UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 0-18620
JSB FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3000874
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
303 Merrick Road, Lynbrook, New York 11563
(Address of principal executive offices)
Registrant's telephone number, including area code: (516) 887-7000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value (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 considered 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 voting stock held by non-affiliates of the
registrant as of March 11, 1997: Common stock par value $.01 per share,
$346,934,107. This figure is based on the closing price by the Nasdaq Stock
Market for a share of the registrant's common stock on March 11, 1997,
which was $41.50 as reported in the Wall Street Journal on March 12, 1997.
The number of shares of the registrant's Common Stock outstanding as of
March 17, 1997 was 9,824,884 shares.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 13, 1997
and portions of the 1996 Annual Report to Stockholders are incorporated
herein by reference Parts I, II and III.
<PAGE>
FORM 10-K CROSS-REFERENCE INDEX
PART I Page
Item 1. Business ..................................................... 3
Item 2. Properties.................................................... 33
Item 3. Legal Proceedings............................................. 33
Item 4. Submission of Matters to a Vote of Security Holders........... 33
Additional Item. Executive Officers.................................... 34
PART II
Item 5. Market for JSB Financial Inc.'s Common Equity
and Related Stockholders' Matters........................... 35
Item 6. Selected Financial Data....................................... 35
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 35
Item 8. Financial Statements and Supplementary Data .................. 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 35
PART III
Item 10. Directors and Executive Officers.............................. 36
Item 11. Executive Compensation........................................ 36
Item 12. Security Ownership of Certain Beneficial Owner6
and Management.............................................. 36
Item 13. Certain Relationships and Related Transactions................ 36
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................... 37
SIGNATURES.............................................................. 39
<PAGE>
PART I
ITEM 1. BUSINESS
--------
DESCRIPTION OF BUSINESS
General
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JSB Financial, Inc. ("JSB Financial" or the "Company") is a Delaware
corporation, incorporated on February 6, 1990, which acquired all of the stock
of Jamaica Savings Bank FSB ("Jamaica Savings" or the "Bank") upon the Bank's
conversion from a federally chartered mutual savings bank to a federally
chartered stock savings bank. The stock conversion was completed on June 27,
1990. The information presented in the financial statements and in the Form 10-K
reflect the financial condition and results of operations of the Company, as
consolidated with its wholly owned subsidiary, the Bank.
In addition to the Company's investment in the Bank, the Company invests in
U.S. Government and agency securities, federal funds sold (through the Bank) and
holds first mortgage loans. The Company received the mortgage loans as a
dividend from the Bank. (See Note 27 to the Consolidated Financial Statements,
included on pages 41 and 42 in the 1996 Annual Report to Stockholders.)
Jamaica Savings was organized in 1866 as a New York state chartered mutual
savings bank. In 1983, the Bank converted to a federally chartered savings bank,
retaining the "leeway" investment authority and broader investment powers
available to a state chartered savings bank, and its Federal Deposit Insurance
Corporation ("FDIC") insurance.
The Bank's principal business consists of attracting deposits from the
general public and investing those deposits, together with funds generated from
operations, in first mortgage loans secured by real estate, collateralized
mortgage obligations ("CMOs"), U.S. Government and agency securities, and to a
lesser extent, various other consumer loans and federal funds sold. The Bank has
a number of wholly-owned subsidiary corporations primarily for the purpose of
owning, operating and disposing of real estate properties.
Since 1990, the Company has maintained stock repurchase programs and paid
quarterly cash dividends to stockholders. During 1996, the Company repurchased
845,000 shares of its common stock at an average price of $32.72 per share, and
paid total cash dividends of $12.1 million, or $1.20 per common share.
Market Area and Competition
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Market Area - Headquartered in Lynbrook, New York, the Bank conducts
business from 13 full service branch offices, 10 of which are located in the New
York City borough of Queens, one in the borough of Manhattan and one each in
suburban Nassau (the headquarters) and Suffolk counties.
Jamaica Savings is a community-oriented financial institution serving its
market area with a wide selection of residential loans, consumer loans and
retail financial services. Management considers the Bank's retail branch
network, reputation for financial strength and quality customer service as its
major competitive advantages in attracting and retaining customers. Management
believes that the Bank benefits from its community bank orientation. The Bank's
long term relationships with its depositors are considered a valuable resource
for the future, as the Bank continues to expand services offered to customers.
Local Economy - The primary market area for the Bank is concentrated in the
neighborhoods surrounding its thirteen full service offices. Management believes
that its branch offices are located in communities that can generally be
characterized as stable, residential neighborhoods, comprised predominantly of
one-to four-family residences and middle income families, except for the
Manhattan branch which is in urban New York City. During the late 1980's to the
early 1990's, the New York metropolitan area experienced reduced employment as a
result of the general decline in the local economy and other factors. The area
experienced a general decline in real estate values and a decline in home sales
and construction and, sharp decreases in the value of commercial properties,
land, as well as cooperatives and condominiums. Currently there are a number of
encouraging signs in the local economy and the Bank's real estate markets;
however, it is unclear how these factors will affect the Company's asset quality
in the future.
<PAGE>
These negative trends have stabilized somewhat in more recent periods;
however, there can be no assurances that conditions in the regional economy,
national economy, or real estate market in general will not deteriorate. A
weakness or deterioration in the economic conditions of the Bank's primary
lending area in the future could result in the Bank experiencing increases in
non-performing loans. Such increases would likely result in higher provisions
for possible loan losses, reduced levels of earning assets which would lower the
net interest income and possibly result in higher levels of other real estate
owned ("ORE") expense.
Highly Competitive Industry and Geographic Area - The Bank faces
significant competition for mortgage and consumer loan originations and in
attracting and retaining deposits. The New York City metropolitan and Long
Island areas have a high concentration of financial institutions, many of which
are significantly larger and have greater financial resources than the Bank, all
of which are competitors of the Bank to varying degrees. The Bank's competition
for loans and deposits comes principally from savings and loan associations,
savings banks, commercial banks, mortgage banking companies, insurance companies
and credit unions. The most direct competition for deposits has historically
come from savings and loan associations, savings banks, commercial banks and
credit unions. In addition, products offered by the securities industry have
created alternative investments, including money market accounts, mutual funds
and annuities, available to the general public. The Bank competes for deposits
through pricing, service and by offering a variety of deposit accounts and other
services. Management competes for loans principally through pricing, efficiency
and the quality of its services provided to borrowers, real estate and mortgage
brokers. Competition may also increase as a result of the lifting of
restrictions on interstate operations of financial institutions.
Lending Activities and Risk
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General - The Bank offers a variety of loans to serve the credit needs of
the communities in which it operates. The Bank's loan portfolio is comprised
primarily of first mortgage loans secured by: multi-family rental properties;
cooperative buildings; one-to four-family residences (which is almost entirely
comprised of mortgages secured by one-to two-family residences); commercial
property and to a lesser extent, construction loans. The Bank also offers other
loans, including: property improvement; loans secured by deposit accounts;
student loans; automobile loans and personal loans. At December 31, 1996, the
loan portfolio was $854.8 million, net of allowances of $5.3 million and
unearned fees and discounts of $3.8 million. At December 31, 1996, net loans
represented 56.4% of the Company's total assets. During 1996, mortgage loans
originated for portfolio were $136.2 million compared to $77.8 million during
1995. The Bank does not offer any loans that provide for negative amortization.
(See "Loan Portfolio" and "Maturities and Sensitivities of Loans to Changes in
Interest Rates" page 25, herein.) Management monitors the economy and real
estate market in which the Bank operates and modifies its lending policies as
considered appropriate.
The Bank has currently agreements to fund new home construction in Queens
and Brooklyn, New York. Pursuant to the New York City Housing Partnership/HPD
Homeownership Program, the Bank is providing the funding for two New York
construction projects, whereby the Bank will hold the first mortgage on the
premises and obtain personal guarantees from the builders. Advances for each of
these projects will be based on presales and construction progress on a per unit
basis for each house. These projects are as follows: (1) East New York Homes -
In February, 1997, the Bank entered into an agreement to finance the
construction of 45 2-family houses in East New York, Brooklyn. The Bank
commitment is for $6.9 million with no more than $3.5 million outstanding at any
one time. (2) Bayswater Village In December, 1996, the Bank entered into an
agreement to finance the construction of 16 two-family houses with a total
development cost of $3.5 million with no more than $1.9 million outstanding at
any one time.
<PAGE>
In addition, the Bank makes 6 month construction loans to a builder who
constructs one and two-family houses in the Bank's market area. The loans are
approved on a per building basis and the Bank holds the first mortgage on the
premises and obtains a personal guarantee from the builder. At December 31,
1996, the Bank held a total $1.8 million in construction loans.
The Bank continues to emphasize lending on multi-family, underlying
cooperative and commercial real estate. Lending on these types of properties
poses significant additional risks to the lender as compared with one-to
four-family mortgage lending. These loans generally are made to single borrowers
or realty corporations controlled by an individual or group of individuals and
involve substantially higher loan balances than one-to four-family residential
mortgage loans. Moreover, the repayment of such loans is typically dependent on
the successful operation of the property, which in turn is dependent upon the
expertise and ability of the borrower to properly manage and maintain the
property. In addition, management recognizes that repayment of commercial and
multi-family loans is subject to adverse changes in the real estate market or
the economy, to a far greater extent than is repayment of one-to four-family
mortgage loans.
Multi-family, Underlying Cooperative and Commercial Real Estate Lending The
Bank originates mortgage loans secured by multi-family dwellings of 50 units or
more, cooperative buildings and income producing properties such as shopping
centers. At December 31, 1996, 51.8% of total gross mortgage loans were secured
by multi-family rental properties, 31.4% by cooperative buildings and 7.4% by
commercial real estate. At that date, the Bank's ten largest loans totaled
$112.4 million. These ten mortgage loans were comprised of: five loans totaling
$57.2 million secured by multi-family rental properties; three loans totaling
$31.6 million secured by underlying cooperative buildings; one $12.8 million
mortgage loan secured by the land underlying a luxury Manhattan hotel; and one
$10.8 million loan secured by a shopping center. At December 31, 1996, the
Bank's largest loan was an $18.5 million mortgage loan secured by a 684
apartment complex. The Bank's largest underlying cooperative loan which had a
balance of $12.8 million at December 31, 1996 was under foreclosure. (See
"Delinquencies and Classified Assets" page 26, herein.)
Substantially all of the Bank's mortgage loans on income producing
properties are secured by properties located within the Bank's market area.
Mortgages currently offered on income producing properties are underwritten for
terms that generally do not exceed 10 years. Since amortization (if any) on
multi-family rental, underlying cooperative and commercial mortgage loans is
over significantly longer periods than the terms to maturity, balloon payments
are due at maturity. In establishing interest rates, origination fees and
amortization terms for these types of loans, management considers current market
conditions, competition and the risks associated with the property securing the
loan. The interest rates on such loans are usually between 1.25% and 1.75% above
the five to ten year U.S. Treasury Constant Maturity Index, depending upon the
term to maturity and level of risk associated with the loan.
In underwriting mortgage loans secured by income producing properties,
including multi-family rental, underlying cooperative and commercial real
estate, the Bank's mortgage officers engage in a detailed analysis of the
property to ensure that its anticipated cash flow will be sufficient to cover
operating expenses and debt service. Under the Bank's current policy, at
origination, loan-to-value ratios generally do not exceed 75% on loans secured
by multi-family rental and commercial real estate properties and 40% on
underlying cooperatives. The Bank requires that the property securing such loans
be appraised by a member of the Bank's appraisal staff or a qualified
independent appraiser. The Bank requires the borrower to obtain title insurance
and hazard insurance naming the Bank as loss payee in an amount sufficient to
cover the mortgage. All loans secured by income producing property must be
approved by two members of the Bank's Mortgage Committee, which is comprised of
five members of the Board of Directors and the Chairman of the Board "ex
officio", or one member of the Mortgage Committee together with the senior
lending officer.
Underlying cooperative loans are first liens on the cooperative building
and the land. Underlying cooperative mortgages are senior to cooperative share
loans. Cooperative share loans are secured by the proprietary leases on the
individual units. Consequently, when the amount of an underlying loan is related
to the market value of a cooperative building, including the value of the
individual units, the resulting loan-to-value ratio generally is in the range of
15% to 30%.
<PAGE>
Mortgage lending on multi-family, cooperative, and commercial properties
poses significant additional risks to the lender as compared with one-to
four-family mortgage lending. At December 31, 1996, the largest concentration of
loans to any one borrower consisted of nine mortgage loans in the aggregate
amount of $27.9 million, of which $12.7 million were held by the Bank and $15.2
million were held by the Company. This concentration was comprised of eight
mortgage loans totaling $24.8 million, secured by income producing multi-family
properties and one $3.1 million loan, secured by a commercial office property.
Management continually monitors the loan portfolios in order to identify
trends that may affect future collectibility. Specific attention is given to
concentrations of credit based on the loan collateral and concentrations to any
one borrower or category of borrower. (See "Delinquencies and Classified Assets"
and "Potential Problem Loans and Subsequent Developments" page 26 through 28,
herein.)
One-to Four-Family Lending - The Bank offers first mortgage loans secured
by one-to four-family residences and condominium units in complexes which are at
least 90% sold and cooperative apartment share loans where at least 65% of the
total cooperative shares are sold. While three-to four-family mortgages are
offered by the Bank, minimal demand has been experienced. At December 31, 1996,
one-to four-family mortgages totaled $76.8 million, of which $68.3 million were
fixed rate mortgage loans and $8.5 million were adjustable rate mortgage ("ARM")
loans. Loan applications are received from existing customers and generated by
referrals, branch and newspaper advertising. One-to four-family mortgage loans
are generally underwritten according to Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") guidelines, except
as to limitations on loan amount.
Upon receipt of a completed loan application from a prospective borrower,
for a loan secured by one-to four-family residential real estate, disclosures
are sent to the applicant(s). Income and certain other information is verified,
a credit report is ordered, and, if necessary, additional financial information
is requested. If the mortgage applicant's credit is verified and approved, an
appraisal and flood certification for the real estate are ordered. In addition
to utilizing its in-house appraisal staff, the Bank obtains some appraisals on
one-to four-family properties prepared by qualified independent appraisers. It
is the Bank's policy to require title insurance and hazard insurance prior to
closing on all real estate first mortgage loans. Borrowers are generally
required to advance funds on a monthly basis to a mortgage escrow account,
together with each payment of principal and interest. Disbursements are made
from escrow accounts for real estate taxes and insurance premiums.
The Bank offers fixed rate mortgages and ARMs, with interest rates and
other terms that are competitive with those available in its market area. The
interest rate on ARMs are adjusted based on a spread above an agreed upon index,
such as a United States Treasury Index. The Bank's ARM loan interest rates are
generally subject to annual rate change limitations of 2.00%, up or down. In
addition, ARM loans offered by the Bank provide for a lifetime cap on the
adjustment in the interest rate of 6.00% from the initial rate. These limits,
help to reduce the interest rate sensitivity of such loans during periods of
changing interest rates. During periods of rising interest rates, the increase
in the required monthly payment for ARM loans may increase the likelihood of
delinquencies. The ARM loans originated by the Bank reprice each year, on the
loan's anniversary date and do not provide for negative amortization.
The Bank currently requires that one-to four-family residential mortgage
loan originations, excluding cooperative apartment loans, not exceed the lesser
of 80% of appraised value of the property securing the loan or purchase price.
Up to 95% financing is available with the purchase of private mortgage insurance
("PMI"), provided that the loan qualifies for sale in the secondary market.
Loans on cooperative apartments (cooperative share loans) generally require a
down payment equal to 20% of the purchase price and are not offered with PMI.
The Bank offers one-to four-family mortgages with various terms. One-to
four-family loans must be approved by at least two senior officers of the
Mortgage, Consumer Loan or Real Estate Departments. Mortgage loans in the Bank's
portfolio ordinarily include due-on-sale clauses, which provide the Bank with
the contractual right to deem the loan immediately due and payable in the event
that the borrower transfers ownership of the property without the Bank's
consent. It is the Bank's policy to enforce due-on-sale provisions or to require
that the interest rate be adjusted to the current market rate when ownership is
transferred. Management monitors various economic indicators and competitive
conditions in its lending area, and, in connection therewith, may modify
underwriting standards based on their assessments.
<PAGE>
During 1996, the Bank originated $1.6 million of mortgages for sale and
sold $1.7 million (a $94,000 mortgage was originated during 1995), without
recourse, on which the Bank retained servicing rights and income. Included in
the loan sales were mortgage loans of $556,000 to SONYMA originated and sold
pursuant to a program aimed at assisting prospective first time home buyers with
low to moderate income. As part of the Bank's agreement with the government
agencies, the Bank offers mortgage loans, for up to 95% of the lower of the
purchase price or appraised value, on single family principal residences to
credit qualified home buyers. In addition, the borrower must have not had income
greater than 115 percent of the area family median income as published by the
U.S. Department of Housing and Urban Development annually in the report,
"Estimated Median Family Incomes". During 1996, the Bank entered into an
agreement to originate and sell qualifying mortgages and FHA Title I loans to
FNMA. During 1996, the Bank sold $1.2 million to FNMA. Management expects to
enter into an agreement during 1997 to sell up to $1.0 million (which amount may
be modified at the Bank's request) of qualifying mortgages and FHA Title I Loans
to FNMA. The Bank plans to originate and sell, without recourse, other mortgage
loans in the secondary market and retain servicing.
On March 1, 1996, the Bank reestablished its FHA Home Improvement Loan
Program. The maximum loan amount for one-to four-family properties is $25,000
with a repayment term of five or ten years. Loan amounts in excess of $7,500
must be secured. No equity is required on owner occupied properties. Equity
equal to the loan amount is required for properties that are: non-owner
occupied; income producing; and, not completed structures occupied for less than
six months. Loans over $15,000, in this category, must have an appraisal.
Inspections are required on all loans in excess of $7,500 or if the borrower
fails to submit a completion certificate. The Bank plans to sell these loans,
without recourse, to FNMA, and retain servicing.
Other Lending - The Bank offers a variety of other loan products,
including: home improvement loans; loans secured by deposit accounts; student
loans; personal and automobile loans. At December 31, 1996, total gross other
loans was $27.9 million, or 3.2% of total gross loans. At December 31, 1996, the
other loan portfolio was comprised as follows: property improvement loans of
$8.8 million, or 31.5% of the other loan portfolio; loans secured by deposit
accounts, which are 100% secured, of $8.3 million, or 29.9% of the other loan
portfolio; and student loans, of $6.2 million, or 22.2% of the other loan
portfolio. Student loans are federally guaranteed to varying degrees. The Bank
sells student loans that are in repayment, without recourse, to the Student Loan
Marketing Association ("SLMA"); the Bank retains servicing for these loans. The
remainder of the portfolio was comprised of various consumer type loans and
overdraft lines of credit.
The Bank offers fixed rate home equity loans, which are reported herein
with property improvement loans. Home equity loans originated by the Bank are
disbursed at closing, and range from $10,100, to a maximum of $50,000 on one and
two-family owner-occupied residences only. Financing is available up to 75% of
the property's appraised value less any outstanding mortgage balance. In
connection with originating these loans, the Bank charges fees incurred to
perfect the lien on the property. At December 31, 1996, the Bank had $7.1
million of home equity loans, with interest rates ranging from 5.5% to 12.0%.
Loan Origination and Other Fees - In addition to interest earned on loans,
the Bank charges fees for originating loans, loan prepayments and modifications.
The income realized from such fees varies with the volume of loans made or
repaid, the availability of funds, and competitive conditions in the lending
market.
Investment Activities
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General - Federally chartered savings institutions have the authority to
invest in various types of liquid assets, including United States Treasury
obligations, securities of various agencies of the federal government, certain
certificates of deposit of insured depository institutions, certain banker's
acceptances, repurchase agreements and federal funds sold. Subject to various
restrictions, federally chartered savings institutions may also invest their
assets in commercial paper, investment grade corporate debt securities and
mutual funds whose assets conform to the investments that a federally chartered
savings institution is authorized to make directly. At December 31, 1996,
securities and the other investment portfolio combined, totaled $518.4 million,
or 34.2% of total assets, of which $299.6 million were in U.S. Government and
federal agency securities. (See "Investment Portfolio" page 23, herein.)
<PAGE>
Management formulates the investment policies of the Company and its
subsidiary, the Bank, subject to approval by the Board of Directors. The Chief
Executive Officer, or his designated alternate, makes investment decisions on a
day-to-day basis while the Board of Directors acts in an advisory capacity. The
Bank's investments in securities have been primarily in CMOs and short-term U.S.
Government and agency securities with an average term to maturity of less than
three years. In response to the low interest rate environment, beginning during
1992, the Bank's purchases of investment securities generally include those
maturing in one to two years. The Bank's investment policy allows investment in
corporate debt securities rated AA or higher. The Bank classifies all
securities, other than marketable equity securities, as "held-to-maturity".
Marketable equity securities are classified as "available-for-sale" and carried
at fair value, which aggregated $51.0 million at December 31, 1996. During 1996,
the Company sold or redeemed marketable equity securities totaling $30,000,
realizing gross gains of $4,000 and gross losses of $2,000. Activity in the
held-to-maturity portfolio included, purchases of $534.6 million and maturities
of $675.0 million of U.S. Government and federal agency securities and purchases
of $124.3 million and maturities and amortization of $114.1 million in the CMO
portfolio, during 1996.
The Company, excluding activities of the Bank, invests in U.S. Government
and agency securities and through the Bank, invests in money market instruments.
By investing in short term securities and maintaining funds in cash and cash
equivalents (investments with an original maturity of less than three months),
the Company is able to meet its liquidity needs. In addition, the Company has
mortgage loans, which were $15.2 million at December 31, 1996, that were
received as a dividend from the Bank during 1994.
CMOs are mortgage-backed bonds secured by the cash flow of a pool of
mortgages. In a CMO, the regular principal and interest payments made by
borrowers are separated into different payment streams, creating several bonds
that repay invested capital at different rates. A given pool generally secures
several different classes of CMO bonds. CMOs pay the bondholder on a schedule
that is different from the mortgage pool as a whole, and includes fast pay,
medium pay, and slow pay bonds to suit the needs of different investors. The
common arrangements include: (i) a fast-pay bond with a maturity much shorter
than the total pool; (ii) a bond paying interest only for the period that may be
contingent on how prior CMOs perform, before payment of principal begins; (iii)
a bond paying variable interest based on an index, typically the London
Interbank Offered Rate ("LIBOR"), even though the mortgages themselves may be
fixed rate loans. CMOs manage the prepayment risk associated with
mortgage-related securities by splitting the pools of mortgage loans into
different categories of classes.
The Bank purchases Planned Amortization Class ("PAC") (also referred to as
Planned Principal Class) bond CMOs. PACs are designed to receive principal
payments using a predetermined principal balance schedule derived by assuming
two constant prepayment rates for the underlying mortgage-backed securities. All
of the Bank's CMOs are backed by FHLMC, FNMA or Government National Mortgage
Association ("GNMA") mortgage-backed securities, which are backed by whole
loans. Management believes these securities represent attractive and limited
risk alternatives relative to other investments. During 1996, the availability
of CMOs that met the Bank's CMO investment guidelines remained limited. At
December 31, 1996, $155.3 million, or 10.2% of total assets, was invested in
CMOs. At December 31, 1996, the Bank's CMO portfolio had an estimated average
maturity of fifteen months. (See "Contractual Maturity Distribution" page 23,
herein.)
Sources of Funds
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General - The Bank's primary source of funds is deposits, principal
payments from maturities on debt securities and CMOs, principal payments on
mortgage and other loans. Deposit flows and mortgage prepayments are greatly
influenced by general interest rate changes, economic conditions and
competition. The Bank has not directly borrowed any funds since 1984. (See
"Borrowings" page 33, herein and "Liquidity and Capital Resources" included on
pages 15 through 16 in the 1996 Annual Report to Stockholders.)
<PAGE>
Deposits - The Bank offers a variety of deposit accounts having a range of
interest rates and terms. The Bank's deposits consist of the following types of
accounts: passbook and lease security; certificate; money market; negotiable
order of withdrawal ("NOW") and non-interest bearing demand deposits. As of
December 31, 1996, passbook and lease security accounts represented 52.4% of the
Bank's total deposits. The flow of deposits is influenced significantly by
changes in market interest rates, general economic conditions and competition.
The Bank's deposits are obtained primarily from the communities in which its
branches are located. The Bank does not use brokers to obtain deposits, relying
primarily on customer service and long-standing relationships with customers to
attract and retain these deposits. Certificate accounts in excess of $100,000
are not actively solicited by the Bank nor does the Bank pay preferential
interest rates on such accounts. (See Note 16 to the Consolidated Financial
Statements, included on pages 34 and 35 in the 1996 Annual Report to
Stockholders.)
The Bank controls deposit levels and composition through its interest rate
structure. Management believes that the relatively low level of interest rates
that has prevailed is the primary cause for the continued decline in deposits
over the past three years. Management chose to allow deposits to decline, rather
than pay rates that would result in a lower net income or necessitate modifying
of the Bank's existing investment structure and guidelines. Rates offered on the
Bank's deposit accounts are competitive with those rates offered by other
financial institutions in its market area. During 1996, interest rates were
relatively stable. While the highest percentage of deposits has remained in
passbook and lease security accounts, the trend of deposit shifts over the past
three years has been towards certificate accounts. Deposits at December 31,
1996, decreased by $19.1 million, or 1.6%, compared to deposits at December 31,
1995. The Bank's passbook and lease security accounts, which decreased by $32.9
million, or 5.2%, represented the most significant decrease of any deposit
category offered by the Bank. Money market accounts decreased by $3.7 million or
4.0%. However, certificate accounts increased by $16.8 million, or 4.5%.
Management expects, in the long term, that the Bank will continue to retain its
deposit base. (See "Deposits" pages 31 and 32, herein.)
Subsidiaries of the Bank
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General - Beginning in the 1970's, under its New York State leeway
investment authority, the Bank organized a number of wholly-owned subsidiary
corporations, many of which formed partnerships. During those years, these
corporations: (i) took "equity interests" in the construction of income
producing properties on which the Bank made loans, (ii) acquired and operated,
primarily multi-family properties, as a result of foreclosure proceedings or by
obtaining deeds in lieu of foreclosure, and (iii) invested in commercial
properties in which the Bank established branch offices. In the late 1980's, one
corporation entered into a joint venture with an unrelated party to construct a
residential apartment building to be sold as a condominium. At December 31,
1996, the Bank had 21 subsidiary corporations, 17 of which are active in the
ownership or operation of real estate. (See "Grandfathered Savings Bank
Authority" page 18, herein, and Notes 11, 12 and 13 to the Consolidated
Financial Statements, included on pages 32 and 33 in the 1996 Annual Report to
Stockholders.)
The cyclical nature of real estate markets and interest rates influence the
level of financial risk to property owners. The Bank through its subsidiaries,
mitigates such risks through: (1) their financial ability to carry properties
until their optimal use and value can be achieved; (2) the use of internal
property management to maintain these properties; and (3) continuous monitoring
of properties' condition and the investments in properties. Management holds
certain real estate properties for the production of income and therefore
regards them as long-term investments and holds other properties for sale. The
condition and estimated values of all significant properties are monitored on a
continuous basis. If management determines to sell a property held for
investment, the property is reclassified to held for sale and adjustments, if
any, are made to account for the property at the lower of cost or net fair
value.
The activities of each of the Bank's wholly-owned subsidiary corporations
and the partnerships they form are described below. Bank subsidiaries that have
converted properties to cooperative residences have done so under New York State
non-eviction plans. Non-eviction plans provide that rent-stabilized tenants may
remain tenants in their units after a building has been sold to a cooperative
association. Due to the uncertainty of timing and future sales value of the
unsold cooperative shares, for financial statement purposes, unsold shares
acquired as a result of converting these properties, are carried at zero value.
<PAGE>
Gains on the sale of these shares are included in income upon sale. However, for
income tax purposes, the value of all cooperative shares, sold and unsold, in
excess of the Bank's investment in the property prior to conversion to
cooperative, was included in taxable income at the time of the sale to the
cooperative. The tax basis of these cooperative shares is depreciated for tax
purposes.
Forty-Second & Park Corp. - Forty-Second & Park Corp. is a wholly-owned
subsidiary corporation of the Bank. At December 31, 1996, the subsidiary owned
31.1% of the shares representing 18 units in a six-story cooperative apartment
building containing 57 residential units and four professional offices located
in Forest Hills, Queens, New York City ("NYC"). The shares, relating to the
unsold units, are carried at zero value. The building was originally acquired by
obtaining the deed in lieu of foreclosure in 1979. This building, which had been
poorly maintained prior to acquisition, was renovated. In 1982, the property was
converted to a cooperative and sold to Barclay Plaza North Owner's, Inc. During
1996, 3 units were sold, resulting in a net gain, before taxes, of $144,000.
Rents received during 1996, on the unsold apartment units totaled $159,000,
covering the $146,000 of maintenance charges paid to the cooperative
association. For 1996, Forty-Second & Park Corp. had net income of $122,000,
after eliminating intercompany transactions. The Bank's net investment in
Forty-Second & Park Corp. was $11,000 at December 31, 1996.
Parkway Associates - Parkway Associates ("Parkway") is a partnership
between two of the Bank's wholly-owned subsidiary corporations, Grandcet Realty
Corp. and Litneck Realty Corp., each of which has a 50% partnership interest. At
December 31, 1996, Parkway owned 21.1% of the cooperative shares, representing
81 unsold apartment units plus parking spaces in a 400 unit cooperative garden
apartment complex located in Floral Park, Queens County, NYC. The shares,
relating to the unsold units, are carried at zero value. The property was
originally acquired through foreclosure in 1979 and initially operated as a
rental property. In the early 1980's, these apartments, which had been poorly
maintained, were substantially renovated. In 1989, the property was converted to
a cooperative and sold to Floral Park Owners, Inc. During 1996, 7 units were
sold, resulting in a net gain, before taxes, of $231,000. Rents received during
1996, from the unsold apartments and garage spaces totaled $609,000 and
maintenance charges paid to the cooperative association and costs for
maintenance employees totaled $614,000. For 1996, Parkway Associates had a net
operating income of $188,000, after eliminating intercompany transactions. The
Bank's net investment in Parkway was $48,000 at December 31, 1996.
Elmback Associates - Elmback Associates ("Elmback") is a partnership
between two of the Bank's wholly-owned subsidiary corporations, Before Real
Estate, Inc. and Afta Real Estate, Inc., each of which has a 50% partnership
interest. At December 31, 1996, Elmback owned 29.8% of the cooperative shares
representing 18 unsold apartment units in a six story cooperative apartment
building with 61 units, located in a low to moderate income area of Jamaica,
Queens County, NYC. The property, originally acquired by deed in lieu of
foreclosure in 1980, was subsequently renovated and operated as a rental
property. During 1996, 3 units were sold resulting in a net gain, before taxes,
of $57,000. In 1988, the property was converted to a cooperative and sold to
87-46 Chelsea Owners, Inc. The shares, relating to the unsold units, are carried
at zero value. Rents received during 1996, on the unsold apartment units totaled
$128,000 covering the $105,000 of maintenance charges paid to the cooperative
association.
In addition, as part of a 1994 mortgage loan workout between the Bank and
an unrelated borrower, Elmback took title to cooperative shares representing 57
unsold cooperative apartments in an 82 unit cooperative property, located in
Brooklyn, New York. During 1994 and 1995, some of the units were improved and
marketed for sale. During 1996, 10 units were sold and $148,000 of gains were
deferred. The remaining 33 units are reflected on the Company's consolidated
statement of financial condition as ORE, and account for substantially all of
the Bank's $647,000 of ORE. This property generated a net loss of $99,000 for
1996. (See "Other Real Estate" page 29, herein.)
For 1996, Elmback Associates had a net operating loss of $24,000, after
eliminating intercompany transactions. The Bank's net investment in Elmback was
$637,000 at December 31, 1996.
<PAGE>
D & D Associates - D & D Associates ("D&D") is a partnership formed by
Pendex Real Estate Corp. and Sutdex Real Estate, Inc., two wholly-owned
subsidiaries of the Bank, each of which holds a 50% partnership interest. At
December 31, 1996, D&D owned 27.2% of the shares representing 41 unsold units in
two six-story cooperative apartment buildings with 176 units. These buildings,
located in Jamaica, Queens County, NYC, were originally acquired through
foreclosure proceedings in 1981. Subsequent to foreclosure, the buildings were
renovated and operated as rental properties. During 1985, one of the buildings
was converted to a cooperative and sold to the Tyler Towers Owners Corp. During
1988, the second building was converted to a cooperative and sold to the Park
Sanford Owners Corp. The shares, relating to the unsold apartment units, are
carried at zero value. During 1996, 12 units were sold, resulting in a net gain
before taxes of $139,000. Rental income from the buildings for 1996 totaled
$245,000 covering the maintenance charges of $203,000 paid to the cooperative
association. For 1996, D&D Associates had a net operating income of $166,000,
after eliminating intercompany transactions. The Bank's net investment in D&D
was $68,000 at December 31, 1996.
Bay Hill Gardens - Bay Hill Gardens is a partnership between 110-11 72nd
Ave., Corp. and Yalcrab Real Estate, Inc., two of the Bank's wholly-owned
subsidiary corporations, each of which holds a 50% interest in the partnership.
For 1996, this subsidiary had net income before taxes of $462,000, which
resulted from a real estate tax refund from prior years. At December 31, 1996,
the Bank had a net liability for this subsidiary of $55,000, comprised primarily
of accounts payable.
1995 Associates - 1995 Associates is a partnership between Jamsab Realty
Corp. and Jasthree Inc., two wholly-owned subsidiary corporations of the Bank,
holding 99% and 1% interests in the partnership, respectively. The partnership
was formed in 1973 to construct and operate an 18 story commercial building at
1995 Broadway, Manhattan, NYC, in which the Bank leased the main floor for a
branch office. During 1989, the Bank purchased the branch office space from the
partnership upon conversion of the property to a two-unit condominium consisting
of the branch office on the main floor and the office tower. For 1996, this
partnership had net income, before taxes of $851,000, after eliminating
intercompany transactions. The Bank's net investment in 1995 Associates was $5.7
million at December 31, 1996.
