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, 1997
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
incorporation or organization) Identification No.)
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 $37,333,603, based upon the last sales price as quoted on the
Nasdaq National Market for December 17, 1997.
The number of shares outstanding of the registrant's Common Stock as of
December 17, 1997 was 1,709,700.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended September
30, 1997 are incorporated by reference into Part II of this Form 10-K.
Portions of the Proxy Statement for the 1998 Annual Meeting of Stockholders
to be held on January 22, 1998 are incorporated by reference into Parts II and
III of this Form 10-K.
<PAGE>
INDEX
Part I
Page
Item 1. Business 1
Item 2. Properties 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 Matters 37
Item 6. Selected Financial Data 37
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 38
Item 12. Security Ownership of Certain Beneficial
Owners and Management 38
Item 13. Certain Relationships and Related Transactions 38
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, mixed-use property
loans, multi-family loans, commercial real estate mortgage loans, and to a
lesser extent construction 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, mixed-use property loans, multi-family real estate loans, commercial
real estate loans, and to a lesser extent construction loans. At September 30,
1997, the Bank's total loans receivable equaled $155.1 million, of which $126.4
million, or 81.5%, were one- to four-family residential first mortgage loans. Of
the one- to four-family residential first mortgage loans outstanding at that
date, $60.0 million, or 47.5% were adjustable-rate mortgage ("ARM") loans. At
September 30, 1997, the Bank's loan portfolio also included $2.6 million of one-
to four-family residential second mortgage loans, $11.8 million of multi-family
loans, $13.2 million of commercial real estate loans, $575,000 of construction
loans and $494,000 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,
------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------- ------------------- ------------------- ------------------- -------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential one- to
four-family:
First mortgages ......... $126,440 81.50% $116,132 80.26% $ 93,361 82.55% $ 72,669 85.29% $ 72,274 85.41%
Second mortgages ........ 2,637 1.70 2,780 1.92 3,806 3.36 4,491 5.27 6,429 7.60
Multi-family ............. 11,779 7.59 8,231 5.69 4,296 3.80 3,213 3.77 2,320 2.74
Commercial ............... 13,217 8.52 12,061 8.34 8,031 7.10 2,940 3.45 3,091 3.65
Construction/land loans .. 575 0.37 4,920 3.40 3,080 2.72 1,455 1.71 109 0.13
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total real estate loans 154,648 99.68 144,124 99.61 112,574 99.53 84,768 99.49 84,223 99.53
Consumer/commercial
business:
Consumer ................. 417 0.27 400 0.27 404 0.36 400 0.47 332 0.40
Commercial business ...... 77 0.05 168 0.12 123 0.11 35 0.04 62 0.07
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total consumer/commercial
business loans ........ 494 0.32 568 0.39 527 0.47 435 0.51 394 0.47
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total loans receivable 155,142 100.00% 144,692 100.00% 113,101 100.00% 85,203 100.00% 84,617 100.00%
======== ======== ======== ======== ========
Less:
Loans in process ............ 201 2,509 1,485 352 44
Unearned discounts and net
deferred loan fees ........ 243 296 311 226 143
Allowance for loan losses ... 1,406 1,573 1,243 1,120 1,005
-------- -------- -------- ------- -------
1,850 4,378 3,039 1,698 1,192
-------- -------- -------- ------- -------
Total loans receivable, net $153,292 $140,314 $110,062 $83,505 $83,425
======== ======== ======== ======= =======
Mortgage-backed securities:
GNMA ..................... $ 23,335 48.73% $ 27,106 49.41% $ 33,144 53.45% $ 26,749 53.67% $ 24,156 48.89%
FHLMC (1) ................ 15,808 33.02 23,015 41.96 22,979 37.06 15,816 31.74 16,065 32.52
FNMA (1) ................. 6,835 14.28 2,697 4.92 3,388 5.46 4,368 8.76 5,741 11.62
Others ................... 1,900 3.97 2,035 3.71 2,497 4.03 2,906 5.83 3,446 6.97
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total mortgage-backed
securities(2) ......... $ 47,878 100.00% $ 54,853 100.00% $ 62,008 100.00% $ 49,839 100.00% $ 49,408 100.00%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- -------------------------
(1) Includes $9.4 million and $5.0 million in Mortgage-backed securities
available for sale as of September 30, 1997 and 1996, respectively.
(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, 1997. 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 $23.1 and $12.1 million respectively, for the twelve months
ended September 30, 1997.
<TABLE>
<CAPTION>
Mortgage Loans and Other Loans
--------------------------------------------------------------------------------------------
At September 30, 1997
--------------------------------------------------------------------------------------------
Commer- Mortgage-
1 - 4 Multi- Commercial cial Total Backed
Family Family Real Estate Construction Consumer Other Loans Securities
---------- --------- ------------ ------------- -------- ------- ---------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year ................... $ 28,448 $ -- $ -- $575 $209 $55 $ 29,287 $21,371
After one year:
One to three years ............... 20,544 610 -- -- 192 22 21,368 6,114
Three to five years .............. 7,549 2,061 1,157 -- 12 -- 10,779 824
Five to ten years ................ 14,651 747 159 -- 4 -- 15,561 3,185
After ten years .................. 57,885 8,361 11,901 -- -- -- 78,147 16,384
-------- ------- ------- ---- ---- --- -------- -------
Total due or repricing
after one year ................. 100,629 11,779 13,217 -- 208 22 125,855 26,507
-------- ------- ------- ---- ---- --- -------- -------
Total amounts due or
repricing, gross ................. $129,077 $11,779 $13,217 $575 $417 $77 $155,142 $47,878
======== ======= ======= ==== ==== === ======== =======
</TABLE>
The following table sets forth at September 30, 1997, the dollar amount of
all loans and mortgage-backed securities due after September 30, 1998 and
indicates whether such loans and mortgage-backed securities have fixed or
adjustable interest rates.
Due After September 30, 1998
-----------------------------------
Fixed Adjustable Total
------- ---------- --------
(In thousands)
Mortgage loans:
One- to four-family .................. $67,910 $32,719 $100,629
Multi-family ......................... 9,466 2,313 11,779
Commercial real estate ............... 12,091 1,126 13,217
Other loans ............................ 230 -- 230
------- ------- --------
Total loans ............................ $89,697 $36,158 $125,855
======= ======= ========
Mortgage-backed securities ............. $21,659 $ 4,848 $ 26,507
======= ======= ========
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,
-------------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands)
Loans receivable at beginning
of period ............................. $ 144,692 $ 113,101 $ 85,203
Originations:
First mortgages ....................... 18,894 21,241 19,344
Second mortgages ...................... 403 342 354
Multi-family .......................... 3,944 2,058 1,136
Commercial ............................ 4,170 7,491 5,187
Construction/land ..................... 130 2,870 4,364
Consumer loans ........................ 229 212 279
Student loans ......................... 35 54 49
Commercial business ................... 4 69 120
Loan purchases ........................ 6,717 14,848 9,045
--------- --------- ---------
Total originations and purchases ..... 34,526 49,185 39,878
--------- --------- ---------
Transfer of mortgage loans to
foreclosed real estate ................. (411) (100) (682)
Loans charged-off ....................... (602) (213) (219)
Repayments .............................. (23,064) (17,281) (11,079)
--------- --------- ---------
Total reductions ...................... (24,077) (17,594) (11,980)
--------- --------- ---------
Total loans receivable at end of period . $ 155,141 $ 144,692 $ 113,101
========= ========= =========
Mortgage-backed securities
at beginning of period ................. $ 54,853 $ 62,008 $ 49,839
Purchases ............................. 5,046 5,068 19,294
Repayments ............................ (12,111) (12,214) (7,169)
Discount (premium) amortization ....... (34) (19) 44
Unrealized gain ....................... 124 10 --
--------- --------- ---------
Mortgage-backed securities at
end of period .......................... $ 47,878 $ 54,853 $ 62,008
========= ========= =========
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 the Bank's loan originators existing customers,
referrals from real estate brokers, builders and through advertising and general
solicitations. The Bank originates both ARM loans and fixed-rate loans. At
September 30, 1997, first mortgage loans secured by residential one- to
four-family real estate totaled $126.4 million, or 81.8% of total real estate
loans at such date. Of the Bank's first mortgage loans secured by one- to four-
family residences, $60.0 million, or 47.5% 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, 1997,
the Bank had $26.6 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 and 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 and 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 85%
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 underwritten and then a decision is
made by two members of the loan committee. The Loan Committee consists of three
outside directors, the Chief Executive Officer, the Chief Administrative Officer
and the Chief Financial 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
6
<PAGE>
lesser of the first rate adjustment or the fully indexed rate in an effort to
reduce the risk 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
additional ARM loan products: a 1/1 mortgage loan, 3/1 mortgage loan, 5/1
mortgage loan, 7/1 mortgage loan and a 10/1 mortgage loan which provides for an
initial fixed rate period, thereafter adjusting each year.
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 an existing first
mortgage with the Bank. At September 30, 1997, the Bank had $2.6 million, or
2.0% of total one- to four-family loans in equity and second mortgage loans,
including $1.4 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, 1997, the
Bank's total loan portfolio contained $11.8 million, or 7.6% of multi-family
loans, and $13.2 million, or 8.5% of commercial real estate loans. The
multi-family and commercial real estate 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 multi-family and
commercial real estate loans primarily in its market area. In making commercial
real estate and multi-family loans, the Bank primarily considers the ability of
net operating income generated by the real estate to support the debt. Other
factors considered are 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. Maximum loan to value ratios on
multi-family and commercial real estate mortgage loans is 70%
Construction Loans. The Bank originates loans, on a selected basis, to
finance the construction of one- to four-family homes and to a much lesser
extent other properties in its market areas. As of September 30, 1997, the
Bank's portfolio contained $575,000, or 0.4% of one-to-four family 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, 1997,
the Bank's consumer and commercial business loans totaled $494,000, or 0.3% of
the Bank's total loan portfolio. Of that amount, $417,000 consisted of home
improvement, personal, passbook and student loans; and $77,000 of commercial
business loans.
7
<PAGE>
Mortgage-backed Securities. The Bank invests in a variety of
mortgage-backed securities, 96.0% of which were insured or guaranteed by the
FHLMC, GNMA or FNMA at September 30, 1997. The remaining 4.0% was invested in a
privately issued mortgage pass-through security. At September 30, 1997,
mortgage-backed securities totaled $47.9 million, or 16.1% of total assets, $9.4
million of which are classified by the Bank as available for sale. Of the $47.9
million in mortgage-backed securities, $26.2 million, or 54.8% were
adjustable-rate and will reprice within three years. During the year ended
September 30, 1997, the Bank purchased $5.0 million of mortgage-backed
securities and received prepayments and scheduled principal amortization of
$12.1 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.
All loans 90 days delinquent are sent to the Bank's attorney in order to
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, 1997, the Bank had 24 loans delinquent 90 days or more
totaling $2.4 million, of which $2.1 million are attributed to one- to
four-family mortgage loans. At September 30, 1997, the Bank's real estate owned
totaled $471,000, comprising entirely of one-to-four family properties.
8
<PAGE>
Delinquent and Non-Performing Loans. At September 30, 1997, 1996 and 1995,
delinquencies in the Bank's loan portfolio were as follows:
<TABLE>
<CAPTION>
At September 30, 1997 At September 30, 1996
---------------------------------------------- --------------------------------------------
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 ....................... 4 $419 16 $2,038 1 $175 15 $1,486
Second mortgages ...................... 1 45 2 11 - -- 1 200
Multi-family residential ............... - -- 2 350 - -- 2 350
Commercial real estate ................. - -- -- -- - -- -- --
Consumer loans ......................... - -- 4 32 - -- 4 11
Commercial Business .................... - -- -- -- - -- 1 45
- ---- -- ------ - ---- -- ------
Total loans ......................... 5 $464 24 $2,431 1 $175 23 $2,092
= ==== == ====== = ==== == ======
Delinquent loans and non-
performing loans to total loans. 0.30% 1.57% 0.12% 1.45%
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1997
----------------------------------------------
60 - 89 Days 90 Days or More
----------------------- ----------------------
Principal Principal
Number of Balance of Number of Balance of
Loans Loans Loans Loans
----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Residential one- to four-family:
First mortgages ...................... 1 $ 2 13 $1,216
Second mortgages ..................... 2 55 -- --
Multi-family residential ............... - -- 3 677
Commercial real estate ................. - -- 1 38
Consumer loans ......................... - -- 4 11
Commercial Business .................... - -- -- --
- --- -- ------
Total loans ................... 3 $ 57 21 $1,942
= === == ======
Delinquent and non-performing
loans to total loans................... 0.05% 1.72%
</TABLE>
9
<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, 1997, 1996 and 1995,
the amounts of additional interest income that would have been recorded on
non-accrual loans, had they been current, totaled $242,000, $207,000 and
$171,000, respectively. The Bank collected interest income on such non-accrual
loans in the amounts of $70,000 , $43,000 and $24,000 during the years ended
September 30, 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual delinquent mortgage
loans ....................... $2,164 $1,911 $1,794 $1,624 $2,008
Delinquent other loans .......... 32 56 11 5 11
Mortgage loans delinquent 90 days
or more and accruing ........ 424 125 137 30 166
------ ------ ------ ------ ------
Total non-performing loans .. 2,620 2,092 1,942 1,659 2,185
Investment in real estate (net
valuation allowance) .......... 3,355 3,308 3,531 2,789 3,153
Real estate owned ............... 471 378 591 620 650
------ ------ ------ ------ ------
Total non-performing assets $6,446 $5,778 $6,064 $5,068 $5,988
====== ====== ====== ====== ======
Non-performing loans
to total loans .............. 1.69% 1.45% 1.72% 1.95% 2.58%
Total non-performing assets
to total assets ............. 2.17% 2.17% 2.65% 2.95% 4.05%
</TABLE>
The above table does not include participation loans serviced by TASCO and
its successor in the amount of $2.2 million and $2.4 million at September 30,
1997 and 1996, respectively. Interest income that could have been recognized
based on contractual terms amounts to $169,000 and $196,000 for the years ended
September 30, 1997 and 1996, respectively. Interest income recorded only when
collected amounted to approximately $79,000 and $118,000 during the years ended
September 30, 1997 and 1996, respectively.
Impaired loans and related amounts recorded in the allowance for loan
losses at September 30, 1997 and 1996 are summarized as follows in thousands:
September 30,
-------------------
1997 1996
------ ----
(In thousands)
Recorded investment in impaired loans:
With recorded allowance ............................ $2,511 $922
Without recorded allowance ......................... -- --
------ ----
Total impaired loans ............................... 2,511 $922
Related allowances for loan losses ................... 225 504
------ ----
Net impaired loans ............................... $2,286 $418
====== ====
10
<PAGE>
For the year ended September 30, 1997 and 1996, interest income that would
have been recognized for these loans had they been performing in accordance with
the original terms was approximately $206,000 and $78,000, respectively, and
interest income recognized when received was $79,000 and $31,000, respectively.
The average balance of impaired loans during the years ended September 30,
1997 and 1996 approximated $2.3 million and $933,000, respectively.
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, 1997, classified assets totaled $6.2 million, or 2.0% of
total assets, of which $200,000 classified as "Doubtful" and the remaining
classified as "Substandard" consisted of 13 one-to four-family loans totaling
$1.6 million, 2 multi-family loans totaling $340,000 and 4 foreclosed real
estate properties totaling $471,000 and $3.4 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
second mortgage loan for $200,000. Assets designated as "Special Mention"
totaled $1.8 million, which consists primarily of 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
11
<PAGE>
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 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
earlier date of acquisition. Real estate owned is carried at the lower of cost
or fair value less estimated selling costs. 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."
12
<PAGE>
The following table sets forth the Bank's allowances for loan losses at the
dates indicated:
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Balance at beginning of period........ $1,573 $1,243 $1,120 $1,005 $343
Charge-Offs:
One- to four-family.............. 39 -- 31 51 50
Multi-family..................... -- 213 189 -- --
Commercial....................... 504 -- -- -- --
Consumer and other loans......... 59 -- -- 19 20
------ ------ ------ ------ ------
Total charge-offs..................... 602 213 220 70 70
Recoveries............................ 7 -- 1 2 --
Provision for loan losses............. 427 543 342 183 732
------ ------ ------ ------ ------
Balance at end of period ............. $1,405 $1,573 $1,243 $1,120 $1,005
====== ====== ====== ====== ======
Ratio of total charge-offs during the
period to average loans outstanding
during the period................... 0.41% 0.17% 0.23% 0.08% 0.08%
Ratio of allowance for loan losses to
total loans at the end of the period 0.91% 1.09% 1.10% 1.31% 1.20%
Ratio of allowance for loan losses to
non-performing loans at the end of
the period.......................... 53.63% 75.19% 63.97% 67.48% 46.00%
</TABLE>
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,
-----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------ ---------------
% 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
total total total total total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
Residential one- to four-family .. $1,040 83.20% $ 650 82.18% $ 305 85.91% $ 293 90.56% $ 235 93.01%
Multi-family ..................... 121 7.59 53 5.69 218 3.80 278 3.77 250 2.74
Commercial ....................... 231 8.52 757 8.34 686 7.10 529 3.45 500 3.65
Commercial business loans ........... 8 0.05 57 0.12 12 0.11 4 0.04 -- 0.07
Construction/land ................... 2 0.37 53 3.40 17 2.72 9 1.71 -- 0.13
Consumer ............................ 3 0.27 3 0.27 5 0.36 7 0.4 20 0.40
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses ................... $1,405 100.00% $1,573 100.00% $1,243 100.00% $1,120 100.00% $1,005 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
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 availability of mortgage loans. The Bank's
liquid investments primarily include United States Government callable agency
securities, and overnight federal funds. Historically, the Bank has maintained
its liquid assets at levels well above the minimum regulatory requirements. At
September 30, 1997, $37.1 million, or 12.5% 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,
---------------------------------------------------------
1997 1996 1995
----------------- ------------------ ----------------
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 ...... $69,410 $69,223 $51,122 $49,903 $38,921 $38,842
Common stock (1) .......... -- -- -- -- 15 15
------- ------- ------- -------
Total investment securities
held to maturity ....... $69,410 $69,223 $51,122 $49,903 $38,936 $38,857
======= ======= ======= ======= ======= =======
Available for sale:
U.S. Treasury securities .. $ -- $ -- $ 2,908 $ 2,908 $ -- $ --
Equity securities ......... 731 731 700 700 -- --
------- ------- ------- ------- ------- -------
Total investment securities
available for sale .... $ 731 $ 731 $ 3,608 $ 3,608 $ -- $ --
======= ======= ======= ======= ======= =======
</TABLE>
- ----------
(1) Investment in 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, 1997.
