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, 1998
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[ ] Transition report pursuant to section 13 or 15(d) of the
securities exchange act of 1934
Commission file number 1-13157
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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 X No
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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, 1999: Common stock par value $.01 per share,
$449,047,144. 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,
1999, which was $56.00 as reported in the Wall Street Journal on March 5,
1999.
The number of shares of the registrant's Common Stock outstanding as of
March 15, 1999 was 9,288,963 shares.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 11, 1999
and portions of the 1998 Annual Report to Stockholders are incorporated
herein by reference - Parts I, II and III.
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<TABLE>
FORM 10-K CROSS-REFERENCE INDEX
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PART I Page
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<S> <C> <C>
ITEM 1. BUSINESS.............................................................. 3
ITEM 2. PROPERTIES............................................................ 33
ITEM 3. LEGAL PROCEEDINGS..................................................... 33
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................... 33
ADDITIONAL ITEM. EXECUTIVE OFFICERS............................................ 34
PART II
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ITEM 5. MARKET FOR JSB FINANCIAL INC.'S COMMON EQUITY AND
RELATED STOCKHOLDERS' MATTERS........................................ 35
ITEM 6. SELECTED FINANCIAL DATA............................................... 35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................. 35
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.......................................................... 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................... 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................................. 36
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY....................... 37
ITEM 11. EXECUTIVE COMPENSATION................................................ 37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT....................................................... 37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................ 37
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.......................................................... 38
SIGNATURES...................................................................... 41
</TABLE>
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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. The Company, which was incorporated on February 6, 1990,
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 Bank's 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 and federal funds sold (through the Bank).
Jamaica Savings was organized in 1866 as a New York ("NY") 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
operating, investing and financing activities, primarily in first mortgage loans
secured by multi-family properties, cooperative apartment buildings, one-to
four-family residential real estate and, to a lesser extent, commercial real
estate loans, U.S. Government and federal agency securities, collateralized
mortgage obligations ("CMOs"), and consumer loans.
Since 1990, the Company has maintained stock repurchase programs and paid
quarterly cash dividends to stockholders. During 1998, the Company repurchased
620,100 shares of its outstanding common stock at an average price of $50.74 per
share, and paid total cash dividends of $15.7 million, or $1.60 per common
share.
Market Area and Competition
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Market Area. Headquartered in Lynbrook, NY, 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.
Management considers Jamaica Savings a community-oriented financial institution,
serving its market area with a wide selection of loan products and retail
financial services. Management believes that the Bank's retail branch network,
quality customer service, community bank orientation and reputation for
financial strength are the key attributes that attract and retain customers for
the Bank. The Bank's long term relationships with its depositors are considered
a valuable resource for the future, as the Bank continues to expand products and
services it offers.
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.
The favorable economy of the New York metropolitan area has benefited the Bank
for the past several years. Unemployment and real estate values have been
healthy, as the economy expanded on a broad base. New York City benefited from
the resurgence and growth in employment and profitability experienced by
<PAGE> 4
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 contributed significantly to the growth
and increased profitability of Wall Street securities and investment banking
firms. During 1998, New York City reported positive job creation, a trend of
declining crime, lower tax rates and an overall improved image as a place to
live and work. Industries such as tourism, media and professional services have
been viewed as strong.
While the third quarter of 1998 was a volatile period in the financial markets,
with Wall Street and investment banks in general initiating job cuts, Wall
Street rebounded and reached record highs during the first quarter of 1999.
Uncertainty regarding the duration of the overseas recessions and their impact
on the financial markets are likely to influence the economic environment in
which the Bank operates over time. Forecasts for 1999 and beyond vary
significantly. The financial press has forecasted scenarios ranging from
moderate growth to a recession. In general, a weakness or deterioration in the
economic conditions within the Bank's primary lending areas generally result in
the Bank experiencing increases in non-performing loans. Such increases
generally result in higher provisions for possible loan losses, reduced levels
of interest earning assets, which over time lower the level of net interest
income and result in higher levels of expense associated with other real estate
("ORE").
There are numerous warning indications that the strength and direction of the
United States economy is surrounded with uncertainty. The demand for U.S exports
has slowed in a number of countries. To respond to signs of a weakening U.S.
economy, during 1998, the Federal Reserve adjusted the discount rate, reducing
it each time, which influenced the direction of market interest rates. During
1998, nation wide refinancing reached record levels, as mortgage rates reached
30-year lows. As a result, loan pricing has been aggressive. The Bank, like most
other financial institutions in the region, experienced growth in mortgage loans
and increased satisfaction and refinancing activity in the portfolio.
Highly Competitive Industry and Geographic Area. The Bank faces significant
competition for mortgage and consumer loan originations and in attracting and
retaining deposits. The New York City metropolitan and Long Island areas have a
high concentration of financial institutions, many of which are significantly
larger and have greater financial resources than the Bank, all of which are
competitors of the Bank to varying degrees. The Bank's competition for loans and
deposits comes principally from savings and loan associations, savings banks,
commercial banks, mortgage banking companies, insurance companies and credit
unions. The most direct competition for deposits has historically come from
savings and loan associations, savings banks, commercial banks and credit
unions. In addition, products offered by the securities industry have created
alternative investments, including money market accounts, mutual funds and
annuities, available to the general public. The Bank competes for deposits
through pricing, service and by offering a variety of deposit accounts and other
services. Management competes for loans principally through pricing, efficiency
and the quality of its services provided to borrowers, real estate and mortgage
brokers. Competition may also increase as a result of the lifting of
restrictions on interstate operations of financial institutions.
Lending Activities and Risk
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General. The Bank offers a variety of loans to serve the credit needs of the
communities in which it operates. The Bank's loan portfolio is comprised
primarily of first mortgage loans secured by: multi-family rental properties;
cooperative apartment 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 consumer type loans. (See "Other Lending", page 8, herein.) At
December 31, 1998, the loan portfolio was $1.170 billion, net of allowances of
$5.9 million and unearned fees and discounts of $2.7 million. At December 31,
1998, net loans represented 72.1% of the Company's total assets. During 1998,
mortgage loans originated for portfolio were $261.2 million, compared to $205.2
million during 1997. The Bank does not offer any loans that provide for negative
<PAGE> 5
amortization. (See "LOAN PORTFOLIO", page 24, herein, SUMMARY OF LOAN LOSS
EXPERIENCE, page 30, herein, and "Maturities and Sensitivities of Loans to
Changes in Interest Rates", page 25, herein.) Management monitors the economy
and real estate market in which the Bank operates and may modify the Bank's
lending policies as it considers 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 Brooklyn, NY - In February, 1997, the Bank entered
into an agreement to finance the construction of 45 2-family houses. The Bank's
commitment, as amended, is for $6.9 million, with no more than $4.3 million
outstanding at any one time; (2) Bayswater Village in Far Rockaway, Queens, NY -
In December, 1996, the Bank entered into an agreement to finance the
construction of 16 two-family houses, having a total development cost of $3.5
million, with no more than $1.9 million outstanding at any one time. This
project was substantially complete as of December 31, 1998, with a balance of
$62,000 owed to the Bank and one unit left to close.
In addition, the Bank makes construction loans, which generally have a six-month
term, to one 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, 1998, all construction
loans held by the Bank totaled $5.2 million.
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. The
Bank originates mortgage loans secured by multi-family dwellings, primarily of
50 units or more, cooperative buildings and income producing properties such as
shopping centers. At December 31, 1998, 60.8% of total gross mortgage loans were
secured by multi-family rental properties, 26.2% by cooperative buildings and
6.0% by commercial real estate. At that date, the Bank's ten largest loans
totaled $116.3 million. These ten mortgage loans were comprised of: six loans
totaling $72.0 million secured by multi-family rental properties; one $11.8
million mortgage loan secured by the land underlying a luxury Manhattan hotel;
one $11.1 million loan secured by a commercial office building; one $10.8
million loan secured by a shopping center and one loan totaling $10.6 million
secured by underlying cooperative buildings;. At December 31, 1998, the Bank's
largest loan was an $18.5 million mortgage loan secured by a 684 unit apartment
complex.
The Bank's mortgage loans on income producing properties are primarily 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 terms for these types of loans, management considers current market
conditions, competition and the risks associated with the property securing the
<PAGE> 6
loan. The interest rates on such loans are linked to 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.
Underlying cooperative loans are first liens on the cooperative building and the
land and 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%.
Concentrations of Credit At December 31, 1998, the largest concentration of
loans to any one borrower consisted of six mortgage loans with an aggregate
balance of $30.6 million, of which five loans totaling $22.6 million were
secured by multi-family apartment buildings and one loan for $8.0 million was
secured by a multi-family apartment building with retail stores.
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 related discussions, pages 26 through 29, herein.)
One-to Four-Family Lending. The Bank offers first mortgage loans secured by
one-to four-family residences and condominium units in complexes which are at
least 90% sold and cooperative apartment share loans where at least 65% of the
total cooperative shares are sold. While three-to four-family mortgages are
offered by the Bank, minimal demand has been experienced. At December 31, 1998,
one-to four-family mortgages totaled $75.8 million, of which $69.5 million were
fixed rate mortgage loans and $6.3 million were adjustable rate mortgage ("ARM")
loans. Loan applications are received from existing customers and are primarily
generated by referrals, branch offices and newspaper advertising. One-to
four-family mortgage loans are generally underwritten according to 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. Appraisals of properties secured by one-to four-family homes must be
approved by at least two senior officers of the Mortgage, Consumer Loan or Real
Estate Departments. 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
<PAGE> 7
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.
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.
During 1998, the Bank originated for sale and subsequently sold, without
recourse, $4.8 million of mortgage loans, on which the Bank retained servicing.
The loans sold include $4.3 million of mortgages to Fannie Mae and $501,000 to
the SONYMA. 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". The Bank has an agreement with Fannie Mae whereby Fannie Mae purchases
qualifying mortgages and Federal Housing Administration ("FHA") Title I loans
that the Bank originates. Loans sold to SONYMA were originated pursuant to a
program aimed at assisting first time homebuyers with low to moderate incomes.
The Bank plans to originate and sell, without recourse, other mortgage loans in
the secondary market and retain servicing. The Bank does not presently have any
recorded servicing assets.
The Bank offers FHA Home Improvement Loans on owner occupied, one family homes
in amounts up to $25,000. While no equity is required, 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.
<PAGE> 8
Other Lending. The Bank offers a variety of other loan products, including: home
equity; home improvement; deposit account; student; personal and automobile
loans. At December 31, 1998, total gross other loans was $22.9 million, or 1.9%
of total gross loans. At December 31, 1998, the other loan portfolio was
comprised as follows: property improvement loans of $10.7 million, or 46.5% of
the other loan portfolio; deposit account loans, which are 100% secured, of $8.2
million, or 35.6% of the other loan portfolio; and various consumer type loans
of $3.8 million, or 16.4% of the other loan portfolio. The remainder of the
other loan portfolio was comprised of student loans and overdraft lines of
credit. Student loans are federally guaranteed to varying degrees. During 1998,
the Bank sold the $5.1 million student loan portfolio to Sallie Mae, realizing a
pre-tax gain of $64,000. As part of the sale transaction, Sallie Mae agreed to
purchase all future student loans originated by the Bank on which repayment by
the student has not begun. This allows the Bank to continue to receive interest
and special allowances (or rate subsidies) while the student is in school and
eliminates the high cost of servicing the loan once repayment begins. Student
loans, which had a balance of $153,000 at December 31, 1998, are carried at fair
value in the aggregate.
The Bank offers fixed rate home equity loans, which are reported combined 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, 1998, the Bank had $9.4
million of home equity loans, with interest rates ranging from 5.5% to 12.0%.
Loan Origination and Other Fees. In addition to interest earned on loans, the
Bank charges fees for originating loans, 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.
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, 1998, the Company's
securities and the other investment portfolio combined, totaled $301.0 million,
or 18.6% of total assets, of which $110.0 million were in U.S. Government and
federal agency securities. (See "INVESTMENT PORTFOLIO", page 23, 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 at the time of purchase. In
response to the low interest rate environment that has prevailed during most of
the 1990's, 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. There
were no sales of securities during 1998. Activity in the held-to-maturity
portfolio included, purchases of $379.0 million and maturities of $514.0 million
<PAGE> 9
of U.S. Government and federal agency securities and purchases of $57.1 million
and maturities and amortization of $65.4 million in the CMO portfolio, during
1998.
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 the past, the
Company has held mortgage loans, which were received in the form of a dividend
from the Bank. As of December 31, 1998, the Company held no mortgage loans.
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
("MBS"). All of the Bank's CMOs are backed by Freddie Mac, Fannie Mae or
Government National Mortgage Association ("Ginnie Mae") MBS, 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, 1998, $95.8 million, or 5.9% of total assets, was
invested in CMOs. At December 31, 1998, the Bank's CMO portfolio had an
estimated average maturity of twenty-six months. (See "Contractual Maturity
Distribution", page 23, herein.)
Sources of Funds
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General. The Bank's primary sources of funds are deposits. Cash flows are
provided from interest and maturities on debt securities and CMOs, principal and
interest payments on mortgage and other loans. Deposit flows and mortgage
prepayments are greatly influenced by general interest rate changes, economic
conditions and competition. During 1998, the Bank took a $50.0 million 10 year
fixed rate advance from the Federal Home Loan Bank of New York ("FHLB-NY"). (See
"BORROWINGS", page 33, herein and "Liquidity and Capital Resources" included on
page 10 in the 1998 Annual Report to Stockholders.)
Deposits. The Bank offers a variety of deposit accounts having a range of
interest rates and terms. The Bank's deposits consist of the following types of
accounts: passbook/statement and lease security; certificate; money market;
negotiable order of withdrawal ("NOW") and non-interest bearing demand. As of
December 31, 1998, passbook/statement and lease security accounts represented
48.4% 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
<PAGE> 10
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 page 35 in the 1998 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/statement and lease security accounts, the trend of deposit
shifts has moved away from passbook/statement accounts and towards certificate
accounts. Deposits at December 31, 1998, increased by $3.0 million, or .3%,
compared to deposits at December 31, 1997. During 1998, the decrease in the
Bank's passbook/statement accounts of $23.8 million, or 4.4%, represented the
most significant decrease of any deposit category offered by the Bank. During
1998, money market accounts decreased by $14.7 million or 19.0%, while
certificate accounts increased by $24.0 million, or 5.9%. (See "DEPOSITS", page
31, herein.)
Subsidiaries of the Bank
- ------------------------
General. At December 31, 1998, the Bank had eighteen wholly owned subsidiary
corporations and a majority owned subsidiary, which operated as a real estate
investment trust that was liquidated on January 4, 1999. Many of the
corporations formed partnerships that are, or were, active in the ownership or
operation of real estate, ("the Real Estate Subsidiaries"). At December 31,
1998, the Bank's net investment in the Real Estate Subsidiaries was $785,000,
which included ORE of $277,000. In addition, six subsidiary corporations were
inactive at December 31, 1998.
The subsidiaries were primarily formed in the 1970's, at which time the Bank was
state regulated, pursuant to the New York State leeway investment authority.
(See "Grandfathered Savings Bank Authority", pages 19 through 20, herein.) The
Real Estate Subsidiaries were originally formed to: (i) operate properties
acquired through foreclosure actions, which were primarily comprised of
multi-family apartment buildings, until such time as the highest and best use
was achieved, at which time the property would be sold; (ii) take "equity
interests" in the construction of income producing properties on which the Bank
made loans; or (iii) invest in commercial properties in which the Bank
established branch offices. The aggregate amount of properties held by the Real
Estate Subsidiaries has continued to decrease since the early 1990's, as real
estate has not been purchased or developed since the late 1980's. However, the
Bank continues to transfer properties acquired through foreclosure to the Real
Estate Subsidiaries to manage, until sold. Effective June 30, 1997, management
reclassified all real estate previously classified as held-for-investment to
held-for-sale. (See Notes 1(g), 11, 12 and 13 to the Consolidated Financial
Statements, on pages 29, 32 and 33, respectively, in the 1998 Annual Report to
Stockholders.)
During the third quarter of 1998, the Bank sold two of its subsidiary
corporations, Pendex Realty Corp. ("Pendex") and Sutdex Realty Corp. ("Sutdex"),
realizing gains of $963,000. Pendex and Sutdex were equal partners in D & D
Associates, a partnership which owned shares representing cooperative
apartments. Prior to the sale, the cooperative apartment shares were transferred
to two other subsidiaries of the Bank, Jascove Corp. and Avre Corp., each a
partner of LeHavre Associates. (See "D & D Associates" and "LeHavre Associates",
on page 12, herein.)
<PAGE> 11
The cyclical nature of real estate markets and interest rates influence the
level of financial risk to property owners and the Bank, as mortgagor. As a
result of these cycles, from time to time, the Bank has acquired real estate
through foreclosure actions. The Real Estate Subsidiaries have been used to
mitigate the risk of loss that generally accompany the acquisition of real
estate through foreclosure actions. The Real Estate Subsidiaries, with the
backing of the Bank, have the financial ability to carry properties until their
perceived optimal use and value is achieved, at which time the property is sold.
Management believes that the Real Estate Subsidiaries provide the most efficient
means to monitor, manage, maintain and operate significant properties acquired
through foreclosure actions.
The activities of each of the Bank's 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. At December 31, 1998, Forty-Second & Park Corp. owned
cooperative shares representing 16 units in a six-story cooperative apartment
building containing 57 residential units and 4 professional offices located in
Forest Hills, Queens, NY. 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 1998, one unit
was sold, resulting in a net gain, before taxes, of $80,000. Rents received
during 1998, on the unsold apartments totaled $134,000 and maintenance charges
paid to the cooperative association totaled $141,000. For 1998, Forty-Second &
Park Corp. had net income of $63,000, after eliminating intercompany
transactions. The Bank's net investment in Forty-Second & Park Corp. was $6,000
at December 31, 1998.
Parkway Associates. Parkway Associates ("Parkway") is a partnership between two
of the Bank's subsidiary corporations, Grandcet Realty Corp. and Litneck Realty
Corp., each of which has a 50% partnership interest. At December 31, 1998,
Parkway owned shares, representing 69 unsold apartment units plus parking spaces
in a 400 unit cooperative garden apartment complex located in Floral Park,
Queens County, NY. 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 1998, four units were sold, resulting in a net gain, before taxes, of
$180,000. Rents received during 1998, from the unsold apartments and garage
spaces totaled $528,000 and maintenance charges paid to the cooperative
association and costs for maintenance employees totaled $488,000. For 1998,
Parkway Associates had a net operating income of $154,000, after eliminating
intercompany transactions. The Bank's net investment in Parkway was $41,000 at
December 31, 1998.
Elmback Associates. Elmback Associates ("Elmback") is a partnership between two
of the Bank's subsidiary corporations, Before Real Estate, Inc. and Afta Real
Estate, Inc., each of which has a 50% partnership interest. At December 31,
1998, Elmback owned cooperative shares representing 10 unsold apartment units in
<PAGE> 12
a six story cooperative apartment building with 61 units, located in Jamaica,
Queens County, NY. 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 1998, 3 units were sold resulting in a net gain, before
taxes, of $111,000. Rents received during 1998, on the unsold apartment units
totaled $66,000 essentially covering the $67,000 of maintenance charges paid to
the cooperative association.
