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, 1998
Commission File No.: 0-18126
FINANCIAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1391814
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
42-25 Queens Boulevard, Long Island City, New York 11104
(Address of principal executive offices)
Registrant's telephone number, including area code: (718) 729-5002
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $0.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. _X_
The aggregate market value of the voting stock held by non-affiliates of
the registrant was $55,940,769, based upon the last sales price as quoted on the
Nasdaq National Market for December 11, 1998.
The number of shares outstanding of the registrant's Common Stock as of
December 11, 1998 was 1,708,632.
<PAGE>
INDEX
Part I
Page
Item 1. Business.......................................................... 3
Item 2. Properties........................................................ 30
Item 3. Legal Proceedings................................................. 30
Item 4. Submission of Matters to a Vote of Securities Holders............. 30
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...................................... 31
Item 6. Selected Financial Data........................................... 32
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 33
Item 7A. Quantitative and Qualitative Disclosure about Market Risk ........ 44
Item 8. Financial Statements and Supplementary Data....................... 45
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ................................ 88
Part III
Item 10. Directors and Executive Officers of the Registrant................ 88
Item 11. Executive Compensation............................................ 91
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 100
Item 13. Certain Relationships and Related Transactions.................... 100
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 101
Signatures.................................................................
<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 offices. 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.
Planned Merger
On July 18, 1998, the Company entered into an Agreement and Plan of Merger
with Dime Community Bancshares, Inc., a Delaware corporation ("Dime Community"),
pursuant to which the Company will be merged with and into Dime Community (the
"Merger"). The Merger is intended to constitute a tax-free reorganization for
federal income tax purposes. Immediately following the consummation of the
Merger, Financial Federal Savings Bank, a federal savings bank and a subsidiary
of Financial Bancorp, will merge with and into The Dime Community Savings Bank
of Williamsburgh, a federal savings bank and a wholly owned subsidiary of Dime
Community. On December 18, 1998, Financial Bancorp's stockholders approved the
Merger. The Merger is expected to be completed by the end of January 1999,
subject to the receipt by Dime Community of the approval of the Merger by the
Office of Thrift Supervision.
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.
3
<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,
1998, the Bank's total loans receivable equaled $198.1 million, of which $155.7
million, or 78.6%, were one- to four-family residential first mortgage loans. Of
the one- to four-family residential first mortgage loans outstanding at that
date, $59.0 million, or 37.9% were adjustable-rate mortgage ("ARM") loans. At
September 30, 1998, the Bank's loan portfolio also included $2.5 million of one-
to four-family residential second mortgage loans, $18.2 million of multi-family
loans, $20.2 million of commercial real estate loans, $925,000 of construction
loans and $542,000 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.
4
<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,
-------------------------------------------------------------------------
1998 1997 1996
----------------------- ----------------------- -----------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
----------- ---------- ----------- ---------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential one- to four-family:
First mortgages.................. $155,674 78.59% $126,440 81.50% $116,132 80.26%
Second mortgages................. 2,492 1.26 2,637 1.70 2,780 1.92
Multi-family....................... 18,207 9.19 11,779 7.59 8,231 5.69
Commercial......................... 20,240 10.22 13,217 8.52 12,061 8.34
Construction/land loans............ 925 0.47 575 0.37 4,920 3.40
-------- ------ -------- ------ -------- ------
Total real estate loans........ 197,538 99.73 154,648 99.68 144,124 99.61
Consumer/commercial business:
Consumer........................... 470 0.24 417 0.27 400 0.27
Commercial business................ 72 0.03 77 0.05 168 0.12
-------- ------ -------- ------ -------- ------
Total consumer/commercial
business loans................. 542 0.27 494 0.32 568 0.39
-------- ------ -------- ------ -------- ------
Total loans receivable......... 198,080 100.00% 155,142 100.00% 144,692 100.00%
====== ====== ======
Less:
Loans in process................. 336 201 2,509
Unearned discounts and net
deferred loan fees............. 60 244 296
Allowance for loan losses........ 1,657 1,405 1,573
-------- -------- --------
2,053 1,850 4,378
-------- -------- --------
Total loans receivable, net $196,027 $153,292 $140,314
======== ======== ========
Mortgage-backed securities:
GNMA ............................... $17,274 35.31% $ 23,335 48.73% $ 27,106 49.41%
FHLMC (1)........................... 17,993 36.78 15,808 33.02 23,015 41.96
FNMA (1) ........................... 12,011 24.55 6,835 14.28 2,697 4.92
Others.............................. 1,643 3.36 1,900 3.97 2,035 3.71
-------- ------ -------- ------ -------- ------
Total mortgage-backed securities (2) $48,921 100.00% $ 47,878 100.00% $ 54,853 100.00%
======== ====== ======== ====== ======== ======
<CAPTION>
At September 30,
-------------------------------------------------
1995 1994
----------------------- ------------------------
Percent Percent
Amount of Total Amount of Total
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Real estate loans:
Residential one- to four-family:
First mortgages.................. $93,361 82.55% $72,669 85.29%
Second mortgages................. 3,806 3.36 4,491 5.27
Multi-family....................... 4,296 3.80 3,213 3.77
Commercial......................... 8,031 7.10 2,940 3.45
Construction/land loans............ 3,080 2.72 1,455 1.71
-------- ------ ------- ------
Total real estate loans........ 112,574 99.53 84,768 99.49
Consumer/commercial business:
Consumer........................... 404 0.36 400 0.47
Commercial business................ 123 0.11 35 0.04
-------- ------ ------- ------
Total consumer/commercial
business loans................. 527 0.47 435 0.51
-------- ------ ------- ------
Total loans receivable......... 113,101 100.00% 85,203 100.00%
====== ======
Less:
Loans in process................. 1,485 352
Unearned discounts and net
deferred loan fees............. 311 226
Allowance for loan losses........ 1,243 1,120
-------- -------
3,039 1,698
-------- -------
Total loans receivable, net $110,062 $83,505
======== =======
Mortgage-backed securities:
GNMA ............................... $ 33,144 53.45% $26,749 53.67%
FHLMC (1)........................... 22,979 37.06 15,816 31.74
FNMA (1) ........................... 3,388 5.46 4,368 8.76
Others.............................. 2,497 4.03 2,906 5.83
-------- ------ ------- ------
Total mortgage-backed securities (2) $ 62,008 100.00% $49,839 100.00%
======== ====== ======= ======
</TABLE>
- ----------
(1) Includes $20.7 million, $9.4 million and $5.0 million in Mortgage-backed
securities available for sale as of September 30, 1998 and 1997,
respectively.
(2) Mortgage-backed securities are net of premiums and discounts.
5
<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, 1998. 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 $34.2 million and $20.7 million respectively, for the twelve
months ended September 30, 1998.
<TABLE>
<CAPTION>
Mortgage Loans, and Other Loans and Mortgage-Backed Securities
At September 30, 1998
---------------------------------------------------------------------------
Mortgage-
1 - 4 Multi- Commercial Commercial 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 .................. $ 36,531 $ 371 $ -- $ 925 $ 65 $ 51 $ 37,943 $ 15,918
After one year:
One to two years ............... 3,727 -- -- -- 60 21 3,808 10,073
Two to three years ............. 8,447 31 29 -- 150 -- 8,657 4,524
Three to four years ............ 1,282 439 26 -- 12 -- 1,759 7,230
Four to five years ............. 12,395 3,609 2,667 -- -- -- 18,671 1,518
After five years ............... 95,785 13,757 17,517 -- 183 -- 127,242 9,658
-------- -------- -------- -------- -------- -------- -------- --------
Total due or repricing
after one year ............. 121,636 17,836 20,239 -- 405 21 160,137 33,003
-------- -------- -------- -------- -------- -------- -------- --------
Total amounts due or
repricing, gross ................. $158,167 $ 18,207 $ 20,239 $ 925 $ 470 $ 72 $198,080 $ 48,921
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The following table sets forth at September 30, 1998, the dollar amount of
all loans and mortgage-backed securities due after September 30, 1999 and
indicates whether such loans and mortgage-backed securities have fixed or
adjustable interest rates.
Due After September 30, 1999
--------------------------------------------
Fixed Adjustable Total
----------- ------------- ------------
(In thousands)
Mortgage loans:
One- to four-family............ $ 97,929 $23,707 $121,636
Multi-family................... 14,268 3,568 17,836
Commercial real estate......... 17,237 3,002 20,239
Other loans...................... 240 186 426
-------- ------- --------
Total loans...................... $129,674 $30,463 $160,137
======== ======= ========
Mortgage-backed securities....... $ 12,323 $20,680 $ 33,003
======== ======= ========
6
<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.
<TABLE>
<CAPTION>
For the Years Ended September 30,
------------------------------------------------
1998 1997 1996
--------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
Loans receivable at beginning of period ......................... $ 155,141 $ 144,692 $ 113,101
Originations:
First mortgages ............................................ 37,872 18,894 21,241
Second mortgages ........................................... 617 403 342
Multi-family ............................................... 7,175 3,944 2,058
Commercial ................................................. 7,166 4,170 7,491
Construction/land .......................................... 650 130 2,870
Consumer loans ............................................. 427 229 212
Student loans .............................................. 37 35 54
Commercial business ........................................ 4 4 69
Loan purchases ............................................. 24,302 6,717 14,848
--------- --------- ---------
Total originations and purchases ......................... 78,250 34,526 49,185
--------- --------- ---------
Transfer of mortgage loans to foreclosed real estate ............ (913) (411) (100)
Loans charged-off ............................................... (149) (602) (213)
Repayments and sales ............................................ (34,249) (23,064) (17,281)
--------- --------- ---------
Total reductions ............................................. 35,311 (24,077) (17,594)
--------- --------- ---------
Total loans receivable at end of period ......................... $ 198,080 $ 155,141 $ 144,692
========= ========= =========
Mortgage-backed securities at beginning of period ............... $ 47,878 $ 54,853 $ 62,008
Purchases .................................................... 22,103 5,046 5,068
Repayments ................................................... (20,698) (12,111) (12,214)
Premium amortization ......................................... (115) (34) (19)
Unrealized gain (loss) ....................................... (247) 124 10
--------- --------- ---------
Mortgage-backed securities at end of period ..................... $ 48,921 $ 47,878 $ 54,853
========= ========= =========
</TABLE>
7
<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, 1998, first mortgage loans secured by residential one- to
four-family real estate totaled $155.7 million, or 78.6% of total real estate
loans at such date. Of the Bank's first mortgage loans secured by one- to four-
family residences, $59.0 million, or 37.9% 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, 1998,
the Bank had $37.8 million in one-to four-family purchased adjustable 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
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 2.75% 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, 1998, the Bank had $2.5 million, or
1.3% of total one- to four-family loans in equity and second mortgage loans,
including $882,000 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, 1998, the
Bank's total loan portfolio contained $18.2 million, or 9.2% of multi-family
loans, and $20.2 million, or 10.2% of commercial real estate loans. The
multi-family and commercial real estate
8
<PAGE>
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 credit history,
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%. In addition, there are prepayment penalties for
the life of these multi-family, and commercial real estate loans.
Construction Loans. The Bank originates loans, on a minimal 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, 1998, the
Bank's portfolio contained $925,000 of construction loans, or 0.5% of total
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
requires personal guarantees from the principals of the borrowing entity. Loan
proceeds are disbursed in stages as construction progresses and as inspections
warrant.
Mortgage-backed Securities. The Bank invests in a variety of
mortgage-backed securities, 96.6% of which were insured or guaranteed by the
FHLMC, GNMA or FNMA at September 30, 1998. The remaining 3.4% was invested in a
privately issued mortgage pass-through security. At September 30, 1998,
mortgage-backed securities totaled $48.9 million, or 15.4% of total assets,
$20.7 million of which are classified by the Bank as available for sale. Of the
$48.9 million in mortgage-backed securities, $36.3 million, or 74.3% were
adjustable-rate and will reprice within five years. During the year ended
September 30, 1998, the Bank purchased $22.1 million of mortgage-backed
securities and received prepayments and scheduled principal amortization of
$20.7 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, 1998, the Bank had 10 mortgage loans delinquent 90 days or
more totaling $1.6 million, of which $1.6 million are attributed to one- to
four-family mortgage loans. At September 30, 1998, the Bank's real estate owned
totaled $739,000, of which $419,000, comprised of 4 one-to-four family
properties. The balance of the Bank's real estate owned consisted of two
multi-family properties totalling $320,000.
9
<PAGE>
Delinquent and Non-Performing Loans. At September 30, 1998, 1997 and 1996,
delinquencies in the Bank's loan portfolio were as follows:
<TABLE>
<CAPTION>
At September 30, 1998 At September 30, 1997
------------------------------------------------- ---------------------------------------------
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 ................ 5 $517 10 $1,590 4 $419 16 $2,038
Second mortgages................ 1 42 -- -- 1 45 2 11
Multi-family residential ......... -- -- -- -- -- -- 2 350
Commercial real estate............ -- -- -- -- -- -- -- --
Consumer loans.................... -- -- 4 10 -- -- 4 32
Commercial Business............... -- -- -- -- -- -- -- --
--- ---- --- ------ --- ---- --- ------
Total loans.............. 6 $559 14 $1,600 5 $464 24 $2,431
=== ==== === ====== === ==== === ======
Delinquent loans and non-
performing loans to total loans... 0.28% 0.81% 0.30% 1.57%
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1996
-----------------------------------------------------------
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 $175 15 $1,486
Second mortgages....................... -- -- 1 200
Multi-family residential................. -- -- 2 350
Commercial real estate................... -- -- -- --
Consumer loans........................... -- -- 4 11
Commercial Business...................... -- -- 1 45
---- ---- --- ------
Total loans..................... 1 $175 23 $2,092
==== ==== === ======
Delinquent and non-performing
loans to total loans................... 0.12% 1.45%
</TABLE>
10
<PAGE>
The following table sets forth information regarding non-accrual mortgage
loans, loans delinquent 90 days or more and still accruing interest, investments
in real estate, real estate owned ("REO") and in-substance foreclosure loans.
The Bank continues to accrue interest on loans delinquent 90 days or more until
commencement of foreclosure proceedings or until recovery of interest is
considered by the Bank to be doubtful based on the value of the property and
other considerations. During the years ended September 30, 1998, 1997 and 1996,
the amounts of additional interest income that would have been recorded on
non-accrual loans, had they been current, totaled $117,000, $242,000 and
$207,000, respectively. The Bank collected interest income on such non-accrual
loans in the amounts of $40,000, $70,000 and $43,000 during the years ended
September 30, 1998, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual delinquent mortgage
loans .......................................... $1,590 $2,164 $1,911 $1,794 $1,624
Delinquent other loans ............................. 10 32 56 11 5
Mortgage loans delinquent 90 days
or more and accruing ........................... -- 424 125 137 30
------ ------ ------ ------ ------
Total non-performing loans ..................... 1,600 2,620 2,092 1,942 1,659
Investment in real estate (net
valuation allowance) ............................. 3,320 3,355 3,308 3,531 2,789
Real estate owned .................................. 739 471 378 591 620
------ ------ ------ ------ ------
Total non-performing assets ................... $5,659 $6,446 $5,778 $6,064 $5,068
====== ====== ====== ====== ======
Non-performing loans
to total loans ................................. 0.81% 1.69% 1.45% 1.72% 1.95%
Total non-performing assets
to total assets ................................ 1.78% 2.17% 2.17% 2.65% 2.95%
</TABLE>
The above table does not include participation loans serviced by TASCO and
its successor in the amount of $1.9 million and $2.2 million at September 30,
1998 and 1997, respectively. Interest income that could have been recognized
based on contractual terms amounts to $161,000 and $169,000 for the years ended
September 30, 1998 and 1997, respectively. Interest income recorded only when
collected amounted to approximately $108,000 and $79,000 during the years ended
September 30, 1998 and 1997, respectively.
Impaired loans and related amounts recorded in the allowance for loan
losses at September 30, 1998 and 1997 are summarized as follows in thousands:
September 30,
-----------------
1998 1997
------ ------
(In thousands)
Recorded investment in impaired loans:
With recorded allowance ............... $2,060 $2,511
Without recorded allowance ............ -- --
------ ------
Total impaired loans .................. 2,060 2,511
Related allowances for loan losses ............. 426 225
------ ------
Net impaired loans .................... $1,634 $2,286
====== ======
For the year ended September 30, 1998 and 1997, interest income that would
have been recognized for these loans had they been performing in accordance with
the original terms was approximately $170,000 and $206,000, respectively, and
interest income recognized when received was $108,000 and $79,000, respectively.
11
<PAGE>
The average balance of impaired loans during the years ended September 30,
1998 and 1997 approximated $2.2 million and $2.3 million, 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, 1998, classified assets totaled $6.5 million, or 2.0% of
total assets, of which $1,000 classified as "Doubtful" and the remaining
classified as "Substandard" consisted of 10 one- to four-family loans totaling
$1.6 million, TASCO participation loans totaling $794,000 and six foreclosed
real estate properties totaling $739,000 and $3.3 million in investment real
estate. Real estate owned and investment in real estate are carried at the lower
of cost or fair value less costs of disposal. Assets classified as "Doubtful"
include 1 consumer loan for $1,000. Assets designated as "Special Mention"
totaled $1.5 million, which consists primarily of one commercial loan for $1.2
million.
Allowances for Losses on Loans, Investments in Real Estate and Real Estate
Owned.
The Bank's allowance for loan losses is maintained at a level considered
adequate to absorb future loan losses. Management of the Bank, in determining
the allowance for loan losses, considers the risks inherent in its loan
portfolio and changes in the nature and volume of its loan activities, along
with the general economic and real estate market conditions. The Bank utilizes a
two tiered approach in determining its allowance: (1) identification of problem
loans and establishment of appropriate loss allowances on such loans; and (2)
establishment of general valuation allowances on the remainder of its loan
portfolio. The Bank maintains a loan review system which allows for a periodic
review of its loan portfolio and the early identification of potential problem
loans. Such system takes into consideration, among other things, delinquency
status, amount, type of collateral and financial condition of the borrower. Loan
loss allowances are established for identified loans based on a review of such
data and/or estimates of the fair value of the underlying collateral. General
loan loss allowances are based upon a combination of 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,
----------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Balance at beginning of period ....... $1,405 $1,573 $1,243 $1,120 $1,005
Charge-Offs:
One- to four-family ............. 65 39 -- 31 51
Multi-family .................... 114 -- 213 189 --
Commercial ...................... -- 504 -- -- --
Consumer and other loans ........ -- 59 -- -- 19
------ ------ ------ ------ ------
Total charge-offs .................... 179 602 213 220 70
Recoveries ........................... 30 7 -- 1 2
Provision for loan losses ............ 401 427 543 342 183
------ ------ ------ ------ ------
Balance at end of period ............. $1,657 $1,405 $1,573 $1,243 $1,120
====== ====== ====== ====== ======
Ratio of total charge-offs during the
period to average loans outstanding
during the period .................. 0.10% 0.41% 0.17% 0.23% 0.08%
Ratio of allowance for loan losses to
total loans at the end of the period 0.84% 0.91% 1.09% 1.10% 1.31%
Ratio of allowance for loan losses to
non-performing loans at the end of
the period ......................... 103.56% 53.63% 75.19% 63.97% 67.48%
</TABLE>
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,
-------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------- --------------------- -------------------- -------------------- -------------------
% of Loans % of Loans % of Loans % of Loans % of Loans
in each in each in each in each in each
category to category to category to category to category to
Amount total loans Amount total loans Amount total loans Amount total loans Amount total loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
Residential
one- to four-family $1,066 64.34% $1,040 83.20% $ 650 82.18% $ 305 85.91% $ 293 90.56%
Multi-family ... 198 11.95 121 7.59 53 5.69 218 3.80 278 3.77
Commercial ..... 375 22.63 231 8.52 757 8.34 686 7.10 529 3.45
Commercial
business loans .... 3 0.18 8 0.05 57 0.12 12 0.11 4 0.04
Construction/land . 12 0.72 2 0.37 53 3.40 17 2.72 9 1.71
Consumer .......... 3 0.18 3 0.27 3 0.27 5 0.36 7 0.4
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total
allowance for
loan losses . $1,657 100.00% $1,405 100.00% $1,573 100.00% $1,243 100.00% $1,120 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
13
<PAGE>
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, 1998, $36.0 million, or 11.3% of the Bank's total assets were
invested in investment securities with final maturities of five years or less.