Lefmet Corp. - Lefmet Corp., a wholly-owned subsidiary corporation of the
Bank, owns and operates commercial property consisting of seven stores located
in Kew Gardens, Queens County, NYC, one of which the Bank occupies as a branch
office. During 1996, the property generated net income, before federal taxes, of
$42,000, after eliminating intercompany transactions. The Bank's net investment
in Lefmet Corp. was $195,000 at December 31, 1996.
Jade Associates and LeHavre Associates - Prior to December 1993, Jade was a
joint venture between Sher Park Realty Corp., ("Sher Park") a wholly-owned
subsidiary of the Bank and an unrelated general contractor, each with a 50%
interest. The joint venture was formed to fund, construct and subsequently sell
an eighty-four unit condominium complex in Flushing, New York.
The project was initially funded through equal contributions from the
partners and an $11.6 million building loan from LeHavre Associates ("LeHavre"),
another wholly-owned subsidiary of the Bank. (LeHavre is a partnership between
Jas Cove Corp. and Avre Realty Corp., both wholly-owned subsidiary corporations
of the Bank.) Between 1989 and 1993, a total of $4.0 million of reserves were
established against the investment and the loan, related to a decline in the
value of the property.
In December of 1993, an agreement was entered into with the joint venture
partner, whereby: (1) Jamlyn Realty Corp. ("Jamlyn"), a wholly-owned subsidiary
corporation of the Bank, acquired the joint ventures partner's 50% interest; (2)
the outside partner was forgiven the excess contributions of $1.5 million made
by Sher Park; (3) Jamlyn paid the costs, which totaled $579,000, incurred in
connection with the transfer of the partnership interest and property. The
inter-company loan from LeHavre was eliminated during 1994.
During 1996, 12 units were sold, resulting in deferred gains of $104,000,
as sales are being accounted for under the cost recovery method. At December 31,
1996, of there were 49 units remaining. For 1996, this property generated pretax
income of $173,000. The Bank's net investment in Jade was $4.6 million at
December 31, 1996.
<PAGE>
Concerned Management - Concerned Management is a wholly-owned subsidiary of
the Bank, which was formed in 1979 to manage and operate the real estate
acquired by the Bank's other subsidiary corporations and partnerships. Concerned
Management operates from an office, which is leased, located in Flushing, Queens
County, NYC. The Bank's net investment in Concerned Management was $8,000 at
December 31, 1996.
Other Subsidiaries - Of the Bank's remaining four wholly-owned subsidiary
corporations, three are nominee corporations used in the conduct of the Bank's
business. The fourth, Jam-Ser Corp., was formed to act as agent to sell life
insurance as permitted by New York State law.
Savings Bank Life Insurance
- ---------------------------
The Bank is a customer of the Savings Bank Life Insurance ("SBLI")
Department, which is a separate legal mutual entity owned by its policy holders.
The Bank, through the SBLI Department offers SBLI to its customers up to the
legal maximum of $50,000 per insured individual and, as a trustee bank, offers
an additional $350,000 in group coverage per insured under the SBLI Department's
Financial Institution Group Life Insurance policy. The SBLI Department's
activities are segregated from the Bank and while they do not directly affect
the Bank's earnings, management believes that offering SBLI is beneficial to the
Bank's relationships with its depositors and the general public. The SBLI
Department pays its own expenses and reimburses the Bank for expenses incurred
on its behalf.
Personnel
- ---------
As of December 31, 1996, the Bank had 315 full-time employees and 117
part-time employees. The employees are not represented by a collective
bargaining unit and the Bank considers its relationship with its employees to be
good.
Regulation And Supervision
- --------------------------
The description of statutory provisions and regulations applicable to
savings institutions and their holding companies set forth in the Form 10-K does
not purport to be a complete description of such statutes and regulations and
their effects on the Bank and the Company.
General - The Company, as a unitary savings and loan holding company, is
required to file certain reports with, and otherwise comply with the rules and
regulations of the Office of Thrift Supervision ("OTS") under the Home Owners'
Loan Act, as amended (the "HOLA") and the Securities and Exchange Commission
("SEC") under the federal securities laws. In addition, the activities of
savings institutions, such as the Bank, are governed by the HOLA and the Federal
Deposit Insurance Act ("FDI Act"). Certain regulatory requirements applicable to
the Bank and the Company are referred to below or elsewhere herein.
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its primary federal regulator, and the FDIC, as the deposit insurer.
The Bank is a member of the Federal Home Loan Bank ("FHLB") System and its
deposit accounts are insured up to applicable limits by the Bank Insurance Fund
("BIF") managed by the FDIC. The Bank must file reports with the OTS and the
FDIC concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other savings institutions. The OTS and the FDIC
conduct periodic examinations to test the Bank's compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulatory requirements and policies, whether by the OTS, the
FDIC or the Congress could have a material adverse impact on the Company, the
Bank and their operations. Certain of the regulatory requirements applicable to
the Bank and to the Company are referred to below or elsewhere herein.
<PAGE>
Holding Company Regulations - The Company is a nondiversified unitary
savings and loan holding company within the meaning of the HOLA. As a unitary
savings and loan holding company, the Company generally is not restricted under
existing laws as to the types of business activities in which it may engage,
provided that the Bank continues to be a qualified thrift lender ("QTL"). (See
"Federal Savings Institution Regulation - Qualified Thrift Lender Test" page 16,
herein.) Upon any non-supervisory acquisition by the Company of another savings
institution or savings bank that meets the QTL test and is deemed to be a
savings institution by the OTS, the Company would become a multiple savings and
loan holding company (if the acquired institution is held as a separate
subsidiary) and would be subject to extensive limitations on the types of
business activities in which it could engage. The HOLA limits the activities of
a multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act ("BHC Act"), subject to
the prior approval of the OTS, and activities authorized by OTS regulation.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS; acquiring or retaining, with certain
exceptions, more than 5% of a nonsubsidiary company engaged in activities other
than those permitted by the HOLA; or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, the HOLA does prescribe such restrictions on
subsidiary savings institutions, as described below. The Bank must notify the
OTS 30 days before declaring any dividend to the Company. In addition, the
financial impact of a holding company on its subsidiary institution is a matter
that is evaluated by the OTS and the OTS has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
Federal Savings Institution Regulation
- --------------------------------------
Capital Requirements - The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital ratio; a
3.0% leverage (core) capital ratio; and an 8.0% risk-based capital ratio. In
addition, the prompt corrective action standards discussed below establish, in
effect, a minimum 2% tangible capital ratio, a 4% leverage (core) capital ratio
(3% for institutions receiving the highest rating on the CAMEL financial 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 the equity accounts of
consolidated subsidiaries, less intangibles other than certain purchased
mortgage servicing rights and credit card relationships. The OTS regulations
also require that, in meeting the leverage (core) ratio, tangible and risk-based
capital standards, institutions must generally deduct investments in and loans
to subsidiaries engaged in activities not permissible for a national bank.
<PAGE>
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of 4% and 8%, respectively.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, as
assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. The components of Tier I (core) capital are
equivalent to those discussed earlier. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the allowance for loan and lease losses, limited to a
maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary
capital included as part of total capital cannot exceed 100% of core capital.
The OTS regulatory capital requirements also incorporate an interest rate
risk component. Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings institution's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) that would result from
a hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12% is not subject to the interest rate risk component, unless the
OTS determines otherwise. At the present time, the OTS has deferred
implementation of the interest rate risk component. At December 31, 1996, the
Bank met each of its capital requirements, in each case and on a fully phased-in
basis and it is anticipated that the Bank will not be subject to the interest
rate risk component. A table presenting the Bank's capital position at December
31, 1996 is presented in Note 26 to the Consolidated Financial Statements,
contained on page 41 of the 1996 Annual Report to Stockholders, and is
incorporated herein by reference.
A reconciliation between the Bank's regulatory capital and GAAP capital at
December 31, 1996 in the accompanying consolidated financial statements is
presented below:
<TABLE>
<CAPTION>
Tangible Capital
(In thousands)
<S> <C>
GAAP capital-originally reported to
regulatory authorities and on the Bank's
consolidated financial statements ............ $ 223,791
Less:
Regulatory capital adjustments:
Investments in Non-includable Subsidiaries ... 13,687
Adjustment for net unrealized gains,
net of tax .................................. 21,795
----------
Regulatory Capital........................... $ 188,309
==========
</TABLE>
<PAGE>
Prompt Corrective Regulatory Action. Under the OTS prompt corrective action
regulations, (the "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.
The regulations define five capital categories and provide the minimum
numerical requirements, subject to certain exceptions, for each capital
category, as detailed below.
<TABLE>
<CAPTION>
Total Risk- Tier I Leverage Tangible Capital
Capital Category Based Ratio (Core) Ratio to Assets Ratio
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Well capitalized 10% or above 6% or above 5% or above N/A
Adequately capitalized 8% or above 4% or above 4% or above(1) N/A
Undercapitalized Less than 8% Less than 4% Less than 4%(1) N/A
Significantly undercapitalized Less than 6% Less than 3% Less than 3% N/A
Critically undercapitalized N/A N/A N/A 2% or less
<FN>
(1) 3% for institutions with the highest examination rating.
</FN>
</TABLE>
Well capitalized institutions must meet or exceed each of the ratios shown
in the table and may not be subject to any order, written agreement, capital
directive, or prompt corrective action directive to meet and maintain a specific
capital level. Institutions failing to meet any one of the minimum capital
requirements will be considered undercapitalized, significantly undercapitalized
or critically undercapitalized, depending on the institution's capital
condition. An institution's capital category is determined on the basis of its
most recent Call Report, Thrift Financial Report, or Report of Examination.
Subject to narrow exception, the banking regulator is required to appoint a
receiver or conservator for an institution that is identified as "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 such plan must be guaranteed
by any parent holding company. In addition, numerous mandatory supervisory
actions become immediately applicable to the institution, including, but not
limited to, increased monitoring by regulators, restrictions on growth, capital
distributions and expansion. The OTS may also take any one of a number of
discretionary supervisory actions, including the issuance of a capital directive
and the replacement of senior executive officers and directors.
Insurance of Deposit Accounts - Deposits of the Bank are insured by the
BIF. Both the BIF and the Savings Association Insurance Fund ("SAIF"), are
statutorily required to be recapitalized to a 1.25% of insured reserve deposits
ratio. Until 1995, members of the BIF and SAIF were paying average deposit
insurance premiums of between 24 and 25 basis points. The BIF met the required
reserve ratio in 1995, whereas the SAIF is not expected to meet or exceed the
required level until 2002 at the earliest. This situation is primarily due to
the statutory requirement that SAIF members make payments on bonds issued in the
late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor
to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC adopted a new
assessment rate schedule from 0 to 27 basis points under which 92% of BIF
members paid an annual premium of only $2,000. The $2,000 statutory minimum
assessment has been eliminated. With respect to SAIF member institutions, the
FDIC adopted a final rule retaining the previously existing assessment rate
schedule applicable to SAIF member institutions of 23 to 31 basis points. As
long as the premium differential continues, it may have adverse consequences for
SAIF members, including reduced earnings and impaired the ability to raise funds
in the capital markets. In addition, SAIF members were placed at a substantial
competitive disadvantage to BIF members with respect to pricing of loans and
deposits and the ability to achieve lower operating costs.
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special
one-time assessment on SAIF member institutions to recapitalize the SAIF. As
required by the Funds Act, the FDIC imposed a special assessment of 65.7 basis
points on SAIF assessable deposits held as of March 15, 1995, payable November
27, 1996.
<PAGE>
The Funds Act also spreads the obligations for payment of the FICO bonds
across all SAIF and BIF members. Effective January 1, 1997, BIF deposits are
assessed for the FICO obligation of 1.3 basis points, while SAIF deposits will
pay 6.48 basis points. Full prorata sharing of the FICO payments between BIF and
SAIF members will occur on the earlier of January 1, 2000 or the date the BIF
and SAIF are merged. The Funds Act specifies that the BIF and SAIF will be
merged on January 1, 1999, provided no savings associations exist at that time.
As a result of the Funds Act, the FDIC recently voted to effectively lower
SAIF assessments ranging from 0 to 27 basis points as of January 1, 1997, which
rates are comparable to those assessed for BIF members. The Bank paid $2,000 in
FDIC insurance premiums during 1996, of which $500 was subsequently refunded as
a result of legislation eliminating the statutory minimum assessment. BIF and
SAIF members will continue to pay assessments, as described above, to fund the
FICO obligation. Management cannot predict the level of FDIC insurance
assessments on an on-going basis, whether the savings association charter will
be eliminated or whether the BIF and SAIF will eventually be merged.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. Management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Thrift Rechartering Legislation - The Funds Act provides that the BIF and
SAIF will merge on January 1, 1999 if there are no more savings associations as
of that date. That legislation also requires that the Department of Treasury
submit a report to Congress by March 31, 1997 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 bill would
require federal savings institutions to convert to a national bank or some type
of state charter by a specified date (January 1, 1998 in one bill, June 30, 1998
in the other) or they would automatically become national banks. 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. Holding companies for savings institutions
would become subject to the same regulation as holding companies that control
commercial banks, with a limited grandfather provision for unitary savings and
loan holding company activities. The Bank is unable to predict whether such
legislation will be enacted, the extent to which legislation would restrict or
disrupt its operations or whether the BIF and SAIF funds will eventually merge.
Loans to One Borrower - Under the HOLA, as amended, savings institutions
are subject to the national bank limits on loans to one borrower. Generally,
savings institutions may not make a loan to a single or related group of
borrowers in an amount greater than 15% of its unimpaired capital and surplus.
An additional amount may be lent, equal to 10% of unimpaired capital and
surplus, if such loan is secured by readily marketable collateral, which is
defined to include certain financial instruments and bullion. At December 31,
1996, the Bank was in compliance with this limitation, with the highest
aggregate loans to one borrower of $25.2 million, or 11.2 % of the Bank's
capital. The Company, as a unitary savings and loan holding company, is not
subject to the loan to one borrower limitation. Management reviews the loans to
one borrower limit at the time the loan is made, however, subsequent changes in
the Bank's capital position may cause credit concentrations to exceed 15% of the
Bank's capital. The Bank carefully monitors the creditworthiness of borrowers
with high concentrations of credit as well as the properties that secure these
loans.
Qualified Thrift Lender Test - The HOLA requires savings institutions to
meet a QTL test. Under the QTL test, a savings institution is required to
maintain at least 65% of its portfolio assets (defined as total assets, less:
intangible assets including goodwill; property used by the institution in
conducting its business and specified liquid assets up to 20% of total assets)
in "qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) on a monthly basis in
9 out of every 12 months.
<PAGE>
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
December 31, 1996, the Bank maintained 86.3% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test.
Limitations on Capital Distributions - OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year or (ii) 75% of its net income for the previous
four quarters. Any additional capital distributions would require prior
regulatory approval. In the event a bank's capital falls below its regulatory
requirements or is notified by the OTS that it is in need of more than normal
supervision, an institution'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 regulation, if the OTS
determines that such distribution would constitute an unsafe or unsound
practice. In December 1994, the OTS proposed amendments to its capital
distribution regulation that would generally authorize the payment of capital
distributions without OTS approval, provided the payment does not make the
institution undercapitalized within the meaning of the prompt corrective action
regulation. However, institutions in a holding company structure would still
have a prior notice requirement. At December 31, 1996, the Bank was a Tier 1
Bank.
Liquidity - Information regarding liquidity appears under the caption
"Liquidity and Capital Resources" included on pages 15 and - 16 in the 1996
Annual Report to Stockholders.
Assessments - Savings institutions are required to pay assessments to the
OTS, to fund the operations of the OTS. The general assessments, to be paid on a
semiannual basis, is computed based upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the institution's latest
quarterly Thrift Financial Report. The Bank's total assessments for the year
ended December 31, 1996, was $262,000.
Branching - OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute. This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
Transactions with Related Parties - The Bank's authority to engage in
transactions with related parties or "affiliates" (e.g., any company that
controls or is under common control with an institution, including the Company
and the Bank's real estate subsidiaries), or to make loans to certain insiders,
is limited by Section 23A and 23B of the Federal Reserve Act ("FRA"). Section
23A limits the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution. The
aggregate amount of transactions with all affiliates is limited to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A, and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution, as those prevailing at the time for comparable
transactions with nonaffiliated individuals or entities. In the absence of
comparable transactions, such transactions may only occur under terms and
circumstances, including credit standards, that in good faith would be offered
to or would apply to non-affiliated individuals or entities. In addition,
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. Further, no savings institution
may invest in the securities of any affiliate other than a subsidiary.
<PAGE>
The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is
governed by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder.
Among other things, such loans are required to be made on terms substantially
the same as those offered to unaffiliated individuals and do 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 orders; the removal of officers and/or
directors; appointment of a receiver or conservator; or termination of deposit
insurance. Civil penalties cover a wide range of violations and an amount to
$25,000 per day, or possibly $1 million per day in especially egregious cases.
Under the FDI Act, the FDIC has the authority to recommend to the Director of
the OTS enforcement action to be taken with respect to a particular savings
institution. If action is not taken by the Director, the FDIC has authority to
take such action under certain circumstances. Federal law also establishes
criminal penalties for certain violations.
Standards for Safety and Soundness - The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; and compensation, fees and benefits.
If the appropriate federal banking agency determines that an institution fails
to meet any standard prescribed by the Guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard, as required by the FDI Act. The final rule establishes
deadlines for the submission and review of such safety and soundness compliance
plans when such plans are required.
Grandfathered Savings Bank Authority - Until 1983, the Bank was a New York
state chartered savings bank with investment powers conferred by New York State
law. The Bank retained such power when it converted to a federally chartered
savings bank. The HOLA and OTS regulations empower the Bank to exercise all the
powers that its predecessor state chartered savings bank possessed under New
York State law, whether or not such powers had been exercised, subject to the
authority of the OTS and FDIC to limit such powers for safety and soundness
reasons. These powers, which were preserved in the FIRREA, are in addition to
powers the Bank possesses as a federally chartered savings bank. Where a
"grandfathered" power overlaps with a power authorized under federal law, the
Bank may act under the more favorable authority.
The grandfathered powers include the authority to invest in various
types of investment securities, including corporate bonds and stock, and in real
estate development. In addition, the Bank has grandfathered authority to make
leeway investments, which include, subject to certain specific exceptions, any
investment not otherwise authorized by the New York State Banking Law at the
time of the Bank's charter conversion, provided that any single investment does
not exceed 1% of the Bank's assets and that all such investments do not exceed
5% of its assets. At December 31, 1996, the Bank's capital investments, computed
for regulatory purposes, retained under the leeway provisions were $14.1
million, or 1.0% of the Bank's assets. Under generally accepted accounting
principles, these assets netted to $10.7 million, on a consolidated basis. These
powers allow the Bank to pursue diversified acquisition opportunities and
provide the Bank with flexibility in restructuring its assets. The Bank intends
to continue to utilize these powers as opportunities arise and as permitted
under applicable rules and regulations. (See "Thrift Rechartering Legislation"
page 16, herein.)
<PAGE>
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-New York ("FHLB-NY"), is required to acquire and hold shares of capital
stock in the FHLB-NY in an amount at least equal to 1% 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-NY, if any, whichever is greater. The Bank was in compliance with
this requirement, with an investment in FHLB-NY stock at December 31, 1996 of
$6.8 million. Should the Bank obtain FHLB advances, these advances must be
secured by specified types of collateral and may be obtained primarily 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 have limited the FHLB-NY's ability to pay dividends to their
members and could also result in the FHLBs imposing higher interest rates on
advances to their members. Further, there can be no assurance that the impact of
FIRREA on the FHLBs will not also cause a decrease in the value of the FHLB-NY
stock held by the Bank. For the years ended December 31, 1996, 1995 and 1994,
dividends from the FHLB-NY to the Bank were $438,000, $481,000 and $514,000
respectively. Changes in the dividends paid by the FHLB affect the Bank's net
interest income.
Federal Reserve System - The Federal Reserve Board ("FRB") regulations
require savings institutions to maintain non-interest earning reserves against
their transaction accounts (primarily NOW and regular checking accounts). During
1996, the FRB regulations generally required that reserves be maintained against
aggregate transaction accounts as follows: for accounts aggregating $52.0
million or less (subject to adjustment by the FRB) a reserve requirement of 3%;
and for accounts greater than $52.0 million, a reserve requirement of $1.6
million plus 10% (subject to adjustment by the FRB between 8% and 14%) against
that portion of total transaction accounts in excess of $52.0 million. The first
$4.3 million of otherwise reservable balances (subject to adjustments by the
FRB) were 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 which may be imposed by the OTS.
Because required reserves must be maintained in the form of either vault cash, a
non-interest bearing account at a Federal Reserve Bank, or a pass-through
account as defined by the FRB, the effect of the reserve requirement is to
reduce the Bank's interest earning assets. FHLB System members are also
authorized to borrow from the Federal Reserve "discount window", but FRB
regulations require institutions to exhaust all FHLB sources before borrowing
from a Federal Reserve Bank.
Taxation
- --------
General - 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 Company. The Bank was audited by the Internal Revenue Service
for taxable years 1990 through 1993 and audited for New York State taxes for
taxable years 1991 through 1993. The Bank was notified that a New York City tax
audit was scheduled for taxable years 1991 through 1993.
Federal - The Bank is subject to the rules of federal income taxation
applicable to corporations. The Bank computes taxable income, using the accrual
method of accounting, on a consolidated basis. The current maximum federal
corporate tax rate for all income, including capital gains, is 35%.
Bad Debt Reserves: The Bank, as a "qualifying thrift", was permitted to
establish a reserve for bad debts and to make annual additions thereto, which
additions may, within specified formula limits, be deducted in arriving at
taxable income. The Bank will be a qualifying thrift only if, among other
requirements, at least 60% of its assets are assets described in Section
7701(a)(19)(C) of the Internal Revenue Code of 1986, as amended (the "Code").
These assets generally include cash, obligations of the United States or an
agency or instrumentality thereof, certain obligations of a state or political
subdivision thereof, residential real estate loans and related loans, loans
secured by savings accounts, student loans and property used by the Bank in the
conduct of its business.
<PAGE>
Recently, the federal law was amended to eliminate the reserve method. The
new law eliminated the reserve method, including the percentage of taxable
income method of computing the federal bad debt deduction for taxable years
beginning after December 31, 1995. The legislation requires recapture of
reserves accumulated after 1987 (the base year). The Bank's base year reserve is
equal to the Bank's bad debt reserve at December 31, 1995 for federal income tax
purposes and accordingly there is no excess to recapture. The base year reserves
and supplemental reserve are frozen, not forgiven. These reserves continue to be
segregated as they are subject to recapture if used for purposes other than to
absorb losses on loans.
State and Local Taxation - The Bank is subject to New York State ("NYS")
Franchise Tax on Banking Corporations and to the NYC Banking Corporation Tax.
The NYS and NYC taxes on banking corporations are each imposed in an annual
amount equal to the greater of; (1) 9% of the Bank's "Entire Net Income"
allocable to NYS (and to NYC for purposes of the City tax) during the taxable
year, or (2) the applicable alternative minimum tax. The applicable alternative
minimum tax is generally the greater of (1) a percentage of the value of the
Bank's assets allocable to NYS (and to NYC for the City tax) with certain
modifications, (2) 3% of the Bank's "Alternative Entire Net Income" allocable to
NYS (and to NYC for the City tax) or (3) A minimum tax of $325 ($300 in the case
of the NYC tax).
For purposes of the NYS and NYC taxes on banking corporations, "Entire Net
Income" is similar to federal taxable income, subject to certain modifications
(including the fact that net operating losses cannot be carried back or carried
forward), and "Alternative Entire Net Income" is similar to "Entire Net Income",
subject to certain further modifications.
New York State adopted legislation to reform the franchise taxation of
thrift reserves for loan losses. The act applies to taxable years beginning
after December 31, 1995. The legislation, among other things, "decouples" New
York State's thrift bad debt provisions from the federal tax law, discussed
above and continues to allow a percentage of taxable income bad debt deduction,
subject to certain overall limitations. The New York State bad debt deduction
will no longer be predicated on the Federal deduction.
In addition to the foregoing, the New York State Tax Law also imposes a
temporary surcharge equal to 17% of that portion of the NYS franchise tax
otherwise payable which is attributable to the Bank's activities in NYC and in
several other New York counties in the NYC Metropolitan Area. This surcharge
currently applies to taxable years ending before December 31, 1997. Further, for
years ending after June 30, 1989 and before July 1, 1997, New York State imposes
a surcharge. This surcharge is equal to 2.5% of the franchise tax after the
deduction of credits for calendar year 1996. This credit is reduced to 0% for
years ending after June 30, 1997.
New York City adopted legislation to reform the franchise taxation of
thrift reserves for loan losses. The act applies to taxable years beginning
after December 31, 1995. The legislation, among other things, "decouples" New
York City's thrift bad debt provisions from the federal tax law, discussed above
and continues to allow a percentage of taxable income bad debt deduction,
subject to certain overall limitations. The New York City bad debt deduction
will no longer be predicated on the Federal deduction. The New York State and
New York City law allows the percentage of taxable income deduction subject to
certain overall limitations.
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.
<PAGE>
STATISTICAL DATA
The detailed statistical data which follows is presented in accordance with
Guide 3, prescribed by the SEC. This data should be read in conjunction with the
financial statements and related notes and Management's Discussion and Analysis
of Financial Condition and Results of Operations incorporated herein by
reference to the 1996 Annual Report to Stockholders as Exhibit 13.01.
I. Distribution of Assets, Liabilities and Stockholders' Equity: Interest
Rates and Interest Differential
A, B. Page 9 of the Company's 1996 Annual Report to Stockholders (portions of
which are filed herewith as Exhibit 13.01) presents the distribution of assets,
liabilities and stockholders' equity and interest differential, under the
caption "Average Balance Sheet" and is incorporated herein by reference.
C. Interest Differential
Page 10 of the Company's 1996 Annual Report to Stockholders (portions of
which are included herewith as Exhibit 13.01) presents the interest differential
under the caption "Rate/Volume Analysis" and is incorporated herein by
reference.
Interest Rate Sensitivity Analysis
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest earning assets
maturing or repricing within a specific time period and the amount of interest
bearing liabilities maturing or repricing within that time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income while a positive
gap would tend to result in an increase in net interest income. During a period
of falling interest rates, a negative gap would tend to result in an increase in
net interest income while a positive gap would tend to adversely affect net
interest income.
At December 31, 1996, the Company had a negative short-term gap. In
general, the lower the level of market interest rates (on a relative basis), the
shorter (term) the Company's investments. The Company generally invests in
securities with maturities ranging from three months to two years. As interest
rates increase the Company purchases securities with longer terms, and may
purchase securities with maturities of up to three years. While management
regularly reviews the Company's gap analysis, the gap is considered an
analytical tool which has limited value. Management has long followed
short-term, high quality standards for the Company's interest-earning asset
portfolios, resulting in high liquidity. This strategy enables the Company
flexibility to reprice assets and liabilities over a relatively short period of
time.
The following prepayment rate assumptions for mortgage loans are based upon
historical performance. Prepayment rate assumptions for fixed rate one-to
four-family mortgage loans and mortgage-backed securities ("MBS") based upon the
remaining term to contractual maturity were as follows: (a) 30% if less than six
months; (b) 12% if beyond six months to one year or beyond five to ten years;
(c) 10% if beyond one year to three years or beyond ten years to twenty years;
(d) 8% if beyond three years to five years; and (e) 19% if beyond 20 years. All
other mortgage loans are assumed to prepay at 3%. Adjustable-rate mortgages are
assumed to prepay at 15% and second mortgages at 18%. All deposit accounts,
which are subject to immediate withdrawal/repricing, except certificates, are
assumed to reprice in the earliest period presented. Securities
available-for-sale, which are comprised entirely of marketable equity securities
which do not have a fixed maturity date, are reflected as repricing in the five
to ten year category.
<PAGE>
The following table sets forth, as of December 31, 1996, repricing
information on earning assets and interest bearing liabilities. The data
reflects estimated principal amortization and prepayments on mortgage loans, and
estimated attrition of deposit accounts based as previously discussed. The table
does not necessarily indicate the impact of general interest rate movements on
the Bank's net interest income because the repricing of certain categories of
assets and liabilities is beyond the Bank's control. As a result, certain assets
and liabilities indicated as repricing within a stated period may in fact
reprice at different times and at different rate levels.
<TABLE>
<CAPTION>
At December 31, 1996
--------------------
More More More More More
Than Than Than Than Than
3 1 Year 3 Years 5 Years 10 Years More
0-3 Months to 3 to 5 to 10 to 20 Than
Months to 1 Year Years Years Years Years 20 Years Total
------- --------- ------ ------- ------- -------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Mortgage loans ,net (1)........ $ 77,153 $157,456 $236,821 $151,854 $163,351 $ 31,602 $ 13,991 $ 832,228
Debt and equity securities and
other investments, net (2).... 101,859 84,829 119,816 - 51,021 - - 357,525
CMOs, net...................... 29,174 76,756 46,436 2,906 - - - 155,272
MBS, net....................... 301 873 1,748 889 1,081 700 - 5,592
Other loans, net (1)........... 153 701 12,235 4,291 10,493 - - 27,873
Federal funds sold............. 86,500 - - - - - - 86,500
-------- -------- -------- -------- -------- --------- -------- ----------
Total interest earning assets 295,140 320,615 417,056 159,940 225,946 32,302 13,991 1,464,990
-------- -------- -------- -------- -------- --------- -------- ----------
Interest bearing liabilities:
Passbook and lease
security accounts......... ... 599,951 - - - - - - 599,951
Certificate accounts........... 130,340 193,448 48,391 14,969 17 - - 387,165
Money market accounts.......... 89,081 - - - - - - 89,081
NOW accounts................... 36,256 - - - - - - 36,256
-------- -------- -------- -------- -------- --------- -------- ----------
Interest bearing liabilities. 855,628 193,448 48,391 14,969 17 - - 1,112,453
-------- -------- -------- -------- -------- --------- -------- ----------
Interest sensitivity gap
per period.................... $(560,488) $127,167 $368,665 $144,971 $225,929 $ 32,302 $ 13,991 $ 352,537
========= ======== ======== ======== ======== ========= ======== ==========
Cumulative interest
sensitivity gap............... $(560,488) $(433,321)$(64,656) $ 80,315 $306,244 $338,546 $352,537 $ -
========= ========= ======== ======== ======== ======== ======== =======
Percentage of gap per period to
total assets................. (36.97%) 8.39% 24.32% 9.56% 14.90% 2.13% 0.92%
Percentage of cumulative gap to
total assets................ (36.97%) (28.58%) (4.26%) 5.30% 20.20% 22.33% 23.25%
<FN>
(1) Includes non-performing loans and excludes the allowance for possible loan
losses.
(2) Securities available-for-sale are shown including the market value
appreciation of $39.3 million, before tax, from Statement 115.
Note:
Certain short comings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as ARM loans, have features which
limit changes in interest rates on a short-term basis and over the life of the
asset. Further, in event of a change in interest rates, prepayment and early
withdrawal levels may deviate significantly from those assumed in calculating
the table.
</FN>
</TABLE>
<PAGE>
INVESTMENT PORTFOLIO
A. The following table sets forth certain information regarding the
Company's investment portfolio at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Securities Available-for-Sale:
Marketable equity securities, at fair value ..... $ 51,021 $ 40,071 $ 27,646
======== ======== ========
Securities Held-to-Maturity:
U.S Government and federal agency securities .... $299,645 $439,896 $404,651
CMOs, net ....................................... 155,272 144,607 314,180
Mortgage-backed securities:
GNMA, net ..................................... 4,999 6,667 8,597
FNMA, net ..................................... 152 235 325
FHLMC, net .................................... 441 655 877
-------- -------- --------
Total ......................................... $460,509 $592,060 $728,630
======== ======== ========
Other investments:
FHLB-NY stock (investment required by law) ...... $ 6,829 $ 6,272 $ 6,082
Other stock...................................... 30 30 70
-------- -------- --------
Total other investments........................ $ 6,859 $ 6,302 $ 6,152
======== ======== ========
</TABLE>
Contractual Maturity Distribution
The table below sets forth certain information regarding the carrying
value, weighted average yields and maturities of the Company's securities
held-to-maturity at December 31, 1996. The table does not reflect prepayments or
scheduled amortization on CMOs or MBS. For MBS, the maturities indicated are the
dates the final payments are due. For CMOs, the maturities reflect the "final
payment dates", which as defined by the issuer, represent the latest date by
which the CMO will be retired. The assumptions used by the issuer in calculating
the final payment dates are highly conservative, and the actual retirement may
occur earlier than its final payment date. The estimated actual average maturity
on the entire CMO portfolio at December 31, 1996 was fifteen months. For
principal reduction on these securities, for the years ended December 31, 1996,
1995 and 1994: See the "Consolidated Statements of Cash Flows", included on
pages 22 and 23 of the 1996 Annual Report to Stockholders.