In addition, as part of a 1994 mortgage loan workout between the Bank and an
unrelated borrower, Elmback took title to cooperative shares representing 57
unsold cooperative apartments in an 82 unit cooperative property, located in
Brooklyn, New York. During 1998, 2 units were sold and $76,000 of gains was
deferred. At December 31, 1998, 29 units remained, which comprised the entire
$277,000 in ORE. This property generated a net loss of $30,000 for 1998. (See
"Other Real Estate", page 29, herein.) For 1998 Elmback Associates had net
operating income of $31,000, after eliminating intercompany transactions. The
Bank's net investment in Elmback was $310,000 at December 31, 1998.
D & D Associates. During 1998, the Bank sold two of its subsidiary corporations,
Pendex and Sutdex, realizing pre-tax gains of $963,000. Prior to the sale of
Pendex and Sutdex, each held a 50% partnership interest in D & D Associates
("D&D"), which interests were assigned to Jas Cove Corp. ("Jas Cove") and Avre
Realty Corp. ("Avre"), each a subsidiary of the Bank.
At December 31, 1998, D&D owned shares representing 31 unsold units in two
six-story cooperative apartment buildings with 176 units. These buildings,
located in Jamaica, Queens County, NY, 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 1998, 4 units were sold, resulting in a net gain
before taxes of $68,000. Rental income from the buildings for 1998 totaled
$190,000 covering the maintenance charges of $145,000 paid to the cooperative
associations. For 1998, D&D Associates had a net operating income of $94,000,
after eliminating intercompany transactions. The Bank's net investment in D&D
was $39,000 at December 31, 1998.
Bay Hill Gardens. Bay Hill Gardens ("Bay Hill") is a partnership between 110-11
72nd Ave., Corp. and Yalcrab Real Estate, Inc., two of the Bank's subsidiary
corporations, each of which holds a 50% interest. During 1998, this subsidiary
had no operations. At December 31, 1998, the Bank had a negative investment in
Bay Hill of $54,000, reflecting an accounts payable related to the operation of
the 684 unit apartment complex previously owned by Bay Hill, that was sold
during 1994.
1995 Associates. 1995 Associates is a partnership between Jamsab Realty Corp.
and Jasthree Inc., two subsidiary corporations of the Bank, holding 99% and 1%
interests in the partnership, respectively. During 1998, this partnership
continued to collect past due rents and incur legal expenses in connection
therewith, from tenants of the 18 story commercial building that was sold during
1997. For 1998, 1995 Associates had a net loss, before taxes of $9,000, after
eliminating intercompany transactions. At December 31, 1998, the Bank had a zero
investment in this subsidiary.
Lefmet Corp. Lefmet Corp., a subsidiary corporation of the Bank, owns and
operates commercial property consisting of seven stores located in Kew Gardens,
Queens County, NY, one of which the Bank occupies as a branch office. During
1998, the property generated net income, before federal taxes, of $62,000, after
eliminating intercompany transactions. The Bank's net investment in Lefmet Corp.
was $211,000 at December 31, 1998.
<PAGE> 13
LeHavre Associates. LeHavre Associates is a partnership between Jas Cove and
Avre, each a subsidiary of the Bank. During 1998, Jas Cove and Avre received
shares representing 31 cooperative apartments from Pendex and Sutdex, which
shares are carried at zero cost. The Bank's net investment in LeHavre at
December 31, 1998, was zero.
Jade Associates. Prior to December 1993, Jade Associates ("Jade") was a joint
venture between Sher Park Realty Corp., ("Sher Park") a 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.
As a result of the region's decline in real estate values in the late 1980's,
the units did not sell, the property became troubled and the Bank ultimately
attained 100% ownership of the unsold units. Sales of the units are accounted
for under the full cost recovery method. During 1998, 28 units were sold, which
resulted in the full investment recovery, and gains of $299,000 were realized.
At December 31, 1998, the 6 units held-for-sale were carried at zero cost.
Concerned Management Concerned Management is a 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, NY.
Other Subsidiaries. Of the Bank's remaining five subsidiary corporations at
December 31, 1998, three are nominee corporations used in the conduct of the
Bank's business, one (Jam-Ser Corp.) acts as an agent to sell life insurance as
permitted by New York State law, and one (Tier Inc.), a real estate investment
trust, was liquidated during the first quarter of 1999 due to a realignment of
operations.
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 policyholders. 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.
New York State passed legislation on June 18, 1998, which was subsequently
signed into law, enabling the SBLI Departments of all Banks issuing SBLI to
combine with the SBLI Fund to become a single mutual insurance company. Pursuant
to the new law, a plan of conversion and transfer describing the formation of
the new combined company must be prepared by the SBLI Fund and is subject to a
75% approval vote by SBLI Issuing Banks. If such approval is obtained, the plan
will be submitted for the approval of the Superintendent of Banks and
Superintendent of Insurance, both of whom urged that the change be made.
Management is not aware of and cannot predict the timing or what changes will
ultimately occur with respect to the structure of the Bank's SBLI Department or
the SBLI Fund. As such, the ultimate effect on the Company of the pending SBLI
conversion and transfer is uncertain at the present time.
<PAGE> 14
Personnel
As of December 31, 1998, the Bank had 305 full-time employees and 124 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.
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 FHLB-NY 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 17 through 18, 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
<PAGE> 15
institution that is not insured by the FDIC. In evaluating applications by
holding companies to acquire savings institutions, the OTS must consider the
financial and managerial resources and future prospects of the company and
institution involved, the effect of the acquisition on the risk to the insurance
funds, the convenience and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific capital
requirements or specific restrictions on the payment of dividends or other
capital distributions, the HOLA does prescribe such restrictions on subsidiary
savings institutions, as described below. The Bank must notify the OTS 30 days
before declaring any dividend to the Company. In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the OTS and the OTS has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
Federal Savings Institution Regulation
- --------------------------------------
Capital Requirements. The OTS capital regulations require savings institutions
to meet three capital standards: a 1.5% tangible capital ratio; a 3.0% leverage
(core) capital ratio; and an 8.0% risk-based capital ratio. In addition, the
prompt corrective action standards discussed below establish, in effect, a
minimum 2% tangible capital ratio, a 4% leverage (core) capital ratio (3% for
institutions receiving the highest rating on the CAMEL financial rating system),
and together with the risk-based capital standard itself, a 4% Tier I risk based
capital standard. Core capital is defined as common stockholders' equity
(including retained earnings), certain noncumulative perpetual preferred stock
and related surplus and minority interests in the equity accounts of
consolidated subsidiaries, less intangibles other than certain purchased
mortgage servicing rights and credit card relationships. The OTS regulations
also require that, in meeting the leverage (core) ratio, tangible and risk-based
capital standards, institutions must generally deduct investments in and loans
to subsidiaries engaged in activities not permissible for a national bank 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 capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the OTS has deferred implementation
of the interest rate risk component. At December 31, 1998, the Bank met each of
its capital requirements. A table presenting the Bank's capital position at
December 31, 1998 is presented in Note 26 to the Consolidated Financial
Statements, on page 42 in the 1998 Annual Report to Stockholders, and is
incorporated herein by reference.
<PAGE> 16
<TABLE>
A reconciliation between the Bank's regulatory capital and GAAP capital at
December 31, 1998 is presented below:
Tangible Capital
----------------
(In thousands)
<CAPTION>
<S> <C>
GAAP capital-originally reported to regulatory authorities
and on the Bank's consolidated financial statements $320,994
Add:
Minority interest in includable consolidated subsidiary 161
Less:
Regulatory capital adjustments:
Investments in Non-includable Subsidiaries 3,920
Adjustment for net unrealized gains, net of tax 40,871
--------
Regulatory Capital $276,364
========
</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
<PAGE> 17
actions become immediately applicable to the institution, including, but not
limited to, increased monitoring by regulators, restrictions on growth, capital
distributions and expansion. The OTS may also take any one of a number of
discretionary supervisory actions, including the issuance of a capital directive
and the replacement of senior executive officers and directors.
Insurance of Deposit Accounts. Deposits of the Bank are insured by the BIF,
which is administered by the FDIC. The FDIC currently imposes an assessment rate
schedule from 0 to 27 basis points. Pursuant to the Deposit Insurance Funds Act
of 1996 (the "Funds Act"), the obligations for payment of the Financing
Corporation ("FICO") bonds is spread across all BIF and Savings Association
Insurance Fund ("SAIF") members. Effective January 1, 1997, BIF deposits have
been assessed for the FICO obligation of 1.3 basis points, while SAIF deposits
are assessed 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 provided that the BIF and SAIF
be merged on January 1, 1999, provided no savings associations existed at that
time. (See "Thrift Rechartering Legislation", below.)
The Bank paid $142,000 in FDIC insurance premiums during 1998. 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. Legislation enacted in 1996 provided that the
BIF and SAIF were to have merged on January 1, 1999 if there were no more saving
associations as of that date. Various proposals to eliminate the federal savings
association charter, create a uniform financial institutions charter, abolish
the OTS and restrict savings and loan holding company activities have been
introduced in Congress. The Bank is unable to predict whether such legislation
will be enacted or the extent to which the legislation would restrict or disrupt
its operations.
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, 1998, the Bank was in
compliance with this limitation, with the highest aggregate loans to one
borrower of $30.6 million, or 9.5% 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, nor did the Company have any mortgage loans at December 31,
1998. 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
<PAGE> 18
business and specified liquid assets up to 20% of total assets) in "qualified
thrift investments" (primarily residential mortgages and related investments,
including certain MBS) on a monthly basis in 9 out of every 12 months.
A savings institution that fails the QTL test is subject to certain operating
restrictions and may be required to convert to a bank charter. As of December
31, 1998, the Bank maintained 96.3% of 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. Effective April 1, 1999, the OTS's capital distribution regulation
will change. Under the new regulation, an application to and the prior approval
of the OTS will be required prior to any capital distribution only if the
institution does not meet the criteria for "expedited treatment" of applications
under OTS regulations (i.e., generally, examination ratings in the two top
categories.), the total capital distributions for the calendar year exceed net
income for that year plus the amount of retained net income for the preceding
two years, the institution would be undercapitalized following the distribution
or the distribution would otherwise be contrary to a statute, regulation or
agreement with the OTS. If an application is not required, the institution must
still provide prior notice to the OTS of the capital distribution. 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. At December 31,
1998, the Bank was a Tier 1 Bank, the highest rating.
Liquidity. Information regarding liquidity is included in Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the caption "Liquidity and Capital Resources", included on page 10 in the 1998
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, 1998, were $266,000.
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
<PAGE> 19
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.
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 up 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 of the OTS, then 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.
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
<PAGE> 20
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, 1998, the Bank's capital investments, computed
for regulatory purposes, retained under the leeway provisions were $3.9 million,
or .2% 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 17, herein.)
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-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, 1998 of $8.9 million.
On December 8, 1998, the Bank borrowed $50.0 million from the FHLB-NY at a fixed
rate of 5.62% for ten years. Interest expense on FHLB-NY advances for the year
ended December 31, 1998 was $185,000. Prior to 1998, the Bank had not borrowed
funds for its direct activities since 1984. Pursuant to a blanket collateral
agreement with the FHLB-NY, advances are secured by qualifying mortgage loans
owned by the Bank in an amount at least equal to 110% of the advances
outstanding. Should management so decide, additional advances may be taken in
the future. (See "Liquidity and Capital Resources", included on page 10 in the
1998 Annual Report to Stockholders.)
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, 1998, 1997 and 1996, dividends from the FHLB-NY
to the Bank were $634,000, $496,000 and $438,000 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). The FRB
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $46.5 million or less
(subject to adjustment by the FRB) a reserve requirement of 3%; and for accounts
greater than $46.5 million, a reserve requirement of $1.25 million plus 10%
(subject to adjustment by the FRB between 8% and 14%) against that portion of
total transaction accounts in excess of $46.5 million. The first $4.9 million of
otherwise reservable balances (subject to adjustments by the FRB) were exempted
from the reserve requirements. During 1998, the Bank was in compliance with the
foregoing requirements and expects to continue to remain in compliance in the
future.
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
<PAGE> 21
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 Company was audited by the Internal Revenue
Service for taxable years 1990 through 1993 and by New York State for taxable
years 1994 through 1996. The Bank was audited by New York City for taxable years
1991 through 1993.
Federal. The Company is subject to the rules of federal income taxation
applicable to corporations. The Company 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 Company is subject to New York State ("NYS")
Franchise Tax on Banking Corporations and the Bank to the New York City ("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 at applicable rates.
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").
Legislation was enacted in August 1996 which repealed the reserve method for tax
purposes, and required Banks to recapture, (i.e. take into taxable income) over
a six year period, the excess of the balance of their bad debt reserves as of
December 31, 1995 (other than supplemental reserves, discussed below) over the
balance of such reserves as of December 31, 1987. The Bank neither had nor has
any excess reserves that would require recapture pursuant to this legislation.
The last tax year that the Bank used the reserve method in computing its bad
debt deduction for tax purposes was 1995, and has since used 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; or
(c) the Bank fails to meet the Internal Revenue Code definition for a qualified
thrift. Management does not presently anticipate an event that would cause
recapture of the aforementioned reserves. However, future changes in the Federal
tax law could further affect the status of the base year reserve. (See Notes 14
and 18 to the Consolidated Financial Statements, included on pages 33 through 34
and page 36, respectively, in the 1998 Annual Report to Stockholders.)
<PAGE> 22
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.
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
Consolidated Financial Statements and Notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations, which is included
in the 1998 Annual Report to Stockholders as Exhibit 13.01.
I. Distribution of Assets, Liabilities and Stockholders' Equity: Interest
Rates and Interest Differential
A, B. See page 14 of the Company's 1998 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
See page 15 of the Company's 1998 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
See pages 11 through 13 of the Company's 1998 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> 23
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,
-------------------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Securities Available-for-Sale:
------------------------------
Marketable equity securities, at fair value $ 83,592 $ 62,243 $ 51,021
======== ========= ========
Securities Held-to-Maturity:
----------------------------
U.S Government and federal agency securities $109,996 $244,903 $299,645
CMOs, net 95,790 104,040 155,272
MBS:
Ginnie Mae, net 2,464 3,640 4,999
Fannie Mae, net 53 106 152
Freddie Mac, net 154 278 441
-------- -------- --------
Total MBS 2,671 4,024 5,592
-------- -------- --------
Total Securities Held-to-Maturity $208,457 $352,967 $460,509
======== ======== ========
Other investments:
------------------
FHLB-NY stock (investment required by law) $ 8,892 $ 7,615 $ 6,829
Other stock 30 30 30
-------- -------- --------
Total other investments $ 8,922 $ 7,645 $ 6,859
======== ======== ========
</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, 1998. 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, 1998 was twenty-six months. For
principal reduction on these securities, for the years ended December 31, 1998,
1997 and 1996: See the "Consolidated Statements of Cash Flows", included on
pages 25 and 26 in the 1998 Annual Report to Stockholders.
<TABLE>
At December 31, 1998
--------------------
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)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal agency $100,000 5.03% $ - -% $ - -% $ - -%
U.S. Government 9,996 6.25 - - - - - -
CMOs - - 4,401 5.75 81,013 6.17 10,376 6.00
MBS 17 12.25 463 10.50 717 9.00 1,474 9.94
-------- ----- --------- ----- -------- ---- -------- ----
Total $110,013 5.14% $ 4,864 6.20% $ 81,730 6.19% $ 11,850 6.49%
======== ========= ======== ========
</TABLE>
<PAGE> 24
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,
---------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Multi-family $ 702,914 $ 563,205 $ 433,224 $ 344,337 $ 294,003
Underlying cooperative 302,494 267,942 262,221 263,972 251,580
One- to four-family 75,773 73,757 76,848 82,391 86,531
Commercial 69,001 71,839 61,829 55,662 58,070
Construction 5,176 3,067 1,836 1,492 2,518
---------- ---------- ---------- ---------- ----------
Total mortgage loans 1,155,358 979,810 835,958 747,854 692,702
---------- ---------- ---------- ---------- ----------
Other loans:
Student 153 5,213 6,204 7,466 9,656
Loans secured by deposit accounts 8,166 8,189 8,328 8,489 9,167
Property improvement 10,652 10,744 8,775 9,165 6,762
Consumer 3,754 4,775 4,350 4,092 1,821
Overdraft loans 202 227 237 220 224
---------- ---------- ---------- ---------- ----------
Total other loans 22,927 29,148 27,894 29,432 27,630
---------- ---------- ---------- ---------- ----------
Total loans receivable 1,178,285 1,008,958 863,852 777,286 720,332
---------- ---------- ---------- ---------- ----------
Less:
Unearned discounts, premiums
and deferred loan fees, net 2,702 3,333 3,751 4,344 4,952
Allowance for possible loan losses 5,924 5,880 5,327 4,697 4,085
---------- ---------- ---------- ---------- -----------
Loans receivable, net $1,169,659 $ 999,745 $ 854,774 $ 768,245 $ 711,295
========== ========== ========== ========== ==========
</TABLE>
<PAGE> 25
B. Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table shows the contractual maturity of the loan portfolios
at December 31, 1998. 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, 1998, 1997
and 1996: See the "Consolidated Statements of Cash Flows", included on
pages 25 and 26 in the 1998 Annual Report to Stockholders.)
<TABLE>
Other
Mortgage Loans Loans Total
---------------------------------------------------------- ------- -------
(In Thousands)
Under- One-to
Multi- lying- Four- Commer- Construct-
Family Co-op Family cial tion Other
------ ----- ------ ---- ---- -----
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within 1 Year $ 25,249 $ 7,788 $ 6,514 $ 4,848 $ 5,176 $ 8,849 $ 58,424
-------- -------- -------- -------- -------- -------- -----------
After 1 Year:
1 to 2 years 39,594 22,750 38 1,764 - 1,435 65,581
2 to 3 years 41,634 20,410 456 4,561 - 1,576 68,637
3 to 5 years 102,158 54,414 1,050 13,283 - 3,301 174,206
5 to 10 years 430,796 162,670 21,481 40,990 - 7,766 663,703
10 to 20 years 63,216 34,462 19,187 3,555 - - 120,420
Over 20 years 267 - 27,047 - - - 27,314
-------- -------- -------- -------- -------- -------- ----------
Total due after 1 year 677,665 294,706 69,259 64,153 - 14,078 1,119,861
-------- -------- -------- -------- -------- -------- ----------
Total amounts due $702,914 $302,494 $ 75,773 $ 69,001 $ 5,176 $ 22,927 $1,178,285
======== ======== ======== ======== ======== ======== ----------
Less:
Unearned discounts,
premiums and deferred
loan fees, net 2,702
Allowance for possible
loan losses 5,924
----------
Loans receivable, net $1,169,659
==========
</TABLE>
<TABLE>
The following table sets forth at December 31, 1998, the dollar amount of all
loans due after December 31, 1999 and whether such loans have fixed interest
rates or adjustable interest rates.
