<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
Commission File No.: 0-21628
HAVEN BANCORP, INC.
(exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
11-3153802
(I.R.S. Employer I.D. No.)
93-22 Jamaica Avenue, Woodhaven, New York 11421
(Address of principal executive offices)
(718) 847-7041
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $0.01 per share
(Title of class)
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
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 the voting stock held by non-
affiliates of the registrant, i.e., persons other than directors
and executive officers of the registrant is $141,737,049 and is
based upon the last sales price as quoted on Nasdaq Stock Market
for March 25, 1997.
The registrant had 4,329,624 shares outstanding as of March 25,
1997.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended
December 31, 1996, are incorporated by reference into Parts I and
II of this Form 10-K.
Portions of the Proxy Statement for the 1997 Annual Meeting of
Stockholders are incorporated by reference into Part III of this
Form 10-K.
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INDEX
PART I Page
Item 1. Description of Business .......................... 1 - 57
Business ....................................... 1 - 2
Market Area and Competition .................... 2 - 3
Lending Activities ............................. 3 - 15
Delinquencies and Classified Assets ............ 16 - 21
Allowances for Loan and REO Losses ............. 21 - 25
Investment Activities .......................... 26 - 29
Mortgage-Backed Securities ..................... 30 - 36
Sources of Funds ............................... 36 - 39
Borrowings ..................................... 39 - 41
Subsidiary Activities .......................... 42
Personnel ...................................... 42
Regulation and Supervision ..................... 43 - 54
Federal and State Taxation ..................... 54 - 57
Item 2. Properties ....................................... 57 - 58
Item 3. Legal Proceedings ................................ 59
Item 4. Submission of Matters to a Vote of Security Holders 59
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters ...................... 59 - 60
Item 6. Selected Financial Data .......................... 60
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............. 60
Item 8. Financial Statements and Supplementary Data ...... 60
Item 9. Change In and Disagreements with Accountants on
Accounting and Financial Disclosure .............. 60
PART III
Item 10. Directors and Executive Officers of the Registrant 60
Item 11. Executive Compensation ........................... 61
Item 12. Security Ownership of Certain Beneficial
Owners and Management ............................ 61
Item 13. Certain Relationships and Related Transactions ... 61
PART IV
Item 14. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K .............................. 61 - 63
EXHIBIT INDEX
Exhibit 11.0 Computation of earnings per share
Exhibit 13.0 1996 Annual Report to Stockholders
Exhibit 23.0 Consent of Independent Auditors
Exhibit 27.0 Financial Data Schedule
Exhibit 99 Proxy Statement for 1997 Annual Meeting
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS
Haven Bancorp, Inc. ("Haven Bancorp" or the "Company") was
incorporated under Delaware law on March 25, 1993 as the holding
company for Columbia Federal Savings Bank ("Columbia" or the
"Bank") in connection with the Bank's conversion from a federally
chartered mutual savings bank to a federally chartered stock
savings bank. The Company is a savings and loan holding company
and is subject to regulation by the Office of Thrift Supervision
("OTS"). The Company is headquartered in Woodhaven, New York and
its principal business currently consists of the operation of its
wholly owned subsidiary, the Bank. At December 31, 1996, the
Company had consolidated total assets of $1.6 billion and
stockholders' equity of $99.4 million.
Currently, the Company does not transact any material business
other than through its subsidiary, the Bank.
Columbia was established in 1889 as a New York-chartered building
and loan association. The Bank converted to a New York-chartered
savings and loan association in 1940. The Bank subsequently
converted to a federal savings and loan association and in 1983
the Bank converted to a federal savings bank under its current
name. The Bank is a member of the Federal Home Loan Bank
("FHLB") System, and its deposit accounts are insured to the
maximum allowable amount by the Federal Deposit Insurance
Corporation ("FDIC"). At December 31, 1996, the Bank had total
assets of $1.6 billion and stockholders' equity of $97.8 million.
The Bank's principal business has been and continues to be
attracting retail deposits from the general public and investing
those deposits, together with funds generated from operations and
borrowings, primarily in one-to four-family, owner-occupied
residential mortgage loans. Since 1994, the Bank has gradually
increased its activity in multi-family and commercial real estate
lending. In addition, in times of low loan demand, the Bank will
invest in debt, equity and mortgage-backed securities to
supplement its lending portfolio. The Bank also invests, to a
lesser extent, in home equity loans, home equity lines of credit
and other marketable securities.
The Bank's results of operations are dependent primarily on its
net interest income, which is the difference between the interest
income earned on its loan and securities portfolios and its cost
of funds, which consist of the interest paid on its deposits and
borrowed funds. The Bank's net income also is affected by its
provision for loan losses as well as non-interest income and
operating expenses consisting primarily of compensation and
benefits, occupancy and equipment, real estate operations, net,
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federal deposit insurance premiums and other general and
administrative expenses. The earnings of the Bank are
significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, and to
a lesser extent by government policies and actions of regulatory
authorities.
MARKET AREA AND COMPETITION
The Bank has been, and continues to be, a community oriented
savings institution offering a variety of traditional financial
services to meet the needs of the communities in which it
operates. Management considers the Bank's reputation and
customer service as its major competitive advantage in attracting
and retaining customers in its market area. In order to better
serve its customers, the Bank has installed ATMs in all of its
branches.
The Bank's primary market area is concentrated in the
neighborhoods surrounding its nine full service banking and nine
supermarket banking facilities (five of which opened in the first
quarter of 1997) located in the New York City Boroughs of Queens
and Brooklyn and in Nassau and Suffolk Counties, New York.
During 1996, the Bank opened four supermarket branches and
announced plans to open approximately 44 full-service branches in
Pathmark Supermarkets throughout New York City, Long Island,
Westchester and Rockland counties. Management believes that
supermarket branching is a cost effective way to extend the
Bank's franchise and put its sales force in touch with more
prospective customers than possible through conventional bank
branches. Management believes that all of its branch offices are
located in communities that can generally be characterized as
stable, residential neighborhoods of predominantly one-to four-
family residences and middle income families.
During the past three years, the Bank's expanded loan work-
out/resolution efforts have successfully contributed toward
reducing non-performing assets to manageable levels. Although
there are a number of encouraging signs in the local economy and
the Bank's real estate markets, it is unclear how these factors
will affect the Bank's asset quality in the future. See
"Delinquencies and Classified Assets."
The New York City metropolitan area has a high number of
financial institutions, many of which are significantly larger
and have greater financial resources than the Bank, and all of
which are competitors of the Bank to varying degrees. The Bank's
competition for loans and deposits comes principally from savings
and loan associations, savings banks, commercial banks, mortgage
banking companies, insurance companies and credit unions. In
addition, the Bank faces increasing competition for deposits from
non-bank institutions such as brokerage firms and insurance
companies in such areas as short-term money market funds,
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corporate and government securities funds, mutual funds and
annuities and insurance. Competition may also increase as a
result of the lifting of restrictions on the interstate
operations of financial institutions.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio consists
primarily of conventional first mortgage loans secured by owner
occupied one-to four-family residences, and, to a lesser extent,
multi-family residences, commercial real estate and construction
and land loans. Also, the Bank's loan portfolio includes
cooperative loans, which the Bank has not originated since 1990
except to facilitate the sale of real estate owned ("REO") or to
restructure a problem asset. During 1996, loan originations and
purchases totalled $363.6 million (comprised of $271.1 million of
residential one-to four family mortgage loans, $83.8 million of
commercial and multi-family real estate loans and $8.7 million of
consumer loans). One-to four-family mortgage loan originations
included $172.3 million of loans purchased in the secondary
market during 1996. During the fourth quarter of 1996, $10.6
million of cooperative apartment loans previously transferred to
loans held for sale were returned to the loan portfolio at their
estimated market value.
At December 31, 1996, the Bank had total mortgage loans
outstanding of $814.3 million, of which $556.8 million were one-
to four-family residential mortgage loans, or 65.6% of the Bank's
total loans. At that same date, multi-family residential
mortgage loans totalled $105.3 million, or 12.4% of total loans.
The remainder of the Bank's mortgage loans, which totalled $152.2
million, or 18% of total loans at December 31, 1996, included
$128.0 million of commercial real estate loans, or 15.1% of total
loans, $19.9 million of cooperative apartment loans, or 2.4% of
total loans and $4.2 million of construction and land loans, or
0.5% of total loans. Other loans in the Bank's portfolio
principally consisted of home equity lines of credit and consumer
loans and totalled $34.1 million, or 4.0% of total loans at
December 31, 1996.
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The following table sets forth the composition of the Bank's loan
portfolio, excluding loans held for sale, in dollar amounts and
in percentages of the respective portfolios at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
---------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
Percent Percent Percent Percent Percent
of of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to four-family $556,818 65.63% $325,050 57.03% $258,698 49.34% $211,946 31.07% $134,920 20.87%
Multi-family 105,341 12.42 79,008 13.86 94,259 17.98 124,566 18.26 135,352 20.94
Commercial 127,956 15.08 111,038 19.48 102,415 19.54 126,059 18.48 131,497 20.34
Cooperative 19,936 2.35 10,187 1.79 24,369 4.65 183,403 26.88 198,653 30.73
Construction and land 4,227 0.50 5,737 1.01 3,491 0.67 2,347 0.34 4,887 0.75
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total mortgage loans 814,278 95.98 531,020 93.17 483,232 92.17 648,321 95.03 605,309 93.63
Other loans:
Home equity lines of
credit 15,677 1.85 16,454 2.89 17,802 3.39 17,032 2.50 18,587 2.88
Property improvement
loans 6,957 0.82 10,248 1.80 11,814 2.26 7,794 1.14 8,488 1.31
Loans on deposit
accounts 809 0.10 821 0.14 940 0.18 1,143 0.17 1,550 0.24
Commercial loans 351 0.04 479 0.08 605 0.12 693 0.10 1,114 0.17
Guaranteed student loans 985 0.12 1,181 0.21 1,761 0.34 2,357 0.35 2,560 0.40
Unsecured consumer loans 809 0.10 1,950 0.34 2,366 0.45 1,659 0.24 1,918 0.30
Other loans 8,506 0.99 7,834 1.37 5,737 1.09 3,220 0.47 6,947 1.07
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total other loans 34,094 4.02 38,967 6.83 41,025 7.83 33,898 4.97 41,164 6.37
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans 848,372 100.00% 569,987 100.00% 524,257 100.00% 682,219 100.00% 646,473 100.00%
====== ====== ====== ====== ======
Less:
Unearned discounts,
premiums and deferred
loan fees, net (786) (1,029) (1,375) (805) (1,356)
Allowance for loan
losses (10,704) (8,573) (10,847) (21,606) (21,027)
------- ------- ------- ------- -------
Loans, net $836,882 $560,385 $512,035 $659,808 $624,090
======= ======= ======= ======= =======
</TABLE>
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The following table shows the estimated contractual maturity of
the Bank's loan portfolio at December 31, 1996, assuming no
prepayments.
<TABLE>
<CAPTION>
At December 31, 1996
Mortgage Other Loans,
Loans Loans Net
-------- ----- ------
(In thousands)
<S> <C> <C> <C>
Amounts due:
Within one year $ 39,684 $ 1,031 $ 40,715
------- ------ -------
After one year:
One to three years 43,547 4,071 47,618
Three to five years 98,126 2,306 100,432
Five to ten years 80,429 21,944 102,373
Ten to twenty years 266,979 4,232 271,211
Over twenty years 285,513 510 286,023
------- ------ -------
Total due after one year 774,594 33,063 807,657
------- ------ -------
Total loans $814,278 $34,094 $848,372
======= ====== =======
</TABLE>
The following table sets forth at December 31, 1996, the dollar
amount of all loans due after December 31, 1997, and whether such
loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due After December 31, 1997
Fixed Adjustable Total
----- ---------- -----
(In thousands)
<S> <C> <C> <C>
Mortgage loans:
One-to four-family $352,251 $201,890 $554,141
Multi-family 50,993 40,968 91,961
Commercial real estate 83,122 25,770 108,892
Cooperative 4,813 14,787 19,600
Other loans 15,259 17,804 33,063
------- ------- -------
Total loans $506,438 $301,219 $807,657
======= ======= =======
<PAGE>
The following table sets forth the Bank's loan origination, loan
purchases, sales and principal repayments for the periods
indicated:
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Mortgage loans (gross):
At beginning of year $531,020 $483,232 $648,321 $605,309 $685,681
Mortgage loans originated:
One-to four-family 98,783 64,139 77,499 121,812 30,368
Multi-family 46,310 11,726 - 4,667 12,841
Commercial real estate 35,886 26,047 4,688 7,386 6,071
Cooperative (1) - 63 499 362 1,828
Construction and land loans 1,562 4,367 1,000 176 936
------- ------- ------- ------- -------
Total mortgage loans
originated 182,541 106,342 83,686 134,403 52,044
Mortgage loans purchased 172,300 26,241 - - -
Transfer of mortgage loans
to REO (3,470) (4,638) (10,998) (22,042) (12,861)
Transfer of mortgage loans to MBSs - - - - (32,741)
Transfer of mortgage loans from/
(to) loans held for sale 10,594 (12,038) - - -
Principal repayments (78,209) (67,274) (64,686) (60,315) (66,708)
Sales of mortgage loans (2) (498) (845) (173,091) (9,034) (20,106)
------- ------- ------- ------- -------
At end of year $814,278 $531,020 $483,232 $648,321 $605,309
======= ======= ======= ======= =======
Other loans (gross):
At beginning of year $ 38,967 $ 41,025 $ 33,898 $ 41,164 $ 53,462
Other loans originated 8,735 10,746 21,533 12,237 11,639
Principal repayments (13,608) (12,804) (14,406) (19,503) (23,937)
------- ------- ------- ------- -------
At end of year $ 34,094 $ 38,967 $ 41,025 $ 33,898 $ 41,164
======= ======= ======= ======= =======
</TABLE>
(1) Cooperative loan originations in the four years ended 1995
were done solely to facilitate the restructuring and the sale of
delinquent cooperative loans and cooperative units held by the
Bank as REO.
(2) As part of the major bulk sales program in 1994, the Bank
sold $170.5 million of loans.
ONE-TO FOUR-FAMILY MORTGAGE LENDING. The Bank offers both fixed-
rate and ARM loans secured by one-to four-family residences
located in the Bank's primary market area. The majority of such
loans are secured by property located on Long Island (in Queens,
and Nassau and Suffolk Counties), and, to a lesser extent,
Manhattan, Brooklyn, Staten Island, and Westchester Counties, and
typically serve as the primary residence of the owner. Loan
originations are generally obtained from existing or past
customers, members of the local communities and local real-estate
brokers and attorney referrals. The substantial majority of the
Bank's loans are originated through efforts of Bank employed
sales representatives who solicit loans from the communities
served by the Bank by visiting real estate attorneys, brokers and
individuals who have expressed an interest in obtaining a
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mortgage loan. The Bank also originates loans from its customer
base in its branch offices. Beginning in 1995, the Bank also
purchased loans on a flow basis from correspondent mortgage
bankers in New York, New Jersey and Connecticut in order to
supplement one-to four-family loan originations.
The Bank generally originates one-to four-family residential
mortgage loans in amounts up to 90% of the lower of the appraised
value or selling price of the property securing the loan.
Properties securing such loans are primarily owner-occupied
principal residences. Residential condominium loans are
originated in amounts up to a maximum of 90% of the appraised
value of the condominium unit. One-to four-family mortgage loans
may be originated with loan-to-value ratios of up to 97% of the
appraised value of the property under the Federal National
Mortgage Association ("FNMA") Community Home Buyers Program,
which targets low to moderate income borrowers. Private mortgage
insurance is required whenever loan-to-value ratios exceed 80% of
the appraised value of the property securing the loan. Loan
amounts generally conform to FNMA/Federal Home Loan Mortgage
Corporation ("FHLMC") limits. Mortgage loans originated by the
Bank generally 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. Due-on-sale clauses are an
important means of enabling the Bank to redeploy funds at current
rates thereby causing the Bank's loan portfolio to be more
interest rate sensitive. The Bank has generally exercised its
rights under these clauses.
The Bank currently offers fixed-rate loans up to $750,000 on one-
to four-family residences with terms up to 30 years. During
1996, the Bank introduced 30 year and 15 year fixed-rate bi-
weekly loans. Interest rates charged on fixed-rate mortgage
loans are competitively priced based on market conditions and the
Bank's cost of funds. Origination fees generally range from 0%
to 3% of the principal amount of the loan. Generally, the Bank's
standard underwriting guidelines conform to the FNMA/FHLMC
guidelines.
The Bank currently offers ARM loans up to $750,000 which adjust
either annually, or in 3, 5, 7 or 15 years with maximum loan
terms of 30 years. The Bank's ARM loans typically carry an
initial interest rate below the fully-indexed rate for the loan.
For one year ARMs the Bank qualifies borrowers based upon a rate
of 2% over the initial rate. The initial discounted rate is
determined by the Bank in accordance with market and competitive
factors and, as of December 31, 1996, the discount offered by the
Bank on the one year adjustable ARM loan ranged from 289 basis
points (with 0% origination fees) to 339 basis points (with 2%
origination fees) below the fully-indexed rate, which was 8.26%
as of such date. The discount offered by the Bank on the three-
year adjustable ARM loan ranged from 211 basis points (with 0%
<PAGE>
origination fees) to 261 basis points (with 2% origination fees)
below the fully-indexed rate, which was 8.73% as of December 31,
1996. The discount offered by the Bank on the five year
adjustable ARM loan ranged from 190 basis points (with 0%
origination fees) to 240 basis points (with 2% origination fees)
below the fully-indexed rate, which was 8.90% as of December 31,
1996. As of December 31, 1996, the discount offered by the Bank
on the seven year adjustable ARM loan ranged from 101 basis
points (with 0% origination fees) to 151 basis points (with 2%
origination fees) below the fully-indexed rate, which was 8.26%
as of such date. Finally, as of December 31, 1996, the discount
offered by the Bank on the fifteen year adjustable ARM loan
ranged from 39 basis points (with 0% origination fees) to 89
basis points (with 2% origination fees) below the fully indexed
rate which was 8.26%. As of December 31, 1996, the Bank's ARM
loans, with the exception of the five, seven and fifteen year ARM
loans, adjust by a maximum of 2.0% each adjustment period, with a
life-time cap of 6% over the initial note rate. The maximum
periodic rate adjustment on the five year ARM loan is 2.5% and
the maximum periodic rate adjustment on the seven year and
fifteen year ARM loans for the first adjustment period are 5%
which defaults to 2% for all adjustment periods thereafter. The
Bank currently charges origination fees ranging from 0% to 2.0%
for its one-to four-family ARM loans. ARM loans generally pose a
risk that as interest rates rise, the amount of a borrower's
monthly loan payment also rises, thereby increasing the potential
for delinquencies and loan losses. This potential risk is
mitigated by the Bank's policy of originating ARM loans with
annual and lifetime interest rate caps that limit the amount that
a borrower's monthly payment may increase. However, interest
rates and the resulting cost of funds increases in a rapidly
increasing interest rate environment could exceed the cap levels
on these loans and negatively impact net interest income. During
1996, the Bank originated or purchased $205.1 million of
adjustable-rate mortgage loans.
In the past, the Bank originated most 30 year fixed-rate loans
for immediate sale to the FHLMC or FNMA. The Bank retains 10,
15, 20 year and 15 and 30 year bi-weekly fixed-rate loans while
continuing to originate 30-year fixed-rate loans for immediate
sale. The Bank arranges for the sale of such loans at the
acceptance of the commitment by the applicant to FHLMC or FNMA
through forward purchase commitments. The Bank retains the
servicing on the loans it sells. For the year ended December 31,
1996, the Bank did not emphasize the origination of 30-year
fixed-rate loans and, accordingly, sold only 11 loans totalling
$0.5 million to the FNMA and other lenders.
During 1996, the Bank purchased $172.3 million of one-to four-
family mortgage loans from correspondent mortgage bankers and
bulk whole loan purchases to supplement retail originations.
Purchases of one-to four-family mortgage loans on a flow basis
are limited to the New York, New Jersey and Connecticut
<PAGE>
metropolitan area to approved correspondents. Credit packages
submitted to the Bank by a correspondent are underwritten by the
Bank and are subject to the Bank's quality control procedures.
The Bank purchased approximately $70.0 million of bulk
residential whole loan packages during the year. The Bank
performed due diligence procedures on the credit quality of the
loans and the servicing operations of the servicer, if
applicable, before purchasing the loans.
MULTI-FAMILY LENDING. The Bank originates multi-family loans
with contractual terms ranging from 5 to 15 years with interim
interest rate repricing tied to matching U.S. Treasury Notes plus
a margin. These loans are generally secured by apartment and
mixed-use (business and residential, with the majority of income
coming from the residential units) properties, located in the
Bank's primary market area and are made in amounts of up to 75%
of the appraised value of the property. In making such loans,
the Bank bases its underwriting decision primarily on the net
operating income generated by the real estate to support the debt
service, the financial resources credit history and ownership/
management experience of the principals/guarantors, and the
marketability of the property. The Bank generally requires a
debt service coverage ratio of at least 1.20x and sometimes
requires personal guarantees from borrowers. As of December 31,
1996, $105.3 million, or 12.4% of the Bank's total loan
portfolio, consisted of multi-family residential loans. At
December 31, 1996, the Bank's largest multi-family loan had an
outstanding balance of $4.6 million and is secured by a mixed use
building containing 110 residential units and 5,400 square feet
of ground floor retail space. The appraised value of the
property securing this loan at July, 1996, the date of the most
recent appraisal, exceeded the outstanding loan balance.
Multi-family, commercial real estate and construction and land
lending are generally believed to involve a higher degree of
credit risk than one-to four-family lending because such loans
typically involve higher principal amounts and the repayment of
such loans generally is dependent on income produced by the
property sufficient to cover operating expenses and debt service.
Economic events that are outside the control of the borrower or
lender could adversely impact the value of the security for the
loan or the future cash flows from the borrower's property. In
recognition of these risks, the Bank applies stringent
underwriting criteria for all of its loans and originates multi-
family, commercial real estate and construction and land loans on
a selective basis. See "Commercial Real Estate Lending" and
"Construction and Land Lending".
COMMERCIAL REAL ESTATE LENDING. The Bank originates commercial
real estate loans that are generally secured by properties used
exclusively for business purposes such as retail stores, mixed-
use properties (residential and retail combined where the
majority of the income from the property comes from the
<PAGE>
commercial business) and, light industrial and small office
buildings located in the Bank's primary market area. The Bank's
commercial real estate loans are generally made in amounts up to
the lesser of 70% of the appraised value of the property or 65%
for owner occupied properties. Commercial real estate loans are
made on a negotiated basis where the interest rate generally
reprices during the term of the loan and is tied to the prime
rate or the U.S. Treasury Note rate matched to the repricing
frequency of the loan and are made as 10 year balloon loans. The
Bank's underwriting standards and procedures are similar to those
applicable to its multi-family loans, whereby the Bank considers
the net operating income of the property and the borrower's
expertise, credit history and profitability. The Bank generally
requires that the properties securing commercial real estate
loans have debt service coverage ratios of not less than 1.20x
and also generally requires personal guarantees from the
borrowers or the principals of the borrowing entity. At December
31, 1996, the Bank's commercial real estate loan portfolio
totalled $128.0 million, or 15.1% of the Bank's total loan
portfolio. The largest commercial real estate loan in the Bank's
portfolio was a loan secured by an office building in Brooklyn,
New York, which, as of December 31, 1996, had an outstanding
balance of $15.9 million and was performing.
COOPERATIVE APARTMENT LOANS. Until 1990, the Bank originated
loans secured by cooperative units. Since 1990, the Bank has not
originated any loans secured by cooperative units with the
exception of loans to facilitate the restructuring of a
classified asset or sale of REO. In 1994, the Bank was approved
as a seller/servicer in a FNMA pilot program, enabling it to
originate cooperative apartment loans for immediate sale to FNMA.
During 1996, the Bank did not originate any cooperative loans.
In addition, during 1996, the Bank returned $10.6 million of
performing cooperative apartment loans previously transferred to
loans held for sale to the loan portfolio at their estimated
market value.
CONSTRUCTION AND LAND LENDING. The Bank's construction loans
primarily have been made to finance the construction of one-to
four-family residential properties, multi-family residential
properties and retail properties. The Bank's policies provide
that construction and land loans may generally be made in amounts
up to 70% of the value when completed. The Bank currently does
not actively solicit land loans. The Bank generally requires
personal guarantees and evidence that the borrower has invested
an amount equal to not less than 20% of the estimated cost of the
land and improvements. Construction loans generally are made
with adjustable rates and a maximum term of 18 months, subject to
renewal. Construction loans are generally made based on pre-
sales or pre-leasing. Loan proceeds are disbursed in increments
as construction progresses and as inspections warrant. As of
December 31, 1996, the Bank had $4.2 million, or 0.5% of its
total loan portfolio invested in construction and land loans. At
<PAGE>
December 31, 1996, the Bank's largest construction and land loan
had an outstanding balance of $3.0 million for the construction
of 108 senior citizen residential apartment units in Bay Port,
New York. The loan has been performing since origination.
Construction and land loans involve additional risks attributable
to the uncertainties inherent in estimating construction and land
development costs as well as the market value on the completed
project and the effects of governmental regulation of real
property. It is relatively difficult to evaluate accurately the
total funds required to complete a project and the related loan-
to-value ratio to mitigate these risks. The Bank generally
engages professional engineers and appraisers at the borrower's
expense, to evaluate project costs and value upon completion. As
a result of the foregoing, construction and land loans often
involve the disbursement of substantial funds with repayment
dependent, in part, on the success of the ultimate project rather
than the ability of the borrower or guarantor to repay principal
and interest. If the Bank is forced to foreclose on a project
prior to or at completion due to a default, there can be no
assurance that the Bank will be able to recover all of the unpaid
balance of, and accrued interest on, the loan as well as related
foreclosure and holding costs. In addition, the Bank may be
required to fund additional amounts to complete the project and
may have to hold the property for an unspecified period of time.
OTHER LOANS. The Bank also offers home equity loans, equity
lines of credit, business loans-lines of credit and Government-
guaranteed student loans. As of December 31, 1996 other loans
totalled $34.1 million, or 4.0% of the Bank's total loan
portfolio. Home equity loans are offered as fixed-rate loans
with a maximum term of 15 years, as adjustable-rate loans with a
15 year term or as fixed-variable loans which are fixed for the
first 5 years and then become adjustable for the remaining 15
years. The maximum amount is $50,000 and principal and interest
amortize over the life of the loan. The Bank also offers equity
lines of credit with a term of 25 years on which interest only is
due for the first 10 years and thereafter principal and interest
payments sufficient to liquidate the line are required for the
remaining term not to exceed 15 years. The maximum amount for a
equity line of credit is $200,000. All products are underwritten
pursuant to the standards applicable to one-to four-family loans
which include a determination of the applicant's payment history
on other debts and an assessment of the borrower's ability to
meet payments on the proposed loan in addition to the borrower's
existing obligations. In addition to the credit worthiness of
the applicant, the underwriting process also includes a
comparison of the value of the security, if any, to the proposed
loan amount. The Bank also offers secured and unsecured business
loans and lines of credit whose term and rate are negotiable
based on the credit standing and financial position of the
customer. The Bank's other loans tend to have higher interest
rates and shorter maturities than one-to four-family mortgage
<PAGE>
loans, but also tend to have a higher risk of default than such
loans. Although the level of delinquencies in the Bank's other
loan portfolio has generally been low ($375,000, or approximately
1.1% of the other loan portfolio, at December 31, 1996 was 90
days or more delinquent), there can be no assurance that
delinquencies will not increase in the future. During the fourth
quarter of 1995, the Bank stopped offering all other consumer
loans, including personal secured and unsecured loans.
LOAN APPROVAL PROCEDURES AND AUTHORITY. For one-to four-family
real estate loans each loan is reviewed and approved by an
underwriter and the department head in accordance with the
policies approved by the Board of Directors. Multi-family,
commercial and construction loans are approved by designated
lending officers within lending authorities approved by the Board
of Directors. Loans greater than $750,000 up to $1,500,000 must
be approved by the Officers Loan Committee, whereas, loans over
$1,500,000 must be approved by the Board of Directors - Loan
Committee. Loans exceeding $2,500,000 must be approved by the
Board. Loans not secured by real estate and unsecured other
loans, depending on the amount of the loan and the loan to value
ratio, where applicable, require the approval of at least one
lending officer and/or underwriter designated by the Board.
For all loans originated by the Bank, upon receipt of a completed
loan application from a prospective borrower, a credit report is
ordered and certain other information is verified by the Bank's
loan underwriters and, if necessary, additional financial
information is required. An appraisal of the real estate
intended to secure the proposed loan is required which currently
is performed by either the staff appraisers of the Bank or by an
independent appraiser designated and approved by the Bank. The
Board annually approves the independent appraisers used by the
Bank and approves the Bank's appraisal policy. It is the Bank's
policy to obtain title insurance on all real estate first
mortgage loans. Borrowers must also obtain hazard insurance
prior to closing. Borrowers generally are required to advance
funds on a monthly basis together with each payment of principal
and interest to a mortgage escrow account from which the Bank
makes disbursements for items such as real estate taxes, and in
some cases, hazard insurance premiums.
LOAN CONCENTRATIONS. As a result of OTS regulations, the Bank
may not extend credit to a single borrower or related group of
borrowers in an amount greater than 15% of the Bank's unimpaired
capital and surplus. An additional amount of credit may be
extended, equal to 10% of unimpaired capital and surplus, if the
loan is secured by readily marketable collateral, which does not
include real estate.
At December 31, 1996, the Bank's loans-to-one borrower limit was
$16.2 million. There was no one borrower which exceeded this
limit in accordance with applicable regulatory requirements.
<PAGE>
DELINQUENCIES AND CLASSIFIED ASSETS
DELINQUENT LOANS. The Bank's collection procedures for mortgage
loans include sending a reminder notice to the borrower if the
loan is 10 days past due, another notice at 16 days and a late
notice after payment is 30 days past due. In the event that
payment is not received after the late notice, the loan is
referred to the collection department and letters are sent or
phone calls are made to the borrower by the collection
department. When contact is made with the borrower at any time
prior to foreclosure, the Bank attempts to obtain full payment or
work out a repayment schedule with the borrower to avoid
foreclosure. Generally, foreclosure procedures are initiated
when a loan is over 90 days delinquent. Property foreclosed upon
is held by the Bank as REO at the lower of its estimated fair
value or cost less selling costs at the time of foreclosure. The
Bank ceases to accrue interest on all loans 90 days or more past
due.
The collection procedures for other loans, excluding student
loans, generally include telephone calls to the borrower after 10
days of the delinquency. At the 120th day and not later than 180
days past due, unsecured loans are written-off by the Bank and
secured loans may be foreclosed upon or negotiations with the
borrower continued. The collection procedures for student loans
follow those specified by federal and state guidelines.
CLASSIFIED ASSETS. Federal regulations and the Bank's
Classification of Assets Policy provide for the classification of
loans and other assets 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 and/or of
the collateral pledged, if any. Substandard assets include those
characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as doubtful have all of the
weaknesses inherent in those classified substandard with the
added characteristic that the weaknesses present make "collection
or liquidation in full", on the basis of currently existing
facts, conditions, and values, "highly questionable and
improbable." Assets classified as loss are those considered
"uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve is
not warranted. Pursuant to OTS guidelines, the Bank is no longer
required to classify assets as "special mention" if such assets
possess weaknesses but do not expose the Bank to sufficient risk
to warrant classification in one of the aforementioned
categories. However, the Bank continues to classify assets as
"special mention" for internal monitoring purposes.
When an insured institution classifies one or more assets, or a
portion thereof, as substandard or doubtful, it is required to
<PAGE>
establish a general allowance 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 one or
more assets, or a portion thereof, as "loss", it is required
either to establish a specific allowance for losses equal to 100%
of the amount of the asset so classified or to charge off such
amount.
A savings institution's determination as to the classification of
its assets and the amount of its valuation allowances is subject
to review by the OTS which can order the establishment of
additional general or specific loss allowances. The OTS, in
conjunction with the other federal banking agencies, has adopted
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.
The Bank's policies provide that the Board of Directors regularly
review problem loans and review all classified assets. The Bank
believes its policies are consistent with the regulatory
requirements regarding classified assets.
The Bank generally obtains appraisals on all properties securing
loans in foreclosure and foreclosed real estate at or about the
time it obtains possession of the property and charges-off any
declines in value against the allowance for loan losses. The
Bank assesses the value of all REO periodically and charges off
any amounts carried in excess of the appraised value against the
allowance for REO.
Non-performing loans (consisting of non-accrual loans and
restructured loans) decreased from $72.8 million at December 31,
1992 to $63.9 million at December 31, 1993, and declined to $28.3
million at December 31, 1994, $16.9 million at December 31, 1995
and $13.9 million at December 31, 1996. The continued decline in
the balance of non-performing loans during the five year period
was due to the Bank's ongoing efforts to reduce non-performing
assets. The significant decrease in non-performing loans during
1994 was mainly due to the sale of $22.0 million of non-accrual
and restructured loans as part of the major bulk sales program
involving loans and REO completed during the year. REO decreased
<PAGE>
each year during the five years ended December 31, 1996 from
$22.5 million at December 31, 1992 to $17.9 million at December
31, 1993 to $7.8 million at December 31, 1994 (net of an
allowance for REO of $717,000) to $2.0 million at December 31,
1995 (net of an allowance for REO of $178,000) to a balance at
December 31, 1996 of $1.0 million (net of an allowance for REO of
$81,000). During 1994, the Bank sold $12.0 million of
cooperative apartment REO in a bulk sale transaction. The Bank
intends to continue its efforts to reduce non-performing assets
in the normal course of business, but it may continue to seek
opportunities to dispose of its non-performing assets through
sales to investors or otherwise.
The Bank also has restructured loans, which has enabled the Bank
to avoid the costs involved with foreclosing on the properties
securing such loans while continuing to collect payments on the
loans under their modified terms. Troubled debt restructurings
("TDRs") are loans for which certain concessions, such as the
reduction of interest rates or the deferral of interest or
principal payments, have been granted due to the borrower's
financial condition. Interest on TDRs is recognized at the
reduced interest rates when the interest rate on the loan is
reduced. The Bank restructures loans when it determines that the
borrower has attempted to perform on his loan obligation and
would perform if the borrower was receiving sufficient income on
the property securing the loan to satisfy the borrower's debt
obligation. Further, the Bank must find that the insufficient
cash flow is most likely due to current market conditions and is
temporary, and that the borrower is taking reasonable steps to
increase the income generated from the property.
At December 31, 1996, the Bank had 23 restructured loans with
aggregate principal balances of $3.4 million. Of this amount,
47.0% were residential loans (including cooperative apartment
loans), 42.3% were multi-family loans and 10.7% were commercial
real estate loans. Management is able to avoid the costs of
foreclosing on loans that it restructures and avoids acquiring
the properties securing such loans as REO. However, restructured
loans have a higher probability of becoming delinquent than loans
that have no previous history of delinquency. As of December 31,
1996, 1 restructured loan for $77,000 was 90 days or more past
due. There can be no assurance that the remaining loans will
continue to perform in accordance with their modified terms. To
the extent that the Bank is unable to return these loans to
performing status, the Bank will have to foreclose on such loans,
which will increase the Bank's REO.
