regulation, examination and supervision
by the OTS, as its primary federal regulator, and the FDIC, as the deposit
insurer. The Bank is a member of the Federal Home Loan Bank ("FHLB") System and
its deposit accounts are insured up to applicable limits by the Savings
Association Insurance Fund ("SAIF") managed by the FDIC. The Bank must file
reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other savings
institutions. The OTS and/or the FDIC conduct
22
<PAGE>
periodic examinations to test the Bank's safety and soundness and compliance
with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulatory requirements and
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Company, the Bank and their operations. Certain of the
regulatory requirements applicable to the Bank and to the Company are referred
to below or elsewhere herein. The description of statutory provisions and
regulations applicable to savings institutions and their holding companies set
forth in this Form 10-K does not purport to be a complete description of such
statutes and regulations and their effects on the Bank and the Company.
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding company
within the meaning of the HOLA. As a unitary savings and loan holding company,
the Company generally is not restricted under existing laws as to the types of
business activities in which it may engage, provided that the Bank continues to
be a qualified thrift lender ("QTL"). See "Federal Savings Institution
Regulation - QTL Test." Upon any non-supervisory acquisition by the Company of
another savings institution or savings bank that meets the QTL test and is
deemed to be a savings institution by the OTS, the Company would become a
multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company Act ("BHC Act"),
subject to the prior approval of the OTS, and certain activities authorized by
OTS regulation.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS; acquiring or retaining, with certain
exceptions, more than 5% of a nonsubsidiary company engaged in activities other
than those permitted by the HOLA; or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result in
a multiple savings and loan holding company controlling savings institutions in
more than one state, subject
23
<PAGE>
to two exceptions: (i) the approval of interstate supervisory acquisitions by
savings and loan holding companies and (ii) the acquisition of a savings
institution in another state if the laws of the state of the target savings
institution specifically permit such acquisitions. The states vary in the extent
to which they permit interstate savings and loan holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions as described below. The Bank must notify the OTS 30 days
before declaring any dividend to the Company. In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the OTS and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
Federal Savings Institution Regulation
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage (core) capital ratio and an 8% risk-based capital ratio. In
addition, the prompt corrective action standards discussed below also establish,
in effect, a minimum 2% tangible capital standard, a 4% leverage (core) capital
ratio (3% for institutions receiving the highest rating on the CAMEL financial
institution rating system), and, together with the risk-based capital standard
itself, a 4% Tier I risk-based capital standard. Core capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
purchased mortgage servicing rights and credit card relationships. The OTS
regulations also require that, in meeting the tangible, leverage (core) and
risk-based capital standards, institutions must generally deduct investments in
and loans to subsidiaries engaged in activities not permissible for a national
bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of 4% and 8%, respectively.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%,
as assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. The components of Tier I (core) capital are
equivalent to those discussed earlier. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the allowance for loan and lease losses limited to a maximum
of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The OTS regulatory capital requirements also incorporate an interest rate
risk component. Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings
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institution's interest rate risk is measured by the decline in the net portfolio
value of its assets (i.e., the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance sheet contracts)
that would result from a hypothetical 200 basis point increase or decrease in
market interest rates divided by the estimated economic value of the
institution's assets. In calculating its total capital under the risk-based
capital rule, a savings institution whose measured interest rate risk exposure
exceeds 2% must deduct an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the institution's assets. The Director of the OTS may waive or
defer a savings institution's interest rate risk component on a case-by-case
basis. A savings institution with assets of less than $300 million and
risk-based capital ratios in excess of 12% is not subject to the interest rate
risk component, unless the OTS determines otherwise. For the present time, the
OTS has deferred implementation of the interest rate risk component. At
September 30, 1996, the Bank met each of its capital requirements, in each case
on a fully phased-in basis and it is anticipated that the Bank will not be
subject to the interest rate risk component.
The following table presents the Bank's capital position at September 30,
1996 relative to fully phased-in regulatory requirements. For a description of
the Bank's delayed phase-in schedule, see "Business of the Bank - Subsidiary and
Joint Venture Activities."
Capital
Excess -----------------------
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
------------ --------- ----------- ---------- -----------
(Dollars in thousands)
Tangible..... $18,209 $3,908 $14,301 6.99% 1.50%
Core (Leverage) $18,209 $7,816 $10,393 6.99% 3.00%
Risk-based... $19,230 $8,337 $10,893 18.45% 8.00%
Prompt Corrective Regulatory Action. Under the OTS prompt corrective
action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution is
considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings institution generally is considered "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%,
and its ratio of core capital to total assets is at least 4% (3% if the
institution receives the highest CAMEL rating). A savings institution that has a
ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier
I (core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to
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total assets of less than 4% (3% or less for institutions with the highest
examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the OTS within 45 days of the date a
savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
Insurance of Deposit Accounts. Deposits of the Bank are presently insured
by the SAIF, except for deposits acquired in a branch purchase from East New
York Savings Bank which are insured by the Bank Insurance Fund ("BIF"). Both the
SAIF and the BIF, (the deposit insurance fund that covers most commercial bank
deposits), are statutorily required to be recapitalized to a 1.25% of insured
reserve deposits ratio. Until recently, members of the SAIF and BIF were paying
average deposit insurance premiums of between 24 and 25 basis points. The BIF
met the required reserve in 1995, whereas the SAIF was not expected to meet or
exceed the required level until 2002 at the earliest. This situation was
primarily due to the statutory requirement that SAIF members make payments on
bonds issued in the late 1980s by the Financing Corporation ("FICO") to
recapitalize the predecessor to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately
adopted a new assessment rate schedule of 0 to 27 basis points under which 92%
of BIF members paid an annual premium of only $2,000. With respect to SAIF
member institutions, the FDIC adopted a final rule retaining the previously
existing assessment rate schedule applicable to SAIF member institutions of 23
to 31 basis points. As long as the premium differential continued, it may have
had adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Bank could have been placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special
one-time assessment on SAIF member institutions, including the Bank, to
recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special
assessment of 65.7 basis points on SAIF assessable deposits held as of March 31,
1995, payable November 27, 1996 (the "SAIF Special Assessment"). The SAIF
Special Assessment was recognized by the Bank as an expense during
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the quarter ended September 30, 1996 and is generally tax deductible. The SAIF
Special Assessment recorded by the Bank amounted to $1.1 million on a pre-tax
basis and $598,000 on an after-tax basis.
The Funds Act also spreads the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits will
be assessed for FICO payments of 1.3 basis points, while SAIF deposits will pay
6.48 basis points. Full pro rata sharing of the FICO payments between BIF and
SAIF members will occur on the earlier of January 1, 2000 or the date the BIF
and SAIF are merged. The Funds Act specifies that the BIF and SAIF will be
merged on January 1, 1999, provided no savings associations remain as of that
time.
As a result of the Funds Act, the FDIC recently voted to effectively lower
SAIF assessments to 0 to 27 basis points as of January 1, 1997, a range
comparable to that of BIF members. However, SAIF members will continue to make
the FICO payments described above. The FDIC also lowered the SAIF assessment
schedule for the fourth quarter of 1996 to 18 to 27 basis points. Management
cannot predict the level of FDIC insurance assessments on an on-going basis,
whether the savings association charter will be eliminated or whether the BIF
and SAIF will eventually be merged.
The Bank's assessment rate for fiscal 1996 was 23 basis points and the
premium paid for this period was $$387,065, exclusive of the $1,115,000 or 65.7
basis points one-time SAIF special assessment.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Thrift Rechartering Legislation. The Funds Act provides that the BIF and
SAIF will merge on January 1, 1999 if there are no more savings associations as
of that date. That legislation also requires that the Department of Treasury to
submit a report to Congress by March 31, 1999 that makes recommendations
regarding a common financial institutions charter, including whether the
separate charters for thrifts and banks should be abolished. Various proposals
to eliminate the federal thrift charter, create a uniform financial institutions
charter and abolish the OTS were introduced in the 104th Congress. It is likely
that legislation will be introduced in the new Congress addressing the
elimination of the savings association charter. However, the Bank is unable to
predict whether such legislation would be enacted and, if so, the extent to
which the legislation would restrict or disrupt its operations.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15%
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of its unimpaired capital and surplus. An additional amount may be lent, equal
to 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. At September 30, 1996, the Bank's limit on loans to one
borrower was $3.2 million. At September 30, 1996, the Bank's largest aggregate
outstanding balance of loans to one borrower was $2.4 million.
QTL Test. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings and loan association is required to maintain at least
65% of its "portfolio assets" (total assets less: (i) specified liquid assets up
to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the
value of property used to conduct business) in certain "qualified thrift
investments" (primarily residential mortgages and related investments, including
certain mortgage-backed securities) in at least 9 months out of each 12 month
period.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
September 30, 1996, the Bank maintained 82.7% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year or (ii) 75% of its net income for the previous
four quarters. Any additional capital distributions would require prior
regulatory approval. In the event the Bank's capital fell below its regulatory
requirements or the OTS notified it that it was in need of more than normal
supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice. In December 1994, the OTS proposed amendments to its capital
distribution regulation that would generally authorize the payment of capital
distributions without OTS approval provided that the payment does not cause the
institution to be undercapitalized within the meaning of the prompt corrective
action regulation. However, institutions in a holding company structure would
still have a prior notice requirement. At September 30, 1996, the Bank was a
Tier 1 Bank.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings.
This liquidity requirement is currently 5% but may be changed from time to time
by the OTS to any amount within the range of 4% to 10%
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depending upon economic conditions and the savings flows of member institutions.
OTS regulations also require each member savings institution to maintain an
average daily balance of short-term liquid assets at a specified percentage
(currently 1%) of the total of its net withdrawable deposit accounts and
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet these liquidity requirements. The Bank's liquidity and
short-term liquidity ratios for September 30, 1996 were 13.9% and 3.2%
respectively, which exceeded the applicable requirements. The Bank has never
been subject to monetary penalties for failure to meet its liquidity
requirements.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest quarterly
thrift financial report. The assessments paid by the Bank for the fiscal year
ended September 30, 1996 totalled $64,000.
Branching. OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute. This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (e.g.., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered transactions
with all affiliates is limited to 20% of the savings institution's capital and
surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
generally provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies. In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders, as well as entities such persons control, is governed by
Sections 22(g) and 22(h) of the FRA and Regulation O thereunder. Among other
things, such loans are required to be made on terms substantially the same as
those offered to unaffiliated individuals and to not involve more than the
normal risk of repayment. Regulation O also places individual and aggregate
limits on the amount of loans the Bank may make to such persons based, in part,
on the Bank's capital position and requires certain board approval procedures to
be followed.
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Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS enforcement action to be taken with respect to a particular
savings institution. If action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; and compensation, fees and benefits.
If the appropriate federal banking agency determines that an institution fails
to meet any standard prescribed by the Guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard, as required by the FDI Act. The final rule establishes
deadlines for the submission and review of such safety and soundness compliance
plans when such plans are required.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). During fiscal 1996, the Federal
Reserve Board regulations generally required that reserves be maintained against
aggregate transaction accounts as follows: for accounts aggregating $52.0
million or less (subject to adjustment by the Federal Reserve Board) the reserve
requirement is 3%; and for accounts aggregating greater than $52.0 million, the
reserve requirement is $1.6 million plus 10% (subject to adjustment by the
Federal Reserve Board between 8% and 14%) against that portion of total
transaction accounts in excess of $52.0 million. The first $4.3 million of
otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.
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FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank report their income on a
consolidated/unconsolidated basis and the accrual/cash method of accounting, and
are subject to federal income taxation in the same manner as other corporations
with some exceptions, including particularly the Bank's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Company. The Bank has not been audited by the
Internal Revenue Service ("IRS") during the last seven years. For its 1996
taxable year, the Bank is subject to a maximum federal income tax rate of 34%.
Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A reserve could be
established for bad debts on qualifying real property loans (generally secured
by interests in real property improved or to be improved) under (i) the
Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience
Method. The reserve for nonqualifying loans was computed using the Experience
Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 20, 1996, requires savings institutions to recapture (i.e.,
take into income) certain portions of their accumulated bad debt reserves. The
1996 Act repeals the reserve method of accounting for bad debts effective for
tax years beginning after 1995. Thrift institutions that would be treated as
small banks are allowed to utilize the Experience Method applicable to such
institutions, while thrift institutions that are treated as large banks (those
generally exceeding $500 million in assets) are required to use only the
specific charge-off method. Thus, the PTI Method of accounting for bad debts is
no longer available for any financial institution.
Use of the PTI Method had the effect of reducing the marginal rate of
federal tax on the Bank's income to 32.2%, exclusive of any minimum or
environmental tax, as compared to the maximum corporate federal income tax rate
of 35%.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in method of accounting,
initiated by the taxpayer, and having been made with the consent of the IRS. Any
Section 481(a) adjustment required to be taken into income with respect to such
change generally will be taken into income ratably over a six-taxable year
period, beginning with the first taxable year beginning after 1995, subject to
the residential loan requirement.
Under the residential loan requirement provision, the recapture required
by the 1996 Act will be suspended for each of two successive taxable years,
beginning in 1996 or 1997 in which
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the Bank's loan originations is at least equal to the average of the principal
amounts of such loans made by the Bank during its six most recent tax years
prior to 1996.
The provisions of the 1996 Act are effective for the Bank's taxable year
beginning October 1, 1996, and the Bank is permitted to make additions to bad
debt reserves based on experience method only. In addition, the Bank is required
to recapture (i.e. take into taxable income) over a six year period or not more
than an eight year period if residential loan requirements are met, the excess
of the balance of its bad debt reserves as of September 30, 1996 (other than its
supplemental reserves for losses on loans) over the balance of such reserves for
the base year (i.e. the last year beginning before 1988). Since the percentage
of taxable income method for Federal tax bad debt deduction and the
corresponding increase in the Federal tax bad debt reserve in excess of the base
year has been recorded as temporary differences pursuant to SFAS 109, this
change in the tax law is not expected to have a material adverse effect on the
Bank's statement of operations.
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and then
from the Bank's supplemental reserve for losses on loans, to the extent thereof,
and an amount based on the amount distributed (but not in excess of the amount
of such reserves) will be included in the Bank's taxable income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the Bank's current or accumulated earnings
and profits will not be so included in the Bank's taxable income.
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if the Bank makes a non-dividend distribution
to the Company, approximately one and one-half times the amount of such
distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Banks does/does not intend to pay dividends that
would result in a recapture of any portion of its bad debt reserves.
SAIF Recapitalization Assessment. The Funds Act levies a 65.7-cent fee on
every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment must be reported as an expense for the quarter ended
September 30, 1996. The Funds Act includes a provision which states that the
amount of any special assessment paid to capitalize SAIF under this legislation
is deductible under Section 162 of the Code in the year of payment.
State and Local Taxation
New York State and New York City Taxation. The Bank is subject to the New
York State Franchise Tax on Banking Corporations in an amount equal to the
greater of (i) 9.0% of "entire net income" allocable to New York State during
the taxable year, or (ii) the applicable alternative
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minimum tax. The alternative minimum tax is generally the greater of (a) 3.0% of
"alternative entire net income" allocable to New York State, (b) 0.01% of the
Bank's assets allocable to New York State, or (c) $250. Entire net income is
similar to federal taxable income, subject to certain modifications (including
the addition of interest income on state and municipal obligations, the partial
exclusion of interest income on certain United States Treasury, New York State,
and New York City obligations, and an additional New York State bad debt
deduction). Alternative entire net income is equal to entire net income without
certain deductions which are allowable for the calculation of entire net income.
New York State also imposes several surcharges on the Franchise Tax on Banking
Corporations including a 17.0% Metropolitan Transportation Business Tax
Surcharge and an additional 2.5% surcharge which currently apply to the Bank.
The Bank is also subject to the New York City Financial Corporation Tax
calculated, subject to a New York City income and expense allocation, on a
similar basis as the New York State Franchise Tax. Currently, New York City does
not impose surcharges applicable to the Bank.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempted from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
Impact of New Accounting Standards
In March 1995, the FASB issued SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of." SFAS 121 established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of. SFAS 121 does not apply to financial instruments, long-term
customer relationships of a financial institution (i.e. core deposit
intangibles), mortgage and other servicing rights, or deferred tax assets. SFAS
121 requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. In such cases, an impairment loss is to be recognized if the
carrying value of such asset exceeds its fair value. In regard to long-lived
assets to be disposed of either through sales or abandonment, such assets are to
be carried at the lower of cost or fair value less costs to sell. SFAS 121 is
effective for fiscal years beginning after December 15, 1995 and restatement of
previously issued financial statements is not permitted. SFAS 121 was adopted
effective October 1, 1996 and such adoption did not have a material adverse
effect on the Company's consolidated financial condition or results of
operations.
In June 1995, the FASB issued SFAS 122, "Accounting for Mortgage Servicing
Rights." SFAS 122 amends SFAS 65, "Accounting for Certain Mortgage Banking
Activities," to require that a mortgage banking enterprise recognize as separate
assets rights to service mortgage loans for others, however those servicing
rights were acquired, should such loans be sold or securitized and the related
mortgage servicing rights retained. The servicing rights are to be recorded
based on an allocation of the total investment in related loans to the relative
fair values of the loans and
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the separated servicing rights retained, providing it is practical to estimate
those fair values. SFAS 122 is effective prospectively in fiscal years beginning
after December 15, 1995. Retroactive capitalization of mortgage servicing rights
retained in transactions in which a mortgage banking enterprise originates
mortgage loans and sells or securitizes those loans before adoption of SFAS 122
is prohibited. SFAS 122 was adopted effective October 1, 1996 and such adoption
did not have a material adverse effect on the Company's consolidated financial
condition or results of operations.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123 establishes financial accounting and reporting standards
for stock-based employees compensation plans. SFAS 123 encourages all entities
to adopt the "fair value base method" of accounting for employee stock
compensation plans.. However, SFAS 123 also allows an entity to continue to
measure compensation cost under such plans using the "intrinsic value based
method." Under the fair value based method, compensation cost is measured at the
grant date based on the value of the award and its recognized over the service
period, usually the vesting period. Fair value is determined using an option
pricing model that takes into account the stock price at the grant date, the
exercise price, the expected life of the option, the volatility of the
underlying stock and the expected dividends on it, and the risk free interest
rate over the expected life of the option. Under the intrinsic value based
method, compensation cost is the excess, if any, of the quoted market price of
the stock at the grant date or other measurement date over the amount an
employee must pay to acquire the stock. Most stock plans have no intrinsic value
at date of grant, and under previous accounting guidance, no compensation cost
was to be recognized.
The accounting requirements of SFAS 123 are effective for transactions
entered into in fiscal years that begin after December 15, 1995. The Company
intends to continue accounting for compensation cost under the intrinsic value
based method and will provide pro forma disclosures for all awards granted after
October 1, 1996. Such disclosures include net income and earnings per share as
if the fair value based method of accounting has been applied.
In September 1996, the FASB issued SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125").
This Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of financial-components approach that focuses on control.
It distinguishes transfers of financial assets that are sales from transfers
that are secured borrowings. Under the financial-components approach, after a
transfer of financial assets, an entity recognizes all financial and servicing
assets it controls and liabilities it has incurred and derecognizes financial
assets it no longer controls and liabilities that have been extinguished. The
financial-components approach focuses on the assets and liabilities that exist
after the transfer. Many of these assets and liabilities are components of
financial assets that existed prior to the transfer. If a transfer does not meet
the criteria for a sale, the transfer is accounted for as a secured borrowing
with a pledge of collateral. SFAS 125 is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after December
31, 1996, and should be applied prospectively. Earlier or retroactive
application of
34
<PAGE>
SFAS 125 is not permitted. SFAS 125, when adopted, is not expected to have a
material adverse effect on the Company's consolidated financial condition or
results of operations.
Additional Item. Executive Officers Who Are Not Directors
The following table sets forth certain information regarding executive
officers of the Company, at September 30, 1996, who are not also directors.
Name Age Position Held
- ------------------------------------------------------------------------------
P. James O'Gorman 37 Senior Vice President, Chief Financial
Officer and Treasurer
Robert E. Adamec 53 Senior Vice President and Corporate
Secretary
P. James O'Gorman. Mr. O'Gorman joined the Bank in 1990 as Controller. In
March 1991, he was promoted to Treasurer of the Bank. From November 1993 to
March 1994, Mr. O'Gorman served as Vice President and Treasurer of the Bank.