<CAPTION>
Fixed Adjustable Total
----- ---------- -----
(In Thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Multi-family $ 677,665 $ - $ 677,665
Underlying cooperative 294,706 - 294,706
One-to four-family 62,955 6,304 69,259
Commercial 64,153 - 64,153
Construction - - -
Other loans:
Student 153 - 153
Loans secured by deposit accounts - - -
Property improvement 10,554 - 10,554
Consumer 3,371 - 3,371
Overdraft loans - - -
---------- ---------- ----------
Total loans receivable $1,113,557 $ 6,304 $1,119,861
========== ========== ==========
</TABLE>
<PAGE> 26
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 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, 1998, 1997 and 1996, 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, 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%
==== ===
At December 31, 1997
- --------------------
Delinquent loans:
Guaranteed(1) 48 $ 221 82 $ 500
Non-guaranteed 5 10 5 12,769(2)
--- ------ --- -------
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(2)
--- ------ --- -------
87 $ 410 159 $14,151
=== ====== === =======
Ratio of delinquent
loans to total loans .05% 1.64%
=== ====
<FN>
(1) Loans which are FHA, VA or New York State Higher Education Services Corporation guaranteed.
(2) Includes the $12,754,000 underlying cooperative mortgage loan, which was satisfied during
the second quarter of 1998.
</FN>
</TABLE>
<PAGE> 27
<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,
---------------
1998 1997 1996 1995 1994
---- ---- ----- ---- ----
(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) $ 213 $12,754 $12,754 $20,903 $ 500
--------- ------- ------- ------- ------
Accruing loans 90 or more days overdue:
Conventional mortgages - - 686 311 322
FHA and VA mortgages (2) 233 335 361 557 581
--------- ------- ------- ------- ------
Total 233 335 1,047 868 903
--------- ------- ------- ------- ------
Other loans:
- ------------
Non-accrual loans - - - - -
Accruing 90 or more days overdue:
Student loans - 165 331 194 379
Consumer loans 3 15 19 13 7
--------- ------- ------- ------- ------
Total 3 180 350 207 386
--------- ------- ------- ------- ------
Total non-performing loans:
Non-accrual 213 12,754 12,754 20,903 500
Accruing 90 days or more overdue 236 515 1,397 1,075 1,289
--------- ------- ------- ------- ------
Total $ 449 $13,269 $14,151 $21,978 $1,789
========= ======= ======= ======= ======
Non-accrual loans to total loans .02% 1.26% 1.48% 2.69% .07%
Accruing loans 90 or more days overdue
to total loans .02 .06 .16 .14 .18
Non-performing loans to total loans .04 1.32 1.64 1.78(3) .25
At December 31:
- ---------------
Restructured loans $ 1,842 $ 1,840 $ 1,874 $ 1,663 $1,828
For the years ended December 31:
- --------------------------------
Income forfeited due to
restructured loans $ 73 $ 62 $ 62 $ 62 $ 6
Income unrecorded due to
non-accrual/impaired loans $ 509 $ 1,180 $ 1,180 $ 226 $ 150
<FN>
(1) See "Financial Condition", included on pages 8 through 9 in the 1998 Annual
Report to Stockholders.
(2) These loans, including the past due loans, do not present any significant
collection risk to the Bank as they are guaranteed and therefore are presented
separately.
(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> 28
Impaired Mortgage Loans. At December 31, 1998, the Bank had one impaired
mortgage loan with a $213,000 balance and a $27,000 specific valuation
allowance. The Bank had a net investment in this loan of $186,000, which
comprised total non-accrual loans at December 31, 1998. At December 31, 1997,
the Bank had one impaired mortgage loan, secured by a cooperative apartment
building, with a balance of $12.8 million and no related valuation allowance.
This loan comprised the total balance of non-accrual loans at December 31, 1997.
If all non-accrual loans had been performing in accordance with their original
terms, the Company would have recorded interest income, with respect to such
loans, of $509,000, $1.2 million and $1.2 million for the years ended December
31, 1998, 1997 and 1996, respectively. This compares to $397,000 of actual
payments recorded for 1998, no interest income was recognized with respect to
such loans for 1997 and 1996.
On May 28, 1998, the $12.8 million underlying cooperative mortgage loan,
discussed above, was satisfied. Upon satisfaction, $4.3 million of previously
unrecorded prior years' interest and legal fees, as well as late charges, were
recovered and included in non-interest income. The average balance of impaired
loans for calendar 1998, 1997 and 1996 was $5.5 million, $12.8 million and $12.8
million, respectively.
At December 31, 1998 and 1997, loans restructured in a troubled debt
restructure, all of which are performing in accordance with their contractual
terms and therefore not considered impaired, were $1,842,000 and $1,840,000,
respectively. Interest forfeited attributable to restructured loans was $73,000,
$62,000 and $62,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Classified Assets. Federal regulations provide for the classification of loans
and other assets such as debt and equity securities considered by the OTS to be
of lesser quality as "substandard", "doubtful" or "loss" assets. An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
Substandard assets include those characterized by the distinct possibility that
the insured institution will sustain some loss if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard", with the added characteristic that the
weaknesses present make "collection or liquidation in full", on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable". Assets classified as "loss" are those considered "uncollectable"
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
<PAGE> 29
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
"Asset Quality and Allowances", included on page 9 in the 1998 Annual Report to
Stockholders.)
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 Management
has not identified any material potential problem loans or other asset, other
than previously discussed and presented in the accompanying tables.
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, 1998, ORE carried at $277,000 was comprised of 29 cooperative
apartments located within an 84 unit cooperative apartment building located in
Brooklyn, New York. The units were acquired during 1994, as part of a
restructuring agreement for the 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, 1998, the total indebtedness related to this property reported in
mortgage loans, including the building improvement loan, was $1.3 million. At
December 31, 1998, 29 units remained unsold and were rented. As of December 31,
1998, there were deferred gains of $453,000 on the 28 units that were sold, as
sales of ORE are accounted under the cost recovery method. During 1998, ORE
operations generated pre-tax losses of $33,000, of which $30,000 was
attributable to the property discussed above. There were no loss provisions
established against ORE during the year ended December 31, 1998.
<PAGE> 30
<TABLE>
SUMMARY OF LOAN LOSS EXPERIENCE
Activity in the allowance for loan losses for the mortgage loan portfolio is
summarized as follows, for the years ended December 31:
<CAPTION>
Mortgage Portfolio Loan Loss Allowance: 1998 1997 1996 1995 1994
- -------------------------------------- ---- ---- ---- ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $5,741 $5,176 $4,575 $3,976 $4,000
Provision for loan losses - 600 600 600 600
Loans charged-off - (35) - (1) (624)
Recoveries of loans previously charged off - - 1 - -
------ ------ ------ ------ ------
Balance at end of period $5,741 $5,741 $5,176 $4,575 $3,976
====== ====== ====== ====== ======
Ratios:
Net charge-offs to average mortgages - % - % - % - % .10%
Allowance for loan losses to
net mortgage loans at December 31: .50% .59% .63% .62% .58%
Allowance for loan losses to mortgage
loans delinquent 90 days or more at December 31: 12.87x 43.86% 37.50% 5.27x 4.40x
</TABLE>
<TABLE>
Activity in the allowance for loan losses for the other loan portfolio is
summarized as follows, for the years ended December 31:
<CAPTION>
Other Loan Portfolio Loss Allowance: 1998 1997 1996 1995 1994
- ----------------------------------- ---- ---- ---- ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 139 $ 151 $ 122 $ 109 $ 136
Provision for loan losses 51 48 40 36 8
Loans charged off (25) (72) (33) (43) (40)
Recoveries of loans previously charged off 18 12 22 20 5
------ ------ ------ ------ ------
Balance at end of period $ 183 $ 139 $ 151 $ 122 $ 109
====== ====== ====== ====== ======
Ratios:
Net charge-offs to average other loans .03% .21% .04% .08% .13%
Allowance for loan losses to
net other loans at December 31: .80% .48% .54% .42% .40%
Allowance for loan losses to other
loans delinquent 90 days or more at December 31: 61.00x 77.22% 43.14% 58.94% 28.24%
</TABLE>
<PAGE> 31
DEPOSITS
<TABLE>
Deposit balances are summarized as follows at December 31:
<CAPTION>
1998 1997 1996
---- ---- ----
Stated Stated Stated
rate Amount rate Amount rate Amount
---- ------ ---- ------ ---- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance by interest rate:
Demand - % $ 47,152 - % $ 33,662 - % $ 1,940
NOW 1.24 37,005 2.47 35,401 2.47 36,256
Money market 2.32 62,747 2.96 77,477 2.96 89,081
Passbook/statement 2.22 522,671 2.71 546,447 2.71 582,808
Lease security 2.22 21,031 2.71 18,683 2.71 17,143
Certificates: 4.07- 5.00 200,635 4.67- 5.00 44,646 4.14- 5.00 174,155
5.01- 6.00 213,121 5.01- 6.00 343,864 5.01- 6.00 187,890
6.01- 6.82 19,804 6.01- 6.82 21,023 6.01- 6.82 25,120
---------- ---------- ----------
433,560 409,533 387,165
---------- ---------- ----------
Total deposits $1,124,166 $1,121,203 $1,144,393
========== ========== ==========
Time certificates in
excess of $100,000 $ 48,517 $ 41,551 $ 32,676
========== ========== ==========
</TABLE>
<TABLE>
The following table sets forth the maturity of certificate accounts in amounts
of $100,000 or more at December 31:
<CAPTION>
1998
----
(In Thousands)
<S> <C>
Three months or less $20,893
Over three months through six months 11,384
Over six months through twelve months 10,347
Over twelve months 5,893
-------
$48,517
=======
</TABLE>
<PAGE> 32
<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>
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Passbook/statement $ 536,617 2.45% $ 561,975 2.70% $ 598,929 2.72%
Lease security 19,661 2.42 18,075 2.72 16,662 2.73%
Certificates 421,359 5.21 397,832 5.22 383,215 5.16
Money Market 75,475 2.77 83,731 3.04 91,597 3.08
NOW 34,918 2.10 35,934 2.45 36,338 2.47
---------- ---------- ----------
$1,088,030 3.52% $1,097,547 3.63% $1,126,741 3.57%
========== ========== ==========
</TABLE>
The FDIC, an agency of the U.S. Government, insures each depositor's savings up
to $100,000 through the BIF.
<TABLE>
Financial Highlights
<CAPTION>
For the Years Ended December 31: 1998 1997 1996
- ------------------------------- ---- ---- ----
<S> <C> <C> <C>
Return on average assets 2.84% 2.42% 1.74%
Return on average equity 11.86 10.64 8.05
Dividend payout ratio(1) 35.32 37.23 47.24
Average equity to average assets 23.97 22.72 21.65
Equity to total assets 23.59 23.94 22.12
Interest rate spread 4.08 3.88 3.90
Net interest margin 4.97 4.73 4.68
Non-interest expense to
average assets 1.76 1.79 1.80
Non-performing loans to total loans(2) .04 1.32 1.64
Non-performing assets to total assets(2) .04 .90 .98
Efficiency ratio(3) 35.10 38.27 40.40
Ratio of net interest income to
non-interest expense 2.63x 2.47x 2.44x
Average interest earning assets to
average interest bearing liabilities 1.33x 1.31x 1.28x
<FN>
(1) Dividend payout ratio is calculated by dividing dividends declared per share
by net income per share.
(2) See also "Asset Composition and Strategy", included on page 9 in the 1998
Annual Report to Stockholders.
(3) Efficiency ratio is calculated by dividing non-interest expense, excluding
ORE expense/(income), by net interest income plus loan fees and service charges.
</FN>
</TABLE>
<PAGE> 33
BORROWINGS
On December 8, 1998, the Bank borrowed $50.0 million from the FHLB-NY at a fixed
rate of 5.62% for ten years. Interest expense on FHLB-NY advances for the year
ended December 31, 1998 was $185,000. Prior to 1998, the Bank had not borrowed
funds for its direct activities since 1984. Pursuant to a blanket collateral
agreement with the FHLB-NY, advances are secured by qualifying mortgage loans
owned by the Bank in an amount at least equal to 110% of the advances
outstanding.
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 Notes 9 and 19 to the Consolidated Financial
Statements, included on pages 32 and 36, respectively, in the 1998 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> 34
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 May. 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, 1998 with the Company
- ---- ----------------- ----------------
<S> <C> <C>
John F. Bennett 64 Senior Vice President
Jack Connors 49 Senior Vice President
John Conroy 52 Senior Vice President
Bernice Glaz 57 Senior Vice President
Lawrence J. Kane 45 Executive Vice President
Thomas R. Lehmann 48 Executive Vice President - Chief Financial Officer
Joseph J. Hennessy 56 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, 1998 with the Bank
- ---- ----------------- -------------
<S> <C> <C>
John F. Bennett 64 Senior Vice President
Jack Connors 49 Senior Vice President
John Conroy 52 Senior Vice President
Bernice Glaz 57 Senior Vice President
Lawrence J. Kane 45 Executive Vice President
Thomas R. Lehmann 48 Executive Vice President - Chief Financial Officer and
Treasurer/Comptroller
</TABLE>
<PAGE> 35
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
1998 calendar year appears on page 7 of the 1998 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 18, 1999, JSB Financial, Inc. had approximately 2,044
shareholders of record, not including the number of persons or entities holding
stock in nominee or street name through various brokers and banks.
During 1998, the Company declared four cash dividends totaling $1.60 per share
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 18 to the Consolidated Financial Statements, included
on page 36 in the 1998 Annual Report to Stockholders.) Dividends were paid
during calendar 1998 to stockholders as follows:
<TABLE>
Declaration Date Record Date Payment Date Dividend Per Share
-----------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C>
January 6, 1998 February 4, 1998 February 18, 1998 $.40
April 14, 1998 May 6, 1998 May 20, 1998 $.40
July 20, 1998 August 5, 1998 August 19, 1998 $.40
October 13, 1998 November 4, 1998 November 18, 1998 $.40
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
Selected financial data appears on pages 5 and 6, under the captions "Financial
Highlights" and "Selected Financial Data", respectively, of the Company's 1998
Annual Report to Stockholders, and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-----------------------------------------------------------
See pages 8 through 21, of the Company's 1998 Annual Report to Stockholders,
portions of which are filed herewith as Exhibit 13.01.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Information regarding quantitative and qualitative disclosures about market risk
appears on pages 11 through 13 of the Company's 1998 Annual Report to
Stockholders, under the caption "Interest Rate Sensitivity Analysis" and is
incorporated herein by reference.
<PAGE> 36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
See pages 22 through 44, of the Company's 1998 Annual Report to Stockholders,
portions of which are filed herewith as Exhibit 13.01.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
------------------------------------------------------------
None.
<PAGE> 37
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 and information pertaining thereto,
included in the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
-----------------------------------------------
Information presented under the caption "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 11, 1999, is incorporated
herein by reference. Information concerning Executive Officers who are not
Directors of the Company is contained herein on page 34, as an Additional Item
in Part I, under the caption Executive Officers, pursuant to paragraph (b) of
Item 401 of Regulation S-K in reliance on Instruction G.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Information included under the captions "Directors' Compensation" and "Executive
Compensation" on pages 8 through 11 (excluding the Report of the Compensation
Committee on pages 9 and 10) in the Company's Proxy Statement for its Annual
Meeting of Stockholders to be held on May 11, 1999, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Information included under the captions "Security Ownership of Certain
Beneficial Owners" and "Stock Ownership of Management" on pages 3 and 7 in the
Company's Proxy Statement for its Annual Meeting of Stockholders to be held on
May 11, 1999, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information included under the captions "Indebtedness of Management and
Transactions with Certain Related Persons" on page 17 in the Company's Proxy
Statement for its Annual Meeting of Stockholders to be held on May 11, 1999, is
incorporated herein by reference.
<PAGE> 38
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, which are included on pages 22 through 44, of the Company's 1998 Annual
Report to Stockholders, are filed herewith.
- Consolidated Statements of Financial Condition at December 31, 1998
and 1997
- Consolidated Statements of Operations for each of the years in the
three year period ended December 31, 1998
- Consolidated Statements of Changes in Stockholders' Equity for each
of the years in the three year period ended December 31, 1998
- Consolidated Statements of Cash Flows for each of the years in the
three year period ended December 31, 1998
- Notes to the Consolidated Financial Statements
- Independent Auditors' Report
The remaining information appearing in the 1998 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 1998: None
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K:
<TABLE>
Exhibit No. Description
- ----------- -----------
<CAPTION>
<S> <C> <C>
3.01 Articles of Incorporation (1)
3.02 Bylaws (Amended and Restated) (2)
4.01 Stock Certificate of JSB Financial, Inc. (1)
Employment Agreement between the Company and:
10.01 Park T. Adikes (3)
10.02 Edward P. Henson (3)
10.05 Joanne Corrigan (3)
10.06 Supplemental Employment Agreement entered into on July 9, 1996
between the Company and:
Park T. Adikes (4)
Edward P. Henson (4)
Joanne Corrigan (4)
<FN>
Continued
</FN>
</TABLE>
<PAGE> 39
<TABLE>
Exhibit No. Description
- ----------- -----------
<CAPTION>
<S> <C> <C>
Employment Agreement between the Bank and:
10.07 Park T. Adikes (3)
10.08 Edward P. Henson (3)
10.10 Joanne Corrigan (3)
10.11 John F. Bennett (3)
10.12 Jack Connors (5)
10.13 John J. Conroy (5)
10.14 Bernice Glaz (5)
10.15 Thomas R. Lehmann (5)
10.16 Lawrence J. Kane (2)
10.18 Supplemental Employment Agreement entered into on July 9, 1996
between the Bank and:
Park T. Adikes (4)
Edward P. Henson (4)
Joanne Corrigan (4)
John F. Bennett (4)
Jack Connors (4)
John J. Conroy (4)
Bernice Glaz (4)
Thomas R. Lehmann (4)
Lawrence J. Kane (4)
Special Termination Agreements between the Bank, guaranteed
by the Company and:
10.19 Teresa DiRe-Covello (3)
10.20 Joseph J. Hennessy (3)
10.21 Philip Pepe (6)
10.22 Supplemental Special Termination Agreements entered into on
July 9, 1996 between the Bank and:
Teresa DiRe-Covello (4)
Joseph J. Hennessy (4)
Philip Pepe (4)
<FN>
Continued
</FN>
</TABLE>
<PAGE> 40
<TABLE>
Exhibit No. Description
- ----------- -----------
<CAPTION>
<S> <C> <C>
10.23 Jamaica Savings Bank FSB Benefit Restoration Plan
(Amended and Restated) (7)
10.24 JSB Financial, Inc. 1990 Incentive Stock Option Plan
(Amended and Restated) (8)
10.25 JSB Financial, Inc. 1990 Stock Option Plan
For Outside Directors (Amended and Restated) (8)
10.26 Jamaica Savings Bank FSB Employee Severance
Compensation Plan (1)
10.27 Jamaica Savings Bank FSB Outside Directors' Consultation
and Retirement Plan (9)
10.28 Incentive Savings Plan of Jamaica Savings Bank FSB (9)
10.29 The JSB Financial, Inc. 1996 Stock Option Plan (10)
11.01 Statement regarding computation of per share earnings, filed herewith
13.01 Portions of the 1998 Annual Report to Stockholders, filed herewith
23.01 Consent of KPMG LLP, filed herewith
27.00 Financial Data Schedule for the Period Ended December 31, 1998,
filed herewith
99.01 Form 11-K for calendar year 1998 for the Incentive Savings Plan of
Jamaica Savings Bank FSB (11)
<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.
