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, 1997
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, 1997 were
$12,872,000.
<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 2, 1998 was $23.9 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, 1998, the Registrant had 1,208,472 shares of Common
Stock issued and outstanding.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Annual Report to Stockholders for the fiscal year
ended December 31, 1997.
Part III of Form 10-KSB - Portions of The Proxy Statement for Annual Meeting
of Stockholders to be held in 1998.
<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, 1997, the Company had total assets of $174.4 million,
deposits of $150.5 million, and stockholders' equity of $21.4 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, 1997, $127.7 million, or 94.9% 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, 1997, the Bank had $17.0 million of
mortgage-backed securities, representing 9.7% of total assets, and $16.1 million
of investment securities (including $4.1 million of securities
available-for-sale, at fair value), representing 9.2% 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, (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 three
branch offices located in the Mayfair Shopping Center in Glenville, New York and
in the Bellevue and Upper Union Street areas 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 1997, the population of Schenectady County was approximately 150,000
essentially unchanged from population levels in 1985. The unemployment rate for
Schenectady County was 4.2% and 4.5% in December 1997 and 1996, respectively.
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, Schenectady International, Inc.
and Golub Corporation.
<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, origination and retention of mortgage loans having shorter
terms to maturity or repricing such as ARMs and home equity loans. The Bank also
offers consumer loans and to a lesser extent commercial real estate mortgage
loans.
<PAGE>
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,
-----------------------------------------------------------------------------------
1997 1996 1995
------------------------- ----------------------- -----------------------
Amount Percent Amount Percent Amount Percent
-------- ------ -------- ------ -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family ........... $105,077 78.07% $ 91,161 76.53% $ 72,219 71.14%
Multi-family .................. 1,981 1.47 1,568 1.32 2,382 2.35
Commercial .................... 4,149 3.08 2,964 2.49 3,762 3.70
Home Equity ................... 22,658 16.84 22,904 19.23 22,723 22.38
-------- ----- -------- ----- -------- -----
Total real estate loans .... 133,865 99.46 118,597 99.57 101,086 99.57
-------- ----- -------- ----- -------- -----
Other Loans:
Consumer:
Deposit account .............. 573 .43 478 .40 361 .35
Education .................... 3 -- 4 -- 22 .02
Personal ..................... 33 .03 34 .03 41 .04
Automobile ................... 110 .08 -- -- --
Home improvement ............. 2 -- 3 -- 5 .01
-------- ------ -------- ------ -------- -------
Total consumer loans ....... 721 .54 519 .43 429 .42
Commercial business loans ...... -- -- 4 -- 5 .01
-------- ----- -------- ----- -------- -----
Total other loans .......... 721 .54 523 .43 434 .43
-------- ----- -------- ----- -------- -----
Total loans ................ 134,586 100.00% 119,120 100.00% 101,520 100.00%
====== ====== ======
Less:
Deferred fees and discounts ... 22 23 27
Allowance for losses .......... 778 642 572
-------- -------- --------
Total loans receivable, net $133,786 $118,455 $100,921
======== ======== ========
</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,
-----------------------------------------------------------------------------------
1997 1996 1995
---------------------- --------------------- -------------------
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 ...................... $ 31,454 23.37% $ 20,615 17.31% $ 22,797 22.45%
Multi-family ............................. 213 .16 242 .20 1,046 1.03
Commercial ............................... 2,335 1.73 1,533 1.29 3,133 3.09
Home equity .............................. 4,656 3.46 4,334 3.64 4,433 4.37
-------- ------ -------- ------ -------- ------
Total fixed-rate real estate loans .... 38,658 28.72 26,724 22.44 31,409 30.94
Consumer .................................. 721 .54 515 .43 407 .40
Commercial business ....................... -- -- 4 -- .01 5
-------- ------ -------- ------ -------- ------
Total fixed-rate loans ............... 39,379 29.26 27,243 22.87 31,821 31.35
Adjustable-Rate Loans
Real estate:
One- to four-family ...................... 73,623 54.70 70,546 59.22 49,422 48.68
Multi-family ............................. 1,768 1.31 1,326 1.11 1,336 1.31
Commercial ............................... 1,814 1.35 1,431 1.20 629 .62
Home equity .............................. 18,002 13.38 18,570 15.59 18,290 18.02
-------- ------ -------- ------ -------- ------
Total adjustable-rate real estate loans 95,207 70.74 91,873 77.13 69,677 68.63
Consumer .................................. -- -- 4 -- 22 .02
Commercial business........................ -- -- -- -- -- --
-------- ------ -------- ------ -------- ------
Total adjustable-rate loans ........... 95,207 70.74 91,877 77.13 69,699 68.65
-------- ------ -------- ------ -------- ------
Total loans ........................... 134,586 100.00% 119,120 100.00% 101,520 100.00%
====== ====== ======
Less:
Deferred fees and discounts ............... 22 23 27
Allowance for loan losses ................. 778 642 572
-------- -------- --------
Total loans receivable, net ............ $133,786 $118,455 $100,921
======== ======== ========
</TABLE>
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio at December 31, 1997. 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,
1998....................... $ 52 7.37% $1,192 3.66% $ 12 8.50% $516 8.37%
1999....................... 359 7.74 73 8.75 1,178 9.80 81 9.02
2000....................... 223 8.47 67 9.50 3,270 9.56 32 7.89
2001 to 2002............... 1,755 7.55 1,334 9.60 4,303 9.40 92 7.84
2003 to 2022............... 37,195 8.10 3,464 9.30 13,878 8.81 -- --
2023 and following......... 65,493 7.42 -- -- 17 7.99 -- --
-------- ------ ------- ----
$105,077 $6,130 $22,658 $721
======== ====== ======= ====
<CAPTION>
Real Estate
-----------------------------------------------
Commercial
Business Total
-------------------- ------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Due During Years
Ending December 31,
1998...................... $ -- -- $ 1,772 5.17%
1999...................... -- -- 1,691 9.28
2000...................... -- -- 3,592 9.48
2001 to 2002.............. -- -- 7,484 8.98
2003 to 2022.............. -- -- 54,537 8.36
2023 and following........ -- -- 65,510 7.42
------ --------
$ -- $134,586
====== ========
</TABLE>
The total amount of loans due after December 31, 1997 which have
predetermined interest rates is $39.7 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $94.9
million.
<PAGE>
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, 1997, based on the above, the Bank's loans-to-one borrower limit
was approximately $2.8 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, 1997 was two loans to one borrower totalling
$788,000. One loan in the amount of $548,000 was on a five building 20 unit
apartment complex located in Saratoga Springs, New York. The second loan in the
amount of $240,000 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, 1997.
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.
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 $500 to $5,000.
Generally, the Bank requires title insurance or updated 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, 1997, $127.7
million, or 94.9% of the Bank's loan portfolio consisted of mortgage loans
(including home equity loans) on one- to four-family residences. Substantially
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, 1997, the Bank also had $6.1 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.
<PAGE>
The Bank offers conventional fixed-rate loans with terms ranging
between 10 and 30 years. 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 Bankalso 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, 1997, one- to four-family ARMs
totaled $73.6 million, or 54.7% 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. However, private
mortgage insurance is required on loans with loan-to-value ratios greater than
80% to reduce the Bank's exposure. 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, 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, 1997, the Bank had $22.7 million of home equity loans and
an additional $10.1 million of additional funds committed, but undrawn, under
home equity lines of credit.
Commercial Real Estate and Multi-Family Lending. The Bank actively
originates and purchases permanent commercial real estate and multi-family
loans. At December 31, 1997, the Bank had $4.1 million in commercial real estate
loans, representing 3.1% of the Bank's total loan portfolio, and $2.0 million in
multi-family loans, or 1.5% of the Bank's total loan portfolio.
<PAGE>
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%. Commercial real estate loans originated during 1997 possess maturity dates
between five and ten years. Those loans maturing in ten years have been
originated to reprice in five years.
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, 1997, 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." Since 1991, the Bank has focused its primary 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, 1997, consumer loans totaled
$721,000 or .5% 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
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, 1997, there were no loans in the consumer loan portfolio which were
non-performing. During 1997, the Bank recovered $42,000 on consumer loans
previously charged off. There can be no assurance that delinquencies will not
develop in the future.
<PAGE>
Originations, Purchases and Sales of Loans and Mortgage-Backed
Securities
Loan applications are taken 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 an effort to mitigate this risk, the Bank hired a representative in
1997 to originate residential mortgage loans on a full commission basis.
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
1995, 1996 and 1997, the Bank's volume of ARMs 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, 1997, the Bank serviced $3.5 million of mortgage
loans for others. The Bank did not sell loans during 1995, 1996 and 1997.
<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,
---------------------------------------
1997 1996 1995
-------- -------- -------
(In Thousands)
<S> <C> <C> <C>
LOANS:
Originations by type:
Adjustable rate:
Real estate - one- to four-family $ 13,186(1) $ 20,894(1) $ 8,219(1)
- home equity ...... 5,705 5,174 5,474
- commercial........ 927 -- --
Non-real estate - consumer........ -- -- --
-------- -------- -------
Total adjustable-rate ..... 19,818 26,068 13,693
Fixed rate:
Real estate - one- to four-family 9,930(2) 1,606(2) 2,966(2)
- home equity...... 515 737 1,713
- commercial ....... 1,318 198 198
Non-real estate - consumer........ 293 16 --
-------- -------- --------
Total fixed-rate ........... 12,056 2,557 4,679
-------- -------- --------
Total loans originated ..... 31,874 28,625
18,372
Purchases:
Real estate - one- to four-family 3,550 6,973 5,245
-------- -------- --------
Sales and Repayments:
Real estate - one- to four-family -- -- --
Non-real estate - consumer........ -- -- --
-------- -------- --------
Total sales................ -- -- --
Principal repayments ............. 19,958 17,998 16,701
-------- -------- --------
Total reductions .......... 19,958 17,998 16,701
-------- -------- --------
Net increase ............... $ 15,466 $ 17,600 $ 6,916
======== ======== ========
MORTGAGE-BACKED SECURITIES:
Purchases:
Mortgage-backed securities ........ $ -- $ -- $ 5,381
Principal repayments................ 3,468 3,984 2,954
-------- -------- --------
Net increase (decrease)........ $ (3,468) $( 3,984) $ 2,427
======== ======== ========
</TABLE>
(1) Includes $12,672, $19,573 and $8,138 of loans originated through brokers in
1997, 1996 and 1995, respectively.
(2) Includes $8,511, $162 and $1,930 of loans originated through brokers in
1997, 1996 and 1995, respectively.
<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, 1997.
<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
---------- ---------- ---------------------- ---------- ----------- ---------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family . . 8 $285 .27% 11 $ 491 .46% 19 $ 776 .73%
Multi-family . . . . . --- --- --- --- --- --- --- --- ---
Commercial . . . . . 1 147 3.55 2 691 16.65 3 838 20.20
Home equity . . . . . --- --- --- 4 165 .72 4 165 .72
Consumer . . . . . . . --- --- --- --- --- --- --- --- ---
. . . .
Commercial business . . --- --- --- --- --- --- --- --- ---
---- ----- ----- ---- ------ ----- --- ------ -----
Total 9 $432 .32% 17 $1,347 1.00% 26 $1,779 1.32%
===== ==== ===== ==== ====== ===== ==== ====== =====
</TABLE>
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
<PAGE>
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, 1997, the Bank had classified a total of $1.5 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 . $602 $691 $165 $1,458
Doubtful . . . --- --- --- ---
Loss . . . . . --- --- --- ---
---- ---- ---- ------
Total . . . . $602 $691 $165 $1,458
==== ==== ==== ======
</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. Subsequent to December 31, 1997, approximately $389,000 of
one-to-four family and commercial real estate and multi-family loans were either
paid off or past due payments brought current.
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,
----------------------------------------
1997 1996 1995
--------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
One- to four-family . . . . . . . . . . . . . . . . $ 472 $ 25 $ 54
Home equity . . . . . . . . . . . . . . . . . . . 165 18 ---
Multi-family . . . . . . . . . . . . . . . . . . . --- --- ---
Commercial real estate . . . . . . . . . . . . . . 691 756 744
Consumer . . . . . . . . . . . . . . . . . . . . . --- 2 ---
Commercial business . . . . . . . . . . . . . . . --- --- ---
-------- ------ -----
Total . . . . . . . . . . . . . . . 1,328 801 798
-------- ------ -----
Accruing loans delinquent 90 days or more:
One- to four-family . . . . . . . . . . . . . . . . 19 32 41
Home equity . . . . . . . . . . . . . . . . . . . --- --- ---
Multi-family . . . . . . . . . . . . . . . . . . . --- --- ---
Commercial real estate . . . . . . . . . . . . . . --- --- ---
Consumer . . . . . . . . . . . . . . . . . . . . . --- --- ---
Commercial business . . . . . . . . . . . . . . . --- --- ---
-------- ------ -----
Total . . . . . . . . . . . . . . . . . . . 19 32 41
-------- ------ -----
Restructured loans:
One- to four-family . . . . . . . . . . . . . . . . --- --- ---
Home equity . . . . . . . . . . . . . . . . . . . --- --- ---
Multi-family . . . . . . . . . . . . . . . . . . . --- --- ---
Commercial real estate . . . . . . . . . . . . . . --- --- ---
Consumer . . . . . . . . . . . . . . . . . . . . . --- --- ---
Commercial business . . . . . . . . . . . . . . . --- --- ---
-------- ------ -----
Total. . . . . . . . . . . . . . . . . . . . --- --- ---
-------- ------ -----
Foreclosed assets:
One- to four-family . . . . . . . . . . . . . . . . --- 94 ---
Home equity . . . . . . . . . . . . . . . . . . . 27 --- ---
Multi-family . . . . . . . . . . . . . . . . . . . --- --- 200
Commercial real estate . . . . . . . . . . . . . . 84 84 ---
Consumer . . . . . . . . . . . . . . . . . . . . . --- --- ---
Commercial business . . . . . . . . . . . . . . . --- --- ---
-------- ------ -----
Total . . . . . . . . . . 111 178 200
-------- ------ -----
Total non-performing assets . . . . . . . . . . . . $ 1,458 $1,011 $1,039
========= ======= ======
Total as a percentage of total assets . . . . . . . .84% .61% .62%
========= ======= ======
Total non-performing loans . . . . . . . . . . . . $ 1,347 $ 833 $ 839
========= ====== ======
Total as a percentage of total loans receivable, net 1.01% .70% .83%
========= ======= ======
</TABLE>
<PAGE>
For the year ended December 31, 1997 gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to $89,000. The amount that was included in interest
income on such loans was $0.