Since March 1994, Mr. O'Gorman has served as Senior Vice President, Chief
Financial Officer and Treasurer of the Bank and is a Certified Public
Accountant.
Robert E. Adamec. Mr. Adamec has been employed with the Bank since July
1990. From October 1990 to November 1993, he served as Vice President of the
Bank. In November 1993, Mr. Adamec was elected Senior Vice President and
Corporate Secretary of the Bank.
Item 2. Properties
The Bank conducts its business through its main office and four
full-service branch offices. Loan originations are processed at the main office.
The Bank believes that its current facilities are adequate to meet the present
and immediately foreseeable needs of the Bank and the Company.
35
<PAGE>
Lease
Expiration
Date Date Net
Owned/ Acquired Including Book Value
Location Leased or Leased Options September 30, 1996
- ------------------------ ------ --------- ----------- ------------------
(In thousands)
Main Office:
Long Island City
42-25 Queens Boulevard Owned 1962 -- $ 579
Branches:
Long Island City
45-14 46th Street.... Leased 1976 2001 10
Jackson Heights
75-23 37th Avenue.... Leased 1990 2005 213
Flushing
59-23 Main Street.... Leased 1974 1999 159
Brooklyn
814 Manhattan Avenue. Owned 1995 -- 1,117
-----
Total $2,078
======
Item 3. Legal Proceedings
Neither the Company nor the Bank are involved in any pending legal
proceedings other than routine legal proceedings occurring in the ordinary
course of business, which in the aggregate involve amounts which are believed by
management to be immaterial to the financial condition and results of the
operation of the Company and the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholders Matters
Information relating to the market for Registrant's common stock and
related stockholder matters appears under Common Stock Information in the
Registrant's 1996 Annual Report to Stockholders on page 41 and is incorporated
herein by reference.
Item 6. Selected Financial Data
The selected financial data appears under Selected Consolidated Financial
and Other Data of the Bank in the Registrant's 1996 Annual Report to
Stockholders on pages 6 through 7 and is incorporated herein by reference.
36
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The above-captioned information appears under Management's Discussion and
Analysis of Financial Condition and Results of Operations in the Registrant's
1996 Annual Report to Stockholders on pages 8 through 15 and is incorporated
herein by reference.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements and related notes thereto of
Financial Bancorp, Inc. and its subsidiaries, together with the report thereon
by Radics & Co., LLC, appears in the Registrant's 1996 Annual Report to
Stockholders on pages 16 through 40 and are incorporated herein by reference.
Item 9. Change In and Disagreements with Accountants on Accounting and Financial
Disclosure
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the 1997 Annual Meeting of Stockholders to be held January 22,
1997 pages 5 through 6.
Item 11. Executive Compensation
The information relating to executive compensation is incorporated herein
by reference to the Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders to be held on January 22, 1997 at pages 7 through 8 and 13 through
17, excluding the Compensation Committee Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the Registrant's
Proxy Statement for the 1997 Annual Meeting of Stockholders to be held on
January 22, 1997 at pages 3 through 6.
Item 13. Certain Relationships and Related Transactions
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
1997 Annual Meeting of Stockholders to be held on January 22, 1997 at page 17.
37
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 10-K.
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of Financial Bancorp, Inc. are
incorporated by reference to the indicated pages of the 1996 Annual
Report to Stockholders.
PAGE
----
Independent Auditors' Report .............................................. 40
Consolidated Statements of Financial Condition as of
September 30, 1996 and 1995 ......................................... 16
Consolidated Statements of Income for Each of the Years in
the Three-Year Period Ended September 30, 1996 ...................... 17
Consolidated Statements of Changes in Stockholders' Equity for Each
of the Years in the Three-Year Period Ended September 30, 1996 ...... 18
Consolidated Statements of Cash Flows for Each
of the Years in the Three-Year Period Ended September 30, 1996 ...... 19
Notes to Consolidated Financial Statements ................................ 21
The remaining information appearing in the 1996 Annual Report to Stockholders is
not deemed to be filed as part of this report, except as expressly provided
herein.
(2) All schedules are omitted because they are not required or
applicable, or the required information is shown in the consolidated
financial statements or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report:
3.1 Certificate of Incorporation of Financial Bancorp, Inc.*
3.2 Bylaws of Financial Bancorp, Inc.*
4.0 Stock Certificate of Financial Bancorp, Inc.*
38
<PAGE>
10.1 Financial Federal Savings Bank Recognition and Retention Plan**
10.2 Financial Bancorp, Inc. 1995 Incentive Stock Option Plan***
10.3 Financial Bancorp, Inc. 1995 Stock Option Plan for Outside
Directors**
10.4 Financial Savings and Loan Association Employee Stock Ownership
Plan and Trust*
10.5 Salary Continuation Agreement between Financial Bancorp, Inc.,
Financial Savings and Loan Association and Frank S. Latawiec
(filed herewith)
10.6 Employment Agreement between Financial Federal Savings and Loan
Association and Irene C. Greco****
10.7 Employment Agreement between Financial Federal Savings and Loan
Association and P. James O'Gorman****
10.8 Employment Agreement between Financial Federal Savings and Loan
Association and Robert E. Adamec****
10.9 Employment Agreement between Financial Bancorp, Inc. and Irene
C. Greco****
10.10 Employment Agreement between Financial Bancorp, Inc. and P.
James O'Gorman****
10.11 Employment Agreement between Financial Bancorp, Inc. and Robert
E. Adamec****
10.12 Financial Federal Savings and Loan Association Outside
Directors' Consultation and Retirement Plan*
11.0 Computation of earnings per share (filed herewith)
13.0 Annual Report to Stockholders for the year ended September 30,
1996 (filed herewith)
21.0 Subsidiary information is incorporated herein by reference to
"Subsidiaries"
23.0 Consent of Radics & Co., LLC (filed herewith)
99.0 Proxy Statement for 1997 Annual Meeting*****
- ----------
* Incorporated herein by reference into this document from the
Exhibits to Form S- 1, Registration Statement and amendments
thereto, initially filed on March 18, 1994, Registration No.
33-76664.
** Incorporated herein by reference into this document from the
Proxy Statement for the January 17, 1996 Annual Meeting of
Stockholders filed on December 18, 1995.
*** Incorporated herein by reference into this document from the
Proxy Statement for the January 26, 1995 Annual Meeting of
Stockholders filed on December 15, 1994.
**** Incorporated herein by reference into this document from the
Annual Report on Form 10-K for the fiscal year ended September
30, 1994 filed with the SEC on December 20, 1994.
***** Incorporated herein by reference into this document from the
Proxy Statement for the January 22, 1997 Annual Meeting of
Stockholders filed with the SEC on December 23, 1996.
(b) Reports on Form 8-K
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
FINANCIAL BANCORP, INC.
By:/s/Frank S. Latawiec
---------------------------------
Frank S. Latawiec
President, Chief Executive
Officer and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
/s/Frank S. Latawiec President, Chief Executive December 30, 1996
- ----------------------- Officer and Director
Frank S. Latawiec (Principal Executive Officer)
/s/P. James O'Gorman Senior Vice President, Chief December 30, 1996
- ----------------------- Financial Officer and Treasurer
P. James O'Gorman (Principal Accounting Officer)
/s/Irene C. Greco Executive Vice President, December 30, 1996
- ----------------------- Chief Operating Officer
Irene C. Greco and Director
/s/Dominick L. Segrete Chairman of the Board December 30, 1996
- -----------------------
Dominick L. Segrete
/s/Peter S. Russo Director December 30, 1996
- -----------------------
Peter S. Russo
/s/Richard J. Hickey Director December 30, 1996
- -----------------------
Richard J. Hickey
/s/Raymond M. Calamari Director December 30, 1996
- -----------------------
Raymond M. Calamari
40
Exhibit 10.5 Salary Continuation Agreement between Financial Bancorp, Inc.,
Financial Savings and Loan Association and Frank S. Latawiec
<PAGE>
FINANCIAL FEDERAL SAVINGS BANK
SALARY AND BENEFITS CONTINUATION AGREEMENT
This Agreement is made effective as of September 24, 1996 by and among
Financial Federal Savings Bank (the "Bank"), a federally chartered savings
institution, Financial Bancorp, Inc. (the "Holding Company"), a corporation
organized under the laws of Delaware, with both their principal administrative
offices located at 42-25 Queens Boulevard, Long Island City, New York, and Frank
Latawiec (the "Executive").
WHEREAS, both the Bank and the Holding Company respectively have retained
Executive as President and Chief Executive Officer; and
WHEREAS, the Bank and the Holding Company wish to provide Executive with
salary continuation and continuation of other benefits enumerated herein in the
event of a change in control of either organization;
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and upon the terms and conditions hereinafter provided the parties hereby agree
as follows:
1. Position and Responsibility.
During the period of employment hereunder, Executive agrees to serve
as President and Chief Executive Officer of both the Bank and the Holding
Company. Executive shall render administrative and management services to each
entity such as are customarily performed by persons in a similar executive
capacity. Executive also agrees to serve, if elected, as an Officer and/or
Director of any subsidiary of the Bank or the Holding Company.
<PAGE>
2. Change in Control.
In the event of a change in control of either the Bank or the
Holding Company ("Change in Control") occurs, then subject to the terms and
conditions of this Agreement, Executive shall be entitled to the payments and
benefits set forth in Sections 3. and 4. of this Agreement. For purposes of this
Agreement a Change in Control of the Bank or the Holding Company shall be of a
nature that: (i) would be required to be reported in response to Item 1(a) of
the current report on Form 8-K, as in effect on the date hereof, pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act");
or (ii) results in a Change in Control of the Bank or the Holding Company within
the meaning of the Home Owner's Loan Act of 1933, as amended, and the Rules and
Regulations promulgated by the Office of Thrift Supervision ("OTS") (or its
predecessor agency), as in effect on the date hereof (provided that in applying
the definition of change in control as set forth under the rules and regulations
of the OTS, the Board shall substitute its judgment for that of the OTS); or
(iii) without limitation such a Change in Control shall be deemed to have
occurred at such time as (a) any "person" (as the term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Bank or the Holding Company representing 20% or more of the combined voting
power of the Bank's or the Holding Company's outstanding securities except for
any securities of the Bank purchased by the Holding Company in connection with
the conversion of the Bank to the stock form and any securities purchased by any
tax qualified employee benefit
-2-
<PAGE>
plans of the Bank; or (b) individuals who constitute the Board on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-quarters of
the directors comprising the Incumbent Board, or whose nomination for election
by the Holding Company's stockholders was approved by the same Nominating
Committee serving under an Incumbent Board, shall be, for purposes of this
clause; (b) considered as though he were a member of the Incumbent Board; or (c)
a plan for reorganization, merger, consolidation, sale of all or substantially
all the assets of the Bank or the Holding Company or similar transaction has
been approved by the Incumbent Board and the shareholders, or otherwise occurs
upon which the Board so notifies the OTS of such occurrence, and in which the
Bank or Holding Company is not the resulting entity; or (d) a proxy statement
soliciting proxies from shareholders of the Holding Company, by someone other
than the current management of the Holding Company, seeking stockholder approval
of a plan of reorganization, merger or consolidation of the Holding Company or
Bank or similar transaction with one or more corporations as a result of which
the outstanding shares of the class of securities then subject to the plan or
transaction are exchanged for or converted into cash or property or securities
not issued by the Bank or the Holding Company shall be distributed; or (e) a
tender offer is made for 20% or more of the voting securities of the Bank or the
Holding Company.
-3-
<PAGE>
3. Salary Continuation Payments.
In the event a Change in Control of either the Bank or the Holding
Company occurs before September 24, 1998, Executive shall receive payment of his
then current base salary through September 24, 1998, made to him in a single sum
payment (subject to applicable withholding) on the date of the Change in
Control, without discount for early payment. Executive shall have no duty to
mitigate the amount of the payment or other benefits received hereunder, it
being agreed and understood that Executive's acceptance of other employment
shall not reduce the obligation of the Bank or the Holding Company hereunder.
4. Medical and Other Benefits.
In addition to any statutory right, if applicable, that Executive
may have with respect to the continuation of medical or other benefits, the Bank
and the Holding Company shall continue to provide Executive with life, medical,
dental and disability coverage substantially identical to the coverage
maintained by the Bank or the Holding Company immediately prior to the Change in
Control through September 24, 1998.
5. Source of Payments.
All payments to be made and benefits to be provided in this
Agreement shall be timely paid in cash or check from the general funds of the
Bank and provided by the Bank. The Holding Company, however, unconditionally
guarantees payment and provision of all amounts and benefits due hereunder to
Executive and, if such amounts and benefits due from the Bank are not timely
paid or provided by the Bank for any reason, such amounts and benefits shall be
paid or provided by the Holding
-4-
<PAGE>
Company. It is agreed and understood that the Executive is not entitled to
duplicate payments from both the Bank and the Holding Company.
6. Entire Agreement.
(a) This Agreement contains the entire understanding between the
parties hereto and supersedes any prior employment agreement between the Bank or
any predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to Executive of
a kind elsewhere provided. No provision of this Agreement shall be interpreted
to mean that Executive is subject to receiving fewer benefits than those
available to him without reference to this Agreement.
(b) This Agreement shall be binding upon, and inure to the benefit
of, Executive and the Bank and the Holding Company and their respective
successors and assigns.
7. Modification and Waiver.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have
been waived, nor shall there be any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver shall
operate only as to the specific
-5-
<PAGE>
term or condition waived and shall not constitute a waiver of such term or
condition for the future as to any act other than that specifically waived.
8. Termination of Employment.
The Bank may terminate Executive's employment at any time. Executive
shall only be entitled to the payments and benefits hereunder in the event a
Change in Control occurs prior to a termination of employment.
9. Required Provisions.
The following provisions are included for the purposes of complying
with various laws, rules and regulations applicable to the Bank and, in the
event of a conflict between a Required Provision and another provision of this
Agreement, the Required Provision shall supersede such other provision and be
applied to the extent required by the law, rule or regulation applicable to the
Bank.
(a) If Executive is suspended from office and/or temporarily
prohibited from participating in the conduct of the Bank's affairs by a notice
served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12
U.S.C. ss.1818(e)(3) or (g)(1), the Bank's obligations under this contract
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank shall (i) pay
Executive all of the compensation withheld while their contract obligations were
suspended and (ii) reinstate any of the obligations which were suspended.
(b) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section
-6-
<PAGE>
8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. ss.1818(e)(4)
or (g)(1), all obligations of the Bank under this contract shall terminate as of
the effective date of the order, but vested rights of the contracting parties
shall not be affected.
(c) If the Bank is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act, 12 U.S.C. ss.1813(x)(1) all obligations of the
Bank under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(d) All obligations of the Bank under this contract shall be
terminated, except to the extent determined that continuation of the contract is
necessary for the continued operation of the institution, (i) by the Director of
the OTS (or his designee), the FDIC or the Resolution Trust Corporation, at the
time the FDIC enters into an agreement to provide assistance to or on behalf of
the Bank under the authority contained in Section 13(c) of the Federal Deposit
Insurance Act, 12 U.S.C. ss.1823(c); or (ii) by the Director of the OTS (or
his designee) at the time the Director (or his designee) approves a supervisory
merger to resolve problems related to the operations of the Bank or when the
Bank is determined by the Director to be in an unsafe or unsound condition. Any
rights of the parties that have already vested, however, shall not be affected
by such action.
(e) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with Section 18(k) of
the Federal Deposit Insurance Act, 12 U.S.C. ss.1828(k) and any rules and
regulations promulgated thereunder.
-7-
<PAGE>
(f) In no event shall the aggregate dollar amount of the
compensation and benefits, if applicable, payable to the Executive under
Sections 3. and 4. hereof constituting "parachute payments" within the meaning
of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended, exceed
three times the Executive's average annual total compensation for the last five
consecutive calendar years ending prior to his termination of employment with
the Bank (or his entire period of employment with the Bank if less than five
calendar years).
10. Severability.
If, for any reason, any provision of this Agreement, or any part of
any provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so invalid,
and each such other provision and part thereof shall to the full extent
consistent with law continue in full force and effect.
11. Headings For Reference Only.
The headings of sections and paragraphs herein are included solely
for convenience of reference and shall not control the meaning or interpretation
of any of the provisions of this Agreement.
12. Governing Law.
The validity, interpretation, performance and enforcement of this
Agreement shall be governed by the laws of the State of New York, but only to
the extent not superseded by federal law.
-8-
<PAGE>
13. Arbitration.
Any dispute or controversy arising or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction.
14. Payment of Costs and Legal Fees.
All reasonable costs and legal fees paid or incurred by Executive
pursuant to any dispute or question of interpretation relating to this Agreement
shall be paid or reimbursed by the Bank if Executive is successful on the merits
pursuant to a legal judgment, arbitration or settlement.
15. Successor to the Bank.
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Holding Company,
expressly and unconditionally to assume and agree to perform the Bank's
obligations under this Agreement, in the same manner and to the same extent that
the Bank would be required to perform if no such succession or assignment had
taken place.
IN WITNESS WHEREOF, Financial Federal Savings Bank and Financial
Bancorp,
-9-
<PAGE>
Inc. have caused this Agreement to be executed by their duly authorized
director, and Executive has signed this Agreement, on the _____ day of
_________, 1996.
ATTEST: FINANCIAL FEDERAL SAVINGS BANK
______________________ By: ______________________________
Dominick L. Segrete
ATTEST: FINANCIAL BANCORP, INC.
______________________ By: ______________________________
Dominick L. Segrete
WITNESS:
______________________ __________________________________
Frank Latawiec
Exhibit 11 Computation of Earnings Per Share
<PAGE>
Exhibit 11
Computation of Earnings Per Share
For the Year Ended
September 30,
---------------------------------
1996 1995
-------------- --------------
(Dollars in thousands,
except per share amounts)
Net Income $1,153 $1,206
====== ======
Weighted average common shares
outstanding 1750 1,975
Common stock equivalents due to dilutive
effect of stock options 41 65
------ ------
Total weighted average common shares and
common share equivalents outstanding 1,790 2,040
====== ======
Earnings per common share and common
share equivalents $ 0.64 $ 0.59
====== ======
Exhibit 13.0 Annual Report to Stockholders for the year ended September 30, 1996
<PAGE>
FINANCIAL BANCORP, INC.
- --------------------------------------------------------------------------------
[Graphic]
FINANCIAL FEDERAL
SAVINGS BANK
Bank on our strength to build your dreams
1996 ANNUAL REPORT
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND
OTHER DATA OF THE BANK
The following table sets forth certain summary historical financial information
concerning the financial position of Financial Bancorp, Inc. (the "Company"),
including its subsidiary, Financial Federal Savings Bank (the "Bank"), for the
period and at the dates indicated. The financial data is derived in part from,
and should be read in conjunction with, the consolidated financial statements
and related notes of the Company contained elsewhere herein. (In Thousands) At
September 30,
(In Thousands) At September 30,
- --------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------------
Financial Condition Data:
Total assets ................. $266,763 $228,823 $171,642 $147,871 $156,749
Total loans receivable, net .. 140,314 110,062 83,505 83,425 94,708
Investment securities(1) ..... 56,406 40,359 17,801 5,435 11,561
Mortgage-backed securities(2) 54,853 62,008 49,839 49,408 40,862
Deposits ..................... 202,884 186,492 140,182 136,638 146,823
Borrowed funds ............... 33,652 12,501 -- -- --
Stockholders' equity ......... 25,787 27,179 29,300 9,374 7,696
<TABLE>
<CAPTION>
(In Thousands) Year Ended September 30,
- --------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income ...................... $ 17,823 $ 14,256 $ 10,490 $ 11,305 $ 12,275
Interest expense ..................... 8,691 6,286 4,000 4,383 6,569
----------------------------------------------------
Net interest income .................. 9,132 7,970 6,490 6,922 5,706
Provision for loan losses ............ 543 342 183 732 75
----------------------------------------------------
Non-interest income:
Fees, service charges, gain (loss)
on sales and other income ........ 490 309 355 1,063 1,087
(Loss) from real estate operations (313) (618) (300) (380) --
----------------------------------------------------
Total non-interest income (loss): 177 (309) 55 683 1,087
----------------------------------------------------
Non-interest expense:
Salaries and employee benefits ..... 3,048 2,619 2,301 1,967 1,909
Premises and equipment ............. 1,064 1,048 826 920 984
Advertising ........................ 70 129 41 19 19
Loss (income) from real estate owned 84 77 (12) 183 (2)
Federal insurance premiums(3) ...... 1,502 390 360 306 314
Miscellaneous ...................... 1,170 1,014 668 700 646
----------------------------------------------------
Total non-interest expense ......... 6,938 5,277 4,184 4,095 3,870
----------------------------------------------------
Income before income taxes ........... 1,828 2,042 2,178 2,778 2,848
Income tax expense(4) ................ 675 836 921 1,099 1,308
----------------------------------------------------
Net income ........................... $ 1,153 $ 1,206 $ 1,257 $ 1,679 $ 1,540
============================================================================================
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
At Year Ended September 30,
- ------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Retained earnings to assets at period end 9.67% 11.88% 17.07% 6.34% 4.91%
Return on average assets ................. 0.47 0.60 0.79 1.09 1.00
Return on average equity ................. 4.31 4.18 9.76 19.71 22.21
Average equity to average assets ......... 10.97 14.27 8.08 5.54 4.49
Net interest rate spread ................. 3.48 3.70 4.12 4.63 3.78
Net interest margin ...................... 3.91 4.18 4.29 4.74 3.88
Operating expenses to average assets(5)(7) 2.20 2.57 2.63 2.55 2.51
Efficiency ratio(7) ...................... 56.01 62.81 61.29 53.38 62.68
Non-performing assets to total assets .... 3.09 2.65 2.95 4.05 3.07
Non-performing loans to total loans ...... 3.15 1.72 1.95 2.58 4.70
Allowance for loan losses to total loans . 1.09 1.10 1.31 1.18 0.36
Allowance for loan losses
to non-performing assets(6) ............ 19.08 20.50 22.09 16.78 7.13
Number of full-service facilities ........ 5 5 5 5 6
</TABLE>
- ----------
(1) Includes Federal Home Loan Bank of New York ("FHLB") stock and investment
securities available for sale.