<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 ..................... $61,650 $61,455 7.06% $7,760 $7,768 7.18% $69,410 $69,223 7.08%
------- ------- ---- ------ ------ ---- ------- ------- ----
Total ................................. $61,650 $61,455 7.06% $7,760 $7,768 7.18% $69,410 $69,223 7.08%
======= ======= ==== ====== ====== ==== ======= ======= ====
</TABLE>
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 certificates of deposit, the Bank has designed special flexible
certificates of deposit ("CDs") to accommodate its customers. 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
15
<PAGE>
pays a bonus rate of 1/8 of 1% (.125%) over the standard twelve month time
deposit and allows one withdrawal of principal per quarter without an early
withdrawal penalty. As of September 30, 1997, Silver Certificates of Deposit
represented $16.9 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 the Bank's Greenpoint, Brooklyn branch. Deposits totaling $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.
The following table presents the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
For the Years Ended September 30,
-------------------------------------------
1997 1996 1995
-------- --------- --------
(In thousands)
<S> <C> <C> <C>
Deposits............................... $313,206 $267,595 $264,455(1)
Withdrawals............................ 310,797 258,815 224,272
-------- --------- --------
Net increase (decrease) before interest
credited............................... 2,409 8,780 40,183
Interest credited...................... 8,102 7,612 6,127
-------- --------- --------
Net increase (decrease) in deposits.... $ 10,511 $ 16,392 $ 46,310
======== ======== ========
</TABLE>
- ----------
(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, 1997.
Maturity Period: (In thousands)
Three months or less.......................................... $ 2,357
Over three through six months................................. 1,231
Over six through 12 months.................................... 2,122
Over 12 months................................................ 5,806
-------
Total................................................... $11,516
=======
16
<PAGE>
The following table sets forth the distribution of the Bank's deposit
accounts at September 30, 1997, 1996 and 1995 and the weighted average nominal
interest rates on each category of deposits presented at September 30, 1997,
1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- --------------------------- --------------------------
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 ................. 4.72% $ 10,089 0.00% 3.52% $ 7,156 0.00% 1.98% $ 3,688 0.00%
Interest-bearing demand ..................... 7.22 15,399 2.17 9.18 18,622 2.18 8.91 16,623 2.29
Savings and club ............................ 34.73 74,109 2.20 36.52 74,084 2.11 41.49 77,370 2.44
Certificates of deposit ..................... 53.33 113,797 5.80 50.78 103,022 5.85 47.62 88,811 5.98
------ -------- ------ -------- ------ ----
Total deposits ......................... 100.00% $213,394 4.01% 100.00% $202,884 3.94% 100.00% $186,492 4.06%
====== ======== ====== ======== ====== ====
</TABLE>
The following table presents the amount of the Bank's certificates of
deposit outstanding, based upon weighted-average rate categories, at September
30, 1997, 1996 and 1995, based upon contractual periods to maturity, at
September 30, 1997.
<TABLE>
<CAPTION>
Period to Maturity from September 30, 1997 At September 30,
------------------------------------------------------------ -------------------------------
Less Than One to Two to Three to Four to After
One Two Three Four Five Five
Year Years Years Years Years Years 1997 1996 1995
------- ------- ------- ------ ------ ----- -------- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
3.00% to 3.99% .................... $ 45 $ -- $ -- $ -- $ -- $-- $ 45 $ 163 $ 1,121
4.00% to 4.99% .................... 12,088 43 17 -- -- -- 12,148 24,776 10,896
5.00% to 5.99% .................... 59,167 11,587 1,224 761 317 -- 73,056 50,468 36,702
6.00% to 6.99% .................... 1,676 2,979 1,970 2,173 3,356 179 12,333 10,685 23,712
7.00% to 7.99% .................... 224 -- 10,917 5,020 -- -- 16,161 16,879 16,313
8.00% to 8.99% .................... -- -- -- 54 -- -- 54 51 67
------- ------- ------- ------ ------ ---- -------- -------- -------
Total .......................... $73,200 $14,609 $14,128 $8,008 $3,673 $179 $113,797 $103,022 $88,811
======= ======= ======= ====== ====== ==== ======== ======== =======
</TABLE>
17
<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 $39.6 million.
Advances under this line of credit, which expires on December 22, 1997, are made
for one-day periods. As of September 30, 1997, advances were secured by stock of
Federal Home Loan Bank in the amount of $1.8 million and mortgage loans with an
unpaid balance of $34.3 million. Information concerning advances from FHLB are
summarized as follows:
<TABLE>
<CAPTION>
September 30,
Interest ---------------------------------------------------
Maturity Rate 1997 1996 1995
- ------------------------------------------ ------------- ------------- -------------- ----------------
(In thousands)
<S> <C> <C> <C> <C>
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 2,000 --
Notes maturing in
December 1998........................... 5.670% 6,000 6,000 --
------ ------ ------
$8,000 $9,725 $5,375
====== ====== ======
</TABLE>
18
<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.
<TABLE>
<CAPTION>
September 30,
Interest ---------------------------------------------------
Maturity Rate 1997 1996 1995
- ------------------------------------------ ------------- ------------- -------------- ----------------
(In thousands)
<S> <C> <C> <C> <C>
November 1995 5.78% $ -- $ -- $5,112
January 1996 5.75% -- -- 2,014
December 1996 5.44% -- 14,046 --
December 2001 5.291% 5,000 -- --
May 2002 5.813% 10,000 -- --
August 2002 5.62% 10,000 -- --
------- ------- ------
$25,000 $14,046 $7,126
======= ======= ======
</TABLE>
At September 30, 1997, these borrowings are callable or will reprice within
two years and at periodic intervals thereafter.
Information concerning borrowings collateralized by securities sold under
agreements to repurchase is summarized as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------------
1997 1996 1995
------------------- -------------------- ------------------------
(In thousands)
<S> <C> <C> <C>
Average balance during
the year................................ $12,010 $8,228 $1,876
Average interest rate
during the year......................... 5.53% 5.70% 6.01%
Maximum month end
balance during the year................ 25,000 15,064 $9,229
Investment securities underlying the
agreement at year end:
Carrying value................... $28,545 $15,120 $6,988
Estimated market value........... $28,427 $14,520 $7,047
</TABLE>
19
<PAGE>
Treasury Tax and Loan Account Borrowings
At September 30, 1997 and 1996, the Bank had borrowings from the Federal
Reserve Bank of New York under the Treasury Tax and Depository program in the
amount of $20.0 million and $9.9 million, respectively, at an interest rate of
5.41% and 5.20%, respectively, per annum payable on demand. These borrowings are
secured by investment securities with a carrying value of $22.2 million and
$11.0 million and fair value of $21.2 million and $10.6 million, respectively.
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, 1997, 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, 1997, 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. FinFed Development Corp. has invested $3.4 million,
which represents 37.5% of the capital and loans from partners of the joint
venture at September 30, 1997. 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
$43,000 in provisions for losses on investment in real estate were established
for the fiscal year ended September 30, 1997.
20
<PAGE>
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, 1997, its total assets were
$30,000.
At September 30, 1997, 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.
Year 2000 Compliance
As the year 2000 approaches, a critical business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. In brief, many existing application software
products in the marketplace were designed to only accommodate a two digit date
position which represents the year (e.g., '95 is stored on the system and
represents the year 1995). The Company is in the process of implementing a
program designed to ensure that all software used in connection with the
Company's business will manage and manipulate data involving the transition with
data from 1999 to 2000 without functional or data abnormality and without
inaccurate results related to such data. To the extent the Company's systems are
not fully year 2000 compliant, there can be no assurance that potential systems
interruptions or the cost necessary to update software would not have a material
adverse effect on the Company's business.
Personnel
As of September 30, 1997 the Bank had 55 full-time employees and 6
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
21
<PAGE>
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 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.
22
<PAGE>
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 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.
23
<PAGE>
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 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, 1997, 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,
1997 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."
<TABLE>
<CAPTION>
Capital
Excess ---------------------------------
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
----------------- ------------- ----------------- -------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible............ $21,144 $4,395 $16,749 7.22% 1.50%
Core (Leverage)..... 21,144 $8,790 $12,354 7.22% 3.00%
Risk-based.......... 22,324 $9,548 $12,776 18.71% 8.00%
</TABLE>
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
24
<PAGE>
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 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
25
<PAGE>
Assessment of $1,115,000 was recognized by the Bank as an expense during 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 were
assessed for FICO payments of 1.3 basis points, while SAIF deposits paid 6.4
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 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 continued 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
the SAIF will merge on January 1, 1999 if there are no more savings associations
as of that date. Several bills have been introduced in the current Congress that
would eliminate the federal thrift charter and the OTS. A bill recently reported
by the House Banking Committee would require federal thrifts to become national
banks or state banks or savings banks within two years after enactment or they
would, by operation of law, become national banks. A national bank resulting
from a converted federal thrift could continue to engage in activities,
including holding any assets, in which it was lawfully engaged on the day before
the date of enactment. Branches operated on the day before enactment could be
retained regardless of their permissibility for national banks. Subject to a
grandfathering provision, all savings and loan holding companies would become
subject to the same regulation and activities restrictions as bank holding
companies. The grandfathering could be lost under certain circumstances, such as
a change in control of the holding company. The legislative proposal would also
abolish the OTS and transfer its functions to the federal bank regulators with
respect to the institutions and to the Board of Governors of the Federal Reserve
Board with respect to the regulation of holding companies. The Bank is unable to
predict whether the legislation will be
26
<PAGE>
enacted or, given such uncertainty, determine the extent to which the
legislation, if enacted, would affect its business. The Bank is also unable to
predict whether the SAIF and BIF will eventually be merged.
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% 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,
1997, the Bank's limit on loans to one borrower was $3.7 million. At September
30, 1997, 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, 1997, 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,
27
<PAGE>
institutions in a holding company structure would still have a prior notice
requirement. At September 30, 1997, 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 for fiscal 1997 was 5%, but may be changed from time
to time by the OTS to any amount within the range of 4% to 10% depending upon
economic conditions and the savings flows of member institutions. OTS
regulations also required each member savings institution to maintain an average
daily balance of short-term liquid assets at a specified percentage (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, 1997 were 6.1% and 14.9% respectively, which exceeded the
applicable requirements. The Bank has never been subject to monetary penalties
for failure to meet its liquidity requirements. In November 1997, the OTS
amended the liquidity requirements to reduce the general requirement from 5% to
4% and eliminated the short-term requirement.
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, 1997 totaled $172,600.
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.
28
<PAGE>
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.
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 1997, 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
29
<PAGE>
balances (subject to adjustments by the Federal Reserve Board) are exempted from
the reserve requirements. The Bank is in compliance with the foregoing
requirements. Effective December 16, 1997, the Federal Reserve has amended the
Reserve Requirements as follows: the amount of transaction accounts subject to a
reserve requirement ratio of 3% will decrease from $49.3 million to $47.8
million and the amount of reservable liabilities that is exempted from reserve
requirements will increase from $4.4 million to $4.7 million. 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.
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 1997
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%.
30
<PAGE>
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 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 Statement of
Financial Accounting Standards ("SFAS") No. 109, this change in the tax law had
no 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.
31
<PAGE>
SAIF Recapitalization Assessment. On September 30, 1996, legislation was
enacted which, among other things, imposed a special one-time assessment on
Savings Association Insurance Fund ("SAIF") member institutions, including the
Bank, to recapitalize the SAIF and spread the obligation for payment of
Financial Corporation ('FICO") bonds across all SAIF and Bank Insurance Fund
('BIF") members. The special assessment levied amounted to 65.7 basis points on
SAIF assessable deposits held as of March 31, 1995. The Bank took a charge of
$1,115,198 as a result of the special assessment during the year ended September
30,1 996. This legislation eliminated the substantial disparity between the
amount that BIF and SAIF members had been paying for deposit insurance premiums.
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 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). The New
York State and New York City tax laws have been amended to prevent bad debt
recapture as applicable to Federal income taxation, and to permit continued
future use of bad debt reserve methods for purposes of determining New York
State and New York City tax liabilities. 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.
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.
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 Financial Accounting Standards Board (FASB) issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 121 prescribes the accounting for the
impairment of long-lived assets and goodwill related to those assets. The new
rules specify when assets should be reviewed for impairment, how to determine
whether an asset is impaired, how to measure an impairment loss, and what
financial
32
<PAGE>
statement disclosures are necessary. Also prescribed is the accounting for long
lived assets and identifiable intangibles that a company plans to dispose of,
other than those that are a part of a discontinued operation. Any impairment of
a long-lived asset resulting from management's review is to be recognized as a
component of noninterest expense. The Company adopted SFAS No. 121 on January 1,
1996. Management believes that the impact of adoption will not have a material
effect on the consolidated financial statements of the Company.
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which is effective in 1996. SFAS No. 123 requires that a fair
value-based method be used to value employee compensation plans that include
stock-based awards. The statement permits a company to recognize compensation
expense under SFAS No. 123 or continue to use the prior accounting rules which
did not consider the market value of stock in certain award plans. If adoption
of the statement's fair value procedures are not used in the computation of
compensation expense in the income statement, the company must disclose in a
footnote to the financial statements the pro forma impact of adoption. The
Company will be adopting the disclosure method of the statement.
In September 1996 the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125") which was amended by SFAS No. 127. This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
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 pledge of collateral. The Statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996 or in the care of repurchase agreements and similar
transactions, occurring after December 31, 1997. Retroactive application of this
Statement is not permitted. The Company does not anticipate that the
implementation of SFAS No. 125 will have a material impact on its results of
operations or financial condition.
In February 1997, the FASB released SFAS No. 128, "Earnings Per Share"
("SFAS No. 128"). SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock. SFAS No. 128 simplifies the standards
for computing earnings per share previously found in APB Opinion No. 15,
"Earnings Per Share," and makes them comparable to international EPS standards.
It replaces the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
numerator and denominator of the diluted EPS computation. Basic EPS excludes
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts
33
<PAGE>
to issue common stock were exercised or converted into common stock or resulted
in the issuance of common stock that then shared in the earnings of the entity.
Diluted EPS is computed similarly to fully diluted EPS pursuant to APB Opinion
No. 15. SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier application
is not permitted.
In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure" ("SFAS No. 129"). SFAS No. 129 continues the existing
requirements to disclose the pertinent rights and privileges of all securities
other than ordinary common stock but expands the number of companies subject to
portions of its requirements. Specifically, the Statement requires all entities
to provide the capital structure disclosures previously required by APB Opinion
No. 15. Companies that were exempt from the provisions of APB Opinion No. 15
will now need to make those disclosures.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general purpose financial statements. SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from net worth
and additional paid-in capital in the equity section of a statement of financial
position. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. Management is in the process of
determining the impact, if any, this statement will have on the Bank.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 requires
disclosures for each segment that are similar to those required under current
standards with the addition of quarterly disclosure requirements and a finer
partitioning of geographic disclosures. It requires limited segment data on a
quarterly basis. It also requires geographic data by country, as opposed to
broader geographic regions as permitted under current standards. SFAS No. 131 is
effective for fiscal year beginning after December 15, 1997 with earlier
application permitted.
34
<PAGE>
Additional Item. Executive Officers Who Are Not Directors
The following table sets forth certain information regarding executive
officers of the Company, at September 30, 1997, who are not also directors.
Name Age Position Held
- --------------------------------------------------------------------------------
P. James O'Gorman 38 Executive Vice President, Chief Financial
Officer and Treasurer
Robert E. Adamec 54 Senior Vice President and Corporate
Secretary
Valerie M. Swaya 31 Vice President and Chief Administrative
Officer
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
until March 1994, when Mr. O'Gorman was named Senior Vice President, Chief
Financial Officer and Treasurer of the Bank. Mr. O'Gorman 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.
Valerie M. Swaya. Ms. Swaya has been employed by the Bank since October
1994. In January 1995, Ms. Swaya was named Vice President, Investor Relations
and Compliance. In March 1997, Ms. Swaya was promoted to Chief Administrative
Officer. Prior to October 1994, Ms. Swaya was an Examiner for the Office of
Thrift Supervision.
35
<PAGE>
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.
<TABLE>
<CAPTION>
Lease Net
Date Expiration Date Book Value
Owned/ Acquired or Including September 30,
Location Leased Leased Options 1997
- -------------------------------------- ----------- -------------- ------------------- ------------------
(In thousands)
<S> <C> <C> <C> <C>
Main Office:
Long Island City
42-25 Queens Boulevard............. Owned 1962 -- $ 570
Branches:
Long Island City
45-14 46th Street.................. Leased 1976 2001 7
Jackson Heights
75-23 37th Avenue.................. Leased 1990 2005 189
Flushing
59-23 Main Street.................. Leased 1974 1999 250
Brooklyn
814 Manhattan Avenue............... Owned 1995 -- 1,055
-----
Total $2,071
======
</TABLE>
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.