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,
------------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- ---------------------
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 ....... $46,200 $46,595 $69,410 $69,223 $51,122 $49,903
------- ------- ------- ------- ------- -------
Total investment securities held to maturity . $46,200 $46,595 $69,410 $69,223 $51,122 $49,903
======= ======= ======= ======= ======= =======
Available for sale:
U.S. Treasury securities ..................... $ -- $ -- $ -- $ -- $ 2,908 $ 2,908
Corporate stocks ............................. 708 708 731 731 700 700
Corporate bonds .............................. 5,580 5,580 -- -- -- --
------- ------- ------- ------- ------- -------
Total investment securities available for sale $ 6,288 $ 6,288 $ 731 $ 731 $ 3,608 $ 3,608
======= ======= ======= ======= ======= =======
</TABLE>
14
<PAGE>
The following table sets forth the carrying values, market values and
average yields for the Bank's debt security portfolio by maturity at September
30, 1998.
<TABLE>
<CAPTION>
One to Five Years Five to Ten Years After Ten Years Total Investment Portfolio
-------------------------- -------------------------- -------------------------- --------------------------
Carrying Market Average Carrying Market Average Carrying Market Average Carrying Market Average
Value Value Yield Value Value Yield Value Value Yield Value Value Yield
-------- ----- ------- -------- ----- ------- -------- ----- ------- -------- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
agency securities . $35,995 $36,304 6.25% $ 7,237 $ 7,316 6.58% $ 2,968 $ 2,975 8.20% $46,200 $46,595 6.43%
Corporate bonds .... -- -- -- -- -- -- 5,853 5,580 6.31 5,853 5,580 6.31
======= ======= ==== ======= ======= ==== ======= ======= ---- ======= ======= ----
Total ........ $35,995 $36,304 6.25% $ 7,237 $ 7,316 6.58% $ 8,821 $ 8,555 6.94% $52,053 $52,175 6.42%
======= ======= ==== ======= ======= ==== ======= ======= ==== ======= ======= ====
</TABLE>
15
<PAGE>
Sources of Funds
General. The Bank's lending and investment activities are predominantly
funded by savings deposits, interest and principal payments on loans and other
investments, FHLB advances, other borrowings and proceeds from the maturities of
securities.
Deposits. The Bank offers a variety of deposit accounts having a wide range
of interest rates and terms. The Bank's deposits consist of savings and club
accounts, interest-bearing and non-interest-bearing demand deposit accounts,
money market deposit accounts and certificates of deposit. In addition to the
standard 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 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, 1998, Silver Certificates of Deposit represented $15.6 million, or
12.7% 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.
The following table presents the deposit activity of the Bank for the
periods indicated.
For the Years Ended September 30,
--------------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
Deposits ................................... $467,844 $313,206 $267,595
Withdrawals ................................ 462,073 310,797 258,815
-------- -------- --------
Net increase (decrease) before interest
credited ................................... 5,771 2,409 8,780
Interest credited .......................... 8,933 8,102 7,612
-------- -------- --------
Net increase (decrease) in deposits ........ $ 14,704 $ 10,511 $ 16,392
======== ======== ========
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, 1998.
(In thousands)
Maturity Period:
Three months or less ....................................... $ 2,229
Over three through six months .............................. 1,711
Over six through 12 months ................................. 2,736
Over 12 months ............................................. 7,446
-------
Total ................................................ $14,122
=======
16
<PAGE>
The following table sets forth the distribution of the Bank's deposit
accounts at September 30, 1998, 1997 and 1996 and the weighted average nominal
interest rates on each category of deposits presented at September 30, 1998,
1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- ---------------------------- ---------------------------
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 ........... 5.73% $ 13,065 0.00% 4.72% $ 10,089 0.00% 3.52% $ 7,156 0.00%
Interest-bearing demand ............... 6.98 15,914 1.87 7.22 15,399 2.17 9.18 18,622 2.18
Savings and club ...................... 33.43 76,267 2.13 34.73 74,109 2.20 36.52 74,084 2.11
Certificates of deposit ............... 53.86 122,850 5.61 53.33 113,797 5.80 50.78 103,022 5.85
------ -------- ------ -------- ------ --------
Total deposits ................... 100.00% $228,096 3.86% 100.00% $213,394 4.01% 100.00% $202,884 3.94%
====== ======== ====== ======== ====== ========
</TABLE>
The following table presents the amount of the Bank's certificates of
deposit outstanding, based upon weighted-average rate categories, at September
30, 1998, 1997 and 1996, based upon contractual periods to maturity, at
September 30, 1998.
<TABLE>
<CAPTION>
Period to Maturity from September 30, 1998 At September 30,
---------------------------------------------------------------- ------------------------------
One to Two to Three to Four to After
Less Than Two Three Four Five Five
One Year Years Years Years Years Years 1998 1997 1996
--------- -------- -------- -------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
3.00% to 3.99% ............. $ 3,391 $ -- $ -- $ -- $ -- $ -- $ 3,391 $ 45 $ 163
4.00% to 4.99% ............. 31,446 881 356 132 119 -- 32,934 12,148 24,776
5.00% to 5.99% ............. 42,349 10,555 2,979 347 1,705 172 58,107 73,056 50,468
6.00% to 6.99% ............. 3,095 2,100 2,022 3,509 747 15 11,488 12,333 10,685
7.00% to 7.99% ............. -- 11,102 5,768 -- -- -- 16,870 16,161 16,879
8.00% to 8.99% ............. -- -- 60 -- -- -- 60 54 51
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total .................. $ 80,281 $ 24,638 $ 11,185 $ 3,988 $ 2,571 $ 187 $122,850 $113,797 $103,022
======== ======== ======== ======== ======== ======== ======== ======== ========
</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 $29.7 million.
Advances under this line of credit, which expires on December 23, 1998, are made
for one-day periods. As of September 30, 1998, advances were secured by stock of
Federal Home Loan Bank in the amount of $2.1 million and mortgage loans with an
unpaid balance of $29.5 million. Information concerning advances from FHLB are
summarized as follows:
<TABLE>
<CAPTION>
September 30,
Interest -------------------------------------------------
Maturity Rate 1998 1997 1996
- ------------------------------------------ ------------- ------------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
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 6,000
------ ------ ------
$6,000 $8,000 $9,725
====== ====== ======
</TABLE>
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 1998 1997 1996
- ------------------------------------------ ------------- ------------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
December 1996 5.44% $ -- $ -- $14,046
December 2001 5.291% -- 5,000 --
May 2002 5.813% 10,000 10,000 --
August 2002 5.62% 10,000 10,000 --
November 2004 5.963% 5,000 -- --
December 2004 5.93% 7,000 -- --
June 2008 5.05% 10,000 -- --
------- ------- -------
$42,000 $25,000 $14,046
======= ======= =======
</TABLE>
At September 30, 1998, these borrowings are callable or will reprice within
one year and at periodic intervals thereafter except the borrowing maturing in
May 2002, which is callable every three months.
Information concerning borrowings collateralized by securities sold under
agreements to repurchase is summarized as follows:
18
<PAGE>
Year Ended September 30,
---------------------------------
1998 1997 1996
------- ------- -------
(In thousands)
Average balance during
the year .............................. $34,033 $12,010 $ 8,228
Average interest rate
during the year ....................... 5.79% 5.53% 5.70%
Maximum month end
balance during the year .............. 42,000 25,000 15,064
Investment securities underlying
the agreement at year end:
Carrying value ................. $45,961 $28,545 $15,120
Estimated market value ......... $45,844 $28,427 $14,520
Treasury Tax and Loan Account Borrowings
At September 30, 1998 and 1997, the Bank had borrowings from the Federal
Reserve Bank of New York under the Treasury Tax and Depository program in the
amount of $7.8 million and $20.0 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 $30.6 million and
$22.2 million and fair value of $30.8 million and $21.2 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, 1998, 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, 1998, 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. The subsidiary has a one-third interest in any
profits realized from the sale of the developed property. As of September 30,
1998, the Bank's investment of $3.3 million in AFT Associates has been
classified as substandard. Subsequent to
19
<PAGE>
receiving the required approvals necessary to develop the land, the joint
venture entered into an agreement to sell this parcel of land owned by AFT
Associates. On November 23, 1998, AFT Associates sold this parcel of land. The
sale of the joint venture's land will have a positive effect on both the Bank's
level of classified assets and interest-earning assets. In addition, pursuant to
the Merger Agreement, the Company will be permitted to pay a one time Special
Dividend of $1.00 per share to its stockholders, which was contingent on the
sale of this participation in the joint venture.
FS Agency Inc. This wholly-owned subsidiary of the Bank was formed in
August 1988 as a conduit to the Bank for commissions on the sale of tax deferred
annuities and life insurance. As of September 30, 1998, its total assets were
$33,000.
At September 30, 1998, the Bank's loans to and investments in one of its
wholly owned subsidiaries, FS Agency Inc., were not subject to the deduction
from capital in accordance with FIRREA. However, the Bank's other wholly owned
subsidiaries, FinFed Funding Ltd. and FinFed Development Corp. are, or have
been, engaged in real estate development activities that are not permitted for a
national bank, and thus are subject to the general rule requiring the Bank's
loans to and investments in the subsidiaries to be deducted from capital.
Personnel
As of September 30, 1998 the Bank had 54 full-time employees and 7
part-time employees.
REGULATION AND SUPERVISION
General
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its chartering agency, and the FDIC, as the deposit insurer. The
Bank is a member of the FHLB System and its deposit accounts are insured up to
applicable limits by the Savings Association Insurance Fund ("SAIF") managed by
the FDIC. The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other financial institutions. There are periodic examinations
by the OTS and the FDIC 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 policies, whether by the OTS, the
FDIC or through legislation, could have a material adverse impact on the
Company, the Bank and their operations. 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 OTS under the Home Owners' Loan Act, as
amended (the "HOLA"), and of the Securities and Exchange Commission ("SEC")
under the federal securities laws. 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 set forth in this document do not purport to be a complete
description of such statutes and regulations and their effects on the Bank.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by HOLA and, in certain respects, the Federal Deposit Insurance Act
("FDI Act") and the regulations issued to implement those statutes. These laws
and regulations delineate the nature and extent of the activities in which
federal associations may engage. In particular, many types of lending
authorities for federal associations, e.g., commercial, nonresidential real
property and consumer loans, are limited to a specified percentage of the
institution's capital assets.
20
<PAGE>
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limits on loans to one borrower. Unless an
exception applies, savings institutions may not make a loan or extend credit to
a single or related group of borrowers in excess of 15.0% of the Bank's
unimpaired capital and surplus. An additional amount may be lent, equal to 10.0%
of unimpaired capital and surplus, if such loan is secured by readily-marketable
collateral, which is defined to include certain financial instruments and
bullion, but does not include real estate. At September 30, 1998, limit on loans
to one borrower was $3.9 million. At September 30, 1998, the Bank's largest
aggregate outstanding balance of loans to one borrower was $2.7 million.
QTL Test. The HOLA requires savings institutions to meet a qualified thrift
lender ("QTL") test. Under the QTL test, a savings bank is required to either
qualify as a "domestic building and loan association" as defined in the Internal
Revenue Code of 1986 or maintain at least 65.0% of its "portfolio assets" (total
assets less (i) specified liquid assets up to 20.0% 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 and related
securities) on a monthly basis in 9 out of every 12 months.
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, 1998, the Bank maintained 85.6% of its portfolio assets in
qualified thrift investments and had more than 65% of its portfolio assets in
qualified thrift investments for each of the 12 months ending September 30,
1998. Therefore, the Bank met the QTL test. Recent legislation has expanded the
extent to which education loans, credit card loans and small business loans may
be considered "qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, 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 to 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) 75.0% of its net earnings 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. At September 30, 1998, the Bank was a
Tier 1 Bank.
Liquidity. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of certain
mutual funds and certain corporate debt securities and commercial paper) 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 may be changed from time to time by the OTS to any amount within the
range of 4.0% to 10.0% depending upon economic conditions and the savings flows
of member institutions, and is currently 4.0%. Monetary penalties may be imposed
for failure to meet these liquidity requirements. The Bank's liquidity ratio for
September 30, 1998 was 9.9% which exceeded the applicable requirements. The Bank
has never been subject to monetary penalties for failure to meet its liquidity
requirements.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessment, paid on a
semi-annual basis, is computed as a percentage upon the savings institution's
total assets, including consolidated subsidiaries, as reported in the bank's
latest quarterly thrift financial report.
Branching. The OTS regulations authorize federally chartered savings
associations to branch nationwide to the extent allowed by federal statute. This
permits federal savings and loan associations with interstate networks
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to diversify more easily their loan portfolios and lines of business
geographically. The OTS authority preempts any state law purporting to regulate
branching by federal savings institutions.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA rating
in its most recent examination.
Transactions with Related Parties. The Bank's authority to engage in
certain transactions with related parties or "affiliates" (i.e., any company
that controls or is under common control with an institution, including the
Company and any 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" (including extension of credit to, purchases of
assets from or the issuance of a guarantee, acceptance or letter of credit on
behalf of affiliate) with any individual affiliate to 10.0% of the capital and
surplus of the savings institution and also limits the aggregate amount of
transactions with all affiliates to 20.0% 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 loan,
asset sales or purchases, and any servicing, leases or other agreements) 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 nonaffiliated companies.
Notwithstanding Sections 23A and 23B, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies under Section 4 (c) of the Bank Holding Company Act
("BHC Act"). Further, no savings institution may purchase the securities of any
affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors and
principal shareholders (generally considered to be those owners controlling or
having the power to vote ten percent or more of any class of the Company's
stock) as well as entities controlled by such persons, are currently governed by
Sections 22(g) and 22(h) of the FRA, and the Federal Reserve Board's ("FRB")
Regulation O thereunder. Among other things, these regulations require such
loans to be made on terms substantially the same as those offered to
unaffiliated individuals and may not involve more than the normal risk of
repayment. Recent legislation created an exception for loans made pursuant to a
benefit or compensation program that is widely available to all employees of the
institution and does not give preference to insiders over other employees.
Regulation O also places individual and aggregate limits on the amount of loans
the Bank may make to insiders 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 the
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
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<PAGE>
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; asset quality; earnings; and compensation, fees and benefits. Most
recently, the agencies have issued safety and soundness standards for Year 2000
computer compliance. 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.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
standard, a 3.0% leverage ratio (or core capital ratio) and an 8.0% risk-based
capital standard. 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 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 as
principal that are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk weighted assets of 4.0% and 8.0%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight 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 1 (core)
capital are equivalent to those discussed earlier under the 3.0% leverage ratio
standard. 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 allowance for
loan and lease losses. Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
The OTS (and other federal banking agencies) has revised the risk-based
capital standards to ensure that such standards take account of interest rate
risk. The OTS regulations set forth the methodology for calculating an interest
rate risk component that would be incorporated into the OTS risk-based capital
regulations. A savings institutions with "above normal" interest rate risk
exposure must deduct from total capital a portion of its capital to cover such
interest rate risk 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 (except when the 3-month
Treasury bond equivalent yield falls below 4.0%, then the decrease will be equal
to one-half of that Treasury rate) divided by the estimated economic value of
the institution's assets, as calculated in accordance with guidelines set forth
by the OTS. A savings institution whose measured interest rate risk exposure
exceeds 2.0% must deduct an interest rate component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2.0%, multiplied by the estimated economic value of the
bank's assets. That dollar amount is deducted from an institution's total
capital in calculating compliance with its risk-based capital requirement. For
the present time, the OTS has deferred implementation of a capital deduction
based on the interest-rate risk component. If the Bank had been subject to an
interest-rate risk component as of September 30, 1998, the Bank would not have
been subject to any deduction from capital as a result of its interest rate risk
position.
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<PAGE>
At September 30, 1998, the Bank met each of its capital requirements. The
following table sets forth in terms of dollars and percentages the OTS tangible,
leverage and risk-based capital requirements, and the Bank's historical amounts
and percentages at September 30, 1998.
<TABLE>
<CAPTION>
At September 30, 1998
-----------------------------------------------------------------
Capital Required Actual Actual Excess Excess
Requirement Percent Capital Percent Capital Percent
----------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Tangible....................... $ 4,708 1.5% $22,746 7.25% $18,038 5.75%
Leverage....................... 12,554 4.0 22,746 7.25 10,192 3.25
Risk-based..................... 11,054 8.0 23,957 17.34 12,903 9.34
</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 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 on Deposit Accounts. The FDIC has established a risk-based
assessment system for insured depository institutions that takes into account
the risks attributable to different categories and concentrations of assets and
liabilities. Under the risk-based assessment system, the average assessment rate
paid by institutions insured under the SAIF was increased. Under the risk- based
assessment system, the FDIC assigns an institution to one of three capital
categories based on the institution's financial information as of the reporting
period ending seven months before the assessment period, consisting of (1) well
capitalized, (2) adequately capitalized or (3) undercapitalized. The FDIC also
assigns an institution to one of three supervisory subcategories within each
capital group. The supervisory subgroup to which an institution is assigned is
based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information that the FDIC determines to be
relevant to the institution's financial conditions and the risk posed to the
deposit insurance funds (which may include, if applicable, information provided
by the institution's state supervisor). An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned. Under
the risk-based assessment system, there are nine assessment risk classifications
(i.e., combinations of capital groups and supervisory subgroups) to which
different assessment rates are applied. As a result of the recapitalization of
the SAIF in 1996 after the enactment of the Deposit Funds Insurance Act of 1996,
the FDIC reduced the assessment rates for deposit insurance for SAIF-assessable
deposits for fiscal 1998 to a range of 0 to 27 basis points. The assessment rate
for the Company's SAIF-assessable deposits for fiscal 1998
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<PAGE>
was 0 basis points. In addition, SAIF-assessable deposits are also subject to
assessments for payments on the bonds issued in the late 1980s by the Financing
Corporation (the "FICO" bonds) to recapitalize the now defunct Federal Savings
and Loan Insurance Corporation. The Company's total expense in fiscal 1998 for
the assessment for deposit insurance and the FICO payments was $125,000, as
compared to $173,000 paid in fiscal 1997.
Thrift Rechartering Legislation. The Funds Act provides that the Bank
Insurance Fund (the "BIF") and SAIF will merge on January 1, 1999 if there are
no more savings associations as of that date. That legislation also required
that the Department of Treasury submit a report to Congress that makes
recommendations regarding a common financial institutions charter, including
whether the separate charters for thrifts and banks should be abolished. Various
proposals to eliminate the federal thrift charter, create a uniform financial
institutions charter and abolish the OTS have been introduced in Congress. The
bills would require federal savings institutions to convert to a national bank
or some type of state charter by a specified date under some bills, or they
would automatically become national banks. Under some proposals, converted
federal thrifts would generally be required to conform their activities to those
permitted for the charter selected and divestiture of nonconforming assets would
be required over a two year period, subject to two possible one year extensions.
State chartered thrifts would become subject to the same federal regulation as
applies to state commercial banks. A more recent bill passed by the House of
Representatives would not affect the federal thrift charter, but would subject
unitary savings and loan holding companies to the same activities restrictions
applicable to multiple savings and loan holding companies. Unitary holding
companies existing on or applied for by March 31, 1998 would be grandfathered.
The Bank is unable to predict whether such legislation would be enacted or the
extent to which the legislation would restrict or disrupt its operations.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in that FHLB in an amount at least equal to 1.0% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement with an investment in FHLB stock at September 30, 1998, of $2.1
million. FHLB advances must be secured by specified types of collateral and all
long-term advances may only be obtained for the purpose of providing funds for
residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended September 30, 1998, 1997 and
1996, dividends from the FHLB to the Bank amounted to $146,000, $115,000 and
$103,000, respectively. If dividends were reduced, or interest on future FHLB
advances increased, the Bank's net interest income would likely also be reduced.
Further, there can be no assurance that the impact of FDICIA and the FIRREA on
the FHLBs will not also cause a decrease in the value of the FHLB stock held by
the Bank.
Federal Reserve System
The FRB regulations require savings institutions to maintain
non-interest-earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). The FRB regulations generally require that
reserves be maintained against aggregate transaction accounts as follows: For
accounts aggregating $47.8 million or less (subject to adjustment by the FRB)
the reserve requirement is 3.0%; and for accounts greater than $47.8 million,
the reserve requirement is $1.48 million plus 10.0% (subject to adjustment by
the FRB between 8.0% and 14.0%) against that portion of total transaction
accounts in excess of $47.8 million. The first $4.7 million of otherwise
reservable balances (subject to adjustments by the FRB) are exempted from the
reserve requirements. The Bank is in compliance with the foregoing requirements.
The balances maintained to meet the reserve requirements imposed by the FRB may
be used to satisfy liquidity requirements imposed by the OTS.
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<PAGE>
Holding Company Regulation
The Company is a non-diversified unitary savings and loan holding company
within the meaning of the HOLA, as amended. As such, the Company has registered
with the OTS and is subject to OTS regulations, examinations, supervision and
reporting requirements. In addition, the OTS has enforcement authority over the
Company and its non-savings institution subsidiaries. Among other things, this
authority permits the OTS to restrict or prohibit activities that are determined
to be a serious risk to the holding company's subsidiary savings institution.
