UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
------------------
COMMISSION FILE NUMBER 1-13157
-------
JSB FINANCIAL, INC.
--------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED ON ITS CHARTER)
DELAWARE 11-3000874
- ------------------------------- ------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
303 MERRICK ROAD, LYNBROOK, NEW YORK 11563
------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(516) 887-7000
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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. [X] YES [ ] NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OF COMMON STOCK OUTSTANDING AT NOVEMBER 8, 1999
- --------------------- -------------------------------
$.01 PAR VALUE 9,346,316
<PAGE> 2
<TABLE>
INDEX
PART I - FINANCIAL INFORMATION
<CAPTION>
Page
Number
------
<S> <C> <C> <C>
ITEM 1. Financial Statements - Unaudited
Consolidated Statements of Financial Condition
at September 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations for the Three
Months and Nine Months Ended September 30, 1999
and September 30, 1998 4
Consolidated Statement of Stockholders' Equity for the
Nine Months Ended September 30, 1999 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and September 30, 1998 6
Notes to Consolidated Financial Statements 7- 8
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-21
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 21-23
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 24
ITEM 2. Changes in Securities and Use of Proceeds 24
ITEM 3. Defaults Upon Senior Securities 24
ITEM 4. Submission of Matters to a Vote of Security Holders 24
ITEM 5. Other Information 24
ITEM 6. Exhibits and Reports on Form 8-K 24
Signatures 25
Exhibit Index 26
Exhibit 11.00 Computation of Earnings Per Share 27
Exhibit 27.00 Financial Data Schedule for the Nine Months Ended
September 30, 1999 28
</TABLE>
<PAGE> 3
<TABLE>
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
- ------
Cash and due from banks $ 12,753 $ 13,849
Federal funds sold 32,500 99,000
---------- ----------
Cash and cash equivalents 45,253 112,849
Securities available-for-sale, at estimated fair value 79,173 83,592
Securities held-to-maturity, net (estimated fair value of
$192,781 and $208,906, respectively) 193,540 208,457
Other investments 10,833 8,922
Mortgage loans, net 1,207,177 1,146,915
Other loans, net 19,631 22,744
Premises and equipment, net 18,310 18,340
Interest due and accrued 8,840 8,773
Real estate held for sale and Other real estate ("ORE") 558 785
Other assets 12,455 10,272
---------- ----------
Total Assets $1,595,770 $1,621,649
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits $1,092,044 $1,124,166
Federal Home Loan Bank of New York ("FHLB-NY") advances 50,000 50,000
Advance payments for real estate taxes and insurance 20,848 13,993
Official bank checks outstanding 17,784 11,604
Deferred tax liability, net 24,715 25,476
Accrued expenses and other liabilities 16,147 13,934
---------- ----------
Total Liabilities 1,221,538 1,239,173
---------- ----------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
- --------------------
Preferred stock ($.01 par value, 15,000,000 shares authorized;
none issued) - -
Common stock ($.01 par value, 65,000,000 shares authorized;
16,000,000 issued; 9,289,793 and 9,505,923 outstanding, respectively) 160 160
Additional paid-in capital 170,219 168,663
Retained income, substantially restricted 345,616 337,474
Common stock held by Benefit Restoration Plan Trust, at cost
(196,823 and 193,723 shares, respectively) (4,758) (4,477)
Common stock held in treasury, at cost (6,710,207 and 6,494,077
shares, respectively) (175,393) (160,215)
Accumulated other comprehensive income:
- ---------------------------------------
Net unrealized gain on securities available-for-sale, net of tax 38,388 40,871
---------- ----------
Total Stockholders' Equity 374,232 382,476
---------- ----------
Total Liabilities and Stockholders' Equity $1,595,770 $1,621,649
========== ==========
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
</TABLE>
<PAGE> 4
<TABLE>
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------
1999 1998 1999 1998
--------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
- ---------------
Mortgage loans, net $ 23,091 $ 22,157 $ 68,848 $ 64,518
Debt & equity securities, net 1,449 2,514 5,244 9,195
Collateralized mortgage obligations ("CMOs") and
mortgage-backed securities ("MBS"), net 1,704 1,711 4,999 4,956
Other loans, net 328 426 1,048 1,436
Federal funds sold 776 773 2,361 3,151
--------- --------- --------- ---------
27,348 27,581 82,500 83,256
--------- --------- --------- ---------
Interest Expense
- ----------------
Deposits 8,531 9,714 25,879 29,098
FHLB-NY advances 709 - 2,102 -
--------- --------- --------- ---------
Total Interest Expense 9,240 9,714 27,981 29,098
--------- --------- --------- ---------
Net Interest Income 18,108 17,867 54,519 54,158
Provision for Loan Losses 1 13 13 41
--------- --------- --------- ---------
Net Interest Income After Provision for
Loan Losses 18,107 17,854 54,506 54,117
--------- --------- --------- ---------
Non-Interest Income
- -------------------
Real estate operations, net 104 172 1,223 287
Loan fees and service charges 1,309 1,967 3,279 4,559
Recovery of prior period expenses & unaccrued
interest on troubled loans - - - 4,346
Miscellaneous (loss)/income (28) 1,359 (41) 1,766
--------- --------- --------- ---------
Total Non-Interest Income 1,385 3,498 4,461 10,958
--------- --------- --------- ---------
Non-Interest Expense
- --------------------
Compensation and benefits 3,894 4,167 11,932 11,941
Occupancy and equipment expenses, net 1,441 1,416 4,155 3,919
Federal deposit insurance premiums 34 36 104 108
Other general and administrative 1,494 1,532 4,984 4,850
--------- --------- --------- ---------
Total Non-Interest Expense 6,863 7,151 21,175 20,818
--------- --------- --------- ---------
Income Before Provision for Income Taxes 12,629 14,201 37,792 44,257
Provision for Income Taxes 5,427 2,824 16,218 10,030
--------- --------- --------- ---------
Net Income $ 7,202 $ 11,377 $ 21,574 $ 34,227
========= ========= ========= =========
Earnings and Cash Dividends Per Common Share:
- ---------------------------------------------
Basic earnings per common share $ .78 $ 1.16 $ 2.32 $ 3.47
========= ========= ========= =========
Diluted earnings per common share $ .76 $ 1.13 $ 2.27 $ 3.37
========= ========= ========= =========
Basic weighted average common shares 9,284 9,830 9,319 9,864
========= ========= ========= =========
Diluted weighted average common & dilutive
potential shares 9,484 10,093 9,520 10,159
========= ========= ========= =========
Cash dividends per common share $ .45 $ .40 $ 1.35 $ 1.20
========= ========= ========= =========
Comprehensive Income:
- ---------------------
Net Income $ 7,202 $ 11,377 $ 21,574 $ 34,227
Other comprehensive income, net of tax:
Net unrealized (depreciation)/appreciation on
securities available-for-sale, net of tax (4,229) (2,206) (2,483) 3,237
--------- --------- --------- ---------
Comprehensive Income $ 2,973 $ 9,171 $ 19,091 $ 37,464
========= ========= ========= =========
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
</TABLE>
<PAGE> 5
<TABLE>
JSB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1999
------------------
<S> <C>
Common Stock (Par value: $.01)
- ------------------------------
Balance at beginning and end of period $ 160
-------------
Additional Paid-in Capital
- --------------------------
Balance at beginning of period 168,663
Net allocation of common stock for Benefit Restoration Plan 281
Tax benefit for stock plans 1,226
Issuance of common stock for Director's compensation 49
-------------
Balance at end of period 170,219
-------------
Retained Income, Substantially Restricted
- -----------------------------------------
Balance at beginning of period 337,474
Net income 21,574
Loss on reissuance of treasury stock (790)
Cash dividends on common stock ($1.35) (12,642)
-------------
Balance at end of period 345,616
-------------
Common Stock Held by Benefit Restoration Plan Trust, at Cost
- ------------------------------------------------------------
Balance at beginning of period (4,477)
Common stock acquired (359)
Common stock distributed 78
-------------
Balance at end of period (4,758)
-------------
Common Stock Held in Treasury, at Cost
- --------------------------------------