36
<PAGE>
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 1997 Annual Report to Stockholders on the inside back cover 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 Company in the Registrant's 1997 Annual Report to
Stockholders on pages 6 through 7 and is incorporated herein by reference.
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
1997 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 1997 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 1998 Annual Meeting of Stockholders to be held January 22,
1998 pages 5 through 6.
37
<PAGE>
Item 11. Executive Compensation
The information relating to executive compensation is incorporated herein
by reference to the Registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders to be held on January 22, 1998 at pages 7 through 9 and 13 through
15, 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 1998 Annual Meeting of Stockholders to be held on January 22,
1998 at pages 5 through 7.
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
1998 Annual Meeting of Stockholders to be held on January 22, 1998 at page 17.
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 1997 Annual
Report to Stockholders.
PAGE
----
Independent Auditors' Report............................................... 40
Consolidated Statements of Financial Condition as of
September 30, 1997 and 1996....................................... 16
Consolidated Statements of Income for Each of the Years in
the Three-Year Period Ended September 30, 1997.................... 17
Consolidated Statements of Changes in Stockholders' Equity for Each
of the Years in the Three-Year Period Ended September 30, 1997.... 20
Consolidated Statements of Cash Flows for Each
of the Years in the Three-Year Period Ended September 30, 1997.... 18
Notes to Consolidated Financial Statements................................. 21
The remaining information appearing in the 1997 Annual Report to Stockholders is
not deemed to be filed as part of this report, except as expressly provided
herein.
38
<PAGE>
(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.*
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 Amended and Restated Salary and Benefits Continuation Agreement
between Financial Bancorp, Inc., Financial Federal Savings Bank and
Frank S. Latawiec (filed herewith)
10.6 Salary and Benefits Continuation Agreement between Financial Bancorp,
Inc., Financial Federal Savings Bank and Valerie M. Swaya (filed
herewith)
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 P. James
O'Gorman****
10.10 Employment Agreement between Financial Bancorp, Inc. and Robert E.
Adamec****
10.11 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, 1997
(filed herewith)
21.0 Subsidiary information is incorporated herein by reference to
"Subsidiaries"
23.0 Consent of Radics & Co., LLC (filed herewith)
27.0 Financial Data Schedule
99.0 Proxy Statement for 1998 Annual Meeting (filed herewith)
- ----------
* 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.
(b) Reports on Form 8-K
None
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.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/Frank S. Latawiec President, Chief Executive December 31, 1997
- ------------------------
Frank S. Latawiec Officer and Director
(Principal Executive Officer)
/s/P. James O'Gorman Executive Vice President, Chief December 31, 1997
- ------------------------
P. James O'Gorman Financial Officer and Treasurer
(Principal Accounting Officer)
/s/Peter S. Russo Chairman of the Board December 31, 1997
- ------------------------
Peter S. Russo
/s/Dominick L. Segrete Director December 31, 1997
- ------------------------
Dominick L. Segrete
/s/Richard J. Hickey Director December 31, 1997
- ------------------------
Richard J. Hickey
/s/Raymond M. Calamari Director December 31, 1997
- ------------------------
Raymond M. Calamari
</TABLE>
Exhibit 10.5 Amended and Restated Salary and Benefits Continuation
Agreement between Financial Bancorp, Inc., Financial Federal
Savings Bank and Frank S. Latawiec
<PAGE>
AMENDED AND RESTATED
FINANCIAL FEDERAL SAVINGS BANK
SALARY AND BENEFITS CONTINUATION AGREEMENT
FOR FRANK LATAWIEC
This Agreement is made effective as of February 18, 1997 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 previously entered into an
agreement with Executive dated September 24, 1996 provide Executive with salary
continuation and continuation of other benefits enumerated therein in the event
of a change in control of either organization (the "Prior Agreement"); and
WHEREAS, the Bank and the Holding Company, and the Executive desire to
restructure certain terms of the Prior Agreement and otherwise to amend and
restate the Prior Agreement in its entirely as set forth in this Agreement:
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
43
<PAGE>
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.
2. Chance 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 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
2
<PAGE>
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. Salary Continuation Payments.
In the event a Change in Control of either the Bank or the Holding Company
occurs at any time after the date of this Agreement, Executive shall receive
payment equal to two (2x) times his then current annual base salary 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.
3
<PAGE>
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 for
the two (2) year period immediately following the Change in Control.
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 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 the Prior Agreement and any other 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.
4
<PAGE>
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 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
5
<PAGE>
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 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.
6
<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.
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.
7
<PAGE>
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.
8
<PAGE>
IN WITNESS WHEREOF, Financial Federal Savings Bank and Financial Bancorp,
Inc. have caused this Agreement to be executed by their duly authorized
director, and Executive has signed this Agreement, on the 16th day of April
1997.
ATTEST: FINANCIAL FEDERAL SAVINGS BANK
/s/ Raymond M. Calamari By: /s/ Peter S. Russo
- ---------------------- ----------------------
Raymond M. Calamari Peter S. Russo
ATTEST: FINANCIAL BANCORP, INC.
/s/ Raymond M. Calamari By: /s/ Peter S. Russo
- ---------------------- ----------------------
Raymond M. Calamari Peter S. Russo
WITNESS:
/s/ Richard J. Hickey By: /s/ Frank Latawiec
- ---------------------- ----------------------
Richard J. Hickey Frank Latawiec
Exhibit 10.6 Salary and Benefits Continuation Agreement between Financial
Bancorp, Inc., Financial Federal Savings Bank and Valerie M.
Swaya
<PAGE>
FINANCIAL FEDERAL SAVINGS BANK
SALARY AND BENEFITS CONTINUATION AGREEMENT
FOR VALERIE SWAYA
This Agreement is made effective as of February 18, 1997 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
Valerie Swaya (the "Executive").
WHEREAS, both the Bank and the Holding Company respectively have retained
Executive as Chief Compliance 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
Chief Compliance Officer of both the Bank and the Holding Company or in such
other position as the Chief Executive Officer of the Bank and the Holding
Company may designate. 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 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
2
<PAGE>
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 she 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. Salary Continuation Payments.
In the event a Change in Control of either the Bank or the Holding Company
occurs at any time after the date of this Agreement, Executive shall receive
payment equal to two (2x) times her then current annual base salary, made to her
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
3
<PAGE>
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 for
the two (2) year period immediately following the Change in Control.
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 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 other 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
4
<PAGE>
shall be interpreted to mean that Executive is subject to receiving fewer
benefits than those available to her 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 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.
5
<PAGE>
(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 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 her 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 her designee)
at the time the Director (or her designee) approves a supervisory merger to
resolve problems related to the operations of the
6
<PAGE>
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.
(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 her termination of employment with the Bank (or
her 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.
7
<PAGE>
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.
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.
8
<PAGE>
IN WITNESS WHEREOF, Financial Federal Savings Bank and Financial Bancorp,
Inc. have caused this Agreement to be executed by their duly authorized officer,
and Executive has signed this Agreement, on the 16th day of April, 1997.
ATTEST:
FINANCIAL FEDERAL SAVINGS BANK
/s/ P. James O'Gorman By: /s/ Frank Latawiec
- --------------------- ------------------
P. James O'Gorman Frank Latwiec
ATTEST:
FINANCIAL BANCORP, INC.
/s/ P. James O'Gorman By: /s/ Frank Latawiec
- --------------------- ------------------
P. James O'Gorman Frank Latawiec
WITNESS:
/s/ P. James O'Gorman By: /s/ Valerie Swaya
- --------------------- ------------------
P. James O'Gorman Valerie Swaya
Exhibit 11 Computation of Earnings Per Share
<PAGE>
Exhibit 11
Computation of Earnings Per Share
For the Year Ended
September 30,
----------------------
1997 1996
-------- ---------
(Dollars in thousands,
except per share amounts)
Net Income $2,505 $1,153
====== ======
Weighted average common shares
outstanding 1,630 1750
Common stock equivalents due to dilutive
effect of stock options 40 41
------ ------
Total weighted average common shares and
common share equivalents outstanding 1,670 1,790
====== ======
Earnings per common share and common
share equivalents $ 1.50 $ 0.64
====== ======
FINANCIAL BANCORP, INC.
[DRAWING OMITTED}
FINANCIAL FEDERAL
SAVINGS BANK
50 years of commitment and dedication to our community
1997 ANNUAL REPORT
<PAGE>
Financial Bancorp, Inc. and Subsidiaries
Corporate Profile
- --------------------------------------------------------------------------------
Financial Bancorp, Inc. headquartered in Long Island City, New York, is the
holding company for Financial Federal Savings Bank. At September 30, 1997, total
assets were $297.0 million and stockholders' equity was $26.9 million. Financial
Federal Savings Bank is a federally chartered savings bank which was organized
in 1947, and has five full service banking facilities, four of which are located
in Queens and one in Brooklyn.
The Bank's principal business is attracting retail deposits from the communities
surrounding the main office and the branch offices, and investing these funds in
mortgage loans throughout the greater New York City metropolitan area. Financial
Federal Savings Bank is a community-oriented savings institution, offering
traditional deposit and lending products, with particular emphasis on the
origination of one-to-four family residential loans, mixed-use real estate
loans, commercial real estate loans, and to a lesser extent, construction loans.
Financial Bancorp, Inc. had 1,709,700 shares of common stock outstanding as of
September 30, 1997. Financial Bancorp. Inc.'s common stock is publicly traded on
the Nasdaq National Market under the symbol "FIBC".
Contents
Financial Highlights.................................. 1
Letter to Stockholders................................ 2
Selected Consolidated Financial
and Other Data...................................... 6
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........................... 8
Consolidated Financial Statements..................... 16
Notes to Consolidated Financial Statements............ 21
Independent Auditors' Report.......................... 40
Management Responsibility Statement .................. 40
Corporate and
Stockholders Information............. Inside Back Cover
- --------------------------------------------------------------------------------
<PAGE>
Financial Bancorp, Inc. and Subsidiaries
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At or for the
(Dollars in Thousands, Except for Per Share Data) Year Ended September 30,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Selected Financial Data:
Total assets............................................ $296,956 $266,763 $228,823 $171,642
Loans receivable........................................ 153,292 140,314 110,062 83,505
Investment securities................................... 71,986 56,406 40,359 17,801
Mortgage-backed securities.............................. 47,878 54,853 62,008 49,839
Deposits................................................ 213,394 202,884 186,492 140,182
Borrowed funds.......................................... 53,000 33,652 12,501 --
Stockholders' equity.................................... 26,856 25,787 27,179 29,300
Book value per share.................................... 15.71 14.40 13.78 13.41
Cash dividends declared................................. 0.375 0.275 0.15 --
Market price per common share........................... 22.50 15.50 14.13 10.25
- ---------------------------------------------------------------------------------------------------------------------------
Selected Operating Data:
Net interest income..................................... $ 10,043 $ 9,132 $ 7,970 $ 6,490
Net income.............................................. 2,505 1,153 1,206 1,257
Earnings per share...................................... 1.50 0.64 0.59 0.62
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
[THE FOLLOWING TABLE WAS PRESENTED AS A SERIES
OF FOUR BAR CHARTS IN THE PRINTED DOCUMENT]
1994 1995 1996 1997
---- ---- ---- ----
(in millions)
Net Interest Income $ 6.5 $ 8.0 $ 9.1 $ 10.0
Total Assets $171.6 $228.8 $266.8 $297.0
Investment Securities $ 17.8 $ 40.4 $ 56.4 $ 72.0
Loans Receivable, Net $ 83.5 $110.1 $140.3 $153.3
fifty years of dedication to our community 1
- --------------------------------------------------------------------------------
<PAGE>
Fifty years of Serving our Community...
To Our Stockholders:
We thank you, our stockholders, customers, local communities and dedicated
employees for making Financial Federal Savings Bank's 50th anniversary an
exciting and memorable milestone. Fiscal 1997 was the Bank's most profitable and
successful year in its past half-century history. The year posed significant
challenges which were successfully addressed and the Company is well positioned
with financial strength to meet the challenges ahead.
Now that the Savings Association Insurance Fund (SAIF) has been recapitalized,
the Bank's deposit premium is 75% lower than previous years. This enables the
Bank to effectively compete with the rest of the financial services industry.
Since the Company's stock conversion in 1994, earnings growth and operating
efficiency have been, and continue to be, a key component of the Board of
Directors' strategic vision. We now take a moment to review the Company's
achievements during fiscal 1997.....
Financial Highlights
- --------------------------------------------------------------------------------
Net income for the year was a record $2.5 million, which represents a return on
equity of 9.6% and a return on average assets of 0.92%. Earnings per share rose
by 53% to $1.50 for fiscal 1997, as compared to $0.98 for fiscal 1996, exclusive
of the one-time, after-tax, $598,000 SAIF assessment. The Company's stock price
increased by 45% to $22.50 per share as of September 30, 1997, from $15.50 per
share as of September 30, 1996. Net interest income was a record $10.0 million
for fiscal 1997 as compared to $9.1 million for the same period in 1996. Another
important measure of the past year's success was the significant improvement in
the efficiency ratio, exclusive of the SAIF assessment and severance payment, to
52.3% for fiscal 1997, from 56.0% for fiscal 1996. During the year, total assets
increased by $30.2 million to $297.0 million and deposits increased by $10.5
million to $213.4 million. Total stockholders' equity increased by $1.1 million
to $26.9 million for the year. Prudent growth in the balance sheet, strong core
earnings and capital management strategies are integral parts of the Company's
overall objectives, which were met, thereby increasing the long-term value of
your investment.
Another component of increasing value is the repurchase of the Company's common
stock which the Board of Directors and Senior Management believe to be a sound
investment. Since the initial public offering in 1994, the Company has completed
five repurchase programs, representing the repurchase of 494,834 shares at an
aggregate cost of $6.5 million, or an average price of $13.19 per common share.
On September 4, 1997, the Company announced a sixth repurchase program in which
the Board of Directors has authorized the repurchase of 10%, or 170,970 shares
of its outstanding shares. The repurchase of such shares will be made from time
to time, during the next two years through open-market transactions, subject to
the availability and the price of the stock.
2
- --------------------------------------------------------------------------------
<PAGE>
In January 1997, the Company announced an increase in the regular quarterly cash
dividend of 33%, to $0.10 per common share from $0.075 per common share. The
regular dividend declaration for the quarter ended September 30, 1997 represents
the twelfth consecutive quarter of dividend payments. The Board will continue to
review the dividend on a regular basis and plans to continue the payment of a
dividend consistent with the Company's financial position and current earnings
performance.
Management Succession
- --------------------------------------------------------------------------------
During the year, the Board of Directors announced a corporate reorganization and
the appointment of Peter S. Russo as Chairman of the Board. Peter succeeds
Dominick L. Segrete as Chairman. At the Board's request, Dominick remains a
Director and is confident of the Company's success under Peter's leadership. The
Company's Senior Management team was restructured in order to maximize expertise
and increase productivity. It is our belief that professional, experienced and
dedicated individuals are the key to attaining the strategic goals set forth in
the Company's business plan. The Board believes that succession planning is a
key component to the Company's on-going success and, therefore, the Board
promoted P. James O'Gorman, Chief Financial Officer, to Executive Vice President
and Valerie M. Swaya, Vice President, to Chief Administrative Officer.
Furthermore, in order to strengthen the depth of the management team,
experienced professionals were hired in fiscal 1997 to oversee marketing
initiatives, business development and technology.
The new Management team remains committed to increasing stockholder value by
continually finding ways to increase the Bank's franchise value. Under the
leadership of Frank S. Latawiec, President and Chief Executive Officer, and
guidance from the Board of Directors, Senior Management is dedicated to growing
the Company in a conservative manner, while increasing profitability and thereby
enhancing value to our stockholders.
Loan Production
- --------------------------------------------------------------------------------
Fiscal 1997 has been a successful year in the development of new real estate
mortgage lending products and services. This is clearly highlighted by the
emphasis on small to moderate sized mixed-use real estate loan originations
within our geographic lending areas. During the fiscal year, total loans
receivable increased by $13.0 million, or 9.2%, to a record $153.3 million, of
which $140.9 million represents residential and mixed-use loans. Usually a
combination of residential units and retail space, mixed-use loans provide
attractive interest rate yields without compromising the integrity of the
underwriting process. In conjunction with the emphasis on mixed-use real estate
lending, Senior Management fine-tuned
fifty years of dedication to our community 3
- --------------------------------------------------------------------------------
<PAGE>
With Commitment,
to giving quality service
lending policies and procedures in order to maintain prudent underwriting
standards and adequate internal controls. In addition, two additional Loan
Originators have recently been hired in order to further bolster mortgage
production within the Bank's geographic lending area. With the newly adopted
lending procedures, the increased staff of professionals and the diversification
of the Bank's product base, the Company has created a foundation to increase our
presence in the Metropolitan area lending market and bolster overall
profitability.
Retail Banking
- --------------------------------------------------------------------------------
For the past fifty years, the Bank has been proud to serve the financial needs
of its local communities which are the lifeblood of its still growing deposit
and customer base. We remain committed to providing high quality and courteous
customer service throughout our branch network. Senior Management has taken a
proactive approach in training the staff and rewarding cross-selling and
customer retention activities. In conjunction with this sales culture, various
staff members are now licensed to sell Savings Bank Life Insurance (SBLI) and
annuities, which will expand relationship banking and cultivate a market for new
customers. These new products will be an important source of additional fee
income while providing an expanded array of products to our customers at a
reasonable cost.
