SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number 0-25994
SFS BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-3366295
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization Identification Number)
251-263 State Street, Schenectady, New York 12305
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (518) 395-2300
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 $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-K. [X]
The issuer's revenues for the fiscal year ended December 31, 1996 were
$12,270,000.
<PAGE>
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, computed by reference to the average of the bid and asked
price of such stock as of March 1, 1997 was $18.6 million. (The exclusion from
such amount of the market value of the shares owned by any person shall not be
deemed an admission by the Registrant that such person is an affiliate of the
Registrant.)
As of March 1, 1997, the Registrant had 1,270,997 shares of Common
Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Annual Report to Stockholders for the fiscal
year ended December 31, 1996.
Part III of Form 10-KSB - Portions of The Proxy Statement for Annual
Meeting of Stockholders to be held in 1997.
<PAGE>
PART I
Item 1 Description of Business
Forward Looking Statements
When used in this Form 10-KSB or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be",
"will allow", "intends to", "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project", or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on
any such forward- looking statements, which speak only as of the date made, and
to advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
General
SFS Bancorp, Inc. (the "Holding Company" or "SFS Bancorp"), a Delaware
corporation, was organized to act as the holding company for Schenectady Federal
Savings Bank ("Schenectady Federal" or the "Bank") upon completion of the Bank's
conversion from the mutual to the stock form of organization (the "Conversion").
Collectively, these entities are referred to herein as the Company. The Holding
Company received approval from the Office of Thrift Supervision (the "OTS") to
acquire all of the common stock of the Bank to be outstanding upon completion of
the Conversion. The Conversion was completed on June 29, 1995. All references to
the Company, unless otherwise indicated, at or before June 29, 1995 refer to the
Bank and its subsidiary on a consolidated basis. The Holding Company's Common
Stock is quoted on the National Association of Securities Dealers Automated
Quotations ("Nasdaq") "National Market System under the symbol "SFED".
At December 31, 1996, the Company had total assets of $164.9 million,
deposits of $140.6 million, and stockholders' equity of $21.7 million.
The executive offices of the Company are located at 251-263 State
Street, Schenectady, New York 12305, and its telephone number at that address is
(518) 395-2300.
The Holding Company and the Bank are subject to comprehensive
regulation, examination and supervision by the Office of Thrift Supervision,
Department of the Treasury ("OTS") and by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank is a member of the Federal Home Loan Bank
("FHLB") System and its deposits are backed by the full faith and credit of the
United States Government and are insured by the Savings Association Insurance
Fund ("SAIF") to the maximum extent permitted by the FDIC. See "Regulation."
<PAGE>
The Bank, the Holding Company's only operating subsidiary, was
originally chartered in 1889 as a state-chartered financial institution. In 1981
the Bank converted to a federally chartered mutual savings and loan association.
Schenectady Federal's business involves attracting deposits from the general
public and using such deposits to fund one- to four-family residential mortgage,
home equity and, to a much lesser extent, consumer and other loans in its market
area. At December 31, 1996, $114.1 million, or 95.8% of the Bank's total loan
portfolio consisted of residential mortgage loans, including home equity loans.
The Bank also invests in mortgage-backed securities, investment securities
(consisting primarily of U.S. government and agency obligations) and other
permissible investments. At December 31, 1996, the Bank had $20.4 million of
mortgage-backed securities, representing 12.4% of total assets, and $17.7
million of investment securities (including $2.0 million of securities
available-for-sale, at fair value), representing 10.8% of total assets.
The Bank has sought to enhance its net income through the adoption of a
strategy designed to maintain capital in excess of regulatory requirements,
limit loan delinquencies and manage the Bank's vulnerability to changes in
interest rates. This strategy involves (i) emphasizing, subject to market
conditions, the acquisition of adjustable rate one- to four-family mortgage
loans ("ARMs") and fixed rate one- to four-family mortgage loans with terms of
15 years or less, (ii) emphasizing the origination of home equity loans (most of
which carry floating rates of interest), (iii) maintaining a substantial
portfolio of mortgage-backed and investment securities and other short- and
medium-term investments, and (iv) using customer service and marketing efforts
to build and maintain a substantial level of core deposits.
Schenectady Federal is a community-oriented financial institution
offering a variety of financial services to meet the needs of the communities it
serves. The Bank attracts retail deposits from the general public and invests
those funds primarily in first mortgages on owner-occupied, one-to-four family
residences, as well as in home equity loans generally secured by junior liens on
the borrower's home. To a lesser extent, the Bank also originates consumer and
other loans in its market area. See "Lending Activities." The Bank also invests
in mortgage-backed securities, investment securities and other permissible
assets. See "Investment Activities."
Market Area
Schenectady Federal conducts business in Schenectady County through its
main office located at 251-263 State Street in Schenectady, New York and two
branch offices located in the Mayfair Shopping Center in Glenville, New York and
in the Bellevue area of Schenectady, New York. Schenectady County is part of the
four-county Capital District Region which also includes the counties of
Saratoga, Albany and Rensselaer. Schenectady Federal's primary market area for
deposits consists of communities within Schenectady County, while the Bank's
primary market area for lending extends to Albany, Rensselaer and Saratoga
Counties and, to a lesser extent, Warren County.
In 1996, the population of Schenectady County was approximately 150,000
essentially unchanged from population levels in 1985. The unemployment rate for
Schenectady County was 4.5% at December 1996 and 1995.
Primary industries in the Bank's market area are manufacturing and
service industries. State and local government and wholesale and retail trade
account for a noteworthy percentage of employment. Major employers include
General Electric, KAPL, Inc., a research laboratory, the County of Schenectady,
Ellis and St. Clare's Hospitals, Union College and Schenectady International,
Inc.
<PAGE>
Lending Activities
General. Historically, the Bank originated 30-year, fixed-rate mortgage
loans secured by one- to four-family residences. During the 1990s, in order to
reduce its vulnerability to changes in interest rates, the Bank has emphasized
the acquisition and retention of mortgage loans having shorter terms to maturity
or repricing such as ARMs, home equity loans, and 15-year, fixed-rate
residential loans and the sale to the secondary market of certain of its new
30-year, fixed-rate originations. The Bank also offers consumer and other loans.
The Bank did not sell loans during 1995 and 1996.
Loan Portfolio Composition. The following table sets forth certain
information concerning the composition of the Bank's loan portfolio in dollar
amounts and in percentages (before deductions for loans in process, deferred
fees and discounts and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
1996 1995 1994
----------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family............................ $91,161 76.53% $72,219 71.14% $63,835 67.48%
Multi-family................................... 1,568 1.32 2,382 2.35 3,373 3.57
Commercial..................................... 2,964 2.49 3,762 3.70 4,489 4.74
Home equity.................................... 22,904 19.23 22,723 22.38 22,394 23.67
-------- ------ ------- ----- ------- ------
Total real estate loans..................... 118,597 99.57 101,086 99.57 94,091 99.46
-------- ------ ------- ----- ------- ------
Other Loans:
Consumer:
Deposit account............................... 478 .40 361 .35 376 .40
Education..................................... 4 --- 22 .02 31 .03
Personal...................................... 34 .03 41 .04 77 .08
Automobile.................................... --- --- --- --- 12 .01
Home improvement.............................. 3 --- 5 .01 10 .01
--------- ------ --------- ------- --------- ------
Total consumer loans........................ 519 .43 429 .42 506 .53
Commercial business loans....................... 4 --- 5 .01 7 .01
--------- ------- --------- ------- --------- ------
Total other loans........................... 523 .43 434 .43 513 .54
-------- ------- -------- ------- -------- ------
Total loans................................. 119,120 100.00% 101,520 100.00% 94,604 100.00%
====== ====== ======
Less:
Deferred fees and discounts.................... 23 27 40
Allowance for losses........................... 642 572 861
-------- --------- --------
Total loans receivable, net................. $118,455 $100,921 $93,703
======== ======== =======
</TABLE>
<PAGE>
The following table shows the composition of the Bank's loan portfolio
by fixed and adjustable or floating rate at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
1996 1995 1994
------------------------ -------------------- --------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family............................ $20,615 17.31% $22,797 22.45% $22,494 23.78%
Multi-family................................... 631 .53 1,046 1.03 2,089 2.21
Commercial..................................... 1,545 1.30 3,133 3.09 2,754 2.91
Home equity.................................... 4,334 3.64 4,433 4.37 3,331 3.51
------- ------ ------- ------ ------- ------
Total fixed-rate real estate loans.......... 27,125 22.78 31,409 30.94 30,668 32.41
Consumer........................................ 515 .43 407 .40 475 .50
Commercial business............................. 4 --- 5 .01 7 .01
------- ------ ------- ----- ------- ------
Total fixed-rate loans...................... 27,644 23.21 31,821 31.35 31,150 32.92
------- ------ ------- ----- ------- ------
Adjustable-Rate Loans
Real estate:
One- to four-family............................ 70,546 59.22 49,422 48.68 41,341 43.70
Multi-family................................... 937 .79 1,336 1.31 1,284 1.36
Commercial..................................... 1,419 1.19 629 .62 1,735 1.84
Home equity.................................... 18,570 15.59 18,290 18.02 19,063 20.15
------- ------ ------- ------ ------- ------
Total adjustable-rate real estate loans..... 91,472 76.79 69,677 68.63 63,423 67.05
Consumer........................................ 4 --- 22 .02 31 .03
Commercial business............................. --- --- --- --- --- --
------- ------- -------- ------- ------- ------
Total adjustable-rate loans................. 91,476 76.79 69,699 68.65 63,454 67.08
------- ------ -------- ------ ------- ------
Total loans................................. 119,120 100.00% 101,520 100.00% 94,604 100.00%
====== ====== ======
Less:
Deferred fees and discounts..................... 23 27 40
Allowance for loan losses....................... 642 572 861
-------- --------- -------
Total loans receivable, net.................. $118,455 $100,921 $93,703
======== ========= =======
</TABLE>
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio at December 31, 1996. Loans which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
Multi-family and
One- to four-family Commercial Home Equity Consumer
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------- ---------- -------- ---------- -------- ---------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Due During Years
Ending December 31,
1997.................... 76 6.94% 863 1.17% 22 8.58% 393 7.91%
1998.................... 171 7.35 253 8.55 42 8.41 113 9.03
1999.................... 674 7.71 91 8.75 1,457 9.47 9 9.95
2000 to 2001............ 1,573 7.75 150 9.07 5,706 9.32 4 7.00
2002 to 2021............ 34,022 8.12 3,175 9.36 15,677 8.74 --- ---
2022 and
following.............. 54,645 7.25 --- --- --- --- --- ---
------- ------ ------- ----
$91,161 $4,532 $22,904 $519
======= ====== ======= ====
<CAPTION>
Commercial
Business Total
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- ---------- -------- -------
<S> <C> <C> <C> <C>
Due During Years
Ending December 31,
1997.................... --- --- 1,354 3.57%
1998.................... --- --- 579 8.28
1999.................... 4 7.50 2,235 8.91
2000 to 2001............ --- --- 7,433 8.98
2002 to 2021............ --- --- 52,873 8.38
2022 and
following.............. --- --- 54,646 7.25
---- --------
$ 4 $119,120
==== ========
</TABLE>
<PAGE>
The total amount of loans due after December 31, 1996 which have
predetermined interest rates is $27.6 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $91.5
million.
Pursuant to Federal law, the aggregate amount of loans that the Bank is
permitted to make to any one borrower is generally limited to 15% of unimpaired
capital and surplus (25% if the security for such loan has a "readily
ascertainable" value or 30% for certain residential development loans). At
December 31, 1996, based on the above, the Bank's loans-to-one borrower limit
was approximately $2.7 million. On the same date, the Bank had no borrowers with
outstanding balances in excess of this amount. The Bank's largest lending
relationship at December 31, 1996 was two loans to one borrower totalling
$813,000. One loan in the amount of $562,000 was on a five building 20 unit
apartment complex located in Saratoga Springs, New York. The second loan in the
amount of $251,000 was on a commercial property used in the borrower's business
in Schenectady, New York. Both loans were performing in accordance with their
terms at December 31, 1996.
The Bank's lending is subject to its written underwriting standards and
to loan origination procedures. Decisions on loan applications are made on the
basis of detailed applications and property valuations (consistent with the
Bank's appraisal policy) by the Bank's independent appraisers. The loan
applications are designed primarily to determine the borrower's ability to repay
and the more significant items on the application are verified through use of
credit reports, financial statements, tax returns and/or confirmations.
Under the Bank's loan policy, the individual processing an application
is responsible for ensuring that all documentation is obtained prior to the
submission of the application to a loan officer for approval. In addition, the
loan officer verifies that the application meets the Bank's underwriting
guidelines described below. Also, each application is assigned to a reviewing
officer who reviews the file to assure its accuracy and completeness.
All secured loans over $500,000, or unsecured loans over $100,000, must
be approved by the Bank's Board of Directors. The Bank's Loan Committee,
consisting of officers Giaquinto, Schlansker, Ammian, and Krywinski, has
authority to approve secured loans up to $500,000 and unsecured loans up to
$100,000. Any three of these individuals acting as a group can approve a loan
within the authority of the Loan Committee. Various officers of the Bank have
individual secured loan approval authority ranging from $10,000 to $300,000.
Authorization for unsecured loans range from $1,000 to $5,000.
Generally, the Bank requires title insurance or abstracts on its
mortgage loans as well as fire and extended coverage casualty insurance in
amounts at least equal to the principal amount of the loan or the value of
improvements on the property, depending on the type of loan. The Bank also
requires flood insurance to protect the property securing its interest when the
property is located in a flood plain.
One- to Four-Family Residential Real Estate Lending. The cornerstone of
the Bank's lending program is the origination of loans secured by mortgages on
owner-occupied one- to four-family residences. At December 31, 1996, $114.1
million, or 95.8% of the Bank's loan portfolio consisted of mortgage loans
(including home equity loans) on one- to four-family residences. Substantially
<PAGE>
all of the residential loans originated by Schenectady Federal are secured by
properties located in the Bank's primary lending area. Included in the mortgage
loan portfolio at December 31, 1996, was $9.4 million of purchased one- to
four-family loans serviced by others, which were primarily secured by properties
located outside its market area. A majority of the mortgage loans originated by
the Bank are retained and serviced by it. No loans have been purchased by the
Bank and serviced by others since 1990.
The Bank offers conventional fixed-rate loans with maximum terms of up
to 30 years, although the Bank generally emphasizes originations of fixed rate
loans with terms of 15 years or less. The interest rate on such loans is
generally based on the FHLMC delivery rates as well as competitive factors.
In addition to fixed rate loans, the Bank offers one-year ARMs at a
margin (generally 300 basis points) over the yield on the Average Monthly One
Year U.S. Treasury Constant Maturity Index for terms of up to 30 years. The ARM
loans currently offered by the Bank generally provide for a 200 basis point
annual interest rate change cap and a lifetime cap of 600 basis points over the
initial rate. The Bank's loans typically do not contain floors. Initial interest
rates offered on the Bank's ARMs may be 100 to 350 basis points below the fully
indexed rate, and borrowers are qualified at that initial rate plus 200 basis
points. As a result, the risk of default on these loans may increase as interest
rates increase. See "Asset Quality-Non-Performing Assets." The Bank also offers
five year/one year and three year/one year ARM products where the rate is fixed
for the first three or five years. After the initial fixed term, the mortgage
has the same characteristics as a one-year ARM. The Bank's ARMs do not permit
negative amortization of principal, do not contain prepayment penalties and are
not convertible into fixed-rate loans. In the past, the Bank offered one-year
ARMs with a margin 200 to 300 basis points over a specified index and an average
annual cap of 600 basis points. At December 31, 1996, one- to four-family ARMs
totaled $70.5 million, or 59.2% of the Bank's total loan portfolio.
In underwriting one- to four-family residential real estate loans, the
Bank evaluates both the borrower's ability to make principal, interest and
escrow payments, the value of the property that will secure the loan and debt to
income ratios. Schenectady Federal originates residential mortgage loans with
loan-to-value ratios of up to 95% for owner-occupied homes and up to 75% for
non-owner occupied homes; however, private mortgage insurance is required to
reduce the Bank's exposure to 80% or less. The Bank generally seeks to
underwrite its loans in accordance with secondary market standards.
The Bank's residential mortgage loans customarily include due-on-sale
clauses giving the Bank the right to declare the loan immediately due and
payable in the event that, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage and the loan is not repaid.
The Bank also originates home equity loans and lines of credit secured
by a lien on the borrower's residence. The Bank's home equity loans are
generally limited to $100,000. The Bank uses the same underwriting standards for
home equity loans as it uses for one- to four-family residential mortgage loans.
The Bank's home equity loans are originated in amounts which, together with the
amount of the first mortgage, generally do not exceed 80% of the appraised value
of the property securing the loan. The interest rates for home equity loans and
lines of credit float with the prime rate or, in the case of loans (but not
lines of credit), are fixed. The Bank writes home equity loans for terms of up
to 25 years. At December 31, 1996, the Bank had $22.9 million of home equity
loans and an additional $10.3 million of additional funds committed, but
undrawn, under home equity lines of credit.
<PAGE>
Commercial Real Estate and Multi-Family Lending. Prior to 1991, the
Bank actively originated and purchased permanent commercial real estate and
multi-family loans. At December 31, 1996, the Bank had $3.0 million in
commercial real estate loans, representing 2.5% of the Bank's total loan
portfolio, and $1.6 million in multi-family loans, or 1.3% of the Bank's total
loan portfolio.
The Bank's commercial real estate and multi-family loan portfolio
includes loans secured by motels, apartment buildings, small office buildings,
and other non-residential building properties, as well as participation
interests therein.
The Bank's permanent commercial real estate and multi-family loans
generally carried a maximum term of 25 years. These loans were generally written
in amounts of up to 75% of the lesser of the appraised value of the property or
the purchase price and had a projected debt service coverage ratio of at least
1.2%.
Multi-family and commercial real estate loans generally present a
higher level of risk than loans secured by one- to four-family residences. This
greater risk is due to several factors, including the concentration of principal
in a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family and commercial real estate is typically dependent
upon the successful operation of the related real estate project. If the cash
flow from the project is reduced (for example, if leases are not obtained or
renewed), the borrower's ability to repay the loan may be impaired. At December
31, 1996, the Bank had two commercial real estate loans to one borrower totaling
over $500,000 that are non-performing. See "Asset Quality-Non-Performing
Assets." In 1991, the Bank determined to limit future commercial real estate and
multi-family lending and focus its efforts on residential lending.
Consumer Lending. The Bank originates a variety of consumer loans,
including automobile, home improvement, deposit account and other loans for
household and personal purposes. At December 31, 1996, consumer loans totaled
$519,000 or .4% of total loans outstanding.
Consumer loan terms vary according to the type of loan and value of
collateral, length of contract and creditworthiness of the borrower. The Bank's
consumer loans are made at fixed interest rates, with terms of up to 20 years
for secured loans and on a demand basis for unsecured loans.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and
the ability to meet existing obligations and payments on the proposed loan.
Although creditworthiness of the applicant is of primary consideration, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount. Consumer loans may entail greater
credit risk than do residential mortgage loans, particularly in the case of
consumer loans which are unsecured or are secured by rapidly depreciable assets,
such as automobiles. In such cases, any repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment of the outstanding
loan balance as a result of the greater likelihood of damage, loss or
depreciation. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
affected by adverse personal circumstances. Furthermore, the application of
<PAGE>
various federal and state laws, including bankruptcy and insolvency laws, may
limit the amount which can be recovered on such loans. Although the Bank has, in
the past, experienced significant losses in the consumer loan portfolio, at
December 31, 1996, loans in the consumer loan portfolio which were
non-performing totaled approximately $2,000. There can be no assurance that
delinquencies will not develop in the future.
Originations, Purchases and Sales of Loans and Mortgage-Backed Securities
Loan applications are taken and processed in all branch offices and
approved in the main office of the Bank. Prior to 1994, most of Schenectady
Federal's originated loans were generated by Schenectady Federal's staff of
salaried loan officers. Beginning in 1994, the Bank began to originate a
significant amount of loans through local mortgage brokers which generally
retained a 100 basis point origination fee as their compensation. Also during
1994, the Bank purchased loans on a servicing released basis which were
originated by a mortgage banker for the Bank. All such loans were originated in
accordance with the Bank's normal underwriting standards. The Bank believes that
its utilization of mortgage brokers has had a favorable impact on loan
originations. However, in the event the Bank's relationship with these mortgage
brokers were terminated in the future, loan originations and results of
operations could be adversely affected.
In the past, in order to supplement loan demand in the Bank's market
area and geographically diversify the Bank's loan portfolio, the Bank has
purchased a limited amount of real estate loans from other lenders. The Bank
reviews all loans prior to purchase to ensure that they meet the Bank's
underwriting standards. The seller usually continues to service purchased loans.
Although the Bank purchased participation in multi-family and commercial real
estate loans in the past, the Bank anticipates that any such purchases in the
future will be strictly limited.
While the Bank originates both fixed and adjustable-rate loans, its
ability to originate loans is dependent upon the relative customer demand for
loans in its market. Demand is affected by the interest rate environment. During
1994, 1995 and 1996, the Bank's volume of ARMs greatly exceeded its volume of
fixed rate loans.