The Bank must notify the OTS 30 days before declaring any dividend to the
Company.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5.0%
of the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS; 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.
As a unitary savings and loan holding company (i.e., one that controls only
one thrift subsidiary), the Company generally will not be restricted under
existing banking laws as to the types of business activities in which it may
engage, provided that the Bank continues to be a QTL. See "Federal Savings
Institution Regulation - QTL Test" for a discussion of the QTL requirements.
Upon any non-supervisory acquisition by the Company of another savings
association or savings bank that meets the QTL test and is deemed to be a
savings institution by 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, subject to the prior
approval of the OTS, and certain other activities authorized by OTS regulation,
and no multiple savings and loan holding company may acquire more than 5.0% of
the stock of a company engaged in impermissible activities.
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.
Federal law generally provides that no "person," (defined to include a
company) acting directly or indirectly or through or in concert with one or more
other persons, may acquire "control," as that term is defined in OTS
regulations, of a federally-insured savings institution without giving at least
60 days written notice to the OTS and providing the OTS an opportunity to
disapprove of the proposed acquisition. Such acquisitions of control may be
disapproved if it is determined, among other things, that (i) the acquisition
would substantially lessen competition; (ii) the financial condition of the
acquiring person might jeopardize the financial stability of the savings
institution or prejudice the interests of its depositors; or (iii) the
competency, experience or integrity of the acquiring person or the proposed
management personnel indicates that it would not be in the interest of the
depositors or the public to permit the acquisition of control by such person.
This requirement would apply to acquisitions of the Company's stock.
Federal Securities Laws
The Company's Common Stock is registered with the SEC under the Exchange
Act of 1934, as amended (the "Exchange Act"). The Company and its officers and
directors are subject to periodic reporting, proxy solicitation regulations,
insider trading restrictions and other requirements under the Exchange Act.
26
<PAGE>
The registration under the Securities Act of 1933 (the "Securities Act") of
shares of the Common Stock issued in the Conversion or pursuant to the Company's
employee stock benefit plans does not cover the resale of such shares. Shares
purchased by an affiliate of the Company will be subject to the resale
restrictions of Rule 144 under the Securities Act. If the Company meets the
current public information requirements of Rule 144 under the Securities Act,
each affiliate of the Company who complies with the other conditions of Rule 144
(including those that require the affiliate's sale to be aggregated with those
of certain other persons) would be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month period, the
greater of (i) 1.0% of the outstanding shares of the Company or (ii) the average
weekly volume of trading in such shares during the preceding four calendar
weeks. Shares acquired from the Company that are deemed to be restricted under
the definition of that term in Rule 144, must be held for a period of at least
one year before they may be publicly resold. Provision may be made in the future
by the Company to permit affiliates to have their shares registered for sale
under the Securities Act under certain circumstances.
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 eight (8) years. For its 1998
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.
In August 1996, provisions repealing the current thrift bad debt rules were
passed by Congress as part of "The Small Business Job Protection Act of 1996."
The new rules eliminate the 8% of taxable income method for deducting additions
to the tax bad debt reserves for all thrifts for tax years beginning after
December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). The Bank has previously
recorded a deferred tax liability equal to the bad debt recapture and as such,
the new rules will have no effect on net income or federal income tax expense.
For taxable years beginning after September 30, 1998, the Bank's bad debt
deduction will be equal to net charge-offs. The new rules allow an institution
to suspend the bad debt reserve recapture for the 1996 and 1997 tax years if the
institution's lending activity for those years is equal to or greater than the
institution's average mortgage lending activity for the six taxable years
preceding 1996. For this purpose, only home purchase and home improvement loans
are included and the institution can elect to have the tax years with the
highest and lowest lending activity removed from the average calculation. If an
institution is permitted and elects to postpone the reserve recapture, it must
begin its six year recapture no later than the 1998 tax year. The unrecaptured
base year reserves will not be subject to recapture as long as the institution
continues to carry on the business of banking. In addition, the balance of the
pre-1988 bad debt reserves continues to be subject to provision of present law
referred to below that require recapture in the case of certain excess
distributions to shareholders.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to the Company that are considered as made (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for such
losses exceeds the amount that would have been allowed under the experience
method, or (ii) from the supplemental
27
<PAGE>
reserve for losses on loans ("Excess Distributions"), then an amount based on
the amount distributed 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, distributions in redemption of stock and
distributions in partial or complete liquidation. However, dividends paid out of
the Bank's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a distribution
from the Bank's bad debt reserve. Thus, any dividends to the Company that would
reduce amounts appropriated to the Bank's bad debt reserve and deducted for
federal income tax purposes would create a tax liability for the Bank. The
amount of additional taxable income created by an Excess Distribution is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. If the Bank makes a "non-dividend distribution,"
then approximately one and one-half times the amount so used would be includable
in gross income for federal income tax purposes, presumably taxed at a 34%
corporate income tax rate (exclusive of state and local taxes). The Bank does
not intend to pay dividends that would result in a recapture of any portion of
its bad debt reserve.
Corporate Alternative Minimum Tax ("AMT"). The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be offset by net operating loss carryovers of which the Bank currently has
none. AMTI is increased by an amount equal to 75% of the amount by which the
Bank's adjusted current earnings exceeds its AMTI (determined without regard to
this preference and prior to reduction for net operating losses). The Bank does
not expect to be subject to the AMT.
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank owns more than 20% of the stock of a
corporation distributing a dividend then 80% of any dividends received may be
deducted.
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.
28
<PAGE>
Impact of New Accounting Standards
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 130 is effective for fiscal years
beginning after December 15, 1997 and requires classification of prior periods
represented. As the requirement 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 operation.
In April 1998, the FASB issued SFAS 131, "Employers Disclosures About
Pensions and Other Post Retirement Benefits." SFAS 132 standardizes the
disclosure requirements for these plans and it requires additional information
about changes in the benefit obligations and fair value of plan assets. The
statement is effective for fiscal years beginning after December 15, 1997 and
information for previous periods presented for comparative purposes is required
to be restated. As the statement does not change measurement or recognition
standards for these plans and is only disclosure related, its implementation
will have no impact on the Company's financial condition or results of
operation.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which addresses the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and hedging activities. This Statement supersedes SFAS 80,
"Accounting for Futures Contracts," 105, "Disclosure of Information about
Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk," and 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments." It amends Statement 107,
"Disclosures about Fair Value of Financial Instruments" to include in Statement
107 the disclosure provisions about concentrations of credit risk from Statement
105. This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Management of the Bank is currently assessing the
impact of this Statement on the Bank's financial reporting process.
29
<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 1998
- -------------------------------------- ----------- -------------- ------------------- ------------------
(In thousands)
<S> <C> <C> <C> <C>
Main Office:
Long Island City
42-25 Queens Boulevard............. Owned 1962 -- $ 556
Branches:
Long Island City
45-14 46th Street.................. Leased 1976 2001 5
Jackson Heights
75-23 37th Avenue.................. Leased 1990 2005 164
Flushing
59-23 Main Street.................. Leased 1974 2013 191
Brooklyn
814 Manhattan Avenue............... Owned 1995 -- 1,025
------
Total $1,941
======
</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
A Special Meeting of Stockholders of the Company was held on December 18,
1998.
The Stockholders approved the merger with Dime Community Bancshares, Inc.,
with 1,153,206 (67.5%) shares cast in favor, 2,645 (.2%) shares cast against and
5,530 (.3%) shares abstaining.
30
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
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 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
---------------------------------- ------------------------------------
High Low Dividends High Low Dividends
-------- ------ --------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
First Quarter..... 25 3/4 22 1/4 0.10 First Quarter.... 15 1/4 14 0.075
Second Quarter.... 27 22 0.125 Second Quarter... 18 1/2 15 0.10
Third Quarter..... 32 1/4 24 3/4 0.125 Third Quarter.... 18 1/4 14 7/8 0.10
Fourth Quarter.... 37 5/8 30 1/4 0.125 Fourth Quarter... 23 15/16 18 1/8 0.10
</TABLE>
As of November 30, 1998, the Company had approximately 621 stockholders of
record. At December 11, 1998, the Company had 1,708,632 shares of common stock
outstanding.
31
<PAGE>
ITEM 6. SELECTED FINANCIAL 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,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Total assets ....................................... $318,611 $296,956 $266,763 $228,823 $171,642
Total loans receivable, net ........................ 196,027 153,292 140,314 110,062 83,505
Investments securities (1) ......................... 54,599 71,986 56,406 40,359 17,801
Mortgage-backed securities (2) ..................... 48,921 47,878 54,853 62,008 49,839
Deposits ........................................... 228,096 213,394 202,884 186,492 140,182
Borrowed Funds ..................................... 55,770 53,000 33,652 12,501 --
Stockholders' equity ............................... 29,175 26,856 25,787 27,179 29,300
<CAPTION>
For the Year Ended September 30,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income .................................... $ 21,965 $ 20,072 $ 17,823 $ 14,256 $ 10,490
Interest expense ................................... 11,790 10,029 8,691 6,286 4,000
-------- -------- -------- -------- --------
Net interest income ................................ 10,175 10,043 9,132 7,970 6,490
-------- -------- -------- -------- --------
Provision for loan losses .......................... 401 427 543 342 183
-------- -------- -------- -------- --------
Non-interest income:
Fees, service charges,
gain/(loss) on sales and
other income .................................. 1,015 655 490 309 355
Gain/(loss) from real estate
operations .................................... (58) 28 (313) (618) (300)
-------- -------- -------- -------- --------
Total non-interest income
(loss): ....................................... 957 683 177 (309) 55
-------- -------- -------- -------- --------
Non-interest expense:
Salaries and employee
benefits ...................................... 2,965 3,207 3,048 2,619 2,301
Occupancy and equipment ......................... 1,195 1,155 1,064 1,048 826
Advertising ..................................... 84 62 70 129 41
Loss (income) from real
estate owned .................................. 22 16 84 77 (12)
Federal insurance
premiums (3) .................................. 125 173 1,502 390 360
Miscellaneous ................................... 1,223 1,253 1,170 1,014 668
-------- -------- -------- -------- --------
Total non-interest expense ...................... 5,614 5,865 6,938 5,277 4,184
-------- -------- -------- -------- --------
Income before income taxes ......................... 5,117 4,434 1,828 2,042 2,178
Income tax expense ................................. 2,116 1,929 675 836 921
-------- -------- -------- -------- --------
Net income ......................................... $ 3,001 $ 2,505 $ 1,153 $ 1,206 $ 1,257
======== ======== ======== ======== ========
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
At or for the
Year Ended September 30,
-------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Stockholders' equity to assets at period end ................. 9.16% 9.04% 9.67% 11.88% 17.07%
Return on average assets ..................................... 0.92 0.92 0.47 0.60 0.79
Return on average equity ..................................... 10.69 9.57 4.31 4.18 9.76
Net interest rate spread ..................................... 2.95 3.43 3.48 3.70 4.12
Net interest margin .......................................... 3.45 3.87 3.91 4.18 4.29
Operating expenses to average assets (4)(5) .................. 1.81 2.05 2.20 2.57 2.63
Efficiency ratio(4)(5) ....................................... 50.61 52.31 56.01 62.81 61.29
Non-performing assets to total assets ........................ 1.78 2.17 2.17 2.65 2.95
Non-performing loans to total loans .......................... 0.81 1.69 1.45 1.72 1.95
Allowance for loan losses to total loans ..................... 0.84 0.91 1.09 1.10 1.31
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) Operating expenses represent total non-interest expenses excluding (income)
loss from real estate owned.
(5) 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.
ITEM 7. 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.
Planned Merger
On July 18, 1998, the Company entered into an Agreement and Plan of Merger
with Dime Community Bancshares, Inc., a Delaware corporation ("Dime
Bancshares"), pursuant to which the Company will be merged with and into Dime
Bancshares (the "Merger"). The Merger is intended to constitute a tax-free
reorganization for federal income tax purposes. Immediately following the
consummation of the Merger, Financial Federal Savings Bank, a federal savings
bank and a subsidiary of Financial Bancorp, will merge with and into The Dime
Community Savings Bank of Williamsburgh, ("Dime of Williamsburgh") a federal
savings bank and a wholly owned subsidiary of Dime Bancshares.
33
<PAGE>
Financial Condition
As of September 30, 1998, total assets were $318.6 million, which
represents a $21.6 million, or a 7.3%, increase from $297.0 million as of
September 30, 1997. Asset growth was funded by a combination of both the $14.7
million increase in the Bank's deposit base and the $2.8 million increase in
overall borrowings. During fiscal 1998, deposits increased by $14.7 million, or
6.9%, to $228.1 million as of September 30, 1998 from $213.4 million at
September 30, 1997. Securities sold under agreements to repurchase increased by
$17.0 million, to $42.0 million at September 30, 1998, from $25.0 million at
September 30, 1997. The treasury tax and loan account and other short-term
borrowings decreased by $12.2 million to $7.8 million at September 30, 1998,
from $20.0 million at September 30, 1997. Advances from the Federal Home Loan
Bank of New York ("FHLB") decreased by $2.0 million to $6.0 million, at
September 30, 1998, as compared to $8.0 million at September 30, 1997.
At September 30, 1998, cash and cash equivalents totalled $7.4 million,
which represents a $6.0 million decrease from $13.4 million, from the same
period in 1997. This decrease primarily resulted from a $5.3 million decrease in
investment in securities purchased under agreements to resell and federal funds
sold.
Investment securities available for sale increased to $6.3 million at
September 30, 1998, as compared to $731,000 at September 30, 1997 and
mortgage-backed securities available for sale increased to $20.1 million at
September 30, 1998, as compared to $9.4 million at September 30, 1997. This
increase was offset by a $23.2 million decrease in investment securities, held
to maturity, to $46.2 million at September 30, 1998, as compared to $69.4
million at September 30, 1997, and a $10.3 million decrease in mortgage-backed
securities, held to maturity, to $28.2 million at September 30, 1998, as
compared to $38.5 million at September 30, 1997. As of September 30, 1998,
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,
decreased by $17.4 million, or 24.2%, to $54.6 million from $72.0 million as of
September 30, 1997. Mortgage-backed securities increased by $1.0 million, or
2.2%, to $48.9 million as of September 30, 1998 from $47.9 million as of
September 30, 1997, including mortgage-backed securities which were classified
as available for sale. Loans receivable increased by $42.7 million, or 27.9%, to
$196.0 million as of September 30, 1998 from $153.3 million as of September 30,
1997. This $42.7 million, or 27.9% increase in loans receivable primarily
resulted from the origination of $53.9 million in mortgage loans, and the
purchase of $24.3 million of one- to-four family, adjustable rate residential
mortgage loans, partially offset by normal amortization, prepayments and
satisfactions.
Non-performing loans totaled $1.6 million, or 0.81% of total loans at
September 30, 1998 as compared to $2.6 million, or 1.69% of total loans at
September 30, 1997. At September 30, 1998, nonperforming assets totalled $5.7
million, or 1.78% of total assets as compared to $6.4 million, or 2.17% of total
assets as of September 30, 1997. The Company's allowance for loan losses
totalled $1.7 million at September 30, 1998, which represents a ratio of
allowance for loan losses to nonperforming assets and to total loans of 29.3%
and 0.84%, respectively, as compared to 21.8% and 0.91%, respectively, at
September 30, 1997.
Total stockholders' equity was $29.2 million at September 30, 1998,
reflecting a $2.3 million, or an 8.6%, 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. At September 30, 1998, the Company had
1,708,632 common shares outstanding and the stated book value per common share
was $17.08, an increase of $1.37 per common share or 8.7%, from $15.71 per
common share at September 30, 1997.
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
34
<PAGE>
emphasized the origination of shorter-term fixed-rate one- to four-family and
multi-family mortgage loans and the 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,
1998. 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 negative 7.59% at September 30, 1998
from a positive 1.58% at September 30, 1997. A negative gap denotes liability
sensitivity, which in a given period will result in more liabilities subject to
repricing than assets. Generally, liability sensitive gaps will result in a net
negative effect on net interest income and consequently, net income in an
increasing interest rate environment. Alternatively, liability sensitive gaps
will generally result in a net positive effect on net interest income and
consequently, net income in a decreasing interest rate environment.
35
<PAGE>
<TABLE>
<CAPTION>
At September 30, 1998
-----------------------------------------------------------------------------------------
More than More than
More than More than 3 Years 4 Years
1 Year 1 Year to 2 Years to to 4 to 5 More than
or Less 2 Years 3 Years Years Years 5 Years Total
--------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage and other loans .............. $ 55,416 $ 18,797 $ 21,520 $ 12,806 $ 28,165 $ 61,376 $ 198,080
Investment securities ................. 46,201 -- -- -- -- -- 46,201
Mortgage-backed securities ............ 17,367 11,304 5,571 8,120 2,274 4,285 48,921
Federal funds sold .................... 5,375 -- -- -- -- -- 5,375
FHLB stock and equity securities ...... -- -- -- -- 203 2,615 2,818
--------- --------- --------- --------- --------- --------- ---------
Total interest-earning assets ........... $ 124,359 $ 30,101 $ 27,091 $ 20,926 $ 30,642 $ 68,276 $ 301,395
========= ========= ========= ========= ========= ========= =========
Interest-bearing liabilities:
Savings and club accounts ............. $ 13,089 $ 10,740 $ 8,915 $ 7,399 $ 6,141 $ 29,984 $ 76,268
NOW accounts .......................... 2,491 1,570 989 623 392 668 6,733
Money Market accounts ................. 7,253 1,523 320 67 14 4 9,181
Certificates of deposit ............... 80,298 24,661 11,184 3,987 2,572 148 122,850
Borrowed funds ........................ 43,770 -- -- -- 12,000 -- 55,770
--------- --------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities ...... $ 146,901 $ 38,494 $ 21,408 $ 12,076 $ 21,119 $ 30,804 $ 270,802
========= ========= ========= ========= ========= ========= =========
Interest-sensitivity gap ................ $ (22,542) $ (8,393) $ 5,683 $ 8,850 $ 9,523 $ 37,472 $ 30,593
========= ========= ========= ========= ========= ========= =========
Cumulative interest-sensitivity gap ..... $ (22,542) $ (30,935) $ (25,252) $ (16,402) $ (6,879) $ 30,593
========= ========= ========= ========= ========= =========
Cumulative interest-sensitivity gap as
a percentage of total assets ........ (7.59)% (10.42)% (8.50)% (5.52)% (2.32)% 10.30%
Cumulative net interest-earning assets as
a percentage of interest-bearing
liabilities ......................... 84.65% 83.31% 87.79% 92.51% 97.13% 111.30%
</TABLE>
- ----------
(1) Fair value of securities, including mortgage-backed securities, is based on
quoted market prices, where available. If quoted market prices are not
available, fair value is based on quoted market prices of comparable
instruments. Fair value of loans is, depending on the type of loan, based
on carrying values or estimates based on discounted cash flow analyses.
Fair value of deposit liabilities are either based on carrying amounts or
estimates based on a discounted cash flow calculation. Fair values for FHLB
advances are estimated using a discounted cash flow analysis that applies
interest rates concurrently being offered on advances to a schedule of
aggregated expected monthly maturities on FHLB advances.