As the focus continues on targeting our market areas, we are in the process of
implementing a customer relationship banking strategy. With increased expertise
in information systems, we are developing a greater understanding of our
customer base through analyses of our customer composition, account
relationships and demographics. This information is assisting us in creating the
most valuable and cost effective marketing strategies. Given the fierce
competition that exists within the financial services marketplace, it is crucial
to growth and profitability to know our customers' needs and financial
expectations and to have technologies equal to those of the larger financial
institutions.
50 Years of Commitment to Our Community
- --------------------------------------------------------------------------------
Since Financial Federal Savings Bank was incorporated in 1947, our main mission
has been to provide affordable home financing to our local communities. Fifty
years ago the Bank was incorporated as a building and loan association in the
once suburban area and home of our main office, Sunnyside, Queens. A
half-century later, Sunnyside has developed into a residential and retail
center. As the neighborhood changed and its new residents' needs evolved,
Financial Federal Savings Bank has kept pace with the financial requirements and
challenges by fulfilling their needs with its products and services. We look
forward to meeting the deposit and credit needs of our communities
4
- --------------------------------------------------------------------------------
<PAGE>
Understanding and Dedication.
what our community wants and needs to all our customers
and appreciate all the support and loyalty we have received from our community,
both homeowners and retail business owners.
As we enter the next fiscal year, there is a renewed sense of excitement and
commitment to all of our customers and stockholders to build upon the foundation
of the franchise and stockholder value that has been established in the past.
Take a look at what lies ahead in fiscal 1998......
Now and In the Future
- --------------------------------------------------------------------------------
We are in the midst of a comprehensive review of each component of the Company's
expense items, focusing on areas of cost reduction and the feasibility of
outsourcing certain functions. Senior Management will continue to emphasize cost
containment while providing high quality products and services at a reasonable
cost to our customers. This is an integral part of the strategic business plan
approved by the Board.
As we look down the road, Senior Management and the Board of Directors are
committed to technology, diversification of deposit products, creating new and
innovative mortgage products, which all, in turn, will generate more business
and increase profitability. Increased profitability and the streamlining of
operating expenses, will assist us in attaining the most important goal-building
stockholder value.
We take a moment to particularly express our thanks to Mr. Dominick L. Segrete
for his valuable years of service as our Chairman. His vision of the future and
strong leadership ability have shaped the Company into its current position.
Dominick and all the members of the Board have faith that Peter S. Russo, our
new Chairman, will provide the energetic leadership to continue to build value
for the future.
Growing the Bank is a challenging and rewarding experience. We thank you, our
stockholders, for supporting our efforts and for your loyalty to our Company.
May our future be as memorable and successful as our past.
/s/Peter S. Russo /s/Frank S. Latawiec
Peter S. Russo Frank S. Latawiec
Chairman of the Board President and
Chief Executive Officer
fifty years of dedication to our community 5
- --------------------------------------------------------------------------------
<PAGE>
Financial Bancorp, Inc. and Subsidiaries
Selected Consolidated Financial and Other Data
- --------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
At September 30,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Total assets $296,956 $266,763 $228,823 $171,642 $147,871
Total loans receivable, net 153,292 140,314 110,062 83,505 83,425
Investments securities(1) 71,986 56,406 40,359 17,801 5,435
Mortgage-backed securities(2) 47,878 54,853 62,008 49,839 49,408
Deposits 213,394 202,884 186,492 140,182 136,638
Borrowed Funds 53,000 33,652 12,501 -- --
Stockholders' equity 26,856 25,787 27,179 29,300 9,374
<CAPTION>
For the Year Ended September 30,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income $ 20,072 $ 17,823 $ 14,256 $ 10,490 $ 11,305
Interest expense 10,029 8,691 6,286 4,000 4,383
-------------------------------------------------------------------
Net interest income 10,043 9,132 7,970 6,490 6,922
-------------------------------------------------------------------
Provision for loan losses 427 543 342 183 732
-------------------------------------------------------------------
Non-interest income:
Fees, service charges, gain/(loss)
on sales and other income 655 490 309 355 1,063
Gain/(loss) from real estate operations 28 (313) (618) (300) (380)
-------------------------------------------------------------------
Total non-interest income (loss): 683 177 (309) 55 683
-------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 3,207 3,048 2,619 2,301 1,967
Occupancy and equipment 1,155 1,064 1,048 826 920
Advertising 62 70 129 41 19
Loss (income) from real estate owned 16 84 77 (12) 183
Federal insurance premiums(3) 173 1,502 390 360 306
Miscellaneous 1,253 1,170 1,014 668 700
-------------------------------------------------------------------
Total non-interest expense 5,865 6,938 5,277 4,184 4,095
-------------------------------------------------------------------
Income before income taxes 4,434 1,828 2,042 2,178 2,778
Income tax expense(4) 1,929 675 836 921 1,099
-------------------------------------------------------------------
Net income $ 2,505 $ 1,153 $ 1,206 $ 1,257 $ 1,679
===================================================================
</TABLE>
6
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
At or for the
Year Ended September 30,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Return on average assets 0.92 0.47 0.60 0.79 1.09
Return on average equity 9.57 4.31 4.18 9.76 19.71
Retained earnings to assets at period end 9.04% 9.67% 11.88% 17.07% 6.34%
Net interest rate spread 3.43 3.48 3.70 4.12 4.63
Net interest margin 3.87 3.91 4.18 4.29 4.74
Operating expenses to average assets(5)(6) 2.05 2.20 2.57 2.63 2.55
Efficiency ratio(5)(6) 52.31 56.01 62.81 61.29 53.38
Non-performing assets to total assets 2.17 2.17 2.65 2.95 4.05
Non-performing loans to total loans 1.69 1.45 1.72 1.95 2.58
Allowance for loan losses to total loans 0.91 1.09 1.10 1.31 1.18
Number of full-service facilities 5 5 5 5 5
</TABLE>
(1) Includes Federal Home Loan Bank of New York ("FHLB") stock and investments
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
$197,000, which reflects the cumulative effect of a change in accounting
for income taxes resulting from the adoption of Financial Accounting
Standards Board ("FASB") 109 as of October 1, 1992.
(5) Operating expenses represent total non-interest expenses excluding (income)
loss from real estate owned.
(6) Excludes non-recurring SAIF assessment of $1,115,000 and severance payment
of $369,000 for the year ending September 30, 1996 and severance payment of
$268,000 for the year ending September 30, 1997.
fifty years of dedication to our community 7
- --------------------------------------------------------------------------------
<PAGE>
Financial Bancorp, Inc. and Subsidiaries
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 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, 1997, total assets were $297.0 million, which represents a
$30.2 million, or an 11.3%, increase from $266.8 million as of September 30,
1996. Asset growth was funded by a combination of both the $10.5 million
increase in the Bank's deposit base and the $19.3 million increase in overall
borrowings. During fiscal 1997, deposits increased by $10.5 million, or 5.2%, to
$213.4 million as of September 30, 1997 from $202.9 million at September 30,
1996. Securities sold under agreements to repurchase increased by $11.0 million,
to $25.0 million at September 30, 1997, from $14.0 million at September 30,
1996. The treasury tax and loan account and other short-term borrowings
increased by $10.1 million to $20.0 million at September 30, 1997, from $9.9
million at September 30, 1996. Advances from the Federal Home Loan Bank of New
York ("FHLB") decreased by $1.7 million to $8.0 million, at September 30, 1997,
as compared to $9.7 million at September 30, 1996.
At September 30, 1997, cash and cash equivalents totalled $13.4 million, which
represents an $8.3 million increase from $5.1 million, from the same period in
1996. This increase primarily resulted from an $8.5 million increase in
investment in securities purchased under agreements to resell and federal funds
sold.
Investment securities available for sale decreased to $731,000, at September 30,
1997, as compared to $3.6 million at September 30, 1996. This decrease was
offset by a $4.4 million increase in mortgage-backed securities available for
sale to $9.4 million, at September 30, 1997, as compared to $5.0 million at
September 30, 1996. As of September 30, 1997, 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."
Investment securities, including FHLB-NY stock, increased by $15.6 million, or
27.6%, to $72.0 million from $56.4 million as of September 30, 1996.
Mortgage-backed securities decreased by $7.0 million, or 12.7%, to $47.9 million
as of September 30, 1997 from $54.9 million as of September 30, 1996, including
mortgage-backed securities which were classified as available for sale. Loans
receivable increased by $13.0 million, or 9.2%, to $153.3 million as of
September 30, 1997 from $140.3 million as of September 30, 1996. This $13.0
million, or 9.2% increase in loans receivable primarily resulted from the
origination of $27.5 million in mortgage loans, and the purchase of $6.7 million
of one- to-four family, adjustable rate residential mortgage loans, partially
offset by normal amortization, prepayments and satisfactions.
Non-performing loans totaled $2.6 million, or 1.69% of total loans at September
30, 1997, as compared to $2.1 million, or 1.45% of total loans at September 30,
1996. At September 30, 1997, nonperforming assets totalled $6.4 million, or
2.17% of total assets as compared to $5.8 million, or 2.17% of total assets as
of September 30, 1996. The Company's allowance for loan losses totalled $1.4
million at September 30, 1997, which represents a ratio of allowance for loan
losses to nonperforming assets and to total loans of 21.8% and 0.91%,
respectively, as compared to 27.22% and 1.09%, respectively, at September 30,
1996.
Total stockholders' equity was $26.9 million at September 30, 1997, reflecting a
$1.1 million, or 4.1%, increase from the prior year. The increase in
stockholders' equity was the result of earnings retained after the payment of
the Company's quarterly cash dividend, partially offset by the repurchase of the
Company's Common Stock. As of September 30, 1997, the Company has repurchased
494,834 shares at an aggregate cost of $6.5 million, or $13.19 per common share
as part of five, 5% repurchase programs since its initial public offering in
August 1994. At September 30, 1997, the Company had 1,709,700 common shares
outstanding and the stated book value per common share was $15.71, an increase
of $1.31 per common share or 9.1%, from $14.40 per common share at September 30,
1996.
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 origination of shorter-term fixed-rate one- to four-family and
multi-family mortgage loans and the
8
- --------------------------------------------------------------------------------
<PAGE>
purchase of adjustable rate-mortgage loans, along with limiting investment
purchases to securities with a final maturity of 5 years or less. This strategy
is necessary to reduce the Bank's exposure to interest rate risk. 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 success in growing its non-interest-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, 1997.
Maturities are adjusted using assumptions for prepayments and decay rates as
researched and applied by the Bank. The assumptions for prepayments on
fixed-rate mortgage loans and mortgage-backed securities range from 10% 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 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 is 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, decreased to a positive 1.58% at September 30, 1997, from a positive
11.12% at September 30, 1996. 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>
At September 30, 1997
- ---------------------------------------------------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage and other loans $ 9,134 $ 31,875 $40,044 $24,547 $29,647 $19,894 $155,141
Investment securities 52,815 8,835 7,760 -- -- -- 69,410
Mortgage-backed securities 13,843 9,985 9,979 3,616 7,229 3,226 47,878
Federal funds sold 10,650 -- -- -- -- -- 10,650
FHLB stock and equity securities -- -- -- -- -- 2,576 2,576
--------------------------------------------------------------------------------------
Total interest-earning assets $86,442 $ 50,695 $57,783 $28,163 $36,876 $25,696 $285,655
======================================================================================
Interest-bearing liabilities:
Savings and club accounts $ 3,106 $ 10,340 $18,872 $12,303 $15,616 $13,872 $ 74,109
NOW accounts 606 1,213 2,546 681 915 595 6,556
Money market accounts 1,747 5,240 973 463 283 138 8,844
Certificates of deposit 22,301 50,899 28,737 11,681 179 -- 113,797
Borrowed funds 27,000 10,000 16,000 -- -- -- 53,000
--------------------------------------------------------------------------------------
Total interest-bearing liabilities $54,760 $ 77,692 $67,128 $25,128 $16,993 $14,605 $256,306
======================================================================================
Interest-sensitivity gap $31,682 $(26,997) $(9,345) $ 3,035 $19,883 $11,091 $ 29,349
======================================================================================
Cumulative interest-sensitivity gap $31,682 $ 4,685 $(4,660) $(1,625) $18,258 $29,349
========================================================================
Cumulative interest-sensitivity gap
as a percentage of total assets 10.67% 1.58% (1.57)% (0.55)% 6.15% 9.88%
Cumulative net interest-earning
assets as a percentage of
interest-bearing liabilities 157.86% 103.54% 97.67% 99.28% 107.55% 111.45%
</TABLE>
fifty years of dedication to our community 9
- --------------------------------------------------------------------------------
<PAGE>
Financial Bancorp, Inc. and Subsidiaries
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.
<TABLE>
<CAPTION>
Year Ended September 30,
- ----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
---------------------------- ---------------------------- ----------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold and
securities purchased under
agreements to resell $ 1,448 $ 77 5.23% $ 659 $ 38 5.72% $ 2,296 $ 136 5.91%
Investment securities(1) 56,786 4,074 7.17 48,728 3,444 7.07 33,059 2,381 7.20
Loans receivable(2) 148,056 12,171 8.22 127,050 10,316 8.12 93,592 7,551 8.07
Mortgage-backed securities(3) 53,530 3,750 7.01 57,274 4,025 7.03 61,872 4,188 6.77
-------- ------- -------- ------- -------- -------
Total interest-earning assets 259,820 $20,072 7.73 233,711 17,823 7.63 190,819 14,256 7.47
------- ---- ------- ---- ------- ----
Non-interest-earning assets 12,558 10,202 11,386
-------- -------- --------
Total assets $272,378 $243,913 $202,205
======== ======== ========
Interest-bearing liabilities:
NOW and money
market deposits $ 16,875 $ 360 2.13 $ 18,818 $ 436 2.31 $ 16,492 $ 373 2.26
Savings deposits 73,352 1,561 2.13 75,243 1,674 2.22 79,679 1,930 2.42
Certificates of deposit 108,095 6,182 5.72 95,003 5,483 5.76 67,563 3,816 5.65
-------- ------- -------- ------- -------- -------
Total interest-
bearing deposits 198,322 8,103 4.09 189,064 7,593 4.01 163,734 6,119 3.74
Borrowed funds 34,803 1,926 5.46 19,770 1,098 5.46 2,804 167 5.98
-------- ------- -------- ------- -------- -------
Total interest-
bearing liabilities 233,125 10,029 4.30 208,834 8,691 4.15 166,538 6,286 3.77
------- ---- ------- ---- ------- ----
Non-interest-bearing liabilities 13,084 8,313 6,809
-------- -------- --------
Total liabilities 246,929 217,147 173,347
Stockholders' equity 26,169 26,766 28,858
-------- -------- --------
Total liabilities and
stockholders' equity $272,378 $243,913 $202,205
======== ======== ========
Net interest income $10,043 $ 9,132 $ 7,970
======= ======= =======
Net interest rate spread(4) 3.43% 3.48% 3.70%
==== ==== ====
Net interest-earning
asset/net interest margin(5) $ 26,695 3.87% $ 24,877 3.91% $ 24,281 4.18%
======== ==== ======== ==== ======== ====
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.11x 1.12x 1.15x
==== ==== ====
</TABLE>
(1) Includes FHLB stock and 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>
Year Ended September 30, Year Ended September 30,
- ---------------------------------------------------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
Increase (Decrease) Due to Increase (Decrease) Due to
-----------------------------------------------------------------------
Rate/ Rate
Volume Rate Volume Total Volume Rate Volume Total
-----------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Federal funds sold and securities
purchased under agreements to resell $ 45 $ (3) $(3) $ 39 $ (97) $ (2) $ 1 $ (98)
Investment securities 570 52 8 630 1,128 (44) (21) 1,063
Loans receivable 1,706 128 21 1,855 2,700 47 18 2,765
Mortgage-backed securities (263) (13) 1 (275) (311) 161 (131) (163)
-----------------------------------------------------------------------
Total 2,058 164 27 (2,249) 3,420 161 (75) 3,567
-----------------------------------------------------------------------
Interest expense:
NOW and money market deposits (45) (35) 4 (76) 53 11 2 66
Savings deposits (42) (73) 2 (113) (107) (159) 9 (257)
Certificates of deposit 756 (50) (7) 699 1,551 81 33 1,665
-----------------------------------------------------------------------
Total deposits 669 (158) (1) 510 1,497 (67) 44 1,476
Borrowed funds 828 -- -- 828 1,015 (12) (22) 831
-----------------------------------------------------------------------
Total 1,497 (158) (1) 1,338 2,512 (79) (28) 2,405
-----------------------------------------------------------------------
Net change in net interest income $ 561 $ 322 $28 $ 911 $ 908 $241 $ 13 $1,162
=======================================================================
</TABLE>
Comparison of Operating Results for the Years Ended September 30, 1997 and
September 30, 1996.
General. Net income for the year ended September 30, 1997 increased by $1.3
million, or 130.0%, to $2.5 million, or $1.50 per share, from $1.2 million, or
$0.64 per share, for the year ended September 30, 1996. Excluding the effect of
a one-time Savings Association Insurance Fund ("SAIF") insurance assessment, net
income for the fiscal year ended September 30, 1996 would have been $1.8
million, or $0.98 per share. The increase in net income was primarily
attributable to a $911,000 increase in net interest income before provision for
loan losses and a $507,000 increase in non-interest income, partially offset by
a $42,000 increase in non-interest expense, exclusive of the one-time SAIF
recapitalization assessment of $1.1 million.