Historically, the Bank retained most of the fixed rate one- to
four-family residential loans in its portfolio. In order to reduce its
vulnerability to changes in interest rates, commencing in 1992 through 1994, the
Bank sold most of the fixed rate residential loans it originated or otherwise
acquired with maturities in excess of 15 years, except where the interest rate
equaled or exceeded a specified rate (as designated from time to time by
management) based on its portfolio objectives and alternative investment
opportunities. When loans are sold, the Bank typically retains the
responsibility for collecting and remitting loan payments, making certain that
real estate tax payments are made on behalf of borrowers, and otherwise
servicing the loans. The servicing fee is recognized as income over the life of
the loans. At December 31, 1996, the Bank serviced $4.2 million of mortgage
loans for others. The Bank did not sell any loans during 1995 and 1996.
<PAGE>
The following table shows the loan and mortgage-backed securities
origination, purchase, sale and repayment activities of the Bank for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
--------- ------- -------
(In Thousands)
<S> <C> <C> <C>
LOANS:
Originations by type:
Adjustable rate:
Real estate - one- to four-family................. $20,894(1) $8,219(1) $ 8,206(1)
- home equity....................... 5,174 5,474 7,226
Non-real estate - consumer........................ --- --- 113
--------- ------- -------
Total adjustable-rate....................... 26,068 13,693 15,545
Fixed rate:
Real estate - one- to four-family................. 1,606(2) 2,966(2) 1,718(2)
- home equity....................... 737 1,713 1,321
- commercial........................ 198 --- ---
Non-real estate - consumer........................ 16 --- 17
-------- -------- --------
Total fixed-rate............................ 2,557 4,679 3,056
Total loans originated...................... 28,625 18,372 18,601
Purchases:
Real estate - one- to four-family................. 6,973 5,245 3,305
------ ------ -------
Sales and Repayments:
Real estate - one- to four-family................. --- --- 281
Non-real estate - consumer........................ --- --- 642
------- ------- --------
Total sales................................. --- --- 923
Principal repayments.............................. 17,998 16,701 19,827
------- ------ -------
Total reductions............................ 17,998 16,701 20,750
------- ------ -------
Net increase................................ $17,600 $ 6,916 $ 1,156
======= ======= =======
MORTGAGE-BACKED SECURITIES:
Purchases:
Mortgage-backed securities......................... $ --- $ 5,381 $ ---
Principal repayments................................ 3,984 2,954 3,406
------- ------ -------
Net increase (decrease)......................... $ 3,984 $2,427 $(3,406)
======= ====== =======
(1)Includes $19,573, $8,138 and $5,971 of loans originated through brokers in
1996, 1995 and 1994, respectively.
(2) Includes $162, $1,930 and $218 of loans originated through brokers in 1996,
1995 and 1994, respectively.
</TABLE>
<PAGE>
Asset Quality
Delinquency Procedures. When a borrower fails to make a required
payment on a loan, the Bank attempts to cure the delinquency by contacting the
borrower. A late notice is sent on all loans over 16 days delinquent. Additional
written and verbal contacts may be made with the borrower between 30 and 60 days
after the due date. If the loan is contractually delinquent 90 days, the Bank
usually sends a 30-day demand letter to the borrower and, after the loan is
contractually delinquent 120 days, institutes appropriate action to foreclose on
the property. If foreclosed, the property is sold at auction and may be
purchased by the Bank. Delinquent consumer loans are generally handled in a
similar manner. The Bank's procedures for repossession and sale of consumer
collateral are subject to various requirements under New York consumer
protection laws.
Real estate acquired by Schenectady Federal as a result of foreclosure
or by deed in lieu of foreclosure is classified as real estate owned until it is
sold. When property is acquired or expected to be acquired by foreclosure or
deed in lieu of foreclosure, it is recorded at the lower of cost or estimated
fair value, less the estimated cost of disposition. After acquisition, all costs
incurred in maintaining the property are expensed. Costs relating to the
development and improvement of the property, however, are capitalized to the
extent of fair value less disposition cost.
The following table sets forth the Bank's loan delinquencies by type,
by amount and by percentage of type at December 31, 1996.
<TABLE>
<CAPTION>
Loans Delinquent For:
----------------------------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
---------------------------------------------------------------------- ----------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Real Estate:
One- to four-family...... 8 $540 .59% 4 $ 57 .06% 12 $597 .65%
Multi-family............. --- --- --- --- --- --- --- --- ---
Commercial............... --- --- --- 3 756 25.51 3 756 25.51
Home equity.............. 1 19 .08 1 18 .08 2 37 .16
Consumer................... 1 1 .19 2 2 .39 3 3 .58
Commercial business........ --- --- --- --- --- --- --- --- ---
--- ------ ------ ------ ---- --------
Total................. 10 $560 .47% 10 $833 .70% 20 $1,393 1.17%
=== ==== ===== ==== === ======
</TABLE>
<PAGE>
Classification of Assets. Federal regulations require that each savings
institution classify its assets on a regular basis. In addition, in connection
with examinations of savings institutions, OTS and FDIC examiners have authority
to identify problem assets and, if appropriate, require them to be classified.
There are three classifications for problem assets: substandard, doubtful
and loss. Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the bank will sustain some loss
if the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets, with the additional characteristics that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified loss is considered uncollectible and of such little value that
continuance as an asset on the balance sheet of the institution is not
warranted. Assets classified as substandard or doubtful require the institution
to establish prudent general allowances for loan losses. If an asset or portion
thereof is classified as loss, the institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss, or charge off such amount. If an institution does not agree
with an examiner's classification of an asset, it may appeal this determination
to the District Director of the OTS. On the basis of management's review of its
assets, at December 31, 1996, the Bank had classified a total of $1.0 million of
its loans and other assets as follows:
<TABLE>
<CAPTION>
Commercial Real
One- to Four- Estate and Consumer
Family Multi-Family and Other Total
------ ------------ --------- -----
(In Thousands)
<S> <C> <C> <C> <C>
Substandard.................... $151 $841 $ 19 $1,011
Doubtful....................... --- --- --- ---
Loss........................... --- --- --- ---
---- ---- ---- ------
Total...................... $151 $841 $ 19 $1,011
==== ==== ==== ======
</TABLE>
Schenectady Federal's classified assets consist of the non-performing
loans and loans and other assets of concern discussed herein. As of the date
hereof, these asset classifications are generally consistent with those of the
OTS and FDIC.
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in the Bank's loan portfolio. Loans are
placed on non-accrual status when the collection of principal and/or interest
become doubtful. Restructured loans consist of troubled debt restructurings
(which involve forgiving a portion of interest or principal on any loans or
making loans at a rate materially less than that of market rates). Foreclosed
assets include assets acquired in settlement of loans.
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
One- to four-family..................................... $ 25 $ 54 $ 238
Home equity............................................. 18 --- ---
Multi-family............................................ --- --- 57
Commercial real estate.................................. 756 744 978
Consumer................................................ 2 --- ---
Commercial business..................................... --- --- ---
----- ----- -----
Total................................................ 801 798 1,273
----- ------ -----
Accruing loans delinquent 90 days or more:
One- to four-family..................................... 32 41 113
Home equity............................................. --- --- ---
Multi-family............................................ --- --- ---
Commercial real estate.................................. --- --- 581
Consumer................................................ --- --- 10
Commercial business....................................... --- --- ---
----- ------ ------
Total................................................ 32 41 704
----- ------ ------
Restructured loans:
One- to four-family..................................... --- --- ---
Home equity............................................. --- --- ---
Multi-family............................................ --- --- 731
Commercial real estate.................................. --- --- ---
Consumer................................................ --- --- ---
Commercial business..................................... --- --- ---
----- ------ ------
Total................................................ --- --- 731
----- ------ ------
Foreclosed assets:
One- to four-family..................................... 94 --- 204
Home equity............................................. --- --- ---
Multi-family............................................ --- 200 ---
Commercial real estate.................................. 84 --- ---
Consumer................................................ --- --- ---
Commercial business..................................... --- --- ---
----- ------ ------
Total................................................ 178 200 204
----- ------ ------
Total non-performing assets............................... $ 1,011 $1,039 $2,912
======= ====== ======
Total as a percentage of total assets..................... .61% .62% 1.93%
=== === ====
Total non-performing loans................................ $ 833 $ 839 $2,708
======= ====== ======
Total as a percentage of total loans receivable, net...... .70% .83% 2.89%
=== === ====
</TABLE>
<PAGE>
For the year ended December 31, 1996 gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $81,000. The amounts that were included in
interest income on such loans were $74,000.
As of December 31, 1996, the Bank's non-performing assets having a book
value of $500,000 or more included the following:
Motel loans. In 1988, the Bank purchased a participation interest in
two loans secured by three Travelers Motor Inns having an aggregate of 315 units
and located in Albany, Plattsburg and Syracuse, New York. As a result of cash
flow and other problems, the loans have been delinquent since 1992. As of
December 31, 1996, the borrower was in bankruptcy. Beginning in February 1996,
the Bank began receiving adequate protection payments in an amount established
by the Bankruptcy Court. At December 31, 1996, the book value of this asset was
$744,000.
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of December 31, 1996 there were no loans with
respect to which known information about the possible credit problems of the
borrowers or the cash flows of the security properties have caused management to
have concerns as to the ability of the borrowers to comply with present loan
repayment terms and which may result in the future inclusion of such items in
the non-performing asset categories.
Management has considered the Bank's non-performing and "of concern"
assets in establishing its allowance for loan losses.
<PAGE>
Allowance for Loan Losses. The following table sets forth an analysis
of the Bank's allowance for loan losses.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period................................ $572 $861 $804
Charge-offs:
One- to four-family......................................... 44 88 94
Home equity................................................. 41 --- ---
Multi-family................................................ --- 419 ---
Commercial real estate...................................... --- 202 ---
Consumer.................................................... 2 9 7
Commercial business......................................... --- --- ---
---- --- ------
87 718 101
--- --- -----
Recoveries:
One- to four-family......................................... --- 7 ---
Home equity................................................. --- --- ---
Multi-family................................................ --- --- 1
Commercial real estate...................................... --- --- ---
Consumer.................................................... 37 52 37
Commercial business......................................... --- --- ---
----- ---- ------
37 59 38
---- ---- -----
Net charge-offs............................................... 50 659 63
Additions charged to operations............................... 120 370 120
----- ---- -----
Balance at end of period...................................... $642 $572 $861
==== ==== ====
Ratio of net charge-offs to average loans outstanding......... .04% .68% .07%
=== === =====
Ratio of net charge-offs to non-performing loans.............. 6.00% 78.55% 2.33%
==== ===== =====
Allowance for loan losses to non-performing loans............. 77.07% 68.18% 31.79%
===== ===== =====
Allowance for loan losses to total loans at end of period..... .54% .56% .91%
=== === =====
</TABLE>
<PAGE>
The distribution of the Bank's allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- -----------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family......................... $141 76.53% $117 71.14% $130 67.48%
Multi-family................................ 16 1.32 24 2.35 172 3.57
Commercial real estate...................... 143 2.49 104 3.70 130 4.74
Home equity................................. 60 19.23 34 22.38 34 23.67
Consumer.................................... 5 .43 4 .42 8 .53
Commercial business......................... --- --- --- .01 --- .01
Unallocated................................. 277 --- 289 --- 387 ---
---- ------ --- ------ ---- ----
Total.................................. $642 100.00% $572 100.00% $861 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
The allowance for loan losses is established through a provision for
loan losses charged to earnings based on management's evaluation of the risk
inherent in the loan portfolio. The allowance is established as an amount that
management believes will be adequate to absorb losses on existing loans that may
become uncollectible, based on evaluations of the collectibility of loans and
prior loan loss experience. Management's evaluation of the adequacy of the
allowance takes into consideration such factors as the historical loan loss
experience, changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans and current economic
conditions that may affect borrowers' ability to pay.
While management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen market conditions could
result in adjustments to the allowance for loan losses, and net earnings could
be significantly affected, if circumstances differ substantially from the
assumptions used in making the final determination.
Investment Activities
The Bank utilizes investment and mortgage-backed securities in
virtually all aspects of its asset/liability management strategy. In making
investment decisions, the Investment Committee considers, among other things,
the Bank's yield and interest rate objectives, its interest rate and credit risk
position and its liquidity and cash flow.
<PAGE>
Schenectady Federal must maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Cash flow projections are
regularly reviewed and updated to assure that adequate liquidity is maintained.
The Bank's level of liquidity is a result of management's asset/liability
strategy.
Investment Securities. 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.
To date, the Bank's investment strategy has been directed toward
high-quality assets (primarily government and agency obligations) with short and
intermediate terms (five years or less) to maturity. At December 31, 1996, the
Bank did not own any investment securities of a single issuer which exceeded 10%
of the Bank's equity, other than U.S. government or federal agency obligations.
The Bank invests its liquid assets primarily in interest-earning
overnight deposits and various money market mutual funds. Other investments
include high grade medium-term (up to five years) corporate debt securities and
a variety of other types of mutual funds which invest in adjustable-rate,
mortgage-backed securities, asset-backed securities, repurchase agreements and
U.S. Treasury and agency obligations. For the year ended December 31, 1996, the
Bank had an average outstanding balance of $21.9 million in securities
(including $5.2 million of securities available for sale) with an average yield
of 6.25%.
<PAGE>
The following table sets forth the composition of the Bank's securities
portfolio at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
1996 1995 1994
------------------------ ---------------------- --------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
Mutual funds....................................... $1,990 9.68% $7,976 21.65% $ 7,776 25.33%
Investment securities:
U.S. government obligations........................ 3,980 19.37 5,968 16.20 7,934 25.84
Federal agency obligations......................... 9,481 46.13 9,692 26.30 4,891 15.93
Municipal bonds.................................... 84 .41 93 .25 101 .33
Collateralized mortgage obligations................ --- --- --- --- 874 2.85
Corporate bonds.................................... 2,201 10.71 2,905 7.88 3,102 10.10
Mutual funds....................................... --- --- --- --- --- ---
-------- ------ ------- ------ -------- ---
Subtotal........................................ 17,736 86.30 26,634 72.28 24,678 80.38
FHLB stock........................................... 1,215 5.91 1,117 3.03 1,123 3.66
------- ------ ------- ------ -------- ------
Total investment securities and FHLB stock...... $18,951 92.21% $27,751 75.31% $25,801 84.04%
======= ====== ======= ====== ======= ======
Average remaining life of securities excluding
FHLB stock and mutual funds......................... 3.6 years 3.2 years 3.2 years
Other interest-earning assets:
Federal funds sold................................. 1,600 7.79 9,100 24.69 4,900 15.96
-------- ------- -------- ------ -------- ------
Total........................................... $20,551 100.00% $36,851 100.00% $30,701 100.00%
======= ====== ======= ====== ======= ======
Average remaining life or term to repricing of
securities and other interest-earning assets,
excluding FHLB stock and mutual funds............... 3.3 years 2.2 years 2.5 years
</TABLE>
<PAGE>
The composition and maturities of the securities portfolio, excluding
FHLB stock and federal funds sold, are indicated in the following table.
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over No Stated
1 Year Years Years 10 Years Maturity Total Securities
Book Value Book Value Book Value Book Value Book Value Book Value Market Value
---------- ---------- ---------- ---------- ---------- -----------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
Mutual funds....................... $ --- $ --- $ --- $ --- $1,990 $1,990 $1,990
Investment securities:
U.S. government securities......... 2,003 1,977 --- --- --- 3,980 3,981
Federal agency obligations......... 47 8,239 --- 1,195 --- 9,481 9,383
Municipal bonds.................... --- --- 84 --- --- 84 84
Corporate bonds.................... 2,201 --- --- --- --- 2,201 2,194
Collateralized mortgage
obligation....................... --- --- --- --- --- --- ---
-------- --------- ------ -------- ------ -------- -------
Total investment securities...... 4,251 10,216 84 1,195 --- 15,746 15,642
------ ------- ----- ------- ------ ------ ------
Total securities..................... $4,251 $10,216 $ 84 $1,195 $1,990 $17,736 $17,632
====== ======= ==== ====== ====== ======= =======
Weighted average yield............... 6.20% 6.18% 7.50% 8.35% 6.38% 6.36%
</TABLE>
Mortgage-Backed Securities. In order to supplement loan production and
achieve its asset/liability management goals, the Bank invests in
mortgage-backed securities. All of the mortgage-backed securities owned by the
Bank are issued, insured or guaranteed either directly or indirectly by a
federal agency or are rated "AA" or higher. At December 31, 1996, Schenectady
Federal had $20.4 million of mortgage-backed securities, all of which are held
for investment purposes.
Consistent with its asset/liability management strategy over the last
several years, a majority of the mortgage-backed securities acquired by the Bank
have had short or intermediate effective terms to maturity or, to a lesser
extent, adjustable interest rates. In particular, virtually all of the
mortgage-backed securities purchased by the Bank since 1992 have carried five
and seven year balloon terms.
<PAGE>
The following table sets forth the contractual maturities of the Bank's
mortgage-backed securities at December 31, 1996.
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------------------------------------
5 Years 5 to 10 10 to 20 Over Total Mortgage-Backed
or Less(1) Years Years 20 Years Securities
Book Value Book Value Book Value Book Value Book Value Market Value
---------- ---------- ---------- ---------- ---------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities - Held for Investment:
Government National Mortgage Association......... $ 18 $ 236 $2,284 $ --- $ 2,538 $ 2,720
Federal National Mortgage Association............ 3,762 --- --- 1,739 5,501 5,446
Federal Home Loan Mortgage Corporation........... 10,586 --- 167 1,642 12,395 12,156
------- ------- ------- ------ ------- --------
Total mortgage-backed securities.................. $14,366 $ 236 $2,451 $3,381 $20,434 $20,322
======= ===== ====== ====== ======= =======
Weighted average yield............................ 5.89% 7.48% 9.22% 6.87% 6.47%
==== ==== ==== ==== ====
(1) At December 31, 1996, the Bank held no mortgage-backed securities
with contractual maturities of one year or less.
</TABLE>
Sources of Funds
General. The Bank's primary sources of funds are deposits, payments
(including prepayments) of loan principal, interest earned on loans and
securities, repayments of securities, borrowings and funds provided from
operations.
Deposits. Schenectady Federal offers a variety of deposits accounts
having a wide range of interest rates and terms. The Bank's deposits consist of
passbook, NOW, money market, noninterest bearing checking and certificate
accounts. The Bank relies primarily on competitive pricing policies and customer
service to attract and retain these deposits.
The variety of deposit accounts offered by the Bank has allowed it to
be competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. As customers have become more interest rate conscious, the Bank
has become more susceptible to short-term fluctuations in deposit flows. The
Bank manages the pricing of its deposits in keeping with its asset/liability
management, profitability and growth objectives.
Based on its experience, the Bank believes that a substantial portion
of its passbook and NOW accounts are relatively stable sources of deposits and
has used customer service and marketing initiatives in an effort to increase the
volume of such deposits. However, the ability of the Bank to attract and
maintain these accounts (as well as certificate accounts) has been and will be
<PAGE>
affected by market conditions. Subsequent to the 1994 fiscal year, the Bank
experienced a decline in the balance of non-certificate accounts (much of which
is believed to have transferred into certificate accounts) as a result of
continued interest rate increases and the rates paid on these deposits. The Bank
has been and will continue to be significantly affected by market conditions.
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1996 1995 1994
--------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance................ $139,671 $ 138,299 $ 134,653
Deposits....................... 237,180 231,591 195,214
Withdrawals.................... (242,412) (236,426) (196,620)
Interest credited.............. 6,177 6,207 5,052
--------- -------- ---------
Ending balance................. $140,616 $ 139,671 $ 138,299
======== ========= =========
Net increase................... $ 945 $ 1,372 $ 3,646
========= ========== =========
Percent increase .............. .68% .99% 2.71%
=== ===== ====
</TABLE>
<PAGE>
The following table sets forth the dollar amount of deposits in the
various types of deposit programs offered by the Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1996 1995 1994
----------------------- ---------------------- ------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction and Savings Deposits:(1)
Noninterest-bearing Checking Accounts............... $ 1,392 .99 $ 2,077 1.49% $ 1,390 1.01%
Savings Accounts 3.00%.............................. 37,152 26.42 40,745 29.17 52,582 38.02
NOW Accounts 1.75%.................................. 9,104 6.47 7,913 5.67 7,753 5.60
Money Market Accounts 2.76%-4.41%................... 6,074 4.32 4,237 3.03 5,584 4.04
------- ------ ------- ------ -------- ------
Total Non-Certificate Accounts...................... 53,722 38.20 54,972 39.36 67,309 48.67
------- ----- ------- ------ -------- -----
Certificates of Deposit:
2.00 - 2.99%....................................... --- --- -- --- 265 .19
3.00 - 3.99%....................................... --- --- 1,124 .80 14,200 10.27
4.00 - 4.99%....................................... 23,244 16.53 2,691 1.93 14,019 10.14
5.00 - 5.99%....................................... 50,815 36.14 51,996 37.23 31,001 22.41
6.00 - 6.99%....................................... 12,835 9.13 28,119 20.13 8,889 6.43
7.00 - 7.99%....................................... --- --- 618 .44 910 .66
8.00 - 8.99%....................................... --- --- 151 .11 1,706 1.23
--------- ---- ------- ------ ------- -------
Total Certificates of Deposit....................... 86,894 61.80 84,699 60.64 70,990 51.33
-------- ------ -------- ------ ------- ------
Total Deposits...................................... $140,616 100.00% $139,671 100.00% $138,299 100.00%
======== ====== ======== ====== ======== ======
(1) Reflects rates paid on transaction and savings deposits at December
31, 1996.
</TABLE>
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of December 31, 1996.