(2) Includes mortgage-backed securities available for sale.
(3) Includes non-recurring SAIF assessment of $1,115,000 for the year ended
September 30, 1996.
(4) Includes for the year ended September 30, 1993, an income tax benefit of
$196,665, which reflects the cumulative effect of a change in accounting
for income taxes resulting from the adoption of Statement of Financial
Accounting Standards ("FASB") 109 as of October 1, 1992.
(5) Operating expenses represent total non-interest expenses excluding
(income) loss from real estate owned.
(6) Non-performing assets for the years ended September 30, 1996, 1995, 1994
and 1993, include investments in real estate.
(7) Excludes non-recurring SAIF assessment of $1,115,000 and severance payment
of $369,000 for the year ending September 30, 1996.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Financial Bancorp, Inc. (the "Company"), is the holding company for Financial
Federal Savings Bank (the "Bank"), which converted to a federally chartered
stock savings association on August 17, 1994 and to a federally chartered stock
savings bank on October 20, 1994. The Company is headquartered in Long Island
City, New York and its principal business currently consists of the operations
of the Bank. The Bank's results of operations are primarily dependent on net
interest income, which is the difference between income earned on its loan,
mortgage-backed securities and investment securities portfolio, and its cost of
funds, consisting primarily of the interest paid on its deposits and borrowings.
The Bank's results of operations are also affected by its provision for loan
losses. The Bank's non-interest expenses principally consists of salaries and
employee benefits, occupancy and equipment expenses, federal deposit insurance
premiums, and other general and administrative expenses. The Bank's results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory authorities.
FINANCIAL CONDITION
As of September 30, 1996, total assets were $266.8 million, which represents a
$38.0 million, or a 16.6%, increase from $228.8 million as of September 30,
1995. During the same period, deposits increased by $16.4 million, or 8.8%, to
$202.9 million as of September 30, 1996 from $186.5 million at September 30,
1995. Furthermore, advances from the Federal Home Loan Bank of New York ("FHLB")
increased by $4.3 million to $9.7 million, at September 30, 1996, as compared to
$5.4 million at September 30, 1995. The treasury tax and loan account and other
short-term borrowings increased to $9.9 million at September 30, 1996, from zero
at September 30, 1995. Securities sold under agreements to repurchase increased
by $6.9 million, to $14.0 million at September 30, 1996, from $7.1 million at
September 30, 1995. Asset growth was funded by a combination of both the $16.4
million increase in the Bank's deposit base, the $4.3 million increase in FHLB
advances, in addition to the $16.8 million increase in other short-term
borrowings and securities sold under agreements to repurchase.
At September 30, 1996, cash and cash equivalents totalled $5.1 million,
which represents a $2.8 million, or a 35.0%, decrease from $7.9 million, from
the same period in 1995. This decrease primarily resulted from the cash utilized
to fund the Company's stock repurchase programs.
Investment securities available for sale increased to $3.6 million, at
September 30, 1996, as compared to zero at September 30, 1995. Furthermore,
mortgage-backed securities available for sale increased to $5.0 million, at
September 30, 1996, as compared to zero at September 30, 1995. In accordance
with an implementation guide for Statement of Financial Accounting Standards
("SFAS") 115, "Accounting for Certain Investments in Debt and Equity
Securities," released by the Financial Accounting Standards Board ("FASB") on
November 15, 1995, which permitted a one-time reassessment and related
reclassification, no later than December 31, 1995, the Bank, during this window
period, realigned its investment securities portfolio to provide greater
flexibility and maximize its total rate of return by transferring $2.0 million
of U.S. Treasury Securities from the held to maturity to the available for sale
portfolio.
As of September 30, 1996, investment securities, including available for
sale, consisted primarily of medium-term U.S. Government Agency obligations,
with features such as calls and/or interest rate "step-ups," and Treasury
Securities increased $15.8 million, or 40.6%, to $54.7 million from $38.9
million as of September 30, 1995. Mortgage-backed securities decreased by $12.2
million, or 19.6%, to $49.8 million as of September 30, 1996, from $62.0 million
as of September 30, 1995, exclusive of $5.0 million in mortgage-backed
securities which were classified as available for sale. Loans receivable
increased by $30.3 million, or 27.5%, to $140.3 million as of September 30,
1996, from $110.0 million as of September 30, 1995. This $30.3 million, or 27.5%
increase in loans receivable primarily resulted from the origination of $34.3
million in mortgage loans, and the purchase of $14.3 million of one- to-four
family, adjustable rate residential mortgage loans, partially offset by normal
amortization, prepayments and satisfactions.
Non-performing loans totaled $4.6 million, or 3.15% of total loans at
September 30, 1996 as compared to $1.9 million, or 1.72% of total loans at
September 30, 1995. The increase in non-performing loans represents the balance
of Thrift Association Service Corporation ("TASCO") pass-through securities. In
May 1996, the FDIC stated that they would not continue the scheduled
pass-through of principal and interest payments whether or not collected. At
September 30, 1996, the FDIC continued to withhold principal and interest
payments on these securities. At September 30, 1996, nonperforming assets
totalled $8.2 million, or 3.09% of total assets as compared to $6.1 million, or
2.65% of total assets as of September 30, 1995. The Company's allowance for loan
losses totalled $1.6 million at September 30, 1996, which represents a ratio of
allowance for loan losses to nonperforming assets and to total loans of 19.08%
and 1.09%, respectively, as compared to 20.51% and 1.10%, respectively, at
September 30, 1995. Of the $1.6 million in allowance for loan losses, $504,000
is attributable to one loan participation with Tasco.
Total stockholders' equity was $25.8 million at September 30, 1996,
reflecting a $1.4 million, or 5.2%, decrease from the prior year. The decrease
in stockholders' equity was the result of the Company's repurchase of
8
<PAGE>
192,266 shares as part of the Company's two, five percent repurchase programs,
each for five percent of the then outstanding common stock, at a total cost of
$2.5 million. As of September 30, 1996, the Company has repurchased 18.5% of the
total shares issued in the initial public offering. At September 30, 1996, the
Company had 1,790,622 common shares outstanding and the stated book value per
common share was $14.40, an increase of $0.62 per common share, or 4.5%, from
$13.78 per common share at September 30, 1995.
INTEREST RATE SENSITIVITY ANALYSIS
The Bank is subject to interest rate risk to the extent that its
interest-bearing liabilities reprice or mature more or less frequently than its
interest-earning assets. The Bank's interest rate risk management policy has
been structured to monitor and maintain the Bank's interest rate sensitivity to
within Board prescribed limits while attempting to maximize net interest income.
In connection with its interest rate risk management strategy, management has
emphasized the purchase of adjustable rate-mortgage loans, and has limited its
other investments to medium-term, U.S. Government Agency securities with an
average maturity of five years or less. This strategy is necessary to offset the
significant amount of fixed-rate loan origination activity. On the liability
side, management has closely monitored the pricing of its deposit products, and
has made a conscious effort to extend deposit maturities, and secure fixed-rate
borrowings when market conditions are favorable. In addition, the Bank has had
tremendous success in growing its noninterest-bearing demand accounts and
utilizing low cost sources of overnight and short-term borrowings to fund
short-to medium-term investments.
The table below summarizes the estimated contractual maturities of the
Bank's interest-earning assets and interest-bearing liabilities at September 30,
1996. Maturities are adjusted using assumptions for prepayments and decay rates
as researched and developed by the Bank. The assumptions for prepayments on
fixed-rate mortgage loans and mortgage-backed securities range from 15% to 20%
dependent upon the type of property (single-family or multi-family) and type of
lien (first or second). The assumptions for deposits are: (i) certificate
accounts are not withdrawn prior to maturity; and (ii) the decay rates for NOW
accounts, money market and regular savings accounts range from 17% to 79% per
year. The table does not necessarily indicate the impact of general interest
rate movements on the Company's net interest income because the actual repricing
dates of various assets and liabilities are subject to customer discretion and
competitive and other pressures and, therefore, actual prepayment and withdrawal
experience may vary from that indicated.
The effect of these assumptions is to quantify the dollar amounts of items
that are interest-sensitive and can be repriced within each of the periods
specified. The difference, or "gap," provides an indication of the extent to
which the Bank's net interest income may be affected by future changes in
interest rates. The Bank's cumulative one-year gap, as a percent of total
interest-earning assets, increased to a positive 11.12% at September 30, 1996
from a positive 8.97% at September 30, 1995. A positive gap denotes asset
sensitivity, which in a given period will result in more assets subject to
repricing than liabilities. Generally, asset sensitive gaps will result in a net
positive effect on net interest income and consequently, net income in an
increasing interest rate environment. Alternatively, asset sensitive gaps will
generally result in a net negative effect on net interest income and
consequently, net income in a decreasing interest rate environment.
<TABLE>
<CAPTION>
(Dollars in Thousands) At September 30, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
More than More than More than
Three Three Months More than Three Years Five Years
Months to Twelve One Year to to Five to Ten More than
or Less Months Three Years Years Years Ten Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage and other loans ...................... $ 9,651 $ 40,874 $ 31,012 $ 27,688 $ 24,708 $ 10,759 $144,692
Investment securities ......................... 34,988 13,568 2,566 2,908 -- -- 54,030
Mortgage-backed securities .................... 17,348 14,765 5,347 5,665 7,750 3,978 54,853
Repurchase agreements ......................... 2,185 -- -- -- -- -- 2,185
FHLB stock and equity securities .............. -- -- -- -- -- 2,376 2,376
--------------------------------------------------------------------------------
Total interest-earning assets ................... $ 64,172 $ 69,207 $ 38,925 $ 36,261 $ 32,458 $ 17,113 $258,136
================================================================================
Interest-bearing liabilities:
Savings and club accounts ..................... $ 4,208 $ 9,306 $ 18,843 $ 12,982 $ 17,422 $ 11,323 $ 74,084
NOW accounts .................................. 738 2,214 3,030 1,203 713 79 7,977
Money market accounts ......................... 2,102 6,306 2,137 94 6 -- 10,645
Certificates of deposit ....................... 15,514 37,663 29,097 19,873 875 -- 103,022
Borrowed funds ................................ 24,452 1,200 8,000 -- -- -- 33,652
--------------------------------------------------------------------------------
Total interest-bearing liabilities .............. $ 47,014 $ 56,689 $ 61,107 $ 34,152 $ 19,016 $ 11,402 $229,380
================================================================================
Interest-sensitivity gap ........................ $ 17,158 $ 12,518 $(22,182) $ 2,109 $ 13,442 $ 5,711 $ 28,756
================================================================================
Cumulative interest-sensitivity gap ............. $ 17,158 $ 28,676 $ 7,494 $ 9,603 $ 23,045 $ 28,756
====================================================================
Cumulative interest-sensitivity gap as a
percentage of total assets .................... 6.43% 11.12% 2.81% 3.60% 8.64% 10.78%
Cumulative net interest-earning assets as a
percentage of interest-bearing liabilities .... 136.50% 128.62% 104.55% 104.83% 110.57% 112.54%
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and the average
cost of liabilities for the periods indicated. Such yields and costs are derived
by dividing income or expense by the average monthly balance of assets or
liabilities, respectively, for the periods shown. Average balances are derived
from average month-end balances, except for federal funds, and borrowed funds
which are derived from average daily balances. Management does not believe that
the use of average monthly balances instead of average daily balances on all
other accounts has caused any material differences in the information presented.
The yields and costs include fees which are considered adjustments to yields.
(Dollars in Thousands) Year Ended September 30,
<TABLE>
<CAPTION>
(Dollars in Thousands) Year Ended September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------- --------------------------------- ----------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold and
securities purchased
under agreements to resell... $ 659 $ 38 5.72% $ 2,296 $ 136 5.91% $ 5,476 $ 194 3.55%
Investment securities(1)....... 48,728 3,444 7.07 33,059 2,381 7.20 15,659 935 5.97
Loans receivable(2)............ 127,050 10,316 8.12 93,592 7,551 8.07 82,568 6,752 8.18
Mortgage-backed securities(3).. 57,274 4,025 7.03 61,872 4,188 6.77 47,655 2,609 5.48
-------- ------- -------- ------ -------- ------
Total interest-earning assets.... 233,711 17,823 7.63 190,819 14,256 7.47 151,358 10,490 6.93
------- ----- ------ ----- ------ -----
Non-interest-earning assets...... 10,202 11,386 8,015
-------- -------- --------
Total assets................. $243,913 $202,205 $159,373
======== ======== ========
Interest-bearing liabilities:
NOW and money market deposits.. $ 18,818 436 2.31 $ 16,492 $ 373 2.26 $ 18,623 424 2.28
Savings deposits............... 75,243 1,674 2.22 79,679 1,930 2.42 85,803 1,994 2.32
Certificates of deposit........ 95,003 5,483 5.76 67,563 3,816 5.65 38,008 1,582 4.16
-------- ------- -------- ------ -------- ------
Total interest-bearing deposits 189,064 7,593 4.01 163,734 6,119 3.741 42,434 4,000 2.81
Borrowed funds................. 19,770 1,098 5.46 2,804 167 5.98 -- -- --
-------- ------- -------- ------ -------- ------
Total interest-bearing
liabilities ............... 208,834 8,691 4.15 166,538 6,286 3.771 42,434 4,000 2.81
------- ----- ------ ----- ------ -----
Non-interest bearing liabilities. 8,313 6,809 4,061
Total liabilities................ 217,147 173,347 146,495
Stockholders' equity............. 26,766 28,858 12,878
-------- -------- --------
Total liabilities and
stockholders' equity....... $243,913 $202,205 $159,373
======== ======== ========
Net interest income.............. $ 9,132 $ 7,970 $ 6,490
======= ======= =======
Net interest rate spread(4)...... 3.48% 3.70% 4.12%
==== ==== ====
Net interest-earning
assets/net interest margin(5).. $ 24,877 3.91% $ 24,281 4.18% $ 8,924 4.29%
======== ==== ======== ==== ======== ====
Ratio of average interest-earning
assets to average
interest-bearing liabilities... 1.12x 1.15x 1.06x
======== ======== ========
</TABLE>
- ----------
(1) Includes FHLB stock and investment securities available for sale.
(2) Includes non-accrual loans.
(3) Includes mortgage-backed securities available for sale.
(4) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
10
<PAGE>
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume); (iii) the changes attributable to the
combined impact of changes in volume and rate; and (iv) the net change.
<TABLE>
<CAPTION>
(In Thousands) Year Ended September 30, Year Ended September 30,
- -----------------------------------------------------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
---------------------------------------------------------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
---------------------------------------------------------------------------------------
Volume Rate Rate/Volume Total Volume Rate Rate/Volume Total
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Federal funds sold and securities
purchased under agreements to resell $ (97) $ (2) $ 1 $ (98) $ (113) $ 130 $ (75) $ (58)
Investment securities ................. 1,128 (44) (21) 1,063 1,039 193 214 1,446
Loans receivable ...................... 2,700 47 18 2,765 902 (91) (12) 799
Mortgage-backed securities ............ (311) 161 (13) (163) 779 617 183 1,579
----------------------------------------------------------------------------------------
Total ................................... 3,420 162 (15) 3,567 2,607 849 310 3,766
----------------------------------------------------------------------------------------
Interest expense:
NOW and money market deposits ......... 53 11 2 66 (49) (3) 1 (51)
Savings deposits ...................... (107) (159) 9 (257) (142) 84 (6) (64)
Certificates of deposit ............... 1,551 81 33 1,665 1,230 565 439 2,234
----------------------------------------------------------------------------------------
Total deposits .......................... 1,497 (67) 44 1,476 1,039 646 434 2,119
Borrowed funds .......................... 1,015 (12) (22) 831 -- -- 167 167
----------------------------------------------------------------------------------------
Total ................................... 2,512 (79) (28) 2,405 1,039 646 601 2,286
----------------------------------------------------------------------------------------
Net change in net interest income ....... $ 908 $ 241 $ 13 $ 1,162 $ 1,568 $ 203 $ (291) $ 1,480
========================================================================================
</TABLE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED
SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995.
General. Net income for the year ended September 30, 1996 modestly decreased by
$53,000 to $1.15 million, or $0.64 per share, from $1.20 million, or $0.59 per
share, for the year ended September 30, 1995. This decrease was primarily due to
a $598,000, after-tax, one-time special assessment for the recapitalization of
the Savings Association Insurance Fund ("SAIF"), a $369,000 severance payment
made to the former president and chief executive officer of the Company and a
$201,000 increase in provisions for loan losses, which was partially offset by a
$1.2 million increase in net interest income before provision for loan losses.
For the year ended September 30, 1996, net income, excluding the $598,000
one-time after-tax special assessment for the recapitalization of the SAIF, was
$1.8 million, or $0.98 per share.
Interest Income. Interest income increased by $3.6 million, or 25.0%, to
$17.8 million for the year ended September 30, 1996, from $14.2 million for the
year ended September 30, 1995. The increase primarily resulted from an increase
in interest-earning assets from the continued leveraging and growing of the
balance sheet to fund new loan originations, loan purchases and the purchase of
investment securities. The average yield on interest-earning assets increased 16
basis points to 7.63%, for the year ended September 30, 1996, from 7.47% from
the year ended September 30, 1995. The increase in the average yield primarily
resulted from a higher interest rate environment during fiscal 1996 in addition
to the Company's investment into higher yielding assets. For the year ended
September 30, 1996, average interest-earning assets were $233.7 million, as
compared to $190.8 million for the fiscal year ended September 30, 1995, which
represents a $42.9 million, or a 22.5% increase. The increase in the average
balance of interest-earning assets resulted from an increase in loans receivable
and investment securities. Interest income from loans increased by $2.8 million,
or 36.6%, to $10.3 million in fiscal 1996 from $7.5 million in fiscal 1995. This
increase was due to a $33.5 million, or 35.7%, increase in the average balance
of loans and a 5 basis point increase in the average yield on loans to 8.12% for
fiscal 1996 from 8.07% for the same period in 1995. The higher average balance
of loans receivable was consistent with management's strategy of deploying the
Company's funds into loans receivable. In fiscal 1996, interest income from
mortgage-backed securities decreased $163,000, or 3.9%, to $4.0 million from
$4.2 million for fiscal 1995. This decrease is primarily due to a $4.6 million,
or 7.4% decline in the average balance of mortgage-backed securities to $57.3
million in fiscal 1996 from $61.9 million in fiscal 1995, partially offset by a
26 basis point increase in the average yield on such securities to 7.03% for
fiscal 1996 from 6.77% for the corresponding period in 1995. Interest income on
investment securities increased $1.0 million, or 44.6%, to $3.4 million during
fiscal 1996 from $2.4 million during fiscal 1995, primarily due to an increase
of $15.7 million, or 47.4%, in the average balance of investment securities,
partially offset by a 13 basis point decrease in the average yield on such
securities of 7.07% during fiscal 1996 from 7.20% for fiscal year 1995. Interest
income from federal funds sold and securities purchased under agreements to
resell for fiscal 1996 decreased by $98,000, or 72.1%, to $38,000 in fiscal 1996
from $136,000 for fiscal 1995. This decrease resulted from a
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
$1.6 million, or 71.3%, decrease in the average asset balance, and a 19 basis
point decrease in the average rate earned on such assets from 5.91% to 5.72%.