The Bank's policy is to recognize income on a cash basis for
restructured loans for a period of six months, after which such
loans are returned to an accrual basis if they are performing in
accordance with their modified terms. At December 31, 1996, the
Bank had 21 restructured loans with principal balances of $3.2
million that were on accrual status and 1 additional restructured
<PAGE>
loan for $134,000 that was on non-accrual status because the loan
had not yet performed in accordance with its modified terms for
the required six-month seasoning period. For restructured loans
that are 90 days or more past due, the loan is returned to non-
accrual status and previously accrued but uncollected interest is
reversed.
At December 31, 1996, the Bank's classified assets consisted of
$13.5 million of loans and REO of which $1.1 million was
classified as doubtful. The Bank's assets classified as
substandard at December 31, 1996 consisted of $12.3 million of
loans and $1.2 million of gross REO. Classified assets in total
declined $4.6 million, or 25.4% since December 31, 1995. At
December 31, 1996, the Bank also had loans aggregating $6.5
million that it had designated special mention.
The Bank continues to use the special mention designation for
internal monitoring purposes although it is not required by OTS
guidelines. Of those assets, 50.6% were multi-family loans and
49.4% were commercial real estate loans. The loans were
performing in accordance with their terms at December 31, 1996
but were deemed to warrant close monitoring by management due to
one or more factors, such as the absence of current financial
information relating to the borrower and/or the collateral,
financial difficulties of the borrower or inadequate cash flow
from the security property.
<PAGE>
At December 31, 1996, 1995, and 1994, delinquencies in the
Bank's loan portfolio were as follows:
<TABLE>
<CAPTION>
At December 31, 1996 At December 31, 1995
60-89 Days 90 Days or More 60-89 Days 90 Days or More
Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans
------ -------- ------ --------- ------ -------- ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One-to four-family 9 $ 950 47 $ 4,083 18 $ 1,215 42 $ 3,800
Multi-family - - 6 1,463 - - 5 967
Commercial - - 11 4,321 - - 8 2,411
Cooperative 5 281 9 431 12 580 15 871
Construction and
land loans - - 1 60 - - 4 1,067
Other loans 26 171 21 375 10 53 38 689
-- ------ --- ------ --- ------ --- ------
Total loans 40 $ 1,402 95 $10,733 40 $ 1,848 112 $ 9,805
== ====== === ====== === ====== === ======
Delinquent loans
to total loans (1) 0.17% 1.27% 0.32% 1.72%
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1994
60-89 Days 90 Days or More
Number Principal Number Principal
of Balance of Balance
Loans of Loans Loans of Loans
------ --------- ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to four-family 15 $ 1,015 58 $ 5,995
Multi-family - - 13 5,088
Commercial 1 41 10 5,579
Cooperative 11 561 18 934
Construction and
land loans - - 2 878
Other loans 36 205 34 275
--- ------ --- ------
Total loans 63 $ 1,822 135 $18,749
=== ====== === ======
Delinquent loans
to total loans (1) 0.35% 3.58%
==== ====
</TABLE>
(1) Restructured loans that have become seasoned for the
required six month period and are currently performing in
accordance with their restructured terms are not included in
delinquent loans. There was 1 restructured loan for $77,000 that
was included in loans delinquent 90 days or more at December 31,
1996 because it had not yet performed in accordance with its
modified terms for the required six month seasoning period.
NON-PERFORMING ASSETS. The following table sets forth
information regarding all non-accrual loans (which consists of
loans 90 days or more past due and restructured loans that have
not yet performed in accordance with their modified terms for the
required six-month seasoning period), restructured loans and REO.
The Bank does not accrue interest on loans 90 days past due and
restructured loans that have not yet performed in accordance with
their modified terms for at least six months. If non-accrual
<PAGE>
loans had been performing in accordance with their original
terms, the Bank would have recorded interest income from such
loans of $489,000, $889,000 and $1.3 million for the years ended
December 31, 1996, 1995 and 1994, respectively, compared to
$220,000, $280,000 and $261,000, which was recognized on non-
accrual loans for such periods, respectively. If all
restructured loans, as of December 31, 1996, 1995 and 1994, had
been performing in accordance with their original loan terms
(prior to being restructured), the Bank would have recognized
interest income from such loans of $505,000, $714,000 and
$967,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual mortgage loans $ 10,358 $ 9,116 $ 18,474 $ 43,170 $ 38,133
Restructured mortgage loans 3,160 7,072 9,550 20,398 33,821
Non-accrual other loans 375 689 275 299 816
------- ------- ------- ------- -------
Total non-performing loans 13,893 16,877 28,299 63,867 72,770
Real estate owned, net of
related reserves 1,038 2,033 7,844 17,887 22,473
------- ------- ------- ------- -------
Total non-performing assets $ 14,931 $ 18,910 $ 36,143 $ 81,754 $ 95,243
======= ======= ======= ======= =======
Non-performing loans to total loans 1.64% 2.97% 5.41% 9.37% 11.28%
Non-performing assets to total assets 0.94 1.28 2.85 6.65 8.15
Non-performing loans to total assets 0.88 1.15 2.23 5.20 6.23
</TABLE>
ALLOWANCES FOR LOAN AND REO LOSSES
The allowance for loan losses is increased by charges to income
and decreased by charge-offs (net of recoveries). Impaired loans
and related reserves have been identified and calculated in
accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 114. On January 1, 1995, the
Company adopted, on a prospective basis, SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan" and the
amendment thereof, SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures". See
Note 1 of Notes to Consolidated Financial Statements in the
Registrant's 1996 Annual Report to Stockholders on page 31, which
is incorporated herein by reference. The total allowance for
loan losses has been determined in accordance with the provisions
of SFAS No. 5, "Accounting for Contingencies". The Bank's
allowance for loan losses is intended to be maintained at a level
sufficient to absorb all estimable and probable losses inherent
in the loan portfolio. The Bank reviews the adequacy of the
allowance for loan losses on a monthly basis taking into account
past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying
collateral, current and prospective economic conditions and
<PAGE>
current regulatory guidance.
In response to the general decline in the economic conditions of
the Bank's primary market area and the national economy in
general, management increased the Bank's allowance for loan
losses in 1992 and 1993 to account for its evaluation of the
potential effects of such factors and in consideration of the
deterioration of real estate values experienced in recent
periods. During 1994, the Bank established additional loan loss
provisions totalling $7.5 million in connection with the bulk
sales. At December 31, 1995, the allowance for loan losses was
$8.6 million, or 1.51% of total loans compared to $10.8 million,
or 2.07% of total loans at December 31, 1994. The Bank took
charge-offs of $5.5 million in 1995 compared to $24.7 million in
1994, which included $14.4 million in connection with the bulk
sales. The allowance as a percentage of non-performing loans was
50.8% at December 31, 1995 compared to 38.3% at December 31,
1994. During 1996, the Bank took charge-offs of $1.9 million
against its loan portfolio compared to $5.5 million for 1995.
The reduction in charge-offs for 1996 when compared to 1995 is a
direct result of the ongoing decline in non-performing loans
during the last five years. Non-performing loans as a percentage
of total loans was 1.64% at December 31, 1996 compared to 11.28%
at December 31, 1992. The allowance as a percentage of non-
performing loans was 77.05% at December 31, 1996 compared to
50.8% at December 31, 1995.
The Bank's provisions for loan losses have varied significantly
over the past five years. Specifically, the Bank made provisions
for loan losses of $19.8 million, $6.4 million, $13.4 million,
$2.8 million and $3.1 million for the five years ended December
31, 1996, respectively. Beginning in 1991, it became apparent to
the Bank that given the decline in the local economy, increased
unemployment rates in the Bank's local market area, the
substantial deterioration in local real estate values as
evidenced by receipt of appraisals reflecting sharp decreases in
property values and increased vacancies in multi-family dwellings
as well as an increase in loan delinquencies, it was likely that
the Bank would sustain additional losses. It is the Bank's
policy to obtain appraisals on properties that the Bank acquires
as REO and charge-off that amount of the loan exceeding the
appraised value against the allowance for loan losses. The
decrease in real estate values that occurred in the early 1990s
in the New York metropolitan area resulted in substantial
decreases in the value of the collateral securing the Bank's non-
performing loans and resulted in an increase in the Bank's
charge-offs. Therefore, during 1992 the Bank booked a loan
provision of $19.8 million. This provision booked was deemed
adequate by management given the decline in the regional economy
and the deterioration of real estate values experienced in such
periods as evidenced by receipt of appraisals reflecting sharp
decreases in property values from prior years; increases in
unemployment rates in the Bank's local market areas and increased
<PAGE>
vacancies in multi-family dwellings as well as an increase in
loan delinquencies. Regulatory criticism of the Bank's loan
portfolio in prior regulatory examinations was also a factor.
The Bank provided $6.4 million for loan losses during 1993 which
reflected management's review of the adequacy of the allowance on
an ongoing basis. The provision of $13.4 million provided during
1994 included additional provisions of $7.5 million that were
established in connection with the bulk sale transactions.
During 1995 and 1996, the Bank provided provisions of $2.8
million and $3.1 million, respectively, to maintain the allowance
at an adequate level.
The Bank also booked provisions for losses on its REO of $291,000
and $750,000, respectively, for the years ended December 31, 1996
and 1995. The significant decline in the provision from 1995 was
attributable to the REO portfolio which declined by $995,000, or
48.9% from the previous year. The $10.3 million provision for
1994 was significantly higher because that year's amount included
an additional provision of $7.7 million in connection with the
bulk sale of $12.0 million of cooperative apartment properties.
During 1996, the Bank sold 60 REO properties with a fair value of
$3.1 million. The contribution of REO sales and normal write-
downs over the past four years has reduced the amount of REO, net
from $22.5 million at December 31, 1992 to $1.0 million at
December 31, 1996.
The Bank will continue to monitor and modify its allowances for
loan and REO losses as conditions dictate. Although the Bank
maintains its allowance at a level which it considers adequate to
provide for potential losses, there can be no assurance that such
losses will not exceed the estimated amounts.
<PAGE>
The following table sets forth the changes in the Bank's
allowance for loan losses at the dates indicated.
<TABLE>
<CAPTION>
At or For the Years Ended December 31,
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 8,573 $10,847 $21,606 $21,027 $11,059
Charge-offs:
One-to four-family (771) (472) (264) (353) (361)
Cooperative (524) (2,142) (8,747) (3,028) (3,266)
Multi-family (30) (1,299) (7,932) (1,174) (616)
Non-residential and other (560) (1,541) (7,798) (1,651) (5,809)
------ ------ ------ ------ ------
Total charge-offs (1) (1,885) (5,454) (24,741) (6,206) (10,052)
Recoveries 891 405 582 385 177
------ ------ ------ ------ ------
Net charge-offs (994) (5,049) (24,159) (5,821) (9,875)
Provision for loan losses 3,125 2,775 13,400 6,400 19,843
------ ------ ------ ------ ------
Balance at end of year $10,704 $ 8,573 $10,847 $21,606 $21,027
====== ====== ====== ====== ======
Ratio of net charge-offs during
the year to average loans out-
standing during the year (2) 0.15% 0.93% 3.83% 0.90% 1.45%
Ratio of allowance for loan
losses to total loans at
the end of year (3) 1.26 1.51 2.07 3.17 3.26
Ratio of allowance for loan
losses to non-performing loan
at the end of the year (4) 77.05 50.80 38.33 33.83 28.90
</TABLE>
(1) Total charge-offs for 1992 were attributable to the
substantial increase in non-performing assets that occurred in
1990 and continued into 1992 and the Bank's recognition that
given the national recession and the economic conditions in the
New York metropolitan area, it was likely that, contrary to the
Bank's past experience, the Bank would incur losses on its non-
performing assets into the future. Moreover, poor economic
conditions resulted in a decrease in the value of the collateral
securing the Bank's non-performing loans, which necessitated
charge-offs. Total charge-offs for the year ended 1994 were
attributable to the bulk sale transactions.
(2) The ratio of net charge-offs during the year to average
loans outstanding during the year increased significantly in 1994
due to substantial charge-offs taken during the year as a result
of the bulk sale transaction and the decrease in average loans
outstanding due to the bulk sale transactions.
(3) The steady decline in the ratio of allowance for loan losses
to total loans is attributable to a decline in non-performing
loans as previously mentioned coupled with growth in the Bank's
total loans outstanding. Specifically, the Bank's total loans
increased from $522.9 million at December 31, 1994 to $569.0
million at December 31, 1995 to $847.6 million at December 31,
1996.
(4) The ratio of allowance for loan losses to non-performing
<PAGE>
loans has increased significantly over the last five years as
non-performing loans have declined.
The following table sets forth the Bank's allocation of its
allowance for loan losses to the total amount of loans in each of
the categories listed.
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994
------ ------ ------
% of % of % of
Loans in Loans in Loans in
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential (1) $5,929 80.90% $3,838 72.67% $ 5,685 71.97%
Commercial 4,340 15.08 4,175 19.48 4,308 19.53
Construction - - 69 1.00 248 .66
Other loans 435 4.02 491 6.85 606 7.84
----- ------ ------ ------ ------ ------
Total allowance for
loan losses (2) $10,704 100.00% $8,573 100.00% $10,847 100.00%
====== ====== ===== ====== ====== ======
</TABLE>
(1) Includes one-to four-family, cooperative and multi-family
loans.
(2) In order to comply with certain regulatory reporting
requirements, management has prepared the above allocation of the
Bank's allowance for loan losses among various categories of the
loan portfolio for each of the years in the three-year period
ended December 31, 1996. In management's opinion, such
allocation has, at best, a limited utility. It is based on
management's assessment as of a given point in time of the risk
characteristics of each of the component parts of the total loan
portfolio and is subject to changes as and when the risk factors
of each such component changes. Such allocation is not
indicative of either the specific amounts or the loan categories
in which future charge-offs may be taken, nor should it be taken
as an indicator of future loss trends. In addition, by
presenting such allocation, management does not mean to imply
that the allocation is exact or that the allowance has been
precisely determined from such allocation.
<PAGE>
INVESTMENT ACTIVITIES
The investment policy of the Bank, which is established by the
Board of Directors and implemented by the Bank's Asset/ Liability
Committee, is designed primarily to provide and maintain
liquidity, to generate a favorable return on investments without
incurring undue interest rate and credit risk, and to complement
the Bank's lending activities. Federally chartered savings
institutions have the authority to invest in various types of
liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of
deposit of insured banks and savings institutions, certain
bankers' acceptances, repurchase agreements and federal funds.
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 otherwise authorized to make directly.
Additionally, the Bank must maintain minimum levels of
investments that qualify as liquid assets under OTS regulations.
See "Regulation and Supervision-Federal Savings Institution
Regulation-Liquidity." Historically, the Bank has maintained
liquid assets above the minimum OTS requirements and at a level
believed to be adequate to meet its normal daily activities. At
December 31, 1996, the Bank had money market investments and debt
and equity securities in the aggregate amount of $6.9 million and
$243.4 million (including $146.1 million of debt and equity
securities available for sale) with a fair value of $6.9 million
and $242.4 million, respectively.
On January 1, 1994 the Company adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". Under
SFAS No. 115, debt and mortgage-backed securities ("MBSs") which
the Company has the positive intent and ability to hold until
maturity are carried at cost, adjusted for amortization of
premiums and accretion of discounts using the level yield method
over the remaining period to contractual maturity, adjusted, in
the case of MBSs, for actual prepayments. Debt and equity
securities and MBSs to be held for indefinite periods of time and
not intended to be held to maturity are classified as available
for sale securities and are recorded at fair value, with
unrealized gains (losses), net of taxes, reported as a separate
component of stockholders' equity.
In November, 1995, the Financial Accounting Standards Board
("FASB") issued an implementation guide for SFAS No. 115. The
implementation guide provided guidance in the form of a question
and answer format and allowed an opportunity from mid-November
1995 to December 31, 1995 for companies to reclassify securities
in the held to maturity portfolio to securities in the available
for sale portfolio without tainting the remainder of the
portfolio. In connection with the implementation guide for SFAS
No. 115, the Company reclassified $41.9 million of debt
<PAGE>
securities and $405.3 million of MBSs previously classified as
held to maturity to securities available for sale. The carrying
value of the MBSs was adjusted to their market value, which
resulted in increasing the carrying value by $3.9 million, and
increasing stockholders' equity by $2.1 million, which was net of
taxes of $1.8 million. The carrying value of the debt securities
approximated market value at the time of the reclassification.
At December 31, 1996, the securities available for sale portfolio
totalled $370.1 million of which $166.2 million were adjustable-
rate securities and $203.9 million were fixed-rate securities.
At December 31, 1996, the held to maturity portfolios totalled
$295.2 million, comprised of $60.4 million of adjustable-rate
securities and $234.8 million of fixed-rate securities. The
estimated fair value of the Company's debt securities and MBSs
held to maturity portfolios was $3.2 million below the carrying
value of the portfolios at December 31, 1996. It is the
Company's intent to hold these securities until maturity and
therefore the Company does not expect to realize the current
unrealized losses brought about by the current market
environment.
The following table sets forth certain information regarding the
carrying and market values of the Company's money market
investments, debt and equity securities and Federal Home Loan
Bank ("FHLB") of New York stock at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994
------ ------ ------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- ------ -------- ------ ------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt and Equity Securities:
U.S. Government and
agency obligations $170,709 $169,849 $142,383(2) $142,281(2) $111,430(3) $105,938(3)
Corporate debt securities 45,350 45,227 45,320 44,437 31,571 31,129
Preferred stock 27,329 27,329 - - - -
------- ------- ------- ------- ------- -------
Subtotal 243,388 242,405 187,703 186,718 143,001 137,067
------- ------- ------- ------- ------- -------
Adjustable-rate MBS-
Mutual Fund - - 3,976 3,976 4,757 4,757
Federal Funds sold 5,000 5,000 5,000 5,000 1,725 1,725
FHLB-NY stock 9,890 9,890 8,138 8,138 6,888 6,888
Money market investments 1,869 1,869 4,064 4,064 5,129 5,129
------- ------- ------- ------- ------- -------
Total $260,147(1) $259,164(1) $208,881(1) $207,896(1) $161,500(1) $155,566(1)
======= ======= ======= ======= ======= =======
</TABLE>
(1) Includes debt and equity securities available for sale
totalling $146.1 million, $63.9 million and $17.1 million, at
December 31, 1996, 1995 and 1994, respectively, carried at fair
value.
<PAGE>
(2) Included in U.S. Government and agency obligations at
December 31, 1995 are federal government agency and FHLB multiple
step-up callable notes available for sale with a carrying value
and estimated fair value of $42.0 million. These notes are
callable periodically at the option of the issuer, but, if not
called, have a pre-determined upward adjustment of the interest
rate. The notes at December 31, 1995 had contractual maturities
between February 1999 and April 2004, and a weighted average rate
of 5.75%. During 1996, $40.0 million of the notes were sold and
$2.0 million were called.
(3) Included in U.S. Government and agency obligations at
December 31, 1994 are federal government agency and FHLB multiple
step-up callable notes held to maturity with an amortized cost
and estimated fair value of $80.0 million and $75.2 million,
respectively. These notes are callable periodically at the
option of the issuer, but, if not called, have a pre-determined
upward adjustment of the interest rate. The notes at December
31, 1994 had contractual maturities between May 1997 and April
2009, and a weighted average rate of 5.99%. During 1995, $38.0
million of the multiple step-up callable notes were called.
<PAGE>
The table below sets forth certain information regarding the
carrying value, weighted average yields and maturities of the
Company's money market investments and debt and equity securities
at December 31, 1996.
<TABLE>
<CAPTION>
At December 31, 1996
----------------------------------------------------------------------------------------------------------------
Total Money Market Investments
More than More than Five and Debt and Equity Securities
One Year or Less One to Five Years to Ten Years Due After 10 Years ---------------------------------------
----------------- ----------------- --------------- ------------------ Average
Weighted Weighted Weighted Weighted Remaining Estimated Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Years to Carrying Fair Average
Value Yield Value Yield Value Yield Value Yield Maturity Value Value Yield
-------- -------- -------- -------- -------- -------- -------- -------- --------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
securities and
agency
obligations $ - - % $ 38,473 6.03% $ 74,203 7.10% $ 58,033 7.38% 9.7 $170,709 $169,849 6.95%
Corporate debt
securities - - 45,350 5.76 - - - - 2.2 45,350 45,227 5.76
Federal Funds 5,000 5.50 - - - - - - - 5,000 5,000 5.50
Money market
investments 1,869 5.39 - - - - - - - 1,869 1,869 5.39
------- ------- ------- ------- ------- ------- -----
Total $ 6,869 5.47% $ 83,823 5.88% $ 74,203 7.10% $ 58,033 7.38% 5.6 $222,928(1) $221,945(1) 6.67%
======= ===== ======= ===== ======= ===== ======= ===== === ======= ======= =====
Preferred Stock $ 27,329 $ 27,329 6.46%
FHLB-NY stock $ 9,890 $ 9,890 6.41%
======= ======= =====
</TABLE>
(1) Includes U.S. Government and agency obligations available
for sale totalling $118,752.
<PAGE>
MORTGAGE-BACKED SECURITIES
The Bank also invests in MBSs. At December 31, 1996, total MBSs,
net, aggregated $422.0 million (including MBSs available for sale
with a fair value of $224.0 million, net), or 26.7% of total
assets. At December 31, 1996, 77.5% of the MBS portfolio,
including Collateralized Mortgage Obligations ("CMOs") and Real
Estate Mortgage Investment Conduits ("REMICs"), were insured or
guaranteed by either FNMA, FHLMC or the Government National
Mortgage Association ("GNMA"). At December 31, 1996, $176.2
million, or 41.8% of total MBSs were adjustable-rate and $245.8
million, or 58.2% of total MBSs were fixed-rate.
The following table sets forth the carrying amount of the
Company's MBS portfolio in dollar amounts and in percentages at
the dates indicated.
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Percent Percent Percent Percent Percent
Carrying of Carrying of Carrying of Carrying of Carrying of
Value Total Value Total Value Total Value Total Value Total
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MBSs(1):
CMOs and REMICS -
Agency-backed(2) $117,969 27.96% $220,284 34.97% $111,076 21.11% $101,245 22.46% $ 47,348 13.12%
CMOs and REMICS -
Non-agency(2) 94,877 22.48 69,109 10.97 65,984 12.54 59,370 13.17 12,261 3.40
FHLMC 97,953 23.21 172,770 27.43 183,874 34.94 166,876 37.01 222,073 61.56
FNMA 110,182 26.12 153,793 24.42 165,314 31.41 123,376 27.36 79,102 21.92
GNMA 983 0.23 13,933 2.21 - - - - - -
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Net MBSs $421,964 100.00% $629,889 100.00% $526,248 100.00% $450,867 100.00% $360,784 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
(1) Includes MBSs available for sale of $224.0 million, $439.2
million, $31.1 million, $38.2 million and $94.2 million at
December 31, 1996, 1995, 1994, 1993 and 1992, respectively.
Effective January 1, 1994, the Company's MBSs available for sale
are carried at estimated fair value with the resultant net
unrealized gain or loss reflected as a separate component of
stockholders' equity, net of related income taxes. Prior to the
adoption of SFAS No. 115, the Company carried MBSs held for sale
at the lower of amortized cost or estimated fair value.
(2) Included in total MBSs are CMOs and REMICs, which, at
December 31, 1996, had a gross carrying value of $212.8 million.
A CMO is a special type of pass-through debt in which the stream
of principal and interest payments on the underlying mortgages or
MBSs is used to create classes with different maturities and, in
some cases, amortization schedules, as well as a residual
interest, with each such class possessing different risk
characteristics. The Bank has in recent periods increased its
investment in REMICs and CMOs because these securities generally
exhibit a more predicable cash flow than mortgage pass-through
<PAGE>
securities. The Bank's policy is to limit its purchases of
REMICs to non high-risk securities as defined by the OTS.
The following tables set forth certain information regarding the
carrying and market values and percentage of total carrying
values of the Bank's mortgage-backed and related securities
portfolio.
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994
------ ------ ------
Carrying % of Market Carrying % of Market Carrying % of Market
Value Total Value Value Total Value Value Total Value
-------- ----- ------ -------- ----- ------ -------- ----- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
MBSs:
FHLMC $ 39,889 9.45% $ 39,594 $ 41,222 6.54% $ 41,352 $162,607 30.90% $157,082
FNMA 71,460 16.94 69,914 78,995 12.54 78,114 165,314 31.41 154,008
------- ----- ------- ------- ----- ------- ------- ----- -------
Total MBSs 111,349 26.39 109,508 120,217 19.09 119,466 327,921 62.31 311,090
------- ----- ------- ------- ----- ------- ------- ----- -------
Mortgage-related securities:
CMOs and REMICS-Agency
backed 24,449 5.79 24,142 22,969 3.65 22,476 101,206 19.23 94,710
CMOs and REMICS-
Non-agency 62,142 14.73 62,032 47,528 7.55 47,609 65,984 12.54 61,100
------- ----- ------- ------- ----- ------- ------- ----- -------
Total mortgage-related
securities 86,591 20.52 86,174 70,497 11.20 70,085 167,190 31.77 155,810
------- ----- ------- ------- ----- ------- ------- ----- -------
Total mortgage-backed and
related securities
held to maturity 197,940 46.91 195,682 190,714 30.29 189,551 495,111 94.08 466,900
------- ----- ------- ------- ----- ------- ------- ----- -------
Available for sale:
MBSs:
GNMA 983 0.23 983 13,933 2.21 13,933 - - -
FHLMC 58,064 13.76 58,064 131,548 20.88 131,548 21,267 4.04 21,267
FNMA 38,722 9.18 38,722 74,798 11.87 74,798 - - -
------- ----- ------- ------- ----- ------- ------- ----- -------
Total MBSs 97,769 23.17 97,769 220,279 34.96 220,279 21,267 4.04 21,267
------- ----- ------- ------- ----- ------- ------- ----- -------
Mortgage-related securities:
CMOs and REMICs-Agency
backed 93,520 22.16 93,520 197,315 31.32 197,315 9,870 1.88 9,870
CMOs and REMICs-
Non-agency 32,735 7.76 32,735 21,581 3.43 21,581 - - -
------- ----- ------- ------- ----- ------- ------- ----- -------
Total mortgage-related
securities 126,255 29.92 126,255 218,896 34.75 218,896 9,870 1.88 9,870
------- ----- ------- ------- ----- ------- ------- ----- -------
Total available for sale
securities 224,024 53.09 224,024 439,175 69.71 439,175 31,137 5.92 31,137
------- ----- ------- ------- ----- ------- ------- ----- -------
Total mortgage-backed and
related securities $421,964 100.00% $419,706 $629,889 100.00% $628,726 $526,248 100.00% $498,037
======= ====== ======= ======= ====== ======= ======= ====== =======
</TABLE>
<PAGE>
The table below sets forth certain information regarding the
carrying value, weighted average yields and maturities of the
Company's mortgage-backed and related securities at December
31, 1996.
<TABLE>
<CAPTION>
At December 31, 1996
Over One to Over Five to Mortgage-Backed
One Year or Less Five Years Ten Years Over Ten Years and Related Securities Totals
---------------- ----------- ------------ -------------- -----------------------------
Average
Weighted Weighted Weighted Weighted Remaining Estimated Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Years to Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Maturity Value Value Yield
-------- -------- -------- -------- -------- -------- -------- -------- --------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
FNMA $ - - % $ 5,131 7.29% $ 9,793 5.75% $56,536 6.45% 15.2 $71,460 $69,914 6.41%
FHLMC 6,405 6.93 2,013 7.00 7,232 6.30 24,239 6.77 14.4 39,889 39,594 6.72
CMOs and Remics 37 6.87 4,339 5.69 - - 82,215 6.72 22.9 86,591 86,174 6.67
------ ---- ------ ---- ------ ---- ------- ---- ---- ------- ------- ----
Total mortgage-
backed and
related
securities held
to maturity 6,442 6.93 11,483 6.63 17,025 5.98 162,990 6.63 18.4 197,940 195,682 6.58
------ ---- ------ ---- ------ ---- ------- ---- ---- ------- ------- ----
Available for sale:
FNMA - - - - - - 38,722 6.98 25.3 38,722 38,722 6.98
FHLMC - - 329 5.47 3,588 7.12 54,147 7.85 23.8 58,064 58,064 7.79
GNMA - - - - - - 983 7.85 27.3 983 983 7.85
CMOs and Remics - - - - - - 126,255 6.69 25.0 126,255 126,255 6.69
------ ---- ------ ---- ------ ---- ------- ---- ---- ------- ------- ----
Total mortgage-
backed and
related
securities
available
for sale - - 329 5.47 3,588 7.12 220,107 7.03 24.8 224,024 224,024 7.03
------ ---- ------- ---- ------- ---- ------- ---- ---- ------- ------- ----
Total mortgage-
backed and
related
securities $ 6,442 6.93% $11,812 6.60% $20,613 6.18% $383,097 6.86% 21.8 $421,964 $419,706 6.82%
====== ==== ====== ==== ====== ==== ======= ==== ==== ======= ======= ====
</TABLE>
<PAGE>
The following table shows the carrying value, maturity or period
to repricing of the Company's mortgage-backed and related
securities portfolio at December 31, 1996.
<TABLE>
<CAPTION>
At December 31, 1996
Total
Mortgage
Fixed Backed
Fixed Rate ARM Rate ARM and Related
MBSs MBSs CMOs CMOs Securities(1)
---------- ---------- ----- ---- -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Amounts due:
Within one year $ 6,402 74,843 37 98,193 179,475
------- ------- ------ ------- -------
After one year:
One to three years 7,141 814 - - 7,955
Three to five years 307 - 4,333 - 4,640
Five to 10 years 20,505 - - - 20,505
10 to 20 years 68,888 - 30,880 - 99,768
Over 20 years 27,487 - 80,924 - 108,411
------- ------- ------- ------- -------
Total due or repricing
after one year 124,328 814 116,137 - 241,279
------- ------- ------- ------- -------
Total 130,730 75,657 116,174 98,193 420,754
Adjusted for:
Unamortized yield
adjustment 675 329 (1,591) 757 170
Unrealized gain/loss 285 1,442 (528) (159) 1,040
------- ------- ------- ------- -------
Total mortgage-backed and
related securities $131,690 77,428 114,055 98,791 421,964
======= ======= ======= ======= =======
</TABLE>
At December 31, 1996, the weighted average contractual maturity
of the Bank's mortgage-backed and related securities portfolio
was 21.8 years.
(1) Includes $224.0 million of mortgage-backed and related
securities available for sale at December 31, 1996, carried at
fair value.
<PAGE>
The following table sets forth the carrying value and the
activity in the Company's mortgage-backed and related securities
portfolio during the periods indicated.
<TABLE>
<CAPTION>
For the Years Ended December 31,
1996 1995 1994
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Mortgage-backed and related
securities:
At beginning of period $629,889 $526,248 $450,867
MBSs purchased 41,647 68,990 145,468
MBSs sold (101,604) - (51,888)
CMOs and Remics purchased 158,654 123,835 95,831
CMOs and Remics sold (205,760) (17,465) (4,909)
Amortization and repayments (97,969) (78,086) (106,753)
Change in unrealized gain (loss) (2,893) 6,367 (2,368)
-------- ------- -------
Balance of mortgage-backed and
related securities at end
of period (1) $421,964 $629,889 $526,248
======= ======= =======
</TABLE>
(1) Includes $224.0 million, $439.2 million and $31.1 million of
mortgage-backed and related securities available for sale at
December 31, 1996, 1995 and 1994, respectively, carried at fair
value.
Effective February 10, 1992, the OTS adopted the Federal
Financial Institutions Examination Council "Statement of Policy
on Securities Activities" through its Thrift Bulletin 52
("Bulletin"). The Bulletin requires depository institutions to
establish prudent policies and strategies for securities
transactions, describes securities trading and sales practices
that are unsuitable when conducted in an investment portfolio and
sets forth certain factors that must be considered when
evaluating whether the reporting of an institution's investments
is consistent with its intent and ability to hold such
investments. The Bulletin also establishes a framework for
identifying when certain mortgage derivative products are high-
risk mortgage securities that must be reported in a "trading" or
"available for sale" account. Purchases of high-risk mortgage
securities prior to the effective date of the Bulletin generally
will be reviewed in accordance with previously-existing OTS
supervisory policies. The Bank believes that it currently holds
and reports its securities and loans in a manner consistent with
the Bulletin.
<PAGE>
The Asset/Liability Committee determines when to make substantial
changes in the MBS portfolio. During 1994, the Bank purchased
$145.6 million of adjustable rate MBSs which repriced upward due
to an increase in rates during 1995. In 1995, the Company
purchased $192.8 million of MBSs, of which $160.8 million were
adjustable-rate which are expected to help protect the net
interest margin during periods of rising interest rates as was
experienced during the second half of 1996. The Company
completed a $75.0 million leverage transaction in the second
quarter of 1995 which utilized short-term borrowings to purchase
floating rate, prime-based CMOs. In 1996, the Company purchased
$199.5 million of MBSs, of which $49.3 million were adjustable-
rate and $150.2 million were fixed-rate primarily to supplement
weak loan demand in the first half of 1996. Total adjustable
rate securities as a percentage of total MBSs was 46% at December
31, 1995 compared to 42% at December 31, 1996. At December 31,
1996, $327.1 million, or 77.5% of the Bank's MBS portfolio, was
directly insured or guaranteed by the FNMA, FHLMC or GNMA. FNMA
and FHLMC provide the certificate holder a guarantee of timely
payments of interest and scheduled principal payments, whether or
not they have been collected. The GNMA MBSs provide a guarantee
to the holder of timely payments of principal and interest and is
backed by the full faith and credit of the U.S. government. The
privately-issued CMOs and REMICs contained in the Bank's held to
maturity portfolio and available for sale portfolio totalling
$94.9 million, or 22.5% of MBSs have generally been underwritten
by large investment banking firms with the timely payment of
principal and interest on these securities supported (credit
enhanced) in varying degrees by either insurance issued by a
financial guarantee insurer, letters of credit or subordination
techniques. Substantially all such securities are rated AAA by
one or more of the nationally recognized securities rating
agencies. These securities are subject to certain credit-related
risks normally not associated with U.S. Government and agency
MBSs. Among such risks is the limited loss protection generally
provided by the various forms of credit enhancements as losses in
excess of certain levels are not protected. Furthermore, the
credit enhancement itself is subject to the credit-worthiness of
the enhancer. Thus, in the event a credit enhancer does not
fulfill its obligations, the MBS holder could be subject to risk
of loss similar to the purchaser of a whole loan pool.
Management believes that the credit enhancements are adequate to
protect the Bank from losses, and therefore the Bank has not
provided an allowance for losses on its privately issued MBSs.