<TABLE>
<CAPTION>
At December 31, 1996
------------------------
One Year or Less Over 1 to 5 Years Over 5 to 10 Years After 10 years
------------------- ------------------- -------------------- ---------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal agency ...... $ 95,000 5.29% $ - - % $ - - % $ - - %
U.S. Government ..... 84,829 5.75 119,816 6.14 - - - -
CMOs ................ - - 55,649 5.47 99,623 5.82 - -
MBS ................. - - 2,152 10.94 - - 3,440 9.61
-------- -------- -------- ----- -------
Total .......... $179,829 5.51% $177,617 5.99% $ 99,623 5.82% $ 3,440 9.61%
======== ======== ======== ===== =======
</TABLE>
<PAGE>
LOAN PORTFOLIO
A. The following table sets forth the composition of the mortgage and other
loan portfolios in dollar amounts:
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Mortgage loans:
Multi-family .......................... $433,224 $344,337 $294,003 $238,756 $207,192
Underlying cooperative ... ............ 262,221 263,972 251,580 253,460 235,439
One- to four-family ................... 76,848 82,391 86,531 95,357 113,948
Commercial ............................ 61,829 55,662 58,070 59,942 63,373
Construction .......................... 1,836 1,492 2,518 410 -
-------- -------- -------- -------- --------
Total mortgage loans ............... 835,958 747,854 692,702 647,925 619,952
-------- -------- -------- -------- --------
Other loans:
Student ............................... 6,204 7,466 9,656 11,132 11,504
Loans secured by deposit accounts ..... 8,328 8,489 9,167 9,340 10,076
Property improvement .................. 8,775 9,165 6,762 5,599 5,624
Consumer .............................. 4,350 4,092 1,821 1,516 1,892
Overdraft loans ....................... 237 220 224 210 181
-------- -------- -------- ------- --------
Total other loans .................. 27,894 29,432 27,630 27,797 29,277
-------- -------- -------- -------- --------
Total loans receivable ............. 863,852 777,286 720,332 675,722 649,229
-------- -------- -------- -------- --------
Less:
Unearned discounts, premiums and
deferred loan fees, net .............. 3,751 4,344 4,952 3,210 3,601
Allowance for possible loan losses .... 5,327 4,697 4,085 4,136 3,554
-------- -------- -------- -------- --------
Loans receivable, net .............. $854,774 $768,245 $711,295 $668,376 $642,074
======== ======== ======== ======== ========
</TABLE>
<PAGE>
B. Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table shows the contractual maturity of the loan portfolios
at December 31, 1996. The table does not reflect prepayments, or scheduled
principal amortization or repricing of adjustable rate loans. (For principal
reduction on loans, for the years ended December 31, 1996, 1995 and 1994: See
the "Consolidated Statements of Cash Flows", included on pages 22 and 23 in the
1996 Annual Report to Stockholders.)
<TABLE>
<CAPTION>
Other
Mortgage Loans Loans Total
-------------- ----- -----
(In Thousands)
Under- One-to
Multi- lying- Four- Commer- Construct-
Family Co-op Family cial tion Other
------ ----- ------ ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within 1 Year ......... $ 35,340 $ 19,603 $ 9,053 $ 21,870 $ 1,613 $ 8,505 $ 95,984
-------- -------- -------- -------- --------- ------- --------
After 1 Year:
1 to 2 years .......... 12,844 22,283 356 6,723 - 1,886 44,092
2 to 3 years .......... 30,900 12,723 615 2,045 223 2,719 49,225
3 to 5 years .......... 105,074 73,539 1,227 5,449 - 4,291 189,580
5 to 10 years ......... 218,096 106,368 5,777 22,006 - 10,493 362,740
10 to 20 years ........ 30,516 27,705 36,866 3,736 - - 98,823
Over 20 years ......... 454 - 22,954 - - - 23,408
-------- -------- -------- -------- --------- ------- --------
Total due after 1 year .... $397,884 $242,618 $ 67,795 $ 39,959 $ 223 $19,389 $767,868
-------- -------- -------- -------- --------- ------- --------
Total amounts due ... $433,224 $262,221 $ 76,848 $ 61,829 $ 1,836 $27,894 $863,852
======== ======== ========= ======== ========= ======= --------
Less:
Unearned discounts,
premiums and deferred
loan fees, net ....... 3,751
Allowance for possible
loan losses .......... 5,327
--------
Loans receivable, net ... $854,774
========
</TABLE>
The following table sets forth at December 31, 1996, the dollar amount of
all loans due after December 31, 1997 and whether such loans have fixed interest
rates or adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Adjustable Total
----- ---------- -----
(In Thousands)
<S> <C> <C> <C>
Due after December 31, 1996:
Mortgage loans:
Multi-family ........................ $ 397,884 $ - $ 397,884
Underlying cooperative .............. 242,618 - 242,618
One-to four-family .................. 59,302 8,493 67,795
Commercial .......................... 39,959 - 39,959
Construction ........................ 223 - 223
Other loans:
Student ............................. 3,319 2,659 5,978
Loans secured by deposit accounts ... 421 - 421
Property improvement ................ 8,568 - 8,568
Consumer ............................ 4,185 - 4,185
Overdraft loans ..................... 237 - 237
---------- ------- ----------
Total loans receivable ................ $ 756,716 $11,152 $ 767,868
========== ======= ==========
</TABLE>
<PAGE>
C. Delinquencies and Classified Assets - Delinquent loans are reviewed by
management monthly and by the Board of Directors quarterly. When a borrower
fails to make a scheduled loan payment, efforts are made to have the borrower
cure the delinquency. The borrower is notified of the delinquency in writing and
by telephone by the Bank's collection staff. For mortgage loans, under certain
circumstances, a site inspection of the property is required. Most delinquencies
are cured within 90 days and no legal action is taken. If a mortgage delinquency
exceeds 90 days, the Bank institutes measures to enforce its remedies, including
commencing a foreclosure action. For delinquent Federal Housing Administration
("FHA") and Veterans Administration ("VA") mortgage loans, the Bank follows
notification and foreclosure procedures prescribed by FHA and VA. Property
acquired by the Bank as a result of a foreclosure is classified as "Other Real
Estate". For uninsured non-mortgage loans, delinquent loans are charged off
after 120 days and are referred to the Bank's attorneys for collection.
At December 31, 1996, 1995 and 1994, delinquencies in the loan portfolios
were as follows:
<TABLE>
<CAPTION>
61-90 Days 90 Days and Over
---------- ----------------
Number Principal Number Principal
of balance of balance
loans of loans loans of loans
----- -------- ----- --------
(Dollars in Thousands)
<S> <C><C> <C> <C><C> <C>
At December 31, 1996
--------------------
Delinquent loans:
Guaranteed1 78 $ 390 144 $ 692
Non-guaranteed 9 20 15 13,459
--- ------ --- -------
87 $ 410 159 $14,151
=== ====== === =======
Ratio of delinquent
loans to total loans .05% 1.64%
=== ====
At December 31, 1995
--------------------
Delinquent loans:
Guaranteed1 91 $ 476 132 $ 751
Non-guaranteed 10 8,165 8 324
--- ------ --- -------
101 $8,641 140 $ 1,075
=== ====== === =======
Ratio of delinquent
loans to total loans 1.11% .14%
===== ===
At December 31, 1994
--------------------
Delinquent loans:
Guaranteed(1) 101 $ 585 247 $ 960
Non-guaranteed 9 119 9 329
--- ------ --- -------
110 $ 704 256 $ 1,289
=== ====== === =======
Ratio of delinquent
loans to total loans .10% .18%
=== ===
<FN>
(1) Loans which are FHA, VA or SLMA guaranteed.
</FN>
</TABLE>
<PAGE>
The following table sets forth information regarding non-accrual,
restructured and impaired loans and loans which are 90 days or more delinquent
but on which the Bank is accruing interest at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Mortgage loans:
One-to four-family, multi-family and
commercial real estate loans:
Non-accrual loans (1) ................... $12,754 $20,903 $ 500 $ - $ -
------- ------- ------ ------ ------
Accruing loans 90 or more days overdue:
Conventional mortgages .................... 686 311 322 326 1,615
VA and FHA mortgages (2) .................. 361 557 581 937 1,174
------ ------ ------ ------ ------
Total ................................ 1,047 868 903 1,263 2,789
------ ------ ------ ------ ------
Other loans:
Non-accrual loans ........................ - - - - -
Accruing 90 or more days overdue:
Student loans .......................... 331 194 379 429 280
Consumer loans ......................... 19 13 7 19 5
------ ------ ------ ------ ------
Total ................................ 350 207 386 448 285
------ ------ ------ ------ ------
Total non-performing loans:
Non-accrual .............................. 12,754 20,903 500 - -
Accruing 90 days or more overdue ......... 1,397 1,075 1,289 1,711 3,074
------ ------ ------ ------ ------
Total ................................ $14,151 $21,978 $1,789 $1,711 $3,074
======= ======= ====== ====== ======
Non-accrual loans to total loans ........... 1.48% 2.69% .07% - % - %
Accruing loans 90 or more days overdue
to total loans ........................... .16 .14 .18 .25 .47
Non-performing loans to total loans ........ 1.64 1.78(3) .25 .25 .47
At December 31:
Restructured loans ......................... $ 1,874 $ 1,663 $1,828 $ - $ -
For the years ended 12/31:
Income forfeited due to
restructured loans ........................ $ 62 $ 62 $ 6 $ - $ -
Income unrecorded due to
non-accrual/impaired loans ................ $ 1,180 $ 226 $ 150(4) $ - $ -
<FN>
(1) See "Asset/Liability Management", included on pages 7 and 8 in the 1996
Annual Report to Stockholders.
(2) The Bank's FHA and VA loans are guaranteed, seasoned loans. These loans,
including the past due loans, do not present any significant collection risk to
the Bank and therefore, are presented separately from conventional mortgages.
(3) Does not include the $8.2 million mortgage loan that was on non-accrual
status, as payments were received through the bankruptcy court.
(4) As part of restructuring interest was waived, therefore loan was placed on
non-accrual status.
</FN>
</TABLE>
<PAGE>
There were no loans included in the preceding table which were modified in
a troubled debt restructure ("TDR"). The entire balance of impaired loans at
December 31, 1996 represents loans on non-accrual status. The average balance of
impaired loans for 1996 and 1995 was $12,754,000 and $208,000, respectively.
There was no interest income recorded for impaired loans (for the period in
which the loans were identified as impaired) during 1996 and 1995. For the years
ended December 31, 1996 and 1995, impaired loans resulted in foregone interest
of $1,180,000 and $29,000, respectively. At December 31, 1996 and 1995, loans
restructured in a TDR, other than those classified as impaired loans and/or
non-accrual loans, were $1,874,000 and $1,663,000, respectively. Interest
forfeited attributable to these loans was $62,000, $62,000 and $6,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
Classified Assets - Federal regulations provide for the classification of
loans and other assets such as debt and equity securities considered by the OTS
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 insured 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. Pursuant to OTS
rules, the Bank recently discontinued classifying assets as "special mention" if
such assets possessed weakness but do not expose the Bank to sufficient risk to
warrant classification in one of the aforementioned categories. However, the
Bank still maintains a "special mention" category under its internal asset
review system.
When an insured institution classifies problem assets as either
"substandard" or "doubtful", it is required to establish general allowances for
loan losses in an amount deemed prudent by management. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss", it is required to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge off such amount. An institution's determination as to
the classification of its assets and the amount of its valuation allowances is
subject to review by the OTS which can order the establishment of additional
general or specific loss allowances. In connection with the filing of its
periodic reports with the OTS, the Bank regularly reviews the problem loans in
its portfolio to determine whether any loans require classification in
accordance with applicable regulations.
Allowances for Possible Loan and Other Credit Losses - The allowances for
possible credit losses are established through provisions made, based on
management's evaluation of the risk inherent in its asset portfolios and changes
in the nature and volume of investment activity. Such evaluation, which includes
a review of all assets for which full collection may not be reasonably assured,
considers among other matters, the estimated fair value of the underlying
collateral, economic conditions, historical loss experience and other factors
that warrant recognition in providing for adequate credit allowances. (For a
more complete discussion of the Bank's problem assets see "Provision For
Possible Loan Losses" and "Provision For Possible Other Credit Losses", included
on page 11 in the 1996 Annual Report to Stockholders.)
<PAGE>
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with other federal banking agencies, have an
interagency policy statement on the allowance for loan and lease losses. The
policy statement provides guidance for financial institutions on both the
responsibilities of management for the assessment and establishment of adequate
allowances and guidance for banking agency examiners to use in determining the
adequacy of general valuation allowances. Generally, the policy statement
requires that: institutions have effective systems and controls to identify,
monitor and address asset quality problems; have analyzed all significant
factors that affect the collectibility of the portfolio in a reasonable manner;
and have established acceptable allowance evaluation processes that meet the
objectives set forth in the policy statement.
Potential Problem Loans and Other Assets and Subsequent Developments
Management has identified underlying cooperative loans, which are less than 51%
sold and have loan to value ratios greater than 30% as having a level of credit
risk greater than underlying cooperative loans not meeting these criteria. At
December 31, 1996, two underlying cooperative loans, totaling $3.6 million met
both of these conditions.
Other Real Estate - During 1994, as part of the restructuring of a $1.9
million mortgage loan secured by a cooperative building, the Bank, through a
subsidiary corporation, took title to cooperative shares representing 57
apartments in an 82 unit cooperative property, located in Brooklyn, New York. As
part of the agreement, the Bank made an additional five year loan to the
cooperative to make improvements to the building and pay expenses of the
cooperative association, In addition, on February 1, 1994, the scheduled
maturity of the mortgage, the loan was extended for an additional five years at
7.25%. This additional loan is scheduled to be repaid over a five year period
commencing March 1, 1994 through maintenance charged to the cooperative
shareholders. At December 31, 1996, the balance of the additional loan was
$386,000.
In connection with this transaction $1.6 million of the $2.4 million
cooperative indebtedness was reclassified from mortgage loans to ORE. The amount
classified as ORE is based on the percentage of cooperative shares owned by the
Bank, compared to the building's total cooperative shares. At December 31, 1996,
the Bank included $1.3 million in mortgage loans and $607,000 in ORE in
connection with this property. The carrying amount of ORE is increased by
capitalized improvements, not to exceed net fair value, and reduced by deferred
gains. At December 31, 1996, a deferred cumulative gain of $347,000 on the sale
of 24 units was deferred; of the remaining 33 units owned by the Bank's
subsidiary, 32 units were rented, and 1 unit was vacant and being marketed for
sale. This property accounted for all but $40,000 of the $647,000 in ORE at
December 31, 1996.
ORE operations generated income of $772,000 for the year ended December 31,
1996. This income reflects a pre-tax gain of $705,000 recognized on the sale of
a property acquired through foreclosure during the first quarter of 1996. The
$705,000 gain reflects the recovery of $529,000 for legal fees, expensed in
prior periods, incurred in connection with the foreclosure process. There were
no provisions established against ORE during the year ended December 31, 1996.
Claims Receivable - On February 6, 1995, the Superintendent of Banks for
the State of New York seized Nationar, a check-clearing and trust company,
freezing all of Nationar's assets. On that date, the Bank had: Federal funds
sold to Nationar of $10,000,000; demand accounts of $200,000 and $38,000 of
Nationar capital stock In May, 1995, management, in accordance with the
Company's standard procedures for monitoring asset quality established a
$2,040,000, or 20%, valuation allowance against the claims receivable. During
1995, the Bank wrote off the $38,000 stock investment.
During 1996, the Bank received distributions from the Nationar estate, for
all amounts invested, except the $38,000 of capital. Therefore, during the
fourth quarter of 1996, the Bank fully recovered the $2,040,000 reserve.
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
Activity in the allowance for possible loan losses for the mortgage loan
portfolio and the other loan portfolio are summarized as follows, respectively,
for the years ended December 31
<TABLE>
<CAPTION>
Mortgage Portfolio Loan Loss Allowance: 1996 1995 1994 1993 1992
- -------------------------------------- ---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $4,575 $3,976 $4,000 $3,400 $2,800
Provision for possible loan losses 600 600 600 600 600
Loans charged-off - (1) (624) - -
Recoveries of loans previously charged off 1 - - - -
------ ------ ------- ------ ------
Balance at end of period $5,176 $4,575 $3,976 $4,000 $3,400
====== ====== ====== ====== ======
Ratios:
Net charge-offs to average mortgages - % - % .10% - % - %
Allowance for possible loan losses to
net mortgage loans at December 31: .63% .62% .58% .62% .55%
Allowance for possible loan losses to mortgage
loans delinquent 90 days or more at December 31: 37.50% 5.27x 4.40x 3.17x 1.22x
Other Loan Portfolio Loss Allowance:
- ------------------------------------
Balance at beginning of period $ 122 $ 109 $ 136 $ 154 $ 176
Provision for possible loan losses 40 36 8 - 1
Loans charged off (33) (43) (40) (33) (41)
Recoveries of loans previously charged off 22 20 5 15 18
------ ------ ------ ------ -----
Balance at end of period $ 151 $ 122 $ 109 $ 136 $ 154
====== ====== ====== ====== =====
Ratios:
- -------
Net charge-offs to average other loans .04% .08% .13% .06% .08%
Allowance for possible loan losses to
net other loans at December 31: .54% .42% .40% .49% .53%
Allowance for possible loan losses to other
loans delinquent 90 days or more at December 31: 43.14% 58.94% 28.24% 30.36% 54.04%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DEPOSITS
Deposit balances are summarized as follows at December 31:
1996 1995 1994
---- ---- ----
Stated Stated Stated
rate Amount rate Amount rate Amount
---- ------ ---- ------ ---- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance by interest rate:
Demand - % $ 31,940 - % $ 30,711 - % $ 28,818
NOW 2.47 36,256 2.47 36,680 2.66 36,866
Money market 2.96 89,081 2.96 92,774 2.81 109,603
Passbook & lease
security 2.71 599,951 2.96 632,879 2.96 717,988
Certificates: - - - - 2.95- 3.00 384
- - 3.70- 4.00 2,083 3.01- 4.00 132,837
4.14- 5.00 174,155 4.01- 5.00 135,386 4.01- 5.00 131,177
5.01- 6.00 187,890 5.01- 6.00 203,054 5.01- 6.00 34,034
6.01- 7.00 25,120 6.01- 7.00 29,016 6.01- 7.00 9,063
7.01- 8.00 - 7.01- 8.00 863 7.01- 8.00 3,045
8.01- 9.00 - 8.01- 9.00 - 8.01- 9.00 609
9.01-10.00 - _ 9.01-10.00 - 9.01-10.00 -
---------- ---------- -------
387,165 370,402 311,149
---------- ---------- ----------
Total deposits $1,144,393 $1,163,446 $1,204,424
========== ========== ==========
Time certificates in
excess of $100,000 $ 32,676 $ 27,039 $ 19,663
========== ========== ==========
</TABLE>
The following table sets forth the maturity of certificate accounts in
amounts of $100,000 or more at December 31:
<TABLE>
<CAPTION>
1996
----
(In Thousands)
<S> <C>
Three months or less $11,792
Over three months through six months 10,132
Over six months through twelve months 5,816
Over twelve months 4,936
-------
$32,676
=======
</TABLE>
<PAGE>
The following table sets forth certain of the Bank's average interest
bearing deposit categories and the related average interest rates for the years
ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Passbook and lease
security $ 615,591 2.72% $ 661,356 2.88% $ 765,098 2.77%
Certificates 383,215 5.16 343,229 5.14 292,762 3.75
Money Market 91,597 3.08 99,016 3.08 122,277 2.78
NOW 36,338 2.47 37,073 2.55 37,937 2.56
---------- ---------- ----------
$1,126,741 3.57% $1,140,674 3.57% $1,218,074 3.00%
========== ========== ==========
</TABLE>
The FDIC, an agency of the U.S. Government, insures each depositor's
savings up to $100,000 through the BIF.
<TABLE>
<CAPTION>
Financial Highlights
For the Years Ended December 31: 1996 1995 1994
- ------------------------------- ---- ---- ----
<S> <C> <C> <C>
Return on average assets 1.74% 1.44% 1.46%
Return on average equity 8.05 6.67 7.19
Dividend payout ratio(1) 47.24 50.25 35.64
Average equity to average assets 21.65 21.60 20.36
Equity to total assets 22.12 22.01 20.93
Interest rate spread 3.90 3.82 3.75
Net interest margin 4.68 4.60 4.36
Non-interest expense to
average assets 1.80 1.92 1.92
Non-performing loans to total loans(2) 1.64 1.78 0.25
Non-performing assets to total assets(2) 0.98 1.50 0.22
Efficiency ratio(3) 40.40 42.36 44.57
Ratio of net interest income to
non-interest expense 2.44x 2.27x 2.15x
Average interest earning assets to
average interest bearing liabilities 1.28x 1.28x 1.25x
<FN>
(1) Dividend payout ratio is calculated by dividing dividends declared per
share by net income per share.
(2) See also "Asset/Liability Management", included on pages 7 and 8 in the
1996 Annual Report to Stockholders.
(3) Amount is determined by dividing non-interest expense, excluding Other Real
Estate (income) expense, by net interest income plus loan fees and service
charges.
</FN>
</TABLE>
<PAGE>
BORROWINGS
The Bank has not directly borrowed funds since 1984, however, in the event
that the Bank should require funds beyond its internal ability, it may take
advances from the Federal Home Loan Bank, New York.
The final payment on the Employee Stock Ownership Plan ("ESOP") obligation
was made during 1994, through the Bank's contributions of $1.0 million. Total
interest expense incurred on the obligation during 1994 was $25,000. The Bank
has continued to make contributions to a non-leveraged ESOP.
ITEM 2. PROPERTIES
----------
The Bank conducts its business through 13 full-service branch offices, 10
located in the borough of Queens, one in the borough of Manhattan and one each
in Nassau and Suffolk counties. The Company believes that the Bank's current
facilities are adequate to meet the present and immediately foreseeable needs of
the Bank and the Company. (See Note 9 to the Consolidated Financial Statements,
included on page 31 in the 1996 Annual Report to Stockholders.)
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Bank is a defendant in several lawsuits arising out of the normal
conduct of business. In the opinion of management, after consultation with legal
counsel, the ultimate outcome of these matters is not expected to have a
material adverse effect on the results of operations, business operations or the
consolidated financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
<PAGE>
ADDITIONAL ITEM. EXECUTIVE OFFICERS
------------------
The following table sets forth certain information with respect to each
executive officer of the Company who is not also a director of the Company. The
Board of Directors appoints or reaffirms the appointment of all of the Company's
Executive Officers each April. The term of each Executive Officer of the Company
is generally one year, or until a respective successor is elected (or
appointed).
<TABLE>
<CAPTION>
Age at Position held
Name December 31, 1996 with the Company
- ---- ----------------- ----------------
<S> <C> <C>
John F. Bennett 62 Senior Vice President
Ronald C. Spielberger 59 Senior Vice President
Jack Connors 47 Senior Vice President
John Conroy 50 Senior Vice President
Bernice Glaz 55 Senior Vice President
Lawrence J. Kane 43 Senior Vice President
Thomas R. Lehmann 46 Chief Financial Officer
Robert A. Neumuth 53 Senior Vice President
Joseph J. Hennessy 54 Asst. Treasurer/Comptroller
</TABLE>
The following table sets forth certain information with respect to each
executive officer of the Bank who is not a director of the Bank.
<TABLE>
<CAPTION>
Age at Position held
Name December 31, 1996 with the Bank
- ---- ----------------- -------------
<S> <C> <C>
John F. Bennett 62 Senior Vice President
Ronald C. Spielberger 59 Senior Vice President
Jack Connors 47 Senior Vice President
John Conroy 50 Senior Vice President
Bernice Glaz 55 Senior Vice President
Thomas R. Lehmann 46 Chief Financial Officer
Treasurer and Comptroller
Lawrence J. Kane 43 Senior Vice President
Robert A. Neumuth 53 Senior Vice President
</TABLE>
<PAGE>
PART II
ITEM 5. MARKET FOR JSB FINANCIAL INC.'S COMMON EQUITY AND RELATED
---------------------------------------------------------
STOCKHOLDERS' MATTERS
---------------------
JSB Financial, Inc. common stock is traded on the Nasdaq National Market
and quoted under the symbol "JSBF".
Information regarding JSB Financial, Inc. common stock and its price for
the 1996 calendar year appears on page 6 of the 1996 Annual Report to
Stockholders, portions of which are filed herewith as Exhibit 13.01, under the
caption "Quarterly Results" and is incorporated herein by reference.
As of February 13, 1997, JSB Financial, Inc. had approximately 2,228
shareholders of record, not including the number of persons or entities holding
stock in nominee or street name through various brokers and banks.
During 1996, the Company declared four cash dividends totaling $1.20 per
share each on its common stock. Although the Company cannot guarantee dividend
payments, management expects to continue to pay cash dividends, provided that
dividend payments are in the best interest of the Company's stockholders.
Certain restrictions exist regarding the amount of dividends that the Company
may declare and pay. (See Note 17 to the Consolidated Financial Statements,
included on page 35 in the 1996 Annual Report to Stockholders.) Dividends were
paid during calendar 1996 to stockholders as follows:
<TABLE>
<CAPTION>
Declaration Date Record Date Payment Date Dividend Per Share
---------------- ----------- ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
January 10, 1996 February 7, 1996 February 21, 1996 $.30
April 9, 1996 May 8, 1996 May 22, 1996 $.30
July 9, 1996 August 7, 1996 August 21, 1996 $.30
October 14, 1996 November 6, 1996 November 20, 1996 $.30
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
Information regarding selected financial data appears on pages 2 and 5 of
the Company's 1996 Annual Report to Stockholders, and is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Pages 7 through 17, of the Company's 1996 Annual Report to Stockholders,
are incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Pages 19 through 42, of the Company's 1996 Annual Report to Stockholders,
are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
-----------------------------------------------------------
AND FINANCIAL DISCLOSURES
-------------------------
None.
<PAGE>
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant has filed a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement"), and certain information included therein
is incorporated herein by reference. Only those sections of the Proxy Statement
which specifically address the items set forth herein are incorporated by
reference. Such incorporation does not include the Report of the Compensation
Committee or the Stock Performance Graphs included in the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
-----------------------------------------------
Information presented under the heading "Information With Respect to
Nominees and Continuing Directors" on pages 4 and 5 in the Company's Proxy
Statement for its Annual Meeting of Stockholders to be held on May 13, 1997, is
incorporated herein by reference. Information concerning Executive Officers who
are not directors is contained in Part I of this report pursuant to paragraph
(b) of Item 401 of Regulation S-K in reliance on Instruction G.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Information included under the headings "Directors' Compensation" and
"Executive Compensation" on pages 9 through 12 (excluding the Report of the
Compensation Committee on pages 10 and 11) in the Company's Proxy Statement for
its Annual Meeting of Stockholders to be held on May 13, 1997, is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Information included under the headings "Security Ownership of Certain
Beneficial Owners" and "Stock Ownership of Management" on pages 3 and 8 in the
Company's Proxy Statement for its Annual Meeting of Stockholders to be held on
May 13, 1997, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information included under the headings "Indebtedness of Management and
Transactions with Certain Related Persons" on page 19 in the Company's Proxy
Statement for its Annual Meeting of Stockholders to be held on May 13, 1997, is
incorporated herein by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) 1. Financial Statements
The following Consolidated Financial Statements of the Company, its
subsidiary, Jamaica Savings Bank FSB, and the independent auditors' report
thereon, included on pages 19 through 43, of the Company's 1996 Annual Report to
Stockholders, are incorporated herein by reference:
- Consolidated Statements of Financial Condition at December 31,
1996 and 1995
- Consolidated Statements of Income for each of the years in the three
year period ended December 31, 1996
- Consolidated Statements of Changes in Stockholders' Equity for each of
the years in the three year period ended December 31, 1996
- Consolidated Statements of Cash Flows for each of the years in the
three year period ended December 31, 1996
- Notes to the Consolidated Financial Statements
- Independent Auditors' Report
The remaining information appearing in the 1996 Annual Report to
Stockholders is not deemed to be filed as part of this report, except as
expressly provided herein.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or Notes thereto.
(b) Reports on Form 8-K filed during the last quarter of 1996: None
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C> <C>
3.01 Articles of Incorporation (1)
3.02 Bylaws (2)
4.01 Stock Certificate of JSB Financial, Inc. (1)
Employment Agreement between the Company and:
10.01 Park T. Adikes (3)
10.02 Edward P. Henson (3)
10.04 Ronald C. Spielberger (3)
10.05 Joanne Corrigan (3)
10.06 Supplemental Employment Agreement entered into on July 9, 1996
between the Company and (filed herewith):
Park T. Adikes
Edward P. Henson
Ronald C. Spielberger
Joanne Corrigan
Continued
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C> <C>
Employment Agreement between the Bank and:
10.07 Park T. Adikes (3)
10.08 Edward P. Henson (3)
10.09 Ronald C. Spielberger (3)
10.10 Joanne Corrigan (3)
10.11 John F. Bennett (3)
10.12 Jack Connors (4)
10.13 John J. Conroy (4)
10.14 Bernice Glaz (4)
10.15 Thomas R. Lehmann (4)
10.16 Lawrence J. Kane (3)
10.17 Robert A. Neumuth, filed herewith
10.18 Supplemental Employment Agreement entered into on July 9, 1996
between the Bank and, (filed herewith):
Park T. Adikes
Edward P. Henson
Ronald C. Spielberger
Joanne Corrigan
John F. Bennett
Jack Connors
John J. Conroy
Bernice Glaz
Thomas R. Lehmann
Lawrence J. Kane
Robert A. Neumuth
Special Termination Agreements between the Bank, guaranteed by
the Company, and:
10.19 Teresa DiRe-Covello (4)
10.20 Joseph J. Hennessy (4)
10.21 Philip Pepe (5)
10.22 Supplemental Special Termination Agreements entered into on July
9, 1996 between the Bank, (filed herewith) and:
Teresa DiRe-Covello
Joseph J. Hennessy
Philip Pepe
Continued
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C> <C>
10.23 Jamaica Savings Bank FSB Benefit Restoration Plan
(Amended and Restated) (6)
10.24 JSB Financial, Inc. 1990 Incentive Stock Option Plan
(Amended and Restated) (7)
10.25 JSB Financial, Inc. 1990 Stock Option Plan
For Outside Directors (Amended and Restated) (7)
10.26 Jamaica Savings Bank FSB Employee Severance
Compensation Plan (1)
10.27 Jamaica Savings Bank FSB Outside Directors' Consultation
and Retirement Plan (8)
10.28 Incentive Savings Plan of Jamaica Savings Bank FSB (8)
10.29 The JSB Financial, Inc. 1996 Stock Option Plan (9)
11.01 Statement regarding computation of per share earnings, filed herewith
13.01 Portions of the 1996 Annual Report to Stockholders, filed herewith
23.01 Consent of KPMG Peat Marwick LLP, filed herewith
27.00 Financial Data Schedule, filed herewith
99.01 Form 11-K for the 1996 Incentive Savings Plan of
Jamaica Savings Bank FSB (10)
<FN>
(1) Incorporated herein by reference to Exhibits filed with the Registration Statement on Form S-1,
Registration No. 33-33821.
(2) Incorporated herein by reference to Exhibits filed with the Registration
Statement on Form S-1, Registration No. 33-33821, as amended by Form 8-K
on January 14, 1992.
(3) Incorporated herein by reference to Exhibits filed with the Form 10-K for the Year Ended December 31, 1990.
(4) Incorporated herein by reference to Exhibits filed with the Form 10-Q for the Quarter Ended June 30, 1995.
(5) Incorporated herein by reference to Exhibits filed with the Form 10-K for the year ended December 31, 1993.
(6) Incorporated herein by reference to Exhibits filed with the Form 10-K for the Year Ended December 31, 1994.
(7) Incorporated herein by reference to Exhibits filed with the Form 10-K for the Year Ended December 31, 1992.
(8) Incorporated herein by reference to Exhibits filed with the Pre-Effective Amendment No.1 to Form S-1,
Registration No. 33-33821, filed on April 2, 1990.
(9) Incorporated herein by reference to Appendix A (pages 21 through 33) of the Proxy Statement, dated March
29, 1996.
(10) To be filed.
</FN>
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
JSB Financial, Inc.
-------------------
(Registrant)
/s/ Park T. Adikes 3/21/97
- ------------------------------------
Park T. Adikes
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
/s/ Park T. Adikes 3/21/97 /s/ Thomas R. Lehmann 3/21/97
- --------------------------- ------- ----------------------------------
Park T. Adikes Thomas R. Lehmann
Chief Executive Officer Chief Financial Officer
Chairman and Director (Principal Accounting Officer)
/s/ James E. Gibbons, Jr. 3/21/97 /s/ Paul R. Screvane 3/21/97
- --------------------------- ------- ------------------------ -------
James E. Gibbons, Jr. Paul R. Screvane
Director Director
/s/ Arnold B. Pritcher 3/21/97 /s/ Alfred F. Kelly 3/24/97
- --------------------------- ------- ------------------------ -------
Arnold B. Pritcher Alfred F. Kelly
Director Director
/s/ Howard J. Dirkes, Jr. 3/24/97 /s/ Edward P. Henson 3/21/97
- ---------------------------- ------- ------------------------ -------
Howard J. Dirkes, Jr. Edward P. Henson
Director President and Director
/s/ Joseph C. Cantwell 3/24/97
- --------------------------- -------
Joseph C. Cantwell
Director
JSB FINANCIAL, INC.
SUPPLEMENTAL EMPLOYMENT AGREEMENT
WHEREAS, ("Executive") and JSB Financial, Inc. (the "Company") desire to enter
into this Supplemental Employment Agreement ("Supplemental Agreement") to
supplement the Employment Agreement entered into between the Executive and the
Company on June 27, 1990 (hereinafter referred to as the "Employment
Agreement"); and
WHEREAS, there is an accelerating trend of consolidation among companies within
the banking industries; and
WHEREAS, tax law provisions relating to "golden parachute payments" could have
the effect of reducing the benefits otherwise provided to Executive under the
Employment Agreement as a result of a change in control of the Company; and
WHEREAS, the Board of Directors of the Company ("Board") believes that it is in
the best interests of the Company and its shareholders that this Supplemental
Agreement be entered into in order to provide the benefits intended to be
provided under the Employment Agreement to Executive in the event of a change in
control of the Company, without any reduction because of tax code "penalties" or
excise taxes relating to a change in control; and
WHEREAS, the Company and the Executive also desire to enter into this
Supplemental Agreement for the purpose of eliminating conflicting terms
contained in the Employment Agreement and to provide the Executive with
termination benefits substantially similar to those provided to key executives
at other savings and loan holding companies; and
WHEREAS, the Company and the Executive also desire to enter into this
Supplemental Agreement for the purpose of providing further incentive to the
Executive to achieve successful results in the management and the operation of
the Company.
NOW, THEREFORE, in consideration of the mutual covenants herein contained, and
upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
A. SUPPLEMENTAL BENEFITS
1. In the event of a Change in Control of the Company (as defined in the
Employment Agreement), the Executive shall be entitled to receive, pursuant to
this Supplemental Agreement, an amount, payable by the Company, in addition to
any compensation or benefits payable by the Company pursuant to the Employment
Agreement, which amount shall equal the difference between (i) the amount that
would be paid under the Employment Agreement pursuant to Section 5(c) of the
Employment Agreement but for the reductions in payments required by Section 5(h)
of the Employment Agreement, and (ii) the amount that is actually paid under the
terms of the Employment Agreement after giving consideration to Section 5(h) of
said Employment Agreement.