<TABLE>
<CAPTION>
4.00- 6.00- Percent
5.99% 9.99% Total of Total
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Certificates of deposit
maturing in quarter ending:
March 31, 1997..................... $10,437 $ 805 $11,242 12.94%
June 30, 1997...................... 16,431 1,162 17,593 20.25
September 30, 1997................. 17,628 976 18,604 21.41
December 31, 1997.................. 10,263 2,212 12,475 14.36
March 31, 1998..................... 3,246 2,457 5,703 6.56
June 30, 1998...................... 4,755 1,260 6,015 6.92
September 30, 1998................. 2,473 57 2,530 2.91
December 31, 1998.................. 1,758 34 1,792 2.06
March 31, 1999..................... 793 385 1,178 1.36
June 30, 1999...................... 2,762 1,516 4,278 4.92
September 30, 1999................. 1,022 183 1,205 1.39
December 31, 1999.................. 344 523 867 1.00
Thereafter......................... 2,147 1,265 3,412 3.92
-------- -------- ------- -------
Total........................... $74,059 $12,835 $86,894 100.00%
======= ======= ======= ======
Percent of total................ 85.23% 14.77%
===== =====
</TABLE>
The following table indicates the amount of the Bank's "jumbo" and
other certificates of deposit as of December 31, 1996.
<TABLE>
<CAPTION>
Maturity
--------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000....... $ 10,590 $ 16,963 $ 28,172 $ 24,942 $ 80,667
Certificates of deposit of $100,000 or more...... 652 630 2,907 2,038 6,227
--------- --------- --------- --------- --------
Total certificates of deposit.................... $11,242 $17,593 $31,079 $26,980 $86,894
======= ======= ======= ======= =======
</TABLE>
<PAGE>
Borrowings. Schenectady Federal's other available sources of funds
include advances from the FHLB of New York and other borrowings. As a member of
the FHLB of New York, the Bank is required to own capital stock in the FHLB of
New York and is authorized to apply for advances from the FHLB of New York. Each
FHLB credit program has its own interest rate, which may be fixed or variable,
and range of maturities. The FHLB of New York may prescribe the acceptable uses
for these advances, as well as limitations on the size of the advances and
repayment provisions. At December 31, 1996, the Bank had no FHLB advances
outstanding. On such date, the Bank had a collateral pledge arrangement with
FHLB of New York pursuant to which the Bank may borrow up to $49.8 million for
liquidity purposes.
During the fiscal year ended December 31, 1996, the Bank had less than
$1,000 of average FHLB advances or other borrowings outstanding. During the
fiscal year ended December 31, 1995 and 1994 the Bank had no FHLB advances or
other borrowings.
Competition
Schenectady Federal faces strong competition both in originating real
estate loans and in attracting deposits. Competition in originating loans comes
primarily from mortgage bankers, commercial banks which have received a
reduction in deposit insurance premiums, credit unions and other savings
institutions, which also make loans secured by real estate located in the Bank's
market area. The Bank competes for loans principally on the basis of the
interest rates and loan fees it charges, the types of loans it originates and
the quality of services it provides to borrowers.
Competition for deposits is principally from money market and mutual
funds, securities firms, commercial banks, credit unions and other savings
institutions located in the same communities. The ability of the Bank to attract
and retain deposits depends on its ability to provide an investment opportunity
that satisfies the requirements of investors as to rate of return, liquidity,
risk, convenient locations and other factors. The Bank competes for these
deposits by offering a variety of deposit accounts at competitive rates,
convenient business hours and a customer oriented staff.
Employees
At December 31, 1996, the Bank had a total of 57 full-time and 9
part-time employees. None of the Bank's employees are represented by any
collective bargaining. Management considers its employee relations to be good.
Subsidiary Activities
As a federally chartered savings and loan association, Schenectady
Federal is permitted by OTS regulations to invest up to 2% of its assets in the
stock of, or loans to, service corporation subsidiaries, and may invest an
additional 1% of its assets in service corporations where such additional funds
are used for inner-city or community development purposes. At December 31, 1996
Schenectady Federal's investment in its service corporation totaled $16,000. In
addition to investments in service corporations, federal institutions are
permitted to invest an unlimited amount in operating subsidiaries engaged solely
in activities which a federal savings association may engage in directly.
<PAGE>
At December 31, 1996, Schenectady Federal had one wholly owned service
corporation, SSLA Services Corp. ("SSLA"). The corporation was formed in 1983 to
sell insurance products. In 1994, SSLA was authorized to sell mutual funds. For
the year ended December 31, 1996, SSLA sold mutual funds totaling $248,000. No
assurance can be made that a material amount of mutual fund sales will occur in
the future. For the fiscal year ended December 31, 1996, SSLA had net income of
$8,000. For the fiscal years ending December 31, 1995 and 1994 SSLA had a net
loss of $10,000, and $15,000, respectively.
REGULATION
General
Schenectady Federal is currently a federally chartered savings and loan
association, the deposits of which are federally insured and backed by the full
faith and credit of the United States Government. Accordingly, Schenectady
Federal is subject to broad federal regulation and oversight extending to all
its operations. Schenectady Federal is a member of the FHLB of New York and is
subject to certain limited regulation by the Federal Reserve Board. As the
savings and loan holding company of Schenectady Federal, the Holding Company
also is subject to federal regulation and oversight. The purpose of the
regulation of the Holding Company and other holding companies is to protect
subsidiary savings associations. Schenectady Federal is a member of the SAIF and
the deposits of Schenectady Federal are insured by the FDIC. As a result, the
FDIC has certain regulatory and examination authority over Schenectady Federal.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. As part of this authority, Schenectady Federal is required to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC. The last regular OTS examination of Schenectady Federal was as of
September 1996. Under agency scheduling guidelines, it is likely that another
examination will be initiated in the near future. When these examinations are
conducted by the OTS and the FDIC, the examiners may require Schenectady Federal
to provide for higher general or specific loan loss reserves. All savings
associations are subject to a semi-annual assessment, based upon the savings
association's total assets, to fund the operations of the OTS. Schenectady
Federal's OTS assessment for the fiscal year ended December 31, 1996 was
$50,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including Schenectady Federal and the
Holding Company. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease- and-desist or removal
orders and to initiate injunctive actions. In general, these enforcement actions
may be initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
<PAGE>
In addition, the investment, lending and branching authority of
Schenectady Federal is prescribed by federal laws and regulations, and it is
prohibited from engaging in any activities not permitted by such laws and
regulations. For instance, no savings institution may invest in non-investment
grade corporate debt securities. In addition, the permissible level of
investment by federal associations in loans secured by non-residential real
property may not exceed 400% of total capital, except with approval of the OTS.
Federal savings associations are also generally authorized to branch nationwide.
Schenectady Federal is in compliance with the noted restrictions.
Schenectady Federal's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At December 31, 1996, Schenectady Federal's
lending limit under this restriction was $2.7 million. Schenectady Federal is in
compliance with the loans-to-one borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on matters such as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action. The OTS and other federal banking
agencies have also proposed additional guidelines on asset quality and earnings
standards. No assurance can be given as whether or in what form the proposed
regulations will be adopted.
Insurance of Accounts and Regulation by the FDIC
Schenectady Federal is a member of the SAIF, which is administered by
the FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings associations, after giving the OTS an opportunity to take such
action, and may terminate the deposit insurance if it determines that the
institution has engaged or is engaging in unsafe or unsound practices or is in
an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system, under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, ranging from .23% to .31% of
deposits, based upon their level of capital and supervisory evaluation. Under
the system, institutions classified as well capitalized (i.e., a core capital
ratio of at least 5%, a ratio of Tier 1 or core capital to risk-weighted assets
("Tier 1 risk-based capital") of at least 6% and a risk-based capital ratio of
at least 10%) and considered healthy pay the lowest premium while institutions
that are less than adequately capitalized (i.e., core or Tier 1 risk-based
capital ratios of less than 4% or a risk-based capital ratio of less than 8%)
and considered of substantial supervisory concern pay the highest premium. Risk
classification of all insured institutions will be made by the FDIC for each
semi-annual assessment period.
<PAGE>
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
For the first six months of 1995, the assessment schedule for BIF
members and SAIF members ranged from .23% to .31% of deposits. As is the case
with the SAIF, the FDIC is authorized to adjust the insurance premium rates for
banks that are insured by the BIF of the FDIC in order to maintain the reserve
ratio of the BIF at 1.25% of BIF insured deposits. As a result of the BIF
reaching its statutory reserve ratio the FDIC revised the premium schedule for
BIF insured institutions to provide a range of .04% to .31% of deposits. The
revisions became effective in the third quarter of 1995. In addition, the BIF
rates were further revised, effective January 1996, to provide a range of 0% to
.27%. The SAIF rates, however, were not adjusted. At the time the FDIC revised
the BIF premium schedule, it noted that, absent legislative action (as discussed
below), the SAIF would not attain its designated reserve ratio until the year
2002. As a result, SAIF insured members would continue to be generally subject
to higher deposit insurance premiums than BIF insured institutions until, all
things being equal, the SAIF attained its required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate has been
established at .657% of deposits by the FDIC and the resulting assessment of
$930,000 was paid in November 1996.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment will be limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of December 31, 1999 or
when no savings association continues to exist, thereby imposing a greater
burden on SAIF member institutions such as Schenectady Federal. Thereafter,
however, assessments on BIF-member institutions will be made on the same basis
as SAIF-member institutions. The rates to be established by the FDIC to
implement this requirement for all FDIC- insured institutions is uncertain at
this time, but are anticipated to be about a 6.5 basis points assessment on SAIF
deposits and 1.5 basis points on BIF deposits until BIF insured institutions
participate fully in the assessment.
<PAGE>
Regulatory Capital Requirements
Federally insured savings associations, such as Schenectady Federal,
are required to maintain a minimum level of regulatory capital. The OTS has
established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk- based capital
requirement applicable to such savings associations. These capital requirements
must be generally as stringent as the comparable capital requirements for
national banks. The OTS is also authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At December 31, 1996, Schenectady Federal had no intangible
assets which were required to be deducted from tangible capital.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. The subsidiaries of Schenectady Federal are includable
subsidiaries.
At December 31, 1996, Schenectady Federal had tangible capital of $17.8
million, or 10.77% of adjusted total assets, which is approximately $15.3
million above the minimum requirement of 1.5% of adjusted total assets in effect
on that date.
The capital standards also require core capital equal to at least 3.0%
of adjusted total assets (as defined by regulation). Core capital generally
consists of tangible capital plus certain intangible assets, including a limited
amount of purchased credit card relationships. As a result of the prompt
corrective action provisions of FDICIA discussed below, however, a savings
association must maintain a core capital ratio of at least 4.0% to be considered
adequately capitalized unless its supervisory condition is such to allow it to
maintain a 3.0% ratio. At December 31, 1996, Schenectady Federal had no
intangibles which were subject to these tests.
At December 31, 1996, Schenectady Federal had core capital equal to
$17.8 million, or 10.77% of adjusted total assets, which is $12.8 million above
the minimum leverage ratio requirement of 3.0% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
<PAGE>
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At December 31, 1996, Schenectady
Federal had $642,000 of general loss reserves, which was less than 1.25% of
risk-weighted assets and was included in capital.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. Schenectady Federal had
no such exclusions from capital and assets at December 31, 1996.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or the FHLMC.
The OTS has adopted a final rule that requires every savings
association with more than normal interest rate risk exposure to deduct from its
total capital, for purposes of determining compliance with such requirement, an
amount equal to 50% of its interest-rate risk exposure multiplied by the present
value of its assets. This exposure is a measure of the potential decline in the
net portfolio value of a savings association, greater than 2% of the present
value of its assets, based upon a hypothetical 200 basis point increase or
decrease in interest rates (whichever results in a greater decline). Net
portfolio value is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The rule provides for a two quarter
lag between calculating interest rate risk and recognizing any deduction from
capital. The rule will not become effective until the OTS evaluates the process
by which savings associations may appeal an interest rate risk deduction
determination. It is uncertain when this evaluation may be completed. Any
savings association with less than $300 million in assets and a total capital
ratio in excess of 12% is exempt from this requirement unless the OTS determines
otherwise.
On December 31, 1996, Schenectady Federal had total capital of $17.1
million (including $17.8 million in core capital and $642,000 in qualifying
supplementary capital) and risk-weighted assets of $88.0 million; or total
capital of 20.9% of risk-weighted assets. This amount was $10.6 million above
the 8.0% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
capital requirements. The OTS is generally required to take action to restrict
the activities of an "undercapitalized association" (generally defined to be one
with less than either a 4% core ratio, a 4% Tier 1 risked-based capital ratio or
an 8% risk-based capital ratio). Any such association must submit a capital
restoration plan and until such plan is approved by the OTS may not increase its
assets, acquire another institution, establish a branch or engage in any new
activities, and generally may not make capital distributions. The OTS is
authorized to impose the additional restrictions that are applicable to
significantly undercapitalized associations.
<PAGE>
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on
Schenectady Federal may have a substantial adverse effect on Schenectady
Federal's operations and profitability. Holding Company shareholders do not have
preemptive rights, and therefore if the Holding Company is directed by the OTS
or the FDIC to issue additional shares of Common Stock, such issuance may result
in the dilution in the percentage of ownership of the Holding Company.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions or requirements on
associations with respect to their ability to pay dividends or make other
distributions of capital which include dividends, stock redemptions or
repurchases cash-out mergers and other transactions charged to the capital
account. OTS regulations prohibit an association from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
capital of the association would be reduced below the amount required to be
maintained for the liquidation account established in connection with its mutual
to stock conversion.
Generally, savings associations, such as Schenectady Federal, that
before and after the proposed distribution meet their capital requirements, may
make capital distributions during any calendar year equal to the greater of 100%
of net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. Schenectady
Federal may pay dividends in accordance with this general authority.
<PAGE>
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern (as defined by regulation) and would remain adequately
capitalized (as defined in the OTS prompt corrective action regulations)
following the proposed distribution. Savings associations that would remain
adequately capitalized following the proposed distribution but do not meet the
other noted requirements must notify the OTS 30 days prior to declaring a
capital distribution. The OTS stated it will generally regard as permissible
that amount of capital distributions that do not exceed 50% of the institution's
excess regulatory capital plus net income to date during the calendar year. A
savings association may not make a capital distribution without prior approval
of the OTS and the FDIC if it is undercapitalized before, or as a result of,
such a distribution. As under the current rule, the OTS may object to a capital
distribution if it would constitute an unsafe or unsound practice. No assurance
may be given as to whether or in what form the regulations may be adopted.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during the 30-day notice period based on safety and soundness
concerns. See "Regulatory Capital Requirements."
Liquidity
All savings associations, including Schenectady Federal, are required
to maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. For a discussion of what
Schenectady Federal includes in liquid assets, see "Management's Discussion and
Analysis of Financial Condition and Results of Operation Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. For the year ended December 31, 1996, Schenectady Federal was
in compliance with both requirements, with an overall average daily liquid asset
ratio of 26.1% and a short-term liquid assets ratio of 5.7%.
Accounting
An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held for investment, sale or
trading) with appropriate documentation. Schenectady Federal is in compliance
with these amended rules.
<PAGE>
The OTS has adopted an amendment to its accounting regulations, which
may be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
Qualified Thrift Lender Test
All savings associations, including Schenectady Federal, are required
to meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. This test requires a savings association to have at least 65%
of its portfolio assets (as defined by regulation) in qualified thrift
investments on a monthly average for nine out of every 12 months on a rolling
basis. Such assets primarily consist of residential housing related loans and
investments. At December 31, 1996, Schenectady Federal met the test and has
always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the Bank Insurance Fund. If such an association has not yet requalified or
converted to a national bank, its new investments and activities are limited to
those permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of
Schenectady Federal, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation of
certain applications, such as a merger or the establishment of a branch, by the
Bank. An unsatisfactory rating may be used as the basis for the denial of an
application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in July 1995 and received a rating of satisfactory.
<PAGE>
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the association's capital. Affiliates of Schenectady Federal include the Holding
Company and any company which is under common control with Schenectady Federal.
In addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. Schenectady Federal's subsidiaries are not deemed
affiliates, however; the OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation
The Holding Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Holding Company is
required to register and file reports and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Holding Company and its non-savings association subsidiaries which also permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Holding Company
generally is not subject to activity restrictions. If the Holding Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Holding Company and any of its subsidiaries (other than Schenectady Federal
or any other SAIF-insured savings association) would become subject to such
restrictions unless such other associations each qualify as a QTL and were
acquired in a supervisory acquisition.
If Schenectady Federal fails the QTL test, the Holding Company must
obtain the approval of the OTS prior to continuing after such failure, directly
or through its other subsidiaries, any business activity other than those
approved for multiple savings and loan holding companies or their subsidiaries.
In addition, within one year of such failure the Holding Company must register
as, and will become subject to, the restrictions applicable to bank holding
companies. The activities authorized for a bank holding company are more limited
than are the activities authorized for a unitary or multiple savings and loan
holding company. See "Qualified Thrift Lender Test."
The Holding Company must obtain approval from the OTS before acquiring
control of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
<PAGE>
Federal Securities Law
The stock of the Holding Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Holding
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Holding Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Holding Company may not
be resold without registration or unless sold in accordance with certain resale
restrictions. If the Holding Company meets specified current public information
requirements, each affiliate of the Holding Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At December 31, 1996, Schenectady Federal was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
Schenectady Federal is a member of the FHLB of New York, which is one
of 12 regional FHLBs, that administers the home financing credit function of
savings associations. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, Schenectady Federal is required to purchase and maintain
stock in the FHLB of New York. At December 31, 1996, Schenectady Federal had
$1.2 million in FHLB stock, which was in compliance with this requirement. In
past years, Schenectady Federal has received substantial dividends on its FHLB
stock. Over the past five calendar years such dividends have averaged 8.2% and
were 6.5% in 1996. For the year ended December 31, 1996, dividends paid by the
FHLB of New York to Schenectady Federal totaled $78,000, which constitute a
$8,000 decrease from the amount of dividends received in 1995. The $20,000
dividend received for the quarter ended December 31, 1996 reflects an annualized
rate of 6.6%.
<PAGE>
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of Schenectady Federal's FHLB stock may result in a
corresponding reduction in Schenectady Federal's capital.
Federal and State Taxation
Federal Taxation. Savings associations such as the Bank that meet
certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code of 1986, as amended (the
"Code"), are permitted to establish reserves for bad debts and to make annual
additions thereto which may, within specified formula limits, be taken as a
deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction is computed under the experience
method. Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings association over a period of years.
In August 1996, federal legislation was enacted that changed the manner
in which the bad debt reduction is calculated by thrift institutions, including
the Bank. Formerly the Bank had been allowed to calculate its deduction under
the experience or percentage of taxable income methods and deduct the higher
amount. The percentage of taxable income method was repealed effective for the
1996 tax year. The legislation effectively requires thrifts to account for bad
debts for federal income tax purposes on the same basis as commercial banks for
tax years beginning after December 31, 1995.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
To the extent prior years earnings appropriated to a savings
association's bad debt reserves for "qualifying real property loans" and
deducted for federal income tax purposes exceed the allowable amount of such
reserves computed under the experience method and to the extent of the
association's supplemental reserves for losses on loans ("Excess"), such Excess
may not, without adverse tax consequences, be utilized for the payment of cash
dividends or other distributions to a shareholder (including distributions on
redemption, dissolution or liquidation) or for any other purpose (except to
absorb bad debt losses). As of December 31, 1996, the Bank's Excess for tax
purposes totaled approximately $4.6 million.
<PAGE>
The Bank and its subsidiaries file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. The
Holding Company intends to file consolidated federal income tax returns with the
Bank and its subsidiaries.
The Bank and its consolidated subsidiaries have been audited by the IRS
with respect to consolidated federal income tax returns through December 31,
1985. With respect to years examined by the IRS, either all deficiencies have
been satisfied or sufficient reserves have been established to satisfy asserted
deficiencies. In the opinion of management, any examination of still open
returns (including returns of subsidiaries and predecessors of, or entities
merged into, the Bank) would not result in a deficiency which could have a
material adverse effect on the financial condition of the Bank and its
consolidated subsidiaries.
New York Taxation. The Bank and its subsidiaries that operate in New
York are subject to New York state taxation. The Bank is subject to the New York
State Franchise Tax on Banking Corporations in an annual amount equal to the
greater of (i) 9% of the Bank's "entire net income" allocable to New York State
during the taxable year, or (ii) the applicable alternative minimum tax. The
alternative minimum tax is generally the greater of (a) 0.01% of the value of
the Bank's assets allocable to New York State with certain modifications, (b) 3%
of the Bank's "alternative entire net income" allocable to New York State, or
(c) $250. In addition, New York also imposes a surtax of approximately 3% on the
applicable tax described above. The surtax is scheduled to expire in 1996.
Entire net income is similar to federal taxable income, subject to certain
modifications (including the fact that net operating losses cannot be carried
back or carried forward) and alternative entire net income is equal to entire
net income without certain modifications.
Delaware Taxation. As a Delaware holding company, the Holding Company
is exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Holding Company
is also subject to an annual franchise tax imposed by the State of Delaware.
Executive Officers of the Company
The executive officers of the Company, each of whom is currently an
executive officer of the Bank, are identified below. The executive officers of
the Company are elected annually by the Company's Board of Directors.
<TABLE>
<CAPTION>
Name Age(1) Position With Company
---- ------ ---------------------
<S> <C> <C>
Joseph H. Giaquinto 57 Chairman of the Board, President and
Chief Executive Officer
David J. Jurczynski 37 Vice President, Treasurer and Chief Financial Officer
Richard D. Ammian 49 Senior Vice President and Corporate Secretary
(1) As of December 31, 1996
</TABLE>
<PAGE>
Executive Officers of the Company
Joseph H. Giaquinto. Mr. Giaquinto, age 57, is Chairman of the Board,
President and Chief Executive Officer of the Bank and the Holding Company. Mr.
