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 for the year ended December 31, 1997
[ ] Transition report pursuant to section 13 or 15(d) of the
securities exchange act of 1934
Commission file number 1-13157
JSB FINANCIAL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 11-3000874
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
303 Merrick Road, Lynbrook, New York 11563
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(Address of principal executive offices)
Registrant's telephone number, including area code: (516) 887-7000
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock $.01 par value (Title of each class)
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New York Stock Exchange (Name of each exchange on which registered)
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Securities registered pursuant to Section 12(g) of the Act: None
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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 ______ No __X___
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 4, 1998: Common stock par value $.01 per share,
$450,467,434. This figure is based on the closing price by the New York
Stock Exchange for a share of the registrant's common stock on March 4,
1998, which was $53.3125 as reported in the Wall Street Journal on March 5,
1998.
The number of shares of the registrant's Common Stock outstanding as of
March 16, 1998 was 9,882,547 shares.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 12, 1998
and portions of the 1997 Annual Report to Stockholders are incorporated
herein by reference Parts I, II and III.
<PAGE> 2
FORM 10-K CROSS-REFERENCE INDEX
PART I Page
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Item 1. Business ..................................................... 3
Item 2. Properties.................................................... 32
Item 3. Legal Proceedings............................................. 32
Item 4. Submission of Matters to a Vote of Security Holders........... 32
Additional Item. Executive Officers.................................... 33
PART II
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Item 5. Market for JSB Financial Inc.'s Common Equity
and Related Stockholders' Matters........................... 34
Item 6. Selected Financial Data....................................... 34
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 34
Item 8. Financial Statements and Supplementary Data .................. 34
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 34
PART III
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Item 10. Directors and Executive Officers.............................. 35
Item 11. Executive Compensation........................................ 35
Item 12. Security Ownership of Certain Beneficial Owners
and Management.............................................. 35
Item 13. Certain Relationships and Related Transactions................ 35
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................... 36
SIGNATURES.............................................................. 39
<PAGE> 3
PART I
ITEM 1. BUSINESS
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DESCRIPTION OF BUSINESS
General
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JSB Financial, Inc. ("JSB Financial", "Company" or the "Holding
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 42 and 43 in the 1997 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 federal 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 1997, the Company did not
repurchase any of its outstanding common stock and paid total cash dividends of
$13.8 million, or $1.40 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 primarily located in communities that can
generally be characterized as stable, residential neighborhoods of predominantly
one- to four-family residences and middle income families. 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.
<PAGE> 4
During the last four years, unemployment and real estate values have
been relatively stable in the New York metropolitan area. New York City has
benefited from the resurgence and growth in employment and profitability
experienced by national securities and investment banking firms, many of which
are domiciled in Manhattan, as well as the growth and profitability of other
financial service companies, such as money center banks. The strength of the
national economy and of the United States equities markets has contributed
significantly to the recent growth and increased profitability of Wall Street
securities and investment banking firms, which has benefited the Bank's market
area.
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 interest earning assets
which would lower the level of net interest income and possibly result in higher
levels of other real estate owned 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
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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 and two family residences); commercial
property and to a lesser extent, construction loans. The Bank also offers other
loans, including: property improvement; home equity loans; loans secured by
deposit accounts; student loans; automobile loans and personal loans. At
December 31, 1997, the loan portfolio was $999.7 million, net of allowances of
$5.9 million and unearned fees and discounts of $3.3 million. At December 31,
1997, net loans represented 65.1% of the Company's total assets. During 1997,
mortgage loans originated for portfolio were $205.2 million compared to $136.2
million during 1996. 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", pages 23 and 24, herein.) Management monitors the
economy and real estate market in which the Bank operates and modifies its
lending policies as considered appropriate.
Pursuant to the New York City Housing Partnership/HPD Homeownership
Program, the Bank provides funding for two New York construction projects, one
in Queens and one in Brooklyn, New York, whereby the Bank holds the first
mortgage on the premises and obtains personal guarantees from the builders.
Advances for each of these projects are based on executed contracts of sale
prior to construction and construction progress on a per unit/house basis. 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 Far
Rockaway, Queens, New York - 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> 5
In addition, the Bank makes six month construction loans to a builder
who constructs one and two-family houses in low to moderate income areas within
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, 1997, the Bank held a total $3.1 million in
construction loans.
The Bank continues to emphasize lending on multi-family and underlying
cooperative properties. 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
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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, 1997, 57.5% of total gross mortgage loans were
secured by multi-family rental properties, 27.3% by cooperative buildings and
7.3% by commercial real estate. At that date, the Bank's ten largest loans
totaled $121.0 million. These ten mortgage loans were comprised of: five loans
totaling $62.9 million secured by multi-family rental properties; two loans
totaling $23.4 million secured by underlying cooperative buildings; one $12.8
million mortgage loan secured by the land underlying a luxury Manhattan hotel;
one $11.1 million loan secured by a commercial office building; and one $10.8
million loan secured by a shopping center. At December 31, 1997, the Bank's
largest loan was an $18.5 million mortgage loan secured by a 684 unit apartment
complex. The Bank's largest underlying cooperative loan, which had a balance of
$12.8 million at December 31, 1997, was non-performing. Subsequent to December
31, 1997, the Bank entered into a settlement agreement with the borrower. (See
"Delinquencies and Classified Assets", page 25 and "Potential Problem Loans and
Other Assets and Subsequent Developments", page 28, 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 based on the five to ten year U.S.
Treasury Constant Maturity Index, plus a spread to reflect the term of the loan
and associated credit risk.
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 detailed analysis to ensure that
the property's anticipated cash flow is 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 properties securing such loans be appraised by a member of the
Bank's appraisal staff or a qualified independent appraiser. The Bank requires
borrowers to obtain title insurance and hazard insurance in an amount sufficient
to cover the mortgage naming the Bank as loss payee. 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 and
the senior lending officer.
<PAGE> 6
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%.
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, 1997, the largest concentration of
loans to any one borrower consisted of two mortgage loans with an aggregate
balance of $29.6 million, which were secured by a multi-family garden apartment
complex and a commercial office tower.
Management monitors the loan portfolios on a regular basis 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 25 through 28, herein.)
One-to Four-Family Lending
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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, 1997, one-to four-family
mortgages totaled $73.8 million, of which $66.0 million were fixed rate mortgage
loans and $7.8 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
("Fannie Mae") and State of New York Mortgage Association ("SONYMA") guidelines,
except as to limitations on loan amount.
For a loan secured by one-to four-family residential real estate, upon
receipt of a completed loan application, 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 property are ordered. In addition to utilizing the Bank's
appraisal staff, some appraisals on one-to four-family properties are prepared
by independent appraisers, who are approved as qualified by the Bank's Mortgage
Committee. 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 with
significant changes in 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
loans, excluding cooperative apartment loans, not exceed the lesser of 80% of
appraised value of the property securing the loan or purchase price at
origination. 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 secured by 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> 7
During 1997, the Bank originated for sale and subsequently sold, without
recourse, $1.6 million of mortgage loans, on which the Bank retained servicing.
Included in loan sales were mortgage loans of $703,000 to the State of New York
Mortgage Association, originated and sold pursuant to a program aimed at
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 Fannie Mae. During 1997, the Bank sold
$907,000 mortgage loans to Fannie Mae. The Bank plans to originate and sell,
without recourse, other mortgage loans in the secondary market and retain
servicing.
During 1996, the Bank began offering FHA Home Improvement Loans, under
which 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, however, 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 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 sells these loans, without recourse, to Fannie Mae, and
retains servicing.
Other Lending
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The Bank offers a variety of other loan products, including: home equity
loans, home improvement loans; loans secured by deposit accounts; student loans;
personal and automobile loans. At December 31, 1997, total gross other loans was
$29.1 million, or 2.9% of total gross loans. At December 31, 1997, the other
loan portfolio was comprised as follows: property improvement loans of $10.7
million, or 36.9% of the other loan portfolio; loans secured by deposit
accounts, which are 100% secured, of $8.2 million, or 28.1% of the other loan
portfolio; and student loans, of $5.2 million, or 17.9% of the other loan
portfolio. Student loans are federally guaranteed to varying degrees. Management
is reviewing student loan origination programs packaged by Sallie Mae and Nellie
Mae, under which future originations of student loans would be funded and owned
by the Bank, but servicing would be provided by others. The student loan
portfolio existing at December 31, 1997, is carried at the lower of cost or
estimated fair value, in the aggregate, as these loans are expected to be sold.
At December 31, 1997, the $5.2 million student loan portfolio had an estimated
fair value of $5.3 million. The remainder of the other loan 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, 1997, the Bank had $9.2
million of home equity loans, with interest rates ranging from 5.5% to 12.0%.
Loan Origination and Other Fees
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In addition to interest earned on loans, the Bank charges fees for
originating loans, certain 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.
<PAGE> 8
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, 1997,
securities and the other investment portfolio combined, totaled $422.9 million,
or 27.5% of total assets, of which $244.9 million were in U.S. Government and
federal agency securities. (See "Investment Portfolio", page 22, herein.)
Management formulates the investment policies, 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 federal 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". The marketable equity
securities portfolio is designated as "available-for-sale" and carried at
estimated fair value. Unrealized gains and losses on available-for-sale
securities are excluded from earnings and reported as a net amount in a separate
component of stockholders' equity, until realized. During 1997, the Company sold
marketable equity securities with a cost of $823,000, realizing gross gains of
$7.0 million and no losses. Activity in the held-to-maturity portfolio included,
purchases of $499.9 million and maturities of $555.0 million of U.S. Government
and federal agency securities and purchases of $55.0 million and maturities and
amortization of $106.5 million in the CMO portfolio, during 1997.
The Company, excluding activities of the Bank, invests in U.S.
Government and federal 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, at
December 31, 1997, the Company held mortgage loans of $15.2 million, 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, scheduled principal and interest payments received from
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 Freddie Mac, Fannie Mae or Government National
Mortgage Association ("Ginnie Mae") mortgage-backed securities, which are backed
by whole loans. Management believes these securities represent attractive and
limited risk alternatives relative to other investments. During the past few
years, the availability of CMOs that met the Bank's CMO investment guidelines
was limited. At December 31, 1997, $104.0 million, or 6.8% of total assets, was
invested in CMOs. At December 31, 1997, the Bank's CMO portfolio had an
estimated average maturity of twenty months. (See "Contractual Maturity
Distribution", page 22, herein.)
<PAGE> 9
Sources of Funds
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General
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The Bank's primary sources of funds are deposits, principal payments from
maturities on debt securities, CMOs and 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 32, herein and
"Liquidity and Capital Resources" included on pages 12 through 13 in the 1997
Annual Report to Stockholders.)
Deposits
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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. As of December 31, 1997,
passbook and lease security accounts represented 50.4% 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 1997 Annual Report to Stockholders.)
The Bank influences deposit levels and composition through its interest
rate structure. Management believes that the relatively low level of interest
rates and the strong performance and growth of the capital markets that have
prevailed are the primary contributors for the continued decline in deposits
over the past several 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. While the highest percentage
of deposits has remained in passbook and lease security accounts, the trend of
deposit shifts has moved away from passbook accounts and towards certificate
accounts. Deposits at December 31, 1997, decreased by $23.2 million, or 2.0%,
compared to deposits at December 31, 1996. During 1997, the decrease in the
Bank's passbook and lease security accounts of $34.8 million, or 5.8%,
represented the most significant decrease of any deposit category offered by the
Bank. During 1997, money market accounts decreased by $10.1 million or 11.3%,
while certificate accounts increased by $22.4 million, or 5.8%. (See "Deposits",
pages 30 and 31, herein.)
Subsidiaries of the Bank
- ------------------------
General
- -------
At December 31, 1997, the Bank had 22 subsidiary corporations of which, 15
were active in the ownership or operation of real estate ("Real Estate
Subsidiaries"), one operates as a real estate investment trust, and 6 were
inactive. At December 31, 1997, the Bank's investment in Real Estate
Subsidiaries, including ORE of $473,000, was $3.5 million, or .2% of total
assets. The Real Estate Subsidiaries trace to the 1970's, when, under its New
York State leeway investment authority, the Bank organized a number of such
wholly-owned subsidiary corporations, many of which formed partnerships. (See
"Grandfathered Savings Bank Authority", page 18, herein.) The Real Estate
Subsidiaries: (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. (See Notes 11, 12 and
13 to the Consolidated Financial Statements, included on pages 32 and 33 in the
1997 Annual Report to Stockholders.) In the late 1980's, one Real Estate
Subsidiary, Jade Associates ("Jade"), entered into a joint venture with an
unrelated party to construct and sell 84 residential cooperative apartments, in
Flushing, New York. At December 31, 1997, the remaining investment in the
condominium building was $2.8 million, or 92.4% of the $3.0 million of real
estate held-for-sale. (See "Jade Associates" and "LeHavre Associates", below.)
<PAGE> 10
During the past three years, the Bank's investment in the Real Estate
Subsidiaries has decreased substantially as a result of the sale of properties.
As of June 30, 1997, management reclassified all remaining real estate
held-for-investment to held-for-sale. All real estate held-for-sale is carried
at the lower of cost or net fair value.
The cyclical nature of real estate markets and interest rates influence
the level of financial risk to property owners. During these cycles, the Bank
and its Real Estate Subsidiaries have mitigated such risks through: (1) their
financial ability to carry properties until their perceived optimal use and
value can be achieved; (2) the use of internal property management to maintain
and operate the properties; and (3) monitoring the condition of significant
properties, on regular basis.
The activities of each of the Bank's wholly-owned subsidiary
corporations and the partnerships they formed are described below. Real Estate
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. 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, 1997, the subsidiary owned 28.7% of the shares
representing 17 units in a six-story cooperative apartment building containing
57 residential units and 4 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 1997, one unit was sold,
resulting in a net gain, before taxes, of $130,000. Rents received during 1997,
on the unsold apartments totaled $145,000 and maintenance charges paid to the
cooperative association totaled $150,000. For 1997, Forty-Second & Park Corp.
had net income of $117,000, after eliminating intercompany transactions. The
Bank's net investment in Forty-Second & Park Corp. was $10,000 at December 31,
1997.
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, 1997,
Parkway owned 19.0% of the cooperative shares, representing 73 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 1997, 8 units were sold, resulting in a net
gain, before taxes, of $252,000. Rents received during 1997, from the unsold
apartments and garage spaces totaled $554,000 and maintenance charges paid to
the cooperative association and costs for maintenance employees totaled
$577,000. For 1997, Parkway Associates had a net operating income of $224,000,
after eliminating intercompany transactions. The Bank's net investment in
Parkway was $29,000 at December 31, 1997.
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,
1997, Elmback owned 22.2% of the cooperative shares representing 13 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. 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. During 1997, 5
units were sold resulting in a net gain, before taxes, of $120,000. Rents
received during 1997, on the unsold apartment units totaled $91,000 covering the
$83,000 of maintenance charges paid to the cooperative association.
<PAGE> 11
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 1997, 2 units were sold and $29,000 of gains was
deferred. At December 31, 1997, 31 units remained, which comprised the entire
$473,000 in ORE. This property generated a net loss of $54,000 for 1997. (See
"Other Real Estate", page 28, herein.)
For 1997 Elmback Associates had net operating income of $69,000, after
eliminating intercompany transactions. The Bank's net investment in Elmback was
$504,000 at December 31, 1997.
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, 1997, D&D owned
23.1% of the shares representing 35 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 1997,
6 units were sold, resulting in a net gain before taxes of $52,000. Rental
income from the buildings for 1997 totaled $192,000 covering the maintenance
charges of $167,000 paid to the cooperative associations. For 1997, D&D
Associates had a net operating income of $20,000, after eliminating intercompany
transactions. The Bank's net investment in D&D was $45,000 at December 31, 1997.
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 1997,
this subsidiary had net income before taxes of $1,000, which resulted from a
real estate tax refund from prior years. At December 31, 1997, the Bank had a
net liability for this subsidiary of $54,000, 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 commercial office tower. On October 29,
1997, the commercial office tower was sold, resulting in a pre-tax gain of $9.2
million. For 1997, this partnership had net income, before taxes of $10.0
million, after eliminating intercompany transactions. At December 31, 1997, the
Bank had a net liability for this subsidiary of $36,000, comprised primarily of
accounts payable.
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
1997, the property generated net income, before federal taxes, of $38,000, after
eliminating intercompany transactions. The Bank's net investment in Lefmet Corp.
was $206,000 at December 31, 1997.
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 84 unit condominium complex in
Flushing, New York.
<PAGE> 12
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 1997, 15 units were sold, resulting in deferred gains of
$232,000, as sales are being accounted for under the cost recovery method. At
December 31, 1997, the Bank's net investment in Jade was $2.8 million, primarily
reflecting the 34 unsold units.
For 1997, this property generated pretax income of $74,000.
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 a leased office, located in Flushing, Queens County, NYC.
Other Subsidiaries Of the Bank's remaining five 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. The fifth, Tier Inc., a real
estate investment trust, was formed during the second quarter of 1997. Tier Inc.
may, among other things, be utilized by the Bank to raise capital in the future.
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, 1997, the Bank had 311 full-time employees and 118
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 as a publicly held company, is subject to the periodic
disclosure and other requirements 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.
<PAGE> 13
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.
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 "Qualified Thrift Lender Test", pages
16 and 17, 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; 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.
<PAGE> 14
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 and investments in equity
securities.
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 has adopted an interest rate risk component as part of its
regulatory capital requirement. Implementation of such an interest rate risk
component has been deferred indefinitely by the OTS. If made applicable by the
OTS, such interest rate risk component would subject savings institutions with
"above normal" interest rate risk exposure to a deduction from total capital for
purposes of calculating their risk-based capital requirements. A savings
institution's interest rate risk would be 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% would have to 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
would have the authority to 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% would not
be subject to the interest rate risk component, unless the OTS determines
otherwise. At December 31, 1997, the Bank met each of its capital requirements
in each case on a fully phased-in basis and it is anticipated that the Bank will
not be subject to the interest rate risk component. A table presenting the
Bank's capital position at December 31, 1997 is presented in Note 26 to the
Consolidated Financial Statements, contained on page 41 of the 1997 Annual
Report to Stockholders, and is incorporated herein by reference.
<PAGE> 15
<TABLE>
A reconciliation between the Bank's regulatory capital and GAAP capital
at December 31, 1997 is presented below:
<CAPTION>
Tangible Capital
(In thousands)
<S> <C>
GAAP capital-originally reported to
regulatory authorities and on the Bank's
consolidated financial statements ............ $264,464
Less:
Regulatory capital adjustments:
Investments in Non-includable Subsidiaries ... 6,827
Adjustment for net unrealized gains,
net of tax .................................. 28,469
--------
Regulatory Capital........................... $229,168
========
</TABLE>
Prompt Corrective Regulatory Action.
- ---------------------------------------
Under the OTS prompt corrective action regulations, ("PCA 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.
<TABLE>
The PCA Regulations define five capital categories and provide the
minimum numerical requirements, subject to certain exceptions, for each capital
category, as detailed below.
<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.
<PAGE> 16
Insurance of Deposit Accounts
- ------------------------------
Deposits of the Bank are insured by the BIF. The BIF is administered by the
FDIC. The FDIC currently imposes an assessment rate schedule from 0 to 27 basis
points. On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the
"Funds Act") was signed into law. The Funds Act spreads the obligations for
payment of the Financing Corporation ("FICO") bonds across all BIF and Savings
Association Insurance Fund ("SAIF") 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 pro-rata sharing of the FICO payments
between BIF and SAIF members will occur on the earlier of January 1, 2000 or the
date the BIF and SAIF are merged. The Funds Act specifies that the BIF and SAIF
will be merged on January 1, 1999, provided no savings associations exist at
that time.