<PAGE>
2. In each calendar year that Executive is entitled to receive payments or
benefits under the provisions of the Employment Agreement and this Supplemental
Agreement, the Company or it's independent accountants shall determine if an
excess parachute payment (as defined in Section 4999 of the Internal Revenue
Code of 1986, as amended, and any successor provision thereto, (the "Code")
exists. Such determination shall be made after taking any reductions permitted
pursuant to Section 280G of the Code and the regulations thereunder. Any amount
determined to be an excess parachute payment after taking into account such
reductions shall be hereafter referred to as the "Initial Excess Parachute
Payment". As soon as practicable after a Change in Control, the Initial Excess
Parachute Payment shall be determined. Upon the Date of Termination following a
Change in Control, the Company shall pay Executive, subject to applicable
withholding requirements under applicable state and federal law an amount equal
to:
(i) twenty (20) percent of the Initial Excess Parachute Payment (or such other
amount equal to the tax imposed under Section 4999 of the Code); and
(ii) such additional amount (tax allowance) as may be necessary to compensate
Executive for the payment by Executive of city, state and federal income, excise
and employment-related taxes on the payment provided under Clause (i) and on any
payments under this Clause (ii). In computing such tax allowance, the payment to
be made under Clause (i) shall be divided by the "gross up percentage" ("GUP").
The GUP shall be determined as follows:
GUP = 1.00 - The Executive's Tax Rate
The Executive's Tax Rate for purposes of computing the GUP shall be the highest
marginal federal, state and city income, excise and employment-related tax rate,
including any applicable to the Executive in the year in which the payment under
Clause (i) is made.
3. Notwithstanding the foregoing, if it shall subsequently be determined in a
final judicial determination with any taxing authority or a final administrative
settlement with any taxing authority to which Executive is a party that the
excess parachute payment as defined in Section 4999 of the Code, reduced as
described above, is different from the Initial Excess Parachute Payment (such
different amount being hereafter referred to as the "Determinative Excess
Parachute Payment") then the Company's independent accountants shall determine
the amount (the "Adjustment Amount") the Executive must pay to the Company or
the Company must pay to the Executive in order to put the Executive (or the
Company, as the case may be ) in the same position as the Executive (or the
Company, as the case may be) would have been if the Initial Excess Parachute
Payment had been equal to the Determinative Excess Parachute Payment. In
determining the Adjustment Amount, the independent accountants shall take into
account any and all taxes (including any penalties and interest) paid by or for
Executive or refunded to Executive or for Executive's benefit. As soon as
practicable after the Adjustment Amount has been so determined, the Company
shall pay the Adjustment Amount to Executive or the Executive shall repay the
Adjustment Amount to the Company, as the case may be.
4. In each calendar year that Executive receives payments or benefits under the
Employment Agreement or this Supplemental Agreement, Executive shall report on
his state and federal income tax returns such information as is consistent with
the determination made by the independent accountants of the Company as
described above. The Company shall indemnify and hold Executive harmless from
any and all losses, costs and expenses (including without limitation, reasonable
attorney's fees, interest, fines and penalties) which Executive incurs as a
result of so reporting such information. Executive shall promptly notify the
Company in writing whenever the Executive receives notice of the institution of
a judicial or administrative proceeding, formal or informal, in which the
federal tax treatment under Section 4999 of the Code of any amount paid or
payable under this Supplemental Agreement is being reviewed or is in dispute.
The Company shall assume control, at its expense, over all legal and accounting
matters pertaining to such federal tax treatment (except to the extent necessary
or appropriate for Executive to resolve any such proceeding with respect to any
matter unrelated to amounts paid or payable pursuant to the Employment Agreement
or this Supplemental Agreement) and Executive shall cooperate fully with the
Company in any such proceeding. The Executive shall not enter into any
compromise or settlement or otherwise prejudice any rights the Company may have
in connection therewith without prior consent of the Company.
<PAGE>
B. MITIGATION
1. Upon the occurrence of an Event of Termination or Change in Control followed
by the subsequent payment of termination benefits to Executive under the
Employment Agreement or this Supplemental Agreement, Executive shall have no
duty or obligation to mitigate and such payments shall not be reduced in the
event the Executive obtains other employment.
C. INSURANCE COVERAGE BENEFITS
1. Notwithstanding the terms contained in Sections 4(c) and 5(d) of the
Employment Agreement, upon the occurrence of an Event of Termination or a Change
of Control, Executive shall receive a cash payment equal to the cost of what the
Executive would be required to pay for continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
Bank or the Company prior to severance in lieu of receiving such continued
coverage as set forth in the Employment Agreement.
D. CONFLICTING TERMS
1. Notwithstanding the terms contained in Sections 4(b) and 5(c) of the
Employment Agreement, upon the occurrence of an Event of Termination or a Change
of Control, the Company shall pay Executive, or in the event of his subsequent
death, his beneficiary or beneficiaries, or his estate, as the case may be, as
severance pay or liquidated damages, or both, a sum equal to the greater of the
payments due for the remaining term of the Agreement or three (3) times the
average of the three (3) preceding years' Base Salary, including bonuses and any
other cash compensation paid to the Executive during such years, and the amount
of any contributions made to any employee benefit plans, on behalf of the
Executive, maintained by the Bank or the Company during such years.
IN WITNESS WHEREOF, JSB Financial, Inc. has caused this Supplemental Agreement
to be executed and its seal to be affixed hereunto by its duly authorized
officers, and Executive has signed this Supplemental Agreement on the day of ,
1996.
ATTEST: [SEAL] JSB FINANCIAL, INC.
Joanne Corrigan Edward P. Henson
- -------------------------- ---------------------------
Joanne Corrigan, Secretary Edward P. Henson, President
[SEAL]
WITNESS:
Lawrence J. Kane Park T. Adikes
- -------------------------------- ----------------------------
Lawrence J. Kane, Sen. Vice Pres. Park T. Adikes
BANK EMPLOYMENT AGREEMENT
This AGREEMENT is made effective as of June 27, 1996 by and between Jamaica
Savings Bank FSB (the "Bank"), a corporation organized under the laws of the
United States, with its principal administrative office at 303 Merrick Road,
Lynbrook, New York 11563, and Robert A. Neumuth ("Executive"). Any reference to
"Holding Company" herein shall mean JSB Financial, Inc. or any successor
thereto.
WHEREAS, the Bank wishes to assure itself of the services of Executive for
the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Bank on a
full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to serve as
Senior Vice President of the Bank. During said period, Executive also agrees to
serve, if elected, as an officer and director of any subsidiary or affiliate of
the Bank. Failure to reelect Executive as Senior Vice President without the
consent of the Executive shall constitute a breach of this Agreement.
2. TERMS AND DUTIES.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty six (36) full calendar months thereafter. Commencing on
the first anniversary date of this Agreement, and continuing at each anniversary
date thereafter, the Agreement shall renew for an additional year such that the
remaining term shall be three (3) years unless written notice is provided to
Executive at least ten (10) days and not more than twenty (20) days prior to any
such anniversary date, that his employment shall cease at the end of twenty-four
(24) months following such anniversary date. Prior to the written notice period
for non-renewal, the Board of Directors of the Bank ("Board") will conduct a
formal performance evaluation of the Executive for purposes of determining
whether to extend the Agreement, and the results thereof shall be included in
the minutes of the Board's meeting.
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the Bank; provided, however, that, with the approval
of the Board, as evidenced by a resolution of such Board, from time to time,
Executive may serve, or continue to serve, on the boards of directors of, and
hold any other offices or positions in, companies or organizations, which, in
such Board's judgment, will not present any conflict of interest with the Bank,
or materially affect the performance of Executive's duties pursuant to this
Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Section 2(b). The Bank
shall pay Executive as compensation a salary of not less than $82,000 per year
("Base Salary"). Such Base Salary shall be payable biweekly. During the period
of this Agreement, Executive's Base Salary shall be reviewed at least annually;
the first such review will be made no later than December 31, 1996. Such review
shall be conducted by a Committee designated by the Board, and the Board may
increase Executive's Base Salary. In addition to the Base Salary provided in
this Section 3(a), the Bank shall provide Executive at no cost to Executive with
all such other benefits as are provided uniformly to permanent full-time
employees of the Bank.
<PAGE>
(b) The Bank will provide Executive with employment benefit plans,
arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Bank will not, without
Executive's prior written consent, make any changes in such plans, arrangements
or perquisites which would adversely affect Executive's rights or benefits
thereunder. Without limiting the generality of the foregoing provisions of this
Subsection (b), Executive will be entitled to participate in or receive benefits
under any employee benefit plans including but not limited to, retirement plans,
supplemental retirement plans, pension plans, profit-sharing plans,
health-and-accident plan, medical coverage or any other employee benefit plan or
arrangement made available by the Bank in the future to its senior executives
and key management employees, subject to and on a basis consistent with the
terms, conditions and overall administration of such plans and arrangements.
Executive will be entitled to incentive compensation and bonuses as provided in
any plan of the Bank in which Executive is eligible to participate. Nothing paid
to the Executive under any such plan or arrangement will be deemed to be in lieu
of other compensation to which the Executive is entitled under this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3, the Bank shall pay or reimburse Executive for all reasonable travel
and other reasonable expenses incurred by Executive performing his obligations
under this Agreement and may provide such additional compensation in such form
and such amounts as the Board may from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
The provisions of this Section shall in all respects be subject to the
terms and conditions stated in Sections 8 and 16.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Bank or the Holding Company of Executive's full-time
employment hereunder for any reason other than a Change in Control, as defined
in Section 5(a) hereof or for Cause, as defined in Section 8 hereof; (ii)
Executive's resignation from the Bank's employ, upon any (A) failure to elect or
reelect or to appoint or reappoint Executive as Senior Vice President, (B)
material change in Executive's function, duties, or responsibilities, which
change would cause Executive's position to become one of lesser responsibility,
importance, or scope from the position and attributes thereof described in
Section 1, above, (and any such material change shall be deemed a continuing
breach of this Agreement), (C) a relocation of Executive's principal place of
employment by more than 30 miles from its location at the effective date of this
Agreement, or a material reduction in the benefits and perquisites to the
Executive from those being provided as of the effective date of this Agreement,
(D) liquidation or dissolution of the Bank or Holding Company, or (E) breach of
this Agreement by the Bank. Upon the occurrence of any event described in
clauses (A), (B), (C), (D) or (E), above, Executive shall have the right to
elect to terminate his employment under this Agreement by resignation upon not
less than sixty (60) days prior written notice given within a reasonable period
of time not to exceed, except in case of a continuing breach, four calendar
months after the event giving rise to said right to elect.
<PAGE>
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 9, the Bank shall pay Executive, or, in the
event of his subsequent death, his beneficiary or beneficiaries, or his estate,
as the case may be, as severance pay or liquidated damages, or both, a sum equal
to the greater of the payments due for the remaining term of the Agreement or
three (3) times the average of the three preceding years' Base Salary, including
bonuses and any other cash compensation paid to the Executive during such years,
and the amount of any benefits received pursuant to any employee benefit plans,
on behalf of the Executive, maintained by the Bank during such years. At the
election of the Executive, which election is to be made within thirty (30) days
of an Event of Termination, such payments shall be made in a lump sum or paid
monthly during the remaining term of the Agreement following the Executive's
termination. In the event that no election is made, payment to the Executive
will be made on a monthly basis during the remaining term of the Agreement. Such
payments shall not be reduced in the event the Executive obtains other
employment following termination of employment.
(c) Upon the occurrence of an Event of Termination, the Bank will cause to
be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank for Executive prior to his
termination. Such coverage shall cease upon the expiration of the remaining term
of this Agreement.
(d) In the event that the Executive is receiving monthly payments pursuant
to Section 4(b) hereof, on an annual basis, thereafter, between the dates of
January 1 and January 31 of each year, Executive shall elect whether the balance
of the amount payable under the Agreement at that time shall be paid in a lump
sum or on a prorata basis. Such election shall be irrevocable for the year for
which such election is made.
5. CHANGE IN CONTROL.
(a) No benefit shall be payable under this Section 5 unless there shall
have been a Change in Control of the Bank or Holding Company, as set forth
below. For purposes of this Agreement, a "Change in Control" of the Bank or
Holding Company shall mean an event of a nature that; (i) would be required to
be reported in response to Item 1 of the current report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change of
Control of the Bank or the Holding Company within the meaning of the Home Owners
Loan Act of 1933 and the Rules and Regulations promulgated by the Office of
Thrift Supervision (or its predecessor agency), as in effect on the date hereof;
or (iii) without limitation such a Change in Control shall be deemed to have
occurred at such time as (a) any "person" (as the term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Bank or the Holding Company representing 20% or more of the Bank's or the
Holding Company's outstanding securities except for any securities of the Bank
purchased by the Holding Company in connection with the conversion of the Bank
to the stock form and any securities purchased by the Bank's employee stock
ownership plan and trust; or (b) individuals who constitute the Board on the
date hereof (the "Incumbent Board") cease for any reason to constitute at least
a majority thereof, provided that any person becoming a director subsequent to
the date hereof whose election was approved by a vote of at least three-quarters
of the directors comprising the Incumbent Board, or whose nomination for
election by the Holding Company's stockholders was approved by the same
Nominating Committee serving under an Incumbent Board, shall be, for purposes of
this clause (b), considered as though he were a member of the Incumbent Board;
or (c) a merger, consolidation or sale of all or substantially all the assets of
the Bank or the Holding Company in which the Bank or Holding Company is not the
resulting entity occurs; or (d) a proxy statement soliciting proxies from
stockholders of the Holding Company, by someone other than the current
management of the Holding Company, seeking stockholder approval of a Plan of
Reorganization, merger or consolidation of the Holding Company or Bank with one
or more corporations as a result of which the outstanding shares of the class of
securities then subject to the Plan are exchanged for or converted into cash or
property or securities not issued by the Bank or the Holding Company shall be
distributed; or (e) a tender offer is made for 20% or more of the voting
securities of the Bank or Holding Company.
<PAGE>
(b) If any of the events described in Section 5(a) hereof constituting a
Change in Control have occurred or the Board has determined that a Change in
Control has occurred, Executive shall be entitled to the benefits provided in
paragraphs (c), (d), (e), (f), (g) and (h) of this Section 5 upon his subsequent
termination of employment at any time during the term of this Agreement
(regardless of whether such termination results from his resignation or his
dismissal), unless such termination is because of his death, termination for
Cause or termination for Disability. Upon the Change in Control, Executive shall
have the right to elect to terminate his employment with the Bank at any time,
for any reason, during the term of this Agreement.
(c) Upon the occurrence of a Change in Control followed by the Executive's
termination of employment, the Bank shall pay Executive, or in the event of his
subsequent death, his beneficiary or beneficiaries, or his estate, as the case
may be, as severance pay or liquidated damages, or both, a sum equal to the
greater of the payments due for the remaining term of the Agreement or three (3)
times the average of the three preceding years' Base Salary, including bonuses
and any other cash compensation paid to the Executive during such years, and the
amount of any contributions made to any employee benefit plans, on behalf of the
Executive, maintained by the Bank during such years. At the election of the
Executive, which election is to be made within thirty (30) days of the Date of
Termination following a Change in Control, such payment may be made in a lump
sum or paid in equal monthly installments during the thirty-six (36) months
following the Executive's termination. In the event that no election is made,
payment to the Executive will be made on a monthly basis during the remaining
term of the Agreement.
(d) Upon the occurrence of a Change in Control followed by the Executive's
termination of employment, the Bank will cause to be continued life, medical,
dental and disability coverage substantially identical to the coverage
maintained by the Bank for Executive prior to his severance. Such coverage and
payments shall cease upon the expiration of thirty-six (36) months.
(e) Upon the occurrence of a Change in Control, Executive will be entitled
to any benefits granted to him pursuant to any Stock Option Plan of the Bank or
Holding Company.
(f) Upon the occurrence of a Change in Control the Executive will be
entitled to any benefits awarded to him under the Bank's Recognition and
Retention Plan arising from a Change in Control.
(g) In the event that the Executive is receiving monthly payments pursuant
to Section 5(c) hereof, on an annual basis, thereafter, between the dates of
January 1 and January 31 of each year, Executive shall elect whether the balance
of the amount payable under the Agreement at that time shall be paid in a lump
sum or on a prorata basis. Such election shall be irrevocable for the year for
which such election is made.
(h) Notwithstanding the preceding paragraphs of this Section 5, in the event
that:
(i) the aggregate payments or benefits to be made or afforded to Executive
under said paragraphs (the "Termination Benefits") would be deemed to
include an "excess parachute payment" under Section 280G of the Code
or any successor thereto, and
(ii) if such Termination Benefits were reduced to an amount (the
"Non-Triggering Amount"), the value of which is one dollar ($1.00)
less than an amount equal to three (3) times Executive's "base
amount", as determined in accordance with said Section 280G, and the
Non-Triggering Amount would be greater than the aggregate value of the
Termination Benefits (without such reduction) minus the amount of tax
required to be paid by Executive thereon by Section 4999 of the Code,
then the Termination Benefits shall be reduced to the Non-Triggering
Amount. The allocation of the reduction required hereby among the
Termination Benefits provided by the preceding paragraphs of this
Section 5 shall be determined by the Executive.
<PAGE>
6. TERMINATION FOR DISABILITY.
(a) If, as a result of Executive's incapacity due to physical or mental
illness, he shall have been absent from his duties with the Bank on a full-time
basis for twelve (12) consecutive months, and within thirty (30) days after
written notice of potential termination is given he shall not have returned to
the full-time performance of his duties, the Bank or the Holding Company may
terminate Executive's employment for "Disability".
(b) The Bank will pay Executive, as disability pay, a biweekly payment
equal to three-quarters (3/4) of Executive's biweekly rate of Base Salary on the
effective date of such termination. These disability payments shall commence on
the effective date of Executive's termination and will end on the earlier of (i)
the date Executive returns to the full-time employment of the Bank in the same
capacity as he was employed prior to his termination for Disability and pursuant
to an employment agreement between Executive and the Bank; (ii) Executive's
full-time employment by another employer; (iii) Executive attaining the normal
age of retirement or receiving benefits under the Bank's Defined Benefit Plan;
(iv) Executive's death; or (v) Executive's eligibility to collect payments under
the disability provision of the Defined Benefit Plan. Notwithstanding any other
provision to the contrary, the Bank may apply any proceeds from disability
income insurance for Executive which was paid for by the Bank as partial
satisfaction of its obligation under this Section.
(c) The Bank will cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
Bank for Executive prior to his termination for Disability. This coverage shall
cease upon the earlier of (i) the date Executive returns to the full-time
employment of the Bank, in the same capacity as he was employed prior to his
termination for Disability and pursuant to an employment agreement between
Executive and the Bank; (ii) Executive's full-time employment by another
employer; (iii) Executive's attaining the normal age of retirement or receiving
benefits under the Bank's Defined Benefit Plan; (iv) the Executive's death; or
(v) the Executive's eligibility to collect payments under the disability
provision of the Defined Benefit Plan.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to Executive during any period during which
Executive is incapable of performing his duties hereunder by reason of temporary
disability.
7. TERMINATION UPON RETIREMENT.
Termination by the Bank of the Executive based on "Retirement" shall mean
termination in accordance with the Bank's retirement policy or in accordance
with any retirement arrangement established with Executive's consent with
respect to him. Upon termination of Executive upon Retirement, Executive shall
be entitled to all benefits under any retirement plan of the Bank and other
plans to which Executive is a party.
<PAGE>
8. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of the
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. In determining incompetence, the acts
or omissions shall be measured against standards generally prevailing in the
savings institutions industry. Notwithstanding the foregoing, Executive shall
not be deemed to have been Terminated for Cause unless and until there shall
have been delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than three-fourths of the members of the Board at a
meeting of the Board called and held for that purpose (after reasonable notice
to Executive and an opportunity for him, together with counsel, to be heard
before the Board), finding that in the good faith opinion of the Board,
Executive was guilty of conduct justifying Termination for Cause and specifying
the particulars thereof in detail. The Executive shall not have the right to
receive compensation or other benefits for any period after Termination for
Cause. Any stock options granted to Executive under any stock option plan of the
Bank, the Holding Company or any subsidiary or affiliate thereof, shall become
null and void effective upon Executive's receipt of Notice of Termination for
Cause pursuant to Section 9 hereof, and shall not be exercisable by Executive at
any time subsequent to such Termination for Cause.
9. NOTICE.
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given.)
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control in which case the date of termination shall be the date
specified in the Notice, the Date of Termination shall be the date on which the
dispute is finally determined, either by mutual written agreement of the
parties, by a binding arbitration award, or by a final judgment, order or decree
of a court of competent jurisdiction (the time for appeal there from having
expired and no appeal having been perfected) and provided further that the Date
of Termination shall be extended by a notice of dispute only if such notice is
given in good faith and the party giving such notice pursues the resolution of
such dispute with reasonable diligence. Notwithstanding the pendency of any such
dispute, the Bank will continue to pay Executive his full compensation in effect
when the notice giving rise to the dispute was given (including, but not limited
to, Base Salary) and continue him as a participant in all compensation, benefit
and insurance plans in which he was participating when the notice of dispute was
given, until the dispute is finally resolved in accordance with this Agreement.
Amounts paid under this Section are in addition to all other amounts due under
this Agreement and shall not be offset against or reduce any other amounts due
under this Agreement.
10. POST-TERMINATION OBLIGATIONS.
(a) All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with paragraph (b) of this Section 10 during
the term of this Agreement and for one (1) full year after the expiration or
termination hereof.
<PAGE>
(b) Executive shall, upon reasonable notice, furnish such information and
assistance to the Bank as may reasonably be required by the Bank in connection
with any litigation in which it or any of its subsidiaries or affiliates is, or
may become, a party.
11. NON-DISCLOSURE.
Executive recognizes and acknowledges that the knowledge of the business
activities and plans for business activities of the Bank and affiliates thereof,
as it may exist from time to time, is a valuable, special and unique asset of
the business of the Bank. Executive will not, during or after the term of his
employment, disclose any knowledge of the past, present, planned or considered
business activities of the Bank or affiliates thereof to any person, firm,
corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, Executive may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Bank. In the
event of a breach or threatened breach by the Executive of the provisions of
this Section 11, the Bank will be entitled to an injunction restraining
Executive from disclosing, in whole or in part, the knowledge of the past,
present, planned or considered business activities of the Bank or affiliates
thereof, or from rendering any services to any person, firm, corporation, other
entity to whom such knowledge, in whole or in part, has been disclosed or is
threatened to be disclosed. Nothing herein will be construed as prohibiting the
Bank from pursuing any other remedies available to the Bank for such breach or
threatened breach, including the recovery of damages from Executive.
12. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank. The Holding Company, however,
guarantees payment and provision of all amounts and benefits due hereunder to
Executive and, if such amounts and benefits due from the Bank are not timely
paid or provided by the Bank, such amounts and benefits shall be paid or
provided by the Holding Company. Notwithstanding any other provision to the
contrary, the Bank may apply any proceeds from disability income insurance for
Executive which was paid for by the Bank as partial satisfaction of its
obligation under Section 6(b).
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to the Executive
of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Bank and their respective successors and assigns.
15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
<PAGE>
16. REQUIRED PROVISIONS.
(a) The Bank may terminate the Executive's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Executive's right to compensation or other benefits under this Agreement.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 8 herein above.
(b) If the Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) (12 USC 1818(e)(3)) or 8(g) (12 USC 1818(g)) of the Federal
Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery
and Enforcement Act of 1989, the Bank's obligations under this contract shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank may in its discretion (i)
pay the Executive all or part of the compensation withheld while their contract
obligations were suspended and (ii) reinstate (in whole or in part) any of the
obligations which were suspended.
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e) (12 USC 1818(e)) or 8(g) (12 USC 1818(g)) of the Federal Deposit
Insurance Act, as amended by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, all obligations of the Bank under this contract shall
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x) (12 USC 1813(x)
(1)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of
the Bank under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be terminated,
except to the extent determined that continuation of the contract is necessary
for the continued operation of the institution, (i) by the Federal Deposit
Insurance Corporation, at the time FDIC enters into an agreement to provide
assistance to or on behalf of the Bank under the authority contained in Section
13(c) (12 USC 1823(c)) of the Federal Deposit Insurance Act, as amended by the
Financial Institutions Reform, Recovery and Enforcement Act of 1989 or (ii) by
the Office of Thrift Supervision ("OTS") at the time the OTS or its District
Director approves a supervisory merger to resolve problems related to the
operations of the Bank or when the Bank is determined by the OTS or FDIC to be
in an unsafe or unsound condition. Any rights of the parties that have already
vested, however, shall not be affected by such action.
17. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
18. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
<PAGE>
19. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of New York but
only to the extent not superseded by Federal law.
20. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
21. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank.
22. INDEMNIFICATION.
The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under Federal law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the Bank (whether or not he continues to be a director or officer
at the time of incurring such expenses or liabilities), such expenses and
liabilities to include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements, such settlements to be
approved by the Board of Directors of the Bank, if such action is brought
against Executive in his capacity as an officer or director of the Bank,
however, shall not extend to matters as to which Executive is finally adjudged
to be liable for willful misconduct in the performance of his duties.
23. SUCCESSOR TO THE BANK.
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Holding Company,
expressly and unconditionally to assume and agree to perform the Bank's
obligations under this Agreement, in the same manner and to the same extent that
the Bank would be required to perform if no such succession or assignment had
taken place.
<PAGE>
24. SIGNATURES.
IN WITNESS WHEREOF, the Bank and the Holding Company have caused this
Agreement to be executed and its seal to be affixed hereunto by their duly
authorized officers and Executive has signed this Agreement on the 9th day of
July, 1996.
ATTEST: JAMAICA SAVINGS BANK FSB
Joanne Corrigan BY: Edward P. Henson
- ------------------------ -----------------------
Joanne Corrigan Edward P. Henson
Secretary President
SEAL
ATTEST: JSB FINANCIAL, INC.
Joanne Corrigan BY: Edward P. Henson
- ------------------------ -----------------------
Joanne Corrigan Edward P. Henson
Secretary President
SEAL
WITNESS:
Lawrence J. Kane Robert A. Neumuth
- ------------------------ ---------------------------
Lawrence J. Kane Robert A. Neumuth
Senior Vice President Executive
JAMAICA SAVINGS BANK FSB
SUPPLEMENTAL EMPLOYMENT AGREEMENT
WHEREAS, , ("Executive") and Jamaica Savings Bank FSB ("Bank") desire to enter
into this Supplemental Employment Agreement ("Supplemental Agreement") to
supplement the Employment Agreement entered into between the Executive and the
Bank on June 27, 1995 (hereinafter referred to as the "Employment Agreement");
and
WHEREAS, there is an accelerating trend of consolidation among companies within
the banking industries; and
WHEREAS, tax law provisions relating to "golden parachute payments" could have
the effect of reducing the benefits otherwise provided to Executive under the
Employment Agreement as a result of a change in control of the Bank; and
WHEREAS, the Board of Directors of the Bank ("Board") believes that it is in the
best interests of the Bank that this Supplemental Agreement be entered into in
order to provide the benefits intended to be provided under the Employment
Agreement to Executive in the event of a change in control of the Bank or its
holding company, JSB Financial, Inc. ("Company") without any reduction because
of tax code "penalties" or excise taxes relating to a change in control; and
WHEREAS, the Bank and the Executive also desire to enter into this Supplemental
Agreement for the purpose of eliminating conflicting terms contained in the
Employment Agreement and to provide the Executive with termination benefits
substantially similar to those provided to key executives at other savings
institutions; and
WHEREAS, the Bank and the Executive also desire to enter into this Supplemental
Agreement for the purpose of providing further incentive to the Executive to
achieve successful results in the management and the operation of the Bank.
NOW, THEREFORE, in consideration of the mutual covenants herein contained, and
upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
A. SUPPLEMENTAL BENEFITS
1. In the event of a Change in Control of the Bank or the Company (as defined in
the Employment Agreement), the Executive shall be entitled to receive, pursuant
to this Supplemental Agreement, an amount, payable by the Bank or the Company,
in addition to any compensation or benefits payable by the Bank or the Company
pursuant to the Employment Agreement, which amount shall equal the difference
between (i) the amount that would be paid under the Employment Agreement
pursuant to Section 5(c) of the Employment Agreement but for the reductions in
payments required by Section 5(h) of the Employment Agreement, and (ii) the
amount that is actually paid under the terms of the Employment Agreement after
giving consideration to Section 5(h) of said Employment Agreement.
<PAGE>
2. In each calendar year that Executive is entitled to receive payments or
benefits under the provisions of the Employment Agreement and this Supplemental
Agreement, the Bank or the Company or their independent accountants shall
determine if an excess parachute payment (as defined in Section 4999 of the
Internal Revenue Code of 1986, as amended, and any successor provision thereto,
(the "Code") exists. Such determination shall be made after taking any
reductions permitted pursuant to Section 280G of the Code and the regulations
thereunder. Any amount determined to be an excess parachute payment after taking
into account such reductions shall be hereafter referred to as the "Initial
Excess Parachute Payment". As soon as practicable after a Change in Control, the
Initial Excess Parachute Payment shall be determined. Upon the Date of
Termination following a Change in Control, the Bank or the Company shall pay
Executive, subject to applicable withholding requirements under applicable state
and federal law an amount equal to:
(i) twenty (20) percent of the Initial Excess Parachute Payment (or such other
amount equal to the tax imposed under Section 4999 of the Code); and
(ii) such additional amount (tax allowance) as may be necessary to compensate
Executive for the payment by Executive of city, state and federal income, excise
and employment-related taxes on the payment provided under Clause (i) and on any
payments under this Clause (ii). In computing such tax allowance, the payment to
be made under Clause (i) shall be divided by the "gross up percentage" ("GUP").
The GUP shall be determined as follows:
GUP = 1.00 - The Executive's Tax Rate
The Executive's Tax Rate for purposes of computing the GUP shall be the highest
marginal federal, state and city income, excise and employment-related tax rate,
including any applicable to the Executive in the year in which the payment under
Clause (i) is made.
3. Notwithstanding the foregoing, if it shall subsequently be determined in a
final judicial determination with any taxing authority or a final administrative
settlement with any taxing authority to which Executive is a party that the
excess parachute payment as defined in Section 4999 of the Code, reduced as
described above, is different from the Initial Excess Parachute Payment (such
different amount being hereafter referred to as the "Determinative Excess
Parachute Payment") then the Bank or the Company's independent accountants shall
determine the amount (the "Adjustment Amount") the Executive must pay to the
Bank or the Company or the Bank or the Company must pay to the Executive in
order to put the Executive (or the Bank or the Company, as the case may be) in
the same position as the Executive (or the Bank or the Company, as the case may
be) would have been if the Initial Excess Parachute Payment had been equal to
the Determinative Excess Parachute Payment. In determining the Adjustment
Amount, the independent accountants shall take into account any and all taxes
(including any penalties and interest) paid by or for Executive or refunded to
Executive or for Executive's benefit. As soon as practicable after the
Adjustment Amount has been so determined, the Bank or the Company shall pay the
Adjustment Amount to Executive or the Executive shall repay the Adjustment
Amount to the Bank or the Company, as the case may be.
4. In each calendar year that Executive receives payments or benefits under the
Employment Agreement or this Supplemental Agreement, Executive shall report on
his state and federal income tax returns such information as is consistent with
the determination made by the independent accountants of the Bank or the Company
as described above. The Bank and the Company shall indemnify and hold Executive
harmless from any and all losses, costs and expenses (including without
limitation, reasonable attorney's fees, interest, fines and penalties) which
Executive incurs as a result of so reporting such information. Executive shall
promptly notify the Bank or the Company in writing whenever the Executive
receives notice of the institution of a judicial or administrative proceeding,
formal or informal, in which the federal tax treatment under Section 4999 of the
Code of any amount paid or payable under this Supplemental Agreement is being
reviewed or is in dispute. The Bank and the Company shall assume control, at
their expense, over all legal and accounting matters pertaining to such federal
tax treatment (except to the extent necessary or appropriate for Executive to
resolve any such proceeding with respect to any matter unrelated to amounts paid
or payable pursuant to the Employment Agreement or this Supplemental Agreement)
and Executive shall cooperate fully with the Bank or the Company in any such
proceeding. The Executive shall not enter into any compromise or settlement or
otherwise prejudice any rights the Bank or the Company may have in connection
therewith without prior consent of the Bank or the Company.
<PAGE>
B. MITIGATION
1. Upon the occurrence of an Event of Termination or a Change in Control
followed by the subsequent payment of termination benefits to Executive under
the Employment Agreement or this Supplemental Agreement, Executive shall have no
duty or obligation to mitigate and such payments shall not be reduced in the
event the Executive obtains other employment.
C. INSURANCE COVERAGE BENEFITS
1. Notwithstanding the terms contained in Sections 4(c) and 5(d) of the
Employment Agreement, upon the occurrence of an Event of Termination or a Change
of Control, Executive shall receive a cash payment equal to the cost of what the
Executive would be required to pay for continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
Bank or the Company prior to severance in lieu of receiving such continued
coverage as set forth in the Employment Agreement.
D. CONFLICTING TERMS
1. Notwithstanding the terms contained in Sections 4(b) and 5(c) of the
Employment Agreement, upon the occurrence of an Event of Termination or a Change
of Control, the Bank shall pay Executive, or in the event of his subsequent
death, his beneficiary or beneficiaries, or his estate, as the case may be, as
severance pay or liquidated damages, or both, a sum equal to the greater of the
payments due for the remaining term of the Agreement or three (3) times the
average of the three (3) preceding years' Base Salary, including bonuses and any
other cash compensation paid to the Executive during such years, and the amount
of any contributions made to any employee benefit plans, on behalf of the
Executive, maintained by the Bank during such years.
IN WITNESS WHEREOF, Jamaica Savings Bank FSB and JSB Financial, Inc. have caused
this Supplemental Agreement to be executed and its seal to be affixed hereunto
by their duly authorized officers, and Executive has signed this Supplemental
Agreement on the day of , 1996.