Giaquinto began his career with Schenectady Federal in 1961 and has served in a
variety of positions including his current positions since 1984.
Richard D. Ammian. Mr. Ammian, age 49, is Senior Vice President of
Administration and Marketing and Corporate Secretary. In that capacity, Mr.
Ammian is responsible for human resources, employee benefits, marketing and
property management functions of the Bank. Mr. Ammian joined the Bank in 1978
and held various positions with the Bank until his promotion to his current
positions in 1988.
David J. Jurczynski. Mr. Jurczynski, age 37, is Vice President, Treasurer,
and Chief Financial Officer of the Bank. Mr. Jurczynski was appointed to the
position in October 1996. From 1990 to 1996, Mr. Jurczynski was Vice President
and Treasurer of Cohoes Savings Bank. Mr. Jurczynski is a certified public
accountant.
Item 2. Properties
Properties
The following table sets forth information concerning the main office and
each branch office of the Bank at December 31, 1996. At December 31, 1996, the
Bank's premises had an aggregate net book value of approximately $1.1 million.
<TABLE>
<CAPTION>
Year Owned or Net Book Value at
Location Acquired Leased December 31, 1996
-------- -------- ------ -----------------
(In Thousands)
<S> <C> <C> <C>
Main Office:
251-263 State Street 1959 Owned $679
Schenectady, New York
Full Service Branches:
262 Saratoga Road 1981 Leased $ 52
Scotia, New York (expires
2006)
2526-2528 Broadway 1977 Owned $380
Schenectady, New York
</TABLE>
The Bank believes that its current facilities are adequate to meet the
present and foreseeable future needs of the Bank and the Holding Company. The
Bank may look to open new branches when and if the prospective market is deemed
to provide an opportunity to the Bank.
The Bank's depositor and borrower customer files are maintained by an
independent data processing company. The net book value of the data processing
and computer equipment utilized by the Bank at December 31, 1996 was
approximately $245,000.
<PAGE>
Item 3. Legal Proceedings
The Holding Company and the Bank are involved as plaintiff or defendant in
various legal actions arising in the normal course of its business. While the
ultimate outcome of these proceedings cannot be predicted with certainty, it is
the opinion of management, after consultation with counsel representing the
Holding Company and the Bank in the proceedings, that the resolution of these
proceedings should not have a material effect on Company's consolidated
financial position, results of operations or liquidity.
Item 4. Submission of Matters to a Vote of Securities Holders
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1996.
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters
Page 51 of the Company's 1996 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Pages 4 through 16 of the Company's 1996 Annual Report to Stockholders is
herein incorporated by reference.
<PAGE>
Item 7. Financial Statements
The following information appearing in the Company's Annual Report to
Stockholders for the year ended December 31, 1996, is incorporated by reference
in this Annual Report on Form 10-KSB as Exhibit 13.
Annual Report Section
Selected Consolidated Financial Information
Management's Discussion and Analysis of Financial Condition
and Results of Operation
Independent Auditors' Report
Consolidated Balance Sheets as of
December 31, 1996 and 1995
Consolidated Statements of Income for the Years
Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
With the exception of the aforementioned information, the Company's
Annual Report to Stockholders for the year ended December 31, 1996, is not
deemed filed as part of this Annual Report on Form 10-KSB.
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
There has been no current report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change in
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure nor has there been a change of accountants
within the past 24 months.
PART III
Item 9. Directors, Promoters and Control Persons; Compliance With
Section 16(a) of the Exchange Act
Directors
Information concerning directors of the Company is incorporated herein
by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders for the fiscal year ended December 31, 1996 a copy of
which will be filed not later than 120 days after the close of the fiscal year.
<PAGE>
Executive Officers
Information regarding the business experience of the executive officers
of the Company and the Bank contained in Part I of this 10-KSB is incorporated
herein by reference.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the fiscal year
ended December 31, 1996, a copy of which will be filed not later than 120 days
after the close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Company's definitive
Proxy Statement for the fiscal year ended December 31, 1996, a copy of which
will be filed not later than 120 days after the close of the fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and transactions is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders for the fiscal year ended December 31,
1996, a copy of which will be filed not later than 120 days after the close of
the fiscal year.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Reference to
Prior Filing
or Exhibit
Regulation Number
S-B Exhibit Attached
Number Document Hereto
------ -------- ------
<S> <C> <C>
2 Plan of acquisition, reorganization
arrangement, liquidation or succession..................... None
3 Articles of Incorporation and Bylaws........................ *
4 Instruments defining the rights of
security holders, including indentures:
Common Stock Certificate................................. *
9 Voting trust agreement...................................... None
10 Material Contracts
10.1 1996 Stock Option and Incentive Plan..................... None
10.2 1996 Management Recognition Plan......................... None
11 Statement re: computation of per
share earnings............................................. None
12 Statement re: computation of ratios......................... None
13 Annual Report to Security Holders........................... 13
16 Letter on change in certifying
accountant................................................. None
18 Letter on change in accounting
principles................................................. None
21 Subsidiaries of Registrant.................................. 21
22 Published report regarding matters
submitted to vote of security holders...................... None
23 Consent of Experts and Counsel.............................. None
24 Power of Attorney........................................... None
27 Financial Data Schedule..................................... None
28 Information from reports furnished to
state insurance regulatory authorities..................... None
99 Additional exhibits......................................... None
- --------------------
* Filed as exhibits to the Company's S-1 registration statement filed on
March 17, 1995, (File No.33-90422) pursuant to Section 5 of the Securities Act
of 1933. All of such previously filed documents are hereby incorporated herein
by reference in accordance with Item 601 of Regulation S-B.
</TABLE>
(b) Reports on Form 8-K:
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
SFS BANCORP, INC.
Date: March 31, 1997 By: /s/Joseph H. Giaquinto
----------------------
Joseph H. Giaquinto (Duly
Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/Joseph H. Giaquinto By:/s/John F. Assini
- -------------------------- ----------------------
Joseph H. Giaquinto, Chairman of the John F. Assini, M.D.
Board, President and Chief Executive Vice Chairman of the Board
Officer (Principal Executive and
Operating Officer)
Date: March 31, 1997 Date: March 31, 1997
By: /s/Richard A. Ammian By:/s/Gerald I. Klein
- ------------------------ -----------------------
Richard A. Ammian, Director Gerald I. Klein, Director
Date: March 31, 1997 Date: March 31, 1997
By: /s/Robert A. Schlansker By:/s/David J. Jurczynski
- ---------------------------- ----------------------
Robert A. Schlansker David J. Jurczynski
Director Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: March 31, 1997 Date: March 31, 1997
1996 ANNUAL REPORT
[GRAPHIC-LOGO]
SFS BANCORP, INC.
Schenectady, New York
<PAGE>
TABLE OF CONTENTS
President's Message
Selected Consolidated Financial Information
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Independent Auditors' Report
Consolidated Financial Statements
Corporate Information
<PAGE>
PRESIDENT'S MESSAGE
President's Message to Our Stockholders:
On behalf of the Board of Directors, Officers and Employees of SFS Bancorp,
Inc. (the "Company") and its wholly owned subsidiary, Schenectady Federal
Savings Bank (the "Bank"), we are pleased to submit our second Annual Report as
a public company.
We are proud to report that the annualized equivalent total return (defined
as market appreciation plus dividends) on your investment in our Company since
we converted to a public entity in 1995 has been approximately 18.6%. During
1996, the Company deployed several strategies which we feel will continue to
enhance shareholder value. First, the Company repurchased 269,750 shares of our
stock, or 18.0% of the shares originally issued. These treasury shares were
purchased on the open market at an average price of $12.67 per share or 74.3% of
the December 31, 1996, book value. Second, the Company declared its first
dividend in July 1996 of $0.06 per share. For the year, the Company declared
dividends of $0.12 per share. It is our plan to continue rewarding our
shareholders with dividends. Finally, the strategic direction of the Bank is to
expand our retail franchise. I am pleased to announce that our expansion will
begin March 1, 1997 with the opening of a new branch location on Union Street in
Schenectady. We also have begun to implement a "sales-oriented" culture
throughout the organization to add valuable customer relationship. This
expansion is considered vital in our efforts to capture market share and provide
growth opportunities to the Company.
As a result of the repurchase of our shares, total assets of the Company
declined slightly for the year with a noticeable change in its composition. The
Bank was extremely successful in growing the loan portfolio due in great part to
our ability to offer competitive rates and quality service. We are committed to
the origination of residential mortgage loans. These loans will be held in our
portfolio, servicing retained, thereby ensuring that our customers receive the
high service levels they deserve. To that end, we originated $29.8 million of
one-to-four family residential mortgages in 1996. This represents an increase of
81.3% in production over the previous year.
The Company reported net earnings of $830,000 or $0.67 per share for 1996.
This decrease from 1995 earnings of $855,000 included a one-time special
assessment of $930,000 paid to recapitalize the Savings Association Insurance
Fund ("SAIF") which was the single most adverse event affecting net income for
the year. While it is frustrating to have our annual earnings clouded by this
assessment, it is clear that insuring the integrity of the deposit system and
substantially reducing our deposit insurance premiums will greatly enhance the
long-term profitability and competitiveness of the Bank. The Company's earnings
would have been $1.4 million for the year absent the one-time SAIF assessment
representing a 62.3% increase over last year's earnings.
It is with great sorrow that I inform you of the passing of George J.
Finster, a member of our Board of Directors. Our Bank benefited greatly from his
dedication, business experience and wise counsel during his 28 years of service.
He will be dearly missed by us all. To meet the continued demands of our Board,
Mr. Richard D. Ammian, Senior Vice President of the Bank, has been appointed to
fill the vacancy on the Board due to the passing of Mr. Finster. We look forward
to Mr. Ammian's involvement and contributions to our Board.
<PAGE>
The Board of Directors and management team is working diligently to set
goals and develop long term strategies to increase profitability within
acceptable risk limitations and to enhance shareholder value. We remain firm in
our pledge to continue to be a community oriented financial institution
providing affordable financial services and products to the greater Capital
District. We at SFS Bancorp, Inc. appreciate and thank you for taking stock in
our future and look forward to a long-lasting and profitable relationship.
Joseph H. Giaquinto
Chairman of the Board, President
and Chief Executive Officer
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
December 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets ..................... $ 164,888 $ 166,529 $ 150,837 $ 146,260 $ 148,433
Cash and cash equivalents ........ 2,896 10,453 6,468 3,481 13,929
Securities available for sale .... 1,990 7,976 7,776 -- --
Investment securities:
Mortgage-backed securities ..... 20,434 24,418 21,991 25,397 10,103
Debt securities ................ 15,746 18,658 16,902 20,842 16,153
FHLB stock ....................... 1,215 1,117 1,123 1,092 1,092
Loans receivable, net ............ 118,455 100,921 93,703 92,601 104,078
Real estate owned ................ 178 200 204 128 134
Deposits ......................... 140,616 139,671 138,299 134,653 137,627
Advance payments by borrowers .... 1,160 1,402 1,270 1,129 1,069
Stockholders' equity ............. 21,671 24,261 10,046 9,642 9,229
<CAPTION>
December 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income ............ $ 11,867 $ 11,523 $ 9,849 $ 9,774 $ 11,264
Total interest expense ........... 6,187 6,236 5,077 5,275 7,046
--------- --------- --------- --------- ---------
Net interest income ............ 5,680 5,287 4,772 4,499 4,218
Provision for loan losses ........ 120 370 120 440 507
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses ....... 5,560 4,917 4,652 4,059 3,711
Noninterest income ............... 403 321 170 599 462
Noninterest expense .............. 5,239 4,027 4,096 4,239 3,809
--------- --------- --------- --------- ---------
Income before taxes .............. 724 1,211 726 419 364
Income tax expense (benefit) ..... (106) 356 215 13 182
--------- --------- --------- --------- ---------
Income before extraordinary item . 830 855 511 406 182
Extraordinary item - tax benefit . -- -- -- -- 178
--------- --------- --------- --------- ---------
Net income ....................... $ 830 $ 855 $ 511 $ 406 $ 360
========= ========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to
average total assets).................................. 0.50% 0.53% 0.34% 0.28% 0.24%
Net interest rate spread................................. 2.95 2.93 3.06 2.96 2.72
Net interest margin...................................... 3.51 3.36 3.26 3.15 2.92
Ratio of noninterest expense to average total assets..... 3.17 2.51 2.74 2.90 2.56
Ratio of net interest income to noninterest expense...... 108.41 131.29 116.50 106.13 110.74
Return on equity (ratio of net income to average
equity)................................................ 3.73 5.07 5.31 4.33 4.04
Liquidity ratio at end of year........................... 22.58 32.45 19.57 12.99 15.14
Efficiency ratio......................................... 86.13 71.81 82.88 83.15 81.39
Asset Quality Ratios:
Non-performing assets to total assets, at end of year.... 0.61 0.62 1.93 1.80 1.43
Allowance for loan losses to non-performing loans,
at year end............................................ 77.07 68.18 31.79 32.02 35.97
Allowance for loan losses to total loans................. 0.54 0.56 0.91 0.86 0.68
Allowance for loan losses to total assets................ 0.39 0.34 0.57 0.55 0.48
Capital Ratios:
Stockholders' equity to total assets at end of year...... 13.14 14.57 6.66 6.59 6.22
Average stockholders' equity to average total assets..... 13.48 10.50 6.43 6.40 5.97
Ratio of average interest-earning assets to average
interest-bearing liabilities........................... 114.72 110.84 105.75 105.09 104.15
Number of full service offices........................... 3 3 3 3 3
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Management's discussion and analysis of the consolidated financial
condition and the results of operations is intended to assist in understanding
the consolidated financial condition and results of operations of the Company.
The information contained in this section should be read in conjunction with the
consolidated financial statements and accompanying notes thereto.
SFS Bancorp, Inc. (the "Parent Company") is the holding company for
Schenectady Federal Savings Bank and its subsidiary (the "Bank"), a federally
chartered stock savings bank. Collectively, these entities are referred to
herein as the "Company." On June 29, 1995, the Bank completed its conversion
from a federal mutual savings and loan association to a federal stock savings
bank. On that date, the Parent Company issued and sold 1,495,000 shares of its
common stock at $10.00 per share in connection with the conversion. Net proceeds
to the Parent Company were $14.2 million after reflecting conversion expenses of
$750,000. The Parent Company used $7.1 million of the net proceeds to acquire
all of the issued and outstanding stock of the Bank.
Business Strategy
The primary goal of management is to improve the Company's profitability
and enhance its net worth while minimizing risk. The Company's profitability is
dependent primarily on its net interest income, which is the difference between
interest earned on its loans and investments and the interest paid on
interest-bearing liabilities. The Company's profitability is also affected by
the generation of noninterest income, which primarily consists of fees and
service charges. Net interest income is determined by (i) the difference between
the yield earned on interest-earning assets and rates paid on interest-bearing
liabilities ("interest rate spread") and (ii) the relative amounts of
interest-earning assets and interest-bearing liabilities. The Company's interest
rate spread is affected by regulatory, economic and competitive factors that
influence interest rates, loan demand and deposit flows. In addition, net income
is affected by the level of noninterest expense and provision for loan losses.
The operations of financial institutions, including the Company, are
significantly affected by prevailing economic conditions, competition and the
monetary and fiscal policies of governmental agencies. Lending activities are
influenced by the demand for the supply of housing, competition among lenders,
the level of interest rates and the availability of funds. Deposit flows and
cost of funds are influenced by prevailing market rates of interest primarily on
competing investments, account maturities and the level of personal income and
savings in the Company's market area.
Management strives to operate as a conservative, well capitalized,
profitable community bank dedicated to financing home ownership and other
consumer needs, and to provide quality service to its customers. The Company
believes it successfully implements this strategy by:
<PAGE>
Emphasizing One-to-Four Family Lending. Historically, the Company has been
predominantly a one-to-four family residential lender. One-to-four family
residential loans constituted 76.5% and 71.1% of total loans at December 31,
1996 and 1995, respectively.
Maintaining Asset Quality. The Company places strong emphasis on achieving
a high degree of asset quality maintained through sound underwriting, constant
monitoring and effective collection techniques. The Company's ratio of
non-performing assets to total assets was 0.6% as of both December 31, 1996 and
1995.
Managing Interest Rate Risk. In order to reduce the impact on the Company's
net interest income due to changes in interest rates, the Company's management
has adopted a strategy that has been designed to maintain the interest rate
sensitivity of its assets and liabilities. The primary elements of this strategy
involve emphasizing the origination of ARM loans and maintaining a short- and
medium-term investment portfolio. The level of adjustable or floating rate loans
included in total loans was 74.9% as of December 31, 1996. Additionally, 24.8%
of the Company's interest-earning assets carried remaining terms of five years
or less.
The Company's management believes that a portion of passbook, transaction
and other non-certificate accounts representing core deposits can have a lower
cost and be more resistant to interest rate changes than certificate accounts.
Accordingly, the Company has used customer service and marketing initiatives to
maintain and expand its core deposits. In addition, the Bank is expected to open
its fourth branch in early 1997 which is expected to increase the level of core
deposits over time. While the Company believes that a portion of these
non-certificate accounts are interest rate sensitive and may flow to other
investments if interest rates continue to rise, the Company believes that the
balance of these accounts represent core deposits. At December 31, 1996, 38.2%
of the Company's total deposits consisted of passbook, transaction and other
non-certificate accounts.
Asset/Liability Management
The principal financial objective of the Company's interest rate risk
management is to achieve long-term profitability while limiting its exposure to
fluctuating interest rates. The Company has sought to reduce exposure of its
earnings to changes in market interest rates by managing the mismatch between
assets and liability maturities and interest rates. The principal element in
achieving this objective is to increase the interest-rate sensitivity of the
Company's assets by holding loans with interest rates subject to periodic
adjustment to market conditions. In addition, the Company maintains an
investment portfolio which primarily consists of securities that mature within
five years. The Company relies on retail deposits as its primary source of
funds. Management believes retail deposits, compared to brokered deposits, limit
the effects of interest rate fluctuation because they generally represent a more
stable source of funds. As part of its interest rate risk strategy, the Company
promotes transaction accounts and certificates of deposit with terms up to five
years.
<PAGE>
The following table is provided by the OTS and sets forth as of December
31, 1996 the Company's interest rate risk as measured by changes in its net
portfolio value ("NPV") (i.e. the present value of the expected cash flow from
assets, liabilities and off-balance sheet contracts) for instantaneous and
sustained parallel shifts in the yield curve, in 100 basis point increments, up
and down 400 basis points.
<TABLE>
<CAPTION>
Change in
Interest Rate $ Amount $ Change % Change
------------- -------- -------- --------
(Basis Points) (Dollars in Thousands)
<S> <C> <C> <C>
+400 $15,153 $(7,053) (32)%
+300 17,431 (4,775) (22)
+200 19,507 (2,700) (12)
+100 21,166 (1,041) (5)
0 22,207 -- --
-100 22,609 402 2
-200 22,893 687 3
-300 23,385 1,178 5
-400 24,174 1,967 9
</TABLE>
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to reprice, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of asset and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as ARM loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, expected rates of
prepayment on loans and early withdrawals from certificates could likely deviate
significantly from those assumed in calculating the table. It is also possible
as a result of an interest rate increase, the increased mortgage payments
required of ARM borrowers could result in an increase in delinquencies and
defaults. Accordingly, the data presented in the table above should not be
relied upon as indicative of actual results in the event of changes in interest
rates. Furthermore, the NPV presented in the table is not intended to represent
the fair market value of the Company.
Financial Condition
Total assets decreased $1.6 million (1.0%) to $164.9 million at December
31, 1996 from $166.5 million at December 31, 1995. This decrease consisted
primarily of an increase in loans receivable, net of $17.5 million (17.4%) to
$118.5 million at December 31, 1996 offset by decreases in federal funds sold of
$7.5 million (82.4%) to $1.6 million, investment securities of $6.9 million
(16.0%) to $36.2 million, and securities available for sale of $6.0 million
(75.1%) to $2.0 million at December 31, 1996.
At December 31, 1996, total liabilities were $143.2 million representing an
increase of $949,000 (0.7%) from December 31, 1995. The increase was entirely
attributable to increases in total deposits to $140.6 million as of December 31,
1996 from $139.7 million a year earlier.
<PAGE>
Stockholders' equity decreased $2.6 million to $21.7 million at December
31, 1996 as compared to $24.3 million at December 31, 1995 primarily due to the
Company's stock repurchase program. As a result of the repurchase program, the
Company purchased $3.4 million of treasury stock during 1996. Retained earnings
increased by $674,000 as a result of net income of the Company for the year
ended December 31, 1996 offset by the declaration and payment of dividends. Net
unrealized gain on securities available for sale decreased $42,000 to $46,000 at
December 31, 1996.
Nonperforming assets totaled $1.0 million at December 31, 1996 and 1995,
respectively. The ratio of nonperforming loans to loans receivable, net improved
to .70% at December 31, 1996, compared with .83% at December 31, 1995. The ratio
of nonperforming assets to total assets was .61% at December 31, 1996 compared
with .62% at December 31, 1995.
Analysis of Net Interest Income
Net interest income represents the difference between interest earned on
interest-earning assets and interest paid on interest-bearing liabilities. Net
interest income depends on the volumes of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them.