MBSs generally yield less than the loans that underlie such
securities, because of the cost of payment guarantees or credit
enhancements that result in nominal credit risk. The MBS
portfolio had a weighted average yield of 6.90% at December 31,
1996. In addition, MBSs are more liquid than individual mortgage
loans and may be used to collateralize obligations of the Bank.
In general, MBSs issued or guaranteed by FNMA and FHLMC and
certain AA-rated mortgage-backed pass-through securities are
<PAGE>
weighted at no more than 20% for risk-based capital purposes, and
MBSs issued or guaranteed by GNMA are weighted at 0% for risk-
based capital purposes, compared to an assigned risk weighting of
50% to 100% for whole residential mortgage loans. These types of
securities thus allow the Bank to optimize regulatory capital to
a greater extent than non-securitized whole loans.
While MBSs carry a reduced credit risk as compared to whole
loans, such securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors
such as the geographic distribution of the underlying mortgage
loans, may alter the prepayment rate of such mortgage loans and
so affect both the prepayment speed, and value, of such
securities. In contrast to MBSs in which cash flow is received
(and, hence, prepayment risk is shared) pro rata by all
securities holders, the cash flows from the mortgages or MBSs
underlying REMICs or CMOs are segmented and paid in accordance
with a predetermined priority to investors holding various
tranches of such securities or obligations. A particular tranche
of REMICs or CMOs may therefore carry prepayment risk that
differs from that of both the underlying collateral or other
tranches.
SOURCES OF FUNDS
GENERAL. Deposits, loan, mortgage-backed and debt securities
repayments, retained earnings and, to a lesser extent, Federal
Home Loan Bank ("FHLB") advances are the primary source of the
Company's and the Bank's funds for use in lending, investing and
for other general purposes.
DEPOSITS. The Bank offers a variety of deposit accounts having a
range of interest rates and terms. The Bank's deposits consist
of passbook, NOW, checking, money market and certificate
accounts. The flow of deposits is influenced significantly by
general economic conditions, changes in money market rates,
prevailing interest rates and competition.
During 1996, the Bank implemented its supermarket banking
program. In May, the Bank opened its first supermarket branch in
an Edwards Super Food Store in Medford, Long Island. During
July, the Bank opened its second supermarket branch in a ShopRite
store in Uniondale, Long Island. During September, the Bank and
Pathmark Stores, Inc. entered into an agreement to open
approximately 44 full-service bank branches in Pathmark
supermarkets throughout New York City, Long Island, Westchester
and Rockland counties by early 1998. The cost of opening a
supermarket branch is approximately one-fifth the cost of a
traditional branch, and in the typical store the branch is
visible to approximately 20,000 people each week. The Bank
believes that supermarket branching is a cost-effective way to
extend its franchise and put its sales force in touch with a
significant number of prospective customers. During the fourth
<PAGE>
quarter of 1996, two additional supermarket locations opened, one
at an Edwards Super Food Store in West Babylon, Long Island and
one at a Pathmark Store in Brooklyn, New York. The branches will
be open seven days a week and will provide a broad range of
traditional banking services, as well as the full package of
financial services offered by CIS, Inc.
The Bank's deposits are obtained primarily from the areas in
which its branch offices are located. The Bank relies primarily
on customer service and long-standing relationships with
customers to attract and retain these deposits. Certificate
accounts in excess of $100,000 are not actively solicited by the
Bank nor does the Bank use brokers to obtain deposits. During
1996, the Bank continued to offer competitive rates without
jeopardizing the value of existing core deposits. During 1996,
the Bank continued to experience a transfer of deposits from
passbook accounts into certificates of deposit. Certificates of
deposit increased from 49.2% of deposits at December 31, 1995 to
52.8% of deposits at December 31, 1996. The Company has been
able to maintain a substantial level of core deposits which the
Company believes helps to limit interest rate risk by providing a
relatively stable, low cost long-term funding base. At December
31, 1996 core deposits represented 47.2% of deposits compared to
50.8% of deposits at December 31, 1995. The Company expects to
attract a higher percentage of core deposits from its supermarket
branch locations as these locations continue to grow and mature.
The following table presents the deposit activity of the Bank for
the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits $2,441,295 2,055,132 1,810,714 1,671,964 1,508,024
Withdrawals 2,428,315 2,041,495 1,816,309 1,682,613 1,584,433
--------- --------- --------- --------- ---------
Net deposits (withdrawals) 12,980 13,637 (5,595) (10,649) (76,409)
Deposits acquired - 17,024 - - -
Interest credited on deposits 41,362 39,623 31,997 33,691 41,270
--------- --------- --------- --------- ---------
Total increase (decrease)
in deposits $ 54,342 70,284 26,402 23,042 (35,139)
========= ========= ========= ========= =========
</TABLE>
<PAGE>
Time deposits by maturity at December 31, 1996 over $100,000 are
as follows:
Maturity Period Amount
--------------- ------
(In thousands)
Six months or less $21,703
Over six through 12 months 10,950
Over 12 months 9,038
------
Total $41,691
======
The following table sets forth the distribution of the Bank's
deposit accounts for the periods indicated and the weighted
average nominal interest rates for each category of deposits
presented.
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
------ ------ ------
Percent Weighted Percent Weighted Percent Weighted
of Average of Average of Average
Average Total Nominal Average Total Nominal Average Total Nominal
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
------- -------- ------ ------- -------- ------ ------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts $373,337 33.46% 2.49% $405,932 38.60% 2.49% $499,326 50.63% 2.49%
Interest earning checking 99,089 8.88 0.90 84,544 8.04 .98 84,643 8.58 1.04
Non-interest earning accounts 12,336 1.11 - 11,698 1.11 - 4,534 .46 -
------- ----- ---- ------- ----- ----- ------- ----- -----
Total passbook and checking
accounts 484,762 43.45 2.13 502,174 47.75 2.21 588,502 59.67 2.27
------- ----- ---- ------- ----- ----- ------- ----- -----
Money market accounts 58,108 5.21 3.32 45,472 4.32 3.49 30,502 3.09 2.47
------- ----- ---- ------- ----- ----- ------- ----- -----
Certificate accounts:
91 days 7,783 0.70 3.92 11,125 1.06 4.61 8,859 .90 3.20
6 months 85,768 7.69 5.12 75,616 7.19 5.47 70,942 7.19 3.96
7 months 2,228 .20 2.99 3,894 .37 2.94 8,219 .83 2.95
One year 203,259 18.22 5.51 166,956 15.88 5.91 77,790 7.89 4.17
13 months 11,036 0.99 5.12 5,784 .55 3.60 8,708 .88 3.38
18 months 23,407 2.10 5.98 40,453 3.85 6.03 10,477 1.06 4.99
2 to 4 years 131,931 11.82 5.87 88,054 8.37 5.66 72,882 7.39 4.89
Five years 101,690 9.11 6.30 106,366 10.11 6.40 103,278 10.48 6.40
7 to 10 years 5,666 0.51 6.28 5,742 .55 6.25 6,152 .62 6.22
--------- ------ ---- -------- ------ ---- ------- ------ ----
Total certificates 572,768 51.34 5.66 503,990 47.93 5.84 367,307 37.24 4.86
--------- ------ ---- --------- ------ ---- ------- ------ ----
Total deposits $1,115,638 100.00% 4.00% $1,051,636 100.00% 4.00% $986,312 100.00% 3.24%
========= ====== ==== ========= ====== ==== ======= ====== ====
</TABLE>
<PAGE>
The following table presents, by various rate categories, the
amount of certificate accounts outstanding at December 31, 1996,
1995 and 1994 and the periods to maturity of the certificate
accounts outstanding at December 31, 1996.
<TABLE>
<CAPTION>
Period of Maturity from December 31, 1996
Within One to Two to Over
At December 31, One Two Three Three
1996 1995 1994 Year Years Years Years Total
------ ------ ------ ------ ------ ------ ----- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
3.99% or less $ 10,396 10,425 50,373 9,940 46 38 372 10,396
4.00% to 4.99% 18,545 55,732 89,735 15,064 1,874 1,378 229 18,545
5.00% to 5.99% 456,789 267,113 143,698 380,083 63,515 3,489 9,702 456,789
6.00% to 6.99% 104,732 175,183 134,733 38,221 48,588 8,389 9,534 104,732
7.00% to 7.99% 10,637 24,557 16,515 2,862 2,959 529 4,287 10,637
8.00% to 8.99% - - 2,835 - - - - -
------- ------- ------- ------- ------ ------ ------ -------
Total $601,099 533,010 437,889 446,170 116,982 13,823 24,124 601,099
======= ======= ======= ======= ====== ====== ====== =======
</TABLE>
BORROWINGS
Although deposits are the Bank's primary source of funds, the
Bank has from time to time utilized borrowings as an alternative
or less costly source of funds. The Bank's primary source of
borrowing is advances from the FHLB-NY. These advances are
collateralized by the capital stock of the FHLB-NY held by the
Bank and certain of the Bank's MBSs. See "Regulation and
Supervision-Federal Home Loan Bank System." Such advances are
made pursuant to several different credit programs, each of which
has its own interest rate and range of maturities. The maximum
amount that the FHLB-NY will advance to member institutions,
including the Bank, for purposes other than meeting withdrawals,
fluctuates from time to time in accordance with the policies of
the OTS and the FHLB-NY. At December 31, 1996, the Bank had
$178.4 million of advances outstanding from the FHLB-NY.
In addition, the Bank may, from time to time, enter into sales of
securities under agreements, generally for up to 30 days, to
repurchase ("reverse repurchase agreements") with nationally
recognized investment banking firms. Reverse repurchase
agreements are accounted for as borrowings by the Bank and are
secured by designated securities. The proceeds of these
transactions are used to meet cash flow or asset/liability needs
of the Bank. At December 31, 1996, the Bank had $142.9 million
of reverse repurchase agreements outstanding.
The Bank had additional borrowings outstanding in the form of a
CMO, which was issued by the Bank's subsidiary, CFSB Funding.
The CMO is secured by MBSs that are held by an unaffiliated
commercial bank as trustee. The original issuance aggregated
$91.7 million, and the Bank received cash of $86.7 million. The
outstanding aggregate balance of the CMO at December 31, 1996 was
$3.0 million and the book value of the MBSs collateralizing the
CMO was $12.2 million. The CMO was originally issued in four
<PAGE>
tranches, the fourth being a zero coupon tranche. The first
three tranches have been paid out and principal and interest
payments are now being received by holders of the fourth tranche.
The original maturity of the bond issue was structured over 30
years. The estimated remaining life of the CMO as of December
31, 1996 was one year. The funds derived from the issuance of
the CMO were used to purchase investment securities.
The Bank has an ESOP loan from an unrelated third party lender
with an outstanding balance of $2.1 million and an interest rate
of 7.91% at December 31, 1996. See Note 11 of Notes to
Consolidated Financial Statements in the Registrant's 1996 Annual
Report to Stockholders on page 45 which is incorporated herein by
reference. The loan, as amended on December 29, 1995, is payable
in thirty-two equal quarterly installments beginning December
1995 through September 2003. The loan bears interest at a
floating rate based on the federal funds rate plus 250 basis
points.
<PAGE>
The following table sets forth certain information regarding
borrowed funds for the dates indicated:
<TABLE>
<CAPTION>
At or For the Years Ended December 31,
1996 1995 1994
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB-NY advances:
Average balance outstanding $152,005 $ 95,775 $ 83,147
Maximum amount outstanding at any
month-end during the period 195,000 134,175 110,775
Balance outstanding at end of period 178,450 134,175 86,000
Weighted average interest rate
during the period 5.54% 5.59% 4.55%
Weighted average interest rate
at end of period 4.72% 4.21% 5.05%
Securities Sold under Agreements to
Repurchase:
Average balance outstanding $128,677 $ 94,375 $ 47,581
Maximum amount outstanding at any
month-end during the period 142,906 150,249 67,538
Balance outstanding at end of period 142,906 126,032 23,003
Weighted average interest rate
during the period 5.65% 5.98% 4.45%
Weighted average interest rate
at end of period 5.09% 4.47% 6.27%
Other Borrowings (1):
Average balance outstanding $ 7,667 $ 13,293 $ 20,775
Maximum amount outstanding at any
month-end during the period 10,725 16,162 27,135
Balance outstanding at end of period 5,077 10,376 16,078
Weighted average interest rate
during the period 6.38% 5.49% 6.92%
Weighted average interest rate
at end of period 9.63% 7.03% 8.86%
Total Borrowings:
Average balance outstanding $288,349 $203,443 $151,503
Maximum amount outstanding at any
month-end during the period 348,631 270,583 199,213
Balance outstanding at end of period 326,433 270,583 125,081
Weighted average interest rate
during the period 5.84% 6.50% 5.64%
Weighted average interest rate
at end of period 5.11% 4.83% 5.82%
</TABLE>
(1) Includes the CMO and ESOP loan.
<PAGE>
SUBSIDIARY ACTIVITIES
COLUMBIA RESOURCES CORP. Columbia Resources is a wholly owned
subsidiary of the Bank and was formed in 1984 for the sole
purpose of acting as a conduit for a partnership to acquire and
develop a parcel of property in New York City. Columbia
Resources acquired the property, but never developed it. The
property was later sold. During 1996, two REO commercial
properties totalling $524,000 were transferred from the Bank to
Columbia Resources to limit exposure to the Bank from unknown
creditors. By December 31, 1996 the properties were written down
to a combined value of $440,000.
CFSB FUNDING CORP. CFSB Funding is a limited purpose wholly
owned finance subsidiary of the Bank that was established in 1986
for the issuance and sale of a CMO collateralized by FHLMC
Participation Certificates. The Bank transferred to CFSB Funding
FHLMC Participation Certificates having a market value of $91.2
million and $10,000 in cash. See "Borrowings." Upon repayment
of the CMO bond, CFSB Funding will have served its limited
purpose as a finance subsidiary of the Bank.
COLUMBIA INVESTMENT SERVICES, INC. ("CIS") CIS is a wholly owned
subsidiary of the Bank organized in 1989 that is engaged in the
sale of tax deferred annuities, securities brokerage activities
and insurance. CIS participates with MDS/Bankmark, which is
registered as a broker-dealer with the SEC and state securities
regulatory authorities. All employees of CIS engaged in
securities brokerage activities are dual employees of
MDS/Bankmark. Products offered through MDS/Bankmark include debt
and equity securities, mutual funds, unit investment trusts and
fixed and variable annuities. Fixed annuities, life and health
insurance, and long term nursing care products are offered
through CIS; a licensed general agent with the New York State
Department of Insurance. In January 1997, CIS changed its
broker/dealer relationship from MDS to BHC Securities, Inc.
Management believes that BHC will enhance CIS's distribution of
investment products by providing superior technology support, and
the ability to offer enhanced product lines.
HAVEN CAPITAL TRUST I. On February 12, 1997, Haven Capital Trust
I, a statutory business trust fund formed under the laws of the
State of Delaware issued $25 million of 10.46% capital
securities. See Note 17 of Notes to Consolidated Financial
Statements in the Registrant's 1996 Annual Report to Stockholders
on page 53 which is incorporated herein by reference.
PERSONNEL
As of December 31, 1996, the Bank had 346 full-time employees and
60 part-time employees. Even though the employees are not
represented by a collective bargaining unit, the Bank considers
its relationship with its employees to be good.
<PAGE>
REGULATION AND SUPERVISION
GENERAL
The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its chartering agency, and the FDIC,
as the deposit insurer. The Bank is a member of the FHLB System
and its deposit accounts are insured up to applicable limits by
the Savings Association Insurance Fund ("SAIF") managed by the
FDIC. The Bank must file reports with the OTS and the FDIC
concerning its activities and financial condition in addition to
obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other
financial institutions. There are periodic examinations by the
OTS and the FDIC to test the Bank's compliance with various
regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The regulatory
structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with
respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change
in such policies, whether by the OTS, the FDIC or 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. The
description of statutory provisions and regulations applicable to
savings associations set forth herein do not purport to be
complete descriptions of such statutes and regulations and their
effects on the Bank.
FEDERAL SAVINGS INSTITUTION REGULATION
Business Activities. The activities of federal savings
institutions are governed by the Home Owners' Loan Act, as
amended (the "HOLA") and, in certain respects, the Federal
Deposit Insurance Act ("FDI Act") and the regulations issued by
the agencies to implement these statutes. These laws and
regulations delineate the nature and extent of the activities in
which federal associations may engage. In particular, many types
of lending authority for federal associations, e.g., commercial,
non-residential real property loans, consumer loans, are limited
to a specified percentage of the institutions's capital or
assets.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one
borrower. Generally, this limit is 15% of the Bank's unimpaired
capital and surplus plus an additional 10% of unimpaired capital
and surplus if such loan is secured by readily-marketable
collateral, which is defined to include certain financial
<PAGE>
instruments and bullion. At December 31, 1996, the Bank's
unimpaired capital and surplus was $108.2 million and its limit
on loans to one borrower was $16.2 million. At December 31,
1996, the Bank's largest aggregate amount of loans to one
borrower had an aggregate balance of $8.2 million.
QTL Test. The HOLA requires savings institutions to meet a
Qualified Thrift Lender ("QTL") test. Under the QTL test, a
savings association is required to maintain at least 65% of its
"portfolio assets" (total assets less: (i) specified liquid
assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct
business) in certain "qualified thrift investments" (primarily
residential mortgages and related investments, including certain
mortgage-backed and related securities) in at least 9 months out
of each 12 month period. A savings association that fails the
QTL test must either convert to a bank charter or operate under
certain restrictions. As of December 31, 1996, the Bank
maintained 83.1% of its portfolio assets in qualified thrift
investments and had more than 65% of its portfolio assets in
qualified thrift investments in each of the prior 12 months.
Therefore, the Bank met the QTL test.
Limitation 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 shareholders of another
institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of
institutions, which are based primarily on an institution's
capital level. An institution that exceeds all fully phased-in
regulatory capital requirements before and after a proposed
capital distribution ("Tier 1 Bank") and has not been advised by
the OTS that it is in need of more than normal supervision,
could, after prior notice to, but without the 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 earnings for the previous four
quarters. Any additional capital distributions would require
prior OTS approval. In the event the Bank's capital fell below
its capital requirements or the OTS notified it that it was in
need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS
could prohibit a proposed capital distribution by any
institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. During 1996, the Bank
paid dividends of $2.0 million to the Holding Company.
The OTS has proposed regulations that would simplify the existing
<PAGE>
procedures governing capital distributions by savings
associations. Under the proposed regulations, the approval of
the OTS would be required only for an association that is deemed
to be in troubled condition or that is undercapitalized or would
be undercapitalized after the capital distribution. A savings
association would be able to make a capital distribution without
notice to or approval of the OTS if it is not held by a saving
and loan holding company, is not deemed to be in troubled
condition, has received either of the two highest composite
supervisory ratings and would continue to be adequately
capitalized after such distribution. Notice would have to be
given to the OTS by an association that is held by a savings and
loan holding company or that had received a composite supervisory
rating below the highest two composite supervisory ratings. An
association's capital rating would be determined under the prompt
corrective action regulations. See "-Prompt Corrective
Regulatory Action."
Liquidity. The Bank is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of
not less than a specified percentage (currently 5%) of its net
withdrawable deposit accounts plus short-term borrowings. OTS
regulations also require each savings institution to maintain an
average daily balance of short-term liquid assets at a specified
percentage (currently 1%) of the total of its net withdrawable
deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet these
liquidity requirements. The Bank's average liquidity and short-
term liquidity ratios for December 31, 1996 were 14.99% and
2.80%, respectively, which exceeded the then applicable
requirements. The Bank has never been subject to monetary
penalties for failure to meet its liquidity requirements.
Assessments. Savings institutions are required by regulation to
pay assessments to the OTS to fund the agency's operations. The
general assessment, paid on a semi-annual basis, is computed upon
the savings institution's total assets, including consolidated
subsidiaries, as reported in the Bank's latest quarterly Thrift
Financial Report. The assessments paid by the Bank for the years
ended December 31, 1995 and 1996, totalled $241,000 and $262,000,
respectively.
Branching. OTS regulations permit federally chartered savings
associations to branch nationwide under certain conditions.
Generally, federal savings associations may establish interstate
networks and geographically diversify their loan portfolios and
lines of business. The OTS authority preempts any state law
purporting to regulate branching by federal savings associations.
Transactions with Related Parties. The Bank's authority to
engage in transactions with related parties or "affiliates"
(i.e., any company that controls or is under common control with
an institution, including the Company and its non-savings
<PAGE>
institution subsidiaries) is limited by Sections 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 and also limits the aggregate amount of transactions
with all affiliates to 20% of the savings institution's capital
and surplus. Certain transactions with affiliates are required
to be secured by collateral in an amount and of a type described
in Section 23A, and the purchase of low quality assets from
affiliates is generally prohibited. Section 23B generally
requires that certain transactions with affiliates, including
loans and asset purchases, must be on terms and under
circumstances, including credit underwriting standards, that are
substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable
transactions with non-affiliated companies. Notwithstanding
Sections 23A and 23B, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are
not permissible for bank holding companies under Section 4(c) of
the Bank Holding Company Act ("BHC Act"). Further, no savings
institution may purchase the securities of any affiliate other
than a subsidiary.
The Bank's authority to extend credit to its executive officers,
directors and 10% shareholders, as well as to entities controlled
by such persons, is currently governed by Sections 22(g) and
22(h) of the FRA, and Regulation O thereunder. Among other
things, these regulations require that such loans to be made on
terms and conditions, including credit underwriting standards,
substantially the same as those offered to unaffiliated
individuals and not involve more than the normal risk of
repayment. Regulation O also places individual and aggregate
limits on the amount of loans the Bank may make to such persons
based, in part, on the Bank's capital position, and requires that
certain board approval procedures be followed. HOLA and the OTS
regulations, with certain minor variances, apply Regulation O to
savings institutions.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties,"
including controlling stockholders, and any stockholders,
attorneys, appraisers and accountants who knowingly or recklessly
participate in any violation of applicable law or regulation or
breach of fiduciary duty or certain other wrongful actions that
causes or is likely to cause a more than a minimal loss or other
significant adverse effect on an insured savings association.
Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of
officers or directors, receivership, conservatorship or
termination of deposit insurance. Civil penalties cover a wide
range of violations and can amount to $5,000 per day for less
serious violations, and up to $1 million per day in more
<PAGE>
egregious cases. Under the FDI Act, the FDIC has the authority
to recommend to the Director of the OTS that enforcement action
be taken with respect to a particular savings institution. If
action is not taken by the Director of the OTS, 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 FDI Act requires each
federal banking agency to prescribe for all insured depository
institutions standards relating to, among other things, internal
controls, information systems and audit systems, loan
documentation, credit underwriting, interest rate risk exposure,
asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems
appropriate. The OTS and the federal banking agencies have
adopted a final rule and Interagency Guidelines Prescribing
Standards for Safety and Soundness ("Guidelines") to implement
these safety and soundness standards. 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
Guidelines address internal controls and information systems;
internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; asset quality;
earnings and compensation, fees and benefits. If the appropriate
federal banking agency determines that an institution fails to
meet any standard prescribed by the Guidelines, the agency may
require the institution to submit to the agency an acceptable
plan to achieve compliance with the standard, as required by the
FDI Act. The final rule establishes deadlines for the submission
and review of such safety and soundness compliance plans, when
such plans are required.
Capital Requirements. The OTS capital regulations require
savings institutions to meet three minimum capital standards: a
tangible capital ratio requirement of 1.5% of total assets as
adjusted under the OTS regulations, a leverage ratio requirement
of 3.0% of core capital to such adjusted total assets, and a
risk-based capital ratio requirement of 8.0% of core and
supplementary capital to total risk-based assets. Tangible
capital is defined, generally, as common stockholders' equity
(including retained earnings), certain noncumulative perpetual
preferred stock and related earnings, minority interests in
equity accounts of fully consolidated subsidiaries, less
intangibles other than certain mortgage servicing rights and
investments in and loans to subsidiaries engaged in activities
not permissible for a national bank. Core capital (also called
"Tier 1" capital) is defined similarly to tangible capital, but
core capital also includes certain qualifying supervisory
goodwill and certain purchased credit card relationships. In
addition, the OTS prompt corrective action regulation provides
that a savings institution that has a leverage capital ratio of
<PAGE>
less than 4% (3% for institutions receiving the highest CAMEL
examination rating) will be deemed to be "undercapitalized" and
may be subject to certain restrictions. See "- Prompt Corrective
Regulatory Action."
The risk-based capital standard for savings institutions requires
the maintenance of total capital (which is defined as core
capital and supplementary capital) to risk-weighted assets of at
least 8%. 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 core capital are
equivalent to those discussed earlier under the 3% leverage
standard. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible debt securities, subordinated debt
and intermediate preferred stock and, within specified limits,
the allowance for loan and lease losses. Overall, the amount of
supplementary capital included as part of total capital cannot
exceed 100% of core capital.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. The final interest rate risk rule also
adjusts the risk-weighting for certain mortgage derivative
securities. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a
deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's
interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between
incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result
from a hypothetical 200-basis point increase or decrease in
market interest rates divided by the estimated economic value of
the association's assets, as calculated in accordance with
guidelines set forth by the OTS. A savings association whose
measured interest rate risk exposure exceeds 2% must deduct an
interest rate component in calculating its total capital under
the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by
the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in
calculating compliance with its risk-based capital requirement.
Under the rule, there is a two quarter lag between the reporting
date of an institution's financial data and the effective date
for the new capital requirement based on that data. A savings
association with assets of less than $300 million and risk-based
capital ratios in excess of 12% is not subject to the interest
rate risk component, unless the OTS determines otherwise. The
rule also provides that the Director of the OTS may waive or
defer an association's interest rate risk component on a
<PAGE>
case-by-case basis. The OTS has not implemented the regulatory
requirement for savings associations to deduct an interest-rate
risk component in calculating their risk-based capital. If the
Bank had been subject to an interest rate risk capital component
as of December 31, 1996, there would have been no material effect
on the Bank's risk-weighted capital.
At December 31, 1996, the Bank met each of its capital
requirements, in each case on a fully phased-in basis. A chart
which sets forth the Bank's compliance with its capital
requirements appears in Note 13 to Notes to Consolidated
Financial Statements in the Registrant's 1996 Annual Report to
Stockholders on page 49, and is incorporated herein by reference.
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS prompt corrective action regulations, the OTS is
required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon
the institution's degree of capitalization. Generally, a savings
institution that has a total risk-based capital of less than 8.0%
or either a leverage ratio or a Tier 1 risk-based capital ratio
that is less than 4.0% is considered to be undercapitalized. A
savings institution that has a total risk-based capital less than
6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a
leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2.0%
is deemed to be "critically undercapitalized." Subject to a
narrow exception, the banking regulator is required to appoint a
receiver or conservator for an institution that is critically
undercapitalized. The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the
date an association receives notice that it is "under-
capitalized", "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed
by any parent holding company. In addition, numerous mandatory
supervisory actions become immediately applicable to the
institution depending upon its category, including, but not
limited to, increased monitoring by regulators, restrictions on
growth,and capital distributions and limitations on expansion.
The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and
directors.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based insurance assessment system.
The FDIC assigns an institution to one of three capital
categories based on the institution's financial information, as
of the reporting period ending seven months before the assessment
period, consisting of (1) well capitalized, (2) adequately
capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory
<PAGE>
subgroup to which an institution is assigned is based on a
supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information which the FDIC
determines to be relevant to the institution's financial
condition and the risk posed to the deposit insurance funds. An
institution's assessment rate depends on the capital category and
supervisory category to which it is assigned.
On September 30, 1996, as part of the omnibus appropriations
bill, Congress passed and President Clinton signed the Deposit
Insurance Funds Act of 1996 ("Act"). The Act significantly
reduced and should eventually end the premium disparity that has
existed between banks insured by the BIF and thrifts insured by
the SAIF. The Act required SAIF-insured institutions to pay a
special one-time assessment to recapitalize the SAIF. The Bank's
special one-time insurance assessment amounted to $6.8 million.
As a result of the special assessment, the SAIF was capitalized
at the required Designated Reserve Ratio (DDR) of 1.25% of
estimated insured deposits. Section 7 of the Federal Deposit
Insurance Act, as amended by the Funds Act, requires the FDIC to
set assessments in order to maintain the target DDR. The Board
has, therefore, lowered the rates on deposit insurance
assessments paid to the SAIF, while simultaneously widening the
spread between the lowest and highest rates to improve the
effectiveness of the FDIC's risk-based premium system. The Board
has established a process, similar to that which has applied to
the Bank Insurance Fund (BIF), for adjusting the rate schedules
for both the SAIF and the BIF within a limited range without
notice and comment to maintain each of the fund balances at the
target DDR. Effective with the semi-annual period beginning on
January 1, 1997, the rates of assessments for both BIF-assessable
and SAIF-assessable deposits were the same, ranging from 0 to 27
basis points.
The Funds Act also separates, effective January 1, 1997, the
Financing Corporation ("FICO") assessment to service the interest
on its bond obligations from the SAIF assessment. The amount
assessed on individual institutions by the FICO will be in
addition to any amount paid for deposit insurance pursuant to the
FDIC's risk-related assessment rate schedules. However, between
October 1, 1996, and January 1, 1997, the amount required by the
FICO was deducted from the amounts the FDIC was authorized to
assess SAIF-member savings associations, and must not be assessed
against Sasser and BIF-member Oakar institutions. FICO
assessment rates for the first semi-annual period of 1997 were
set at 1.30 basis points annually for BIF-assessable deposits and
6.48 basis points annually for SAIF-assessable deposits. (These
rates may be adjusted quarterly to reflect changes in assessment
bases for the BIF and the SAIF. By law, the FICO rate on BIF-
assessable deposits must be one-fifth the rate on SAIF-assessable
deposits until the insurance funds are merged or until January 1,
2000, whichever occurs first.) Beginning January 1, 2000, or the
date at which no thrift institution continues to exist, BIF-
<PAGE>
insured institutions will be required to pay their full pro-rate
share of FICO payments. The Bank's annual assessment rate for
the first three quarters of 1996 was 23 basis points and was 18
basis points for the last quarter of 1996.
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. The management of the Bank does not know of any practice,
condition or violation that might lead to termination of deposit
insurance.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12
regional FHLBs. The FHLB provides a central credit facility
primarily for member institutions. The Bank, as a member of the
FHLB of New York, is required to acquire and hold shares of
capital stock in the FHLB 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, whichever is
greater. The Bank was in compliance with this requirement with
an investment in FHLB stock at December 31, 1996 of $9.9 million.
FHLB advances must be secured by specified types of collateral,
and all long-term advances may only be obtained for the purpose
of providing funds for residential housing finance.
The FHLBs are required to provide funds for the resolution of
insolvent thrifts and to contribute funds for affordable housing
programs. These requirements could reduce the amount of
dividends that the FHLBs pay to their members and could also
result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended December 31,
1996, 1995 and 1994, dividends from the FHLB to the Bank amounted
to $571,000, $496,000 and $545,000, respectively. If dividends
were reduced or interest on future FHLB advances increased, the
Bank's net interest income would likely also be reduced.
Further, there can be no assurance that the impact of recent
legislation on the FHLBs will not also cause a decrease in the
value of the FHLB stock held by the Bank.
Federal Reserve System
The Federal Reserve Board regulations require savings
institutions to maintain non-interest-earning reserves against
their transaction accounts (primarily NOW and regular checking
accounts). The Federal Reserve Board regulations generally
require that reserves be maintained against aggregate transaction
accounts as follows: for accounts aggregating $49.3 million or
less (subject to adjustment by the Federal Reserve Board) the
reserve requirement is 3%; and for accounts greater than $49.3
million, the reserve requirement is $1.5 million plus 10%
<PAGE>
(subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in
excess of $49.3 million. The first $4.4 million of otherwise
reservable balances (subject to adjustments by the Federal
Reserve Board) are exempted from the reserve requirements. The
Bank is in compliance with the foregoing requirements. 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 Federal Reserve Board,
the effect of this reserve requirement is to reduce the Bank's
interest-earning assets. FHLB System members are also authorized
to borrow from the Federal Reserve "discount window," but Federal
Reserve Board regulations require institutions to exhaust all
FHLB sources before borrowing from a Federal Reserve Bank.
HOLDING COMPANY REGULATION
The Company is a non-diversified unitary savings and loan holding
company within the meaning of the HOLA. As such, the Company is
required to be registered with the OTS and is subject to OTS
regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority
over the Company and its non-savings institution subsidiaries.
Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to
the subsidiary savings institution. The Bank must notify the OTS
30 days before declaring any dividend to the Company.
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 QTL. See "- Federal Savings Institution
Regulation - QTL Test" for a discussion of the QTL requirements.
Upon any non-supervisory acquisition by the Company of another
savings association, 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 BHC Act, subject to the prior
approval of the OTS, and to other activities authorized by OTS
regulation. Legislation has been proposed in the past to
restrict the activities of unitary savings and loan holding
companies to those permissible for multiple savings and loan
holding companies. See "Legislative Developments".
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; and from acquiring or retaining, with
certain exceptions, more than 5% of a non-subsidiary holding
<PAGE>
company, or a non-subsidiary company engaged in activities other
than those permitted by the HOLA; or acquiring or retaining
control of a depository institution that is not insured by the
FDIC. In evaluating applications by holding companies to acquire
savings institutions, the OTS must consider the financial and
managerial resources and future prospects of the company and
institution involved, the effect of the acquisition on the risk
to the insurance funds, the convenience and needs of the
community and competitive factors.
The OTS is prohibited from approving any acquisition that would
result in a multiple savings and loan holding company controlling
savings institutions in more than one state, except: (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.
LEGISLATIVE DEVELOPMENTS
The 1996 Funds Act requires the Secretary of the Treasury to
conduct a study of the relevant factors with respect to the
development of a common charter for all insured depository
institutions and to the abolition of separate charters for banks
and thrifts, and the Secretary of the Treasury is to report his
conclusions and findings to the Congress on or before March 31,
1997. Proposals to eliminate the thrift charter are included in
two bills that have been introduced in Congress to remove
statutory restrictions on the operations and activities of
financial institutions, including proposed amendments to
eliminate the federal thrift charter. One bill would require a
federal thrift to convert to a bank charter and the other bill
would give the federal thrift the option to convert to a national
or state chartered bank or to a state savings and loan
association. Existing thrift holding companies, such as the
Company, would be grandfathered and continue to be able to engage
in the same activities as were permissible for it before the
enactment of the new law. Other proposed statutory changes would
permit (a) depository institutions to engage in a wider range of
securities and insurance activities and (b) affiliations between
depository institutions and insurance, securities and other
financial companies. The outcome of these efforts to eliminate
the thrift charter and to change the regulation of depository
institutions and their holding companies is uncertain.
Therefore, the Company is unable to determine the extent to which
any such legislation, if enacted, would affect the Company's
business.
FEDERAL SECURITIES LAWS
The Company's Common Stock is registered with the Securities and
Exchange Commission under Section 12(g) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The
<PAGE>
Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements under the
Exchange Act.