As of December 31, 1997, 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, 1997, 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, 1997, the book value of this asset was
$691,000. In January, 1998, the loan secured by the Plattsburgh facility was
paid in full and the Bank recovered approximately $21,000 of the amount
previously charged off. In accordance with the ruling of the Bankruptcy Court,
the remaining loan will begin paying at a rate of 10.5% with a term of five
years.
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of December 31, 1997 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,
----------------------------------
1997 1996 1995
-------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period . . . . . . . . . . . . . $642 $572 $861
Charge-offs:
One- to four-family . . . . . . . . . . . . . . . . . . 16 44 88
Home equity . . . . . . . . . . . . . . . . . . . . . . 7 41 ---
Multi-family . . . . . . . . . . . . . . . . . . . . . . --- --- 419
Commercial real estate . . . . . . . . . . . . . . . . . --- --- 202
Consumer . . . . . . . . . . . . . . . . . . . . . . . 3 2 9
Commercial business . . . . . . . . . . . . . . . . . --- --- ---
---- ---- ----
Total . . . . . . . . . . . . . . . 26 87 718
---- ---- ----
Recoveries:
One- to four-family . . . . . . . . . . . . . . . . . . --- --- 7
Home equity . . . . . . . . . . . . . . . . . . . . . . --- --- ---
Multi-family . . . . . . . . . . . . . . . . . . . . . . --- --- ---
Commercial real estate . . . . . . . . . . . . . . . . . --- --- ---
Consumer . . . . . . . . . . . . . . . . . . . . . . . 42 37 52
Commercial business . . . . . . . . . . . . . . . . . --- --- ---
---- ---- ----
Total . . . . . . . . . . . . . . . 42 37 59
---- ---- ----
Net charge-offs (recoveries) . . . . . . . . . . . . . . (16) 50 659
Additions charged to operations . . . . . . . . . . . . . 120 120 370
---- ---- ----
Balance at end of period . . . . . . . . . . . . . . . . . $778 $642 $572
==== ==== ====
Ratio of net charge-offs (recoveries) to average
loans outstanding . . . . . . . . . . . . . . . . . . . . (.01)% .04% .68%
==== ==== ====
Ratio of net charge-offs (recoveries)
to non-performing loans . . . . . . . . . . . . . . . (1.19)% 6.00% 78.55%
==== ==== ====
Allowance for loan losses to non-performing loans . . . . 57.76% 77.07% 68.18%
==== ==== ====
Allowance for loan losses to total loans at end of
period. . . . . . . . . . . . . . . . . . . . . . . . . . .58% .54% .56%
==== ==== ====
</TABLE>
<PAGE>
The distribution of the Bank's allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------
1997 1996 1995
------------------------- -------------------------- --------------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
of Total of Total of Total
Amount Loans Amount Loans Amount Loans
---------- ------------ ---------- ------------ ---------- ------------
In Thousands)
<S> <C> <C> <C> <C> <C> <C>
One-to-four family.......... $ 239 78.03 $ 141 76.53 $ 117 71.14
Multi-family ................ 20 1.47 16 1.32 24 2.35
Commercial real estate....... 143 3.12 143 2.49 104 3.70
Home equity.................. 68 16.84 60 19.23 34 22.38
Consumer..................... 7 .54 5 .43 4 .42
Commercial business.......... --- --- --- --- --- .01
Unallocated.................. 301 --- 277 --- 289 ---
------- ------ ------- ------ ----- -------
Total..................... $ 778 100.00% $ 642 100.00% $ 572 100.00%
======= ====== ======= ====== ===== =======
</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. No portion of the reserve is
available to absorb realized losses. The amount and timing of realized losses
and future reserve allocations may vary from current estimates.
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 investment securities, 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 varying
terms to maturity. At December 31, 1997, 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. Other investments include primarily high grade medium-term
(up to five years) U.S. Treasury and agency obligations. For the year ended
December 31, 1997, the Bank had an average outstanding balance of $18.1 million
in investment securities (including $4.4 million of securities available for
sale) with an average yield of 6.51%.
<PAGE>
The following table sets forth the composition of the Bank's securities
portfolio at the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------- ---------------------
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 (at fair value):
Federal agency obligations . . . . . . . . . . $ 4,067 22.96% $ --- ---% $ --- ---%
Mutual funds . . . . . . . . . . . . . . . . . --- --- 1,990 9.68 7,976 21.65
Investment securities (at amortized cost):
U.S. government obligations . . . . . . . . . 1,992 11.24 3,980 19.37 5,968 16.20
Federal agency obligations . . . . . . . . . . 9,945 56.13 9,481 46.13 9,692 26.30
Municipal bonds . . . . . . . . . . . . . . . 76 .43 84 .41 93 .25
Corporate bonds . . . . . . . . . . . . . . . --- --- 2,201 10.71 2,905 7.88
Mutual funds . . . . . . . . . . . . . . . . . --- --- --- --- --- ---
-------- ------ -------- ------ ------- ------
Subtotal . . . . . . . . . . . . . . . . . . . 16,080 90.76 17,736 86.30 26,634 72.28
FHLB stock . . . . . . . . . . . . . . . . . . 1,338 7.55 1,215 5.91 1,117 3.03
-------- ------ -------- ------ ------- ------
Total investment securities and FHLB stock $17,418 98.31% $18,951 92.21% $27,751 75.31%
======= ====== ======= ====== ======= ======
Average remaining life of securities excluding
FHLB stock and mutual funds . . . . . . . . . 5.1 years 3.6 years 3.2 years
Other interest-earning assets:
Federal funds sold . . . . . . . . . . . . . . 300 1.69 1,600 7.79 9,100 24.69
------- ------ ------- ------ ------- ------
Total . . . . . . . . . . . . . . . . . . . $17,718 100.00% $20,551 100.00% $36,851 100.00%
======= ====== ======= ====== ======= ======
Average remaining life or term to repricing of
securities and other interest-earning assets,
excluding FHLB stock and mutual funds . . . . 5.0 years 3.3 years 2.2 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, 1997
--------------------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over No Stated
1 Year Years Years 10 Years Maturity Total Securities
--------- ------- -------- -------- --------- -------------------
Book Book Book Book Book Book Market
Value Value Value Value Value Value Value
------- ------- ------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Securities available for
sale:
Federal agency obligations .............. $ 4,067 $ -- $ -- $ -- $ -- $ 4,067 $ 4,067
------- ------- ------- ------- ------- ------- -------
Investment securities:
U.S. government securities .............. 1,992 -- -- -- -- 1,992 1,998
Federal agency obligations .............. -- 7,057 1,124 1,764 -- 9,945 9,945
Municipal bonds ......................... -- -- 76 -- -- 76 76
Corporate bonds ......................... -- -- -- -- -- -- --
Collateralized mortgage obligation ...... -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total investmentsecurities ............ 1,992 7,057 1,200 1,764 -- 12,013 12,019
------- ------- ------- ------- ------- ------- -------
Total securities ......................... $ 1,992 $11,124 $ 1,200 $ 1,764 $ -- $16,080 $16,086
======= ======= ======= ======= ======= ======= =======
Weighted average yield .................... 5.13% 6.47% 8.30% 8.00% ---% 6.61%
</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, 1997, Schenectady
Federal had $17.0 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, 1997.
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 10 to 20 Over Total Mortgage-Backed
1 Year Years Years Years 20 Years Securities
-------- ------ ------- --------- --------- ------------------------
Book Book Book Book Book Book Market
Value Value Value Value Value Value Value
------- ------- ------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage Backed Securities
Held for Investment:
Government National Mortgage
Association ..................... $ 2 $ -- $ 180 $ 1,867 $ -- $ 2,049 $ 2,197
Federal National Mortgage
Association ..................... -- 2,826 -- 98 1,533 4,457 4,465
Federal Home Loan Mortgage
Corporation ..................... 2,123 6,743 -- 402 1,192 10,460 10,414
------- ------- ------- ------- ------- ------- -------
Total mortgage-backed
securities ........................ $ 2,125 $ 9,569 $ 180 $ 2,367 $ 2,725 $16,966 $17,076
======= ======= ======= ======= ======= ======= =======
Weighted average yield ............. 5.23% 6.03% 7.47% 8.82% 6.98% 6.49%
======= ======= ======= ======= ======= =======
</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.
<PAGE>
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
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,
-----------------------------------------
1997 1996 1995
---------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening Balance ................... $ 140,616 $ 139,671 $ 138,299
Deposits .......................... 249,343 237,180 231,591
Withdrawals ....................... (246,113) (242,412) (236,426)
Interest credited ................. 6,623 6,177 6,207
--------- --------- ---------
Ending balance .................... $ 150,469 $ 140,616 $ 139,671
========= ========= =========
Net increase ...................... $ 9,853 $ 945 $ 1,372
========= ========= =========
Percent increase .................. 7.01% .68% .99%
========= ========= =========
</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,
--------------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
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
Savings Accounts 3.00% . . . . . . . $ 2,265 1.51% $ 1,392 .99% $ 2,077 1.49%
NOW Accounts 1.75% . . . . . . . . 36,681 24.38 37,152 26.42 40,745 29.17
Money Market Accounts 2.60%-4.30% . 9,163 6.09 9,104 6.47 7,913 5.67
7,619 5.06 6,074 4.32 4,237 3.03
-------- ------ -------- ------ -------- ------
Total Non-Certificate Accounts . . . .
55,728 37.04 53,722 38.20 54,972 39.36
-------- ------ -------- ------ -------- ------
Certificates of Deposit:
3.00 - 3.99% . . . . . . . . . . . . . --- --- --- --- 1,124 .80
4.00 - 4.99% . . . . . . . . . . . . . 801 .53 23,244 16.53 2,691 1.93
5.00 - 5.99% . . . . . . . . . . . . . 84,451 56.12 50,815 36.14 51,996 37.23
6.00 - 6.99% . . . . . . . . . . . . . 9,489 6.31 12,835 9.13 28,119 20.13
7.00 - 7.99% . . . . . . . . . . . . . --- --- --- --- 618 .44
8.00 - 8.99% . . . . . . . . . . . . . --- --- --- --- 151 .11
-------- ------ -------- ------ -------- ------
Total Certificates of Deposit . . . 94,741 62.96 86,894 61.80 84,699 60.64
-------- ------ -------- ------ -------- ------
Total Deposits . . . . . . . . . . . . $150,469 100.00% $140,616 100.00% $139,671 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
(1) Reflects rates paid on transaction and savings deposits at December
31, 1997.
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of December 31, 1997.
<TABLE>
<CAPTION>
4.00- 6.00- Percent
5.99% 6.99% Total of Total
--------- --------- --------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Certificates of deposit
maturing in quarter ending:
March 31, 1998 . . . . . . . $13,748 $2,835 $16,583 17.50%
June 30, 1998 . . . . . . . . 15,112 1,317 16,429 17.34
September 30, 1998 . . . . . 15,274 599 15,873 16.75
December 31, 1998 . . . . . 16,351 37 16,388 17.30
March 31, 1999 . . . . . . . 8,521 405 8,926 9.42
June 30, 1999 . . . . . . . . 8,636 1,519 10,155 10.72
September 30, 1999 . . . . . 1,740 277 2,017 2.13
December 31, 1999 . . . . . 678 538 1,216 1.28
March 31, 2000 . . . . . . . 447 499 946 1.00
June 30, 2000 . . . . . . . . 476 540 1,016 1.07
September 30, 2000 . . . . . 308 165 473 0.50
December 31, 2000 . . . . . 696 116 812 0.86
Thereafter . . . . . . . . . . 3,265 642 3,907 4.13
------- ------ ------- ------
Total . . . . . . . . $85,252 $9,489 $94,741 100.00%
======= ====== ======= ======
Percent of total . . . . . . 89.98% 10.02%
======= ======
</TABLE>
The following table indicates the amount of the Bank's "jumbo" and
other certificates of deposit as of December 31, 1997.
<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 $14,718 $14,743 $29,467 $27,364 $86,292
Certificates of deposit of $100,000 or more 1,865 1,686 2,794 2,104 8,449
------- ------- ------- ------- -------
Total certificates of deposit $16,583 $16,429 $32,261 $29,468 $94,741
======= ======= ======= ======= =======
</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, 1997, 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 $52.3 million for
liquidity purposes.
During the fiscal years ended December 31, 1997 and 1996, the Bank had
average FHLB advances or other borrowings outstanding totaling approximately
$16,000 and $1,000, respectively. During the fiscal year ended December 31, 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, 1997, the Bank had a total of 54 full-time and 6
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, 1997
Schenectady Federal's investment in its service corporation totaled $7,000. 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, 1997, 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, 1997, SSLA sold mutual funds totaling $275,000 and
annuities totaling $793,000. No assurance can be made that a material amount of
mutual fund and/or annuity sales will occur in the future. For the fiscal year
ended December 31, 1997, SSLA had a net loss of $9,000. For the fiscal year
ending December 31, 1996, SSLA had net income of $8,000. For the fiscal year
ended December 31, 1995, SSLA had a net loss of $10,000.
REGULATION
General
Schenectady Federal is currently a federally chartered savings bank,
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 bank. 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 Banks
The OTS has extensive authority over the operations of savings banks.
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 banks
are subject to a semi-annual assessment, based upon the savings bank's total
assets, to fund the operations of the OTS. Schenectady Federal's OTS assessment
for the fiscal year ended December 31, 1997 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 savings banks in loans secured by non-residential real
property may not exceed 400% of total capital, except with approval of the OTS.
Federal savings banks 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, 1997, Schenectady Federal's
lending limit under this restriction was $2.8 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 institutions, 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 0% 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.
Prior to the enactment of legislation, a portion of the SAIF assessment
imposed on savings institutions 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 legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment was limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of December 31, 1999 or
when no savings institution 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.
Regulatory Capital Requirements
Federally insured savings banks, 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 institutions. 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 institutions 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 retained 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, 1997, Schenectady Federal had no intangible
assets which were required to be deducted from tangible capital.
The OTS regulations establish special capitalization requirements for
savings institutions 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 institution'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.
<PAGE>
At December 31, 1997, Schenectady Federal had tangible capital of $19.0
million, or 10.88% of adjusted total assets, which is approximately $16.4
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
institution 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, 1997, Schenectady Federal had no
intangibles which were subject to these tests.
At December 31, 1997, Schenectady Federal had core capital equal to
$19.0 million, or 10.88% of adjusted total assets, which is $13.7 million above
the minimum leverage ratio requirement of 3.0% as in effect on that date.
The OTS risk-based requirement requires savings institutions 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
OTS is also authorized to require a savings institution 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, 1997, Schenectady
Federal had $778,000 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, 1997.