The Bank paid $149,000 in FDIC insurance premiums during 1997. 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 the Bank's 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. Various proposals to
eliminate the federal thrift charter, create a uniform financial institutions
charter and abolish the OTS have been introduced in Congress. Some bills would
require federal savings institutions to convert to a national bank or some type
of state charter by a specified date or they would automatically become national
banks. Under some proposals, converted federal thrifts would generally be
required to conform their activities to those permitted for the charter selected
and divestiture of nonconforming assets would be required over a two year
period, subject to two possible one year extensions. State chartered thrifts
would become subject to the same federal regulation as applies to state
commercial banks. A more recent bill passed by the Banking Committee of the
House of Representatives, would allow savings institutions to continue to engage
in activities being conducted when they convert to a bank. Holding companies for
savings institutions would become subject to the same regulation as holding
companies that control commercial banks, with limited grandfather provisions.
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, 1997, the Bank was in compliance with
this limitation, with the highest aggregate loans to one borrower of $29.6
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> 17
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, 1997, the Bank maintained 91.4% 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, 1997, the Bank was a Tier 1 Bank.
Liquidity
- ---------
Information regarding liquidity appears under the caption "Liquidity and
Capital Resources" included on pages 12 and 13 in the 1997 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, 1997, was $261,000.
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), 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> 18
The Bank's authority to extend credit to executive officers, directors
and 10% shareholders (referred to as "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 Guidelines, 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, 1997, the Bank's capital investments, computed
for regulatory purposes, retained under the leeway provisions were $6.8 million,
or .5% of the Bank's assets. 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> 19
Federal Home Loan Bank System
- -------------------------------
The Bank is a member of the FHLB System which consists of twelve (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, 1997 of $7.6 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, 1997, 1996 and 1995,
dividends from the FHLB-NY to the Bank were $496,000, $438,000 and $481,000
respectively.
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 1997, the FRB regulations
generally required that reserves be maintained against aggregate transaction
accounts as follows: for accounts aggregating $49.3 million or less (subject to
adjustment by the FRB) a reserve requirement of 3%; and for accounts greater
than $49.3 million, a reserve requirement of $1.35 million plus 10% (subject to
adjustment by the FRB between 8% and 14%) against that portion of total
transaction accounts in excess of $49.3 million. The first $4.4 million of
otherwise reservable balances (subject to adjustments by the FRB) were exempted
from the reserve requirements. During 1997, the Bank was in compliance with the
foregoing requirements and expects to continue to remain in compliance in the
future. For 1998, the FRB has decreased from $49.3 million to $47.8 million, the
amount of transaction accounts subject to the 3% reserve requirement and has
increased the amount of exempt reservable balances, from $4.4 million to $4.7
million.
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; New York State for taxable years 1994 through
1996 and; New York City 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%.
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).
<PAGE> 20
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.
Bad Debt Reserves
- -----------------
Under the Federal law that existed prior to 1996, the Bank was generally
allowed a special bad debt deduction in determining income for tax purposes. The
deduction was based on either an experience formula or a percentage of taxable
income before such deduction ("reserve method"). The reserve method was used in
preparing the income tax returns for 1995. Legislation was enacted in August
1996 which repealed the reserve method for tax purposes. As a result, the Bank
must instead use the direct charge-off method to compute its bad debt deduction.
Pursuant to Statement of Financial Accounting Standards Statement No.
109, the Bank is generally not required to provide deferred taxes for the
difference between book and tax bad debt expense taken in years prior to, or
ending at December 31, 1987, the base year reserves. The base year reserves of
$85.1 million and supplemental reserve are frozen, not forgiven. These reserves
continue to be segregated as they are subject to recapture penalty if one of the
following occurs: (a) the Bank's retained earnings represented by this reserve
are used for purposes other than to absorb losses on loans, including excess
dividends or distributions in liquidation; (b) the Bank redeems its stock; (c)
the Bank fails to meet the definition provided by the Code for a Bank. Future
changes in the Federal tax law, could further affect the status of the base year
reserve. (See Notes 14 and 17 to the Consolidated Financial Statements, included
on pages 33 through 35 in the 1997 Annual Report to Stockholders.)
New York State and the City of New York adopted legislation to reform
the franchise taxation of thrift reserves for loan losses. The legislation
applies to taxable years beginning after December 31, 1995. The legislation,
among other things, retains the reserve method for bad debt deductions. The New
York State and the City of New York bad debt deduction are no longer predicated
on the Federal deduction.
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 of $150,000 to the State of
Delaware.
<PAGE> 21
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 1997 Annual Report to Stockholders as Exhibit 13.01.
I. Distribution of Assets, Liabilities and Stockholders' Equity: Interest
Rates and Interest Differential
A, B. Page 11 of the Company's 1997 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 12 of the Company's 1997 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
Pages 8 through 10 of the Company's 1997 Annual Report to Stockholders
(portions of which are filed herewith as Exhibit 13.01) presents the interest
rate sensitivity analysis, under the caption "Interest Rate Sensitivity
Analysis" and is incorporated herein by reference.
<PAGE> 22
INVESTMENT PORTFOLIO
<TABLE>
A. The following table sets forth certain information regarding the Company's
investment portfolio at the dates indicated:
<CAPTION>
At December 31,
1997 1996 1995
---------------------------------
(In Thousands)
<S> <C> <C> <C>
Securities Available-for-Sale:
Marketable equity securities, at fair value ..... $ 62,243 $ 51,021 $ 40,071
======== ======== ========
Securities Held-to-Maturity:
U.S Government and federal agency securities .... $244,903 $299,645 $439,896
CMOs, net ....................................... 104,040 155,272 144,607
Mortgage-backed securities:
Ginnie Mae, net ............................... 3,640 4,999 6,667
Fannie Mae, net ............................... 106 152 235
Freddie Mac, net .............................. 278 441 655
-------- -------- --------
Total ......................................... $352,967 $460,509 $592,060
======== ======== ========
Other investments:
FHLB-NY stock (investment required by law) ...... $ 7,615 $ 6,829 $ 6,272
Other stock...................................... 30 30 30
-------- -------- --------
Total other investments........................ $ 7,645 $ 6,859 $ 6,302
======== ======== ========
</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, 1997. 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, 1997 was twenty months. For
principal reduction on these securities, for the years ended December 31, 1997,
1996 and 1995: See the "Consolidated Statements of Cash Flows", included on
pages 24 and 25 of the 1997 Annual Report to Stockholders.
<TABLE>
At December 31, 1997
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 ...... $110,000 5.58% $ - - % $ - - % $ - - %
U.S. Government ..... 124,921 6.10 9,982 6.26 - - - -
CMOs ................ - - 20,257 5.43 83,783 6.41 - -
MBS ................. 196 11.60 959 10.65 - - 2,869 9.61
-------- -------- -------- -------
Total .......... $235,117 5.86% $ 31,198 5.86% $ 83,783 6.41% $ 2,869 9.61%
======== ======== ======== =======
</TABLE>
<PAGE> 23
LOAN PORTFOLIO
<TABLE>
A. The following table sets forth the composition of the mortgage and other loan
portfolios in dollar amounts:
<CAPTION>
At December 31,
-------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Mortgage loans:
Multi-family .......................... $563,205 $433,224 $344,337 $294,003 $238,756
Underlying cooperative ... ............ 267,942 262,221 263,972 251,580 253,460
One- to four-family ................... 73,757 76,848 82,391 86,531 95,357
Commercial ............................ 71,839 61,829 55,662 58,070 59,942
Construction .......................... 3,067 1,836 1,492 2,518 410
--------- -------- -------- -------- --------
Total mortgage loans ............... 979,810 835,958 747,854 692,702 647,925
--------- -------- -------- -------- --------
Other loans:
Student ............................... 5,213 6,204 7,466 9,656 11,132
Loans secured by deposit accounts ..... 8,189 8,328 8,489 9,167 9,340
Property improvement .................. 10,744 8,775 9,165 6,762 5,599
Consumer .............................. 4,775 4,350 4,092 1,821 1,516
Overdraft loans ....................... 227 237 220 224 210
--------- -------- -------- ------- --------
Total other loans .................. 29,148 27,894 29,432 27,630 27,797
--------- -------- -------- -------- --------
Total loans receivable ............. 1,008,958 863,852 777,286 720,332 675,722
--------- -------- -------- -------- --------
Less:
Unearned discounts, premiums and
deferred loan fees, net .............. 3,333 3,751 4,344 4,952 3,210
Allowance for possible loan losses .... 5,880 5,327 4,697 4,085 4,136
-------- -------- -------- -------- --------
Loans receivable, net .............. $999,745 $854,774 $768,245 $711,295 $668,376
======== ======== ======== ======== ========
</TABLE>
<PAGE> 24
B. Maturities and Sensitivities of Loans to Changes in Interest Rates
- ----------------------------------------------------------------------
<TABLE>
The following table shows the contractual maturity of the loan portfolios
at December 31, 1997. 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, 1997, 1996 and 1995: See
the "Consolidated Statements of Cash Flows", included on pages 24 and 25 in the
1997 Annual Report to Stockholders.)
<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 ......... $ 11,095 $ 21,099 $ 7,951 $ 10,497 $ 402 $ 8,797 $ 59,841
-------- -------- -------- -------- --------- ------- ----------
After 1 Year:
1 to 2 years .......... 25,915 10,610 331 1,978 2,665 1,859 43,358
2 to 3 years .......... 42,195 35,458 79 1,763 - 2,789 82,284
3 to 5 years .......... 110,689 58,637 1,207 16,392 - 4,142 191,067
5 to 10 years ......... 326,876 113,800 17,611 38,472 - 11,561 508,320
10 to 20 years ........ 45,929 28,338 22,090 2,737 - - 99,094
Over 20 years ......... 506 - 24,488 - - - 24,994
-------- -------- -------- -------- --------- ------- ----------
Total due after 1 year .... $552,110 $246,843 $ 65,806 $ 61,342 $ 2,665 $20,351 $ 949,117
-------- -------- -------- -------- --------- ------- ----------
Total amounts due ... $563,205 $267,942 $ 73,757 $ 71,839 $ 3,067 $29,148 $1,008,958
======== ======== ========= ======== ========= ======= ----------
Less:
Unearned discounts,
premiums and deferred
loan fees, net ....... 3,333
Allowance for possible
loan losses .......... 5,880
----------
Loans receivable, net ... $ 999,745
==========
</TABLE>
<TABLE>
The following table sets forth at December 31, 1997, the dollar amount
of all loans due after December 31, 1998 and whether such loans have fixed
interest rates or adjustable interest rates.
<CAPTION>
Fixed Adjustable Total
----- ---------- -----
(In Thousands)
<S> <C> <C> <C>
Due after December 31, 1998:
Mortgage loans:
Multi-family ........................ $ 552,110 $ - $ 552,110
Underlying cooperative .............. 246,843 - 246,843
One-to four-family .................. 57,975 7,831 65,806
Commercial .......................... 61,342 - 61,342
Construction ........................ 2,665 - 2,665
Other loans:
Student ............................. 2,235 2,710 4,945
Loans secured by deposit accounts ... 4 - 4
Property improvement ................ 10,619 - 10,619
Consumer ............................ 4,556 - 4,556
Overdraft loans ..................... 227 - 227
---------- ------- ----------
Total loans receivable ................ $ 938,576 $10,541 $ 949,117
========== ======= ==========
</TABLE>
<PAGE> 25
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.
<TABLE>
At December 31, 1997, 1996 and 1995, delinquencies in the loan portfolios
were as follows:
<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, 1997
- --------------------
Delinquent loans:
Guaranteed(1) 48 $ 221 82 $ 500
Non-guaranteed 5 10 5 12,769
--- ------ --- -------
53 $ 231 87 $13,269
=== ====== === =======
Ratio of delinquent
loans to total loans .02% 1.32%
=== ====
At December 31, 1996
- --------------------
Delinquent loans:
Guaranteed(1) 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:
Guaranteed(1) 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%
===== ===
<FN>
(1) Loans which are FHA, VA or SLMA guaranteed.
</FN>
</TABLE>
<PAGE> 26
<TABLE>
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.
<CAPTION>
At December 31,
---------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(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 $12,754 $20,903 $ 500 $ -
------- ------- ------- ------ ------
Accruing loans 90 or more days overdue:
Conventional mortgages .................... - 686 311 322 326
VA and FHA mortgages (2) .................. 335 361 557 581 937
------ ------ ------- ------ ------
Total ................................ 335 1,047 868 903 1,263
------ ------ ------- ------ ------
Other loans:
- ------------
Non-accrual loans ........................ - - - - -
Accruing 90 or more days overdue:
Student loans .......................... 165 331 194 379 429
Consumer loans ......................... 15 19 13 7 19
------ ------ ------- ------ ------
Total ................................ 180 350 207 386 448
------ ------ ------- ------ ------
Total non-performing loans:
Non-accrual .............................. 12,754 12,754 20,903 500 -
Accruing 90 days or more overdue ......... 515 1,397 1,075 1,289 1,711
------ ------ ------- ------ ------
Total ................................ $13,269 $14,151 $21,978 $1,789 $1,711
======= ======= ======= ====== ======
Non-accrual loans to total loans ........... 1.26% 1.48% 2.69% .07% - %
Accruing loans 90 or more days overdue
to total loans ........................... .06 .16 .14 .18 .25
Non-performing loans to total loans ........ 1.32 1.64 1.78(3) .25 .25
At December 31:
- ---------------
Restructured loans ......................... $ 1,840 $ 1,874 $1,663 $1,828 $ -
For the years ended December 31:
- --------------------------------
Income forfeited due to
restructured loans ........................ $ 62 $ 62 $ 62 $ 6 $ -
Income unrecorded due to
non-accrual/impaired loans ................ $ 1,180 $ 1,180 $ 226 $ 150 $ -
<FN>
(1) See "Asset/Liability Management", included on pages 7 and 8 in the 1997
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 an $8.2 million mortgage loan that was current on a
cash basis, but on non-accrual status, as payments were received through the
bankruptcy court.
</FN>
</TABLE>
<PAGE> 27
There were no loans included in the preceding table which were modified
in a troubled debt restructuring ("TDR"). The entire balance of impaired loans
at December 31, 1997 represents loans on non-accrual status. The average balance
of impaired loans for both 1997 and 1996 was $12.8 million. There was no
interest income recorded for impaired loans (for the period in which the loans
were identified as impaired) during 1997 and 1996. For both years ended December
31, 1997 and 1996, impaired loans resulted in foregone interest of $1.2 million.
At December 31, 1997 and 1996, loans restructured in a TDR, other than those
classified as impaired loans and/or non-accrual loans, were $1.8 million and
$1.9 million, respectively. Interest forfeited attributable to these loans was
$62,000 for each of the years ended December 31, 1997, 1996 and 1995.
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 insured 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 loan and other 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 16 in the 1997 Annual Report
to Stockholders.)
<PAGE> 28
The OTS, in conjunction with other federal banking agencies, has 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
- ------------------------------------------------------------------------
Non-performing loans at December 31, 1997 included a $12.8 million
underlying cooperative mortgage loan which comprised 96.1% of non-performing
loans. This mortgage is secured by a 148 unit cooperative apartment building,
located in Manhattan, New York. On January 28, 1998, the Bank entered into a
settlement agreement with the borrower, that provides that the Bank be made
whole for unpaid principal, contractual interest, late charges and legal fees,
no later than May 28, 1998. In addition, the borrower is responsible for
interest, which will continue to accrue and for any additional legal fees that
the Bank incurs in connection with this credit. In accordance with the terms of
the agreement, the Bank received $1.2 million from the borrower, through March
13, 1998, comprised of a $1.0 million payment, which could be applied against
any portion of the indebtedness other than principal and $197,000 for interim
interest, which is due monthly. The borrower is seeking to refinance elsewhere.
Other Real Estate
- -----------------
ORE represents real estate properties owned by the Bank, or a subsidiary
company, as a result of foreclosure or by obtaining a deed in lieu of
foreclosure. ORE is recorded at the lower of the net unpaid indebtedness, or the
property's net fair value at the time of acquisition. Subsequent valuation
adjustments are made if the net fair value decreases below the carrying amount.
Gains, if any, on the sale of ORE are deferred under the cost recovery method.
At December 31, 1997, ORE carried at $473,000 was comprised of 31
cooperative apartments located within an 84 unit cooperative apartment building
located in Brooklyn, New York. The units were acquired during 1994, when the
Bank restructured an underlying cooperative loan. As part of the agreement, the
Bank extended the mortgage loan for an additional five years at 7.25%, made an
additional five year building improvement/liquidity loan to the cooperative and,
through a subsidiary corporation, received cooperative shares representing 57
apartments. As a result of the restructuring, $1.6 million (the Bank's
proportionate share of property ownership) of the cooperative association's $2.4
million indebtedness to the Bank was reclassified from mortgage loans to ORE on
the Company's consolidated financial statements. At December 31, 1997, the total
indebtedness related to this restructured loan reported in mortgage loans,
including the building improvement loan, was $1.3 million. At December 31, 1997,
of the original 57 units acquired; 26 units had been sold, resulting in deferred
gains of $376,000, 30 units were rented and, 1 unit was vacant and being
marketed for sale.
During 1997, ORE operations generated pre-tax income of $59,000, which
included net gains of $144,000 realized on the sale of ORE properties and the
net cost of operations of $85,000. There were no loss provisions established
against ORE during the year ended December 31, 1997.
<PAGE> 29
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
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:
<CAPTION>
Mortgage Portfolio Loan Loss Allowance: 1997 1996 1995 1994 1993
- -------------------------------------- ---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $5,176 $4,575 $3,976 $4,000 $3,400
Provision for possible loan losses 600 600 600 600 600
Loans charged-off (35) - (1) (624) -
Recoveries of loans previously charged off - 1 - - -
------ ------ ------- ------ ------
Balance at end of period $5,741 $5,176 $4,575 $3,976 $4,000
====== ====== ====== ====== ======
Ratios:
- -------
Net charge-offs to average mortgages - % - % - % .10% - %
Allowance for possible loan losses to
net mortgage loans at December 31: .59% .63% .62% .58% .62%
Allowance for possible loan losses to mortgage
loans delinquent 90 days or more at December 31: 43.86% 37.50% 5.27x 4.40x 3.17x
Other Loan Portfolio Loss Allowance:
- ------------------------------------
Balance at beginning of period $ 151 $ 122 $ 109 $ 136 $ 154
Provision for possible loan losses 48 40 36 8 -
Loans charged off (72) (33) (43) (40) (33)
Recoveries of loans previously charged off 12 22 20 5 15
------ ------ ------ ------ -----
Balance at end of period $ 139 $ 151 $ 122 $ 109 $ 136
====== ====== ====== ====== =====
Ratios:
- -------
Net charge-offs to average other loans .21% .04% .08% .13% .06%
Allowance for possible loan losses to
net other loans at December 31: .48% .54% .42% .40% .49%
Allowance for possible loan losses to other
loans delinquent 90 days or more at December 31: 77.22% 43.14% 58.94% 28.24% 30.36%
</TABLE>
<PAGE> 30
DEPOSITS
<TABLE>
Deposit balances are summarized as follows at December 31:
<CAPTION>
1997 1996 1995
---- ---- ----
Stated Stated Stated
rate Amount rate Amount rate Amount
---- ------ ---- ------ ---- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance by interest rate:
Demand - % $ 32,132 - % $ 31,940 - % $ 30,711
NOW 2.47 35,401 2.47 36,256 2.47 36,680
Money market 2.96 79,007 2.96 89,081 2.96 92,774
Passbook & lease
security 2.71 565,130 2.71 599,951 2.96 632,879
Certificates - - - - 3.70- 4.00 2,083
4.67- 5.00 44,646 4.14- 5.00 174,155 4.01- 5.00 135,386
5.01- 6.00 343,864 5.01- 6.00 187,890 5.01- 6.00 203,054
6.01- 7.00 21,023 6.01- 7.00 25,120 6.01- 7.00 29,016
7.01- 8.00 - 7.01- 8.00 - 7.01- 8.00 863
---------- ---------- ----------
409,533 387,165 370,402
---------- ---------- ----------
Total deposits $1,121,203 $1,144,393 $1,163,446
========== ========== ==========
Time certificates in
excess of $100,000 $ 41,551 $ 32,676 $ 27,039
========== ========== ==========
</TABLE>
<TABLE>
The following table sets forth the maturity of certificate accounts in
amounts of $100,000 or more at December 31:
<CAPTION>
1997
----
(In Thousands)
<S> <C>
Three months or less $18,067
Over three months through six months 8,288
Over six months through twelve months 9,430
Over twelve months 5,766
$41,551
</TABLE>
<PAGE> 31
<TABLE>
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:
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Passbook and lease
security $ 580,050 2.70% $ 615,591 2.72% $ 661,356 2.88%
Certificates 397,832 5.22 383,215 5.16 343,229 5.14
Money Market 83,731 3.04 91,597 3.08 99,016 3.08
NOW 35,934 2.45 36,338 2.47 37,073 2.55
---------- ---------- ----------
$1,097,547 3.63% $1,126,741 3.57% $1,140,674 3.57%
========== ========== ==========
<FN>
The FDIC, an agency of the U.S. Government, insures each depositor's
savings up to $100,000 through the BIF.