The registration under the Securities Act of 1933 (the
"Securities Act") of shares of the Common Stock issued in the
Conversion does not cover the resale of such shares. Shares of
the Common Stock purchased by persons who are not affiliates of
the Company may be resold without registration. Shares purchased
by an affiliate of the Company will be subject to the resale
restrictions of Rule 144 under the Securities Act. If the
Company meets the current public information requirements of Rule
144 under the Securities Act, each affiliate of the Company who
complies with the other conditions of Rule 144 (including those
that require the affiliate's sale to be aggregated with those of
certain other persons) would be able to sell in the public
market, without registration, a number of shares not to exceed,
in any three-month period, the greater of (i) 1% of the
outstanding shares of the Company or (ii) the average weekly
volume of trading in such shares during the preceding four
calendar weeks. Shares acquired through the Company's option
plans have been registered under the Securities Act and,
therefore, are not subject to resale restrictions. Provision may
be made in the future by the Company to permit affiliates to have
their shares registered for sale under the Securities Act under
certain circumstances.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Company and the Bank report their income on a
calendar year basis using the accrual method of accounting and
will be subject to federal income taxation in the same manner as
other corporations with some exceptions. The following
discussion of tax matters is intended only as a summary and does
not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Company. The Bank and the Company
have not been audited by the Internal Revenue Service during the
last five fiscal years.
The Company and its subsidiaries file a consolidated Federal
income tax return on a calendar-year basis. Under Section 593 of
the Internal Revenue Code of 1986, as amended ("Code"), prior to
January 1, 1996 thrift institutions such as the Bank which met
certain definitional tests primarily relating to their assets and
the nature of their business, were permitted to establish a tax
reserve for bad debts. Such thrift institutions were also
permitted to make annual additions to the reserve, to be deducted
in arriving at their taxable income within specified limitations.
The Bank's deduction was computed using an amount based on the
Bank's actual loss experience ("experience method"), or a
percentage equal to 8% of the Bank's taxable income ("PTI
<PAGE>
method"). Similar deductions for additions to the Bank's bad
debt reserve were also permitted under the New York State Bank
Franchise Tax and the New York City Banking Corporation Tax;
however, for purposes of these taxes, the effective allowable
percentage under the PTI method was 32% rather than 8%.
Under the Small Business Job Protection Act of 1996 ("1996 Act"),
signed into law in August 1996, the special rules for bad debt
reserves of thrift institutions no longer apply and the Bank will
be unable to make additions to the tax bad debt reserves but will
be permitted to deduct bad debts as they occur. Additionally,
under the 1996 Act, the Bank will be required to recapture (that
is, include in taxable income) the excess of the balance of its
bad debt reserves as of December 31, 1995 over the balance of
such reserves as of December 31, 1987 ("base year"). The Bank's
federal tax bad debt reserves at December 31, 1995 exceeded its
base year reserves by $2.7 million which will be recaptured into
taxable income ratably over a six year period. This recapture
will be suspended for 1997 since the Bank satisfies the
residential loan requirement. A taxpayer meets the residential
loan requirement if the principal amount of residential loans
made by the taxpayer during the year is not less than its base
amount. The "base amount" means the average of the principal
amounts of the residential loans made by the taxpayer during the
six most recent tax years beginning before January 1, 1996. The
base year reserves will be subject to recapture, and the Bank
could be required to recognize a tax liability, if (i) the Bank
fails to qualify as a "bank" for Federal income tax purposes;
(ii) certain distributions are made with respect to the stock of
the Bank (see "Distributions"); (iii) the Bank uses the bad debt
reserves for any purpose other than to absorb bad debt losses;
and (iv) there is a change in Federal tax law. Management is not
aware of the occurrence of any such event.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to stockholders, such distributions will be
considered as made from the Bank's base year reserve to the
extent thereof, and then from the supplemental reserve for losses
on loans and an amount based on the amount distributed will be
included in the Bank's taxable income. Non-dividend
distributions include distributions in excess of the Bank's
current and accumulated earnings and profits, distributions in
redemption of stock, and distributions in partial or complete
liquidation. However, dividends paid out of the Bank's current
or accumulated earnings and profits, as calculated for federal
income tax purposes, will not be considered to result in a
distribution from the Bank's bad debt reserves.
The amount of additional taxable income created from a non-
dividend distribution is an amount that when reduced by the tax
attributable to the income is equal to the amount of the
distribution. Thus, if the Bank makes a non-dividend
distribution, approximately one and one-half times the amount so
<PAGE>
used would be includable in the Bank's gross income for federal
income tax purposes, assuming a 34% corporate income tax rate
(exclusive of state taxes). See "Regulation and Supervision" and
"Dividend Policy" for limits on the payment of dividends by the
Bank. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserves.
Corporate Alternative Minimum Tax. The Internal Revenue
Code (the "Code") imposes a tax on alternative minimum taxable
income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset
by net operating loss carryovers. AMTI is increased by an amount
equal to 75% of the amount by which a corporation's adjusted
current earnings exceeds its AMTI (determined without regard to
this adjustment and prior to reduction for net operating losses).
In addition, pending legislative proposals would retroactively
reinstate an environmental tax of .12% of the excess of AMTI
(with certain modifications) over $2.0 million is imposed on
corporations, including the Bank, whether or not an Alternative
Minimum Tax ("AMT") is paid. The Bank was subject to an
environmental tax liability for tax year ended December 31, 1992,
which was not material.
Dividends Received Deduction and Other Matters. The Company may
exclude from its income 100% of dividends received from the Bank
as a member of the same affiliated group of corporations. The
corporate dividends received deduction is generally 70% in the
case of dividends received from unaffiliated corporations with
which the Company and the Bank will not file a consolidated tax
return, except that if the Company or the Bank owns more than 20%
of the stock of a corporation distributing a dividend, 80% of any
dividends received may be deducted. Under pending legislative
proposals, the 70% dividends received deduction would be reduced
to 50%.
STATE AND LOCAL TAXATION
New York State and New York City Taxation. The Bank and the
Company are subject to New York State and City franchise taxes on
net income or one of several alternative bases, whichever results
in the highest tax. "Net income" means federal taxable income
with adjustments. The Company's annual tax liability for each
year is the greatest of a tax on allocated entire net income;
allocated alternative entire net income; allocated assets to New
York State and/or New York City; or a minimum tax. Operating
losses cannot be carried back or carried forward for New York
State or New York City tax purposes. The Bank is also subject to
a surcharge (at the rate of 2.5% of the New York State Franchise
Tax for calendar 1996) on its New York State tax and the 17%
Metropolitan Commuter District Surcharge on its New York State
tax after the deduction of credits.
In response to the 1996 Act, the New York State and New York City
tax laws have been amended to prevent the recapture of existing
<PAGE>
tax bad debt reserves and to allow for the continued use of the
PTI method to determine the bad debt deduction in computing New
York State tax liability.
Delaware Taxation. As a Delaware holding company not earning
income in Delaware, the Company is exempted from Delaware
Corporate income tax but is required to file an annual report
with and pay an annual franchise tax to the State of Delaware.
ITEM 2. PROPERTIES
The Bank conducts its business through nine full-service banking
and nine supermarket banking facilities (five of which were
opened during the first quarter of 1997) located in the New York
City Boroughs of Queens and Brooklyn and in Nassau and Suffolk
counties, New York. The Bank also maintains an office for data
processing and other property for possible future expansion. The
total net book value of the Bank's premises and equipment was
$8.8 million at December 31, 1996, which included four
supermarket branches. During 1996, the Bank opened four
supermarket branches and announced plans to open approximately 44
full-service branches in Pathmark supermarkets throughout New
York City, Long Island, Westchester and Rockland 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.
<PAGE>
<TABLE>
<CAPTION>
Net Book Value
of Property or
Leasehold
Improvements
Leased or Leased or Date of Lease at December 31,
Location Description Owned Acquired Expiration(1) 1996
-------- ----------- --------- --------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
93-22/93-30 & 94-09/ Main Office Owned 1957 - $2,806
94-13 Jamaica Avenue Complex
& 87-14/86-35 94th St.
Woodhaven, NY 11421
Forest Parkway Branch Owned 1979 - 344
80-35 Jamaica Avenue
Woodhaven, NY 11421
Howard Beach Branch Owned 1971 - 879
82-10 153rd Avenue
Howard Beach, NY 11414
Ozone Park Branch Owned 1976 - 579
98-16 101st Avenue
Ozone Park, NY 11416
Bellerose (2) Branch Leased 1973 2003 152
244-19 Braddock Avenue
Bellerose, NY 11426
Forest Hills Branch Leased 1959 1999 51
106-17 Continental Ave.
Forest Hills, NY 11375
Snug Harbor Branch Leased 1977 2001 459
343 Merrick Road
Amityville, NY 11701
Clock Tower(3) Branch Leased 1985 2000 303
91-20 Atlantic Avenue
Ozone Park, NY 11417
Rockaway Beach Branch Leased 1996 1998 42
104-08 Rockaway Beach Blvd.
Rockaway Beach, NY 11693
Medford (Edwards Super Branch Leased 1996 2001 216
Food Stores)
700-60 Patchogue-Yaphank Road
Medford, NY 11763
Uniondale (ShopRite Branch Leased 1996 2001 243
Supermarket)
1121 Jerusalem Avenue
Uniondale, NY 11553
Mineola Office Leased 1996 1998 6
242 & 250 Old Country Road
Mineola, NY 11501
Bayshore (Edwards Super Branch Leased 1996 2001 340
Food Stores)
533 Montauk Highway
Bayshore, NY 11708
Atlantic Terminal (Pathmark Branch Leased 1996 2001 267
Supermarket)
625 Atlantic Avenue
Brooklyn, NY 11217
</TABLE>
(1) Rent expense for the year ended December 31, 1996 was
$404,000.
(2) Includes land that is adjacent to the branch office that was
acquired by the Bank in 1973.
(3) The Bank expects to close this branch in April 1997 and
consolidate its operations in a branch located at a Pathmark
Supermarket, 92-10 Atlantic Avenue, Ozone Park, New York 11416
which opened in March 1997.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
On February 6, 1995, Nationar, the entity that provided check
collection services for the Bank was seized by the Superintendent
of Banks of the State of New York ("Superintendent"). Checks in
process of collection for the Bank totalling $8.9 million were
held by Nationar at the time it was seized. In April 1995, $3.9
million of these funds were remitted to the Bank. On June 27,
1996, the Bank received a partial payment of its claims against
Nationar totalling $4,987,000, at which time $389,000 of a
$430,000 reserve previously established was taken into income.
On November 20, 1996, the Supreme Court of the State of New York
entered an order authorizing the Superintendent to pay a final
payment to creditors of Nationar whose claims or accounts payable
have been accepted by the Superintendent, reduced by any previous
partial payments on such claims or account payable. The Bank
received $33,000, which represents the final aggregate payment on
the remaining claims totaling $54,000.
In February, 1983, a burglary of the contents of safe deposit
boxes occurred at a branch office of the Bank. At December 31,
1996, the Bank has a class action lawsuit related thereto
pending, whereby the plaintiffs are seeking recovery of
approximately $12,900,000 in actual damages and an additional
$12,900,000 of unspecified damages. The Bank's ultimate
liability, if any, which might arise from the disposition of
these claims cannot presently be determined. Management believes
it has meritorious defenses against these actions and has and
will continue to defend its position. Accordingly, no provision
for any liability that may result upon adjudication has been
recognized in the accompanying consolidated financial statements.
The Company is involved in various other legal actions arising in
the ordinary course of business, which in the aggregate, are
believed by management to be immaterial to the financial position
of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Information relating to the market for Registrant's common equity
and related stockholder matters appears under "Common Stock
Information" in the Registrant's 1996 Annual Report to
Stockholders on page 56, and is incorporated herein by reference.
Information relating to the payment of dividends by the
Registrant appears in "Note 13 to Notes to Consolidated Financial
<PAGE>
Statements" in the Registrant's Annual Report on page 48 and is
incorporated herein by reference.
The Company initiated a quarterly cash dividend of $0.10 per
share in the third quarter of 1995 paid on October 20, 1995. The
following schedule summarizes the cash dividends paid for 1995
and 1996:
Dividend Payment Dividend Paid
Date Per Share Record Date
---------------- ------------- -----------
October 20, 1995 .10 October 2, 1995
January 19, 1996 .10 January 2, 1996
April 29, 1996 .10 April 8, 1996
July 12, 1996 .15 June 27, 1996
October 28, 1996 .15 October 7, 1996
ITEM 6. SELECTED FINANCIAL DATA
The above-captioned information appears in the Registrant's 1996
Annual Report to Stockholders on pages 12 and 13 and is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The above-captioned information appears under "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" in the Registrant's 1996 Annual Report to
Stockholders on pages 14 through 26 and is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Haven Bancorp, Inc. and
its subsidiaries, together with the report thereon by KPMG Peat
Marwick LLP appears in the Registrant's 1996 Annual Report to
Stockholders on pages 27 through 54 and are incorporated herein
by reference.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to Directors and Executive Officers of
the Registrant is incorporated herein by reference to the
Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 23, 1997, on pages 4 through 8.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation is
incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on
April 23, 1997, on pages 8 through 20 (excluding the Report of
the Compensation Committee on pages 11 through 13 and the Stock
Performance Graph on page 14).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information relating to security ownership of certain
beneficial owners and management is incorporated herein by
reference to the Registrant's Proxy Statement for the Annual
Meeting of Stockholders to be held on April 23, 1997, on pages 3
and 5 through 7.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related
transactions is incorporated herein by reference to the
Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 23, 1997, on pages 20 and 21.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company are
incorporated by reference to the following indicated pages of the
1996 Annual Report to Stockholders.
Pages
Consolidated Statements of Financial Condition
as of December 31, 1996 and 1995 ................... 27
Consolidated Statements of Operations for the Years
Ended December 31, 1996, 1995 and 1994 ............. 28
Consolidated Statements of Changes In Stockholders'
Equity for the Three Years Ended December 31, 1996 . 29
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994 ............. 30
Notes to Consolidated Financial Statements ......... 31 - 53
Independent Auditors' Report ....................... 54
<PAGE>
The remaining information appearing in the Annual Report to
Stockholders is not deemed to be filed as part of this report,
except as expressly provided herein.
(2) All schedules are omitted because they are not required or
applicable, or the required information is shown in the
consolidated financial statements or the notes thereto.
(3) Exhibits (filed herewith unless otherwise noted)
(a) The following exhibits are filed as part of this
report:
3.1 Amended Certificate of Incorporation of Haven Bancorp,
Inc.*
3.2 Certificate of Designations, Preferences and Rights of
Series A Junior Participating Preferred Stock**
3.3 Bylaws of Haven Bancorp, Inc.*
4.0 Rights Agreement between Haven Bancorp, Inc. and
Chemical Bank**
10.1 Employment Agreement between Haven Bancorp, Inc. and
Philip S. Messina****
10.2 (a) Form of Change in Control Agreement between
Columbia Federal Savings Bank and certain executive
officers, as amended****
10.2 (b) Form of Change in Control Agreement between Haven
Bancorp, Inc. and certain executive officers, as
amended****
10.3 Consultation Agreement between Haven Bancorp, Inc. and
George S. Worgul***
10.4 (a) Amended and Restated Columbia Federal Savings Bank
Recognition and Retention Plans and Trusts for
Officers and Employees***
10.4 (b) Amended and Restated Recognition and Retention
Plan and Trusts for Outside Directors***
10.5 Haven Bancorp, Inc. 1993 Incentive Stock Option
Plan***
10.6 Haven Bancorp, Inc. 1993 Stock Option Plan for Outside
Directors***
10.7 Columbia Federal Savings Bank Employee Severance
Compensation Plan, as amended****
10.8 Columbia Federal Savings Bank Consultation and
Retirement Plan for Non-Employee Directors***
10.9 Form of Supplemental Executive Retirement Plan*
10.10 Haven Bancorp, Inc. 1996 Stock Incentive Plan****
11.0 Computation of earnings per share (filed herewith)
13.0 1996 Annual Report to Stockholders (filed herewith)
21.0 Subsidiary information is incorporated herein by
reference to "Part I - Subsidiaries"
23.0 Consent of Independent Auditors (filed herewith)
27.0 Financial Data Schedule (filed herewith)
99 Proxy Statement for 1997 Annual Meeting (filed
herewith)
<PAGE>
________________
* Incorporated herein by reference into this document from the
Exhibits to Form S-1, Registration Statement and any amendments
thereto, filed on April 14, 1993, Registration No. 33-61048.
** Incorporated herein by reference into this document from the
Exhibits to Form 8-K, Current Report, filed on January 30, 1996.
*** Incorporated herein by reference into this document from the
Exhibits to Form 10-K for the year ended December 31, 1994, filed
on March 30, 1995.
**** Incorporated herein by reference into this document from the
Exhibits to Form 10-K for the year ended December 31, 1995, filed
on March 29, 1996.
(b) Reports on Form 8-K.
One report on Form 8-K was filed by the Company dated
September 25, 1996 relating to its agreement with Pathmark
Stores, Inc. No financial statements were filed as a part of
such report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly
authorized.
HAVEN BANCORP, INC.
By: /s/ George S. Worgul
--------------------
George S. Worgul
Dated: March 28, 1997 Chairman of the Board
Pursuant to the requirements of the Securities and Exchange Act
of 1934, this report has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ George S. Worgul Chairman of the Board March 28, 1997
- --------------------------
George S. Worgul
/s/ Philip S. Messina President and Chief March 28, 1997
- -------------------------- Executive Officer
Philip S. Messina
/s/ Robert L. Koop Director March 28, 1997
- --------------------------
Robert L. Koop
/s/ Robert M. Sprotte Director March 28, 1997
- --------------------------
Robert M. Sprotte
/s/ Joseph A. Ruggiere Director March 28, 1997
- --------------------------
Joseph A. Ruggiere
<PAGE>
/s/ Michael J. Fitzpatrick Director March 28, 1997
- --------------------------
Michael J. Fitzpatrick
/s/ William J. Jennings II Director March 28, 1997
- --------------------------
William J. Jennings II
/s/ Michael J. Levine Director March 28, 1997
- --------------------------
Michael J. Levine
/s/ Catherine Califano Senior Vice President and March 28, 1997
- -------------------------- Chief Financial Officer
Catherine Califano
</TABLE>
<PAGE>
Exhibit No. 11
Statement re Computation of Earnings Per Share
Year Ended
December 31, 1996
-----------------
Net income $ 9,424,724
=========
Weighted average shares outstanding 4,158,271
Common stock equivalents due to dilutive
effect on stock options 277,397
---------
Total weighted average common shares
and equivalents outstanding 4,435,668
=========
Primary earnings per share $ 2.12
=========
Total weighted average common shares
and equivalents outstanding 4,435,668
Additional dilutive shares using the
end of period market value versus
the average market value when
applying the treasury stock method 31,699
---------
Total weighted average common shares
and equivalents outstanding for
fully diluted computation 4,467,367
=========
Fully diluted earnings per share $ 2.11
=========
<PAGE>
EXHIBIT 13.0
Annual Report 1996
This report contains statements that are forward-looking in
nature within the meaning of the Private Securities Litigation
Reform Act of 1995 and are subject to risks and uncertainties
that could cause actual results to differ materially. Such risks
and uncertainties include, but are not limited to, those related
to overall business conditions, particularly in the markets in
which Haven operates, fiscal and monetary policy, competitive
products and pricing, credit risk management and changes in
regulations affecting financial institutions and other risks and
uncertainties discussed from time to time in the Company's SEC
filings.
Table of Contents
President's Letter 1
Financial Highlights 4
A Year of Achievement 5
Selected Financial and Other Data 12
Management's Discussion and Analysis 14
Consolidated Financial Statements 27
Notes to Consolidated Financial Statements 31
Independent Auditors' Report 54
Directors and Officers/Directory 55
Stockholder Information 56
<PAGE>
Dear Fellow Stockholders,
This past year will undoubtedly prove to be one of the most
pivotal in Haven Bancorp's recent history. In addition to
building upon our considerable earnings momentum, we embarked on
a path we believe will produce tremendous rewards for our
shareholders and customers alike.
We typically like to take this opportunity to look back to see
how successful we have been in accomplishing our goals for the
year. We have more than once described 1995 as a "turning point"
and "the first of many more years of improving, positive results"
for Haven. Also, we have referred to 1996 as a year in which we
expected to carry on many of the initiatives we set in place,
such as reinvigorating our mortgage loan origination efforts,
developing innovative new products and services for our expanding
customer base and the start of our supermarket banking strategy.
In addition, we noted Haven's improvement in return on average
equity to 9.3% for 1995 and stated our interim target return for
1996 to be 12%.
Haven Bancorp earned a record $9.4 million in 1996, which
included a one-time assessment charge of $6.8 million to
recapitalize the Savings Association Insurance Fund (SAIF).
Excluding the SAIF assessment charge, our earnings would have
been $13.5 million, or a return on average equity of 14.0%.
Mortgage loans originated and purchased during 1996 were more
than two and a half times greater than the comparable volume for
1995 and first mortgages experienced a year to year increase of
53%. We unveiled many new, successful retail products. However,
the most significant event in 1996 was the agreement we reached
with Pathmark Supermarkets, Inc. whereby Columbia Federal Savings
Bank will open a minimum of 44 in-store bank branches throughout
the five boroughs of New York City, Long Island, Westchester and
Rockland counties. These are in addition to the two branches we
currently have open in Edwards Super Food Stores and another in a
ShopRite Supermarket, Inc. The results we have thus far
experienced at our first five supermarket branches give us much
reason to be optimistic about this enormously important venture.
We determined that this project, based on low entry costs, the
magnitude of expected returns and the franchise value it will
ultimately produce, was the clearest course for Haven Bancorp to
enhance shareholder value. We expect this value enhancement to
continue for many years to come.
We believe that Supermarket Banking or, as we call it, "Banking A
La Cart," positions us on the cutting edge of what is certain to
be one of the most significant developments in the distribution
of banking services in the 1990s. Within 18 months, Columbia
expects to have more supermarket branches in the New York area
than any other banking institution. We believe we will rank among
the top-ten supermarket banks in the country.
<PAGE>
Supermarket branching is a cost-effective way to extend our
franchise and put our sales force in touch with more prospective
customers than possible through conventional bank branches while
offering the public convenient one-stop shopping. The cost of
opening a supermarket branch is approximately one-fifth the cost
of a traditional branch, and in the typical store we are clearly
visible to some 20,000 prospects each week. At our first five
supermarket branches, we have opened thousands of new accounts
with balances that exceeded our original forecasts. This strategy
not only lengthens our reach into new areas such as Westchester
and Rockland counties, it demonstrates Columbia's commitment to
providing full-service banking seven days a week with extended
customer-friendly hours. Each branch will offer all of our
products and services including checking and savings accounts,
certificates of deposit, home mortgages and home equity loans,
discount brokerage services, mutual funds, annuities and life
insurance.
The outstanding growth in mortgages originated and purchased over
the past eighteen months has resulted in an important shift in
the composition of Haven's balance sheet. For the first time in
three years, total loans exceeded investment securities. Since
loans typically provide a higher yield than investment
securities, such a shift in the mix can have a very positive
effect on gross yields and ultimate profitability, which, in
fact, occurred in 1996. As our growth in loan originations
continues, this positive trend and the resultant effect on asset
yields will similarly follow.
It is important to note that we have undertaken this expansion in
mortgage originations while concurrently maintaining a strict
vigil on our credit standards and asset quality. Haven's overall
asset quality has improved, to the point where our year-end ratio
of non-performing assets to total assets, at 0.94%, was one-third
below the average of all publicly traded thrifts operating in New
York State. Although the challenging credit circumstances we
faced during the first half of this decade are clearly behind us,
the lessons we learned are deeply ingrained on our lending
philosophy and strategies.
In 1996, Columbia celebrated substantial successes in a variety
of retail and commercial services areas. New customers came to
Columbia Federal Savings Bank branches in record numbers to take
advantage of our most popular product, Positively Free Checking.
The wide acceptance of this account demonstrates the customer-
friendly and cost-efficient product positioning we targeted. The
account eliminates monthly charges and has served as a powerful
magnet for us in attracting new accounts. A specially designed
direct marketing program has attracted thousands of new
depositors.
For our retail customers, 1996 was a year of new services and
greater convenience. For instance, with our WealthBuilder Savings
<PAGE>
account, Columbia customers can make regular monthly deposits and
earn a guaranteed annual yield of 6%. Our SmartMoney T-Bill CD
Plus earns a monthly variable rate that's always 50 basis points,
or 0.5%, above the 90-day T-Bill rate.
Our Cash-It Club, which offers check cashing and other convenient
services to non-depositors, was introduced at two branches in
1996, with 10 more branches slated to offer the service in the
next 12 months. It not only represents a source of income for the
bank, it serves as a perfect introduction to the bank's products
and services for an entirely new market of potential depositors.
EasyTouch Telephone Banking added significant volume as well in
1996, bringing our array of products and services to thousands
every day from the convenience of a nearby telephone. We plan to
unveil a sophisticated Home Banking system this spring which will
revolutionize access to our products and services. Home Banking
will enable customers to log on to Columbia via their personal
computer and open accounts, check balances, make transfers, and
perform a host of other transactions.
The Internet also came alive for Columbia in 1996, and we made an
impressive showing with a highly informative, extremely user-
friendly Web site. Present and prospective customers who log on
to our Internet site (http://www.cfsb.com) receive a warm welcome
on our Home Page, followed by a logical series of Web pages
packed with information on Columbia's products and services.
Customers can open an account, check on current rates, and even
calculate how much they'll need for a mortgage. Our Internet site
has proven extremely successful, with an average of 5,500 "hits"
- -or visits- each week from interested consumers.
We pride ourselves on creating products that anticipate as well
as respond to the financial needs of our customers. We devote
considerable effort to maintaining close contact with our market.
Through our subsidiary, Columbia Investment Services, Inc., many
current and new customers have begun to explore investment
services with us, and a large number have signed on for products
ranging from stocks, bonds and annuities to mutual funds and life
insurance. The bulk of Columbia's investment sales last year were
in fixed and variable annuities. We broke the $60 million mark in
investment sales for 1996, compared with investments sales of $54
million in 1995. Relative to asset size, Columbia Investment
Services, Inc. ranks within the top 1% in gross sales and profits
among the country's 416 largest commercial banks and thrift
institutions.
In February, 1997, Haven Capital Trust I issued $25 million of
10.46% capital securities and invested the proceeds in Junior
Subordinated Debentures of Haven. Haven intends to use the net
proceeds from the sale of the Junior Subordinated Debentures for
general corporate purposes, which may include capital
contributions to Columbia, the financing of future acquisitions
<PAGE>
and the funding of repurchases of the Company's common stock.
On a more personal level, we note the passing of our Director,
Robert J. Webster, who died in September, 1996 following
distinguished and valuable service to the Board for 28 years. In
addition, William J. Claffey retired from the Board in January,
1997 after 26 years of service and Robert M. Cashill resigned
from the Board in February 1997. These three gentlemen each made
significant contributions in guiding Haven to the success we
currently enjoy.
We welcome William J. Jennings II and Michael J. Levine to our
Board of Directors. Mr. Jennings is Managing Director and Chief
of Staff to the Chairman of Salomon Brothers Inc., investment
bankers. Mr. Levine is President of Norse Realty Group &
Affiliates, real estate developers, and a partner of Levine &
Schmutter, Certified Public Accountants. They bring a wealth of
experience and expertise that will add to the existing Board
commitment to enhance shareholder value. We are also pleased to
announce the appointment of Msgr. Thomas J. Hartman, Director of
Radio and Television for the Diocese of Rockville Centre, to the
Board to fill the vacancy created by Mr. Cashill's departure.
As I indicated earlier, this was a year of considerable
accomplishment. It was also a unique beginning of what we believe
will be a major defining point in our Company's future. The
development of supermarket branching is an enormous challenge for
Haven Bancorp. It is a challenge we relish and one that our
employees are singularly prepared to meet with the enthusiasm,
talent and skills they bring to bear. We would not have enjoyed
our significant success nor be poised for such an attractive
future without the support of our loyal customers, stockholders
and dedicated staff to whom I extend my most sincere thanks.
Sincerely,
Philip S. Messina
President & Chief Executive Officer
March 3, 1997
<PAGE>
FINANCIAL HIGHLIGHTS
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
1996 1995
At Year End --------- ---------
<S> <C> <C>
Total Assets $1,583,545 1,472,816
Loans, Net 836,882 560,385
Securities Available for Sale 370,105 503,058
Debt Securities Held to Maturity 97,307 127,796
Mortgage-Backed Securities Held to Maturity 197,940 190,714
Real Estate Owned, Net 1,038 2,033
Deposits 1,137,788 1,083,446
Borrowed Funds 326,433 270,583
Stockholders' Equity 99,384 98,519
Non-Performing Assets 14,931 18,910
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
For the Year ------ ------ ------
<S> <C> <C> <C>
Net Interest Income $47,885 41,319 41,202
Provision for Loan Losses 3,125 2,775 13,400
Non-Interest Income 9,554 9,022 6,529
Real Estate Operations, Net 277 1,405 12,253
SAIF Recapitalization Charge 6,800 - -
Other Non-Interest Expense 31,378 30,387 28,888
Income Tax Expense (Benefit) 6,434 7,230 (2,475)
Net Income (Loss) 9,425(1) 8,544 (4,335)
Net Income (Loss) per common share:
Primary 2.12(1) 1.89 (0.94)
Fully Diluted 2.11(1) 1.87 (0.94)
Performance Ratios
Return on Average Assets 0.62% 0.63% (0.35)%
Return on Average Assets excluding
SAIF assessment charge 0.89 0.63 (0.35)
Return on Average Equity 9.83 9.27 (4.90)
Return on Average Equity excluding
SAIF assessment charge 14.04 9.27 (4.90)
Net Interest Margin 3.29 3.17 3.48
Non-Performing Assets to Total Assets 0.94 1.28 2.85
Allowance for Loan Losses to Non-
Performing Loans 77.05 50.80 38.33
</TABLE>
(1) Net income excluding the SAIF assessment charge would have
been $13.5 million, or $3.03 per share ($3.01 per share, fully
<PAGE>
diluted).
Haven Bancorp, Inc. is the holding company for Columbia Federal
Savings Bank which converted from a federally chartered mutual to
a federally chartered stock savings bank on September 23, 1993.
Columbia Federal is a wholly-owned subsidiary of the holding
company whose principal business is the operation of the Bank.
The Bank, which was organized in 1889, is a community oriented
institution offering deposit products, residential and commercial
real estate loans and a full range of financial services
including discount brokerage, mutual funds, annuities and
insurance. Headquartered in Woodhaven, New York, the Bank serves
its customers through nine full-service banking and five
supermarket banking facilities located in the New York City
Boroughs of Queens and Brooklyn and in Nassau and Suffolk
Counties, New York. The Bank's deposits are insured up to the
maximum allowable amount by the Federal Deposit Insurance
Corporation ("FDIC").
<PAGE>
A Year of Achievement
The future of banking has arrived, and it's revolutionizing the
way financial products and services are reaching consumers.
Columbia Federal Savings Bank's Supermarket Banking program will
give us a presence throughout the New York region - in the form
of "Banking A La Cart."
Columbia has a reputation for outstanding customer service based
on our in-depth knowledge of our customers and a long history of
anticipating and responding to their needs with market specific
products and services. In 1996 we continued to demonstrate this
unique understanding of our constituency in a bold fashion by
embarking on a plan of strategic growth that promises to broaden
our customer base and improve profit-ability. Supermarket Banking
is at the nucleus of our commitment to expansion.
Those unaccustomed to Banking A La Cart may be surprised to
discover a full-service in-store branch right inside their local
supermarket. Every one of these locations reveals our dedication
to meeting our customers' demands for convenient and attractive
products and services, every day of the week.
Our Banking A La Cart branches are a natural outgrowth of our
traditional branch structure. In the supermarket environment,
customers are offered an array of checking and savings accounts,
loan products and mortgages found at every Columbia branch
office. Offerings include financial products and services,
investments, as well as life insurance. Although the typical
supermarket branch measures approximately 500 square feet, the
space is optimized to allow sales associates to interact with
customers in a comfortable setting.
Supermarket Banking affords Columbia the opportunity to tap a
vast and varied demographic mix and to offer banking services in
a safe, convenient environment. In order to maximize the benefits
of operating an in-store branch, Columbia sales associates open
accounts and establish relationships by greeting prospective
customers in the aisles and explaining the Bank's offerings in a
simple, friendly manner. As a result, the account process is
facilitated and customers are easily introduced to an assortment
of financial services.
Columbia's premier account! Positively Free Checking! represents
a strong anchor in attracting customers and in creating cross-
selling opportunities. With no minimum balance requirements, no
monthly fees and no per-check charges, Positively Free Checking
has served as a powerful magnet for new depositors, and for new
accounts from current customers. No other bank in Columbia's
marketing area offers such an attractive checking program.
Therefore, depositors who have been locked out of the opportunity
to open a checking account because of the high account charges
and strict balance requirements imposed by other institutions are
<PAGE>
heartened to learn that Columbia offers an affordable checking
plan. Columbia continues to appeal to a broad constituency by
offering alternatives to Positively Free Checking in the form of
a variety of interest-earning checking accounts.
Full service for Columbia means catering to the needs of the
community with products and services that make a difference in
people's lives. We've responded to the needs of our marketplace
again in 1996 by making the banking and borrowing process easier
and more convenient in numerous ways. This is evident in our
innovative, user-friendly Web site and our Telephone Banking
program. In 1997 our PC Banking program will let customers bank
conveniently from their home or office computer.
Notwithstanding an increasingly competitive marketplace in 1996,
Columbia Federal Savings Bank doubled its commercial and multi-
family real estate loan production as compared to 1995.
Our disciplined credit and underwriting standards were applied to
larger average loans. Flexible loan structure coupled with longer
terms and more frequent repricings have resulted in significant
efficiencies. Columbia's timely and understanding response to
borrower needs have been responsible for developing and
maintaining strong customer relationships.
The growth of residential lending, which experienced enormous
success in 1996, will be enhanced by in-store banking. Mortgage
customers outside our current market area will soon be able to
establish a full-service banking relationship at future in-store
locations.
The sales associates at each Supermarket Banking location are
well trained in and prepared to advise customers of the wide
variety of residential lending products offered by the Bank. One
example is the Bi-Weekly Mortgage option. This allows mortgage
holders to make payments on a biweekly basis, rather than on a
traditional monthly schedule resulting in savings of thousands of
dollars in interest costs over the life of their loan.
The Bank continues to target home equity credit opportunities.
With a variety of home equity loans and a home equity line of
credit, Columbia serves homeowners from across the region who may
be looking for financing for any purpose, from home improvements
or a new car, to education, a wedding, or even a vacation.
Customers looking for Savings Accounts continue to look to
Columbia, which provides savings packages tailored to virtually
every need. To complement the Banking A La Cart program and as an
incentive for our Supermarket Banking customers, Columbia created
the exclusive SmartShopper's Savings Account. Depositors with a
Positively Free Checking account earn a higher rate when they
open the innovative Smartshopper's Savings Account. Columbia's
Management Savings Account, a multi-tiered savings plan linked to
<PAGE>
account balances, once again satisfies the requirements of a
varied customer base by allowing customers to save at their own
pace.