(3) Incorporated herein by reference to Exhibits filed with the Form 10-K for the Year Ended December 31, 1990.
(4) Incorporated herein by reference to Exhibits filed with the Form 10-K for the Year Ended December 31, 1996.
(5) Incorporated herein by reference to Exhibits filed with the Form 10-Q for the Quarter Ended June 30, 1995.
(6) Incorporated herein by reference to Exhibits filed with the Form 10-K for the year ended December 31, 1993.
(7) Incorporated herein by reference to Exhibits filed with the Form 10-K for the Year Ended December 31, 1994.
(8) Incorporated herein by reference to Exhibits filed with the Form 10-K for the Year Ended December 31, 1992.
(9) 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.
(10) Incorporated herein by reference to Appendix A (pages 21 through 33) of the Proxy Statement, dated March 29, 1996.
(11) To be filed.
</FN>
</TABLE>
<PAGE> 41
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 3/26/99
- ------------------------------ -------
Park T. Adikes
Chairman of the Board and
Chief Executive Officer
<TABLE>
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:
<CAPTION>
<S> <C> <C> <C>
/s/ Park T. Adikes 3/26/99 /s/ Thomas R. Lehmann 3/26/99
- ----------------------------- ------- --------------------------------- -------
Park T. Adikes Thomas R. Lehmann
Chief Executive Officer Chief Financial Officer
Chairman of the Board (Principal Accounting Officer)
(Director)
/s/ Joseph C. Cantwell 3/26/99 /s/ Cynthia Gibbons 3/26/99
- ----------------------------- ------- --------------------------------- -------
Joseph C. Cantwell Cynthia Gibbons
Director Director
/s/ James E. Gibbons, Jr. 3/26/99 /s/ Edward P. Henson 3/26/99
- ----------------------------- ------- --------------------------------- -------
James E. Gibbons, Jr. Edward P. Henson
Director President and Director
/s/ Richard W. Meyer 3/26/99
- ----------------------------- -------
Richard W. Meyer
Director
</TABLE>
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,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic earnings per share:
- -------------------------
Basic weighted average common shares 9,793 9,858 9,582 9,912
Net Income $44,388 $37,090 $10,161 $14,979
Basic earnings per common share $4.53 $3.76 $ 1.06 $ 1.51
Diluted earnings per share:
- ---------------------------
Weighted average common and dilutive potential shares 10,074 10,190 9,820 10,243
Net Income $44,388 $37,090 $10,161 $14,979
Diluted earnings per common share $4.41 $3.64 $1.03 $ 1.46
</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, 1998 1997 1996 1995 1994
- --------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total assets $1,621,649 $1,535,031 $1,516,016 $1,548,301 $1,565,095
Securities held-to-maturity/held-
for-investment, net 208,457 352,967 460,509 592,060 728,630
Loans receivable, net 1,169,659 999,745 854,774 768,245 711,295
Deposits 1,124,166 1,121,203 1,144,393 1,163,446 1,204,424
Federal Home Loan Bank of
New York ("FHLB-NY") advances 50,000 - - - -
Retained income 337,474 311,436 289,588 276,317 266,361
Total stockholders' equity 382,476 367,514 335,299 340,107 327,634
Selected Operating Data:
Years Ended December 31, 1998 1997 1996 1995 1994
- ------------------------ ---- ---- ---- ---- ----
Interest income $ 110,760 $ 107,742 $ 107,611 $ 107,726 $ 103,027
Interest expense 38,476 39,874 40,217 40,707 36,619
---------- ---------- ---------- ---------- ---------
Net interest income 72,284 67,868 67,394 67,019 66,408
Provision for possible
loan losses 51 648 640 636 608
(Recovery of) provision for
possible other credit losses - - (2,040) 2,040 -
---------- --------- ---------- ---------- ---------
Net interest income after
provision for possible
credit losses 72,233 67,220 68,794 64,343 65,800
Non-interest income 12,901 21,929 5,081 3,995 6,752
Non-interest expense 27,458 27,434 27,598 29,561 30,937
---------- ---------- --------- ---------- ---------
Income before provision for
income taxes 57,676 61,715 46,277 38,777 41,615
Provision for income taxes 13,288 24,625 19,552 16,603 18,018
---------- ---------- ---------- ---------- ---------
Net income $ 44,388 $ 37,090 $ 26,725 $ 22,174 $ 23,597
========== ========== ========== ========== =========
Basic earnings per common share $4.53 $3.76 $2.66 $2.09 $2.13
===== ===== ===== ===== =====
Diluted earnings per common share $4.41 $3.64 $2.56 $2.01 $2.04
===== ===== ===== ===== =====
Cash dividends per common share $1.60 $1.40 $1.20 $1.00 $ .72
===== ===== ===== ===== =====
</TABLE>
<PAGE>
Quarterly Results
(In Thousands, Except Per Share Amounts and Yields)
- ---------------------------------------------------
<TABLE>
1998 Quarter Ended
------------------
<CAPTION>
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Interest income $27,398 $28,277 $27,581 $27,504
Interest expense 9,642 9,742 9,714 9,378
------- ------- -------- -------
Net interest income 17,756 18,535 17,867 18,126
Provision for possible loan losses 14 14 13 10
------- ------- ------- -------
Net interest income after provision
for possible loan losses 17,742 18,521 17,854 18,116
Non-interest income 1,656 5,804 3,498 1,943
Non-interest expense 6,786 6,881 7,151 6,640
------- ------- ------- -------
Income before provision for income taxes 12,612 17,444 14,201 13,419
Provision for income taxes 4,948 2,258 2,824 3,258
------- ------- ------- -------
Net income $ 7,664 $15,186 $11,377 $10,161
======= ======= ======= =======
Basic earnings per common share $ .78 $1.54 $1.16 $1.06
===== ===== ===== =====
Diluted earnings per common share $ .75 $1.49 $1.13 $1.03
===== ===== ===== =====
Stock Prices, Dividends and Yields:
High $57.13 $59.44 $60.00 $54.38
Low $45.75 $53.44 $44.75 $45.13
Close $55.94 $58.56 $51.31 $54.38
Cash dividends per common share $ .40 $ .40 $ .40 $ .40
Dividend yield1 3.11% 2.83% 3.05% 3.22%
1997 Quarter Ended
------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
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%
<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
JSB Financial, Inc. is the holding company for Jamaica Savings Bank. The Bank's
primary business is attracting deposits from the general public and investing
deposits, along with cash flows generated from operating, investing and other
financing activities, in first mortgage loans, U.S. Government and federal
agency securities, CMOs and consumer type loans. The Company's mortgage
portfolio is comprised primarily of mortgages secured by multi-family and
cooperative apartment buildings. To a lesser extent, the Bank originates
mortgages for one-to four-family homes, commercial real estate properties and
construction projects.
As a unitary savings and loan holding company, the Company's results of
operations are significantly affected by changes in market interest rates,
general economic and competitive conditions, as well as government policies and
actions of regulatory authorities. The Company considers net interest income
plus loan fees and service charges as its "core revenue". 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.
Operating results are also affected by non-interest income and non-interest
expense. Items included in non-interest income may vary significantly from
period to period. These items may, but do not necessarily, include results of
real estate operations, gains or losses on the sale of equity securities, loan
servicing income and various other miscellaneous income/loss items. The
principal components of non-interest expense are compensation and employee
benefits, occupancy costs and other general and administrative expenses.
Management is focused on providing quality service as the Bank's key strategy
for maintaining its relationships with its customers. Within recent years, the
Bank has expanded products and services, including providing automated telephone
banking 24 hours a day, 365 days a year, issuing credit cards, which portfolio
is owned and managed by an unrelated financial institution that incurs all risk
of loss, and accepting automated teller machine ("ATM") transactions for
MasterCard(R), VISA(R), NYCE(R), CIRRUS(R), PLUS(R), Pulse(R) and HONOR(R)
networks. By offering these products and services, the Company is providing
services essential to its customers and earning fee income. In addition, the
Company has continued to invest in technology to further improve convenience and
service to its customers, while controlling costs.
Financial Condition
Assets increased by $86.6 million, or 5.6%, to $1.622 billion at year-end 1998,
compared to assets of $1.535 billion at year-end 1997. At December 31, 1998, net
mortgage loans were $1.147 billion, comprising 70.7% of total assets, as
compared to $970.7 million, or 63.2% of total assets at December 31, 1997.
Securities held-to-maturity totaled $208.5 million, or 12.9% of total assets at
December 31, 1998, of which $110.0 million was invested in U.S. Government and
federal agency securities, $95.8 million in CMOs and $2.7 million in
mortgage-backed securities ("MBS"). Unrealized gains and losses in these
portfolios are not expected to impact future results of operations, as these
securities are designated as held-to-maturity. At December 31, 1997, securities
held-to maturity totaled $353.0 million, or 23.0% of total assets. The Company's
marketable equity securities ("MES") are designated as available-for-sale and
carried at estimated fair value, with net unrealized gains and losses excluded
from earnings and reported net of tax effects in a separate component of
stockholders' equity, until realized. At December 31, 1998, these securities,
which had a cost basis of $10.9 million, were carried at their aggregated fair
value of $83.6 million.
During 1998, the Company continued to shift assets into fixed rate mortgage
loans, which have longer maturities and produce higher yields than the
short-term investments in U.S. Government and federal agency securities and CMOs
they replaced. Given the combination of extended asset maturities, increased
yield on assets and interest rate risk, along with the deposit trend, management
decided that some degree of leveraging would be beneficial. On December 8, 1998,
the Bank took a $50.0 million fixed rate advance from the FHLB-NY, with a
balloon payment due in ten years. By lengthening the maturity of a portion of
the Company's funding liabilities at a relatively low long-term fixed rate,
management believes the Company's exposure to interest rate risk is mitigated.
Liabilities increased by $71.7 million, or 6.1%, to $1.239 billion at December
31, 1998 from $1.168 billion at December 31, 1997, of which $50.0 million is
attributable to the FHLB-NY advance. Aside from the $3.0 million, or 0.3%,
increase in deposits during 1998, year-end deposit levels had been declining
since 1992. The Bank's deposit trend is similar to that experienced by the
thrift industry, which in general, has used non-deposit sources to fund recent
growth. Management will continue to analyze deposit trends, mortgage demand and
market conditions, and may consider additional FHLB-NY advances in the future.
While the FHLB-NY advances are expected to lessen the Company's exposure to
interest rate risk, over time, the higher cost associated with the long-term
advances may result in narrowing the net interest rate spread and interest
margin. Future movements in market interest rates, asset and liability
composition, as well as other market and economic conditions, will also
influence the Company's results of operations.
Stockholders' equity totaled $382.5 million at December 31, 1998, an increase of
$15.0 million from December 31, 1997. This increase primarily reflects: earnings
of $44.4 million for 1998; an increase in unrealized gains on securities
classified as available-for-sale, net of tax effects, of $12.4 million; $3.2
million for tax benefits related to various of the Company's stock based plans
and $2.0 million received in connection with the exercise of common stock
options. These increases to stockholders' equity were partially off-set by:
$31.5 million used to make repurchases of the Company's common stock; $15.7
million used for cash dividends, and other changes to stockholders' equity,
primarily related to the reissuance of treasury stock pursuant to the Company's
stock based compensation plans.
Asset Composition and Strategy
Much of the 1998 activity in the mortgage loan portfolio can be attributed to
the low level of interest rates. As mortgage rates reached 30-year lows, the
Bank's mortgage loan originations, refinancing and satisfaction activity soared.
This scenario fostered the Company's goal to increase its mortgage portfolio,
enabling it to originate loans that meet with the Bank's underwriting standards.
The increase in mortgage loans has generally been funded with proceeds from
maturities of U.S. Government and federal agency securities. The Company's
multi-family and underlying cooperative mortgage loans generally have maturities
of ten years or less and produce higher yields than do similar termed U.S.
Government and federal agency securities. These mortgages inherently present
greater credit risk than the securities they replaced. (See Asset Quality and
Allowances, which follows.) This shift in asset composition and the decline in
interest rates are the primary factors which contributed to the increases in the
Company's net interest margin and interest rate spread during 1998.
At December 31, 1998, 87.0% of the mortgage portfolio was comprised of mortgages
secured by multi-family and cooperative apartment buildings. The repayment of
multi-family loans is subject, among other things, to adverse changes in the
real estate market and the economy to a far greater extent than is repayment of
one-to four-family mortgage loans. Thus, these loans generally pose greater
credit risk to the Bank, compared to loans secured by one-to four-family
dwellings.
During 1998, investments in CMOs decreased, as payments of $65.4 million were
received from maturities and amortization and purchases of $57.1 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"), MBS which are collateralized by whole loans. At
December 31, 1998, the estimated average remaining maturity of the CMO portfolio
was approximately twenty-six months. Management plans to continue to purchase
CMOs which meet its investment guidelines, when available.
Asset Quality and Allowances
Non-performing loans to total loans at December 31, 1998 was 0.04%, well below
industry averages, compared to 1.32% at December 31, 1997. Non-performing loans
at December 31, 1997 included a $12.8 million underlying cooperative mortgage
loan on which the Bank had commenced foreclosure proceedings. This mortgage
loan, which comprised 96.1% of non-performing loans and 92.8% of non-performing
assets at December 31, 1997, was satisfied during the second quarter of 1998,
resulting in the Company recovering all interest, late charges and expenses
incurred in connection with this loan.
The ratio of non-performing assets to total assets at December 31, 1998 also
decreased in connection with the satisfaction of the non-performing mortgage
loan, discussed above. At December 31, 1998, non-performing assets to total
assets was 0.04%, compared to 0.90% at December 31, 1997.
In addition to non-performing loans, non-performing assets include ORE and any
other investments not performing in accordance with contractual terms. ORE
represents real estate properties owned as a result of foreclosure or obtained
by receiving a deed in lieu of foreclosure. At December 31, 1998, ORE of
$277,000 was comprised of the remaining 29 residential cooperative apartments
received in connection with the 1994 troubled debt restructuring of a mortgage
secured by a cooperative apartment building. Management closely monitors
properties that are obtained through foreclosure actions and regularly assesses
their value.
The Company's increased concentration in mortgage loans is accompanied by
management's continued commitment to asset quality. The Bank's underwriting
standards and regular monitoring of assets and allowances are the primary means
for identifying and limiting losses. However, 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 assets. Such a
scenario could result in higher provisions for possible loan losses and ORE and
related expenses, reduced levels of interest earning assets and interest income.
During 1998, no additions were made to the general valuation mortgage allowance,
as loan quality remained high and non-performing loans declined substantially,
as previously discussed. Management has not modified the Company's underwriting
standards, nor has the Company entered into any new lending category of any
significance to foster recent loan growth. The ratio of mortgage allowances to
mortgage loans (net of deferred fees and unearned discounts) at December 31,
1998 was 0.50%; however, the mortgage allowance of $5.7 million was 27.0 times
the $213,000 of non-performing mortgage loans.
Liquidity and Capital Resources
The Company's primary source of funds is deposits. Significant cash flows are
provided by proceeds from maturities of securities held-to-maturity,
amortization on and maturities of loans and from operations. Overall liquidity
is affected by the Company's operating, financing and investing activities, as
well as the interest rate environment, economic conditions and competition.
Due to the increased emphasis on mortgage loans, which replaced a significant
portion of the short-term investments in U.S. Government and federal agency
securities during 1998, the Company's exposure to interest rate risk increased.
In response to this increased interest rate risk, management determined that
some degree of leveraging would be beneficial. In addition to providing an
alternative source of funds to deposits, terms available on FHLB-NY advances
allowed the Company to reduce interest rate risk by more closely matching the
repricing of some assets with the repricing of the advance liability. The Bank,
should management so decide, has the ability to take additional advances from
the FHLB-NY. The amount of future advances, if any, would be determined by
management, subject to the approval and terms of the FHLB-NY.
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. Should deposits continue to
migrate into higher cost term accounts, deposits decrease significantly, or
additional long-term advances from the FHLB-NY be taken, interest rate spreads
and margins are likely to decline. In determining whether additional advances
will be taken, management will assess deposit levels and trends, loan demand,
the Company's overall liquidity and other market conditions in the future.
Management monitors deposit levels and sets interest rates with the intent of
influencing those levels and preserving the Bank's deposit base. While deposits
increased by $3.0 million, or .30%, during 1998, deposit composition continued
to shift. The most relevant change was the shift between certificate of deposit
accounts ("CDs"), which increased $24.0 million, or 5.9%, and passbook accounts,
which decreased by $23.8 million, or 4.4%. In addition, the Bank's demand
deposits (i.e. checking accounts) increased by $13.5 million and negotiable
order of withdrawal ("NOW") accounts increased by $1.6 million, while money
market accounts decreased by $14.7 million. As part of the mortgage term, the
Bank generally requires mortgagees for multi-family apartment buildings to
maintain tenants' rent security accounts with the Bank. The $2.3 million
increase in lease security accounts reflects the growth in multi-family
mortgages during 1998. (See Note 16 to the Consolidated Financial Statements,
herein.)
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 and shift deposits out of savings
accounts and into CDs, which offer higher yields. Management attributes the
decline of deposits and migration to CDs to the relatively low interest rate
environment and strong equities market that has prevailed over the last several
years. Under the Company's present interest rate structure, management expects
gradual changes in deposit composition and total deposits.
During 1998, operating activities provided $52.5 million, the greatest source of
funds, on a net basis. The Company's investing activities used $26.1 million,
net. The largest uses of funds for investing activities included purchases of
U.S. Government and federal agency securities, mortgage originations and
purchases of CMOs, respectively. Financing activities provided $11.5 million,
net. This net increase reflects the Company receiving a $50.0 million advance
from the FHLB-NY in December, 1998. (See Management of Interest Rate Risk,
herein.) Significant uses of funds for the Company's financing activities
included $31.5 million to repurchase 620,100 shares of the Company's common
stock and $15.7 million to make dividend payments on its common stock.
Liquidity management for the Company is both a daily and a long-term function.
During 1998, the Company maintained strong liquidity, which management expects
to continue in the future. The Company's most liquid assets are cash and cash
equivalents. The Company considers all short-term investments with a maturity of
three months or less from the time of purchase to be cash equivalents.
Historically, the Company's cash equivalents have been comprised of federal
funds sold. The amount of cash and cash equivalents is affected by the funds
used for and generated by operating, financing and investing activities during
any given period. At December 31, 1998, the U.S. Government and federal agency
securities portfolio had an average remaining maturity of two months and the CMO
portfolio had an average anticipated remaining maturity of twenty-six months.
(See the Consolidated Statements of Cash Flows, which are part of the
Consolidated Financial Statements, herein.)