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
Nonaccruing loans have been included in the table as loans carrying a zero
yield.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
1996 1995
------------------------------------------------------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable, net(1)................... $ 111,524 $ 8,758 7.85% $ 97,120 $ 7,800 8.03%
Mortgage-backed securities................. 22,403 1,418 6.33 23,199 1,464 6.31
Securities available for sale.............. 5,169 307 5.94 7,911 492 6.22
Investment securities...................... 16,698 1,059 6.34 17,227 1,041 6.04
Other interest-earning assets
including cash equivalents............... 4,698 247 5.26 10,948 640 5.85
FHLB stock................................. 1,204 78 6.48 1,118 86 7.69
----------- ---------- ---- -------- ------- ----
Total interest-earning assets.......... $ 161,696 11,867 7.34 $157,523 11,523 7.32
=========== ---------- ======== -------
Interest-Bearing Liabilities:
Savings accounts........................... 38,857 1,173 3.02 44,054 1,325 3.01
Money market accounts...................... 5,195 161 3.10 4,809 129 2.68
Demand and NOW accounts(2)................. 10,102 148 1.47 9,090 133 1.46
Certificate accounts....................... 85,642 4,680 5.46 82,893 4,620 5.57
Escrow..................................... 1,155 25 2.16 1,266 29 2.29
----------- ---------- ---- -------- ------- ----
Total interest-bearing liabilities...... $ 140,951 6,187 4.39 $142,112 6,236 4.39
=========== ---------- ======== -------
Net interest income......................... $ 5,680 $ 5,287
========== =======
Net interest rate spread.................... 2.95% 2.93%
==== ====
Net earning assets.......................... $ 20,745 $ 15,411
============ ========
Net yield on average interest-
earning assets............................ 3.51% 3.36%
==== ====
Average interest-earning assets to
average interest-bearing liabilities...... 1.15 1.11
==== ====
<PAGE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1994
-------------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
------- ---- ----
<S> <C> <C> <C>
Interest-Earning Assets:
Loans receivable, net(1)................... $ 91,306 $6,757 7.40%
Mortgage-backed securities................. 23,500 1,451 6.17
Securities available for sale.............. 7,599 352 4.63
Investment securities...................... 16,627 921 5.54
Other interest-earning assets
including cash equivalents............... 6,385 283 4.43
FHLB stock................................. 1,119 85 7.60
---------- ------ ----
Total interest-earning assets.......... $146,536 9,849 6.72
======== ------
Interest-Bearing Liabilities:
Savings accounts........................... 56,685 1,706 3.01
Money market accounts...................... 6,224 155 2.49
Demand and NOW accounts(2)................. 9,163 137 1.50
Certificate accounts....................... 65,425 3,054 4.67
Escrow..................................... 1,070 25 2.34
--------- ------ ----
Total interest-bearing liabilities...... $138,567 5,077 3.66
======== ------ -----
Net interest income......................... $4,772
======
Net interest rate spread.................... 3.06%
====
Net earning assets.......................... $ 7,969
========
Net yield on average interest-
earning assets............................ 3.26%
====
Average interest-earning assets to
average interest-bearing liabilities...... 1.06
====
(1) Calculated net of deferred loan fees.
(2) Includes noninterest-bearing demand accounts.
</TABLE>
<PAGE>
The following table sets forth the weighted average yields on the Company's
interest-earning assets, the weighted average interest rates paid on
interest-bearing liabilities and the interest rate spread between the weighted
average yields and rates at December 31, 1996 and 1995. Non-accruing loans have
been included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
At At
December 31, December 31,
1996 1995
------ -----
<S> <C> <C>
Weighted average yield on:
Loans receivable ....................................... 7.94% 8.11%
Mortgage-backed securities ............................. 6.47 6.46
Securities available for sale .......................... 6.26 6.23
Investment securities .................................. 6.36 6.27
Other interest-earning assets including cash equivalents 5.81 5.88
FHLB Stock ............................................. 6.61 6.85
Combined weighted average yield on
interest-earning assets ............................ 7.55 7.43
---- ----
Weighted average rate paid on:
Savings accounts ....................................... 3.00 3.00
Money market accounts .................................. 3.12 2.76
NOW accounts ........................................... 1.75 1.75
Certificate accounts ................................... 5.39 5.70
Escrow ................................................. 2.00 2.00
Combined weighted average rate paid
on interest-bearing liabilities .................... 4.37 4.56
---- ----
Spread .................................................. 3.18% 2.87%
==== ====
</TABLE>
<PAGE>
Rate/Volume Analysis
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase (decrease)
related to outstanding balances and that due to the changes in interest rates.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated have been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
------------------------------------ ----------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
--------------------- --------------------
Total Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net...................... $ 1,127 $ (169) $ 958 $ 446 $ 597 $1,043
Mortgage-backed securities................. (50) 4 (46) (19) 32 13
Securities available for sale.............. (165) (20) (185) 15 125 140
Investment securities...................... (29) 47 18 34 86 120
Other interest-earning assets.............. (334) (59) (393) 247 110 357
FHLB stock................................. 8 (16) (8) --- 1 1
------- ------- ------ ----- ------- ------
Total interest-earning assets............ $ 557 $ (213) $ 344 $ 723 $ 951 $1,674
======= ======= ====== ===== ======= ======
Interest-bearing liabilities:
Savings accounts........................... $ (157) $ 5 $ (152) $(380) $ (1) $ (381)
Money market accounts...................... 9 23 32 (37) 11 (26)
Demand and NOW accounts.................... 15 --- 15 (1) (3) (4)
Certificate accounts....................... 146 (86) 60 907 659 1,566
Escrow..................................... (2) (2) (4) 4 --- 4
Borrowings................................. --- --- --- --- --- ---
------- ------- ------ ----- ------- ------
Total interest-bearing liabilities....... $ 11 $ (60) $ (49) $ 493 $ 666 $1,159
======= ======= ====== ===== ======= ======
Net interest income......................... $ 393 $ 515
====== ======
</TABLE>
<PAGE>
Results of Operations
General. The Company's results of operations depend primarily on net
interest income, noninterest expense, and to a lesser extent, income taxes and
noninterest income. Net interest income is a function of the volume of
interest-earning assets and interest-bearing liabilities and the interest rates
earned or paid on such assets and liabilities, respectively. Noninterest expense
consists primarily of general and administrative expenses, which this year also
included a one-time special assessment to recapitalize the Savings Association
Insurance Fund (the "SAIF"). The Company's noninterest income consists primarily
of fees charged on deposit accounts, and other loan charges which help to offset
the cost associated with establishing and maintaining these deposit and loan
accounts.
Comparison of Operating Results for Years Ended December 31, 1996 and 1995
Net Income. The Company had net income of $830,000 for the year ended
December 31, 1996, as compared to $855,000 for the year ended December 31, 1995.
As discussed below, the decrease in net income of $25,000 or 2.9%, was due to an
increase in noninterest expense of $1.2 million offset by an increase in net
interest income of $393,000, an increase in noninterest income of $82,000, a
decrease in provision for loan losses of $250,000 and a decrease in income tax
expense of $462,000.
Interest Income. Interest income increased by $344,000, or 3.0% from $11.5
million in 1995 to $11.9 million in 1996. This increase was due to the increase
in the amount of average interest-earning assets and the yield earned. Average
interest-earning assets increased from $157.5 million in 1995 to $161.7 million
in 1996 resulting from the Company's ability to utilize for a full year the
proceeds received from the initial public offering. The yield on the Company's
interest-earning assets increased from 7.32% for the year ended December 31,
1995 to 7.34% for the year ended December 31, 1996 as a result of the general
increase in the market rates of interest.
Interest Expense. Interest expense decreased by $49,000, or 0.8% to $6.2
million for the year ended December 31, 1996. The decrease was a result of a
$1.2 million (0.8%) decrease in average interest-bearing liabilities to $141.0
million. The average rate paid for the years ended December 31, 1996 and 1995
was 4.39%. The mix within the deposit structure changed as the average balance
of certificate and demand and NOW account balances grew $2.8 million (3.3%) and
$1.0 million (11.1%), respectively while savings accounts declined $5.2 million
(11.8%). The average rate paid was a reflection of the general interest rate and
competitive environment that prevailed during 1996 and 1995.
Net Interest Income. Net interest income increased $393,000, or 7.4% from
$5.3 million in 1995 to $5.7 million in 1996 due to a $5.3 million increase in
average net interest-earning assets in 1996 as compared to 1995 and a 15 basis
point increase in margin. The increase in net interest-earning assets was
primarily a result of the proceeds received in the initial public offering of
the Company during 1995.
<PAGE>
Provision For Loan Losses. The decrease of $250,000 or 67.6% in the
provision for loan losses from 1995 to 1996 reflects primarily management's
evaluation of the loan portfolio. When determining the level of provision for
loan losses, management also considers charge off history, as well as national
and regional economic indicators such as unemployment data, single family home
delinquency data reported separately by the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"),
local single family construction permits and local economic growth rates, and
the then current regulatory and the general economic environment. Net
charge-offs decreased from $659,000 in 1995 to $50,000 in 1996 due to the
Company's resolution of certain non-performing loans in 1995. The Company will
continue to monitor and modify its allowance for loan losses as conditions
dictate. Although the Company maintains its allowance for loan losses at a level
it considers adequate to provide for potential losses, there can be no assurance
that such losses will not exceed the estimated amounts or that additional
provisions for loan losses will not be required in future periods.
Noninterest Income. Total noninterest income increased by $82,000, or 25.5%
from $321,000 in 1995 to $403,000 in 1996. Other loan charges increased $35,000
or 31.8% as a result of increased originations and other noninterest income
increased $46,000 or 97.9% as a result of increased other real estate income,
income from the Bank's service corporation and gains taken on the sale of
certain fixed assets.
Noninterest Expense. Noninterest expense increased by $1.2 million, or
30.1% from $4.0 million in 1995 to $5.2 million in 1996. The increase is
primarily attributable to the special one-time SAIF assessment which totaled
$930,000. Compensation and benefits increased $262,000 (11.6%) as a result of
annual merit increases and the establishment of the Retention and Recognition
Plan ("RRP") partially offset by reduced pension and retirement benefits
expense. Mortgage servicing fees decreased $22,000 (35.5%) between 1995 and 1996
as serviced loan balances continued to decline. Professional service fees
increased $53,000 (28.0%) during 1996 as compared to 1995 as a result of
increased cost associated with being a public company. Advertising and business
promotion, office occupancy and equipment expenses, other insurance premiums,
data processing fees, and real estate owned writedowns remained relatively
stable during 1996 as compared with 1995. The ratio of noninterest expense to
average assets increased from 2.51% for 1995 to 3.17% for 1996.
Income Tax Expense. Income tax expense decreased from $356,000 in 1995 to a
benefit of $106,000 in 1996. The decrease is the result of decreased income
before taxes during 1996 and the reduction of the valuation allowance for
deferred tax assets during 1996. This reduction was primarily the result of the
expected realization of certain deferred items which were previously considered
to be uncertain.
Comparison of Operating Results for the Years Ended December 31, 1995 and 1994
Net Income. The Company had net income of $855,000 for the year ended
December 31, 1995, as compared to $511,000 for the year ended December 31, 1994.
As discussed below, the increase in net income of $344,000 or 67.3%, was due to
an increase in net interest income of $515,000, an increase in noninterest
income of $151,000 and a decrease in noninterest expense of $69,000, which more
than offset an increase in the provision for loan losses of $250,000 and an
increase in income tax expense of $141,000.
<PAGE>
Interest Income. Interest income increased by $1.6 million, or 16.2% from
$9.9 million in 1994 to $11.5 million in 1995. This increase was due to the
increase in the amount of interest-earning assets and the yield earned. The
yield on the Company's interest-earning assets increased from 6.72% for the year
ended December 31, 1994 to 7.32% for the year ended December 31, 1995 as a
result of the general increase in market rates of interest.
Interest Expense. Interest expense increased by $1.1 million, or 21.6% from
$5.1 million in 1994 to $6.2 million in 1995. The increase was largely a result
of a $3.5 million (2.5%) increase in average interest-bearing liabilities to
$142.1 million combined with a 73 basis point (19.9%) increase in average rates
paid to 4.39%. The mix within the deposit structure changed as the average
balance of certificate account balances grew $17.5 million (26.8%) while savings
and money market accounts declined $12.6 million (22.2%) and $1.4 million
(22.6%), respectively. The increase in average rates paid was a reflection of
the general interest rate and competitive environment that prevailed during
1995, compared with 1994.
Net Interest Income. Net interest income increased $515,000, or 10.8% from
$4.8 million in 1994 to $5.3 million in 1995 due to a $7.4 million increase in
net interest-earning assets in 1995 as compared to 1994 and a 10 basis point
increase in margin. The increase in net interest-earning assets was primarily as
a result of an increase in the average balance of stockholders' equity which
increased primarily as a result of the net proceeds received in the initial
public offering of the Company.
Provision for Loan Losses. The increase of $250,000 or 208.3% in the
provision for loan losses from 1994 to 1995 reflects primarily a significant
increase in the amount of loan charge-offs from $101,000 in 1994 to $718,000 in
1995 and management's evaluation of the loan portfolio as well as its evaluation
of national and regional economic indicators such as national and regional
unemployment data, single family loan delinquency data as reported separately by
the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"), local single family construction permits and
local economic growth rates and the then current regulatory and general economic
environment. Charge-offs increased due to the Company's resolution of certain
non-performing loans. The Company will continue to monitor and modify its
allowance for loan losses as conditions dictate. Although the Company maintains
its allowance for loan losses at a level it considers adequate to provide for
potential losses, there can be no assurance that such losses will not exceed the
estimated amounts or that additional provision for loan losses will not be
required in future periods.
Noninterest Income. Total noninterest income increased by $151,000, or
88.8%, from $170,000 in 1994 to $321,000 in 1995. Of the $151,000 increase,
$109,000 was related to losses on the sale of securities taken in 1994. Other
loan charges increased $27,000 or 32.5% as a result of increased home equity
credit line modification fees and other noninterest income increased $13,000 or
38.2% as a result of increased other real estate income.
Noninterest Expense. Noninterest expense decreased by $69,000, or 1.7% from
$4.1 million in 1994 to $4.0 million in 1995. Compensation and benefits
increased $57,000 (2.6%) as a result of annual merit increases and the
establishment of the Employee Stock Ownership Plan ("ESOP") partially offset by
reduced pension and retirement benefits expense. Advertising and business
promotion decreased $20,000 (15.9%) reflecting a reduced level of activity.
<PAGE>
Mortgage servicing fees decreased $21,000 (25.3%) between 1994 and 1995 as
serviced loan balances continued to decline. Data processing fees decreased
$12,000 (7.1%) as a result of a change in the method of recording data
processing fees. Professional service fees increased $66,000 (53.7%) during 1995
as compared with 1994 as a result of increased cost associated with being a
public company. Real estate owned writedown declined $111,000 (100.0%) as no
writedowns were taken in 1995. Office occupancy and equipment expenses, federal
deposit insurance and other insurance premiums, and other expense remained
relatively stable during 1995 as compared with 1994. The ratio of noninterest
expense to average assets decreased from 2.74% for 1994 to 2.51% for 1995.
Income Tax Expense. Income tax expense increased from $215,000 in 1994 to
$356,000 in 1995. The increase is the result of increased income before taxes
during 1995 and the utilization of net operating loss carryforwards in 1994. The
effective tax rate for the year ended December 31, 1995 was 29.4% compared with
29.6% for the prior year.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, proceeds from
principal and interest payment on loans, the maturity of and interest income on
investment securities, proceeds from the sale of securities available for sale
and advances from the FHLB of New York. While maturities and scheduled
amortization of loans and securities are a predictable source of funds, deposit
flows, mortgage prepayments and loan sales are greatly influenced by general
interest rates, economic conditions and competition.
The Company must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
to satisfy financial commitments and to take advantage of investment
opportunities. The Company generally maintains sufficient cash and overnight
deposits to meet short-term liquidity needs. At December 31, 1996, cash
(including overnight deposits) totaled $2.9 million, or 1.8% of total assets. In
addition, the Company maintains a credit facility with the FHLB of New York,
which provides for immediately available advances. As of December 31, 1996,
there were no advances under this credit facility. Depending on market
conditions and the pricing of deposit products and FHLB borrowings, the Company
may continue to rely on FHLB borrowings for its liquidity needs.
The Company is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which may be varied by the OTS
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The required minimum liquidity ratio is
currently 5.0% and the short-term liquidity ratio is 1.0%. The Company's average
daily liquidity ratio for the year ended December 31, 1996 was 26.1%, and its
short-term liquidity for the same period was 5.7%.
The primary investing activities of the Company are the origination and
purchase of mortgage loans and the purchase of securities. During the years
ended December 31, 1996, 1995 and 1994, the Company's mortgage loan originations
and purchases totaled $31.4 million, $23.6 million, and $21.8 million,
respectively. The Company purchased securities available for sale of $6.9
million for the year ended December 31, 1994. The Company did not purchase any
securities available for sale during 1996 and 1995. The Company purchased
investment securities during the years ended December 31, 1996, 1995 and 1994 of
$6.0 million, $10.0 million and $5.9 million, respectively.
<PAGE>
The primary financing activity of the Company is the attraction of deposits
and the issuance and subsequent repurchase of the Company's shares. During the
years ended December 31, 1996, 1995, and 1994, the Company experienced a net
increase in deposits of $945,000, $1.4 million, and $3.6 million, respectively.
During 1995 the Company received $13.0 million net proceeds from the sale of
common stock during its initial public offering. During the year ended December
31, 1996, the Company repurchased 269,750 shares of which 53,222 shares were
used to fund the RRP. The average price of treasury shares purchased was $12.68
totaling $2.8 million. The average price paid of $12.68 was approximately 74.4%
of the Company's book value per share of $17.05 at December 31, 1996. Management
believes that the repurchase of shares at less than book value is an appropriate
utilization of excess capital. The Office of Thrift Supervision (OTS) restricts
the number of shares which may be repurchased during the three year period
following conversion. Generally, only 5% of shares outstanding may be
repurchased annually during the first three years following conversion. However,
the OTS has allowed additional share repurchases of 5% annually based on
extenuating facts and circumstances.
At December 31, 1996, the Bank's capital exceeded each of the capital
requirements of the OTS. At December 31, 1996, the Bank's tangible and core
capital levels were both $17.8 million (10.77% of total adjusted assets) and its
risk-based capital level was $17.1 million (20.92% of total risk-weighted
assets). The current minimum regulatory capital ratio requirements are 1.5% for
tangible capital, 3.0% for core capital and 8.0% for risk-weighted capital.
The Company anticipates that it will have sufficient funds available to
meet its current commitments. At December 31, 1996, the Company had commitments
to originate loans of $2.2 million as well as undrawn commitments of $10.4
million on home equity and other lines of credit. Certificates of deposits which
are scheduled to mature in one year or less at December 31, 1996 totaled $59.9
million. Management believes that a significant portion of these deposits will
remain with the Company.
Impact of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles ("GAAP"), which generally requires the measurement of financial
position and operating results in terms of historical dollars, without
considering the change in the relative purchasing power of money over time due
to inflation. The primary impact of inflation is reflected in the increased cost
of the Company's operations. Unlike most industrial companies, virtually all the
assets and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates do
not necessarily move in the same direction or to the same extent as the prices
of goods and services.
Impact of New Accounting Standards
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 122, "Accounting for Mortgage Servicing
Rights" (SFAS No. 122), which amends SFAS No. 65, "Accounting for Certain
Mortgage Banking Activities." SFAS No. 122 requires that entities recognize as
separate assets, the rights to service mortgage loans for others, regardless of
<PAGE>
how those servicing rights are acquired. Additionally, SFAS No. 122 requires
that the capitalized mortgage servicing rights be assessed for impairment based
on the fair value of those rights, and that impairment, if any, be recognized
through a valuation allowance. Since there have been no mortgage loans sold on a
servicing retained basis in 1996, the adoption of SFAS No. 122 has not had an
effect on the Company's consolidated financial position and results of
operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which establishes a fair value based method of accounting for
employee stock options or similar equity instruments such as the Company's Stock
Option Plan. Under SFAS No. 123, entities can recognize stock-based compensation
expense in the basic financial statements using either (i) the intrinsic value
based approach set forth in Accounting Principles Board ("APB") Opinion No. 25
or (ii) the fair value based method introduced in SFAS No. 123. Entities
electing to remain with the accounting in APB Opinion 25, must make pro forma
disclosures of net income and earnings per share, s if the fair value based
method of accounting defined in SFAS No. 123 had been applied. Under APB Opinion
No. 25, compensation expense is determined based upon the option's intrinsic
value, or the excess (if any) of the market price of the underlying stock at the
measurement date over the amount the employee is required to pay. Under the fair
value based method introduced by SFAS No. 123, compensation expense is based on
the option's estimated fair value at the grant date and is generally recognized
over the vesting period. The Company plans to measure compensation costs using
APB Opinion No. 25; therefore, the adoption of SFAS No. 123 will have no effect
on the Company's financial condition or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities, such as the sales of loans
with full or partial recourse. SFAS No. 125 applies an approach that focuses on
financial and servicing assets it controls and the liabilities it has incurred,
derecognized financial assets when control has been surrendered, and
derecognized liabilities when extinguished. SFAS No. 125 is effective for
transfers and servicing of financial assets and extinguishment of liabilities
occurring after December 31, 1996, and is to be applied prospectively. The
Company does not expect the impact of adopting SFAS No. 125 to be material to
its consolidated financial statements.