Balance at beginning of period (160,215)
Common stock reacquired (17,995)
Common stock reissued for options exercised 2,775
Common stock reissued for Director's compensation 42
-------------
Balance at end of period (175,393)
-------------
Accumulated Other Comprehensive Income
- --------------------------------------
Balance at beginning of period 40,871
Net unrealized depreciation in securities
available-for-sale, net of tax benefit of $1,935 (2,483)
-------------
Balance at end of period 38,388
-------------
Total Stockholders' Equity $ 374,232
=============
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
</TABLE>
<PAGE> 6
<TABLE>
JSB FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
1999 1998
---------------------------------
<S> <C> <C>
Cash flows from operating activities
- ------------------------------------
Net income $ 21,574 $ 34,227
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 13 41
Decrease in deferred loan fees and discounts, net (468) (576)
Accretion of discount less than (in excess of) amortization of
premium on MBS and CMOs 109 (47)
Accretion of discount in excess of amortization of premium on debt securities (4) (90)
Depreciation and amortization on premises and equipment 1,894 1,544
Mortgage loans originated for sale (274) (4,249)
Proceeds from sale of mortgage loans originated for sale 370 4,229
Gains on sale of mortgage and other loans (3) (45)
Tax benefit for stock plans credited to capital 1,226 2,430
(Increase) decrease in interest due and accrued (67) 223
Increase (decrease) in official bank checks outstanding 6,180 (2,780)
Other, net 1,675 3,685
--------- ---------
Net cash provided by operating activities 32,225 38,592
--------- ---------
Net cash flow from investing activities
- ---------------------------------------
Loans originated:
Mortgage loans (115,180) (208,769)
Other loans (7,497) (12,282)
Purchases of CMOs held-to-maturity (50,244) (46,701)
Purchases of debt securities held-to-maturity and securities available-for-sale (305,000) (279,000)
Principal payments on:
Mortgage loans 55,087 68,849
Other loans 10,461 12,469
CMOs 34,282 47,686
MBS 774 1,111
Proceeds from maturities of U.S. Government and federal agency securities 335,000 389,000
Proceeds from sale of other loans 138 5,133
Purchases of FHLB-NY stock (1,911) (1,277)
Purchases of premises and equipment, net of disposals (1,864) (2,779)
Net decrease in investment in real estate held-for-sale 52 2,128
--------- ---------
Net cash used by investing activities (45,902) (24,432)
--------- ---------
Net cash flow from financing activities
- ---------------------------------------
Net decrease in deposits (32,122) (11,590)
Increase in advance payments for real estate taxes and insurance 6,855 11,406
Proceeds from common stock option exercises 1,985 1,531
Cash dividend paid to common stockholders (12,642) (11,862)
Payments to repurchase common stock (17,995) (16,034)
--------- ---------
Net cash used by financing activities (53,919) (26,549)
--------- ---------
Decrease in cash and cash equivalents (67,596) (12,389)
Cash and cash equivalents at beginning of year 112,849 74,924
--------- ---------
Cash and cash equivalents at end of quarter $ 45,253 $ 62,535
========= =========
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
</TABLE>
<PAGE> 7
JSB FINANCIAL, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
- -------------------------
The financial information for JSB Financial, Inc. (the "Company" or "JSB
Financial") as consolidated with its wholly owned subsidiary Jamaica Savings
Bank FSB (the "Bank") is prepared in conformity with generally accepted
accounting principles for interim financial statements and with instructions to
Form 10-Q and Article 10 of Regulation S-X. Such principles are applied on a
basis consistent with those reflected in the 1998 Annual Report filed with the
Securities and Exchange Commission ("SEC"). The financial information included
herein, other than the consolidated statement of financial condition as of
December 31, 1998, has been prepared by management without an audit by
independent certified public accountants who do not express an opinion thereon.
The consolidated statement of financial condition as of December 31, 1998, has
been derived from, but does not include all the disclosures contained in, the
audited consolidated financial statements for the year ended December 31, 1998.
The information furnished includes all adjustments and accruals consisting only
of normal recurring accrual adjustments which are in the opinion of management,
necessary for a fair presentation of results for the interim periods. The
foregoing interim results are not necessarily indicative of the results of
operations for the full year ending December 31, 1999.
These consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto, included in the
Annual Report to Stockholders for JSB Financial, Inc. for the year ended
December 31, 1998 and the Form's 10-Q for the periods ended March 31, 1999 and
June 30, 1999.
2. Impact of New Accounting Standard Not Yet Adopted
- -----------------------------------------------------
In June of 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("Statement 133"). Statement 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. Statement
133 requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation. If
certain conditions are met, a derivative may be specifically designed as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction.
The issuance of Statement No. 137, "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133,"
delayed the effective date of Statement 133 to all fiscal quarters beginning
after June 15, 2000. Earlier application of all provisions of Statement 133 is
encouraged, but it is permitted only as of the beginning of a fiscal quarter
that begins after the issuance of this Statement. Statement 133 should not be
applied retroactively to financial statements of prior periods. Upon
implementation of Statement 133, hedging relationships must be designated anew
and documented pursuant to the provisions of Statement 133. The Company does not
expect the adoption of Statement 133 to have a material affect on its financial
condition or results of operations.
<PAGE> 8
3. Debt and Equity Securities
- ------------------------------
The following tables set forth information regarding the Company's debt and
equity securities as of:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
--------------------------- ----------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- ---------- ------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Held-to-Maturity
- ----------------
U.S. Government and federal
agency securities $ 80,000 $ 79,973 $ 109,996 $ 110,026
CMOs, net 111,641 110,795 95,790 95,997
MBS, net 1,899 2,013 2,671 2,883
--------- --------- --------- ---------
Total Securities held-to-maturity $ 193,540 $ 192,781 $ 208,457 $ 208,906
========= ========= ========= =========
Estimated Estimated
Cost Fair Value Cost Fair Value
--------- ---------- --------- ----------
Available-for-Sale (In Thousands)
Marketable equity securities $ 10,869 $ 79,173 $ 10,869 $ 83,592
========= ========= ========= ==========
</TABLE>
4. Recent Developments
- -----------------------
On August 16, 1999, the Company announced that, on that day, it had entered into
an Agreement and Plan of Merger ("Merger Agreement") in which the Company will
merge with and into North Fork Bancorporation, Inc. ("North Fork"). Under the
terms of the Merger Agreement, stockholders of JSB Financial will receive 3.0
shares of North Fork common stock for each share of the Company's common stock.
The transaction, which is subject to regulatory and stockholder approvals, is
expected to be accounted for as a pooling-of-interests and is expected to close
during the first quarter of 2000.
On September 14, 1999, in connection with the pending merger with North Fork,
the Company's Board of Directors terminated the Company's eleventh stock
repurchase program, which was approved by the Board of Directors on October 13,
1998. Prior to the termination, the Company repurchased 326,600 shares of its
common stock during the nine months ended September 30, 1999. Under the eleventh
program, 461,700 shares of the 900,000 shares targeted for repurchase had been
acquired at an aggregate cost of $25.1 million, or an average price of $54.33
per share through September 14, 1999.