The Bank is required to maintain minimum levels of liquid assets as defined by
Office of Thrift Supervision ("OTS") regulations. This requirement, which may be
varied at the discretion of the OTS, is based upon a percentage of deposits and
short-term borrowings. The required ratio at December 31, 1998 was 4.0%. The
Bank's average liquidity ratios were 26.2% and 29.9% for the years ended
December 31, 1998 and 1997, respectively. Management has structured the assets
and liabilities of the Company to enable the Bank to meet all regulatory
liquidity requirements.
Management of Interest Rate Risk
The Company's primary market risk is interest rate volatility. Net interest
income is the Company's primary component of income. Changes in interest rates,
particularly if there is a substantial variation in the timing between the
repricing of the Company's assets and the liabilities which fund them, subjects
the Company's net interest income to substantial risk. Management seeks to
address this risk by monitoring and controlling the variation in repricing
intervals between its assets and liabilities. To a lesser extent, the Company
also monitors its interest rate sensitivity by analyzing the estimated changes
in market value of its assets and liabilities assuming various interest rate
scenarios. As discussed below, there are a variety of factors which influence
the repricing characteristics and market values of any given asset or liability.
The principal objectives of the Company's interest rate risk management are to
evaluate the interest rate risk inherent in certain assets and liabilities,
determine the level of risk appropriate given the Company's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board of Directors' approved
guidelines. Through such management, the Company seeks to reduce the
vulnerability of its operations to changes in interest rates. The Bank's Board
of Directors reviews the Bank's interest rate risk position on a quarterly
basis.
Interest Rate Risk
At December 31, 1998, 70.7% of the Company's assets were invested in mortgage
loans, which were primarily at fixed rates. Multi-family and underlying
cooperative mortgage loans, which are predominantly underwritten with fixed
rates and ten year maturities, comprised approximately 87.0% of the mortgage
portfolio. In addition, the Company remained highly liquid with 7.0% of assets
invested in cash and cash equivalents and 11.9% invested in securities
held-to-maturity, that were scheduled to mature within twelve months and
securities available-for-sale. The Company's investments in U.S. Government and
federal agency securities generally have maturities ranging from three months to
two years at the time of purchase. As interest rates increase, the Company
generally purchases securities with longer terms, and may purchase securities
with maturities of up to three years.
Within recent years, management has been extending asset maturities by
increasing mortgages originated for its portfolio, while reducing its
investments in short-term, U.S. Government and federal agency securities. This
strategy has tended to improve the Company's interest rate spreads and net
interest margins. However, due to the lengthening of asset maturities without
corresponding lengthening of funding liabilities, the Company's exposure to
interest rate risk has increased. In recognition of this risk factor, management
has closely monitored the pricing of its depository products. Low-cost core
deposits, which exclude CDs, have historically displayed a low level of
volatility and help limit the Company's exposure to interest rate risk. In
addition, management determined that terms available on fixed rate advances from
the FHLB-NY were conducive to mitigating some of the increased interest rate
risk associated with the increased emphasis on mortgages. On December 8, 1998,
the Bank borrowed $50.0 million from the FHLB-NY at a fixed rate of 5.62% for
ten years.
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 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. At December 31, 1998, the Company had a negative short-term (up
to one year) gap.
The following table sets forth, as of December 31, 1998, repricing information
on earning assets and interest bearing liabilities. The data reflects estimated
principal amortization and prepayments on mortgage loans based upon 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. MES 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>
<TABLE>
At December 31, 1998
--------------------
More More More More
Than Than Than Than
1 Year 2 Years 3 Years 4 Years More
1 Year to to to to Than Fair
or Less 2 Years 3 Years 4 Years 5 Years 5 Years Total Value 1
------------------------------------------------------------------------------------
(Dollars in Thousands)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Mortgage loans, net 2..........$ 49,793 $ 64,055 $ 66,839 $ 101,279 $ 69,065 $ 801,625 $ 1,152,656 $1,197,873
Average interest rate ....... 8.76% 8.78% 8.78% 8.22% 8.25% 7.61%
U.S. Government and federal
agency securities, net ....... 109,996 - - - - - 109,996 110,026
Average interest rate ....... 5.14% - - - - -
Marketable equity securities
and other investments, net 3.. - - - - - 92,514 92,514 92,514
Average interest rate ....... - - - - - -
CMOs, net...................... - - - - 4,401 91,389 95,790 95,997
Average interest rate ....... - - - - 5.75% 6.15%
MBS, net....................... 17 463 - - - 2,191 2,671 2,883
Average interest rate ....... 12.25% 10.50% - - - 9.63%
Other loans, net 2............. 481 1,435 9,944 1,660 1,641 7,766 22,927 22,915
Average interest rate ....... 8.33% 8.22% 4.93% 7.79% 7.80% 8.07%
Federal funds sold............. 99,000 - - - - - 99,000 99,000
Average interest rate ....... 4.74% - - - - -
--------- ------- ------- -------- ------- -------- ----------- ----------
Total interest earning assets 259,287 65,953 76,783 102,939 75,107 995,485 1,575,554 1,621,208
--------- -------- -------- --------- -------- --------- ----------- ----------
Interest bearing deposit accounts:
Passbook....................... 522,671 - - - - - 522,671 522,671
Average interest rate ....... 2.45% - - - - -
Lease security accounts........ 21,031 - - - - - 21,031 21,031
Average interest rate ....... 2.42% - - - - -
CDs............................ 367,226 37,388 10,832 9,134 8,980 - 433,560 435,545
Average interest rate ....... 4.76% 5.10% 5.12% 5.53% 5.38% -
Money market accounts.......... 62,747 - - - - - 62,747 62,747
Average interest rate ....... 2.77% - - - - -
NOW accounts................... 37,005 - - - - - 37,005 37,005
Average interest rate ....... 2.10% - - - - -
FHLB-NY advances............... - - - - - 50,000 50,000 50,249
Average interest rate ....... - - - - - 5.62%
--------- -------- --------- --------- --------- -------- ----------- ----------
Interest bearing liabilities. 1,010,680 37,388 10,832 9,134 8,980 50,000 1,127,014 1,129,248
---------- -------- --------- --------- --------- -------- ---------- -----------
Interest sensitivity gap
per period.....................$(751,393) $ 28,565 $ 65,951 $ 93,805 $ 66,127 $ 945,485 $ 448,540
========= ========= ========= ========= ========= ========= ==========
Cumulative interest
sensitivity gap................$(751,393) $(722,828)$(656,877)$(563,072) $(496,945)$ 448,540 $ -
========= ========= ========= ========= ========= ========= ==========
Percentage of gap per period to
total assets................. (46.34%) 1.76% 4.07% 5.78% 4.08% 58.30%
Percentage of cumulative gap to
total assets................ (46.34%) (44.58%) (40.51%) (34.73%) (30.65%) 27.65%
<FN>
1 See Note 25 to the Consolidated Financial Statements for the methods,
assumptions and limitations regarding the fair values presented.
2 Balance includes non-performing loans, as amount is immaterial and is not
reduced for the allowance for possible loan losses.
3 Securities available-for-sale are shown including the market value
appreciation of $72.7 million, before tax.
</FN>
</TABLE>
<PAGE>
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 for 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 December 31, 1998, as calculated by the Company.
<TABLE>
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)
<CAPTION>
<S> <C> <C> <C> <C> <C>
+200 $356,281 $ (60,153) (14.44)% 21.98% (2.59)%
+100 382,871 (33,563) (8.06) 23.14 (1.43)
0 416,434 - - 24.57 -
-100 463,902 47,468 11.40 26.50 1.93
-200 518,059 101,625 24.40 28.56 3.99
<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>
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, 1998, 1997 and 1996 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 the amortization of fees which are considered
adjustments to yields. Average loan balances and yields include non-accruing
loans.
<PAGE>
<TABLE>
Year Ended December 31,
--------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- -------------------------
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)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets:
Mortgage loans, net...$1,064,723 $ 87,149 8.19% $ 878,697 $ 74,149 8.44% $ 792,579 $ 69,113 8.72%
Debt and equity
securities, net1..... 183,217 11,179 6.10 325,964 19,584 6.01 361,106 21,695 6.01
CMOs, net............. 101,867 6,218 6.10 133,418 7,937 5.95 179,336 10,063 5.61
Other loans, net...... 25,888 1,838 7.10 28,119 2,070 7.36 28,393 2,138 7.53
MBS, net.............. 3,330 319 9.58 4,855 499 10.28 6,540 739 11.30
Federal funds sold.... 76,357 4,057 5.31 64,345 3,503 5.44 72,221 3,863 5.35
---------- -------- ---------- -------- ---------- ---------
Total interest earning
assets................. 1,455,382 110,760 7.61 1,435,398 107,742 7.51 1,440,175 107,611 7.47
Non-interest earning
assets................. 105,922 99,180 93,539
---------- ---------- ----------
Total assets.........$1,561,304 $1,534,578 $1,533,714
========== ========== ==========
Liabilities and stockholders' equity
Interest bearing
liabilities:
Passbook and other.....$ 666,672 $ 16,318 2.45% $ 699,715 $ 19,106 2.73% $ 743,526 $ 20,440 2.75%
CDs.................... 421,359 21,973 5.21 397,832 20,768 5.22 383,215 19,777 5.16
FHLB-NY advances....... 3,288 185 5.63 - - - - - -
---------- -------- ---------- -------- ---------- --------
Total interest
bearing liabilities.... 1,091,319 38,476 3.53 1,097,547 39,874 3.63 1,126,741 40,217 3.57
Non-interest bearing
liabilities.......... 95,791 88,423 74,928
---------- ---------- ----------
Total liabilities.... 1,187,110 1,185,970 1,201,669
Total stockholders'
equity.............. 374,194 348,608 332,045
---------- ---------- ----------
Total liabilities
and stockholders'
equity..............$1,561,304 $1,534,578 $1,533,714
========== ========== ==========
Net interest income/
interest rate spread2.. $ 72,284 4.08% $ 67,868 3.88% $ 67,394 3.90%
======== ==== ======== ==== ======== ====
Net interest earning
assets/net interest
margin3................$ 364,063 4.97% $ 337,851 4.73% $ 313,434 4.68%
========== ==== ========== ==== ========== =====
Ratio of interest
earning assets to
interest bearing
liabilities............ 1.33x 1.31x 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>
Year Ended December 31, 1998 Year Ended December 31, 1997
Compared to Compared to
Year Ended December 31, 1997 Year Ended December 31, 1996
---------------------------- ----------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In Thousands)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Mortgage loans, net .............. $15,259 $ (2,259) $ 13,000 $ 7,313 $(2,277) $ 5,036
Debt and equity securities, net .. (8,694) 289 (8,405) (2,111) - (2,111)
CMOs, net......................... (1,915) 196 (1,719) (2,705) 579 (2,126)
MBS, net.......................... (148) (32) (180) (177) (63) (240)
Other loans, net ................. (161) (71) (232) (21) (47) (68)
Federal funds sold ............... 640 (86) 554 (424) 64 (360)
------- -------- -------- ------- ------- -------
Total ...................... 4,981 (1,963) 3,018 1,875 (1,744) 131
------- -------- -------- ------- ------- -------
Interest bearing liabilities:
Passbook and other ............... (942) (1,846) (2,788) (1,186) (148) (1,334)
CDs............................... 1,244 (39) 1,205 759 232 991
FHLB-NY advances.................. 185 - 185 - - -
------- -------- -------- ------- ------- --------
Total....................... 487 (1,885) (1,398) (427) 84 (343)
------- -------- -------- ------- ------- -------
Net change in net interest income... $ 4,494 $ (78) $ 4,416 $ 2,302 $(1,828) $ 474
======= ======== ======== ======= ======= =======
</TABLE>
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997
- ------------------------------------------------------------------------------
General
Net income for the year ended December 31, 1998 was $44.4 million, or $4.41 per
diluted share, compared with $37.1 million, or $3.64 per diluted share for the
year ended December 31, 1997. In comparing the results of operations for 1998 to
1997, management notes that, as more fully discussed below, each of the 1998 and
1997 results of operations were significantly improved by items of a
non-recurring nature.
Earnings for the year ended December 31, 1998, were significantly improved by
the following non-recurring items: (1) the Company experienced a lower effective
tax rate, principally related to the second quarter realignment of an operating
subsidiary of the Bank, resulting in tax savings of $10.7 million; (2) in
connection with the settlement of a $12.8 million underlying cooperative loan,
additional pre-tax income of $4.3 million was realized; (3) the Company
experienced a $2.1 million increase in prepayment penalties compared to 1997 and
(4) the Bank sold two subsidiary corporations, realizing pre-tax gains of
$963,000. Combined, these items contributed $14.8 million, or $1.47 per diluted
share, to net income for 1998.
Earnings for the year ended December 31, 1997, were significantly improved by
the following non-recurring items: (1) pre-tax gains of $9.3 million on sales of
real estate were realized and (2) pre-tax gains of $7.0 million on the sale of
equity securities were realized. Combined, these items contributed $9.4 million,
or $.92 per diluted share, to net income for 1997.
Interest Income
Income on mortgage loans increased by $13.0 million, or 17.5%, to $87.1 million
for 1998, from $74.1 million for 1997. The average investment in mortgage loans
increased by $186.0 million, or 21.2%, to $1.065 billion for 1998, from $878.7
million for 1997. The amount invested in mortgage loans has continued to
increase over the past nine years, both in dollar amount and as a percentage of
assets. During 1998, mortgages originated for the Bank's portfolio increased by
$56.0 million, or 27.3%, to $261.2 million, from $205.2 million during 1997. The
mortgage portfolio yield decreased to 8.19% for 1998 from 8.44% for 1997,
reflecting the lower yields on new originations.
Income on debt and equity securities decreased $8.4 million, or 42.9%, to $11.2
million for 1998, compared to $19.6 million for 1997. The decrease in income
reflected a $142.7 million, or 43.8%, decrease in the average balance of this
portfolio, while the yield for 1998 increased to 6.10% from 6.01% for 1997.
Activity in the investment securities portfolio during 1998 included purchases
of $379.0 million and maturities of $514.0 million. At December 31, 1998, the
$110.0 million debt securities portfolio had net unrealized gains of $30,000,
which are not expected to impact future income as these securities are
designated as held-to-maturity. The MES portfolio is designated as
available-for-sale and was carried at its aggregate fair value of $83.6 million
at December 31, 1998, exceeding its cost of $10.9 million.
Income on CMOs decreased by $1.7 million, or 21.7%, to $6.2 million for 1998,
from $7.9 million for 1997. Purchases of CMOs during 1998 totaled $57.1 million,
compared to $55.0 million during 1997. Principal payments on CMOs decreased to
$65.4 million during 1998 from $106.5 million during 1997. The average
investment in CMOs decreased by $31.6 million, or 23.6%, to $101.9 million for
1998, from $133.4 million for 1997. During 1998, the CMO portfolio yielded 6.10%
compared with 5.95% for 1997. At December 31, 1998, the $95.8 million CMO
portfolio had net unrealized gains of $207,000 (comprised of unrealized gains of
$310,000 and unrealized losses of $103,000), which are not expected to impact
future results of operations, as CMOs are designated as held-to-maturity.
Income on other loans decreased by $232,000, or 11.2%, to $1.8 million for 1998,
from $2.1 million for 1997. This decrease reflects the decline in the average
other loan portfolio of $2.2 million, accompanied by a decrease in the yield on
the portfolio to 7.10% for 1998, from 7.36% for 1997. During 1998, the Bank sold
the $5.1 million student loan portfolio to Sallie Mae, realizing a pre-tax gain
of $64,000. As part of the sale transaction, Sallie Mae agreed to purchase all
future student loans originated by the Bank on which repayment by the student
has not begun. This allows the Bank to continue to receive interest and special
allowances (or rate subsidies) while the student is in school and eliminates the
high cost of servicing the loan once repayment begins. Student loans, which had
a balance of $153,000 at December 31, 1998, are carried at fair value, in the
aggregate.
During 1998, MBS continued to amortize, as no additional investments have been
made in these securities. Income earned on MBS decreased to $319,000 during 1998
from $499,000 during 1997. There were no sales of MBS during 1998 or 1997. At
December 31, 1998, there were unrealized gains of $212,000 in the $2.7 million
MBS portfolio, which are not expected to impact future results of operations, as
MBS are designated as held-to-maturity.
Income from federal funds sold increased to $4.1 million for 1998 from $3.5
million for 1997. The average balance invested in federal funds sold increased
to $76.4 million during 1998, compared to $64.3 million during 1997. The average
yield on federal funds sold decreased to 5.31% during 1998 from 5.44% during
1997. Investments in federal funds sold, which are cash equivalents, provide the
liquidity 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 on Deposits
Interest expense on deposits decreased by 4.0%, to $38.3 million for 1998 from
$39.9 million for 1997. This decrease in interest expense resulted, despite the
continued shift from lower cost passbook accounts into higher cost CDs. In
general, declining market interest rates during 1998 allowed the Bank to lower
rates on deposits. For 1998, the average cost of deposits was 3.52%, compared to
3.63% for 1997. In addition, while total deposits at year end 1998 had increased
slightly compared to year end 1997, average interest bearing deposits decreased
by $9.5 million, or .9%, to $1.088 billion for 1998, from $1.098 billion for
1997.
Interest on FHLB-NY Advances
On December 8, 1998, the Bank borrowed $50.0 million from the FHLB-NY, in the
form of a fixed rate ten year non-amortizing advance. As a result, interest
expense on the advance for 1998 was $185,000, reflecting an interest rate of
5.62%. The Bank did not have any borrowed funds during 1997.
Net Interest Income
The Bank's profitability is dependent to a large extent upon its net interest
income, which is the difference between income generated from interest earning
assets and expense incurred for interest bearing liabilities. 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 $4.4 million, to $72.3 million for 1998, from
$67.9 million for 1997. For 1998, the net interest margin increased to 4.97%
from 4.73% for 1997. The interest rate spread increased to 4.08% for 1998 from
3.88% for 1997. The yield on interest earning assets increased to 7.61% for 1998
from 7.51% for 1997. These increases are primarily the result of the increased
emphasis on mortgage loans during 1998.
The average balance of interest earning assets increased by $20.0 million or
1.4% for 1998, compared to 1997. Average interest earning assets as a percentage
of interest bearing liabilities increased to 133% for 1998, compared to 131% for
1997. This increase reflects the continued decrease in non-interest earning
assets, such as real estate held-for-sale and ORE.
Provision for Possible Loan Losses
The provision for possible loan losses for 1998 decreased to $51,000 compared to
$648,000 for 1997. Based on management's internal loan review analysis, no
additions to the general valuation mortgage allowance were considered necessary
during 1998. During 1997, $600,000 of provisions were made to increase the
general valuation mortgage allowance. Provisions made against the other loan
portfolio, which is comprised of consumer type loans, increased slightly to
$51,000 for 1998, compared to $48,000 for 1997. 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.
Non-Interest Income
Non-interest income for 1998 decreased by $9.0 million, or 41.2%, to $12.9
million, compared to $21.9 million in 1997. The decrease in income from real
estate operations of $9.7 million reflects the pre-tax gain realized during 1997
of $9.2 million 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.