36
<PAGE>
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,
------------------------------------------------------------------------
1998 1997
--------------------------------- -----------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets: (Dollars in Thousands)
Federal funds sold and securities purchased
under agreements to resell ............... $ 16,199 $ 895 5.45% $ 1,448 $ 77 5.23%
Investment securities (1) ..................... 49,849 3,415 6.85 56,786 4,074 7.17
Loans receivable (2) .......................... 172,105 13,880 8.07 148,056 12,171 8.22
Mortgage-backed securities (3) ................ 56,979 3,775 6.63 53,530 3,750 7.01
-------- -------- -------- --------
Total interest-earning assets ..................... 295,132 21,965 7.44 259,820 20,072 7.73
-------- ---- -------- ----
Non-interest-earning assets ....................... 14,658 12,558
-------- --------
Total assets ............................. $309,790 $272,378
======== ========
Interest-bearing liabilities:
NOW and money market deposits ................. $ 16,051 324 2.02 $ 16,875 360 2.13
Savings deposits .............................. 75,629 1,682 2.22 73,352 1,561 2.13
Certificates of deposit ....................... 120,688 6,927 5.74 108,095 6,182 5.72
-------- -------- -------- --------
Total interest-bearing deposits ............... 212,368 8,933 4.21 198,322 8,103 4.09
Borrowed funds ................................ 50,220 2,857 5.61 34,803 1,926 5.46
-------- -------- -------- --------
Total interest-bearing liabilities ....... 262,588 11,790 4.49 233,125 10,029 4.30
-------- ---- -------- ----
Non-interest bearing liabilities .................. 19,116 13,084
-------- --------
Total liabilities ................................. 281,704 246,929
Stockholders' equity .............................. 28,086 26,169
-------- --------
Total liabilities and stockholders' equity $309,790 $272,378
======== ========
Net interest income ............................... $ 10,175 $ 10,043
======== ========
Net interest rate spread (4) ...................... 2.95% 3.43%
==== ====
Net interest-earning asset/net interest margin (5) $ 32,544 3.45% $ 26,695 3.87%
======== ==== ======== ====
Ratio of average interest-earning assets to average
interest-bearing liabilities .................... 1.12x 1.11x
======== ========
<CAPTION>
Year Ended September 30,
------------------------------------
1996
------------------------------------
Average Average
Balance Interest Yield/Cost
------- -------- -----------
<S> <C> <C> <C>
Interest earning assets: (Dollars in Thousands)
Federal funds sold and securities purchased
under agreements to resell ............... $ 659 38 5.72%
Investment securities (1) ..................... 48,728 3,444 7.07
Loans receivable (2) .......................... 127,050 10,316 8.12
Mortgage-backed securities (3) ................ 57,274 4,025 7.03
-------- -------
Total interest-earning assets ..................... 233,711 17,823 7.63
------- ----
Non-interest-earning assets ....................... 10,202
--------
Total assets ............................. $243,913
========
Interest-bearing liabilities:
NOW and money market deposits ................. $ 18,818 436 2.31
Savings deposits .............................. 75,243 1,674 2.22
Certificates of deposit ....................... 95,003 5,483 5.76
-------- -------
Total interest-bearing deposits ............... 189,064 7,593 4.01
Borrowed funds ................................ 19,770 1,098 5.46
-------- -------
Total interest-bearing liabilities ....... 208,834 8,691 4.15
------- ----
Non-interest bearing liabilities .................. 8,313
--------
Total liabilities ................................. 217,147
Stockholders' equity .............................. 26,766
--------
Total liabilities and stockholders' equity $243,913
========
Net interest income ............................... $ 9,132
=======
Net interest rate spread (4) ...................... 3.48%
====
Net interest-earning asset/net interest margin (5) $ 24,877 3.91%
======== ====
Ratio of average interest-earning assets to average
interest-bearing liabilities .................... 1.12x
========
</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.
37
<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,
------------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
---------------------------------------- ----------------------------------------
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 .. $ 784 $ 3 $ 31 $ 818 $ 45 $ (3) $ (3) $ 39
Investment securities ................... (498) (183) 22 (659) 570 52 8 630
Loans receivable ........................ 1,977 (231) (37) 1,709 1,706 128 21 1,855
Mortgage-backed securities .............. 240 (204) (13) 25 (263) (13) 1 (275)
------- ------- ------- ------- ------- ------- ------- -------
Total ................................. 2,505 (615) 3 1,893 2,058 164 27 (2,249)
------- ------- ------- ------- ------- ------- ------- -------
Interest expense:
NOW and money market deposits ........... (18) (19) 1 (36) (45) (35) 4 (76)
Savings deposits ........................ 49 70 2 121 (42) (73) 2 (113)
Certificates of deposit ................. 720 22 3 745 756 (50) (7) 699
------- ------- ------- ------- ------- ------- ------- -------
Total deposits .......................... 751 73 6 830 669 (158) (1) 510
Borrowed funds .......................... 853 54 24 931 828 -- -- 828
------- ------- ------- ------- ------- ------- ------- -------
Total ................................. 1,604 127 30 1,761 1,497 (158) (1) 1,338
------- ------- ------- ------- ------- ------- ------- -------
Net change in net interest income ....... $ 901 $ (742) $ (27) $ 132 $ 561 $ 322 $ 28 $ 911
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
38
<PAGE>
Comparison of Operating Results for the Years Ended September 30, 1998 and
September 30, 1997
General. Net income for the year ended September 30, 1998 increased by
$496,000, or 19.8%, to $3.0 million, or $1.77 diluted earnings per share, from
$2.5 million, or $1.50 diluted earnings per share, for the year ended September
30, 1997. The increase in net income was primarily attributable to a $132,000,
or a 1.3% increase in net interest income before provision for loan losses and a
$274,000, or a 40.1% increase in non-interest income, and a $251,000, or a 4.3%
decrease in non-interest expense, partially offset by $187,000, or a 9.7%
increase in income taxes.
Interest Income. Interest income increased by $1.9 million, or 9.4%, to
$22.0 million for the year ended September 30, 1998 from $20.1 million for the
year ended September 30, 1997. 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 mortgage-backed securities. The average yield on
interest earning assets decreased by 29 basis points to 7.44% for the year ended
September 30, 1998, from 7.73% for the year ended September 30, 1997. The
Company realized lower average yields on its interest-earning assets primarily
as a result of the purchase of lower-yielding adjustable-rate mortgage loans and
adjustable-rate mortgage-backed securities. For the year ended September 30,
1998, the average balance of interest-earning assets was $295.1 million, as
compared to $259.8 million for the fiscal year ended September 30, 1997, which
represents a $35.3 million, or a 13.6% increase. The increase in the average
balance of interest-earning assets resulted from an increase in loans
receivable. Interest income from loans increased by $1.7 million, or 14.0%, to
$13.9 million in fiscal 1998 from $12.2 million in fiscal 1997. This increase
was due to a $24.0 million, or a 16.2%, increase in the average balance of
loans, partially offset by 15 basis points decrease in the average yield on
loans to 8.07% for fiscal 1998 from 8.22% for the same period in 1997. Interest
income from mortgage-backed securities increased by $25,000, or 0.7%, to $3.8
million in fiscal 1998. This increase is primarily attributable to a $3.5
million, or a 6.4%, increase in the average balance of mortgage-backed
securities to $57.0 million in fiscal 1998 from $53.5 million in fiscal 1997,
partially offset by a 38 basis points decline in the average yield on such
securities to 6.63% for fiscal 1998 from 7.01% for fiscal 1997. Interest income
on investment securities decreased by $660,000, or 16.2%, to 3.4 million during
fiscal 1998 from $4.1 million during fiscal 1997, which primarily resulted from
a decrease of $6.9 million, or 12.2%, in the average balance of investment
securities and a 32 basis points increase in the average yield on such
securities to 6.85% during fiscal 1998 from 7.17% for fiscal 1997. Interest
income from federal funds sold and securities purchased under agreements to
resell for fiscal 1998 increased by $819,000, to $895,000 in fiscal 1998 from
$77,000 for fiscal 1997. This increase resulted from a $14.8 million increase in
the average asset balance and a 22 basis points increase in the average rate
earned on such assets to 5.45% for fiscal 1998 from 5.23% for fiscal 1997.
Interest Expense. Interest expense on total deposits for the year ended
September 30, 1998, increased by $830,000, or 10.2%, to $8.9 million for the
year ended September 30, 1998, from $8.1 million for the year ended September
30, 1997. The increase resulted from a $14.0 million, or a 7.1%, increase in the
average balance of interest-bearing deposits and a 12 basis points increase in
the average cost of interest-bearing deposits to 4.21% for fiscal 1998 from
4.09% for fiscal 1997. Interest expense on borrowings increased by $931,000 to
$2.9 million, due to a $15.4 million, or a 44.3%, increase in the average
balance of borrowed funds to $50.2 million in fiscal 1998 from $34.8 million in
fiscal 1997. The increase in the average cost of borrowings resulted from the
continued leverage and growing of the balance sheet. Interest expense on savings
accounts increased by $121,000, or 7.8%, to $1.7 million for fiscal 1998 from
$1.6 million for fiscal 1997, resulting from a $2.3 million increase in average
balances, in addition to a 9 basis points increase in the average cost of such
deposits. The average balance of savings and club accounts decreased to 35.6% of
the total average of interest-bearing deposits for fiscal 1998, from 37.0% for
fiscal 1997. For the year ended September 30, 1998, interest expense on
certificates of deposit increased by $745,000, or 12.1%, to $6.9 million for
fiscal 1998 from $6.2 million for fiscal 1997, which resulted from an 11.6%
increase in the average balance of these accounts to $120.7 million for fiscal
1998 from $108.1 million for fiscal 1997, and a 2 basis points increase in the
average cost of such accounts to 5.74% in fiscal 1998 from 5.72% in fiscal 1997.
Net Interest Income. Net interest income for the year ended September 30,
1998, increased by $132,000, or 1.3%, to $10.2 million from $10.0 million for
the year ended September 30, 1997. The Bank's net interest rate spread decreased
to 2.95% in fiscal 1998 from 3.43% in fiscal 1997, and its net interest margin
decreased to 3.45% in fiscal
39
<PAGE>
1998 from 3.87% in fiscal 1997. The average yield on interest-earning assets was
7.44% for the year ended September 30, 1998, as compared to 7.73% for the year
ended September 30, 1997. The average cost of interest-bearing liabilities was
4.49% for the year ended September 30, 1998, as compared to 4.30% for the
corresponding period in 1997.
Provision for Loan Losses. The provision for loan losses decreased by
$25,921 to $401,000 for the year ended September 30, 1998 from $427,000 for the
year ended September 30, 1997. At September 30, 1998, allowance for loan losses
amounted to $1.7 million. The decrease in the provision of losses is primarily
attributable to the Bank's loan recoveries increasing by $23,000 and an overall
decrease in the level of non-performing 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,
1998 increased by $274,000 to $957,000 from $683,000 for the year ended
September 30, 1997. This significant increase in non-interest income is
primarily attributable to a $239,000, or 41.5%, increase in fees and service
charges to $815,000 for the year ended September 30, 1998 from $576,000 for the
year ended September 30, 1997. This increase in non-interest income represents
fees associated with the increase in the number of demand deposit accounts and
automated teller machines ("ATMs") related service fees. In addition, the
increase in non-interest income was attributable to a $102,000 increase in the
gain on sale of investment securities to $131,000 for the year ended September
30, 1998, as compared to $29,000 for the same period in 1997. The increase in
non-interest income was partially offset by the $86,000 increase in losses
realized on investments in real estate, which represents a joint venture project
in which a subsidiary of the Bank has a one-third interest.
Non-Interest Expenses. Non-interest expenses decreased by $251,000, or
4.3%, to 5.6 million for the year ended September 30, 1998 from $5.9 million for
the year ended September 30, 1997. Salaries and employee benefits decreased by
$242,000, or 7.5%, to $3.0 million for fiscal 1998 from $3.2 million for fiscal
1997. The decrease in salaries and employee benefits during the year was
primarily attributable to a non-recurring charge of $268,000 for the retirement
of a senior executive officer during fiscal 1997. For the year ended September
30, 1998, occupancy expense decreased by $23,000 to $504,000 from $527,000 for
the year ended September 30, 1997. The decrease in occupancy expense is
primarily attributable to the collection of rental income on the Bank owned
properties. For the year ended September 30, 1998, equipment expense increased
by $63,000 to $691,000 from $628,000 for the year ended September 30, 1997. The
increase in equipment expense represents costs associated with the Company's
data processing services, including deposit and check processing service fees,
automated teller machines ("ATM's") and other vendor related services and
contracts. In addition, advertising expense increased by $22,000 to $84,000 for
fiscal 1998 from $62,000 for fiscal 1997. The increase in advertising expense
was primarily attributable to costs associated with loan and deposit marketing
efforts, in addition to the Bank's 50th anniversary and related gift campaigns
early in fiscal 1998. Losses on real estate owned increased by $7,000 to $23,000
for fiscal 1998 from $16,000 for fiscal 1997. For the fiscal year ended
September 30, 1998, the federal deposit insurance premium decreased by $47,000
to $125,000 from $172,000, while miscellaneous expenses decreased by $30,000 to
$1.2 million from $1.3 million for the fiscal year ended September 30, 1997. The
ratio of operating expense to average assets, was 1.81% for the fiscal year
ended September 30, 1998, as compared to 2.05%. Furthermore, the Company's
efficiency ratio was 50.6% for the year ended September 30, 1998, as compared to
52.3%.
Income Tax Expense. Income tax expense increased by $187,000 to $2.1
million in fiscal 1998 from $1.9 million in fiscal 1997. The effective income
tax rate for fiscal 1998 was 41.4%, as compared to 43.5% for fiscal 1997. The
decrease in the effective tax rate primarily relates to certain state and city
tax benefits realized during fiscal 1998.
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 diluted earnings per share, from
$1.2 million, or $0.64 diluted earnings per share, for the year ended September
30, 1996. Excluding the effect of a one-time Savings Association Insurance Fund
("SAIF") insurance
40
<PAGE>
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 $53.5 million in fiscal 1997 from $57.3 million in
fiscal 1997, 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 in fiscal
1997 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
leverage 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,
41
<PAGE>
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 establishes 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 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.
42
<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, 1998 was 9.9%, which
exceeded the then applicable 4.0% liquidity requirement.
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, 1998, 1997 and 1996, the Bank originated mortgage loans in the
amounts of $53.9 million, $27.5 million and $34.0 million, respectively, and
purchased mortgage loans in the amounts of $24.3 million, $6.7 million and $14.8
million, respectively. Purchases of mortgage-backed securities totalled $22.1
million, $5.0 million and $5.1 million for the same periods. Other investments
primarily include U.S. Government Agency obligations.
At September 30, 1998, the Bank had outstanding loan commitments of $8.0
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, 1998, totalled $80.7 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
43
<PAGE>
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.
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, through a series of phases, has
identified 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 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 to update software would not have
a material adverse effect on the Company's business. As previously reported, the
Company has completed both the Organization Awareness Phase and Assessment Phase
of its Year 2000 Compliance Plan. The Company has drafted a compliance plan and
established a steering committee. In the Assessment Phase, the Company has
performed a complete inventory of internal business hardware and software as
well as an inventory of environmental systems and critical vendor applications.
Critical applications and a risk assessment in the event of non-compliance have
been defined and the Company has identified resources needed to implement the
Year 2000 Plan. As of October 31, 1998, the Company completed the Renovation
Phase which involves installing required system hardware and software upgrades
and obtaining various vendor certifications. As such, the Company has begun the
final phase called the Validation or Testing phase. In developing a strategy for
testing, the Company is following the FFIEC guidelines. The Company is currently
drafting a written test plan to test internal and external systems. The results
of the hardware tests will be documented and copies of the scripts written for
these tests will be attached to the written test plan.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The above-captioned information appears in this report under Part II, Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and is incorporated herein by reference.
44
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
RADICS & CO., LLC [LETTERHERAD]
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, 1998 and
1997, 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, 1998. 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, 1998
and 1997, and the results of their operations and their cash flows for each of
the years in the three-year period ended September 30, 1998, in conformity with
generally accepted accounting principles.
/s/ Radics & CO., LLC
Pine Brook, New Jersey
December 4, 1998
45
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30,
------------------------------
Assets Notes 1998 1997
- ------ ------------- ------------ ------------
<S> <C> <C> <C>
Cash and cash amounts due from depository institutions $ 2,001,493 $ 2,738,392
Securities purchased under agreements
to resell and federal funds sold 3 5,375,000 10,650,000
------------ ------------
Total cash and cash equivalents 1 and 21 7,376,493 13,388,392
Investment securities available for sale 1, 4 and 21 6,287,750 730,750
Investment securities held to maturity; estimated fair value
of $46,595,000 and $69,223,000 at September 30, 1998 and 1997,
respectively 1,4,13,14 and 21 46,200,449 69,410,103
Mortgage-backed securities available for sale 1, 5 and 21 20,679,363 9,357,048
Mortgage-backed securities held to maturity; estimated
fair value value of $28,582,000 and $39,129,000 at
September 30, 1998 and 1997, respectively 1,5 and 21 28,242,002 38,521,050
Loans receivable 1, 6, 12 and 21 196,027,388 153,291,828
Real estate owned 1 and 7 739,403 471,417
Investments in real estate 1 and 8 3,496,029 3,543,453
Premises and equipment 1, 9 and 20 2,446,120 2,431,570
Federal Home Loan Bank of New York stock 12 2,110,400 1,845,000
Accrued interest receivable 1, 10 and 21 2,043,279 2,248,578
Other 15 2,962,720 1,716,727
------------ ------------
Total assets $318,611,396 $296,955,916
============ ============
</TABLE>
See notes to consolidated financial statements.