5. Subsequent Events
- ---------------------
On October 12, 1999, the Board of Directors declared a $.45 per share cash
dividend on the Company's common stock. The dividend is to be paid on November
17, 1999, to stockholders of record on November 3, 1999, and will total
approximately $4.2 million.
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
General/Financial Condition
- ---------------------------
JSB Financial is a Delaware-chartered savings and loan holding company, which
owns 100% of the outstanding common stock of Jamaica Savings Bank FSB. The
Company's assets, including the assets of the Bank, totaled $1.60 billion at
September 30, 1999. In addition to the Company's investment in the Bank, at
September 30, 1999, the Company had $11.4 million in money market investments
and $20.0 million in short-term federal agency securities.
Planned Acquisition of JSB Financial by North Fork
- --------------------------------------------------
On August 16, 1999, the Company announced that, on that day, it had entered into
a Merger Agreement with North Fork, a bank holding company and parent of North
Fork Bank, a New York State chartered stock commercial bank. The Merger
Agreement provides, among other things, that the Company will merge with and
into North Fork, with North Fork being the surviving corporation.
Pursuant to the Merger Agreement, each share of the Company's common stock (par
value $0.01 per share) issued and outstanding immediately prior to the time at
which the merger becomes effective, will be converted into and become the right
to receive 3.0 shares of North Fork common stock, par value $2.50 per share. On
November 3, 1999, North Fork and the Company filed a preliminary joint
proxy/prospectus statement with the SEC, which included a proposal for North
Fork's stockholders to vote upon amending North Fork's certificate of
incorporation to increase the number of authorized shares of North Fork common
stock from 200 million to 500 million and to reduce the par value of North Fork
common stock from $2.50 per share to $0.01 per share; the merger is not
contingent on the approval of this proposal. Based upon the price of North
Fork's stock closing price on August 13, 1999 of $20.44, the total initial value
of the merger to JSB stockholders was $61.31. The ultimate value received by JSB
Financial stockholders will be based on the future price of North Fork stock at
the effective time of the merger.
The merger is expected to be structured as a tax-free reorganization and
accounted for under the pooling-of-interests method of accounting. Consummation
of the merger is subject to the satisfaction of certain customary conditions,
including approval of the Merger Agreement by the stockholders of the Company
and North Fork and approval of the appropriate regulatory agencies. The Company
expects to mail a joint proxy statement/prospectus regarding the merger to
stockholders in December, 1999. Both the Company and North Fork have scheduled a
meeting of stockholders to vote upon the merger on January 13, 2000, at 10:00
a.m. It is anticipated that the merger will be completed during the first
quarter of 2000.
The Merger Agreement also provides that options to purchase shares of the
Company's common stock under the Company's stock option plans that are
outstanding at the effective time, shall be converted into options to purchase
shares of North Fork Common Stock, in accordance with the procedure set forth in
the Merger Agreement.
In connection with the Merger Agreement, the Company granted to North Fork a
stock option pursuant to a stock option agreement, that under certain defined
circumstances would enable North Fork to purchase up to 19.9% of the Company's
issued and outstanding shares of common stock at a price of $58.75 per share.
<PAGE> 10
This option is exercisable upon the occurrence of certain events generally
involving a competing transaction with a third party to acquire the Company or a
significant amount of its stock or assets. As of the date of this Form 10-Q, the
Company knows of no such event that has occurred that would enable North Fork to
exercise this option. This option could have the effect of discouraging other
companies from offering to acquire the Company. JSB Financial has a right to
terminate the agreement should the average closing price of North Fork's shares,
over a specified period, decline below a specified price and index, unless North
Fork elects to increase the exchange ratio.
On August 30, 1999, North Fork entered into an agreement to purchase Reliance
Bancorp, Inc. ("Reliance"), the parent of Reliance Federal Savings Bank, in a
common stock transaction valued at approximately $352 million. At September 30,
1999, Reliance reported $2.5 billion in total assets, $1.6 billion in deposits,
$171.7 million in stockholders' equity and served customers from twenty-nine
branches throughout the New York counties of Suffolk and Nassau, as well as the
New York City, New York boroughs of Manhattan and Queens. North Fork plans to
close the Reliance transaction, which is to be accounted for as a purchase,
prior to the merger between the Company and North Fork. North Fork did not seek
or obtain JSB's approval before entering into the merger agreement with Reliance
because, in North Fork's judgment, the Reliance merger was desirable in the
conduct of its business and would not delay the effective time of the JSB merger
or adversely affect the merger consideration to be received by JSB stockholders
under the Merger Agreement. JSB retains its rights under the Merger Agreement if
it is determined that North Fork was not reasonable in concluding that the
Reliance merger would not delay the effective time of the JSB merger or
adversely affect the merger consideration to be received by JSB stockholders.
North Fork management believes that the Reliance acquisition will be immediately
accretive to earnings and is in the best interest of North Fork and JSB
Financial stockholders.
Asset Quality
- -------------
The Bank's non-performing assets may include: (1) loans which are 90 days or
more in arrears; (2) loans which have been placed on non-accrual status; (3)
ORE; and (4) any other investments on which the collection of contractual
principal and interest is questionable. At September 30, 1999, the Bank's
non-performing assets, which totaled $708,000, included: non-performing loans of
$307,000 and ORE of $401,000. The ratio of non-performing assets to total assets
was .04% at both September 30, 1999 and December 31, 1998, respectively. The
ratio of non-performing loans to total loans was .02% and .04% at September 30,
1999 and December 31, 1998, respectively, which are well below industry
averages. (See Non-performing/Non-accrual Table, herein.)
Year 2000 Issues
- ----------------
The Company is continuing with its plans to address the possible exposures
related to the impact on its computer systems of the year 2000 ("Y2K")
irrespective of the Merger Agreement with North Fork. The following discussion
and tables contain certain forward-looking information with respect to
management's expectations for implementation and compliance with year 2000
issues and requirements, as they pertain to the Company, without considering any
impact that the merger could have on the Company once completed. Management has
inventoried and analyzed the internal and outsourced computer hardware,
operating systems and applications, including both information technology
systems and non-information technology systems, such as telephone systems, air
conditioning, electrical, etc. The actual readiness of these systems may differ
materially from what is presented below. Factors that may cause differences
between anticipated Y2K readiness and actual Y2K readiness include failure of
outside vendors to provide upgrades on a timely basis, and/or failure of the
Bank's hardware, operating systems and applications to meet Y2K readiness
<PAGE> 11
requirements as planned. In addition, the actions of depositors and borrowers in
anticipation of Y2K complications may adversely impact the Company, regardless
of the Company's actual state of Y2K readiness.
The Company completed its assessment of all of its critical computer systems by
September 30, 1997, which included both information technology systems and
non-information technology systems. All of the Bank's system upgrades and/or
programming changes have been made within the normal course of business,
therefore, no material costs specific to attaining Y2K capability have been
incurred. In accordance with Y2K disclosure requirements, the Company has
analyzed the cost impact of Y2K compliance issues and does not expect related
future costs to be material to the Company's future results of operations or
financial condition.
Management has contacted all outside vendors inquiring as to the status of Y2K
compliance and is not aware of any vendor who does not expect to be Y2K
compliant. Management will continue to require updates from all vendors who are
not yet Y2K compliant. The Bank has many non-critical applications, which will
be tested for Y2K compliance during 1999, encompassing the majority of the dates
outlined by the Federal Financial Institutions Examination Council.