</FN>
</TABLE>
<TABLE>
Financial Highlights
<CAPTION>
For the Years Ended December 31: 1997 1996 1995
- ------------------------------- ---- ---- ----
<S> <C> <C> <C>
Return on average assets 2.42% 1.74% 1.44%
Return on average equity 10.64 8.05 6.67
Dividend payout ratio(1) 37.23 47.24 50.25
Average equity to average assets 22.72 21.65 21.60
Equity to total assets 23.94 22.12 22.01
Interest rate spread 3.88 3.90 3.82
Net interest margin 4.73 4.68 4.60
Non-interest expense to
average assets 1.79 1.80 1.92
Non-performing loans to total loans(2) 1.32 1.64 1.78
Non-performing assets to total assets(2) 0.90 0.98 1.50
Efficiency ratio(3) 38.27 40.40 42.36
Ratio of net interest income to
non-interest expense 2.47x 2.44x 2.27x
Average interest earning assets to
average interest bearing liabilities 1.31x 1.28x 1.28x
<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
1997 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> 32
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.
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 32 in the 1997 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> 33
ADDITIONAL ITEM. EXECUTIVE OFFICERS
- ------------------------------------
<TABLE>
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).
<CAPTION>
Age at Position held
Name December 31, 1997 with the Company
- ---- ----------------- ----------------
<S> <C> <C>
John F. Bennett 63 Senior Vice President
Ronald C. Spielberger 60 Senior Vice President
Jack Connors 48 Senior Vice President
John Conroy 51 Senior Vice President
Bernice Glaz 56 Senior Vice President
Lawrence J. Kane 44 Senior Vice President
Thomas R. Lehmann 47 Chief Financial Officer
Robert A. Neumuth 54 Senior Vice President
Joseph J. Hennessy 55 Asst. Treasurer/Comptroller
</TABLE>
<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.
<CAPTION>
Age at Position held
Name December 31, 1997 with the Bank
- ---- ----------------- -------------
<S> <C> <C>
John F. Bennett 63 Senior Vice President
Ronald C. Spielberger 60 Senior Vice President
Jack Connors 48 Senior Vice President
John Conroy 51 Senior Vice President
Bernice Glaz 56 Senior Vice President
Thomas R. Lehmann 47 Chief Financial Officer
Treasurer and Comptroller
Lawrence J. Kane 44 Senior Vice President
Robert A. Neumuth 54 Senior Vice President
</TABLE>
<PAGE> 34
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 New York Stock
Exchange under the symbol "JSB". Prior to August 7, 1997, the Company's common
stock was traded on the Nasdaq National Market under the symbol "JSBF".
Information regarding JSB Financial, Inc. common stock and its price for
the 1997 calendar year appears on page 6 of the 1997 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 17, 1998, JSB Financial, Inc. had approximately 2,143
shareholders of record, not including the number of persons or entities holding
stock in nominee or street name through various brokers and banks.
During 1997, the Company declared four cash dividends totaling $1.40 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 1997 Annual Report to Stockholders.) Dividends were
paid during calendar 1997 to stockholders as follows:
<TABLE>
<CAPTION>
Declaration Date Record Date Payment Date Dividend Per Share
---------------- ----------- ------------ ------------------
<S> <C> <C> <C> <C>
January 7, 1997 February 5, 1997 February 19, 1997 $.35
April 8, 1997 May 7, 1997 May 21, 1997 $.35
July 8, 1997 August 6, 1997 August 20, 1997 $.35
October 21, 1997 November 5, 1997 November 19, 1997 $.35
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
Information regarding selected financial data appears on pages 2 and 5
of the Company's 1997 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 19, of the Company's 1997 Annual Report to Stockholders,
are incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
Pages 21 through 43, of the Company's 1997 Annual Report to
Stockholders, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
-----------------------------------------------------------
None.
<PAGE> 35
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 Graph 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 12, 1998, 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 12, 1998, 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 12, 1998, 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 18 in the Company's Proxy
Statement for its Annual Meeting of Stockholders to be held on May 12, 1998, is
incorporated herein by reference.
<PAGE> 36
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 21 through 43, of the Company's 1997 Annual Report to
Stockholders, are incorporated herein by reference:
- - Consolidated Statements of Financial Condition at December 31, 1997 and
1996 - Consolidated Statements of Operations for each of the years in the
three year period ended December 31, 1997
- - Consolidated Statements of Changes in Stockholders' Equity for each of the
years in the three year period ended December 31, 1997
- - Consolidated Statements of Cash Flows for each of the years in the three
year period ended December 31, 1997
- - Notes to the Consolidated Financial Statements
- - Independent Auditors' Report
The remaining information appearing in the 1997 Annual Report to
Stockholders is not deemed to be filed as part of this report, except as
expressly provided herein.
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 1997: None
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K:
Exhibit No. Description
----------- -----------
3.01 Articles of Incorporation (1)
3.02 Bylaws (Amended and Restated, filed herewith)
4.01 Stock Certificate of JSB Financial, Inc. (1)
Employment Agreement between the Company and:
10.01 Park T. Adikes (2)
10.02 Edward P. Henson (2)
10.04 Ronald C. Spielberger (2)
10.05 Joanne Corrigan (2)
10.06 Supplemental Employment Agreement entered into on
July 9, 1996 between the Company and:
Park T. Adikes (3)
Edward P. Henson (3)
Ronald C. Spielberger (3)
Joanne Corrigan (3)
Continued
<PAGE> 37
Exhibit No. Description
----------- -----------
Employment Agreement between the Bank and:
10.07 Park T. Adikes (2)
10.08 Edward P. Henson (2)
10.09 Ronald C. Spielberger (2)
10.10 Joanne Corrigan (2)
10.11 John F. Bennett (2)
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, filed herewith
10.17 Robert A. Neumuth (3)
10.18 Supplemental Employment Agreement entered into on
July 9, 1996 between the Bank and:
Park T. Adikes (3)
Edward P. Henson (3)
Ronald C. Spielberger (3)
Joanne Corrigan (3)
John F. Bennett (3)
Jack Connors (3)
John J. Conroy (3)
Bernice Glaz (3)
Thomas R. Lehmann (3)
Lawrence J. Kane (3)
Robert A. Neumuth (3)
Special Termination Agreements between the Bank, guaranteed
by the Company and:
10.19 Teresa DiRe-Covello (2)
10.20 Joseph J. Hennessy (2)
10.21 Philip Pepe (5)
10.22 Supplemental Special Termination Agreements entered into
on July 9, 1996 between the Bank and:
Teresa DiRe-Covello (3)
Joseph J. Hennessy (3)
Philip Pepe (3)
Continued
<PAGE> 38
Exhibit No. Description
----------- -----------
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 1997 Annual Report to Stockholders,
filed herewith
23.01 Consent of KPMG Peat Marwick LLP, filed herewith
27.00 Financial Data Schedule for the Period Ended December 31,
1997, filed herewith
27.01 Financial Data Schedule for the Period Ended December 31,
1996, Restated, filed herewith
99.01 Form 11-K for calendar year 1997 for the Incentive Savings
Plan of Jamaica Savings Bank FSB (10)
(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 Form 10-K
for the Year Ended December 31, 1990.
(3) Incorporated herein by reference to Exhibits filed with the Form 10-K
for the Year Ended December 31, 1996.
(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.
<PAGE> 39
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 3/20/98
- --- -------------- -------
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 3/20/98 /s/ Thomas R. Lehmann 3/23/98
- --- -------------- ------- --------------------- -------
Park T. Adikes Thomas R. Lehmann
Chief Executive Officer Chief Financial Officer
Chairman and Director (Principal Accounting Officer)
/s/ Joseph C. Cantwell 3/26/98 /s/ James E. Gibbons, Jr. 3/26/98
- --------------------------- ------- -------------------------- -------
Joseph C. Cantwell James E. Gibbons, Jr.
Director Director
/s/ Edward P. Henson 3/24/98 /s/ Richard W. Meyer 3/26/98
- --------------------------- ------- -------------------------- -------
Edward P. Henson Richard W. Meyer
President and Director Director
/s/ Arnold B. Pritcher 3/26/98 /s/ Paul R. Screvane 3/26/98
- --------------------------- ------- -------------------------- -------
Arnold B. Pritcher Paul R. Screvane
Director Director
JSB FINANCIAL, INC.
BY-LAWS
ARTICLE I - STOCKHOLDERS
------------------------
Section 1. Annual Meeting.
An Annual meeting of the stockholders, for the election of Directors to succeed
those whose terms expire and for the transaction of such other business as may
properly come before the meeting, shall be held at such place, on such date, and
at such time as the Board of Directors shall each year fix, which date shall be
within thirteen (13) months subsequent to the later of the date of incorporation
or the last annual meeting of stockholders.
Section 2. Special Meetings.
Subject to the rights of the holders of any class or series of preferred stock
of the Corporation, special meetings of stockholders of the Corporation may be
called by the Board of Directors pursuant to a resolution adopted by a majority
of the total number of Directors which the Corporation would have if there were
no vacancies on the Board of Directors (hereinafter the "Whole Board") or by the
Chief Executive Officer of the Corporation.
Section 3. Notice of Meetings.
Written notice of the place, date, and time of all meetings of the stockholders
shall be given, not less than ten (10) nor more than sixty (60) days before the
date on which the meeting is to be held, to each stockholder entitled to vote at
such meeting, except as otherwise provided herein or required by law (meaning,
here and hereinafter, as required from time to time by the Delaware General
Corporation Law or the Certificate of Incorporation of the Corporation).
When a meeting is adjourned to another place, date or time, written notice need
not be given of the adjourned meeting if the place, date and time thereof are
announced at the meeting at which the adjournment is taken; provided, however,
that if the date of any adjourned meeting is more than thirty (30) days after
the date for which the meeting was originally noticed, or if a new record date
is fixed for the adjourned meeting, written notice of the place, date, and time
of adjourned meeting shall be given in conformity herewith. At any adjourned
meeting, any business may be transacted which might have been transacted at the
original meeting.
Section 4. Quorum.
At any meeting of the stockholders, the holders of a majority of all of the
shares of the stock entitled to vote at the meeting, present in person or by
proxy, shall constitute a quorum for all purposes, unless or except to the
extent that the presence of a larger number may be required by law. Where a
separate vote by a class or classes is required, a majority of the shares of
such class or classes present in person or represented by proxy shall constitute
a quorum entitled to take action with respect to that vote on that matter.
If a quorum shall fail to attend any meeting, the chairman of the meeting or the
holders of a majority of the shares of stock entitled to vote who are present,
in person or by proxy, may adjourn the meeting to another place, date, or time.
<PAGE>
If a notice of any adjourned special meeting of stockholders is sent to all
stockholders entitled to vote thereat, stating that it will be held with those
present constituting a quorum, then except as otherwise required by law, those
present at such adjourned meeting shall constitute a quorum, and all matters
shall be determined by a majority of the votes cast at such meeting.
Section 5. Organization.
Such person as the Board of Directors may have designated or, in the absence of
such a person, the Chief Executive Officer of the Corporation or, in his or her
absence, such person as may be chosen by the holders of a majority of the shares
entitled to vote who are present, in person or by proxy, shall call to order any
meeting of the stockholders and act as chairman of the meeting. In the absence
of the Secretary of the Corporation, the secretary of the meeting shall be such
person as the chairman appoints.
Section 6. Conduct of Business.
(a) The chairman of any meeting of stockholders shall determine the order of
business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of discussion as seem to him or her in order.
(b) At any annual meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting (i) by or at the
direction of the Board of Directors or (ii) by any stockholder of the
Corporation who is entitled to voted with respect thereto and who complies with
the notice procedures set forth in this Section 6(b). For business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the Corporation.
To be timely a stockholder's notice must be delivered or mailed to and received
at the principal executive offices of the Corporation not less than thirty (30)
days prior to the date of the annual meeting; provided, however, that in the
event that less than forty (40) days' notice or prior public disclosure of the
date of the meeting is given or made to stockholders, notice by the stockholder
to be timely must be received not later than the close of business on the 10th
day following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure was made. A stockholder's notice to the
Secretary shall set forth as to each matter such stockholder proposes to bring
before the annual meeting (i) a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting such business
at the annual meeting, (ii) the name and address, as they appear on the
Corporation's books, of the stockholder proposing such business, (iii) the class
and number of share of the Corporation's capital stock that are beneficially
owned by such stockholder and (iv) any material interest of such stockholder in
such business. Notwithstanding anything in these By-laws to the contrary, no
business shall be brought before or conducted at an annual meeting except in
accordance with the provisions of this Section 6(b). The Officer of the
Corporation or other person presiding over the annual meeting shall, if the
facts so warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the provisions of this
Section 6(b) and, if he should so determine, he shall so declare to the meeting
and any such business so determined to be not properly brought before the
meeting shall not be transacted.
At any special meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting by or at the direction
of the Board of Directors.
<PAGE>
(c) Only persons who are nominated in accordance with the procedures set forth
in these By-laws shall be eligible for election as Directors. Nominations of
persons for election to the Board of Directors of the Corporation may be made at
a meeting of stockholders at which Directors are to be elected only (i) by or at
the direction of the Board of Directors or (ii) by any stockholder of the
Corporation entitled to vote for the Election of Directors at the meeting who
complies with the notice procedures set forth in this Section 6(c). Such
nominations, other than those made by or at the direction of the Board of
Directors, shall be made by timely notice in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice shall be delivered or mailed
to and received at the principal executive offices of the Corporation not less
than 30 days prior to the date of the meeting; provided, however, that in the
event that less than 40 days notice or prior disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to be timely
must be so received not later than the close of business on the 10th day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. Such stockholder's notice shall set forth (i)
as to each person whom such stockholder proposes to nominate for election or
reelection as a Director, all information relating to such person that is
required to be disclosed in solicitations of proxies for election of Directors,
or is otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
Director if Elected); and (ii) as to the stockholder giving the notice (x) the
name and address, as they appear on the Corporation's books, of such stockholder
and (y) the class and number of shares of the Corporation's capital stock that
are beneficially owned by such stockholder. At the request of the Board of
Directors any person nominated by the Board of Directors for election as a
Director shall furnish to the Secretary of the Corporation that information
required to be set forth in a stockholder's notice of nomination which pertains
to the nominee. No person shall be eligible for election as a Director of the
Corporation unless nominated in accordance with the provisions of this Section
6(c). The Officer of the Corporation or other person presiding at the meeting
shall, if the facts so warrant, determine that a nomination was not made in
accordance with such provisions and, if he or she should so determine, he or she
shall so declare to the meeting and the defective nomination shall be
disregarded.
Section 7. Proxies and Voting.
At any meeting of the stockholders, every stockholder entitled to vote may vote
in person or by proxy authorized by an instrument in writing filed in accordance
with the procedure established for the meeting or such other manner as permitted
under the laws of the State of Delaware, including, but not limited to,
appropriate procedures for telephone voting and internet voting by stockholders
to authorize proxies.
Each stockholder shall have one (1) vote for every share of stock entitled to
vote which is registered in his or her name on the record date for the meeting,
except as otherwise provided herein or required by law.
All voting, including on the election of Directors but excepting where otherwise
required by law, may be by a voice vote; provided, however, that upon demand
therefore by a stockholder entitled to vote or his or her proxy, a stock vote
shall be taken. Every stock vote shall be taken by ballots, each of which shall
state the name of the stockholder or proxy voting and such other information as
may be required under the procedure established for the meeting. Every vote
taken by ballots shall be counted by an inspector or inspectors appointed by the
chairman of the meeting.
All elections shall be determined by a plurality of the votes cast, and except
as otherwise required by law or the Certificate of Incorporation, all other
matters shall be determined by a majority of the votes cast, without regard to
abstentions or broker non-votes.
<PAGE>
Section 8. Stock List.
A complete list of stockholders entitled to vote at any meeting of stockholders,
arranged in alphabetical order for each class of stock and showing the address
of each such stockholder and the number of shares registered in his or her name,
shall be open to the examination of any such stockholder, for any purpose
germane to the meeting, during ordinary business hours for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or if not so specified, at the place where the meeting is to be held.
The stock list shall also be kept at the place of the meeting during the whole
time thereof and shall be open to the examination of any such stockholder who is
present. This list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.
Section 9. Consent of Stockholders in Lieu of Meeting.
Subject to the rights of the holders of any class or series of preferred stock
of the Corporation, any action required or permitted to be taken by the
stockholders of the Corporation must be effected at an annual or special meeting
of stockholders of the Corporation and may not be effected by any consent in
writing by such stockholders.
ARTICLE II - BOARD OF DIRECTORS
-------------------------------
Section 1. General Powers, Number and Term of Office.
The business and affairs of the corporation shall be under the direction of its
Board of Directors. The number of Directors who shall constitute the Whole Board
shall be such number as the Board of Directors shall from time to time have
designated, except that in the absence of any such designation, such number
shall be ten (10). The Board of Directors shall annually elect a Chairman of the
Board from among its member who shall, when present, preside at its meetings.
The Directors, other than those who may be elected by the holders of any class
or series of Preferred Stock, shall be divided, with respect to the time for
which they severally hold office, into three classes, with the term of office of
the first class to expire at the first annual meeting of stockholders, the term
of office of the second class to expire at the annual meeting of stockholders
one year thereafter and the term of office of the third class to expire at the
annual meeting of stockholders two years thereafter, with each Director to hold
office until his or her successor shall have been duly elected and qualified. At
each annual meeting of stockholder, commencing with the first annual meeting,
Directors elected to succeed those Directors whose terms then expire shall be
elected for a term of office to expire at the third succeeding annual meeting of
stockholders after their election, with each Director to hold office until his
or her successor shall have been duly elected and qualified.
Section 2. Vacancies and Newly Created Directorships.
Subject to the rights of the holders of any class or series of preferred stock,
and unless the Board of Directors otherwise determines, newly created
Directorships resulting from any increase in the authorized number of Directors
or any vacancies in the Board of Directors resulting from death, resignation,
retirement, disqualification, removal from office or other cause may be filled
only by a majority vote of the Directors then in office, though less than a
quorum, and Directors so chosen shall hold office for a term expiring at the
annual meeting of stockholders at which the term of office of the class to which
they have been elected expires and until such Director's successor shall have
been duly elected and qualified. No decrease in the number of authorized
Directors constituting the Board shall shorten the term of any incumbent
Director.
<PAGE>
Section 3. Regular Meetings.
Regular meetings of the Board of Directors shall be held at such place or
places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all Directors. A
notice of each regular meeting shall not be required.
Section 4. Special Meetings.
Special meetings of the Board of Directors may be called by one-third (1/3) of
the Directors then in office (rounded up to the nearest whole number) or by the
Chairman of the Board and shall be held at such place, on such date, and at such
time as they or he or she shall fix. Notice of the place, date, and time of each
such special meeting shall be given each Director by whom it is not waived by
mailing written notice not less than five (5) days before the meeting or by
telegraphing or telexing or by facsimile transmission of the same not less than
twenty-four (24) hours before the meeting. Unless otherwise indicated in the
notice thereof, any and all business may be transacted at a special meeting.
Section 5. Quorum.