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
institution 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 institution, 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,
<PAGE>
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 institutions may appeal an interest rate risk deduction
determination. It is uncertain when this evaluation may be completed. Any
savings institution 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, 1997, Schenectady Federal had total capital of $19.8
million (including $19.0 million in core capital and $778,000 in qualifying
supplementary capital) and risk-weighted assets of $93.4 million; or total
capital of 21.2% of risk-weighted assets. This amount was $12.3 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 institutions 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 institution 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 institutions.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized institution 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 institution 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 institution. An institution 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 institutions. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings institution, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized institution 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 institution 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.
<PAGE>
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
institutions 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 institution from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
capital of the institution 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 banks, 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 institution'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 institution 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.
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings institution 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 banks 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
institution 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 institutions proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings institutions 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."
<PAGE>
Liquidity
All savings banks, 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
institutions. At the present time, the minimum liquid asset ratio is 4%. For the
year ended December 31, 1997, Schenectady Federal was in compliance with this
requirement, with an overall average daily liquid asset ratio of 19.7%.
Accounting
An OTS policy statement applicable to all savings institutions
clarifies and re-emphasizes that the investment activities of a savings
institutions 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.
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 banks, 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 institution 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, 1997, Schenectady Federal met the test and has always met the test
since its effectiveness.
Any savings institution 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 institution 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 institution has not yet requalified or
converted to a national bank, its new investments and activities are limited to
those permissible for both a savings institution and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
institution is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such institution
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
institution 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."
<PAGE>
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 September 1997 and received a rating of satisfactory.
Transactions with Affiliates
Generally, transactions between a savings institutions or its
subsidiaries and its affiliates are required to be on terms as favorable to the
institution as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the institution'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 institution 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
institutions 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 institutions.
<PAGE>
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 institution 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 institution. 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 institution.
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, 1997, 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 institutions are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
institutions to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
<PAGE>
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 institutions. 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, 1997, Schenectady Federal had
$1.3 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 7.4% and
were 6.6% in 1997. For the year ended December 31, 1997, dividends paid by the
FHLB of New York to Schenectady Federal totaled $87,000, which constitute a
$9,000 increase from the amount of dividends received in 1996. The $24,000
dividend received for the quarter ended December 31, 1997 reflects an annualized
rate of 7.05%.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings institutions 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 institutions 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 institution over a period of years.
<PAGE>
In August 1996, federal legislation was enacted that changed the manner
in which the bad debt deduction 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 an alternative 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
institutions such as the Bank, were 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, 1997, the Bank's Excess for tax
purposes totaled approximately $4.6 million.
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%
<PAGE>
of the Bank's "alternative entire net income" allocable to New York State, or
(c) $250. 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 58 Chairman of the Board, President and Chief Executive Officer
David J. Jurczynski 38 Senior Vice President, Treasurer and Chief Financial Officer
Richard D. Ammian 50 Senior Vice President and Corporate Secretary
</TABLE>
(1) As of December 31, 1997
Executive Officers of the Company
Joseph H. Giaquinto. Mr. Giaquinto, age 58, 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 50, 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 38, is Senior 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.
<PAGE>
Item 2. Properties
The following table sets forth information concerning the main office and
each branch office of the Bank at December 31, 1997. At December 31, 1997, the
Bank's premises had an aggregate net book value of approximately $1.7 million.
<TABLE>
<CAPTION>
Year Owned or Net Book Value
Location Acquired Leased December 31, 1997
-------- -------- ------ -----------------
(In Thousands)
<S> <C> <C> <C>
Main Office:
251-263 State Street 1959 Owned $713
Schenectady, New York
Full Service Branches:
262 Saratoga Road 1981 Leased $ 15
Scotia, New York (expires 2006)
2526-2528 Broadway 1977 Owned $367
Schenectady, New York
1624 Union Street 1997 Owned $559
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, 1997 was
approximately $220,000.
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,
1997.
<PAGE>
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters
Page 52 of the Company's 1997 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 1997 Annual Report to Stockholders is
herein incorporated by reference.
Item 7. Financial Statements
The following information appearing in the Company's Annual Report to
Stockholders for the year ended December 31, 1997, is incorporated by reference
in this Annual Report on Form 10-KSB as Exhibit 13.
Pages in
Annual Report Section Annual Report
- --------------------- -------------
Selected Consolidated Financial Information..................... 2 - 3
Management's Discussion and Analysis of Financial Condition
and Results of Operation..................................... 4 - 16
Independent Auditors' Report.................................... 17
Consolidated Balance Sheets as of
December 31, 1997 and 1996................................... 18
Consolidated Statements of Income for the Years
Ended December 31, 1997, 1996 and 1995....................... 19
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995......... 20
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997, 1996 and 1995................. 21 - 22
Notes to Consolidated Financial Statements...................... 23 - 51
With the exception of the aforementioned information, the Company's
Annual Report to Stockholders for the year ended December 31, 1997, 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.
<PAGE>
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, 1997, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
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, 1997, 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, 1997, 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,
1997, 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
10.3 Employment Agreement with Joseph I. Giaquinto . . . . . . . . 10.3
10.4 Employment Agreement with Richard D. Ammian . . . . . . . . . 10.4
10.5 Employment Agreement with David J. Jurczynski . . . . . . . . 10.5
10.6 Severance Agreement with Michael J. Krywinski . . . . . . . . 10.6
10.7 Severance Agreement with William Pezzula . . . . . . . . . . 10.7
10.8 Change of Control Benefit Plan . . . . . . . . . . . . . . . 10.8
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 . . . . . . . . . . . None
23 Consent of Experts and Counsel . . . . . . . . . . . . . . . 23
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
</TABLE>
<PAGE>
* 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.
(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, 1998 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.
<TABLE>
<CAPTION>
<S> <C>
By: /s/ Joseph H. Giaquinto By: /s/ John F. Assini, M.D.
----------------------- ------------------------
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, 1998 Date: March 31, 1998
By: /s/ Richard A. Ammian By: /s/ Gerald I. Klein
--------------------- -------------------
Richard A. Ammian, Director Gerald I. Klein, Director
Date: March 31, 1998 Date: March 31, 1998
By: /s/ Robert A. Schlansker By: /s/ David J. Jurczynski
------------------------ -----------------------
Robert A. Schlansker David J. Jurczynski
Director Senior Vice President, Treasurer and
Chief Financial Officer (Principal
Financial and Accounting Officer)
Date: March 31, 1998 Date: March 31, 1998
</TABLE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of this 17th day of December, 1997 (the "Commencement Date"), by and between SFS
Bancorp, Inc., a Delaware corporation having an office at 251-263 State Street,
Schenectady, New York 12301 (which, together with any successor thereto which
executes and delivers the assumption agreement provided for in Section 9(a)
hereof or which otherwise becomes bound by all of the terms and provisions of
this Agreement by operation of law, is hereinafter referred to as the
"Company"), and Joseph H. Giaquinto (the "Executive").
WHEREAS, the Executive is currently serving as Chairman, President and
Chief Executive Officer of the Company and Chairman, President and Chief
Executive Officer of the Company's wholly-owned subsidiary, Schenectady Federal
Savings Bank (the "Bank"); and
WHEREAS, the Board of Directors of the Company (the "Board") recognizes
that, as is the case with many publicly held corporations, the possibility of a
change in control of the Company may exist and that such possibility, and the
uncertainty and questions which it may raise among management, may result in the
departure or distraction of management personnel to the detriment of the Company
and its stockholders; and
WHEREAS, the Board believes it is in the best interests of the Company
to enter into this Agreement with the Executive in order to assure continuity of
management of the Company and the Bank and to reinforce and encourage the
continued attention and dedication of the Executive to the Executive's assigned
duties without distraction in the face of potentially disruptive circumstances
arising from the possibility of a change in control of the Company and/or the
Bank, although no such change is now contemplated; and
WHEREAS, the Board has approved and authorized the execution of this
Agreement with the Executive;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. Certain Definitions.
(a) The term "Change in Control" means (i) any "person," as such term
is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (other than the Company, any Consolidated
Subsidiaries (as hereinafter defined), any person (as hereinabove defined)
acting on behalf of the Company as underwriter pursuant to an offering who is
temporarily holding securities in connection with such offering, any trustee or
other fiduciary holding securities under an employee benefit plan of the
Company, or any corporation owned, directly or indirectly, by the stockholders
of the Company in substantially the same proportions as their ownership of stock
of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the Company
representing 25% or more of the combined voting power of the Company's then
outstanding securities; (ii) individuals who are members of the Board on the
Commencement Date (the "Incumbent Board") cease for any reason to constitute at
least a majority thereof, provided that any person becoming a director
subsequent to the Commencement Date whose election was approved by a vote of at
least three-quarters of the directors comprising the Incumbent Board or whose
<PAGE>
nomination for election by the Company's stockholders was approved by the
nominating committee serving under an Incumbent Board, shall be considered a
member of the Incumbent Board; (iii) the stockholders of the Company approve a
merger or consolidation of the Company with any other corporation, other than
(1) a merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 50% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation or (2) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in which no
person (as hereinabove defined) acquires more than 25% of the combined voting
power of the Company's then outstanding securities; or (iv) the stockholders of
the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially all
of the Company's assets (or any transaction having a similar effect).
(b) The term "Consolidated Subsidiaries" means any subsidiary
or subsidiaries of the Company that are part of the consolidated group of the
Company for federal income tax reporting.
(c) The term "Date of Termination" means (i) if the
Executive's employment is terminated for Disability (as hereinafter defined), 30
days after Notice of Termination is given (provided that the Executive shall not
have returned to the full-time performance of his duties during such 30-day
period), and (ii) if the Executive's employment is terminated for Cause (as
hereinafter defined) or Good Reason (as hereinafter defined) or for any other
reason (other than death or Disability), the date specified in the Notice of
Termination (which, in the case of a termination for Cause shall not be less
than 30 days from the date such Notice of Termination is given, and in the case
of a termination for Good Reason shall not be less than 15 nor more than 60 days
from the date such Notice of Termination is given); provided, however, that if
within 15 days after any Notice of Termination is given, or, if later, prior to
the Date of Termination (as determined without regard to this proviso), the
party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, then the Date of Termination shall be
the date on which the dispute is finally determined, whether by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (which is not
appealable or with respect to which the time for appeal therefrom has expired
and no appeal has been perfected); and provided, further, that the Date of
Termination shall be extended by a notice of dispute only if such notice is
given in good faith and the party giving such notice pursues the resolution of
such dispute with reasonable diligence. Notwithstanding the pendency of any such
dispute, the Company will continue to pay the Executive the Executive's full
Company Salary (as hereinafter defined) in effect when the notice giving rise to
the dispute was given and continue the Executive as a participant in all benefit
and fringe benefit plans (as provided in Section 5 hereof) in which the
Executive was participating when the notice giving rise to the dispute was
given, until the dispute is finally resolved in accordance with this Section
1(c).
<PAGE>
(d) The term "Good Reason" means the occurrence, without the
Executive's express written consent, of a material diminution of or interference
with the Executive's duties, responsibilities or benefits, including (without
limitation) any of the following circumstances unless such circumstances are
fully corrected prior to the Date of Termination given in respect thereof:
(i) a requirement that the Executive be based at any location
not within ten miles of Schenectady, New York, or that he substantially increase
his travel on Company or Bank business; (ii) a material demotion of the
Executive; (iii) a material reduction in the number or seniority of personnel
reporting to the Executive or a material reduction in the frequency with which,
or in the nature of the matters with respect to which such personnel are to
report to the Executive, other than as part of a Company-wide or Bank-wide
reduction in staff; (iv) a reduction in the Executive's salary or a material
adverse change in the Executive's perquisites, benefits, contingent benefits or
vacation, other than as part of an overall program applied uniformly and with
equitable effect to all members of the senior management of the Company or the
Bank; (v) a material and extended increase in the required hours of work or the
workload of the Executive; (vi) the failure of the Board to elect him as
Chairman (during any time when he is serving as a director) or President and
Chief Executive Officer of the Company or any action by the Board removing him
from any of such offices, or the failure of the board of directors of the Bank
(or any successor of the Bank) to elect him as Chairman (during any time when he
is serving as a director) or President and Chief Executive Officer of the Bank
or any action by such board (or board of a successor of the Bank) removing him
from such offices; (vii) the failure of the Company to obtain a satisfactory
agreement from any successor to assume the obligations and liabilities under
this Agreement, as contemplated in Section 9(a) hereof; or (viii) any purported
termination of the Executive's employment that is not effected pursuant to a
Notice of Termination satisfying the requirements of Section 8 hereof (and, if
applicable, the requirements of Section 1(e) hereof), which purported
termination shall not be effective for purposes of this Agreement.
The Executive's right to terminate employment pursuant to this Section
1(d) shall not be affected by the Executive's incapacity due to physical or
mental illness. The Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any circumstance constituting
Good Reason hereunder.
(e) The terms "Termination for Cause" and "Terminated For Cause" mean
termination of the employment of the Executive with either the Company or the
Bank, as the case may be, because of the Executive's (i) intentional misconduct
and/or gross negligence that has a material adverse affect on the Company or the
Bank, monetarily or otherwise, or (ii) material breach of any provision of this
Agreement. No act or failure to act by the Executive shall be considered
intentional unless the Executive acted or failed to act with an absence of good
faith and without a reasonable belief that his action or failure to act was in
the best interest of the Company. Notwithstanding the foregoing, the Executive
shall not be deemed to have been Terminated for Cause unless and until there
shall have been delivered to the Executive a copy of a resolution, duly adopted
by the affirmative vote of not less than three-quarters of the entire membership
of the Board at a meeting of the Board duly called and held for such purpose
(after reasonable notice to the Executive and an opportunity for the Executive,
together with the Executive's counsel, to be heard before the Board), stating
that in the good faith opinion of the Board the Executive has engaged in conduct
described in the preceding sentence and specifying the particulars thereof in
detail.
<PAGE>
2. Term. The term of this Agreement shall be a period of four years
commencing on the Commencement Date, subject to earlier termination as provided
herein. Beginning on the first anniversary of the Commencement Date, and on each
anniversary thereafter, the term of this Agreement shall be extended for a
period of one year in addition to the then-remaining term, provided that the
Company has not given notice to the Executive in writing at least 90 days prior
to such anniversary that the term of this Agreement shall not be extended
further, and provided further that the Executive has not received an
unsatisfactory performance review by either the Board or the Board of Directors
of the Bank.
3. Employment. The Executive is employed as the Chairman, President and
Chief Executive Officer of the Company and the Bank. As such, the Executive
shall render administrative and management services as are customarily performed
by persons situated in similar executive capacities, and shall have such other
powers and duties as the Board or the Board of Directors of the Bank may
prescribe from time to time. The Executive shall also render services to any
Consolidated Subsidiary as requested by the Company or the Bank from time to
time consistent with his executive position. The Executive shall devote his best
efforts and reasonable time and attention to the business and affairs of the
Company and the Bank to the extent necessary to discharge his responsibilities
hereunder. The Executive may serve on corporate or charitable boards or
committees and manage personal investments, so long as such activities do not
interfere materially with the performance of his responsibilities hereunder.