Interest Income. Interest income increased by $2.2 million, or 12.6%, to $20.1
million for the year ended September 30, 1997 from $17.8 million for the year
ended September 30, 1996. The increase in interest income 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 by 10 basis points to 7.73% for the year ended September 30,
1997, from 7.63% for the year ended September 30, 1996. The increase in the
average yield primarily resulted from the Company's investment into higher
yielding assets, without compromising the integrity of the loan and investment
portfolios. For the year ended September 30, 1997, the average balance of
interest-earning assets was $259.8 million, as compared to $233.7 million for
the fiscal year ended September 30, 1996, which represents a $26.1 million, or
an 11.2% 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 $1.9 million, or 18.0%, to $12.2 million
in fiscal 1997 from $10.3 million in fiscal 1996. This increase was due to a
$21.0 million, or a 16.5%, increase in the average balance of loans along with a
10 basis points increase in the average yield on loans to 8.22% for fiscal 1997
from 8.12% for the same period in 1996. Interest income from mortgage-backed
securities decreased by $275,000, or 6.8%, to $3.7 million in fiscal 1997 from
$4.0 million for fiscal 1996. This decrease is primarily attributable to a $3.8
million, or a 6.5%, decline in the average balance of mortgage-backed securities
to
fifty years of dedication to our community 11
- --------------------------------------------------------------------------------
<PAGE>
Financial Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
(Continued)
$53.5 million in fiscal 1997 from $57.3 million in fiscal 1996, along with a 2
basis points decline in the average yield on such securities to 7.01% for fiscal
1997 from 7.03% for fiscal 1996. Interest income on investment securities
increased by $631,000, or 18.3%, to $4.1 million during fiscal 1997 from $3.4
million during fiscal 1996, which primarily resulted from an increase of $8.1
million, or 16.5%, in the average balance of investment securities and a 10
basis points increase in the average yield on such securities to 7.17% during
fiscal 1997 from 7.07% for fiscal 1996. Interest income from federal funds sold
and securities purchased under agreements to resell for fiscal 1997 increased by
$39,000, or 100.3%, to $77,000 from $39,000 for fiscal 1996. This increase
resulted from a $789,000, or 119.7%, increase in the average asset balance,
partially offset by a 49 basis points decrease in the average rate earned on
such assets to 5.23% for fiscal 1997 from 5.72% for fiscal 1996.
Interest Expense. Interest expense on total deposits for the year ended
September 30, 1997, increased by $510,000, or 6.7%, to $8.1 million for the year
ended September 30, 1997, from $7.6 million for the year ended September 30,
1996. The increase resulted from a $9.3 million, or 4.9%, increase in the
average balance of interest-bearing deposits and an 8 basis points increase in
the average cost of interest-bearing deposits to 4.09% for fiscal 1997 from
4.01% for fiscal 1996. Interest expense on borrowings increased by $828,000 to
$1.9 million, due to a $15.0 million, or 79.8%, increase in the average balance
of borrowed funds to $34.8 million in fiscal 1997 from $19.8 million in fiscal
1996. The increase in the average cost of borrowings resulted from the continued
leveraging and growing of the balance sheet. Interest expense on savings
accounts decreased by $113,000, or 6.7%, to $1.6 million for fiscal 1997 from
$1.7 million for fiscal 1996, resulting from a $1.9 million reduction in average
balances, in addition to a 9 basis points decrease in the average cost of such
deposits. The average balance of savings and club accounts decreased to 37.0% of
the total average of interest-bearing deposits for fiscal 1997, from 39.8% for
fiscal 1996. For the year ended September 30, 1997, interest expense on
certificates of deposit increased by $699,000, or 12.7%, to $6.2 million for
fiscal 1997 from $5.5 million for fiscal 1996, which resulted from a 13.8%
increase in the average balance of these accounts to $108.1 million for fiscal
1997 from $95.0 million for fiscal 1996, slightly offset by a 4 basis points
decrease in the average cost of such accounts to 5.72% in fiscal 1997 from 5.76%
in fiscal 1996.
Net Interest Income. Net interest income for the year ended September 30, 1997,
increased by $911,000, or 10.0%, to $10.0 million from $9.1 million for the year
ended September 30, 1996. The Bank's net interest rate spread decreased to 3.43%
in fiscal 1997 from 3.48% in fiscal 1996, and its net interest margin decreased
to 3.87% in fiscal 1997 from 3.91% in fiscal 1996. During fiscal year ended
September 30, 1997, the narrowing of the net interest rate spread and net
interest margin was primarily caused by increased leveraging of the balance
sheet in an effort to increase net interest income. The average yield on
interest-earning assets was 7.73% for the year ended September 30, 1997, as
compared to 7.63% for the year ended September 30, 1996. The average cost of
interest-bearing liabilities was 4.30% for the year ended September 30, 1997, as
compared to 4.15% for the corresponding period in 1996.
Provision for Loan Losses. The provision for loan losses decreased by $116,000
to $427,000 for the year ended September 30, 1997 from $543,000 for the year
ended September 30, 1996. At September 30, 1997, allowance for loan losses
amounted to $1.4 million. The decrease in the provision of losses is primarily
attributable to a loss provision of $124,000 established for the Thrift
Association Service Corporation ("TASCO") participation loans during fiscal
1996. In determining its provision for loan losses, management establishes loss
allowances on identified problem loans and general allowances on the remainder
of the loan portfolio.
Non-Interest Income. Non-interest income for the year ended September 30, 1997
increased by $507,000 to $684,000 from $177,000 for the year ended September 30,
1996. This significant increase in non-interest income is primarily attributable
to the decrease of $307,000 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 also attributable to a $173,000, or 42.9%, increase in fees and service
charges to $576,000 for the year ended September 30, 1997 from $403,000 for the
year ended September 30, 1996. This increase in non-interest income represents
fees associated with the increase in the number of demand deposit accounts.
Non-Interest Expenses. Non-interest expenses decreased by $1.0 million, or
15.5%, to $5.9 million for the year ended September 30, 1997 from $6.9 million
for the year ended September 30, 1996. Exclusive of the SAIF recapitalization
assessment, non-interest expense increased by $42,000, or 0.7%, to $5.9 million
for fiscal 1997 from $5.8 million for fiscal 1996. Salaries and employee
benefits increased by $159,000, or 5.2%, to $3.2 million for fiscal 1997 from
$3.0 million for fiscal 1996. This increase is primarily attributable to the
implementation of company-wide incentive awards and increased costs associated
with the Employee Stock Ownership Plan. For the year ended September 30, 1997,
occupancy expense increased by $34,000 to $527,000 from $493,000 for the year
ended September 30, 1996. This increase in occupancy expenses represents costs
associated with an increase in the rent expense of one of the Bank's branch
offices, offset, in part by the collection of rental income on the Bank owned
properties. For the year ended September 30, 1997, equipment expense increased
by $57,000 to $628,000 from $571,000 for the year ended September 30, 1996. The
increase in equipment expense represents costs associated with the Company's
data processing service, deposit
12
- --------------------------------------------------------------------------------
<PAGE>
and check processing service fees, automated teller machines ("ATM's") and other
vendor related services and contracts. In addition, advertising expense
decreased by $7,000 to $63,000 for fiscal 1997 from $70,000 for fiscal 1996. The
Company has on occasion limited its advertising expense in an effort to bolster
current earnings. Losses on real estate owned decreased by $68,000 to $16,000
for fiscal 1997 from $84,000 for fiscal 1996. The decrease in losses on real
estate owned is primarily attributable to the decline in foreclosures during
fiscal 1997. It is management's objective to dispose of real estate owned as
rapidly as possible. For the fiscal year ended September 30, 1997, the federal
deposit insurance premium decreased by $1.3 million to $173,000 from $1.5
million for the fiscal year ended September 30, 1996. The decrease is
attributable to the $1.1 million one-time special assessment to recapitalize the
SAIF in fiscal 1996 and the lower premium assessed on insured deposits
commencing in 1997. The ratio of operating expense to average assets, was 2.15%
for the fiscal year ended September 30, 1997, as compared to 2.35%, exclusive of
the $1.1 million SAIF assessment and the loss from real estate owned, for the
year ended September 30, 1996. Furthermore, the Company's efficiency ratio was
54.8% for the year ended September 30, 1997, as compared to 59.7%, exclusive of
the $1.1 million SAIF assessment and the loss from real estate owned, for the
corresponding period in 1996.
Income Tax Expense. Income tax expense increased by $1.3 million to $1.9 million
in fiscal 1997 from $675,000 in fiscal 1996. The effective income tax rate for
fiscal 1997 was 43.5%, as compared to 36.9% for fiscal 1996. The increase in the
effective tax rate primarily relates to certain state and city tax benefits
realized during fiscal 1996.
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% for 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 points 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 points 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 points 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 $1.6 million, or 71.3%, decreases in the average asset balance,
and a 19 basis points 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 for the
year ended September 30, 1996, from $6.1 million for the year ended September
30, 1995. The increase resulted from a 27 basis points 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
fifty years of dedication to our community 13
- --------------------------------------------------------------------------------
<PAGE>
Financial Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
(Continued)
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 points 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 for fiscal 1996 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 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 partially 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, 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.
14
- --------------------------------------------------------------------------------
<PAGE>
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, 1997 was 14.9%, which
exceeded the then applicable 5.0% liquidity requirement. Its short-term
liquidity ratio at September 30, 1997 was 6.1%.
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 and investment securities. During the years ended September 30, 1997,
1996 and 1995, the Bank originated mortgage loans in the amounts of $27.5
million, $34.0 million and $30.4 million, respectively, and purchased mortgage
loans in the amounts of $6.7 million, $14.8 million and $9.0 million,
respectively. Purchases of mortgage-backed securities totalled $5.0 million,
$5.1 million and $19.3 million for the same periods. Other investments primarily
include U.S. Government Agency obligations.
At September 30, 1997, the Bank had outstanding loan commitments of $8.6
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, 1997, totalled $40.3 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
On September 30, 1996, legislation was enacted which, among other things,
imposed a special one-time assessment on Savings Association Insurance Fund
("SAIF") member institutions, including the Bank, to recapitalize the SAIF and
spread the obligation for payment of Financial Corporation ("FICO") bonds across
all SAIF and Bank Insurance Fund ("BIF") members. The special assessment levied
amounted to 65.7 basis points on SAIF assessable deposits held as of March 31,
1995. The Bank took a charge of $1,115,000 as a result of the special assessment
during the year ended September 30, 1996. This legislation eliminated the amount
that BIF and SAIF members had to pay for deposit insurance premiums.
The recent legislation provides that the BIF and the SAIF will merge on January
1, 1999 if there are no more savings associations as of that date. Several bills
have been introduced in the current Congress that would eliminate the federal
thrift charter and the OTS. A bill recently reported by the House Banking
Committee would require federal thrifts to become national banks or state banks
or savings banks within two years after enactment or they would, by operation of
law, become national banks. A national bank resulting from a converted federal
thrift could continue to engage in activities, including holding any assets, in
which it was lawfully engaged on the day before the date of enactment. Branches
operated on the day before enactment could be retained regardless of their
permissibility for national banks. Subject to a grandfathering provision, all
savings and loan holding companies would become subject to the same regulation
and activities restrictions as bank holding companies. The grandfathering could
be lost under certain circumstances, such as a change in control of the holding
company. The legislative proposal would also abolish the OTS and transfer its
functions to the federal bank regulators with respect to the institutions and to
the Board of Governors of the Federal Reserve Board with respect to the
regulation of holding companies. The Bank is unable to predict whether the
legislation will be enacted or, given such uncertainty, determine the extent to
which the legislation, if enacted, would affect its business. The Bank is also
unable to predict whether the SAIF and BIF will eventually be merged.
fifty years of dedication to our community 15
- --------------------------------------------------------------------------------
<PAGE>
Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30,
- ---------------------------------------------------------------------------------------------------------------------------
Assets Notes (s) 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Cash and cash amounts due from depository institutions $ 2,738,392 $ 2,917,223
Securities purchased under agreements
to resell and federal funds sold 3 10,650,000 2,185,000
-------------------------------
Total cash and cash equivalents 1 and 22 13,388,392 5,102,223
Investment securities available for sale 1, 4, 13, 14 and 22 730,750 3,608,125
Investment securities held to maturity; estimated
fair value of $69,223,000 and $49,903,000
at September 30, 1997 and 1996, respectively 1, 4 and 22 69,410,103 51,122,128
Mortgage-backed securities available for sale 1, 5 and 22 9,357,048 5,016,112
Mortgage-backed securities held to maturity;
estimated fair value of $39,129,000 and $49,901,000,
at September 30, 1997 and 1996, respectively 1, 5 and 22 38,521,050 49,836,734
Loans receivable 1, 6, 12 and 22 153,291,828 140,314,158
Real estate owned 1 and 7 471,417 377,910
Investments in real estate 1 and 8 3,543,453 3,493,153
Premises and equipment 1, 9 and 21 2,431,570 2,522,264
Federal Home Loan Bank of New York stock 12 1,845,000 1,675,800
Accrued interest receivable 1, 10 and 22 2,248,578 1,788,970
Other assets 15 and 19 1,716,727 1,904,945
-------------------------------
Total assets $296,955,916 $266,762,522
===============================
Liabilities and stockholders' equity
Liabilities
Deposits 11, 19 and 22 $213,394,282 $202,883,766
Advance payments by borrowers for taxes and insurance 1,267,896 1,063,036
Advances from Federal Home Loan Bank of New York 12 and 22 8,000,000 9,725,000
Securities sold under agreements to repurchase 13 and 22 25,000,000 14,046,000
Treasury tax and loan account borrowings 14 and 22 20,000,000 9,880,970
Other liabilities 17 2,437,504 3,376,552
-------------------------------
Total liabilities 270,099,682 240,975,324
-------------------------------
Commitments and contingencies 21 and 22 -- --
Stockholders' equity 1, 2, 15, 16
17 and 18
Preferred stock $.01 par value, 2,500,000 shares authorized;
none issued and outstanding
Common stock $.01 par value, 6,000,000 shares authorized; 2,185,000 shares
issued; 1,709,700 and 1,790,622 shares
outstanding at September 30, 1997 and 1996, respectively 21,850 21,850
Additional paid-in capital 20,239,758 20,151,858
Retained earnings--substantially restricted 14,111,882 12,218,607
Common stock acquired by Employee Stock
Ownership Plan ("ESOP") (1,011,566) (1,173,422)
Common stock acquired by Recognition and Retention Plan ("RRP") (317,955) (454,221)
Treasury stock, at cost; 475,300 and 394,378
shares at September 30, 1997 and 1996, respectively (6,279,339) (4,976,986)
Unrealized gain (loss) on securities
available for sale, net of income taxes 91,604 (488)
-------------------------------
Total stockholders' equity 26,856,234 25,787,198
-------------------------------
Total liabilities and stockholders' equity $296,955,916 $266,762,522
===============================
</TABLE>
See notes to consolidated financial statements.
16
- --------------------------------------------------------------------------------
<PAGE>
Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30,
- ---------------------------------------------------------------------------------------------------------------------------
Note(s) 1997 1996 1995
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans 1 and 6 $12,170,938 $10,316,082 $ 7,551,131
Mortgage-backed securities 1 3,749,723 4,025,030 4,187,550
Investments and other interest-earning assets 1 4,074,392 3,443,504 2,381,326
Federal funds sold and securities purchased
under agreements to resell 1 76,821 38,354 135,739
-----------------------------------------------
Total interest income 20,071,874 17,822,970 14,255,746
-----------------------------------------------
Interest expense:
Deposits 11 8,102,809 7,592,723 6,118,726
Borrowings 1,926,223 1,098,104 167,609
-----------------------------------------------
Total interest expense 10,029,032 8,690,827 6,286,335
-----------------------------------------------
Net interest income 10,042,842 9,132,143 7,969,411
Provision for loan losses 1 and 6 426,600 542,920 341,530
-----------------------------------------------
Net interest income after provision for loan losses 9,616,242 8,589,223 7,627,881
-----------------------------------------------
Non-interest income (loss):
Fees and service charges 575,821 402,813 293,722
Gain (loss) on sale and
write-down of investments 1 and 4 29,387 36,089 (8,964)
Gain (loss) from real estate operations 1 27,650 (313,011) (618,074)
Miscellaneous 20, 18 and 19 50,607 50,635 24,255
-----------------------------------------------
Total non-interest income (loss) 683,465 176,526 (309,061)
-----------------------------------------------
Non-interest expenses:
Salaries and employee benefits 17 and 18 3,206,774 3,048,238 2,618,287
Net occupancy expense of premises 1 and 21 526,583 492,507 542,375
Equipment 1 628,182 571,180 505,834
Advertising 62,435 69,510 129,237
Loss from real estate owned 1 and 7 15,823 84,123 76,890
Federal insurance premium 20 172,577 1,502,263 390,011
Miscellaneous 18 and 19 1,253,033 1,169,816 1,014,132
-----------------------------------------------
Total non-interest expenses 5,865,407 6,937,637 5,276,766
-----------------------------------------------
Income before income taxes 4,434,300 1,828,112 2,042,054
Income taxes 1 and 15 1,929,477 675,227 836,092
-----------------------------------------------
Net income $ 2,504,823 $ 1,152,885 $ 1,205,962
===============================================
Net income per common share and
common stock equivalents 1 $ 1.50 $ 0.64 $ 0.59
===============================================
Weighted average number of common shares and
common stock equivalents outstanding 1 1,670,300 1,790,900 2,039,500
===============================================
</TABLE>
See notes to consolidated financial statements.