ATTEST: [SEAL] JAMAICA SAVINGS BANK FSB
Joanne Corrigan Park T. Adikes
- -------------------------- ------------------------
Joanne Corrigan, Secretary Park T. Adikes, Chairman
ATTEST: [SEAL] JSB FINANCIAL, INC.
Joanne Corrigan Park T. Adikes
- -------------------------- ------------------------
Joanne Corrigan, Secretary Park T. Adikes, Chairman
WITNESS:
Lawrence J. Kane
- --------------------------------
Lawrence J. Kane, Sen. Vice Pres.
JAMAICA SAVINGS BANK FSB
SUPPLEMENTAL SPECIAL TERMINATION AGREEMENT
WHEREAS, ("Executive") and Jamaica Savings Bank FSB ("Bank") desire to enter
into this Supplemental Special Termination Agreement ("Supplemental Agreement")
to supplement the Special Termination Agreement entered into between the
Executive and the Bank on June 27, 1993 (hereinafter referred to as the
"Termination Agreement"); and
WHEREAS, there is an accelerating trend of consolidation among companies within
the banking industries; and
WHEREAS, tax law provisions relating to "golden parachute payments" could have
the effect of reducing the benefits otherwise provided to Executive under the
Termination Agreement as a result of a change in control of the Bank; and
WHEREAS, the Board of Directors of the Bank ("Board") believes that it is in the
best interests of the Bank that this Supplemental Agreement be entered into in
order to provide the benefits intended to be provided under the Termination
Agreement to Executive in the event of a change in control of the Bank or its
holding company, JSB Financial, Inc. ("Company"), without any reduction because
of tax code "penalties" or excise taxes relating to a change in control; and
WHEREAS, the Bank and the Executive also desire to enter into this Supplemental
Agreement for the purpose of eliminating conflicting terms contained in the
Termination Agreement and to provide the Executive with termination benefits
substantially similar to those provided to key executives at other savings
institutions; and
WHEREAS, the Bank and the Executive also desire to enter into this Supplemental
Agreement for the purpose of providing further incentive to the Executive to
achieve successful results in the management and the operation of the Bank.
NOW, THEREFORE, in consideration of the mutual covenants herein contained, and
upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
A. SUPPLEMENTAL BENEFITS
1. In the event of a Change in Control of the Bank or the Company (as defined in
the Termination Agreement), the Executive shall be entitled to receive, pursuant
to this Supplemental Agreement, an amount, payable by the Bank or the Company,
in addition to any compensation or benefits payable by the Bank or the Company
pursuant to the Termination Agreement, which amount shall equal the difference
between (i) the amount that would be paid under the Termination Agreement
pursuant to Section 3(a) of the Termination Agreement but for the reductions in
payments required by Section 3(f) of the Termination Agreement, and (ii) the
amount that is actually paid under the terms of the Termination Agreement after
giving consideration to Section 3(f) of said Termination Agreement.
2. In each calendar year that Executive is entitled to receive payments or
benefits under the provisions of the Termination Agreement and this Supplemental
Agreement, the Bank or the Company or their independent accountants shall
determine if an excess parachute payment (as defined in Section 4999 of the
Internal Revenue Code of 1986, as amended, and any successor provision thereto,
(the "Code") exists. Such determination shall be made after taking any
reductions permitted pursuant to Section 280G of the Code and the regulations
thereunder. Any amount determined to be an excess parachute payment after taking
into account such reductions shall be hereafter referred to as the "Initial
Excess Parachute Payment". As soon as practicable after a Change in Control and
an event entitling the Executive to payments under the Termination Agreement and
this Supplemental Agreement, the Initial Excess Parachute Payment shall be
determined. Upon the Date of Termination following a Change in Control, the Bank
or the Company shall pay Executive, subject to applicable withholding
requirements under applicable state and federal law an amount equal to:
<PAGE>
(i) twenty (20) percent of the Initial Excess Parachute Payment (or such other
amount equal to the tax imposed under Section 4999 of the Code); and
(ii) such additional amount (tax allowance) as may be necessary to compensate
Executive for the payment by Executive of city, state and federal income, excise
and employment-related taxes on the payment provided under Clause (i) and on any
payments under this Clause (ii). In computing such tax allowance, the payment to
be made under Clause (i) shall be divided by the "gross up percentage" ("GUP").
The GUP shall be determined as follows:
GUP = 1.00 - The Executive's Tax Rate
The Executive's Tax Rate for purposes of computing the GUP shall be the highest
marginal federal, state and city income, excise and employment-related tax rate,
including any applicable to the Executive in the year in which the payment under
Clause (i) is made.
3. Notwithstanding the foregoing, if it shall subsequently be determined in a
final judicial determination with any taxing authority or a final administrative
settlement with any taxing authority to which Executive is a party that the
excess parachute payment as defined in Section 4999 of the Code, reduced as
described above, is different from the Initial Excess Parachute Payment (such
different amount being hereafter referred to as the "Determinative Excess
Parachute Payment") then the Bank or the Company's independent accountants shall
determine the amount (the "Adjustment Amount") the Executive must pay to the
Bank or the Company or the Bank or the Company must pay to the Executive in
order to put the Executive (or the Bank or the Company, as the case may be) in
the same position as the Executive (or the Bank or the Company, as the case may
be) would have been if the Initial Excess Parachute Payment had been equal to
the Determinative Excess Parachute Payment. In determining the Adjustment
Amount, the independent accountants shall take into account any and all taxes
(including any penalties and interest) paid by or for Executive or refunded to
Executive or for Executive's benefit. As soon as practicable after the
Adjustment Amount has been so determined, the Bank or the Company shall pay the
Adjustment Amount to Executive or the Executive shall repay the Adjustment
Amount to the Bank or the Company, as the case may be.
4. In each calendar year that Executive receives payments or benefits under the
Termination Agreement or this Supplemental Agreement, Executive shall report on
his state and federal income tax returns such information as is consistent with
the determination made by the independent accountants of the Bank or the Company
as described above. The Bank and the Company shall indemnify and hold Executive
harmless from any and all losses, costs and expenses (including without
limitation, reasonable attorney's fees, interest, fines and penalties) which
Executive incurs as a result of so reporting such information. Executive shall
promptly notify the Bank or the Company in writing whenever the Executive
receives notice of the institution of a judicial or administrative proceeding,
formal or informal, in which the federal tax treatment under Section 4999 of the
Code of any amount paid or payable under this Supplemental Agreement is being
reviewed or is in dispute. The Bank and the Company shall assume control, at
their expense, over all legal and accounting matters pertaining to such federal
tax treatment (except to the extent necessary or appropriate for Executive to
resolve any such proceeding with respect to any matter unrelated to amounts paid
or payable pursuant to the Termination Agreement or this Supplemental Agreement)
and Executive shall cooperate fully with the Bank or the Company in any such
proceeding. The Executive shall not enter into any compromise or settlement or
otherwise prejudice any rights the Bank or the Company may have in connection
therewith without prior consent of the Bank or the Company.
<PAGE>
B. WINDOW PERIOD PROVISION
1. Notwithstanding the provisions of Section 2(a) of the Termination Agreement,
Executive shall be entitled to payments under Section 3 of the Termination
Agreement upon a voluntary termination of employment following a Change of
Control, whether or not for good reason and regardless of whether the events
described in the last sentence of Section 2A of the Termination Agreement have
occurred, provided Executive terminates employment during a thirty (30) day
window period beginning on the first anniversary of the date of the Change of
Control. Such payments shall be made in accordance with Section 3(a) of the
Termination Agreement giving full consideration to Paragraph A of this
Supplemental Agreement.
C. MITIGATION
1. Upon the occurrence of a Change in Control followed by the subsequent payment
of termination benefits to Executive under the Termination Agreement or this
Supplemental Agreement, Executive shall have no duty or obligation to mitigate
and such payments shall not be reduced in the event the Executive obtains other
employment.
D. INSURANCE COVERAGE BENEFITS
1. Notwithstanding the terms contained in Sections 3(b) of the Termination
Agreement, upon the occurrence of a Change of Control followed by the subsequent
payment of termination benefits to Executive under the Termination Agreement or
this Supplemental Agreement, Executive shall receive a cash payment equal to the
cost of what the Executive would be required to pay for continued life, medical,
dental and disability coverage substantially identical to the coverage
maintained by the Bank prior to severance, in lieu of receiving such continued
coverage as set forth in the Termination Agreement.
E. CONFLICTING TERMS
1. Notwithstanding the terms contained in Sections 3(a) of the Termination
Agreement, upon the occurrence of a Change of Control followed by the subsequent
payment of termination benefits to Executive under the Termination Agreement or
this Supplemental Agreement the Bank or the Company shall pay Executive, or in
the event of his subsequent death, his beneficiary or beneficiaries, or his
estate, as the case may be, as severance pay or liquidated damages, or both, a
sum equal to the greater of the payments due for the remaining term of the
Agreement or three (3) times the average of the three (3) preceding years' Base
Salary, including bonuses and any other cash compensation paid to the Executive
during such years, and the amount of any contributions made to any employee
benefit plans, on behalf of the Executive, maintained by the Bank or the Company
during such years.
<PAGE>
IN WITNESS WHEREOF, Jamaica Savings Bank FSB and JSB Financial, Inc. have caused
this Supplemental Agreement to be executed and its seal to be affixed hereunto
by their duly authorized officers, and Executive has signed this Supplemental
Agreement on the day of , 1996.
ATTEST: [SEAL] JAMAICA SAVINGS BANK FSB
Joanne Corrigan Edward P. Henson
- -------------------------- ---------------------------
Joanne Corrigan, Secretary Edward P. Henson, President
ATTEST: [SEAL] JSB FINANCIAL, INC.
Joanne Corrigan Edward P. Henson
- -------------------------- --------------------------
Joanne Corrigan, Secretary Edward P. Henson, President
WITNESS:
Lawrence J. Kane
- ----------------------------------
Lawrence J. Kane, Senior Vice Pres.
<TABLE>
EXHIBIT 11.01
JSB FINANCIAL, INC. AND SUBSIDIARY
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(Unaudited, In Thousands, except per share amounts)
<CAPTION>
Year Ended Three Months Ended
December 31, December 31,
------------ ------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary earnings per share:
Shares used in computing earnings per share:
Weighted average number of shares outstanding: 10,062 10,604 9,776 10,538
Assuming exercise of options reduced by the
number of shares which could have been purchased
at average stock price with proceeds from
exercise of such options 469 534 464 503
------ ------ ------ ------
Common stock and common stock equivalents 10,531 11,138 10,240 11,041
Earnings:
Net Income $26,725 $22,174 $7,287 $5,915
Earnings per common and common equivalent share $2.54 $1.99 $ .71 $ .54
Earnings per share - assuming full dilution:
Shares used in computing earnings per share:
Weighted average number of shares outstanding 10,062 10,604 9,776 10,538
Assuming exercise of options reduced by the
number of shares which could have been purchased
at period end stock price with proceeds from
exercise of such options 505 548 477 504
------ ------ ------ ------
Common stock and common stock equivalents 10,567 11,152 10,253 11,042
Earnings:
Net Income $26,725 $22,174 $7,287 $5,915
Earnings per common share assuming full dilution $2.53 $1.99 $ .71 $ .54
</TABLE>
Selected Financial Data
(In Thousands, Except Per Share Amounts)
Set forth below are selected consolidated financial data of the Company. This
financial data is derived in part from, and should be read in conjunction with,
the Consolidated Financial Statements of the Company.
<TABLE>
<CAPTION>
Selected Financial Condition Data:
At December 31, 1996 1995 1994 1993 1992
- --------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total assets $1,516,016 $1,548,301 $1,565,095 $1,635,870 $1,698,440
Securities held-to-maturity/held-
for-investment, net 460,509 592,060 728,630 859,909 902,350
Loans receivable, net 854,774 768,245 711,295 668,376 642,074
Deposits 1,144,393 1,163,446 1,204,424 1,273,917 1,323,546
Employee Stock Ownership
Plan (ESOP) obligation - - - 1,045 4,303
Retained income 289,588 276,317 266,361 251,959 232,436
Total stockholders' equity 335,299 340,107 327,634 325,207 332,844
Selected Operating Data:
Years Ended December 31, 1996 1995 1994 1993 1992
- ------------------------ ---- ---- ---- ---- ----
Interest income $ 107,611 $ 107,726 $ 103,027 $ 108,205 $ 130,020
Interest expense 40,217 40,707 36,619 39,740 53,516
---------- ---------- ---------- ---------- ---------
Net interest income 67,394 67,019 66,408 68,465 76,504
Provision for possible
loan losses 640 636 608 600 601
(Recovery of) provision for
possible other credit losses (2,040) 2,040 - - -
---------- --------- ---------- ---------- ------
Net interest income after
provision for possible
credit losses 68,794 64,343 65,800 67,865 75,903
Non-interest income 5,081 3,995 6,752 2,239 3,999
Non-interest expense 27,598 29,561 30,937 33,657 34,726
---------- ---------- --------- ---------- ---------
Income before provision for
income taxes and cumulative
effect of accounting changes 46,277 38,777 41,615 36,447 45,176
Provision for income taxes 19,552 16,603 18,018 15,798 18,733
---------- ---------- ---------- ---------- ---------
Income before cumulative effect
of accounting changes 26,725 22,174 23,597 20,649 26,443
Cumulative effect of accounting
changes, net - - - 7,688 -
---------- ---------- ---------- ---------- --------
Net income $ 26,725 $ 22,174 $ 23,597 $ 28,337 $ 26,443
========== ========== ========== ========== ========
Income per share before cumulative
effect of accounting changes $2.54 $1.99 $2.02 $1.57 $1.89
Cumulative effect of accounting
changes, net - - - .59 -
----- ----- ----- ----- -----
Net income per share $2.54 $1.99 $2.02 $2.16 $1.89
===== ===== ===== ===== =====
Cash dividends per share $1.20 $1.00 $ .72 $ .60 $ .52
===== ===== ===== ===== =====
</TABLE>
<PAGE>
Quarterly Results
(In Thousands, Except Per Share Amounts and Yields)
<TABLE>
<CAPTION>
1996 Quarter Ended
------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Interest income $26,905 $26,958 $26,948 $26,800
Interest expense 10,147 10,041 10,060 9,969
------- ------- -------- -------
Net interest income 16,758 16,917 16,888 16,831
Provision for possible loan losses 161 160 160 159
Recovery of possible other credit losses - - - (2,040)
------- ------- ------- -------
Net interest income after provision
for possible credit losses 16,597 16,757 16,728 18,712
Non-interest income 1,215 1,135 1,646 1,085
Non-interest expense 7,266 6,062 6,965 7,305
------- ------- ------- -------
Income before provision for income taxes 10,546 11,830 11,409 12,492
Provision for income taxes 4,468 5,032 4,847 5,205
------- ------- ------- -------
Net income $ 6,078 $ 6,798 $ 6,562 $ 7,287
======= ======= ======= =======
Net income per share $ .56 $ .63 $ .64 $ .71
===== ===== ===== =====
Stock prices, Dividends and Yields:
High $34.00 $35.00 $37.13 $38.38
Low $31.50 $32.25 $32.75 $35.63
Close $33.63 $33.13 $36.13 $38.00
Cash dividends per share $ .30 $ .30 $ .30 $ .30
Dividend yield(1) 3.66% 3.57% 3.43% 3.24%
1995 Quarter Ended
------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
Interest income $26,720 $27,050 $26,978 $26,978
Interest expense 9,755 10,293 10,342 10,317
------- ------- -------- -------
Net interest income 16,965 16,757 16,636 16,661
Provision for possible loan losses 156 159 160 161
Provision for possible other credit losses - 2,040 - -
------ ------- ------- --------
Net interest income after provision
for possible credit losses 16,809 14,558 16,476 16,500
Non-interest income 814 1,041 1,143 997
Non-interest expense 7,771 7,980 6,682 7,128
------- ------- ------- -------
Income before provision for income taxes 9,852 7,619 10,937 10,369
Provision for income taxes 4,245 3,228 4,676 4,454
------- ------- ------- -------
Net income $ 5,607 $ 4,391 $ 6,261 $ 5,915
======= ======= ======= =======
Net income per share $ .50 $ .39 $ .56 $ .54
===== ===== ===== =====
Stock prices, Dividends and Yields:
High $32.00 $31.63 $31.75 $34.25
Low $23.75 $28.88 $28.88 $30.63
Close $31.00 $28.88 $31.38 $31.63
Cash dividends per share $ .25 $ .25 $ .25 $ .25
Dividend yield(1) 3.59% 3.31% 3.30% 3.08%
<FN>
(1)Dividend yield is calculated by annualizing the quarterly dividend per share
and dividing by an average of the high and low price for the quarter.
</FN>
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
- -------
1996 marked the sixth full year of operation for JSB Financial, Inc. as a
publicly held company. Net income for the year was $26.7 million, or $2.54 per
share. The Company paid cash dividends on its common stock, which totaled $1.20
per share, or 47.2% of net income per share. During 1996, under two stock
repurchase programs, the Company reacquired 845,000 shares of its common stock
at an aggregate cost of $27.7 million, or at an average price of $32.72 per
share.
The Company's results of operations are most significantly affected by the
results of operations of its wholly owned subsidiary, Jamaica Savings Bank. The
Bank's results of operations are affected by general economic and competitive
conditions, particularly changes in market interest rates, as well as government
policies and actions of regulatory authorities. The Bank's core earnings are
provided from its net interest income. The operating results of the Bank are
also affected to a lesser extent by the amount of its non-interest income, such
as loan servicing income, results of real estate operations and miscellaneous
income. The principal non-interest expenses of the Bank include compensation and
employee benefits, occupancy costs and other general and administrative
expenses.
Asset/Liability Management
- --------------------------
Management aims at maintaining a stable net interest margin, through its
asset/liability structure, to minimize the effects of market interest rate
fluctuations on net interest income. Rates offered on interest bearing deposits
are established to control levels of change in deposits. Assets decreased by
$32.3 million, or 2.1% at December 31, 1996, compared to assets at December 31,
1995, while liabilities decreased by $27.5 million, or 2.3%, over the same
period. The Company maintains asset quality through its investment and loan
underwriting policies.
At December 31, 1996, investments in U.S. Government and agency securities
were $299.6 million and investments in CMOs were $155.3 million, representing
19.8% and 10.2% of total assets, respectively. During 1996, all investments in
U.S. Government and agency securities, CMOs, and mortgage-backed securities
(MBS), were designated held-to-maturity and carried at amortized cost.
Unrealized gains and losses in these portfolios are not expected to have a
material impact on future results of operations, as these securities are
intended to be held until maturity. Marketable equity securities are designated
as available-for-sale and carried at fair value. At December 31, 1996, these
securities, which had a cost basis of $11.7 million, were carried at their
aggregated fair value of $51.0 million.
During 1996, investments in CMOs increased, as purchases of $124.3 million
were made, while payments of $114.1 million were received from maturities and
amortization. CMOs meeting the Bank's CMO investment guidelines became more
readily available on the secondary market during 1996, compared to 1995. All of
the Bank's CMOs are First Tranche - Planned Amortization Class Bonds that are
collateralized by Federal National Mortgage Association (FNMA), Federal Home
Loan Mortgage Corporation (FHLMC), or Government National Mortgage Association
(GNMA), mortgage-backed securities which are collateralized by whole loans. At
December 31, 1996, the Bank did not have any CMOs that would be classified as
"high risk" securities as defined by a policy statement by the Federal Financial
<PAGE>
Institutions Examination Council. At December 31, 1996, the estimated average
remaining maturity of the CMO portfolio was approximately fifteen months.
Management plans to continue to purchase CMOs which meet its investment
guidelines, when available.
The Bank offers adjustable-rate and fixed-rate mortgages secured by one-to
four-family properties, apartment buildings, underlying cooperative properties,
commercial real estate and offers various other consumer type loans that conform
to its lending requirements. During the first quarter of 1996, the Bank
re-established its FHA Title I Home Improvement Loan Program. During 1996, the
Bank sold $1.7 million of single family mortgage loans, originated for sale, to
government agencies. Loans held for sale are carried at the lower of cost or
market, in the aggregate. At December 31, 1996, there were no mortgage loans
held for sale.
Non-performing loans to total loans at December 31, 1996 was 1.64%,
compared to 1.78% at December 31, 1995. Non-performing loans at December 31,
1996 and 1995 included a $12.8 million underlying cooperative mortgage loan on
which the Bank has commenced foreclosure proceedings. At December 31, 1995, this
loan was 60 days in arrears and placed on non-accrual status. The mortgage is
secured by a 148 unit cooperative apartment building, located in Manhattan, New
York. No specific valuation allowances have been established against this loan.
In addition to non-performing loans, non-performing assets include Other
Real Estate (ORE) and any other investment not performing in accordance with
contractual terms. ORE represents real estate properties owned by the Bank as a
result of foreclosure or obtained by receiving a deed in lieu of foreclosure. At
December 31, 1996, the Bank held shares to 34 residential cooperative
apartments, (33 of which were attributable to one property), that comprised the
Bank's ORE of $647,000. Management closely monitors the value of properties that
are obtained through foreclosure actions. (See Note 12 to the Consolidated
Financial Statements.)
Non-performing assets to total assets at December 31, 1996 was .98%,
compared to 1.50% at December 31, 1995. The decrease in this ratio reflects the
recovery of the Bank's investments with Nationar Trust Company (Nationar).
During 1995, the Superintendent of Banks for the State of New York seized
Nationar, a check-clearing and trust company, freezing all of Nationar's assets.
On that date, the Bank had: federal funds sold to Nationar of $10.0 million;
demand accounts of $200,000 and $38,000 of Nationar capital stock. In accordance
with the Company's internal procedures for monitoring asset quality and
information available, the $38,000 stock investment was written off and a
provision for possible other credit losses of $2.0 million, or 20% of the
remaining investment, was established during 1995. During 1996, the Bank
received distributions from the Nationar estate for all amounts invested, except
the $38,000 of capital stock. Therefore, during the fourth quarter of 1996, the
Bank fully recovered the $2.0 million reserve.
Deposits at December 31, 1996, decreased by $19.1 million, or 1.6%,
compared to deposits at December 31, 1995. The most significant dollar change in
deposit composition was experienced in the Bank's passbook accounts, which
decreased by $32.9 million, or 5.2%. Money market accounts decreased by $3.7
million, or 4.0%, during 1996. However, certificate accounts increased $16.8
million, or 4.5%. Other interest bearing deposit accounts remained relatively
stable. In general, market interest rates decreased during 1996. Interest rates
on the various accounts offered by the Bank remained competitive with those of
other depository institutions in the Bank's market.
<PAGE>
Customers have continued to withdraw funds to invest in alternative
instruments and shift funds into certificate accounts, both of which offered
higher yields. Management attributes this deposit outflow and shift in deposit
composition to the relatively low interest rate environment that has prevailed
over the last several years. The Bank controls deposit levels, and composition
through its interest rate structure. While the highest percentage of deposits
has historically remained in passbook and lease security accounts, the trend of
deposit shifts has continued towards certificate accounts. Management has
maintained an interest rate structure that has allowed deposits to continue to
shift and decline in a controlled fashion, rather than offering interest rates
that would result in significantly reducing net interest margins and interest
rate spreads or necessitate modifying the existing asset structure and
investment guidelines.
Net interest rate spread, net interest margin, liquidity, and related asset
quality are some of the key measures of financial performance that management
focuses on. The Bank's assets are structured such that gradual declines in
deposits, such as the current scenario, will not adversely affect the Company.
The Bank's liquidity ratios continue to exceed all short and long term minimum
regulatory requirements. Management is focused on providing quality customer
service as its main strategy for maintaining its relationships with its
customers. During the past year the Bank has expanded services offered to its
depositors. Automated telephone banking is now available 24 hours a day, 365
days a year. The Bank also began offering its customers credit cards. The credit
cards are issued and owned by an unrelated bank which manages and bears all
credit risk.
Analysis of Net Interest Income
- -------------------------------
Net interest income represents the difference between income on interest
earning assets and expense on interest bearing liabilities. Net interest income
depends upon the relative amount of interest earning assets and interest bearing
liabilities and the interest rate earned or paid on them.
Average Balance Sheet
The following table sets forth, for the periods indicated, information
relating to the Company's Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994 and reflects the average yield on interest
earning assets and average cost of interest bearing liabilities. Yields and
costs are derived by dividing income or expense by the average balance of the
related assets or liabilities, respectively, for the periods shown. Average
balances are derived from average daily balances. The yields and costs include
fees which are considered adjustments to yields. Average balances and yields
include non-accruing loans.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------
1996 1995 1994
-------------------------- -------------------------- ---------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost Balance Expense Cost
Assets (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Mortgage loans, net...$ 792,579 $ 69,113 8.72% $ 702,252 $ 64,309 9.16% $ 656,694 $ 61,142 9.31%
Debt and equity
securities, net(1)... 361,106 21,695 6.01 456,581 27,545 6.03 392,210 19,088 4.87
CMOs, net............. 179,336 10,063 5.61 209,537 9,572 4.57 398,353 17,951 4.51
MBS, net.............. 6,540 739 11.30 8,650 969 11.20 11,773 1,288 10.94
Other loans, net...... 28,393 2,138 7.53 28,977 2,299 7.93 26,665 1,988 7.45
Federal funds sold.... 72,221 3,863 5.35 52,432 3,032 5.78 38,337 1,570 4.10
---------- --------- ---------- -------- ---------- ---------
Total interest earning
assets1................ 1,440,175 107,611 7.47 1,458,429 107,726 7.39 1,524,032 103,027 6.76
Non-interest earning
assets................. 93,539 80,701 88,899
---------- ---------- ----------
Total assets.........$1,533,714 $1,539,130 $1,612,931
========== ========== ==========
Liabilities and stockholders' equity
Interest bearing
liabilities:
Passbook and other.....$ 743,526 $ 20,440 2.75% $ 797,445 $ 23,058 2.89% $ 925,312 $ 25,599 2.77%
Certificate accounts... 383,215 19,777 5.16 343,229 17,649 5.14 292,762 10,995 3.75
---------- -------- ---------- -------- ---------- --------
1,126,741 40,217 3.57 1,140,674 40,707 3.57 1,218,074 36,594 3.00
ESOP obligation........ - - - - - - 394 25 6.35
---------- -------- ---------- -------- ---------- --------
Total interest
bearing liabilities.... 1,126,741 40,217 3.57 1,140,674 40,707 3.57 1,218,468 36,619 3.01
Non-interest bearing
liabilities.......... 74,928 65,963 66,150
---------- ---------- ----------
Total liabilities.... 1,201,669 1,206,637 1,284,618
Total stockholders'
equity.............. 332,045 332,493 328,313
---------- ---------- ----------
Total liabilities
and stockholders'
equity..............$1,533,714 $1,539,130 $1,612,931
========== ========== ==========
Net interest income/
interest rate spread(2) $ 67,394 3.90% $ 67,019 3.82% $ 66,408 3.75%
======== ==== ======== ==== ======== ====
Net interest earning
assets/net interest
margin(3)..............$ 313,434 4.68% $ 317,755 4.60% $ 305,564 4.36%
========== ==== ========== ==== ========== ====
Ratio of interest
earning assets to
interest bearing
liabilities............ 1.28x 1.28x 1.25x
===== ==== ====
<FN>
(1) Average balances for debt and equity securities and total interest earning
assets, exclude the net market appreciation recognized in connection with
Statement 115 and is not included in deriving the yield.
(2) Interest rate spread represents the difference between the average yield on
average interest earning assets and the average cost of average interest
bearing liabilities.
(3) Net interest margin represents net interest income divided by average
interest earning assets.
</FN>
</TABLE>
<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), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Year Ended December 31, 1996 Year Ended December 31, 1995
Compared to Compared to
Year Ended December 31, 1995 Year Ended December 31, 1994
---------------------------- ----------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Mortgage loans, net .............. $ 7,997 $ (3,193) $ 4,804 $ 4,169 $(1,002) $ 3,167
Debt and equity securities ....... (5,759) (91) (5,850) 3,450 5,007 8,457
CMOs, net......................... (1,499) 1,990 491 (8,615) 236 (8,379)
Other loans, net ................. (46) (115) (161) 178 133 311
MBS, net.......................... (239) 9 (230) (349) 30 (319)
Federal funds sold .............. 1,070 (239) 831 692 770 1,462
------- -------- -------- ------- ------- -------
Total ...................... 1,524 (1,639) (115) (475) 5,174 4,699
------- -------- -------- -------- ------- -------
Interest bearing liabilities:
Passbook and other ............... (1,400) (1,218) (2,618) (3,603) 1,062 (2,541)
Certificate accounts.............. 2,059 69 2,128 2,113 4,541 6,654
ESOP obligation................... - - - (25) - (25)
------- -------- -------- ------- ------- -------
Total....................... 659 (1,149) (490) (1,515) 5,603 4,088
------- -------- -------- -------- ------- -------
Net change in net interest income... $ 865 $ (490) $ 375 $ 1,040 $ (429) $ 611
======= ======= ======== ======= ======= =======
</TABLE>
<PAGE>
Comparison of Operating Results for the Years Ended December 31, 1996 and 1995
- ------------------------------------------------------------------------------
General
Net income for the year ended December 31, 1996 was $26.7 million, or $2.54
per share, compared with $22.2 million, or $1.99 per share, for 1995. Comments
regarding the components of net income are detailed in the following paragraphs.
Interest Income
Income on mortgage loans increased by $4.8 million, or 7.5%, to $69.1
million, from $64.3 million. The average investment in mortgage loans increased
by $90.3 million, or 12.9%, to $792.6 million for 1996, from $702.3 million for
1995. The amount invested in mortgage loans has continued to increase over the
past seven years in both dollar amount and as a percentage of assets. Mortgages
originated for the Bank's portfolio during 1996, increased by $58.4 million, or
75.0%, to $136.2 million, from $77.8 million during 1995. The mortgage portfolio
yield decreased to 8.72% for 1996 from 9.16% for 1995.
Income on debt and equity securities decreased $5.9 million, or 21.2%, to
$21.7 million for 1996, compared to $27.5 million for 1995. The decrease in
income reflects a $95.5 million, or 20.9%, decrease in the average investment in
this portfolio and a minimal decrease in the yield to 6.01% for 1996, from 6.03%
for 1995. During 1996, activity in the investment securities portfolio included
purchases of $534.6 million and maturities of $675.0 million. During 1996, the
Bank sold or redeemed marketable equity securities totaling $30,000, realizing
gains of $4,000 and losses of $2,000. There were no sales of debt or equity
securities during 1995. At December 31, 1996, the $299.6 million debt securities
portfolio had net unrealized gains of $617,000, which are not expected to impact
future income, as these securities are designated as held-to-maturity. The
equity portfolio, which is designated as available-for-sale, was carried at its
aggregate market value of $51.0 million, which exceeds its cost of $11.7
million.
Income on CMOs increased by $491,000, or 5.1%, to $10.1 million, from $9.6
million. During 1996 an increased number of CMOs meeting the Bank's investment
guidelines became available on the secondary market, resulting in an increase of
CMOs purchased. Purchases of CMOs for 1996, totaled $124.3 million, compared
with $67.9 million for 1995. The average investment in CMOs decreased by $30.2
million, or 14.4%, to $179.3 million for 1996. Principal payments on CMOs
decreased to $114.1 million during 1996 from $237.1 million during 1995. During
1996, the CMO portfolio yielded 5.61% compared with 4.57% for 1995. At December
31, 1996, the $155.3 million CMO portfolio had net unrealized gains of $149,000,
which are not expected to impact future results of operations, as these
securities are designated as held-to-maturity.
During 1996, MBS continued and will continue to amortize without
replacement, as the Bank discontinued purchasing MBS during the 1980's. Income
earned on MBS decreased to $739,000 during 1996 from $969,000 during 1995,
reflecting the amortizing balance. There were no sales of MBS during 1996 or
1995. At December 31, 1996, there were unrealized gains of $509,000 and no
unrealized losses in the $5.6 million MBS portfolio. These gains are not
expected to impact future results of operations, as MBS securities are
designated as held-to-maturity.
Income from federal funds sold increased to $3.9 million for 1996 from $3.0
million for 1995. The average balance invested in federal funds sold increased
to $72.2 million during 1996, compared to $52.4 million during 1995. The average
yield on federal funds sold decreased to 5.35% during 1996 from 5.78% during
1995. Liquidity, provided by federal funds sold, is necessary to fund: mortgage
lending; deposit withdrawals; dividend payments on and repurchases of the
Company's common stock and to meet obligations for non-interest expense.
<PAGE>
Interest Expense
Interest expense on deposits decreased to $40.2 million, or 1.2%, for 1996
from $40.7 million for 1995. This decrease reflects a decrease in average
interest bearing deposits of $13.9 million, or 1.2%, to $1.13 billion for 1996,
from $1.14 billion for 1995. Market interest rates fluctuated during 1996 and
the Bank's deposits continued to shift from passbook accounts into certificate
accounts. Management monitors deposit levels and interest rates offered by
competitors.
Net Interest Income
The Bank's profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest income on interest
earning assets, such as loans and investments, and its interest expense on
interest bearing deposits. The Bank, like most savings institutions, will
continue to be affected by general changes in levels of interest rates,
government regulations and other economic factors beyond its control.
Net interest income, increased by $375,000, to $67.4 million, from $67.0
million for 1995. For 1996, the net interest margin increased to 4.68% from
4.60% for 1995, and the net interest spread increased to 3.90% from 3.82% for
1995. The yield on interest earning assets increased to 7.47% for 1996 from
7.39% for 1995. The cost of interest bearing deposits remained unchanged at
3.57% for 1996 and 1995. The average balance of interest earning assets and
interest bearing deposits decreased by $18.3 million and $13.9 million,
respectively.
Provision For Possible Loan Losses
The provision for possible loan losses for 1996 remained stable at $640,000
compared to $636,000 for 1995. During 1996 and 1995 management made general
mortgage loan provisions of $600,000. Provisions of $40,000 and $36,000 were
made against the other loan portfolio during 1996 and 1995, respectively. Future
additions to the loan loss allowances will be based on management's continuing
evaluations of the loan portfolios and assessments of economic conditions.
Material changes in portfolio value, performance and/or general economic
conditions, would further affect the amount of any such loan provisions.