Again responding to the needs of the marketplace, Columbia offers
a range of Certificates of Deposit, as well as the popular
SmartMoney T-Bill CD Plus. This represents another example of a
product innovation by offering a rate that adjusts every month to
one-half of one percentage point over the prevailing 90-day T-
Bill rate.
Columbia's supermarket sales associates are trained and licensed
to offer annuity and life insurance products provided through
Columbia Investment Services, Inc. (CIS), as well as mutual funds
and discount stock and bond brokerage services offered through
CIS's relationship with BHC Securities, Inc. Customers interested
in life insurance are put in touch with a qualified CIS life
insurance specialist. Beginning in 1997, CIS will be dealing
directly with a select group of insurance companies that offer
virtually every type of policy.
Columbia has responded to its customer base by expanding the
Good-Friends, GreatTimes Club. This group grows more popular
every year, and 1996 was no exception. What began as a simple
gathering of people from all segments of the community who get
together to take in local events and visit regional sites, has
expanded enormously. Today this popular travel club attracts
hundreds of community residents to a variety of destinations and
functions. Its horizons are broadening each year: Trips are
slated for Hawaii, Alaska and the Caribbean Islands.
Columbia's Cash-It Club appeals to those who, although not
Columbia depositors, want the convenience of quick and easy check
cashing and bill paying. It represents a viable entree into the
accounts and services offered by Columbia. The Club made its
debut in supermarket branches in 1996 and will be introduced to
10 Banking A La Cart locations in the near future.
As Columbia opens more in-store banking branches in New York
City, Long Island, Westchester and Rockland, more shoppers are
destined to discover the full complement of financial products
and services, all delivered in a convenient, shopper-friendly
manner from true banking professionals.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
December 31,
(In thousands) 1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Total assets $1,583,545 1,472,816 1,268,774 1,229,140 1,168,120
Loans, net 836,882 560,385 512,035 659,808 624,090
Securities available for sale 370,105 503,058 48,189 38,190 94,205
Debt securities held to maturity 97,307 127,796 130,706 19,208 11,275
Mortgage-backed securities held to maturity 197,940 190,714 495,111 412,677 266,579
Real estate owned, net 1,038 2,033 7,844 17,887 22,473
Deposits 1,137,788 1,083,446 1,013,162 986,760 963,718
FHLB advances 178,450 134,175 86,000 55,800 -
Other borrowed funds 147,983 136,408 39,081 80,216 139,777
Stockholders' equity 99,384 98,519 86,235 95,810 55,358
</TABLE>
SELECTED FINANCIAL RATIOS AND OTHER DATA
<TABLE>
<CAPTION>
At or For the Years Ended December 31,
(In thousands of dollars, 1996 1995 1994 1993 1992
except per share data) ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets 0.62% 0.63 (0.35) (0.06) 0.25
Return on average assets excluding SAIF
assessment charge (1) 0.89 0.63 (0.35) (0.06) 0.25
Return on average equity 9.83 9.27 (4.90) (1.05) 5.58
Return on average equity excluding SAIF
assessment charge (1) 14.04 9.27 (4.90) (1.05) 5.58
Stockholders' equity to total assets 6.28 6.69 6.80 7.79 4.74
Net interest spread 3.12 2.99 3.34 3.28 3.11
Net interest margin (2) 3.29 3.17 3.48 3.38 3.22
Average interest-earning assets to
average interest-bearing liabilities 103.95 104.23 104.42 102.61 102.24
Operating expenses to average assets (3) 2.04 2.18 2.26 2.26 2.01
Stockholders' equity per share (4) $ 22.98 21.84 18.95 19.49 NA
Asset Quality Ratios:
Non-performing loans to total loans (5) 1.64% 2.97 5.41 9.37 11.28
Non-performing assets to total assets 0.94 1.28 2.85 6.65 8.15
Allowance for loan losses to non-
performing loans (5) 77.05 50.80 38.33 33.83 28.90
Allowance for loan losses to total loans 1.26 1.51 2.07 3.17 3.26
Other Data:
Number of deposit accounts 171,382 155,424 140,701 132,044 122,880
Mortgage loans serviced for others $197,017 219,752 239,844 110,058 138,386
Loan originations and purchases $363,576 143,329 105,219 146,640 63,683
Facilities:
Full service offices 14 9 9 9 10
</TABLE>
(1) Excludes the SAIF assessment charge in 1996 of $6.8 million.
(2) Calculation is based on net interest income before provision
for loan losses divided by average interest-earning assets.
(3) For purposes of calculating these ratios, operating expenses
equal non-interest expense less real estate operations, net where
applicable, of $0.3 million, $1.4 million, $12.3 million, $9.4
million and $5.7 million for the five years ended December 31,
1996, respectively. For the five years ended December 31, 1996,
non-performing loan expense of $0.4 million, $0.6 million, $0.9
million, $1.2 million and $1.6 million, respectively, was also
excluded from non-interest expense. For the year ended December
<PAGE>
31, 1996, the SAIF assessment charge of $6.8 million was also
excluded.
(4) Not applicable prior to conversion on September 23, 1993.
Based on 4,325,407, 4,511,457 and 4,551,406 shares outstanding at
December 31, 1996, 1995 and 1994, respectively.
(5) For purposes of calculating these ratios, non-performing
loans consist of all non-accrual loans and restructured loans.
SELECTED CONSOLIDATED OPERATING DATA
<TABLE>
<CAPTION>
At or For the Years Ended December 31,
(In thousands of dollars, 1996 1995 1994 1993 1992
except per share data) ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Interest income $ 109,253 96,434 81,491 79,236 93,481
Interest expense 61,368 55,115 40,289 41,833 56,914
Net interest income 47,885 41,319 41,202 37,403 36,567
Provision for loan losses 3,125 2,775 13,400 6,400 19,843
Net interest income after provision
for loan losses 44,760 38,544 27,802 31,003 16,724
Non-interest income:
Loan fees and servicing income 1,807 2,241 790 943 957
Savings/checking fees 3,378 2,861 2,282 2,205 2,168
Net gain on sales of interest-earning assets 140 126 372 552 3,449
Insurance annuity and mutual fund fees 3,114 2,525 2,025 1,736 2,636
Other 1,115 1,269 1,060 1,072 1,096
Total non-interest income 9,554 9,022 6,529 6,508 10,306
Non-interest expense:
Compensation and benefits 15,737 14,889 13,605 11,809 10,679
Occupancy and equipment 3,478 3,334 3,238 3,631 3,450
Real estate operations, net 277 1,405 12,253 9,401 5,676
SAIF recapitalization charge 6,800 - - - -
Federal deposit insurance premiums 2,327 2,653 2,709 2,554 2,223
Other 9,836 9,511 9,336 9,416 9,125
Total non-interest expense 38,455 31,792 41,141 36,811 31,153
Income (loss) before income tax expense
(benefit) and cumulative effect of
change in accounting principle 15,859 15,774 (6,810) 700 (4,123)
Income tax expense (benefit) 6,434 7,230 (2,475) 1,392 (1,615)
Income (loss) before cumulative effect
of change in accounting principle 9,425 8,544 (4,335) (692) (2,508)
Cumulative effect of change in
accounting principle (1) - - - - 5,487
Net income (loss) $ 9,425(2) 8,544 (4,335) (692) 2,979
Net income (loss) per common share:
Primary $ 2.12(2) 1.89 (0.94) (0.09)(3) NA
Fully diluted $ 2.11(2) 1.87 (0.94) (0.09)(3) NA
</TABLE>
(1) This addition to net income relates to the Bank's adoption of
SFAS No. 109 effective January 1, 1992.
(2) Net income excluding the SAIF assessment charge would have
been $13.5 million, or $3.03 per share ($3.01 per share, fully
diluted).
(3) Represents loss per common share for the quarter ended
December 31, 1993 since the stock conversion occurred on
September 23, 1993.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Haven Bancorp, Inc. ("Haven Bancorp" or the "Company") was formed
on March 25, 1993 as the Holding Company for Columbia Federal
Savings Bank ("Columbia" or the "Bank") in connection with the
Bank's conversion from a federally chartered mutual savings bank
to a federally chartered stock savings bank. The Company is
headquartered in Woodhaven, New York and its principal business
currently consists of the operation of its wholly-owned
subsidiary, Columbia Federal Savings Bank. The Company had no
operations prior to September 23, 1993.
The Bank's principal business has been and continues to be
attracting retail deposits from the general public and investing
those deposits, together with funds generated from operations
primarily in one-to four-family, owner occupied residential
mortgage loans. In addition, in times of low loan demand, the
Bank will invest in debt, equity and mortgage-backed securities
to supplement its lending portfolio. The Bank also invests, to a
lesser extent, in multi-family residential mortgage loans,
commercial real estate loans and other marketable securities.
The Bank's results of operations are dependent primarily on its
net interest income, which is the difference between the interest
income earned on its loan and securities portfolios and its cost
of funds, which consist of the interest paid on its deposits and
borrowed funds. The Bank's net income also is affected by its
provision for loan losses as well as non-interest income and
operating expenses consisting primarily of compensation and
benefits, occupancy and equipment, real estate operations, net,
federal deposit insurance premiums and other general and
administrative expenses. The earnings of the Bank are
significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, and to
a lesser extent by government policies and actions of regulatory
authorities.
FINANCIAL CONDITION
The Company had total assets of $1.58 billion at December 31,
1996, compared to $1.47 billion at December 31, 1995, an increase
of $110.7 million, or 7.5%.
The Company's portfolio of debt and equity securities and
mortgage-backed securities ("MBSs") available for sale ("AFS")
totalled $370.1 million, a decrease of $133.0 million, or 26.4%
at December 31, 1996 compared to $503.1 million at December 31,
1995. At December 31, 1996, of the AFS securities portfolio,
$166.2 million were adjustable-rate securities and $203.9 million
were fixed-rate securities. During 1996, there was a continued
shift in interest-earning assets to mortgage loans from MBSs
<PAGE>
through management of the Company's AFS portfolio to maximize
yields. Mortgage loan yields are generally higher than those of
MBSs. During 1996, the Company purchased $321.2 million of debt
and equity securities and MBSs for its AFS portfolio, of which
$52.3 million were adjustable-rate and $268.9 million were fixed-
rate. Principal repayments and proceeds from sales of AFS
securities totalled $448.3 million. A portion of the proceeds
from AFS sales were used to fund loan originations and to
purchase bulk whole loan packages totalling approximately $70.0
million.
In November, 1995, the Financial Accounting Standards Board
("FASB") issued an implementation guide for Statement of
Financial Accounting Standards ("SFAS") No. 115. The
implementation guide provided guidance in the form of a question
and answer format and allowed an opportunity from mid-November
1995 to December 31, 1995 for companies to reclassify securities
in the held to maturity portfolio to securities in the AFS
portfolio without tainting the remainder of the portfolio. In
connection with the implementation guide for SFAS No. 115, the
Company reclassified $41.9 million of debt securities and $405.3
million of MBSs previously classified as held to maturity to AFS
securities. The carrying value of the MBSs was adjusted to their
market value, which resulted in increasing the carrying value by
$3.9 million, and increasing stockholders' equity by $2.1
million, which was net of taxes of $1.8 million. The carrying
value of the debt securities approximated market value at the
time of the reclassification.
At December 31, 1996, the debt securities and MBS held to
maturity portfolios totalled $295.2 million, comprised of $60.4
million of adjustable-rate securities and $234.8 million of
fixed-rate securities. During 1996, the Company purchased $45.3
million of debt securities and MBSs for its held to maturity
portfolio. These were all fixed rate securities. Principal
repayments on MBSs and debt securities and maturities and calls
on debt securities held to maturity totalled $69.5 million. The
estimated fair value of the Company's debt securities and MBS
held to maturity portfolios were $3.2 million below the carrying
value of the portfolios at December 31, 1996. It is the Company's
intent to hold these securities until maturity and therefore the
Company does not expect to realize the current unrealized losses
brought about by the current market environment.
Net loans increased by $276.5 million, or 49.3% during 1996 to
$836.9 million at December 31, 1996 from $560.4 million at
December 31, 1995. Loan originations and purchases during 1996
totalled $363.6 million (comprised of $271.1 million of
residential one-to four-family mortgage loans, $83.8 million of
commercial and multi-family real estate loans and $8.7 million of
consumer loans). One-to four-family mortgage loan originations
included $172.3 million of loans purchased in the secondary
market during 1996. Commercial and multi-family real estate loan
<PAGE>
originations increased by $41.6 million to $83.8 million in 1996
from $42.2 million in 1995, or 98.6% comprised of $46.3 million
of multi-family loans and $37.5 million of commercial real estate
loans. Total loans increased substantially while the Company
continued towards its objective to shift toward adjustable-rate
loans. At December 31, 1996, total loans were comprised of $301.8
million adjustable-rate loans and $545.8 million fixed-rate
loans. During 1996, principal repayments totalled $91.8 million
and $3.5 million was transferred to REO. During the fourth
quarter, $10.6 million of loans held for sale were returned to
the loan portfolio at their estimated fair value.
Included in other assets at December 31, 1996 was $6.2 million of
net deferred tax assets compared to $4.1 million at December 31,
1995. The increase in the overall deferred tax asset from 1995
was attributable to an increase in the difference between the
financial statement credit loss provision and the tax bad debt
deduction along with a decrease in the deferred tax liability
related to securities marked to market for financial statement
purposes. These increases were partially offset by the deferred
tax liability related to the recapture of a portion of the tax
bad debt reserve per Section 593 of the Internal Revenue Code, as
amended during 1996. (See Note 9 to Notes to Consolidated
Financial Statements). Management believes that the Company's
projected future earnings will allow the Company to generate
future taxable income sufficient to utilize the deferred tax
asset over time.
Deposits totalled $1.14 billion at December 31, 1996, an increase
of $54.3 million, or 5.0% from $1.08 billion at December 31,
1995. Interest credited retained totalled $41.4 million in
addition to deposit growth of $12.9 million. In May, 1996, the
Bank opened its first supermarket branch in an Edwards Super Food
Store in Medford, Long Island. During July, 1996, the Bank opened
its second supermarket branch in a ShopRite store in Uniondale,
Long Island. During September, Columbia and Pathmark Stores, Inc.
entered into an agreement to open approximately 44 full-service
bank branches in Pathmark supermarkets throughout New York City,
Long Island, Westchester and Rockland counties by early 1998.
During the fourth quarter of 1996, two additional supermarket
locations opened, one at an Edwards Super Food Store in West
Babylon, Long Island, and one at a Pathmark Store in Brooklyn,
New York, bringing total deposits for the four locations to $12.1
million at December 31, 1996. Throughout most of 1996, the Bank
continued to experience a transfer of deposits from passbook and
money market accounts into certificates of deposit. As a result,
certificates of deposit increased from 49.2% of deposits at
December 31, 1995 to 52.8% of deposits at December 31, 1996.
Other deposit accounts decreased from 50.8% of deposits at
December 31, 1995 to 47.2% of deposits at December 31, 1996.
Borrowed funds increased 20.6% to $326.4 million at December 31,
1996 from $270.6 million at December 31, 1995. The increase in
<PAGE>
borrowings was used to provide funding for loan originations and
whole loan bulk purchases during 1996.
Stockholders' equity totalled $99.4 million, or 6.3% of total
assets at December 31, 1996, an increase of $0.9 million, or 0.9%
from $98.5 million, or 6.7% of total assets at December 31, 1995.
The increase reflects net income of $9.4 million, an increase of
$1.9 million related to the allocation of ESOP stock,
amortization of awards of shares of common stock by the Bank's
Recognition and Retention Plans and Trusts ("RRPs") and
amortization of deferred compensation plan and $0.2 million
related to stock options exercised, net of taxes. These
components were offset by a decrease of $2.9 million in
unrealized appreciation on AFS securities, the purchase of
225,537 shares of treasury stock for $5.5 million and dividends
declared of $2.2 million.
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 the same period. A gap
is considered positive when the amount of interest-earning assets
maturing or repricing exceeds the amount of interest-bearing
liabilities maturing or repricing within the same period. A gap
is considered negative when the amount of interest-bearing
liabilities maturing or repricing exceeds the amount of interest-
earning assets maturing or repricing within the same period.
Accordingly, in a rising interest rate environment, an
institution with a positive gap would be in a better position to
invest in higher yielding assets which would result in the yield
on its assets increasing at a pace closer to the cost of its
interest-bearing liabilities, than would be the case if it had a
negative gap. During a period of falling interest rates, an
institution with a positive gap would tend to have its assets
repricing at a faster rate than one with a negative gap, which
would tend to restrain the growth of its net interest income.
The Company closely monitors its interest rate risk as such risk
relates to its operational strategies. The Company's Board of
Directors has established an Asset/Liability Committee,
responsible for reviewing its asset/liability policies and
interest rate risk position, which generally meets weekly and
reports to the Board on interest rate risk and trends on a
quarterly basis.
<PAGE>
The following table sets forth the amounts of interest-earning
assets and interest-bearing liabilities outstanding at December
31, 1996 which are anticipated by the Company, based upon certain
assumptions described below, to reprice or mature in each of the
future time periods shown. Adjustable-rate assets and liabilities
are included in the table in the period in which their interest
rates can next be adjusted. For purposes of this table,
prepayment assumptions for fixed interest-rate assets are based
upon industry standards as well as the Company's historical
experience and estimates. The Company has assumed an annual
prepayment rate of approximately 11% for its fixed-rate MBS
portfolio. The computation of the estimated one-year gap assumes
that the interest rate on passbook account deposits is variable
and, therefore, interest sensitive. During the rising interest
rate environment throughout 1996, these funds were maintained at
an average rate of 2.49%, but may be repriced upward if rates
continue to rise. The Company has assumed that its passbook, NOW
and money market accounts, which totaled $528.2 million at
December 31, 1996, are withdrawn at the annual percentages of
approximately 11%, 5% and 26%, respectively.
<PAGE>
<TABLE>
<CAPTION>
More Than More Than More Than More Than
Three One Year Three Five Years Ten Years
Months Three to to Years to to to More Than
(Dollars in thousands) or Less Twelve Months Three Years Five Years Ten Years Twenty Years Twenty Years Total
------- ------------- ----------- ---------- ---------- ------------ ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans (1) $ 65,434 119,134 200,096 206,736 123,095 89,425 - 803,920
Other loans (1) 13,694 6,263 2,686 2,125 6,604 2,150 197 33,719
MBSs held to maturity 8,338 19,308 42,818 42,258 64,194 21,024 - 197,940
Debt securities held to maturity - - 52,249 2,075 12,022 30,961 - 97,307
Securities available for sale 370,105 - - - - - - 370,105
Money market investments 6,869 - - - - - - 6,869
------- ------- ------- ------- ------- ------- ------ ---------
Total interest-earning assets 464,440 144,705 297,849 253,194 205,915 143,560 197 1,509,860
Premiums, net of unearned
discount and deferred fees (2) 10 3 7 6 5 3 - 34
------- ------- ------- ------- ------- ------- ------ ---------
Net interest-earning assets 464,450 144,708 297,856 253,200 205,920 143,563 197 1,509,894
------- ------- ------- ------- ------- ------- ------ ---------
Interest-bearing liabilities:
Passbook accounts 10,019 30,022 100,048 65,252 82,795 57,258 16,313 361,707
NOW accounts 1,461 4,360 56,817 15,200 20,396 11,207 2,075 111,516
Money market accounts 3,592 10,749 21,311 10,017 7,839 1,425 775 5,010
Certificate accounts 170,897 275,273 130,749 24,168 12 - - 601,099
Borrowed funds 205,437 42,413 77,420 620 543 - - 326,433
------- ------- ------- ------- ------- ------- ------ ---------
Total interest-bearing liabilities 391,406 362,817 386,345 115,257 111,585 69,890 18,465 1,455,765
------- ------- ------- ------- ------- ------- ------ ---------
Interest sensitivity gap $73,044 (218,109) (88,489) 137,943 94,335 73,673 (18,268) 54,129
======= ======= ======= ======= ======= ======= ====== =========
Cumulative interest sensitivity gap $73,044 (145,065) (233,554) (95,611) (1,276) 72,397 54,129
======= ======= ======= ======= ======= ======= ======
Cumulative interest sensitivity gap
as a percentage of total assets 4.61% (9.16)% (14.75)% (6.04)% (0.08)% 4.57% 3.42%
Cumulative net interest-earning
assets as a percentage of
interest-sensitive liabilities 118.66% 80.77% 79.52% 92.39% 99.91% 105.04% 103.72%
</TABLE>
(1) For purposes of the gap analysis, mortgage and other loans
are reduced for non-performing mortgage loans and other loans but
are not reduced for the allowance for loan losses.
(2) For purposes of the gap analysis, premiums, unearned
discount and deferred fees are pro-rated.
<PAGE>
At December 31, 1996, the Company's total interest-bearing
liabilities maturing or repricing within one year exceeded its
total interest-earning assets maturing or repricing within the
same time period by $145.1 million, representing a one year
cumulative gap ratio of negative 9.16%.
In order to reduce its sensitivity to interest rate risk, the
Company's current strategy includes emphasizing the origination
or purchase for portfolio of adjustable-rate loans, debt
securities and MBSs and maintaining an AFS securities portfolio.
During 1996, the Company purchased $49.3 million of adjustable-
rate MBSs which are expected to help protect net interest margins
during periods of rising interest rates. The Company also
purchased $6.0 million of floating rate corporate notes for its
debt securities portfolio. In 1996, the Company originated or
purchased $205.1 million of adjustable-rate mortgage loans.
Historically, the Company has been able to maintain a substantial
level of core deposits which the Company believes helps to limit
interest rate risk by providing a relatively stable, low cost
long-term funding base. At December 31, 1996, core deposits
represented 47.2% of deposits compared to 50.8% of deposits at
December 31, 1995. The Company expects to attract a higher
percentage of core deposits from its supermarket branch locations
as these locations continue to grow and mature.
AVERAGE STATEMENTS OF FINANCIAL POSITION
The following table sets forth certain information relating to
the Company's average consolidated statements of financial
condition and consolidated statements of operations for the three
years ended December 31, 1996 and reflects the average yield on
assets and average cost of liabilities for the periods indicated.
Such yields and costs are derived by dividing income or expense
by the average balance of assets or liabilities, respectively,
for the periods shown. Average balances are derived from average
daily balances. The average balance of loans includes loans on
which the Company has discontinued accruing interest. The yields
and costs include fees which are considered adjustments to
yields.
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
Average Average Average
Average Yield/ Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Mortgage loans $647,516 $53,110 8.20% $503,085 $42,115 8.37% $594,104 $45,277 7.62%
Other loans 35,952 3,638 10.12 40,418 4,215 10.43 36,478 3,417 9.37
MBSs(1) 543,810 37,517 6.90 557,977 37,510 6.72 439,189 25,705 5.85
Money market investments 2,175 176 8.09 4,313 339 7.86 8,344 821 9.84
Debt and equity securities (1) 227,521 14,812 6.51 199,600 12,255 6.14 105,356 6,271 5.95
--------- ------- --------- ------ --------- ------
Total interest-earning assets 1,456,974 109,253 7.50 1,305,393 96,434 7.39 1,183,471 81,491 6.89
Non-interest earning assets 61,120 57,149 54,348
--------- --------- ---------
Total assets 1,518,094 1,362,542 1,237,819
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Passbook accounts 373,337 9,314 2.49 405,932 10,105 2.49 499,326 12,458 2.49
Certificate accounts 572,768 32,436 5.66 503,990 29,426 5.84 367,307 17,864 4.86
NOW accounts 111,425 999 0.90 96,242 939 0.98 89,177 923 1.04
Money market accounts 58,108 1,929 3.32 45,472 1,585 3.49 30,502 752 2.47
Borrowed funds 285,951 16,690 5.84 200,788 13,060 6.50 147,112 8,292 5.64
--------- ------- --------- ------ --------- ------
Total interest-bearing liabilities 1,401,589 61,368 4.38 1,252,424 55,115 4.40 1,133,424 40,289 3.55
Other liabilities 20,628 17,946 15,845
--------- --------- ---------
Total liabilities 1,422,217 1,270,370 1,149,269
Stockholders' equity 95,877 92,172 88,550
--------- --------- ---------
Total liabilities and stockholders'
equity $1,518,094 $1,362,542 $1,237,819
Net interest income/net interest ========= ========= =========
rate spread (2) $47,885 3.12% $41,319 2.99% $41,202 3.34%
Net interest-earning assets/net ====== ==== ====== ==== ====== ====
interest margin (3) $55,385 3.29% $52,969 3.17% $50,047 3.48%
Ratio of interest-earning assets ====== ==== ====== ==== ====== ====
to interest-bearing liabilities 103.95% 104.23% 104.42%
====== ====== ======
</TABLE>
(1) Includes AFS securities and securities held to maturity.
(2) Net interest rate spread represents the difference between
the average yield on interest-earning assets and the average cost
of interest-bearing liabilities.
(3) Net interest margin represents net interest income before
provision for loan losses divided by average interest-earning
assets.
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31,
1996 AND 1995
GENERAL
The Company reported net income of $9.4 million for 1996 compared
to a net income of $8.5 million for 1995. The $0.9 million
increase in earnings was primarily attributable to an increase of
$12.9 million in interest income, an increase of $0.5 million in
non-interest income and a reduction of $0.8 million in income tax
expense. These factors were mainly offset by interest expense
which increased by $6.3 million, an increase of $0.4 million in
the provision for loan losses and non-interest expense which
increased by $6.7 million (which included the one-time $6.8
million SAIF assessment charge).
INTEREST INCOME
Interest income increased by $12.9 million, or 13.3% to $109.3
million in 1996 from $96.4 million in 1995. The increase was
primarily the result of an increase in interest income on
mortgage loans, and debt and equity securities which were
partially offset by a decrease in interest income on other loans
and money market investments.
Interest income on mortgage loans increased by $11.0 million, or
26.1% to $53.1 million in 1996 from $42.1 million in 1995
primarily as a result of an increase in the average mortgage loan
balance of $144.4 million partially offset by a decrease in
average yield on mortgage loans of 17 basis points. During 1996,
the Bank originated or purchased $354.9 million of mortgage loans
which included $172.3 million of one-to four-family mortgage
loans purchased in the secondary market during 1996. Mortgage
loan originations for 1996 were originated at an average rate of
7.56% compared to 8.03% for 1995. The decline in the average
rate for originations was primarily due to decreases in the rate
indices used for residential and commercial real estate loans.
These indices which are the 30 year treasury bond and the 5 year
treasury note declined 19 and 21 basis points, respectively, for
1996 when compared to 1995. Principal repayments totalled $78.2
million in 1996 compared to $67.0 million in 1995.
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.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996 Year Ended December 31, 1995
Compared to Compared to
Year Ended December 31, 1995 Year Ended December 31, 1994
Increase (Decrease) Increase (Decrease)
In Net Interest Income In Net Interest Income
Due to Due to
(In thousands) Volume Rate Net Volume Rate Net
------ ------ --- ------ ------ ---
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $11,866 (871) 10,995 (7,351) 4,189 (3,162)
Other loans (455) (122) (577) 390 408 798
MBSs(1) (974) 981 7 7,617 4,188 11,805
Money market investments (173) 10 (163) (341) (141) (482)
Debt and equity securities(1) 1,787 770 2,557 5,778 206 5,984
------ ----- ------ ------ ------ ------
Total 12,051 768 12,819 6,093 8,850 14,943
------ ----- ------ ------ ------ ------
Interest-bearing liabilities:
Passbook accounts (791) - (791) (2,353) - (2,353)
Certificate accounts 3,935 (925) 3,010 7,498 4,064 11,562
NOW accounts 141 (81) 607 1 (55) 16
Money market accounts 424 (80) 344 453 380 833
Borrowed funds 5,067 (1,437) 3,630 3,363 1,405 4,768
------ ----- ------ ------ ------ ------
Total 8,776 (2,523) 6,253 9,032 5,794 14,826
------ ----- ------ ------ ------ ------
Net change in net interest income $ 3,275 3,291 6,566 (2,939) 3,056 117
====== ===== ====== ====== ====== ======
</TABLE>
Interest income on other loans decreased by $577,000, or 13.7% to
$3.6 million in 1996 from $4.2 million in 1995 due to a decrease
of $4.5 million in average balances and a decline of 31 basis
points in the average yield. The Bank's consumer loan products
with the exception of equity loan/lines was discontinued in
November 1995. The consumer loan portfolio balance will continue
to amortize until all loans are satisfied except for the
overdraft line-of-credit product.
Interest income on MBSs was $37.5 million for both 1996 and 1995.
The average balance for 1996 decreased by $14.2 million, or 2.5%
to $543.8 million from $558.0 for 1995. This decrease was offset
by the average yield which increased by 18 basis points to 6.90%
for 1996 from 6.72% in 1995. During 1996, the Bank purchased
$161.1 million of MBSs for its AFS portfolio which were offset by
sales totalling $304.2 million. The average balance for 1996 was
down only $14.2 million because 96% of the net change in the MBS
portfolio occurred during the second half of 1996. The sales from
the AFS portfolio were used to fund mortgage loan originations,
purchases of loans in the secondary market and also for managing
the AFS portfolio to improve overall yield and shorten duration
of various securities. The improvement in the overall yield on
MBS securities was due to an increase in market rates during the
first quarter of 1996. During 1996, the Bank also purchased $38.4
million of MBSs for the held to maturity portfolio which were
offset by principal repayments totalling $32.0 million.
Interest income on money market investments decreased by
$163,000, or 48.1% to $176,000 in 1996 from $339,000 in 1995
<PAGE>
primarily as a result of a decrease in average balances of $2.1
million in 1996. The decrease in the average balances is the
result of the Company's strategy to take advantage of its
liquidity and invest in higher yielding assets.
Interest on debt and equity securities increased by $2.6 million,
or 20.9% to $14.8 million in 1996 from $12.3 million in 1995
primarily as a result of an increase in the average balance of
$27.9 million and an increase in average yield of 37 basis
points. During 1996, the Company purchased $160.1 million of debt
and equity securities for its AFS portfolio which were offset by
sales totalling $63.5 million. The increase in the overall yield
to 6.51% from 6.14% was due to the acquisition of callable agency
securities and Federal National Mortgage Association ("FNMA")
preferred stock. In addition, during 1996, the Bank purchased
$7.0 million of debt securities for the held to maturity
portfolio offset by principal repayments totalling $37.5 million.
INTEREST EXPENSE
Interest expense increased by $6.3 million, or 11.3% to $61.4
million in 1996 from $55.1 million in 1995. The increase was
partially attributable to an increase in interest on deposits of
$2.6 million, or 6.2% to $44.7 million in 1996 from $42.1 million
in 1995. The increase in interest on deposits was due to an
increase of $64.0 million, or 6.1% in average deposits to $1.12
billion in 1996 from $1.05 billion in 1995. The overall cost of
deposits was 4.00% for both years.
Interest expense on certificate accounts increased by $3.0
million, or 10.2% to $32.4 million in 1996 from $29.4 million in
1995. The average balance of certificate accounts increased by
$68.8 million, or 13.6% to $572.8 million in 1996 from $504.0
million in 1995. The average cost of certificates decreased to
5.66% in 1996 from 5.84% in 1995. During most of 1996, the Bank
continued to experience net outflows from passbook accounts into
its certificates of deposit accounts. In 1996, passbook accounts
experienced an excess of withdrawals over deposits of $16.0
million, while certificates of deposit experienced an excess of
deposits over withdrawals of $36.8 million. Interest expense on
passbook accounts decreased by $791,000, or 7.8% to $9.3 million
in 1996 from $10.1 million in 1995 primarily due to a decrease in
average balances of $32.6 million due to customers seeking higher
yielding investment opportunities including the Bank's
certificates of deposit accounts. The Bank maintained its
passbook rate at 2.49% for both years.
Interest on borrowed funds increased by $3.6 million, or 27.8% to
$16.7 million in 1996 compared to $13.1 million in 1995. Borrowed
funds on an average basis increased by $85.2 million in 1996 due
to an increase in short-term advances with the Federal Home Loan
Bank ("FHLB") and reverse repurchase agreements with brokers to
provide funding for loan originations and partial funding for
residential loans purchased in the secondary market which
<PAGE>
included two bulk purchases totalling approximately $70.0
million. The average cost of borrowings decreased to 5.84% in
1996 from 6.50% in 1995 due to a reduction in short and
intermediate term rates during the end of 1995 and the beginning
of 1996.
NET INTEREST INCOME
Net interest income increased by $6.6 million, or 15.9% to $47.9
million in 1996 from $41.3 million in 1995. The average yield on
interest-earning assets increased by 11 basis points to 7.50% in
1996 from 7.39% in 1995, and the average cost of liabilities
decreased by 2 basis points to 4.38% in 1996 from 4.40% in 1995.
The net interest rate spread was 3.12% in 1996 compared to 2.99%
in 1995.
PROVISION FOR LOAN LOSSES
The Bank provided $3.1 million for loan losses in 1996 compared
to $2.8 million in 1995. The provision for loan losses reflects
management's periodic review and evaluation of the loan
portfolio. The increase in the provision for loan losses was due
to the growth in the Bank's residential and commercial mortgage
loan portfolios. As of December 31, 1996, the allowance for loan
losses was $10.7 million compared to $8.6 million at December 31,
1995. As of December 31, 1996, the allowance for loan losses was
1.26% of total loans compared to 1.51% of total loans at December
31, 1995. The decrease was attributable to the growth in the loan
portfolio and a decline in non-performing loans. The allowance
for loan losses was 77.05% of non-performing loans at December
31, 1996 compared to 50.80% at December 31, 1995.
NON-INTEREST INCOME
Non-interest income increased by $532,000, or 5.9% to $9.6
million in 1996 from $9.0 million in 1995. Fee income on savings
and checking accounts increased by $517,000, or 18.1% primarily
due to an increase of approximately 16,000 in the number of
active accounts. Annuity, insurance and mutual fund fees
increased by $589,000, or 23.3% due to an increase of $224,000 in
annuity income, an increase of $200,000 in mutual fund income and
an increase of $165,000 in revenue from the distribution of
traditional life insurance products. The increase in sales of
annuity and mutual fund products by Columbia Investment Services,
Inc. ("CIS"), the Bank's wholly-owned subsidiary, is partially
due to the increased demand for alternative sources of
investments by the Bank's depositors. Approximately 45% of sales
were from withdrawals of deposit balances from the Bank. Finally,
loan fees and servicing income decreased by $434,000, or 19.4% to
$1.8 million in 1996 from $2.2 million in 1995. The decrease was
attributable to prepayment fees on commercial real estate loans
which were higher in 1995 due to the prepayment of several large
commercial real estate loans. During 1996, the Company realized
net gains of $371,000 on the sales of AFS securities which were
offset by an increase of $228,000 in the valuation allowance on
cooperative apartment loans held for sale.