46
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30,
------------------------------
Liabilities and stockholders' equity Notes 1998 1997
- ------------------------------------ ------------- ------------ -------------
<S> <C> <C> <C>
Liabilities
Deposits 11, 19 and 21 $ 228,095,902 $ 213,394,282
Advance payments by borrowers for taxes and insurance 1,518,016 1,267,896
Advances from Federal Home Loan Bank of New York 12 and 21 6,000,000 8,000,000
Securities sold under agreements to repurchase 13 and 21 42,000,000 25,000,000
Treasury tax and loan account borrowings 14 and 21 7,770,251 20,000,000
Other 15 and 17 4,051,936 2,437,504
------------- -------------
Total liabilities 289,436,105 270,099,682
------------- -------------
Commitments and contingencies 19 and 20 -- --
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 issued; 1,708,632 and 1,709,700 shares
outstanding at September 30, 1998 and 1997, respectively 21,850 21,850
Additional paid-in capital 20,505,364 20,239,758
Retained earnings - substantially restricted 16,347,698 14,111,882
Common stock acquired by Employee Stock
Ownership Plan ("ESOP") (849,710) (1,011,566)
Common stock acquired by Recognition and Retention Plan ("RPR") (280,888) (317,955)
Treasury stock, at cost; 476,368 and 475,300
shares at September 30, 1998 and 1997, respectively (6,356,261) (6,279,339)
Unrealized (loss) gain on securities available for sale, net of income taxes (212,762) 91,604
------------- -------------
Total stockholders' equity 29,175,291 26,856,234
------------- -------------
Total liabilities and stockholders' equity $ 318,611,396 $ 296,955,916
============= =============
</TABLE>
See notes to consolidated financial statements
47
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------
Note(s) 1998 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income:
Loans 1 and 6 $ 13,880,178 $ 12,170,938 $ 10,316,082
Mortgage-backed securities 1 3,774,638 3,749,723 4,025,030
Investments and other interest-earning assets 1 3,414,495 4,074,392 3,443,504
Federal funds sold and securities
purchased under agreements to resell 1 895,486 76,821 38,354
------------ ------------ ------------
Total interest income 21,964,797 20,071,874 17,822,970
------------ ------------ ------------
Interest expense:
Deposits 11 8,933,075 8,102,809 7,592,723
Borrowings 2,856,927 1,926,223 1,098,104
------------ ------------ ------------
Total interest expense 11,790,002 10,029,032 8,690,827
------------ ------------ ------------
Net interest income 10,174,795 10,042,842 9,132,143
Provision for loan losses 1 and 6 400,679 426,600 542,920
------------ ------------ ------------
Net interest income after provision for loan losses 9,774,116 9,616,242 8,589,223
------------ ------------ ------------
Non-interest income:
Fees and service charges 815,012 575,821 402,813
Gain on sale on securities available for sale 1, 4 and 5 131,212 29,387 36,089
(Loss) gain from real estate operations 1 (58,238) 27,650 (313,011)
Miscellaneous 69,432 50,607 50,635
------------ ------------ ------------
Total non-interest income 957,418 683,465 176,526
------------ ------------ ------------
Non-interest expenses:
Salaries and employee benefits 17 and 18 2,964,817 3,206,774 3,048,238
Net occupancy expense of premises 1 and 20 503,694 526,583 492,507
Equipment 1 691,122 628,182 571,180
Advertising 84,336 62,435 69,510
Loss from real estate owned 1 and 7 22,518 15,823 84,123
Federal insurance premium 19 125,382 172,577 1,502,263
Miscellaneous 18 1,222,576 1,253,033 1,169,816
------------ ------------ ------------
Total non-interest expenses 5,614,445 5,865,407 6,937,637
------------ ------------ ------------
Income before income taxes 5,117,089 4,434,300 1,828,112
Income taxes 1 and 15 2,116,145 1,929,477 675,227
------------ ------------ ------------
Net income $ 3,000,944 $ 2,504,823 $ 1,152,885
============ ============ ============
Earnings per common share: 1
Basic $ 1.86 $ 1.54 $ 0.66
============ ============ ============
Diluted $ 1.77 $ 1.50 $ 0.65
============ ============ ============
Weighted average number of common shares: 1
Basic 1,614,600 1,630,300 1,750,900
============ ============ ============
Diluted 1,695,700 1,670,300 1,786,000
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
48
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained Common Common
Additional Earnings - Stock Stock
Common Paid-in Substantially Acquired Acquired
Stock Capital Restricted By ESOP By RRP
----------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance - October 1, 1995 $ 21,850 $ 20,130,021 $ 11,544,464 $ (1,335,278) $ (590,487)
Net income for the year ended
September 30, 1996 -- -- 1,152,885 -- --
ESOP shares committed
to be released -- 55,705 -- 161,856 --
Amortization of cost of common
stock acquired by the RRP -- -- -- -- 136,266
Purchase of 192,266
shares of treasury stock -- -- -- -- --
Reissue of 10,925 shares of
treasury stock for stock options -- (33,868) -- -- --
Dividends paid -- -- (478,742) -- --
Unrealized loss on securities
available for sale, net -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance - September 30, 1996 21,850 20,151,858 12,218,607 (1,173,422) (454,221)
Net income for the year ended
September 30, 1997 -- -- 2,504,823 -- --
ESOP shares committed
to be released -- 117,067 -- 161,856 --
Amortization of cost of common
stock acquired by the RRP -- -- -- -- 136,266
Purchase of 89,531 shares
of treasury stock -- -- -- -- --
Reissue of 8,609 shares of
treasury stock for stock options -- (29,167) -- -- --
Dividends paid -- -- (611,548) -- --
Unrealized gain on securities
available for sale, net -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance - September 30, 1997 21,850 20,239,758 14,111,882 (1,011,566) (317,955)
Net income for the year ended
September 30, 1998 -- -- 3,000,944 -- --
ESOP shares committed
to be released -- 280,941 -- 161,856 --
Amortization of cost of common
stock acquired by the RRP -- -- -- -- 37,067
Purchase of 5,000 shares
of treasury stock -- -- -- -- --
Reissue of 3,932 shares of
treasury stock for stock options -- (15,335) -- -- --
Dividends paid -- -- (765,128) -- --
Unrealized loss on securities
available for sale, net -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance - September 30, 1998 $ 21,850 $ 20,505,364 $ 16,347,698 $ (849,710) $ (280,888)
============ ============ ============ ============ ============
<CAPTION>
Unrealized
Gain (Loss)
on Securities
Treasury Available
Stock for sale, net Total
------------ --------------- ------------
<S> <C> <C> <C>
Balance - October 1, 1995 $ (2,591,542) $ -- $ 27,179,028
Net income for the year ended
September 30, 1996 -- -- 1,152,885
ESOP shares committed
to be released -- -- 217,561
Amortization of cost of common
stock acquired by the RRP -- -- 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 137,000 -- 103,132
Dividends paid -- -- (478,742)
Unrealized loss on securities
available for sale, net -- (488) (488)
------------ ------------ ------------
Balance - September 30, 1996 (4,976,986) (488) 25,787,198
Net income for the year ended
September 30, 1997 -- -- 2,504,823
ESOP shares committed
to be released -- -- 278,923
Amortization of cost of common
stock acquired by the RRP -- -- 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 110,436 -- 81,269
Dividends paid -- -- (611,548)
Unrealized gain on securities
available for sale, net -- 92,092 92,092
------------ ------------ ------------
Balance - September 30, 1997 (6,279,339) 91,604 26,856,234
Net income for the year ended
September 30, 1998 -- -- 3,000,944
ESOP shares committed
to be released -- -- 442,797
Amortization of cost of common
stock acquired by the RRP -- -- 37,067
Purchase of 5,000 shares
of treasury stock (129,375) -- (129,375)
Reissue of 3,932 shares of
treasury stock for stock options 52,453 -- 37,118
Dividends paid -- -- (765,128)
Unrealized loss on securities
available for sale, net -- (304,366) (304,366)
------------ ------------ ------------
Balance - September 30, 1998 $ (6,356,261) $ (212,762) $ 29,175,291
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
49
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,000,944 $ 2,504,823 $ 1,152,885
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 276,085 300,589 298,613
Amortization of premiums and accretion
of discounts on investment securities, net (244,197) (201,544) (91,107)
Amortization of premiums and accretion
of discounts on mortgage-backed securities, net 114,501 34,159 19,268
Accretion of deferred loan fees and discounts (67,091) (110,837) (84,132)
Amortization of intangible assets 17,045 17,045 18,489
(Gain) on sale of investment securities available for sale (36,750) (29,387) (51,029)
(Gain) on sale of mortgage-backed securities available for sale (94,462) -- --
(Gain) loss on sale of real estate owned (30,541) 5,542 33,583
Write-down on investment securities available for sale -- -- 14,940
Provision for loan losses 400,679 426,600 542,920
Deferred income taxes 142,146 255,206 (1,088,167)
Decrease (increase) in accrued interest receivable 205,299 (459,608) (213,950)
(Increase) in refundable income taxes (148,500) (181,613) (13,693)
(Increase) decrease in other assets (1,017,539) 25,222 160,736
Cost of ESOP and RRP 479,864 415,189 353,827
Increase (decrease) in other liabilities 1,614,432 (939,048) 1,679,142
------------ ------------ ------------
Net cash provided by operating activities 4,611,915 2,062,338 2,732,325
------------ ------------ ------------
Cash flows from investing activities:
Purchases of investment securities available for sale (6,550,375) (4,939,672) (8,596,719)
Purchases of investment securities held to maturity (54,489,063) (35,090,000) (48,040,000)
Proceeds from maturities of investment securities held to maturity 77,940,000 17,000,000 33,930,000
Proceeds from sale of investment securities available for sale 736,750 7,890,781 7,028,594
Purchases of mortgage-backed securities available for sale (21,719,234) (5,046,498) (5,068,148)
Purchases of mortgage-backed securities held to maturity (384,083) -- --
Proceeds from sale of mortgage-backed securities available for sale 3,797,846 -- --
Proceeds from principal repayments on
mortgage-backed securities available for sale 6,381,532 832,014 61,971
Proceeds from principal repayments on
mortgage-backed securities held to maturity 10,613,411 11,278,745 12,152,454
Loan originations, net of repayments (19,680,328) (7,021,993) (16,486,091)
Purchases of loans (24,301,570) (6,682,351) (14,326,221)
Proceeds from sale of and insurance recoveries on real estate owned 675,305 311,862 289,116
Capitalized expenses on real estate owned -- -- (8,637)
Net decrease (increase) in investments in real estate 35,200 (61,895) 217,450
Additions to premises and equipment (278,411) (198,300) (1,138,187)
(Purchase) of Federal Home Loan Bank of New York stock (265,400) (169,200) (252,800)
------------ ------------ ------------
Net cash (used in) investing activities (27,488,420) (21,896,507) (40,237,218)
------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
50
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 14,701,620 $ 10,510,516 $ 16,392,178
Increase in advance payments by borrowers for taxes and insurance 250,120 204,860 108,956
Advances from Federal Home Loan Bank of New York -- -- 9,200,000
Repayments of Federal Home Loan Bank of New York advances (2,000,000) (1,200,000) --
Net change in short-term borrowings
from Federal Home Loan Bank of New York -- (525,000) (4,850,000)
Proceeds from securities sold under agreement to repurchase 22,000,000 25,000,000 14,046,000
Repurchase of securities sold under agreements to repurchase (5,000,000) (14,046,000) (7,126,250)
Net (decrease) increase in treasury tax and loan account borrowings (12,229,749) 10,119,030 9,880,970
Dividends paid (765,128) (611,548) (478,742)
Treasury stock acquired (129,375) (1,412,789) (2,522,444)
Reissue of treasury stock for stock options 37,118 81,269 103,132
------------ ------------ ------------
Net cash provided by financing activities 16,864,606 28,120,338 34,753,800
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (6,011,899) 8,286,169 (2,751,093)
Cash and cash equivalents - beginning 13,388,392 5,102,223 7,853,316
------------ ------------ ------------
Cash and cash equivalents - ending $ 7,376,493 $ 13,388,392 $ 5,102,223
============ ============ ============
Supplemental schedule of noncash investing and financing activities:
Loans transferred to real estate owned $ 1,087,750 $ 506,911 $ 248,945
============ ============ ============
Loans to facilitate sales of real estate owned $ 175,000 $ 96,000 $ 148,000
============ ============ ============
Securities transferred to available for sale from held to maturity $ -- $ -- $ 1,989,839
============ ============ ============
Unrealized (loss) gain on securities available for sale $ (543,511) $ 164,450 $ (871)
Deferred income tax 239,145 (72,358) 383
------------ ------------ ------------
$ (304,366) $ 92,092 $ (488)
============ ============ ============
Property transferred to investment in real
estate, net of accumulated depreciation $ -- $ -- $ 190,174
============ ============ ============
Supplemental disclosures of cash flows information:
Cash paid (net of refunds received) during the year for:
Federal, state and city income taxes $ 2,122,499 $ 1,857,768 $ 1,777,958
============ ============ ============
Interest $ 11,740,700 $ 9,903,908 $ 8,676,430
============ ============ ============
</TABLE>
See notes to consolidated financial statements
51
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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.
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.
52
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
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 Statement of Financial Accounting Standards
("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.
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.
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.
53
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Allowance for loan losses (Cont'd)
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.
An impaired loan is evaluated 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 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.
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.
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.
54
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Real estate owned (Cont'd)
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.
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.
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.
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.
Income taxes
The Company and its subsidiaries file consolidated federal, state and city
income tax returns, except for two of the subsidiaries, which file 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. 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.
55
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
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
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.
Earnings per common share
The Company, during the first quarter of fiscal year 1998, adopted SFAS
128, "Earnings per share", which supersedes Accounting Principles Board
("APB") Opinion No. 15, "Earnings per Share". SFAS 128 replaces the primary
and fully diluted earnings per common share presentations previously
required by APB Opinion No. 15 with basic and diluted earnings per common
share presentations. As required by SFAS 128, all prior period earnings per
common share have been restated. Basic earnings per common share have been
computed by dividing net income by the weighted average number of shares of
common stock outstanding, adjusted for the unallocated portion of common
shares held by ESOP. Diluted earnings per common share have been computed
by dividing net income by weighted average number of shares of common stock
outstanding, as adjusted and dilutive common stock equivalents outstanding
(using the treasury stock method) during the period.
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.
Fair value of financial instruments
The following methods and assumptions were used in estimating the fair
value of 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.
56
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Fair value of financial instruments (Cont'd.)
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, savings and club 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 and loan 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.
Impact of new accounting standards
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.
57
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Impact of new accounting standards (Cont'd)
In April 1998, the FASB issued SFAS 132, "Employers Disclosures About
Pensions and Other Post Retirement Benefits". SFAS 132 standardizes the
disclosure requirements for these plans and it requires additional
information about changes in the benefit obligations and fair value of plan
assets. SFAS 132 is effective for fiscal years beginning after December 15,
1997 and information for previous periods presented for comparative
purposes is required to be restated. SFAS 132 does not change measurement
or recognition standards for these plans and is only disclosure related,
therefore its implementation will have no impact on the Company's financial
condition or results of operations.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities" which addresses the accounting for
derivative instruments, including certain derivative instruments embedded
in other contracts, and hedging activities. SFAS 133 supersedes SFAS 80,
"Accounting for Futures Contracts", SFAS 105, "Disclosure of Information
about Financial Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk", and SFAS 119, "Disclosure
about Derivative Financial Instruments and Fair Value of Financial
Instruments." It amends SFAS 107, "Disclosures about Fair Value of
Financial Instruments" to include in SFAS 107 the disclosure provisions
about concentrations of credit risk from SFAS 105. SFAS 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. As
the Company does not have any derivative instruments or similar contracts,
the representation of SFAS 133 will have no impact on the Company's
financial condition or results of operations.
Reclassification
Certain amounts for the years ended September 30, 1997 and 1996 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 account
may be decreased if the balances of eligible account holders decreased on
the annual determination date. The Bank did not determine the balance of
liquidation account as of September 30, 1998. 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 ("OTS").
During the years ended September 30, 1998, 1997 and 1996, the Company
repurchased, in the open market, 5,000, 89,531, and 192,266 shares,
respectively, of common stock at an aggregate cost of $129,375, $1,412,789,
and $2,522,444, respectively. These repurchases are reflected as treasury
stock in the consolidated statements of financial condition.
58
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998, 1997 and 1996, the average balances of securities
purchased under agreements to resell totalled $1,583,000, $15,200 and $133,000,
respectively, and the maximum amount outstanding at any month end was
$15,000,000, $2,000,000 and $5,240,000, respectively. The average interest rate
for 1998, 1997 and 1996 was 5.75%, 5.85% and 5.89%, respectively.
4. INVESTMENT SECURITIES
<TABLE>
<CAPTION>
September 30, 1998
-----------------------------------------------------------------------
Gross Unrealized
Amortized -------------------------------- Estimated
Cost Gains Losses Fair Value
--------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Available for Sale
Corporate stocks $ 701,000 $ 6,750 $ -- $ 707,750
Corporate bonds 5,853,289 -- 273,289 5,580,000
----------- ----------- ----------- -----------
$ 6,554,289 $ 6,750 $ 273,289 $ 6,287,750
=========== =========== =========== ===========
Held to Maturity
U.S. Government (including agencies):
After one through five years $35,994,830 $ 309,610 $ -- $36,304,440
After five through ten years 7,237,211 78,849 -- 7,316,060
After ten years 2,968,408 6,332 -- 2,974,740
----------- ----------- ----------- -----------
$46,200,449 $ 394,791 $ -- $46,595,240
=========== =========== =========== ===========
</TABLE>
<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
=========== =========== =========== ===========
</TABLE>
59
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENT SECURITIES (Cont'd)
There were no sales of investment securities held to maturity during the years
ended September 30, 1998, 1997, and 1996. Proceeds from sales of investment
securities available for sale during the years ended September 30, 1998, 1997
and 1996 were $736,750, $7,890,781 and $7,028,594, respectively. Gross gains of
$36,750, $29,387 and $51,029, were realized on these sales. Provision for losses
of $14,940, representing permanent impairment in the value of common stock, was
charged to operations during the year ended September 30, 1996. At September 30,
1998 approximately $42,241,000 of investment securities held to maturity are
callable within one year and at periodic intervals thereafter.
5. MORTGAGE-BACKED SECURITIES
<TABLE>
<CAPTION>
September 30, 1998
---------------------------------------------------------------------
Principal Unamortized Unearned Amortized
Balance Premiums Discounts Cost
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Available for Sale
Federal Home Loan Mortgage Corporation $10,402,921 $ 133,784 $ -- $10,536,705
Federal National Mortgage Association 10,145,905 110,146 -- 10,256,051
----------- ----------- ----------- -----------
$20,548,826 $ 243,930 $ -- $20,792,756
=========== =========== =========== ===========
Held to Maturity
Government National Mortgage Association $17,109,250 $ 198,426 $ 34,130 $17,273,546
Federal Home Loan Mortgage Corporation 7,542,184 12,147 22,315 7,532,016
Federal National Mortgage Association 1,774,626 18,087 -- 1,792,713
Other pass-through 1,649,914 -- 6,187 1,643,727
----------- ----------- ----------- -----------
$28,075,974 $ 228,660 $ 62,632 $28,242,002
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
---------------------------------------------------------------------
Gross Unrealized
Amortized ------------------------------- Estimated
Cost Gains Losses Fair Value
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Available for Sale
Federal Home Loan Mortgage Corporation $10,536,705 $ -- $ 76,061 $10,460,644
Federal National Mortgage Association 10,256,051 -- 37,332 10,218,719
----------- ----------- ----------- -----------
$20,792,756 $ -- $ 113,393 $20,679,363
=========== =========== =========== ===========
Held to Maturity
Government National Mortgage Association $17,273,546 $ 304,112 $ 83,543 $17,494,115
Federal Home Loan Mortgage Corporation 7,532,016 144,192 26,935 7,649,273
Federal National Mortgage Association 1,792,713 8,646 4,823 1,796,536
Other pass-through 1,643,727 -- 1,650 1,642,077
----------- ----------- ----------- -----------
$28,242,002 $ 456,950 $ 116,951 $28,582,001
=========== =========== =========== ===========
</TABLE>
60
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. MORTGAGE-BACKED SECURITIES (Cont'd)
<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
=========== =========== =========== ============
</TABLE>
<TABLE>
<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>
61
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. MORTGAGE-BACKED SECURITIES (Cont'd)
The scheduled maturities of all mortgage-backed securities as of September 30,
1998 follows (in thousands):
Amortized Estimated
Cost Fair Value
---------- ------------
Within five years $ 6,451 $ 6,506
After five through ten years 2,521 2,506
After ten years 40,063 40,249
------- -------
$49,035 $49,261
======= =======
Proceeds from sale of mortgage-backed securities available for sale during the
year ended September 30, 1998 were $3,797,846. Gross gains of $94,462 were
realized on these sales. There were no sale of mortgage-backed securities held
to maturity during the year ended September 30, 1998. There were no sales of
mortgage-backed securities available for sale or held to maturity during the
years ended September 30, 1997 and 1996.
62
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LOANS RECEIVABLE
September 30,
-----------------------------
1998 1997
------------ ------------
Real estate mortgages:
One-to-four family $155,674,406 $126,440,274
Equity and second mortgages 2,492,492 2,637,065
Multi-family 18,206,979 11,778,942
Commercial 20,239,513 13,216,661
------------ ------------
196,613,390 154,072,942
Construction 925,000 574,500
------------ ------------
Consumer:
Passbook or certificate 241,625 176,307
Home improvement 1,531 3,785
Guaranteed student loans 208,673 213,701
Personal 18,600 23,637
------------ ------------
470,429 417,430
------------ ------------
Commercial, including lines of credit 71,586 76,567
------------ ------------
Total loans 198,080,405 155,141,439
------------ ------------
Less: Loans in process 336,250 200,860
Allowance for loan losses 1,657,235 1,405,404
Deferred loan fees and discounts 59,532 243,347
------------ ------------
2,053,017 1,849,611
------------ ------------
$196,027,388 $153,291,828
============ ============
At September 30, 1998, 1997 and 1996, loans serviced by the Bank for the benefit
of others totalled approximately $6,498,000, $8,329,000 and $10,067,000,
respectively.
An analysis of the allowance for loan losses follows:
Year Ended September 30,
-------------------------------------------
1998 1997 1996
----------- ------------ ------------
Balance - beginning $ 1,405,404 $ 1,573,338 $ 1,243,068
Provision for loan losses 400,679 426,600 542,920
Charge offs (179,198) (601,674) (212,650)
Recoveries 30,350 7,140 --
----------- ----------- -----------
Balance - ending $ 1,657,235 $ 1,405,404 $ 1,573,338
=========== =========== ===========
63
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LOANS RECEIVABLE (Cont'd)
Non-accrual loans totalled approximately $3,520,000, $4,324,000 and $4,380,000
at September 30, 1998, 1997 and 1996, respectively. Interest income that would
have been recognized on loans for which the accrual of income has been
discontinued totalled approximately $284,000, $411,000 and $403,000 for the
years ended September 30, 1998, 1997 and 1996, respectively. Interest income on
these loans, which is recorded only when collected, amounted to approximately
$148,000, $149,000 and $160,000 for the years ended September 30, 1998, 1997 and
1996, respectively.
Impaired loans and related amounts recorded in the allowance for loan losses are
summarized as follows:
September 30.
-------------------------
1998 1997
---------- -----------
Recorded investment in impaired loans:
With recorded allowance $2,060,091 $2,510,632
Without recorded allowance -- --
---------- ----------
Total impaired loans 2,060,091 2,510,632
Related allowances for loan losses 426,000 225,125
---------- ----------
Net impaired loans $1,634,091 $2,285,507
========== ==========
For the years ended September 30, 1998, 1997 and 1996, interest income
recognized on impaired loans was $108,000, $79,000 and $31,000, respectively.
The average balance of impaired loans during the years ended September 30, 1998,
1997 and 1996 approximated $2,176,000, $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,
-------------------------------
1998 1997
----------- -----------
Balance - beginning $ 678,772 $ 395,523
New loans 395,800 380,000
Repayments (17,421) (5,955)
Loans removed -- (90,796)
----------- -----------
Balance - ending $ 1,057,151 $ 678,772
=========== ===========
64
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. REAL ESTATE OWNED
Real estate owned is summarized as follows:
September 30,
--------------------------
1998 1997
--------- ---------
Acquired by foreclosure $ 739,403 $ 471,417
========= =========
The following is an analysis of loss from real estate owned:
Year Ended September 30,
-------------------------------
1998 1997 1996
-------- -------- --------
Operational expenses, net of rental income $ 53,059 $ 10,281 $ 50,540
(Gain) loss on sale (30,541) 5,542 33,583
-------- -------- --------
Net loss $ 22,518 $ 15,823 $ 84,123
======== ======== ========
8. INVESTMENTS IN REAL ESTATE
September 30,
-----------------------------
1998 1997
---------- ----------
Held for rental operations $ 176,063 $ 188,287
Held for development 3,319,966 3,355,166
---------- ----------
$3,496,029 $3,543,453
========== ==========
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.