4. Cash Compensation.
(a) Salary. The Company agrees to pay the Executive during the
term of this Agreement a base salary, the annualized amount of which shall be
not less than the annualized aggregate amount of the Executive's base salary
from the Company and any Consolidated Subsidiaries in effect at the Commencement
Date or as subsequently increased (the "Company Salary"). While employed, any
amounts of salary actually paid to the Executive by any Consolidated
Subsidiaries shall reduce the amount to be paid by the Company to the Executive.
The Company Salary shall be paid no less frequently than monthly and shall be
subject to customary tax withholding. The amount of the Executive's Company
Salary shall be increased (but shall not thereafter be decreased) from time to
time in accordance with the amounts of salary approved by the Board or the board
of directors of any of the Consolidated Subsidiaries after the Commencement
Date.
(b) Bonuses. The Executive shall be entitled to participate in
an equitable manner with all other executive officers of the Company and/or the
Bank in all performance-based and discretionary bonuses authorized by the Board
for executive officers of the Company or by the Board of Directors of the Bank
for executive officers of the Bank. No other compensation provided for in this
Agreement shall be deemed a substitute for the Executive's right to participate
in such bonuses when and as declared by the Board of Directors.
<PAGE>
(c) Expenses. During the term of his employment hereunder, the
Executive shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by the Executive in performing services under this Agreement
in accordance with the policies and procedures applicable to the executive
officers of the Company and the Bank.
5. Benefits.
(a) Participation in Benefit Plans. The Executive shall be
entitled to participate, to the same extent as executive officers of the Company
and/or the Bank generally, in all plans of the Company and/or the Bank relating
to pension, retirement, savings, group or other life insurance, hospitalization,
medical and dental coverage, cash bonuses, and other retirement or employee
benefits or combinations thereof. In addition, the Executive shall be entitled
to be considered for benefits under all of the stock and stock option related
plans in which the Company's or the Bank's executive officers generally are
eligible or become eligible to participate. Nothing herein shall preclude the
Company from providing other benefits to the Executive independent of or
separate from those provided to other executive officers or its executives
generally. Upon any separation of service of the Executive from the Company and
the Bank (other than a "Termination for Cause" as defined in Section 1(e) of
this Agreement), the Company will thereafter provide (through the Consolidated
Subsidiaries or otherwise) the Executive and his spouse for their respective
lifetimes, at the sole cost and expense of the Company, with continued group
life insurance, hospitalization, medical, dental, prescription drug, and other
health benefits coverage, at least equivalent to the coverage being provided by
the Company and/or the Bank to the Executive and his spouse on the Commencement
Date (the "Post-Separation Health Benefits"). The Post-Separation Health
Benefits shall be deemed for all purposes of this Agreement to be vested
contractual rights of the Executive and the obligation of the Company with
respect thereto shall survive any termination of this Agreement. In the event
the Company reasonably determines that the provision of Post-Separation Health
Benefits to the Executive or his surviving spouse as provided in this Agreement
could result in the Company or the Bank violating the Employee Retirement Income
Security Act of 1974, as amended, or any other applicable law or regulation,
then the Company may in lieu thereof make a monthly payment to the Executive or
his surviving spouse in an amount equal to the sum of (i) the actual cost
incurred by the Executive or his surviving spouse for comparable health benefit
coverage plus (ii) a tax gross-up amount to enable the Executive or his
surviving spouse to receive the amount set forth in Section 5(a)(i) on an
after-tax basis.
(b) Fringe Benefits. The Executive shall be eligible to
participate in, and receive benefits under, any other fringe benefit plans or
perquisites which are or may become generally available to the Company's or the
Bank's executive officers, including, but not limited to, supplemental
retirement, incentive compensation, supplemental medical or life insurance
plans, company cars, club dues, physical examinations, financial planning and
tax preparation services.
6. Vacations; Leave. The Executive shall be entitled to annual paid
vacation in accordance with the policies established by the Board and the board
of directors of the Bank for executive officers, in no event less than four
weeks per year, and to voluntary leaves of absence, with or without pay, from
time to time at such times and upon such conditions as the Board may determine
in its discretion. In the event that the Executive is employed hereunder during
a calendar year for less than all of that year, he shall be entitled in that
<PAGE>
year to a number of paid vacation days which shall be prorated in accordance
with the number of days on which he is so employed in that year. The Executive
shall be entitled to all paid holidays given by the Company to its executive
officers.
7. Termination of Employment.
(a) Death. In the event of the death of the Executive while
employed under this Agreement and prior to any termination of employment, (i)
the Company shall pay to the Executive's estate, or such person as the Executive
may have previously designated in writing, the Company Salary which was not
previously paid to the Executive plus the Company Salary which he would have
earned if he had continued to be employed under this Agreement through the 180th
day after the date on which the Executive died, at the time such payments would
have been due; and (ii) the Company shall pay to the Executive's estate, or such
person as the Executive may have previously designated in writing, the amounts
of all benefits or awards which, pursuant to the terms of any applicable plan or
plans, were earned with respect to the fiscal year in which the Executive died
and which the Executive would have been entitled to receive if he had continued
to be employed, and the amount of any bonus or incentive compensation for such
fiscal year which the Executive would have been entitled to receive if he had
continued to be employed, pro-rated in accordance with the portion of the fiscal
year served prior to his death; provided that such amounts shall be payable when
and as ordinarily payable under the applicable plans. The death of the Executive
shall not reduce or alter the obligation of the Company to provide
Post-Separation Health Benefits to his surviving spouse.
(b) Disability. If, as a result of the Executive's incapacity
due to physical or mental illness, the Executive shall have been absent from the
full-time performance of his duties hereunder for 130 consecutive business days,
and within 30 days after a written Notice of Termination is given, shall not
have returned to the performance of his duties hereunder on a full-time basis,
the Company may terminate the Executive's employment hereunder for "Disability."
In the event the Executive is terminated for Disability, (i) the Company shall
pay to the Executive the Company Salary which was not previously paid to the
Executive plus the Company Salary which he would have earned if he had continued
to be employed under this Agreement through the term of the Agreement remaining
at the time the Notice of Termination for Disability is given, at the time such
payments would have been due, less the amount of disability insurance payments
received during such period by the Executive on account of insurance maintained
by the Company or any of its Consolidated Subsidiaries for the benefit of the
Executive; and (ii) the Company shall pay to the Executive the amounts of all
benefits or awards which, pursuant to the terms of any applicable plan or plans,
were earned with respect to the fiscal year in which the Executive was
terminated due to Disability and which the Executive would have been entitled to
receive if he had continued to be employed, and the amount of any bonus or
incentive compensation for such fiscal year which the Executive would have been
entitled to receive if he had continued to be employed, pro-rated in accordance
with the portion of the fiscal year served prior to his termination due to
Disability; provided, that, such amounts shall be payable when and as ordinarily
payable under the applicable plans. The termination of the Executive for
Disability shall not reduce or alter the obligation of the Company to provide
Post-Separation Health Benefits to the Executive and his spouse.
(c) Cause. In the event of Termination for Cause, the Company
shall pay to the Executive his Company Salary through the Date of Termination at
the rate in effect at the time the Notice of Termination is given and the
Company shall have no further obligation to the Executive under this Agreement.
<PAGE>
(d) Involuntary Termination. In the event that (i) the Company
terminates the Executive's employment without the Executive's written consent
other than pursuant to Section 7(a), 7(b) or 7(c) hereof, or the Executive
terminates his employment for Good Reason, and (ii) the Executive offers to
continue to provide services as contemplated by this Agreement and such offer is
declined ("Involuntary Termination"), then, subject to Section 7(e) of this
Agreement, the Company shall, during the lesser period of the Date of
Termination through the remaining term of this Agreement or three years
following the Date of Termination, as liquidated damages pay to the Executive
monthly one-twelfth of the Company Salary at the annual rate in effect at the
time the Notice of Termination is given and one-twelfth of the average annual
amount of cash bonus and cash incentive compensation of the Executive, based on
the average amounts of such compensation earned by the Executive for the two
full fiscal years preceding the Date of Termination. In addition, the Executive
shall be entitled to the Post-Separation Health Benefits.
(e) Reduction of the Company's Obligations Under Section 7(d).
In the event that the Executive becomes entitled to liquidated damages pursuant
to Section 7(d), the Company's obligation thereunder with respect to cash
damages shall be reduced by the amount of the Executive's income, if any, earned
from providing services other than to the Company or the Consolidated
Subsidiaries during the period of the lesser of the Date of Termination through
the remaining term of this Agreement or three years following the Date of
Termination.
(f) Voluntary Termination. The Executive may terminate his
employment voluntarily at any time by a notice pursuant to Section 8 of this
Agreement. In the event that the Executive voluntarily terminates his employment
other than for Good Reason ("Voluntary Termination"), the Company shall pay to
the Executive his Company Salary through the Date of Termination at the rate in
effect at the time the Notice of Termination is given, at the time such payments
are due, and the Company shall have no further obligation to the Executive under
this Agreement other than for Post-Separation Health Benefits.
(g) Change in Control. In the event that the Company shall
terminate the Executive's employment other than pursuant to Section 7(a), 7(b)
or 7(c) hereof, or the Executive shall terminate his employment for Good Reason,
within the 24 months following a Change in Control, in addition to any payments
and benefits to which the Executive is entitled under Section 7(d) hereof, the
Company shall (i) pay the Executive his Company Salary through the Date of
Termination at the rate in effect at the time the Notice of Termination is
given, at the time such payments are due; plus (ii) pay to the Executive in a
lump sum in cash, within 25 days after the later of the date of such Change in
Control or the Date of Termination, an amount equal to 299% of the Executive's
"base amount" as determined under Section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), less the aggregate present value of the payments
or benefits, if any, in the nature of compensation for the benefit of the
Executive, arising under any other plans or arrangements (i.e., not this
Agreement) between the Company or any of the Consolidated Subsidiaries and the
Executive, which are contingent upon a Change in Control. The Company's
obligation under this Section 7 shall not be reduced by any amounts paid under
the Restated Executive Supplemental Retirement Plan and Compensation
Continuation Agreement, dated March 23, 1988, by and between the Executive and
the Bank.
<PAGE>
While it is not contemplated that the Executive will receive any
amounts or benefits that will constitute "excess parachute payments" under
Section 280G of the Code, in the event that any payments or benefits provided or
to be provided to the Executive pursuant to this Agreement, in combination with
payments or benefits, if any, from other plans or arrangements maintained by the
Company or any of the Consolidated Subsidiaries, constitute "excess parachute
payments" under Section 280G of the Code that are subject to excise tax under
Section 4999 of the Code, the Company shall pay to the Executive in cash an
additional amount equal to the amount of the Gross Up Payment (as hereinafter
defined). The "Gross Up Payment" shall be the amount needed to ensure that the
amount of such payments and the value of such benefits received by the Executive
(net of such excise tax and any federal, state and local tax on the Company's
payment to him attributable to such excise tax) equals the amount of such
payments and value of such benefits as he would receive in the absence of such
excise tax and any federal, state and local tax on the Company's payment to him
attributable to such excise tax. The Company shall pay the Gross Up Payment
within 30 days after the Date of Termination. For purposes of determining the
amount of the Gross Up Payment, the value of any non-cash benefits and deferred
payments or benefits shall be determined by the Company's independent auditors
in accordance with the principles of Section 280G(d)(3) and (4) of the Code. In
the event that, after the Gross Up Payment is made, the amount of the excise tax
is determined to be less than the amount calculated in the determination of the
actual Gross Up Payment made by the Company, the Executive shall repay to the
Company, at the time that such reduction in the amount of excise tax is finally
determined, the portion of the Gross Up Payment attributable to such reduction,
plus interest on the amount of such repayment at the applicable federal rate
under Section 1274 of the Code from the date of the Gross Up Payment to the date
of the repayment. The amount of the reduction of the Gross Up Payment shall
reflect any subsequent reduction in excise taxes resulting from such repayment.
In the event that, after the Gross Up Payment is made, the amount of the excise
tax is determined to exceed the amount anticipated at the time the Gross Up
Payment was made, the Company shall pay to the Executive, in immediately
available funds, at the time that such additional amount of excise tax is
finally determined, an additional payment ("Additional Gross Up Payment") equal
to such additional amount of excise tax and any federal, state and local taxes
thereon, plus all interest and penalties, if any, owed by the Executive with
respect to such additional amount of excise and other tax. The Company shall
have the right to challenge, on the Executive's behalf, any excise tax
assessment against him as to which the Executive is entitled to (or would be
entitled if such assessment is finally determined to be proper) a Gross Up
Payment or Additional Gross Up Payment, provided that all costs and expenses
incurred in such a challenge shall be borne by the Company and the Company shall
indemnify the Executive and hold him harmless, on an after-tax basis, from any
excise or other tax (including interest and penalties with respect thereto)
imposed as a result of such payment of costs and expenses by the Company.
(h) Other Payments. The Company's obligation under this Section 7
shall not be reduced by any amounts paid under the Restated Executive
Supplemental Retirement Plan and Compensation Continuation Agreement, dated
March 23, 1988, by and between the Executive and the Bank.
8. Notice of Termination. In the event that the Company or the Bank, or
both, desire to terminate the employment of the Executive during the term of
this Agreement, the Company and/or the Bank (as the case may be) shall deliver
to the Executive a written notice of termination, stating whether such
termination constitutes Termination for Disability, Termination for Cause or
Involuntary Termination, setting forth in reasonable detail the facts and
<PAGE>
circumstances that are the basis for the termination, and specifying the date
upon which employment shall terminate, which date shall be at least 30 days
after the date upon which the notice is delivered, except in the case of
Termination for Cause. In the event that the Executive determines in good faith
that he has experienced an Involuntary Termination of his employment, he shall
send a written notice to the Company stating the circumstances that constitute
such Involuntary Termination and the date upon which his employment shall have
ceased due to such Involuntary Termination. In the event that the Executive
desires to effect a Voluntary Termination, he shall deliver a written notice to
the Company, stating the date upon which employment shall terminate, which date
shall be at least 30 days after the date upon which the notice is delivered,
unless the parties agree to a date sooner.