fifty years of dedication to our community 17
- --------------------------------------------------------------------------------
<PAGE>
Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,504,823 $ 1,152,885 $ 1,205,962
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 300,589 298,613 302,168
Amortization of premiums and accretion of
discounts on investment securities, net (201,544) (91,107) 2,122
Amortization of premiums and accretion of
discounts on mortgage-backed securities, net 34,159 19,268 (44,020)
Accretion of deferred loan fees and discounts (110,837) (84,132) (39,114)
Amortization of intangible assets 17,045 18,489 8,500
(Gain) on sale of investment securities available for sale (29,387) (51,029) --
Loss on sale of real estate owned 5,542 33,583 24,667
Write-down on investment securities available for sale -- 14,940 8,964
Provision for loan losses 426,600 542,920 341,530
Deferred income taxes 255,206 (1,088,167) (376,195)
(Increase) in accrued interest receivable (459,608) (213,950) (913,785)
(Increase) decrease in refundable income taxes (181,613) (13,693) 123,292
Decrease (increase) in other assets 25,222 160,736 (177,832)
Cost of ESOP and RRP 415,189 353,827 281,583
(Decrease) increase in other liabilities (939,048) 1,679,142 877,521
------------------------------------------------
Net cash provided by operating activities 2,062,338 2,732,325 1,625,363
------------------------------------------------
Cash flows from investing activities:
Purchases of investment securities available for sale (4,939,672) (8,596,719) --
Purchases of investment securities held to maturity (35,090,000) (48,040,000) (28,413,729)
Proceeds from maturities of investment securities held to maturity 17,000,000 33,930,000 6,000,000
Proceeds from sale of investment securities available for sale 7,890,781 7,028,594 --
Purchases of mortgage-backed securities available for sale (5,046,498) (5,068,148) --
Purchases of mortgage-backed securities held to maturity -- -- (19,294,195)
Proceeds from principal repayments on mortgage-backed
securities available for sale 832,014 61,971 --
Proceeds from principal repayments on mortgage-backed
securities held to maturity 11,278,745 12,152,454 7,168,724
Loan originations, net of repayments (7,021,993) (16,486,091) (18,521,635)
Purchases of loans (6,682,351) (14,326,221) (9,019,089)
Proceeds from sale of and insurance recoveries on real estate owned 311,862 289,116 705,959
Capitalized expenses on real estate owned -- (8,637) (20,427)
Net (increase) decrease in investments in real estate (61,895) 217,450 (742,549)
Additions to premises and equipment (198,300) (1,138,187) (645,783)
(Purchase) of Federal Home Loan Bank of New York stock (169,200) (252,800) (155,100)
Net cash received on acquisition of branch -- -- 14,638,010
------------------------------------------------
Net cash (used in) investing activities (21,896,507) (40,237,218) (48,299,814)
------------------------------------------------
</TABLE>
See notes to consolidated financial statements. (Continued)
18
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 10,510,516 $ 16,392,178 $ 31,496,186
Increase (decrease) in advance payments
by borrowers for taxes and insurance 204,860 108,956 (340,661)
Advances from Federal Home Loan Bank of New York -- 9,200,000 --
Repayments of Federal Home Loan Bank of New York advances (1,200,000) -- --
Net change in short-term borrowings from
Federal Home Loan Bank of New York (525,000) (4,850,000) 5,375,000
Proceeds from securities sold under agreement to repurchase 25,000,000 14,046,000 7,126,250
Repurchase of securities sold under agreements to repurchase (14,046,000) (7,126,250) --
Net increase in treasury tax account borrowings 10,119,030 9,880,970 --
Additional conversion expenses -- -- (43,099)
Dividends paid (611,548) (478,742) (292,550)
Acquisition of common stock by the RRP -- -- (681,331)
Treasury stock acquired (1,412,789) (2,522,444) (2,591,542)
Reissue of treasury stock for stock options 81,269 103,132 --
------------------------------------------------
Net cash provided by financing activities 28,120,338 34,753,800 40,048,253
------------------------------------------------
Net increase (decrease) in cash and cash equivalents 8,286,169 (2,751,093) (6,626,198)
Cash and cash equivalents--beginning 5,102,223 7,853,316 14,479,514
------------------------------------------------
Cash and cash equivalents--ending 13,388,392 5,102,223 7,853,316
================================================
Supplemental schedule of noncash investing and financing activities:
Loans transferred to real estate owned $ 506,911 $ 248,945 $ 681,725
================================================
Loans to facilitate sales of real estate owned $ 96,000 $ 148,000 $ --
Securities transferred to available for sale from held to maturity $ -- $ 1,989,839 $ --
Unrealized gain (loss) on securities available for sale $ 164,450 $ (871) $ --
Deferred income tax $ (72,358) 383 --
------------------------------------------------
$ 92,092 $ (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 for:
Federal, state and city income taxes, net of refunds $ 1,857,768 $ 1,777,958 $ 1,088,995
================================================
Interest $ 9,903,908 $ 8,676,430 $ 6,208,733
================================================
</TABLE>
See notes to consolidated financial statements.
fifty years of dedication to our community 19
- --------------------------------------------------------------------------------
<PAGE>
Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Retained Common Common gain (loss)
Additional Earnings- Stock Stock on 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, 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 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
Net income for the year ended
September 30, 1997 -- -- 2,504,823 -- -- -- -- 2,504,823
ESOP shares committed
to be released -- 117,067 -- 161,856 -- -- -- 278,923
Amortization of cost of common
stock acquired by the RRP -- -- -- -- 136,266 -- -- 136,266
Purchase of 89,531 shares
of treasury stock -- -- -- -- -- (1,412,789) -- (1,412,789)
Reissue of 8,609 shares of
treasury stock
for stock options -- (29,167) -- -- -- 110,436 -- 81,269
Dividends paid -- -- (611,548) -- -- -- -- (611,548)
Unrealized gain on securities
available for sale -- -- -- -- -- -- 92,092 92,092
---------------------------------------------------------------------------------------------
Balance--September 30, 1997 $21,850 $20,239,758 $14,111,882 $(1,011,566) $(317,955)$(6,279,339) $91,604 $26,856,234
=============================================================================================
</TABLE>
See notes to consolidated financial statements.
20
- --------------------------------------------------------------------------------
<PAGE>
Financial Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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, 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
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 are classified as available for sale securities and
reported at fair value, with unrealized holding gains or losses, net of
applicable deferred income taxes, reported in a separate component of
stockholders' equity.
As permitted by the Financial Accounting Standards Board's ("FASB") "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 portfolio to the 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.
(d) Loans receivable
Loans receivable are 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 the
loan portfolio and changes in the nature and volume of loan activities, along
with general economic and real estate market conditions. The Bank utilizes a
two-tier approach: (1) identification of impaired 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 impaired 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.
fifty years of dedication to our community 21
- --------------------------------------------------------------------------------
<PAGE>
Financial Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
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, with no material adverse effect on
the Company's financial statements, Statement of Financial Accounting Standards
("SFAS") 114, "Accounting by Creditors for Impairment of a Loan" and SFAS 118,
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures". 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.
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.
(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
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 such initially recorded amount 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 economic conditions and the current softness in
certain geographic real estate markets.
(h) Investments in real estate
Investments in real estate consist of investments in non-consolidated joint
ventures and property held by a subsidiary and 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
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 two 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.
22
- --------------------------------------------------------------------------------
<PAGE>
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 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. 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.
(l) Accounting for stock based compensation
The Bank adopted, effective October 1, 1996, SFAS 123, "Accounting for
Stock-Based Compensation". SFAS 123 established a fair value-based method of
accounting for stock-based compensation arrangements with employees, rather than
the intrinsic value-based method that is contained in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25").
SFAS 123 does not require an entity to adopt the new fair value-based method for
purposes of preparing its basic financial statements, but permits each entity to
elect the new method or to continue to use the APB 25 method. The Company has
chosen to continue to use the APB 25 method which, under SFAS 123, requires
presentation in the notes to the financial statements of pro forma net income
and earnings per share information as if the fair value-based method had been
adopted.
The disclosure requirements are effective for financial statements for fiscal
years beginning after December 15, 1995; however, the pro forma disclosures are
required to include the effects of all awards granted in fiscal years that begin
after December 15, 1994, which for the Company includes any awards granted after
September 30, 1995.
(m) 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 calculations, if dilutive, using the treasury stock method.
(n) Interest rate risk
The Bank is principally engaged in the business of attracting deposits from the
general public and using these deposits, along with borrowings and other funds,
to make loans secured by real estate and to purchase mortgage-backed and
investment securities. The potential for interest-rate risk exists as a result
of the generally shorter duration of the Bank's interest-sensitive liabilities
compared to the generally longer duration of its interest-sensitive assets. In a
rising interest rate environment, liabilities will reprice faster than assets,
thereby reducing the market value of long-term assets and net interest income.
For this reason, management regularly monitors the maturity structure of the
Bank's interest-earning assets and interest-bearing liabilities in order to
measure its level of interest-rate risk and to plan for future volatility.
(o) Fair value of financial instruments
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Cash and cash equivalents and accrued interest receivable: The carrying
amounts reported in the consolidated financial statements for cash and cash
equivalents and accrued interest receivable approximate their fair values.
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 receivable is determined by
reference to market prices for similar loans with the 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, and Treasury tax account borrowings: The fair values
of these instruments are estimated using rates currently available to the Bank
for borrowings with similar terms and remaining maturities.
Commitments to extend credit: The fair value of commitments is estimated
using 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.
(p) Impact of new accounting standards
In September 1996, the FASB issued SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". This
Statement
fifty years of dedication to our community 23
- --------------------------------------------------------------------------------
<PAGE>
Financial Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a 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, as amended by SFAS 127, is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, or, in the case of repurchase agreements and
similar transactions, after December 31, 1997, and should be applied
prospectively. SFAS 125 was adopted effective January 1, 1997 and such adoption
did not have a material adverse effect on the Company's consolidated financial
condition or results of operations.
In February 1997, the FASB issued SFAS 128, "Earnings Per Share". SFAS 128
specifies the computation, presentation and disclosure requirements for earnings
per share ("EPS") for entities with publicly held common stock or potential
common stock. This statement simplifies the standard for computing EPS
previously found in Accounting Principles Board Opinion No. 15. It replaces the
presentation of primary EPS with basic EPS and the presentation of fully diluted
EPS with diluted EPS. Basic EPS is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. SFAS 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods, and requires the restatement
of all prior-period EPS data presented. Management does not believe the adoption
of SFAS 128 will have a material impact on its financial condition or results of
operations.
In February 1997, the FASB issued SFAS 129, "Disclosure of Information about
Capital Structure", which establishes standards for disclosure about a company's
capital structure. SFAS 129 requires companies to provide in the financial
statements a complete description of all aspects of their capital structures,
including call and put features, redemption requirements and conversion options.
The disclosures required by SFAS 129 are effective for financial statements for
periods ending after December 15, 1997. All the requirements of SFAS 129 are
disclosure related and its implementation will have no impact on the company's
financial condition or result of operations.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income". SFAS
130 requires that all items that are components of "comprehensive income" be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income is defined as the "change in
equity [net assets] of a business enterprise during a period from transactions
and other events and circumstances from nonowner sources. It includes all
changes in equity during a period except those resulting from investments by
owners and distributions to owners". Companies will be required to (a) classify
items of other comprehensive income by their nature in the financial statements
and (b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997 and requires reclassification of prior periods
presented. As the requirements of SFAS 130 are disclosure-related, its
implementation will have no impact on the Company's financial condition or
results of operations.
In June 1997, the FASB issued SFAS 131, "Disclosure about Segments of an
Enterprise and Related Information". SFAS 131 requires that enterprises report
certain financial and descriptive information about operating segments in
complete sets of financial statements of the company and in condensed financial
statements of interim period issued to shareholders. It also requires that a
company report certain information about their products and services, geographic
areas in which they operate and their major customers. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997 and requires interim periods
to be presented in the second year of application. As the requirements of SFAS
131 are disclosure-related, its implementation will have no impact on the
Company's financial condition or results of operations.
(q) Reclassification
Certain amounts for the years ended September 30, 1996 and 1995 have been
reclassified to conform to the current period's presentation.
2. Liquidation Account and Stock Repurchases
At the time of conversion to the stock form of organization, the Bank
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
24
- --------------------------------------------------------------------------------
<PAGE>
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, 1997 and 1996 was $2,391,000 and $3,143,000, respectively. The
Bank shall not declare or pay any dividend on or repurchase any of its capital
stock if the effect thereof would be to 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 years ended September 30, 1997, 1996 and 1995, the Company
repurchased, in the open market, 89,531, 192,266 and 213,037 shares,
respectively, of common stock at an aggregate cost of $1,412,789, $2,522,444 and
$2,591,542, respectively. These repurchases are reflected as treasury stock in
the consolidated statements of financial condition. On August 20, 1997, the
company approved a plan to repurchase, during the next two years, an additional
170,970 shares of common stock through 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, 1997 and 1996, the average balances of securities purchased
under agreements to resell totalled $15,200 and $133,000, respectively, and the
maximum amount outstanding at any month end was $2,000,000 and $5,240,000,
respectively. The average interest rate for 1997 and 1996 was 5.85% and 5.89%,
respectively.
4. Investment Securities
<TABLE>
<CAPTION>
September 30, 1997
- ---------------------------------------------------------------------------------------------------------------------------
Gross Unrealized
Amortized ---------------------- Estimated
Cost Gains Losses Fair Value
---------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
Corporate stocks $ 701,000 $29,750 $ -- $ 730,750
=========================================================
Held to Maturity
U.S. Government (including agencies):
After one through five years $22,090,000 $65,521 $ 300 22,155,221
After five through ten years 26,975,436 -- 45,156 26,930,280
After ten years 20,344,667 505 207,992 20,137,180
---------------------------------------------------------
$69,410,103 $66,026 $ 253,448 $69,222,681
=========================================================
<CAPTION>
September 30, 1996
- ---------------------------------------------------------------------------------------------------------------------------
Gross Unrealized
Amortized ---------------------- Estimated
Cost Gains Losses Fair Value
---------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
U.S. Government obligations
maturing after one through five years $ 2,919,153 $ -- $ 11,028 $ 2,908,125
Corporate stocks $ 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
=========================================================
</TABLE>
There were no sales of investment securities held to maturity during the years
ended September 30, 1997, 1996, and 1995. Proceeds from sales of investment
securities available for sale during the years ended September 30, 1997 and 1996
were $7,089,781 and $7,028,394, respectively. Gross gains of $29,387 and $51,029
were realized on these sales. There were no sales of investment securities
available for sale during the year ended September 30, 1995. Provision for
losses of $14,960 and $8,964, representing permanent impairment in the value of
common stock, were charged to operations during the years ended September 30,
1996 and 1995, respectively. At September 30, 1997, approximately $61,700,000 of
investment securities are callable within one year and at periodic intervals
thereafter.
fifty years of dedication to our community 25
- --------------------------------------------------------------------------------
<PAGE>
Financial Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
5. Mortgage-Backed Securities
<TABLE>
<CAPTION>
September 30, 1997
- ---------------------------------------------------------------------------------------------------------------------------
Principal Unamortized Unearned Amortized
Balance Premiums Discounts Cost
---------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
Federal Home Loan Mortgage Corporation $ 4,406,263 $ 15,835 $ -- $ 4,422,098
Federal National Mortgage Association 4,787,656 13,465 -- 4,801,121
---------------------------------------------------------
$ 9,193,919 $ 29,300 $ -- $ 9,223,219
=========================================================
Held to Maturity
Government National Mortgage Association $23,122,551 $257,872 $ 45,262 $23,335,161
Federal Home Loan Mortgage Corporation 11,310,317 16,524 28,298 11,298,543
Federal National Mortgage Association 1,973,407 14,530 -- 1,987,937
Other pass-through 1,906,558 -- 7,149 1,899,409
---------------------------------------------------------
$38,312,833 $288,926 $ 80,709 $38,521,050
===========================================================================================================================
<CAPTION>
September 30, 1996
- ---------------------------------------------------------------------------------------------------------------------------
Principal Unamortized Unearned Amortized
Balance Premiums Discounts Cost
---------------------------------------------------------
<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, 1997
- ---------------------------------------------------------------------------------------------------------------------------
Gross Unrealized
Amortized ---------------------- Estimated
Cost Gains Losses Fair Value
---------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
Federal Home Loan Mortgage Corporation $ 4,422,098 $ 87,448 $ -- $ 4,509,546
Federal National Mortgage Association 4,801,121 46,381 -- 4,847,502
---------------------------------------------------------
$ 9,223,219 $133,829 $ -- $ 9,357,048
===========================================================================================================================
Held to maturity
Government National Mortgage Association $23,335,161 $463,125 $ 47,080 $23,751,206
Federal Home Loan Mortgage Corporation 11,298,543 252,820 71,109 11,480,254
Federal National Mortgage Association 1,987,937 14,767 4,986 1,997,718
Other pass-through 1,899,409 -- -- 1,899,409
---------------------------------------------------------
$38,521,050 $730,712 $123,175 $39,128,587
===========================================================================================================================
</TABLE>
26
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
September 30, 1996
- ---------------------------------------------------------------------------------------------------------------------------
Gross Unrealized
Amortized ---------------------- Estimated
Cost 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
===========================================================================================================================
</TABLE>
The scheduled maturities of all mortgage-backed securities as of September 30,
1997 follows (in thousands):
Amortized Estimated
Cost Fair Value
- --------------------------------------------------------------------------------
Within five years $ 2,090 $ 2,104
After five through ten years 4,640 4,742
After ten years 41,014 41,640
---------------------
$47,744 $48,486
=====================
There were no sales of mortgage-backed securities available for sale or held to
maturity during the years ended September 30, 1997, 1996 and 1995.