Interest Expense. Interest expense on total deposits for the year ended
September 30, 1996, increased $1.5 million, or 24.1%, to $7.6 million, from $6.1
million for the year ended September 30, 1995. The increase resulted from a 27
basis point increase in the average cost of interest-bearing deposits to 4.01%
for fiscal 1996 from 3.74% for fiscal 1995, and a $25.3 million, or 15.5%,
increase in the average balance of interest-bearing deposits to $189.0 million
in fiscal 1996 from $163.7 million in fiscal 1995. Interest expense on
borrowings increased $931,000 to $1.1 million, due to a $17.0 million increase
in the average balance of borrowed funds to $19.8 million in fiscal 1996 from
$2.8 million in fiscal 1995. The increase in the average cost of
interest-bearing liabilities resulted from the continued leveraging and growing
of the balance sheet, in addition to competitive pricing of longer-term
certificate of deposit accounts. Interest expense on savings accounts decreased
$257,000, or 13.3%, to $1.7 million for fiscal 1996 from $1.9 million for fiscal
1995, resulting from a $4.4 million reduction in average balances, in addition
to a 20 basis point decrease in the average cost of such deposits. The average
balance of savings and club accounts decreased to 39.8% of total average
deposits for fiscal 1996, as compared to 48.7% for fiscal 1995. For the year
ended September 30, 1996, interest expense on certificates of deposit increased
$1.7 million, or 43.7%, to $5.5 million, which resulted from a 40.6% increase in
the average balance of these accounts to $95.0 million for fiscal 1996 from
$67.6 million in fiscal 1995, and an 11 basis points increase in the average
cost of such accounts to 5.76% in fiscal 1996 from 5.65% in fiscal 1995.
Net Interest Income. Net interest income for the year ended September 30,
1996, increased $1.1 million, or 14.6%, to $9.1 million from $8.0 million for
fiscal 1995. The Bank's net interest rate spread decreased to 3.48% in fiscal
1996 from 3.70% in fiscal 1995, and its net interest margin decreased to 3.91%
in fiscal 1996 from 4.18% in fiscal 1995. During the fiscal year ended September
30, 1996, the narrowing of the net interest rate spread and net interest margin
was primarily caused by the Bank's competitive deposit pricing in an effort to
attract new certificate of deposits during the first quarter of fiscal 1996 and
the simultaneous leveraging of the balance sheet in an effort to increase net
interest income. The average yield on interest-earning assets was 7.63% for the
year ended September 30, 1996, as compared to 7.47% for the year ended September
30, 1995. The average cost of interest-bearing liabilities was 4.15% for the
year ended September 30, 1996, as compared to 3.77% for the corresponding period
last year.
Provision for Loan Losses. The provision for loan losses increased by
$201,000 to $543,000 for the year ended September 30, 1996 from $342,000 for the
year ended September 30, 1995, which resulted in an increase of the Bank's total
allowance for loan losses to $1.6 million at September 30, 1996. The increase in
the provision for losses is partially attributable to an increase in loss
provisions established for participation loans. In addition, the increase in the
provisions for losses is reflective of the significant increase in the loan
portfolio as a result of an increase in loan originations and the purchase of
one-to-four family mortgage loans. In determining its provision for loan losses,
management establishes loss allowances on identified problem loans and
establishes general allowances on the remainder of the loan portfolio.
Non-Interest Income. Non-interest income for the year ended September 30,
1996, increased $486,000, or 157.1%, to $177,000 from a loss of $309,000 for the
year ended September 30, 1995. This significant increase is primarily
attributable to the decrease in provisions for losses on investments in real
estate, which represents a joint venture project in which a subsidiary of the
bank has a one-third interest. In addition, the increase in non-interest income
is attributable to a $109,000 increase in fees and service charges and a $37,000
net gain on sale of investment securities after the write-down for the decline
in market value of TASCO common stock.
Non-Interest Expenses. Non-interest expense increased $1.66 million, or
31.5%, to $6.9 million for the year ended September 30, 1996 from $5.3 million
for the year ended September 30, 1995. Salaries and employee benefits increased
$430,000, or 16.4%, to $3.0 million for fiscal 1996 from $2.6 million for fiscal
1995. The increase in salaries and employee benefits is primarily attributable
to a one-time charge of $369,000 pursuant to the employment contract with the
former president and chief executive officer of the Company and Bank. For the
year ended September 30, 1996, office occupancy decreased by $50,000 to $493,000
from $543,000 for the year ended September 30, 1995. The decrease in occupancy
expense during fiscal 1996 is partly attributable to the collection of rental
income on the Bank owned properties. For the year ended September 30, 1996,
equipment expense increased by $65,000 to $571,000 from $506,000 for the fiscal
year ended September 30, 1995. The increase in equipment expense represents
costs associated with the Company's data processing service, deposit and check
processing service fees, automated teller machines ("ATMs") and other vendor
related services and contracts. In addition, advertising expense decreased by
$60,000 to $69,000 for fiscal 1996 from $129,000 for fiscal 1995. The Company
has limited its advertising expense in an effort to bolster earnings. Losses on
real estate owned increased $7,000 to $84,000 for fiscal 1996,
12
<PAGE>
as compared to $77,000 in losses realized in fiscal 1995. It is management's
objective to dispose of real estate owned as rapidly as possible. For the fiscal
year ended September 30, 1996, the federal insurance premium increased by $1.1
million to $1.5 million from $400,000 for fiscal year ended September 30, 1995.
The increase is solely attributable to a $1.1 million one-time special
assessment to recapitalize the SAIF. Exclusive of the SAIF assessment and the
loss from real estate owned, the ratio of operating expenses to average assets
decreased by 22 basis points to 2.35% for fiscal 1996 from 2.57% for fiscal
1995.
Income Tax Expense. Income tax expense decreased by $161,000, or 19.2%, to
$675,000 in fiscal 1996 from $836,000 in fiscal 1995, due primarily to a
decrease in income before income taxes. Income tax expense is indicative of the
normal level of income tax expense attributable to pre-tax income for the
period.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND
SEPTEMBER 30, 1994.
General. Net income for the year ended September 30, 1995 decreased by $51,000
to $1.2 million, or $0.59 per share, from $1.3 million, or $0.62 per share, for
the year ended September 30, 1994. This decrease was primarily due to a $318,000
increase in losses from real estate operations, an additional $159,000 in
provisions for loan losses, and a $1.1 million increase in non-interest
expenses, which was partially offset by a $1.5 million increase in net interest
income before provisions for loan losses.
Interest Income. Interest income increased by $3.8 million, or 35.9%, to
$14.3 million for the year ended September 30, 1995 from $10.5 million for the
year ended September 30, 1994. The increase primarily resulted from an increase
in interest-earning assets from the investment of net proceeds from the initial
public offering, cash obtained from the Company's purchase of a branch with
$14.8 million in deposits, and income earned on the investment of cash realized
from borrowings obtained during the fiscal year. The average yield on interest
earning assets increased 54 basis points to 7.47%, for the year ended September
30, 1995, from 6.93% from the year ended September 30, 1994. The increase in the
average yield primarily resulted from a higher interest rate environment during
fiscal 1995. For the year ended September 30, 1995, average interest-earning
assets were $190.8 million, as compared to $151.4 million for the fiscal year
ended September 30, 1994, which represents a $39.4 million, or a 26.1% increase.
The increase in the average balance of interest-earning assets resulted from an
increase in loans receivable, investment securities, and mortgage-backed
securities. Interest income from loans increased by $799,000, or 11.8%, to $7.6
million in fiscal 1995 from $6.8 million in fiscal 1994. This increase was due
to an $11.0 million, or 13.4%, increase in the average balance of loans, offset
by an 11 basis point decrease in the average yield on loans to 8.07% for the
fiscal 1995 period from 8.18% for the corresponding period in 1994. In fiscal
1995, interest income from mortgage-backed securities increased $1.6 million, or
60.5%, to $4.2 million from $2.6 million for fiscal 1994. This increase is
primarily due to an increase in the average yield on such securities of 129
basis points to 6.77%, and by a $14.2 million, or 29.8% increase in the average
balance of mortgage-backed securities. Interest income on investment securities
increased $1.4 million, or 154.9%, to $2.4 million during fiscal 1995 from
$935,000 during fiscal 1994, primarily due to an increase of $17.4 million, or
111.1%, in the average balance of investment securities. The average yield on
investment securities increased 123 basis points to 7.20% during fiscal 1995
from 5.97% during fiscal 1994. Interest income from federal funds sold and
securities purchased under agreements to resell for fiscal 1995 decreased by
$58,000, or 29.9%, to $136,000 in fiscal 1995 from $194,000 for fiscal 1994.
This decrease resulted from a $3.2 million, or 58.1%, decrease in the average
asset balance, offset by a 236 basis points increase in the average rate earned
on such assets from 3.55% to 5.91%.
Interest Expense. Interest expense on total deposits for the year ended
September 30, 1995, increased $2.1 million, or 53.0%, to $6.1 million for the
year ended September 30, 1995, from $4.0 million for the year ended September
30, 1994. The increase resulted from a 93 basis point increase in the average
cost of interest-bearing deposits to 3.74% for fiscal 1995 from 2.81% for fiscal
1994, and a $21.3 million, or 15.0%, increase in the average balance of
interest-bearing deposits. Interest expense on borrowings increased $168,000 due
to a $2.8 million increase in the average balance of borrowed funds. The
increase in the average cost of interest-bearing liabilities resulted from the
higher interest rate environment and the Bank's competitive deposit pricing
during the fiscal year. Interest expense on savings accounts decreased $64,000,
or 3.2%, to $1.9 million for fiscal 1995 from $2.0 million for fiscal 1994,
resulting from a $6.1 million reduction in average balances, partially offset by
a 10 basis point increase in the average cost of such deposits. The average
balance of savings and club accounts decreased to 48.7% of total average
deposits for fiscal 1995, as compared to 60.2% for fiscal 1994. For the year
ended September 30, 1995, interest expense on certificates of deposit increased
$2.2 million, or 141.2%, to $3.8 million, which resulted from a 77.8% increase
in the average balance of these accounts to $67.6 million for fiscal 1995 from
$38.0 million in fiscal 1994, and a 149 basis points increase in the average
cost of such accounts to 5.65% in fiscal 1995 from 4.16% in fiscal 1994.
Net Interest Income. Net interest income for the year ended September 30,
1995, increased $1.5 million, or 22.8%, to $8.0 million for fiscal 1995 from
$6.5 million for fiscal 1994. The Bank's net interest rate spread decreased to
3.70% in fiscal 1995 from 4.12% in fiscal 1994, and its net interest margin
decreased to 4.18% in fiscal 1995 from 4.29% in fiscal 1994. The narrowing of
the net interest margin and spread reflects the impact of several Federal
Reserve rate increases during 1994 and the first three months of 1995, an
overall flattening of the yield curve, and the Bank's competitive deposit
pricing in an effort to attract new certificate of deposit accounts. The average
yield on interest-earning assets was 7.47% for the year ended
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
September 30, 1995, as compared to 6.93% for the year ended September 30, 1994.
The average cost of interest-bearing liabilities was 3.77% for the year ended
September 30, 1995, as compared to 2.81% for the corresponding period last year.
Provision for Loan Losses. The provision for loan losses increased by
$159,000 to $342,000 for the year ended September 30, 1995 from $183,000 for the
year ended September 30, 1994, which resulted in an increase of the Bank's total
allowance for loan losses to $1.2 million at September 30, 1995. This increase
resulted from the decline in value of the Hyde Park Tasco loan participation,
along with additional valuation allowances required for the overall increase in
mortgage lending activity during fiscal 1995. In determining its provision for
loan losses, management establishes loss allowances on identified problem loans
and establishes general allowances on the remainder of the loan portfolio.
Non-Interest Income. Non-interest income for the year ended September 30,
1995, decreased $364,000, or 661.8%, to a $309,000 loss from $55,000 in income
for the year ended September 30, 1994. This decrease is primarily attributable
to an additional $318,000 provision for losses on investment in real estate,
which reflects a current appraisal of the value of real estate owned by the
joint venture in which a subsidiary of the Bank has a one-third interest. The
remainder of the decrease represents a decline in other fees and service
charges.
Non-Interest Expenses. Non-interest expenses increased $1.1 million, or
26.1%, to $5.3 million for the year ended September 30, 1995 from $4.2 million
for the year ended September 30, 1994. Salaries and employee benefits increased
$318,000, or 13.8%, to $2.6 million for fiscal 1995 from $2.3 million for fiscal
1994. The increase in salaries and employee benefits resulted from the
establishment and implementation of the Bank's Recognition and Retention Plan
(RRP) and the Company's Employee Stock Ownership Plan (ESOP), increased overtime
and additional staffing during the first half of 1995. The additional staffing
resulted from the temporary operation of two branches in Brooklyn at the time of
the purchase of deposits from the East New York Savings Bank. For the year ended
September 30, 1995, office occupancy and equipment expense increased by $122,000
and $100,000, respectively, to $542,000 and $506,000, respectively, from
$420,000 and $406,000, respectively, for the year ended September 30, 1994. The
increase in occupancy expense represents costs associated with the temporary
operation of two branches in Brooklyn at the time of the deposit purchase from
the East New York Savings Bank. The increase in equipment expense represents
costs associated with the Company's data processing service, automated teller
machines ("ATMs") and other vendor related services and contracts. In addition,
advertising and miscellaneous expense increased by $88,000 and $346,000,
respectively, to $129,000 and $1.0 million, respectively, for fiscal 1995 from
$41,000 and $668,000, respectively, for fiscal 1994. The substantial increase in
advertising expense represents the Company's gift and advertising campaign
associated with the deposit purchase in Brooklyn and a Company-wide campaign
emphasizing specific time deposits. The increase in miscellaneous expense is
attributable to additional stationery and printing costs associated with the
Bank's change of name and logo during the fiscal year, servicing costs related
to newly installed ATMs and other costs associated with a publicly traded
company, including but not limited to, legal costs. Losses on real estate owned
increased $89,000 to $77,000 for fiscal 1995, as compared to $13,000 in net
income in fiscal 1994. It is management's objective to dispose of real estate
owned as rapidly as possible.
Income Tax Expense. Income tax expense decreased by $85,000, or 9.2%, to
$836,000 in fiscal 1995 from $921,000 in fiscal 1994, due primarily to a
decrease in income before income taxes. Income tax expense is indicative of the
normal level of income tax expense attributable to pre-tax income for the
period.
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required to maintain an average daily balance of liquid assets (as
defined in the regulations) equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 5%. OTS regulations also
require each member savings institution to maintain an average daily balance of
short-term liquid assets at a specified percentage (currently 1%) of the total
of its net withdrawable deposit accounts and borrowings payable in one year or
less. Monetary penalties may be imposed for failure to meet these liquidity
requirements. The liquidity of the Bank at September 30, 1996 was 13.9%, which
exceeded the then applicable 5.0% liquidity requirement. Its short-term
liquidity ratio at September 30, 1996 was 3.2%.
The primary investment activities of the Bank are the origination of
mortgage loans, the purchase of mortgage loans, and the purchase of
mortgage-backed securities
14
<PAGE>
and investment securities. During the years ended September 30, 1996, 1995 and
1994, the Bank originated mortgage loans in the amounts of $34.0 million, $30.4
million and $12.3 million, respectively, and purchased mortgage loans in the
amounts of $14.8 million, $9.0 million and zero, respectively. Purchases of
mortgage-backed securities totalled $5.1 million, $19.3 million, and $8.1
million for the same periods. Other investments primarily include U.S.
government and federal agency obligations.
At September 30, 1996, the Bank had outstanding loan commitments of $7.4
million. The Bank anticipates that it will have sufficient funds available to
meet its current loan commitments. Certificates of deposit which are scheduled
to mature in one year or less from September 30, 1996, totalled $53.2 million.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes presented herein have been
prepared in accordance with Generally Accepted Accounting Principles ("GAAP"),
which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Bank's operations. Unlike industrial
companies, nearly all of the assets and liabilities of the Bank are monetary in
nature. As a result, interest rates have a greater impact on the Bank's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
IMPACT OF NEW LEGISLATION
Recapitalization of SAIF. On September 30, 1996, the President signed into law
the Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other
things, imposes a special one-time assessment on SAIF member institutions,
including the Bank, to recapitalize the SAIF. As required by the Funds Act, the
FDIC imposed a special assessment of 65.7 basis points on SAIF assessable
deposits held as of March 31, 1995. The Special Assessment of $1,115,000 was
paid in November 1996 and expensed in the fourth quarter of 1996.
The Funds Act also spreads the obligations for payment of the Financing
Corporation ("FICO") bonds across all SAIF and BIF members. Beginning on January
1, 1997, BIF deposits will be assessed for FICO payments at a rate of 20% of the
rate assessed on SAIF deposits. Based on current estimates by the FDIC, BIF
deposits will be assessed a FICO payment of 1.3 basis points, while SAIF
deposits will pay an estimated 6.5 basis points on the FICO bonds. Full pro rata
sharing of the FICO payments between BIF and SAIF members will occur on the
earlier of January 1, 2000 or the date the BIF and SAIF are merged. The Funds
Act specifies that the BIF and SAIF will be merged on January 1, 1999 provided
no savings associations remain as of that time.
As a result of the Funds Act, the FDIC recently proposed to lower SAIF
assessments to 0 to 27 basis points effective January 1, 1997, a range
comparable to that of BIF members. However, SAIF members will continue to make
the higher FICO payments described above. Management cannot predict the level of
FDIC insurance assessments on an on-going basis whether the savings association
charter will be eliminated or whether the BIF and SAIF will eventually be
merged.
15
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Financial Bancorp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
September 30,
- ------------------------------------------------------------------------------------------------------------------------
Note(s) 1996 1995
----------- ------------- --------------
<S> <C> <C> <C>
Assets
Cash and cash amounts due from depository institutions............. $ 2,917,223 $ 2,395,316
Securities purchased under agreements to resell.................... 3 2,185,000 5,458,000
------------------------------
Total cash and cash equivalents................................ 1 and 21 5,102,223 7,853,316
Investment securities available for sale........................... 3,608,125 --
Investment securities held to maturity, net;
estimated fair value of $49,903,000
and $38,857,000 at September 30, 1996
and 1995, respectively........................................... 1, 4 and 21 51,122,128 38,935,960
Mortgage-backed securities available for sale...................... 1, 5 and 21 5,016,112 --
Mortgage-backed securities held to maturity, net;
estimated fair value of $49,901,000 and $62,544,000
at September 30, 1996 and 1995, respectively..................... 1, 5 and 21 49,836,734 62,008,234
Loans receivable, net.............................................. 1, 6 and 21 140,314,158 110,061,579
Real estate owned, net............................................. 1 and 7 377,910 591,027
Investments in real estate......................................... 1, 8 and 20 3,493,153 3,531,166
Premises and equipment, net........................................ 1, 9 and 20 2,522,264 1,862,127
Federal Home Loan Bank of New York stock, at cost.................. 1,675,800 1,423,000
Accrued interest receivable, net................................... 1, 10 and 21 1,788,970 1,575,020
Other assets....................................................... 15 and 19 1,904,945 981,927
------------------------------
Total assets................................................... $266,762,522 $228,823,356
==============================
Liabilities and stockholders' equity
Deposits........................................................... 11, 19 and 21 $202,883,766 $186,491,588
Advance payments by borrowers for taxes and insurance.............. 1,063,036 954,080
Advances from Federal Home Loan Bank of New York................... 12 and 21 9,725,000 5,375,000
Securities sold under agreements to repurchase..................... 13 and 21 14,046,000 7,126,250
Treasury tax and loan account and other short-term borrowings...... 14 and 21 9,880,970
Other liabilities.................................................. 15 and 17 3,376,552 1,697,410
------------------------------
Total liabilities.............................................. 240,975,324 201,644,328
------------------------------
Commitments and contingencies...................................... 20 and 21
Stockholders' equity:.............................................. 1, 2, 15, 16
17 and 18
Preferred stock $0.01 par value, 2,500,000 shares authorized;
none issued and outstanding.................................... -- --
Common stock $0.01 par value, 6,000,000 shares authorized;
1,790,622 and 1,971,963 shares issued and outstanding
at September 30, 1996 and 1995, respectively................... 21,850 21,850
Additional paid-in capital....................................... 20,151,858 20,130,021
Retained earnings--substantially restricted ..................... . 12,218,607 11,544,464
Common stock acquired by Employee Stock
Ownership Plan ("ESOP")........................................ (1,173,422) (1,335,278)
Common stock acquired by Recognition and
Retention Plan ("RRP")......................................... (454,221) (590,487)
Treasury stock, at cost; 394,378 and 213,037
shares at September 30, 1996 and 1995.......................... (4,976,986) (2,591,542)
Unrealized loss on securities available for sale,
net of income taxes............................................ (488) 0
------------------------------
Total stockholders' equity..................................... 25,787,198 27,179,028
------------------------------
Total liabilities and stockholders' equity..................... $266,762,522 $228,823,356
==============================
</TABLE>
See notes to consolidated financial statements.