At any meeting of the Board of Directors, a majority of the Whole Board shall
constitute a quorum for all purposes. If a quorum shall fail to attend any
meeting, a majority of those present may adjourn the meeting to another place,
date, or time, without further notice or waiver thereof.
Section 6. Participation in Meetings By Conference Telephone.
Members of the Board of Directors, or of any committee thereof, may participate
in a meeting of such Board or committee by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other and such participation shall constitute presence
in person at such meeting.
Section 7. Conduct of Business.
At any meeting of the Board of Directors, business shall be transacted in such
order and manner as the Board may from time to time determine, and all matters
shall be determined by the vote of the majority of the Directors present, except
as otherwise provided herein or required by law. Action may be taken by the
Board of Directors without a meeting if all members thereof consent thereto in
writing, and the writing or writings are filed with the minutes of proceedings
of the Board of Directors.
Section 8. Powers.
The Board of Directors may, except as otherwise required by law, exercise all
such powers and do all such acts and things as may be exercised or done by the
Corporation, including, without limiting the generality of the foregoing, the
unqualified power:
<PAGE>
(1) To declare dividends from time to time in accordance with law;
(2) To purchase or otherwise acquire any property, rights or privileges on such
terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form as it may
determine, of written obligations of every kind, negotiable or nonnegotiable,
secured or unsecured, and to do all things necessary in connection therewith;
(4) To remove any Officer of the Corporation with or without cause, and from
time to time to devolve the powers and duties of any Officer upon any other
person for the time being;
(5) To confer upon any Officer of the Corporation the power to appoint, remove
and suspend subordinate Officers, employees and agents;
(6) To adopt from time to time such stock, option, stock purchase, bonus or
other compensation plans for Directors, Officers, employees and agents of the
Corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and other benefit
plans for Directors, Officers, employees and agents of the Corporation and its
subsidiaries as it may determine; and,
(8) To adopt from time to time regulations, not inconsistent with these By-Laws,
for the management of the Corporation's business and affairs.
Section 9. Compensation of Directors.
Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as Directors,
including, without limitation, their services as members of committees of the
Board of Directors.
ARTICLE III - COMMITTEES
------------------------
Section 1. Committees of the Board of Directors.
The Board of Directors, by a vote of a majority of the Whole Board, may from
time to time designate committees of the Board, with such lawfully delegable
powers and duties as it thereby confers, to serve at the pleasure of the Board
and shall, for those committees and any others provided for herein, elect a
Director or Directors to serve as the member or members, designating, if it
desires, other Directors as alternate members who may replace any absent or
disqualified member at any meeting of the committee. Any committee so designated
may exercise the power and authority of the Board of Directors to declare a
dividend, to authorize the issuance of stock or to adopt a certificate of
ownership and merger pursuant to Section 253 of the Delaware General Corporation
Law if the resolution which designates the committee or a supplemental
resolution of the Board of Directors shall so provide. In the absence or
disqualification of any member of any committee and any alternate member in his
or her place, the member or members of the committee present at the meeting and
not disqualified from voting, whether or not he or she or they constitute a
quorum, may by unanimous vote appoint another member of the Board of Directors
to act at the meeting in the place of the absent or disqualified member.
<PAGE>
Section 2. Conduct of Business.
Each committee may determine the procedural rules for meeting and conducting its
business and shall act in accordance therewith, except as otherwise provided
herein or required by law. Adequate provisions shall be made for notice to
members of all meetings; one-third (1/3) of the members shall constitute a
quorum unless the committee shall consist of one (1) or two (2) members, in
which event one (1) member shall constitute a quorum; and all matters shall be
determined by a majority vote of the members present. Action may be taken by any
committee without a meeting if all members thereof consent thereto in writing,
and the writing or writings are filed with the minutes of the proceedings of
such committee.
Section 3. Nominating Committee.
The Board of Directors shall appoint a Nominating Committee of the Board,
consisting of three (3) members, one of which shall be the Chairman of the
Board. The Nominating Committee shall have authority (a) to review any
nominations for election to the Board of Directors made by a stockholder of the
Corporation pursuant to section 6(c)(ii) of Article I of these By-Laws in order
to determine compliance with such By-laws and (b) to recommend to the Whole
Board nominees for election to the Board of Directors to replace those Directors
whose terms expire at the annual meeting of stockholders next ensuing.
ARTICLE IV - OFFICERS
---------------------
Section 1. Generally.
(a) The Board of Directors as soon as may be practicable after the annual
meeting of stockholders shall choose a Chief Executive Officer, a President, one
or more Vice Presidents, a Secretary and a Comptroller and from time to time may
choose such other Officers as it may deem proper. The Chief Executive Officer
and the President shall be chosen from among the Directors. Any number of
offices may be held by the same person.
(b) The term of office of all Officers shall be until the next annual election
of Officers and until their respective successors are chosen but any Officer may
be removed from office at any time by the affirmative vote of a majority of the
authorized number of Directors then constituting the Board of Directors.
(c) All Officers chosen by the Board of Directors shall each have such powers
and duties as generally pertain to their respective offices, subject to the
specific provisions of this Article IV. Such Officers shall also have such
powers and duties as from time to time may be conferred by the Board of
Directors or by any committee thereof.
Section 2. Chief Executive Officer.
The Chief Executive Officer shall, subject to the provisions of these By-Laws
and to the direction of the Board of Directors, have the responsibility for the
general management and control of the business and affairs of the Corporation
and shall perform all duties and have all powers which are commonly incident to
the office of Chief executive or which are delegated to him or her by the Board
of Directors. He or she shall have power to sign all stock certificates,
contracts and other instruments of the Corporation which are authorized and
shall have general supervision and direction of all of the other Officers,
employees and agents of the Corporation.
<PAGE>
Section 3. President.
The President shall have general responsibility for the management and control
of the operations of the Corporation and shall perform all duties and have all
powers which are commonly incident to the office of President or which are
delegated to him or her by the Board of Directors. Subject to the direction of
the Board of Directors and the Chief Executive Officer, the President shall have
power to sign all stock certificates, contracts and other instruments of the
Corporation which are authorized and shall have general supervision of all of
the other Officers (other than the Chief Executive Officer), employees and
agents of the Corporation.
Section 4. Vice President.
The Vice President or Vice Presidents shall perform the duties of the President
in his absence or during his disability to act. In addition, the Vice Presidents
shall perform the duties and exercise the powers usually incident to their
respective office and/or such other duties and powers as may be properly
assigned to them by the Board of Directors, the Chairman of the Board and the
Chief Executive Officer or the President. A Vice President or Vice Presidents
may be designated as Executive Vice President or Senior Vice President.
Section 5. Secretary.
The Secretary or an Assistant Secretary shall issue notices of meetings, shall
keep their minutes, shall have charge of the seal and the corporate books, shall
perform such other duties and exercise such other powers as are usually incident
to such offices and/or such other duties and powers as are properly assigned
thereto by the Board of Directors, the Chairman of the Board, the Chief
Executive Officer or the President.
Section 6. Comptroller.
The Comptroller shall be the Chief Financial Officer and the Treasurer of the
Corporation and shall have the responsibility for maintaining the financial
records of the Corporation. He or she shall make such disbursements of the funds
of the Corporation as are authorized and shall render from time to time an
account of all such transactions and of the financial condition of the
Corporation. The Comptroller shall also perform such other duties as the Board
of Directors may from time to time prescribe.
Section 7. Assistant Secretaries and Other Officers.
The Board of Directors may appoint one or more Assistant Secretaries and such
other Officers who shall have such powers and shall perform such duties as are
provided in these By-laws or as may be assigned to them by the Board of
Directors, the Chairman of the Board, the Chief Executive Officer or the
President.
Section 8. Action with Respect to Securities of Other Corporations.
Unless otherwise directed by the Board of Directors, the President or any
Officer of the Corporation authorized by the President shall have power to vote
and otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of stockholders of or with respect to any action of stockholders of any
other corporation in which this Corporation may hold securities and otherwise to
exercise any and all rights and powers which this Corporation may possess by
reason of its ownership of securities in such other corporation.
<PAGE>
ARTICLE V - STOCK
-----------------
Section 1. Certificate of Stock.
Each stockholder shall be entitled to a certificate signed by, or in the name of
the Corporation by, the Chairman of the Board or the President, and by the
Secretary or an Assistant Secretary, or any Treasurer or Assistant Treasurer,
certifying the number of shares owned by him or her. Any or all of the
signatures on the certificate may be by facsimile.
Section 2. Transfer of Stock.
Transfers of stock shall be made only upon the transfer books of the Corporation
kept at an office of the Corporation or by transfer agents designated to
transfer shares of the stock of the Corporation. Except where a certificate is
issued in accordance with Section 4 of Article V of these By-laws, an
outstanding certificate for the number of shares involved shall be surrendered
for cancellation before a new certificate is issued therefor.
Section 3. Record Date.
In order that the Corporation may determine the stockholders entitled to notice
of or to vote at any meeting of stockholders, or to receive payment of any
dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date on which the resolution
fixing the record date is adopted and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date of any meeting of
stockholders, nor more than sixty (60) days prior to the time for such other
action as hereinbefore described; provided, however, that if no record date is
fixed by the Board of Directors, the Record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the day next preceding the day
on which the meeting is held, and, for determining stockholders entitled to
received payment of any dividend or other distribution or allotment of rights or
to exercise any rights of change, conversion or exchange of stock or for any
other purpose, the record date shall be at close of business on the day on which
the Board of Directors adopts a resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the
adjourned.
Section 4. Lost, Stolen or Destroyed Certificates.
In the event of the loss, theft or destruction of any certificate of stock,
another may be issued in its place pursuant to such regulations as the Board of
Directors may establish concerning proof of such loss, theft or destruction and
concerning the giving of a satisfactory bond or bonds of indemnity.
Section 5. Regulations.
The issue, transfer, conversion and registration of certificates of stock shall
be governed by such other regulations as the Board of Directors may establish.
<PAGE>
ARTICLE VI - NOTICES
--------------------
Section 1. Notices.
Except as otherwise specifically provided herein or required by law, all notices
required to be given to any stockholder, Director, Officer, employee or agent
shall be in writing and may in every instance be effectively given by hand
delivery to the recipient thereof, by depositing such notice in the mails,
postage paid, or by sending such notice by prepaid telegram or mailgram or other
courier. Any such notice shall be addressed to such stockholder, Director,
Officer, employee or agent at his or her last known address as the same appears
on the books of the Corporation. The time when such notice is received, if hand
delivered, or dispatched, if delivered through the mails or by telegram or
mailgram or other courier, shall be the time of the giving of the notice.
Section 2. Waivers.
A written waiver of any notice, signed by a stockholder, Director, Officer,
employee or agent, whether before or after the time of the event for which
notice is to be given, shall be deemed equivalent to the notice required to be
given to such stockholder, Director, Officer, employee or agent. Neither the
business nor the purpose of any meeting need be specified in such a waiver.
ARTICLE VII - MISCELLANEOUS
---------------------------
Section 1. Facsimile Signatures.
In addition to the provisions for use of facsimile signatures elsewhere
specifically authorized in these By-laws, facsimile signatures of any Officer or
Officers of the Corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof.
Section 2. Corporate Seal.
The Board of Directors may provide a suitable seal, containing the name of the
Corporation, which seal shall be in the charge of the Secretary. If and when so
directed by the Board of Directors or a committee thereof, duplicates of the
seal may be kept and used by the Comptroller or by an Assistant Secretary or an
assistant to the Comptroller.
Section 3. Reliance upon Books, Reports and Records.
Each Director, each member of any committee designated by the Board of
Directors, and each Officer of the Corporation shall, in the performance of his
or her duties, be fully protected in relying in good faith upon the books of
account or other records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of its Officers or
employees, or committees of the Board of Directors so designated, or by any
other person as to matters which such Director or committee member reasonably
believes are within such other person's professional or expert competence and
who has been selected with reasonable care by or on behalf of the Corporation.
<PAGE>
Section 4. Fiscal Year.
The fiscal year of the Corporation shall be as fixed by the Board of Directors.
Section 5. Time Periods.
In applying any provision of these By-laws which requires that an act be done or
not be done a specified number of days prior to an event or that an act be done
during a period of a specified number of days prior to an event, calendar days
shall be used, the day of the doing of the act shall be excluded, and the day of
the event shall be included.
ARTICLE VIII - AMENDMENTS
-------------------------
The Board of Directors may amend, alter or repeal these By-laws at any meeting
of the Board, provided notice of the proposed change is given in a notice given
not less than two days prior to the meeting. The stockholders shall also have
power to amend, alter or repeal these By-laws at any meeting of Stockholders,
provided notice of the proposed change was given in the notice of the meeting;
provided, however, that, notwithstanding any other provisions of these By-laws
or any provision of law which might otherwise permit a lesser vote or no vote,
but in addition to any affirmative vote of the holders of any particular class
or series of the Voting Stock required by law, the Certificate of Incorporation,
any Preferred Stock Designation or these By-laws, the affirmative votes of the
holders of at least 80% of the voting power of all the then-outstanding shares
of the Voting Stock, voting together as a single class, shall be required to
alter, amend or repeal any provisions of these By-laws.
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 Lawrence J. Kane ("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.
<PAGE>
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 $93,000 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.
(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
<PAGE>
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.
(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
<PAGE>
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.
(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.
<PAGE>
(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.
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.
<PAGE>
(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.
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.
<PAGE>
(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.
<PAGE>
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.
(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 hereinabove.
(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:
John J. Conroy Lawrence J. Kane
- ------------------------ ------------------------
John J. Conroy Lawrence J. Kane
Senior Vice President Senior Vice President
PART 1: EXHIBIT 11.01
<TABLE>
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,
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic earnings per share:
- -------------------------
Basic weighted average common shares* 9,858 10,062 9,912 9,776
Net Income $37,090 $26,725 $14,979 $7,287
Basic earnings per common share* $3.76 $2.66 $ 1.51 $ .75
Diluted earnings per share:
- ---------------------------
Weighted average common and dilutive potential shares* 10,190 10,436 10,243 10,139
Net Income $37,090 $26,725 $14,979 $7,287
Diluted earnings per common share* $3.64 $2.56 $1.46 $ .72
<FN>
* Earnings per share for 1996 have been restated, as required, for the adoption
of Financial Accounting Standards Board Statement No. 128.
</FN>
</TABLE>
Selected Financial Data
(In Thousands, Except Per Share Amounts)
<TABLE>
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.
<CAPTION>
Selected Financial Condition Data:
At December 31, 1997 1996 1995 1994 1993
- --------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total assets $1,535,031 $1,516,016 $1,548,301 $1,565,095 $1,635,870
Securities held-to-maturity/held-
for-investment, net 352,967 460,509 592,060 728,630 859,909
Loans receivable, net 999,745 854,774 768,245 711,295 668,376
Deposits 1,121,203 1,144,393 1,163,446 1,204,424 1,273,917
Employee Stock Ownership
Plan (ESOP) obligation - - - - 1,045
Retained income 311,436 289,588 276,317 266,361 251,959
Total stockholders' equity 367,514 335,299 340,107 327,634 325,207
Selected Operating Data:
Years Ended December 31, 1997 1996 1995 1994 1993
- ------------------------ ---- ---- ---- ---- ----
Interest income $ 107,742 $ 107,611 $ 107,726 $ 103,027 $ 108,205
Interest expense 39,874 40,217 40,707 36,619 39,740
---------- ---------- ---------- ---------- ---------
Net interest income 67,868 67,394 67,019 66,408 68,465
Provision for possible
loan losses 648 640 636 608 600
(Recovery of) provision for
possible other credit losses - (2,040) 2,040 - -
---------- --------- ---------- ---------- ---------
Net interest income after
provision for possible
credit losses 67,220 68,794 64,343 65,800 67,865
Non-interest income 21,929 5,081 3,995 6,752 2,239
Non-interest expense 27,434 27,598 29,561 30,937 33,657
---------- ---------- --------- ---------- ---------
Income before provision for
income taxes and cumulative
effect of accounting changes 61,715 46,277 38,777 41,615 36,447
Provision for income taxes 24,625 19,552 16,603 18,018 15,798
---------- ---------- ---------- ---------- ---------
Income before cumulative effect
of accounting changes 37,090 26,725 22,174 23,597 20,649
Cumulative effect of accounting
changes, net _-___ - - - 7,688
---------- ---------- ---------- ---------- --------
Net income $ 37,090 $ 26,725 $ 22,174 $ 23,597 $ 28,337
========== ========== ========== ========== ========
Basic earnings per common share
before cumulative effect of
accounting changes $3.76 $2.66 $2.09 $2.13 $1.65
Cumulative effect of accounting
changes, net -__ - - - .62
----- ----- ----- ----- -----
Basic earnings per common share $3.76 $2.66 $2.09 $2.13 $2.27
===== ===== ===== ===== =====
Diluted earnings per common share
before cumulative effect of
accounting changes $3.64 $2.56 $2.01 $2.04 $1.58
Cumulative effect of accounting
changes, net -__ - - - .59
----- ----- ----- ----- -----
Diluted earnings per common share $3.64 $2.56 $2.01 $2.04 $2.17
===== ===== ===== ===== =====
Cash dividends per common share $1.40 $1.20 $1.00 $ .72 $ .60
===== ===== ===== ===== =====
</TABLE>
<PAGE>
<TABLE>
Quarterly Results
(In Thousands, Except Per Share Amounts and Yields)
<CAPTION>
1997 Quarter Ended
------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Interest income $26,683 $26,993 $26,796 $27,270
Interest expense 9,738 9,932 10,094 10,110
------- ------- ------- -------
Net interest income 16,945 17,061 16,702 17,160
Provision for possible loan losses 160 161 162 165
------- ------- ------- -------
Net interest income after provision
for possible loan losses 16,785 16,900 16,540 16,995
Non-interest income 1,114 1,536 4,513 14,766
Non-interest expense 6,884 6,751 7,063 6,736
------- ------- ------- -------
Income before provision for income taxes 11,015 11,685 13,990 25,025
Provision for income taxes 4,567 4,576 5,436 10,046
------- ------- ------- -------
Net income $ 6,448 $ 7,109 $ 8,554 $14,979
======= ======= ======= =======
Basic earnings per common share $ .66 $ .72 $ .87 $1.51
===== ===== ===== ======
Diluted earnings per common share $ .63 $ .70 $ .84 $1.46
===== ===== ===== =====
Stock prices, Dividends and Yields:
High $44.00 $47.00 $49.69 $50.63
Low $36.00 $40.00 $39.75 $46.31
Close $42.50 $43.25 $48.94 $50.06
Cash dividends per common share $ .35 $ .35 $ .35 $ .35
Dividend yield1 3.50% 3.22% 3.13% 2.89%
1996 Quarter Ended
------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
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
======= ======= ======= =======
Basic earnings per common share $ .58 $ .66 $ .67 $ .75
===== ===== ===== =====
Diluted earnings per common share $ .56 $ .64 $ .65 $ .72
===== ===== ===== =====
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 common share $ .30 $ .30 $ .30 $ .30
Dividend yield1 3.66% 3.57% 3.43% 3.24%
<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
- -------
1997 marked the seventh full year of operations for JSB Financial, Inc. as
a publicly held company. Net income for the year was $37.1 million, or $3.64 per
diluted share. The Company paid cash dividends on its common stock which totaled
$1.40 per share, or 38.5% of diluted earnings per common 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 by its net interest income. The operating results of the Bank are also
affected, generally to a lesser extent, by the amount of its non-interest income
and non-interest expense. Items comprising non-interest income are, results of
real estate operations, gains or losses on the sale of equity securities, if
any, loan servicing income and various other items comprising miscellaneous
income. The principal non-interest expense of the Bank includes compensation and
employee benefits, occupancy costs and other general and administrative
expenses.
Asset/Liability Management
- --------------------------
Management aims at maintaining a stable net interest margin and minimizing
the effects of market interest rate fluctuations on net interest income through
its asset/liability structure. Rates offered on interest bearing deposits are
established to influence changes in levels of deposits. Assets increased by
$19.0 million, or 1.3%, to $1.535 billion during 1997, compared to assets of
$1.516 billion at December 31, 1996, while liabilities decreased by $13.2
million, or 1.1%, to $1.168 billion from $1.181 billion over the same period.