65
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INVESTMENTS IN REAL ESTATE (Cont'd)
The following represents the combined statements of financial condition, loss
and partners' capital of the joint ventures:
STATEMENTS OF FINANCIAL CONDITION
September 30,
-------------------------
Assets 1998 1997
----------- -----------
Cash $ 2,183 $ 11,418
----------- -----------
Investments 134,393 134,085
----------- -----------
Land and construction-in-progress:
Land 7,210,900 7,210,900
Construction-in-progress 8,966,698 8,483,285
----------- -----------
16,177,598 15,694,185
Less allowances for inventory valuation 4,074,600 3,774,000
----------- -----------
12,102,998 11,920,185
----------- -----------
Total assets $12,239,574 $12,065,688
=========== ===========
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 loan payable 2,513,868 2,513,868
----------- -----------
Other liabilities 3,074,337 2,794,851
----------- -----------
Total liabilities 5,588,205 5,308,719
----------- -----------
Partners' capital
Bank subsidiary 2,188,726 2,223,926
Other partners 4,462,643 4,533,043
----------- -----------
Total partners' capital 6,651,369 6,756,969
----------- -----------
Total liabilities and partners' capital $12,239,574 $12,065,688
=========== ===========
66
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INVESTMENTS IN REAL ESTATE (Cont'd)
STATEMENTS OF (LOSS)
Year Ended September 30,
-------------------------------------
1998 1997 1996
--------- --------- ---------
Allowance for inventory valuation $(300,600) $(129,000) $(894,000)
--------- --------- ---------
Net (loss) $(300,600) $(129,000) $(894,000)
========= ========= =========
STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Bank's
Partners' capital Subsidiaries Others Total
- ----------------- ------------ ------ -----
<S> <C> <C> <C>
Balance October 1, 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
Capital contribution 65,000 130,000 195,000
(Loss) for year ended September 30, 1998 (100,200) (200,400) (300,600)
----------- ----------- -----------
Balance September 30, 1998 $ 2,188,726 $ 4,462,643 $ 6,651,369
=========== =========== ===========
</TABLE>
67
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. PREMISES AND EQUIPMENT
September 30,
------------------------
1998 1997
---------- ----------
Land $ 220,000 $ 220,000
Buildings and improvements 2,177,218 2,161,668
Leasehold improvements 1,393,782 1,393,782
Furniture, fixtures and equipment 915,676 845,167
---------- ----------
4,706,676 4,620,617
Less accumulated depreciation and amortization 2,260,556 2,189,047
---------- ----------
$2,446,120 $2,431,570
========== ==========
10. ACCRUED INTEREST RECEIVABLE
September 30,
-----------------------------
1998 1997
---------- ----------
Loans $ 929,028 $ 693,958
Mortgage-backed securities 357,398 314,088
Investment securities 756,853 1,240,532
---------- ----------
$2,043,279 $2,248,578
========== ==========
11. DEPOSITS
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------------------
1998 1997
------------------------------------- -------------------------------------
Weighted Weighted
Average Average
Percent Amount Rate Percent Amount Rate
------- ------------ -------- ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand 5.73 $ 13,064,996 0.00% 4.72 $ 10,088,755 0.00%
Interest-bearing demand 6.98 15,913,714 1.87% 7.22 15,399,555 2.17%
Savings and club 33.43 76,267,570 2.13% 34.73 74,109,004 2.20%
Certificates of deposit 53.86 122,849,622 5.61% 53.33 113,796,968 5.80%
------ ------------ ------ ------------
Total deposits 100.00 $228,095,902 3.86% 100.00 $213,394,282 4.01%
====== ============ ==== ====== ============
</TABLE>
68
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. DEPOSITS (Cont'd)
The following table presents certificates of deposit outstanding based upon
interest rate ranges:
September 30,
---------------------------
1998 1997
-------- --------
(In Thousands)
Certificate accounts:
3.00% to 3.99% $ 3,391 $ 45
4.00% to 4.99% 32,934 12,148
5.00% to 5.99% 58,107 73,056
6.00% to 6.99% 11,488 12,333
7.00% to 7.99% 16,870 16,161
8.00% to 8.99% 60 54
-------- --------
$122,850 $113,797
======== ========
The scheduled maturities of certificates of deposit were as follows:
September 30,
-----------------------------
1998 1997
-------- --------
(In Thousands)
One year of less $ 80,234 $ 73,200
One to two years 24,660 14,609
Two to three years 11,185 14,128
Thereafter 6,771 11,860
-------- --------
Total $122,850 $113,797
======== ========
Certificates of deposit of $100,000 or more totalled approximately $14,122,000
and $11,516,000 at September 30, 1998 and 1997, respectively.
Interest expense on deposits consists of the following:
Year Ended September 30,
------------------------------------------
1998 1997 1996
---------- ---------- ----------
Demand $ 324,437 $ 359,612 $ 439,309
Savings and clubs 1,682,214 1,560,734 1,672,529
Certificates of deposit 6,926,424 6,182,463 5,480,885
---------- ---------- ----------
$8,933,075 $8,102,809 $7,592,723
========== ========== ==========
69
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. ADVANCES FROM FEDERAL HOME LOAN BANK OF NEW YORK ("FHLB")
September 30,
--------------------------
Interest Rate 1998 1997
------------- ---------- ----------
Notes maturing on:
December 19, 1997 5.597% $ -- $2,000,000
December 28, 1998 5.670% 6,000,000 6,000,000
---------- ----------
$6,000,000 $8,000,000
========== ==========
The Bank also 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 $44,487,000 and $39,598,000 at September 30, 1998 and 1997,
respectively. Advances under this line of credit, which expires on December 23,
1998, are made for one-day periods. The advances were secured by stock of the
FHLB in the amount of $2,110,400 and $1,845,000 at September 30, 1998 and 1997,
respectively, and mortgage loans with an unpaid balance of $29,483,000 and
$34,254,000 at September 30, 1998 and 1997, respectively.
13. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
<TABLE>
<CAPTION>
September 30,
-----------------------------
Lender Maturity Interest Rate 1998 1997
- ---------------------- ----------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Federal Home Loan Bank December 18, 2001 5.291% $ -- $ 5,000,000
Federal Home Loan Bank May 30, 2002 5.813% 10,000,000 10,000,000
Security broker dealer August 19, 2002 5.620% 10,000,000 10,000,000
Federal Home Loan Bank November 2, 2004 5.963% 5,000,000 --
Federal Home Loan Bank December 19, 2004 5.930% 7,000,000 --
Federal Home Loan Bank June 18, 2008 5.050% 10,000,000 --
----------- -----------
$42,000,000 $25,000,000
=========== ===========
</TABLE>
At September 30, 1998, the securities sold under agreements to repurchase are
all callable or will reprice within one year and at periodic intervals
thereafter.
70
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SECURITIES SOLD UNDER AGREEMENTS TO PURCHASE (Cont'd)
Information concerning borrowings collateralized by securities sold under
agreements to repurchase is summarized as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------
1998 1997 1996
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Average balance during the year $34,033 $12,010 $ 8,228
Average interest rate during the year 5.79% 5.53% 5.70%
Maximum month-end balance during the year $42,000 $25,000 $15,064
Investment and mortgage-backed securities underlying
the agreement at year end:
Carrying value $45,961 $28,545 $15,150
Estimated fair value $45,844 $28,427 $14,520
</TABLE>
14. TREASURY TAX AND LOAN ACCOUNT BORROWINGS
At September 30, 1998 and 1997, the Bank had borrowings from the Federal Reserve
Bank of New York under the Treasury Tax and Depository program in the amount of
$7,770,251 and $20,000,000, 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 $30,572,000 and $22,225,000
and fair value of $30,755,000 and $22,133,000, respectively.
15. INCOME TAXES
The Bank qualifies as a Savings Institution 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 after
September 30, 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 does not have a
material adverse effect on the Company's consolidated statement of income. 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.
71
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. INCOME TAXES (Cont'd)
Retained earnings at September 30, 1998 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,
------------------------------------------
1998 1997 1996
----------- ----------- -----------
Current tax expense:
Federal income $ 1,373,767 $ 1,164,599 $ 1,186,475
State and city income 600,232 509,672 576,919
----------- ----------- -----------
1,973,999 1,674,271 1,763,394
----------- ----------- -----------
Deferred tax expense (benefit):
Federal income 57,934 178,353 (609,709)
State and city income 84,212 76,853 (478,458)
----------- ----------- -----------
142,146 255,206 (1,088,167)
----------- ----------- -----------
$ 2,116,145 $ 1,929,477 $ 675,227
=========== =========== ===========
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:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Federal income taxes $ 1,739,810 $ 1,507,662 $ 621,558
Increase (reduction) of income taxes resulting from:
New York state and city taxes,
net of federal income tax effect 451,733 387,106 79,010
Cost of ESOP and RRP 15,381 (21,605) (14,835)
Other (90,779) 56,314 (10,506)
----------- ----------- -----------
$ 2,116,145 $ 1,929,477 $ 675,227
=========== =========== ===========
</TABLE>
At September 30, 1998 and 1997, refundable income taxes of $366,453 and
$217,953, respectively are included in other assets.
72
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. INCOME TAXES (Cont'd)
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:
<TABLE>
<CAPTION>
September 30,
--------------------------
Deferred income tax assets 1998 1997
- -------------------------- ---------- ----------
<S> <C> <C>
Uncollected interest $ 78,808 $ 279,421
Allowance for loss on loans
in excess of tax bad debt deductions 629,530 470,815
Deferred loan fees 58,467 66,147
Accrued pension and benefits 109,697 126,280
Deferred compensation 72,523 186,796
Depreciation 189,274 131,594
ESOP and RRP cost 44,822 98,524
Unrealized loss on investments available for sale 167,170 --
---------- ----------
1,350,291 1,359,577
---------- ----------
Deferred income tax liabilities
- -------------------------------
Deferred premiums and discounts 11,190 11,588
Deferred loss on investments in real estate 67,989 116,693
Unrealized gain on securities available for sale -- 71,975
State and city taxes 82,451 67,659
---------- ----------
161,630 267,915
---------- ----------
Net deferred income tax assets included in other assets $1,188,661 $1,091,662
========== ==========
</TABLE>
16. REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the Bank.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of Total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier 1 capital to assets (as defined).
73
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. REGULATORY CAPITAL (Cont'd)
The following tables present a reconciliation of capital per generally accepted
accounting principles ("GAAP") and regulatory capital and information as to the
Bank's capital levels at September 30, 1998 (in thousands):
GAAP capital $ 25,958
Add unrealized loss on securities available for sale 217
Less goodwill and other intangibles (109)
Less investment in "non-includable"
subsidiaries (3,320)
--------
Core and tangible capital 22,746
Add general valuation allowance 1,211
--------
Regulatory capital $ 23,957
========
<TABLE>
<CAPTION>
To Be Well Captialized
Minimum Capital Under Prompt Corrective
Actual Requirements Action Provisions
---------------- ----------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- -------- ----- ------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital $23,957 17.34% $ 11,054 8.00% $13,818 10.00%
(to risk-weighted assets)
Tier 1 Capital $22,746 16.46% -- -- $ 8,291 6.00%
(to risk-weighted assets)
Core (Tier1) Capital
(to adjusted total assets) $22,746 7.25% $ 12,555 4.00% $15,693 5.00%
Tangible Capital
(to adjusted total assets) $22,746 7.25% $ 4,708 1.50% -- --
</TABLE>
As of June 30, 1998, 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 I leverage ratios of 10%, 6% an 5%,
respectively. There are no conditions existing or events which have occurred
since notification that management believes have changed the institution's
category.
The dividend payments to the Company by the Bank are subject to the
profitability of the Bank and applicable regulations. On October 30, 1997, the
Bank paid a dividend of $1,881,000 to the Company.
74
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
<TABLE>
<CAPTION>
September 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligation, including
vested benefits of $2,606,121 and $2,170,928, respectively $ 2,683,465 $ 2,183,045
=========== ===========
Projected benefit obligation (2,953,686) $(2,634,154)
Plan assets at fair value 3,006,807 2,518,311
----------- -----------
Plan assets at fair value in excess of (less than)
projected plan obligation 53,121 (115,843)
Unrecognized (gain) (489,923) (423,050)
Unrecognized net transition obligation at
October 1, 1988 being amortized over fifteen years 143,325 170,625
Unrecognized prior service cost at
October 1, 1989 being amortized over 11.1 years 60,230 111,212
----------- -----------
(Accrued) pension cost included in other liabilities $ (233,247) $ (257,056)
=========== ===========
</TABLE>
Net periodic pension cost included the following components:
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Service cost $ 86,991 $ 88,225 $ 87,457
Interest cost 199,801 173,867 169,729
Actual return on plan assets (601,202) (285,480) (217,332)
Net amortization and deferral 290,601 141,159 115,821
--------- --------- ---------
Net periodic pension (benefit) cost
included in salaries and employee benefits $ (23,809) $ 117,771 $ 155,675
========= ========= =========
</TABLE>
Assumptions used in accounting for the plan are as follows:
Year Ended September 30,
-------------------------------
1998 1997 1996
------- ------- -------
Discount rate 7.75% 7.75% 7.50%
Rate of increase in compensation 5.50% 5.50% 5.50%
Long-term rate of return on plan assets 8.00% 8.00% 8.00%
75
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. BENEFIT PLANS (Cont'd)
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, 1998, 1997 and 1996 was
approximately $17,000, $14,000 and $14,000, respectively.
18. STOCK BENEFIT PLANS
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, 1998 and 1997, the Bank made cash contributions of
$287,347 and $232,066, respectively, to the ESOP, of which $197,523 and
$133,520, 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, 1998 and 1997, the loan had an outstanding balance of $935,440 and
$1,132,963, 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 $442,797, $278,923 and $217,561 for the
years ended September 30, 1998, 1997, and 1996, respectively.
76
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. STOCK BENEFIT PLANS (Cont'd)
ESOP (Cont'd)
The ESOP shares are summarized as follows:
September 30,
----------------------------
1998 1997
---------- ----------
Allocated shares 59,506 39,653
Shares to be released 8,473 12,140
Unreleased shares 84,971 101,157
---------- ----------
Total ESOP shares 152,950 152,950
========== ==========
Fair value of unreleased shares $2,814,664 $2,276,033
========== ==========
RRP
On January 26, 1995, the Bank established a 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. During the year ended September 30, 1998, 963 shares to
employees were forfeited.
The Company recorded compensation expense for the RRP of $37,067, $136,266 and
$136,266 for the years ended September 30, 1998, 1997 and 1996, respectively.
Stock Option Plan
The Company has adopted an Incentive Stock Option Plan ("ISO Plan") authorizing
the grant of stock options and limited rights equal to 152,950 shares of common
stock to officers and employees of the Bank or the Company. Options granted
under the ISO Plan may be either options that qualify as incentive stock options
as defined in section 422 of the Internal Revenue Code of 1986, as amended, or
non-statutory options. Options will be exercisable on a cumulative basis in
equal installments at the rate of 20% per year commencing one year from the date
of grant. All options granted will be exercisable in the event the optionee
terminates 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.
77
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. STOCK BENEFIT PLANS (Cont'd)
Stock Option Plan (Cont'd)
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:
Weighted
Average
Option Option Exercise
ISO Plan Plan Price Per Share Price
-------- ------- --------------- -----
Options reserved 152,950 65,550
======= =======
Balance at September 30, 1995 86,970 43,700 $9.44 $9.44
Granted -- 5,000 13.50 13.50
Exercised -- (10,925) 9.44 9.44
Cancelled (19,534) -- 9.44 9.44
------- -------
Balance at September 30, 1996 67,436 37,775 9.44 to 13.50 9.63
Granted 63,000 16,850 14.25 to 18.00 17.33
Exercised (8,609) -- 9.44 9.44
Cancelled (10,096) -- 9.44 9.44
------- -------
Balance at September 30, 1997 111,731 54,625 9.44 to 18.00 13.35
Granted 10,000 -- 26.00 26.00
Exercised (3,932) -- 9.44 9.44
Cancelled (2,624) -- 9.44 9.44
------- -------
Balance at September 30, 1998 115,175 54,625 9.44 to 26.00 14.24
======= =======
Shares execisable at
September 30, 1998 37,905 47,625 9.44 to 18.00 11.84
======= =======
78
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. STOCK BENEFIT PLANS (Cont'd.)
Stock Option Plan (Cont'd)
Had compensation cost for the Company's stock benefit plans been determined
consistent with SFAS 123 for awards made after September 30, 1995, estimating
fair values on the date of grant using the Black- Scholes option pricing model
with the following assumptions, the Company's net income and net income per
common share would have been reduced to the pro forma amounts reflected below:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars in Thousands,
except for per share data)
<S> <C> <C> <C>
Net income:
As reported $ 3,001 $ 2,505 $ 1,153
Pro forma $ 2,964 $ 2,488 $ 1,152
Net income per common share:
As reported:
Basic $ 1.86 $ 1.54 $ 0.66
Diluted $ 1.77 $ 1.50 $ 0.65
Pro forma:
Basic $ 1.84 $ 1.53 $ 0.66
Diluted $ 1.75 $ 1.49 $ 0.65
Weighted average fair value at date of grant $ 5.55 $ 3.77 $ 3.04
Dividend yield 1.92% 2.32% 1.48%
Expected volatility 16.73% 17.48% 17.48%
Risk free interest rate 5.64% 6.19% 5.28%
Expected lives of options (in years) 5 5 5
</TABLE>
19. 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.
79
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. LEGISLATIVE MATTER (Cont'd.)
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.
20. COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments 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,
-------------------------------
1998 1997
---------- ----------
Conventional mortgages $7,983,000 $8,565,000
========== ==========
At September 30, 1998, of the $7,983,000 in outstanding commitments to originate
loans, $6,675,000 are at fixed rates ranging from 6.38% to 9.50% and $1,308,000
are at adjustable rates with initial rates ranging from 6.00% to 8.25%.
80
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. COMMITMENTS AND CONTINGENCIES (Cont'd.)
Rentals under long-term operating leases for certain branch offices amounted to
approximately $188,000, $178,000 and $144,000 for the years ended September 30,
1998, 1997 and 1996, respectively. At September 30, 1998, 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
------------- --------
1999 $190,000
2000 139,000
2001 102,000
2002 48,000
2003 48,000
Thereafter 101,000
--------
$628,000
========
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.
21. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the corporation's financial instruments
are as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------
1998 1997
---------------------- ----------------------
Carrying Fair Carrying Fair
Financial assets Value Value Value Value
-------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 7,376 $ 7,376 $ 13,388 $ 13,388
Investment securities, including available for sale 52,488 52,883 70,141 69,953
Mortgage-backed securities, including available for sale 48,921 49,261 47,878 48,486
Loans receivable 196,027 202,422 153,292 156,083
Accrued interest receivable 2,043 2,043 2,249 2,249
Financial liabilities
Deposits 228,096 229,984 213,394 214,103
Advances and other borrowings 55,770 56,578 53,000 51,452
Commitments
To originate loans 7,983 7,983 8,565 8,565
</TABLE>
81
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. FAIR VALUES OF FINANCIAL INSTRUMENTS (Cont'd.)
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.