The Company has completed the required upgrades and testing pursuant to its Y2K
project. However, given the broad spectrum of potential Y2K problems, including
the ultimate state of readiness of the Company's local utilities and other third
parties, including governmental and quasi-governmental agencies on which the
Company relies, an amount of uncertainty remains with respect to the actual
affect of Y2K. Like all other financial institutions, a failure to correct a
material Y2K problem could result in an interruption in, or a failure of,
certain normal business activities or operations of the Company. Such failures
could materially and adversely affect the Company's results of operations and
financial condition. In addition, the long term effect of poorly managing Y2K
problems that may arise, or failure of critical computer systems to be Y2K
compliant could result in a decline in business, depositors and confidence in
the Company. The Company's Y2K project was designed and has significantly
reduced the Company's level of uncertainty about internal and external Y2K
implications.
As of September 30, 1999, the Company had renovated and tested all of its
critical computer systems. The following table presents the Company's Y2K
contingency plan for the Bank's systems which are identified as critical, should
they fail to meet Y2K compliance deadlines, or ultimately fail to be Y2K
compliant in the future.
<TABLE>
<CAPTION>
<S> <C>
System Contingency Plan
- ------ ----------------
Relational Data Base* No contingency plan is considered necessary
Local Area Network No contingency plan is considered necessary
Accounting system Use system in prior date mode
Check Processing Manual processing
ATMs Customers to use branches
NYCE Customers to use the Bank's ATM's or branches
<FN>
* The system, by design, was Y2K compliant.
</FN>
</TABLE>
<PAGE> 12
Loan Delinquency Table
- ----------------------
<TABLE>
At September 30, 1999 and December 31, 1998, 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 September 30, 1999:
- ----------------------
Delinquent loans:
Guaranteed(1) 8 $ 225 12 $ 261
Non-guaranteed 9 22 4 46
-- ------ -- --------
17 $ 247 16 $ 307
== ====== == ========
Ratio of delinquent loans
to total loans .02% .02%
At December 31, 1998:
- ---------------------
Delinquent loans
Guaranteed(1) 11 $ 212 10 $ 233
Non-guaranteed 5 63 5 216
-- ------ -- --------
16 $ 275 15 $ 449
== ====== == ========
Ratio of delinquent loans
to total loans .02% .04%
<FN>
(1) Includes loans which are guaranteed by the Federal Housing
Administration ("FHA"), Veterans Administration ("VA") or New
York State Higher Education Services Corporation.
</FN>
</TABLE>
<PAGE> 13
Non-performing/Non-accrual Table
- --------------------------------
<TABLE>
The following table sets forth information regarding non-accrual loans and loans
which were delinquent 90 days or more on which the Bank was accruing interest at
the dates indicated:
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(In Thousands)
<S> <C> <C>
Mortgage loans:
- ---------------
Non-accrual loans $ - $ 213
Accruing loans 90 or more days overdue (1) 261 233
---------- ----------
Total 261 446
---------- ----------
Other loans: (2)
- ----------------
Accruing loans 90 or more days overdue:
Consumer loans 46 3
---------- ----------
Total 46 3
---------- ----------
Total non-performing loans:
Non-accrual - 213
Accruing loans 90 days or more overdue 307 236
---------- ----------
Total $ 307 $ 449
========== ==========
Non-accrual loans to total loans -% .02%
Accruing loans 90 or more days overdue to total loans .02 .02
Non-performing loans to total loans .02 .04
<FN>
(1) Represents only seasoned FHA and VA loans, which are guaranteed. Management
does not believe that these loans, including those in arrears, present any
significant collection risk to the Bank.
(2) There were no non-accrual loans in the other loans portfolio at September
30, 1999 or December 31, 1998.
</FN>
</TABLE>
<TABLE>
Information regarding impaired loans at or for the year to date periods
indicated is as follows:
<CAPTION>
September 30, September 30, December 31,
1999 1998 1998
------------- ------------- ------------
(Dollars in Thousands)
Impaired loans
- --------------
<S> <C> <C> <C>
Number of loans - 1 1
Balance of impaired loans $ - $ 213 $ 213
Average balance for the year to date period ended 213 6,891 5,491
Interest income recorded for the year to date periods ended - 387 397
Unrecorded interest on impaired loans 13 9 509
</TABLE>
There were no loans included in the above table that were modified in a trouble
debt restructure ("TDRs"). TDRs other than those classified as impaired and/or
non-accrual loans, were $553,000 and $1,842,000 at September 30, 1999 and
December 31, 1998, respectively. Interest forfeited attributable to these loans
was $18,000 and 52,000 for the nine months ended September 30, 1999 and 1998,
respectively.
<PAGE> 14
Loan Loss Activity Table
- ------------------------
<TABLE>
Activity in the allowance for loan losses for the mortgage loan portfolio and
the other loan portfolio are summarized for the nine months ended September 30,
1999 and the year ended December 31, 1998, as follows:
September 30, December 31,
1999 1998
------------- ------------
(Dollars in Thousands)
<S> <C> <C>
Mortgage Portfolio Loan Loss Allowance:
- ---------------------------------------
Balance at beginning of period $ 5,741 $ 5,741
Provision for loan losses - -
Loans charged off (9) -
Recoveries of loans previously charged off - -
-------- --------
Balance at end of period $ 5,732 $ 5,741
======== ========
Ratios for Mortgage Portfolio:
- ------------------------------
Net charge-offs to average mortgages -%* -%
Allowance for loan losses to net mortgage loans .47 .50
Allowance for loan losses to mortgage loans
delinquent 90 days or more 21.96x 12.87x
Other Loan Portfolio Loss Allowance:
- ------------------------------------
Balance at beginning of period $ 183 $ 139
Provision for loan losses 13 51
Loans charged off (13) (25)
Recoveries of loans previously charged off 22 18
-------- --------
Balance at end of period $ 205 $ 183
======== ========
Ratios for Other Loan Portfolio:
- --------------------------------
Net (recoveries) charge-offs to average other loans (.05)% .03%
Allowance for loan losses to net other loans 1.04 .80
Allowance for loan losses to other loans
delinquent 90 days or more 4.56x 61.00x
<FN>
* Is less than .01%.
</FN>
</TABLE>
<PAGE> 15
Liquidity and Capital Resources
- -------------------------------
The Company's funds are primarily obtained through dividends paid by the Bank.
The Bank's primary source of funds is deposits. Cash flow is provided from
maturities of and interest payments on debt securities, principal and interest
payments on mortgage loans, CMOs and other loans. In accordance with the
Company's policy, there were no sales of investments designated as
held-to-maturity during the periods presented. Overall liquidity is affected by
the Company's operating, financing and investing activities, as well as the
interest rate environment, economic conditions and competition.
The Company's overall asset/liability structure and level of non-performing
assets affects interest rate spreads and margins, which are considered key
measures of the Company's financial performance. As deposits continue to
decrease and migrate into higher cost term accounts, interest rate spreads and
margins are likely to decline. At the present time, the Bank does not expect to
take additional advances available from the FHLB-NY.
During the nine months ended September 30, 1999, the $305.0 million of purchases
of U.S. Government and federal agency securities represented the most
significant use of funds for investing activities. Mortgage originations for the
portfolio, substantially all of which were at fixed rates, for the nine months
ended September 30, 1999 were $115.2 million, compared to $208.8 million for the
nine months ended September 30, 1998. The decrease in mortgage origination
activity is attributed to the increase in market interest rates. CMO purchases
for the nine months ended September 30, 1999 were $50.2 million, compared to
$46.7 for the nine months ended September 30, 1998. During the first nine months
of 1999, maturities of U.S. Government and federal agency securities generated
$335.0 million, the most significant cash inflow from investing activities,
followed by principal payments on mortgage loans and CMOs of $55.1 million and
$34.3 million, respectively. The $18.0 million cost of repurchasing the
Company's common stock represents the most significant use of funds in financing
activities for the first nine months of 1999. The increase in dividend payments
reflects the increase in dividends paid per share to $1.35 for the nine months
ended September 30, 1999, compared to $1.20 per share for the nine months ended
September 30, 1998.