The Company maintains asset quality through its investment and loan underwriting
policies.
At December 31, 1997, net mortgage loans were $970.7 million, comprising
63.2% of total assets, investments in U.S. Government and federal agency
securities were $244.9 million and investments in CMOs were $104.0 million,
representing 16.0% and 6.8% of total assets, respectively. During 1997, all
investments in U.S. Government and federal 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 impact 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 estimated fair value. At December 31, 1997,
these securities, which had a cost basis of $10.9 million, were carried at their
aggregated fair value of $62.2 million. Unrealized gains and losses on
available-for-sale securities are excluded from earnings and reported as a net
amount in a separate component of stockholders' equity until realized.
<PAGE>
During 1997, investments in CMOs decreased, as payments of $106.5 million
were received from maturities and amortization and purchases of $55.0 million
were made. 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, 1997, 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 Institutions Examination Council. At December 31, 1997, the
estimated average remaining maturity of the CMO portfolio was approximately
twenty months. Management plans to continue to purchase CMOs which meet its
investment guidelines, when available.
The Bank offers fixed-rate and adjustable-rate mortgage loans secured by
one-to four-family properties, apartment buildings, underlying cooperative
properties, commercial real estate and offers various other consumer type loans.
During 1997, the Bank sold $1.6 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, 1997, there were
no mortgage loans held-for-sale.
Non-performing loans to total loans at December 31, 1997 was 1.32%,
compared to 1.64% at December 31, 1996. Non-performing loans at December 31,
1997 and 1996 included a $12.8 million underlying cooperative mortgage loan on
which the Bank has commenced foreclosure proceedings. This one mortgage loan
comprised 96.1% of non-performing loans and 92.8% of non-performing assets at
December 31, 1997. 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, as management believes that the mortgage is
adequately secured. On January 28, 1998, the Bank entered into a settlement
agreement with the borrower, that provides that the Bank be made whole for
unpaid principal, contractual interest, late charges and legal fees, no later
than May 28, 1998. In addition, the borrower will be responsible for interest,
which will continue to accrue and for any additional legal fees that the Bank
incurs in connection with this credit. In accordance with the terms of the
agreement, the Bank received $1.1 million from the borrower, through February
16, 1998, comprised of a $1.0 million payment which could be applied against any
portion of the indebtedness other than principal and, $98,000 for interim
interest, which is due monthly. The borrower is seeking to refinance the
mortgage elsewhere.
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 or
transferred to a subsidiary corporation as a result of foreclosure or obtained
by receiving a deed in lieu of foreclosure. At December 31, 1997 the Bank held
shares to 31 residential cooperative apartments attributable to one property,
that comprised the Bank's ORE of $473,000. Management closely monitors the value
of properties that are obtained through foreclosure actions. (See Note 12 to the
Consolidated Financial Statements.)
<PAGE>
Non-performing assets to total assets at December 31, 1997 was .90%,
compared to .98% at December 31, 1996. The decrease in this ratio primarily
reflected the foreclosure and subsequent sale of a single family house with a
mortgage of $450,000 which was not performing at December 31, 1996.
Deposits at December 31, 1997, decreased by $23.2 million, or 2.0%,
compared to deposits at December 31, 1996. While interest rates on the various
accounts offered by the Bank remained competitive with those of other depository
institutions in the Bank's market, 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 influences deposit
levels and composition through its interest rate structure. While the highest
percentage of deposits has historically been in passbook and lease security
accounts, the trend of deposit shifts has continued towards certificate
accounts. (See Liquidity and Capital Resources, herein.) 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.
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 continuance of the current trend, is not expected to have a
material adverse affect on the Company within the foreseeable future. However,
if, as is the current trend, the Company's deposits continue to decline,
interest earning assets may also decline, resulting in a decrease in net
interest income, the Company's primary component of net income.
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. Within recent years, the Bank has expanded services offered to its
depositors, including automated telephone banking 24 hours a day, 365 days a
year. The Bank also offers credit cards, which are issued and owned by an
unrelated bank that manages and bears all credit risk.
<PAGE>
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, 1997, 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 MBS based upon the remaining term to contractual
maturity were as follows: (a) 27% if less than six months; (b) 11% if six months
to one year and for five to ten years; (c) 8% if one to three years; (d) 9% if
three to five years and for ten to twenty years; and (e) 17% if beyond 20 years.
Adjustable-rate mortgages are assumed to prepay at 15% and second mortgages at
18%. All other fixed rate first mortgage loans are assumed to prepay at 3%. 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>
<TABLE>
The following table sets forth, as of December 31, 1997, 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 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.
<CAPTION>
At December 31, 1997
----------------------------------------------------------------------
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.......... 24,354 $ 28,993 $ 118,719 $ 186,235 $482,160 $ 98,503 $ 37,514 $ 976,478
Debt and equity securities and
other investments, net 2....... 179,888 124,922 9,981 - - - - 314,791
CMOs, net...................... 3,287 16,969 77,250 6,534 - - - 104,040
MBS, net....................... - 196 959 - - 2,869 - 4,024
Other loans, net 1............. 63 640 12,741 4,142 11,561 - - 29,147
Federal funds sold............. 62,000 - - - - - - 62,000
-------- -------- -------- --------- -------- -------- -------- ----------
Total interest earning assets 269,592 171,720 219,650 196,911 493,721 101,372 37,514 1,490,480
-------- -------- -------- --------- -------- -------- -------- ----------
Interest bearing deposit accounts:
Passbook and lease
security accounts............. 565,130 - - - - - - 565,130
Certificate accounts........... 141,365 203,527 50,011 14,630 - - - 409,533
Money market accounts.......... 79,007 - - - - - - 79,007
Negotiable order of withdrawal3 35,401 - - - - - - 35,401
-------- -------- --------- --------- -------- -------- -------- ----------
Interest bearing liabilities. 820,903 203,527 50,011 14,630 - - - 1,089,071
-------- -------- --------- --------- -------- -------- -------- ----------
Interest sensitivity gap
per period.................... $(551,311) $(31,807)$ 169,639 $ 182,281 $493,721 $101,372 $ 37,514 $ 401,409
========= ======== ========= ========= ======== ======== ======== ==========
Cumulative interest
sensitivity gap............... $(551,311) $(583,118)$(413,479) $(231,198) $262,523 $363,895 $401,409 $ -
========= ========= ========= ========= ======== ======== ======== ==========
Percentage of gap per period to
total assets................. (35.92%) (2.07%) 11.05% 11.87% 32.16% 6.60% 2.44%
Percentage of cumulative gap to
total assets................ (35.92%) (37.99%) (26.94%) (15.07%) 17.09% 23.69% 26.13%
<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 $51.4 million, before tax.
3 Negotiable order of withdrawal (NOW) accounts.
Note: Certain shortcomings 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. In the 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>
The Bank's interest rate sensitivity is also monitored by management
through the use of a model which internally generates estimates of the change in
the net portfolio value (NPV) over a range of interest rate change scenarios.
NPV is the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is
defined as the NPV in that scenario divided by the market value of assets in the
same scenario. The Office of Thrift Supervision (OTS) also produces a similar
analysis using its own model, based upon data submitted on the Bank's quarterly
Thrift Financial Reports, the results of which may vary from the Bank's internal
model primarily due to differences in assumptions utilized between the Bank's
internal model and the OTS model, including estimated loan prepayment rates,
reinvestment rates and deposit decay rates. For purposes of the NPV table,
prepayment speeds similar to those used in the Gap table were used, reinvestment
rates were those in effect for similar products currently being offered, and
rates on deposits were modified to reflect recent trends. The following table
sets forth the Bank's NPV as of December 31, 1997, as calculated by the Bank.
<TABLE>
<CAPTION>
Rate Changes in Net Portfolio Value Portfolio Value of Assets
- --------------- ------------------- -------------------------
Basis Points Dollar Dollar Percent NPV Percent
(Rate Shock) Amount Change Change Ratio Change1
- --------------------------------------------------------- ------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+200 $317,949 $(42,954) (11.90)% 21.35% (3.10)%
+100 338,813 (22,090) (6.12) 22.40 (1.59)
0 360,903 - - 23.48 -
-100 391,417 30,514 8.45 24.94 2.14
-200 437,804 76,901 21.31 27.05 5.32
<FN>
1 Reflects the percentage change in the portfolio value of the Bank's assets for
each rate shock compared to the portfolio value of the Bank's assets under the
zero rate change scenario.
Note: As in the case with the Gap table, certain shortcomings are inherent in
the methodology used in the above interest rate risk measurements. Modeling
changes in NPV require certain assumptions which may or may not reflect the
manner in which actual yields and costs respond to changes in market interest
rates. In this regard, the NPV model presented assumes that the composition of
the Bank's interest sensitive assets and liabilities existing at the beginning
of a period remains constant over the period being measured and also assumes
that a particular change in interest rates is reflected uniformly across the
yield curve regardless of the duration to maturity or repricing of specific
assets and liabilities. Accordingly, although the NPV measurements and net
interest income models provide an indication of the Bank's interest rate risk
exposure at a particular point in time, such measurements are not intended to
and do not provide a precise forecast of the effect of changes in market
interest rates on the Bank's net interest income, as actual results will differ.
</FN>
</TABLE>
<PAGE>
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 information relating to the Company's
Consolidated Statements of Financial Condition and the Consolidated Statements
of Operations for the years ended December 31, 1997, 1996 and 1995 and reflects
the average yield on assets and average cost of liabilities for the periods
indicated. 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,
---------------------------------------------------------------------------------
1997 1996 1995
-------------------------- -------------------------- -------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost Balance Expense Cost
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets:
Mortgage loans, net...$ 878,697 $ 74,149 8.44% $ 792,579 $ 69,113 8.72% $ 702,252 $ 64,309 9.16%
Debt and equity
securities, net1..... 325,964 19,584 6.01 361,106 21,695 6.01 456,581 27,545 6.03
CMOs, net............. 133,418 7,937 5.95 179,336 10,063 5.61 209,537 9,572 4.57
MBS, net.............. 4,855 499 10.28 6,540 739 11.30 8,650 969 11.20
Other loans, net...... 28,119 2,070 7.36 28,393 2,138 7.53 28,977 2,299 7.93
Federal funds sold.... 64,345 3,503 5.44 72,221 3,863 5.35 52,432 3,032 5.78
---------- -------- ---------- -------- ---------- ---------
Total interest earning
assets1................ 1,435,398 107,742 7.51 1,440,175 107,611 7.47 1,458,429 107,726 7.39
Non-interest earning
assets................. 99,180 93,539 80,701
---------- ---------- ----------
Total assets.........$1,534,578 $1,533,714 $1,539,130
========== ========== ==========
Liabilities and stockholders' equity
Interest bearing
liabilities:
Passbook and other.....$ 699,715 $ 19,106 2.73% $ 743,526 $ 20,440 2.75% $ 797,445 $ 23,058 2.89%
Certificate accounts... 397,832 20,768 5.22 383,215 19,777 5.16 343,229 17,649 5.14
---------- -------- ---------- -------- ---------- --------
Total interest
bearing liabilities.... 1,097,547 39,874 3.63 1,126,741 40,217 3.57 1,140,674 40,707 3.57
Non-interest bearing
liabilities.......... 88,423 74,928 65,963
---------- ---------- ----------
Total liabilities.... 1,185,970 1,201,669 1,206,637
Total stockholders'
equity.............. 348,608 332,045 332,493
---------- ---------- ----------
Total liabilities
and stockholders'
equity..............$1,534,578 $1,533,714 $1,539,130
========== ========== ==========
Net interest income/
interest rate spread2.. $ 67,868 3.88% $ 67,394 3.90% $ 67,019 3.82%
======== ==== ======== ==== ======== ====
Net interest earning
assets/net interest
margin3................$ 337,851 4.73% $ 313,434 4.68% $ 317,755 4.60%
========== ==== ========== ==== ========== =====
Ratio of interest
earning assets to
interest bearing
liabilities............ 1.31x 1.28x 1.28x
==== ==== ====
<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, 1997 Year Ended December 31, 1996
Compared to Compared to
Year Ended December 31, 1996 Year Ended December 31, 1995
---------------------------- ----------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Mortgage loans, net .............. $ 7,313 $ (2,277) $ 5,036 $ 7,997 $(3,193) $ 4,804
Debt and equity securities ....... (2,111) - (2,111) (5,759) (91) (5,850)
CMOs, net......................... (2,705) 579 (2,126) (1,499) 1,990 491
MBS, net.......................... (177) (63) (240) (239) 9 (230)
Other loans, net ................. (21) (47) (68) (46) (115) (161)
Federal funds sold ............... (424) 64 (360) 1,070 (239) 831
------- -------- -------- ------- ------- -------
Total ...................... 1,875 (1,744) 131 1,524 (1,639) (115)
------- -------- -------- ------- ------- --------
Interest bearing liabilities:
Passbook and other ............... (1,186) (148) (1,334) (1,400) (1,218) (2,618)
Certificate accounts.............. 759 232 991 2,059 69 2,128
------- -------- -------- ------- ------- --------
Total....................... (427) 84 (343) 659 (1,149) (490)
------- -------- -------- -------- ------- -------
Net change in net interest income... $ 2,302 $(1,828) $ 474 $ 865 $ (490) $ 375
======= ======= ======== ======= ======= =======
</TABLE>
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company's funds are primarily obtained through dividends paid by the
Bank. 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 federal 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 1997, the net deposit outflows of $23.2 million and dividend
payments of $13.8 million, contributed to the net cash outflow from financing
activities. The most significant dollar change in deposit composition was
experienced in the Bank's passbook accounts, which decreased by $34.8 million,
or 5.8%, followed by a $10.1 million decrease in money market accounts and an
$855,000 decrease in NOW accounts. However, certificate accounts increased $22.4
million, or 5.8% and demand accounts increased $192,000.
During 1997, 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 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, 1997 was 4.0%. The Bank's liquidity ratio is
significantly in excess of the required level. The Bank's average liquidity
ratios were 29.9% and 34.0% for the years ended December 31, 1997 and 1996,
respectively. The Bank's high liquidity reflects management's strategy of
investing funds in short-term CMOs and U.S. Government and federal 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.
<PAGE>
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 federal agency securities portfolio had
an average remaining maturity of five months and the CMO portfolio had an
average anticipated remaining maturity of twenty months as of December 31, 1997.
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.)
Management monitors 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 in the long-term future, the
Company's future interest rate spreads, margins and net income will likely
decline. 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 New York Cash Exchange (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, which incurs all risk of loss.
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>
Year 2000
- ---------
In the early 1990's, the Bank's existing staff began converting its
computer system to be Year 2000 compliant. At December 31, 1997, 100% of the
Bank's mainframe programs and 50% of other critical systems were year 2000
compliant, with the remainder expected to be compliant by the end of 1998. The
system upgrades and/or programming changes have been made within the normal
course of business, therefore, no material costs specific to the year 2000
upgrades have been incurred. Management does not expect implementation of the
remaining computer system upgrades to have a material affect on the Company's
financial condition or results of operations. Management has contacted all
outside vendors inquiring as to the status of year 2000 compliance. Management
will continue to require updates from all vendors who are not yet year 2000
compliant.
<PAGE>
Impact of New Accounting Standards To Be Adopted
- ------------------------------------------------
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (Statement 125), except for
those transactions that are governed by SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of Financial Accounting Standards Board (FASB)
Statement 125" (Statement 127). Statement 127 was issued in December 1996 to
extend the effective date of the provisions of Statement 125, as they relate to
secured borrowings, collateral and repurchase agreements, dollar rolls,
securities lending and similar transactions for one year. Statement 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996
based on consistent application of a financial-components approach that focuses
on control. Under this approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. This statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. This statement supersedes SFAS
No. 76, "Extinguishment of Debt", and SFAS No. 77, "Reporting by Transferors for
Transfers of Receivables with Recourse," and SFAS No. 122, "Accounting for
Mortgage Servicing Rights," and amends SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," and SFAS No. 65, "Accounting for
Certain Mortgage Banking Activities." The adoption of Statement 125 had no
material effect on the consolidated financial statements of the Company, nor
does the Company expect the amendments to Statement 125 contained in Statement
127 to have a material effect on the financial statements.
In June of 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" (Statement 130). Statement 130 is effective for years beginning after
December 15, 1997 and requires reclassification of financial statements for
earlier periods provided for comparative purposes. The statement establishes
standards for reporting and display of comprehensive income and its components.
This statement requires that all items that are required to be recognized as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income is defined as all changes in equity during a period except those
resulting from investments by owners and distributions to owners. The Company
has not yet determined the impact of Statement 130 on its financial statements.
In June of 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (Statement 131). Statement 131 is effective
for financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is to be
restated. The statement requires that a public business enterprise report
financial and descriptive information about its reportable operating segments.
The Company has not yet determined the impact of Statement 131 on its financial
statements.
<PAGE>
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 1997 Form 10-K.
<PAGE>
Comparison of Operating Results for the Years Ended December 31, 1997 and 1996
- ------------------------------------------------------------------------------
General
Net income for the year ended December 31, 1997 was $37.1 million, or $3.64
per diluted share, compared with $26.7 million, or $2.56 per diluted share, for
1996. In comparing the results of operations for 1997 to 1996, it must be noted
that both the 1997 and 1996 results of operations were significantly improved by
items of a non-recurring nature. During 1997, sales of real estate generated
pre-tax gains of $9.3 million, which, net of tax, increased net income by $5.4
million and contributed $.53 to diluted earnings per share. Gains on the sale of
equity securities during 1997 generated pre-tax gains of $7.0 million, which,
net of tax, increased net income by $3.9 million and contributed $.39 to diluted
earnings per share. The 1996 results included a pre-tax recovery of a $2.0
million credit valuation allowance against the Bank's investments with Nationar
Trust Company, which increased net income for 1996 by $1.2 million, or $.11 per
diluted share. Additional comments regarding the components of net income are
detailed in the following paragraphs.
Interest Income
Income on mortgage loans increased by $5.0 million, or 7.3%, to $74.1
million, from $69.1 million. The average investment in mortgage loans increased
by $86.1 million, or 10.9%, to $878.7 million for 1997, from $792.6 million for
1996. The amount invested in mortgage loans has continued to increase over the
past eight years in both dollar amount and as a percentage of assets. Mortgages
originated for the Bank's portfolio during 1997 increased by $69.0 million, or
50.6%, to $205.2 million, from $136.2 million during 1996. The mortgage
portfolio yield decreased to 8.44% for 1997 from 8.72% for 1996.
Income on debt and equity securities decreased $2.1 million, or 9.7%, to
$19.6 million for 1997, compared to $21.7 million for 1996. The decrease in
income reflected a $35.1 million, or 9.7%, decrease in the average investment in
this portfolio while the yield remained unchanged at 6.01% for 1997 and 1996.
During 1997, activity in the investment securities portfolio included purchases
of $499.9 million and maturities of $555.0 million. At December 31, 1997, the
$244.9 million debt securities portfolio had unrealized gains of $464,000, which
are not expected to impact future income as these securities are designated as
held-to-maturity. The marketable equity securities portfolio is designated as
available-for-sale and was carried at its aggregate market value of $62.2
million at December 31, 1997, exceeding its cost of $10.9 million. During 1997
the Bank sold marketable equity securities having a cost of $823,000, realizing
gains of $7.0 million. During 1996, the Bank sold or redeemed marketable equity
securities totaling $30,000, and realized gross gains of $4,000 and gross losses
of $2,000.
<PAGE>
Income on CMOs decreased by $2.1 million or 21.1%, to $7.9 million for
1997, from $10.1 million for 1996. Purchases of CMOs for 1997, totaled $55.0
million, compared with $124.3 million for 1996. The average investment in CMOs
decreased by $45.9 million, or 25.6%, to $133.4 million for 1997, from $179.3
million for 1996. Principal payments on CMOs decreased to $106.5 million during
1997 from $114.1 million during 1996. During 1997, the CMO portfolio yielded
5.95% compared with 5.61% for 1996. At December 31, 1997, the $104.0 million CMO
portfolio had net unrealized gains of $230,000 (comprised of unrealized gains of
$295,000 and unrealized losses of $65,000), which are not expected to impact
future results of operations, as CMOs are designated as held-to-maturity.