16
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Financial Bancorp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Year Ended September 30,
- ----------------------------------------------------------------------------------------------------------------------------
Note(s) 1996 1995 1994
---------- -----------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans.................................................. 1 and 6 $10,316,082 $ 7,551,131 $ 6,751,742
Mortgage-backed securities............................. 1 4,025,030 4,187,550 2,609,188
Investments and other interest-earning assets.......... 1 3,443,504 2,381,326 934,295
Federal funds sold and securities purchased
under agreements to resell........................... 1 38,354 135,739 194,185
-----------------------------------------------
Total interest income.............................. 17,822,970 14,255,746 10,489,410
-----------------------------------------------
Interest expense:
Deposits............................................... 11 7,592,723 6,118,726 3,999,910
Borrowings............................................. 1,098,104 167,609 --
-----------------------------------------------
Total interest expense............................. 8,690,827 6,286,335 3,999,910
-----------------------------------------------
Net interest income...................................... 9,132,143 7,969,411 6,489,500
Provision for loan losses................................ 1 and 6 542,920 341,530 182,763
-----------------------------------------------
Net income after provision for loan losses............... 8,589,223 7,627,881 6,306,737
-----------------------------------------------
Non-interest income (loss):
Fees and service charges............................... 402,813 293,722 306,158
Gain (loss) on sale and write-down of investments...... 1 and 4 36,089 (8,964) (2,656)
(Loss) from real estate operations..................... 1 and 8 (313,011) (618,074) (299,658)
Miscellaneous.......................................... 50,635 24,255 51,041
-----------------------------------------------
Total non-interest income (loss)................... 176,526 (309,061) 54,885
-----------------------------------------------
Non-interest expenses:
Salaries and employee benefits......................... 17 and 18 3,048,238 2,618,287 2,300,895
Net occupancy expense of premises...................... 1 and 20 492,507 542,375 420,332
Equipment.............................................. 1 571,180 505,834 406,238
Advertising............................................ 69,510 129,237 40,967
Loss (income) from real estate owned................... 1 and 7 84,123 76,890 (12,556)
Federal insurance premium.............................. 1,502,263 390,011 359,715
Miscellaneous.......................................... 1,169,816 1,014,132 668,124
-----------------------------------------------
Total non-interest expenses........................ 6,937,637 5,276,766 4,183,715
-----------------------------------------------
Income before income taxes............................... 1,828,112 2,042,054 2,177,907
Income taxes............................................. 1 and 15 675,227 836,092 920,984
-----------------------------------------------
Net income............................................... $ 1,152,885 $ 1,205,962 $ 1,256,923
===============================================
Net income per common share and
common stock equivalents............................... 1 $ 0.64 $ 0.59 $ 0.62
===============================================
Weighted average number of common shares and
common stock equivalents outstanding................... 1 1,790,900 2,039,500 2,033,000
===============================================
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Financial Bancorp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Unrealized
Retained Common Common loss on
Additional Earnings-- Stock Stock securities
Common Paid-in Substantially Acquired Acquired Treasury available
Stock Capital Restricted By ESOP By RRP Stock for sale, net Total
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance--
October 1, 1993...... $ -- $ -- $ 9,374,129 $ -- $ -- $ -- $ -- $ 9,374,129
Net income for the
year ended
September 30, 1994... -- -- 1,256,923 -- -- -- -- 1,256,923
Net proceeds from
issuance of common
stock................ 21,850 20,158,395 -- -- -- -- -- 20,180,245
Acquisition of common
stock by the ESOP.... -- -- -- (1,529,500) -- -- -- (1,529,500)
ESOP shares committed
to be released....... -- -- -- 18,208 -- -- -- 18,208
-----------------------------------------------------------------------------------------------------------
Balance--
September 30, 1994... 21,850 20,158,395 10,631,052 (1,511,292) -- -- -- 29,300,005
Additional conversion
expenses............. -- (43,099) -- -- -- -- -- (43,099)
Net income for the
year ended
September 30, 1995... -- -- 1,205,962 -- -- -- -- 1,205,962
ESOP shares committed
to be released....... -- 14,725 -- 176,014 -- -- -- 190,739
Acquisition of common
stock by the RRP..... -- -- -- -- (681,331) -- -- (681,331)
Amortization of cost of
common stock
acquired by the RRP.. -- -- -- -- 90,844 -- -- 90,844
Purchase of 213,037
shares of
treasury stock....... -- -- -- -- -- (2,591,542) -- (2,591,542)
Dividends paid......... -- -- (292,550) -- -- -- -- (292,550)
-----------------------------------------------------------------------------------------------------------
Balance--
September 30, 1995... 21,850 20,130,021 11,544,464 (1,335,278) (590,487) (2,591,542) -- 27,179,028
Net income for the
year ended
September 30, 1996... -- -- 1,152,885 -- -- -- -- 1,152,885
ESOP shares committed
to be released....... -- 55,705 -- 161,856 -- -- -- 217,561
Amortization of cost of
common stock
acquired by the RRP.. -- -- -- -- 136,266 -- -- 136,266
Purchase of 192,266
shares of
treasury stock....... -- -- -- -- -- (2,522,444) -- (2,522,444)
Reissue of 10,925 shares
of treasury stock
for stock options.... -- (33,868) -- -- -- 137,000 -- 103,132
Dividends paid......... -- -- (478,742) -- -- -- -- (478,742)
Unrealized loss on
securities available
for sale, net........ -- -- -- -- -- -- (488) (488)
-----------------------------------------------------------------------------------------------------------
Balance--
September 30, 1996... $21,850 $20,151,858 $12,218,607 $(1,173,422) $(454,221) $(4,976,986) $ (488) $25,787,198
===========================================================================================================
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Financial Bancorp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Year Ended September 30,
- ----------------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................. $ 1,152,885 $ 1,205,962 $ 1,256,923
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment .. 298,613 302,168 274,285
Amortization of premiums and accretion of
discounts on investment securities, net ................ (91,107) 2,122 (42,781)
Amortization of premiums and of accretion of discounts
on mortgage-backed securities, net ..................... 19,268 (44,020) 115,106
Accretion of deferred loan fees and discounts ............ (84,132) (39,114) (45,071)
Amortization of intangible assets ........................ 5,373 8,500 --
(Gain) on sale of investment securities available for sale (51,029) -- --
Loss (gain) on sale of real estate owned ................. 33,583 24,667 (116,359)
Write-down on investment securities ...................... 14,940 8,964 2,656
Provision for loan losses ................................ 542,920 341,530 182,763
Provision for losses on real estate owned ................ -- -- 48,195
Deferred income taxes .................................... (1,088,167) (376,195) 109,427
(Increase) in accrued interest receivable, net ........... (213,950) (913,785) (64,530)
(Increase) decrease in refundable income taxes ........... (13,693) 123,292 82,985
Decrease (increase) in other assets ...................... 173,852 (177,832) (29,690)
Cost of ESOP and RRP ..................................... 353,827 281,583 18,208
Increase (decrease) in other liabilities ................. 1,679,142 877,521 (65,633)
------------------------------------------
Net cash provided by operating activities ............ 2,732,325 1,625,363 1,726,484
------------------------------------------
Cash flows from investing activities:
Purchases of investment securities available for sale ...... (8,596,719) -- --
Purchases of investment securities held to maturity ........ (48,040,000) (28,413,729) (26,406,271)
Proceeds from maturities of investment securities
held to maturity ......................................... 33,930,000 6,000,000 14,000,000
Proceeds from sale of investment securities available
for sale ................................................. 7,028,594 -- --
Purchases of mortgage-backed securities available for sale . (5,068,148) -- --
Purchases of mortgage-backed securities held to maturity ... -- (19,294,195) (8,082,017)
Proceeds from principal repayments on mortgage-backed
securities available for sale ............................ 61,971 -- --
Proceeds from principal repayments on mortgage-backed
securities held to maturity .............................. 12,152,454 7,168,724 7,536,229
Loan originations, net of repayments ....................... (16,486,091) (18,521,635) (853,669)
Purchases of loans ......................................... (14,326,221) (9,019,089) --
Proceeds from sale of and insurance recoveries on
real estate owned ........................................ 289,116 705,959 748,106
Capitalized expenses on real estate owned .................. (8,637) (20,427) (13,757)
Net (increase) decrease in investments in real estate ...... 217,450 (742,549) 364,729
Additions to premises and equipment ........................ (1,138,187) (645,783) (97,622)
(Purchase) redemption of Federal Home Loan Bank
of New York stock ........................................ (252,800) (155,100) 80,200
Net cash received on acquisition of branch ................. -- 14,638,010 --
------------------------------------------
Net cash (used in) investing activities .............. $(40,237,218) $(48,299,814) $(12,724,072)
------------------------------------------
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Financial Bancorp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Year Ended September 30,
- ----------------------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits ......................................... $ 16,392,178 $ 31,496,186 $ 3,543,635
Increase (decrease) in advance payments by borrowers
for taxes and insurance ........................................ 108,956 (340,661) 321,413
Advances from Federal Home Loan Bank of New York ................. 9,200,000 -- --
Net change in short-term borrowings from Federal Home
Loan Bank of New York .......................................... 9,196,000 5,375,000 --
Net change in other borrowings ................................... 2,754,720 7,126,250 --
Net proceeds from issuance of common stock ....................... -- -- 20,180,245
Additional conversion expenses ................................... -- (43,099) --
Dividends paid ................................................... (478,742) (292,550) --
Acquisition of common stock by the ESOP .......................... -- -- (1,529,500)
Acquisition of common stock by the RRP ........................... -- (681,331) --
Treasury stock acquired .......................................... (2,522,444) (2,591,542) --
Reissue of treasury stock for stock options ...................... 103,132 -- --
------------------------------------------
Net cash provided by financing activities ...................... 34,753,800 40,048,253 22,515,793
------------------------------------------
Net (decrease) increase in cash and cash equivalents ............... (2,751,093) (6,626,198) 11,518,205
Cash and cash equivalents--beginning ............................... 7,853,316 14,479,514 2,961,309
------------------------------------------
Cash and cash equivalents--ending .................................. $ 5,102,223 $ 7,853,316 $ 14,479,514
==========================================
Supplemental schedule of noncash investing and financing activities:
Loans transferred to real estate owned ........................... $ 248,945 $ 681,725 $ 29,891
==========================================
Loans to facilitate sales of real estate owned ................... $ 148,000 $ -- $ 94,000
==========================================
Securities transferred to available for sale from held to maturity $ 1,989,839 $ -- $ --
==========================================
Unrealized loss on securities available for sale ................... $ 871 $ -- $ --
Deferred income tax ................................................ (383) -- --
------------------------------------------
$ 488 $ -- $ --
==========================================
Property transferred to investment in real estate,
net of accumulated depreciation .................................. $ 190,174 $ -- $ --
==========================================
Assets acquired in connection with the acquisition of branch:
Equipment ........................................................ $ -- $ 4,871 $ --
Other assets ..................................................... -- 70,454 --
------------------------------------------
$ -- $ 175,325 $ --
==========================================
Supplemental disclosures of cash flows information:
Cash paid (net of refunds received) during the year for:
Federal, state and city income taxes ........................... $ 1,777,958 $ 1,088,995 $ 728,572
==========================================
Interest ....................................................... $ 8,676,430 $ 6,208,733 $ 3,998,039
==========================================
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Bancorp, Inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of financial statement presentation
The consolidated financial statements, which have been prepared in conformity
with generally accepted accounting principles, include the accounts of Financial
Bancorp, Inc. (the "Company"), its wholly owned subsidiaries, 842 Manhattan
Avenue Corporation and Financial Federal Savings Bank (the "Bank"), a federally
chartered stock savings bank and the Bank's wholly owned subsidiaries, FinFed
Development Corp. which participates in a joint venture for development of land
and sale of lots, FinFed Funding Ltd., which serves as a conduit for funding
investments in FinFed Development Corp. and F.S. Agency Inc., which is engaged
in the sale of annuities. All significant intercompany accounts and transactions
have been eliminated in consolidation. Investments in non-consolidated joint
ventures are accounted for using the equity method of accounting.
Effective October 20, 1994, the Bank changed its charter from that of a
federally chartered savings and loan association to that of a federally
chartered savings bank and changed its name to Financial Federal Savings Bank.
Such changes do not materially impact financial condition or operations.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the consolidated statements of financial
condition and revenues and expenses for the periods then ended. Actual results
could differ significantly from those estimates. Material estimates that are
particularly susceptible to significant changes relate to the determination of
the allowance for loan losses and the valuation of real estate owned and
investments in real estate. Management believes that the allowance for loan
losses is adequate and that real estate owned and investments in real estate are
appropriately valued. While management uses available information to recognize
losses on loans, real estate owned and investments in real estate, future
additions to the allowance for loan losses or further writedowns of real estate
owned and investments in real estate may be necessary based on changes in
economic conditions in the market area.
In addition, various regulatory agencies, as an integral part of their
examination processes, periodically review the allowance for loan losses and the
valuations of real estate owned and investments in real estate. Such agencies
may require additions to the allowance or additional writedowns based on their
judgments about information available to them at the time of their examinations.
(b) Cash and cash equivalents
Cash and cash equivalents include cash and amounts due from depository
institutions, interest-bearing deposits in other banks, federal funds sold and
securities purchased under agreements to resell, all with original maturities of
three months or less.
(c) Investments and mortgage-backed securities
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments
in Debt and Equity Securities," which established standards of financial
accounting and reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt securities. Pursuant to
SFAS 115, securities are to be classified into one of three categories:
held-to-maturity, available-for-sale, or trading.
Investments in debt securities that the enterprise has the positive intent
and ability to hold to maturity are classified as held-to-maturity securities
and reported at amortized cost. Debt and equity securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with unrealized holding gains
and losses included in earnings. Debt and equity securities not classified as
held-to-maturity or trading must be classified as available for sale securities
and reported at fair value, with unrealized holding gains or losses reported in
a separate component of retained earnings.
The Bank adopted SFAS 115, effective October 1, 1994. No securities were
classified as available for sale or trading at that time as the Bank elected to
maintain its original intent to hold its investments and mortgage-backed
securities until maturity. The equity securities have been marked down to fair
value as the result of a permanent impairment and are included in investment
securities held-to-maturity.
As permitted by FASB's "A guide to Implementation of SFAS 115 on
Accounting for Certain Investments in Debt and Equity Securities," the Bank
reassessed the classification of its held-to-maturity portfolio during December,
1995 and transferred investment securities with a carrying value of $1,989,839
and a fair value of $2,005,630 from the held to maturity to available-for-sale
portfolio.
Premiums and discounts on all securities are amortized/accreted to
maturity by use of a method which approximates the level-yield method.
Gains or losses on sales are recognized based on the specific
identification method.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financial Bancorp, Inc. and Subsidiaries
In October 1994, the FASB issued Statement of Financial Accounting
Standards No. 119 ("SFAS 119"), "Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments." SFAS 119 requires
disclosure of all derivative financial instruments defined as "futures, forward,
swap, and option contracts, and other financial instruments with similar
characteristics." SFAS 119 also expands on and amends SFAS's 105 and 107 which
dealt with off-balance-sheet risk and disclosing the fair value of financial
instruments. The amendments require a distinction as to whether financial
instruments are held for sale or issued for trading, or other purposes. The
standard is effective for fiscal years ending after December 15, 1994. The
adoption of SFAS 119, effective October 1, 1994, did not have a material effect
on the Company's consolidated financial condition or results of operations as
the statements extends only to financial statement disclosure. Further, the
Company does not have any derivative financial instruments, as defined by SFAS
119, at September 30, 1996 and 1995.
(d) Loans receivable, net
Loans receivable is carried at unpaid principal balances less the allowance for
loan losses and net deferred loan fees and discounts.
Loan origination fees and certain direct loan origination costs are
deferred and amortized as an adjustment of yield over the contractual lives of
the related loans.
(e) Allowance for loan losses
An allowance for loan losses is maintained at a level considered adequate to
absorb losses inherent in the loan portfolio. Management of the Bank, in
determining the allowance for loan losses, considers the risks inherent in its
loan portfolio and changes in the nature and volume of its loan activities,
along with the general economic and real estate market conditions. The Bank
utilizes a two-tier approach: (1) identification of problem loans and
establishment of loss allowances on such loans; and (2) establishment of
valuation allowances on the remainder of its loan portfolio. The Bank maintains
a loan review system which allows for a periodic review of its loan portfolio
and the early identification of potential problem loans. Such system takes into
consideration, among other things, delinquency status, size of loans, types of
collateral and financial condition of the borrowers. Loan loss allowances are
established for identified loans based on a review of such data and/or estimates
of the fair value of the underlying collateral. Loan loss allowances are
established on the remainder of the loan portfolio, based upon a combination of
factors including, but not limited to actual loan loss experience, composition
of the loan portfolio, current economic conditions and management's judgment.
Although management believes that adequate loan loss allowances are established,
actual losses are dependent upon future events and, as such, further additions
to the level of the loan loss allowance may be necessary.
Effective October 1, 1995, the Bank adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan"("SFAS 114") and Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures"("SFAS 118"). The provisions of these statements are applicable to
all loans, uncollateralized as well as collateralized, except large groups of
smaller-balance homogeneous loans that are collectively evaluated for impairment
and loans that are measured at fair value or at the lower of cost or fair value,
and to all loans that are renegotiated in a troubled debt restructuring
involving a modification of terms.
SFAS 114 requires that 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, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent, except that
loans renegotiated as part of a troubled debt restructuring subsequent to the
adoption of SFAS 114 and 118 must be measured for impairment by discounting the
total expected cash flow under the renegotiated terms at each loan's original
effective interest rate.
A loan evaluated for impairment pursuant to SFAS 114 is deemed to be
impaired when, based on current information and events, it is probable that the
Bank will be unable to collect all amounts due according to the contractual
terms of the loan agreement. An insignificant payment delay, which is defined as
up to ninety days by the Bank, will not cause a loan to be classified as
impaired. A loan is not impaired during a period of delay in payment if the Bank
expects to collect all amounts due, including interest accrued at the
contractual interest rate for the period of delay. Thus, a demand loan or other
loan with no stated maturity is not impaired if the Bank expects to collect all
amounts due, including interest accrued at the contractual interest rate, during
the period the loan is outstanding. All loans identified as impaired are
evaluated independently. The Bank does not aggregate such loans for evaluation
purposes.
Payments received on impaired loans are applied first to accrued interest
receivable and then to principal.
22
<PAGE>
(f) Allowances for uncollected interest
The Bank provides an allowance for the loss of uncollected interest on loans
where collection of the uncollected interest is doubtful. Such interest
ultimately collected is credited to income in the period of recovery.