Management monitors deposit levels and interest rates in conjunction with asset
structure and has evaluated and implemented various strategies aimed at
achieving targeted objectives in various interest rate scenarios. Interest rate
spread, net interest margin, liquidity, and related asset quality are some of
the key factors that management considers in determining its investment strategy
and underwriting standards. The Bank's assets are structured such that the
gradual changes in deposits has not materially affected the Company. The Bank's
liquidity ratios continue to exceed all short and long term minimum regulatory
requirements. Management remains focused on providing quality customer service
as its primary strategy for maintaining its relationships with its depositors.
The Bank aims to influence 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 continues to
impact deposit runoff. Management decided to allow deposits to decline, rather
than offer rates that would result in lowering net income or necessitate
modifying the Bank's existing investment structure and credit quality standards.
Rates offered on the Bank's deposit accounts are competitive with those rates
offered by other financial institutions in its market area. Historically the
highest percentage of the Bank's deposits have been in passbook accounts;
however, deposits have continued to migrate from passbook accounts to
certificate of deposit accounts ("CDs"). At September 30, 1999, deposits were
comprised as follows: passbook accounts 45.8%, CDs 39.2%, money market accounts
6.5%, non-interest bearing checking accounts 3.4%, negotiable order of
withdrawal ("NOW") accounts 3.1% and lease security accounts 2.0%. While the
Company cannot predict the future direction of deposits, management expects the
current trend to continue, provided that, among other factors, interest rates
remain low.
<PAGE> 16
The net decrease in deposits of $32.1 million to $1.092 billion at September 30,
1999, from $1.124 billion at December 31, 1998, reflected decreases of $22.0
million in passbook accounts, $10.0 million in non-interest bearing checking
accounts, $5.8 million in CDs and $3.3 million in NOW accounts, partially offset
by increases in money market accounts and lease security accounts of $8.0
million and $911,000, respectively.
On July 20, 1999, the Company's Board of Directors declared a cash dividend of
$.45 per share to stockholders of record on August 4, 1999. The dividend
payment, which totaled $4.2 million, was made on August 18, 1999.
On September 14, 1999, in connection with the pending merger with North Fork,
the Company's Board of Directors terminated the Company's eleventh stock
repurchase program, which began on October 16, 1998. (See Note 4 to the
Consolidated Financial Statements, Page 8, herein.)
Regulations
- -----------
As a condition of deposit account insurance, Office of Thrift Supervision
("OTS") regulations require that the Bank calculate three regulatory net worth
requirements on a quarterly basis, and satisfy each requirement at the
calculation date and throughout the ensuing quarter. The three requirements are:
a tangible capital ratio of 1.50%, a leverage ratio (or "core capital") of 3.00%
(4.00% pursuant to the OTS Prompt Corrective Action Regulations), and a
risk-based assets capital ratio of 8.00%. The Bank's capital ratios at September
30, 1999 were as follows:
<TABLE>
<CAPTION>
Percentage Dollars
---------- -------
(In Thousands)
<S> <C> <C>
TANGIBLE CAPITAL
Required 1.50% $ 22,722
Actual 19.85 300,712
----- --------
Excess 18.35% $277,990
===== ========
CORE CAPITAL
Required 3.00% $ 45,444
Actual 19.85 300,712
----- --------
Excess 16.85% $255,268
===== ========
RISK BASED CAPITAL
Required 8.00% $102,398
Actual 25.44 325,690
------ --------
Excess 17.44% $223,292
====== ========
</TABLE>
<PAGE> 17
Comparison of Operating Results for the Three Months Ended
September 30, 1999 and 1998
- --------------------------------------------------------------------------------
Net income for the three months ended September 30, 1999, was $7.2 million, or
$.78 per basic share ($.76 per diluted share), compared with $11.4 million, or
$1.16 per basic share ($1.13 per diluted share) for the three months ended
September 30, 1998. Earnings for the three months ended September 30, 1998 were
improved by significant non-recurring items (discussed below), which increased
net income for the three months ended September 30, 1998 by $4.4 million.
Excluding the effect of these items, net income for the three months ended
September 30, 1998 would have been $7.0 million, or $.72 per basic share ($.70
per diluted share).
Net interest income for the three months ended September 30, 1999, was $18.1
million, compared to $17.9 million for the three months ended September 30,
1998. This increase reflects a $474,000 decrease in interest expense, partially
offset by a $233,000 decrease in interest income. Comparing the quarter ended
September 30, 1999 to the quarter ended September 30, 1998, the annualized yield
on interest earning assets decreased to 7.40%, from 7.60%; average interest
earning assets increased by $27.8 million; the cost of funds decreased to 3.33%
from 3.59%. These changes resulted in a modest increase in the interest rate
spread to 4.07% for the current quarter, from 4.01% for the quarter ended
September 30, 1998, while the net interest margin decreased to 4.90% from 4.93%,
for the same periods, respectively.
Income earned on mortgage loans increased by 4.2%, to $23.1 million for the
three months ended September 30, 1999, compared to $22.2 million for the quarter
ended September 30, 1998. The net increase reflects continued growth in the
mortgage loan portfolio, partially offset by a decrease in the mortgage
portfolio yield to 7.83% for the quarter ended September 30, 1999, from 8.08%
for the same quarter a year ago.
For the three months ended September 30, 1999, income from debt and equity
securities, decreased by $1.1 million, or 42.4%, to $1.4 million from $2.5
million for the three months ended September 30, 1998. This decrease resulted
from a decline in the average investment in U.S. Government and federal agency
securities and other investments of $66.0 million, or 39.8%, to $99.6 million,
compared to $165.6 million for the three months ended September 30, 1998. The
annualized yield on the debt and equity securities portfolio decreased to 5.82%
for the three months ended September 30, 1999 from 6.07% for the three months
ended September 30, 1998. The debt and equity securities portfolio activity for
the current period included purchases of $80.0 million and maturities of $100.0
million, compared with purchases of $125.0 million and maturities of $119.0
million for the quarter ended September 30, 1998.
For the quarter ended September 30, 1999, income on CMOs remained stable at $1.7
million, increasing by $19,000, compared to the quarter ended September 30,
1998. The annualized yield on the CMO portfolio decreased to 5.71% for the three
months ended September 30, 1999, from 6.12% for the three months ended September
30, 1998. During the third quarter of 1999, the Bank received principal payments
of $7.6 million on CMOs, compared with principal payments of $121.1 million for
the quarter ended September 30, 1998. There were no CMO purchases during the
quarter ended September 30, 1999, compared to purchases of $11.7 million for the
quarter ended September 30, 1998. Income on MBS declined by $26,000 to $49,000
for the quarter ended September 30, 1999, from income of $75,000 for the quarter
ended September 30, 1998, reflecting the amortizing portfolio.
Income on federal funds sold remained flat, increasing by $3,000, to $776,000
for the quarter ended September 30, 1999, from $773,000 for the quarter ended
September 30, 1998. This minimal increase resulted from an increase in the
average investment in federal funds of $6.0 million to $61.1 million for the
current period, compared with $55.1 million for the quarter ended September 30,
1998; partially offset by a decrease in the annualized yield on federal funds
sold to 5.08% for the current quarter, compared to 5.61% for the quarter ended
September 30, 1998.