The 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. There were no sales of MES during
1998, however, during 1997, the Bank sold MES with a cost basis 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 assets; the availability of alternative investments; liquidity, tax
and other regulatory considerations. Future gains/losses on the sale of MES may
be recognized; however, management can provide no assurance as to the timing or,
whether gains or losses will actually result from future sales from the MES
portfolio.
Non-interest income for 1998 includes a $4.3 million recovery of prior period
expenses, unaccrued interest and late charges on a troubled loan. This recovery
resulted from the final settlement on a $12.8 million underlying cooperative
mortgage loan. (See Asset Quality and Allowances, herein.)
Loan fees and service charges increased by $1.9 million to $5.9 million for
1998, from $4.0 million for 1997. The decline in market interest rates sparked
refinancing and satisfaction activity, which resulted in an increase in
prepayment penalties, primarily on multi-family mortgage loans.
The net increase of $1.5 million in miscellaneous income to $2.0 million for
1998, from $527,000 for 1997, reflects gains of: $963,000 on the sale of two of
the Bank's subsidiary corporations; $394,000 of real estate tax refunds for
prior years on the Company's headquarters; and a $173,000 medical insurance
premium refund for 1997.
Non-Interest Expense
Non-interest expense remained relatively stable, increasing by $24,000, to $27.5
million for 1998, compared to $27.4 million for 1997. 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. During 1997, the Company spent $1.0 million for
advertising. After analyzing the results from various forms of advertising, the
Company reduced certain types of advertising during 1998, which resulted in a
$124,000, or 12.3% decrease in advertising costs compared to 1997. The Company
is continuing to monitor the effectiveness to its advertising campaigns and may
consider future spending adjustments.
Provision for Income Taxes
Income taxes decreased by $11.3 million, or 46.0%, to $13.3 million for 1998
from $24.6 million for 1997. This decrease is reflective of the significant
decrease in the Company's effective tax rate from 39.9% for 1997, to 23.0% for
1998. The effective tax rate for 1998, reflects tax benefits recognized from the
realignment of an operating subsidiary of the Bank during the second quarter of
1998. (See Note 14 to the Consolidated Financial Statements.)
<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 and sales of equity securities generated pre-tax
gains of $7.0 million. Combined, these items contributed $9.4 million, or $.92
per diluted share, to net income for 1997. 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.
Interest Income
Income on mortgage loans increased by $5.0 million, or 7.3%, to $74.1 million
for 1997, from $69.1 million for 1996. 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. 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. The
MES portfolio is designated as available-for-sale and was carried at its
aggregate fair value of $62.2 million at December 31, 1997, exceeding its cost
of $10.9 million. During 1997, the Bank sold MES having a cost of $823,000,
realizing gains of $7.0 million. During 1996, the Bank sold or redeemed MES
totaling $30,000, and realized gross gains of $4,000 and gross losses of $2,000.
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 unrealized gains of $295,000 and unrealized losses of $65,000, or
net unrealized gains of $230,000.
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. During 1997, MBS
continued to amortize, as the Bank discontinued investing in these securities.
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.
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.
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 CDs. (See Asset Composition and Strategy, herein.)
Net Interest Income
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 CDs, the cost
of interest bearing deposits increased to 3.63% for 1997, from 3.57% for 1996.
During 1997, 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.
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, resulting in recapture of the
entire allowance.
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 loan
prepayment penalties.
The 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.
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 held-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.
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. At December 31, 1997, the Bank's pension plan was fully
funded, which resulted in the Bank recognizing pension plan income. 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,
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 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 $505,000, to $5.1 million for 1997
from $5.6 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 project since
completion of the building in 1974.
Other general and administrative expense increased by $307,000, or 6.1%, to $5.3
million for 1997, from $5.0 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 25.9%, to $24.6 million for 1997 from
$19.6 million for 1996. This increase was 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 reflected certain tax benefits
attributable to an operating subsidiary of the Bank, which was formed during
1997. (See Note 14 to the Consolidated Financial Statements.)
Year 2000 Issues
The following discussion and tables contain certain forward-looking information
with respect to management's expectations for implementation and compliance with
year 2000 ("Y2K") issues and requirements. Management has analyzed the Company's
internal and outsourced computer hardware, operating systems and applications,
both information technology systems and non-information technology systems, such
as telephone, 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 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. In January 1999, for reasons unrelated to
Y2K, the Bank substantially replaced its mainframe system with a Windows NT(R)
Client/Server system. This new system had Y2K capabilities built into its
design. 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.
A member of the Bank's senior management has inventoried all of the Bank's
hardware and software programs and has contacted all outside vendors inquiring
as to the status of Y2K compliance. Management is not aware of any vendor who
does not expect to be Y2K compliant and 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. The
applications will be loaded and the dates used for the tests will include the
majority of the dates outlined by the Federal Financial Institutions Examination
Council.
The Company believes the required upgrades and testing will ensure completion of
the Y2K project by September 1999. 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, a vast 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 is expected to significantly reduce the Company's level of
uncertainty about internal and external Y2K implications. Should the Company
face Y2K liability, the Company's Directors and Officers Errors and Omissions
Insurance Policy may provide some relief.
<PAGE>
<TABLE>
The following table presents the Company's Y2K renovation and testing status
indicating the Company's state of readiness regarding its critical computer
systems, as they pertain to the Company as of February 28, 1999.
<CAPTION>
Hardware Operating Systems Application
-------- ----------------- -----------
System Renovated Tested Renovated Tested Renovated Tested
- ------ --------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Relational Data Base(1) Yes Yes Yes Yes Yes Yes
Local Area Network(2) Yes Yes Yes Yes Yes No
Accounting Systems Yes Yes Yes Yes Yes Yes
Federal Reserve
Wire System(3) Yes No Yes No Yes No
Check Processing Yes No Yes No Yes No
ATMs(4) No No No No No No
NYCE(4) No No No No No No
<FN>
(1) During January 1999, the Company replaced its mainframe with a relational
data base system, which now supports all of the critical applications
previously supported by the mainframe system. Only non-critical
applications remain supported by the mainframe system.
(2) Application is expected to be internally tested by March 31, 1999.
(3) Expected to be internally tested during the second quarter of 1999.
(4) Management expects these third party systems to be upgraded and tested
during the second quarter of 1999.
</FN>
</TABLE>
<TABLE>
The following table presents the Company's Y2K contingency plan for the Bank's
critical systems should they fail to meet Y2K compliance deadlines, or
ultimately fail to be Y2K compliant in the future.
<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 manual system
Federal Reserve
Wire System Use off-line system
Check Processing Manual processing
ATMs Customers to use branches
NYCE Customers to use the Bank's ATM's or branches
</TABLE>
Impact of New Accounting Standards To Be Adopted
In June of 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 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 designated 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.
Statement 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of this Statement should be as of the
beginning of an entity's fiscal quarter. When implemented, hedging relationships
must be designated anew and documented pursuant to the provisions of Statement
133. Earlier application of all of the provisions of Statement 133 is
encouraged, but it is permitted only as of the beginning of any fiscal quarter
that begins after the issuance of this Statement. Statement 133 should not be
applied retroactively to financial statements of prior periods. The Company does
not expect the adoption of Statement 133 to have a material affect on its
financial condition or results of operations.
Private Securities Litigation Reform Act Safe Harbor Statement
In addition to historical information, this Annual Report may include certain
forward looking statements based on management's current 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, the actual impact of
Y2K, 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 1998 Form
10-K.
<PAGE>
<TABLE>
JSB FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31, 1998 and 1997 (In Thousands, Except Share and Per Share Amounts)
<CAPTION>
ASSETS 1998 1997
- ------ ---- ----
<S> <C> <C>
Cash and due from banks $ 13,849 $ 12,924
Federal funds sold 99,000 62,000
---------- ---------
Cash and cash equivalents 112,849 74,924
Securities available-for-sale, at estimated fair value 83,592 62,243
Securities held-to-maturity, net (estimated fair value
of $208,906 and $353,996, respectively) 208,457 352,967
Other investments 8,922 7,645
Mortgage loans, net 1,146,915 970,737
Other loans, net 22,744 29,008
Premises and equipment, net 18,340 17,029
Interest due and accrued 8,773 9,278
Real estate held-for-sale and Other real estate 785 3,450
Other assets 10,272 7,750
---------- ----------
Total Assets $1,621,649 $1,535,031
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $1,124,166 $1,121,203
Federal Home Loan Bank of New York ("FHLB-NY") advances 50,000 -
Advance payments for real estate taxes and insurance 13,993 10,322
Official bank checks outstanding 11,604 10,405
Deferred tax liability, net 25,476 15,628
Accrued expenses and other liabilities 13,934 9,959
---------- ----------
Total Liabilities 1,239,173 1,167,517
---------- ----------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value, 15,000,000 shares
authorized; none issued) - -
Common stock ($.01 par value, 65,000,000 shares
authorized; 16,000,000 issued; 9,505,923 and
9,919,927 outstanding, respectively) 160 160
Additional paid-in capital 168,663 165,112
Retained income, substantially restricted 337,474 311,436
Accumulated other comprehensive income:
Net unrealized gain on securities available-for-sale,
net of tax 40,871 28,469
Common stock held by Benefit Restoration Plan Trust,
at cost (193,723 and 188,323 shares, respectively) (4,477) (4,199)
Common stock held in treasury, at cost (6,494,077
and 6,080,073 shares, respectively) (160,215) (133,464)
---------- ----------
Total Stockholders' Equity 382,476 367,514
---------- ----------
Total Liabilities and Stockholders' Equity $1,621,649 $1,535,031
========== ==========
<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, 1998, 1997 and 1996
(In Thousands, Except Per Share Amounts)
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest Income:
Mortgage loans, net $ 87,149 $ 74,149 $ 69,113
Debt & equity securities, net 11,179 19,584 21,695
Collateralized mortgage obligations("CMOs"), net 6,218 7,937 10,063
Other loans, net 1,838 2,070 2,138
Mortgage-backed securities("MBS"), net 319 499 739
Federal funds sold 4,057 3,503 3,863
--------- --------- ---------
Total Interest Income 110,760 107,742 107,611
--------- --------- ---------
Interest Expense:
Deposits 38,291 39,874 40,217
FHLB advances 185 - -
--------- -------- ---------
Total Interest Expense 38,476 39,874 40,217
--------- -------- ---------
Net Interest Income 72,284 67,868 67,394
Provision for Possible Loan Losses 51 648 640
Recovery of Provision for Possible Other Credit Losses - - (2,040)
--------- --------- ---------
Net Interest Income After Provision
for Possible Credit Losses 72,233 67,220 68,794
--------- --------- ---------
Non-Interest Income:
Real estate operations, net 714 10,442 1,767
Loan fees and service charges 5,859 3,969 2,833
Recovery of prior period expenses and unaccrued
interest on troubled loans 4,346 - -
Gain on sale of investments, net - 6,991 2
Miscellaneous income, net 1,982 527 479
--------- --------- ---------
Total Non-Interest Income 12,901 21,929 5,081
--------- --------- ---------
Non-Interest Expense:
Compensation and benefits 15,843 15,921 16,412
Occupancy and equipment expenses (net of rental
income of $1,283, $1,287 and $1,126, respectively) 5,181 5,094 5,599
Federal deposit insurance premiums 142 149 2
Advertising 881 1,005 1,340
Other real estate expense (income), net 33 (59) (772)
Other general and administrative 5,378 5,324 5,017
--------- --------- ---------
Total Non-Interest Expense 27,458 27,434 27,598
--------- --------- ---------
Income Before Provision for Income Taxes 57,676 61,715 46,277
Provision for Income Taxes 13,288 24,625 19,552
--------- --------- ---------
Net Income $ 44,388 $ 37,090 $ 26,725
========= ========= =========
Basic earnings per common share $ 4.53 $ 3.76 $ 2.66
Diluted earnings per common share $ 4.41 $ 3.64 $ 2.56
Cash dividends per common share $ 1.60 $ 1.40 $ 1.20
<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, 1998, 1997 and 1996 (In Thousands, Except Per Share Amounts)
<CAPTION>
1998 1997 1996
---- ---- -----
<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 165,112 163,500 162,566
Net allocation of common stock
for Benefit Restoration Plan 278 924 5
Tax benefit for stock plans 3,222 688 599
Issuance of common stock for Directors' compensation 51 - -
Compensation expense for 1996 stock option plan - - 330
-------- -------- --------
Balance at end of year 168,663 165,112 163,500
-------- -------- --------
Retained Income, Substantially Restricted
Balance at beginning of year 311,436 289,588 276,317
Net income 44,388 37,090 26,725
Loss on reissuance of treasury stock (2,634) (1,437) (1,364)
Cash dividends on common stock ($1.60, $1.40, $1.20,
respectively) (15,716) (13,805) (12,090)
-------- -------- --------
Balance at end of year 337,474 311,436 289,588
-------- -------- --------
Accumulated Other Comprehensive Income:
Net Unrealized Gain on Securities Available-For-Sale, Net of Tax
Balance at beginning of year 28,469 21,795 15,750
Net unrealized holding gains on securities arising
during period (net of realized gains included in income of
$0, $6,991 and $2, respectively, and tax effect of
$8,947, $5,371 and $4,863, respectively) 12,402 6,674 6,045
-------- -------- --------
Balance at end of year 40,871 28,469 21,795
-------- -------- --------
Common Stock Held by Benefit Restoration Plan Trust, at Cost
Balance at beginning of year (4,199) (3,275) (3,270)
Common stock acquired (285) (934) (11)
Common stock distributed _7 10 6
-------- -------- --------
Balance at end of year (4,477) (4,199) (3,275)
-------- -------- --------
Common Stock Held in Treasury, at Cost
Balance at beginning of year (133,464) (136,469) (111,416)
Common stock reacquired (31,466) - (27,650)
Common stock reissued for options exercised 4,675 3,005 2,597
Common stock reissued for Directors' compensation 40 - -
-------- -------- --------
Balance at end of year (160,215) (133,464) (136,469)
-------- -------- --------
Total Stockholders' Equity $382,476 $367,514 $335,299
======== ======== ========
<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, 1998, 1997 and 1996 (In Thousands)
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income $ 44,388 $ 37,090 $ 26,725
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses 51 648 640
(Recovery of) provision for possible other credit losses - - (2,040)
Net gain on sale/redemption of equity securities - (6,991) (2)
Decrease in deferred loan fees and discounts, net (630) (418) (593)
Accretion of discount in excess of
amortization of premium on MBS and CMOs (46) (300) (578)
Accretion of discount in excess of amortization
of premium on debt securities (94) (337) (249)
Depreciation and amortization of premises and equipment 2,213 1,891 1,826
Mortgage loans originated for sale (4,839) (1,612) (1,621)
Proceeds from sale of mortgage loans originated for sale 4,821 1,636 1,737
Gain on sales of mortgage and other loans, net (47) (35) (53)
Tax benefit for stock plans credited to capital 3,222 688 599
Gain on sale of real estate held-for-sale (691) (9,992) (571)
Decrease in interest due and accrued 505 32 3,597
Payments received against Nationar claim - - 10,205
Net gain on sale of ORE - (144) (688)
Increase (decrease) in official bank checks outstanding 1,199 761 (14,748)
Other 2,445 137 1,547
--------- --------- ---------
Net cash provided by operating activities 52,497 23,054 25,733
--------- --------- ---------
Cash flows from investing activities:
Loans originated:
Mortgage loans (261,201) (205,174) (136,218)
Other loans (15,143) (21,010) (19,032)
Purchases of CMOs held-to-maturity (57,084) (55,035) (124,275)
Purchases of debt securities held-to-maturity and
securities available-for-sale (379,000) (499,920) (534,569)
Principal payments on:
Mortgage loans 85,652 60,833 46,506
Other loans 16,278 19,025 19,656
CMOs 65,381 106,545 114,105
MBS 1,353 1,590 2,047
Proceeds from maturities of U.S. Government and
federal agency securities 514,000 555,000 675,000
Proceeds from sale of other loans 5,144 681 934
Purchases of FHLB-NY stock (1,277) (786) (557)
Proceeds from sale/redemption of equity securities - 7,813 30
Purchases of premises and equipment, net of disposals (3,524) (2,091) (3,498)
Proceeds from sales of real estate held-for-sale and
ORE, net of change in real estate holdings 3,356 18,375 5,165
------- ------- -------
Net cash (used) provided by investing activities (26,065) (14,154) 45,294
------- ------- -------
<FN>
(Continued)
</FN>
</TABLE>
<PAGE>
<TABLE>
JSB FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows - Continued
Years ended December 31, 1998, 1997 and 1996 (In Thousands)
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits 2,963 (23,190) (19,053)
Increase in advance payments for real estate
taxes and insurance 3,671 2,057 34
Proceeds upon exercise of common stock options 2,041 1,568 1,233
Cash dividends paid to common stockholders (15,716) (13,805) (12,090)
Payments to repurchase common stock (31,466) - (27,650)
FHLB-NY advances 50,000 - -
--------- --------- ---------
Net cash provided (used) by financing activities 11,493 (33,370) (57,526)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 37,925 (24,470) 13,501
Cash and cash equivalents at beginning of year 74,924 99,394 85,893
--------- --------- ---------
Cash and cash equivalents at end of year $ 112,849 $ 74,924 $ 99,394
========= ========= =========
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest on deposits $ 38,333 $ 39,881 $ 40,215
========= ========= =========
Income taxes $ 5,825 $ 32,036 $ 22,370
========= ========= =========
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 $ 31,852 $ 22,905 $ 17,534
========= ========= =========
<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 Presentation and Accounting Standards Adopted During 1998
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. 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. Reclassifications have been made to prior year financial
statements to conform with the 1998 presentation.
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.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income"
("Statement 130"). Comprehensive income represents the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. Statement 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. In applying Statement 130, such items are reported in the
Consolidated Statements of Changes in Stockholders' Equity.
Effective January 1, 1998, the Company addressed SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information"
("Statement 131"). The Company determined that it has no reportable segments
pursuant to the criteria presented in Statement 131, however if such reportable
segments should exist in the future, the disclosure as required by Statement 131
would be provided.
Effective January 1, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("Statement 132").
Statement 132 revises employers' disclosures about pension and other
postretirement benefit plans, it does not change the accounting for such plans.
The adoption of Statement 132 had no impact on the Company's financial condition
or results of operations. (See Note 20.)
(b) 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.
(c) 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 other comprehensive
income, 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.
(d) Mortgage and Other 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 non-accrual status, at which time loan interest
due and accrued is reversed against interest income of the current period. A
non-accrual 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 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, the Company 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, underlying cooperative, commercial and
construction 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
January 1, 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.
(e) Allowances for Losses
Allowances for losses are estimates which 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 held-for-sale, ORE and properties securing
significant mortgages; investment ratings for debt and equity securities; and
capital and liquidity levels for correspondent banks, on an ongoing basis.
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.
The ultimate collection of the Bank's loan portfolio 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.
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 judgment using information available to them at the time of their
examination.
(f) 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.