(g) Real estate owned, net
Real estate owned consists of real estate acquired by foreclosure or deed in
lieu of foreclosure. Real estate owned is initially recorded at the lower of
cost or fair value at the date of acquisition and subsequently carried at the
lower of cost or fair value less estimated selling costs. Fair value is defined
as the amount reasonably expected to be received in a current sale between a
willing seller and a willing buyer. Cost incurred in developing or preparing
properties for sale are capitalized. Income and expense related to operating and
holding properties are recorded in operations as incurred. Gains and losses on
such properties are recognized as incurred. The amounts ultimately recoverable
from real estate owned could differ from the net carrying value of these assets
because of weak economic conditions and the current softness in certain
geographic real estate markets.
(h) Investments in real estate
Investments in real estate consists of investments in non-consolidated joint
ventures and property held by a subsidiary. Investments in non-consolidated
joint ventures are recorded at the lower of cost or estimated fair values.
(i) Concentration of risk
Lending and real estate activities are concentrated in real estate and loans
secured by real estate located in the State of New York.
(j) Premises and equipment, net
Premises and equipment are comprised of land, at cost, and buildings and
improvements, leasehold improvements and furniture, fixtures and equipment, at
cost, less accumulated depreciation and amortization. Depreciation and
amortization charges are computed on the straight-line method over the following
estimated useful lives:
Buildings and improvements 6 to 40 years
Furniture, fixtures and equipment 5 to 10 years
Leasehold improvements The lesser of useful
life or term of lease.
Significant renewals and betterments are capitalized to the premises and
equipment account. Maintenance and repairs are charged to expense in the period
incurred. Rental income is netted against occupancy costs in the consolidated
statements of income.
(k) Income taxes
The Company and its subsidiaries file consolidated federal, state and city
income tax returns, except for one of the subsidiaries, which files separate
state and city income tax returns. Income taxes are allocated to the Company and
its subsidiaries based upon the contribution of their respective income or loss
to the consolidated returns. Federal, state and city income taxes have been
provided on the basis of reported income. The amounts reflected on the tax
returns differ from these provisions due principally to temporary differences in
the reporting of certain items for financial reporting and tax reporting
purposes. In accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"), deferred income tax expense or
benefit is determined by recognizing deferred tax assets and liabilities for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
realization of deferred tax assets is assessed and a valuation allowance
provided, when necessary, for that portion of the asset which is not likely to
be realized. Management believes, based upon current facts, that it is more
likely than not that there will be sufficient taxable income in future years to
realize the deferred tax assets. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in earnings in the period
that includes the enactment date.
(l) Net income per common share
Net income per common share is calculated by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding, adjusted for the unallocated portion of shares held by the ESOP in
accordance with the American Institute of Certified Public Accountants'
("AICPA") Statement of Position ("SOP") 93-6. Stock options granted are
considered common stock equivalents and therefore considered in net income per
common share calculation, if dilutive, using the treasury stock method.
Net income per common share for the year ended September 30, 1994 is
calculated based on the net income for the entire year. The weighted average
number of common shares outstanding, adjusted for the unallocated portion of
shares held by the ESOP, from the date of conversion to stock form (August 17,
1994) through September 30, 1994, assume such shares were outstanding for the
entire year (as if the conversion had taken place on October 1, 1993).
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financial Bancorp, Inc. and Subsidiaries
(m) Fair value of financial instrument
The following methods and assumptions were used by the Bank in estimating the
fair value of its financial instruments:
Cash and cash equivalents, term deposits and interest receivable: The
carrying amounts reported in the consolidated financial statements for cash and
cash equivalents and interest receivable approximate their fair value.
Investment and mortgage-backed securities: Fair value is determined by
reference to quoted market prices where available. If quoted market prices are
not available, fair values are based on quoted market prices of comparable
instruments.
Loans receivable: The fair value of loans is determined by reference to
market prices for similar loans with same maturities and interest rates.
Deposits: The carrying amounts reported in the consolidated financial
statements for demand and savings and NOW accounts approximate their fair
values. For fixed-maturity time deposits, fair value is estimated using market
rates currently offered for deposits of similar remaining maturities.
Advances from Federal Home Loan Bank of New York, Securities sold under
agreements to repurchase, Treasury tax and loan account and other short-term
borrowings: The fair values are estimated using rates currently available to the
Bank for debts with similar terms and remaining maturities.
Commitments to extend credit: The fair value of commitments is estimated
using the fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present creditworthiness
of counterparties. For fixed-rate loan commitments, fair value also considers
the difference between current levels of interest rates and the committed rates.
(n) Impact of new accounting standards
In March 1995, the FASB issued SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of." SFAS 121 established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of. SFAS 121 does not apply to financial instruments, long-term
customer relationships of a financial institution (i.e. core deposit
intangibles), mortgage and other servicing rights, or deferred tax assets. SFAS
121 requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. In such cases, an impairment loss is to be recognized if the
carrying value of such asset exceeds its fair value. In regard to long-lived
assets to be disposed of either through sales or abandonment, such assets are to
be carried at the lower of cost or fair value less costs to sell. SFAS 121 is
effective for fiscal years beginning after December 15, 1995 and restatement of
previously issued financial statements is not permitted. SFAS 121 was adopted
effective October 1, 1996 and such adoption did not have a material adverse
effect on the Company's consolidated financial condition or results of
operations.
In June 1995, the FASB issued SFAS 122, "Accounting for Mortgage Servicing
Rights." SFAS 122 amends SFAS 65, "Accounting for Certain Mortgage Banking
Activities," to require that a mortgage banking enterprise recognize as separate
assets rights to service mortgage loans for others, however those servicing
rights were acquired, should such loans be sold or securitized and the related
mortgage servicing rights retained. The servicing rights are to be recorded
based on an allocation of the total investment in related loans to the relative
fair values of the loans and the separated servicing rights retained, providing
it is practical to estimate those fair values. SFAS 122 is effective
prospectively in fiscal years beginning after December 15, 1995. Retroactive
capitalization of mortgage servicing rights retained in transactions in which a
mortgage banking enterprise originates mortgage loans and sells or securitizes
those loans before adoption of SFAS 122 is prohibited. SFAS 122 was adopted
effective October 1, 1996 and such adoption did not have a material adverse
effect on the Company's consolidated financial condition or results of
operations.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123 establishes financial accounting and reporting standards
for stock-based employees compensation plans. SFAS 123 encourages all entities
to adopt the "fair value base method" of accounting for employee stock
compensation plans. However, SFAS 123 also allows an entity to continue to
measure compensation cost under such plans using the "intrinsic value based
method." Under the fair value based method, compensation cost is measured at the
grant date based on the value of the award and its recognized over the service
period, usually the vesting period. Fair value is determined using an option
pricing model that takes into account the stock price at the grant date, the
exercise price, the expected life of the option, the volatility of the
underlying stock and the expected dividends on it, and the risk free interest
rate over the expected life of the option. Under the intrinsic value based
method, compensation cost is the excess, if any, of the quoted market price of
the stock at the grant date or other measurement date over the amount an
employee must pay to acquire the stock. Most stock plans have no intrinsic value
at date of grant, and under previous accounting guidance, no compensation cost
was to be recognized.
24
<PAGE>
The accounting requirements of SFAS 123 are effective for transactions
entered into in fiscal years that begin after December 15, 1995. The Company
intends to continue accounting for compensation cost under the intrinsic value
based method and will provide proforma disclosures for all awards granted after
October 1, 1996. Such disclosures include net income and earnings per share as
if the fair value based method of accounting has been applied.
In September 1996 the FASB issued SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities"("SFAS 125").
This Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of financial-components approach that focuses on control.
It distinguishes transfers of financial assets that are sales from transfers
that are secured borrowings. Under the financial-components approach, after a
transfer of financial assets, an entity recognizes all financial and servicing
assets it controls and liabilities it has incurred and derecognizes financial
assets it no longer controls and liabilities that have been extinguished. The
financial-components approach focuses on the assets and liabilities that exist
after the transfer. Many of these assets and liabilities are components of
financial assets that existed prior to the transfer. If a transfer does not meet
the criteria for a sale, the transfer is accounted for as a secured borrowing
with a pledge of collateral. SFAS 125 is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after December
31, 1996, and should be applied prospectively. Earlier or retroactive
application of SFAS 125 is not permitted. SFAS 125, when adopted, is not
expected to have a material adverse effect on the Company's consolidated
financial condition or results of operations.
(o) Reclassification
Certain amounts for the years ended September 30, 1995 and 1994 have been
reclassified to conform to the current period's presentation.
2. STOCK FORM OF OWNERSHIP
On December 21, 1993, the Board of Directors of Financial Federal Savings and
Loan Association (the "Association") approved plans to convert the Association
from a federally chartered mutual savings association to a federally chartered
stock savings association. Concurrent with the conversion, the Company was
organized under the laws of the State of Delaware for the purpose of acquiring
all of the capital stock of the Association. The shares of the Company were
offered for subscription by eligible members of the Association. On August 17,
1994, the Company offered 2,185,000 shares of common stock, at a par value
$0.01, at a price of $10.00 per share, resulting in net proceeds, after
conversion expenses, of $20,180,000. The ESOP purchased 152,950 shares from the
initial offering. Simultaneous with the issuance of common stock, the Company
purchased all the capital stock issued by the Association for $10,115,000. The
financial position and results of operations of the Company only, as of and for
the year ended September 30, 1996 and 1995 and as of and for the period from
completion of conversion through September 30, 1994, are presented in Note 22.
At the time of conversion, the Association established a liquidation account
in an amount equal to its total retained earnings at June 30, 1994. The
liquidation account will be maintained by the Bank for the benefit of eligible
account holders who continue to maintain savings accounts with the Bank after
conversion. In the unlikely event of a complete liquidation of the Bank,
eligible depositors who continue to maintain accounts shall be entitled to
receive a distribution from the liquidation account. The total amount of the
liquidation account may be decreased if the balances of eligible account holders
decreased on the annual determination date. The balance of the liquidation
account on September 30, 1996 was $3,143,000. The Bank shall not declare or pay
any dividend on or repurchase any of its capital stock if the effect thereof
would cause its net worth to be reduced below: 1) the amount required for the
liquidation account, or 2) the net worth requirements contained in Section
563.13(b) of the Rules and Regulations of Office of Thrift Supervision.
During the year ended September 30, 1995, the Company approved plans to
repurchase 311,635 shares of common stock outstanding, up to five percent (5%)
of common stock outstanding at any single instance. In accordance with the
plans, 213,037 shares at an aggregate cost of $2,591,542 were purchased in the
open market.
During the year ended September 30, 1996 the Company approved similar
plans to repurchase 183,199 shares of common stock outstanding and in accordance
with the plans, 192,266 shares, at an aggregate cost of $2,522,444, were
purchased in the open market. These repurchases are reflected as treasury stock
in the consolidated statements of financial condition. Subsequent to September
30, 1996, the Company began purchasing the remaining 89,531 shares of approved
repurchases in open market transactions.
3. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The Company purchases securities under agreements to resell substantially
identical securities. These agreements represent short-term loans and are
included as cash equivalents in the consolidated statements of financial
condition as all such agreements mature within ninety days.
During the years ended September 30, 1996 and 1995, the average balances
of securities purchased under agreements to resell totalled $133,000 and
$102,000 respectively and the maximum amount outstanding at any month end was
$5,240,000 and $7,000,000 respectively. The average interest rate for 1996 and
1995 was 5.89% and 5.70%, respectively.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financial Bancorp, Inc. and Subsidiaries
4. INVESTMENT SECURITIES
<TABLE>
<CAPTION>
September 30, 1996
- -----------------------------------------------------------------------------------------------------
Gross Unrealized
Carrying ----------------- Estimated
Value Gains Losses Fair Value
---------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
U.S. Government obligations maturing within five years $ 2,919,153 $ -- $ 11,028 $ 2,908,125
Corporate preferred stock ............................ 700,000 -- -- 700,000
---------------------------------------------
$ 3,619,153 $ -- $ 11,028 $ 3,608,125
=============================================
Held to Maturity
U.S. Government (including agencies):
After one through five years ....................... $18,000,000 $22,100 $ 25,000 $17,997,100
After five through ten years ....................... 11,972,067 -- 483,707 11,488,360
After ten years .................................... 21,150,061 -- 732,805 20,417,256
---------------------------------------------
$51,122,128 $22,100 $1,241,512 $49,902,716
=============================================
<CAPTION>
September 30, 1996
- -----------------------------------------------------------------------------------------------------
Gross Unrealized
Carrying ----------------- Estimated
Value Gains Losses Fair Value
---------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity
U.S. Government (including agencies):
Less than one year ................................. $ 2,494,879 $ -- $ 19,879 $ 2,475,000
After one through five years ....................... 15,984,918 42,748 218,506 15,809,160
After five through ten years ....................... 19,441,223 137,836 37,308 19,541,751
After ten years .................................... 1,000,000 16,240 -- 1,016,240
Common stock ......................................... 14,940 -- -- 14,940
---------------------------------------------
$38,935,960 $196,824 $ 275,693 $38,857,091
=============================================
</TABLE>
At December 31, 1995, the Bank transferred investment securities with a
carrying value of $1,989,839 and a fair value of $2,005,630 from held to
maturity to available for sale.
There were no sales of investment securities held to maturity during the
years ended September 30, 1996, 1995, and 1994. Proceeds from sales investment
securities available for sale during the year ended September 30, 1996 were
$7,028,594. Gross gains of $51,029 were realized on these sales. Provision for
losses of $14,940, $8,964 and $2,656 representing permanent impairment in the
value of common stock, were charged to operations during the years ended
September 30, 1996, 1995 and 1994, respectively.
26
<PAGE>
5. MORTGAGE-BACKED SECURITIES
<TABLE>
<CAPTION>
September 30, 1996
- -----------------------------------------------------------------------------------------------------
Principal Unamortized Unearned Carrying
Balance Premiums Discounts Value
---------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
Federal Home Loan Mortgage Corporation ............... $ 4,988,029 $17,926 $ -- $ 5,005,955
=============================================
Held to maturity
Government National Mortgage Association ............. $26,853,877 $304,560 $ 52,458 $27,105,979
Federal Home Loan Mortgage Corporation ............... 18,013,608 20,823 35,545 17,998,886
Federal National Mortgage Association ................ 2,681,985 15,434 -- 2,697,419
Other pass-through ................................... 2,042,108 -- 7,658 2,034,450
---------------------------------------------
$49,591,578 $340,817 $ 95,661 $49,836,734
=============================================
<CAPTION>
September 30, 1996
- -----------------------------------------------------------------------------------------------------
Principal Unamortized Unearned Carrying
Balance Premiums Discounts Value
---------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity
Government National Mortgage Association ............. $32,834,845 $371,382 $ 61,871 $33,144,356
Federal Home Loan Mortgage Corporation ............... 23,035,466 26,742 83,363 22,978,845
Federal National Mortgage Association ................ 3,367,166 20,711 -- 3,387,877
Other pass-through ................................... 2,506,555 -- 9,399 2,497,156
---------------------------------------------
$61,744,032 $418,835 $ 154,633 $62,008,234
=============================================
<CAPTION>
September 30, 1996
- -----------------------------------------------------------------------------------------------------
Gross Unrealized
Carrying ----------------- Estimated
Value Gains Losses Fair Value
---------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
Federal Home Loan Mortgage Corporation ............... $ 5,005,955 $10,157 $ -- $ 5,016,112
=============================================
Held to maturity
Government National Mortgage Association ............. $27,105,979 $307,930 $ 215,575 $27,198,334
Federal Home Loan Mortgage Corporation ............... 17,998,886 149,978 189,156 17,959,708
Federal National Mortgage Association ................ 2,697,419 12,211 1,545 2,708,085
Other pass-through ................................... 2,034,450 -- -- 2,034,450
---------------------------------------------
$49,836,734 $470,119 $ 406,276 $49,900,577
=============================================
<CAPTION>
September 30, 1996
- -----------------------------------------------------------------------------------------------------
Gross Unrealized
Carrying ----------------- Estimated
Value Gains Losses Fair Value
---------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity
Government National Mortgage Association ............. $33,144,356 $496,694 $ 152,628 $33,488,422
Federal Home Loan Mortgage Corporation ............... 22,978,845 360,929 149,089 23,190,685
Federal National Mortgage Association ................ 3,387,877 18,342 38,385 3,367,834
Other pass-through ................................... 2,497,156 -- 1 2,497,155
---------------------------------------------
$62,008,234 $875,965 $ 340,103 $62,544,096
=============================================
</TABLE>
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financial Bancorp, Inc. and Subsidiaries
The schedule of maturities as of September 30, 1996 follows (in
thousands):
Carrying Estimated
Value Fair Value
-------------------------
After one through five years ................... $ 5,903 $ 5,888
After five through ten years ................... 2,762 2,755
After ten years ................................ 46,188 46,274
-------------------------
$54,853 $54,917
=========================
There were no sales of mortgage-backed securities available for sale or
held to maturity during the years ended September 30, 1996, 1995 and 1994.
6. LOANS RECEIVABLE, NET
September 30,
- --------------------------------------------------------------------------------
1996 1995
------------------------------
Real estate mortgages:
One-to-four family ....................... $115,499,853 $ 93,360,878
Equity and second mortgages .............. 2,779,860 3,806,267
Multi-family ............................. 5,622,129 4,295,959
Commercial ............................... 15,301,665 8,030,860
------------------------------
139,203,507 109,493,964
------------------------------
Construction ............................... 4,919,747 3,079,975
------------------------------
Consumer:
Passbook or certificate .................. 171,055 152,374
Home improvement ......................... 6,844 9,508
Student education guaranteed
by the State of New York ............... 201,789 214,295
Personal ................................. 21,468 27,414
------------------------------
401,156 403,591
------------------------------
Commercial, including lines
of credit ................................ 167,910 123,050
------------------------------
Total loans............................. 144,692,320 113,100,580
------------------------------
Less: Loans in process ..................... 2,508,812 1,485,237
Allowance for loan losses .......... 1,573,338 1,243,068
Deferred loan fees
and discounts .................... 296,012 310,696
------------------------------
4,378,162 3,039,001
------------------------------
$140,314,158 $110,061,579
==============================
At September 30, 1996, 1995 and 1994, loans serviced by the Bank for the
benefit of others totalled approximately $10,067,000, $11,877,000 and
$13,653,000 respectively.
An analysis of the allowance for loan losses follows:
Year Ended September 30,
- --------------------------------------------------------------------------------
1996 1995 1994
----------------------------------------------
Balance--beginning .......... $ 1,243,068 $ 1,119,542 $ 1,004,668
Provision for
loan losses ............... 542,920 341,530 182,763
Charge-offs ................. (212,650) (218,716) (70,476)
Recoveries .................. -- 712 2,587
----------------------------------------------
Balance--ending ............. $ 1,573,338 $ 1,243,068 $ 1,119,542
==============================================
Non-accrual loans totalled approximately $4,380,000, $1,794,000 and
$1,629,000 at September 30, 1996, 1995 and 1994, respectively. Interest income
that would have been recognized on loans for which the accrual of income has
been discontinued totalled approximately $256,000, $171,000 and $165,000 for the
years ended September 30, 1996, 1995 and 1994, respectively. Interest income on
these loans, which is recorded only when collected, amounted to approximately
$43,000, $24,000 and $17,000 for the years ended September 30, 1996, 1995 and
1994, respectively.
Impaired loans and related amounts recorded in the allowance for loan
losses at September 30, 1996 are summarized as follows:
Recorded investment in impaired loans:
With recorded allowance .................................... $922,426
Without recorded allowance ................................. --
--------
Total impaired loans ....................................... 922,426
Recorded allowances for loan losses .......................... 504,095
--------
Net impaired loans ......................................... $418,331
========
For the year ended September 30, 1996 interest income that would have been
recognized for these loans had they been performing in accordance with the
original terms approximated $78,000 and interest income recognized when received
was $31,000.
The average balance of impaired loans during the year ended September 30,
1996 approximated $933,000.