Income on other loans remained relatively stable during 1997 compared to
1996, decreasing by $68,000, or 3.2% to $2.1 million for 1997. Management has
determined to sell the student loan portfolio, which at December 31, 1997, had a
balance of $5.2 million and comprised 17.9% of the other loan portfolio. At
December 31, 1997, the portfolio, which had an estimated market value of $5.3
million will continue to be carried at the lower of cost or estimated market
value, in the aggregate, until sold. Management is reviewing student loan
origination programs packaged by the Student Loan Marketing Association (Sallie
Mae) and Nellie Mae under which the Bank would fund and own the loans, but
servicing would be provided by others.
During 1997, MBS continued and will continue to amortize without
replacement. Income earned on MBS decreased to $499,000 during 1997 from
$739,000 during 1996, reflecting the amortizing balance. There were no sales of
MBS during 1997 or 1996. At December 31, 1997, there were unrealized gains of
$335,000 in the $4.0 million MBS portfolio, which are not expected to impact
future results of operations, as MBS securities are designated as
held-to-maturity.
Income from federal funds sold decreased to $3.5 million for 1997 from $3.9
million for 1996. The average balance invested in federal funds sold decreased
to $64.3 million during 1997, compared to $72.2 million during 1996. The average
yield on federal funds sold increased to 5.44% during 1997 from 5.35% during
1996. Investments in federal funds sold provide the liquidity of an interest
bearing cash equivalent necessary to fund: mortgage and other loan originations;
deposit withdrawals; dividend payments on and repurchases (if any) of the
Company's common stock and to meet non-interest operating expense.
Interest Expense
Interest expense on deposits decreased .9% to $39.9 million for 1997 from
$40.2 million for 1996. This decrease reflected a decrease in average interest
bearing deposits of $29.2 million, or 2.6%, to $1.098 billion for 1997, from
$1.127 billion for 1996. Market interest rates generally declined during 1997
and the Bank's deposits continued to decrease and to shift primarily from
passbook accounts into certificate accounts. (See Asset/Liability Management,
herein.)
<PAGE>
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 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 $474,000, to $67.9 million for 1997, from
$67.4 million for 1996. For 1997, the net interest margin increased to 4.73%
from 4.68% for 1996. The interest rate spread decreased to 3.88% for 1997 from
3.90% for 1996. The yield on interest earning assets increased slightly to 7.51%
for 1997 from 7.47% for 1996. The average balance of interest earning assets
decreased by $4.8 million or .3% for 1997, compared to 1996. Reflecting the
shift in deposits from lower yielding passbook deposit accounts to certificate
accounts, the cost of interest bearing deposits increased to 3.63% from 3.57%.
The average balance of interest bearing deposits decreased by $29.2 million, as
the trend of deposit outflows continued. The slight increase in the net interest
margin during 1997, reflected an increase in the ratio of interest earning
assets funded by interest bearing liabilities, accompanied by a decrease in the
interest rate spread. Average interest earning assets as a percentage of
interest bearing liabilities increased to 131% for 1997, compared to 128% for
1996.
Provision For Possible Loan Losses
The provision for possible loan losses for 1997 increased slightly to
$648,000 compared to $640,000 for 1996. During 1997 and 1996 management made
general mortgage loan provisions of $600,000, while provisions made against the
other loan portfolio increased to $48,000 for 1997, compared to $40,000 for
1996. Effective January 1, 1998, management discontinued making additions to the
general valuation mortgage allowance, and therefore does not currently expect to
make any provisions for possible loan losses for the mortgage portfolio during
1998. However, future additions to or recoveries of the loan loss allowances
will be based on management's continuing evaluations of the loan portfolios and
assessments of economic conditions, changes in portfolio value and loan
performance.
Provision For Possible Other Credit Losses
During 1997 and 1996, no provisions were made for any investments, other
than for possible loan losses. However, during 1996, the Bank recovered the
entire $2.0 million allowance (established during 1995) in connection with
investments with and in Nationar, a check clearing and trust company. Nationar
was seized by the Superintendent of Banks for the State of New York during 1995.
At the time of Nationar's seizure, the Bank had invested with Nationar $10.0
million of federal funds sold, cash in demand accounts of $200,000 and owned
$38,000 of Nationar's capital stock. In accordance with the Company's internal
procedures for monitoring asset quality, in 1995 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. The Bank received
payments totaling $10.2 million from the Nationar estate during 1996, allowing
the Bank to recapture the entire allowance.
<PAGE>
Non-Interest Income
Non-interest income for 1997 increased by $16.8 million, or 331.6%, to
$21.9 million compared to $5.1 million in 1996. The increase in income from real
estate operations comprised $8.7 million or 51.5% of the total increase, while
the increase in gains realized on the sale of investments of $7.0 million
comprised 41.5% of the total increase. The increase of $1.1 million for loan
fees and service charges primarily reflected an increase in mortgage prepayment
penalties.
As required, the marketable equity securities (MES) portfolio is designated
as available-for-sale and carried at estimated fair value, with changes in the
fair value of the portfolio recorded to a separate component of stockholders'
equity. During 1997, the Bank sold MES with a cost of $823,000, realizing gross
gains of $7.0 million. Significant sales of MES have been rare in recent years,
as management generally considers these securities as long-term investments.
Management reviews many factors in determining whether to sell or hold MES.
Among other things, these factors include: the anticipated future performance of
individual securities, the overall stock market and economy; actual and
anticipated direction of interest rates; the percentage of MES comprising
interest-earning assets; the availability of alternative investments; liquidity,
tax and other regulatory considerations. Future gains and/or losses (if either)
on the sale of MES may be recognized; however, management can provide no
assurance as to the timing, amount or resulting gains or losses from future
sales, if any, from the MES portfolio.
The increase in income from real estate operations of $8.7 million includes
a pre-tax gain of $9.2 million realized on the sale of a commercial office tower
located at 1995 Broadway, Manhattan, New York. The Bank retained ownership of
the first floor of the building which houses a branch office. During the second
quarter of 1997, management reclassified all real estate from
held-for-investment to available-for-sale. The improving real estate market
during 1997 in the New York metropolitan area impacted management's decision to
consider offers received on properties previously held-for-investment.
<PAGE>
Non-Interest Expense
Non-interest expense decreased $164,000, or .6%, to $27.4 million for 1997,
compared to $27.6 million for 1996. Included in non-interest expense are the
costs of compensation and benefits, occupancy and equipment expense, federal
deposit insurance premiums, advertising, ORE and other general and
administrative expense.
Compensation and benefits decreased by $491,000 or 3.0% to $15.9 million
for 1997, compared to $16.4 million for 1996. The $491,000 decrease in
compensation and benefits expense resulted primarily from the Bank realizing
income from the pension plan of $1.5 million for 1997, compared to $711,000 for
1996, or an increase of $754,000. The Bank's pension plan is fully funded, which
has resulted in the Bank recording income from the pension plan. The amount of
future income, if any, will be impacted by the rate of return on the pension
plan assets and various other factors. During 1996, a non-recurring expense of
$330,000 was recognized 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. The cost of dental and medical insurance
premiums increased by $419,000 to $1.5 million for 1997 from $1.1 million for
1996. During 1996, the Bank received $564,000 in premium refunds due to excess
insurance fund reserves for the dental and medical plans. Salaries and bonuses
increased $206,000, or 1.6% to $13.0 million for 1997, from $12.8 million for
1996. At December 31, 1997 the Bank had 311 full-time and 118 part-time workers,
compared to 315 full-time and 117 part-time workers at December 31, 1996.
Federal deposit insurance premiums, which rates are established by law,
were increased by $147,000 to $149,000 for 1997, compared with $2,000 for 1996,
when the Bank Insurance Fund (BIF) became fully funded and excess premiums were
refunded to the Bank. During 1997, BIF members were assessed a 1.3 basis point
charge per $100 of insurable deposits to meet the Financing Corporation (FICO)
bond obligations, which assessments will continue through 1999. Provided that
the BIF remains fully funded, no additional charges will be assessed.
ORE operations generated income of $59,000 for 1997 compared with income of
$772,000 for 1996. Included in the 1997 results from ORE operations are net
gains of $144,000 on the sale of ORE, while during 1996 net gains of $688,000
were recognized on the sale of ORE. Gains on the sale of ORE properties are
recognized under the cost recovery method. During 1997 and 1996, $29,000 and
$148,000 of gains on sales of cooperative shares held in ORE were deferred,
respectively. At December 31, 1997 and 1996, ORE, net of deferred gains, was
$473,000 and $647,000, respectively.
Occupancy and equipment expense decreased $651,000, to $4.6 million for
1997 from $5.2 million for 1996. During 1996, the Company completed the
renovations to the Company's headquarters. The project, which began during 1995
and continued through 1996, was the first major capital improvement since
completion of the building in 1974.
Other general and administrative expense increased by $453,000, or 8.4%, to
$5.9 million for 1997, from $5.4 million for 1996. This increase was primarily
related to consulting fees incurred in connection with the formation of the
Bank's real estate investment trust subsidiary, Tier, Inc., during 1997, while
various other administrative expenses decreased.
Provision for Income Taxes
Income taxes increased by $5.1 million, or 26.0%, to $24.6 million for 1997
from $19.6 million for 1996. This increase is reflective of the $15.4 million
increase in pre-tax income, partially offset by the decrease in the Company's
effective tax rate from 42.3% for 1996, to 39.9% for 1997. The decrease in the
effective tax rate for 1997, compared to 1996 reflects certain tax benefits
attributable to the Bank's real estate investment trust, which was formed during
1997. (See Note 14 to the Consolidated Financial Statements.)
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 $2.56
per diluted share, compared with $22.2 million, or $2.01 per diluted 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 for 1996, from $64.3 million for 1995. 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 reflected 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 gross gains of $4,000 and gross 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 fair value of $51.0 million, which exceeded
its cost of $11.7 million.
<PAGE>
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 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.
Interest Expense
Interest expense on deposits decreased to $40.2 million, or 1.2%, for 1996
from $40.7 million for 1995. This decrease reflected a decrease in average
interest bearing deposits of $13.9 million, or 1.2%, to $1.127 billion for 1996,
from $1.141 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.
<PAGE>
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 rate 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.
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 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(R)
and Mastercard(R) 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
reflected 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.
<PAGE>
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, occupancy and equipment, 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
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 reflected a pre-tax 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 reflected increased costs as a
result of the renovations at the Company's headquarters. The renovations, which
began during 1995 and continued through 1996, were 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.
Compensation and benefit expense 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.
<PAGE>
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 42.3% for 1996 compared to 42.8% for 1995. (See Note 14 to the Consolidated
Financial Statements.)
<PAGE>
<TABLE>
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1997 and 1996 (In Thousands, Except Share and Per Share Amounts)
<CAPTION>
ASSETS 1997 1996
- ------ ---- ----
<S> <C> <C>
Cash and due from banks $ 12,924 $ 12,894
Federal funds sold 62,000 86,500
---------- ---------
Cash and cash equivalents 74,924 99,394
Securities available-for-sale, at estimated fair value 62,243 51,021
Securities held-to-maturity, net (estimated fair value
of $353,996 and $461,784, respectively) 352,967 460,509
Other investments 7,645 6,859
Mortgage loans, net 970,737 827,052
Other loans, net 29,008 27,722
Premises and equipment, net 17,029 16,829
Interest due and accrued 9,278 9,310
Real estate held-for-investment, net - 6,082
Real estate held-for-sale and Other real estate 3,450 5,236
Other assets 7,750 6,002
---------- ----------
Total Assets $1,535,031 $1,516,016
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $1,121,203 $1,144,393
Advance payments for real estate taxes and insurance 10,322 8,265
Official bank checks outstanding 10,405 9,644
Accrued expenses and other liabilities 25,587 18,415
---------- ----------
Total Liabilities 1,167,517 1,180,717
---------- ----------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value, 15,000,000 shares
authorized; none issued) - -
Common stock ($.01 par value, 30,000,000 shares
authorized; 16,000,000 issued; 9,919,927 and
9,783,031 outstanding, respectively) 160 160
Additional paid-in capital 165,112 163,500
Retained income, substantially restricted 311,436 289,588
Net unrealized gain on securities available-for-sale,
net of tax 28,469 21,795
Common stock held by Benefit Restoration Plan Trust,
at cost (188,323 and 166,848 shares, respectively) (4,199) (3,275)
Common stock held in treasury, at cost (6,080,073
and 6,216,969 shares, respectively) (133,464) (136,469)
---------- ----------
Total Stockholders' Equity 367,514 335,299
---------- ----------
Total Liabilities and Stockholders' Equity $1,535,031 $1,516,016
========== ==========
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1997, 1996 and 1995
(In Thousands, Except Per Share Amounts)
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest Income:
Mortgage loans, net $ 74,149 $ 69,113 $ 64,309
Debt & equity securities, net 19,584 21,695 27,545
Collateralized mortgage obligations(CMOs), net 7,937 10,063 9,572
Other loans, net 2,070 2,138 2,299
Mortgage-backed securities(MBS), net 499 739 969
Federal funds sold 3,503 3,863 3,032
--------- --------- ---------
Total Interest Income 107,742 107,611 107,726
--------- --------- ---------
Interest Expense:
Deposits 39,874 40,217 40,707
--------- -------- ---------
Net Interest Income 67,868 67,394 67,019
Provision for Possible Loan Losses 648 640 636
(Recovery of) Provision for Possible Other Credit Losses - (2,040) 2,040
--------- --------- ---------
Net Interest Income After Provision
for Possible Credit Losses 67,220 68,794 64,343
--------- --------- ---------
Non-Interest Income:
Real estate operations, net 10,442 1,767 1,225
Loan fees and service charges 3,969 2,833 2,280
Gain on sale of investments, net 6,991 2 -
Miscellaneous income 527 479 490
--------- --------- ---------
Total Non-Interest Income 21,929 5,081 3,995
--------- --------- ---------
Non-Interest Expense:
Compensation and benefits 15,921 16,412 16,579
Occupancy and equipment expenses (net of rental
income of $1,287, $1,126 and $1,199, respectively) 4,560 5,211 4,957
Federal deposit insurance premiums 149 2 1,477
Advertising 1,005 1,340 1,142
Other real estate (income) expense, net (59) (772) 209
Other general and administrative 5,858 5,405 5,197
--------- --------- ---------
Total Non-Interest Expense 27,434 27,598 29,561
--------- --------- ---------
Income Before Provision for Income Taxes 61,715 46,277 38,777
Provision for Income Taxes 24,625 19,552 16,603
--------- --------- ---------
Net Income $ 37,090 $ 26,725 $ 22,174
========= ========= =========
Earnings and Cash Dividends per Common Share
Basic earnings per common share $ 3.76 $ 2.66 $ 2.09
Diluted earnings per common share $ 3.64 $ 2.56 $ 2.01
Cash dividends per common share $ 1.40 $ 1.20 $ 1.00
<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, 1997, 1996 and 1995 (In Thousands, Except Per Share Amounts)
<CAPTION>
1997 1996 1995
---- ---- ----
<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 163,500 162,566 160,962
Net allocation (distribution) of common stock
for Benefit Restoration Plan 924 5 (199)
Tax benefit for stock plans 688 599 1,645
Reallocation of forfeited Bank Recognition and
Retention Plans shares - - 158
Compensation expense for 1996 stock option plan - 330 -
-------- -------- --------
Balance at end of year 165,112 163,500 162,566
-------- -------- --------
Retained Income, Substantially Restricted
Balance at beginning of year 289,588 276,317 266,361
Net income 37,090 26,725 22,174
Loss on reissuance of treasury stock (1,437) (1,364) (1,602)
Cash dividends on common stock ($1.40, $1.20, $1.00,
respectively) (13,805) (12,090) (10,616)
------- ------- -------
Balance at end of year 311,436 289,588 276,317
------- ------- -------
Net Unrealized Gain on Securities Available-for-Sale, Net of Tax
Balance at beginning of year 21,795 15,750 8,892
Change in net unrealized gains on securities available-
for-sale (net of tax change of $5,371, $4,863 and
$5,517, respectively) 6,674 6,045 6,858
-------- -------- --------
Balance at end of year 28,469 21,795 15,750
-------- -------- --------
Unearned Common Stock Held by Bank Recognition and
Retention Plans
Balance at beginning of year - - (516)
Earned during the period - - 516
-------- -------- --------
Balance at end of year - - -
-------- -------- --------
Common Stock Held by Benefit Restoration Plan Trust, at Cost
Balance at beginning of year (3,275) (3,270) (3,469)
Common stock acquired (934) (11) (9)
Common stock distributed 10 6 208
-------- ------- --------
Balance at end of year (4,199) (3,275) (3,270)
-------- ------- --------
Common Stock Held in Treasury, at Cost
Balance at beginning of year (136,469) (111,416) (104,756)
Common stock reacquired - (27,650) (9,881)
Common stock reissued for options exercised 3,005 2,597 3,221
-------- -------- --------
Balance at end of year (133,464) (136,469) (111,416)
-------- -------- --------
Total Stockholders' Equity $367,514 $335,299 $340,107
======== ======== ========
<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, 1997, 1996 and 1995 (In Thousands)
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income $ 37,090 $ 26,725 $ 22,174
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 648 640 636
(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 (6,991) (2) -
Decrease in deferred loan fees and discounts, net (418) (593) (608)
Accretion of discount (in excess of) less than
amortization of premium on MBS and CMOs (300) (578) 320
Accretion of discount in excess of amortization
of premium on debt securities (337) (249) (248)
Depreciation and amortization of premises and equipment 1,891 1,826 1,920
Mortgage loans originated for sale (1,612) (1,621) (1,792)
Proceeds from sale of mortgage loans originated for sale 1,636 1,737 1,818
Gain on sale of mortgage and other loans (35) (53) (61)
Expense recognized for Bank Recognition and Retention Plans - - 675
Tax benefit for stock plans credited to capital 688 599 1,645
Gain on sale of real estate held for sale (9,992) (571) (587)
Decrease in interest due and accrued 32 3,597 752
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 (144) (688) -
Increase (decrease) in official bank checks outstanding 761 (14,748) 3,986
Other 137 1,547 (1,389)
--------- --------- ---------
Net cash provided by operating activities 23,054 25,733 21,114
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated:
Mortgage loans (205,174) (136,218) (77,826)
Other loans (21,010) (19,032) (25,718)
Purchases of CMOs held-to-maturity (55,035) (124,275) (67,889)
Purchases of debt securities held-to-maturity and
securities available-for-sale (499,920) (534,569) (300,047)
Principal payments on:
Mortgage loans 60,833 46,506 22,672
Other loans 19,025 19,656 22,556
CMOs 106,545 114,105 237,060
MBS 1,590 2,047 2,324
Proceeds from maturities of U.S. Government and
federal agency securities 555,000 675,000 265,000
Proceeds from sale of other loans 681 934 1,372
Purchases of Federal Home Loan Bank stock (786) (557) (188)
(Continued)
</TABLE>
<PAGE>
<TABLE>
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31, 1997, 1996 and 1995 (In Thousands)
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Proceeds from sale/redemption of equity securities 7,813 30 -
Purchases of premises and equipment, net of disposals (2,091) (3,498) (2,647)
Net decrease in real estate held-for-investment,
excluding transfers to held-for-sale - 313 168
Proceeds from sale of real estate held-for-sale 17,703 571 587
Proceeds from sale of Other real estate 688 2,759 -
Net (increase) decrease in real estate holdings,
excluding sales (16) 1,522 1,995
-------- ------- -------
Net cash (used by) provided by investing activities (14,154) 45,294 79,419
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits (23,190) (19,053) (40,978)
Increase (decrease) in advance payments for real
estate taxes and insurance 2,057 34 (79)
Proceeds upon exercise of common stock options 1,568 1,233 1,619
Cash dividends paid to common stockholders (13,805) (12,090) (10,616)
Payments to repurchase common stock - (27,650) (9,881)
--------- --------- ---------
Net cash used by financing activities (33,370) (57,526) (59,935)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (24,470) 13,501 40,598
Cash and cash equivalents at beginning of year 99,394 85,893 45,295
--------- --------- ---------
Cash and cash equivalents at end of year $ 74,924 $ 99,394 $ 85,893
========= ========= =========
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest on deposits $ 39,881 $ 40,215 $ 40,721
========= ========= =========
Income taxes $ 32,036 $ 22,370 $ 18,216
========= ========= =========
Supplemental Disclosures of Noncash Investing and
Financing Activities
Real estate acquired through foreclosure $ 540 $ 8,190 $ -
========= ========= =========
Transfer of real estate held-for-investment
to held-for-sale $ 6,145 $ - $ -
========= ========= =========
Mortgage originated upon sale of real estate
from the held-for-sale portfolio and other real
estate $ 33 $ 6,675 $ -
========= ========= =========
Deferred tax liability on securities available-for-sale $ 22,905 $ 17,534 $ 12,671
========= ========= =========
<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.(the Company or the 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 (referred to
collectively as 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 real estate holdings and 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 affected by 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 loan losses as presented in
these consolidated financial statements are adequate. 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 the Bank's
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(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 the date
of purchase to be cash equivalents.