(g) Real Estate Held-for-Sale and ORE
Real estate held-for-sale is carried at the 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.
Real estate properties acquired through foreclosure, known as 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. (See Notes 11, 12
and 13.)
(h) Income Taxes
The Company, the Bank and certain of its subsidiary corporations file
consolidated tax returns with the federal, state and local taxing authorities.
Other subsidiaries file separate domestic tax returns as required.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases (temporary differences). Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which temporary differences are expected to be recovered or settled. A valuation
allowance is provided for deferred tax assets where realization is not
considered "more likely than not". The effect of changes in tax laws or rates on
deferred tax assets and liabilities is recognized in the period that includes
the enactment date. (See Note 14.)
(i) Stock Based Compensation
SFAS No. 123 "Accounting for Stock-Based Compensation" ("Statement 123")
permits either the recognition of compensation cost for the estimated fair value
of employee stock-based compensation arrangements on the date of grant, or the
disclosure in the notes to the financial statements of the pro forma effects on
net income and earnings per share, determined as if the fair value-based method
had been applied in measuring compensation cost. The Company has adopted the
disclosure option and continues to apply Accounting Principles Bulletin Opinion
No. 25, "Accounting for Stock Issued to Employees" in accounting for its plans.
Accordingly, no compensation cost has been recognized for the Company's stock
option plans. (See Note 22.)
(j) Earnings Per Share
Basic earnings per share ("EPS") is calculated by dividing net income by
the weighted average number of common shares outstanding, with no consideration
given to potential outstanding shares. Diluted EPS is calculated using the same
method as basic EPS, but reflects the potential dilution that would occur if
stock options outstanding were exercised and converted into common stock. Common
stock equivalents are computed using the treasury stock method. (See Note 15.)
(k) 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.)
Note (2) Repurchases of Common Stock
For the year ended December 31, 1998 the Company repurchased 620,100 shares
of its outstanding common stock at an average price of $50.74. The Company did
not repurchase any shares during 1997 and repurchased 845,000 shares during 1996
at an average price of $32.72 per share. The Company issued 204,296, 136,896 and
123,256 shares of treasury stock for options exercised during 1998, 1997 and
1996, respectively. In addition, during 1998, the Company issued 1,800 shares of
treasury stock pursuant to the Directors' Stock Program. (See Note 23.) There
were 6,494,077 and 6,080,073 shares of common stock in the treasury at December
31, 1998 and 1997, respectively.
<PAGE>
Note (3) Securities
<TABLE>
The following tables set forth information regarding the Company's
securities portfolios as of December 31:
<CAPTION>
1998
----
Securities Available-for-Sale:
Estimated Gross Unrealized
Cost Fair Value Gains Losses
---- ---------- ----- ------
(In Thousands)
<S> <C> <C> <C> <C>
Marketable equity securities $ 10,869 $ 83,592 $72,746 $ 23
======== ======== ======= =======
Securities Held-to-Maturity:
Amortized Estimated Gross Unrealized
Cost Fair Value Gains Losses
--------- ---------- ----- ------
(In Thousands)
U.S. Government and federal
agency securities $109,996 $110,026 $ 38 $ 8
CMOs, net 95,790 95,997 310 103
MBS:
GNMA* 2,464 2,659 195 -
FNMA* 53 57 4 -
Freddie Mac* 154 167 13 -
-------- -------- ------- -------
Total MBS, net 2,671 2,883 212 -
-------- -------- ------- -------
Total $208,457 $208,906 $ 560 $ 111
======== ======== ======= =======
1997
----
Securities Available-for-Sale:
Estimated Gross Unrealized
Cost Fair Value Gains Losses
---- ---------- ----- ------
(In Thousands)
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
======== ======== ======= =======
<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.
There were no sales of securities during 1998. 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.
<TABLE>
Presented in the table below is the contractual maturity distribution for
debt securities held-to-maturity at December 31, 1998:
<CAPTION>
Amortized Estimated
Cost Fair Value
--------- ----------
(In Thousands)
<S> <C> <C>
Within 1 year $110,013 $110,044
After 1 year through 5 years 4,864 4,913
After 5 years through 10 years 81,730 82,046
After 10 years 11,850 11,903
-------- --------
Total $208,457 $208,906
======== ========
</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 Company 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 Company'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 Company. 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>
1998 1997
---- ----
(In Thousands)
<CAPTION>
<S> <C> <C>
Amortized cost - Securities loaned $ 9,996 $ 79,970
======== ========
Estimated fair value - Securities loaned $ 10,034 $ 80,188
======== ========
Estimated fair value - Collateral $ 10,422 $ 82,069
======== ========
</TABLE>
<PAGE>
Note (4) Other Investments
<TABLE>
Other investments at December 31, 1998 and 1997 were as follows:
<CAPTION>
1998 1997
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
-----------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Investment required by law* $ 8,892 $ 8,892 $ 7,615 $ 7,615
Other stock 30 30 30 30
-------- -------- -------- --------
Total other investments $ 8,922 $ 8,922 $ 7,645 $ 7,645
======== ======== ======== ========
<FN>
* The Bank is required to hold shares of the FHLB-NY.
</FN>
</TABLE>
Note (5) Loans
<TABLE>
Loans are summarized as follows:
<CAPTION>
December 31,
------------
1998 1997
-------------------------------
(In Thousands)
<S> <C> <C>
Mortgage loans:
Multi-family $ 702,914 $ 563,205
Underlying cooperative* 302,494 267,942
One-to four-family 75,773 73,757
Commercial 69,001 71,839
Construction 5,176 3,067
---------- ----------
Total mortgage loans 1,155,358 979,810
---------- ----------
Deferred loan fees and unearned
discounts (2,702) (3,332)
Allowance for possible loan losses (5,741) (5,741)
---------- ----------
Total mortgage loans, net $1,146,915 $ 970,737
========== ==========
Other loans:
Property improvement $ 10,652 $ 10,744
--------- ---------
Loans secured by deposit accounts 8,166 8,189
Consumer 3,754 4,775
Overdraft loans 202 227
Student 153 5,213
---------- ----------
Total other loans 22,927 29,148
---------- ----------
Unearned discounts - (1)
Allowance for possible loan losses (183) (139)
---------- ----------
Total other loans, net $ 22,744 $ 29,008
========== ==========
<FN>
* Underlying cooperative loans are first liens on cooperative apartment
buildings and are senior to loans on the individual units commonly called
cooperative share loans.
</FN>
</TABLE>
<PAGE>
Note (6) Loan Delinquencies
<TABLE>
Information regarding loans delinquent 90 days or more at December 31, 1998
and 1997 is summarized as follows:
<CAPTION>
1998 1997
---- ----
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* 10 $ 233 82 $ 500
Non-guaranteed 5 216 5 12,769
--- ------- --- -------
Total delinquencies
over 90 days 15 $ 449 87 $13,269
=== ======= === =======
Ratio of loans 90 days
or more past due to
total gross loans .04% 1.32%
<FN>
*These loans are guaranteed by the Federal Housing Administration, the Veterans
Administration or the New York State Higher Education Services Corporation.
</FN>
</TABLE>
Impaired and Non-accrual loans
At December 31, 1998, the Bank had one impaired mortgage loan with a
$213,000 balance and a $27,000 specific valuation allowance. The Bank had a net
investment in this loan of $186,000, which comprised total non-accrual loans at
December 31, 1998. At December 31, 1997, the Bank had one impaired mortgage
loan, secured by a cooperative apartment building, with a balance of $12,754,000
and no related valuation allowance. This loan comprised the total balance of
non-accrual loans at December 31, 1997.
If all non-accrual loans had been performing in accordance with their
original terms, the Company would have recorded interest income, with respect to
such loans, of $509,000, $1,180,000 and $1,180,000 for the years ended December
31, 1998, 1997 and 1996, respectively. This compares to $397,000 of actual
payments recorded for 1998, no interest income was recognized with respect to
such loans for 1997 and 1996.
On May 28, 1998, the $12,754,000 underlying cooperative mortgage loan,
discussed above, was satisfied. Upon satisfaction, $4,346,000 of previously
unrecorded prior years' interest and legal fees, as well as late charges, were
recovered and included in non-interest income. The average balance of impaired
loans for calendar 1998, 1997 and 1996 was $5,491,000, $12,754,000 and
$12,754,000, respectively.
At December 31, 1998 and 1997, loans restructured in a TDR, all of which
are performing in accordance with their contractual terms and therefore not
considered impaired, were $1,842,000 and $1,840,000, respectively. Interest
forfeited attributable to these loans was $73,000, $62,000 and $62,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
<PAGE>
Note (7) Allowance for Possible Loan Losses
Activity in the allowance for possible loan losses for the years ended
December 31, 1998, 1997 and 1996 is summarized as follows:
<TABLE>
Mortgage loans
--------------
1998 1997 1996
---- ---- ----
(In Thousands)
<CAPTION>
<S> <C> <C> <C>
Balance at beginning of period $5,741 $5,176 $4,575
Provision for possible loan losses - 600 600
Loans charged off - (35) -
Recoveries of loans previously
charged off - _ - 1
------ ------ ------
Balance at end of period $5,741 $5,741 $5,176
====== ====== ======
</TABLE>
<TABLE>
Other loans
-----------
1998 1997 1996
---- ---- ----
(In Thousands)
<CAPTION>
<S> <C> <C> <C>
Balance at beginning of period $139 $151 $122
Provision for possible loan losses 51 48 40
Loans charged off (25) (72) (33)
Recoveries of loans previously
charged off 18 12 22
---- ---- ----
Balance at end of period $183 $139 $151
==== ==== ====
</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, 1998,
1997 and 1996 were as follows:
<CAPTION>
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Principal balances $16,509 $14,467 $16,016
======= ======= =======
Servicing income $ 40 $ 46 $ 59
======= ======= =======
Number of loans 534 906 1,494
======= ======= =======
</TABLE>
<PAGE>
The balance of loans sold with full recourse was $4,414,000 and $5,441,000
at December 31, 1998 and 1997, respectively. The Bank has not sold any loans
with recourse since 1985. The Bank sold mortgage loans without recourse during
1998 and 1997, receiving proceeds of $4,821,000 and $1,636,000, respectively.
The Bank retained servicing for these loans, which did not result in the
recording of any servicing assets.
Note (9) Premises and Equipment
<TABLE>
Premises and equipment at December 31, 1998 and 1997 consisted of the
following:
<CAPTION>
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Banking houses and land $22,253 $21,709
Furniture, fixtures and equipment 19,813 16,911
Safe deposit vaults 1,016 1,016
------- -------
43,082 39,636
Less accumulated depreciation and
amortization 24,742 22,607
------- -------
Premises and equipment, net $18,340 $17,029
======= =======
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1998, 1997 and 1996 was $2,213,000, $1,891,000 and $1,826,000, respectively.
Note (10) Interest Due and Accrued
<TABLE>
Interest due and accrued at December 31, 1998 and 1997 consisted of the
following:
<CAPTION>
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
U.S. Government and federal agencies $ 1,042 $ 2,354
CMOs 489 540
MBS 23 36
Mortgage and other loans 7,219 6,348
------- -------
Total interest due and accrued $ 8,773 $ 9,278
======= =======
</TABLE>
Note (11) Real Estate Held-for-Investment
On June 30, 1997, management reclassified all real estate
held-for-investment to held-for-sale. There has been no real estate
held-for-investment subsequent to this reclassification and accordingly, no
results of operations for 1998 are presented. A commercial office tower located
at 1995 Broadway, New York, was sold in October 1997, subsequent to its
reclassification to held-for-sale, resulting in a pre-tax gain of $9,163,000.
(See Note 12.)
<PAGE>
<TABLE>
The summarized statements of operations for the Bank's wholly-owned
subsidiaries that comprised real estate held-for-investment, for the years ended
December 31, 1997 and 1996 were as follows:
<CAPTION>
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
Rental income $1,478 $4,020
Net interest income 2 4
Other income 17 652
------ ------
Total income 1,497 4,676
------ ------
Real estate taxes 246 566
Operating and other expenses 647 3,087
------ ------
Total expenses 893 3,653
------ ------
Income from real estate held-
for-investment $ 604 $ 1,023
====== =======
</TABLE>
Note (12) Real Estate Held-for-Sale and ORE
<TABLE>
The following summarizes real estate properties owned by the Bank through
its real estate subsidiaries at December 31:
<CAPTION>
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Real Estate Held-for-Sale:1
Condominium property2 $ - $2,752
Land 130 130
Buildings 50 140
Accrued interest and other assets 641 372
Liabilities (313) (417)
------ ------
Net Assets 508 2,977
------ ------
ORE:
Cooperative apartments 277 473
------ ------
Total Real Estate Held-for-Sale and ORE $ 785 $3,450
====== ======
<FN>
1 On June 30, 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, 1998 and 1997, 126 and 138 such
cooperative apartments remained held-for-sale, respectively.
2 The condominium property resulted from a joint venture formed in the 1980's to
construct and subsequently sell an 84 unit condominium complex. The property
became troubled and the Bank ultimately attained 100% ownership of the unsold
units. Sales of the units were accounted for under the full cost recovery
method. During 1998, 28 units were sold, which resulted in the full recovery of
amounts invested and $299,000 of realized gains. At December 31, 1998, the 6
units held-for-sale were carried at zero cost, compared to 34 units at December
31 1997.
</FN>
</TABLE>
<PAGE>
NOTE (13) Real Estate Operations, Net
<TABLE>
Results of real estate operations for the years ended December 31, 1998,
1997 and 1996 were as follows:
<CAPTION>
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Income from real estate held-
for-investment, net (See Note 11.) $ - $ 604 $1,023
------- ------- ------
Real estate held-for-sale:
Rental income, net of expenses 23 (154) 173
Gain on sale1 691 9,992 571
------- ------- ------
714 9,838 744
------- ------- ------
Real estate operations, net $ 714 $10,442 $1,767
======= ======= ======
<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. The 1997 gains
include a $9,163,000 pre-tax gain on the sale of an office tower. (See Note 11.)
</FN>
</TABLE>
NOTE (14) Income Taxes
<TABLE>
The 1998, 1997 and 1996 provisions for income tax were comprised of the
following amounts:
<CAPTION>
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Current:
Federal $ 8,791 $18,877 $12,870
State and local 3,597 5,652 5,630
------- ------- -------
12,388 24,529 18,500
------- ------- -------
Deferred:
Federal 465 66 703
State and local 435 30 349
------- ------- -------
900 96 1,052
------- ------- -------
Provision for income taxes $13,288 $24,625 $19,552
======= ======= =======
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, the Company
recognized tax benefits relating to its stock option and other stock benefit
plans of $3,222,000, $688,000 and $599,000, respectively, which were credited
directly to stockholders' equity.
<PAGE>
<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, 1998, 1997 and 1996 were as follows:
<CAPTION>
1998 1997 1996
---- ---- ----
% 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 Federal rate $20,187 35.00% $21,600 35.00% $16,197 35.00%
Dividends received
exclusion (247) (.43) (246) (.40) (235) (.51)
State and local income
taxes, net of Federal
income tax benefit 2,621 4.54 3,693 5.98 3,886 8.40
Benefits realized from
realignment of operating
subsidiary (10,667) (18.49) - - - -
Other, net 1,394 2.42 (422) (.68) (296) (.64)
------- ----- ------- ----- ------- -----
Provision for income taxes $13,288 23.04% $24,625 39.90% $19,552 42.25%
======= ===== ======= ===== ======= =====
</TABLE>
<PAGE>
<TABLE>
At December 31, 1998 and 1997, deferred tax assets and liabilities were
comprised of the following:
<CAPTION>
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Deferred Tax Assets:
Deferred profits on unsold cooperative shares $ 1,582 $ 1,955
Allowance for possible loan losses 2,594 2,621
Benefit plan costs 4,684 4,400
Loan fees and mortgage discounts 294 415
Other 657 561
-------- -------
Deferred tax assets 9,811 9,952
-------- -------
Deferred Tax Liabilities:
Securities available-for-sale (31,852) (22,905)
Benefit plan costs (3,435) (2,570)
Other - (105)
-------- -------
Deferred tax liabilities (35,287) (25,580)
-------- -------
Deferred tax liability, net $(25,476) $(15,628)
======== ========
</TABLE>
Pursuant to SFAS No. 109 "Accounting for Income Taxes", 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 Bank did not have any post 1987 tax
reserves. 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 18.)
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 which is now computed on the direct charge-off method.
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,
1998 1997 1996
-------------------------------
(In Thousands, Except EPS Amounts)
<S> <C> <C> <C>
Net Income - (Numerator) $44,388 $37,090 $26,725
Basic EPS: (Denominator)
Weighted Average Shares 9,793 9,858 10,062
Basic EPS $4.53 $3.76 $2.66
===== ===== =====
Diluted EPS: (Denominator)
Weighted Average Shares 9,793 9,858 10,062
Incremental shares-options 281 332 374
------ ------ ------
Weighted Average and Incremental Shares 10,074 10,190 10,436
Diluted EPS $4.41 $3.64 $2.56
===== ===== =====
</TABLE>
<PAGE>
NOTE (16) Deposits
<TABLE>
Deposits at December 31, 1998 and 1997 are summarized as follows:
<CAPTION>
1998 1997
------------------------------ -----------------------------
Stated Stated
rate Amount Percent rate Amount Percent
---- ------ ------- ---- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance by interest rate:
Demand - % $ 47,152 4.20% - % $ 33,662 3.00%
Negotiable order of
withdrawal ("NOW") 1.24 37,005 3.29 2.47 35,401 3.16
Money market 2.32 62,747 5.58 2.96 77,477 6.92
Passbook 2.22 522,671 46.49 2.71 546,447 48.74
Lease security 2.22 21,031 1.87 2.71 18,683 1.66
Certificates: 4.07- 5.00 200,635 17.85 4.67- 5.00 44,646 3.98
5.01- 6.00 213,121 18.96 5.01- 6.00 343,864 30.67
6.01- 6.82 19,804 1.76 6.01- 6.82 21,023 1.87
---------- ------ ---------- ------
433,560 38.57 409,533 36.52
---------- ------ ---------- ------
Total deposits $1,124,166 100.00% $1,121,203 100.00%
========== ====== ========== ======
</TABLE>
<TABLE>
At December 31, 1998 and 1997, the scheduled maturities of certificate
accounts were as follows:
<CAPTION>
1998 1997
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
12 months or less $367,226 84.70% $344,893 84.22%
13 to 24 months 37,388 8.62 35,437 8.65
25 to 36 months 10,832 2.50 14,573 3.56
37 to 48 months 9,134 2.11 14,630 3.57
49 to 60 months 8,980 2.07 - -
-------- ------ -------- ------
$433,560 100.00% $409,533 100.00%
======== ====== ======== ======
</TABLE>
At December 31, 1998 and 1997, certificate accounts in excess of
$100,000, were $48,517,000 and $41,551,000, 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, 1998, 1997 and 1996:
<CAPTION>
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
NOW $ 733 $ 880 $ 899
Money market 2,092 2,549 2,819
Passbook 13,011 15,186 16,267
Lease security 482 491 455
Certificates 21,973 20,768 19,777
------- ------- -------
Total interest expense $38,291 $39,874 $40,217
======= ======= =======
</TABLE>
NOTE (17) FHLB-NY Advances
On December 8, 1998, the Bank borrowed $50.0 million from the FHLB-NY
at a fixed rate of 5.62% for ten years. Interest expense on FHLB-NY advances for
the year ended December 31, 1998 was $185,000. Prior to 1998, the Bank had not
borrowed funds for its direct activities since 1984. Pursuant to a blanket
collateral agreement with the FHLB-NY, advances are secured by qualifying
mortgage loans owned by the Bank in an amount at least equal to 110% of the
advances outstanding.