28
<PAGE>
The following is a summary of the loans to the directors and officers (and
to any associates of such persons) of the Company and its subsidiaries exclusive
of loans to any such persons which in the aggregate did not exceed $60,000:
Year Ended
September 30,
- --------------------------------------------------------------------------------
1996 1995
------------------------------
Balance--beginning ..................... $ 651,939 $ 351,469
New loans .............................. -- 310,000
Repayments ............................. (6,581) (9,530)
Loans removed .......................... (249,835) --
------------------------------
Balance--ending ........................ $ 395,523 $ 651,939
==============================
7. REAL ESTATE OWNED, NET
Real estate owned is summarized as follows:
September 30,
- --------------------------------------------------------------------------------
1996 1995
------------------------------
Acquired by foreclosure $377,910 $591,027
==============================
The following is an analysis of loss (income) from real estate owned:
Year Ended September 30,
- --------------------------------------------------------------------------------
1996 1995 1994
--------------------------------------
Provision for losses .............. $ -- $ -- $ 48,195
Operational expenses,
net of rental
income .......................... 50,540 52,223 55,608
Loss (gain) on sale
and write down .................. 33,583 24,667 (116,359)
--------------------------------------
Net loss (income) ................. $84,123 $76,890 $ (12,556)
======================================
8. INVESTMENTS IN REAL ESTATE
September 30,
- --------------------------------------------------------------------------------
1996 1995
--------------------------
Investment in real estate including:
Real estate held for
rental operations .......................... $ 184,987 $ --
Investment in real estate
for development ............................ 3,308,166 3,531,166
--------------------------
$3,493,153 $3,531,166
==========================
The Bank's wholly owned subsidiary has entered into joint venture with
builders, developers and one financial institution to acquire land, design
projects and install site improvements thereon and engage in marketing
activities to sell the improved lots. Profits and losses are shared in
accordance with partnership agreements, under which the subsidiary shares of
33.33% of profits and losses.
Combined Statements of Financial Condition
September 30,
- --------------------------------------------------------------------------------
Assets 1996 1995
----------------------------
Cash ......................................... $ 19,738 $ 90,489
----------------------------
Investments .................................. 133,163 49,507
----------------------------
Land and construction-in-progress:
Land ....................................... 7,210,900 7,210,900
Construction-in-progress ................... 7,848,912 7,018,280
----------------------------
15,059,812 14,229,180
----------------------------
Less allowances for inventory
valuation ................................ 3,645,000 2,751,000
----------------------------
11,414,812 11,478,180
----------------------------
Total assets ............................... $11,567,713 $11,618,176
============================
Liabilities and partners' capital
Liabilities
Loan payable to Bank's
subsidiary ................................. $ 1,256,934 $ 1,256,934
Loan payable to other partner ................ 1,256,934 1,256,934
----------------------------
Loans payable .............................. 2,513,868 2,513,868
Other liabilities ............................ 1,237,876 619,339
----------------------------
Total liabilities .......................... 3,751,744 3,133,207
----------------------------
Partners' capital
Bank's subsidiaries .......................... 2,176,926 2,399,926
Other partners ............................... 5,639,043 6,085,043
----------------------------
Total partners' capital .................... 7,815,969 8,484,969
----------------------------
Total liabilities and
partners' capital ........................ $11,567,713 $11,618,176
============================
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financial Bancorp, Inc. and Subsidiaries
Combined Statements of Income (Loss)
Year Ended September 30,
1996 1995 1994
------------------------------------------
Allowance for inven-
tory valuation ................ $(894,000) $(1,842,000) $(909,000)
(Loss) on sale of
real estate ................... -- -- (2,393)
------------------------------------------
Net (loss) ...................... $(894,000) $(1,842,000) $(911,393)
==========================================
Combined Statements of Partners' Capital
Bank's
Partners' capital Subsidiaries Others Total
-----------------------------------------------
Balance
October 1, 1993 .......... $ 3,153,346 $ 7,229,761 $ 10,383,107
Capital
contribution ............. 335,000 522,553 857,553
(Loss) for year ended
September 30,
1994 ..................... (286,313) (625,080) (911,393)
Distribution of
capital .................. (413,416) -- (413,416)
-----------------------------------------------
Balance September 30,
1994 ..................... 2,788,617 7,127,234 9,915,851
Capital
contribution ............. 225,309 185,809 411,118
(Loss) for year ended
September 30,
1995 ..................... (614,000) (1,228,000) (1,842,000)
-----------------------------------------------
Balance September 30,
1995 ..................... 2,399,926 6,085,043 8,484,969
Capital
contribution ............. 75,000 150,000 225,000
(Loss) for year ended
September 30,
1996 ..................... (298,000) (596,000) (894,000)
-----------------------------------------------
Balance September 30,
1996 ..................... $ 2,176,926 $ 5,639,043 $ 7,815,969
===============================================
See Note 20 to consolidated financial statements regarding related
commitments.
9. PREMISES AND EQUIPMENT, NET
September 30,
1996 1995
----------------------------
Land ....................................... $ 220,000 $ 102,000
Buildings and improvements ................. 2,174,114 1,594,663
Leasehold improvements ..................... 1,245,011 1,238,491
Furniture, fixtures and
equipment ................................ 904,034 868,620
----------------------------
4,543,159 3,803,774
Less accumulated depreciation
and amortization.......................... 2,020,895 1,941,647
----------------------------
$2,522,264 $1,862,127
============================
10. ACCRUED INTEREST RECEIVABLE, NET
September 30,
1996 1995
----------------------------
Loans, net of allowance for
uncollected interest of
$473,000, and $353,000
at September 30, 1996 and
1995, respectively ....................... $ 605,257 $ 401,176
Mortgage-backed securities ................. 382,225 405,353
Investment securities ...................... 801,142 766,741
Other interest-earning assets .............. 346 1,750
----------------------------
$1,788,970 $1,575,020
============================
11. DEPOSITS
<TABLE>
<CAPTION>
September 30,
- -----------------------------------------------------------------------------------------------------
1996 1995
--------------------------------------------------------------------
Weighted Weighted
Average Average
Percent Amount Rate Percent Amount Rate
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand 3.52 $ 7,155,614 0.00% 1.98 $ 3,688,019 0.00%
Interest-bearing demand ... 9.18 18,621,553 2.18% 8.911 6,622,561 2.29%
Savings and club .......... 36.52 74,084,490 2.11% 41.49 77,370,417 2.44%
Certificates of deposit ... 50.78 103,022,109 5.85% 47.62 88,810,591 5.98%
-------------------- --------------------
Total deposits .......... 100.00 $202,883,766 3.94% 100.00 $186,491,588 4.06%
==================== ====================
</TABLE>
30
<PAGE>
The following table presents certificates of deposit outstanding, based
upon interest rate ranges, at September 30, 1996 and 1995:
(In Thousands) September 30,
- --------------------------------------------------------------------------------
1996 1995
-------------------------
Certificate accounts:
3.00% to 3.99% ............................ $ 163 $ 1,121
4.00% to 4.99% ............................ 24,776 10,896
5.00% to 5.99% ............................ 50,468 36,702
6.00% to 6.99% ............................ 10,685 23,712
7.00% to 7.99% ............................ 16,879 16,313
8.00% to 8.99% ............................ 51 67
-------------------------
$103,022 $88,811
=========================
The scheduled maturities of certificates of deposit were as follows:
(In Thousands) September 30,
- --------------------------------------------------------------------------------
1996 1995
--------------------------
One year or less .......................... $ 53,177 $56,201
One to two years .......................... 23,168 11,264
Two to three years ........................ 5,929 3,053
Thereafter ................................ 20,748 18,293
--------------------------
Total ................................. $103,022 $88,811
==========================
Certificates of deposit of $100,000 or more totalled approximately
$7,860,000 and $6,677,000 at September 30, 1996 and 1995, respectively.
Interest expense on deposits consists of the following:
Year Ended September 30,
- --------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------
Demand ......................... $ 439,309 $ 372,698 $ 423,873
Savings and clubs .............. 1,672,529 1,930,106 1,994,256
Certificates of
deposit ...................... 5,480,885 3,815,922 1,581,781
------------------------------------------
$7,592,723 $6,118,726 $3,999,910
==========================================
12. ADVANCES FROM FEDERAL HOME LOAN BANK OF NEW YORK ("FHLB")
September 30,
- --------------------------------------------------------------------------------
Interest
Rate 1996 1995
---------------------------------------
Overnight advances due:
October 2, 1995 ............... 6.625% $ -- $5,375,000
October 1, 1996 ............... 6.125% 525,000 --
Notes maturing on:
February 14, 1997 ............. 5.133% 1,200,000 --
December 19, 1997 ............. 5.597% 2,000,000 --
December 28, 1998 ............. 5.670% 6,000,000 --
---------------------------
$9,725,000 $5,375,000
---------------------------
The Bank has an available overnight line of credit with the FHLB, subject
to the terms and conditions of the lender's overnight advance program in the
amount of $22,330,400 and $20,956,300, at September 30, 1996 and 1995,
respectively. Advances under this line of credit, which expires on December 22,
1996, are made for one-day periods. The advances were secured by stock of the
FHLB in the amount of $1,675,000 and $1,423,000 and mortgage loans with an
unpaid balance of $5,185,000 and $6,716,000 at September 30, 1996 and 1995,
respectively.
13. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
September 30,
Interest ------------------------
Lender Maturity Rate 1996 1995
- --------------------------------------------------------------------------------
Security broker-dealer ..... November 9, 1995 5.78% $ -- $5,112,500
Security broker-dealer ..... January 26, 1996 5.75% -- 2,013,750
Federal Home Loan Bank ..... December 18, 1996 5.46% 4,600,000 --
Federal Home Loan Bank ..... December 20, 1996 5.46% 4,768,000 --
Federal Home Loan Bank ..... December 26, 1996 5.40% 4,678,000 --
------------------------
$14,046,000 $7,126,250
========================
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financial Bancorp, Inc. and Subsidiaries
Information concerning borrowings collateralized by securities sold under
agreements to repurchase is summarized as follows:
Year Ended
September 30,
- --------------------------------------------------------------------------------
1996 1995
----------------------
(Dollars in Thousands)
Average balance during
the year ........................................ $ 8,228 $1,876
Average interest rate
during the year ................................. 5.70% 6.01%
Maximum month-end
balance during the year ......................... $15,064 $9,229
Investment securities underlying the
agreement at year end:
Carrying value ................................ $15,150 $6,988
Estimated fair value .......................... $14,520 $7,047
14. TREASURY TAX AND LOAN ACCOUNT AND OTHER SHORT TERM BORROWINGS
At September 30, 1996, the Bank had borrowings from the Federal Reserve Bank of
New York under the Treasury Tax and Depository program in the amount of
$9,880,970 at an interest rate of 5.20 per annum payable on demand. These
borrowings are secured by investment securities with a carrying value of
$10,972,000 and fair value of $10,570,000.
15. INCOME TAXES
The Bank qualifies as a Savings and Loan Association under the provisions of the
Internal Revenue Code and was therefore permitted to deduct from taxable income
an allowance for bad debts based on the greater of; (1) actual loan losses (the
"experience method"); or (2) eight (8) percent of taxable income before such bad
debt deduction less certain adjustments (the "percentage of taxable income
method"). For the tax years 1996, 1995, and 1994, the Bank used the percentage
of taxable income method.
On August 21, 1996, legislation was signed into law which repealed the
percentage of taxable income method for tax bad debt deduction. The repeal is
effective for the Bank's taxable year beginning October 1, 1996. In addition,
the legislation requires the Company to include in taxable income its bad debt
reserves in excess of its base year reserves over a six, seven, or eight year
period depending upon the attainment of certain loan origination levels. Since
the percentage of taxable income method for Federal tax bad debt deduction and
the corresponding increase in the Federal tax bad debt reserve in excess of the
base year have been recorded as temporary differences pursuant to SFAS 109, this
change in the tax law is not expected to have a material adverse effect on the
Company's statement of operations.
Retained earnings at September 30, 1996 include approximately $3,127,000
related to bad debt deductions for income tax purposes for which income taxes
have not been provided. If such amount is used for purposes other than for bad
debt losses, including distributions in liquidation, it will be subject to
income tax at the then current rates.
The components of income taxes are summarized as follows:
Year Ended September 30,
- --------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------
Current tax expense:
Federal income ................ $ 1,186,475 $ 846,068 $499,873
State and city
income ...................... 576,919 366,219 311,684
------------------------------------------
1,763,394 1,212,287 811,557
------------------------------------------
Deferred tax expense
(benefit):
Federal income ................ (609,709) (220,292) 71,730
State and city
income ...................... (478,458) (155,903) 37,697
------------------------------------------
(1,088,167) (376,195) 109,427
------------------------------------------
$ 675,227 $ 836,092 $920,984
==========================================
The following table presents a reconciliation between reported income
taxes and the income taxes which would be computed by applying the federal
statutory rate of 34% to income before income taxes:
Year Ended September 30,
- --------------------------------------------------------------------------------
1996 1995 1994
--------------------------------------
Federal income
taxes ............................. $ 621,558 $694,298 $ 740,488
Increase (reduction) of
income taxes
resulting from:
New York state
and city taxes,
net of federal
income tax
effect .......................... 79,010 138,809 230,591
ESOP and MRP ...................... (14,835) -- --
Other ............................. (10,506) 2,985 (50,095)
--------------------------------------
$ 675,227 $836,092 $ 920,984
--------------------------------------
Refundable income taxes of $36,340 and $22,647 at September 30, 1996 and
1995, respectively, and net deferred income taxes of $1,419,226 and $330,676 at
September 30, 1996 and 1995, respectively are included in other assets.
32
<PAGE>
The tax effects of existing temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities are
as follows:
September 30,
- --------------------------------------------------------------------------------
1996 1995
--------------------------
Deferred tax assets
Uncollected interest ......................... $ 219,699 $169,444
Allowance for loss on loans
in excess of tax bad debt
deductions ................................. 352,744 176,505
Deferred loan fees ........................... 73,972 108,052
Prepaid pension .............................. 93,084 49,824
Depreciation ................................. 131,650 104,818
ESOP and RRP cost ............................ 99,702 94,387
Special assessment of
Federal Insurance .......................... 517,452 --
Other ........................................ 59,922 11,313
--------------------------
1,548,225 714,343
--------------------------
Deferred tax liabilities
Deferred premiums
and discounts .............................. 11,953 12,993
Deferred loss on investments in
real estate ................................ 117,046 287,600
State and city taxes ......................... -- 68,643
Other ........................................ -- 14,431
--------------------------
128,999 383,667
--------------------------
Net deferred tax assets
(liabilities) ............................ $1,419,226 $330,676
==========================
16. REGULATORY CAPITAL
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and the regulations prescribed by the Office of Thrift Supervision
(the "OTS") prescribed capital requirements, which include three separate
measurements of capital adequacy (the "Capital Rule"). The Capital Rule requires
each savings institution to maintain tangible capital equal to at least 1.5% of
its adjusted total assets and core capital equal to at least 3.0% of its
adjusted total assets. The Capital Rule further requires each savings
institution to maintain total capital equal to at least 8.0% of its
risk-weighted assets.
The following table sets forth the capital position of the Bank as
calculated under the Capital Rule:
<TABLE>
<CAPTION>
Tangible Core Risk-based
----------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
GAAP stockholders' equity ...................... $ 21,660 8.31 $ 21,660 8.31 $ 21,660 20.78
Less goodwill and other intangibles ............ (143) (0.05) (143) (0.05) (143) (0.14)
Less investment in "non-includable" subsidiaries
required to be deducted ...................... (3,308) (1.27) (3,308) (1.27) (3,308) (3.17)
Add general valuation allowance ................ -- -- -- -- 1,021 0.98
----------------------------------------------------------------
Capital as calculated under FIRREA ............. 18,209 6.99 18,209 6.99 19,230 18.45
Capital as required under FIRREA ............... 3,908 1.50 7,816 3.00 8,337 8.00
----------------------------------------------------------------
Excess ......................................... $ 14,301 5.49 $ 10,393 3.99 $ 10,893 10.45
================================================================
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") imposes increased requirements on the operations of financial
institutions and mandates the development of regulations designed to empower
regulators to take prompt corrective action with respect to institutions that
fall below certain capital standards. FDICIA stipulates that an institution with
less than 4% core capital is deemed to be undercapitalized.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financial Bancorp, Inc. and Subsidiaries
17. BENEFIT PLANS
Pension Plan
The Bank has a non-contributory defined benefit pension plan covering all
eligible employees. The benefits are based upon each employee's years of
service. The Bank's policy is to fund the plan with annual contributions equal
to the maximum amount deductible for federal income tax purposes.
The following table sets forth the plan's funded status:
September 30,
- --------------------------------------------------------------------------------
1996 1995
------------------------------
Actuarial present value of
benefit obligation, including
vested benefits of $1,840,708
and $1,857,122, respectively ............. $ 1,903,127 $ 1,922,763
==============================
Projected benefit obligation ............... $(2,299,516) $(2,318,598)
Plan assets at fair value .................. 2,234,942 2,009,196
------------------------------
Projected benefit obligation
in excess of plan assets ................. (64,574) (309,402)
Unrecognized (gain) loss ................... (536,887) (318,597)
Unrecognized net obligation
at October 1, 1988 being
amortized over 15 years .................. 197,925 225,225
Unrecognized prior service cost
at October 1, 1989 being
amortized over 11.1 years ................ 145,598 179,984
Contributions made during
the three months ended
September 30 ............................. 57,290 120,527
------------------------------
(Accrued) pension cost included
in other liabilities ..................... $ (200,648) $ (102,263)
==============================
Net periodic pension cost included the following components:
Year Ended September 30,
- --------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------
Service cost ................... $ 87,457 $ 74,246 $ 70,308
Interest cost .................. 169,729 210,445 199,052
Actual return on
plan assets .................. (217,332) (141,270) (147,514)
Net amortization
and deferrals ................ 115,821 61,686 61,686
------------------------------------------
Net periodic pension
cost included in
salaries and
employee benefits ............ $ 155,675 $ 205,107 $ 183,532
==========================================
Assumptions used in accounting for the plan are as follows:
Year Ended September 30,
- --------------------------------------------------------------------------------
1996 1995 1994
---------------------------------
Discount rate ........................ 7.50% 8.25% 8.25%
Rate of increase in
compensation ....................... 5.50% 6.00% 6.00%
Long-term rate of
return on
plan assets ........................ 8.00% 8.00% 8.00%
Savings Incentive Plan
The Bank has a savings incentive plan, pursuant to Section 401(K) of the
Internal Revenue Code, for all eligible employees of the Bank. Employees may
elect to save from 1% to 15% of their eligible compensation, of which the Bank
will match the lesser of 25% of the employees' contribution or 1% of the
employees' compensation. The Bank may make a special employer contribution in
addition to its matching contribution. Total savings incentive plan expense for
the years ended September 30, 1996, 1995 and 1994 was approximately $13,700,
$22,000 and $36,000, respectively.
18. STOCK BENEFIT PLANS
Employee Stock Ownership Plan
Effective upon conversion, an ESOP was established for all eligible employees.
The ESOP used $1,529,500 of proceeds from a term loan from the Company to
purchase 152,950 shares of Company common stock in the initial offering. The
term loan from the Company to the ESOP was payable initially over seven annual
installments commencing on December 31, 1994. Interest on the term loan is
payable annually, commencing on December 31, 1994, at a rate of 7.75 percent per
annum. Each year, the Bank intends to make discretionary contributions to the
ESOP which will be equal to principal and interest payments required from the
ESOP on the term loan less any dividends received by the ESOP on unallocated
shares. Shares purchased with the loan proceeds were initially pledged as
collateral for the term loan and are held in a suspense account for future
allocation among participants. Contributions to the ESOP and shares released
from the suspense account will be allocated among the participants on the basis
of compensation, as described by the Plan, in the year of allocation. During the
years ended September 30, 1996 and 1995, the Bank made $302,190 and $127,284
cash contributions to the ESOP of which $190,184 and $72,833 were applied to the
principal. During the year
34
<PAGE>
ended September 30, 1994, no contributions were made to the ESOP and no loan
repayments were due. Effective January 1, 1995, the terms of the term loan were
renegotiated between the Company and the ESOP and the remaining term to maturity
was extended from six to nine years. At September 30, 1996, the loan had an
outstanding balance of $1,266,483.
The ESOP is accounted for in accordance with SOP 93-6 "Accounting for
Employee Stock Ownership Plans," which was issued by the AICPA in November 1993.
Accordingly, the ESOP shares pledged as collateral are reported as unearned ESOP
shares in the consolidated statements of financial condition. As shares are
committed to be released from collateral, the Company reports compensation
expense equal to the current market price of the shares, and the shares become
outstanding for net income per common share computations. Dividends on allocated
ESOP shares will be recorded as a reduction of retained earnings. Contributions
equivalent to dividends on unallocated ESOP shares are recorded as a reduction
of debt. ESOP compensation expenses were $218,000, $191,000 and $18,000 for the
years ended September 30, 1996, 1995 and 1994, respectively.