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Consolidated Financial Statements
As of December 31, 1996 and 1995
and for the years in the three year period
ended December 31, 1996
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
SFS Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of SFS Bancorp,
Inc. and subsidiary (the Company) as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SFS Bancorp, Inc.
and subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
As discussed in note 1 and note 6 to the consolidated financial statements, as
of January 1, 1995, the Company adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No. 114
"Accounting by Creditors For Impairment of a Loan," and Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors For Impairment of a Loan
- - Income Recognition and Disclosures," which prescribe recognition criteria for
loan impairment and measurement methods for certain impaired loans and loans
whose terms are modified in a troubled debt restructuring subsequent to the
adoption of these statements.
Albany, New York /s/KPMG Peat Marwick LLP
January 24, 1997 ------------------------
KPMG Peat Marwick LLP
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1996 and 1995
Assets 1996 1995
------ ---- ----
(in thousands, except share data)
<S> <C> <C>
Cash and due from banks $ 1,296 1,353
Federal funds sold 1,600 9,100
------- --------
Total cash and cash equivalents 2,896 10,453
Securities available for sale, at fair value 1,990 7,976
Investment securities:
Debt securities (approximate fair value
of $15,642 and $18,712 at December 31,
1996 and 1995, respectively) 15,746 18,658
Mortgage-backed securities (approximate fair value
of $20,322 and $24,645 at
December 31, 1996 and 1995, respectively) 20,434 24,418
Investment required by law, stock in Federal Home Loan
Bank of New York, at cost 1,215 1,117
Loans receivable, net 118,455 100,921
Accrued interest receivable 1,137 1,161
Premises and equipment, net 1,921 1,414
Real estate owned 178 200
Prepaid expenses and other assets 916 211
------- --------
Total assets $164,888 166,529
======= ========
Liabilities and Stockholders' Equity
Liabilities:
Due to depositors:
Demand and NOW deposit accounts 10,496 9,990
Savings accounts 43,226 44,982
Time deposit accounts 86,894 84,699
------- --------
Total deposits 140,616 139,671
------- --------
Advance payments by borrowers for property taxes and insurance 1,160 1,402
Accrued expenses and other liabilities 1,441 1,195
------- --------
Total liabilities 143,217 142,268
------- --------
(Continued)
Commitments and contingent liabilities
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets, Continued
December 31, 1996 and 1995
1996 1995
---- ----
(in thousands, except share data)
<S> <C> <C>
Stockholders' Equity:
Preferred stock, $.01 par value. Authorized 500,000 shares;
none issued ............................................ $ -- _
Common stock, $.01 par value. Authorized 2,500,000
shares; 1,495,000 shares issued; 1,270,997 and
1,495,000 shares outstanding at December 31, 1996
and 1995, respectively ................................ 15 15
Additional paid-in capital ................................. 14,260 14,221
Retained earnings, substantially restricted ................ 11,687 11,013
Treasury stock, at cost (224,003 shares at
December 31, 1996, none at December 31, 1995)
Common stock acquired:
Employee stock ownership plan "ESOP" (95,680
shares and 107,640 shares at December 31, 1996
and 1995, respectively .............................. (957) (1,076)
Recognition and retention plan "RRP" (42,757
shares at December 31, 1996; none
at December 31, 1995) ................................ (540) -
Net unrealized gain on securities available for sale ....... 46 88
--------- ---------
Total stockholders' equity ........................ 21,671 24,261
--------- ---------
Total liabilities and stockholders' equity ........ $ 164,888 166,529
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
For the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
(in thousands, except for per share amounts)
<S> <C> <C> <C>
Interest income:
Real estate loans .......................................... $ 8,714 7,762 6,674
Other loans ................................................ 44 38 83
Mortgage-backed securities ................................. 1,418 1,464 1,451
Debt securities ............................................ 1,059 1,041 921
Fed funds sold and cash deposits ........................... 247 640 283
Securities available for sale .............................. 307 492 352
Stock in Federal Home Loan Bank ............................ 78 86 85
-------- -------- --------
Total interest income ............................. 11,867 11,523 9,849
Interest expense:
Deposits ................................................... 6,187 6,236 5,077
-------- -------- --------
Net interest income ............................... 5,680 5,287 4,772
Provision for loan losses ....................................... 120 370 120
-------- -------- --------
Net interest income after provision for loan losses 5,560 4,917 4,652
-------- -------- --------
Noninterest income:
Net gain (loss) on security transactions and
writedown of common stock .............................. 8 -- (109)
Service fee income ......................................... 19 21 19
Other loan charges ......................................... 145 110 83
Bank fees and service charges .............................. 138 143 143
Other income ............................................... 93 47 34
-------- -------- --------
Total noninterest income .......................... 403 321 170
-------- -------- --------
<PAGE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income (continued)
For the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
(in thousands, except for per share amounts)
<S> <C> <C> <C>
Noninterest expense:
Compensation and benefits .................................. 2,512 2,250 2,193
Advertising and business promotion ......................... 108 106 126
Office occupancy and equipment expenses .................... 522 523 529
Federal deposit insurance premiums ......................... 322 323 311
Federal deposit insurance special SAIF assessment .......... 930 -- --
Other insurance premiums ................................... 97 89 103
Mortgage servicing fees .................................... 40 62 83
Data processing fees ....................................... 166 157 169
Real estate owned writedown ................................ -- -- 111
Professional service fees .................................. 242 189 123
Other expense .............................................. 300 328 348
-------- -------- --------
Total noninterest expense ......................... 5,239 4,027 4,096
-------- -------- --------
Income before taxes ............................... 724 1,211 726
Income tax expense (benefit) .................................... (106) 356 215
-------- -------- --------
Net income ...................................................... $ 830 855 511
======== ======== ========
Net income per share ............................................ $ .67 .41 N/A
======== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994
Common
Additional stock
Shares Common paid-in Retained acquired
Issued stock capital earnings by ESOP
------ ----- ------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 ................................ -- $ -- -- 9,647 --
Net income .................................................. -- -- -- 511 --
Adjustment of securities available for sale to fair value ... -- -- -- -- --
Change in valuation allowance on marketable equity securities -- -- -- -- --
Balance at December 31, 1994 ................................ -- -- -- 10,158 --
Net income .................................................. -- -- -- 855 --
Adjustment of securities available for sale to fair value ... -- -- -- -- --
Common stock issued ......................................... 1,495,000 15 14,185 -- --
Acquisition of common stock by ESOP (119,600 shares) ........ -- -- -- -- (1,196)
Allocation of ESOP stock (11,960 shares) .................... -- -- 36 -- 120
Balance at December 31, 1995 ................................ 1,495,000 15 14,221 11,013 (1,076)
Net income .................................................. -- -- -- 830 --
Adjustment of securities available for sale to fair value ... -- -- -- -- --
Purchase of treasury stock (269,750 shares) ................. -- -- -- -- --
Acquisition of common stock by RRP .......................... -- -- -- -- --
Amortization of award of RRP stock .......................... -- -- -- -- --
Cash dividends declared ..................................... -- -- -- (156) --
Allocation of ESOP stock (11,960 shares) .................... -- -- 39 -- 119
Balance at December 31, 1996 ................................ 1,495,000 $ 15 14,260 11,687 (957)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994
(continued)
Net unrealized Valuation
Common gain (loss) on allowance
stock securities on marketable
acquired available Treasury equity
by RRP for sale stock securities Total
------ -------- ----- ---------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 ................................ -- -- -- (5) 9,642
Net income .................................................. -- -- -- -- 511
Adjustment of securities available for sale to fair value ... -- (112) -- -- (112)
Change in valuation allowance on marketable equity securities -- -- -- 5 5
------ ----- ------ ------- -------
Balance at December 31, 1994 ................................ -- (112) -- -- 10,046
Net income .................................................. -- -- -- -- 855
Adjustment of securities available for sale to fair value ... -- 200 -- -- 200
Common stock issued ......................................... -- -- -- -- 14,200
Acquisition of common stock by ESOP (119,600 shares) ........ -- -- -- -- (1,196)
Allocation of ESOP stock (11,960 shares) .................... -- -- -- -- 156
------ ----- ------ ------- -------
Balance at December 31, 1995 ................................ -- 88 -- -- 24,261
Net income .................................................. -- -- -- -- 830
Adjustment of securities available for sale to fair value ... -- (42) -- -- (42)
Purchase of treasury stock (269,750 shares) ................. -- -- (3,418) -- (3,418)
Acquisition of common stock by RRP .......................... (578) -- 578 -- --
Amortization of award of RRP stock .......................... 38 -- -- -- 38
Cash dividends declared ..................................... -- -- -- -- (156)
Allocation of ESOP stock (11,960 shares) .................... -- -- -- -- 158
------ ----- ------ ------- -------
Balance at December 31, 1996 ................................ (540) 46 (2,840) -- 21,671
======= ===== ====== ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Reconciliation of net income to net cash provided by operating
activities:
Net income .................................................. $ 830 855 511
-------- -------- --------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .......................... 140 143 142
Net (accretion) amortization on investment securities .. (12) (30) 5
Amortization of award of ESOP .......................... 158 156 --
Amortization of award of RRP ........................... 38 -- --
Provision for possible loan losses ..................... 120 370 120
Recovery credited to the allowance ..................... -- (7) --
Other real estate writedown ............................ 7 -- 112
Loss on sale of other real estate ...................... -- -- 12
(Gain) loss on sale of available for sale securities ... (8) -- 109
Proceeds from sale of mortgage loans held for sale ..... -- -- 279
Net mortgage loans made to customers and held for sale . -- -- (281)
Net loss on sale of mortgage loans held for sale ....... -- -- 2
(Increase) decrease in accrued interest receivable ..... 24 (109) (71)
(Increase) decrease in prepaid expenses and other assets
(705) (60) 36
(Decrease) increase in accrued expenses and other
liabilities .......................................... 246 (27) 386
-------- -------- --------
Total adjustments .................................. 8 436 851
-------- -------- --------
Net cash provided by operating activities .......... 838 1,291 1,362
Cash flows from investing activities:
Proceeds from maturity/paydown of investment securities ......... 8,924 8,269 4,847
Purchases of investment securities .............................. (6,000) (9,995) (5,907)
Purchase of securities available for sale ....................... -- -- (6,885)
Redemption (purchase) of FHLB Stock ............................. (98) 6 (31)
Principal collected on mortgaged-backed securities .............. 3,984 2,954 3,406
Net (increase) decrease in loan made to customers ............... (10,859) (2,710) 1,768
Capital expenditures, net of disposals .......................... (647) (90) (58)
Purchase of loans receivable .................................... (6,973) (5,245) (3,305)
Purchases of mortgage-backed securities ......................... -- (5,381) --
Proceeds from the sale of available for sale securities ......... 5,952 -- 3,888
Proceeds from the sale of other real estate ..................... 193 378 115
-------- -------- --------
Net cash used by investing activities .............. (5,524) (11,814) (2,162)
-------- -------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
For the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits ..................................... $ 945 1,372 3,646
Net increase (decrease) in advance payments by borrowers for
property taxes and insurance ............................... (242) 132 141
Purchase of treasury stock ................................... (3,418) -- --
Cash dividends paid .......................................... (156) -- --
Net proceeds from common stock issued in stock conversion .... -- 14,200 --
Acquisition of common stock by ESOP .......................... -- (1,196) --
-------- -------- --------
Net cash provided (used) in financing activities (2,871) 14,508 3,787
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .............. (7,557) 3,985 2,987
Cash and cash equivalents at beginning of year .................... 10,453 6,468 3,481
-------- -------- --------
Cash and cash equivalents at end of year .......................... $ 2,896 10,453 6,468
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year
for:
Interest paid ............................................ $ 6,187 6,264 5,119
======== ======== ========
Taxes paid ............................................... $ 509 520 20
======== ======== ========
Supplemental schedule of noncash investing activities:
Transfer of loans to other real estate owned ................. $ 178 367 315
======== ======== ========
Investment securities reclassified as available for sale upon the
adoption of Statement of Financial Accounting Standards No. 115 $ -- -- 5,000
======== ======== ========
Adjustment of securities available for sale to fair value ......... $ (42) 200 (112)
======== ======== ========
Decrease in excess of cost over market value of marketable equity
securities .................................................... $ -- -- --
======== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
SFS BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies
SFS Bancorp, Inc. (the Holding Company) was incorporated under Delaware
law in March, 1995 as a holding company to purchase 100% of the common
stock of Schenectady Federal Savings Bank and subsidiary (the Bank). The
Bank converted from a mutual form to a stock form institution, and the
Holding Company completed its initial public offering on June 29, 1995,
at which time the Holding Company purchased all of the outstanding stock
of the Bank. To date, the principal operations of SFS Bancorp, Inc. and
subsidiary (the Company) have been those of the Bank.
The following is a description of the more significant policies which the
Company follows in preparing and presenting its consolidated financial
statements:
(a) Basis of Presentation
The accompanying consolidated financial statements include the
accounts of the Holding Company, its wholly owned subsidiary the
Bank, and the Bank's wholly owned subsidiary. All significant
intercompany transactions and balances are eliminated in
consolidation. The accounting and reporting policies of the
Company conform in all material respects to generally accepted
accounting principles and to general practice within the thrift
industry. In the OParent Company OnlyO financial statements, the
investment in the wholly owned subsidiary is carried under the
equity method of accounting.
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination of
the allowance for loan losses and the valuation of real estate
acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowance for
loan losses and the valuation of real estate owned, management
obtained appraisals for significant properties.
(b) Business
A substantial portion of the Company's assets are loans secured by
real estate in the upstate New York area. In addition, a
substantial portion of the real estate owned is located in those
same markets. Accordingly, the ultimate collectibility of a
substantial portion of the Bank's loan portfolio and the recovery
of a substantial portion of the carrying amount of real estate
owned are dependent upon market conditions in the upstate New York
region.
<PAGE>
(c) Cash Equivalents
For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(d) Securities Available for Sale and Investment Securities
The Company adopted Statement of Financial Accounting Standards
No. 115, (SFAS No. 115) "Accounting for Certain Investments in
Debt and Equity Securities" on January 1, 1994. Management
determines the appropriate classification of securities at the
time of purchase. If management has the positive intent and
ability to hold debt securities to maturity, they are classified
as investment securities and are stated at amortized cost. These
securities are adjusted for amortization of premium and accretion
of discount using a method which approximates the level-yield
method. All other debt and equity securities are classified as
securities available-for-sale and are reported at fair value, with
net unrealized gains or losses reported as a separate component of
equity. Realized gains and losses on the sale of securities
available-for-sale are determined using the specific
identification method.
(e) Mortgage-Backed Securities
Mortgage-backed securities, which are guaranteed by the Government
National Mortgage Association ("GNMA"), the Federal Home Loan
Mortgage Corporation ("FHLMC") or the Federal National Mortgage
Corporation ("FNMA"), represent participating interests in direct
pass-through pools of long-term first mortgage loans originated
and serviced by the issuers of the securities. These investment
securities are carried at amortized cost, with amortization of
premiums and accretion of discounts determined using the
level-yield method over the remaining term to maturity. Management
has the positive intent and ability to hold these investment
securities to maturity.
(f) Loans Receivable
Loans receivable are stated at unpaid principal amount, net of
unearned discount, unamortized premiums, deferred loan fees and
the allowance for loan losses. Premiums and discounts on related
loans are amortized into income using a method that approximates
the level-yield method. Loan origination fees net of certain
related costs are generally amortized into income over the
estimated term of the loan. Interest income on loans is not
recognized when considered doubtful of collection by management.
Loans considered doubtful of collection by management are placed
on a nonaccrual status for the recording of interest. Generally
loans past due 90 days or more as to principal or interest are
placed on nonaccrual status except for certain loans which, in
management's judgment, are adequately secured and for which
collection is probable. Previously accrued income that has not
been collected is reversed from current income. Thereafter, the
application of payments received (principal or interest) is
dependent on the expectation of ultimate repayment of the loan. If
ultimate repayment of the loan is expected, any payments received
<PAGE>
are applied in accordance with contractual terms. If ultimate
repayment of principal is not expected or management judges it to
be prudent, any payment received on a nonaccrual loan is applied
to principal until ultimate repayment becomes expected. Loans are
removed from nonaccrual status when they become current as to
principal and interest and when, in the opinion of management, the
loans are estimated to be fully collectible as to principal and
interest. Amortization of related deferred fees is suspended when
a loan is placed on nonaccrual status.
The Company maintains an allowance for loan losses for estimable
and probable losses. The allowance for loan losses is maintained
at a level deemed appropriate by management to adequately provide
for known and inherent risks in the present portfolio.
ManagementOs evaluation of the adequacy of the allowance takes
into consideration such factors as the historical loan loss
experience, changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem
loans and current economic conditions that may affect the
borrowersO ability to pay. The determination of the amount of the
allowance for loan losses includes estimates that are susceptible
to significant fluctuations due to changes in appraisal values of
collateral and general economic conditions. In connection with the
determination of the allowance for loan losses, management obtains
independent appraisals for significant properties. While
management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on
changes in economic conditions, particularly in the Capital
District region of New York State. In addition, various regulatory
agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such
agencies may require the Company to recognize additions to the
allowance based upon their judgment of information available to
them at the time of their examination.
In 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 114 (SFAS No.
114), "Accounting by Creditors for Impairment of a Loan". SFAS No.
114 was amended by Statement of Financial Accounting Standards No.
118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures," (SFAS No. 118). These statements
prescribe recognition criteria for loan impairment generally
related to commercial type loans, and measurement methods for
certain impaired loans and all loans whose terms are modified in
troubled debt restructurings subsequent to the adoption of these
statements. A loan is considered impaired when it is probable that
the borrower will not repay the loan according to the original
contractual terms of the loan agreement.
On January 1, 1995, the Company adopted the provisions of SFAS No.
114 and SFAS No. 118 and has provided the required disclosures.
The effect of adoption was not material to the consolidated
financial statements. As a matter of policy, the Company generally
places impaired loans on nonaccrual status and recognizes interest
income on such loans only on a cash basis, upon receipt of
<PAGE>
interest payments from the borrower. In some instances, all monies
received from the borrower, or from the proceeds of collateral,
are applied directly to reduce the principal balance of the loan,
and no interest income is recognized until the principal balance
of the impaired loan is paid in full or is no longer considered
impaired.
(g) Real Estate Owned
Included in real estate owned are assets received from foreclosure
and in-substance foreclosures. In accordance with SFAS No. 114, a
loan is classified as an in-substance foreclosure when the Company
has taken possession of the collateral regardless of whether
formal foreclosure proceedings have taken place.
Foreclosed assets, including in-substance foreclosures, are
recorded on an individual asset basis at net realizable value
which is the lower of fair value minus estimated costs to sell or
"cost" (defined as the fair value at initial foreclosure). When a
property is acquired or identified as in-substance foreclosure,
the excess of the loan balance over fair value is charged to the
allowance for loan losses. Subsequent writedowns to carry the
property at fair value are included in noninterest expense.
(h) Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed on the
straight-line or accelerated method over the estimated useful
lives of the related assets. Useful lives are 20 to 50 years for
banking house and 3 to 15 years for furniture, fixtures, and
office equipment.
(i) Employee Benefit Plans
The Company has a defined benefit pension plan covering all full
time employees meeting age and service requirements. The projected
unit credit method was utilized to measure the net periodic
pension costs over the employee's service life.
(j) Income Taxes
Income taxes are provided on income reported in the consolidated
statements of income regardless of when such taxes are payable.
The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, OAccounting for Income
TaxesO (SFAS No. 109). SFAS No. 109 requires the asset and
liability method of accounting for income taxes. Under the asset
and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective
tax basis. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered
or settled. Under SFAS No. 109, the effect on deferred tax assets
<PAGE>
and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date. The CompanyOs
policy is that deferred tax assets are reduced by a valuation
reserve if, based on the weight of available evidence, it is more
likely than not that some or all of the deferred tax assets will
not be realized.
(k) Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities
In June 1996, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 125 (SFAS No.
125), which provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishment of
liabilities based on consistent application of a
financial-components approach that focuses on control. In
addition, SFAS No. 125 amends SFAS No. 115 to prevent a security
from being classified as held to maturity if the security can be
prepaid or settled in such a manner that the holder of the
security would not recover substantially all of its recorded
investment. The extension of the SFAS No. 115 approach to certain
non-security financial assets and the amendment of SFAS No. 115
are effective for financial assets held on or acquired after
January 1, 1997. Effective January 1, 1997, SFAS No. 125 will
supersede SFAS No. 122. SFAS No. 125 is effective for transfers
and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996. Management believes
the adoption of SFAS No. 125 will not have a material impact on
the CompanyOs consolidated financial statements.
(l) Borrowings
The Company has an overnight line of credit and a one-month
overnight repricing line of credit with the Federal Home Loan Bank
of New York as of December 31, 1996 totaling approximately $16.6
million. The interest rate may fluctuate based on existing market
conditions and customersO demands for credit. There were no
amounts outstanding under this line of credit at December 31,
1996.
(m) Earnings per Share
Earnings per share was determined by dividing net income by the
weighted average number of shares outstanding during the period.
The weighted average number of shares does not include unallocated
employee stock ownership plan shares. Earnings per share in 1995
were compiled on earnings and weighted average shares from the
date of conversion through December 31, 1995. The weighted average
number of shares outstanding was 1,248,074 for the year ended
December 31, 1996, and 1,495,000 for the period from the date of
conversion through December 31, 1995. In calculating earnings per
share for 1995, post conversion net income of $613,000 was used.
The effect of outstanding stock option awards is not material to
the calculation of earnings per share. Earnings per share are not
presented for periods prior to the initial stock offering as the
Bank was a mutual thrift at the time and no stock was outstanding.