Provision For Possible Other Credit Losses
The Bank recovered the entire $2.0 million allowance that was established
during 1995 in connection with the seizure of Nationar (a check clearing and
trust company) by the Superintendent of Banks for the State of New York. The
Bank received two payments from the Nationar estate during 1996. The first
payment of $4.1 million was received during the second quarter and the final
distribution of $6.1 million, received during the fourth quarter, resulted in
the Bank recapturing the allowance.
Prior information indicated that the Bank was likely to incur some loss in
connection with its investments at Nationar. At the time of seizure, the Bank
had invested with Nationar $10.0 million of federal funds sold, cash in demand
accounts of $200,000 and $38,000 of capital stock. In accordance with the
Company's internal procedures for monitoring asset quality, the $38,000 stock
investment was written off and a provision for possible other credit losses of
$2.0 million, or 20% of the remaining investment, was made during 1995.
<PAGE>
Non-Interest Income
Non-interest income for 1996 increased by $1.1 million, or 27.2%, to $5.1
million compared to $4.0 million in 1995. Loan fees and service charges
increased by $553,000, or 24.3%, primarily reflecting increases of $525,000 in
prepayment penalties; $67,000 in mortgage loan late charges and $51,000 in New
York Cash Exchange (NYCE) fees; partially offset by decreases of $32,000 each in
NOW account service charges and regular account fees. During 1995, the Bank
began to offer VISA and Mastercard credit cards resulting in related fee income
of $38,000 for 1996. The Bank has an agreement with an unrelated financial
institution, which bears all costs and credit risk associated with originating
and owning the credit card portfolio originated from the Bank's customer list.
In general, the Bank receives a fee for each new account opened or renewed and a
percentage of all finance charges paid by the cardholders.
The $542,000 net increase in income from real estate operations primarily
reflects a $437,000 retroactive property tax refund received for a property that
was sold during 1994. During 1996, gains of $571,000 were realized from the sale
of 25 cooperative apartments owned by the Bank's real estate subsidiaries.
During 1995, $587,000 of gains were realized from the sale of 31 cooperative
apartments. At December 31, 1996, 158 cooperative apartments, which are carried
at a zero basis, remained available for sale.
Income on loaned securities decreased by $21,000, to $37,000 for 1996,
compared to $58,000 for 1995. Lower market demand for loaned securities was
experienced during 1996. Management does not expect income from security loans
to contribute substantially to non-interest income in the near future.
Non-Interest Expense
Non-interest expense decreased $2.0 million, or 6.6%, to $27.6 million for
1996, compared to $29.6 million for 1995. Included in non-interest expense are
the costs of compensation and benefits, office occupancy, federal deposit
insurance corporation premiums, advertising, ORE and other general and
administrative expense.
Federal deposit insurance premiums, which rates are established by law,
were $2,000, the statutory minimum, for 1996, compared to $1.5 million for 1995.
During 1995, the Federal Deposit Insurance Corporation (FDIC) announced that the
Bank Insurance Fund (BIF) was recapitalized as of May 31, 1995, and issued
refunds of deposit insurance overpayments from June 1 through September 30,
1995. In connection with federal legislation, BIF members will be assessed a 1.3
basis point charge per $100 of insurable deposits to meet the FICO bond
obligations beginning in 1997 and continuing through 1999. Assuming that the BIF
remains fully funded, no additional charges will be assessed.
ORE operations generated income of $772,000 for 1996 compared to an expense
of $209,000 for 1995. This income includes a pretax gain of $705,000 recognized
on the sale of a property acquired through foreclosure during the first quarter
of 1996. Gains on the sale of ORE properties are recognized under the cost
recovery method. During 1996, $148,000 of gains on sales of ORE were deferred.
Occupancy and equipment expenses increased $254,000, to $5.2 million for
1996 from $5.0 million for 1995. This increase reflects increased costs as a
result of the renovations at the Company's headquarters. The renovations, which
began during 1995 and continued through 1996, are the first major capital
improvements since completion of the building in 1974.
Other general and administrative expense increased by $208,000, or 4.0%,
reflecting increased legal fees in connection with foreclosure actions for
problem loans and the Nationar claim.
<PAGE>
Compensation and benefit expenses decreased by $167,000, to $16.4 million
from $16.6 million, or 1.0%. Salaries increased overall by $326,000, or 2.5%.
During 1995, the final vesting for the Bank Recognition and Retention Plans
(BRRPs) occurred, resulting in the Bank recognizing an expense of $594,000.
Since the BRRPs were terminated after the final vesting in 1995, no expense was
incurred for the BRRPs during 1996. A non-recurring expense of $330,000 was
recognized during 1996 in connection with the 1996 Stock Option Plan for the
difference between the option price set on the date of grant and the stock price
on the date of stockholder approval. During 1996, the Bank realized savings of
$564,000 for dental and medical insurance premiums resulting from excess
insurance fund reserves. The Bank does not expect such savings in the future.
Provision for Income Taxes
Income taxes increased by $2.9 million, or 17.8%, to $19.6 million for 1996
from $16.6 million for 1995. The provision for income taxes increased due to the
increase in pretax income, as the effective tax rate remained relatively stable
at 42.2% for 1996 compared to 42.8% for 1995. (See Note 15 to the Consolidated
Financial Statements.)
<PAGE>
Comparison of Operating Results for the Years Ended December 31, 1995 and 1994
- ------------------------------------------------------------------------------
General
Net income for the year ended December 31, 1995 was $22.2 million, or $1.99
per share, compared with $23.6 million, or $2.02 per share, for 1994. Comments
regarding the components of net income are detailed in the following paragraphs.
Interest Income
Income on mortgage loans increased by $3.2 million, or 5.2%, to $64.3
million, from $61.1 million. The average investment in mortgage loans increased
by $45.6 million, or 6.9%, to $702.3 million for 1995, from $656.7 million for
1994. The amount invested in mortgage loans has continued to increase over the
past six years. Mortgages originated for the Bank's portfolio during 1995
remained relatively unchanged at $77.8 million, from $78.0 million during 1994.
Mortgage originations for 1994 included an $18.5 million mortgage made in
connection with the sale of a real estate property, which was included in the
Company's real estate held for sale portfolio. Market interest rates decreased
during 1995 compared to 1994. The mortgage portfolio yield decreased to 9.16%
for 1995 from 9.31% for 1994.
Income on debt and equity securities increased $8.5 million, or 44.3%, to
$27.5 million for 1995, compared to $19.1 million for 1994. The increase in
income reflects an increase in the yield to 6.03% for 1995, from 4.87% for 1994,
coupled with a $64.4 million, or 16.4%, (excluding the Statement 115 adjustments
for marketable equity securities), increase in the average investment in this
portfolio. During 1995, activity in the investment securities portfolio included
purchases of $300.0 million and maturities of $265.0 million. There were no
sales of debt or equity securities during 1995. At December 31, 1995, the $439.9
million debt securities portfolio had net unrealized gains of $1.3 million,
which are not expected to impact future income, as these securities are
designated as held-to-maturity. The equity portfolio, which is designated as
available-for-sale, was carried at its aggregate market value of $40.1 million,
which exceeds its original cost of $11.7 million.
Income on CMOs decreased by $8.4 million, or 46.7% to $9.6 million, from
$18.0 million. The average investment in CMOs decreased by $188.8 million, or
47.4%, to $209.5 million for 1995. Principal payments on CMOs increased to
$237.1 million during 1995 from $181.0 million during 1994. The increase in
principal payments reflects more CMO payments coming due during 1995 than in
1994. During 1995, the market availability of CMOs meeting the Bank's investment
guidelines remained limited, resulting in fewer CMO purchases. For 1995,
purchases totaled $67.9 million, compared with $79.5 million for 1994. During
1995, the CMO portfolio yielded 4.57% compared with 4.51% for 1994. At December
31, 1995, the $144.6 million CMO portfolio had net unrealized losses of
$203,000, which are not expected to impact future income, as these securities
are designated as held-to-maturity.
During 1995, MBS continued and will continue to amortize without
replacement, as the Bank had previously discontinued purchasing MBS. Income
earned on MBS decreased to $969,000 during 1995 from $1.3 million during 1994,
reflecting the declining balance. There were no sales of MBS during 1995 or
1994. At December 31, 1995, there were unrealized gains of $847,000 and no
unrealized losses in the $7.6 million MBS portfolio. These gains are not
expected to impact future income, as MBS securities are designated as
held-to-maturity.
<PAGE>
Income from federal funds sold increased to $3.0 million for 1995 from $1.6
million for 1994. The average balance invested in federal funds sold increased
to $52.4 million during 1995, compared to $38.3 million during 1994. The average
yield on federal funds sold increased to 5.78% during 1995 from 4.10% during
1994. Liquidity, provided by federal funds sold, is necessary to fund: mortgage
lending; deposit withdrawals; dividend payments on and make repurchases of the
Company's common stock; and meet obligations for non-interest expense.
Interest Expense
Interest expense on deposits increased to $40.7 million, or 11.2%, for 1995
from $36.6 million for 1994. This increase reflects a 57 basis point increase in
the average cost of funds, partially offset by a decrease in average interest
bearing deposits of $77.4 million, or 6.4%, to $1.14 billion for 1995, from
$1.22 billion for 1994. The increase in market interest rates during 1994 and
the continued shift of the Bank's deposits from passbook and lease security
accounts into certificate accounts, contributed to the increase in interest
expense for 1995. Management continues to monitor deposit levels and interest
rates offered by competitors.
The obligation on the leveraged ESOP, which was satisfied during 1994, had
related interest expense of $25,000. The Bank continued to make contributions to
a non-leveraged ESOP during 1995.
Net Interest Income
Net interest income increased by $611,000, to $67.0 million, from $66.4
million for 1994. For 1995, the net interest margin increased to 4.60% from
4.36% for 1994, and the net interest spread increased to 3.82% from 3.75% for
1994. The yield on interest earning assets increased to 7.39% for 1995 from
6.76% for 1994. The cost of interest bearing deposits increased to 3.57% for
1995 from 3.00% for 1994. The average balance of interest earning assets and
interest bearing deposits decreased by $65.6 million and $77.4 million,
respectively. As interest rates began to decrease during 1995, management
reinvested proceeds from maturing investments in shorter-term securities than
those investments made during 1994.
The Bank's profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest income on interest
earning assets, such as loans and investments, and its interest expense on
interest bearing deposits. The Bank, like most savings institutions, will
continue to be affected by general changes in levels of interest rates,
government regulations and other economic factors beyond its control.
Provision For Possible Loan Losses
The provision for possible loan losses for 1995 increased slightly to
$636,000 compared to $608,000 for 1994. During 1995 and 1994 management made
general mortgage loan provisions of $600,000. Provisions of $36,000 and $8,000
were made against the other loan portfolio during 1995 and 1994, respectively.
Future additions to the loan loss allowances will be based on management's
continuing evaluations of the loan portfolio and assessments of economic
conditions. Material changes in portfolio value, performance and/or general
economic conditions, would further affect the amount of any such loan
provisions.
<PAGE>
Provision For Possible Other Credit Losses
On February 6, 1995, the Superintendent of Banks for the State of New York
seized Nationar, a check-clearing and trust company, freezing all of Nationar's
assets. On that date, the Bank had: federal funds sold to Nationar of $10.0
million; demand accounts of $200,000 and $38,000 of Nationar capital stock. In
accordance with the Company's internal procedures for monitoring asset quality,
the $38,000 stock investment was written off and a provision for possible other
credit losses of $2.0 million, or 20% of the remaining investment, was
established during 1995.
Non-Interest Income
Non-interest income decreased by $2.7 million, or 40.8%, to $4.0 million
compared to $6.7 million in 1994. The $2.3 million net decrease in income from
real estate operations reflects a $2.6 million non-recurring gain realized
during 1994, from the sale of a 684 unit rental property, known as Bay Hill
Gardens. (See Note 13 to the Consolidated Financial Statements.) During 1995,
$587,000 of gains were realized from the sale of 31 cooperative apartments owned
by the Bank's real estate subsidiaries. At December 31, 1995, 183 cooperative
apartments, which are carried at a zero basis, remained available for sale.
Income on loaned securities decreased by $214,000, to $58,000 for 1995,
compared to $272,000 for 1994. Lower market demand for loaned securities was
experienced during 1995. Management does not expect income from security loans
to contribute substantially to non-interest income in the near future.
Loan fees and service charges decreased $272,000, or 10.7%, primarily
reflecting a decrease in prepayments and therefore the related prepayment
charges for commercial mortgages. During 1995, the Bank began to offer VISA and
Mastercard credit cards. This portfolio is managed by an unrelated company,
which also assumes the risk of any loss.
Non-Interest Expense
Non-interest expense decreased $1.3 million, or 4.5%, to $29.6 million for
1995, compared to $30.9 million for 1994. Included in non-interest expense are
the costs of compensation and benefits, office occupancy, FDIC insurance
premiums, advertising, ORE expenses and other general and administrative
expense.
Compensation and benefit expense decreased by $353,000, to $16.6 million
from $16.9 million, or 2.1%. Salaries increased overall by $396,000, or 3.3% and
medical insurance premiums increased $250,000. During 1994, the final
allocations of the initial grant were made from the ESOP and during 1995, awards
under the BRRPs were fully amortized, resulting in a $941,000 net savings. The
BRRPs were terminated during 1995 and the ESOP contributions were fixed at
approximately 6% of base salary.
Occupancy and equipment expenses remained relatively stable, decreasing
slightly by $44,000, to $4.9 million for 1995 from $5.0 million for 1994. This
decrease reflects the results of management's emphasis on expense control.
During 1996, it is expected that these costs will rise as a result of the
renovations at the Company's headquarters.
Federal deposit insurance premiums, which rates are established by law,
decreased by $1.5 million, or 50.5%. During the third quarter of 1995, the FDIC
announced that the BIF was recapitalized as of May 31, 1995, and issued refunds
of deposit insurance overpayments from June 1 through September 30, 1995.
<PAGE>
The cost of ORE operations increased slightly to $209,000 for 1995 from
$200,000 for 1994. Gains on the sale of ORE properties are recognized under the
cost recovery method. During 1995, $167,000 of gains on the sale of ORE were
deferred. At December 31, 1995, there were two significant mortgage loans
totaling $20.9 million on which the Bank had commenced foreclosure proceedings.
(See "Asset/Liability Management".)
Other general and administrative expense increased by $433,000, or 9.1%,
reflecting increased legal fees in connection with problem loans and the
Nationar claim as well as the cost of upgrading the Bank's computer system.
Provision for Income Taxes
Income taxes decreased by $1.4 million or 7.9% to $16.6 million for 1995
from $18.0 million for 1994. The provision for income taxes decreased due to the
decrease in pretax income before cumulative effect of accounting changes. The
effective tax rate decreased to 42.8% for 1995 from 43.3% for 1994. (See Note 15
to the Consolidated Financial Statements.)
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company's funds are primarily obtained through dividends paid by the
Bank. During 1996, the Bank paid $20.0 million in dividends to the Company. The
Company is provided with the long-term liquidity resources of the Bank as well
as the liquidity provided by its own investments. The Bank's primary sources of
funds are deposits, proceeds from maturities of securities held-to-maturity,
amortization on and maturities of loans and cash flows from operations. Overall
liquidity is affected by activity in general interest rates, economic conditions
and competition.
The Company's investments, excluding investments made by the Bank, are
primarily in federal agency securities. The Company expects to utilize its funds
to continue investing in U.S. Government and agency securities, repurchasing
shares of the Company's common stock and paying dividends on its common stock,
as management deems appropriate. The Company presently has no plans to expand
its activities; however, should the Company decide to expand its investment
activities, the Bank may pay additional cash dividends to the Company, subject
to certain regulatory limitations, to fund such activities. (See Note 26 to the
Consolidated Financial Statements.)
During 1996, the Company used $27.7 million to repurchase 845,000 shares of
its common stock, which represents the largest use of funds for financing
activities. In addition, net deposit outflows of $19.1 million and dividend
payments of $12.1 million, contributed to the net cash outflow from financing
activities. The net deposit decline of $19.1 million during 1996, represents
deposit increases of $4.7 million during the first quarter, followed by deposit
outflows of $3.8 million, $13.3 million and $6.7 million during the second,
third and fourth quarters, respectively.
During 1996, the most significant investing activities for which cash was
used included purchases of debt securities held-to-maturity and securities
available-for-sale, originations of mortgage loans and purchases of CMOs. The
most significant investing activities which provided cash were maturities of
debt securities and principal payments on CMOs.
The Bank is required to maintain minimum levels of liquid assets as defined
by the Office of Thrift Supervision (OTS) regulations. This requirement, which
may be varied at the direction of the OTS, is based upon a percentage of
deposits and short-term borrowings. The required ratio at December 31, 1996 was
5.0%. The Bank's liquidity ratio is significantly in excess of the required
level. The Bank's average liquidity ratios were 34.0% and 44.0% for the years
ended December 31, 1996 and 1995, respectively. The Bank's high liquidity
reflects management's strategy of investing funds in short-term CMOs and U.S.
Government and agency securities. Management has structured the assets and
liabilities of the Company to enable the Bank to meet its regulatory liquidity
requirements. In addition, the asset/liability structure serves to provide funds
for operating, investing and financing activities of the Company, while holding
securities, other than marketable equity securities, to maturity.
Liquidity management for the Bank is both a daily and a long-term function.
Management expects the Bank to be able to maintain high levels of liquidity in
the future due to its investment strategy and projected earnings. Excess funds
are generally invested in short-term investments such as federal funds sold.
Investments in the U.S. Government and agency securities portfolio had an
average remaining maturity of thirteen months and the CMO portfolio had an
average anticipated remaining maturity of fifteen months as of December 31,
1996. The Bank's most liquid assets are cash and cash equivalents which include
investments in federal funds sold. The levels of these assets are dependent on
the Bank's operating, financing and investing activities during any given
period. (See the Consolidated Statements of Cash Flows which are part of the
Consolidated Financial Statements.)
<PAGE>
Management is carefully monitoring the deposit outflow and has taken a
series of actions aimed at curtailing the erosion of the Bank's deposit base.
Management considers the Bank's relationship with its long-term customers vital
to enabling the Company to continue to enhance future stockholder value. If the
current trend of deposit shifts and outflows were to continue without management
intervention in the long-term, the Company's future interest rate spreads,
margins and net income would suffer as a result. To address these concerns,
management: (1) established a more aggressive interest rate structure, in order
to retain the Bank's customer relationships; (2) has placed emphasis on
expanding fee income as a means of offsetting future decreases in net interest
income; and (3) is focusing on the use of available technology in order to
continue to reduce banking staff, which will be accomplished through attrition.
To generate additional fee income, the Bank participates in the NYCE automated
teller system, and receives additional fee income for issuing credit cards. The
credit cards issued with the Bank's name are owned and managed by an unrelated
financial institution, who incurs all risk of loss. Lastly, management has
reduced assets to correlate with the decline in deposits, thereby shrinking the
Company, while maintaining strong liquidity and steady earnings.
In the event that the Bank should require funds beyond its internal
ability, it may take Federal Home Loan Bank (FHLB) of New York advances. The
Bank has not utilized FHLB advances to meet its liquidity needs.
Impact of Inflation and Changing Prices
- ---------------------------------------
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles,
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 Company's non-interest expense. Unlike most industrial
companies, nearly all the assets and liabilities of the Company are monetary. As
a result, interest rates have a greater impact on the Company'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.
<PAGE>
Impact of New Accounting Standards Issued, But Not Yet Adopted
- --------------------------------------------------------------
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(Statement 125). Statement 125 establishes accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial components approach
that focuses on control. Under this approach, an entity, subsequent to a
transfer of financial assets, must recognize the financial and servicing assets
it controls and the liabilities it has incurred, derecognize financial assets
when control has been surrendered, and derecognize liabilities when
extinguished. Standards for distinguishing transfers of financial assets that
are sales from those that are secured borrowings are provided in Statement 125.
A transfer not meeting the criteria for a sale must be accounted for as a
secured borrowing with pledged collateral.
Statement 125 requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be initially
measured at fair value, if practicable. It additionally requires that servicing
assets and other retained interests in transferred assets be measured by
allocating the previous carrying amount between the assets sold, if any, and
retained interests, if any, based on their relative fair values at the date of
transfer. Servicing assets and liabilities must be subsequently measured by
amortization in proportion to and over the period of estimated net servicing
income or loss and assessed for asset impairment, or increased obligation, based
on their fair value.
Statement 125 requires that a liability be derecognized if either (a) the
debtor pays the creditor and is relieved of its obligation for the liability or
(b) the debtor is legally released from being the primary obligor under the
liability either judicially or by the creditor.
Statement 125 provides implementation guidance for assessing isolation of
transferred assets and for accounting for transfers of partial interests,
servicing of financial assets, securitizations, transfers of sales-type and
direct financing lease receivables, securities lending transactions, repurchase
agreements including "dollar rolls", "wash sales", loan syndications and
participations, risk participations in banker's acceptances, factoring
agreements, transfers of receivables with recourse and extinguishments of
liabilities.
Statement 125 supersedes FASB Statements No. 76, "Extinguishment of Debt"
and No. 77, "Reporting by Transferors for Transfer of Receivables with
Recourse". Statement 125 amends Statement 115, to prohibit the classification of
a debt security as held-to-maturity if it can be prepaid or otherwise settled in
such a way that the holder of the security would not recover substantially all
of its recorded investment. Statement 125 further requires that loans and other
assets that can be prepaid or otherwise settled in such a way that the holder
would not recover substantially all of its recorded investment shall be
subsequently measured like debt securities classified as available-for-sale or
trading under Statement 115, as amended by Statement 125. Statement 125 also
amends and extends to all servicing assets and liabilities the accounting for
mortgage servicing rights now in Statement 65, and supersedes Statement 122.
<PAGE>
In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement 125". As amended, Statement 125 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, except that its provisions with
respect to securities lending, repurchase agreements and "dollar roll"
transactions are effective for transfers occurring after December 31, 1997.
The Company does not expect the adoption of Statement 125, as amended, to
have a material affect on its financial condition or results of operations.
Private Securities Litigation Reform Act Safe Harbor Statement
- --------------------------------------------------------------
In addition to historical information, this Annual Report may include
certain forward looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Bank's loan
and investment portfolios, changes in accounting principles, policies or
guidelines, and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices. Further description of the risks and uncertainties to the business are
included in detail in Item 1, "Business" of the Company's 1996 Form 10-K.
<PAGE>
<TABLE>
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1996 and 1995 (In Thousands, Except Share and Per Share Amounts)
<CAPTION>
ASSETS 1996 1995
- ------ ---- ----
<S> <C> <C>
Cash and due from banks $ 12,894 $ 14,893
Federal funds sold 86,500 71,000
---------- ---------
Cash and cash equivalents 99,394 85,893
Securities available-for-sale, at estimated fair value 51,021 40,071
Securities held-to-maturity, net (estimated fair value
of $461,784 and $593,991, respectively) 460,509 592,060
Other investments 6,859 6,302
Mortgage loans, net 827,052 739,037
Other loans, net 27,722 29,208
Premises and equipment, net 16,829 15,157
Interest due and accrued 9,310 12,907
Real estate held for investment, net 6,082 6,395
Real estate held for sale and Other real estate 5,236 7,314
Claims receivable, net - 8,165
Other assets 6,002 5,792
---------- ----------
Total Assets $1,516,016 $1,548,301
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to depositors $1,144,393 $1,163,446
Advance payments for real estate taxes and insurance 8,265 8,231
Official bank checks outstanding 9,644 24,392
Accrued expenses and other liabilities 18,415 12,125
---------- ----------
Total Liabilities 1,180,717 1,208,194
---------- ----------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value, 15,000,000 shares
authorized; none issued) - -
Common stock ($.01 par value, 30,000,000 shares
authorized; 16,000,000 issued; 9,783,031 and
10,504,775 outstanding, respectively) 160 160
Additional paid-in capital 163,500 162,566
Retained income, substantially restricted 289,588 276,317
Net unrealized gain on securities available-for-sale,
net of tax 21,795 15,750
Common stock held by Benefit Restoration Plan
Trust, at cost (166,848 shares) (3,275) (3,270)
Common stock held in treasury, at cost (6,216,969
and 5,495,225 shares, respectively) (136,469) (111,416)
---------- ----------
Total Stockholders' Equity 335,299 340,107
---------- ----------
Total Liabilities and Stockholders' Equity $1,516,016 $1,548,301
========== ==========
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996, 1995 and 1994
(In Thousands, Except Per Share Amounts)
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest Income:
Mortgage loans, net $ 69,113 $ 64,309 $ 61,142
Debt & equity securities, net 21,695 27,545 19,088
Collateralized mortgage obligations, net (CMOs) 10,063 9,572 17,951
Other loans, net 2,138 2,299 1,988
Mortgage-backed securities, net (MBS) 739 969 1,288
Federal funds sold 3,863 3,032 1,570
--------- --------- ---------
Total Interest Income 107,611 107,726 103,027
--------- --------- ---------
Interest Expense:
Deposits 40,217 40,707 36,594
Employee Stock Ownership Plan obligation - - 25
--------- --------- ---------
Total Interest Expense 40,217 40,707 36,619
--------- --------- ---------
Net Interest Income 67,394 67,019 66,408
Provision for Possible Loan Losses 640 636 608
(Recovery of) Provision for Possible Other Credit Losses (2,040) 2,040 -
--------- --------- ---------
Net Interest Income After Provision
for Possible Credit Losses 68,794 64,343 65,800
--------- ---------- ---------
Non-Interest Income:
Real estate operations, net 1,767 1,225 3,497
Loan fees and service charges 2,833 2,280 2,552
Income on loaned securities 37 58 272
Miscellaneous income 444 432 431
--------- --------- ---------
Total Non-Interest Income 5,081 3,995 6,752
--------- --------- ---------
Non-Interest Expense:
Compensation and benefits 16,412 16,579 16,932
Occupancy and equipment expenses (net of rental
income of $1,126, $1,199 and $1,189, respectively) 5,211 4,957 5,001
Federal deposit insurance premiums 2 1,477 2,983
Advertising 1,340 1,142 1,057
Other real estate (income) expense, net (772) 209 200
Other general and administrative 5,405 5,197 4,764
--------- --------- ---------
Total Non-Interest Expense 27,598 29,561 30,937
--------- --------- ---------
Income Before Provision for Income Taxes 46,277 38,777 41,615
Provision for Income Taxes 19,552 16,603 18,018
--------- --------- ---------
Net Income $ 26,725 $ 22,174 $ 23,597
========= ========= =========
Income and Cash Dividends Per Share:
Earnings per common and common equivalent share $ 2.54 $ 1.99 $ 2.02
========= ========= =========
Cash Dividends $ 1.20 $ 1.00 $ .72
========= ========= =========
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1995 and 1994 (In Thousands, Except Per Share Amounts)
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Common Stock (Par value: $.01)
Balance at beginning and end of year $ 160 $ 160 $ 160
-------- -------- --------
Additional Paid-in Capital
Balance at beginning of year 162,566 160,962 159,606
Net allocation (distribution) of common stock
for Benefit Restoration Plan 5 (199) 373
Tax benefit for stock plans 599 1,645 983
Reallocation of forfeited Bank Recognition and
Retention Plans shares - 158 -
Compensation expense for 1996 option plan 330 - -
-------- -------- --------
Balance at end of year 163,500 162,566 160,962
-------- -------- --------
Retained Income, Substantially Restricted
Balance at beginning of year 276,317 266,361 251,959
Net income 26,725 22,174 23,597
Tax benefit for dividends paid to Employee Stock
Ownership Plan (ESOP) - - 11
Loss on reissuance of treasury stock (1,364) (1,602) (1,210)
Cash dividends on common stock ($1.20, $1.00, $.72,
respectively) (12,090) (10,616) (7,996)
------- ------- -------
Balance at end of year 289,588 276,317 266,361
------- ------- -------
Net Unrealized Gain on Securities Available-for-Sale, Net of Tax
Balance at beginning of year 15,750 8,892 -
Cumulative effect of a change in accounting for
securities available-for-sale at January 1, 1994
net unrealized gain (net of tax of $7,000) - - 8,761
Change in net unrealized gains on securities available-
for-sale (net of tax of $4,863, $5,517 and $105,
respectively) 6,045 6,858 131
-------- -------- --------
Balance at end of year 21,795 15,750 8,892
-------- -------- --------
Unallocated Common Stock Held by Leveraged ESOP
Balance at beginning of year - - (1,045)
Allocation of Leveraged ESOP stock - - 1,045
-------- -------- --------
Balance at end of year - - -
-------- -------- --------
Unearned Common Stock Held by Bank Recognition and
Retention Plans
Balance at beginning of year - (516) (1,504)
Earned during the period - 516 988
-------- -------- --------
Balance at end of year - - (516)
-------- -------- --------
Common Stock Held by Benefit Restoration Plan Trust, at Cost
Balance at beginning of year (3,270) (3,469) (3,096)
Common stock acquired (11) (9) (378)
Common stock distributed 6 208 5
-------- ------- --------
Balance at end of year (3,275) (3,270) (3,469)
-------- ------- --------
Common Stock Held in Treasury, at Cost
Balance at beginning of year (111,416) (104,756) (80,873)
Common stock reacquired (27,650) (9,881) (26,404)
Common stock reissued for options exercised 2,597 3,221 2,521
-------- -------- --------
Balance at end of year (136,469) (111,416) (104,756)
-------- -------- --------
Total Stockholders' Equity $335,299 $340,107 $327,634
======== ======== ========
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994 (In Thousands)
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income $ 26,725 $ 22,174 $ 23,597
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 640 636 608
(Recovery of) provision for possible other credit losses (2,040) 2,040 -
Loss on Nationar capital stock - 38 -
Net gain on sale/redemption of equity securities (2) - -
(Decrease) increase in deferred loan fees
and discounts, net (593) (608) 1,743
Accretion of discount (in excess of) less than
amortization of premium on MBS and CMOs (578) 320 896
Accretion of discount in excess of amortization
of premium on debt securities (249) (248) (140)
Depreciation and amortization of premises and equipment 1,826 1,920 1,847
Mortgage loans originated for sale (1,621) (1,792) (1,923)
Proceeds from sale of mortgage loans originated for sale 1,737 1,818 1,946
Gain on sale of mortgage and other loans (53) (61) (26)
Expense recognized for Bank Recognition and Retention Plans - 675 988
Net expense recorded for leveraged ESOP - - 978
Tax benefit for cash dividends paid to ESOP - - 11
Tax benefit for stock plans credited to capital 599 1,645 983
Gain on sale of real estate held for sale (571) (587) (2,737)
Decrease (increase) in interest due and accrued 3,597 752 (2,272)
Transfer of federal funds sold to Nationar to
claims receivable - (10,205) -
Payments received against Nationar claim 10,205 - -
Net gain on sale of other real estate (688) - -
(Increase) decrease in official bank checks outstanding (14,748) 3,986 (2,899)
Other 1,547 (1,389) 1,111
--------- --------- ---------
Net cash provided by operating activities 25,733 21,114 24,711
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated:
Mortgage loans (136,218) (77,826) (59,548)
Other loans (19,032) (25,718) (21,426)
Purchases of CMOs held-to-maturity (124,275) (67,889) (79,458)
Purchases of debt securities held-to-maturity and
securities available-for-sale (534,569) (300,047) (615,000)
Principal payments on:
Mortgage loans 46,506 22,672 31,129
Other loans 19,656 22,556 20,169
CMOs 114,105 237,060 181,024
MBS 2,047 2,324 4,900
Proceeds from maturities of U.S. Government and
federal agency securities 675,000 265,000 627,000
Proceeds from sale of other loans 934 1,372 1,391
Purchases of Federal Home Loan Bank stock (557) (188) -
Proceeds from redemption of Federal Home Loan Bank stock - - 4,147
Continued
</TABLE>
<PAGE>
<TABLE>
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31, 1996, 1995 and 1994 (In Thousands)
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Proceeds from sale/redemption of equity securities 30 - -
Purchases of premises and equipment, net of disposals (3,498) (2,647) (2,212)
Net decrease (increase) in real estate held for
investment 313 168 (350)
Proceeds from sale of real estate held for sale 571 587 5,233
Proceeds from sale of Other real estate 2,759 - -
Net decrease in investment in real estate held for sale 1,522 1,995 1,022
------- ------- -------
Net cash provided by investing activities 45,294 79,419 98,021
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in due to depositors (19,053) (40,978) (69,493)
Increase (decrease) in advance payments for real
estate taxes and insurance 34 (79) 889
Proceeds upon exercise of common stock options 1,233 1,619 1,311
Contributions to leveraged ESOP - - (1,011)
Cash dividends paid to common stockholders (12,090) (10,616) (7,996)
Payments to repurchase common stock (27,650) (9,881) (26,404)
--------- --------- ---------
Net cash used by financing activities (57,526) (59,935) (102,704)
--------- --------- ---------
Net increase in cash and cash equivalents 13,501 40,598 20,028
Cash and cash equivalents at beginning of year 85,893 45,295 25,267
--------- --------- ---------
Cash and cash equivalents at end of year $ 99,394 $ 85,893 $ 45,295
========= ========= =========
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest on deposits $ 40,215 $ 40,721 $ 36,601
========= ========= =========
Income taxes $ 22,370 $ 18,216 $ 21,308
========= ========= =========
ESOP obligation $ - $ - $ (1,045)
========= ========= =========
Supplemental Disclosures of Noncash Investing and
Financing Activities
Real estate acquired through foreclosure $ 8,190 $ - $ 1,472
========= ========= =========
Mortgage originated upon sale of real estate
from the held for sale portfolio and Other real
estate $ 6,675 $ - $ 18,500
========= ========= =========
January 1, 1994 transfer of securities from held-
for-investment to available-for-sale, at estimated
fair value $ - $ - $ 27,364
========= ========= =========
Deferred tax liability on securities available-for-sale $ 17,534 $ 12,671 $ 7,154
========= ========= =========
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
JSB FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS
JSB Financial, Inc.(Company or Parent) is a unitary savings and loan
holding company. The Company holds all of the outstanding common stock of its
subsidiary, Jamaica Savings Bank FSB (the Bank or the Subsidiary). The Company
is subject to the financial reporting requirements of the Securities Exchange
Act of 1934.