The ESOP shares at September 30, 1996 and 1995 were as follows:
1996 1995
---------------------------
Allocated shares ............................. 26,302 7,283
Shares committed to be released .............. 9,306 12,139
Unreleased shares ............................ 117,342 133,528
---------------------------
Total ESOP shares ............................ 152,950 152,950
===========================
Fair value of unreleased shares .............. $1,768,344 $1,886,083
===========================
Recognition and Retention Plan
On January 26, 1995, the Bank established a Recognition and Retention Plan
("RRP") to provide both key employees and outside directors of the Bank with a
proprietary interest in the Company in a manner designed to encourage such
persons to remain with the Bank. The Bank contributed $681,331 from available
liquid assets to the RRP to enable the trust to acquire 65,550 shares of the
Company's common stock in open market transactions. As of September 30, 1995,
3,500 of the total of 4,589 shares allotted to outside directors have been
awarded and 54,407 of the total of 60,961 shares allotted to officers and
employees have been awarded.
Under the RRP, awards are granted in the form of common stock held by the
RRP trust. The awards vest over a period of time not more than five years
commencing one year from the date of award. The awards become fully vested upon
termination of employment due to death, disability or normal retirement. The
awards to officers, employees and outside directors become fully vested upon a
change in control of the Bank or the Company. At September 30, 1995, 1,500
shares awarded were vested. During the year ended September 30, 1996, an
additional 6,964 shares were awarded to officers and employees and awards for
13,547 shares were forfeited. As of September 30, 1996, 11,274 shares to
officers and employees and 1900 shares to outside directors were distributed and
1600 shares to outside directors were vested. $136,266 and $90,844 of expenses
related to the RRP shares are included in the consolidated statements of income
for years ended September 30, 1996 and 1995, respectively.
Stock Option Plan
The Company has adopted an Incentive Stock Option Plan ("ISO") Plan")
authorizing the grant of stock options and limited rights equal to 152,950
shares of common stock to officers and employees of the Bank or the Company.
Options granted under the ISO Plan may be either options that qualify as
incentive stock options as defined in Section 422 of the Internal Revenue Code
of 1986, as amended, or non-statutory options. Options will be exercisable on a
cumulative basis in equal installments at the rate of 20% per year commencing
one year from the date of grant. All options granted will be exercisable in the
event the optionee terminates his employment due to death, disability or normal
retirement or in the event of a change in control of the Bank or the Company.
The options expire ten years from the date of the grant. Simultaneously with the
grant of options, the Company granted "limited rights" with respect to the
shares covered by the options, which enables the optionee, upon a change of
control of the Bank or the Company, to elect to receive cash for each option
granted, equal to the difference between the exercise price of the option and
the fair market value of the common stock on the date of the exercise.
As of September 30, 1995, 86,970 shares of common stock had been granted
under the ISO Plan at an option price of $9.44 per common share (the market
price on the date approved by the stockholders). No options are exercisable as
of September 30, 1995 and no options were exercised during the year then ended.
During the year ended September 30, 1996, options previously granted for 19,534
shares were canceled. At September 30, 1996, options to purchase 4,064 shares
are exercisable.
The Company adopted a stock option plan for outside directors (the "Option
Plan") authorizing the grant of non-statutory stock options equal to 65,550
shares of common stock to outside directors of the Bank and/or the Company.
Options granted will be exercisable on a cumulative basis in equal installments
at the rate of 20% per year commencing one year from the date the individual
began serving as outside director, including service prior to adoption of the
Plan. All options granted under the Option Plan expire upon the earlier of ten
years following the date of grant or one year following the date the optionee
ceases to be a Director for any reason other than removal for cause. If Director
is removed for cause, all options awarded to him shall expire upon such removal.
Upon the death or disability of the participant, all options previously granted
would automatically be exercisable. As of September 30, 1995, 43,700 shares of
common stock were granted under the Option Plan at an option price of $9.44 per
common share (the market price on the date approved by the stockholders).
Options to purchase 10,925 shares of common stock were exercised during the year
ended September 30, 1996 and options to purchase 32,775 shares are exercisable.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financial Bancorp, Inc. and Subsidiaries
Activity for the stock option plans is as follows:
Stock Options Option
Option Price
ISO Plan Plan Per Share
----------------------------
Balance at
September 30, 1994 ........................... -- -- --
Granted ........................................ 86,970 43,700 $9.44
Exercised ...................................... -- -- --
Cancelled ...................................... -- -- --
----------------------------
Balance at
September 30, 1995 ........................... 86,970 43,700 $9.44
----------------------------
Exercised ...................................... -- 10,925 9.44
Cancelled ...................................... 19,534 -- --
----------------------------
Balance at
September 30, 1996 ........................... 67,436 32,775 $9.44
============================
19. BRANCH ACQUISITION
On February 24, 1995, the Bank purchased deposit liabilities associated with a
branch office located in Greenpoint, Brooklyn. The Bank assumed deposit
liabilities in the amount of $14,813,000 and paid a premium of $127,000. The
premium, along with other costs of acquisition, is amortized on a straight-line
basis over a period of ten years. At September 30, 1996, the unamortized premium
and other acquisition costs totalling $143,000 are included in other assets. The
amortization expense for the years ended September 30, 1996 and 1995 were
$19,000 and $9,000, respectively.
20. COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off- balance sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and purchase securities. The
commitments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the consolidated statements of
financial condition. The Bank's exposure to credit loss in the event of
non-performance by the other party to the financial instrument for commitments
to extend credit is represented by the contractual notional amount of those
instruments. The Bank uses the same credit policies in making commitments as it
does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the counterparty. Collateral held varies but primarily includes residential real
estate.
The Bank has the following outstanding commitments to originate
conventional mortgage loans. All commitments expire within three months.
September 30,
- --------------------------------------------------------------------------------
1996 1995
-----------------------------
Conventional mortgages ................... $7,355,000 $4,122,000
=============================
At September 30, 1996, of the $7,355,000 in outstanding commitments to
originate loans, $6,768,000 are at a fixed rate within ranges from 7.08% to
10.00% and $587,000 are at adjustable rates with initial rates within a range
from 6.23% to 8.00%.
Rentals under long-term operating leases for certain branch offices
amounted to approximately $144,000, $142,000 and $109,000 for the years ended
September 30, 1996, 1995 and 1994, respectively. At September 30, 1996, the
minimum rental commitments under all non-cancelable leases with initial or
remaining terms of more than one year and expiring through August 31, 2005 are
as follows:
Year Ending
September 30, Minimum Rent
- --------------------------------------------------------------------------------
1997 ............................................... $179,000
1998 ............................................... 187,000
1999 ............................................... 190,000
2000 ............................................... 139,000
Thereafter ............................................ 299,000
--------
$994,000
========
At September 30, 1996, a real estate joint venture, in which FinFed
Development Corp. ("FDC") is a partner, may require additional contributions to
the joint venture over the next two-year period to enable development of the
property, and its share of the normal operating costs of the joint venture.
The Bank also has, in the normal course of business, commitments for
services and supplies. Management does not anticipate losses on any of these
transactions.
The Company and is subsidiaries, in the conduct of their business, are
involved in normal litigation matters. In the opinion of management, the
ultimate disposition of such litigation should not have a material adverse
effect on the consolidated financial position or results of operations of the
Company and Subsidiaries.
36
<PAGE>
21. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the corporation's financial instruments
at September 30, 1996 are as follows:
Carrying Fair
Value Value
-------------------------
(In Thousands)
Financial assets
Cash and cash equivalents .................... $ 5,102 $ 5,102
Investment securities ........................ 54,730 53,511
Mortgage-backed securities ................... 54,853 54,917
Loans receivable ............................. 140,314 140,464
Interest receivable .......................... 1,789 1,789
Financial liabilities
Deposits ..................................... 202,884 203,510
Advances and borrowings ...................... 33,652 33,486
Commitments
To originate loans ........................... 7,355 7,355
The fair value estimates are made at a discrete point in time based on
relevant market information and information about the financial instruments.
Fair value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates. Further, the foregoing estimates may not
reflect the actual amount that could be realized if all or substantially all of
the financial instruments were offered for sale.
In addition, the fair value estimates were based on existing on-and-off
balance sheet financial instruments without attempting to value the anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets and liabilities include premises and equipment and
advances from borrowers for taxes and insurance. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in any of the estimates.
Finally, reasonable comparability between financial institutions may not
be likely due to the wide range of permitted valuation techniques and numerous
estimates which must be made given the absence of the active secondary markets
for many of the financial instruments. This lack of uniform valuation
methodologies introduces a greater degree of subjectivity to these estimated
fair values.
22. PARENT ONLY FINANCIAL INFORMATION
Financial Bancorp, Inc. operates two wholly owned subsidiaries, Financial
Federal Savings Bank, and 842 Manhattan Avenue Corp. ("Corporation"). The
earnings of the subsidiaries are recognized by the holding company using the
equity method of accounting. Accordingly, earnings of the subsidiaries are
recorded as increases in the Company's investment in the Subsidiary. The
following are the condensed financial statements for Financial Bancorp, Inc.
(Parent company only) as of September 30, 1996 and 1995 and for the periods then
ended. The Company had no operations prior to the Bank's conversion to stock
form on August 17, 1994.
Statements of Financial Condition
September 30,
- --------------------------------------------------------------------------------
1996 1995
----------------------------
Assets
Cash and amounts due from depository institutions $ 6,475 $ 536
Repurchase agreements ............................ 2,185,000 5,458,000
----------------------------
Cash and cash equivalents ...................... 2,191,475 5,458,536
Accrued interest receivable ...................... 75,058 86,184
ESOP loan to Financial Federal Savings Bank ...... 1,266,483 1,456,667
Investment in Financial Federal Savings Bank ..... 21,660,028 20,090,937
Investment in 842 Manhattan Avenue Corp. ......... 232,193 --
Other assets ..................................... 401,809 86,704
----------------------------
Total assets ................................. $ 25,827,046 $ 27,179,028
============================
Liabilities and stockholders' equity
Other liabilities ................................ $ 39,360 $ --
----------------------------
Total liabilities ............................ 39,360 --
----------------------------
Stockholders' equity
Common stock ..................................... 21,850 21,850
Paid-in capital .................................. 20,151,858 20,130,021
Retained earnings ................................ 12,218,607 11,544,464
Employees Stock Ownership Plan ................... (1,173,422) (1,335,278)
Recognition and Retention Plan ................... (454,221) (590,487)
Treasury stock ................................... (4,976,986) (2,591,542)
----------------------------
Total stockholders' equity ................... 25,787,686 27,179,028
----------------------------
Total liabilities and stockholders' .......... $ 25,827,046 $ 27,179,028
============================
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financial Bancorp, Inc. and Subsidiaries
Statements of Income
<TABLE>
<CAPTION>
From Inception
August 17, to
Year Ended September 30, September 30,
- ------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Interest income ................................... $ 112,031 $ 119,883 $ 14,817
Equity in undistributed earning of the subsidiaries 1,211,457 1,262,813 382,243
-------------------------------------------
1,323,488 1,382,696 397,060
Expenses .......................................... 201,401 226,383 2,180
-------------------------------------------
Income before income taxes ........................ 1,122,087 1,156,313 394,880
Income tax (benefit) expense ...................... (30,798) (49,649) 5,932
-------------------------------------------
Net income ........................................ $ 1,152,885 $ 1,205,962 $388,948
===========================================
</TABLE>
Statements of Cash Flows
<TABLE>
<CAPTION>
From Inception
August 17, to
Year Ended September 30, September 30,
- -----------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................ $ 1,152,885 $ 1,205,962 $ 388,948
Adjustments to reconcile net income to net cash used
in operating activities:
Equity in undistributed earnings of the subsidiary .. (1,211,457) (1,262,813) (382,243)
Decrease (increase) in accrued interest receivable .. 11,126 (71,367) (14,817)
(Increase) in other assets .......................... (315,105) (80,818) (5,886)
Increase (decrease) in other liabilities ............ 39,360 (5,932) 5,932
------------------------------------------
Net cash (used in) operating activities ........... (323,191) (214,968) (8,066)
------------------------------------------
Cash flows from investing activities:
Purchase of all outstanding stock of the Bank ......... -- -- (10,114,817)
Decrease (increase) in ESOP loan receivable ........... 190,184 72,833 (1,529,500)
Capital contribution to 842 Manhattan Avenue Corp. .... (236,000) -- --
------------------------------------------
Net cash (used in) provided by investing activities (45,816) 72,833 (11,644,317)
------------------------------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock ............ -- -- 20,180,245
Acquisition of treasury stock ......................... (2,522,444) (2,591,542) --
Payment of dividends on common stock .................. (478,742) (292,550) --
Payment of conversion expenses ........................ -- (43,099) --
Treasury stock reissued for stock options ............. 103,132 -- --
------------------------------------------
Net cash (used in) provided by financing activities (2,898,054) (2,927,191) 20,180,245
------------------------------------------
Net (decrease) increase in cash and cash equivalents .... (3,267,061) (3,069,326) 8,527,862
Cash and cash equivalents--beginning .................... 5,458,536 8,527,862 --
------------------------------------------
Cash and cash equivalents--ending ....................... $ 2,191,475 $ 5,458,536 $ 8,527,862
==========================================
</TABLE>
38
<PAGE>
23. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Year ended September 30, 1996 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
(In Thousands, except per share data)
Interest income .................... $4,212 $4,393 $ 4,532 $ 4,686
Interest expense ................... 2,071 2,170 2,131 2,319
----------------------------------------
Net interest income .............. 2,141 2,223 2,401 2,367
Provision for loan losses .......... 54 76 159 254
Non-interest income (loss) ......... 77 92 (110) 117
Non-interest expenses .............. 1,301 1,353 1,332 2,951
Income taxes ....................... 379 391 295 (390)
----------------------------------------
Net income (loss) .................. $ 484 $ 495 $ 505 $ (331)
----------------------------------------
Net income (loss) per common share
and common stock equivalents ..... $ 0.26 $ 0.27 $ 0.29 $ (0.19)
========================================
First Second Third Fourth
Year ended September 30, 1996 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
(In Thousands, except per share data)
Interest income .................... $2,978 $3,388 $ 3,844 $ 4,046
Interest expense ................... 1,079 1,442 1,788 1,977
----------------------------------------
Net interest income .............. 1,899 1,946 2,056 2,069
Provision for loan losses .......... 30 36 32 244
Non-interest income (loss) ......... 12 45 60 (426)
Non-interest expenses .............. 1,265 1,384 1,332 1,296
Income taxes ....................... 259 240 317 20
----------------------------------------
Net income ......................... $ 357 $ 331 $ 435 $ 83
----------------------------------------
Net income per common share and
common stock equivalents ......... $ 0.18 $ 0.16 $ 0.21 $ 0.04
========================================
39
<PAGE>
INDEPENDENT AUDITORS'
REPORT
To The Board of Directors
Financial Bancorp, Inc.
and Subsidiaries
We have audited the consolidated statements of financial condition of Financial
Bancorp, Inc. (the "Company") and Subsidiaries as of September 30, 1996 and
1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended September 30, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the
second preceding paragraph present fairly, in all material respects, the
financial position of Financial Bancorp, Inc. and Subsidiaries as of September
30, 1996 and 1995, and the results of their operations and their cash flows for
each of the years in the three-year period ended September 30, 1996, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to consolidated financial statements, the Company
changed its methods of accounting for debt and equity securities as of October
1, 1994.
/s/ Radics & Co., LLC
Pine Brook, New Jersey
November 19, 1996
MANAGEMENT RESPONSIBILITY
STATEMENT
Management of Financial Bancorp, Inc. and Subsidiaries is responsible for the
preparation of the consolidated financial statements and all other consolidated
financial information included in this report. Consolidated financial statements
were prepared in accordance with generally accepted accounting principles.
All consolidated financial information included in the report agrees with
the consolidated financial statements. In preparing the consolidated financial
statements, management makes informed estimates and judgments, with
consideration given to materiality, about the expected results of various events
and transactions.
Management maintains a system of internal accounting control that includes
personnel selection, appropriate division of responsibilities and formal
procedures and policies consistent with high standards of accounting and
administrative practice. Consideration has been given to the necessary balance
between the costs of systems of internal control and the benefits derived.
Management reviews and modifies its systems of accounting and internal
control in light of changes in conditions and operations as well as in response
to recommendations from the independent certified public accountants. Management
believes that the accounting and internal control systems provide reasonable
assurance that assets are safeguarded and the consolidated financial information
is reliable.
The Board of Directors through its Audit Committee of non-management
directors, is responsible for determining that management fulfills its
responsibilities in the preparation of the consolidated financial statements and
the control of operations. The Board appoints the independent certified public
accountants. The Audit Committee meets with management, the independent
certified public accountants and the internal auditor, approves the overall
scope of audit work and related fee arrangements, and reviews audit reports and
findings.
/s/ Frank Latawiec
Frank Latawiec
President/Chief Executive Officer
/s/ Irene C. Greco
Irene C. Greco
Executive Vice President/
Chief Operating Officer
/s/ P. James O'Gorman
P. James O'Gorman
Senior Vice President/Chief Financial Officer
40
<PAGE>
Common Stock Information
Financial Bancorp, Inc. common
stock is traded on the Nasdaq
National Market under the symbol
"FIBC." The table below shows the
reported high and low sales price of
the common stock during the periods
indicated in the fiscal years ended
September 1996 and 1995.
1996
- ---------------------------------
High Low
- ---------------------------------
First Quarter 14 13
Second Quarter 13 3/4 12 1/2
Third Quarter 13 1/2 12 1/2
Fourth Quarter 16 1/4 12 1/2
1995
- ---------------------------------
High Low
- ---------------------------------
First Quarter 10 1/2 8 1/2
Second Quarter 10 3/4 8 7/8
Third Quarter 12 1/4 10 1/2
Fourth Quarter 15 11 3/4
As of December 3, 1996, the
Company had approximately 175
stockholders of record, not including
the number of persons or entities
holding stock in nominee or street
name through broker-dealers and
banks. At December 3, 1996, the
Company had 1,747,686 shares of
common stock outstanding.
Exhibit 23.0 Consent of Radics & Co., LLC
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference into the Registration
Statement on Form S-8 of Financial Bancorp, Inc. (the "Company") of our report
dated November 19, 1996, included in the 1996 annual report to stockholders of
the Company, which is incorporated by reference in the Company's Annual Report
on Form 10-K for the year ended September 30, 1996.
Radics & Co., LLC
December 23, 1996
Pine Brook, New Jersey
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 2,917,223
<INT-BEARING-DEPOSITS> 195,728,000
<FED-FUNDS-SOLD> 2,185,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,102,223
<INVESTMENTS-CARRYING> 51,122,128
<INVESTMENTS-MARKET> 49,903,000
<LOANS> 140,314,158
<ALLOWANCE> 1,573,000
<TOTAL-ASSETS> 266,762,522
<DEPOSITS> 202,883,766
<SHORT-TERM> 25,651,970
<LIABILITIES-OTHER> 3,376,552
<LONG-TERM> 8,000,000
0
0
<COMMON> 21,850,000
<OTHER-SE> 25,765,348
<TOTAL-LIABILITIES-AND-EQUITY> 266,762,522
<INTEREST-LOAN> 10,316,082
<INTEREST-INVEST> 7,468,534
<INTEREST-OTHER> 38,354
<INTEREST-TOTAL> 17,822,970
<INTEREST-DEPOSIT> 7,592,723
<INTEREST-EXPENSE> 8,690,827
<INTEREST-INCOME-NET> 9,132,143
<LOAN-LOSSES> 542,920
<SECURITIES-GAINS> 36,089
<EXPENSE-OTHER> 6,937,637
<INCOME-PRETAX> 1,828,112
<INCOME-PRE-EXTRAORDINARY> 1,828,112
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,152,885
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.64
<YIELD-ACTUAL> 7.63
<LOANS-NON> 4,380,000
<LOANS-PAST> 181,000
<LOANS-TROUBLED> 922,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,243,000
<CHARGE-OFFS> 213,000
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,573,000
<ALLOWANCE-DOMESTIC> 1,573,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,121,000
</TABLE>