6. Loans Receivable
September 30,
- --------------------------------------------------------------------------------
1997 1996
-------------------------------
Real estate mortgages:
One-to-four family $126,440,274 $116,131,721
Equity and
second mortgages 2,637,065 2,779,860
Multi-family 11,778,942 8,231,136
Commercial 13,216,661 12,060,790
-------------------------------
154,072,942 139,203,507
-------------------------------
Construction 574,500 4,919,747
-------------------------------
Consumer:
Passbook or certificate 176,307 171,055
Home improvement 3,785 6,844
Guaranteed student loans 213,701 201,789
Personal 23,637 21,468
-------------------------------
417,430 401,156
-------------------------------
Commercial, including
lines of credit 76,567 167,910
-------------------------------
Total loans 155,141,439 144,692,320
-------------------------------
Less: Loans in process 200,860 2,508,812
Allowance for loan losses 1,405,404 1,573,338
Deferred loan fees
and discounts 243,347 296,012
-------------------------------
1,849,611 4,378,162
-------------------------------
$153,291,828 $140,314,158
===============================
At September 30, 1997, 1996 and 1995, loans serviced by the Bank for the benefit
of others totalled approximately $8,329,000, $10,067,000, and $11,877,000,
respectively.
An analysis of the allowance for loan losses follows:
Year Ended September 30,
- --------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------
Balance--beginning $ 1,573,338 $ 1,243,068 $ 1,119,542
Provision for
loan losses 426,600 542,920 341,530
Charge-offs (601,674) (212,650) (218,716)
Recoveries 7,140 -- 712
------------------------------------------------
Balance--ending $ 1,405,404 $ 1,573,338 $ 1,243,068
================================================
Non-accrual loans totalled approximately $4,324,000, $4,380,000 and $1,794,000
at September 30, 1997, 1996 and 1995, respectively. Interest income that would
have been recognized on loans for which the accrual of income has been
discontinued totalled approximately $411,000, $403,000 and $171,000 for the
years ended September 30, 1997, 1996 and 1995, respectively. Interest income on
these loans, which is recorded only when collected, amounted to approximately
$149,000, $160,000 and $24,000 for the years ended September 30, 1997, 1996 and
1995, respectively.
Impaired loans and related amounts recorded in the allowance for loan losses are
summarized as follows:
September 30,
- --------------------------------------------------------------------------------
1997 1996
-------------------------------
Recorded investment in impaired loans:
With recorded allowance $ 2,510,632 $ 922,426
Without recorded allowance -- --
-------------------------------
Total impaired loans 2,510,632 922,426
Related allowances
for loan losses 225,125 504,095
-------------------------------
Net impaired loans $ 2,285,507 $ 418,331
===============================
fifty years of dedication to our community 27
- --------------------------------------------------------------------------------
<PAGE>
Financial Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
For the years ended September 30, 1997 and 1996, interest income that would have
been recognized for these loans had they been performing in accordance with the
original terms approximated $206,000 and $78,000, respectively, and interest
income recognized when received was $79,000 and $31,000, respectively. The
average balance of impaired loans during the years ended September 30, 1997 and
1996 approximated $2,315,000 and $933,000, respectively.
The following is a summary of 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,
- --------------------------------------------------------------------------------
1997 1996
-------------------------------
Balance--beginning $ 395,523 $ 651,939
New loans 380,000 --
Repayments (5,955) (6,581)
Loans removed (90,796) 249,835
-------------------------------
Balance--ending $ 678,772 $ 395,523
===============================
7. Real Estate Owned
Real estate owned is summarized as follows:
September 30,
- --------------------------------------------------------------------------------
1997 1996
-------------------------------
Acquired by foreclosure $ 471,417 $ 377,910
===============================
The following is an analysis of loss from real estate owned:
Year Ended September 30,
- --------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------
Operational expenses,
net of rental income $ 10,281 $ 50,540 $ 52,223
Loss on sale 5,542 33,583 24,667
------------------------------------------------
Net loss $ 15,823 $ 84,123 $ 76,890
================================================
8. Investments in Real Estate
September 30,
- --------------------------------------------------------------------------------
1997 1996
-------------------------------
Held for rental operations $ 188,287 $ 184,987
Held for development 3,355,166 3,308,166
-------------------------------
$ 3,543,453 $ 3,493,153
===============================
The Bank's wholly owned subsidiary has entered into a joint venture agreement
with a builder/developer and a 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 a partnership agreement.
The following represents the combined statements of financial condition, loss
and partners' capital of the joint ventures:
Statements of Financial Condition
September 30,
- --------------------------------------------------------------------------------
Assets 1997 1996
-------------------------------
Cash $ 11,418 $ 19,738
-------------------------------
Investments 134,085 133,163
-------------------------------
Land and construction-
in-progress:
Land 7,210,900 7,210,900
Construction-in-progress 8,483,285 7,848,912
-------------------------------
15,694,185 15,059,812
Less allowances for
inventory valuation 3,774,000 3,645,000
-------------------------------
11,920,185 11,414,812
-------------------------------
Total assets $ 12,065,688 $ 11,567,713
===============================
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
-------------------------------
Total loans payable 2,513,868 2,513,868
Other liabilities 2,794,851 1,237,876
-------------------------------
Total liabilities 5,308,719 3,751,744
-------------------------------
Partners' capital
Bank subsidiary 2,223,926 2,176,926
Other partners 4,533,043 5,639,043
-------------------------------
Total partners'
capital 6,756,969 7,815,969
-------------------------------
Total liabilities
and partners'
capital $ 12,065,688 $ 11,567,713
===============================
28
- --------------------------------------------------------------------------------
<PAGE>
Statements of (Loss)
Year Ended September 30,
- --------------------------------------------------------------------------------
1997 1996 1995
---------------------------------------
Allowance for inventory valuation $ (129,000) $ (894,000) $(1,842,000)
---------------------------------------
Net (loss) $ (129,000) $ (894,000) $(1,842,000)
=======================================
Statements of Partners' Capital
Bank's
Partners' capital Subsidiaries Others Total
- --------------------------------------------------------------------------------
Balance October 1, 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
Capital contribution 90,000 180,000 270,000
(Loss) for year ended September 30, 1997 (43,000) (86,000) (129,000)
Distribution of capital -- (1,200,000) (1,200,000)
---------------------------------------
Balance September 30, 1997 $ 2,223,926 $ 4,533,043 $ 6,756,969
=======================================
9. Premises and Equipment
September 30,
- --------------------------------------------------------------------------------
1997 1996
-------------------------------
Land $ 220,000 $ 220,000
Buildings and improvements 2,161,668 2,174,114
Leasehold improvements 1,393,782 1,245,011
Furniture, fixtures
and equipment 845,167 904,034
-------------------------------
4,620,617 4,543,159
Less accumulated depreciation
and amortization 2,189,047 2,020,895
-------------------------------
$ 2,431,570 $ 2,522,264
===============================
10. Accrued Interest Receivable
September 30,
- --------------------------------------------------------------------------------
1997 1996
-------------------------------
Loans, net of allowance for
uncollected interest of
$603,000 and $473,000
at September 30, 1997 and
1996, respectively $ 693,958 $ 605,257
Mortgage-backed securities 314,088 382,225
Investment securities 1,240,532 801,142
Other interest-earning assets -- 346
-------------------------------
$ 2,248,578 $ 1,788,970
===============================
11. Deposits
<TABLE>
<CAPTION>
September 30,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
--------------------------------------------------------------------------------
Weighted Weighted
Average Average
Percent Amount Rate Percent Amount Rate
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand 4.72 $ 10,088,755 0.00% 3.52 $ 7,155,614 0.00%
Interest-bearing demand 7.22 15,399,555 2.17% 9.18 18,621,553 2.18%
Savings and club 34.73 74,109,004 2.20% 36.52 74,084,490 2.11%
Certificates of deposit 53.33 113,796,968 5.80% 50.78 103,022,109 5.85%
------------------------ ------------------------
Total deposits 100.00 $213,394,282 4.01% 100.00 $202,883,766 3.94%
======================== ========================
</TABLE>
fifty years of dedication to our community 29
- --------------------------------------------------------------------------------
<PAGE>
Financial Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
The following table presents certificates of deposit outstanding based upon
interest rate ranges:
September 30,
- --------------------------------------------------------------------------------
1997 1996
-------------------------------
(In Thousands)
Certificate accounts:
3.00% to 3.99% $ 45 $ 163
4.00% to 4.99% 12,148 24,776
5.00% to 5.99% 73,056 50,468
6.00% to 6.99% 12,333 10,685
7.00% to 7.99% 16,161 16,879
8.00% to 8.99% 54 51
-------------------------------
$ 113,797 $ 103,022
===============================
The scheduled maturities of certificates of deposit were as follows:
September 30,
- --------------------------------------------------------------------------------
1997 1996
-------------------------------
(In Thousands)
One year or less $ 73,200 $ 53,177
One to two years 14,609 23,168
Two to three years 14,128 5,929
Thereafter 11,860 20,748
-------------------------------
Total $ 113,797 $ 103,022
===============================
Certificates of deposit of $100,000 or more totalled approximately $11,516,000
and $7,860,000 at September 30, 1997 and 1996, respectively.
Interest expense on deposits consists of the following:
Year Ended September 30,
- --------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------
Demand $ 359,612 $ 439,309 $ 372,698
Savings and clubs 1,560,734 1,672,529 1,930,106
Certificates
of deposit 6,182,463 5,480,885 3,815,922
------------------------------------------------
$ 8,102,809 $ 7,592,723 $ 6,118,726
================================================
12. Advances from Federal Home Loan Bank of New York ("FHLB")
September 30,
- --------------------------------------------------------------------------------
Interest
Rate 1997 1996
------------------------------------------------
Overnight advances due:
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 2,000,000
December 28, 1998 5.670% 6,000,000 6,000,000
------------------------------------------------
$ 8,000,000 $ 9,725,000
================================================
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
$39,598,000 and $22,330,400 at September 30, 1997 and 1996, respectively.
Advances under this line of credit, which expires on December 22, 1997, are made
for one-day periods. The advances were secured by stock of the FHLB in the
amount of $1,845,000 and $1,675,800 at September 30, 1997 and 1996,
respectively, and mortgage loans with an unpaid balance of $34,254,000 and
$5,185,000 at September 30, 1997 and 1996, respectively.
13. Securities Sold Under Agreements to Repurchase
<TABLE>
<CAPTION>
September 30,
Interest -----------------------------
Lender Maturity Rate 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Federal Home Loan Bank December 18, 2001 5.291% 5,000,000 --
Federal Home Loan Bank May 30, 2002 5.813% 10,000,000 --
Security broker dealer August 19, 2002 5.62% 10,000,000 --
-----------------------------
$25,000,000 $14,046,000
=============================
</TABLE>
At September 30, 1997, securities sold under agreements to repurchase are all
callable or will reprice within two years and at periodic intervals thereafter.
30
- --------------------------------------------------------------------------------
<PAGE>
Information concerning borrowings collateralized by securities sold under
agreements to repurchase is summarized as follows:
Year Ended
September 30,
- --------------------------------------------------------------------------------
1997 1996
-------------------------------
(Dollars in Thousands)
Average balance during the year $ 12,010 $ 8,228
Average interest rate
during the year 5.53% 5.70%
Maximum month-end
balance during the year $ 25,000 $ 15,064
Investment securities underlying
the agreement at year end:
Carrying value $ 28,545 $ 15,150
Estimated fair value $ 28,427 $ 14,520
14. Treasury Tax and Loan Account Borrowings
At September 30, 1997 and 1996, the Bank had borrowings from the Federal Reserve
Bank of New York under the Treasury Tax and Depository program in the amount of
$20,000,000 and $9,880,970, respectively, at an interest rate of 5.408% and
5.20%, respectively, per annum payable on demand. These borrowings are secured
by investment securities with a carrying value of $22,225,000 and $10,972,000
and fair value of $21,151,000 and $10,570,000, respectively.
15. Income Taxes
The Bank qualifies as a Savings and Loan Association under the provisions of the
Internal Revenue Code and was therefore permitted, prior to October 1, 1996, 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 and 1995, 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 the federal income 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 the
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 will not have a
material adverse effect on the Company's consolidated statement of operations.
The New York State and New York City tax laws have been amended to prevent a
similar recapture of the Bank's bad debt reserve, and to permit continued future
use of the bad debt reserve methods, for purposes of determining New York State
and New York City tax liabilities.
Retained earnings at September 30, 1997 include approximately $3,127,000 related
to bad debt deductions for federal income tax purposes for which income taxes
have not been provided. If such amount is used for purposes other than 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,
- --------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------
Current tax expense:
Federal income $ 1,164,599 $ 1,186,475 $ 846,068
State and
city income 509,672 576,919 366,219
------------------------------------------------
1,674,271 1,763,394 1,212,287
------------------------------------------------
Deferred tax
expense (benefit):
Federal income 178,353 (609,709) (220,292)
State and
city income 76,853 (478,458) (155,903)
------------------------------------------------
255,206 (1,088,167) (376,195)
------------------------------------------------
$ 1,929,477 $ 675,227 $ 836,092
================================================
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,
- --------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------
Federal income
taxes $ 1,507,662 $ 621,558 $ 694,298
Increase (reduction)
of income taxes
resulting from:
New York state
and city
taxes, net of
federal income
tax effect 387,106 79,010 138,809
Cost of ESOP
and RRP (21,605) (14,835) --
Other 56,314 (10,506) 2,985
------------------------------------------------
$ 1,929,477 $ 675,227 $ 836,092
================================================
At September 30, 1997 and 1996, refundable income taxes of $217,953 and $36,340,
respectively, are included in other assets.
fifty years of dedication to our community 31
- --------------------------------------------------------------------------------
<PAGE>
Financial Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
The tax effects of existing temporary differences that give rise to significant
portions of the deferred income tax assets and deferred income tax liabilities
are as follows:
September 30,
- --------------------------------------------------------------------------------
1997 1996
-------------------------------
Deferred income tax assets
Uncollected interest $ 279,421 $ 219,699
Allowance for loss on loans
in excess of tax bad debt
deductions 470,815 352,744
Deferred loan fees 66,147 73,972
Accrued pension and benefits 126,280 93,084
Deferred compensation 186,796 --
Depreciation 131,594 131,650
ESOP and RRP cost 98,524 99,702
Special assessment of
Federal Insurance -- 517,452
Other -- 59,922
-------------------------------
1,359,577 1,548,225
-------------------------------
Deferred income tax liabilities
Deferred premiums and discounts 11,588 11,953
Deferred loss on investments
in real estate 116,693 117,046
Unrealized gain on securities
available for sale 71,975 --
State and city taxes 67,659 --
-------------------------------
267,915 128,999
-------------------------------
Net deferred income tax assets
included in other assets $ 1,091,662 $ 1,419,226
===============================
16. Regulatory Capital
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and the capital regulations of the Office of Thrift Supervision (the
"OTS") prescribe 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.
As of June 30, 1997, the most recent notification from the OTS, the Bank was
categorized as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum total, risk-based and Tier 1 leverage ratios of 10%, 6% and 5%,
respectively. There are no conditions existing or events which have occurred
since notification that management believes have changed the institution's
category.
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 $ 24,717 8.44 $ 24,717 8.44 $ 24,717 20.71
Less unrealized gain (92) (0.03) (92) (0.03) (92) (0.08)
Less goodwill and other intangibles (126) (0.04) (126) (0.04) (126) (0.11)
Less investment in "non-includable"
subsidiaries required to be deducted (3,355) (1.15) (3,355) (1.15) (3,355) (2.81)
Add general valuation allowance -- -- -- -- 1,180 1.00
-------------------------------------------------------------------------
Capital as calculated under FIRREA 21,144 7.22 21,144 7.22 22,324 18.71
Capital as required under FIRREA 4,395 1.50 8,790 3.00 9,548 8.00
-------------------------------------------------------------------------
Excess $ 16,749 5.72 $ 12,354 4.22 $ 12,776 10.71
=========================================================================
</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.
32
- --------------------------------------------------------------------------------
<PAGE>
The dividend payments to the Company by the Bank are subject to the
profitability of the Bank and applicable regulations. The Bank did not pay
dividends to the Company during the years ended September 30, 1997, 1996 and
1995. On October 30, 1997, the Bank paid a dividend of $1,881,000 to the
Company. Had this dividend been paid on September 30, 1997, the capital position
of the Bank would be as follows:
<TABLE>
<CAPTION>
Tangible Core Risk-Based
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
-----------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Actual $19,263 6.62 $19,263 6.62 $20,443 17.18
Required 4,367 1.50 8,734 3.00 9,517 8.00
-----------------------------------------------------------------------------------------
Excess $14,896 5.12 $10,529 3.62 $10,926 9.18
=========================================================================================
</TABLE>
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,
- --------------------------------------------------------------------------------
1997 1996
-------------------------------
Actuarial present value of
benefit obligation,
including vested benefits
of $2,170,928 and
$1,840,708, respectively $ 2,183,045 $ 1,903,127
===============================
Projected benefit obligation $ (2,634,154) $(2,299,516)
Plan assets at fair value 2,518,311 2,234,942
-------------------------------
Projected benefit obligation in
excess of plan assets (115,843) (64,574)
Unrecognized (gain) (423,050) (536,887)
Unrecognized net transition
obligation at October 1,
1988 being amortized
over fifteen years 170,625 197,925
Unrecognized prior service
cost at October 1, 1989
being amortized
over 11.1 years 111,212 145,598
Contributions made during
the three months
ended September 30 -- 57,290
-------------------------------
(Accrued) pension cost
included in other liabilities$ (257,056) $ (200,648)
===============================
Net periodic pension cost included the following components:
Year Ended September 30,
- --------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------
Service cost $ 88,225 $ 87,457 $ 74,246
Interest cost 173,867 169,729 210,445
Actual return on
plan assets (285,480) (217,332) (141,270)
Net amortization
and deferral 141,159 115,821 61,686
------------------------------------------------
Net periodic pension
cost included in
salaries and
employee benefits $ 117,771 $ 155,675 $ 205,107
================================================
Assumptions used in accounting for the plan are as follows:
Year Ended September 30,
- --------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------
Discount rate 7.75% 7.50% 8.25%
Rate of increase in
compensation 5.50% 5.50% 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 elective employer
contribution in addition to its matching contribution. Total savings incentive
plan expense for the years ended September 30, 1997, 1996 and 1995 was
approximately $14,000, $14,000 and $22,000, respectively.
fifty years of dedication to our community 33
- --------------------------------------------------------------------------------
<PAGE>
Financial Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
18. Stock Benefit Plans
Employee Stock Ownership Plan ("ESOP")
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, 1997 and 1996, the Bank made cash contributions of
$232,066 and $302,190, respectively, to the ESOP, of which $133,520 and
$190,184, respectively, were applied to the principal. 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, 1997 and 1996, the loan had an outstanding balance of $1,132,962
and $1,266,483, respectively.