82
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. 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, 1998 and 1997 and for the three-year period ended September 30,
1998.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
September 30,
--------------------------
Assets 1998 1997
----------- -----------
Cash and amounts due from depository institution $ 579,752 $ 396,357
Investment securities available for sale 706,750 --
Accrued interest receivable 76,427 65,853
ESOP loan receivable 935,440 1,132,963
Investment in Financial Federal Savings Bank 25,958,635 24,717,432
Investment in 842 Manhattan Avenue Corp. 297,936 264,590
Other assets 620,351 319,595
----------- -----------
Total assets $29,175,291 $26,896,790
=========== ===========
Liabilities and stockholders' equity
Other liabilities $ -- $ 40,556
Stockholders' equity 29,175,291 26,856,234
----------- -----------
Total liabilities and stockholders' equity $29,175,291 $26,896,790
=========== ===========
83
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. PARENT ONLY FINANCIAL INFORMATION (Cont'd)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest income $ 99,397 $ 90,849 $ 112,031
Equity in earning of the subsidiaries 2,983,831 2,583,008 1,211,457
----------- ----------- -----------
3,083,228 2,673,857 1,323,488
Expenses 128,295 226,680 201,401
----------- ----------- -----------
Income before income taxes 2,954,933 2,447,177 1,122,087
Income tax (benefit) (46,011) (57,646) (30,798)
----------- ----------- -----------
Net income $ 3,000,944 $ 2,504,823 $ 1,152,885
=========== =========== ===========
</TABLE>
84
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. PARENT ONLY FINANCIAL INFORMATION (Cont'd)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,000,944 $ 2,504,823 $ 1,152,885
Adjustments to reconcile net income
to net cash used in operating activities:
Equity in undistributed earnings of the subsidiaries (1,102,831) (2,583,008) (1,211,457)
(Increase) decrease in accrued interest receivable (10,574) 9,205 11,126
(Increase) decrease in other assets (303,726) 82,214 (315,105)
(Decrease) increase in other liabilities (40,556) 1,196 39,360
----------- ----------- -----------
Net cash provided by (used in) operating activities 1,543,257 14,430 (323,191)
----------- ----------- -----------
Cash flows from investing activities:
Decrease in ESOP loan receivable 197,523 133,520 190,184
Capital contribution to 842 Manhattan Avenue Corp. -- -- (236,000)
Purchase of investment securities available for sale (700,000) -- --
----------- ----------- -----------
Net cash (used in) provided by investing activities (502,477) 133,520 (45,816)
----------- ----------- -----------
Cash flows from financing activities:
Acquisition of treasury stock (129,375) (1,412,789) (2,522,444)
Payment of dividends on common stock (765,128) (611,548) (478,742)
Treasury stock reissued for stock options 37,118 81,269 103,132
----------- ----------- -----------
Net cash (used in) financing activities (857,385) (1,943,068) (2,898,054)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 183,395 (1,795,118) (3,267,061)
Cash and cash equivalents - beginning 396,357 2,191,475 5,458,536
----------- ----------- -----------
Cash and cash equivalents - ending $ 579,752 $ 396,357 $ 2,191,475
=========== =========== ===========
</TABLE>
85
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Year Ended September 30, 1998 Quarter Quarter Quarter Quarter
- ----------------------------- ------ ------ ------ ------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income $5,318 $5,395 $5,568 $5,684
Interest expense 2,802 2,970 2,962 3,056
------ ------ ------ ------
Net interest income 2,516 2,425 2,606 2,628
Provision for loan losses 110 85 118 88
Non-interest income 183 325 314 135
Non-interest expenses 1,355 1,353 1,566 1,340
Income taxes 534 575 457 550
------ ------ ------ ------
Net income $ 700 $ 737 $ 779 $ 785
====== ====== ====== ======
Earnings per commons share:
Basic $ 0.43 $ 0.46 $ 0.48 $ 0.49
Diluted $ 0.42 $ 0.44 $ 0.46 $ 0.45
====== ====== ====== ======
<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
====== ====== ====== ======
Earnings per common share:
Basic $ 0.36 $ 0.35 $ 0.41 $ 0.42
Diluted $ 0.35 $ 0.35 $ 0.40 $ 0.40
====== ====== ====== ======
</TABLE>
86
<PAGE>
FINANCIAL BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24. MERGER WITH DIME COMMUNITY BANCHARES, INC.
On July 18, 1998, the Company entered into a definitive merger agreement with
Dime Community Bancshares, Inc. ("Dime Community"), pursuant to which the
Company will be merged with and into Dime Community. Immediately following the
consummation of the merger, Financial Federal Savings Bank, a subsidiary of the
Company, will merge with and into Dime Community Savings Bank of Williamsburgh,
a wholly owned subsidiary of Dime Community.
Under the terms of the agreement, holders of the Company common stock will
receive cash or shares of Dime Community common stock pursuant to an election,
proration and allocation procedure subject to holders of 50% of the Company's
shares receiving cash and 50% receiving stock. The number of shares of stock any
Company stockholder receives will be determined based upon an exchange ratio
designed to produce a value of $40.50 per share when Dime Community stock has a
market value, during a pricing period specified in the agreement, of between
$22.95 and $31.05. The maximum exchange ratio is 1.7647 and the minimum exchange
ratio is 1.3043. To the extent that the market value of Dime Community common
stock during the pricing period exceeds $31.05 or is less than $22.95, the per
share value of the consideration to be received by the Company stockholders in
the merger, whether in cash or stock, will increase or decrease, respectively.
The Company granted Dime Community an irrevocable option to purchase up to
339,627 shares of common stock at a purchase price equal to $32.00 per share. In
no event shall the number of option shares exercised exceed 19.9% of the issued
and outstanding shares of the Company. The Dime Community may exercise the
option, in whole or in part, at anytime and from time to time, following the
occurrence of purchase events, as defined, which occur prior to termination. The
option shall terminate at the earlier of the effective time of merger or other
events specified in the agreement. Purchase events include issuance, sale or
other disposition by the Company of securities representing 20% or more voting
power of the Company or any of its significant subsidiaries. Deferred merger
costs in the amount of $488,000 are included in other assets at September 30,
1998.
87
<PAGE>
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 following table sets forth, as of September 30, 1998, the names of the
directors, their ages, a brief description of their recent business experience,
including present occupations and employment, certain directorships held by
each, the year in which each became a director, the year in which their terms
(or in the case of the nominees, their proposed terms) as director of the
Company expire. The table also sets forth the amount of Common Stock and the
percent thereof beneficially owned by each and all directors and executive
officers as a group as of the Record Date.
88
<PAGE>
<TABLE>
<CAPTION>
Shares of
Name and Principal Expiration Common Stock
Occupation at Present Director of Term as Beneficially Percent of
and for Past Five Years Age Since(1) Director Owned(2) Class
- ----------------------- --- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
DIRECTORS
Peter S. Russo 52 1987 2000 53,760(4) 3.12%
Chairman of the Board. Managing
partner in Trio Realty Co. and Quad
Realty Co., owner of various retail and
commercial properties. President of Ven-
Rea Corp., a photo retailer.
Dominick L. Segrete 58 1974 2001 69,262(4) 4.03
President and Chief Executive Officer of
Tucci, Segrete and Rosen Consultants Inc.,
an architectural design firm.
Frank S. Latawiec 63 1996 2001 30,956(3)(6) 1.80
President and Chief Executive Officer of
the Company and the Bank since August
6, 1996. Prior to that, Vice President
for LCM Marketing, Inc., a financial services
company, and Senior Vice President for
Hamilton Federal Savings, F.A.
Richard J. Hickey 60 1988 1999 22,354(4) 1.30
Partner in the firm of Girardi & Hickey,
certified public accountants. Prior to that,
Mr. Hickey was a partner in the firm of
Girardi, Hickey and Napolitano, certified
public accountants.
Raymond M. Calamari 67 1996 1999 8,000(5) 0.47
Business Consultant, self-employed.
Office Manager for LCM Marketing, Inc.,
a financial services company. Prior to
that, Vice President for Marketing for
H.T.C. Inc., an industrial products
company, and President and Chief
Executive Officer of D.A.V. Corp., an
industrial products fabricator.
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
Shares of
Name and Principal Expiration Common Stock
Occupation at Present Director of Term as Beneficially Percent of
and for Past Five Years Age Since(1) Director Owned(2) Class
- ----------------------- --- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
NAMED EXECUTIVE OFFICERS
WHO ARE NOT DIRECTORS
P. James O'Gorman 39 -- -- 40,518(3)(6) 2.36%
Executive Vice President, Chief Financial
Officer and Treasurer of the Company
and the Bank since March 1997.
STOCK OWNERSHIP OF ALL -- -- -- 250,194(6)(7) 14.07
DIRECTORS AND EXECUTIVE
OFFICERS AS A GROUP
(9 PERSONS)
</TABLE>
- ----------
(1) Includes years of service as a director of the Company's predecessor, the
Bank.
(2) Each person effectively exercises sole (or shares with spouse or other
immediate family member) voting or dispositive power as to shares reported
herein (except as noted).
(3) Includes 3,002, 4,002 and 2,001 unvested shares held by Mr. Latawiec under
Part I, Part II and Part III, respectively, of the Financial Federal
Savings Bank Recognition and Retention Plan ("RRP") which will vest in
equal annual installments until September 24, 2001, February 18, 2002 and
June 17, 2002, respectively. Includes 3,117, 2,801 and 1,613 unvested
shares held by Mr. O'Gorman under Part I, Part II and Part III,
respectively, of the RRP which will vest in equal annual installments until
January 26, 2000, February 18, 2002 and June 17, 2002, respectively.
(4) Includes 10,925, 16,850 and 16,850 shares subject to options held by Mr.
Segrete, Mr. Russo and Mr. Hickey, respectively, under the Financial
Bancorp, Inc. 1995 Stock Option Plan for Outside Directors ("Directors'
Option Plan"), which are currently exercisable.
(5) Includes 1,000 and 1,000 shares subject to options held by Mr. Calamari
under the Directors' Option Plan, which became exercisable on October 22,
1997 and October 22, 1998, respectively. Does not include the remaining
3,000 shares subject to options granted to Mr. Calamari under the
Directors' Option Plan, which will continue to vest in equal annual
installment on October 22, 1999, 2000 and 2001, respectively.
(6) Includes 4,590, 3,200 and 1,200 shares subject to options held by Mr.
O'Gorman under Part I, Part II and Part III, respectively, of the Incentive
Stock Option Plan ("Incentive Option Plan") which became exercisable in
equal annual installments on January 26, 1996, February 18, 1998 and June
17, 1998, respectively. Does not include the remaining 3,058, 12,800 and
4,800 shares subject to option granted to Mr. O'Gorman under the Incentive
Option Plan which will continue to vest in equal annual installments until
January 26, 2000, February 18, 2002 and June 17, 2002, respectively.
Includes 3,000, 4,800 and 1,800 shares subject to options held by Mr.
Latawiec under the Directors' Option Plan and Part II and Part III,
respectively, of the Incentive Stock Option Plan which became exercisable
in equal annual installments beginning December 21, 1996, February 18, 1998
and June 17, 1998. Does not include 2,000, 19,200 and 7,200 shares subject
to options granted to Mr. Latawiec under the Directors' and Incentive
Option Plan which will continue to vest in equal annual installments until
December 21, 2000, February 18, 2002 and June 17, 2002, respectively.
(7) Includes 49,625 shares which may be acquired through the exercise of stock
options granted under the Directors' Option Plan, 19,937 shares with
respect to all executive officers which may be acquired through the
exercise of stock options under the Incentive Stock Option Plan, and 23,568
unvested shares awarded to executive officers under the RRP.
90
<PAGE>
Executive Officers Who Are Not Directors
The following table sets forth certain information regarding executive
officers of the Company, at September 30, 1998, who are not also directors.
Name Age Position Held
- --------------------------------------------------------------------------------
P. James O'Gorman 39 Executive Vice President, Chief Financial
Officer and Treasurer
Robert E. Adamec 55 Senior Vice President and Corporate Secretary
Valerie M. Swaya 32 Vice President and Chief Administrative Officer
Dennis Hodne 52 Senior Vice President, Retail Operations
P. James O'Gorman. Mr. O'Gorman joined the Bank in 1990 as Controller, and
in March 1991 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, and in March 1997 was promoted to Executive
Vice President. 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.
Dennis Hodne. Mr. Hodne has been employed by the Bank since April 1998 as
Senior Vice President. Prior to April 1998, Mr. Hodne was Senior Vice President
and Branch Administrator at Home Federal Savings Bank and Senior Vice President
of Hamilton Federal Savings and Loan Association from 1992 to 1994.
ITEM 11. EXECUTIVE COMPENSATION
Directors' Fees
Directors of the Company do not receive any fees or retainer for serving on
the Company's Board of Directors. For the 1998 fiscal year, outside directors of
the Bank received an annual retainer of $35,000 and the Chairman received an
annual retainer of $25,000, All fees are paid to outside directors on a monthly
basis. Directors of the Bank receive no fee or other compensation for
participation on committees of the Board. Directors who are also officers of the
Bank or the Company receive no fee or other compensation for their Board or
Committee participation. In addition, commencing in January 1998, Mr. Calamari
receives $500 per month for building/property inspections for potential loan
originations of mixed-use, multi-family and commercial real estate loans.
Outside Directors' Consultation and Retirement Plan.
The Bank maintains the Financial Federal Savings and Loan Association
Outside Directors' Consultation and Retirement Plan (the "Directors' Retirement
Plan") to provide benefits to outside directors and to ensure their continued
service and assistance in the conduct of the Bank's business in the future.
Directors who currently are not officers or
91
<PAGE>
employees of the Bank ("Outside Directors"), have served as a director for at
least seven years and who, within thirty days of retirement, agree to provide
consulting services to the Bank are eligible, upon retirement, to receive an
annual benefit, based on the Outside Director's annual retainer fee determined
at the date of termination, equal to the lesser of ten (10) years or one half of
the number of months of such participant's credited service. The Directors'
Retirement Plan provides that, in the event of a change in control of either the
Company or the Bank, any requirement for the performance of consulting services
is waived, and the compensation that would have been payable to each currently
serving, eligible outside director in the event of his retirement will be paid
in a single lump sum without discount for early payment. Consummation of the
Merger with Dime Bancshares will result in a change in control of the Company
and the Bank for purposes of the Directors' Retirement Plan. Assuming a closing
date of February 1, 1999, the following lump sum amounts would be payable as of
the Effective Time to the following current directors: Mr. Russo, $195,417; Mr.
Segrete, $250,000; and Mr. Hickey, $129,167.
Outside Directors' Option Plan.
The Company maintains the Stock Option Plan for Outside Directors
("Directors' Option Plan") for all directors who are not also employees of the
Company or the Bank. The Directors' Option Plan authorizes the granting of
non-statutory options for a total of 65,550 shares of Common Stock to certain
members of the Board of Directors of the Company. Directors who were serving as
directors on both the date of the Company's initial public offering and the
effective date of the Directors' Option Plan and who were not also serving as
employees of the Company or any of its affiliates are eligible to participate in
the Directors' Option Plan. Each member of the Board of Directors who was not an
officer of the Bank or the Company received options to purchase a number of
shares of Common Stock, depending upon length of Board service, at an exercise
price of 100% of the Fair Market Value of the Common Stock of the Company on the
date of grant. Each outside director with years of service in excess of five (5)
years was granted non-statutory options to purchase 10,925 shares of Common
Stock. Each outside director with less than five (5) years of service was
granted non-statutory options to purchase 5,000 shares of Common Stock. Options
granted after September 24, 1996 under the Directors Option Plan become
exercisable in the amount of twenty percent (20%) per year commencing one year
from the date of grant. In addition, options granted in December 1995 to Mr.
Latawiec under the Directors Option Plan became exercisable in the amount of
twenty percent (20%) per year commencing one year from the date of grant.
Recognition and Retention Plan for Outside Directors.
The Company maintains the Recognition and Retention Plan for Outside
Directors ("RRP") which grants awards to directors who are not also employees of
the Company or the Bank. The RRP authorizes the granting of plan share awards
("Plan Share Awards") in the form of up to 65,550 shares of Common Stock. Under
Part II of the RRP, outside directors serving in such capacity as of the
effective date of the RRP were awarded Plan Share Awards based upon length of
Board service. Each outside director with years of service in excess of twenty
(20) years was granted an award of 1,500 shares of Common Stock. Each outside
director with between ten (10) and twenty (20) years of service was granted an
award of 1,000 shares of Common Stock. Each outside director with between five
(5) and ten (10) years of service was granted an award of 500 shares of Common
Stock. Plan Share Awards are nontransferable and nonassignable. Recipients of
the Plan Share Awards will earn (i.e., become vested in) the shares of Common
Stock covered by the Plan Share Awards over a period of time. At September 30,
1997, all Plan Share Awards granted to Outside Directors to date were vested.
Plan Share Awards to subsequent Outside Directors shall vest at the rate of
twenty percent (20%) annually commencing one year from the date of grant.
Pursuant to the terms of the FIBC Option Plans and the Financial Federal
Savings Bank Recognition and Retention Plan (together, the "FIBC Stock Plans"),
upon consummation of the Merger, each FIBC Option will become fully vested and
exercisable and each award of restricted shares of FIBC Common Stock will
immediately vest. As of October 30, 1998, the executive officers of FIBC held
FIBC Options at the indicated weighted average exercise price: Mr. Latawiec,
38,000 shares at $17.17 (29,400 of which are currently unvested); Mr. Adamec,
7,244 shares at $11.53 (3,697 of which are currently unvested); Mr. O'Gorman,
29,648 shares at $15.59 (20,658 of which are currently unvested); and Ms. Swaya,
4,000 shares at $17.00 (3,200 of which are currently unvested). As of such date,
such
92
<PAGE>
executive officers held shares of restricted stock, as follows: Mr. Latawiec,
9,003 shares; Mr. Adamec, 2,671 shares; Mr. O'Gorman, 7,531 shares; and Ms.
Swaya, 4,361 shares. As of October 30, 1998, the directors of FIBC held FIBC
Options at the indicated weighted average exercise price: Mr. Calamari, 5,000
shares at $14.25; Mr. Hickey, 16,850 shares at $12.10; Mr. Russo, 16,850 shares
at $12.10; and Mr. Segrete, 10,925 shares at $9.44.
Executive Compensation
The report of the Compensation Committee and the stock performance graph
shall not be deemed incorporated by reference by any general statement
incorporating by reference this proxy statement into any filing under the
Securities Act of 1933, as amended (the "Securities Act") or the Exchange Act,
except as to the extent that the Company specifically incorporates this
information by reference, and shall not otherwise be deemed filed under such
Acts.
Compensation Committee Report on Executive Compensation. Under rules
established by the Securities and Exchange Commission ("SEC"), the Company is
required to provide certain data and information in regard to the compensation
and benefits provided to the Company's Chief Executive Officer and other
executive officers of the Company. The disclosure requirements for the Chief
Executive Officer and other executive officers include the use of tables and a
report explaining the rationale and considerations that led to fundamental
compensation decisions affecting those individuals. In fulfillment of this
requirement, the executive compensation committee of the Bank at the direction
of the Board of Directors has prepared the following report for inclusion in
this proxy statement.
This report is submitted by the Compensation Committee of the Boards of
Directors of the Company and Bank (the "Compensation Committee") and summarizes
its involvement in the compensation decisions, policies and programs adopted by
the Bank and Company for executive officers, including the Chief Executive
Officer ("CEO"), during the fiscal year ended September 30, 1998. The members of
the Compensation Committee include Messrs. Hickey (Chairman), Segrete, Russo and
Calamari, all of whom are outside directors.
General Policy. The stated purpose of the Compensation Committee and its
corresponding practices are designed to reward and provide incentives for
executives, based upon the Company's financial performance and the individual's
performance. One of the primary objectives of the executive compensation program
is to retain skilled and motivated executive officers, along with promoting
growth and profitability for the Company. Compensation levels are established
subsequent to a review of certain quantitative and qualitative factors,
including, but not limited to, financial performance, the individual's
commitment, leadership and level of responsibilities.
The Compensation Committee is responsible for conducting periodic reviews
of compensation for executive officers, including the CEO. The Compensation
Committee determines salary levels for executive officers, other officers and
employees, and short-term cash incentive awards, if and as deemed appropriate,
in addition to grants under the Bank and Company's stock-based benefit plans.
Components of Compensation. In evaluating executive compensation, the
Compensation Committee reviews and analyzes three fundamental components, which
include salary, short-term incentive awards (performance awards) and long-term
incentive compensation, which includes, but is not limited to, grants under the
Company's stock-based benefit plans.
Salary. Salary levels for executive officers and other officers are
reviewed by the Compensation Committee on an annual basis. Evaluations of the
executive officers and their specific cash compensation levels are based upon
the Company's financial performance for the said fiscal year, in addition to
certain discretionary criteria; however, no specific formula was used to
determine annual cash compensation levels or performance awards for executive
officers, although the Company's financial performance was a major factor which
determined compensation levels. Salary levels are designed to be commensurate
with the individual's responsibilities, experience and marketplace conditions.
In making such determination, the Compensation Committee reviewed the "1998 Bank
Executive and Director Compensation Survey" published by Sheshunoff. The
institutions reviewed by the compensation committee in the survey are not
necessarily comprised of the same group of institutions used in the peer group
of the Stock Performance
93
<PAGE>
Graph. For purposes of determining compensation, the Bank generally considers
its peer group to consist of thrift institutions and banks with deposits between
$250 million and $500 million, operating in the Mid-Atlantic region, with
particular emphasis on the New York City Metropolitan Area.
Short-term Incentive Compensation (Performance Awards). The Board of
Directors adopted, as part of its Executive Compensation Policy, a program for
quarterly incentive performance awards. Historically, the short-term incentive
component of executive compensation has been granted based upon the Company's
annual profitability. The short-term incentive awards are in the form of cash
distributions or stock-based benefit awards to executives based upon financial
performance, as well as individual achievements. The financial performance
component consists of certain factors, including, but not limited to, earnings
per share, return on average assets and return on average equity. Although the
Compensation Committee analyzes these individual factors, no specific
mathematical weightings of these factors are used to calculate the performance
awards. However, the Compensation Committee makes these performance measures as
quantitative and objective as possible.
The Compensation Committee has the authority and discretion to make
adjustments to the short-term incentive plan as deemed prudent and appropriate.
The Compensation Committee determined that short-term incentive awards for
executive officers be determined and distributed on a quarterly basis,
subsequent to a review of the Company's quarterly financial results. The CEO and
the other executive officers were granted cash incentive awards for three
quarters of fiscal 1998.