(a) Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities and disclosures of
contingent assets and liabilities as of the dates of the consolidated statements
of financial condition and revenues and expenses for the periods presented.
Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowances for credit losses and the
valuation of real estate held for sale and other real estate and real estate
held for investment (real estate holdings). These estimates are primarily
reactive to actual and anticipated changes in the real estate market, the
economy in the Bank's market area and debtors' financial condition. In
connection with the determination of allowances, management reviews: loan
performance; historical trends; appraisals of properties securing significant
mortgages; investment ratings for equity securities; and capital and liquidity
levels for correspondent banks, on an ongoing basis.
The ultimate collection of the Bank's loan portfolio and the recovery of
its various real estate holdings is susceptible to economic conditions in the
Bank's market area and changes thereto. The Bank's mortgage loans are secured
primarily by properties located in the New York-metropolitan area. In addition,
all real estate holdings are located in the same market area.
Management believes that the allowances for credit losses as presented in
these consolidated financial statements are adequate. Available information is
utilized to identify probable losses on loans, real estate holdings, and various
other investments. Future additions to the allowances could be necessary based
on changes in debtors' financial condition, economic conditions or if economic
conditions differ from management's previous assessments. Various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowances for losses. Such agencies may require the Bank to
recognize additions to the allowances based on their judgments about information
available to them at the time of their examination.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, the Bank, as consolidated with its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
<PAGE>
(c) Consolidated Statements of Cash Flows
For the purposes of reporting cash flows, the Company considers all
short-term investments with a maturity of less than three months from date of
purchase to be cash equivalents.
(d) Securities
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" (Statement 115). Under Statement 115, the Company is
required to report debt, readily-marketable equity, and mortgage-backed
securities in one of the following categories: (i) "held-to-maturity" (when
management has a positive intent and ability to hold to maturity) which are
reported at amortized cost; (ii) "trading" (when held for current resale) which
are to be reported at estimated fair value, with unrealized gains and losses
included in earnings; and (iii) "available-for-sale" (all other debt and equity
securities not designated as held-to-maturity or trading) which are reported at
estimated fair value, with unrealized gains and losses excluded from earnings
and reported, net of tax, as a separate component of stockholders' equity.
The designation of a security as held-to-maturity or available-for-sale is
made at the time of acquisition. Upon adopting Statement 115, management
reviewed the composition of the investment portfolio and designated all
securities, other than marketable equity securities, as held-to-maturity. On
January 1, 1994, marketable equity securities totaling $11,577,000, at cost,
were designated as available-for-sale and recorded at their fair value of
$27,364,000. The Company does not maintain any investments for trading purposes.
The adoption of Statement 115 had no impact on net income.
Discounts on debt securities are accreted to income and premiums are
amortized against income over the life of the security using a method which
approximates the level yield method. Gains and losses on the sales of
securities, if any, are recognized upon realization, using the specific
identification method.
(e) Loans
Loans are carried at unpaid principal balances net of any deferred loan
fees and unearned discounts. Discounts are accreted to income using a method
which approximates the level yield method, over the composite average life of
the loans. Loan fees received for commitments to make or purchase loans, are
deferred and accreted into income over the life of the loan using the level
yield method.
Interest is accrued monthly on the outstanding balances of loans. Mortgages
90 days in arrears and/or loans where full collection of principal and interest
is questionable are placed on nonaccrual status, at which time loan interest due
and accrued is reversed against interest income of the current period. A
nonaccrual loan is restored to accrual status when principal and interest
payments are current and full payment of principal and interest is expected.
Cash receipts on an impaired loan are applied to principal and interest in
accordance with the contractual terms of the loan unless full payment of
principal is not expected, in which case both principal and interest payments
received are netted against the loan balance. The Bank continues to accrue
interest income on non-insured other loans up to 120 days delinquent, beyond
which time the loan balance is written off.
<PAGE>
On January 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" (Statement 114), and the amendment thereof,
SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition Disclosures" (Statement 118). In accordance with these standards,
the Company considers a loan impaired if it is probable that, based upon current
information, a creditor will be unable to collect all amounts due according to
the contractual terms of a loan agreement. Statement 114 does not apply to large
groups of smaller-balance homogeneous loans that are collectively evaluated for
impairment including the Company's one-to four-family mortgage loans and
consumer loans other than those modified in a troubled debt restructure (TDR).
The Company generally does not consider a loan impaired when the delay in the
timing of payments is three months or less or the shortfall in the amount of
payments is the lower of $10,000 or 1.0% of the loan amount. The adoption of
Statements 114 and 118 had no impact on net income.
Loans individually reviewed for impairment by the Company are limited to
loans secured by multi-family, commercial, construction and underlying
cooperative properties, loans modified in TDRs and selected large one-to
four-family loans. Examples of measurement techniques utilized by the Company
include present value of expected future cash flows, the loan's market price if
one exists and the estimated fair value of the collateral. Reserves are
established against impaired loans in amounts equal to the difference between
the recorded investment in the asset and either the present value of the cash
flows expected to be received, or the fair value of the underlying collateral if
foreclosure is deemed probable or if the loan is considered collateral
dependent. The Company's impaired loan identification and measurement process is
conducted in conjunction with the Company's review of the adequacy of its
allowance for loan losses.
A loan is deemed a TDR by the Company when concessionary modifications to
the original contractual terms are made for economic or legal reasons related to
the debtor's financial difficulties. Loans modified in a TDR subsequent to the
adoption of Statement 114 are considered impaired, unless in periods subsequent
to restructuring the loan is performing in accordance with the new terms of the
agreement and such terms reflect those that would be offered by the Bank for a
new credit. Valuation allowances associated with such impaired loans are
measured in accordance with Statement 114 throughout the loan term.
Modifications made to loans in TDRs prior to the adoption of Statement 114 that
are not considered impaired based on the terms of the restructuring agreement
continue to be accounted for under Statement 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructurings", are not included in the Company's
impaired loan statistics.
Loans originated for sale are carried at the lower of unpaid principal
balance, net of any discounts and deferred fees or estimated fair value, in the
aggregate.
<PAGE>
(f) Allowance for Possible Loan Losses
The allowance for possible loan losses is available for future charge-offs
of loans. The allowance is increased by the provision for possible loan losses
made and recoveries of loans previously charged off. The allowance is reduced by
charge-offs, in whole or in part, of problem loans. The allowance for possible
loan losses is based on continuous analysis of the loan portfolio and reflects
an amount which in management's judgment is adequate to provide for possible
loan losses in the existing portfolio. In evaluating the portfolio, management
considers numerous factors, such as the Bank's loan growth, prior loss
experience, present and potential risks of the loan portfolio and current
economic conditions and entails management's review of delinquency reports, loan
to value ratios, collateral condition and debt coverage ratios.
(g) Premises and Equipment
Depreciation is computed on the straight-line method over the estimated
useful life of the related assets. Estimated lives are 15 to 60 years for
buildings and 5 to 8 years for furniture and fixtures. Amortization for
leasehold improvements is computed on the straight-line method over the lesser
of the term of the lease or the asset's estimated useful life. Premises and
equipment are carried at cost, net of accumulated depreciation.
(h) Real Estate Held for Investment
Real estate held for investment represents real estate properties financed,
owned and operated by the Bank's subsidiaries. Significant improvements have
been made to the properties, thereby increasing the amount invested in
individual properties. The properties were initially recorded at the lower of
cost or fair value at acquisition (if foreclosed property) or cost (if
purchased) and subsequently increased by capital improvements and decreased by
depreciation. Management monitors each investment on a continuous basis.
Valuation allowances for estimated losses on real estate held for investment are
provided when a significant and permanent decline in value occurs.
In the event of a change in classification from "held for investment" to
"held for sale", the property's carrying value is compared to fair value less
estimated selling costs (i.e. net fair value). If the carrying value exceeds net
fair value, the investment is adjusted down through a valuation allowance, and
subsequently carried at the lower of the carrying value or net fair value.
(i) Real Estate Held for Sale and Other Real Estate
Real estate held for sale is carried at lower of cost or net fair value.
Gains on the sale, if any, are accounted for using the cost recovery method.
Revenues and expenses from the operations are reflected, as incurred, in the
Company's operating results. (See Note 12.)
Real estate properties acquired through foreclosure, known as other real
estate (ORE), are recorded at the lower of the net unpaid loan balance at the
foreclosure date plus related costs, or net fair value. Subsequent valuation
adjustments are made if the net fair value decreases below the carrying amount.
Gains, if any, on the sale of ORE are accounted for using the cost recovery
method.
<PAGE>
(j) Income Taxes
The Company follows SFAS No. 109, "Accounting for Income Taxes" (Statement
109), which requires the asset and liability method of accounting for income
taxes. Under the asset liability method, deferred income taxes are recognized
for the tax consequences of "temporary differences" by applying enacted
statutory tax rates, applicable to future years, to differences between the
financial statement carrying amounts and the tax basis of existing assets and
liabilities. Under Statement 109, deferred tax assets are recognized if it is
more likely than not that a future benefit will be realized. It is management's
position, as currently supported by the facts and circumstances, that no
valuation allowance is necessary against any of the Company's deferred tax
assets (See Notes 15 and 17.)
(k) Earnings Per Share
Earnings per share is based on net income for the periods presented,
divided by the sum of the weighted average number of shares actually outstanding
plus common stock equivalents. Common stock equivalents are computed under the
treasury stock method. For the years ended December 31, 1996, 1995 and 1994,
weighted average common stock and common stock equivalents, used to compute
primary earnings per share, were 10,531,000, 11,138,000 and 11,663,000,
respectively.
(l) Reclassification
Reclassifications have been made to prior year financial statements to
conform with the 1996 presentation.
(m) Treasury Stock
Repurchases of common stock are accounted for under the cost method,
whereby shares repurchased are recorded in a contra-equity account. (See Note
2.)
<PAGE>
(n) Adoption of Accounting Standards
Stock Based Compensation
------------------------
In October, 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, "Accounting for Stock-Based Compensation" (Statement 123).
Statement 123 applies to all transactions in which an entity acquires goods or
services by issuing equity instruments or by incurring liabilities where the
payment amounts are based on the entity's common stock price, except for
employee stock ownership plans.
Statement 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 25
(Opinion 25). Statement 123 does not require an entity to adopt the new fair
value based method for purposes of preparing its basic financial statements.
While the Statement 123 fair value based method is considered by the FASB to be
preferable to the Opinion 25 method, entities may opt to continue to use the
method prescribed by Opinion 25. Entities not adopting the fair value based
method under Statement 123 are required to present pro forma net income and
earnings per share, in the notes to the financial statements, as if the fair
value based method had been adopted.
The accounting requirements of Statement 123 are effective for transactions
entered into during fiscal years that begin after December 15, 1995. The
disclosure requirements became effective for financial statements for fiscal
years beginning after December 15, 1995, or for any earlier fiscal year for
which Statement 123 is initially adopted for recognizing compensation cost. Pro
forma disclosures required for entities that elect to continue to measure cost
using the Opinion 25 method must include the effects of all awards granted in
fiscal years that begin after December 15, 1994. Pro forma disclosures for
awards granted in the first fiscal year beginning after December 15, 1994, need
not be included in financial statements for that fiscal year but should be
presented subsequently whenever financial statements for that fiscal year are
presented for comparative purposes with financial statements for a later year.
During 1996, the Company adopted the disclosure provisions of Statement 123 and
continues to measure cost using the Opinion 25 method for purposes of preparing
its consolidated financial statements. Therefore, Statement 123 had no impact on
the Company's financial condition or results of operation. (See Note 22.)
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
-------------------------------------------------------------------------
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (Statement
121). This statement requires that long-lived assets and certain identifiable
intangibles, and goodwill related to those assets to be held and used and
long-lived assets and certain identifiable intangibles to be disposed of, be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
<PAGE>
In performing the review for recoverability, the entity should estimate the
future cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the asset, an
impairment loss is recognized. Otherwise, an impairment loss is not recognized.
Measurement of an impairment loss for long-lived assets and identifiable
intangibles that an entity expects to hold and use should be based on the fair
value of the asset.
Statement 121 generally requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell.
Statement 121 became effective for fiscal years beginning after December
15, 1995, applied prospectively. The Company's adoption of Statement 121,
effective January 1, 1996, had no material impact on its financial condition or
results of operations.
Mortgage Servicing Rights
-------------------------
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights" (Statement 122). Statement 122 amends SFAS No. 65, "Accounting
for Certain Mortgage Banking Activities" (Statement 65), to require that a
company recognize, as separate assets, rights to service mortgage loans for
others, regardless of how those servicing rights are acquired. A company that
acquires mortgage servicing rights through either the purchase or origination of
mortgage loans and sells or securitizes those loans with servicing rights
retained should allocate the total cost of the mortgage loans to the mortgage
servicing rights and the loans (without the mortgage servicing rights) based on
their relative fair values if it is practicable to estimate those fair values.
This statement also requires that a company assess its capitalized mortgage
servicing rights for impairment based on an estimated fair value of those
rights.
Statement 122 became effective for fiscal years beginning after December
15, 1995, applied prospectively. The Company's adoption of Statement 122,
effective January 1, 1996 has not resulted in the recognition of mortgage
servicing rights as separate assets, as the Company's sales of mortgage loans
with servicing retained have been immaterial.
<PAGE>
(o) Impact of New Accounting Standards Not Yet Adopted
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities
-----------
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (Statement
125). Statement 125 establishes accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial components approach that focuses on
control. Under this approach, an entity, subsequent to a transfer of financial
assets, must recognize the financial and servicing assets it controls and the
liabilities it has incurred, derecognize financial assets when control has been
surrendered, and derecognize liabilities when extinguished. Standards for
distinguishing transfers of financial assets that are sales from those that are
secured borrowings are provided in Statement 125. A transfer not meeting the
criteria for a sale must be accounted for as a secured borrowing with pledged
collateral.
Statement 125 requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be initially
measured at fair value, if practicable. It additionally requires that servicing
assets and other retained interests in transferred assets be measured by
allocating the previous carrying amount between the assets sold, if any, and
retained interests, if any, based on their relative fair values at the date of
transfer. Servicing assets and liabilities must be subsequently measured by
amortization in proportion to and over the period of estimated net servicing
income or loss and assessed for asset impairment, or increased obligation, based
on their fair value.
Statement 125 requires that a liability be derecognized if either (a)
the debtor pays the creditor and is relieved of its obligation for the liability
or (b) the debtor is legally released from being the primary obligor under the
liability either judicially or by the creditor.
Statement 125 provides implementation guidance for assessing isolation of
transferred assets and for accounting for transfers of partial interests,
servicing of financial assets, securitizations, transfers of sales-type and
direct financing lease receivables, securities lending transactions, repurchase
agreements including "dollar rolls", "wash sales", loan syndications and
participations, risk participations in banker's acceptances, factoring
agreements, transfers of receivables with recourse and extinguishments of
liabilities.
Statement 125 supersedes FASB Statements No. 76, "Extinguishment of Debt"
and No. 77, "Reporting by Transferors for Transfer of Receivables with
Recourse". Statement 125 amends Statement 115, to prohibit the classification of
a debt security as held-to-maturity if it can be prepaid or otherwise settled in
such a way that the holder of the security would not recover substantially all
of its recorded investment. Statement 125 further requires that loans and other
assets that can be prepaid or otherwise settled in such a way that the holder
would not recover substantially all of its recorded investment shall be
subsequently measured like debt securities classified as available-for-sale or
trading under Statement 115, as amended by Statement 125. Statement 125 also
amends and extends to all servicing assets and liabilities the accounting for
mortgage servicing rights now in Statement 65, and supersedes Statement 122.
<PAGE>
In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement 125". As amended, Statement 125 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, except that its provisions with
respect to securities lending, repurchase agreements and dollar-roll
transactions are effective for transfers occurring after December 31, 1997.
The Company does not expect that the adoption of Statement 125, as amended,
will have a material affect on its financial condition or results of operations.
NOTE (2) STOCK REPURCHASE PROGRAMS
During the years ended December 31, 1996, 1995 and 1994, the Company
repurchased 845,000, 339,485 and 1,116,515 shares at an average price of $32.72,
$29.11 and $23.65 per share, respectively. The Company issued 123,256, 161,860
and 131,104 shares of treasury stock for options exercised during 1996, 1995 and
1994, respectively. There were 6,216,969 and 5,495,225 shares of common stock in
the treasury at December 31, 1996 and 1995, respectively.
<PAGE>
NOTE (3) SECURITIES
The following tables set forth information regarding the Company's
securities as of December 31:
<TABLE>
<CAPTION>
1996
----
Securities Available-for-Sale:
- ------------------------------
Estimated Gross Unrealized
Cost Fair Value Gains Losses
---- ---------- ----- ------
(In Thousands)
<S> <C> <C> <C> <C>
Marketable equity securities $ 11,692 $ 51,021 $39,368 $ 39
======== ======== ======= =======
Securities Held-to-Maturity:
- ----------------------------
Estimated
Amortized Fair Gross Unrealized
Cost Value Gains Losses
---- ----- ----- ------
(In Thousands)
U.S. Government and Federal
Agency securities $299,645 $300,262 $ 617 $ -
CMOs, net 155,272 155,421 436 287
MBS:
GNMA 4,999 5,455 456 -
FNMA 152 166 14 -
FHLMC 441 480 39 -
-------- -------- ------- -------
Total MBS, net 5,592 6,101 509 -
-------- -------- ------- -------
Total $460,509 $461,784 $ 1,562 $ 287
======== ======== ======= =======
1995
----
Securities Available-for-Sale:
- ------------------------------
Estimated Gross Unrealized
Cost Fair Value Gains Losses
---- ---------- ----- ------
(In Thousands)
Marketable equity securities $ 11,650 $ 40,071 $28,488 $ 67
======== ======== ======= =======
Securities Held-to-Maturity:
- ----------------------------
Estimated
Amortized Fair Gross Unrealized
Cost Value Gains Losses
---- ----- ----- ------
(In Thousands)
U.S. Government and Federal
Agency securities $439,896 $441,183 $ 1,311 $ 24
CMOs, net 144,607 144,404 212 415
MBS:
GNMA 6,667 7,428 761 -
FNMA 235 260 25 -
FHLMC 655 716 61 -
-------- -------- ------- -------
Total MBS, net 7,557 _8,404 847 -
-------- -------- ------- -------
Total $592,060 $593,991 $ 2,370 $ 439
======== ======== ======= =======
<FN>
GNMA - Government National Mortgage Association
FNMA - Federal National Mortgage Association
FHLMC - Federal Home Loan Mortgage Corporation
</FN>
</TABLE>
<PAGE>
CMOs represent participating interests in pools of long-term first mortgage
loans originated and serviced by the issuers of the securities. All of the CMOs
held by the Company consist of First Tranche-Planned Amortization Class Bonds
collateralized by FNMA, FHLMC and GNMA mortgage-backed securities which in turn
are collateralized by whole loans. MBS represent securities issued by
governmental mortgage agencies and collateralized by mortgage loans.
During 1996, the Bank sold or redeemed marketable equity securities
totaling $30,000, realizing gross gains of $4,000 and gross losses of $2,000.
There were no sales of securities during the years ended December 31, 1995 or
1994.
Presented in the table below is the contractual maturity distribution, for
debt securities held-to-maturity at December 31, 1996:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---- -----
(In Thousands)
<S> <C> <C>
Within 1 year $179,829 $179,918
After 1 year through 5 years 177,617 178,374
After 5 years through 10 years 99,623 99,769
After 10 years 3,440 3,723
-------- --------
Total $460,509 $461,784
======== ========
</TABLE>
Actual maturities of CMOs and MBS may differ substantially from the
presentation, due to prepayment activity. The table reflects the balance of the
entire security in the category in which the final contractual payment is due.
The Bank loans securities to specified brokerage houses. These loaned
securities are collateralized at a minimum of 102% of their fair value with
government securities and/or cash. To protect the Bank's investment, the
agreements contain provisions to increase the collateral obtained, should the
fair value of the collateral decline or the fair value of the security loaned
increase. Upon termination of the agreement, securities loaned are returned to
the Bank. The following table reflects the carrying value of securities loaned
and their estimated fair value and the estimated fair value of the collateral at
December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
Amortized cost - Securities loaned $ - $ 18,500
======== ========
Estimated fair value - Securities loaned $ - $ 18,557
======== ========
Estimated fair value - Collateral $ - $ 19,256
======== ========
</TABLE>
<PAGE>
NOTE (4) OTHER INVESTMENTS
<TABLE>
<CAPTION>
Other investments at December 31, 1996 and 1995 were as follows:
1996 1995
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C>
Investment required by law* $ 6,829 $ 6,829 $ 6,272 $ 6,272
Other stock 30 30 30 30
-------- -------- -------- --------
Total other investments $ 6,859 $ 6,859 $ 6,302 $ 6,302
======== ======== ======== ========
<FN>
* The Bank is required to hold shares of the Federal Home Loan Bank of New York.
</FN>
</TABLE>
NOTE (5) LOANS
<TABLE>
<CAPTION>
Loans are summarized as follows:
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
(In Thousands)
Mortgage loans:
One-to four-family $ 76,848 $ 82,391
Multi-family 433,224 344,337
Underlying cooperative* 262,221 263,972
Commercial 61,829 55,662
Construction 1,836 1,492
-------- --------
Total mortgage loans 835,958 747,854
-------- --------
Deferred loan fees and unearned
discounts (3,730) (4,242)
Allowance for possible loan losses (5,176) (4,575)
-------- --------
Total mortgage loans, net $827,052 $739,037
======== ========
Other loans:
Student $ 6,204 $ 7,466
Consumer 4,350 4,092
Loans secured by deposit accounts 8,328 8,489
Overdraft loans 237 220
Property improvement 8,775 9,165
-------- --------
Total other loans 27,894 29,432
-------- --------
Unearned discounts (21) (102)
Allowance for possible loan losses (151) (122)
-------- --------
Total other loans, net $ 27,722 $ 29,208
======== ========
<FN>
* Underlying cooperative loans are first liens on cooperative property and are
senior to loans on the individual units commonly called cooperative share loans.
</FN>
</TABLE>
<PAGE>
NOTE (6) LOAN DELINQUENCIES
Information regarding loans delinquent 90 days or more at December 31, 1996
and 1995 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
Number Principal Number Principal
of balance of balance
loans of loans loans of loans
----- -------- ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Delinquent loans:
Guaranteed* 144 $ 692 132 $ 751
Non-guaranteed 15 13,459 8 324
--- ------- --- ------
Total delinquencies
over 90 days 159 $14,151 140 $1,075
=== ======= === ======
Ratio of loans 90 days
or more past due to
total gross loans 1.64% .14%
==== ===
<FN>
*These loans are guaranteed by the Federal Housing Administration, the Veterans
Administration or New York State Higher Education Services Corporation.
</FN>
</TABLE>
At December 31, 1996, there was one mortgage loan with a balance of
$12,754,000 on non-accrual status. At December 31, 1995 there were two loans
totaling $20,903,000 on non-accrual status comprised of a $12,754,000 underlying
cooperative mortgage which was 60 days in arrears and an $8,149,000 multi-family
property mortgage which was current and being accounted for on a cash basis, as
payments were received through the bankruptcy court. Net interest income was
reduced by approximately $1,180,000, $197,000 and $150,000 for the years ended
December 31, 1996, 1995 and 1994 in connection with non-accrual loans.
<TABLE>
<CAPTION>
The following table summarizes information regarding the Company's impaired
loans at December 31:
1996
----
Allowance
Recorded for Loan Net
Investment Losses Investment
---------- ------ ----------
(In Thousands)
<S> <C> <C> <C>
Underlying Cooperative:
With a related allowance $ - $ - $ -
Without a related allowance 12,754 - 12,754
------- ------- -------
Total Impaired Loans $12,754 $ - $12,754
======= ======= =======
</TABLE>
There were no impaired loans at December 31, 1995.
There were no loans included in the above table which were modified in a
TDR. The entire balance of impaired loans at December 31, 1996 represents loans
on non-accrual status. The average balance of impaired loans for 1996 and 1995
was $12,754,000 and $208,000, respectively. There was no interest income
recorded for impaired loans (for the period in which the loans were identified
as impaired) during 1996 and 1995. For the years ended December 31, 1996 and
1995, impaired loans resulted in foregone interest of $1,180,000 and $29,000,
respectively. At December 31, 1996 and 1995, loans restructured in a TDR, other
than those classified as impaired loans and/or non-accrual loans, were
$1,874,000 and $1,663,000, respectively. Interest forfeited attributable to
these loans was $62,000, $62,000 and $6,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
<PAGE>
NOTE (7) ALLOWANCE FOR POSSIBLE LOAN LOSSES
Activity in the allowance for possible loan losses for the years ended
December 31, 1996, 1995 and 1994 is summarized as follows:
<TABLE>
<CAPTION>
Mortgage loans Other loans
-------------- -----------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $4,575 $3,976 $4,000 $122 $109 $136
Provision for possible loan losses 600 600 600 40 36 8
Loans charged off - (1) (624) (33) (43) (40)
Recoveries of loans previously
charged off 1 - - 22 20 5
------ ------ ------ ---- ---- ----
Balance at end of period $5,176 $4,575 $3,976 $151 $122 $109
====== ====== ====== ==== ==== ====
</TABLE>
NOTE (8) MORTGAGE LOAN SERVICING
A summary of principal balances, servicing income and the number of loans
serviced for others by the Bank at and for the years ended December 31, 1996,
1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Principal balances $16,016 $18,381 $21,605
======= ======= =======
Servicing income $ 39 $ 47 $ 81
======= ======= =======
Number of loans 1,494 2,023 2,623
===== ===== =======
</TABLE>
The balance of loans sold with full recourse was $7,366,000 and $10,330,000
at December 31, 1996 and 1995, respectively. The Bank has not sold any loans
with recourse since 1985. The Bank sold, without recourse, $1,715,000 and
$1,792,000 of mortgage loans to FNMA and/or the State of New York Mortgage
Association (SONYMA) during 1996 and 1995, respectively. The Bank retained
servicing for these loans, which did not result in any servicing assets.
NOTE (9) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1996 and 1995 consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
Banking houses and land $21,493 $20,542
Furniture, fixtures and equipment 15,086 14,179
Safe deposit vaults 1,016 1,016
------- -------
37,595 35,737
Less accumulated depreciation and
amortization 20,766 20,580
------- -------
Premises and equipment, net $16,829 $15,157
======= =======
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1996, 1995 and 1994 was $1,826,000, $1,920,000 and $1,847,000, respectively.
<PAGE>
NOTE (10) INTEREST DUE AND ACCRUED
Interest due and accrued at December 31, 1996 and 1995 consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
U.S. Government and Agencies $ 2,655 $ 6,455
CMOs 739 641
MBS 51 71
Mortgage and other loans 5,865 5,740
------- -------
$ 9,310 $12,907
======= =======
</TABLE>
NOTE (11) REAL ESTATE HELD FOR INVESTMENT
Through its wholly-owned subsidiaries, the Bank has investments in real
estate. At December 31, 1996 and 1995, components of the net asset amounts of
real estate held for investment were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
Buildings, net $ 4,000 $ 4,033
Land 1,561 1,561
Accrued interest and other assets 1,385 1,708
Other liabilities (864) (907)
------- -------
Net assets $ 6,082 $ 6,395
======= =======
</TABLE>
The summarized statements of income of the Bank's wholly-owned subsidiaries
that comprise real estate held for investment, for the years ended December 31,
1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Rental income $ 4,020 $ 4,236 $ 4,040
Net interest income 4 5 4
Other income 652 210 317
------- ------- -------
Total income 4,676 4,451 4,361
------- ------- -------
Real estate taxes 566 574 576
Operating and other expenses 3,087 3,376 3,640
------ ------- -------
Total expenses 3,653 3,950 4,216
------ ------- -------
Income from real estate held
for investment $1,023 $ 501 $ 145
====== ======= ========
</TABLE>
<PAGE>
NOTE (12) REAL ESTATE HELD FOR SALE AND OTHER REAL ESTATE
Real Estate Held for Sale
Condominium Property: The Bank, through its wholly-owned subsidiary Sher
Park Realty Corp. (Sher Park), was originally a 50% partner with a general
contractor in Jade Associates (Jade). Jade was a joint venture formed to
construct and subsequently sell an 84 unit condominium complex in Flushing, New
York. During 1993, Jamlyn Realty Corp., another of the Bank's wholly owned
subsidiaries, acquired the general contractor's ownership share. During 1996, 12
units were sold, resulting in deferred gains of $104,000, as sales in this
property are being accounted for under the cost recovery method. At December 31,
1996, of the remaining 49 units, 42 were rented and 7 were vacant. On a
consolidated basis, for the years ended December 31, 1996, 1995 and 1994, this
investment generated pretax income of $173,000, $137,000 and $240,000,
respectively. At December 31, 1996 and 1995, the net investment in the property
was $4,589,000 and $6,111,000, respectively.
Cooperative Apartments: Several of the Bank's wholly owned subsidiaries
own cooperative apartments in various buildings, which are carried at zero cost.
At December 31, 1996 and 1995, 158 and 183 cooperative apartments remained
available for sale, respectively.
Other Real Estate
ORE at December 31, 1996 and 1995 totaled $647,000 and $1,203,000,
respectively. The aggregate (income from)/cost of ORE operations was ($772,000),
$209,000 and $200,000 for the years ended December 31, 1996, 1995, and 1994,
respectively. During 1996, two ORE properties were sold, generating a net gain
of $688,000, comprised of a $705,000 gain and a $17,000 loss. There were no
sales of ORE during 1995 or 1994. There were no provisions established against
ORE during the years ended December 31, 1996, 1995 or 1994.
During 1994, as part of the workout of a $1,877,000 mortgage loan secured by
a cooperative building, the Bank, through a subsidiary corporation, took title
to cooperative shares representing 57 apartments in an 82 unit cooperative
property, located in Brooklyn, New York. As part of the agreement, the Bank made
an additional five year loan to the cooperative to make improvements to the
building and pay expenses of the cooperative association. At December 31, 1996
and 1995, the balance of the additional loan was $386,000 and $491,000,
respectively. In addition, the mortgage loan was extended for an additional five
years at 7.25% on February 1, 1994, the scheduled maturity.
In connection with this transaction, $1,622,000, representing the
proportionate share of the Bank's interest in the $2,379,000 cooperative
indebtedness to the Bank, was reclassified from mortgage loans to ORE on the
Company's consolidated financial statements as of December 31, 1994. The amount
included in ORE is based on the percentage of cooperative shares owned by the
Bank's subsidiary to the total cooperative shares outstanding. The amount that
remained included in mortgage loans was $1,311,000 and $1,092,000 at December
31, 1996 and 1995, respectively. The carrying amount of this property is
increased by capitalized improvements, not to exceed net fair value, and
reported net of deferred gains. At December 31, 1996, cumulative gains of
$347,000 on the sale of 24 units were deferred. At December 31, 1996, 33 units
were owned by the Bank's subsidiary, of which 32 were rented and 1 was vacant
and being marketed for sale. This property accounted for $607,000 of the
$647,000 in ORE at December 31, 1996.
<PAGE>
NOTE (13) REAL ESTATE OPERATIONS, NET
Results of real estate operations for the years ended December 31, 1996,
1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Income from real estate held
for investment, net (See Note 11.) $1,023 $ 501 $ 145
------ ------ ------
Real estate held for sale:
Rental income 173 137 615
Gain on sale1 571 587 2,737
------ ------ ------
744 724 3,352
------ ------ ------
Real estate operations, net $1,767 $1,225 $3,497
====== ====== ======
<FN>
1 Includes gains on the sale of cooperative apartments, owned by various
of the Bank's wholly-owned subsidiaries, which are carried at zero cost. During
1994, the Company sold a 684 apartment complex, known as Bay Hill Gardens,
recognizing a pre-tax gain of $2,609,000.
</FN>
</TABLE>
NOTE (14) CLAIMS RECEIVABLE, NET
On February 6, 1995, the Superintendent of Banks for the State of New York
seized Nationar, a check-clearing and trust company, freezing all of Nationar's
assets. On that date, the Bank had: Federal funds sold to Nationar of
$10,000,000; demand accounts of $200,000 and $38,000 of Nationar capital stock.
In May, 1995, management, in accordance with the Company's standard procedures
for monitoring asset quality established a $2,040,000, or 20%, valuation
allowance against the claims receivable. During 1995, the Bank wrote off the
$38,000 stock investment.
During 1996, the Bank received distributions from the Nationar estate, for
all amounts invested, except the $38,000 of capital stock. Therefore, during the
fourth quarter of 1996, the Bank fully recovered the $2,040,000 reserve.
<PAGE>
NOTE (15) INCOME TAXES
The 1996, 1995 and 1994 provisions for income tax were comprised of the
following amounts:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Current:
Federal $12,870 $11,657 $12,724
State and local 5,630 5,344 5,379
------- ------- -------
18,500 17,001 18,103
------- ------- -------
Deferred:
Federal 703 (133) (57)
State and local 349 (265) (28)
------- ------- -------
1,052 (398) (85)
------- ------- -------
Provision for income taxes $19,552 $16,603 $18,018
======= ======= =======
</TABLE>
For the years ended December 31, 1996, 1995 and 1994, the Company
recognized tax benefits relating to its stock option and other stock benefit
plans of $599,000, $1,645,000 and $994,000, respectively, which were credited
directly to stockholders' equity.