<PAGE>
(n) Reclassifications
Certain amounts in the prior years' financial statements are
reclassified whenever necessary, in order to conform to the
presentation in the current year's financial statements.
(2) Conversion to Stock Ownership
On June 29, 1995, the Holding Company sold 1,495,000 shares of common
stock at $10.00 per share to depositors, employees of the Bank, and
outsiders. Net proceeds from the sale of stock of the Holding Company,
after deducting conversion expenses of approximately $750,000, were $14.2
million and are reflected as common stock and additional paid-in capital
in the accompanying consolidated balance sheets. The Company utilized
$7.1 million of the net proceeds to acquire all of the capital stock of
the Bank.
As part of the conversion, the Bank established a liquidation account for
the benefit of eligible depositors who continue to maintain their deposit
accounts in the Bank after conversion. In the unlikely event of a
complete liquidation of the Bank, each eligible depositor will be
entitled to receive a liquidation distribution from the liquidation
account, in the proportionate amount of the then current adjusted balance
for deposit accounts held, before distribution may be made with respect
to the Bank's capital stock. The Bank may not declare or pay a cash
dividend to the Holding Company on, or repurchase any of, its capital
stock if the effect thereof would cause the retained earnings of the Bank
to be reduced below the amount required for the liquidation account.
Except for such restrictions, the existence of the liquidation account
does not restrict the use or application of retained earnings.
The Bank's capital exceeds all of the fully phased-in capital regulatory
requirements. The 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 the approval by the OTS, make capital
distribution during the calendar year of up to 100% of its 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.
Any additional capital distributions would require prior regulatory
approval. At December 31, 1996, the maximum amount that could have been
paid by the Bank to the Holding Company was approximately $7.0 million.
Unlike the Bank, the Holding Company is not subject to these regulatory
restrictions on the payment of dividends to its stockholders.
(3) Reserve Requirements
The Company is required to maintain certain reserves of cash and/or
deposits with the Federal Reserve Bank. The amount of this reserve
requirement, included in cash and due from banks, was approximately
$171,000 and $149,000 at December 31, 1996 and 1995, respectively.
The Company is also required to maintain certain levels of stock in the
Federal Home Loan Bank of New York.
<PAGE>
(4) Securities Available-for-Sale
The available-for-sale portfolio at December 31, 1996 and 1995 consists
of mutual funds representing investments in both adjustable and fixed
rate mortgage-related securities and U.S. Government obligations.
The amortized cost and approximate fair value at December 31, 1996 and
1995 is as follows:
<TABLE>
<CAPTION>
1996
-------------------------------------------------------
(in thousands)
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Mutual funds $ 1,944 46 -- 1,990
------- ----- ------ --------
Total securities available-for-sale $ 1,944 46 -- 1,990
======= ===== ====== ========
<CAPTION>
1995
-------------------------------------------------------
(in thousands)
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Mutual funds $ 7,888 88 -- 7,976
------- ----- ------ --------
Total securities available-for-sale $ 7,888 88 -- 7,976
======= ===== ====== ========
</TABLE>
Proceeds from the sale of securities available-for-sale were
approximately $6.0 million, $0, and $3.9 million during 1996, 1995 and
1994, respectively. During 1996, the sale of available-for-sale
securities resulted in gross realized gains of $44,000 and gross realized
losses of $36,000. During 1994, the sale of available for sale securities
resulted in gross realized gain of approximately $8,000.
(5) Investment and Mortgage-Backed Securities
(a) Investment Securities
<PAGE>
The amortized cost and approximate fair values of investment
securities at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
U.S. Government securities and agencies $13,461 1 (98) 13,364
States and political subdivisions ..... 84 -- -- 84
Public utilities ...................... 2,201 -- (7) 2,194
------- ------- ------- -------
Total investment securities ......... $15,746 1 (105) 15,642
======= ======= ======= =======
</TABLE>
The amortized cost and approximate fair values of investment
securities at December 31, 1995 is as follows:
<TABLE>
<CAPTION>
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
U.S. Government securities and agencies $15,660 58 (6) 15,712
States and political subdivisions ..... 93 -- -- 93
Corporate securities .................. 204 -- -- 204
Public utilities ...................... 2,701 4 (2) 2,703
------- ------- ------- -------
Total investment securities ......... $18,658 62 (8) 18,712
======= ======= ======= =======
</TABLE>
There were no sales of investment securities during 1996, 1995 and
1994.
The amortized cost and approximate fair value of debt securities
at December 31, 1996, by contractual maturity, are shown below.
Expected 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>
Amortized Estimated
Cost Fair Value
---- ----------
(in thousands)
<S> <C> <C>
Due within one year $ 4,251 4,245
Due one year to five years 10,216 10,118
Due five years to ten years 84 84
Due after ten years 1,195 1,195
------- ---------
Total debt securities $ 15,746 15,642
======== ======
</TABLE>
<PAGE>
(b) Mortgage-Backed Securities
A summary of mortgage-backed securities at December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
GNMA ............. $ 2,538 183 (1) 2,720
FHLMC ............ 12,395 15 (254) 12,156
FNMA ............. 5,501 34 (89) 5,446
------- ------- ------- -------
$20,434 232 (344) 20,322
======= ======= ======= =======
</TABLE>
A summary of mortgage-backed securities at December 31, 1995 is as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
GNMA ............. $ 3,107 240 -- 3,347
FHLMC ............ 14,388 55 (87) 14,356
FNMA ............. 6,923 45 (26) 6,942
------- ------- ------- -------
$24,418 340 (113) 24,645
======= ======= ======= =======
</TABLE>
There were no sales of mortgage-backed securities during 1996,
1995 and 1994.
<PAGE>
The amortized cost and estimated fair value of mortgage-backed
securities at December 31, 1996, by final contractual maturity
date, are shown below. Contractual maturities will differ from
actual maturities because borrowers have the right to call or
prepay obligations without penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
---- ----------
(in thousands)
<S> <C> <C>
Due within five years ........................ $14,366 14,035
Due five years to ten years .................. 236 240
Due after ten years ......................... 5,832 6,047
------- -------
$20,434 20,322
======= =======
</TABLE>
The Company held no mortgage-backed securities with final
contractual maturities of one year or less.
(6) Loans Receivable, Net
A summary of loans receivable at December 31, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Loans secured by real estate:
Residential:
Conventional ................................ $ 84,840 64,322
Home equity ................................. 22,904 22,723
FHA insured ................................. 3,511 4,797
VA guaranteed ............................... 2,810 3,100
Commercial and multi family ..................... 4,532 6,144
-------- --------
118,597 101,086
-------- --------
Other loans:
Education ....................................... 4 22
Commercial ...................................... 4 5
Personal ........................................ 34 41
Property improvement ............................ 3 5
Loans on savings accounts ....................... 478 361
-------- --------
523 434
-------- --------
Less:
Unearned discount and net deferred loan fees .... 23 27
Allowance for loan losses ....................... 642 572
-------- --------
665 599
-------- --------
Loans receivable, net ....................... $118,455 100,921
======== ========
</TABLE>
<PAGE>
Not included in the Company's loans receivable are real estate mortgages
serviced by the Bank for other institutions of approximately $4.2 and
$4.9 million at December 31, 1996 and 1995, respectively.
As a result of the adoption of SFAS No. 114, the allowance for loan
losses related to impaired loans is based on discounted cash flows using
the loan's initial effective interest rate or the fair value of the
collateral for certain loans where repayment of the loan is expected to
be provided solely by the underlying collateral (collateral dependent
loans). The Company's impaired loans at December 31, 1996 and 1995 were
collateral dependent. The Company considers estimated costs to sell, on a
discounted basis, when determining the fair value of collateral in the
measurement of impairment if those costs are expected to reduce the cash
flows available to repay or otherwise satisfy the loans.
At both December 31, 1996 and 1995, the recorded investment in loans that
were considered to be impaired under SFAS No. 114 totaled approximately
$744,000. The amount in both years represents one impaired loan that, as
a result of charge-offs of approximately $202,000, did not require an
allowance for credit losses determined in accordance with SFAS No. 114.
The average recorded investment in impaired loans during the twelve
months ended December 31, 1996 and 1995 was approximately $744,000 and
$1,091,000, respectively.
For the years ended December 31, 1996 and 1995, the Company recognized
approximately $74,000 and $50,000 of interest income on impaired loans,
respectively.
The following table sets forth the information with regard to
non-performing loans:
<TABLE>
<CAPTION>
1996 1995
------ -------
(in thousands)
<S> <C> <C>
Loans on a nonaccrual status $ 801 798
Loans contractually past due 90 days or more
and still accruing interest 32 41
Restructured loans -- --
------ -------
Total non-performing loans $ 833 839
====== =======
</TABLE>
Interest on nonaccrual and restructured loans of approximately $81,000,
$99,000 and $196,000 would have been earned in accordance with the
original contractual terms of the loans in 1996, 1995 and 1994,
respectively. Approximately $74,000, $38,000 and $47,000 of interest was
collected and recognized as income in 1996, 1995 and 1994, respectively.
There are no commitments to extend further credit on the restructured
loans.
<PAGE>
Certain directors and executive officers of the Company were customers of
and had other transactions with the Company in the ordinary course of
business. Loans to these parties were made in the ordinary course of
business at the Company's normal credit terms, including interest rate
and collateralization. The aggregate of such loans totaled approximately
$145,000 and $140,000 at December 31, 1996 and 1995, respectively. Total
advances to the directors and executive officers during the year ended
December 31, 1996 were $13,000. Total payments made on these loans were
approximately $8,000.
Changes in the allowance for loan losses for the years ended December 31,
1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year .................... $ 572 861 804
Provision charged to operations ............... 120 370 120
Loans charged off ............................. (87) (718) (101)
Recoveries on loans previously charged off .... 37 59 38
----- ----- -----
Balance, end of year .......................... $ 642 572 861
===== ===== =====
</TABLE>
(7) Accrued Interest Receivable
A summary of accrued interest receivable as of December 31, 1996 and 1995
by type was as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Loans .............................................. $ 693 645
Mortgage-backed securities ......................... 120 144
Investment securities .............................. 324 372
------ ------
Total accrued interest receivable .............. $1,137 1,161
====== ======
</TABLE>
(8) Premises and Equipment, Net
<PAGE>
Premises and equipment at December 31, 1996 and 1995 are summarized by
major classification as follows:
<TABLE>
<CAPTION>
1996 1995
(in thousands)
<S> <C> <C>
Land ................................................... $ 305 305
Leasehold improvements ................................. 240 203
Office buildings ....................................... 2,338 1,915
Furniture, fixtures and equipment ...................... 889 842
------ ------
Total .......................................... 3,772 3,265
Less accumulated depreciation and amortization ......... 1,851 1,851
------ ------
Premises and equipment, net .................... $1,921 1,414
====== ======
</TABLE>
Depreciation and amortization included in office occupancy and equipment
expense amounted to approximately $140,000, $143,000 and $142,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
(9) Real Estate Owned
A summary of real estate acquired through foreclosure by the Company or
classified as in-substance foreclosure as of December 31, 1996 and 1995
is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Residential (1 - 4 family) ..................... $ 93 --
Commercial property ............................ 85 200
---- ----
Total real estate owned .................... $178 200
==== ====
</TABLE>
<PAGE>
(10) Due to Depositors
Due to depositors account balances at December 31, 1996 and 1995 are
summarized as follows:
<TABLE>
<CAPTION>
Stated
rate 1996 1995
(in thousands)
<S> <C> <C> <C>
Savings deposit accounts:
Passbook and statement deposit accounts
3.00% $ 37,152 40,745
Money market deposit accounts ......... 2.76 - 4.41 6,074 4,237
-------- --------
43,226 44,982
Time deposit accounts:
3.00 - 3.99 ..................... -- 1,124
4.00 - 4.99 ..................... 23,244 2,691
5.00 - 5.99 ..................... 50,815 51,996
6.00 - 6.99 ..................... 12,835 28,119
7.00 - 7.99 ..................... -- 618
8.00 - 8.99 ..................... -- 151
-------- --------
86,894 84,699
NOW deposit accounts ....................... 1.75 9,104 7,913
Demand deposit accounts .................... 0 1,392 2,077
-------- --------
Total deposits .................... $140,616 139,671
======== ========
</TABLE>
The approximate amount of contractual maturities of time deposit accounts
at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Year ended December 31, (in thousands)
<S> <C>
1997 $59,914
1998 16,040
1999 7,528
2000 2,328
2001 1,084
-------
$86,894
</TABLE>
At December 31, 1996 and 1995, the aggregate amount of time deposit
accounts with balances equal to or in excess of $100,000 was
approximately $6.2 million and $5.4 million, respectively.
<PAGE>
Interest expense on deposits and advance payments by borrowers for
property taxes and insurance for the years ended December 31, 1996, 1995
and 1994 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
Escrow balances ....................................... $ 25 29 25
Passbook and statement savings ........................ 1,173 1,325 1,706
Money market accounts ................................. 161 129 155
Time deposits ......................................... 4,680 4,620 3,054
NOW accounts .......................................... 148 133 137
------ ------ ------
Total interest on deposits and advance payments by
borrowers for property taxes and insurance .... $6,187 6,236 5,077
====== ====== ======
Weighted average interest rates ....................... 4.32% 4.39% 3.66%
====== ====== ======
</TABLE>
(11) Income Taxes
As discussed in Note 1, the Company adopted SFAS No. 109 as of January 1,
1993. At implementation, the Company was unable to record any impact of
the prior years' net operating loss carryforwards due to the uncertainty
of the realization of the resultant deferred tax asset. Therefore, the
adoption of SFAS No. 109 had no material impact on the Company's
financial position at January 1, 1993.
The following is a summary of the components of income tax expense for
the year ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current tax expense:
Federal ............................ $ 372 306 175
State .............................. 76 50 40
Deferred benefit ................... (554) -- --
----- ----- -----
Income tax expense (benefit) ........... $(106) 356 215
===== ===== =====
</TABLE>
<PAGE>
The provision for income taxes is less than the amount computed by
applying the U.S. Federal income tax rate of 34% to income before taxes as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------- --------------------- ----------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax expense at statutory rate ... $ 246 34.0% $ 412 34.0% $247 34.0%
Utilization of net operating loss
carryforward ................ -- -- -- -- (97) (13.4)
State income tax, net of
federal tax benefit ......... 45 6.2 33 2.7 26 3.6
Change in beginning of year
balance of the valuation
allowance for deferred tax
assets ....................... (396) (54.7) (78) (6.4) -- --
Other, net ...................... (1) (.1) (11) (.9) 39 5.4
----- ---- ----- ---- --- ----
$(106) (14.6)% $ 356 29.4% $215 29.6%
===== ===== ===== ==== ==== ====
</TABLE>
<PAGE>
The tax effects of significant temporary differences that give rise to
the deferred tax assets and liabilities as of December 31, 1996 and 1995, are as
follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 276 195
Deferred loan fees, net 3 4
Deferred compensation and pension costs 406 303
Recognition and retention plan expense 62 --
Securities basis adjustment 46 54
-------- --------
Total gross deferred tax assets 793 556
Less valuation allowance (96) (492)
-------- --------
Net deferred tax assets 697 64
-------- --------
Deferred tax liabilities:
Depreciation differences 74 48
Accretion of discount on securities 19 16
Other items 50 --
-------- --------
Total gross deferred tax liabilities 143 64
-------- --------
Net deferred tax asset at year-end 554 -
Net deferred tax asset at beginning of year -- -
Deferred tax benefit for the years ended $ 554 -
======== =======
</TABLE>
<PAGE>
The valuation allowance for deferred tax assets as of December 31, 1996
was $96,000, a reduction of $396,000 from December 31, 1995. This
reduction was primarily the result of the expected realization of certain
deferred items which were previously considered to be uncertain. In
evaluating the valuation allowance the Company takes into consideration
the nature and timing of the deferred tax asset items as well as the
amount of available open tax carrybacks. The Company has fully reserved
its New York State deferred tax asset, which is a significant component
of deferred tax assets, due to the lack of carryback and carryforward
provisions available in New York State. Any changes in the deferred tax
asset valuation allowance is based upon the CompanyOs continuing
evaluation of the level of such allowance and the realizability of the
temporary differences creating the deferred tax asset.
Formerly, as a qualifying thrift institution under IRS guidelines, the
Bank was allowed a special bad debt deduction which has not been subject
to deferred taxes through December 31, 1987 in accordance with SFAS No.
109. Accordingly, no deferred tax liability has been recorded for the tax
bad debt reserve at December 31, 1987. This reserve, which was
approximately $4.6 million at December 31, 1987, will not be subject to
tax as long as the Bank does not redeem stock or have excess
distributions to its shareholder.
(12) Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires the Company to disclose estimated fair values for its financial
instruments. SFAS No. 107 defined fair value of financial instruments as
the amount at which the instrument could be exchanged in a current
transaction between willing parties other than in a forced or liquidation
sale. SFAS No. 107 defines a financial instrument as cash, evidence of
ownership interest in an entity, or a contract that imposes on one entity
a contractual obligation to deliver cash or another financial instrument
to a second entity or to exchange other financial instruments on
potentially unfavorable terms with a second entity and conveys to that
second entity a contractual right to receive cash or another financial
instrument from the first entity or to exchange other financial
instruments on potentially favorable terms with the first entity.
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 Company's entire
holdings of a particular financial instrument. Because no ready market
exists for a significant portion of the Company's financial instruments,
fair value estimates are based on judgments regarding future expected net
cash flows, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Fair value estimates are based on existing 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
<PAGE>
are not considered financial instruments. Significant assets and
liabilities that are not considered financial assets or liabilities
include the deferred tax asset and office premises and equipment. In
addition, tax ramifications related to the realization of the unrealized
gains and losses, which can have a significant effect on fair value
estimates, have not have been considered in the estimates of fair value
under SFAS No. 107.
In addition there are significant intangible assets that SFAS No. 107
does not recognize, such as the value of "core deposits", the Company's
branch network and other items generally referred to as "goodwill."
The following tables present the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
December 31, 1996
--------------------------
(in thousands)
Carrying Estimated
Amount Fair Value
------ ----------
<S> <C> <C>
Cash and cash equivalents .................................... $ 2,896 2,896
Securities available for sale ................................ 1,990 1,990
Debt securities .............................................. 15,746 15,642
Mortgage-backed securities ................................... 20,434 20,322
Accrued interest receivable .................................. 1,137 1,137
Loans ........................................................ 119,120 118,903
Less: allowance for loan losses ........................... 642 --
unearned discount, and deferred loan fees, net ... 23 --
-------- --------
Net loans ............................................. 118,455 118,903
-------- --------
Total financial assets ............................ $160,658 160,890
======== ========
Savings, now, and demand deposit accounts .................... 53,722 53,722
Time deposit accounts ........................................ 86,894 86,968
Advance payments by borrowers for property taxes and insurance 1,160 1,160
Accrued interest on depositors accounts ...................... 7 7
-------- --------
Total financial liabilities ....................... $141,783 141,857
======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995
--------------------------
(in thousands)
Carrying Estimated
Amount Fair Value
------ ----------
<S> <C> <C>
Cash and cash equivalents .................................... $ 10,453 10,453
Securities available-for-sale ................................ 7,976 7,976
Debt securities .............................................. 18,658 18,712
Mortgage-backed securities ................................... 24,418 24,645
Accrued interest receivable .................................. 1,161 1,161
Loans ........................................................ 101,520 102,389
Less: allowance for loan losses ........................... 572 --
unearned discount, and deferred loan fees, net ... 27 --
-------- --------
Net loans ............................................. 100,921 102,389
-------- --------
Total financial assets ............................ $163,587 165,336
======== ========
Savings, now, and demand deposit accounts .................... 54,972 54,972
Time deposit accounts ........................................ 84,699 85,234
Advance payments by borrowers for property taxes and insurance 1,402 1,402
Accrued interest on depositors accounts ...................... 10 10
-------- --------
Total financial liabilities ....................... $141,083 141,618
======== ========
</TABLE>
Financial Instruments with Carrying Amount Equal to Fair Value The
carrying amount of cash and due from banks and federal funds sold
(collectively defined as "cash and cash equivalents"), accrued interest
receivable, accrued interest payable, and advance payments by borrowers
for property taxes and insurance is considered to be equal to fair value
as a result of their short-term nature.
Securities Available for Sale, Debt Securities and Mortgage-Backed
Securities The fair value of securities available for sale, investment
securities and mortgage-backed securities is estimated based on bid
prices published in financial newspapers and bid quotations received from
either quotation services or securities dealers.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as one- to
four-family, commercial real estate, consumer and commercial loans. Each
loan category is further segmented into fixed and adjustable rate
interest terms and by performing and nonperforming categories.
The fair value of performing loans is calculated by discounting scheduled
cash flows through the estimated maturity using estimated market discount
rates that reflect the credit and interest rate risk inherent in the
loan. The estimate of maturity is based on the contractual term of the
loans to maturity, adjusted for estimated prepayments.
<PAGE>
Fair value for nonperforming loans is based on recent external appraisals
and discounting of cash flows. Estimated cash flows are discounted using
a rate commensurate with the risk associated with the estimated cash
flows. Assumptions regarding credit risk, cash flows, and discount rates
are judgmentally determined using available market information and
specific borrower information.