<PAGE>
NON-INTEREST EXPENSE
Non-interest expense increased by $6.7 million, or 21.0% to $38.5
million in 1996 from $31.8 million in 1995. The increase in non-
interest expense was primarily due to the SAIF recapitalization
charge of $6.8 million which was recorded in the third quarter of
1996. On September 30, 1996, the President signed into law the
Deposit Insurance Funds Act of 1996 which empowered the Board of
Directors of the FDIC to impose and collect the assessment. The
special assessment rate was 65.7 basis points per $100 of insured
deposits at March 31, 1995. Compensation and benefit costs
increased by $848,000, or 5.7% to $15.7 million in 1996 from
$14.9 million in 1995. Salary costs increased by $1.6 million due
to normal merit increases, staff hired for the supermarket
banking program and an increase in commission costs for CIS.
These factors were partially offset by a curtailment gain of
$266,000 which was recorded upon the freeze of the Bank's pension
plan as of July 1, 1996. The curtailment gain coupled with a
decrease in the normal accrual for 1996 reduced pension expense
by $462,000 when compared to the previous year. During 1996, the
Bank accrued a matching contribution for its employee 401(k)
contributions of $120,000. Real estate owned ("REO") operations,
net decreased by $1.1 million, or 80.3% to $277,000 for 1996 from
$1.4 million for 1995. REO expenses incurred on properties in the
portfolio decreased by $669,000 and the provision for REO
decreased by $459,000, respectively, since the REO portfolio
decreased by $995,000, or 48.9% from the previous year. The
annual premium paid for SAIF insurance, exclusive of the SAIF
assessment charge, decreased by $326,000, or 12.3% to $2.3
million for 1996 from $2.7 million for 1995 due to a reduction in
the premium for the fourth quarter of 1996 which included a
rebate for the 1996 overassessment. Finally, other non-interest
expenses increased by $325,000, or 3.4% to $9.8 million for 1996
from $9.5 million for 1995. During 1996, advertising costs
increased by $233,000 to support the Bank's various products and
for the implementation of the supermarket banking program.
Miscellaneous expenses increased by $587,000 due to the
settlement of two legal suits totalling $150,000 and agency fees
incurred to hire staff for the supermarket program. These
increases were partially offset by the reversal of a reserve of
$430,000 for potential losses relating to checks in process of
collection which were held by Nationar. During 1996, the Bank
recovered all of its previously outstanding claims. (See Note 12
to Notes to Consolidated Financial Statements.)
INCOME TAX EXPENSE
Income tax expense was $6.4 million in 1996 compared to $7.2
million in 1995. In the fourth quarter of 1996, the Company
recorded the benefit resulting from a change in the method it
used for determining the federal tax return treatment of its bad
debt reserve. This resulted in a reduction in its effective
federal tax rate for the fourth quarter of 1996 and the entire
year. In the third quarter of 1996, the Company recorded a tax
benefit relating to the method of computing its bad debt reserve
<PAGE>
for New York State income tax purposes. Income tax expense for
1996 was reported at an effective tax rate of 40.6% compared to
45.8% in 1995. (See Note 9 to Notes to Consolidated Financial
Statements.)
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31,
1995 AND 1994
GENERAL
The Company reported net income of $8.5 million for 1995 compared
to a net loss of $4.3 million for 1994. The $12.8 million
increase in earnings was primarily attributable to an increase of
$14.9 million in interest income, a decrease of $10.6 million in
the provision for loan losses, a decrease of $9.3 million in non-
interest expense and an increase of $2.5 million in non-interest
income. These were partially offset by an increase in interest
expense of $14.8 million and an increase of $9.7 million in
income tax expense.
INTEREST INCOME
Interest income increased by $14.9 million, or 18.3% to $96.4
million in 1995 from $81.5 million in 1994. The increase was
primarily the result of an increase in interest income on MBSs,
debt securities and other loans which was partially offset by a
decrease in interest income on mortgages and money market
investments.
Interest income on mortgage loans decreased by $3.2 million, or
7.0% to $42.1 million in 1995 from $45.3 million in 1994
primarily as a result of a decrease in the average loan balance
of $91.0 million partially offset by an increase in average yield
of 75 basis points. The decrease in average balances of mortgage
loans is primarily due to the sale of non-performing commercial,
multi-family real estate and cooperative apartment loans and
performing cooperative apartment loans in several bulk sale
transactions during 1994. These sales were partially offset by
loan originations of $132.6 million during 1995 which were
originated at an average rate of 8.03% compared to $83.7 million
of mortgage loans which were originated at an average rate of
7.17% in 1994. Principal repayments totalled $67.0 million in
1995 compared to $64.8 million in 1994.
Interest income on other loans increased by $798,000, or 23.4% to
$4.2 million in 1995 from $3.4 million in 1994 due to an increase
in average yield of 106 basis points coupled with an increase in
average balances of $3.9 million. The increase in average
balances was due primarily to loan originations of $10.7 million
in 1995. The increase in yield was due to higher rates on new
loans originated in 1995.
Interest income on MBSs increased by $11.8 million, or 45.9% to
$37.5 million in 1995 from $25.7 million in 1994 primarily due to
an increase in average balances of $118.8 million and an increase
<PAGE>
in average yield of 87 basis points. The increase in average
balances was primarily due to the reinvestment of the proceeds of
the bulk sales of loans and REO during the second half of 1994
into MBSs. In addition, during the second quarter of 1995, the
Company completed a $75 million leverage transaction which
utilized short-term borrowings to purchase floating-rate CMOs.
The increase in yield was primarily due to the purchase of $160.8
million of adjustable-rate MBSs during 1995 and $145.6 million of
adjustable-rate MBSs during 1994 which repriced upward due to the
increase in market interest rates during 1995. The increase in
yield was also attributable to a decrease in premium amortization
since the prepayment rate was slower in 1995 than during 1994.
Interest income on money market investments decreased by
$482,000, or 58.7% to $339,000 in 1995 from $821,000 in 1994
primarily as a result of a decrease in average balances of $4.0
million in 1995. The decrease in the average balances is the
result of the Company's strategy to take advantage of its
liquidity and invest in higher yielding assets.
Interest on debt and equity securities increased by $6.0 million,
or 95.4% to $12.3 million in 1995 from $6.3 million in 1994
primarily as a result of an increase in the average balances of
$94.2 million and an increase in average yield of 19 basis
points. The increase in average balances was due to purchases of
$112.1 million of which $21.8 million were adjustable-rate
securities. These purchases were made to supplement a lack of
loan demand during the first quarter of 1995.
INTEREST EXPENSE
Interest expense increased by $14.8 million, or 36.8% to $55.1
million in 1995 from $40.3 million in 1994. The increase was
primarily the result of an increase in interest on deposits of
$10.1 million, or 31.4% to $42.1 million in 1995 from $32.0
million in 1994. The increase in interest on deposits was
primarily due to an increase of 76 basis points in the average
cost of deposits and an increase of $65.3 million in average
balances of deposits.
Interest expense on certificate accounts increased by $11.5
million, or 64.7% to $29.4 million in 1995 from $17.9 million in
1994. The average balance of certificate accounts increased by
$136.7 million, or 37.2% to $504.0 million in 1995 from $367.3
million in 1994. The average cost of certificates increased to
5.84% in 1995 from 4.86% in 1994. During most of 1995, the Bank
experienced net outflows from passbook accounts into its
certificates of deposit accounts. In 1995, passbook accounts
experienced an excess of withdrawals over deposits of $92.6
million, while certificates of deposit experienced an excess of
deposits over withdrawals of $62.5 million. Interest expense on
passbook accounts decreased by $2.4 million, or 18.9% to $10.1
million in 1995 from $12.5 million in 1994 primarily due to a
decrease in average balances of $93.4 million due to customers
<PAGE>
seeking higher yielding investment opportunities including the
Bank's certificates of deposit accounts.
Interest on borrowed funds increased by $4.8 million, or 57.5% to
$13.1 million in 1995 compared to $8.3 million in 1994. Borrowed
funds on an average basis increased by $53.7 million in 1995 due
to an increase in short-term advances with the FHLB and reverse
repurchase agreements with brokers to provide funding for
purchases of debt securities and MBSs with wholesale borrowings
including the Bank's $75.0 million leverage transaction. The
average cost of borrowings increased to 6.50% in 1995 from 5.64%
in 1994 due to increases in market interest rates.
NET INTEREST INCOME
Net interest income increased by $117,000, or 0.3% to $41.3
million in 1995 from $41.2 million in 1994. The average cost of
liabilities increased 85 basis points to 4.40% in 1995 from 3.55%
in 1994, which was partially offset by the average yield on
interest-earning assets which increased by 50 basis points to
7.39% in 1995 from 6.89% in 1994. The net interest rate spread
was 2.99% in 1995 compared to 3.34% in 1994.
PROVISION FOR LOAN LOSSES
The Bank provided $2.8 million for loan losses in 1995 compared
to $13.4 million in 1994. The provision for loan losses
represents management's periodic review and evaluation of the
loan portfolio. The decrease in 1995 when compared to 1994 was
principally due to additional provisions of $7.5 million booked
in 1994 in connection with the bulk sales completed in 1994. As
of December 31, 1995, the allowance for loan losses was $8.6
million compared to $10.8 million at December 31, 1994. The Bank
took charge-offs totaling $5.5 million in 1995, compared to $24.7
million in 1994 which included $14.4 million in connection with
the bulk sales. As of December 31, 1995, the allowance for loan
losses was 1.51% of total loans compared to 2.07% of total loans
at December 31, 1994. The decrease was attributable to the growth
in the loan portfolio and a decline in non-performing loans. The
allowance for loan losses was 50.80% of non-performing loans at
December 31, 1995 compared to 38.33% at December 31, 1994.
NON-INTEREST INCOME
Non-interest income increased by $2.5 million, or 38.2% to $9.0
million in 1995 from $6.5 million in 1994. The increase of $1.5
million in loan fees and servicing income was primarily due to
$975,000 received in prepayment fees on several commercial real
estate loans repaid during the fourth quarter of 1995. Fee income
on savings and checking accounts increased by $579,000, or 25.4%
due to an increase of approximately 7,700 in the number of active
accounts. Annuity, insurance and mutual fund fees increased by
$500,000, or 24.7% due to an increase of $437,000 in annuity
income, an increase of $37,000 in mutual fund income and an
increase of $26,000 in revenue from our new venture, the
distribution of traditional life insurance products. The increase
<PAGE>
in sales of annuity and mutual fund products by CIS, the Bank's
wholly-owned subsidiary, is partially due to the increased demand
for alternative sources of investments by the Bank's depositors.
Approximately 49% of sales were from withdrawals of deposit
balances from the Bank.
NON-INTEREST EXPENSE
Non-interest expense decreased by $9.3 million, or 22.7% to $31.8
million in 1995 from $41.1 million in 1994. The decrease is
primarily due to a decrease of $10.8 million in expenses from REO
operations due to provisions on REO losses recorded during 1994
in connection with the bulk sale transactions. Compensation and
benefit expenses increased by $1.3 million, or 9.4% due to normal
merit increases and the implementation of an executive and staff
incentive plan and an increase of $461,000 in the cost of the
ESOP plan due to the significant appreciation in the Company's
stock price. Other miscellaneous expenses increased by $175,000,
or 1.9% when compared to 1994, partially due to additions of
$430,000 to the reserve for possible losses for checks in the
process of collection being held by Nationar. (See Note 12 to
Notes to Consolidated Financial Statements.)
INCOME TAX EXPENSE
The income tax provision was $7.2 million in 1995 compared to a
tax benefit of $2.5 million in 1994. The increase in income taxes
is primarily due to an increase of $22.6 million in income before
income taxes. Income tax expense in 1995 reflects a reduction of
$300,000 in the valuation allowance for the Bank's net deferred
tax asset due to a decline in the deferred tax asset allocated to
state and local taxes.
<PAGE>
NON-PERFORMING ASSETS
The following table sets forth information regarding non-
performing assets which include all non-accrual loans (which
consist of loans 90 days or more past due and restructured loans
that have not yet performed in accordance with their modified
terms for the required six-month seasoning period), accruing
restructured loans and real estate owned.
<TABLE>
<CAPTION>
December 31,
(In thousands) 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Non accrual loans:
One-to four-family $ 4,083 3,800 5,995
Cooperative 431 871 934
Multi-family 1,463 967 5,088
Non-residential and other 4,756 4,167 6,732
------ ------ ------
Total non-accrual loans 10,733 9,805 18,749
------ ------ ------
Restructured loans:
One-to four-family 887 853 815
Cooperative 486 494 502
Multi-family 1,427 3,602 4,071
Non-residential and other 360 2,123 4,162
------ ------ ------
Total restructured loans 3,160 7,072 9,550
------ ------ ------
Total non-performing loans 13,893 16,877 28,299
------ ------ ------
REO, net:
One-to four-family 266 1,148 971
Cooperative 292 723 1,128
Multi-family - 156 -
Non-residential and other 561 184 6,462
------ ------ ------
Total REO 1,119 2,211 8,561
Less allowance for REO (81) (178) (717)
------ ------ ------
REO, net 1,038 2,033 7,844
------ ------ ------
Total non-performing assets $14,931 18,910 36,143
====== ====== ======
</TABLE>
During the past three years the Company's expanded loan
workout/resolution efforts have successfully contributed toward
reducing non-performing assets to manageable levels. Since year-
end 1994, non-performing assets have declined by $21.2 million,
or 58.7%, from a level of $36.1 million to $14.9 million at year-
end 1996. The decrease in non-performing assets is reflected in
<PAGE>
the following ratios: Non-performing loans to total loans was
1.64% for 1996 compared to 2.97% for 1995 and 5.41% for 1994;
Non-performing assets to total assets was 0.94% for 1996 compared
to 1.28% for 1995 and 2.85% for 1994 and Non-performing loans to
total assets was 0.87% for 1996 compared to 1.15% for 1995 and
2.23% for 1994. There can be no assurance that non-performing
assets will continue to decline.
The decrease in non-performing assets in 1996 was primarily due
to continued sales of REO properties and a continued decline in
non-performing loans. During 1996, the Company sold 60 REO
properties with a fair value of $3.1 million. During 1996, 2
restructured loans with a balance of $2.1 million were
reclassified to performing loans since they had performed in
accordance with their modified terms for a period of 18 months
and are no longer considered classified assets. Total non-accrual
loans increased by $928,000 during 1996 due to an increase in
non-residential loans.
The decrease in non-performing assets in 1995 was primarily due
to continued sales of REO properties and a continued decline in
non-performing loans. During 1995, the Company sold 76 REO
properties with a fair value of $8.5 million. During 1995, six
restructured loans with a balance of $3.0 million were
reclassified to performing loans since they had performed in
accordance with their modified terms for a period of 18 months
and are no longer considered classified assets. Also, total non-
accrual loans declined by $8.9 million during 1995 due to the
Company's continued efforts to reduce non-performing loans.
LIQUIDITY
The Bank is required to maintain minimum levels of liquid assets
as defined by the Office of Thrift Supervision ("OTS")
regulations. This requirement, which may be varied by the OTS
depending upon economic conditions and deposit flows, is based
upon a percentage of withdrawable deposits and short-term
borrowings. The required ratio is currently 5%. The Bank's ratio
was 14.99% at December 31, 1996 compared to 10.31% at December
31, 1995.
The Company's primary sources of funds are deposits, principal
and interest payments on loans, debt securities and MBSs,
retained earnings and advances from FHLB and other borrowings.
Proceeds from the sale of AFS securities are also a source of
funding, as are, to a lesser extent, the sales of annuities,
insurance and securities brokerage activities conducted by the
Bank's wholly-owned subsidiary, CIS. While maturities and
scheduled amortization of loans and securities are somewhat
predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates,
economic conditions, competition and regulatory changes.
<PAGE>
The Company's most liquid assets are cash and short term
investments. The levels of these assets are dependent on the
Company's operating, financing, lending and investing activities
during any given period. At December 31, 1996 and December 31,
1995, cash and short and intermediate-term investments totaled
$35.7 million and $38.9 million, respectively.
The Company and the Bank have other sources of liquidity which
include debt securities maturing within one year and AFS
securities. Other sources of funds include FHLB advances, which
at December 31, 1996, totaled $178.4 million. If needed, the Bank
may borrow an additional $11.6 million from the FHLB.
The Company's cash flows are comprised of three primary
classifications: cash flows from operating activities; investing
activities and financing activities. Net cash provided by (used
in) operating activities, consisting primarily of interest and
dividends received less interest paid on deposits were $10.7
million, $(8.3) million and $45.0 million for the years ended
December 31, 1996, 1995 and 1994, respectively. Net cash used in
investing activities, consisting primarily of disbursements of
loan originations and securities purchases, offset by principal
collections on loans and proceeds from maturities of securities
held to maturity or sales of AFS securities or disposition of
assets including REO were $(117.6) million, $(197.6) million and
$(62.4) million for the years ended December 31, 1996, 1995 and
1994, respectively. Net cash provided by financing activities,
consisting primarily of net activity in deposits and borrowings,
purchases of treasury stock, payments of common stock dividends
and proceeds from stock options exercised were $103.7 million,
$214.3 million and $11.8 million for the years ended December 31,
1996, 1995 and 1994, respectively.
At December 31, 1996, the Bank had outstanding loan commitments
to originate $55.8 million of loans. The Bank also had
commitments to purchase $1.0 million of debt securities. The Bank
believes that it will have sufficient funds available to meet
these commitments. At December 31, 1996, certificates of deposit
which are scheduled to mature in one year or less totalled $446.2
million.
INFLATION AND CHANGING PRICES
The consolidated financial statements and notes thereto presented
herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars
without considering the changes in the relative purchasing power
of money over time and changes due to inflation. The impact of
inflation is reflected in the increased cost of the Bank's
operations. Unlike most industrial companies, nearly all the
assets and liabilities of the Bank are monetary. As a result,
interest rates have a greater impact on the Bank's performance
than do the effects of general levels of inflation. Interest
<PAGE>
rates do not necessarily move in the same direction or to the
same extent as the price of goods and services.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
See Note 1 to Notes to Consolidated Financial Statements.
STOCK DATA
Haven Bancorp, Inc.'s common stock, listed under the symbol HAVN
is publicly traded on the Nasdaq Stock Market. As of March 5,
1997, the Company had approximately 450 stockholders of record
(not including the number of persons or entities holding stock in
nominee or street name through various brokerage firms) and
4,328,874 outstanding shares of common stock (excluding treasury
shares). The common stock traded in a high and low range of
$291/2 and $221/4 during the year ended December 31, 1996.
<PAGE>
HAVEN BANCORP, INC.
Consolidated Statements of Financial Condition
(Dollars in thousands, except for share data)
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 28,848 $ 29,790
Money market investments 6,869 9,064
Securities available for sale (note 2) 370,105 503,058
Loans held for sale (note 5) - 11,412
Debt securities held to maturity (estimated fair value of $96,324
and $126,811 in 1996 and 1995, respectively) (note 3) 97,307 127,796
Federal Home Loan Bank of NY Stock, at cost 9,890 8,138
Mortgage-backed securities held to maturity (estimated fair value of
$195,682 and $189,551 in 1996 and 1995, respectively) (notes 4 and 8) 197,940 190,714
Loans (note 5):
First mortgage loans 793,556 519,804
Cooperative apartment loans 19,936 10,187
Other loans 34,094 38,967
--------- ---------
Total loans 847,586 568,958
Less allowance for loan losses (note 6) (10,704) (8,573)
--------- ---------
Loans, net 836,882 560,385
Premises and equipment, net 8,820 7,590
Accrued interest receivable (notes 2, 3, 4 and 5) 12,172 10,736
Real estate owned, net (note 6) 1,038 2,033
Other assets (note 9) 13,674 12,100
--------- ---------
Total assets $1,583,545 1,472,816
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 7) $1,137,788 1,083,446
Borrowed funds (note 8) 326,433 270,583
Mortgagors' escrow balances 4,621 3,227
Due to broker 1,000 5,000
Other liabilities (note 9) 14,319 12,041
--------- ---------
Total liabilities 1,484,161 1,374,297
--------- ---------
Commitments and contingencies (notes 6 and 12)
Stockholders' Equity (note 13):
Preferred stock, $.01 par value, 2,000,000
shares authorized, none issued - -
Common stock, $.01 par value, 10,500,000 shares authorized,
4,959,375 issued; 4,325,407 and 4,511,457 shares
outstanding in 1996 and 1995, respectively 50 50
Additional paid-in capital 48,844 47,331
Retained earnings, substantially restricted (note 13) 65,092 57,919
Unrealized (loss) gain on securities available for sale, net
of tax effect (note 2) (840) 2,083
Treasury stock, at cost (633,968 and 447,918 shares in 1996
and 1995, respectively) (11,049) (6,023)
Unallocated common stock held by ESOP (note 11) (1,854) (2,197)
Unearned common stock held by Bank's Recognition Plans
and Trusts (note 11) (267) (644)
Unearned compensation (note 11) (592) -
--------- ---------
Total stockholders' equity 99,384 98,519
--------- ---------
Total liabilities and stockholders' equity $1,583,545 1,472,816
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
HAVEN BANCORP, INC.
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Interest income:
Mortgage loans $53,110 42,115 45,277
Other loans 3,638 4,215 3,417
Mortgage-backed securities 37,517 37,510 25,705
Money market investments 176 339 821
Debt and equity securities 14,812 12,255 6,271
------- ------ ------
Total interest income 109,253 96,434 81,491
------- ------ ------
Interest expense:
Deposits:
Passbook accounts 9,314 10,105 12,458
NOW accounts 999 939 923
Money market accounts 1,929 1,585 752
Certificate accounts 32,436 29,426 17,864
Borrowings 16,690 13,060 8,292
------ ------ ------
Total interest expense 61,368 55,115 40,289
------ ------ ------
Net interest income before provision for loan losses 47,885 41,319 41,202
Provision for loan losses (note 6) 3,125 2,775 13,400
------ ------ ------
Net interest income after provision for loan losses 44,760 38,544 27,802
------ ------ ------
Non-interest income:
Loan fees and servicing income 1,807 2,241 790
Savings/checking fees 3,378 2,861 2,282
Net gain on sales of interest-earning assets 140 126 372
Insurance annuity and mutual funds fees 3,114 2,525 2,025
Other 1,115 1,269 1,060
------ ------ ------
Total non-interest income 9,554 9,022 6,529
------ ------ ------
Non-interest expense:
Compensation and benefits (notes 10 and 11) 15,737 14,889 13,605
Occupancy and equipment (note 12) 3,478 3,334 3,238
Real estate owned operations, net 277 1,405 12,253
SAIF recapitalization charge (note 7) 6,800 - -
Federal deposit insurance premiums 2,327 2,653 2,709
Other 9,836 9,511 9,336
------ ------ ------
Total non-interest expense 38,455 31,792 41,141
------ ------ ------
Income (loss) before income tax expense (benefit) 15,859 15,774 (6,810)
Income tax expense (benefit) (note 9) 6,434 7,230 (2,475)
------ ------ ------
Net income (loss) $9,425 8,544 (4,335)
====== ====== ======
Net income (loss) per common share: Primary $ 2.12 1.89 (0.94)
====== ====== ======
Fully diluted $ 2.11 1.87 (0.94)
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
HAVEN BANCORP, INC.
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
The three years ended December 31, 1996
Unrealized
Gain (Loss) Unallocated Unearned
Additional on Securities Common Common
Common Paid-In Retained Available Treasury Stock Held Stock Held Unearned
(In thousands of dollars, Stock Capital Earnings for Sale Stock by ESOP by RRPs Compensation Total
except for share data) ------ ---------- -------- ------------- -------- ----------- ---------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 50 46,303 54,666 - (518) (3,318) (1,373) - 95,810
Net loss - - (4,335) - - - - - (4,335)
Purchase of treasury stock
(365,469 shares) - - - - (4,575) - - - (4,575)
Unrealized appreciation on securities
transferred from held to maturity to
available for sale, net of tax effect - - - 321 - - - - 321
Change in unrealized appreciation on
securities available for sale, net
of tax effect - - - (2,201) - - - - (2,201)
Allocation of ESOP stock and
amortization of award of RRP stock
and related tax benefits - 192 - - - 593 430 - 1,215
---- ------ ------ ------ ------ ------ ----- ----- ------
Balance at December 31, 1994 50 46,495 50,331 (1,880) (5,093) (2,725) (943) - 86,235
Net income - - 8,544 - - - - - 8,544
Dividends declared - - (902) - - - - - (902)
Purchase of treasury stock
(75,570 shares) - - - - (1,360) - - - (1,360)
Reissued Treasury Stock contributed to
RRP (9,918 shares) - 49 - - 119 - (168) - -
Stock options exercised and related
tax effect (25,703 shares) - 45 (54) - 311 - - - 302
Unrealized appreciation on securities
transferred from held to maturity to
available for sale, net of tax effect - - - 2,091 - - - - 2,091
Change in unrealized appreciation on
securities available for sale, net
of tax effect - - - 1,872 - - - - 1,872
Allocation of ESOP stock and
amortization of award of RRP stock
and related tax benefits - 742 - - - 528 467 - 1,737
---- ------ ------ ------ ------ ------ ----- ----- ------
Balance at December 31, 1995 50 47,331 57,919 2,083 (6,023) (2,197) (644) - 98,519
Net income - - 9,425 - - - - - 9,425
Dividends declared - - (2,229) - - - - - (2,229)
Purchase of treasury stock
(225,537 shares) - - - - (5,516) - - - (5,516)
Treasury Stock issued for deferred
compensation plan (30,081 shares) - 410 - - 372 - - (782) -
Stock options exercised and related
tax effect (9,406 shares) - 104 (23) - 118 - - - 199
Change in unrealized appreciation on
securities available for sale, net
of tax effect - - - (2,923) - - - - (2,923)
Allocation of ESOP stock and
amortization of award of RRP stock
and related tax benefits - 999 - - - 343 377 - 1,719
Amortization of deferred compensation
plan - - - - - - - 190 190
---- ------ ------ ------ ------ ------ ----- ----- ------
Balance at December 31, 1996 $ 50 48,844 65,092 (840) (11,049) (1,854) (267) (592) 99,384
==== ====== ====== ====== ====== ====== ===== ===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
HAVEN BANCORP, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 9,425 8,544 (4,335)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Amortization of cost of stock benefit plans 1,909 1,737 1,388
Amortization of net deferred loan origination fees (245) (433) (71)
Premiums and discounts on loans, mortgage-backed
and debt securities 233 390 2,081
Provision for loan losses 3,125 2,775 13,400
Provision for losses on real estate owned 291 750 10,309
Deferred income taxes 230 5,232 (1,782)
Net gain on sales of interest-earning assets (140) (126) (372)
Depreciation and amortization 878 925 1,208
Increase in accrued interest receivable (1,436) (2,163) (863)
(Decrease) increase in due to broker (4,000) (25,800) 30,800
Increase (decrease) in other liabilities 2,278 1,682 (2,022)
Increase in other assets (1,804) (1,844) (4,747)
------- ------- -------
Net cash provided by (used in) operating activities 10,744 (8,331) 44,994
------- ------- -------
Cash flows from investing activities:
Net increase in loans (269,343) (65,505) (55,080)
Proceeds from disposition of assets (including REO) 4,313 9,703 169,399
Purchases of securities available for sale (321,162) (28,964) (5,000)
Principal repayments on securities available for sale 73,472 2,800 15,015
Proceeds from sales of securities available for sale 374,840 25,152 59,432
Purchases of debt securities held to maturity (6,989) (99,022) (130,537)
Principal repayments, maturities and calls on debt securities
held to maturity 37,511 60,693 -
Purchases of mortgage-backed securities held to maturity (38,357) (175,859) (206,449)
Principal repayment on mortgage-backed securities
held to maturity 32,004 74,163 91,015
Purchases of Federal Home Loan Bank Stock, net (1,752) (1,250) -
Net (increase) decrease in premises and equipment (2,108) 483 (200)
------- ------- -------
Net cash used in investing activities (117,571) (197,606) (62,405)
------- ------- -------
Cash flows from financing activities:
Net increase in deposits 54,342 70,284 26,402
Net increase (decrease) in borrowed funds 55,850 145,502 (10,935)
Increase in mortgagors' escrow balances 1,394 90 920
Purchase of treasury stock (5,516) (1,360) (4,575)
Payment of common stock dividends (2,475) (454) -
Stock options exercised 95 257 -
------- ------- -------
Net cash provided by financing activities 103,690 214,319 11,812
------- ------- -------
Net (decrease) increase in cash and cash equivalents (3,137) 8,382 (5,599)
Cash and cash equivalents at beginning of year 38,854 30,472 36,071
------- ------- -------
Cash and cash equivalents at end of year $35,717 38,854 30,472
======= ======= =======
Supplemental information:
Cash paid during the year for:
Interest $60,187 54,042 39,489
Income taxes 7,824 685 63
Additions to real estate owned 3,470 4,638 7,764
Loans transferred (from) to loans held for sale (10,594) 12,038 170,500
Securities purchased not yet received 1,000 5,000 30,800
Mortgage-backed securities and debt securities held
to maturity transferred to securities available for sale (note 1) - 447,200 82,800
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Haven Bancorp, Inc. (the "Holding Company") was formed on March
25, 1993, as the holding company for Columbia Federal Savings
Bank (the "Bank"). On September 23, 1993, the Holding Company
completed its initial public offering of 4,959,375 shares of
common stock in connection with the Bank's conversion from a
federally chartered mutual savings bank to a federally chartered
stock savings bank (the "Conversion"). Concurrent with the
conversion process, the Holding Company acquired all of the
issued and outstanding stock of the Bank with a portion of the
net proceeds.
The accounting and reporting policies of the Holding Company and
the Bank and its subsidiaries (the "Company") conform to
generally accepted accounting principles and to general practices
within the banking industry. The following summarizes the
significant policies and practices:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Holding Company and its subsidiary, the Bank, and
its wholly-owned subsidiaries. All significant intercompany
transactions and balances are eliminated in consolidation. In
preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of each
consolidated statement of financial condition and revenues and
expenses for the year then ended. Actual results could differ
from those estimates.
For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks and money market investments.
MONEY MARKET INVESTMENTS
Money market investments represent instruments with maturities of
ninety days or less. These investments are carried at cost,
adjusted for premiums and discounts which are recognized in
interest income over the period to maturity.
DEBT, EQUITY AND MORTGAGE-BACKED SECURITIES
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", debt and mortgage-backed securities ("MBSs")
which the Company has the positive intent and ability to hold
until maturity are carried at cost, adjusted for amortization of
premiums and accretion of discounts on a level yield method over
the remaining period to contractual maturity, adjusted, in the
case of MBSs, for actual prepayments. Debt and equity securities
and MBSs to be held for indefinite periods of time and not
intended to be held to maturity are classified as available for
sale securities and are recorded at fair value, with unrealized
<PAGE>
gains (losses), net of tax, reported as a separate component of
stockholders' equity.
In connection with its adoption of SFAS No. 115 on January 1,
1994, the Company reclassified $19.0 million of debt securities
and $63.8 million of MBSs previously classified as held to
maturity to securities available for sale.
In November, 1995, the Financial Accounting Standards Board
("FASB") issued an implementation guide for SFAS No. 115. The
implementation guide provided guidance in the form of a question
and answer format and allowed an opportunity from mid-November
1995 to December 31, 1995 for companies to reclassify securities
in the held to maturity portfolio to securities in the available
for sale portfolio without tainting the remainder of the
portfolio. In connection with the implementation guide for SFAS
No. 115, the Company reclassified $41.9 million of debt
securities and $405.3 million of MBSs previously classified as
held to maturity to securities available for sale.
Gains and losses on the sale of securities are determined using
the specific identification method and are included in non-
interest income.
LOANS HELD FOR SALE
Loans held for sale are carried at the lower of cost or estimated
market value in the aggregate. Net unrealized losses are provided
for in a valuation allowance created through charges to
operations. Transfers to/from loans held for investment to loans
held for sale are recorded at the lower of cost or estimated
market value in the aggregate.
LOANS
Loans are carried at their unpaid principal balances, less
unearned discounts, net deferred loan origination fees and the
allowance for loan losses. Purchased loans are recorded at cost.
Related premiums or discounts are amortized to expense or
accreted to income using the level-yield method over the
estimated life of the loans.
On January 1, 1995, the Company adopted, on a prospective basis,
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan"
and the amendment thereof, SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures".
These statements require that impaired loans that are within
their scope be measured based on the present value of expected
future cash flows discounted at the loan's effective interest
rate or as a practical expedient, at the loan's current
observable market price, or the fair value of the collateral if
the loan is collateral dependent. The amount by which the
recorded investment of an impaired loan exceeds the measurement
value is recognized by creating a valuation allowance through a
charge to the provision for loan losses. SFAS No. 114 does not
<PAGE>
apply to those large groups of smaller-balance homogeneous loans
that are collectively evaluated for impairment, which, for the
Company, include one-to four-family first mortgage loans and
cooperative apartment loans ("residential loans") and consumer
loans. The implementation of SFAS No. 114 and SFAS No. 118 did
not materially affect the Company's consolidated financial
statements.
Loans individually reviewed for impairment by the Company within
the scope of SFAS No. 114 are limited to loans modified in a
troubled debt restructuring ("TDR") and commercial and multi-
family first mortgage loans. The measurement value of the
Company's impaired loans was based on the fair value of the
underlying collateral. The Company's impaired loan identification
and measurement process are conducted in conjunction with the
Company's review of the adequacy of its allowance for loan
losses. Specific factors utilized in the impaired loan
identification process include, but are not limited to,
delinquency status, loan-to-value ratio, the condition of the
underlying collateral, credit history and debt coverage. At a
minimum, such loans are classified as impaired by the Company
when they become past due 90 days. A loan modified in a TDR
subsequent to the adoption of SFAS No. 114 is, except as noted,
considered impaired. A loan modified in a TDR subsequent to the
adoption of SFAS No. 114 is not considered impaired in years
following the restructuring if the restructuring agreement
specifies an interest rate equal to or greater than the rate the
Company was willing to accept at the restructuring date for a new
loan with comparable risk and the loan is not impaired based on
the terms of the restructuring agreement. Loans that were
modified in a TDR prior to the Company's adoption of SFAS No. 114
that are not considered impaired based on the terms of the
restructuring agreement continue to be accounted for under SFAS
No. 15, "Accounting by Debtors and Creditors for Troubled Debt
Restructurings".
The Company places loans, including impaired loans, on non-
accrual status when they become past due 90 days. All interest
previously accrued and not collected is reversed against interest
income, and income is subsequently recognized only to the extent
cash is received until, in management's judgement, a return to
accrual status is warranted.
Cash receipts on impaired loans 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 applied as a
reduction of the carrying value of the loan. For non-performing
impaired loans, interest income is recognized to the extent
received in cash and not otherwise utilized to reduce the
carrying value of the loan. For impaired loans not classified as
non-performing by the Company, interest income is recognized on
an accrual basis as the Company anticipates the full payment of
<PAGE>
principal and interest due. The Company's policy is to recognize
income on a cash basis for TDRs for a period of six months, after
which such loans are returned to an accrual status.