A reconciliation of the statutory U.S. federal income tax provision and
rate, to the actual tax provision and effective rate for the years ended
December 31, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
% of % of % of
pre tax pre tax pre tax
Amount earnings Amount earnings Amount earnings
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Statutory rate $16,197 35.00% $13,572 35.00% $14,565 35.00%
Dividends received
exclusion (235) (.51) (218) (.56) (201) (.48)
State and local income
taxes, net of Federal
income tax benefit 3,886 8.40 3,301 8.51 3,478 8.36
Other, net (296) (.64) (52) (.13) 176 .42
------- ----- ------- ----- ------- -----
Provision for income taxes $19,552 42.25% $16,603 42.82% $18,018 43.30%
======= ===== ======= ===== ======= =====
</TABLE>
<PAGE>
<TABLE>
At December 31, 1996 and 1995, deferred tax assets and liabilities were
comprised of the following:
<CAPTION>
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
Deferred Tax Assets:
Deferred profits on unsold cooperative shares $ 2,308 $ 2,775
Allowance for possible loan losses 2,375 2,094
Benefit plan costs 1,877 1,898
Loan fees and mortgage discounts 517 699
Other 485 1,297
-------- -------
Deferred tax assets 7,562 8,763
-------- -------
Deferred Tax Liabilities:
Securities available-for-sale (17,534) (12,671)
Depreciation (46) (102)
Cash basis mortgages (144) (237)
-------- -------
Deferred tax liabilities (17,724) (13,010)
-------- -------
Deferred tax liability, net $(10,162) $(4,247)
======== =======
</TABLE>
Recently Enacted Tax Legislation
--------------------------------
Federal legislation regarding bad debt recapture was enacted into law on
August 20, 1996. The legislation requires recapture of reserves accumulated
after 1987 (the base year). The recapture tax on post 1987 reserves must be paid
over a six year period starting in 1996. The payment of the tax can be deferred
in each of 1996 and 1997 if an institution originated at least the same average
annual principal amount of mortgage loans that it originated in the six years
prior to 1996. The base year reserves and supplemental reserve are frozen, not
forgiven. These reserves continue to be segregated as they are subject to
recapture penalty if used for purposes other than to absorb losses on loans.
New York State adopted legislation to reform the franchise taxation of
thrift reserves for loan losses. The act applies to taxable years beginning
after December 31, 1995. The legislation, among other things, "decouples" New
York State's thrift bad debt provisions from the federal tax law, discussed
above. The New York State bad debt deduction will no longer be predicated on the
Federal deduction.
Management has evaluated the new Federal and New York State tax
legislation, and does not expect a material adverse impact on the operations or
financial condition of the Company or the Bank as a result of these tax law
changes.
To date, New York City has not changed its law regarding taxation of thrift
reserves for loan losses and accordingly will follow the new federal law
discussed above.
<PAGE>
NOTE (16) DUE TO DEPOSITORS
<TABLE>
Due to depositors at December 31, 1996 and 1995 are summarized as follows:
<CAPTION>
1996 1995
------------------------------ ----------------------------
Stated Stated
rate Amount Percent rate Amount Percent
---- ------ ------- ---- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance by interest rate:
Demand - % $ 31,940 2.79% - % $ 30,711 2.64%
N.O.W. 2.47 36,256 3.17 2.47 36,680 3.15
Money market 2.96 89,081 7.78 2.96 92,774 7.97
Passbook and lease
security 2.71 599,951 52.43 2.96 632,879 54.40
Certificates: - - - 3.70- 4.00 2,083 .18
4.14- 5.00 174,155 15.22 4.01- 5.00 135,386 11.64
5.01- 6.00 187,890 16.42 5.01- 6.00 203,054 17.45
6.01- 7.00 25,120 2.19 6.01- 7.00 29,016 2.49
7.01- 8.00 - - 7.01- 8.00 863 .08
---------- ------ ---------- ------
387,165 33.83 370,402 31.84
---------- ------ ---------- ------
Due to depositors $1,144,393 100.00% $1,163,446 100.00%
========== ====== ========== ======
</TABLE>
<TABLE>
At December 31, 1996 and 1995, the scheduled maturities of certificate
accounts were as follows:
<CAPTION>
1996 1995
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
12 months or less $323,788 83.63% $305,599 82.51%
13 to 24 months 34,452 8.90 31,738 8.57
25 to 36 months 13,939 3.60 14,039 3.79
37 to 48 months 14,969 3.87 10,270 2.77
49 to 60 months 17 - 8,756 2.36
-------- ------ -------- ------
$387,165 100.00% $370,402 100.00%
======== ====== ======== ======
</TABLE>
At December 31, 1996 and 1995, certificate accounts in excess of
$100,000, were $32,676,000 and $27,039,000, respectively. The Federal Deposit
Insurance Corporation, an agency of the U.S. Government, generally insures each
depositor's savings up to $100,000, through the Bank Insurance Fund.
<TABLE>
Interest expense on deposit balances is summarized as follows for the years
ended December 31, 1996, 1995 and 1994:
<CAPTION>
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Passbook and lease security $16,722 $19,063 $21,230
Certificates 19,777 17,649 10,995
Money market 2,819 3,051 3,397
N.O.W. 899 944 972
------- ------- -------
Total interest expense $40,217 $40,707 $36,594
======= ======= =======
</TABLE>
<PAGE>
NOTE (17) RETAINED INCOME, SUBSTANTIALLY RESTRICTED
In the unlikely event of a complete liquidation of the Bank (and only
in such an event) eligible depositors who continue to maintain accounts shall be
entitled to receive a distribution from the liquidation account, which was
established in connection with the Company's initial public stock offering. The
total amount of the liquidation account may be decreased if the balances of
eligible deposits decrease on the annual determination dates. The balance of the
liquidation account was $71,589,000 at December 31, 1996 and $80,230,000 at
December 31, 1995.
The Bank is not permitted to declare or pay a cash dividend on, or
repurchase any of its stock if the effect thereof would cause its net worth to
be reduced below either (i) the amount required for the liquidation account or
(ii) the amount of applicable regulatory capital requirements.
Retained income at December 31, 1996 and 1995 includes $85,107,000 and
$84,457,000, respectively, which has been segregated for federal income tax
purposes as a bad debt reserve. Any use of these amounts for purposes other than
to absorb losses on loans may result in taxable income, under federal
regulations, at current rates. The Bank recognized $661,000 in tax bad debt
deductions during the year ended December 31, 1996, $52,000 for 1995, and
$66,000 for 1994. (See Note 15, regarding recently enacted tax legislation.)
<PAGE>
NOTE (18) COMMITMENTS AND CONTINGENCIES
Lease Commitments
-----------------
The Bank occupies premises covered by noncancelable leases with expiration
dates through June 24, 2002 (exclusive of renewal options). Rental expense under
these leases for the years ended December 31, 1996, 1995 and 1994 was $267,000,
$262,000 and $256,000, respectively. At December 31, 1996, the projected minimum
rental payments (exclusive of possible rent escalation charges and normal
recurring charges for maintenance, insurance and taxes) are as follows:
<TABLE>
<CAPTION>
Years Ending
December 31, Amount
------------ ------
(In Thousands)
<S> <C>
1997 $ 182
1998 147
1999 142
2000 115
2001 50
Thereafter 9
------
Total $ 645
======
</TABLE>
Loan Commitments
----------------
At December 31, 1996 and 1995, commitments to originate mortgage loans at
fixed rates were $34,376,000 with stated rates ranging from 7.38% to 8.00% and
$41,678,000 with stated rates ranging from 6.50% to 8.38%, respectively. There
were no commitments to originate adjustable rate mortgages at December 31, 1996
and 1995. At December 31, 1996 and 1995, deposit account overdraft lines
available were $745,000 and $723,000, respectively, with stated rates ranging
from 10.00% to 12.00% and unused business lines of credit were $16,000 and
$14,000, respectively, with a stated rate of 15.00%. There were no loans held
for sale at December 31, 1996 and $94,000 at December 31, 1995.
Security Purchase Commitments
-----------------------------
At December 31, 1996, there were commitments to purchase $45,000,000 of
federal agency securities and no commitments to purchase equity securities, CMOs
or MBS.
Litigation
----------
The Bank is a defendant in several lawsuits arising out of the normal
conduct of business. In the opinion of management, after consultation with legal
counsel, the ultimate outcome of these matters is not expected to have a
material adverse effect on the Company's results of operations, business
operations or the consolidated financial condition of the Company.
<PAGE>
NOTE (19) PENSION PLAN
Retirement Plan of Jamaica Savings Bank
---------------------------------------
The Bank sponsors a trusteed non-contributory defined benefit pension plan
(the Pension Plan) covering substantially all of its full-time employees. It is
the policy of the Bank to fund current and past service pension costs accrued.
The following table sets forth the Pension Plan's funded status and amounts
recognized in the Company's consolidated financial statements at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $24,451,000 and
$24,962,000 at December 31, 1996 and 1995,
respectively $(26,001) $(25,976)
======== ========
Projected benefit obligation for services
rendered to date (36,701) (36,374)
Plan assets at fair value, primarily listed
stocks and U.S. bonds 52,873 47,322
-------- --------
Plan assets in excess of projected benefit
obligation 16,172 10,948
Unrecognized net gain from past experience
different from that assumed and effects of
changes in assumptions (9,801) (4,980)
Unrecognized prior service cost 1,721 1,867
Unrecognized net asset being amortized over
18.35 years (3,794) (4,248)
-------- --------
Prepaid pension cost $ 4,298 $ 3,587
======== ========
</TABLE>
<TABLE>
The components of net periodic pension income for the years ended
December 31, 1996, 1995, and 1994, are as follows:
<CAPTION>
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Service cost-benefits earned $ 1,078 $ 619 $ 913
Interest cost on projected
benefit obligation 2,239 2,066 1,962
Actual return on plan assets (7,140) (10,631) 1,184
Net amortization and deferral 3,112 7,184 (4,719)
-------- -------- -------
Net periodic pension (income) $ (711) $ (762) $ (660)
======== ======== =======
</TABLE>
The expected long-term rate of return on assets was 8.00% for the years
ended December 31, 1996, 1995 and 1994. The following actuarial assumptions have
been made to determine the actuarial present value of the projected benefit
obligation for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Rate of increase in future compensation 6.50% 6.50% 6.50%
Weighted average discount rate 6.50% 6.00% 8.00%
</TABLE>
<PAGE>
Jamaica Savings Bank Benefit Restoration Plan-Pension
-----------------------------------------------------
The Bank sponsors a pension benefit restoration plan (Pension Restore Plan)
to provide retirement benefits which would have been provided under the Pension
Plan except for limitations imposed by Section 415 of the Internal Revenue Code.
Payments under the Pension Restore Plan will be paid out of the general assets
of the Bank.
<TABLE>
The following sets forth the Pension Restore Plan's status and amounts
recognized in the Company's consolidated financial statements at December 31:
<CAPTION>
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $3,936,000 and $3,468,000
at December 31, 1996 and 1995, respectively $(3,936) $(3,468)
Projected benefit obligation for service
rendered to date (4,607) (4,204)
Plan assets at fair value - -
------- -------
Projected benefit obligations in excess of
plan assets (4,607) (4,204)
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions 1,003 1,092
Unrecognized prior service cost (4) (4)
Additional minimum liability (328) -
------- -------
Accrued pension cost $(3,936) $(3,116)
======= =======
</TABLE>
<TABLE>
The components for the net periodic Pension Restore Plan cost for the years
ended December 31, 1996, 1995 and 1994, are as follows:
<CAPTION>
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Interest cost on projected benefit obligation $ 274 $ 264 $ 232
Net amortization and deferral 252 41 184
------- ------- -------
Net periodic Pension Restore Plan cost $ 526 $ 305 $ 416
======= ======= =======
</TABLE>
<TABLE>
The following actuarial assumptions have been made to determine the
projected benefit obligation for the years ended December 31:
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Rate of increase in future compensation 6.50% 6.50% 6.50%
Weighted average discount rate 6.50% 6.00% 8.00%
</TABLE>
<PAGE>
NOTE (20) POST RETIREMENT BENEFITS, OTHER THAN PENSIONS
The Bank's life insurance benefit plan provides for continued coverage for
retirees with fifteen years of credited service. The coverage at the time of
retirement is reduced by 20% per year over a five year period to a minimum
coverage of $5,000, which remains in force until death. The retiree has the
option each time the coverage is reduced to convert all or part of the reduction
to regular life insurance at the retiree's cost based on his/her attained age
and without medical examination.
The net periodic cost, before income taxes, related to the Bank's
postretirement life insurance benefits for the years ended December 31, 1996,
1995 and 1994, was $70,000, $64,000 and $74,000, respectively. This periodic
cost is included in the current cost of compensation and benefits.
NOTE (21) INCENTIVE SAVINGS PLAN
The Incentive Savings Plan (the Savings Plan) is a defined contribution and
thrift savings plan. Prior to the suspension of the Savings Plan during 1990,
all full-time employees were eligible for voluntary participation after one year
of continuous service. The Savings Plan continues to earn income on the Savings
Plan's investments. It is subject to the provisions of the Employee Retirement
Income Security Act of 1974 (ERISA), as amended. The Bank bears the costs of
administering the Savings Plan.
In connection with the Bank's adoption of an ESOP during 1990, in order to
comply with the limitations set forth by the Internal Revenue Code regarding
qualified plans, no further contributions have been made to the Savings Plan.
During 1994, management determined to continue the ESOP and that contributions
to the Savings Plan would remain suspended indefinitely.
NOTE (22) STOCK OPTION PLANS
Effective upon the conversion of the Bank in 1990 from mutual to stock form
of ownership (the Conversion), the Company adopted the Incentive Stock Option
Plan (the Stock Option Plan) and the Option Plan for Outside Directors (the
Directors' Option Plan).
Stock Option Plan Under the Stock Option Plan, 1,430,000 common stock
options (which expire ten years from the date of grant, June 27, 1990) were
granted to the executive officers and employees of the Company and its
subsidiary, the Bank. Each option entitles the holder to purchase one share of
the Company's common stock at an exercise price equal to $10.00 per share (the
initial public offering price). Options became exercisable on a cumulative basis
in equal installments at a rate of 20% per year commencing one year from the
date of grant. Simultaneously with the grant of these options, "limited rights"
with respect to the shares covered by the options were granted. Limited rights
granted are subject to terms and conditions and can be exercised only in the
event of a change in control of the Company. Upon exercise of a limited right,
the holder shall receive from the Company a cash payment equal to the difference
between the exercise price of the option ($10.00) and the fair market value of
the underlying shares of common stock. During the years ended December 31, 1996,
1995 and 1994, 121,256, 161,860 and 128,604 options granted under the Stock
Option Plan were exercised, respectively. At December 31, 1996, the remaining
446,786 options granted under the Stock Option Plan were exercisable.
Directors' Option Plan Each member of the Board of Directors, who is not
an officer or employee of the Company or the Bank, was granted nonstatutory
common stock options to purchase 25,000 shares of the common stock. In addition,
active Directors Emeritus were each granted nonstatutory common stock options to
purchase 10,000 shares of the common stock. In the aggregate, members of the
Board of Directors and active Directors Emeritus of the Company were granted
options to purchase 170,000 shares of the common stock of the Company at an
exercise price equal to $10.00 per share (the initial public offering price)
with limited rights. All options granted, including limited rights attached
thereto, under the Directors' Option Plan expire upon the earlier of 10 years
following the date of grant or one year following the date the optionee ceases
to be a director. There were 2,000 options exercised under the Directors' Option
Plan during 1996, no options exercised during 1995 and 2,500 options exercised
during calendar 1994, respectively. At December 31, 1996, 153,000 options
granted under the Directors' Option Plan were exercisable.
<PAGE>
The 1996 Stock Option Plan On December 12, 1995, the Board of Directors
adopted the JSB Financial, Inc. 1996 Stock Option Plan (the 1996 Option Plan),
which became effective January 1, 1996, subject to stockholder approval, which
was obtained on May 14, 1996. The Company reserved 800,000 shares of common
stock of the Company for issuance upon the exercise of options. The 1996 Option
Plan provides for: (1) the grant of stock options to directors on an annual
basis pursuant to a specified formula; (2) the grant of stock options to
officers at the discretion of the Employee Benefits Committee of the Bank; (3)
if certain events, which are likely to lead to a change in control of the
Company or the Bank, should occur, stock options relating to any shares of the
Company reserved for issuance that were not previously made subject to options,
will be granted to all current directors and officers who were previously
granted stock options under the 1996 Option Plan; (4) the grant of limited
rights relating to all of the foregoing options, which shall be exercisable only
upon a change of control; and (5) the grant of dividend equivalent rights (DER)
relating to all of the foregoing options, which may provide for a cash payment
to the optionee upon exercise of the option, based on the difference between the
percentage of earnings per share paid by the Company as cash dividends compared
to the percentage of earnings per share paid as cash dividends by the
twenty-five largest stock owned thrift institutions in the United States,
calculated on an annual basis.
Under the 1996 Option Plan, each member of the Board of Directors, who
is not an officer or employee of the Company or the Bank, is granted
nonstatutory common stock options to purchase 4,000 shares of the common stock,
each active Director Emeritus is granted 2,000 options and individuals who
become directors are granted 5,000 options. In the aggregate, members of the
Board of Directors and the active Director Emeritus of the Company were granted
options, with limited rights, to purchase 39,000 shares and the Company's
officers were granted options to purchase 126,000 shares of the common stock of
the Company. All options granted on January 1, 1996, were granted at an exercise
price of $31.625, the market closing price of the Company's common stock on the
business day before grant. The option period during which an individual granted
options may exercise such option will commence six months after the date of
grant and will expire no later than ten years from the date of the grant. At
December 31, 1996, all 165,000 options granted under the 1996 Option Plan were
exercisable and had a remaining contractual life of 9 years, as none of these
options expired or were exercised or forfeited. Effective January 1, 1997, an
additional 160,000 options were granted at an exercise price of $38.00 per
share.
<TABLE>
The following summarizes the pro forma net income as if the fair value
method of accounting for awards had been adopted for grants after January 1,
1995:
<CAPTION>
<S> <C>
Net income (as reported) $26,725
Pro forma net income $26,188
Net income per share (as reported) $2.54
Pro forma net income per share $2.49
</TABLE>
The pro forma results presented above may not be representative of the
effects reported in pro forma net income for future years.
The fair value of the 1996 option grant was estimated using the
Black-Scholes option pricing model on the date of grant, using the following
assumptions: dividend yield of 3.63%, expected volatility of 21.9%, risk-free
interest rate of 5.44% and an expected option term of six years.
The Company modified the 1996 Stock Option Plan, as originally adopted,
to allow for the cash payment for the DER to option holders; rather than have
the DER reduce the exercise price of the option. This change separated the cost
of the DER from the cost of the option, and is expected to result in less
expense volatility. During 1996, the Company recognized $330,000 in expense
related to the options (for the difference in market closing price between grant
date and subsequent stockholder approval) and $99,000 of compensation expense
related to the DER.
<PAGE>
NOTE (23) STOCK PLANS
Employee Stock Ownership Plan In connection with the Conversion, the Bank
established an ESOP. The ESOP borrowed $12,800,000 from an unrelated third party
lender to purchase 1,280,000 shares of the Company's common stock. The final
payment of the ESOP loan was made during 1994, through the Bank's contributions.
Interest expense for the ESOP obligation was $25,000 for the year ended December
31, 1994.
During 1994, the Board of Directors adopted a resolution authorizing
additional contributions to the ESOP which commenced in 1995. Such additional
contributions to purchase shares are based on approximately 6.0% of employees'
base salary.
ESOP benefits generally become 20% vested after each year of credited
service, becoming 100% vested after five years of service with the Bank.
Forfeitures are reallocated among participating employees, in the same
proportion as contributions. Benefits are payable upon death, retirement, early
retirement, disability or separation from service and may be payable in cash or
stock. The Bank recorded a net expense of $550,000, $533,000 and $978,000
related to the ESOP for the years ended December 31, 1996, 1995 and 1994,
respectively. There were no unallocated shares at December 31, 1996 and 1995.
Dividends paid on the unallocated ESOP shares were $33,000 for the year ended
December 31, 1994, and were used to make principal payments on the obligation.
The trustee for the ESOP must vote all allocated stock held in the ESOP
trust in accordance with the instructions of the participants. Common stock
allocated to participants was 17,633, 21,583 and 104,472 for the years ended
December 31, 1996, 1995 and 1994, respectively. The Bank bears the cost of
administering the ESOP.
Bank Recognition and Retention Plans and Trusts In connection with the
Conversion, to provide employees, officers and directors of the Bank with a
proprietary interest in the Company and in a manner designed to retain such
individuals, the Bank established the Bank Recognition and Retention Plans
(BRRPs). The Bank contributed a total of $6.4 million to the BRRPs to enable
them to acquire an aggregate of 640,000 shares of the Company's common stock in
the Company's Conversion, all of which have been awarded. Awards vested at a
rate of 20% per year commencing one year from the date of the award. Awards
became 100% vested upon termination of employment due to death, disability or
normal retirement, or following a change in control of the Bank or the Company.
Unvested amounts represented deferred compensation and were reflected as a
reduction of stockholders' equity. Awards under the BRRPs were fully vested and
the BRRPs were terminated during 1995. The Bank recorded an expense of $594,000
and $835,000, for the BRRPs for the years ended December 31, 1995 and 1994,
respectively. Pursuant to the BRRPs, 51,631 and 98,815 shares of common stock
were vested during the years ended December 31, 1995 and 1994, respectively.
NOTE (24) BENEFIT RESTORATION PLAN
The Bank maintains a non-qualified Benefit Restoration Plan (the Restore
Plan), to compensate participants in the Bank's benefit plans that are limited
by Section 415 of the Internal Revenue Code. With certain exceptions, the
Restore Plan is unfunded. However, in connection with the ESOP, which entitles
participants to shares of the Company's common stock and the Savings Plan, which
entitles participants to direct amounts, if any, invested in the Company's
stock, the Bank established a trust. The purpose of this trust is to purchase,
on an ongoing basis, shares of the Company's common stock to which participants
of the Restore Plan are entitled. By establishing this trust, the Bank fixed the
amount of cash expended for amounts payable in shares of common stock of the
Company or its equivalent cash value at the time of payout. The shares of common
stock held by the trust are reflected as contra-equity and additional paid-in
capital on the Consolidated Statements of Financial Condition of the Company. At
December 31, 1996 and 1995, the trust held 166,848 shares of common stock, at an
aggregate cost of $3,275,000 and $3,270,000, respectively. The expense
recognized for the Restore Plan in connection with the ESOP for 1996, 1995 and
1994 was $105,000, $35,000 and $281,000, respectively.
<PAGE>
NOTE (25) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS Statement No. 107 "Disclosures about Fair Value of Financial
Instruments" (Statement 107) defines the fair value of a financial instrument as
the amount at which the instrument could be exchanged in a current transaction
between willing parties. Statement 107 provides limited guidance for calculating
fair value estimates when quoted prices are not available, therefore the Company
has disclosed the valuation approach and the material assumptions which have
been made. The relevance and reliability of the estimates of fair values
presented are limited, given the dynamic nature of market conditions, including
changes in interest rates, the real estate market, existing borrowers' financial
condition and numerous other factors over time.
<TABLE>
The following table presents carrying values and estimated fair values of
financial instruments at December 31:
<CAPTION>
1996 1995
----------------- --------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 99,394 $ 99,394 $ 85,893 $ 85,893
Securities available-for-sale 51,021 51,021 40,071 40,071
Securities held-to-maturity 460,509 461,784 592,060 593,991
Other investments 6,859 6,859 6,302 6,302
Mortgage loans, gross 835,958 846,508 747,854 785,742
Other loans, gross 27,894 27,970 29,432 29,517
Interest due and accrued 9,310 9,310 12,907 12,907
Financial liabilities
Deposits $1,144,393 $1,144,690 $1,163,446 $1,164,354
</TABLE>
The following methods and assumptions were utilized by management to estimate
the fair value of each class of financial instruments at December 31, 1996 and
1995:
Cash and cash equivalents, interest due and accrued: The carrying values
approximate fair value because of the short-term nature of these instruments.
Securities available-for-sale, securities held-to-maturity and other
investments: The estimated fair values are based on quoted market prices at the
reporting date for those or similar investments. (FHLB stock is recorded at
cost).
Mortgage and other loans: For certain homogeneous categories of loans, such
as some residential mortgages and student loans, fair value is estimated using
the quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. In addition, it is assumed that one-to
four-family fixed rate mortgage loans are FNMA qualifying, and could therefore
be packaged into a MBS. The estimated fair value for the remainder of the
mortgage and other loan portfolios was computed by discounting the contractual
future cash flows at rates offered by the Bank, which approximate market rates,
at December 31, 1996 and 1995 on loans with terms similar to the remaining term
to maturity and to borrowers with similar credit quality. The estimated fair
value of non-performing loans, if material, are calculated on an individual
basis, applying a discount commensurate with the credit risk.
Techniques for estimating fair value are extremely sensitive to the
assumptions and estimates used. While management has attempted to use
assumptions and estimates which it believes are most reflective of the loan
portfolio and the current market, a greater degree of subjectivity is inherent
in these values than those determined in formal trading marketplaces. As such,
readers are cautioned in using this information for purposes of evaluating the
financial condition and/or value of the Company in and of itself or in
comparison with any other company.
Deposits: All deposits, except certificates, are subject to rate changes at
any time, and therefore are considered to be carried at fair value. The
estimates of fair value for certificates reflect the present value of the
contractual future cash flow for each certificate. The present value rates
utilized were the rates offered by the Bank (which approximate market rates) at
December 31, 1996 and 1995, respectively, on a certificate with an initial term
to maturity equal to the remaining term to maturity of the existing
certificates.
<PAGE>
Commitments: Commitments to originate loans and purchase securities are
derived by applying the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the present credit
worthiness of the counterparties. For fixed-rate loan commitments, estimated
fair value also considers the difference between interest rates on the reporting
date and the committed rates. The estimated fair value of lines of credit is
based on the fees charged for similar agreements or on the estimated cost to
terminate them or otherwise settle the obligations with the counterparties at
the reporting dates. The commitments existing at December 31, 1996 and 1995,
would have been offered at substantially the same rates and under substantially
the same terms that would have been offered at December 31, 1996 and 1995 to the
counterparties; therefore the estimated fair value of the commitments was zero
at those dates.
NOTE (26) REGULATORY CAPITAL
The Office of Thrift Supervision (OTS) rules regarding stock repurchases
and redemptions, cash-out mergers, the upstreaming of funds to holding companies
and any other distributions charged against an institution's capital accounts,
are subject to certain limitations. An institution, such as the Bank, which
meets its fully phased-in capital requirements is able to pay dividends to the
Company, upon 30 days notice to the OTS, in an amount that would reduce its
surplus capital ratio by one-half at the beginning of the year, plus all of its
net income determined on the basis of generally accepted accounting principles
for that calendar year. The institution must continue to meet all fully
phased-in capital requirements after the proposed capital distribution.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off balance-sheet items as calculated under 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.
<PAGE>
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum capital amounts and ratios. As of December
31, 1996, the most recent notification from the OTS categorized the Bank as
"well capitalized" under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management
believes have changed the institution's category. The following table sets forth
the required ratios and amounts and the Bank's actual capital amounts and ratios
at December 31:
<TABLE>
<CAPTION>
To be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
1996
----
Total risk-based capital
(to risk weighted assets) $182,345 19.96% $ 73,074 8.00% $ 91,343 10.00%
Tangible capital
(to tangible assets) 188,309 13.54 20,866 1.50 N/A N/A
Tier I leverage (core)
capital (to adjusted
tangible assets) 188,309 13.54 41,733 3.00 69,555 5.00
1995
----
Total risk-based capital
(to risk weighted assets) $180,648 21.30% $ 67,834 8.00% $ 84,793 10.00%
Tangible capital
(to tangible assets) 187,202 13.16 21,344 1.50 N/A N/A
Tier I leverage (core)
capital (to adjusted
tangible assets) 187,202 13.16 42,688 3.00 71,147 5.00
</TABLE>
The OTS regulatory capital requirements incorporate an interest rate risk
(IRR) component. Savings institutions with "above normal" IRR exposure are
subject to a deduction from regulatory capital for purposes of calculating their
risk-based capital requirements. Implementation of the IRR component has been
delayed by the OTS.
OTS regulations generally require that institutions deduct from capital
their investment in and advances to subsidiaries engaged, as principal, in
activities not permissible for national banks, such as real estate development.
OTS regulations also require that all equity and direct investments including
all loans and advances in which a legally binding commitment existed at April
12, 1989 be deducted from capital for the purposes of computing regulatory
capital ratios. At December 31, 1996, the Bank excluded from its regulatory
capital $13.7 million as a result of this regulation.
<PAGE>
NOTE (27) PARENT ONLY FINANCIAL INFORMATION
The following condensed statements of financial condition at December 31,
1996 and 1995 and the condensed statements of income and cash flows for the
years ended December 31, 1996, 1995 and 1994, for JSB Financial, Inc. (parent
company only) present the Company's investment in its wholly-owned subsidiary,
the Bank, using the equity method of accounting.
<TABLE>
Condensed Statements of Financial Condition
December 31, 1996 and 1995
(In Thousands)
<CAPTION>
ASSETS 1996 1995
---- ----
<S> <C> <C>
Cash and cash equivalents $ 15,582 $ 19,303
Securities held-to-maturity (estimated fair
value of $80,028 and $90,177, respectively) 80,007 90,000
Mortgage loans, net 15,239 15,279
Other assets, net 680 1,377
Investment in the Bank 223,791 214,148
-------- --------
Total Assets $335,299 $340,107
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities, net $ - $ -
Stockholders' equity 335,299 340,107
-------- --------
Total Liabilities and Stockholders' Equity $335,299 $340,107
======== ========
</TABLE>
<TABLE>
Condensed Statements of Income
For the Years Ended December 31,
(In Thousands)
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Dividends from the Bank $20,000 $43,000 $44,000
Interest income 6,589 7,275 4,337
Other income 18 15 51
------- ------- -------
26,607 50,290 48,388
------- ------- -------
Expenses 451 437 412
------- ------- -------
Income Before Income Taxes and Equity in
Undistributed Earnings of the Bank 26,156 49,853 47,976
Provision for Income Taxes 2,100 2,557 1,471
------- ------- -------
Income Before Equity in Undistributed Earnings
of the Bank 24,056 47,296 46,505
Equity in Undistributed Earnings of the Bank,
Net of Provision for Income Taxes 2,669 (25,122)(1) (22,908)(1)
------- ------- -------
Net Income $26,725 $22,174 $23,597
======= ======= =======
<FN>
(1) Represents excess of dividends over net income.
</FN>
</TABLE>
<PAGE>
<TABLE>
Condensed Statements of Cash Flows
For the Years Ended December 31,
(In Thousands)
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income $ 26,725 $ 22,174 $ 23,597
Adjustments to reconcile net income to cash provided
by operating activities:
(Equity in undistributed earnings) excess of
dividends over net income of the Bank (2,669) 25,122 22,908
Non-cash dividends from the Bank (mortgage loans) - - (15,340)
Decrease (increase) in other assets 697 (247) (491)
Tax benefit for cash dividends paid to ESOP - - 11
Decrease in other liabilities - - (30)
-------- --------- ---------
Net cash provided by operating activities 24,753 47,049 30,655
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities held-to-maturity (205,021) (190,000) (160,000)
Proceeds from maturities of securities held-
to-maturity 215,000 170,000 165,000
Principal payments on mortgage loans 40 38 24
Accretion of discount in excess of amortization of
premium on debt securities 14 - -
-------- --------- ---------
Net cash provided (used) by investing activities 10,033 (19,962) 5,024
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid to common stockholders (12,090) (10,616) (7,996)
Payments to repurchase common stock (27,650) (9,881) (26,404)
Proceeds upon exercise of common stock options 1,233 1,619 1,311
-------- --------- ---------
Net cash used by financing activities (38,507) (18,878) (33,089)
-------- --------- ---------
Net (decrease) increase in cash and cash equivalents (3,721) 8,209 2,590
Cash and cash equivalents at beginning of year 19,303 11,094 8,504
-------- --------- ---------
Cash and cash equivalents at end of year $ 15,582 $ 19,303 $ 11,094
======== ========= =========
</TABLE>
<PAGE>
KPMG Peat Marwick LLP
INDEPENDENT AUDITORS' REPORT
To The Stockholders
and The Board of Directors of JSB Financial, Inc.:
We have audited the accompanying consolidated statements of financial condition
of JSB Financial, Inc. and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of JSB Financial, Inc.
and subsidiary at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in note 1(d) to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", effective
January 1, 1994.
KPMG Peat Marwick LLP
Jericho, New York
January 30, 1997
KPMG Peat Marwick LLP
Independent Auditors' Consent
The Stockholders and the
Board of Directors of
JSB Financial, Inc.:
We consent to incorporation by reference in the registration statement (Nos.
33-37217, 33-36491 and 33-36490) on Form S-8 of JSB Financial, Inc. of our
report dated January 30, 1997, relating to the consolidated statements of
financial condition of JSB Financial, Inc. and subsidiary as of December 31,
1996 and 1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996, which report is incorporated by reference to the
December 31, 1996 Annual Report on Form 10-K of JSB Financial, Inc. Our report
included an explanatory paragraph that described the adoption of a new
accounting principle as discussed in the notes to those statements.
KPMG PEAT MARWICK LLP
Jericho, New York
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Unaudited Statement of Financial Condition as of December 31, 1996 and the
Unaudited Consolidated Statement of Income for the year ended December 31, 1996
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000861499
<NAME> JSB Financial, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 12,894
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 86,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 51,021
<INVESTMENTS-CARRYING> 460,509
<INVESTMENTS-MARKET> 461,784
<LOANS> 860,101
<ALLOWANCE> 5,327
<TOTAL-ASSETS> 1,516,016
<DEPOSITS> 1,144,393
<SHORT-TERM> 0
<LIABILITIES-OTHER> 36,324
<LONG-TERM> 0
0
0
<COMMON> 160
<OTHER-SE> 335,139
<TOTAL-LIABILITIES-AND-EQUITY> 1,516,016
<INTEREST-LOAN> 71,251
<INTEREST-INVEST> 32,497
<INTEREST-OTHER> 3,863
<INTEREST-TOTAL> 107,611
<INTEREST-DEPOSIT> 40,217
<INTEREST-EXPENSE> 40,217
<INTEREST-INCOME-NET> 67,394
<LOAN-LOSSES> 640
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 27,598
<INCOME-PRETAX> 46,277
<INCOME-PRE-EXTRAORDINARY> 26,725
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,725
<EPS-PRIMARY> 2.54
<EPS-DILUTED> 2.53
<YIELD-ACTUAL> 4.68
<LOANS-NON> 12,754
<LOANS-PAST> 1,397
<LOANS-TROUBLED> 1,874
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,697
<CHARGE-OFFS> 33
<RECOVERIES> 23
<ALLOWANCE-CLOSE> 5,327
<ALLOWANCE-DOMESTIC> 5,327
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