Long-term Incentive Compensation. The long-term incentive compensation
portion of the Bank and Company's compensation program consists of the ESOP, the
RRP and the Incentive Option Plan. After the Company's first Annual Meeting of
Shareholders held on January 26, 1995, the Committee granted stock options and
restricted stock awards during fiscal 1995, 1996 and 1997, which vest over a
five year period. These stock-based benefit plans are designed as an incentive
for the executive officers and key employees of the Bank to encourage and retain
longer-term performance, and to align the financial interests of such
individuals with those of the Company's shareholders.
All stock options granted under the Incentive Option Plan have an exercise
price equal to the fair market value of the common stock on the date of grant.
Under the RRP, the awards are granted in the form of shares of the Company's
Common Stock, which are held in trust until the share award vests. The
Compensation Committee may grant awards at its discretion under the plan at any
time. Although there is no specific formula, the factors utilized in determining
an individual's eligibility in the plans are commensurate with the executive
officer's position, responsibilities and contributions to the Company.
Compensation of the Chief Executive Officer. In assessing the appropriate
level of compensation for the CEO, the Compensation Committee reviews corporate
performance, individual performance, and a published compensation survey. For
fiscal 1998, the CEO's annual base salary was $120,016.
The Compensation Committee recognizes the CEO's contributions to the
Company's operations and attempts to ensure that the CEO's compensation is
commensurate with the Company's peer group. Subsequent to a review of the "1998
Bank Executive and Director Compensation Survey" published by Sheshunoff, the
Compensation Committee determined that the CEO's cash compensation is in line
with the average disclosed in the compensation survey.
Although certain quantitative and qualitative factors were reviewed to
determine the CEO's compensation, no specific formula was utilized in the
Compensation Committee's decisions nor did the Committee set a specified salary
level based upon the corporate performance.
94
<PAGE>
The Compensation Committee
Richard J. Hickey (Chairman)
Peter S. Russo
Dominick L. Segrete
Raymond M. Calamari
95
<PAGE>
Stock Performance Graph. The following graph shows a comparison of total
shareholder return on the Company's Common Stock, based on the market price of
the Common Stock with the cumulative total return of companies in The Nasdaq
Stock Market and The Nasdaq Stock Market Bank Stock Index for the period
beginning on August 17, 1994, the day the Company's Common Stock began trading,
through September 30, 1998. The data was supplied by the Center for Research in
Security Prices ("CRSP").
Comparison of Total Returns of Financial Bancorp, Inc.
Nasdaq Market Index and Nasdaq Bank Stocks
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Summary
<TABLE>
<CAPTION>
8/17/94 9/30/94 9/29/95 9/30/96 9/30/97 9/30/98
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Financial Bancorp, Inc. 100.0 92.2 127.3 142.5 211.4 315.5
Nasdaq Market Index 100.0 102.9 142.1 168.6 231.4 236.5
Nasdaq Bank Stocks Index 100.0 98.6 124.3 158.6 264.3 262.3
</TABLE>
Notes:
A. The lines represent annual index levels derived from compounded daily
returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the
previous trading day.
C. If the monthly interval, based on the fiscal year-end is not a trading day,
the preceding trading day is used.
D. The index level for all series was set to $100.00 on 8/17/94.
96
<PAGE>
Summary Compensation Table. The following table shows, for the years ended
September 30, 1998, 1997 and 1996, the cash compensation paid by the Bank, as
well as certain other compensation paid or accrued for those years, to each
person serving as chief executive officer during fiscal year 1998 and executive
officers of the Company and the Bank who received salary and bonus in excess of
$100,000 in fiscal year 1998 ("Named Executive Officers"). No other executive
officer of the Company and the Bank received salary and bonus in excess of
$100,000 in fiscal year 1998. The Company does not pay any cash compensation.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------------- -----------------------------------
Awards Payouts
-------------------------- -------
Securities
Other Annual Restricted Underlying LTIP
Name and Salary Bonus Compensation Stock Awards Options/SARs Payouts All Other
Principal Office Year ($)(1) ($) ($)(2) ($)(3) (#)(4) (5) Compensation
---------------- ---- -------- -------- ------------ ------------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Frank S. Latawiec ............ 1998 $120,016 $ 75,000(8) $ -- $ -- 5,000(9) None $ --
President and Chief 1997 120,016 51,500 -- 130,313 33,000 None --
Executive Officer of 1996 17,541 -- -- 76,250 -- None 10,500(6)
the Company and the
Bank
P. James O'Gorman ............ 1998 $ 83,980 $ 64,000(8) $ -- $ -- -- None $ 58,466(7)
Executive Vice 1997 83,980 31,000 -- 97,693 22,000 None 27,405
President, Chief 1996 79,307 6,000 -- -- -- None 12,677
Financial Officer of the
Company and the Bank
</TABLE>
(1) Salary includes compensation deferred at the election of the Named
Executive Officers through the Bank's 401(k) Plan.
(2) There were no (a) perquisites over the lesser of $50,000 or 10% of either
of the Named Executive Officer's total salary and bonus for the year; (b)
payments of above-market preferential earnings on deferred compensation;
(c) payments of earnings with respect to long-term incentive plans prior to
settlement or maturation; (d) tax payment reimbursements; or (e)
preferential discounts on stock.
(3) Mr. Latawiec and Mr. O'Gorman held an aggregate of 9,005 and 7,531 unvested
shares of Common Stock, respectively, pursuant to the RRP. Unvested awards
to Mr. Latawiec and Mr. O'Gorman will vest in equal annual installments
from the respective dates of their grants. When shares become vested and
are distributed, the recipient will also receive an amount equal to
accumulated dividends and earnings thereon (if any). All awards vest
immediately upon termination of employment due to death, disability or
change in control. As of September 30, 1998, the market value of the 9,005
unvested shares held by Mr. Latawiec was $298,291 and the market value of
the 7,531 unvested shares held by Mr. O'Gorman was $249,464.
(4) Includes options awarded under the Incentive Option Plan. To the extent not
already exercisable, the options become exercisable upon death, disability
or a change in control. See "Incentive Stock Option Plan."
(5) For fiscal years 1998, 1997 and 1996, the Bank had no long-term incentive
plans in existence, and therefore made no payouts or awards under such
plans.
(6) Represents directors' fees paid to Mr. Latawiec during fiscal 1996 prior to
his appointment as President and Chief Executive Officer of the Bank and
the Company.
(7) Represents shares of Common Stock granted pursuant to the ESOP. For fiscal
year 1998, Mr. O'Gorman was allocated 1,765 shares of Common Stock. Dollar
amounts reflect market value $58,466 as of September 30, 1998. No
discretionary contributions were made to the 401(k) for fiscal 1998.
(8) Bonuses are earned on a fiscal year basis and are paid quarterly. A portion
of the fiscal year 1998 bonus was paid during the first fiscal quarter of
1999. Mr. Latawiec and Mr. O'Gorman were awarded $75,000 and $64,000,
respectively, in short-term incentive awards.
(9) Includes options awarded under the Directors Incentive Stock Option Plan
during the time Mr. Latawiec served as an outside director.
97
<PAGE>
Employment/Salary and Benefit Continuation Agreements. FIBC has in effect
Employment Agreements with each of Messrs. Adamec and O'Gorman which provide,
among other things, for severance and other benefits to be paid in the event of
a qualifying termination of the executive's employment with FIBC during the term
of the Employment Agreement and following a change in control (as defined in the
Employment Agreements). In addition to cash severance payments, the executive is
entitled under his Employment Agreement to continued welfare-type benefits for
the 36-month period following the date of such termination of employment, and to
receive benefits due to him or contributed on his behalf to any retirement,
incentive, profit sharing, bonus, performance disability or other employee
benefit plan maintained by FIBC or Financial Federal on the executive's behalf.
In connection with the Merger, Dime Bancshares has entered into a letter
agreement with each of Messrs. Adamec and O'Gorman whereby such executives will
receive on the Closing Date in full settlement of their rights to severance pay
under the Employment Agreement a lump sum in cash equal to, for Mr. Adamec,
$319,958; and Mr. O'Gorman, $462,747 (each executive will still be entitled to
continued welfare-type benefits as described above). Consummation of the Merger
will constitute a change in control for purposes of the Employment Agreements.
FIBC has in effect Salary Continuation Agreements with each of Mr. Latawiec
and Ms. Swaya which provide for salary continuation and other benefits to be
paid in the event of a change in control (as defined in the Salary Continuation
Agreements). In addition to salary continuation payments, the executive is
entitled under his or her Salary Continuation Agreement to continued
welfare-type benefits for the two-year period following the date of such change
in control. Each Salary Continuation Agreement provides that the aggregate
benefits to be received by the executive under such agreement will be reduced in
order to avoid any portion of such benefits being treated as an "excess
parachute payment" (within the meaning of Section 280G of the Code). In
connection with the Merger, Dime Bancshares and each of Mr. Latawiec and Ms.
Swaya have entered into a letter agreement whereby such executives will receive
in full settlement of their rights to salary continuation payments under the
Employment Agreement the lesser of (i) the maximum amount which may be paid
without any portion of such amount being treated as an excess parachute payment
and (ii) a lump sum in cash equal to, for Mr. Latawiec, $240,032; and for Ms.
Swaya, $130,416 (each executive will still be entitled to continued welfare-type
benefits as described above). The Merger will constitute a change in control for
purposes of the Salary Continuation Agreements.
In exchange for the receipt of severance or salary continuation payments,
as applicable, on the Closing Date, each executive has agreed to execute a
general release of FIBC, Financial Federal, Dime Bancshares and Dime of
Williamsburgh from any claims which the executive has or may have with respect
to the Employment Agreement or Salary Continuation Agreement, as applicable
(except for claims with respect to continued welfare benefits).
Incentive Stock Option Plan. The Company maintains the Incentive Stock
Option Plan, which provides discretionary awards to officers and key employees
as determined by a committee of disinterested directors who administer the plan.
No stock appreciation rights were granted to the Named Executive Officers during
fiscal year 1998.
98
<PAGE>
The following table provides certain information with respect to the number
of shares of Common Stock represented by outstanding options held by the Named
Executive Officers as of September 30, 1998. Also reported are the value for
"in-the-money" options which represent the positive spread between the exercise
price of any such existing stock options and the year-end price of the Common
Stock.
FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Securities Underlying Number Value of Unexercised In-the-
of Unexercised Options/SARs Money Options/SARs at
at Fiscal Year End (#) Fiscal Year End ($)
---------------------------------- ------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
-------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
Frank S. Latawiec.................... 9,600 28,400 $160,500 $445,750(1)
P. James O'Gorman.................... 8,990 20,658 176,464 343,429(2)
</TABLE>
- ----------
(1) Market value of underlying securities at fiscal year end ($33.125) minus
the exercise or base price ($13.50, $18.00 and $17.00) per share for 2,000,
19,200 and 7,200 shares subject to options, respectively.
(2) Market value of underlying securities at fiscal year end ($33.125) minus
the exercise or base price ($9.44, $18.00 and $17.00) per share for 3,058,
12,800 and 4,800 shares subject to options, respectively.
Retirement Plan. The Bank maintains the Financial Federal Savings and Loan
Association Retirement Income Plan ("Retirement Plan"), a non-contributory
defined benefit plan. The following table indicates the annual retirement
benefit that would be payable under the plan upon retirement at age 65, or at
age 60 with 30 years of service, to a participant electing to receive his
retirement benefit in the standard form of benefit, assuming various specified
levels of plan compensation and various specified years of credited service. The
benefits listed in the retirement benefit table are based upon salary and bonus
and are subject to any Social Security amounts.
AS OF SEPTEMBER 30, 1998
RETIREMENT AGE 65
-----------------
Years of Credited Service
-----------------------------------------------------------------
Average
Annual
Compensation 15 20 25 30 35
- -------------- ----------- ----------- ---------- ---------- -----------
$ 25,000 $ 5,625 $ 7,500 $ 9,375 $11,250 $ 13,125
50,000 12,665 16,887 21,109 25,331 29,553
75,000 20,166 26,887 33,609 40,331 47,053
100,000 27,665 36,887 46,109 55,331 64,553
150,000 42,665 56,887 71,109 85,331 99,553
160,000 45,665 60,887 76,109 91,331 106,553
The maximum annual compensation on which retirement benefits may be calculated
under Section 401(a)(17) of the Internal Revenue Code is limited to $160,000.
99
<PAGE>
The following table sets forth the years of credited service (i.e., benefit
service) as of September 30, 1998 for each executive officer.
Credited Service
--------------------------------------------
Name Years Months
--------------- -----------------
Frank S. Latawiec 2 1
P. James O'Gorman 7 11
Robert E. Adamec 8 2
Valerie M. Swaya 3 11
Dennis Hodne 0 5
Management of Dime Bancshares after the Merger
The Merger Agreement provides that, at the Effective Time, the directors
and officers of Dime Bancshares will consist of the directors and officers of
Dime Bancshares immediately prior to the Effective Time. The directors and
officers of Dime of Williamsburgh following the Bank Merger will consist of the
directors and officers of Dime of Williamsburgh immediately prior to the
Effective Time.
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 Part III, Item 10 of this
Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions With Certain Related Persons
The Bank's current policy provides that all loans made by the Bank to its
directors and officers are made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons and do not involve more than the normal risk of
collectibility or present other unfavorable features. Prior to the FIRREA, the
Bank made loans to officers with discounted interest rates and loan origination
fees.
100
<PAGE>
Set forth below is certain information as of September 30, 1998, with
respect to loans made by the Bank on preferential terms to executive officers
whose aggregate indebtedness to the Bank exceeded $60,000 at any time since
October 1, 1997.
<TABLE>
<CAPTION>
Balance Interest Rate
Maturity Largest Amount as of as of
Date Date Outstanding Since September September Type of
Name and Position of Loan of Loan October 1, 1997 30, 1998 30, 1998 Loan
- ----------------- ------- ------- --------------- --------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Valerie M. Swaya 07/26/95 08/01/25 $ 98,935 $ 97,155 7.0% Mortgage
Vice President and
Chief Administrative
Officer
P. James O'Gorman 03/09/98 04/01/13 $240,800 $236,874 6.75% Mortgage
Executive Vice President,
Chief Financial Officer
</TABLE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) The following are filed as a part of this report:
o Independent Auditors' Report
o Consolidated Statements of Financial Condition as of
September 30, 1998 and 1997
o Consolidated Statements of Income for Each of the Years in
the Three-Year Period Ended September 30, 1998
o Consolidated Statements of Changes in Stockholders' Equity
for Each of the Years in the Three-Year Period Ended
September 30, 1998
o Consolidated Statements of Cash Flows for Each of the Years
in the Three-Year Period Ended September 30, 1998
o Notes to Consolidated Financial Statements
(2) All financial statement 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
101
<PAGE>
Exhibit
Number
------
2.0 Agreement and Plan of Merger by and between Financial Bancorp, Inc.
and Dime Community Bancshares, Inc. dated as of July 18, 1998. (1)
3.1 Certificate of Incorporation of Financial Bancorp, Inc. (2)
3.2 Bylaws of Financial Bancorp, Inc. (2)
4.0 Stock Certificate of Financial Bancorp, Inc. (2)
10.1 Financial Federal Savings Bank Recognition and Retention Plan (3)
10.2 Financial Bancorp, Inc. 1995 Incentive Stock Option Plan (4)
10.3 Financial Bancorp, Inc. 1995 Stock Option Plan for Outside Directors
(3)
10.4 Financial Savings and Loan Association Employee Stock Ownership Plan
and Trust (2)
10.5 Amended and Restated Salary and Benefits Continuation Agreement
between Financial Bancorp, Inc., Financial Federal Savings Bank and
Frank S. Latawiec (6)
10.6 Salary and Benefits Continuation Agreement between Financial
Bancorp, Inc., Financial Federal Savings Bank and Valerie M. Swaya
(6)
10.7 Employment Agreement between Financial Federal Savings and Loan
Association and P. James O'Gorman (5)
10.8 Employment Agreement between Financial Federal Savings and Loan
Association and Robert E. Adamec (5)
10.9 Employment Agreement between Financial Bancorp, Inc. and P. James
O'Gorman (5)
10.10 Employment Agreement between Financial Bancorp, Inc. and Robert E.
Adamec (5)
10.11 Financial Federal Savings and Loan Association Outside Directors'
Consultation and Retirement Plan (2)
11.0 Computation of earnings per share (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 Stock Option Agreement, dated July 18, 1998, between Financial
Bancorp, Inc. and Dime Community Bancshares, Inc. (1)
- ----------
(1) Incorporated by reference from the Form 8-K, filed with the SEC on July 23,
1998.
(2) 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.
(3) 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.
(4) 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.
(5) 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.
(6) Incorporated by reference into this document from the Exhibits to the
Annual Report on Form 10-K for the fiscal year ended September 30, 1997,
filed with the SEC on December 29, 1997.
(b) Reports on Form 8-K
On July 20, 1998, the Company and Dime Community Bancshares, Inc. the
holding company for the Dime Savings Bank of Williamsburgh, entered into a
definitive merger agreement pursuant to which Dime Community will acquire
Financial Bancorp, Inc., subject to regulatory and shareholder approval.
Subsequently on July 23, 1998, the Company filed a Form 8-K, which reported the
terms of the merger. The Merger Agreement was filed as an exhibit thereto.
102
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
FINANCIAL BANCORP, INC.
By: /s/Frank S. Latawiec
------------------------------
Frank S. Latawiec
President, Chief Executive
Officer and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/Frank S. Latawiec President, Chief Executive December 29, 1998
- ----------------------- Officer and Director
Frank S. Latawiec (Principal Executive Officer)
/s/P. James O'Gorman Executive Vice President, Chief December 29, 1998
- ----------------------- Financial Officer and Treasurer
P. James O'Gorman (Principal Accounting Officer)
/s/Peter S. Russo Chairman of the Board December 29, 1998
- -----------------------
Peter S. Russo
/s/Dominick L. Segrete Director December 29, 1998
- -----------------------
Dominick L. Segrete
/s/Richard J. Hickey Director December 29, 1998
- -----------------------
Richard J. Hickey
/s/Raymond M. Calamari Director December 29, 1998
- -----------------------
Raymond M. Calamari
Exhibit 11 Computation of Earnings Per Share
<PAGE>
Exhibit 11
Computation of Earnings Per Share
For the Year Ended
September 30,
-------------------
1998 1997
------ ------
(Dollars in thousands,
except per share amounts)
Net Income $3,001 $2,505
====== ======
Weighted average common shares
outstanding 1,615 1,630
Common stock equivalents due to dilutive
effect of stock options 81 40
------ ------
Total weighted average common shares and
common share equivalents outstanding 1,696 1,670
====== ======
Basic earnings per common share and
common share equivalents $ 1.86 $ 1.54
====== ======
Diluted earnings per common share $ 1.77 $ 1.50
====== ======
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 December 4, 1998, in the Company's Annual Report on Form 10-K for the year
ended September 30, 1998.
/s/ Radics & Co.
----------------------
Radics & Co., LLC
December 29, 1998
Pine Brook, New Jersey
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 2,001,493
<INT-BEARING-DEPOSITS> 228,095,902
<FED-FUNDS-SOLD> 5,375,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 26,967,113
<INVESTMENTS-CARRYING> 74,442,451
<INVESTMENTS-MARKET> 75,177,000
<LOANS> 196,027,388
<ALLOWANCE> 1,657,235
<TOTAL-ASSETS> 318,611,396
<DEPOSITS> 228,095,902
<SHORT-TERM> 57,288,267
<LIABILITIES-OTHER> 4,051,937
<LONG-TERM> 0
21,850
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 318,611,396
<INTEREST-LOAN> 13,880,178
<INTEREST-INVEST> 7,189,133
<INTEREST-OTHER> 895,486
<INTEREST-TOTAL> 21,964,797
<INTEREST-DEPOSIT> 8,933,074
<INTEREST-EXPENSE> 11,790,003
<INTEREST-INCOME-NET> 10,174,794
<LOAN-LOSSES> 400,679
<SECURITIES-GAINS> 9,517
<EXPENSE-OTHER> 5,614,447
<INCOME-PRETAX> 5,117,089
<INCOME-PRE-EXTRAORDINARY> 5,117,089
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,000,944
<EPS-PRIMARY> 1.86
<EPS-DILUTED> 1.77
<YIELD-ACTUAL> 7.44
<LOANS-NON> 1,590,287
<LOANS-PAST> 1,600,000
<LOANS-TROUBLED> 739,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,405,000
<CHARGE-OFFS> 179,000
<RECOVERIES> 30,000
<ALLOWANCE-CLOSE> 1,657,000
<ALLOWANCE-DOMESTIC> 1,657,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,211,000
</TABLE>