<PAGE> 18
Interest expense on deposits decreased by $1.2 million to $8.5 million for the
quarter ended September 30, 1999, compared to $9.7 million for the quarter ended
September 30, 1998. Average interest bearing deposits decreased by $19.6
million, to $1.062 billion for the three months ended September 30, 1999,
compared to $1.081 billion for the three months ended September 30, 1998.
Further, the cost of interest bearing deposits decreased to 3.21% from 3.59% for
the comparative quarter in 1998.
The Bank has a $50.0 million advance from the FHLB-NY at a fixed rate of 5.62%.
Interest expense on this advance for the third quarter of 1999 totaled $709,000.
The Bank did not have any borrowed funds during the third quarter of 1998.
The provision for loan losses for the quarter ended September 30, 1999 was
$1,000, compared to $13,000 for the quarter ended September 30, 1998, comprised
entirely of provisions against the other loan portfolio. Based on management's
internal loan review analysis, no adjustments have been made to the mortgage
allowance since January of 1998. During the third quarter of 1999, management
discontinued provisions to the other loan portfolio allowance. Management will
continue to monitor performance and credit risk of the loan portfolios and, as a
result, may adjust allowances accordingly in the future.
Total non-interest income for the three months ended September 30, 1999,
decreased by $2.1 million, to $1.4 million from $3.5 million for the three
months ended September 30, 1998. Non-interest income for the 1998 period
includes the impact of significant non-recurring items. Miscellaneous income
decreased by $1.4 million, as the 1998 quarter included a $963,000 pre-tax gain
on the sale of two of the Bank's subsidiary corporations and $494,000 of income
recognized in connection with refunds of prior years taxes and medical premiums.
In addition, during the third quarter of 1999, loan fees and service charges
decreased, as the Company experienced a $636,000 decrease in mortgage loan
prepayment penalties.
Non-interest expense decreased by $288,000 or 4.0%, to $6.9 million for the
quarter ended September 30, 1999, compared to $7.2 million for the quarter ended
September 30, 1998. This decrease is primarily the result of the $273,000
decline in compensation and benefits, reflecting a $228,000 decrease in salary
expense and a $71,000 increase in income recognized on excess pension fund
assets, partially offset by an increase in medical insurance premiums.
The provision for income taxes increased by $2.6 million, or 92.2%, to $5.4
million for the three months ended September 30, 1999, from $2.8 million for the
three months ended September 30, 1998. This increase reflects an increase in the
Company's effective tax rate to 43.0% for the quarter ended September 30, 1999,
compared to 19.9% for the quarter ended September 30, 1998. During the three
months ended September 30, 1998, the Company realized $3.2 million in tax
benefits in connection with the realignment of an operating subsidiary, which
were not realized during the third quarter of 1999, as the subsidiary had been
liquidated during the first quarter of 1999.
Comparison of Operating Results for the Nine Months Ended
September 30, 1999 and 1998
- --------------------------------------------------------------------------------
Net income for the nine months ended September 30, 1999, was $21.6 million, or
$2.32 per basic share ($2.27 per diluted share), compared with $34.2 million, or
$3.47 per basic share ($3.37 per diluted share) for the nine months ended
September 30, 1998. Earnings for the nine months ended September 30, 1998 were
improved by significant non-recurring items (discussed below), which increased
net income for the nine months ended September 30, 1998 by $12.1 million.
Excluding the effect of these items, net income for the nine months ended
September 30, 1998, would have been $22.1 million, or $2.24 per basic share
($2.18 per diluted share).
Net interest income for the nine months ended September 30, 1999, was $54.5
million, compared to $54.2 million for the nine months ended September 30, 1998.
The increase in net interest income reflects a $1.1 million decrease in interest
expense, partially offset by a $756,000 decrease in interest income. Comparing
<PAGE> 19
the nine months ended September 30, 1999 to the nine months ended September 30,
1998, the annualized yield on interest earning assets decreased to 7.38%,
compared to 7.64%. Average interest earning assets increased by $39.1 million,
while the cost of funds decreased to 3.33% from 3.57%. Average interest bearing
deposits were $1.070 billion for the nine months ended September 30, 1999
compared to $1.085 billion for the nine months ended September 30, 1998. For the
year to date period ended September 30, 1999, the interest rate spread decreased
to 4.05%, compared to 4.07% for the nine month period ended September 30, 1998
and the net interest margin decreased to 4.88% compared to 4.98%, for the nine
months ended September 30, 1999 and September 30, 1998, respectively.
Income earned on mortgage loans increased by $4.3 million, or 6.7%, to $68.8
million for the nine months ended September 30, 1999, compared to $64.5 million
for the nine months ended September 30, 1998, reflecting continued growth in the
mortgage loan portfolio. This increase was partially offset by a decrease in the
mortgage portfolio yield to 7.90% for the nine months ended September 30, 1999,
from 8.25% for the nine months ended September 30, 1998.
For the nine months ended September 30, 1999, income on debt and equity
securities decreased by $4.0 million, or 43.0%, to $5.2 million from $9.2
million for the nine months ended September 30, 1998. This decrease resulted
from the decline in the average investment in U.S. Government and federal agency
securities and other investments of $71.8 million, or 36.1%, to $127.1 million
for the nine months ended September 30, 1999, compared to $198.9 million for the
nine months ended September 30, 1998. The annualized yield on the debt and
equity security portfolio decreased to 5.50% from 6.16% for the comparative nine
month periods. The debt and equity securities portfolio activity for the current
period included purchases of $305.0 million and maturities of $335.0 million,
compared with purchases of $279.0 million and maturities of $389.0 million for
the nine months ended September 30, 1998.
For the nine months ended September 30, 1999, income on CMOs increased by
$135,000, or 2.9%, to $4.8 million, with an annualized yield of 5.72%, from
income of $4.7 million with an annualized yield of 6.15% for the nine months
ended September 30, 1998. This increase is reflective of the increase in the
average investment in the CMO portfolio of $10.9 million, or 10.7% for the
comparative nine month period. During the nine months ended September 30, 1999,
the Bank received principal payments of $34.3 million on CMOs, compared with
$47.7 million for the nine months ended September 30, 1998. CMO purchases during
the first nine months of 1999 totaled $50.2 million, compared to $46.7 million
for the first nine months of 1998. Income on MBS declined by $92,000 to $160,000
for the nine months ended September 30, 1999, from income of $252,000 for the
nine months ended September 30, 1998, reflecting the amortizing portfolio.
Income on federal funds decreased by $790,000, or 25.1%, to $2.4 million for the
nine months ended September 30, 1999, from $3.2 million for the nine months
ended September 30, 1998. This decrease resulted from a decrease in the average
investment in federal funds of $11.4 million, or 14.9%, to $65.6 million for the
current period, compared with $77.0 million for the nine months ended September
30, 1998. The annualized yield on federal funds sold decreased to 4.80% for the
current nine month period, compared to 5.45% for the nine month period ended
September 30, 1998.
Interest expense on deposits decreased by $3.2 million, or 11.1%, to $25.9
million for the nine months ended September 30, 1999, compared to $29.1 million
for the nine months ended September 30, 1998. Average interest bearing deposits
decreased by $15.7 million, or 1.4%, to $1.070 billion for the nine months ended
September 30, 1999, compared to $1.085 billion for the nine months ended
September 30, 1998, and the average rate paid on interest bearing deposits
decreased to 3.23% for the nine months ended September 30, 1999 from 3.57% for
the comparative nine month periods.
<PAGE> 20
Interest expense on the $50.0 million FHLB-NY advance for the nine months ended
September 30, 1999 was $2.1 million, reflecting interest at the fixed rate of
5.62%. The Bank did not have any borrowed funds during the nine months ended
September 30, 1998.