9. No Assignments.
(a) This Agreement is personal to each of the parties hereto,
and neither party may assign or delegate any of its rights or obligations
hereunder without first obtaining the written consent of the other party;
provided, however, that the Company shall require any successor or assign
(whether direct or indirect, by purchase, merger, consolidation, operation of
law or otherwise) to all or substantially all of the business and/or assets of
the Company, by an assumption agreement in form and substance satisfactory to
the Executive, to expressly assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to perform
it if no such succession or assignment had taken place. Failure of the Company
to obtain such an assumption agreement prior to the effectiveness of any such
succession or assignment shall be a breach of this Agreement and shall entitle
the Executive to compensation and benefits from the Company in the same amount
and on the same terms that he would be entitled to hereunder if he terminated
his employment for Good Reason, in addition to any payments and benefits to
which the Executive is entitled under Section 7(g) hereof. For purposes of
implementing the provisions of this Section 9(a), the date on which any such
succession becomes effective shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Executive hereunder
shall inure to the benefit of and be enforceable by the Executive's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. In the event of the death of the Executive,
unless otherwise provided herein, all amounts payable hereunder shall be paid to
the Executive's devisee, legatee, or other designee or, if there be no such
designee, to the Executive's estate.
10. Notices. For the purposes of this Agreement, all notices and other
communications to any party hereto shall be in writing and shall be deemed to
have been duly given when delivered or sent by certified mail, return receipt
requested, postage prepaid, addressed as follows:
If to the Executive: Joseph H. Giaquinto, Chairman of the Board,
President and Chief Executive Officer
SFS Bancorp, Inc.
251-263 State Street
Schenectady, New York 12301
If to the Company: SFS Bancorp, Inc.
251-263 State Street
Schenectady, New York 12301
Attention: Corporate Secretary
<PAGE>
or to such other address as such party may have furnished to the other in
writing in accordance herewith, except that a notice of change of address shall
be effective only upon receipt.
11. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
12. Headings. The headings used in this Agreement are included solely
for convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
13. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
14. Governing Law. This Agreement shall be governed by the laws of the
State of Delaware.
15. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by binding
arbitration, conducted before a panel of three arbitrators in a location
selected by the Executive within 100 miles of such Executive's job location with
the Company, in accordance with the rules of the American Arbitration
Association then in effect; provided, however, that the Executive shall be
entitled to seek specific performance of his rights under Section 1(c) during
the pendency of any dispute or controversy arising under or in connection with
this Agreement. Judgment may be entered on the arbitrator's award in any court
having jurisdiction.
16. Reimbursement of Expenses. In the event any dispute shall arise
between the Executive and the Company or the Bank as to the terms or
interpretation of this Agreement, including this Section 16, whether instituted
by formal legal proceedings or otherwise, including any action taken by the
Executive to enforce the terms of this Section 16 or in defending against any
action taken by the Company or the Bank, the Company shall reimburse the
Executive for all costs and expenses incurred by the Executive, including
reasonable attorney's fees, arising from such dispute, proceedings or actions,
unless a court of competent jurisdiction renders a final and nonappealable
judgment against the Executive as to the matter in dispute. Reimbursement of the
Executive's expenses shall be paid within ten days of the Executive furnishing
to the Company written evidence, which may be in the form, among other things,
of a canceled check or receipt, of any costs or expenses incurred by the
Executive.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
Attest: SFS BANCORP, INC.
- --------------------- ---------------------------
Secretary By:
Its:
EXECUTIVE
----------------------------
Joseph H. Giaquinto, individually
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this 13th day of December, 1995, by and between Schenectady Federal Savings Bank
hereinafter referred to as the "Bank" whether in mutual or stock form), and
Richard D. Ammian (the "Employee").
WHEREAS, the Employee is currently serving as the Senior Vice President
and Corporate Secretary; and
WHEREAS, the Bank has adopted a plan of conversion whereby the Bank
will convert to capital stock form as the subsidiary of SFS Bancorp, Inc. (the
"Holding Company"), subject to the approval of the Bank's members and the Office
of Thrift Supervision (the "Conversion"); and
WHEREAS, the board of directors of the Bank ("Board of Directors")
recognizes that, as is the case with publicly held corporations generally, the
possibility of a change in control of the Holding Company and/or the Bank may
exist and that such possibility, and the uncertainty and questions which it may
raise among management, may result in the departure or distraction of key
management personnel to the detriment of the Bank, the Holding Company and their
respective stockholders; and
WHEREAS, the Board of Directors believes it is in the best interests of
the Bank to enter into this Agreement with the Employee in order to assure
continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to his assigned duties
without distraction in the face of potentially disruptive circumstances arising
from the possibility of a change in control of the Holding Company or the Bank,
although no such change is now contemplated; and
WHEREAS, the Board of Directors has approved and authorized the
execution of this Agreement with the Employee to take effect as stated in
Section 2 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. Definitions.
(a) The term "Change in Control" means (1) an event of a
nature that (i) results in a change in control of the Bank or the Holding
Company within the meaning of the Home Owners' Loan Act of 1933 and 12 C.F.R.
Part 574 as in effect on the date hereof; or (ii) would be required to be
reported in response to Item 1 of the current report on Form 8-K, as in effect
on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act"); (2) any person (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the beneficial owner
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of
securities of the Bank or the Holding Company representing 20% or more of the
Bank's or the Holding Company's outstanding securities; (3) individuals who are
members of the board of directors of the Bank or the Holding Company on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-quarters of
the directors comprising the Incumbent Board, or whose nomination for election
by the Holding Company's stockholders was approved by the nominating committee
<PAGE>
serving under an Incumbent Board, shall be considered a member of the Incumbent
Board; or (4) a plan of reorganization, merger consolidation, sale of all or
substantially all of the assets of the Bank or the Holding Company or a similar
transaction in which the Bank or the Holding Company is not the resulting
entity. The term "change in control" shall not include an acquisition of
securities by an employee benefit plan of the Bank or the Holding Company or the
acquisition of securities of the Bank by the Holding Company in connection with
the Conversion. In the application of 12 C.F.R. Part 574 to a determination of a
Change in Control, determinations to be made by the OTS or its Director under
such regulations shall be made by the Board of Directors.
(b) The term "Commencement Date" means the date of completion
of Conversion.
(c) The term "Date of Termination" means the earlier of (1)
the date upon which the Bank gives notice to the Employee of the termination of
his employment with the Bank or (2) the date upon which the Employee ceases to
serve as an Employee of the Bank.
(d) The term "Involuntarily Termination" means termination of
the employment of Employee without his express written consent, and shall
include a material diminution of or interference with the Employee's duties,
responsibilities and benefits as Senior Vice President of the Bank, including
(without limitation) any of the following actions unless consented to in writing
by the Employee: (1) a change in the principal workplace of the Employee to a
location outside of a 20 mile radius from the Bank's headquarters office as of
the date hereof; (2) a material reduction in the number or seniority of other
Bank personnel reporting to the Employee or a material reduction in the
frequency with which, or in the nature of the matters with respect to which such
personnel are to report to the Employee, other than as part of a Bank- or
Holding Company-wide reduction in staff; (3) a material adverse change in the
Employee's salary, perquisites, benefits, contingent benefits or vacation, other
than as part of an overall program applied uniformly and with equitable effect
to all members of the senior management of the Bank or the Holding Company; and
(4) a material permanent increase in the required hours of work or the workload
of the Employee. The term "Involuntary Termination" does not include Termination
for Cause or termination of employment due to retirement, death, disability or
suspension or temporary or permanent prohibition from participation in the
conduct of the Bank's affairs under Section 8 of the Federal Deposit Insurance
Act ("FDIA").
(e) The terms "Termination for Cause" and "Terminated for
Cause" mean termination of the employment of the Employee because of the
Employee's personal dishonesty, incompetence, willful misconduct, breach of a
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. The Employee shall not be deemed to
have been Terminated for Cause unless and until there shall have been delivered
to the Employee a copy of a resolution, duly adopted by the affirmative vote of
not less than a majority of the entire membership of the Board of Directors of
the Bank at a meeting of the Board called and held for such purpose (after
reasonable notice to the Employee and an opportunity for the Employee, together
with the Employee's counsel, to be heard before the Board), stating that in the
good faith opinion of the Board the Employee has engaged in the conduct
described in the preceding sentence and specifying the particulars thereof in
detail.
<PAGE>
2. Term. The term of this Agreement shall be a period of two years
commencing on the Commencement Date, subject to earlier termination as provided
herein. Beginning on the first anniversary of the Commencement Date, and on each
anniversary thereafter, the term of this Agreement shall be extended for a
period of one year in addition to the then-remaining term, provided that (1) the
Bank has not given notice to the Employee in writing at least 90 days prior to
such anniversary that the term of this Agreement shall not be extended further;
and (2) prior to such anniversary, the Board of Directors explicitly reviews and
approves the extension. Reference herein to the term of this Agreement shall
refer to both such initial term and such extended terms.
3. Employment. The Employee is employed as the Senior Vice President
and Corporate Secretary of the Bank. As Senior Vice President and Corporate
Secretary, Employee shall render such administrative and management services
under the supervision of the President as are customarily performed by persons
situated in similar executive capacities, and shall have such other powers and
duties of an officer of the Bank as the Board of Directors may prescribe from
time to time.
4. Compensation.
(a) Salary. The Bank agrees to pay the Employee during the
term of this Agreement the salary established by the Board of Directors, which
shall be at least the Employee's salary in effect as of the Commencement Date.
The amount of the Employee's salary shall be reviewed by the Board of Directors,
beginning not later than the first anniversary of the Commencement Date.
Adjustments in salary or other compensation shall not limit or reduce any other
obligation of the Bank under this Agreement. The Employee's salary in effect
from time to time during the term of this Agreement shall not thereafter be
reduced.
(b) Discretionary Bonuses. The Employee shall be entitled to
participate in an equitable manner with all other executive officers of the Bank
in discretionary bonuses as authorized and declared by the Board of Directors to
its executive employees. No other compensation provided for in this Agreement
shall be deemed a substitute for the Employee's right to participate in such
bonuses when and as declared by the Board of Directors.
(c) Expenses. The Employee shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Employee in performing
services under this Agreement in accordance with the policies and procedures
applicable to the executive officers of the Bank, provided that the Employee
accounts for such expenses as required under such policies and procedures.
5. Benefits.
(a) Participation in Retirement and Employee Benefit Plans.
The Employee shall be entitled to participate in all plans relating to pension,
thrift, profit-sharing, group life insurance, medical and dental coverage,
education, cash bonuses, and other retirement or employee benefits or
combinations thereof, in which the Bank's executive officers participate. In
addition, the Employee shall be entitled to be considered for benefits under all
of the stock and stock option related plans adopted for the benefit of the
Bank's executive or other employees.
<PAGE>
(b) Fringe Benefits. The Employee shall be eligible to
participate in, and receive benefits under, any other fringe benefit plans which
are or may become applicable to the Bank's executive officers.
6. Vacations; Leave. The Employee shall be entitled to annual paid
vacation in accordance with the policies established by the Bank's Board of
Directors for executive employees and to voluntary leave of absence, with or
without pay, from time to time at such times and upon such conditions as the
Board of Directors of the Bank may determine in its discretion.
7. Termination of Employment.
(a) Involuntary Termination. The Board of Directors may
terminate the Employee's employment at any time, but, except in the case of
Termination for Cause, termination of employment shall not prejudice the
Employee's right to compensation or other benefits under this Agreement. In the
event of Involuntary Termination other than in connection with or within twelve
(12) months after a Change in Control, (1) the Bank shall pay to the Employee
during the remaining term of this Agreement, his salary at the rate in effect
immediately prior to the Date of Termination, payable in such manner and at such
times as such salary would have been payable to the Employee under Section 2 if
the Employee had continued to be employed by the Bank, and (2) the Bank shall
provide to the Employee during the remaining term of this Agreement health
benefits as maintained by the Bank for the benefit of its executive officers
from time to time during the remaining term of the Agreement.
(b) Termination for Cause. In the event of Termination for
Cause, the Bank shall pay the Employee his salary through the date of
termination, and the Bank shall have no further obligation to the Employee under
this Agreement.
(c) Voluntary Termination. The Employee's employment may be
voluntarily terminated by the Employee at any time upon 90 days written notice
to the Bank or upon such shorter period as may be agreed upon between the
Employee and the Board of Directors of the Bank. In the event of such voluntary
termination, the Bank shall be obligated to continue to pay the Employee his
salary and benefits only through the date of termination, at the time such
payments are due, and the Bank shall have no further obligation to the Employee
under this Agreement.
(d) Change in Control. In the event of Involuntary Termination
in connection with or within 12 months after a change in control which occurs at
any time while the Employee is employed under this Agreement, the Bank shall,
subject to Section 8 of this Agreement, (1) pay to the Employee in a lump sum in
cash within 25 business days after the Date of Termination an amount equal to
200% of the Employee's "base amount" as defined in Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"); and (2) provide to the Employee
during the remaining term of this Agreement such health benefits as are
maintained for executive officers of the Bank from time to time during the
remaining term of this Agreement.
(e) Death; Disability. In the event of the death of the
Employee while employed under this Agreement and prior to any termination of
employment, the Employee's estate, or such person as the Employee may have
previously designated in writing, shall be entitled to receive from the Bank the
salary of the Employee through the last day of the calendar month in which the
Employee died. If the Employee becomes disabled as defined in the Bank's then
current disability plan or if the Employee is otherwise unable to serve in his
<PAGE>
present capacity, the Employee shall be entitled to receive group and other
disability income benefits of the type then provided by the Bank for executive
officers. In the event of such disability, this Agreement shall not be
suspended. However, the Bank shall be obligated to pay the Employee compensation
pursuant to Sections 4(a) and (b) hereof only to the extent the Employee's
salary, in the absence of such disability, would exceed (on an after tax basis)
the disability income benefits received pursuant to this paragraph. In addition,
the Bank shall have the right, upon resolution of its Board, to discontinue
paying cash compensation pursuant to Sections 4(a) and (b) beginning six months
following a determination that Employee qualifies for the foregoing disability
income benefits.
(f) Temporary Suspension or Prohibition. If the Employee is
suspended and/or temporarily prohibited from participating in the conduct of the
Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA,
12 U.S.C. ss. 1818(e)(3) and (g)(1), the Bank's obligations under this Agreement
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (1) pay the Employee all or part of the compensation withheld while
its obligations under this Agreement were suspended and (ii) reinstate in whole
or in part any of its obligations which were suspended.
(g) Permanent Suspension or Prohibition. If the Employee is
removed and/or permanently prohibited from participating in the conduct of the
Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA,
12 U.S.C. ss. 1818(e)(4) and (g)(1), all obligations of the Bank under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(h) Default of the Bank. If the Bank is in default (as defined
in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect any
vested rights of the contracting parties.