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 1994.
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 are 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 $279,000, $218,000, and $191,000 for
the years ended September 30, 1997, 1996, and 1995, respectively.
The ESOP shares are summarized as follows:
September 30,
- --------------------------------------------------------------------------------
1997 1996
-------------------------------
Allocated shares 39,653 26,302
Shares committed to be released 12,140 9,306
Unreleased shares 101,157 117,342
-------------------------------
Total ESOP shares 152,950 152,950
===============================
Fair value of unreleased shares $ 2,276,033 $ 1,768,344
===============================
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.
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. During the year ended September 30, 1995,
54,407 shares were awarded to employees and officers and 3,500 shares were
awarded to outside directors. During the year ended September 30, 1996, 6,964
shares were awarded to employees and officers and 13,547 shares were forfeited.
During the year ended September 30, 1997, 1,089 shares were awarded to outside
directors, 19,429 shares were awarded to employees and officers and 6,292 shares
were forfeited.
The Company recorded compensation expense for the RRP of $136,266, $136,266 and
$90,844 for the years ended September 30, 1997, 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.
34
- --------------------------------------------------------------------------------
<PAGE>
All options granted will be exercisable in the event the optionee terminates
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 exercise.
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 a
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.
Activity for the stock option plans is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Option Option Exercise
ISO Plan Plan Price Per Share Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options reserved 152,970 65,550
===========================
Granted during year ended September 30, 1995 86,970 43,700 $9.44 $ 9.44
---------------------------
Balance at September 30, 1995 86,970 43,700 9.44 9.44
Exercised -- (10,925) 9.44 9.44
Canceled (19,534) -- 9.44 9.44
---------------------------
Balance at September 30, 1996 67,436 32,775 9.44 9.44
Granted 63,000 16,850 14.25 to 18.00 17.33
Exercised (8,609) -- 9.44 9.44
Canceled (10,096) -- 9.44 9.44
---------------------------
Balance at September 30, 1997 111,731 49,625 9.44 to 18.00 13.34
===========================
Shares exercisable at September 30, 1997 19,492 44,625 $9.44 to $18.00 $10.84
===========================
</TABLE>
Had compensation cost for the Company's stock benefit plans been determined,
consistent with SFAS 123 for awards made after September 30, 1995, the Company's
net income and net income per common share would have been reduced to the pro
forma amounts reflected below:
Year Ended
September 30,
- --------------------------------------------------------------------------------
1997 1996
-------------------------------
(Dollars in Thousands, except
for per share data)
Net income:
As reported $ 2,505 $ 1,152
Pro forma 2,489 1,152
Net income per common share:
As reported 1.50 .64
Pro forma 1.49 .64
The weighted average fair value at date of grant for options granted during the
year ended September 30, 1997 was $3.77 per option. The fair values of share
grants were estimated on the date of grant using the Black-Scholes
option-pricing model using the following weighted average assumptions: Dividend
yield 2.32%; expected volatility of 17.48%; risk free interest rate of 6.19%;
and expected option lives of 5.0 years.
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 being amortized on a
straight-line basis over a period of ten years. At September 30, 1997 and 1996,
the unamortized premium and other acquisition costs totalling $126,000 and
$143,000, respectively, are included in other assets. The amortization expense
for the years ended September 30, 1997, 1996 and 1995 were $17,000, $18,000 and
$9,000, respectively.
fifty years of dedication to our community 35
- --------------------------------------------------------------------------------
<PAGE>
Financial Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
20. Legislative Matter
On September 30, 1996, legislation was enacted which, among other things,
imposed a special one-time assessment on Savings Association Insurance Fund
("SAIF") member institutions, including the Bank, to recapitalize the SAIF and
spread the obligation for payment of Financial Corporation ("FICO") bonds across
all SAIF and Bank Insurance Fund ("BIF") members. The special assessment levied
amounted to 65.7 basis points on SAIF assessable deposits held as of March 31,
1995. The Bank took a charge of $1,115,198 as a result of the special assessment
during the year ended September 30, 1996. This legislation eliminated the
substantial disparity between the amount that BIF and SAIF members had been
paying for deposit insurance premiums.
Currently, the FDIC has estimated that, in addition to normal deposit insurance
premiums, BIF members will pay a portion of the FICO payment equal to 1.3 basis
points on BIF-insured deposits compared to 6.4 basis points by SAIF members on
SAIF-insured deposits. All institutions will pay a pro-rata share of the FICO
payment on the earlier of January 1, 2000 or the date upon which the last
savings association ceases to exist. The legislation also requires BIF and SAIF
to be merged by January 1, 1999, provided that legislation is adopted to
eliminate the savings association charter and no savings associations remain as
of the time.
The FDIC has lowered SAIF assessments to a range comparable to that of BIF
members. However, SAIF members will continue to make the higher FICO payments as
described above. Management cannot predict the precise level of FDIC insurance
assessments on an ongoing basis or whether BIF and SAIF will eventually be
merged.
21. 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 primarily 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,
- --------------------------------------------------------------------------------
1997 1996
-------------------------------
Conventional mortgages $ 8,565,000 $ 7,355,000
===============================
At September 30, 1997, of the $8,565,000 in outstanding commitments to originate
loans, $6,901,000 are at fixed rates ranging from 6.625% to 10.00% and
$1,664,000 are at adjustable rates with initial rates within ranging from 5.75%
to 7.875%.
Rentals under long-term operating leases for certain branch offices amounted to
approximately $178,000, $144,000 and $142,000 for the years ended September 30,
1997, 1996 and 1995, respectively. At September 30, 1997, 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 Minimum
September 30, Rent
- --------------------------------------------------------------------------------
1998 $187,000
1999 190,000
2000 139,000
2001 102,000
Thereafter 197,000
--------
$815,000
========
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 its 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>
22. Fair Values of Financial Instruments
The carrying amounts and fair values of the corporation's financial instruments
are as follows:
<TABLE>
<CAPTION>
September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
-----------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-----------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 13,388 $ 13,388 $ 5,102 $ 5,102
Investment securities, including available for sale 70,141 69,953 54,730 53,511
Mortgage-backed securities, including available for sale 47,878 48,486 54,853 54,917
Loans receivable 153,292 156,083 140,314 140,464
Accrued interest receivable 2,249 2,249 1,789 1,789
Financial liabilities
Deposits 213,394 214,103 202,884 203,510
Advances and other borrowings 53,000 51,452 33,652 33,486
Commitments
To originate loans 8,565 8,565 7,355 7,355
</TABLE>
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.
23. Parent Only Financial Information
Financial Bancorp, Inc. operates two wholly owned
subsidiaries, Financial Federal Savings Bank and 842 Manhattan Avenue Corp. 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, 1997 and 1996 and for the three-year
period ended September 30, 1997.
fifty years of dedication to our community 37
- --------------------------------------------------------------------------------
<PAGE>
Financial Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
Condensed Statements of Financial Condition
September 30,
- --------------------------------------------------------------------------------
Assets 1997 1996
-------------------------------
Cash and amounts due from depository institution $ 396,357 $ 6,475
Repurchase agreements -- 2,185,000
-------------------------------
Cash and cash equivalents 396,357 2,191,475
Accrued interest receivable 65,853 75,058
ESOP loan receivable 1,132,963 1,266,483
Investment in Financial Federal Savings Bank 24,717,432 21,659,540
Investment in 842 Manhattan Avenue Corp. 264,590 232,193
Other assets 319,595 401,809
-------------------------------
Total assets $ 26,896,790 $ 25,826,558
===============================
Liabilities and stockholders' equity
Other liabilities $ 40,556 $ 39,360
Stockholders' equity 26,856,234 25,787,198
-------------------------------
Total liabilities and stockholders' equity $ 26,896,790 $ 25,826,558
===============================
Statements of Income
<TABLE>
<CAPTION>
Year Ended September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 90,849 $ 112,031 $ 119,883
Equity in undistributed earning of the subsidiaries 2,583,008 1,211,457 1,262,813
------------------------------------------------------
2,673,857 1,323,488 1,382,696
Expenses 226,680 201,401 226,383
------------------------------------------------------
Income before income taxes 2,447,177 1,122,087 1,156,313
Income tax (benefit) (57,646) (30,798) (49,649)
------------------------------------------------------
Net income $ 2,504,823 $ 1,152,885 $ 1,205,962
======================================================
</TABLE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,504,823 $ 1,152,885 $ 1,205,962
Adjustments to reconcile net income to net cash used
in operating activities:
Equity in undistributed earnings of the subsidiaries (2,583,008) (1,211,457) (1,262,813)
Decrease (increase) in accrued interest receivable 9,205 11,126 (71,367)
Decrease (increase) in other assets 82,214 (315,105) (80,818)
Increase (decrease) in other liabilities 1,196 39,360 (5,932)
------------------------------------------------------
Net cash provided by (used in) operating activities 14,430 (323,191) (214,968)
Cash flows from investing activities:
Decrease in ESOP loan receivable 133,520 190,184 72,833
Capital contribution to 842 Manhattan Avenue Corp. -- (236,000) --
------------------------------------------------------
Net cash provided by (used in) investing activities 133,520 (45,816) 72,833
Cash flows from financing activities:
Acquisition of treasury stock (1,412,789) (2,522,444) (2,591,542)
Payment of dividends on common stock (611,548) (478,742) (292,550)
Payment of conversion expenses -- -- (43,099)
Treasury stock reissued for stock options 81,269 103,132 --
------------------------------------------------------
Net cash (used in) by financing activities (1,943,068) (2,898,054) (2,927,191)
Net (decrease) in cash and cash equivalents (1,795,118) (3,267,061) (3,069,326)
Cash and cash equivalents--beginning 2,191,475 5,458,536 8,527,862
------------------------------------------------------
Cash and cash equivalents--ending $ 396,357 $ 2,191,475 $ 5,458,536
======================================================
</TABLE>
38
- --------------------------------------------------------------------------------
<PAGE>
24. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
Year Ended September 30, 1997 Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income $4,912 $4,809 $5,070 $5,281
Interest expense 2,458 2,330 2,527 2,714
--------------------------------------------------
Net interest income 2,454 2,479 2,543 2,567
Provision for loan losses 100 96 111 120
Non-interest income 140 171 175 197
Non-interest expenses 1,384 1,659 1,446 1,376
Income taxes 517 315 500 597
--------------------------------------------------
Net income $ 593 $ 580 $ 661 $ 671
==================================================
Net income per common share and common stock equivalents $ 0.35 $ 0.35 $ 0.40 $ 0.40
==================================================
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Year Ended September 30, 1996 Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
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)
==================================================
</TABLE>
fifty years of dedication to our community 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, 1997 and
1996, 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, 1997. 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, 1997
and 1996, and the results of their operations and their cash flows for each of
the years in the three-period ended September 30, 1997, in conformity with
generally accepted accounting principles.
/s/Radics & Co. LLC
Pine Brook, New Jersey
November 17, 1997
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 S. Latawiec
Frank S. Latawiec
President and
Chief Executive Officer
/s/P. James O'Gorman
P. James O'Gorman
Executive Vice President and
Chief Financial Officer
40
- --------------------------------------------------------------------------------
<PAGE>
Financial Bancorp, Inc. and Subsidiaries
Corporate & Stockholder Information
- --------------------------------------------------------------------------------
Directors
Peter S. Russo, Chairman
Managing Partner, Trio Realty
Corp. and Quad Realty Corp.
Frank S. Latawiec
President and Chief Executive
Officer, Financial Federal Savings
Bank
Dominick L. Segrete
President, Tucci, Segrete & Rosen
Consultants Inc.
Richard J. Hickey, CPA
Partner, Girardi and Hickey
Raymond M. Calamari
Business Consultant
Executive Officers
Frank S. Latawiec
President and Chief Executive
Officer
P. James O'Gorman, CPA
Executive Vice President, Chief
Financial Officer and Treasurer
Robert E. Adamec
Senior Vice President, Corporate
Secretary
Valerie M. Swaya
Vice President, Chief
Administrative Officer
Vice Presidents
Steven D. Trow
Lending
Christine J. Santangelo
Business Development
Laura T. Mazzanti
Systems
Corporate Offices:
Financial Bancorp, Inc.
42-25 Queens Boulevard
Long Island City, New York 11104
(718) 729-5002
Annual Meeting
The annual meeting of stockholders will be held on Thursday, January 22, 1998 at
10:30am, at the La Guardia Marriot, 102-05 Ditmars Boulevard, East Elmhurst, New
York. A notice of the meeting, a proxy statement and a proxy form are included
with this mailing to stockholders of record on December 5, 1997.
Branch Directory
42-25 Queens Boulevard
Long Island City, New York 11104
(718) 729-5002
45-14 46th Street
Long Island City, New York 11104
(718) 729-4600
75-23 37th Avenue
Jackson Heights, New York 11372
(718) 779-4600
59-23 Main Street
Flushing, New York 11355
(718) 353-3911
814 Manhattan Avenue
Brooklyn, New York 11222
(718) 383-0561
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 1997 and 1996.
1997
- -----------------------------------------------------------------------
High Low
- -----------------------------------------------------------------------
First Quarter 15 1/4 14
Second Quarter 18 1/2 15
Third Quarter 18 1/4 14 7/8
Fourth Quarter 23 15/16 18 1/8
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
As of December 5, 1997, the Company had approximately 153 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 5, 1997, the
Company had 1,709,700 shares of common stock outstanding.
Stock Transfer Agent
Inquiries regarding stock transfer, registration, lost certificates or changes
in name and address should be directed to the stock transfer agent and registrar
by contacting:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
(800) 368-5948
Investor Relations
Stockholder and general inquiries regarding Financial Bancorp, Inc. should be
directed to:
Valerie M. Swaya, Vice President
Investor Relations
Financial Bancorp, Inc.
42-25 Queens Boulevard
Long Island City, New York 11104
(718) 729-5002
Annual Report on Form 10-K
A copy of the annual report on form 10-K for the fiscal year ended September 30,
1997, which has been filed with the Securities and Exchange Commission, is
available to stockholders (excluding exhibits) at no charge, upon written
request to:
Investor Relations Department
Financial Bancorp, Inc.
42-25 Queens Boulevard
Long Island City, New York 11104
Legal Counsel
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
Thomas & Graham
5 Dakota Drive
Lake Success, New York 11042
Auditor
Radics & Co., LLC
55 U.S. Highway 46
Pine Brook, New Jersey 07058
Designed by Curran & Connors, Inc.
- --------------------------------------------------------------------------------
<PAGE>
Corporate Offices:
Financial Bancorp, Inc.
42-25 Queens Boulevard
Long Island City, NY 11104
(718) 729-5002
[GRAPHIC OMITTED] Printed on recycled paper
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 17, 1997, included in the 1997 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, 1997.
/s/ Radics & Co.
-----------------------------
Radics & Co., LLC
December 23, 1997
Pine Brook, New Jersey
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted for the Form
10-K and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 2,738,392
<INT-BEARING-DEPOSITS> 203,305,000
<FED-FUNDS-SOLD> 10,650,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,087,798
<INVESTMENTS-CARRYING> 107,931,153
<INVESTMENTS-MARKET> 108,352,000
<LOANS> 153,291,828
<ALLOWANCE> 1,405,000
<TOTAL-ASSETS> 296,955,916
<DEPOSITS> 213,394,282
<SHORT-TERM> 22,000,000
<LIABILITIES-OTHER> 0
<LONG-TERM> 31,000,000
21,850
0
<COMMON> 0
<OTHER-SE> 26,834,000
<TOTAL-LIABILITIES-AND-EQUITY> 296,955,916
<INTEREST-LOAN> 12,170,938
<INTEREST-INVEST> 7,824,115
<INTEREST-OTHER> 76,821
<INTEREST-TOTAL> 20,071,871
<INTEREST-DEPOSIT> 8,102,809
<INTEREST-EXPENSE> 10,029,032
<INTEREST-INCOME-NET> 10,042,842
<LOAN-LOSSES> 426,600
<SECURITIES-GAINS> 29,387
<EXPENSE-OTHER> 5,865,406
<INCOME-PRETAX> 4,434,300
<INCOME-PRE-EXTRAORDINARY> 2,504,823
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,504,823
<EPS-PRIMARY> 1.50
<EPS-DILUTED> 1.50
<YIELD-ACTUAL> 7.73
<LOANS-NON> 2,164,000
<LOANS-PAST> 456,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,573,000
<CHARGE-OFFS> 602,000
<RECOVERIES> 7,000
<ALLOWANCE-CLOSE> 1,405,000
<ALLOWANCE-DOMESTIC> 1,405,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,180,000
</TABLE>