The provision for loan losses for the nine months ended September 30, 1999 was
$13,000, compared to $41,000 for the nine months ended September 30, 1998,
comprised entirely of provisions against the other loan portfolio. Based on
management's internal loan review analysis, no adjustments to the mortgage
allowance were made during the first nine months of 1999 or during calendar
1998. During the third quarter of 1999, management discontinued provisions to
the other loan portfolio allowance. Management will continue to monitor the
performance and credit risk of the loan portfolios and may adjust future loan
loss provisions accordingly.
Total non-interest income for the nine months ended September 30, 1999,
decreased by $6.5 million, to $4.5 million, from $11.0 million for the nine
months ended September 30, 1998. Non-interest income for the 1998 period
included significant non-recurring items, including income related to the final
settlement on a $12.8 million non-performing mortgage loan, whereby all
contractual principal, interest, legal and other fees were received, resulting
in additional pre-tax income of 4.3 million. The decrease in loan fees and
service charges for the comparative periods primarily reflects the $1.1 million
decline in prepayment penalties received by the Company on mortgage loan
prepayment penalties. Real estate operations increased by $936,000, primarily
related to gains realized on the sale of condominium apartments owned by a real
estate subsidiary. Miscellaneous income for the first nine months of 1998
included a $963,000 pre-tax gain on the sale of two of the Bank's subsidiary
corporations, $494,000 in refunds for prior years property taxes and medical
premiums and $64,000 of profits realized on the sale of the student loan
portfolio.
Non-interest expense increased by $357,000, or 1.7%, to $21.2 million for the
nine months ended September 30, 1999, compared to $20.8 million for the nine
months ended September 30, 1998. The $236,000 increase in occupancy and
equipment expense primarily reflects increases in computer related expenses in
connection with newer equipment. The $134,000 increase in other general and
administrative expense primarily reflects an increase in professional fees,
primarily related to the Company's strategic analysis and planning.
The provision for income taxes increased by $6.2 million, or 61.7%, to $16.2
million for the nine months ended September 30, 1999, from $10.0 million for the
nine months ended September 30, 1998. This increase reflects an increase in the
Company's effective tax rate to 42.9% for the nine months ended September 30,
1999, from 22.7% for the nine months ended September 30, 1998. During the nine
months ended September 30, 1998, the Company realized $8.2 million in tax
benefits in connection with an operating subsidiary, which were not realized
during the nine months ended September 30, 1999, as the subsidiary had been
liquidated during the first quarter of 1999.
New Legislation
- ---------------
The House of Representatives and the Senate have passed, and the President is
expected to approve, legislation intended to modernize the financial services
industry by establishing a comprehensive framework to permit affiliations among
commercial banks, insurance companies and other financial service providers.
Generally, such legislation would (1) repeal the historical restrictions and
eliminate many federal and state law barriers to affiliations among banks and
securities firms, insurance companies and other financial service providers, (2)
provide a uniform framework for the activities of banks, savings institutions
and their holding companies, (3) broaden the activities that may be conducted by
national banks and banking subsidiaries of bank holding companies, (4) provide
an enhanced framework for protecting the privacy of consumer's information, (5)
modify the laws governing the implementation of the Community Reinvestment Act,
<PAGE> 21
(6) address a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions and (7)
adopt a number of provisions related to the capitalization, membership,
corporate governance and other measures designed to modernize the Federal Home
Loan Bank system. The pending legislation would restrict certain of the powers
that unitary savings and loan association holding companies currently have, with
an exception for any company, such as JSB Financial, that became a unitary
savings and loan holding company pursuant to an application filed with the OTS
before May 4, 1999. The proposed legislation would also prohibit non-financial
companies from acquiring unitary savings and loan association holding companies.
The Company does not believe that the proposed legislation would have a material
adverse affect on its financial condition or results of operations. However, to
the extent the legislation permits banks, securities firms and insurance
companies to affiliate, the financial services industry may experience further
consolidation. This could result in a growing number of larger financial
institutions offering a wider variety of financial services that can
aggressively compete in the markets the Company currently serves.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
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 the Company'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
declining 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.
The following table sets forth, as of September 30, 1999, repricing information
on earning assets and interest bearing liabilities. The data reflects estimated
principal amortization and prepayments on mortgage loans based on historical
performance. Approximate prepayment rate assumptions for fixed rate one-to
four-family mortgage loans and MBS are based upon the remaining term to
contractual maturity as follows: (a) 26% if less than six months; (b) 11% if six
months to one year, three to five years and for five to ten years; (c) 8% if one
to three years; (d) 9% if 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
CDs, are assumed to reprice in the earliest period presented. Marketable equity
securities and other investments which do not have a fixed maturity date or a
stated yield, are reflected as repricing in the more than five years category.
The table does not necessarily indicate the impact of general interest rate
movements on the Company's net interest income because the repricing of certain
categories of assets and liabilities, is beyond the Company'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.
While management regularly reviews the Company's gap analysis, the gap is
considered an analytical tool, which has limited value.
<PAGE> 22
<TABLE>
<CAPTION>
At September 30, 1999
-------------------------------------------------------------------------------------
More Than More Than More Than More Than
1 Year 1 Year to 2 Years to 3 Years to 4 Years to More Than
or Less 2 Years 3 Years 4 Years 5 Years 5 Years Total
-------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Mortgage loans, net1 $ 48,054 $ 57,276 $ 86,145 $ 79,017 $ 88,515 $ 853,902 $1,212,909
U.S. Government and federal
agency securities, net 80,000 - - - - - 80,000
Marketable equity securities
and other investments, net2 - - - - - 90,006 90,006
CMOs, net - - - - 3,730 107,911 111,641
MBS, net 8 217 - - - 1,674 1,899
Other loans, net1 8,289 1,082 1,529 1,242 998 6,696 19,836
Federal funds sold 32,500 - - - - - 32,500
--------- --------- --------- --------- --------- ---------- ----------
Total interest earning assets 168,851 58,575 87,674 80,259 93,243 1,060,189 1,548,791
--------- --------- --------- --------- --------- ---------- ----------
Interest bearing deposit accounts:
Passbook 500,661 - - - - - 500,661
Lease security accounts 21,942 - - - - - 21,942
CDs 359,380 36,857 12,555 9,082 9,929 - 427,803
Money market accounts 70,775 - - - - - 70,775
NOW accounts 33,722 - - - - - 33,722
FHLB-NY advances - - - - - 50,000 50,000
--------- --------- --------- --------- --------- ---------- ----------
Total interest bearing liabilities 986,480 36,857 12,555 9,082 9,929 50,000 1,104,903
--------- --------- --------- --------- --------- ---------- ----------
Interest sensitivity gap
per period $(817,629) $ 21,718 $ 75,119 $ 71,177 $ 83,314 $1,010,189 $ 443,888
========= ========= ========= ========= ========= ========== ==========
Cumulative interest
sensitivity gap $(817,629) $(795,911) $(720,792) $(649,615) $(566,301) $ 443,888 $ -
========= ========= ========= ========= ========= ========== ==========
Percentage of gap per period
to total assets (51.24%) 1.36% 4.71% 4.46% 5.22% 63.30%
========= ========== ========== ========== ========== ===========
Percentage of cumulative gap
to total assets (51.24%) (49.88%) (45.17%) (40.71%) (35.49%) 27.81%
========= ========== ========== ========== ========== ===========
<FN>
N/A - Does not apply, as none of the securities in the marketable equity
securities portfolio carry a stated rate of return.
1. Balance includes non-performing loans, as amount is immaterial and is not
reduced for the allowance for loan losses
2. Securities available-for-sale are shown including the market value
appreciation of $68.3 million, before tax.