<PAGE>
(d) Securities
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.
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.
In accordance with Statement of Financial Accounting Standards (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), 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.
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
1995 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", and 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.
(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 Holdings
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. As of
June 30, 1997, management reclassified all real estate held-for-investment to
held-for-sale. (See Notes 11, 12 and 13.)
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.
(i) Income Taxes
The Company follows SFAS No. 109, "Accounting for Income Taxes" (Statement
109), which requires the asset/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 Note 14.)
(j) 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 No.
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 was 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, the adoption of Statement 123
had no impact on the Company's financial condition or results of operations.
(See Note 22.)
<PAGE>
(k) Earnings Per Share
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings
Per Share" (Statement 128). Statement 128 establishes standards for computing
and presenting earnings per share (EPS) and applies to entities with publicly
held common stock or potential common stock. Statement 128 simplifies the
standards for computing EPS previously found in Accounting Principles Board
Opinion No. 15, "Earnings Per Share" (Opinion 15), and makes them comparable to
international EPS standards. Statement 128 replaces the presentation of primary
EPS with a presentation of basic EPS and replaces fully diluted EPS with diluted
EPS. Statement 128 requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
(See Note 15.)
Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to Opinion 15. This Statement required
restatement of all prior-period EPS data presented.
(l) 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.)
(m) Reclassification
Reclassifications have been made to prior year financial statements to
conform with the 1997 presentation.
NOTE (2) STOCK REPURCHASE PROGRAMS
The Company did not repurchase any of its outstanding common stock during
1997. For the years ended December 31, 1996 and 1995, the Company repurchased
845,000 and 339,485 shares at an average price of $32.72 and $29.11 per share,
respectively. The Company issued 136,896, 123,256 and 161,860 shares of treasury
stock for options exercised during 1997, 1996 and 1995, respectively. There were
6,080,073 and 6,216,969 shares of common stock in the treasury at December 31,
1997 and 1996, respectively.
<PAGE>
NOTE (3) SECURITIES
The following tables set forth information regarding the Company's
securities as of December 31:
<TABLE>
<CAPTION>
1997
----
Securities Available-for-Sale:
- ------------------------------
Estimated Gross Unrealized
Cost Fair Value Gains Losses
---- ---------- ----- ------
(In Thousands)
<S> <C> <C> <C> <C>
Marketable equity securities $ 10,869 $ 62,243 $51,462 $ 88
======== ======== ======= =======
Securities Held-to-Maturity:
- ----------------------------
Amortized Estimated Gross Unrealized
Cost Fair Value Gains Losses
---- ---------- ----- ------
(In Thousands)
U.S. Government and Federal
Agency securities $244,903 $245,367 $ 464 $ -
CMOs, net 104,040 104,270 295 65
MBS:
GNMA* 3,640 3,944 304 -
FNMA* 106 115 9 -
Freddie Mac* 278 300 22 -
-------- -------- ------- -------
Total MBS, net 4,024 4,359 335 -
-------- -------- ------- -------
Total $352,967 $353,996 $ 1,094 $ 65
======== ======== ======= =======
1996
----
Securities Available-for-Sale:
- ------------------------------
Estimated Gross Unrealized
Cost Fair Value Gains Losses
---- ---------- ----- ------
(In Thousands)
Marketable equity securities $ 11,692 $ 51,021 $39,368 $ 39
======== ======== ======= =======
Securities Held-to-Maturity:
- ----------------------------
Amortized Estimated Gross Unrealized
Cost Fair 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 -
Freddie Mac 441 480 39 -
-------- -------- ------- -------
Total MBS, net 5,592 6,101 509 -
-------- -------- ------- -------
Total $460,509 $461,784 $ 1,562 $ 287
======== ======== ======= =======
<FN>
* Definitions: GNMA - Government National Mortgage Association; FNMA -
Federal National Mortgage Association; Freddie Mac - 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, Freddie Mac 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 1997, the Bank sold or redeemed marketable equity securities with a
cost of $823,000, realizing gross gains of $6,991,000 and no losses. 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 1995.
<TABLE>
Presented in the table below is the contractual maturity distribution, for
debt securities held-to-maturity at December 31, 1997:
<CAPTION>
Amortized Estimated
Cost Fair Value
---- ----------
(In Thousands)
<S> <C> <C>
Within 1 year $235,117 $235,515
After 1 year through 5 years 31,198 31,332
After 5 years through 10 years 83,783 84,051
After 10 years 2,869 3,098
-------- --------
Total $352,967 $353,996
======== ========
</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>
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
Amortized cost - Securities loaned $ 79,970 $ -
======== ========
Estimated fair value - Securities loaned $ 80,188 $ -
======== ========
Estimated fair value - Collateral $ 82,069 $ -
======== ========
</TABLE>
<PAGE>
NOTE (4) OTHER INVESTMENTS
<TABLE>
Other investments at December 31, 1997 and 1996 were as follows:
<CAPTION>
1997 1996
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C>
Investment required by law* $ 7,615 $ 7,615 $ 6,829 $ 6,829
Other stock 30 30 30 30
-------- -------- -------- --------
Total other investments $ 7,645 $ 7,645 $ 6,859 $ 6,859
======== ======== ======== ========
<FN>
* The Bank is required to hold shares of the Federal Home Loan Bank of New York.
</FN>
</TABLE>
NOTE (5) LOANS
Loans are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
Mortgage loans:
One-to four-family $ 73,757 $ 76,848
Multi-family 563,205 433,224
Underlying cooperative* 267,942 262,221
Commercial 71,839 61,829
Construction 3,067 1,836
-------- --------
Total mortgage loans 979,810 835,958
-------- --------
Deferred loan fees and unearned
discounts (3,332) (3,730)
Allowance for possible loan losses (5,741) (5,176)
-------- --------
Total mortgage loans, net $970,737 $827,052
======== ========
Other loans:
Student $ 5,213 $ 6,204
Consumer 4,775 4,350
Loans secured by deposit accounts 8,189 8,328
Overdraft loans 227 237
Property improvement 10,744 8,775
-------- --------
Total other loans 29,148 27,894
-------- --------
Unearned discounts (1) (21)
Allowance for possible loan losses (139) (151)
-------- --------
Total other loans, net $ 29,008 $ 27,722
======== ========
<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, 1997
and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
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* 82 $ 500 144 $ 692
Non-guaranteed 5 12,769 15 13,459
--- ------- --- -------
Total delinquencies
over 90 days 87 $13,269 159 $14,151
=== ======= === =======
Ratio of loans 90 days
or more past due to
total gross loans 1.32% 1.64%
==== ====
<FN>
*These loans are guaranteed by the Federal Housing Administration, the Veterans
Administration or the New York State Higher Education Services Corporation.
</FN>
</TABLE>
At December 31, 1997 and December 31, 1996, there was one mortgage loan
with a balance of $12,754,000 on non-accrual status. Net interest income was
reduced by approximately $1,180,000, $1,180,000 and $197,000 for the years ended
December 31, 1997, 1996 and 1995 in connection with non-accrual loans.
<TABLE>
The following table summarizes information regarding the Company's impaired
loans at December 31:
<CAPTION>
1997
----
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
======= ======= =======
1996
----
Allowance
Recorded for Loan Net
Investment Losses Investment
---------- ------ ----------
(In Thousands)
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 loans included in the above table which were modified in
a TDR. The entire balance of impaired loans at December 31, 1997 and December
31, 1996 represents one loan on non-accrual status. The average balance of
impaired loans for both 1997 and 1996 was $12,754,000 and for 1995 was $208,000.
There was no interest income recorded for impaired loans (for the period in
which the loans were identified as impaired) during 1997 and 1996. For both
years ended December 31, 1997 and 1996, impaired loans resulted in foregone
interest of $1,180,000. At December 31, 1997 and 1996, loans restructured in a
TDR, other than those classified as impaired loans and/or non-accrual loans,
were $1,840,000 and $1,874,000, respectively. Interest forfeited attributable to
these loans was $62,000, each for the years ended December 31, 1997, 1996 and
1995.
<PAGE>
NOTE (7) ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
Activity in the allowance for possible loan losses for the years ended
December 31, 1997, 1996 and 1995 is summarized as follows:
<CAPTION>
Mortgage loans Other loans
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $5,176 $4,575 $3,976 $151 $122 $109
Provision for possible loan losses 600 600 600 48 40 36
Loans charged off (35) - (1) (72) (33) (43)
Recoveries of loans previously
charged off - 1 - 12 22 20
------ ------ ------ ---- ---- ----
Balance at end of period $5,741 $5,176 $4,575 $139 $151 $122
====== ====== ====== ==== ==== ====
</TABLE>
NOTE (8) MORTGAGE LOAN SERVICING
<TABLE>
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, 1997,
1996 and 1995 were as follows:
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Principal balances $14,467 $16,016 $18,381
======= ======= =======
Servicing income $ 25 $ 39 $ 47
======= ======= =======
Number of loans 906 1,494 2,023
======= ===== =======
</TABLE>
The balance of loans sold with full recourse was $5,441,000 and $7,366,000
at December 31, 1997 and 1996, respectively. The Bank has not sold any loans
with recourse since 1985. The Bank sold, without recourse, $1,612,000 and
$1,715,000 of mortgage loans to FNMA and/or the State of New York Mortgage
Association (SONYMA) during 1997 and 1996, respectively. The Bank retained
servicing for these loans, which did not result in the recording of any
servicing assets.
<PAGE>
NOTE (9) PREMISES AND EQUIPMENT
<TABLE>
Premises and equipment at December 31, 1997 and 1996 consisted of the
following:
<CAPTION>
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
Banking houses and land $21,709 $21,493
Furniture, fixtures and equipment 16,911 15,086
Safe deposit vaults 1,016 1,016
39,636 37,595
Less accumulated depreciation and
amortization 22,607 20,766
Premises and equipment, net $17,029 $16,829
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1997, 1996 and 1995 was $1,891,000, $1,826,000 and $1,920,000, respectively.
<PAGE>
NOTE (10) INTEREST DUE AND ACCRUED
<TABLE>
Interest due and accrued at December 31, 1997 and 1996 consisted of the
following:
<CAPTION>
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
U.S. Government and Federal Agencies $ 2,354 $ 2,655
CMOs 540 739
MBS 36 51
Mortgage and other loans 6,348 5,865
------- -------
Total interest due and accrued $ 9,278 $ 9,310
======= =======
</TABLE>
NOTE (11) REAL ESTATE HELD-FOR-INVESTMENT
Through its wholly-owned subsidiaries, the Bank has investments in real
estate. On June 30, 1997, management reclassified all real estate
held-for-investment to held-for-sale. As of December 31, 1996, the components of
the net asset amounts of real estate held-for-investment were as follows:
<TABLE>
<CAPTION>
1996
----
(In Thousands)
<S> <C>
Buildings, net $ 4,000
Land 1,561
Accrued interest and other assets 1,385
Other liabilities (864)
-------
Net assets $ 6,082
=======
</TABLE>
<TABLE>
The summarized statements of operations for the Bank's wholly-owned
subsidiaries that comprise real estate held-for-investment, for the years ended
December 31, 1997, 1996 and 1995 were as follows:
<CAPTION>
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Rental income $1,478 $4,020 $4,236
Net interest income 2 4 5
Other income 17 652 210
------ ------ ------
Total income 1,497 4,676 4,451
------ ------ ------
Real estate taxes 246 566 574
Operating and other expenses 647 3,087 3,376
------ ------ ------
Total expenses 893 3,653 3,950
------ ------ ------
Income from real estate held-
for-investment 1 $ 604 $1,023 $ 501
====== ====== =======
<FN>
1 On June 30, 1997, management reclassified all real estate held-for-investment
to held-for-sale. In October, 1997, a commercial office tower located at 1995
Broadway, New York and previously classified held-for-investment was sold,
resulting in a pre-tax gain of $9,163,000.
</FN>
</TABLE>
<PAGE>
NOTE (12) REAL ESTATE HELD-FOR-SALE AND OTHER REAL ESTATE
<TABLE>
The following summarizes real estate properties owned by the Bank through
its real estate subsidiaries at December 31:
<CAPTION>
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
Real Estate Held-for-Sale1
Condominium Property $2,752 $4,589
Land 130 -
Buildings 140 -
Accrued interest and other assets 372 -
Liabilities (417) -
------ ------
Net Assets 2,977 4,589
------ ------
Other Real Estate
Cooperative apartments 473 647
------ ------
Total Real Estate Held-for-Sale and ORE $3,450 $5,236
====== ======
<FN>
1 During 1997, all real estate held-for-investment was reclassified to
held-for-sale. (See Note 11.) In addition to the cooperative apartments that
comprised ORE, several of the Bank's wholly owned subsidiaries own cooperative
apartments in various buildings, which are carried at zero cost and are included
in Real Estate Held-for-Sale. At December 31, 1997 and 1996, 138 and 158 such
cooperative apartments remained available-for-sale, respectively.
</FN>
</TABLE>
NOTE (13) REAL ESTATE OPERATIONS, NET
<TABLE>
Results of real estate operations for the years ended December 31, 1997,
1996 and 1995 were as follows:
<CAPTION>
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Income from real estate held
for investment, net (See Note 11.) $ 604 $1,023 $ 501
------- ------ ------
Real estate held for sale:
Rental income, net of expenses (154) 173 137
Gain on sale1 9,992 571 587
------- ------ ------
9,838 744 724
------- ------ ------
Real estate operations, net $10,442 $1,767 $1,225
======= ====== ======
<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, and for
1997, the $9,163,000 pre-tax gain on the sale of an office tower (see Note 11.)
</FN>
</TABLE>
<PAGE>
NOTE (14) INCOME TAXES
<TABLE>
The 1997, 1996 and 1995 provisions for income tax were comprised of the
following amounts:
<CAPTION>
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Current:
Federal $18,877 $12,870 $11,657
State and local 5,652 5,630 5,344
------- ------- -------
24,529 18,500 17,001
------- ------- -------
Deferred:
Federal 66 703 (133)
State and local 30 349 (265)
------- ------- -------
96 1,052 (398)
------- ------- -------
Provision for income taxes $24,625 $19,552 $16,603
======= ======= =======
</TABLE>
For the years ended December 31, 1997, 1996 and 1995, the Company
recognized tax benefits relating to its stock option and other stock benefit
plans of $688,000, $599,000 and $1,645,000, respectively, which were credited
directly to stockholders' equity.
<TABLE>
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, 1997, 1996 and 1995 were as follows:
<CAPTION>
1997 1996 1995
---- ---- ----
% 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 $21,600 35.00% $16,197 35.00% $13,572 35.00%
Dividends received
exclusion (246) (.40) (235) (.51) (218) (.56)
State and local income
taxes, net of Federal
income tax benefit 3,693 5.98 3,886 8.40 3,301 8.51
Other, net (422) (.68) (296) (.64) (52) (.13)
------- ----- ------- ----- ------- -----
Provision for income taxes $24,625 39.90% $19,552 42.25% $16,603 42.82%
======= ===== ======= ===== ======= =====
</TABLE>
<PAGE>
<TABLE>
At December 31, 1997 and 1996, deferred tax assets and liabilities were
comprised of the following:
<CAPTION>
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
Deferred Tax Assets:
Deferred profits on unsold cooperative shares $ 1,955 $ 2,308
Allowance for possible loan losses 2,621 2,375
Benefit plan costs 1,830 1,877
Loan fees and mortgage discounts 415 517
Other 561 485
-------- -------
Deferred tax assets 7,382 7,562
-------- -------
Deferred Tax Liabilities:
Securities available-for-sale (22,905) (17,534)
Depreciation (21) (46)
Cash basis mortgages (84) (144)
-------- -------
Deferred tax liabilities (23,010) (17,724)
-------- -------
Deferred tax liability, net $(15,628) $(10,162)
======== ========
</TABLE>
Under the Federal law that existed prior to 1996, the Bank was generally
allowed a special bad debt deduction in determining income for tax purposes. The
deduction was based on either an experience formula or a percentage of taxable
income before such deduction (reserve method). The reserve method was used in
preparing the income tax returns for 1995. Legislation was enacted in August
1996 which repealed the reserve method for tax purposes. As a result, the Bank
must instead use the direct charge-off method to compute its bad debt deduction.
Pursuant to Statement 109, the Bank is generally not required to provide
deferred taxes for the difference between book and tax bad debt expense taken in
years prior to, or ending at December 31, 1987, referred to as base year
reserves. The recapture tax on post 1987 reserves must be paid over a six year
period starting in 1996. The payment of the tax was deferred in 1996 and 1997,
as the Bank 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 of $85,107,000 and supplemental reserve are frozen, not forgiven. These
reserves continue to be segregated as they are subject to recapture penalty if
one of the following occurs: (a) the Bank's retained earnings represented by
this reserve are used for purposes other than to absorb losses on loans,
including excess dividends or distributions in liquidation; (b) the Bank redeems
its stock; (c) the Bank fails to meet the definition provided by the Code for a
Bank. Future changes in the Federal tax law, could of course further affect the
status of the base year reserve. (See Note 17.)
New York State and the City of New York adopted legislation to reform the
franchise taxation of thrift reserves for loan losses. The legislation applies
to taxable years beginning after December 31, 1995. The legislation, among other
things, retained the reserve method for bad debt deductions. The New York State
and the City of New York bad debt deduction is no longer predicated on the
Federal deduction.
<PAGE>
NOTE (15) EARNINGS PER SHARE
<TABLE>
The following is a reconciliation of the denominators of basic and
diluted EPS computations for net income. The numerator for calculating both
basic and diluted earnings per share for the Company is net income.
<CAPTION>
For the Year Ended December 31,
1997 1996* 1995*
-------------------------------
(In Thousands, Except EPS Amounts)
<S> <C> <C> <C>
Numerator - Net Income $37,090 $26,725 $22,174
Basic EPS: Denominator
Weighted Average Shares 9,858 10,062 10,604
Basic EPS $3.76 $2.66 $2.09
===== ===== =====
Diluted EPS: Denominator
Weighted Average Shares 9,858 10,062 10,604
Incremental shares-options 332 374 449
------ ------ ------
10,190 10,436 11,053
Diluted EPS $3.64 $2.56 $2.01
===== ===== =====
<FN>
* Earnings per share for 1996 and 1995 have been restated, as required,
for the adoption of Statement 128. (See Note 1(k).)