The allowance for loan losses is increased by charges to income
and decreased by charge-offs (net of recoveries). Impaired loans
and related reserves have been identified and calculated in
accordance with the provisions of SFAS No. 114. The total
allowance for loan losses has been determined in accordance with
the provisions of SFAS No. 5, "Accounting for Contingencies". The
Company's allowance for loan losses is intended to be maintained
at a level sufficient to absorb all estimable and probable losses
inherent in the loan portfolio. The Company reviews the adequacy
of the allowance for loan losses on a monthly basis taking into
account past loan loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying
collateral, current and prospective economic conditions and
current regulatory guidance.
Management believes that the allowance for loan losses is
adequate. While Management uses available information to
recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions and the
reviews of various regulatory agencies.
Loan fees received and certain direct loan origination costs are
deferred, and the net fee or cost is recognized in income using
the interest method over the contractual lives of the related
loans, adjusted for estimated prepayments.
PREMISES AND EQUIPMENT
Land is carried at cost. Buildings, leasehold improvements,
furniture, fixtures and equipment are carried at cost, less
accumulated depreciation and amortization. Premises and equipment
are depreciated using the straight-line method over the estimated
useful lives of the respective assets except for leasehold
improvements which are amortized over the related lease term or
estimated useful life.
REAL ESTATE OWNED
Real estate properties acquired through loan foreclosure are
recorded at the lower of cost or estimated fair value less
estimated selling costs at the time of foreclosure. Subsequent
valuations are periodically performed by management and the
carrying value may be adjusted by a valuation allowance,
established through charges to income and included in real estate
operations, net to reflect subsequent declines in the estimated
fair value of the real estate. Real estate owned ("REO") is shown
net of the allowance. Operating results of real estate owned,
including rental income, operating expenses, and gains and losses
realized from the sales of properties owned, are also recorded in
real estate operations, net.
<PAGE>
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are accounted for as financing
transactions. Accordingly, the collateral securities continue to
be carried as assets and a borrowing liability is established for
the transaction proceeds.
INCOME TAXES
The Company utilizes the asset and liability method of accounting
for income taxes. Under the asset and liability method, deferred
income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets
and liabilities. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the
enactment date. Additionally, the recognition of net deferred tax
assets is based upon the likelihood of realization of tax
benefits in the future. A valuation allowance would be provided
for deferred tax assets which are determined more than likely not
to be realized.
BENEFIT PLANS
The Company maintains various pension, savings, employee stock
ownership and other benefit plans and programs for its employees,
including the Bank's Retirement Plan covering substantially all
employees who have attained minimum service requirements. The
Bank's funding policy is to make contributions to the plan at
least equal to the amounts required by applicable Internal
Revenue Service regulations. The Bank periodically evaluates the
overall effectiveness and economic value of such programs, in the
interest of maintaining a comprehensive benefit package for
employees. Based on an evaluation of the Retirement Plan in 1996,
the Bank concluded that future benefit accruals under the
Retirement Plan would cease, or "freeze" on July 1, 1996.
Although the benefit accruals are frozen, the Bank will continue
to maintain and provide benefits under its Employee Stock
Ownership Plan and Employee 401(k) Thrift Incentive Savings Plan
("401(k) Plan"). In connection with the Retirement Plan "freeze",
the Bank resumed its matching of contributions to the 401(k) Plan
on July 1, 1996.
Post-retirement and post-employment benefits are recorded on an
accrual basis with an annual provision that recognizes the
expense over the service life of the employee, determined on an
actuarial basis.
STOCK COMPENSATION PLANS
In October, 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation". SFAS No. 123 applies to all
transactions in which an entity acquires goods or services by
issuing equity instruments or by incurring liabilities where the
payment amounts are based on the entity's common stock price,
except for employee stock ownership plans. SFAS No. 123 covers
<PAGE>
transactions with employees and non-employees.
SFAS No. 123 established a new method of accounting for stock-
based compensation arrangements with employees. The new method is
a fair value based method rather than the intrinsic value based
method that is contained in APB Opinion 25 ("Opinion 25").
However, SFAS No. 123 does not require an entity to adopt the new
fair value based method for purposes of preparing its basic
financial statements. Entities are allowed (1) to continue to use
the Opinion 25 method or (2) to adopt the SFAS No. 123 fair value
based method. For entities not adopting the SFAS No. 123 fair
value based method, SFAS No. 123 requires the entity to display
in the footnotes to the financial statements pro forma net income
and earnings per share information as if the fair value based
method had been adopted. Under the fair value based method,
compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period,
which is usually the vesting period.
The accounting requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years that begin after
December 15, 1995, though they may be adopted on issuance. The
disclosure requirements are effective for financial statements
for fiscal years beginning after December 15, 1995, or for an
earlier fiscal year for which SFAS No. 123 is initially adopted
for recognizing compensation cost. Pro forma disclosures required
for entities that elect to continue to measure compensation cost
using the Opinion 25 method must include the effects of all
awards granted in fiscal years that begin after December 15,
1994. The Company will continue to apply the Opinion No. 25
method in preparing its consolidated financial statements and
will provide the pro forma disclosures required by SFAS No. 123.
(See Note 11 to Notes to Consolidated Financial Statements.)
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Company has utilized interest rate caps to manage its
interest rate risk. Generally, the net settlements on such
transactions used as hedges of non-trading liabilities are
accrued as an adjustment to interest expense over the life of the
agreements.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common and common equivalent share is
calculated by dividing net income (loss) by the weighted average
number of shares of common stock outstanding and common stock
equivalents. Stock options are regarded as common stock
equivalents and therefore considered in net income per common
share calculations if dilutive. Common stock equivalents are
computed using the treasury stock method. The weighted average
number of shares outstanding does not include shares which are
unallocated by the Employee Stock Ownership Plan ("ESOP") in
accordance with American Institute of CPAs ("AICPA") Statement of
Position ("SOP") 93-6, "Employers Accounting for ESOPs".
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June, 1996, the FASB issued SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" which establishes accounting and reporting
standards for transfers and servicing of financial assets and
extinguishments of liabilities based on the consistent
application of the financial-components approach. This approach
requires the recognition of financial assets and servicing assets
that are controlled by the reporting entity, the derecognition of
financial assets when control is surrendered, and the
derecognition of liabilities when they are extinguished. This
statement provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that
are secured borrowings.
This Statement supersedes SFAS No. 76, "Extinguishment of Debt,"
SFAS No. 77, "Reporting by Transferors for Transfers of
Receivables with Recourse," and SFAS No. 122, "Accounting for
Mortgage Servicing Rights," and amends SFAS No. 115 and SFAS No.
65, "Accounting for Certain Mortgage Banking Activities."
SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring
after December 31, 1996. It is to be applied prospectively;
earlier or retroactive application is not permitted. SFAS No.
125, when adopted, is not expected to have a material effect on
the Company's financial statements.
In December, 1996, the FASB issued SFAS No. 127 "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125".
The FASB was made aware that the volume and variety of certain
transactions and the related changes to information systems and
accounting processes that are necessary to comply with the
requirements of SFAS No. 125 would make it extremely difficult,
if not impossible, for some affected enterprises to apply the
transfer and collateral provisions of SFAS No. 125 to those
transactions as soon as January 1, 1997. As a result, the
Statement defers for one year the effective date (a) of paragraph
15 of SFAS No. 125 and (b) for repurchase agreement, dollar-roll,
securities lending, and similar transactions, of paragraphs 9-12
and 237(b) of SFAS No. 125. The provisions of SFAS No. 125 will
continue to be applied prospectively, and earlier or retroactive
application is not permitted.
<PAGE>
2. SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair values of securities
available for sale at December 31 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
(In thousands) Cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
1996
Debt and equity securities available for sale:
U.S. Government and agency obligations $121,647 163 (3,058) 118,752
Preferred stock 26,896 433 - 27,329
------- ------ ------ -------
148,543 596 (3,058) 146,081
------- ------ ------ -------
MBSs available for sale:
GNMA Certificates 949 34 - 983
FNMA Certificates 38,230 518 (26) 38,722
FHLMC Certificates 56,863 1,226 (25) 58,064
CMOs and REMICs 126,942 230 (917) 126,255
------- ------ ------ -------
222,984 2,008 (968) 224,024
------- ------ ------ -------
Total $371,527 2,604 (4,026) 370,105
1995
Debt and equity securities available for sale:
U.S. Government and agency obligations $ 59,983 - (76) 59,907
Adjustable-rate MBS Mutual Fund 3,976 - - 3,976
------- ------ ------ -------
63,959 - (76) 63,883
------- ------ ------ -------
MBSs available for sale:
GNMA Certificates 13,594 339 - 13,933
FNMA Certificates 73,613 1,335 (150) 74,798
FHLMC Certificates 129,622 2,042 (116) 131,548
CMOs and REMICs 218,413 1,120 (637) 218,896
------- ------ ------ -------
435,242 4,836 (903) 439,175
------- ------ ------ -------
Total $499,201 4,836 (979) 503,058
======= ====== ====== =======
</TABLE>
In connection with the implementation guide for SFAS No. 115
issued in November 1995, $405.3 million of MBSs previously
classified as held to maturity, and carried at amortized cost,
were reclassified to MBSs available for sale. The carrying value
of such MBSs was adjusted to their market value, which resulted
in increasing the carrying value by $3.9 million, and increasing
stockholders' equity by $2.1 million, which was net of taxes of
$1.8 million. In addition, $41.9 million of debt securities
previously classified as held to maturity, and carried at
amortized cost, were classified as available for sale. The
carrying value of these debt securities approximated market value
at the time of the reclassification.
Gross gains of approximately $1,948,000, $126,000 and $639,000
for the years ended December 31, 1996, 1995 and 1994,
respectively, were realized on sales of securities available for
sale. Gross losses amounted to $1,577,000, $0 and $135,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.
<PAGE>
The Company's portfolio of MBSs available for sale has an
estimated weighted average expected life of approximately 10
years at December 31, 1996. At December 31, 1996, $166.2 million
of MBSs available for sale were adjustable-rate securities.
U.S. Government and agency obligations at December 31, 1996 had
contractual maturities between June 30, 2000 and September 1,
2016.
Accrued interest receivable on securities available for sale
amounted to $4,848,000 and $3,760,000 at December 31, 1996 and
1995, respectively.
3. DEBT SECURITIES HELD TO MATURITY
The amortized cost, gross unrealized gains and losses and
estimated fair values of debt securities held to maturity at
December 31 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
(In thousands) Cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
1996
U.S. Government and agency obligations $51,957 16 (876) 51,097
Corporate debt securities 45,350 46 (169) 45,227
------ --- ----- -------
Total $97,307 62 (1,045) 96,324
====== === ===== =======
1995
U.S. Government and agency obligations $82,476 15 (117) 82,374
Corporate debt securities 45,320 - (883) 44,437
------ --- ----- -------
Total $127,796 15 (1,000) 126,811
====== === ===== =======
</TABLE>
The amortized cost and estimated fair value of debt securities
held to maturity at December 31 by contractual maturity are shown
below. Actual maturities will differ from contractual maturities
because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
1996 1995
Estimated Estimated
Amortized fair Amortized fair
(In thousands) Cost value Cost value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Due in one year or less $ - - 18 18
Due after one year through five years 54,324 54,212 70,372 69,384
Due after five years through ten years 12,022 11,853 32,481 32,496
Due after ten years 30,961 30,259 24,925 24,913
------- ------- ------- -------
Total $ 97,307 96,324 127,796 126,811
======= ======= ======= =======
</TABLE>
<PAGE>
Accrued interest receivable on debt securities held to maturity
amounted to $1,318,000 and $1,921,000 at December 31, 1996 and
1995, respectively.
4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
The amortized cost, gross unrealized gains and losses and
estimated fair values of MBSs held to maturity at December 31 are
summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
(In thousands) Cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
1996
FNMA Certificates $ 71,460 185 (1,731) 69,914
FHLMC Certificates 39,889 284 (579) 39,594
CMOs and REMICs 86,591 409 (826) 86,174
------- ---- ------ -------
Total $197,940 878 (3,136) 195,682
======= ==== ====== =======
1995
FNMA Certificates $ 78,995 162 (1,043) 78,114
FHLMC Certificates 41,222 331 (201) 41,352
CMOs and REMICs 70,497 405 (817) 70,085
------- ---- ------ -------
Total $190,714 898 (2,061) 189,551
======= ==== ====== =======
</TABLE>
The estimated weighted average expected life of the MBSs held to
maturity portfolio was approximately 5.0 years at December 31,
1996.
At December 31, 1996 and 1995, $10.1 million and $11.9 million,
respectively, of the MBSs held to maturity portfolio consists of
adjustable-rate securities. Such securities had an estimated fair
value of $10.0 million and $11.8 million, respectively.
The privately-issued CMOs and REMICs contained in the Company's
held to maturity and available for sale portfolios have generally
been underwritten by large investment banking firms with the
timely payment of principal and interest on these securities
supported (credit enhanced) in varying degrees by either
insurance issued by a financial guarantee insurer, letters of
credit or subordination techniques. Substantially all such
securities are rated AAA by one or more of the nationally
recognized securities rating agencies. These securities are
subject to certain credit-related risks normally not associated
with U.S. Government and agency mortgage-backed securities. Among
such risks is the limited loss protection generally provided by
the various forms of credit enhancements as losses in excess of
<PAGE>
certain levels are not protected. Furthermore, the credit
enhancement itself is subject to the credit worthiness of the
enhancer. Thus, in the event a credit enhancer does not fulfill
its obligations, the MBS holder could be subject to risk of loss
similar to the purchaser of a whole loan pool. Management
believes that the credit enhancements are adequate to protect the
Company from losses, and therefore the Company has not provided
an allowance for losses on its privately issued MBSs.
Accrued interest receivable on MBSs held to maturity amounted to
$1,180,000 and $1,118,000 at December 31, 1996 and 1995,
respectively.
5. LOANS
Loans, net at December 31 are summarized as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
------ ------
<S> <C> <C>
First mortgage loans:
Principal balances:
One-to four-family $552,968 320,442
Multi-family 105,341 78,797
Commercial 127,956 111,038
Construction 4,227 5,737
Partially guaranteed by VA or insured by FHA 3,850 4,819
------- -------
794,342 520,833
Less net deferred loan origination fees,
unearned discounts and unamortized premiums (786) (1,029)
------- -------
Total first mortgage loans 793,556 519,804
------- -------
Cooperative apartment loans, net 19,936 10,187
------- -------
Other loans:
Consumer loans 15,938 19,619
Home equity loans 15,677 16,454
Other 2,479 2,894
------- -------
Total other loans 34,094 38,967
------- -------
847,586 568,958
Less allowance for loan losses (10,704) (8,573)
------- -------
Total $836,882 560,385
======= =======
</TABLE>
<PAGE>
Included in total loans are loans on which interest is not being
accrued and loans which have been restructured with the result
that interest has been reduced or foregone. The principal
balances of these loans are summarized as follows:
<TABLE>
<CAPTION>
December 31,
(In thousands) 1996 1995
------ ------
<S> <C> <C>
Non-accrual loans $ 10,733 9,805
Restructured loans 3,160 7,072
------ ------
Total $ 13,893 16,877
====== ======
</TABLE>
If interest income on non-accrual loans had been current in
accordance with the original terms, approximately $489,000,
$889,000 and $1,278,000 of interest income would have been
recorded for the years ended December 31, 1996, 1995 and 1994,
respectively. Approximately $220,000, $280,000 and $261,000 of
interest income was recognized on non-accrual loans for the years
ended December 31, 1996, 1995 and 1994, respectively. The Bank
has no obligation to fund any additional monies on these loans.
The amount of interest income that would have been recorded if
restructured loans had been performing in accordance with their
original terms (prior to being restructured) was $505,000,
$714,000 and $967,000 for the years ended December 31, 1996, 1995
and 1994, respectively.
The Bank services for investors first mortgage loans which are
not included in the accompanying consolidated statements of
financial condition. The unpaid principal balances of such loans
were approximately $197.0 million and $219.8 million at December
31, 1996 and 1995, respectively.
The geographical location of the Bank's loan portfolio is
primarily within the New York metropolitan area.
During 1996, $10.6 million of cooperative apartment loans
previously transferred to loans held for sale were returned to
the loan portfolio at their estimated market value.
Accrued interest receivable on loans amounted to $4,826,000 and
$3,640,000 at December 31, 1996 and 1995, respectively.
6. ALLOWANCES FOR LOAN AND REAL ESTATE OWNED LOSSES
Impaired loans and related reserves have been identified and
calculated in accordance with the provisions of SFAS No. 114. The
<PAGE>
total allowance for loan losses has been determined in accordance
with the provisions of SFAS No. 5, "Accounting for
Contingencies".
As such, the Company has provided amounts for anticipated losses
that exceed the immediately identified losses associated with
loans that have been deemed impaired. Provisions have been made
and reserves established accordingly, based upon experience and
expectations, for losses associated with the general population
of loans, specific industry and loan types, including residential
and consumer loans which are not subject to the provisions of
SFAS 114.
The following table summarizes information regarding the
Company's impaired loans at December 31:
<TABLE>
<CAPTION>
1996 1995
Related Related
Allowance Allowance
Recorded for Loan Net Recorded for Loan Net
(In thousands) Investment Losses Investment Investment Losses Investment
---------- ------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Residential loans:
With a related allowance $ - - - 3,076 517 2,559
Without a related allowance 4,423 - 4,423 1,552 - 1,552
------ ---- ------ ------ ----- ------
Total residential loans 4,423 - 4,423 4,628 517 4,111
------ ---- ------ ------ ----- ------
Multi-family and non-residential loans:
With a related allowance 981 321 660 1,228 243 985
Without a related allowance 5,329 - 5,329 11,611 - 11,611
------ ---- ------ ------ ----- ------
Total multi-family and non-residential
loans 6,310 321 5,989 12,839 243 12,596
------ ---- ------ ------ ----- ------
Total impaired loans $10,733 321 10,412 17,467 760 16,707
====== ==== ====== ====== ===== ======
</TABLE>
The Company's average recorded investment in impaired loans for
the years ended December 31, 1996 and 1995 was $9.8 million and
$23.9 million, respectively. Interest income recognized on
impaired loans, which was not materially different from cash-
basis interest income, amounted to $489,000 and $949,000 for the
years ended December 31, 1996 and 1995, respectively.
<PAGE>
Activity in the allowance for loan losses for the years ended
December 31 is as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year $ 8,573 10,847 21,606
Charge-offs:
One-to four-family (771) (472) (264)
Cooperative (524) (2,142) (8,747)
Multi-family (30) (1,299) (7,932)
Non-residential and other (560) (1,541) (7,798)
------ ------ ------
Total charge-offs (1,885) (5,454) (24,741)
Recoveries 891 405 582
------ ------ ------
Net charge-offs (994) (5,049) (24,159)
Provision for loan losses 3,125 2,775 13,400
------ ------ ------
Balance at end of year $10,704 8,573 10,847
====== ====== ======
</TABLE>
As part of the major bulk sales program in 1994, the Bank sold
$170.5 million of loans and established additional provisions of
$7.5 million in connection with the sales. In connection with the
sale of cooperative apartment loans, a letter of credit was
established. (See Note 12 to Notes to Consolidated Financial
Statements.)
Activity in the allowance for REO for the years ended December 31
is as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year $ 178 717 2,188
Provision charged to operations 291 750 10,309
Charge-offs (450) (1,414) (11,780)
Recoveries 62 125 -
--- ----- ------
Balance at end of year $ 81 178 717
=== ===== ======
</TABLE>
As part of the major bulk sales program during 1994, the Company
sold $12.0 million of cooperative apartments and established
additional provisions of $7.7 million in connection with the
sales which are included in REO operations, net in the
Consolidated Statements of Operations.
<PAGE>
7. DEPOSITS
Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
Weighted
(Dollars in thousands) Amount Percent average rates
------ ------- -------------
<S> <C> <C> <C>
1996
Passbook accounts $ 361,707 31.8% 2.58%
Money market 55,010 4.8 3.51
NOW 111,516 9.8 0.90
Demand 8,456 0.8 -
--------- ----
536,689 47.2 2.28
Certificates of deposit 601,099 52.8 5.40
--------- -----
Total $1,137,788 100.0% 3.93%
========= =====
1995
Passbook accounts $ 375,957 34.7% 2.52%
Money market 63,047 5.8 3.63
NOW 95,617 8.8 1.74
Demand 15,815 1.5 -
--------- -----
550,436 50.8 2.44
Certificates of deposit 533,010 49.2 6.02
--------- -----
Total $1,083,446 100.0% 4.20%
========= =====
</TABLE>
The aggregate amount of certificates of deposit in denominations
of $100,000 or more amounted to approximately
$41,691,000 and $34,323,000 at December 31, 1996 and 1995,
respectively.
Scheduled maturities of certificates of deposit at December 31
are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
(Dollars in thousands) Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Within six months $305,641 50.8% $233,972 43.9%
Six months to one year 140,529 23.4 147,201 27.6
One to two years 116,982 19.5 82,527 15.5
Over two years 37,947 6.3 69,310 13.0
------- ----- ------- -----
Total $601,099 100.0% $533,010 100.0%
======= ===== ======= =====
</TABLE>
<PAGE>
The deposits of the Bank are insured up to $100,000 per depositor
(as defined by law and regulation) by the Savings Association
Insurance Fund ("SAIF") which is administered by the FDIC.
Deposits of certain other financial institutions are insured by
the Bank Insurance Fund ("BIF"). On September 30, 1996, as part
of the omnibus appropriations bill, Congress passed and President
Clinton signed the Deposit Insurance Funds Act of 1996 ("Act").
The Act has significantly reduced and should eventually end the
premium disparity that has existed between banks insured by the
BIF and thrifts insured by the SAIF. The Act required SAIF-
insured institutions to pay a special one-time assessment to
recapitalize the SAIF. The Bank's special one-time insurance
assessment amounted to $6.8 million. Beginning January 1, 1997,
the schedule of SAIF assessment rates became the same as the
schedule of BIF assessment rates. The Act also required BIF-
insured institutions to pay a portion of the interest due on
Financial Corporation ("FICO") bonds beginning January 1, 1997.
Beginning January 1, 2000, or the date at which no thrift
institution continues to exist, BIF-insured institutions will
be required to pay their full pro rata share of FICO payments.
<PAGE>
8. BORROWED FUNDS
Borrowed funds at December 31 are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
------ ------
<S> <C> <C>
Other secured borrowings:
Collateralized mortgage obligation at 9.00%
maturing through 2016, net of unamortized
discount of $0 in 1996 and $231 in 1995
secured by mortgage-backed securities with
a carrying value of $12,214 in 1996 and
$16,529 in 1995 (notes 2 and 4) $ 2,985 7,974
------- -------
Fixed-rate advances from the FHLB of New York:
4.61% to 6.93% due in 1996 - 94,175
5.55% to 7.125% due in 1997 138,450 20,000
5.74% due in 1998 20,000 20,000
5.355% due in 1999 20,000 -
------- -------
178,450 134,175
------- -------
Securities sold under agreements to repurchase:
Fixed rate agreements:
5.70% to 5.96% due in 1996 - 104,590
5.50% to 6.250% due in 1997 108,106 21,442
5.51% to 5.72% due in 1998 34,800 -
------- -------
142,906 126,032
------- -------
Debt of Employee Stock Ownership Plan (note 11) 2,092 2,402
------- -------
$326,433 270,583
======= =======
</TABLE>
At December 31, 1996 and 1995, pursuant to a physical pledge
collateral agreement, advances from the FHLB of New York were
collateralized by MBSs with an estimated fair value of
approximately $90,814,000 and $107,600,000, respectively. At
December 31, 1996 and 1995, advances from the FHLB of New York
were also collateralized by U.S. Government and Agency
obligations with an estimated fair value of approximately
$126,826,000 and $50,000,000, respectively. At December 31, 1996
the Bank has unused lines of credit totalling $11,550,000 with
the FHLB of New York.
At December 31, 1996, all securities sold under agreements to
repurchase were delivered to primary dealers who arranged the
transactions. The securities will remain registered in the name
of the Bank and will be returned at maturity. During the years
ended December 31, 1996 and 1995, securities sold under
<PAGE>
agreements to repurchase averaged $128,677,000 and $94,374,000,
respectively. The maximum amounts outstanding at any month-end
were $142,906,000 and $150,249,000, respectively. The average
interest rate paid during the years ended December 31, 1996 and
1995 were 5.65% and 5.98%, respectively. MBSs with an estimated
fair value of approximately $151,700,000 and $133,700,000 were
pledged as collateral at December 31, 1996 and 1995,
respectively.
9. FEDERAL, STATE AND LOCAL TAXES
FEDERAL INCOME TAXES
The Company and its subsidiaries file a consolidated Federal
income tax return on a calendar-year basis. Under Section 593 of
the Internal Revenue Code of 1986, as amended ("Code"), prior to
January 1, 1996 thrift institutions such as the Bank which met
certain definitional tests primarily relating to their assets and
the nature of their business, were permitted to establish a tax
reserve for bad debts. Such thrift institutions were also
permitted to make annual additions to the reserve, to be deducted
in arriving at their taxable income within specified limitations.
The Bank's deduction was computed using an amount based on the
Bank's actual loss experience ("experience method"), or a
percentage equal to 8% of the Bank's taxable income ("PTI
method"). Similar deductions for additions to the Bank's bad debt
reserve were also permitted under the New York State Bank
Franchise Tax and the New York City Banking Corporation Tax;
however, for purposes of these taxes, the effective allowable
percentage under the PTI method was 32% rather than 8%.
Under the Small Business Job Protection Act of 1996 ("1996 Act"),
signed into law in August 1996, Section 593 of the Code was
amended. The Bank will be unable to make additions to the tax bad
debt reserves but will be permitted to deduct bad debts as they
occur. Additionally, the 1996 Act required institutions to
recapture (that is, include in taxable income) the excess of the
balance of its bad debt reserves as of December 31, 1995 over the
balance of such reserves as of December 31, 1987 ("base year").
The Bank's federal tax bad debt reserves at December 31, 1995
exceeded its base year reserves by $2.7 million which will be
recaptured into taxable income ratably over a six year period.
This recapture will be frozen for 1997 since the Bank satisfies
specified mortgage origination tests. The base year reserves will
be subject to recapture, and the Bank could be required to
recognize a tax liability, if (i) the Bank fails to qualify as a
"bank" for Federal income tax purposes; (ii) certain
distributions are made with respect to the stock of the Bank;
(iii) the Bank uses the bad debt reserves for any purpose other
than to absorb bad debt losses; and (iv) there is a change in
Federal tax law. Management is not aware of the occurrence of any
such event.
In response to the Federal legislation, the New York State tax
<PAGE>
law has been amended to prevent the recapture of existing tax bad
debt reserves and to allow for the continued use of the PTI
method to determine the bad debt deduction in computing New York
State tax liability. No such amendments have been made to date
with respect to the New York City tax law. This may result in
there being a recapture of the New York City bad debt reserves in
excess of the base year, December 31, 1987. However, the Company
cannot predict whether such changes will be made or as to the
form of the changes.
The components of the net deferred tax assets at December 31 are
as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
------ ------
<S> <C> <C>
Deferred tax assets:
Difference between financial statement credit
loss provision and tax bad-debt deduction $ 4,874 4,087
Non-accrual interest and non-performing loan
expense 1,002 1,347
Securities marked to market for financial
statement purposes 582 -
Other 1,235 1,214
------ ------
Total deferred tax assets 7,693 6,648
------ ------
Valuation allowance - (800)
------ ------
Deferred tax liabilities:
Recapture of Tax Bad Debt Reserve (1,241) -
Securities marked to market for financial
statement purposes - (1,774)
Basis difference of fixed assets (143) (15)
Other (124) -
------ ------
Total deferred tax liabilities (1,508) (1,789)
------ ------
Net deferred tax assets $ 6,185 4,059
====== ======
</TABLE>
The Company had an $800,000 valuation allowance for its deferred
tax asset as of December 31, 1995, related to potential New York
State and New York City deferred tax assets. Upon review of the
Company's deferred tax assets as of December 31, 1996, the
Company determined that the valuation allowance was no longer
required. The Company will continue to review the recognition
criteria as set forth in SFAS No. 109, "Accounting for Income
Taxes" on a quarterly basis and determine the need for a
valuation allowance accordingly.
<PAGE>
Income tax expense (benefit) for the years ended December 31 are
summarized as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Current:
Federal $ 3,391 1,273 (943)
State and local 2,813 725 250
------ ------ ------
6,204 1,998 (693)
------ ------ ------
Deferred:
Federal 906 3,302 (1,053)
State and local (676) 1,930 (729)
------ ------ ------
230 5,232 (1,782)
------ ------ ------
Total income tax expense (benefit) $ 6,434 7,230 (2,475)
====== ====== ======
</TABLE>
The following is a reconciliation of statutory Federal income tax
expense (benefit) to the combined effective income tax expense
(benefit) for the years ended December 31:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Statutory Federal income tax expense (benefit) $ 5,392 5,363 (2,315)
State and local income taxes, net of Federal
income tax benefit 1,410 1,752 (311)
Change in deferred tax asset valuation allowance (800) (300) -
Tax bad debt reserve (780) - -
Other, net 1,212 415 151
------ ------ ------
Total income tax expense (benefit) $ 6,434 7,230 (2,475)
====== ====== ======
</TABLE>
STATE AND LOCAL TAXES
The Company and subsidiaries file combined New York State
franchise tax and New York City financial corporation tax returns
on a calendar-year basis. The Company's annual tax liability for
each year is the greatest of a tax on (i) allocated entire net
income; (ii) allocated alternative entire net income; (iii)
allocated assets to New York State and/or New York City; or (iv)
a minimum tax. Operating losses cannot be carried back or carried
forward for New York State or New York City tax purposes.
<PAGE>
The Company expects to determine its 1996 New York State and New
York City tax liability based on entire net income. The Company
has provided for New York State and New York City taxes based on
assets for the years ended December 31, 1995 and 1994.
10. EMPLOYEE BENEFIT PLANS AND POST-RETIREMENT BENEFITS
RETIREMENT PLAN
The Company has a qualified, non-contributory defined benefit
pension plan covering substantially all of its eligible
employees. The Company's policy is to fund pension costs in
accordance with the minimum funding requirements of the Employee
Retirement Income Security Act of 1974, and to provide the plan
with sufficient assets with which to pay pension benefits to plan
participants. Contributions are intended to provide not only for
benefits attributed to service to date but also for those
expected to be earned in the future. Based on an evaluation of
the Retirement Plan in 1996, the Bank concluded that future
benefit accruals under the Retirement Plan would cease or
"freeze" effective July 1, 1996. The Bank recognized a
curtailment gain of approximately $266,000 as of July 1, 1996.
The Bank made a cash contribution of $352,000 to the plan in
January 1997.
The following is a reconciliation of the funded status of the
Plan and the amount of accrued pension cost as determined by the
Plan's actuary in accordance with SFAS No. 87, based upon
actuarial information as of July 1, 1996 and January 1, 1995,
respectively:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested $ 7,800 6,906
Non-vested 356 207
----- -----
8,156 7,113
Effect of projected future compensation - 1,726
----- -----
Projected benefit obligation for service rendered to date 8,156 8,839
Plan assets, at fair value 7,832 7,327
----- -----
Deficiency of plan assets under projected benefit obligation (324) (1,512)
Unrecognized net transition asset (from adoption
of SFAS No. 87) being amortized over 18 years - (125)
Prior service cost not yet recognized - (138)
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions - 1,331
----- -----
Accrued pension cost $ (324) (444)
===== =====
</TABLE>
<PAGE>
The amount of accrued pension cost recognized in the Company's
consolidated statements of financial condition at December 31,
1996 was $101,000.
The components of net pension expense, exclusive of the
aforementioned 1996 curtailment gain, for the years ended
December 31 are as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost (benefits earned during the period) $ 211 338 409
Interest cost on projected benefit obligation 597 626 591
Actual return on plan assets (714) (652) (587)
Net amortization and deferral 2 (20) (19)
--- --- ---
Net pension expense $ 96 292 394
=== === ===
</TABLE>
Assumptions used to develop the actuarial present value of
benefit obligations at December 31 were:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Discount rate 7.00% 8.25% 7.25%
Expected long-term rate of return 9.00 9.00 8.00
Rate of increase in compensation levels 5.00 6.00 4.50
</TABLE>
THRIFT INCENTIVE SAVINGS PLAN
The Bank maintains a 401(k) thrift incentive savings plan which
provides for employee contributions on a pre-tax basis up to a
maximum of 16% of total compensation, with matching contributions
to be made by the Bank equal to 50% of employee contributions,
not to exceed employee contributions greater than 6% of total
compensation. During the two years ended December 31, 1995, the
Bank elected not to match employee contributions. In connection
with the Retirement Plan freeze, the Bank resumed matching
employee contributions which totalled $120,000 for the period
July 1, 1996 through December 31, 1996.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
In 1996, the Bank implemented a non-qualified defined benefit
supplemental executive retirement plan ("SERP") for the President
and Chief Executive Officer. The SERP is an unfunded plan. During
1996, the Bank accrued $132,000 for the SERP. At December 31,
1996, the accumulated benefit obligation was $890,000.
The Bank also maintains a non-qualified defined benefit SERP for
the Chairman of the Board. The SERP is an unfunded plan. The SERP
<PAGE>
provides for an annual retirement benefit of $120,000 for 10
years after retirement which occurred in 1995. The SERP also
provides for a lump sum benefit of $1.2 million payable to the
estate of the Chairman of the Board in the event of his death
prior to retirement, or in the event of a hostile change in
control after retirement but prior to the payment of the entire
benefit; any unpaid benefit shall be paid in a lump sum. The
Company had accrued the entire $1.2 million liability under the
unfunded plan through December 31, 1995.
POST-RETIREMENT LIFE INSURANCE BENEFITS
The Company provides life insurance coverage to retirees under
two separate insurance plans. The first plan provides life
insurance coverage equal to one-half of annual pay at retirement,
subject to a maximum of $10,000 and a minimum of $2,000. The
second plan provides life insurance coverage equal to two times
annual pay reduced by 10% per year for each of the first five
years following retirement.
The following table sets forth the components of post-retirement
life insurance benefits expense for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Service cost $ 29 18 21
Interest cost 59 46 44
Actual return on plan assets 9 - -
Amortization of transition obligation
(from adoption of SFAS No. 106)
being amortized over 20 years 25 25 25
--- --- ---
Net post-retirement benefits expense $122 89 90
=== === ===
Assumptions used to develop the accumulated
post-retirement benefit obligation were:
Discount rate 7.50% 8.25% 7.25%
Rate of increase in compensation levels 5.00 6.00 4.50
</TABLE>
At December 31, 1996 and 1995, the accumulated post-retirement
benefit obligation totaled $824,000 and $559,000, respectively.
The accrued post-retirement benefit liability at those dates was
$360,000 and $238,000, respectively.