(i) Termination by Regulators. All obligations under this
Agreement shall be terminated, except to the extent determined that continuation
of this Agreement is necessary for the continued operation of the Bank: (1) by
the Director of the Office of Thrift Supervision (the "Director") or his or her
designee, at the time the Federal Deposit Insurance Corporation or the
Resolution Trust Corporation enters into an agreement to provide assistance to
or on behalf of the Bank under the authority contained in Section 13(c) of the
FDIA; or (2) by the Director or his or her designee, at the time the Director or
his or her designee approves a supervisory merger to resolve problems related to
operation of the Bank or when the Bank is determined by the Director to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by any such action.
8. Certain Reduction of Payments by the Bank.
(a) Notwithstanding any other provision of this Agreement, if
payments under this Agreement, together with any other payments received or to
be received by the Employee in connection with a Change in Control would cause
any amount to be nondeductible by the Bank or the Holding Company for federal
income tax purposes pursuant to Section 280G of the Code, then benefits under
this Agreement shall be reduced (not less than zero) to the extent necessary so
as to maximize payments to the Employee without causing any amount to become
nondeductible by the Bank or the Holding Company. The Employee shall determine
the allocation of such reduction among payments to the Employee.
<PAGE>
(b) Any payments made to the Employee pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with 12 U.S.C. 1828(k) and any regulations promulgated thereunder.
9. No Mitigation. The Employee shall not be required to mitigate the
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
the Employee as the result of employment by another employer, by retirement
benefits after the date of termination or otherwise.
10. Attorneys Fees. In the event the Bank exercises its right of
Termination for Cause, but it is determined by a court of competent jurisdiction
or by an arbitrator pursuant to Section 18 that cause did not exist for such
termination, or if in any event it is determined by any such court or arbitrator
that the Bank has failed to make timely payment of any amounts owed to the
Employee under this Agreement, the Employee shall be entitled to reimbursement
for all reasonable costs, including attorneys' fees, incurred in challenging
such termination or collecting such amounts. Such reimbursement shall be in
addition to all rights to which the Employee is otherwise entitled under this
Agreement.
11. Confidential Information; Loyalty; Noncompetition.
(a) During the term of the Employee's employment hereunder and
thereafter, the Employee shall not, except as may be required to perform his
duties hereunder or as required by law, disclose to others or use, whether
directly or indirectly, any Confidential Information. "Confidential Information"
means information about the Bank and the Bank's clients and customers which is
not available to the general public and was or shall be learned by the Employee
in the course of his employment by the Bank, including without limitation any
data, formulae, information, proprietary knowledge, trade secrets, credit
reports and analyses owned, developed and used in the course of the business of
the Bank, including client and customer lists and information related thereto;
and all papers, records and other documents (and all copies thereof) contained
such Confidential Information. The Employee acknowledges that such Confidential
Information is specialized, unique in nature and of great value to the Bank. The
Employee agrees that upon the expiration of the Employee's term of employment
hereunder or in the event the Employee's employment hereunder is terminated
prior thereto for any reason whatsoever, the Employee will promptly deliver to
the Bank all documents (and all copies thereof) containing any Confidential
Information.
(b) The Employee shall devote his full time to the performance
of his employment under this Agreement; provided, however, that the Employee may
serve, without compensation, as a director of charitable, community and industry
organizations and continue to serve, with compensation, as a director of the
business corporations of which he is currently a director to the extent such
directorships do not inhibit the performance of his duties thereunder or
conflict with the business of the Bank. During the term of the Employee's
employment hereunder, the Employee shall not engage in any business or activity
contrary to the business affairs or interests of the Bank.
(c) Upon the expiration of the term of the Employee's
employment hereunder or in the event the Employee's employment hereunder
terminates prior thereto for any reason whatsoever, the Employee shall not, for
a period of one year after the occurrence of such event, for himself, or as the
<PAGE>
agent of, on behalf of, or in conjunction with, any person or entity, solicit or
attempt to solicit, whether directly or indirectly: (i) any employee of the Bank
to terminate such employee's employment relationship with the Bank; or (ii) any
savings and loan, banking or similar business from any person or entity that is
or was a client, employee, or customer of the Bank and had dealt with the
Employee or any other employee of the Bank under the supervision of the
Employee.
(d) In the event Employee voluntarily resigns pursuant to
Section 7(c) of this Agreement, the Employee shall not, for a period equal to
the lesser of one year from the date of termination or the period during which
the Bank is obligated to continue to pay the Employee his salary, directly or
indirectly, own, manage, operate or control, or participate in the ownership,
management, operation or control of, or be employed by or connected in any
manner with, any financial institution having an office located within ten miles
of any office of the Bank as of the date of termination.
(e) The provisions of this Section 11 shall not prevent the
Employee from purchasing, solely for investment, not more than 5 percent of any
financial institution's stock or other securities which are traded on any
national or regional securities.
(f) The provisions of this Section shall survive the
termination of the Employee's employment hereunder whether by expiration of the
term thereof or otherwise.
12. No Assignments.
(a) This Agreement is personal to each of the parties hereto,
and neither party may assign or delegate any of its rights or obligations
hereunder without first obtaining the written consent of the other party;
provided, however, that the Bank shall require any successor or assign (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Bank, by an assumption
agreement in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Bank would be required to perform it if no such succession or
assignment had taken place. Failure of the Bank to obtain such an assumption
agreement prior to the effectiveness of any such succession or assignment shall
be a breach of this Agreement and shall entitle the Employee to compensation
from the Bank in the same amount and on the same terms as the compensation
pursuant to Section 7(d) hereof. For purposes of implementing the provisions of
this Section 12(a), the date on which any such succession becomes effective
shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder
shall inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Employee should die while any
amounts would still be payable to the Employee hereunder if the Employee had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Employee's devisee,
legatee or other designee or if there is no such designee, to the Employee's
estate.
<PAGE>
13. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Bank at its home office
the attention of the Board of Directors with a copy to the Secretary of the
Bank, or, if the Employee, to such home or other address as the Employee has
most recently provided in writing to the Bank.
14. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
15. Paragraph Headings. The paragraph headings used in this Agreement
are included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
17. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
New York.
18. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
Attest: Schenectady Federal Savings Bank
- --------------------- ---------------------------
Secretary
By:
Its:
EMPLOYEE
----------------------------
Richard D. Ammian
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this 17th day of December, 1997, by and between Schenectady Federal Savings Bank
hereinafter referred to as the "Bank"), and David Jurczynski (the "Employee").
WHEREAS, the Employee is currently serving as the Chief Financial
Officer; and
WHEREAS, the board of directors of the Bank ("Board of Directors")
recognizes that, as is the case with publicly held corporations generally, the
possibility of a change in control of the Holding Company and/or the Bank may
exist and that such possibility, and the uncertainty and questions which it may
raise among management, may result in the departure or distraction of key
management personnel to the detriment of the Bank, the Holding Company and their
respective stockholders; and
WHEREAS, the Board of Directors believes it is in the best interests of
the Bank to enter into this Agreement with the Employee in order to assure
continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to his assigned duties
without distraction in the face of potentially disruptive circumstances arising
from the possibility of a change in control of the Holding Company or the Bank,
although no such change is now contemplated; and
WHEREAS, the Board of Directors has approved and authorized the
execution of this Agreement with the Employee to take effect as stated in
Section 2 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. Definitions.
(a) The term "Change in Control" means (1) an event of a
nature that (i) results in a change in control of the Bank or the Holding
Company within the meaning of the Home Owners' Loan Act of 1933 and 12 C.F.R.
Part 574 as in effect on the date hereof; or (ii) would be required to be
reported in response to Item 1 of the current report on Form 8-K, as in effect
on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act"); (2) any person (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the beneficial owner
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of
securities of the Bank or the Holding Company representing 20% or more of the
Bank's or the Holding Company's outstanding securities; (3) individuals who are
members of the board of directors of the Bank or the Holding Company on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-quarters of
the directors comprising the Incumbent Board, or whose nomination for election
by the Holding Company's stockholders was approved by the nominating committee
serving under an Incumbent Board, shall be considered a member of the Incumbent
Board; or (4) a plan of reorganization, merger consolidation, sale of all or
substantially all of the assets of the Bank or the Holding Company or a similar
<PAGE>
transaction in which the Bank or the Holding Company is not the resulting
entity. The term "change in control" shall not include an acquisition of
securities by an employee benefit plan of the Bank or the Holding Company or the
acquisition of securities of the Bank by the Holding Company in connection with
the Conversion. In the application of 12 C.F.R. Part 574 to a determination of a
Change in Control, determinations to be made by the OTS or its Director under
such regulations shall be made by the Board of Directors.
(b) The term "Commencement Date" means the 17th of December,
1997.
(c) The term "Date of Termination" means the earlier of (1)
the date upon which the Bank gives notice to the Employee of the termination of
his employment with the Bank or (2) the date upon which the Employee ceases to
serve as an Employee of the Bank.
(d) The term "Involuntarily Termination" means termination of
the employment of Employee without his express written consent, and shall
include a material diminution of or interference with the Employee's duties,
responsibilities and benefits as Chief Financial Officer of the Bank, including
(without limitation) any of the following actions unless consented to in writing
by the Employee: (1) a change in the principal workplace of the Employee to a
location outside of a 20 mile radius from the Bank's headquarters office as of
the date hereof; (2) a material reduction in the number or seniority of other
Bank personnel reporting to the Employee or a material reduction in the
frequency with which, or in the nature of the matters with respect to which such
personnel are to report to the Employee, other than as part of a Bank- or
Holding Company-wide reduction in staff; (3) a material adverse change in the
Employee's salary, perquisites, benefits, contingent benefits or vacation, other
than as part of an overall program applied uniformly and with equitable effect
to all members of the senior management of the Bank or the Holding Company; and
(4) a material permanent increase in the required hours of work or the workload
of the Employee. The term "Involuntary Termination" does not include Termination
for Cause or termination of employment due to retirement, death, disability or
suspension or temporary or permanent prohibition from participation in the
conduct of the Bank's affairs under Section 8 of the Federal Deposit Insurance
Act ("FDIA").
(e) The terms "Termination for Cause" and "Terminated for
Cause" mean termination of the employment of the Employee because of the
Employee's personal dishonesty, incompetence, willful misconduct, breach of a
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. The Employee shall not be deemed to
have been Terminated for Cause unless and until there shall have been delivered
to the Employee a copy of a resolution, duly adopted by the affirmative vote of
not less than a majority of the entire membership of the Board of Directors of
the Bank at a meeting of the Board called and held for such purpose (after
reasonable notice to the Employee and an opportunity for the Employee, together
with the Employee's counsel, to be heard before the Board), stating that in the
good faith opinion of the Board the Employee has engaged in the conduct
described in the preceding sentence and specifying the particulars thereof in
detail.
<PAGE>
2. Term. The term of this Agreement shall be a period of two years
commencing on the Commencement Date, subject to earlier termination as provided
herein. Beginning on the first anniversary of the Commencement Date, and on each
anniversary thereafter, the term of this Agreement shall be extended for a
period of one year in addition to the then-remaining term, provided that (1) the
Bank has not given notice to the Employee in writing at least 90 days prior to
such anniversary that the term of this Agreement shall not be extended further;
and (2) prior to such anniversary, the Board of Directors explicitly reviews and
approves the extension. Reference herein to the term of this Agreement shall
refer to both such initial term and such extended terms.
3. Employment. The Employee is employed as the Chief Financial Officer
of the Bank. As Chief Financial Officer, Employee shall render such
administrative and management services under the supervision of the President as
are customarily performed by persons situated in similar executive capacities,
and shall have such other powers and duties of an officer of the Bank as the
Board of Directors may prescribe from time to time.
4. Compensation.
(a) Salary. The Bank agrees to pay the Employee during the
term of this Agreement the salary established by the Board of Directors, which
shall be at least the Employee's salary in effect as of the Commencement Date.
The amount of the Employee's salary shall be reviewed by the Board of Directors,
beginning not later than the first anniversary of the Commencement Date.
Adjustments in salary or other compensation shall not limit or reduce any other
obligation of the Bank under this Agreement. The Employee's salary in effect
from time to time during the term of this Agreement shall not thereafter be
reduced.
(b) Discretionary Bonuses. The Employee shall be entitled to
participate in an equitable manner with all other executive officers of the Bank
in discretionary bonuses as authorized and declared by the Board of Directors to
its executive employees. No other compensation provided for in this Agreement
shall be deemed a substitute for the Employee's right to participate in such
bonuses when and as declared by the Board of Directors.
(c) Expenses. The Employee shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Employee in performing
services under this Agreement in accordance with the policies and procedures
applicable to the executive officers of the Bank, provided that the Employee
accounts for such expenses as required under such policies and procedures.
5. Benefits.
(a) Participation in Retirement and Employee Benefit Plans.
The Employee shall be entitled to participate in all plans relating to pension,
thrift, profit-sharing, group life insurance, medical and dental coverage,
education, cash bonuses, and other retirement or employee benefits or
combinations thereof, in which the Bank's executive officers participate. In
addition, the Employee shall be entitled to be considered for benefits under all
of the stock and stock option related plans adopted for the benefit of the
Bank's executive or other employees.
(b) Fringe Benefits. The Employee shall be eligible to
participate in, and receive benefits under, any other fringe benefit plans which
are or may become applicable to the Bank's executive officers.
<PAGE>
6. Vacations; Leave. The Employee shall be entitled to annual paid
vacation in accordance with the policies established by the Bank's Board of
Directors for executive employees and to voluntary leave of absence, with or
without pay, from time to time at such times and upon such conditions as the
Board of Directors of the Bank may determine in its discretion.
7. Termination of Employment.
(a) Involuntary Termination. The Board of Directors may
terminate the Employee's employment at any time, but, except in the case of
Termination for Cause, termination of employment shall not prejudice the
Employee's right to compensation or other benefits under this Agreement. In the
event of Involuntary Termination other than in connection with or within twelve
(12) months after a Change in Control, (1) the Bank shall pay to the Employee
during the remaining term of this Agreement, his salary at the rate in effect
immediately prior to the Date of Termination, payable in such manner and at such
times as such salary would have been payable to the Employee under Section 2 if
the Employee had continued to be employed by the Bank, and (2) the Bank shall
provide to the Employee during the remaining term of this Agreement health
benefits as maintained by the Bank for the benefit of its executive officers
from time to time during the remaining term of the Agreement.
(b) Termination for Cause. In the event of Termination for
Cause, the Bank shall pay the Employee his salary through the date of
termination, and the Bank shall have no further obligation to the Employee under
this Agreement.
(c) Voluntary Termination. The Employee's employment may be
voluntarily terminated by the Employee at any time upon 90 days written notice
to the Bank or upon such shorter period as may be agreed upon between the
Employee and the Board of Directors of the Bank. In the event of such voluntary
termination, the Bank shall be obligated to continue to pay the Employee his
salary and benefits only through the date of termination, at the time such
payments are due, and the Bank shall have no further obligation to the Employee
under this Agreement.