</FN>
</TABLE>
<PAGE> 23
The Company's interest rate sensitivity is also monitored by management through
the use of a model which internally generates estimates of 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.
Based upon data submitted on the Bank's quarterly Thrift Financial Reports,
which does not include the assets, liabilities or off-balance sheet contracts of
the Company, the OTS produces a similar analysis using its own model and
assumptions. Due to differences in assumptions applied in the Bank's internal
model and the OTS model, including estimated loan prepayment rates, reinvestment
rates and deposit decay rates, the results of the OTS model may vary from the
Bank's internal model. For purposes of the NPV table, the Company applied
prepayment speeds similar to those used in the Gap table. Reinvestment rates
applied were rates offered for similar products at the time the NPV was
calculated. The discount rates applied for CDs and borrowings were based on
rates that approximate the rates offered by the Bank for deposits and borrowings
of similar remaining maturities. The following table sets forth the Company's
NPV as of September 30, 1999, as calculated by the Company.
<TABLE>
<CAPTION>
Net Portfolio Value Portfolio Value of Assets
Rate Changes in -------------------------------------- -------------------------
Basis Points Dollar Dollar Percent NPV Percent
(Rate Shock) Amount Change Change Ratio Change1
- ------------ ------ ------ ------ ----- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+200 $336,646 $(77,485) (18.71)% 21.78% (5.43)%
+100 374,667 (39,464) (9.53) 23.58 (2.78)
0 414,131 - - 25.34 -
-100 459,441 45,310 10.94 27.25 3.18
-200 520,042 105,911 25.57 29.64 7.35
<FN>
1 Reflects the percentage change in the portfolio value of the Company's assets
for each rate shock compared to the portfolio value of the Company'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 Company'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 Company'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 Company's net interest income, as actual results will
differ.
</FN>
</TABLE>
Private Securities Litigation Reform Act Safe Harbor Statement
- --------------------------------------------------------------
In addition to historical information, this Form 10-Q may contain certain
forward looking statements and may be identified by the use of such words as
"believe(s)", "expect(s)", "anticipate(s)", "should", "planned", "estimated" and
"potential". The Company's discussion regarding the anticipated future direction
of its net interest margin and interest rate spread are considered forward
looking statements, which are subject to various factors which could cause
actual results to differ materially from those statements made. These factors
include, but are not limited to: general economic conditions; changes in
interest rates; deposit flows; loan demand; real estate values; the actual
impact of Y2K; and other economic; competitive; governmental; regulatory and
technological factors affecting the Company's operations, pricing, products and
services. Further description of the risks and uncertainties to the business are
included in detail in Item 1, BUSINESS, in the Company's 1998 Form 10-K.
<PAGE> 24
<TABLE>
<CAPTION>
PART II - OTHER INFORMATION
<S> <C> <C>
ITEM 1. 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 Company's
results of operations, business operations or the consolidated
financial condition of the Company.
ITEM 2. Changes in securities (Not Applicable)
ITEM 3. Defaults upon Senior Securities (Not Applicable)
ITEM 4. Submission of Matters to a Vote of Security Holders (Not Applicable)
ITEM 5. Other information (Not Applicable)
ITEM 6. Exhibits and Reports on Form 8-K
Page
Number
------
(a) Exhibits
3.01 Articles of Incorporation (1)
3.02 By-laws (2)
11.00 Computation of Earnings Per Share 27
27.00 Financial Data Schedule for the Nine Months Ended September 30, 1999 28
(b) Reports on Form 8-K
On August 16, 1999, the Company filed with the SEC, a Current Report on
Form 8-K, which contained the press release announcing the Company's
Agreement and Plan of Merger by and between North Fork and the Company.
On August 31, 1999, the Company filed a Current Report on Form 8-K/A
with the SEC.
On October 27, 1999, the Company filed with the SEC, a Current Report
on Form 8-K, which contained the press release announcing the Company's
earnings for the three and nine months ended September 30, 1999 and the
date for the special meeting of stockholders to vote upon the merger
with North Fork.
<FN>
(1) Incorporated herein by reference to Exhibits filed with the Registration Statement
on Form S-1, Registration No. 33-33821.
(2) Incorporated herein by reference to Exhibits filed with the Form 10-K for the
Year Ended December 31, 1997.
</FN>
</TABLE>
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Quarterly Report on the Form
10-Q for the quarter ended September 30, 1999, to be signed on its behalf by the
undersigned, thereunto duly authorized.
JSB Financial, Inc.
(By)
/s/ Park T. Adikes
--------------
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.
DATE: November 9, 1999 /s/ Park T. Adikes
---------------- --------------
Park T. Adikes
Chairman of the Board and
Chief Executive Officer
DATE: November 9, 1999 /s/ Thomas R. Lehmann
---------------- -----------------
Thomas R. Lehmann
Chief Financial Officer
Executive Vice President
(Principal Accounting Officer)
<PAGE> 26
<TABLE>
Exhibit Index
<CAPTION>
Exhibit No. Identification of Exhibit
- ----------- -------------------------
<S> <C>
11.00 Statement Re: Computation of Earnings Per Share
27.00 Financial Data Schedule for the Nine Months Ended September 30, 1999
</TABLE>
<TABLE>
PART 1: EXHIBIT 11.00
JSB FINANCIAL, INC. AND SUBSIDIARY
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(Unaudited, In Thousands, except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
Basic earnings per share:
- -------------------------
<S> <C> <C> <C> <C>
Basic weighted average common shares 9,284 9,830 9,319 9,864
Net income $ 7,202 $11,377 $21,574 $34,227
Basic earnings per common share $ 0.78 $ 1.16 $ 2.32 $ 3.47
Diluted earnings per share:
- ---------------------------
Weighted average common and dilutive potential shares 9,484 10,093 9,520 10,159
Net income $ 7,202 $11,377 $21,574 $34,227
Diluted earnings per common share $ 0.76 $ 1.13 $ 2.27 $ 3.37
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition as of September 30, 1999 and the
Consolidated Statement of Operations for the nine months ended September 30,
1999 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> 9-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Sep-30-1999
<EXCHANGE-RATE> 1
<CASH> 12,753
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 32,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 79,173
<INVESTMENTS-CARRYING> 193,540
<INVESTMENTS-MARKET> 192,781
<LOANS> 1,232,745
<ALLOWANCE> 5,937
<TOTAL-ASSETS> 1,595,770
<DEPOSITS> 1,092,044
<SHORT-TERM> 0
<LIABILITIES-OTHER> 79,494
<LONG-TERM> 50,000
0
0
<COMMON> 160
<OTHER-SE> 374,072
<TOTAL-LIABILITIES-AND-EQUITY> 1,595,770
<INTEREST-LOAN> 69,896
<INTEREST-INVEST> 10,243
<INTEREST-OTHER> 2,361
<INTEREST-TOTAL> 82,500
<INTEREST-DEPOSIT> 25,879
<INTEREST-EXPENSE> 27,981
<INTEREST-INCOME-NET> 54,519
<LOAN-LOSSES> 13
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 21,175
<INCOME-PRETAX> 37,792
<INCOME-PRE-EXTRAORDINARY> 37,792
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,574
<EPS-BASIC> 2.32
<EPS-DILUTED> 2.27
<YIELD-ACTUAL> 4.88
<LOANS-NON> 0
<LOANS-PAST> 307
<LOANS-TROUBLED> 553
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,924
<CHARGE-OFFS> 22
<RECOVERIES> 22
<ALLOWANCE-CLOSE> 5,937
<ALLOWANCE-DOMESTIC> 5,937
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