Deposit Liabilities
Under SFAS No. 107, the fair value of deposits with no stated maturity,
such as noninterest-bearing demand deposits, savings deposits, NOW
deposits and money market deposits, must be stated at the amount payable
on demand as of December 31, 1996 and 1995. The fair value of
certificates of deposit is based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates currently
offered for deposits of similar remaining maturities. The fair value
estimates of deposit liabilities in the foregoing table do not include
the benefit that results from the low cost funding provided by the
deposit liabilities compared to the cost of borrowing funds in the
market.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments to extend credit is estimated using the
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed rate loan commitments,
fair value also considers the difference between current level of
interest rates and the committed rates. Based on an analysis of the
foregoing factors, the fair value of these items approximates their
carrying value at December 31, 1996 and 1995.
(13) Commitments and Contingent Liabilities
(a) Off-Balance Sheet Financing and Concentrations of Credit
The Company is a party to certain financial instruments with
off-balance sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments
are limited to commitments to extend credit. These instruments
involve, to varying degrees, elements of credit risk in excess of
the amount recognized on the statement of financial condition. The
contract amounts of these instruments reflect the extent of
involvement by the Company.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the commitment to extend
credit is represented by the contractual notional amount of those
instruments. The Company uses the same credit policies in making
commitments as it does for on-balance sheet instruments.
<PAGE>
Contract amounts of financial instruments that represent credit
risk as of December 31, 1996 and 1995 at fixed and variable
interest rates are as follows:
<TABLE>
<CAPTION>
1996
--------------------------------
Fixed Variable Total
----- -------- -----
(in thousands)
<S> <C> <C> <C>
Financial instruments
whose contract amounts represent
credit risk:
Conventional mortgage loans ......... $ 316 1,572 1,888
Home equity ......................... -- 10,278 10,278
Commercial loans .................... 306 -- 306
Overdraft loans ..................... 114 -- 114
------- ------- -------
$ 736 11,850 12,586
======= ======= =======
<CAPTION>
1995
--------------------------------
Fixed Variable Total
----- -------- -----
(in thousands)
<S> <C> <C> <C>
Financial instruments
whose contract amounts represent
credit risk:
Conventional mortgage loans ......... $ 483 3,054 3,537
Home equity ......................... -- 9,172 9,172
Commercial loans .................... 152 -- 152
Overdraft loans ..................... 112 -- 112
------- ------- -------
$ 747 12,226 12,973
======= ====== ======
</TABLE>
The range of interest rates on fixed rate commitments was 5.0% to
18.0% at December 31, 1996 and 6.25% to 18.00% at December 31,
1995. The Company offers various adjustable rate mortgage (ARM)
products on 1-4 family residential dwellings. The principal
one-year ARM offered as of December 31, 1996 has a 2.00% annual
interest rate adjustment cap, and uses the weekly average from the
one-year Treasury Constant Maturity Series, plus a margin of
3.00%, as an index for rate adjustments. The lifetime rate ceiling
for the one-year ARM product at December 31, 1996 was 6.00% above
the initial rate. The Company also offers 3/1 and 5/1 ARM products
<PAGE>
where the rate is fixed for the first 3 and 5 years, respectively.
After the initial fixed term, the mortgage has the same
characteristics as a one-year ARM. The other ARM product offered
at December 31, 1996, was a jumbo ARM with a lifetime ceiling of
6.00% above the initial rate. The Company does not originate loans
which provide for negative amortization. Mortgage loan terms vary
from 10 to 30 years.
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being fully
drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral, if any, required by the Company upon the extension of
credit is based on management's credit evaluation of the customer.
Mortgage and construction loan commitments are secured by a first
or second lien on real estate. Typically, consumer credit and
overdraft loans do not require collateral.
The Company does not engage in investments in futures contracts,
forwards, swaps, option contracts or other derivative investments
with similar characteristics.
(b) Lease Commitments
The Company leases a branch facility under a noncancelable
operating lease expiring in 2006. Total expenses under this lease
for the years ended December 31, 1996, 1995 and 1994 were
approximately $45,000, $42,000 and $40,000, respectively. A
summary of the future minimum commitments required under the
noncancelable facility lease are as follows:
<TABLE>
<CAPTION>
Years ending December 31: (in thousands)
<S> <C>
1997 $ 48
1998 48
1999 48
2000 48
2001 48
Thereafter 252
-----
$ 492
=======
</TABLE>
(14) Employee Benefit Plans
The Company's defined benefit, non-contributory, pension plan (the
OPlanO) covers all full time employees meeting age and service
requirements. The benefit formula is equal to 2% of three year average
base earnings multiplied by the number of years of credited service up to
30 years. Benefits contemplated by the plan are being funded under a
group annuity contract with an insurance company.
<PAGE>
The following table sets forth the Plan's funded status and amounts
recognized in the Company's consolidated financial statements at December
31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------- -------
(in thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of approximately $2,828,000 in
1996 and $2,585,000 in 1995 ....................... $(2,927) (2,630)
======= =======
Projected benefit obligation for service
rendered to date ................................. (3,936) (3,588)
Plan assets at fair value ........................... 3,190 2,865
------- -------
Projected benefit obligations in excess
of plan assets ................................... (746) (723)
Unrecognized net loss from past experience
different from that assumed of effects
and changes in assumptions ....................... 359 293
Unrecognized prior service costs .................... 2 2
Unrecognized net obligation at January 1,
1989 being recognized over 19.66 years ........... 269 292
------- -------
Accrued pension liability ........................... $ (116) (136)
======= =======
</TABLE>
Net pension cost for 1996 and 1995 included the following
components:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Service cost - benefits earned during the period ....... $ 171 139
Interest cost on projected benefit obligations ......... 265 237
Actual return on plan assets ........................... (171) (352)
Net amortization and deferral .......................... (67) 151
----- -----
Net periodic pension cost .............................. $ 198 175
===== =====
</TABLE>
<PAGE>
Significant assumptions used in determining pension expense of the Plan
for 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Discount rate ........................... 7.5% 7.5% 8.0%
Expected long-term rate of return ....... 9.0% 9.0% 9.0%
Compensation increase rate .............. 6.0% 6.0% 6.0%
</TABLE>
The Company has also established an Executive Supplemental Retirement
Plan for key management personnel. An expense of approximately $72,000,
$107,000 and $184,000 was recorded in 1996, 1995 and 1994, respectively.
The Company also maintains a defined contribution 401(k) savings plan,
covering all full time employees who have attained age 21 and have
completed one year of employment. The Company matches 50% of employee
contributions that are less than or equal to 6% of the employee's salary.
Total expense recorded during 1996, 1995 and 1994 was approximately
$23,000, $24,000 and $22,000, respectively.
Employee Stock Ownership Plan
As part of the conversion discussed in Note 2, an employee stock
ownership plan (ESOP) was established to provide substantially all
employees of the Company the opportunity to also become stockholders. The
ESOP borrowed $1,196,000 from the Company and used the funds to purchase
119,600 shares of the common stock of the Company issued in the
conversion. The loan will be repaid principally from the Company's
discretionary contributions to the ESOP over a period of ten years. At
December 31, 1996 and 1995, the loan had an outstanding balance of
$956,800 and $1,076,400, respectively, and an interest rate of 7.31%.
Both the loan obligation and the unearned compensation are reduced by the
amount of loan repayments made by the ESOP. Shares purchased with the
loan proceeds are held in a suspense account for allocation among
participants as the loan is repaid. Contributions to the ESOP and shares
released from the suspense account are allocated among participants on
the basis of compensation in the year of allocation.
The Company accounts for the ESOP in accordance with the American
Institute of Certified Public Accountants' Statement of Position No. 93-6
"Employees' Accounting For Stock Ownership Plans" (SOP 93-6).
Accordingly, the shares pledged as collateral are reported as unallocated
ESOP shares in stockholdersO equity. As shares are released from
collateral, the Company reports compensation expense equal to the current
market price of the shares, and the shares become outstanding for
earnings per share computations. Unallocated ESOP shares are not included
in the earnings per share computations. The Company recorded
approximately $158,000 and $156,000 of compensation expense under the
ESOP in 1996 and 1995, respectively.
<PAGE>
The ESOP shares as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
<S> <C>
Allocated shares ............................................... 11,960
Shares released for allocation ................................. 11,960
Unallocated shares ............................................. 95,680
----------
119,600
Market value of unallocated shares at December 31, 1996 ........ $1,411,280
==========
</TABLE>
(15) Stock Option Plans
The Company has established fixed Incentive Stock Option and
Non-qualified Stock Option Plans. These programs reserve shares of common
stock (adjusted for stock splits and dividends) for issuance to key
employees. Options may be granted at a price no less than the greater of
the par value or fair market value of such shares on the date on which
such option is granted, and expire ten years from the date of grant.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its stock option plans. In October 1995, the FASB issued
SFAS No. 123, OAccounting for Stock-Based Compensation.O SFAS No. 123
requires Companies not using a fair value based method of accounting for
employee stock options or similar plans, to provide pro forma disclosure
of net income and earnings per share as if that method of accounting had
been applied. The fair value of each option 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: dividend
of $.24 for each year; expected volatility of 25.0%; risk free interest
rates of 5.6%; and expected lives of 7 years. Pro forma disclosures for
the Company for the year ending December 31, 1996 is as follows:
<TABLE>
<CAPTION>
(in thousands except per share data)
<S> <C>
Net income:
As reported ........................... $ 830
Pro Forma ............................. 744
Earning Per Share:
As reported ........................... .67
Pro Forma ............................. .60
</TABLE>
A summary of the status of the CompanyOs stock option plans as of
December 31, 1996 and changes during the year on that date is presented
below:
<PAGE>
<TABLE>
<CAPTION>
Weighted-
Average
Exercise
Shares Price
<S> <C> <C>
Options:
Outstanding at January 1 ................... -- --
Granted .................................... 133,054 $12.625
Exercised .................................. -- --
Cancelled .................................. (18,687) 12.625
Outstanding at Year-end .................... 114,367 12.625
Exercisable at Year-end .................... -- --
Estimated Weighted-Average Fair Value .......... $ 4.08
========
</TABLE>
The following table summarizes information about the CompanyOs stock
options at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted
Average Weighted- Weighted-
Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Price at 12/31/96 Life Price at 12/31/96 Price
----- ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
$12.625 114,367 7 years $12.625 -- $--
</TABLE>
(16) Regulatory Capital Requirements
OTS regulations require savings institutions to maintain minimum levels
of regulatory capital. Under the regulations in effect at December 31,
1996, the Bank was required to maintain a minimum ratio of tangible
capital to total adjusted assets of 1.5%; a minimum ratio of Tier 1
(core) capital to total adjusted assets of 3.0%; and a minimum ratio of
total (core and supplementary) capital to risk-weighted assets of 8.0%.
Under its prompt corrective action regulations, the OTS is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized institution. Such actions
could have a direct material effect on an institutionOs financial
statements. The regulations establish a framework for the classification
of savings institutions into five categories: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized,
and critically undercapitalized. Generally, an institution considered
well capitalized if it has a Tier 1 (core) capital ratio of at least
5.0%; a Tier 1 risk-based capital ratio of at least 6.0%; and a total
risk-based capital ratio of at least 10.0%.
<PAGE>
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the OTS
about capital components, risk weightings and other factors.
Management believes that, as of December 31, 1996, the Bank meets all
capital adequacy requirements to which it is subject. Further, the most
recent OTS notification categorized the Bank as a well capitalized
institution under the prompt corrective action regulations. There have
been no conditions or events since that notification that management
believes have changed the AssociationOs capital classification.
The following is a summary of the Bank's and Company's actual capital
amounts and ratios as of December 31, 1996, compared to the OTS minimum
capital adequacy requirements and the OTS requirements for classification
as a well capitalized institution.
<TABLE>
<CAPTION>
Minimum Capital Classification
Actual Adequacy as Well Capitalized
--------------- -------------------
Amount Ratio Ratio Ratio
------ ----- ----- -----
<S> <C> <C> <C> <C>
Bank
Tangible capital $ 17,762 10.77% 1.50% --
Tier 1 (core) capital 17,762 10.77 3.00 5.00
Risk-based capital:
Tier 1 17,762 20.19 -- 6.00
Total 17,120 20.92 8.00 10.00
<CAPTION>
Actual
----------------------
Amount Ratio
------ -----
<S> <C> <C>
Consolidated
Tangible capital $ 21,625 13.12%
Tier 1 (core) capital 21,625 13.12
Risk-based capital:
Tier 1 21,625 24.59
Total 22,267 25.32
</TABLE>
(17) Parent Company Financial Information
SFS Bancorp, Inc. was organized to serve as the holding company for the
Bank and began operations on June 29, 1995 in conjunction with the Bank's
mutual-to-stock conversion and the Holding Company's initial public
offering of its common stock. The Holding Company's statement of
financial condition as of December 31, 1996 and 1995 and related
statements of income and cash flows for the year ended December 31, 1996
and the period from June 29, 1995 to December 31, 1995 are as follows:
<PAGE>
<TABLE>
<CAPTION>
Statement of Financial Condition
as of December 31, 1996 and 1995
1996 1995
-------- --------
(in thousands, except share data)
Assets
<S> <C> <C>
Cash and cash equivalents .................................. $ 96 135
Loan receivable from subsidiary ............................ 3,757 7,076
Equity in net assets of subsidiary ......................... 17,808 17,030
Other assets ............................................... 58 41
-------- --------
Total assets ............................. $ 21,719 24,282
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Other liabilities ..................................... $ 48 21
-------- --------
Stockholders' Equity:
Preferred stock, $.01 par value. Authorized 500,000
shares; none issued .............................. $ -- --
Common stock, $.01 par value. Authorized
2,500,000 shares; 1,495,000 shares issued;
1,270,997 and 1,495,000 shares outstanding at
December 31, 1996 and 1995, respectively ......... 15 15
Additional paid-in capital ............................ 14,260 14,221
Retained earnings, substantially restricted ........... 11,687 11,013
Treasury stock, at cost (224,003 shares at
December 31, 1996, none at December 31, 1995) .... (2,840) --
Common stock acquired:
Employee stock ownership plan "ESOP" (95,680
share and 107,640 shares at December 31,
1996 and 1995, respectively .................... (957) (1,076)
Recognition and retention plan "RRP" (42,757
share at December 31, 1996; none at
December 31, 1995) ............................ (540) --
Net unrealized gain on securities available for sale .. 46 88
-------- --------
Total stockholders' equity ............... 21,671 24,261
-------- --------
Total liabilities and stockholders' equity $ 21,719 24,282
======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of Income
For the year ended December 31, 1996 and
For the period from inception (June 29, 1995)
through December 31, 1995
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Interest income ............................................ $384 269
Interest expense ........................................... -- --
Net interest income ................................... 384 269
Noninterest expense ........................................ 104 49
---- ---
Income before income taxes and equity in undistributed
earnings of subsidiary ................................ 280 220
---- ---
Income tax expense ......................................... 112 89
---- ---
Income before equity in undistributed earnings
of subsidiary ......................................... 168 131
Equity in undistributed earnings of subsidiary (for the
year ended December 31, 1996 and the period from
June 29, 1995 through December 31, 1995) .............. 662 724
---- ---
Net income ................................................. $830 855
==== ===
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of Cash Flows
For the year ended December 31, 1996 and
For the period from inception (June 29, 1995)
through December 31, 1995
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income ..................................................... $ 830 855
Adjustment to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiary ........... (662) (724)
Increase in other assets ................................. (17) (41)
Increase in liabilities .................................. 27 21
------- -------
Net cash provided by operating activities ............. 178 111
------- -------
Cash flows from investing activities:
Investment in common stock of subsidiary ....................... -- (7,100)
Net (increase) decrease in loans ............................... 3,319 (7,076)
------- -------
Net cash provided (used) in investing activities ...... 3,319 (14,176)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock, net .................... -- 14,200
Purchase of treasury stock ..................................... (3,418) --
Cash dividends paid ............................................ (156) --
Distribution of RRP shares ..................................... 38 --
Net cash provided (used) from financing activities .... (3,536) 14,200
------- -------
Net increase (decrease) in cash and cash equivalents ................ (39) 135
Cash and cash equivalents:
Beginning of period ............................................ 135 --
End of period .................................................. $ 96 135
======= =======
</TABLE>
These financial statements should be read in conjunction with the
Company's consolidated financial statements and notes thereto.
<PAGE>
CORPORATE INFORMATION
Annual Meeting
The annual meeting of SFS Bancorp, Inc. will be held on April 16, 1997 at
10:00 a.m. at the Main Office of the Company at 251-263 State Street in
Schenectady, New York.
Market Information
SFS Bancorp, Inc. Common Stock is traded on the Nasdaq National System
under the symbol "SFED." SFS Bancorp, Inc. Common Stock was issued at $10.00 per
share in connection with the conversion of Schenectady Federal from mutual to
stock form on June 29, 1995. At February 28, 1997 there were approximately 357
holders of record and approximately 389 additional beneficial shareholders of
SFS Bancorp, Inc. Common Stock and 1,270,997 shares (reflects correction from
Annual Reports mailed to shareholders) of common stock issued and outstanding.
PRICE RANGE OF COMMON STOCK
The table below shows the range of high and low bid prices since the
Company's Common Stock began trading on June 30, 1995. The information set forth
in the table below was provided by the Nasdaq. Such information reflects
interdealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------ ------------------------------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C> <C>
First Quarter $ 13.00 $ 11.50 Second Quarter $11.75 $10.50
Second Quarter $ 13.00 $ 11.75 Third Quarter $13.25 $11.125
Third Quarter $ 14.25 $ 12.00 Fourth Quarter $13.50 $12.00
Fourth Quarter $ 16.25 $ 13.50
</TABLE>
As of December 31, 1996, the Corporation declared dividends totaling $156,000 or
$0.12 per share on its Common Stock. Dividend payment decisions are made with
consideration of a variety of factors including earnings, financial condition,
market considerations and regulatory restrictions. Restrictions on dividend
payments are described in Note 2 of the Notes to Consolidated Financial
Statements included in this Annual Report.
Annual Report on Form 10-KSB and Other Investor Information
SFS Bancorp, Inc. will furnish at no charge to any stockholder a copy of
SFS Bancorp, Inc.'s Annual Report on Form 10-KSB for the year ended December 31,
1996 and the exhibits thereto required to be filed with the Securities and
Exchange Commission by writing to:
David J. Jurczynski
Chief Financial Officer
SFS Bancorp, Inc.
251-263 State Street
Schenectady, New York 12305
(518) 395-2300
<PAGE>
Transfer Agent and Registrar Independent Auditors
Registrar and Transfer Company KPMG Peat Marwick, LLP
10 Commerce Drive 74 North Pearl Street
Cranford, NJ 07016 Albany, NY 12207
(908) 272-8511
Special Counsel
Silver Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
7th Floor, East Tower
Washington, D.C. 20005
BOARD OF DIRECTORS OF SFS BANCORP, INC. AND SCHENECTADY FEDERAL
SAVINGS BANK
Joseph H. Giaquinto, Chairman Gerald I. Klein
John F. Assini, M.D., Vice Chairman Robert A. Schlansker
Richard D. Ammian
OFFICERS OF SFS BANCORP, INC. AND SCHENECTADY FEDERAL SAVINGS BANK
Joseph H. Giaquinto
President and Chief Executive Officer
Richard D. Ammian
Senior Vice President and Secretary
David J. Jurczynski
Vice President, Treasurer
and Chief Financial Officer
Michael Krywinski
Vice President
William Pezzula
Vice President
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State of
Percentage of Incorporation
Parent Subsidiary Ownership or Organization
------ ---------- --------- ---------------
<S> <C> <C> <C>
SFS Bancorp, Inc. Schenectady Federal Savings Bank 100% Federal
Schenectady Federal Savings SSLA Service Corp. 100% New York
Bank
</TABLE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
SFS Bancorp, Inc.:
We consent to incorporation by reference in the following registration
statements:
No. 333-05789 on Form S-8, and
No. 333-05831 on Form S-8
of SFS Bancorp, Inc. of our report dated January 24, 1997, relating to the
consolidated balance sheets of SFS Bancorp, Inc. and subsidiary as of December
31, 1996 and 1995, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996, which report appears in the December 31, 1996
Annual Report on Form 10-KSB of SFS Bancorp, Inc. Our report refers to the
adoption of the provisions of Statement of Financial Accounting Standards No.
114 "Accounting by Creditors For Impairment of a Loan" and Statement of
Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment
of a Loan-Income Recognition and Disclosures."
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Albany, NY
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,296
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,990
<INVESTMENTS-CARRYING> 36,180
<INVESTMENTS-MARKET> 35,964
<LOANS> 119,097
<ALLOWANCE> 642
<TOTAL-ASSETS> 164,888
<DEPOSITS> 140,616
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,601
<LONG-TERM> 0
0
0
<COMMON> 15
<OTHER-SE> 21,656
<TOTAL-LIABILITIES-AND-EQUITY> 164,888
<INTEREST-LOAN> 8,758
<INTEREST-INVEST> 2,784
<INTEREST-OTHER> 325
<INTEREST-TOTAL> 11,867
<INTEREST-DEPOSIT> 6,162
<INTEREST-EXPENSE> 6,187
<INTEREST-INCOME-NET> 5,680
<LOAN-LOSSES> 120
<SECURITIES-GAINS> 8
<EXPENSE-OTHER> 5,239
<INCOME-PRETAX> 724
<INCOME-PRE-EXTRAORDINARY> 724
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 830
<EPS-PRIMARY> .67
<EPS-DILUTED> .67
<YIELD-ACTUAL> 3.51
<LOANS-NON> 801
<LOANS-PAST> 32
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 572
<CHARGE-OFFS> 87
<RECOVERIES> 37
<ALLOWANCE-CLOSE> 642
<ALLOWANCE-DOMESTIC> 365
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 277
</TABLE>