(d) Change in Control. In the event of Involuntary Termination
in connection with or within 12 months after a change in control which occurs at
any time while the Employee is employed under this Agreement, the Bank shall,
subject to Section 8 of this Agreement, (1) pay to the Employee in a lump sum in
cash within 25 business days after the Date of Termination an amount equal to
200% of the Employee's "base amount" as defined in Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"); and (2) provide to the Employee
during the remaining term of this Agreement such health benefits as are
maintained for executive officers of the Bank from time to time during the
remaining term of this Agreement.
(e) Death; Disability. In the event of the death of the
Employee while employed under this Agreement and prior to any termination of
employment, the Employee's estate, or such person as the Employee may have
previously designated in writing, shall be entitled to receive from the Bank the
salary of the Employee through the last day of the calendar month in which the
Employee died. If the Employee becomes disabled as defined in the Bank's then
current disability plan or if the Employee is otherwise unable to serve in his
<PAGE>
present capacity, the Employee shall be entitled to receive group and other
disability income benefits of the type then provided by the Bank for executive
officers. In the event of such disability, this Agreement shall not be
suspended. However, the Bank shall be obligated to pay the Employee compensation
pursuant to Sections 4(a) and (b) hereof only to the extent the Employee's
salary, in the absence of such disability, would exceed (on an after tax basis)
the disability income benefits received pursuant to this paragraph. In addition,
the Bank shall have the right, upon resolution of its Board, to discontinue
paying cash compensation pursuant to Sections 4(a) and (b) beginning six months
following a determination that Employee qualifies for the foregoing disability
income benefits.
(f) Temporary Suspension or Prohibition. If the Employee is
suspended and/or temporarily prohibited from participating in the conduct of the
Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA,
12 U.S.C. ss. 1818(e)(3) and (g)(1), the Bank's obligations under this Agreement
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (1) pay the Employee all or part of the compensation withheld while
its obligations under this Agreement were suspended and (ii) reinstate in whole
or in part any of its obligations which were suspended.
(g) Permanent Suspension or Prohibition. If the Employee is
removed and/or permanently prohibited from participating in the conduct of the
Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA,
12 U.S.C. ss. 1818(e)(4) and (g)(1), all obligations of the Bank under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(h) Default of the Bank. If the Bank is in default (as defined
in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect any
vested rights of the contracting parties.
(i) Termination by Regulators. All obligations under this
Agreement shall be terminated, except to the extent determined that continuation
of this Agreement is necessary for the continued operation of the Bank: (1) by
the Director of the Office of Thrift Supervision (the "Director") or his or her
designee, at the time the Federal Deposit Insurance Corporation or the
Resolution Trust Corporation enters into an agreement to provide assistance to
or on behalf of the Bank under the authority contained in Section 13(c) of the
FDIA; or (2) by the Director or his or her designee, at the time the Director or
his or her designee approves a supervisory merger to resolve problems related to
operation of the Bank or when the Bank is determined by the Director to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by any such action.
8. Certain Reduction of Payments by the Bank.
(a) Notwithstanding any other provision of this Agreement, if
payments under this Agreement, together with any other payments received or to
be received by the Employee in connection with a Change in Control would cause
any amount to be nondeductible by the Bank or the Holding Company for federal
income tax purposes pursuant to Section 280G of the Code, then benefits under
this Agreement shall be reduced (not less than zero) to the extent necessary so
as to maximize payments to the Employee without causing any amount to become
nondeductible by the Bank or the Holding Company. The Employee shall determine
the allocation of such reduction among payments to the Employee.
<PAGE>
(b) Any payments made to the Employee pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with 12 U.S.C. 1828(k) and any regulations promulgated thereunder.
9. No Mitigation. The Employee shall not be required to mitigate the
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
the Employee as the result of employment by another employer, by retirement
benefits after the date of termination or otherwise.
10. Attorneys Fees. In the event the Bank exercises its right of
Termination for Cause, but it is determined by a court of competent jurisdiction
or by an arbitrator pursuant to Section 18 that cause did not exist for such
termination, or if in any event it is determined by any such court or arbitrator
that the Bank has failed to make timely payment of any amounts owed to the
Employee under this Agreement, the Employee shall be entitled to reimbursement
for all reasonable costs, including attorneys' fees, incurred in challenging
such termination or collecting such amounts. Such reimbursement shall be in
addition to all rights to which the Employee is otherwise entitled under this
Agreement.
11. Confidential Information; Loyalty; Noncompetition.
(a) During the term of the Employee's employment hereunder and
thereafter, the Employee shall not, except as may be required to perform his
duties hereunder or as required by law, disclose to others or use, whether
directly or indirectly, any Confidential Information. "Confidential Information"
means information about the Bank and the Bank's clients and customers which is
not available to the general public and was or shall be learned by the Employee
in the course of his employment by the Bank, including without limitation any
data, formulae, information, proprietary knowledge, trade secrets, credit
reports and analyses owned, developed and used in the course of the business of
the Bank, including client and customer lists and information related thereto;
and all papers, records and other documents (and all copies thereof) contained
such Confidential Information. The Employee acknowledges that such Confidential
Information is specialized, unique in nature and of great value to the Bank. The
Employee agrees that upon the expiration of the Employee's term of employment
hereunder or in the event the Employee's employment hereunder is terminated
prior thereto for any reason whatsoever, the Employee will promptly deliver to
the Bank all documents (and all copies thereof) containing any Confidential
Information.
(b) The Employee shall devote his full time to the performance
of his employment under this Agreement; provided, however, that the Employee may
serve, without compensation, as a director of charitable, community and industry
organizations and continue to serve, with compensation, as a director of the
business corporations of which he is currently a director to the extent such
directorships do not inhibit the performance of his duties thereunder or
conflict with the business of the Bank. During the term of the Employee's
employment hereunder, the Employee shall not engage in any business or activity
contrary to the business affairs or interests of the Bank.
(c) Upon the expiration of the term of the Employee's
employment hereunder or in the event the Employee's employment hereunder
terminates prior thereto for any reason whatsoever, the Employee shall not, for
a period of one year after the occurrence of such event, for himself, or as the
<PAGE>
agent of, on behalf of, or in conjunction with, any person or entity, solicit or
attempt to solicit, whether directly or indirectly: (i) any employee of the Bank
to terminate such employee's employment relationship with the Bank; or (ii) any
savings and loan, banking or similar business from any person or entity that is
or was a client, employee, or customer of the Bank and had dealt with the
Employee or any other employee of the Bank under the supervision of the
Employee.
(d) In the event Employee voluntarily resigns pursuant to
Section 7(c) of this Agreement, the Employee shall not, for a period equal to
the lesser of one year from the date of termination or the period during which
the Bank is obligated to continue to pay the Employee his salary, directly or
indirectly, own, manage, operate or control, or participate in the ownership,
management, operation or control of, or be employed by or connected in any
manner with, any financial institution having an office located within ten miles
of any office of the Bank as of the date of termination.
(e) The provisions of this Section 11 shall not prevent the
Employee from purchasing, solely for investment, not more than 5 percent of any
financial institution's stock or other securities which are traded on any
national or regional securities.
(f) The provisions of this Section shall survive the
termination of the Employee's employment hereunder whether by expiration of the
term thereof or otherwise.
12. No Assignments.
(a) This Agreement is personal to each of the parties hereto,
and neither party may assign or delegate any of its rights or obligations
hereunder without first obtaining the written consent of the other party;
provided, however, that the Bank shall require any successor or assign (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Bank, by an assumption
agreement in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Bank would be required to perform it if no such succession or
assignment had taken place. Failure of the Bank to obtain such an assumption
agreement prior to the effectiveness of any such succession or assignment shall
be a breach of this Agreement and shall entitle the Employee to compensation
from the Bank in the same amount and on the same terms as the compensation
pursuant to Section 7(d) hereof. For purposes of implementing the provisions of
this Section 12(a), the date on which any such succession becomes effective
shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder
shall inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Employee should die while any
amounts would still be payable to the Employee hereunder if the Employee had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Employee's devisee,
legatee or other designee or if there is no such designee, to the Employee's
estate.
<PAGE>
13. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Bank at its home office
the attention of the Board of Directors with a copy to the Secretary of the
Bank, or, if the Employee, to such home or other address as the Employee has
most recently provided in writing to the Bank.
14. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
15. Paragraph Headings. The paragraph headings used in this Agreement
are included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
17. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
New York.
18. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
Attest: Schenectady Federal Savings Bank
- --------------------- ---------------------------
Secretary
By:
Its:
EMPLOYEE
----------------------------
David Jurczynski
CHANGE IN CONTROL SEVERANCE AGREEMENT
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT ("Agreement") is
made and entered into as of this 13th day of December, 1995, by and between
SCHENECTADY FEDERAL SAVINGS BANK, a federally chartered savings institution
(which, together with any successor thereto which executes and delivers the
assumption agreement provided for in Section 11(a) hereof or which otherwise
becomes bound by the terms and provisions of this Agreement by operation of law,
is hereinafter referred to as the "Company"), and Michael J. Krywinski (the
"Employee") whose residence address is 34 Omega Terrace Latham, NY 12110.
WHEREAS, the Employee is currently serving as the Vice President of
Lending of the Bank; and
WHEREAS, the Company has adopted a plan of conversion whereby the
Company will convert (the "Conversion") to capital stock form and become the
wholly owned subsidiary of SFS Bancorp, Inc. (the "Holding Company"); and
WHEREAS, the Board of Directors of the Company recognizes that, as is
the case with publicly held corporations generally, the possibility of a change
in control of the Holding Company may exist and that such possibility, and the
uncertainty and questions which it may raise among management, may result in the
departure or distraction of key management personnel to the detriment of the
Company and its stockholder; and
WHEREAS, the Board of Directors of the Company believes it is in the
best interests of the Company to enter into this Agreement with the Employee in
order to assure continuity of management of the Company and to reinforce and
encourage the continued attention and dedication of the Employee to his assigned
duties without dis traction in the face of potentially disruptive circumstances
arising from the possibility of a change in control of the Holding Company,
although no such change is now contemplated; and
WHEREAS, the Board of Directors of the Company has approved and
authorized the execution of this Agreement with the Employee to take effect as
stated in Section 1 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein con tained, it is AGREED as
follows:
1. TERM OF AGREEMENT.
The term of this Agreement shall be deemed to have commenced as of the
date of the completion of the Company's conversion to stock form and shall
continue for a period of twelve (12) full calendar months thereafter. Commencing
on the first monthly anniversary date of this Agreement and continuing at each
monthly anniversary date thereafter, this Agreement shall be extended for a
period of one month in addition to the then-remaining term of employment under
this Agreement, unless either the Company or the Employee gives contrary written
notice to the other not less than 90 days in advance of the date on which the
term of employment under this Agreement would otherwise be extended.
<PAGE>
Notwithstanding any other statement or provision in this Agreement to
the contrary, beginning on the first annual anniversary date of the conversion,
this Agreement will not be automatically extended unless, within 13 months prior
thereto, the Board of Directors of the Company reviews a formal performance
evaluation of the Employee performed by the disinterested members of the Board
of Directors of the Company and reflected in the minutes of the Board of
Directors.
2. PAYMENTS TO THE EMPLOYEE UPON CHANGE IN CONTROL.
(a) Upon the occurrence of a Change in Control (as herein defined) of
the Company or the Holding Company followed at any time during the term of this
Agreement by the involuntary termination of the Employee's employment, other
than for cause, as defined in Section 2(d) hereof, the provisions of Section 3
shall apply.
(b) A "change in control" of the Company or the Holding Company is
defined solely as any acquisition of control (other than by a trustee or other
fiduciary holding securities under an employee benefit plan of the Holding
Company or a subsidiary of the Holding Company), as defined in 12 C.F.R. ss.
574.4, or any successor regulation, of the Company or Holding Company which
would require the filing of an application for acquisition of control or notice
of change in control in a manner as set forth in 12 C.F.R. ss. 574.3, or any
successor regulation.
(c) The Employee's employment under this Agreement may be terminated at
any time by the Board of Directors of the Company. The terms "involuntary
termination" or "involuntarily terminated" in this Agreement shall refer to the
termination of the employment of Employee without his express written consent.
In addition, a material diminution of the Employee's benefits or an adverse
change in the quality of the work environment shall be deemed and shall
constitute an involuntary termination of employment to the same extent as
express notice of such involuntary termination. By way of example and not by way
of limitation, any of the following actions, if unreasonable or materially
adverse to the Employee, shall constitute such diminution or interference unless
consented to in writing by the Employee: (1) change in the principal workplace
of the Employee to a location outside of a 20 mile radius from the Company's
headquarters office as of the date hereof; (2) a reduction or adverse change in
the scope or nature of the secretarial or other administrative support of the
Employee; (3) a reduction or adverse change in the salary, perquisites,
benefits, contingent benefits or vacation time which had theretofore been
provided to the Employee, other than as part of an overall program applied
uniformly and with equitable effect to all members of the senior management of
the Company or the Holding Company; and (4) a material increase in the required
hours of work or the workload of the Employee.
(d) The Employee shall not have the right to receive termination
benefits pursuant to Section 3 hereof upon termination for cause. For purposes
of this Agreement, termination for "cause" shall include termination for
personal dishonesty, incompetence, willful misconduct, breach of a fiduciary
duty involving personal profit, intentional failure to perform stated duties,
willful violation of any material law, rule, or regulation (other than a law,
rule or regulation relating to a traffic violation or similar offense) or final
cease-and-desist order, or material breach of any provision of this Agreement.
Notwithstanding the foregoing, the Employee shall not be deemed to have been
terminated for cause unless and until there shall have been delivered to the
<PAGE>
Employee a copy of a resolution, duly adopted by the affirmative vote of not
less than a majority of the entire membership of the Board of Directors of the
Company at a meeting of the Board called and held for such purpose (after
reasonable notice to the Employee and an opportunity for the Employee, together
with the Employee's counsel, to be heard before the Board), stating that in the
good faith opinion of the Board the Employee was guilty of conduct con stituting
"cause" as set forth above and specifying the particulars thereof in detail.
3. TERMINATION BENEFITS.
(a) Upon the occurrence of a change in control, followed by the
involuntary termination of the Employee's employment, other than for cause, the
Company shall pay to the Employee in a lump sum in cash within 25 business days
after the date of severance of employment an amount equal to 100 percent of the
Employee's "base amount" of compensation, as defined in Section 280G(b)(3) of
the Internal Revenue Code of 1986, as amended ("Code"). At the discretion of the
Employee, upon an election pursuant to Section 3(d) hereof, such payment may be
made, on a pro rata basis, semi-monthly during the twelve (12) months following
the Employee's termination.