<PAGE>
NOTE (18) 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 is decreased if the balances of eligible
deposits decrease on the annual determination dates. The balance of the
liquidation account was $57,358,000 at December 31, 1998 and $63,709,000 at
December 31, 1997.
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, 1998 and 1997 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 years ended December 31, 1998
or 1997, and recognized $661,000 for the year ended December 31, 1996. (See Note
14.)
Note (19) 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, 1998, 1997 and 1996 was
$270,000, $272,000 and $267,000, respectively. At December 31, 1998 the
projected minimum rental payments (exclusive of possible rent escalation charges
and normal recurring charges for maintenance, insurance and taxes) were as
follows for the years ended December 31:
<TABLE>
Amount
(In Thousands)
--------------
<CAPTION>
<S> <C>
1999 $ 191
2000 166
2001 100
2002 50
Thereafter -
------
Total $ 507
======
</TABLE>
Loan Commitments
At December 31, 1998, commitments to originate mortgage loans, all of which
were at fixed rates, were $40,915,000 with stated rates ranging from 6.125% to
7.25%. At December 31, 1998, deposit account overdraft lines available were
$832,000, with stated rates ranging from 10.00% to 12.00% and unused business
lines of credit were $16,000, with a stated rate of 15.00%. At December 31,
1998, there were $175,000 of mortgage loans held-for-sale.
Security Purchase Commitments
At December 31, 1998, there were commitments to purchase $40,000,000 of
federal agency securities at par with a three month term to maturity and a
stated yield of 4.87%. There was a commitment to purchase $10,000,000 of CMOs at
101.07 of par. This security had a stated rate of 6.00% and a contractual
maturity of approximately eight years. The anticipated maturity of this CMO is
approximately forty-eight months and the anticipated yield is approximately
5.50%.
Litigation
The Bank is a defendant in several lawsuits arising out of the normal
conduct of business. In the opinion of management and 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.
NOTE (20) Pension Plans and Other Postretirement Benefit Plans
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. In addition, 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.
<PAGE>
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, or age 65, whichever comes first, 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. In
accordance with SFAS No. 106, costs of postretirement benefits are accrued
during an employee's active working career.
In accordance with Statement 132, the following tables set forth the Bank's
benefit obligations, fair values of plan assets and funded status recognized in
the Company's consolidated financial statements for the Pension Plan and Pension
Restore Plan, as combined, and other postretirement benefit plans at December
31:
<TABLE>
Pension Benefits Other Benefits
---------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
<CAPTION>
<S> <C> <C> <C> <C>
Change in benefit obligation
Balance at beginning of year $47,133 $ 41,308 $ 1,596 $ 1,527
Service cost 1,239 998 24 24
Interest cost 2,624 2,568 96 96
Actuarial (gain)/loss (1,150) 3,930 - -
Benefits paid (1,745) (1,671) (53) (51)
-------------------------------------
Balance at end of year $48,101 $ 47,133 $ 1,663 $ 1,596
=====================================
Change in plan assets
Balance at beginning of year $63,711 $ 52,873 $ - $ -
Actual return on plan assets,
net of expenses 9,020 12,475 - -
Employer contribution 34 34 53 51
Benefits paid (1,745) (1,671) (53) (51)
-------------------------------------
Balance at end of year $ 71,020 $ 63,711 $ - $ -
=====================================
Funded status 22,919 16,578 (1,663) (1,596)
Unrecognized net asset (2,885) (3,340) - -
Unrecognized prior service cost 1,428 1,572 - -
Unrecognized actuarial (gain)/loss) (17,658) (12,948) - -
--------------------------------------
Net amount recognized $ 3,804 $ 1,862 $ (1,663) $ (1,596)
======================================
Amounts recognized in the statement of
Financial position consist of:
Prepaid benefit cost $ 7,917 $ 5,763 $ - $ -
Accrued benefit liability (4,113) (4,036) (1,663) (1,596)
Accumulated other comprehensive income - 135 - -
--------------------------------------
Net amount recognized $ 3,804 $ 1,862 $ (1,663) $ (1,596)
======================================
</TABLE>
<TABLE>
Weighted-average assumptions were as follows as of December 31:
Pension Benefits Other Benefits
------------------------ ------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Discount rate 5.75% 5.75% 6.50% 8.00% 8.00% 8.00%
Expected return on plan assets 8.00% 8.00% 8.00% N/A N/A N/A
Rate of compensation increase 6.50% 6.50% 6.50% 6.50% 6.50% 6.50%
</TABLE>
<PAGE>
The components of net periodic benefit cost were as follows for the years
ended December 31:
<TABLE>
Pension Benefits Other Benefits
---------------------------- -------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
(In Thousands)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 1,239 $ 998 $ 1,078 $ 24 $ 24 $ 24
Interest cost 2,624 2,568 2,513 96 96 97
Expected return on plan assets (5,032) (4,167) (3,719) - - -
Amortization of unrecognized net asset (454) (454) (454) - - -
Amortization of prior service cost 145 145 145 - - -
Recognized actuarial (gain)/loss (429) (228) 253 - - -
-----------------------------------------------------------
Net periodic benefit cost $ (1,907) $ (1,138) $ (184) $ 120 $ 120 $ 121
===========================================================
</TABLE>
The projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for the pension plan with accumulated benefit
obligations (i.e. the Pension Restore Plan) in excess of plan assets were
$4,043,000, $3,544,000 and $0, respectively, as of December 31, 1998, and
$4,728,000, $4,036,000 and $0, respectively, as of December 31, 1997.
Note (21) Incentive Savings Plan
The Incentive Savings Plan (the "Savings Plan") is a defined contribution
and thrift savings plan subject to the provisions of the Employee Retirement
Income Security Act of 1974 ("ERISA"), as amended. 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. 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 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. Pursuant to 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, 1998,
1997 and 1996, 98,046, 122,646 and 121,256 options granted under the Stock
Option Plan were exercised, respectively. At December 31, 1998, the remaining
226,094 options granted under the Stock Option Plan were exercisable.
Directors' Option Plan. Each member of the Board of Directors, who is
neither an officer nor an 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, with limited rights, 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. 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 years ended December 31, 1998, 1997 and
1996, 106,250, 6,250, and 2,000 options granted under the Directors' Option Plan
were exercised. At December 31, 1998, 40,500 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.
Pursuant to 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. There were no options exercised from
the 1996 Option Plan during 1998. During 1997, 8,000 options granted from the
1996 Option Plan were exercised. At December 31, 1998, all of the 496,000
options outstanding under the 1996 Option Plan were exercisable. Effective
January 1, 1999, an additional 154,000 options were granted at an exercise of
$54.375 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, 1996, 1997 and
1998.
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
------ ---------
<S> <C> <C>
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
1998 Grants 164,000 50.06
1998 Forfeitures - -
1998 Exercises (204,296) 10.00
-------
Options outstanding at December 31, 1998 762,594 $29.57
=======
Options exercisable at December 31, 1998 762,594 $29.57
=======
</TABLE>
The range of exercise prices on options outstanding were $10.00 to
$50.06, $10.00 to $47.88, and $10.00 to $31.63, for the years ended December 31,
1998, 1997 and 1996, respectively. The weighted average remaining contractual
life for all stock options outstanding at December 31, 1998 was 5.4 years.
<TABLE>
In accordance with Statement 123, the Company used the Black-Scholes
option-pricing model to determine the fair value of the 1998, 1997 and 1996
option grants, using the following weighted average assumptions:
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividend yield 3.07% 3.63% 3.63%
Expected volatility 20.75 20.93 21.92
Risk-free interest rate 5.74 6.28 5.44
Expected option lives 5.7 Years 6 Years 6 Years
</TABLE>
<PAGE>
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:
<TABLE>
1998 1997 1996
---- ---- ----
<CAPTION>
<S> <C> <C> <C>
Net income (as reported) $44,388 $37,090 $26,725
Pro forma net income $43,378 $36,288 26,188
Basic EPS (as reported) $4.53 $3.76 $2.66
Pro forma Basic EPS $4.43 $3.68 $2.60
Diluted EPS (as reported) $4.41 $3.64 $2.56
Pro forma Diluted EPS $4.31 $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 $270,000, $73,000 and $99,000 of
expense related to the DER for the years ended December 31, 1998, 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 1996, 1997 and 1998, 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.
Forfeited shares 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 $574,000, $566,000 and $550,000
related to the ESOP for the years ended December 31, 1998, 1997 and 1996,
respectively. There were eight and three unallocated shares in the ESOP Plan at
December 31, 1998 and 1997, respectively, and none at December 31, 1996.
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 12,451, 15,342 and 17,633 for the years ended
December 31, 1998, 1997 and 1996, respectively. The Bank bears the cost of
administering the ESOP.
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. During 1998, the Company issued 1,800 shares pursuant
to this program.
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 benefits 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, 1998 and 1997, the trust held 193,723 and 188,323 shares of common
stock, respectively, at an aggregate cost of $4,477,000 and $4,199,000,
respectively. The expense recognized for the Restore Plan in connection with the
ESOP for 1998, 1997 and 1996 was $7,000, $113,000 and $105,000, 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,
1998 and 1997:
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 FHLB-NY 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, 1998 and 1997 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, 1998 and 1997, respectively, on a certificate with an initial term
to maturity equal to the remaining term to maturity of the existing
certificates.
FHLB-NY Advances: Fair value estimates are based on discounted
contractual cash flows using rates which approximate the rates offered for
borrowings of similar remaining maturities.
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, 1998 and 1997,
would have been offered at substantially the same rates and under substantially
the same terms that would have been offered at December 31, 1998 and 1997 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 financial instruments at December 31:
<CAPTION>
1998 1997
-------------------- ----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
------- --------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 112,849 $ 112,849 $ 74,924 $ 74,924
Securities available-for-sale 83,592 83,592 62,243 62,243
Securities held-to-maturity 208,457 208,906 352,967 353,996
Other investments 8,922 8,922 7,645 7,645
Mortgage loans, gross 1,155,358 1,197,873 979,810 1,031,586
Other loans, gross 22,927 22,915 29,148 29,256
Interest due and accrued 8,773 8,773 9,278 9,278
Financial liabilities
Deposits $1,124,166 $1,126,151 $1,121,203 $1,121,903
FHLB-NY advances 50,000 50,249 - -
</TABLE>
NOTE (26) Regulatory Capital
The Bank is subject to various regulatory capital requirements established
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. (See also Note 18.)
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 March 31,
1998, 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 "well
capitalized" status. The following table sets forth the required ratios and
amounts and the Bank's actual capital ratios and amounts at December 31:
<TABLE>
To be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------- ----------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1998
Total risk-based capital
(to risk weighted assets) $302,663 24.62% $ 98,362 8.00% $122,953 10.00%
Tangible capital
(to tangible assets) 276,364 18.25 22,717 1.50 N/A N/A
Tier I leverage (core)
capital (to adjusted
tangible assets) 276,364 18.25 45,434 3.00 75,723 5.00
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
</TABLE>
The OTS regulatory capital requirements incorporate an interest rate risk
("IRR") component. Savings institutions with "above normal" IRR exposure are
subject to a deduction from regulatory capital for purposes of calculating their
risk-based capital requirements. Implementation of the IRR component has been
delayed by the OTS.
OTS regulations generally require that institutions deduct from capital
their investment in and advances to subsidiaries engaged, as principal, in
activities not permissible for national banks, such as real estate development.
OTS regulations also require that all equity and direct investments including
all loans and advances in which a legally binding commitment existed at April
12, 1989 be deducted from capital for the purposes of computing regulatory
capital ratios. As a result of this regulation, the Bank excluded from its
regulatory capital $4,588,000 and $6,827,000 at December 31, 1998 and 1997,
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.
Note (27) Parent Only Financial Information
The following condensed statements of financial condition at December 31,
1998 and 1997 and the condensed statements of operations and cash flows for the
years ended December 31, 1998, 1997 and 1996, for JSB Financial, Inc. (parent
company-only) present the Company's investment in its wholly-owned subsidiary,
the Bank, using the equity method of accounting.
<TABLE>
Condensed Statements of Financial Condition
December 31, 1998 and 1997
(In Thousands)
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 21,102 $ 17,164
Securities held-to-maturity, net (estimated fair
value of $39,995 and $70,000, respectively) 40,000 70,000
Mortgage loans, net - 15,195
Other assets, net 410 726
Investment in subsidiary 321,155 264,464
-------- --------
Total Assets $382,667 $367,549
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities, net $ 30 $ 35
Stockholders' equity 382,637 367,514
-------- --------
Total Liabilities and Stockholders' Equity $382,667 $367,549
======== ========
</TABLE>
<TABLE>
Condensed Statements of Operations
For the Years Ended December 31,
(In Thousands)
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividends from subsidiary $ - $ - $20,000
Interest income 4,596 6,080 6,589
Other income 1,087 13 18
------- ------- -------
Total income 5,683 6,093 26,607
------- ------- -------
Expenses 661 531 451
------- ------- -------
Income Before Income Taxes and Equity in
Undistributed Earnings of the Bank 5,022 5,562 26,156
Provision for Income Taxes 1,542 1,781 2,100
------- ------- -------
Income Before Equity in Undistributed Earnings
of the Bank 3,480 3,781 24,056
Equity in Undistributed Earnings of the Bank,
Net of Provision for Income Taxes 40,908 33,309 2,669
------- ------- -------
Net Income $44,388 $37,090 $26,725
======= ======= =======
</TABLE>
<PAGE>
<TABLE>
Condensed Statements of Cash Flows
For the Years Ended December 31,
(In Thousands)
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 44,388 $ 37,090 $ 26,725
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in undistributed earnings of the Bank (40,908) (33,309) (2,669)
Decrease (increase) in other assets 316 (11) 697
Other 88 (2) -
-------- --------- ----------
Net cash provided by operating activities 3,884 3,768 24,753
-------- --------- ---------
Cash flows from investing activities:
Purchases of securities held-to-maturity (205,000) (260,000) (205,021)
Proceeds from maturities of securities held-
to-maturity 235,000 270,000 215,000
Principal payments on mortgage loans 15,195 44 40
Accretion of discount in excess of amortization of
premium on debt securities - 7 14
-------- --------- ---------
Net cash provided by investing activities 45,195 10,051 10,033
-------- --------- ---------
Cash flows from financing activities:
Cash dividends paid to common stockholders (15,716) (13,805) (12,090)
Payments to repurchase common stock (31,466) - (27,650)
Proceeds upon exercise of common stock options 2,041 1,568 1,233
-------- --------- ---------
Net cash used by financing activities (45,141) (12,237) (38,507)
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents 3,938 1,582 (3,721)
Cash and cash equivalents at beginning of year 17,164 15,582 19,303
-------- --------- ---------
Cash and cash equivalents at end of year $ 21,102 $ 17,164 $ 15,582
======== ========= =========
</TABLE>
<PAGE>
KPMG LLP LOGO
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, 1998 and 1997, 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,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Melville, New York
January 28, 1999
REPORT OF MANAGEMENT RESPONSIBILITY
To the Stockholders:
Management is responsible for the preparation and integrity of the Consolidated
Financial Statements and all other information included in this Annual Report.
The financial statements were prepared in conformity with generally accepted
accounting principles and reflect, in all material respects, the substance of
events and transactions reported in the statements and management's judgments
and estimates with respect to such matters. The other financial information
included in the Annual Report is consistent with the financial statements.
Management has established and maintains an internal control structure designed
to provide reasonable assurance as to the integrity and reliability of the
financial statements, the protection of assets from unauthorized use or
disposition, the execution of transactions in accordance with management's
authorizations, and the prevention and detection of improper financial
reporting. Management monitors the internal control structure for compliance,
adequacy and cost effectiveness. Management believes that the Company's internal
control structure is adequate to accomplish the objectives discussed herein.
JSB Financial, Inc.'s independent auditors have been engaged to perform an audit
of the Consolidated Financial Statements in accordance with generally accepted
auditing standards and the auditors' report expresses their opinion as to the
fair presentation of the Consolidated Financial Statements and their conformity
with generally accepted accounting principles. The Audit Committee of the Board
of Directors is responsible for overseeing the Company's financial reporting and
internal control structure. The Board of Directors' Audit Committee, which is
composed entirely of directors who are not employees of JSB Financial, Inc. or
Jamaica Savings Bank, meets periodically with the independent auditors, internal
auditors and with management to discuss audit, internal accounting controls and
financial reporting matters.
Park T. Adikes
Chairman of the Board and
Chief Executive Officer
Thomas R. Lehmann
Chief Financial Officer and
Executive Vice President
KPMG LLP LOGO
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 28, 1999, relating to the consolidated statements of
financial condition of JSB Financial, Inc. and subsidiary as of December 31,
1998 and 1997, 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, 1998, which report is incorporated by reference to the
December 31, 1998 Annual Report on Form 10-K of JSB Financial, Inc.
KPMG LLP
Melville, New York
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Statement of Financial Condition as of December 31, 1998 and the Consolidated
Statement of Operations for the year ended December 31, 1998 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-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<EXCHANGE-RATE> 1
<CASH> 13,849
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 99,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 83,592
<INVESTMENTS-CARRYING> 208,457
<INVESTMENTS-MARKET> 208,906
<LOANS> 1,175,583
<ALLOWANCE> 5,924
<TOTAL-ASSETS> 1,621,649
<DEPOSITS> 1,124,166
<SHORT-TERM> 0
<LIABILITIES-OTHER> 65,007
<LONG-TERM> 50,000
0
0
<COMMON> 160
<OTHER-SE> 382,316
<TOTAL-LIABILITIES-AND-EQUITY> 1,621,649
<INTEREST-LOAN> 88,987
<INTEREST-INVEST> 17,716
<INTEREST-OTHER> 4,057
<INTEREST-TOTAL> 110,760
<INTEREST-DEPOSIT> 38,291
<INTEREST-EXPENSE> 38,476
<INTEREST-INCOME-NET> 72,284
<LOAN-LOSSES> 51
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 27,458
<INCOME-PRETAX> 57,676
<INCOME-PRE-EXTRAORDINARY> 44,388
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,388
<EPS-PRIMARY> 4.53
<EPS-DILUTED> 4.41
<YIELD-ACTUAL> 4.97
<LOANS-NON> 213
<LOANS-PAST> 236
<LOANS-TROUBLED> 1,842
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,880
<CHARGE-OFFS> 25
<RECOVERIES> 18
<ALLOWANCE-CLOSE> 5,924
<ALLOWANCE-DOMESTIC> 5,924
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