</FN>
</TABLE>
<PAGE>
NOTE (16) DEPOSITS
<TABLE>
Deposits at December 31, 1997 and 1996 are summarized as follows:
<CAPTION>
1997 1996
------------------------------ ----------------------------
Stated Stated
rate Amount Percent rate Amount Percent
---- ------ ------- ---- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance by interest rate:
Demand - % $ 32,132 2.87% - % $ 31,940 2.79%
Negotiable order of
withdrawal (NOW) 2.47 35,401 3.16 2.47 36,256 3.17
Money market 2.96 79,007 7.05 2.96 89,081 7.78
Passbook and lease
security 2.71 565,130 50.40 2.71 599,951 52.43
Certificates: 4.67- 5.00 44,646 3.98 4.14- 5.00 174,155 15.22
5.01- 6.00 343,864 30.67 5.01- 6.00 187,890 16.42
6.01- 7.00 21,023 1.87 6.01- 7.00 25,120 2.19
---------- ------ ---------- ------
409,533 36.52 387,165 33.83
---------- ------ ---------- ------
Deposits $1,121,203 100.00% $1,144,393 100.00%
========== ====== ========== ======
</TABLE>
<TABLE>
At December 31, 1997 and 1996, the scheduled maturities of certificate
accounts were as follows:
<CAPTION>
1997 1996
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
12 months or less $344,893 84.22% $323,788 83.63%
13 to 24 months 35,437 8.65 34,452 8.90
25 to 36 months 14,573 3.56 13,939 3.60
37 to 48 months 14,630 3.57 14,969 3.87
49 to 60 months - - 17 -
-------- ------ -------- ------
$409,533 100.00% $387,165 100.00%
======== ====== ======== ======
</TABLE>
At December 31, 1997 and 1996, certificate accounts in excess of
$100,000, were $41,551,000 and $32,676,000, 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, 1997, 1996 and 1995:
<CAPTION>
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Passbook and lease security $15,677 $16,722 $19,063
Certificates 20,768 19,777 17,649
Money market 2,549 2,819 3,051
NOW 880 899 944
------- ------- -------
Total interest expense $39,874 $40,217 $40,707
======= ======= =======
</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 $63,709,000 at December 31, 1997 and $71,589,000 at
December 31, 1996.
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, 1997 and 1996 includes $85,107,000, which
has been segregated for federal income tax purposes as a bad debt reserve. Any
use of this amount for purposes other than to absorb losses on loans may result
in taxable income, under federal regulations, at current rates. The Bank did not
recognize any tax bad debt deductions during the year ended December 31, 1997.
For the years ending December 31, 1996 and December 31, 1995, the Bank
recognized tax bad debt deductions of $661,000 and $52,000, respectively.
(See Note 14.)
NOTE (18) COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Bank occupies premises covered by noncancelable leases with expiration
dates through October 31, 2002 (exclusive of renewal options). Rental expense
under these leases for the years ended December 31, 1997, 1996 and 1995 was
$272,000, $267,000 and $262,000, respectively. At December 31, 1997, 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>
1998 $ 197
1999 191
2000 166
2001 100
2002 50
Thereafter -
------
Total $ 704
======
</TABLE>
Loan Commitments
----------------
At December 31, 1997 and 1996, commitments to originate mortgage loans at
fixed rates were $54,810,000 with stated rates ranging from 7.05% to 7.68% and
$34,376,000 with stated rates ranging from 7.38% to 8.00%, respectively. There
were no commitments to originate adjustable rate mortgages at December 31, 1997
and 1996. At December 31, 1997 and 1996, deposit account overdraft lines
available were $821,000 and $745,000, respectively, with stated rates ranging
from 10.00% to 12.00% and unused business lines of credit were $16,000 and
$16,000, respectively, with a stated rate of 15.00%. At December 31, 1997 there
were $233,000 of student loans held for sale. There were no loans held for sale
at December 31, 1996.
Security Purchase Commitments
-----------------------------
At December 31, 1997, there were commitments to purchase $15,000,000
federal agency securities at par with a three month term to maturity and a
yield of 5.62%.
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>
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $28,527,000 and
$25,451,000 at December 31, 1997 and 1996,
respectively $(29,190) $(26,001)
======== ========
Projected benefit obligation for services
rendered to date (42,405) (36,701)
Plan assets at fair value, primarily listed
stocks and U.S. bonds 63,711 52,873
-------- --------
Plan assets in excess of projected benefit
obligation 21,306 16,172
Unrecognized net gain from past experience
different from that assumed and effects of
changes in assumptions (13,779) (9,801)
Unrecognized prior service cost 1,576 1,721
Unrecognized net asset being amortized over
18.35 years (3,340) (3,794)
-------- --------
Prepaid pension cost $ 5,763 $ 4,298
======== ========
</TABLE>
<TABLE>
The components of net periodic pension income for the years ended
December 31, 1997, 1996, and 1995, are as follows:
<CAPTION>
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Service cost-benefits earned $ 998 $ 1,078 $ 619
Interest cost on projected
benefit obligation 2,295 2,239 2,066
Actual return on plan assets (12,475) (7,140) (10,631)
Net amortization and deferral 7,717 3,112 7,184
-------- -------- -------
Net periodic pension (income) $ (1,465) $ (711) $ (762)
======== ======== =======
</TABLE>
<TABLE>
The expected long-term rate of return on assets was 8.00% for the years
ended December 31, 1997, 1996 and 1995. The following actuarial assumptions have
been made to determine the actuarial present value of the projected benefit
obligation for the years ended December 31:
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Rate of increase in future compensation 6.50% 6.50% 6.50%
Weighted average discount rate 5.75% 6.50% 6.00%
</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 and 401(a)(17) 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>
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, all of which
are vested $(4,036) $(3,936)
======= =======
Projected benefit obligation for service
rendered to date (4,728) (4,607)
Plan assets at fair value - -
------- -------
Projected benefit obligations in excess of
plan assets (4,728) (4,607)
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions 831 1,003
Unrecognized prior service cost (4) (4)
Additional minimum liability (135) (328)
------- -------
Accrued pension cost $(4,036) $(3,936)
======= =======
</TABLE>
<TABLE>
The components for the net periodic Pension Restore Plan cost for the years
ended December 31, 1997, 1996 and 1995, are as follows:
<CAPTION>
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Interest cost on projected benefit obligation $ 273 $ 274 $ 264
Net amortization and deferral 54 252 41
------- ------- -------
Net periodic Pension Restore Plan cost $ 327 $ 526 $ 305
======= ======= =======
</TABLE>
<TABLE>
The following actuarial assumptions have been made to determine the
projected benefit obligation for the years ended December 31:
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Rate of increase in future compensation 6.50% 6.50% 6.50%
Weighted average discount rate 5.75% 6.50% 6.00%
</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 whole-life coverage 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, 1997,
1996 and 1995, was $69,000, $70,000 and $64,000, 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 Employee Stock Ownership Plan
(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. Management has determined to continue the ESOP
and that contributions to the Savings Plan will 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, 1997, 1996 and 1995, 122,646, 121,256
and 161,860 options granted under the Stock Option Plan were exercised,
respectively. At December 31, 1997, the remaining 324,140 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. During the
<PAGE>
years ended December 31, 1997 and 1996, 6,250, and 2,000 options granted under
the Directors' Option Plan were exercised. There were no options exercised from
the Directors' Option Plan during 1995. At December 31, 1997, 146,750 options
granted under the Directors' Option Plan were exercisable.
The 1996 Stock Option Plan
- --------------------------
The JSB Financial, Inc. 1996 Stock Option Plan (the 1996 Option Plan),
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 of the Company's Directors, who is
neither an officer nor an employee of the Company or the Bank, is granted
annually, 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. Options granted
under the 1996 Option Plan are granted at an exercise price equal to the market
closing price of the Company's common stock on the business day prior to 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. During 1997, 8,000 options granted
from the 1996 Option Plan were exercised. At December 31, 1997, 326,000 of the
332,000 options outstanding under the 1996 Option Plan were exercisable.
Effective January 1, 1998, an additional 164,000 options were granted at an
exercise price of $50.0625 per share.
<TABLE>
The following table presents option transactions summarized for all of
the Company's stock option plans for the years ended December 31, 1995, 1996 and
1997.
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
------ -----
<S> <C> <C>
Options outstanding at December 31, 1994 889,892 $10.00
1995 Grants - -
1995 Forfeitures (61) 10.00
1995 Exercises (161,860) 10.00
------- -----
Options outstanding at December 31, 1995 727,971 10.00
1996 Grants 165,000 31.63
1996 Forfeitures (4,929) 10.00
1996 Exercises (123,256) 10.00
------- -----
Options outstanding at December 31, 1996 764,786 14.67
1997 Grants 175,000 38.48
1997 Forfeitures - -
1997 Exercises (136,896) 11.45
------- -----
Options outstanding at December 31, 1997 802,890 $20.40
======= =====
Options exercisable at December 31, 1997 796,890 $20.20
======= =====
</TABLE>
<PAGE>
The range of exercise prices on options outstanding were $10.00 to
$47.88, $10.00 to $31.63, and all at $10.00, for the years ended December 31,
1997, 1996 and 1995, respectively. The weighted average remaining contractual
life for all stock options outstanding at December 31, 1997 was five years.
<TABLE>
In accordance with Statement 123, the Company used the Black-Scholes
option-pricing model to determine the fair value of the 1996 and 1997 option
grants, using the following weighted average assumptions:
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Dividend yield 3.63% 3.63%
Expected volatility 20.93 21.92
Risk-free interest rate 6.28 5.44
Expected option lives 6 Years 6 Years
</TABLE>
<TABLE>
On a pro forma basis, had compensation expense for the Company's 1996
Stock Option Plan been determined based on the fair value at the grant dates for
awards made under that plan, in accordance with the expense method of Statement
123, the Company's net income and earnings per share would have been reduced as
follows for the years ended December 31:
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net income (as reported) $37,090 $26,725
Pro forma net income $36,288 $26,188
Basic EPS (as reported) $3.76 $2.66
Pro forma Basic EPS $3.68 $2.60
Diluted EPS (as reported) $3.64 $2.56
Pro forma Diluted EPS $3.56 $2.51
</TABLE>
The pro forma results presented above may not be representative of the
effects reported in pro forma net income for future years, because Statement 123
was not applied to all outstanding, non-vested awards, as Statement 123 does not
apply to awards prior to January 1, 1996.
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. The Company recognized $73,000 and $99,000 of expense
related to the DER for the years ended December 31, 1997 and 1996, respectively.
For 1996 the Company recognized $330,000 in expense for the difference in market
closing price between the option grant date and date of stockholder approval.
NOTE (23) STOCK PLANS
Employee Stock Ownership Plan
- ------------------------------
Since 1990 the Bank has maintained an ESOP. For 1995, 1996 and 1997, the
Board of Directors authorized contributions to the ESOP, to purchase shares,
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 $566,000, $550,000 and $533,000
related to the ESOP for the years ended December 31, 1997, 1996 and 1995,
respectively. There were three unallocated shares in the ESOP Plan at December
31, 1997 and none at December 31, 1996 and 1995.
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 15,342, 17,633 and 21,583 for the years ended
December 31, 1997, 1996 and 1995, respectively. The Bank bears the cost of
administering the ESOP.
<PAGE>
Directors' Stock Program
- ------------------------
To further align the outside Directors' interest with those of the
Company's stockholders, on December 9, 1997, the Board of Directors of the
Company authorized the issuance of up to 20,000 shares of the Company's common
stock to the Company's non-employee directors, pursuant to the Jamaica Savings
Bank FSB Directors' Stock Program (the Directors' Stock Program). Pursuant to
the Directors Stock Program, each year, non-employee Directors of the Bank will
receive shares of the Company's common stock having a fair market value equal to
approximately one-third of the annual directorship fees during such year. The
stock will be issued in lieu of a cash payment of such fees. Shares distributed
thereunder will be from the Company's treasury stock. The operation of the
Directors' Stock Program is automatic, with the determination of the appropriate
number of shares to be issued to each director based on the fair market value of
the common stock at the close of business prior to the date of issuance.
Directors do not have the option to receive cash rather than stock in payment of
the portion of their fees subject to the Directors' Stock Program. The maximum
number of shares to be issued to any eligible director during 1998 is not
expected to exceed 200 shares.
Bank Recognition and Retention Plans and Trusts
- ----------------------------------------------
In connection with the Company's initial public stock offering during 1990,
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 during 1990 to acquire an
aggregate of 640,000 shares of the Company's common stock in the Company's
initial public stock offering, all of which have been awarded. Awards vested 20%
per year commencing one year from the date of the award, and vested 100% upon
termination of employment due to death, disability or normal retirement.
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,
for the BRRPs for the year ended December 31, 1995. Pursuant to the BRRPs,
51,631 shares of common stock were vested during the year ended December 31,
1995.
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, 1997 and 1996, the trust held 188,323 and 166,848 shares of common
stock, respectively, at an aggregate cost of $4,199,000 and $3,275,000,
respectively. The expense recognized for the Restore Plan in connection with the
ESOP for 1997, 1996 and 1995 was $113,000, $105,000 and $35,000, respectively.
NOTE (25) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 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.
The following methods and assumptions were utilized by management to
estimate the fair value of each class of financial instruments at December 31,
1997 and 1996:
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, except for Federal Home Loan
Bank stock, which is reflected 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, 1997 and 1996 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, 1997 and 1996, respectively, on a certificate with an initial term
to maturity equal to the remaining term to maturity of the existing
certificates.
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, 1997 and 1996,
would have been offered at substantially the same rates and under substantially
the same terms that would have been offered at December 31, 1997 and 1996 to the
counterparties; therefore the estimated fair value of the commitments was zero
at those dates.
<PAGE>
<TABLE>
The following table presents carrying values and estimated fair values of
<CAPTION>
financial instruments at December 31:
1997 1996
------------------- --------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 74,924 $ 74,924 $ 99,394 $ 99,394
Securities available-for-sale 62,243 62,243 51,021 51,021
Securities held-to-maturity 352,967 353,996 460,509 461,784
Other investments 7,645 7,645 6,859 6,859
Mortgage loans, gross 979,810 1,031,586 835,958 846,508
Other loans, gross 29,148 29,256 27,894 27,970
Interest due and accrued 9,278 9,278 9,310 9,310
Financial liabilities
Deposits $1,121,203 $1,121,903 $1,144,393 $1,144,690
</TABLE>
NOTE (26) REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank'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. The most recent
notification from the Office of Thrift Supervision (OTS), as of December 31,
1996, 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>
1997
Total risk-based capital
(to risk weighted assets) $224,444 21.66% $ 82,889 8.00% $103,612 10.00%
Tangible capital
(to tangible assets) 229,168 16.35 21,020 1.50 N/A N/A
Tier I leverage (core)
capital (to adjusted
tangible assets) 229,168 16.35 42,040 3.00 51,806 5.00
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
</TABLE>
<PAGE>
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. As a result of this regulation, the Bank excluded from its
regulatory capital $6,827,000 and $13,687,000 at December 31, 1997 and 1996,
respectively.
Distributions charged against an institution's capital accounts, such as,
the upstreaming of funds to holding companies are subject to certain limitations
under OTS regulations. 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.
<PAGE>
NOTE (27) PARENT ONLY FINANCIAL INFORMATION
The following condensed statements of financial condition at December 31,
1997 and 1996 and the condensed statements of operations and cash flows for the
years ended December 31, 1997, 1996 and 1995, 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>
<CAPTION>
Condensed Statements of Financial Condition
December 31, 1997 and 1996
(In Thousands)
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 17,164 $ 15,582
Securities held-to-maturity, net (estimated fair
value of $70,000 and $80,028, respectively) 70,000 80,007
Mortgage loans, net 15,195 15,239
Other assets, net 691 680
Investment in the Bank 264,464 223,791
-------- --------
Total Assets $367,514 $335,299
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities, net $ - $ -
Stockholders' equity 367,514 335,299
-------- --------
Total Liabilities and Stockholders' Equity $367,514 $335,299
======== ========
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Operations
For the Years Ended December 31,
(In Thousands)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Dividends from the Bank $ - $20,000 $43,000
Interest income 6,080 6,589 7,275
Other income 13 18 15
------- ------- -------
Total income 6,093 26,607 50,290
------- ------- -------
Expenses 531 451 437
------- ------- -------
Income Before Income Taxes and Equity in
Undistributed Earnings of the Bank 5,562 26,156 49,853
Provision for Income Taxes 1,781 2,100 2,557
------- ------- -------
Income Before Equity in Undistributed Earnings
of the Bank 3,781 24,056 47,296
Equity in Undistributed Earnings of the Bank,
Net of Provision for Income Taxes 33,309 2,669 (25,122)1
------- ------- -------
Net Income $37,090 $26,725 $22,174
======= ======= =======
<FN>
1 Represents excess of dividends over net income.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
For the Years Ended December 31,
(In Thousands)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 37,090 $ 26,725 $ 22,174
Adjustments to reconcile net income to cash
provided by operating activities:
(Equity in undistributed earnings) excess of
dividends over net income of the Bank (33,309) (2,669) 25,122
(Increase) decrease in other assets (11) 697 (247)
Other (2) - -
-------- --------- ---------
Net cash provided by operating activities 3,768 24,753 47,049
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities held-to-maturity (260,000) (205,021) (190,000)
Proceeds from maturities of securities held-
to-maturity 270,000 215,000 170,000
Principal payments on mortgage loans 44 40 38
Accretion of discount in excess of amortization of
premium on debt securities 7 14 -
-------- --------- ---------
Net cash provided (used) by investing activities 10,051 10,033 (19,962)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid to common stockholders (13,805) (12,090) (10,616)
Payments to repurchase common stock - (27,650) (9,881)
Proceeds upon exercise of common stock options 1,568 1,233 1,619
-------- --------- ---------
Net cash used by financing activities (12,237) (38,507) (18,878)
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents 1,582 (3,721) 8,209
Cash and cash equivalents at beginning of year 15,582 19,303 11,094
-------- --------- ---------
Cash and cash equivalents at end of year $ 17,164 $ 15,582 $ 19,303
======== ========= =========
</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, 1997 and 1996, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the years in the three year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Jericho, New York
January 29, 1998
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 Statements (Nos.
33-37217, 33-36491 and 33-36490) on Form S-8 of JSB Financial, Inc. of our
report dated January 29, 1998, relating to the consolidated statements of
financial condition of JSB Financial, Inc. and subsidiary as of December 31,
1997 and 1996, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997, which report is incorporated by reference to the
December 31, 1997 Annual Report on Form 10-K of JSB Financial, Inc.
KPMG PEAT MARWICK LLP
Jericho, New York
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Statement of Financial Condition as of December 31, 1997 and the Consolidated
Statement of Income for the year ended December 31, 1997 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-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Dec-31-1997
<EXCHANGE-RATE> 1
<CASH> 12,924
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 62,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 62,243
<INVESTMENTS-CARRYING> 352,967
<INVESTMENTS-MARKET> 353,996
<LOANS> 1,005,625
<ALLOWANCE> 5,880
<TOTAL-ASSETS> 1,535,031
<DEPOSITS> 1,121,203
<SHORT-TERM> 0
<LIABILITIES-OTHER> 46,314
<LONG-TERM> 0
0
0
<COMMON> 160
<OTHER-SE> 367,354
<TOTAL-LIABILITIES-AND-EQUITY> 1,535,031
<INTEREST-LOAN> 76,219
<INTEREST-INVEST> 28,020
<INTEREST-OTHER> 3,503
<INTEREST-TOTAL> 107,742
<INTEREST-DEPOSIT> 39,874
<INTEREST-EXPENSE> 39,874
<INTEREST-INCOME-NET> 67,868
<LOAN-LOSSES> 648
<SECURITIES-GAINS> 6,991
<EXPENSE-OTHER> 27,434
<INCOME-PRETAX> 61,715
<INCOME-PRE-EXTRAORDINARY> 37,090
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,090
<EPS-PRIMARY> 3.76
<EPS-DILUTED> 3.64
<YIELD-ACTUAL> 4.73
<LOANS-NON> 12,754
<LOANS-PAST> 515
<LOANS-TROUBLED> 1,840
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,327
<CHARGE-OFFS> 107
<RECOVERIES> 12
<ALLOWANCE-CLOSE> 5,880
<ALLOWANCE-DOMESTIC> 5,880
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Statement of Financial Condition as of December 31, 1996 and the 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> 2.66
<EPS-DILUTED> 2.56
<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>