11. STOCK PLANS
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The Bank established for eligible employees an Employee Stock
Ownership Plan ("ESOP") in connection with the Conversion. The
ESOP borrowed $3.5 million from an unrelated third party lender
<PAGE>
and purchased 347,156 common shares issued in the Conversion. The
Bank is expected to make scheduled cash contributions to the ESOP
sufficient to service the amount borrowed over a period not to
exceed 10 years. The unpaid balance of the ESOP loan is included
in borrowed funds and the unamortized balance of unearned
compensation is shown as unallocated common stock held by the
ESOP reflected as a reduction of stockholders' equity. As of
December 31, 1996, total contributions to the ESOP which were
used to fund principal and interest payments on the ESOP debt
totaled approximately $2,057,000. At December 31, 1996, the loan
had an outstanding balance of $2,092,000 and an interest rate of
7.91%. The loan, as amended on December 29, 1995, is payable in
thirty two equal quarterly installments beginning December 1995
and ending September 2003. The loan bears interest at a floating
rate based on the federal funds rate plus 250 basis points.
Dividends declared on common stock held by the ESOP which have
been allocated to the account of a participant are allocated to
the account of such participant. Dividends declared on common
stock held by the ESOP and not allocated to the account of a
participant are used to repay the ESOP loan. The Company recorded
$983,000, $1,246,000 and $785,000 of ESOP expense for the years
ended December 31, 1996, 1995 and 1994, respectively. For the
years ended December 31, 1996, 1995 and 1994, ESOP expense was
based on the fair market value of the shares allocated in
accordance with the AICPA SOP 93-6 which was adopted on January
1, 1994. At December 31, 1996, there were 219,725 shares
remaining for future allocation, of which 34,330 shares will be
allocated for the 1996 year in the first quarter of 1997.
RECOGNITION AND RETENTION PLANS
The Bank has established several Recognition and Retention Plans
("RRPs") which purchased in the aggregate 148,781 shares of
common stock in the Conversion. The Bank contributed $1.5 million
to fund the purchase of the RRP shares. In 1995, the RRP was
amended to increase the number of shares of common stock which
may be granted by 9,918 shares and such shares were contrib-uted
to the RRP from treasury stock. During 1996, the remaining
previously unallocated shares totaling 8,601 were awarded to
directors and officers. The fair market value of these shares at
the date of the award will be amortized as compensation expense
as participants become vested. The unamortized cost, which is
comparable to deferred compensation, is reflected as a reduction
of stockholders' equity. For the years ended December 31, 1996,
1995 and 1994, respectively, $409,000, $490,000 and $430,000 of
expense has been recognized.
STOCK OPTION AND INCENTIVE PLANS
In 1993, the Holding Company adopted stock option plans for the
benefit of directors (the "1993 Directors Plan") and for officers
and other key employees (the "1993 Stock Plan") of the Bank. The
number of shares of common stock reserved for issuance under the
stock option plans was equal to 10% of the total number of shares
of common stock issued pursuant to the Bank's Conversion to the
<PAGE>
stock form of ownership. In 1995, the 1993 Stock Plan was amended
to increase the number of shares for which stock options may be
granted by 34,715 shares. All options awarded to employees vest
over a three year period beginning one year from the date of
grant. The option exercise price cannot be less than the fair
value market of the underlying common stock as of the date of the
option grant, and the maximum option term cannot exceed ten
years. The stock options awarded to directors become exercisable
one year from the date of grant. In 1996, the remaining 5,885
options were granted from the 1993 Stock Plan and the remaining
18,602 options were granted from the 1993 Directors Plan.
At the annual meeting of stockholders on April 24, 1996, the
stockholders approved the Haven Bancorp, Inc. 1996 Stock
Incentive Plan which provided 210,000 shares for the grant of
options and restricted stock awards. On April 24, 1996, an
aggregate of 1,976 shares of restricted stock was granted to
directors which vested six months from the date of grant and an
aggregate of 27,989 shares was granted to officers and employees
on May 23, 1996, which vest over a three year period beginning
one year from the date of grant. In addition, an aggregate of 116
shares was granted to two new directors on October 1, 1996 which
vested on December 31, 1996. Such shares were recorded as
unearned compensation at their fair market value on the date of
the award (which is reflected as a reduction of stockholders'
equity), to be amortized to expense over the vesting period.
During 1996, an aggregate of 160,850 options were granted to
directors and officers under the 1996 Stock Incentive Plan, which
vest over a three year period beginning one year from the date of
grant.
<PAGE>
The following table summarizes certain information regarding the
stock option plans:
<TABLE>
<CAPTION>
Number of shares of
Non- Non- Weighted
Incentive Statutory Qualified Average
Stock Stock Options to Exercise
Options Options Directors Price
--------- --------- ---------- --------
<S> <C> <C> <C> <C>
Options reserved in conversion 158,112 189,044 148,781 $10.00
------- ------- ------- -----
Balance outstanding at December 31,1993 154,381 189,044 111,582 10.00
Granted - - 18,597 16.69
Forfeited (7,438) - - 10.00
Exercised - - - -
------- ------- ------- -----
Balance outstanding at December 31, 1994 146,943 189,044 130,179 10.27
Granted - 40,000 - 16.94
Forfeited - - - -
Exercised (20,825) (4,878) - 10.00
------- ------- ------- -----
Balance outstanding at December 31, 1995 126,118 224,166 130,179 10.84
Granted 91,285 19,450 74,602 25.82
Forfeited - - - -
Exercised (9,406) - - 10.00
------- ------- ------- -----
Balance outstanding at December 31, 1996 207,997 243,616 204,781 $15.08
======= ======= ======= =====
Shares exercisable at December 31, 1996 89,934 197,499 130,179 $10.51
======= ======= ======= =====
</TABLE>
The fair value of each share grant is estimated on the date of
grant using the Black-Scholes option - pricing model with the
following weighted-average assumptions used for grants in 1996
and 1995, respectively: dividend yield of 1.93% in 1996 and 1995;
expected volatility of 16.85% in 1996 and 1995; risk-free
interest rates of 5.89% to 6.38% in 1996 and 6.29% in 1995; and
expected lives of 3 years for the 1993 Stock Plan, 8 years for
the 1993 Directors Plan and 3 years for grants to officers and
employees under the 1996 Stock Incentive Plan and 8 years for
grants to directors under that plan.
Had compensation cost for the Company's three stock-based
compensation plans been determined consistent with SFAS No. 123
for awards made after January 1,1995, the Company's net income
and net income per common share would have been reduced to the
pro forma amounts indicated below for the years ended December
31:
(Dollars in thousands, 1996 1995
except per share data) ------ ------
Net income As reported $ 9,425 8,544
Pro forma 9,135 8,364
Net income per common share:
Primary As reported $ 2.12 1.89
Pro forma 2.06 1.85
Fully diluted As reported $ 2.11 1.87
Pro forma 2.04 1.83
<PAGE>
12. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
At December 31, 1996, the Company was obligated under several
noncancelable operating leases on property used for office space
and banking purposes. Several of the leases contain escalation
clauses which provide for increased rentals, primarily based upon
increases in real estate taxes. Rent expense under these leases
was approximately $404,000, $379,000 and $310,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
The projected minimum rental payments under the terms of the
noncancelable leases at December 31, 1996 are as follows:
Years ending December 31, (In thousands)
1997 $ 772
1998 661
1999 577
2000 415
2001 245
Thereafter 25
-----
$2,695
=====
Four supermarket branches have opened through December 31, 1996,
and the leases related thereto are reflected in the table above.
In September 1996, the Bank entered into an agreement to open
approximately 44 full-service bank branches in Pathmark
supermarkets throughout New York City, Long Island, Westchester
and Rockland counties by early 1998.
LOAN COMMITMENTS
The Company had outstanding commitments totaling $55.8 million to
originate loans at December 31, 1996 of which $15.2 million were
fixed rate loans and $40.6 million were variable rate loans. For
fixed rate loan commitments at December 31, 1996, the interest
rates on mortgage loans ranged from 6.375% to 10.0%. The standard
commitment term for these loans is 45 days. For other consumer
fixed-rate loan commitments, interest rates ranged from 9.75% to
10.5% with the standard term of the commitment of 30 days. Loan
commitments are made at current rates and no material difference
exists between book and market values of such commitments.
For commitments to originate loans, the Company's maximum
exposure to credit risk is represented by the contractual amount
of those instruments. Those commitments represent ultimate
exposure to credit risk only to the extent that they are
subsequently drawn upon by customers. The Company uses the same
credit policies and underwriting standards in making loan
commitments as it does for on-balance-sheet instruments. For loan
commitments, the Company would generally be exposed to interest
rate risk from the time a commitment is issued with a defined
contractual interest rate.
<PAGE>
In connection with the securitization and sale of $48.6 million
of cooperative apartment loans in 1994, a letter of credit
totalling $6.8 million was established with the FHLB. The letter
of credit provides a level of protection of approximately 14% to
the buyer against losses on the cooperative apartment loans sold
behind a pool insurance policy the Bank purchased which provides
a level of protection of approximately 20%. The letter of credit
totalled $6.8 million at December 31, 1996.
INTEREST RATE CAPS
During the year ended December 31, 1995, the Company, in order to
hedge a portion of the borrowings to fund a $75 million leverage
transaction, purchased an interest rate cap on a $25.0 million
notional principal amount on which it will receive a payment,
based on the notional principal amount, equal to the three month
LIBOR rate in excess of 8% on any reset date for a three year
period. The premium paid for the cap, $133,000, which is carried
in other assets is being amortized to interest expense over the
term of the contract. As of December 31, 1996 and 1995, three
month LIBOR was 5.56% and 5.63%, respectively. Interest expense
on borrowed funds was increased by approximately $44,000 and
$11,000 during the years ended December 31, 1996 and 1995,
respectively, as a result of this agreement.
LITIGATION AND LOSS CONTINGENCY
On February 6, 1995, Nationar, the entity that provided check
collection services for the Bank was seized by the Superintendent
of Banks of the State of New York ("Superintendent"). Checks in
process of collection for the Bank totalling $8.9 million were
held by Nationar at the time it was seized. In April 1995, $3.9
million of these funds were remitted to the Bank. On June 27,
1996, the Bank received a partial payment of its claims against
Nationar totalling $4,987,000, at which time $389,000 of a
$430,000 reserve previously established was taken into income. On
November 20, 1996, the Supreme Court of the State of New York
entered an order authorizing the Superintendent to pay a final
payment to creditors of Nationar whose claims or accounts payable
have been accepted by the Superintendent, reduced by any previous
partial payments on such claims or account payable. The Bank
received $33,000 which represents the final aggregate payment on
the remaining claims totaling $54,000.
In February, 1983, a burglary of the contents of safe deposit
boxes occurred at a branch office of the Bank. At December 31,
1995, the Bank has a class action lawsuit related thereto
pending, whereby the plaintiffs are seeking recovery of
approximately $12,900,000 in actual damages and an additional
$12,900,000 of unspecified damages. The Banks ultimate liability,
if any, which might arise from the disposition of these claims
cannot presently be determined. Management believes it has
meritorious defenses against these actions and has and will
continue to defend its position. Accordingly, no provision for
any liability that may result upon adjudication has been
<PAGE>
recognized in the accompanying consolidated financial statements.
The Company is involved in various legal actions arising in the
ordinary course of business, which in the aggregate, are believed
by management to be immaterial to the financial position of the
Company.
13. STOCKHOLDERS' EQUITY
At the time of its conversion to a stock savings bank, the Bank
established a liquidation account in an amount equal to its total
retained earnings as of June 30, 1993. The liquidation account
will be maintained for the benefit of eligible account holders
who continue to maintain their accounts at the Bank, after the
conversion. The liquidation account will be reduced annually to
the extent that eligible account holders have reduced their
qualifying deposits. Subsequent increases will not restore an
eligible account holder's interest in the liquidation account. In
the event of a complete liquidation, each eligible account holder
will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted
qualifying balances for accounts then held. The balance of the
liquidation account was approximately $20.8 million at December
31, 1996.
Subsequent to the conversion, the Bank may not declare or pay
cash dividends on or repurchase any of its shares of common
stock, if the effect would cause stockholders' equity to be
reduced below the amount required for the liquidation account,
applicable regulatory capital maintenance requirements or if such
declaration and payment would otherwise violate regulatory
requirements. Office of Thrift Supervision ("OTS") regulations
provide that an institution that exceeds all fully phased-in
capital requirements, before and after a proposed capital
distribution could, after prior notice but without prior approval
of the OTS, make capital distributions during the calendar year
up to 100% of net income 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 period. Any
additional capital distributions would require prior regulatory
approval. Unlike the Bank, the Company is not subject to these
regulatory restrictions on the payment of dividends to its
stockholders. However, the source of future dividends may depend
upon dividends from the Bank.
TREASURY STOCK TRANSACTIONS
During the year ended December 31, 1996, the Company repurchased
225,537 shares under its third repurchase program that was
completed March 11, 1996. During the year ended December 31,
1995, the Company repurchased 75,570 shares under its second
repurchase program that was completed June 28, 1995.
<PAGE>
REGULATORY CAPITAL
As required by regulation of the OTS, savings institutions are
required to maintain regulatory capital in the form of a
"tangible capital requirement," a "core capital requirement," and
a "risk-based capital requirement."
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 are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
As of December 31, 1996, the Bank has been categorized as "well
capitalized" by the OTS under the regulatory framework for prompt
corrective action. There are no conditions or events since that
notification that management believes have changed the
institution's category. The following table sets forth the
required ratios and amounts and the Bank's actual capital amounts
and ratios at December 31:
<TABLE>
<CAPTION>
To Be Well
Capitalized
For Capital Under Prompt
Adequacy Corrective Action
Actual Purposes Provisions
Amount Ratio(3) Amount Ratio Amount Ratio
(Dollars in thousands) ------ -------- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1996
Tangible Capital $ 97,201 6.14% $23,743 1.50% N/A N/A
Core Capital (1) 97,201 6.14 47,487 3.00 79,144 5.00%
Risk-based Capital (2) 106,555 13.22 64,479 8.00 80,599 10.00
1995
Tangible Capital $ 87,723 6.01% $21,909 1.50% N/A N/A
Core Capital (1) 87,723 6.01 43,819 3.00 73,03 15.00%
Risk-based Capital (2) 94,968 14.625 1,955 8.00 64,944 10.00
</TABLE>
(1) Under the OTS's prompt corrective action regulations, the
core capital requirement was effectively increased to 4.00% since
OTS regulations stipulate that as of that date an institution
with less than 4.00% core capital will be deemed to be
classified as "undercapitalized."
(2) The OTS adopted a final regulation which incorporates an
interest rate risk component into its existing risk-based
capital standard. The regulation requires certain institutions
with more than a "normal level" of interest rate risk to maintain
capital in addition to the 8.0% risk-based capital requirement.
The Bank does not anticipate that its risk-based capital
requirement will be materially affected as a result of the new
regulation.
(3) For tangible and core capital, the ratio is to adjusted total
<PAGE>
assets. For risk-based capital, the ratio is to total risk-
weighted assets.
STOCKHOLDER RIGHTS PLAN
On January 26, 1996, the Board of Directors of the Holding
Company (the "Board") adopted a Stockholder Rights Plan (the
"Rights Plan"). Under the Rights Plan, which expires in February,
2006, the Board declared a dividend of one right on each
outstanding share of the Holding Company's common stock, which
was paid on February 5, 1996 to stockholders of record on that
date (the "Rights"). Until it is announced that a person or group
has acquired 10% or more of the outstanding common stock of the
Holding Company (an "Acquiring Person") or has commenced a tender
offer that could result in their owning 10% or more of such
common stock, the Rights are initially redeemable for $.01 each,
are evidenced solely by the Holding Company's common stock
certificates, automatically trade with the Holding Company's
common stock and are not exercisable. Following any such
announcement, separate Rights would be distributed, with each
Right entitling its owner to purchase participating preferred
stock of the Holding Company having economic and voting terms
similar to those of one share of the Holding Company's common
stock for an exercise price of $90.
Upon announcement that any person or group has become an
Acquiring Person and unless the Board acts to redeem the Rights,
then twenty business days thereafter (the "Flip-in Date"), each
Right (other than Rights beneficially owned by any Acquiring
Person or transferee thereof, which become void) will entitle the
holder to purchase, for the $90 exercise price, a number of
shares of the Holding Company's common stock having a market
value of $180. In addition, if after an Acquiring Person gains
control of the Board, the Holding Company is involved in a merger
or sells more than 50% of its assets or assets generating more
than 50% of its operating income or cash flow, or has entered
into an agreement to do any of the foregoing (or an Acquiring
Person is to receive different treatment than all other
stockholders), each Right will entitle its holder to purchase,
for the $90 exercise price, a number of shares of common stock of
the Acquiring Person having a market value of $180. If any person
or group acquires more than 50% of the outstanding common stock
of the Holding Company, the Board may, at its option, exchange
one share of such common stock for each Right. The Rights may
also be redeemed by the Board for $0.01 per Right prior to the
Flip-in Date.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments" requires the Company to disclose estimated fair
values for substantially all of its financial instruments. The
fair value of a financial instrument is the amount at which the
asset or obligation could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation
<PAGE>
sale. Fair value estimates are made at a specific point in time
based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium
or discount that could result from offering for sale at one time
the entire holdings of a particular financial instrument. Because
no market value exists for a significant portion of the financial
instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic
conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in
nature, involve uncertainties and matters of judgment and,
therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Fair value estimates are determined for on and off-balance sheet
financial instruments, without attempting to estimate the value
of anticipated future business and the value of assets and
liabilities that are not considered financial instruments.
Additionally, tax consequences related to the realization of the
unrealized gains and losses can have a potential effect on fair
value estimates and have not been considered in many of the
estimates.
The following table summarizes the carrying values and estimated
fair values of the Company's on-balance-sheet financial
instruments at December 31:
<TABLE>
<CAPTION>
1996 1995
Estimated Estimated
Carrying Fair Carrying Fair
(In thousands) Value Value Value Value
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 35,717 35,717 38,854 38,854
Securities available for sale 370,105 370,105 503,058 503,058
Loans held for sale - - 11,412 11,412
Debt securities held to maturity 97,307 96,324 127,796 126,811
FHLB-NY stock 9,890 9,890 8,138 8,138
Mortgage-backed securities held to maturity 197,940 195,682 190,714 189,551
Loans, net 836,882 850,513 560,385 568,007
Accrued interest receivable 12,172 12,172 10,736 10,736
Financial Liabilities:
Deposits 1,137,788 1,138,385 1,083,446 1,086,814
Borrowed funds 326,433 326,341 270,583 271,334
Mortgagors' escrow balances 4,621 4,621 3,227 3,227
Due to broker 1,000 1,000 5,000 5,000
Accrued interest payable 1,002 1,002 660 660
</TABLE>
The methods and significant assumptions used to estimate fair
values for different categories of financial instruments are as
follows:
Cash and cash equivalents - The estimated fair values of cash and
cash equivalents are assumed to equal the carrying values as
these financial instruments are either due on demand or mature
within 90 days.
<PAGE>
Securities available for sale, Debt Securities and Mortgage-
Backed Securities Held to Maturity - Estimated fair value for
substantially all of the Company's bonds, notes and equity
securities, both available for sale and held to maturity are
based on market quotes as provided by an independent pricing
service. For MBSs, the Company obtains bids from broker dealers
to estimate fair value. For those occasional securities for which
a market price cannot be obtained, market prices of comparable
securities are used.
Loans held for sale - Fair value is estimated based on
preliminary pricing information obtained by the Company from a
major Wall Street investment banking firm, active in the purchase
and sale of such assets.
FHLB-NY stock - The estimated fair value of the Company's
investment in FHLB-NY stock is deemed to be equal to its carrying
value which represents the price at which it may be redeemed.
Residential loans - Residential loans include 1-4 family
mortgages and individual cooperative apartment loans. Estimated
fair value is based on discounted cash flow analysis. The
residential loan portfolio is segmented by loan type (fixed
conventional, adjustable products, etc.) with weighted average
coupon rate, remaining term, and other pertinent information for
each segment. A discount rate is determined based on the U.S.
Treasury yield curve plus a pricing spread. Expected principal
prepayments, consistent with empirical evidence and management's
future expectations, are used to modify the future cash flows.
For potential problem loans, the present value result is
separately adjusted downward consistent with management's
assumptions in evaluating the adequacy of the allowance for loan
losses.
Commercial real estate and other loans - Estimated fair value is
based on discounted cash flow analysis which take into account
the contractual coupon rate and maturity date of each loan. A
discount rate is determined based on the U.S. Treasury yield
curve plus a pricing spread. For potential problem loans, the
present value result is separately adjusted downward consistent
with management's assumptions regarding the value of any
collateral underlying the loans.
Deposits - Certificates of deposit are valued by performing a
discounted cash flow analysis of the remaining contractual
maturities of outstanding certificates. The discount rates used
are wholesale secondary market rates as of the valuation date.
For all other deposits, fair value is deemed to be equivalent to
the amount payable on demand as of the valuation date.
Borrowed funds - Borrowings are fair valued based on rates
available to the Company in either public or private markets for
debt with similar terms and remaining maturities.
<PAGE>
Accrued interest receivable, accrued interest payable,
mortgagors' escrow balances and due to broker - The fair values
are estimated to equal the carrying values of short-term
receivables and payables, including accrued interest, mortgage
escrow funds and due to broker.
Off-balance sheet financial instruments - The fair value of the
interest rate cap was obtained from dealer quotes and represents
the cost of terminating the agreement. The estimated fair value
of open off-balance sheet financial instruments results in an
unrealized loss of $62,000 and $70,000 at December 31, 1996 and
1995, respectively.
The estimated fair value of commitments to extend credit is
estimated using the fees charged to enter into similar
agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the
counterparties. Generally, for fixed-rate loan commitments, fair
value also considers the difference between current levels of
interest rates and the committed interest rates. The fair value
of commitments to purchase debt securities and MBSs is based on
the estimated cost to terminate them or otherwise settle the
obligations with the counterparties. The estimated fair value of
these off-balance sheet financial instruments resulted in no
unrealized gain or loss at December 31, 1996 and 1995.
<PAGE>
15. PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
The condensed financial statements of the Holding Company (parent
company only) are as follows:
Parent Company Condensed Statements of Financial Condition
December 31,
<TABLE>
<CAPTION>
(In thousands) 1996 1995
------ ------
<S> <C> <C>
Assets:
Cash $ 38 119
Money market investments 1,869 4,064
Securities available for sale - 3,976
Accrued interest receivable 2 25
Accrued income taxes receivable 359 184
Investment in net assets of Bank 97,789 90,891
------- -------
Total assets 100,057 99,259
======= =======
Liabilities:
Other liabilities 673 740
------- -------
Total liabilities 673 740
------- -------
Stockholders' equity:
Common stock 50 50
Additional paid-in capital48,84447,331
Retained earnings, substantially restricted 65,092 57,919
Unrealized (loss) gain on securities available
for sale, net of tax effect (840) 2,083
Treasury stock, at cost (11,049) (6,023)
Unallocated common stock held by ESOP (1,854) (2,197)
Unearned common stock held by RRPs (267) (644)
Unearned compensation (592) -
------- -------
Total stockholders' equity 99,384 98,519
------- -------
Total liabilities and stockholders' equity $100,057 99,259
======= =======
</TABLE>
<PAGE>
Parent Company Only Condensed Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands) 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Dividend from Bank $2,000 - -
Interest income 178 571 541
Other operating expenses (961) (788) (788)
----- ---- ----
Income (loss) before income tax expense (benefit) and equity in
undistributed net income (loss) of Bank 1,217 (217) (247)
Income tax (benefit) expense (360) (100) 181
----- ---- ----
Net income (loss) before equity in undistributed net income (loss)
of Bank 1,577 (117) (428)
Equity in undistributed net income (loss) of Bank 7,848 8,661 (3,907)
----- ---- ----
Net income (loss) $9,425 8,544 (4,335)
===== ===== =====
</TABLE>
Parent Company Only Condensed Statements of Cash Flows
Years Ended December 31,
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands) 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 9,425 8,544 (4,335)
Less equity in undistributed net income (loss) of the Bank (7,848) (8,661) 3,907
Decrease in accrued interest receivable 23 8 1
(Increase) decrease in accrued income tax receivable (175) 774 320
Increase (decrease) in other liabilities 219 (841) (146)
----- ---- ----
Net cash provided by (used in) operating activities 1,644 (176) (253)
----- ---- ----
Financing activities:
Purchase of treasury stock (5,516) (1,360) (4,575)
Payment of common stock dividends (2,475) (454) -
Exercise of stock options 95 257 -
----- ----- -----
Net cash used in financing activities (7,896) (1,557) (4,575)
----- ----- -----
Net decrease in cash (6,252) (1,733) (4,828)
Cash at beginning of year 8,159 9,892 14,720
----- ----- -----
Cash at end of year $1,907 8,159 9,892
===== ===== =====
</TABLE>
<PAGE>
16. QUARTERLY FINANCIAL DATA (Unaudited)
The following table is a summary of financial data by quarter
for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
(Dollars in thousands, 1st 2nd 3rd 4th 1st 2nd 3rd 4th
except for share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $25,905 27,013 27,963 28,372 21,844 23,268 25,317 26,005
Interest expense 14,566 15,001 15,972 15,829 11,921 13,198 14,877 15,119
------ ------ ------ ------ ------ ------ ------ ------
Net interest income before
provision for loan losses 11,339 12,012 11,991 12,543 9,923 10,070 10,440 10,886
Provision for loan losses 650 1,125 700 650 600 700 700 775
------ ------ ------ ------ ------ ------ ------ ------
Net interest income after
provision for loan losses 10,689 10,887 11,291 11,893 9,323 9,370 9,740 10,111
Non-interest income 2,153 2,784 2,251 2,366 1,866 1,899 2,076 3,181
Non-interest expense 7,445 8,015 14,024 8,971 7,668 7,751 7,903 8,470
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before income
tax expense (benefit) 5,397 5,656 (482) 5,288 3,521 3,518 3,913 4,822
Income tax expense (benefit) 2,539 2,630 (559) 1,824 1,675 1,670 1,708 2,177
------ ------ ------ ------ ------ ------ ------ ------
Net income 2,858 3,026 77 3,464 1,846 1,848 2,205 2,645
====== ====== ====== ====== ====== ====== ====== ======
Net income per common share:
Primary $ 0.64 0.69 0.02 0.78 0.41 0.41 0.49 0.58
Fully diluted $ 0.64 0.69 0.02 0.78 0.41 0.41 0.49 0.58
====== ====== ====== ====== ====== ====== ====== ======
Weighted average number of shares
outstanding and common stock
equivalents: Primary 4,459,742 4,379,980 4,425,562 4,436,178 4,454,320 4,509,829 4,508,766 4,540,392
Fully diluted 4,460,495 4,407,301 4,400,450 4,448,266 4,482,491 4,522,057 4,529,509 4,549,727
</TABLE>
<PAGE>
17. SUBSEQUENT EVENT (UNAUDITED)
On February 12, 1997, Haven Capital Trust I, a trust formed under
the laws of the State of Delaware (the "Trust") issued $25
million of 10.46% capital securities. The Holding Company is the
owner of all the beneficial interests represented by common
securities of the Trust. The Trust exists for the sole purpose
of issuing the Trust securities (comprised of the capital
securities and the common securities) and investing the proceeds
thereof in the 10.46% Junior Subordinated Deferrable Interest
Debentures issued by the Holding Company on February 12, 1997
which are scheduled to mature on February 1, 2027. The Holding
Company intends to use the net proceeds from the sale of the
Junior Subordinated Debentures for general corporate purposes,
which may include capital contributions to the Bank, the
financing of future acquisitions and the funding of repurchases
of the Company's common stock.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Haven Bancorp, Inc.:
We have audited the accompanying consolidated statements of
financial condition of Haven Bancorp, Inc. (the "Company") as of
December 31, 1996 and 1995, 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, 1996. These consolidated financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of the Company at December 31, 1996 and 1995, and the
results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles.
January 23, 1997
Jericho, New York
<PAGE>
DIRECTORS AND OFFICERS AND DIRECTORY
DIRECTORS
Haven Bancorp, Inc.
and Columbia Federal Savings Bank
George S. Worgul
Chairman of the Board
Philip S. Messina
Chief Executive Officer and President
Robert L. Koop
President, Haven Chevrolet
Robert M. Sprotte
President, Schmelz Bros., Inc.
President, RDR Realty Corp.
Joseph A. Ruggiere
President, Ohlert-Ruggiere, Inc.
Michael J. Fitzpatrick
C.P.A., Financial Consultant
Retired, Vice President, National Thrift Director,
E.F. Hutton & Co.
William J. Jennings II
Managing Director, Salomon Brothers Inc.
Michael J. Levine
President, Norse Realty Group Inc. & Affiliates
Partner, Levine & Schmutter, CPAs
Msgr. Thomas J. Hartman
Director of Radio and Television
for the Diocese of Rockville Centre
(Appointed on February 26, 1997)
EXECUTIVE OFFICERS
Haven Bancorp, Inc.
and Columbia Federal Savings Bank
Philip S. Messina
Chief Executive Officer, President
Gerard H. McGuirk
Executive Vice President, Chief Lending Officer
Thomas J. Seery
Executive Vice President, Operations
Catherine Califano
Senior Vice President, Chief Financial Officer
Joseph W. Rennhack
Senior Vice President, Secretary
DIRECTORY
Administrative Headquarters
Haven Bancorp, Inc.
93-22 Jamaica Avenue
Woodhaven, NY 11421
(718) 847-7041
<PAGE>
Columbia Federal Savings Bank Locations
Main Office
93-22 Jamaica Avenue
Woodhaven, NY 11421
Forest Parkway
80-35 Jamaica Avenue
Woodhaven, NY 11421
Forest Hills
106-19 Continental Avenue
Forest Hills, NY 11375
Ozone Park
98-16 101st Avenue
Ozone Park, NY 11416
Clock Tower
91-20 Atlantic Avenue
Ozone Park, NY 11416
Howard Beach
82-10 153rd Avenue
Howard Beach, NY 11414
Rockaway
104-08 Rockaway Beach Boulevard
Rockaway, NY 11694
Bellerose
244-19 Braddock Avenue
Bellerose, NY 11426
Snug Harbor
343 Merrick Road
Amityville, NY 11701
Medford (Edwards Super Food Stores)
700-60 Patchogue-Yaphank Road
Medford, NY 11763
Uniondale (ShopRite Supermarket)
1121 Jerusalem Avenue
Uniondale, NY 11553
Bay Shore (Edwards Super Food Stores)
533 Montauk Highway
Bayshore, NY 11706
Atlantic Terminal (Pathmark Supermarket)
625 Atlantic Avenue and Fort Green Place
Brooklyn, NY 11217
North Babylon (Pathmark Supermarket)
1251 Deer Park Avenue
North Babylon, NY 11703
Stockholder Information
Corporate Offices
Haven Bancorp, Inc.
93-22 Jamaica Avenue
Woodhaven, NY 11421
<PAGE>
Annual Meeting
The annual meeting of stockholders will be held on Wednesday,
April 23, 1997 at 9:00 A.M., at the Holiday Inn Crowne Plaza,
104-04 Ditmars Blvd., East Elmhurst, New York. A notice of the
meeting, a proxy statement and a proxy form are included with
this mailing to stockholders of record as of March 5, 1997.
Common Stock Information
Haven Bancorp common stock is traded on the Nasdaq National
Market under the symbol HAVN. The table below shows the reported
high and low sales prices of the common stock during the periods
indicated in 1996 and 1995.
1996 1995
High Low High Low
First Quarter 25 5/16 22 1/4 17 7/8 12 7/8
Second Quarter 28 3/4 22 3/8 18.88 12.88
Third Quarter 29 3/8 25 1/4 23 5/8 18
Fourth Quarter 29 1/2 25 1/2 25 20.88
As of March 5, 1997, the Company had approximately 450
stockholders of record, not including the number of persons or
entities holding stock in nominee or street name through various
brokers and banks. At December 31, 1996, there were 4,325,407
shares of common stock outstanding.
Transfer Agent and Registrar
Inquiries regarding stockholder administration and
services should be directed to:
ChaseMellon Shareholder Services, L.L.C.
Overpeck Center
85 Challenger Road
Ridgefield Park, NJ 07660
1-800-851-9677
Independent Auditors
KPMG Peat Marwick LLP
1 Jericho Plaza
Jericho, NY 11753
Legal Counsel
Thacher Proffitt & Wood
Two World Trade Center
New York, NY 10048
Investor Relations
Inquiries regarding Haven Bancorp, Inc.
should be directed to:
Catherine Califano
Haven Bancorp, Inc.
93-22 Jamaica Avenue
Woodhaven, NY 11421
(718) 847-7041
<PAGE>
Annual Report on Form 10-K
A copy of the annual report on Form 10-K for the year ended
December 31, 1996, which has been filed with the Securities and
Exchange Commission, is available to stockholders (excluding
exhibits) at no charge, upon written requests to:
Investor Relations
Haven Bancorp, Inc.
93-22 Jamaica Avenue
Woodhaven, NY 11421
** World Wide Web Site: http://www.cfsb.com
<PAGE>
Exhibit 23.0
Independent Accountants' Consent
The Board of Directors
Haven Bancorp, Inc.:
We consent to incorporation by reference in the registration
statements (No. 333-79740, No. 333-85056 and No. 333-20823) on Form
S-8 of Haven Bancorp, Inc. of our report dated January 23, 1997,
relating to the consolidated statements of financial condition of
Haven Bancorp, Inc. as of December 31, 1996 and 1995, 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, 1996, which report is
incorporated by reference in the 1996 Annual Report on Form 10-K of
Haven Bancorp, Inc.
KPMG Peat Marwick LLP
Jericho, New York
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at December 31, 1996 and
the Consolidated Statement of Operations for the twelve months ended
December 31, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 28,848
<INT-BEARING-DEPOSITS> 1,125,386
<FED-FUNDS-SOLD> 5,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 370,105
<INVESTMENTS-CARRYING> 295,247
<INVESTMENTS-MARKET> 292,006
<LOANS> 847,586
<ALLOWANCE> 10,704
<TOTAL-ASSETS> 1,583,545
<DEPOSITS> 1,137,788
<SHORT-TERM> 261,356
<LIABILITIES-OTHER> 19,940
<LONG-TERM> 65,077
0
0
<COMMON> 50
<OTHER-SE> 99,334
<TOTAL-LIABILITIES-AND-EQUITY> 1,583,545
<INTEREST-LOAN> 56,748
<INTEREST-INVEST> 52,505
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 109,253
<INTEREST-DEPOSIT> 9,314
<INTEREST-EXPENSE> 61,368
<INTEREST-INCOME-NET> 47,885
<LOAN-LOSSES> 3,125
<SECURITIES-GAINS> 140
<EXPENSE-OTHER> 38,455
<INCOME-PRETAX> 15,859
<INCOME-PRE-EXTRAORDINARY> 15,859
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,425
<EPS-PRIMARY> 2.12
<EPS-DILUTED> 2.11
<YIELD-ACTUAL> 7.50
<LOANS-NON> 10,733
<LOANS-PAST> 0
<LOANS-TROUBLED> 3,160
<LOANS-PROBLEM> 28,270
<ALLOWANCE-OPEN> 8,573
<CHARGE-OFFS> 1,885
<RECOVERIES> 891
<ALLOWANCE-CLOSE> 10,704
<ALLOWANCE-DOMESTIC> 10,704
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