(b) Upon the occurrence of a change in control of the Company or the
Holding Company followed by the involuntary termination of the Employee's
employment, other than for cause, the Company shall cause life and health
insurance coverage (substantially similar to the coverage maintained by the
Company for the Employee prior to his severance) to be maintained for a period
of 12 months or for the remaining term of the agreement, whichever is greater.
4. CERTAIN REDUCTION OF PAYMENTS BY THE COMPANY.
(a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or distribution by the Company to
or for the benefit of the Employee (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise) (a
"Payment") would be nondeductible (in whole or part) by the Company for Federal
income tax purposes because of Section 280G of the Code, then the aggregate
present value of amounts payable or distributable to or for the benefit of the
Employee pursuant to this Agreement (such amounts payable or distributable
pursuant to this Agreement are hereinafter referred to as "Agreement Payments")
shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount,
not less than zero, expressed in present value which maximizes the aggregate
present value of Agreement Payments without causing any Payment to be
nondeductible by the Company because of Section 280G of the Code. For purposes
of this Section 4, present value shall be determined in accordance with Section
280G(d)(4) of the Code.
(b) All determinations required to be made under this Section 4 shall
be made by the Company's independent auditors, or at the election of such
auditors by such other firm or individuals of recognized expertise as such
auditors may select (such auditors or, if applicable, such other firm or
individual, are hereinafter referred to as the "Advisory Firm"). The Advisory
Firm shall within ten business days of the Date of Termination, or at such
earlier time as is requested by the Company, provide to both the Company and the
Employee an opinion (and detailed supporting calculations) that the Company has
substantial authority to deduct for federal income tax purposes the full amount
of the Agreement Payments and that the Employee has substantial authority not to
report on his federal income tax return any excise tax imposed by Section 4999
of the Code with respect to the Agreement Payments. Any such determination and
opinion by the Advisory Firm shall be binding upon the Company and the Employee.
The Employee shall determine which and how much, if any, of the Agreement
<PAGE>
Payments shall be eliminated or reduced consistent with the requirements of this
Section 4, provided that, if the Employee does not make such determination
within ten business days of the receipt of the calculations made by the Advisory
Firm, the Company shall elect which and how much, if any, of the Agreement
Payments shall be eliminated or reduced consistent with the requirements of this
Section 4 and shall notify the Employee promptly of such election. Within five
business days of the earlier of (i) the Company's receipt of the Employee's
determination pursuant to the immediately preceding sentence of this Agreement
or (ii) the Company's election in lieu of such determination, the Company shall
pay to or distribute to or for the benefit of the Employee such amounts as are
then due the Employee under this Agreement. The Company and the Employee shall
cooperate fully with the Advisory Firm, including without limitation providing
to the Advisory Firm all information and materials reasonably requested by it,
in connection with the making of the determinations required under this Section
4.
(c) As a result of uncertainty in application of Section 280G of the
Code at the time of the initial determination by the Advisory Firm hereunder, it
is possible that Agreement Payments will have been made by the Company which
should not have been made ("Overpayment") or that additional Agreement Payments
will not have been made by the Company which should have been made ("Underpay
ment"), in each case, consistent with the calculations required to be made
hereunder. In the event that the Advisory Firm, based upon the assertion by the
Internal Revenue Service against the Employee of a deficiency which the Advisory
Firm believes has a high probability of success determines that an Overpayment
has been made, any such Overpayment paid or distributed by the Company to or for
the benefit of Employee shall be treated for all purposes as a loan ab initio
which the Employee shall repay to the Company together with interest at the
applicable federal rate provided for in Section 7872(f)(2) of the Code;
provided, however, that no such loan shall be deemed to have been made and no
amount shall be payable by the Employee to the Company if and to the extent such
deemed loan and payment would not either reduce the amount on which the Employee
is subject to tax under Section 1 and Section 4999 of the Code or generate a
refund of such taxes. In the event that the Advisory Firm, based upon
controlling preceding or other sub stantial authority, determines that an
Underpayment has occurred, any such Underpayment shall be promptly paid by the
Company to or for the benefit of the Employee together with interest at the
applicable federal rate provided for in Section 7872(f)(2) of the Code.
5. REQUIRED REGULATORY PROVISIONS.
(a) The Company may terminate the Employee's employment at any time,
but any termination by the Company, other than a termination for cause, shall
not prejudice the Employee's right to compensation or other benefits under this
Agreement. The Employee shall not have the right to receive compensation or
other benefits for any period after a termination for cause as defined in
Section 2(d) hereinabove.
(b) If the Employee is suspended from office and/or temporarily
prohibited from participating in the conduct of the Company's affairs by a
notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance
Act ("FDIA"), 12 U.S.C. ss. 1818(e)(3) and (g)(1), the Company's obligations
under this Agreement shall be suspended as of the date of service, unless stayed
by appropriate proceedings. If the charges in the notice are dismissed, the
Company may in its discretion (i) pay the Employee all or part of the
compensation withheld while its obligations under this Agreement were suspended
and (ii) reinstate in whole or in part any of the obligations which were
suspended.
<PAGE>
(c) If the Employee is removed from office and/or permanently
prohibited from participating in the conduct of the Company's affairs by an
order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. ss.
1818(e)(4) or (g)(1), all obligations of the Company under this Agreement shall
terminate, as of the effective date of the order, but vested rights of the
parties shall not be affected.
(d) If the Company becomes in default (as defined in Section 3(x)(1) of
the FDIA), all obligations under this Agreement shall terminate as of the date
of default, but this provision shall not affect any vested rights of the
parties.
(e) All obligations under this Agreement may be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Company: (i) by the Director or his or her designee,
at the time the Federal Deposit Insurance Corporation ("FDIC") or the Resolution
Trust Corporation ("RTC") at the time the FDIC or the RTC enters into an
agreement to provide assistance to or on behalf of the Company under the
authority contained in Section 13(c) of the FDIA, or (ii) by the Director of the
Office of Thrift Supervision ("OTS") or his or her designee at the time the
Director or his or her designee approves a supervisory merger to resolve
problems related to operation of the Company or when the Company is determined
by the Director to be in an unsafe or unsound condition. Any rights of the
parties that have already vested, however, shall not be affected by any such
action.
6. REINSTATEMENT OF BENEFITS UNDER SECTION 9(b).
In the event the Employee is suspended and/or temporarily prohibited
from participating in the conduct of the Company's affairs by a notice described
in Section 12 hereof (the "Notice") during the term of this Agreement and a
change in control occurs, the Company will assume its obligation to pay and the
Employee will be entitled to receive all of the termination benefits provided
for under Section 3 of this Agreement upon the Company's receipt of a dismissal
of charges in the Notice.
7. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior agreement between the Company and the Employee,
except that this Agreement shall not affect or operate to reduce any benefit or
compensation inuring to the Employee of a kind elsewhere provided. No provision
of this Agreement shall be interpreted to mean that the Employee is subject to
receiving fewer benefits than those available to him without reference to this
Agreement.
8. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
the Employee, the Company and their respective successors and assigns.
<PAGE>
9. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
10. NO MITIGATION.
The amount of any payment or benefit provided for in this Agreement
shall not be reduced by any compensation earned by the Employee as the result of
employment by another employer, by retirement benefits after the date of
termination or otherwise.
11. NO ASSIGNMENTS.
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that the Company will require any successor or assign (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by an assumption
agreement in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession or
assignment had taken place. Failure of the Company to obtain such an assumption
agreement prior to the effectiveness of any such succession or assignment shall
be a breach of this Agreement and shall entitle the Employee to compensation
from the Company in the same amount and on the same terms as the compensation
pursuant to Section 3 hereof. For purposes of implementing the provisions of
this Section 11(a), the date on which any such succession becomes effective
shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder shall inure
to the benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Employee should die while any amounts would still
be payable to the Employee hereunder if the Employee had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Employee's devisee, legatee or other designee
or if there is no such designee, to the Employee's estate.
12. NOTICE.
For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the respective
<PAGE>
addresses set forth on the first page of this Agreement (provided that all
notices to the Company shall be directed to the attention of the Board of
Directors of the Company with a copy to the Secretary of the Company), or to
such other address as either party may have fur nished to the other in writing
in accordance herewith.
13. AMENDMENTS.
No amendments or additions to this Agreement shall be binding unless in
writing and signed by both parties, except as herein otherwise provided.
14. PARAGRAPH HEADINGS.
The paragraph headings used in this Agreement are included solely for
convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
15. SEVERABILITY.
The provisions of this Agreement shall be deemed severable and the
invalidity or unenforceability of any provision shall not affect the validity or
enforceability of the other provisions hereof.
16. GOVERNING LAW.
This Agreement shall be governed by the laws of the United States to
the extent applicable and otherwise by the laws of the State of New York.
17. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction.
18. REIMBURSEMENT.
In the event the Company purports to terminate the Employee for cause,
but it is determined by a court of competent jurisdiction or by an arbitrator
pursuant to Section 17 that cause did not exist for such termination, or if in
any event it is deter mined by any such court or arbitrator that the Company has
failed to make timely payment of any amounts owed to the Employee under this
Agreement, the Employee shall be entitled to reimbursement for all reasonable
costs, including attorneys' fees, incurred in challenging such termination or
collecting such amounts. Such reimbursement shall be in addition to all rights
to which the Em ployee is otherwise entitled under this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
ATTEST: SCHENECTADY FEDERAL SAVINGS BANK
By:
Richard D. Ammian, Secretary Joseph H. Giaquinto, President
WITNESS: EMPLOYEE
CHANGE IN CONTROL SEVERANCE AGREEMENT
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT ("Agreement") is
made and entered into as of this 13th day of December, 1995, by and between
SCHENECTADY FEDERAL SAVINGS BANK, a federally chartered savings institution
(which, together with any successor thereto which executes and delivers the
assumption agreement provided for in Section 11(a) hereof or which otherwise
becomes bound by the terms and provisions of this Agreement by operation of law,
is hereinafter referred to as the "Company"), and William Pezzula (the
"Employee") whose residence address is 11 Ravenwood Drive, Albany, NY 12205.
WHEREAS, the Employee is currently serving as the Vice
President of Retail Banking of the Company; and
WHEREAS, the Company has adopted a plan of conversion whereby the
Company will convert (the "Conversion") to capital stock form and become the
wholly owned subsidiary of SFS Bancorp, Inc. (the "Holding Company"); and
WHEREAS, the Board of Directors of the Company recognizes that, as is
the case with publicly held corporations generally, the possibility of a change
in control of the Holding Company may exist and that such possibility, and the
uncertainty and questions which it may raise among management, may result in the
departure or distraction of key management personnel to the detriment of the
Company and its stockholder; and
WHEREAS, the Board of Directors of the Company believes it is in the
best interests of the Company to enter into this Agreement with the Employee in
order to assure continuity of management of the Company and to reinforce and
encourage the continued attention and dedication of the Employee to his assigned
duties without dis traction in the face of potentially disruptive circumstances
arising from the possibility of a change in control of the Holding Company,
although no such change is now contemplated; and
WHEREAS, the Board of Directors of the Company has approved and
authorized the execution of this Agreement with the Employee to take effect as
stated in Section 1 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein con tained, it is AGREED as
follows:
1. TERM OF AGREEMENT.
The term of this Agreement shall be deemed to have commenced as of the
date of the completion of the Company's conversion to stock form and shall
continue for a period of twelve (12) full calendar months thereafter. Commencing
on the first monthly anniversary date of this Agreement and continuing at each
monthly anniversary date thereafter, this Agreement shall be extended for a
period of one month in addition to the then-remaining term of employment under
this Agreement, unless either the Company or the Employee gives contrary written
notice to the other not less than 90 days in advance of the date on which the
term of employment under this Agreement would otherwise be extended.
Notwithstanding any other statement or provision in this Agreement to
the contrary, beginning on the first annual anniversary date of the conversion,
this Agreement will not be automatically extended unless, within 13 months prior
thereto, the Board of Directors of the Company reviews a formal performance
evaluation of the Employee performed by the disinterested members of the Board
of Directors of the Company and reflected in the minutes of the Board of
Directors.
2. PAYMENTS TO THE EMPLOYEE UPON CHANGE IN CONTROL.
(a) Upon the occurrence of a Change in Control (as herein defined) of
the Company or the Holding Company followed at any time during the term of this
Agreement by the involuntary termination of the Employee's employment, other
than for cause, as defined in Section 2(d) hereof, the provisions of Section 3
shall apply.
(b) A "change in control" of the Company or the Holding Company is
defined solely as any acquisition of control (other than by a trustee or other
fiduciary holding securities under an employee benefit plan of the Holding
Company or a subsidiary of the Holding Company), as defined in 12 C.F.R. ss.
574.4, or any successor regulation, of the Company or Holding Company which
would require the filing of an application for acquisition of control or notice
of change in control in a manner as set forth in 12 C.F.R. ss. 574.3, or any
successor regulation.
(c) The Employee's employment under this Agreement may be terminated at
any time by the Board of Directors of the Company. The terms "involuntary
termination" or "involuntarily terminated" in this Agreement shall refer to the
termination of the employment of Employee without his express written consent.
In addition, a material diminution of the Employee's benefits or an adverse
change in the quality of the work environment shall be deemed and shall
constitute an involuntary termination of employment to the same extent as
express notice of such involuntary termination. By way of example and not by way
of limitation, any of the following actions, if unreasonable or materially
adverse to the Employee, shall constitute such diminution or interference unless
consented to in writing by the Employee: (1) change in the principal workplace
of the Employee to a location outside of a 20 mile radius from the Company's
headquarters office as of the date hereof; (2) a reduction or adverse change in
the scope or nature of the secretarial or other administrative support of the
Employee; (3) a reduction or adverse change in the salary, perquisites,
benefits, contingent benefits or vacation time which had theretofore been
provided to the Employee, other than as part of an overall program applied
uniformly and with equitable effect to all members of the senior management of
the Company or the Holding Company; and (4) a material increase in the required
hours of work or the workload of the Employee.
(d) The Employee shall not have the right to receive termination
benefits pursuant to Section 3 hereof upon termination for cause. For purposes
of this Agreement, termination for "cause" shall include termination for
personal dishonesty, incompetence, willful misconduct, breach of a fiduciary
duty involving personal profit, intentional failure to perform stated duties,
willful violation of any material law, rule, or regulation (other than a law,
rule or regulation relating to a traffic violation or similar offense) or final
cease-and-desist order, or material breach of any provision of this Agreement.
Notwithstanding the foregoing, the Employee shall not be deemed to have been
terminated for cause unless and until there shall have been delivered to the
Employee a copy of a resolution, duly adopted by the affirmative vote of not
less than a majority of the entire membership of the Board of Directors of the
Company at a meeting of the Board called and held for such purpose (after
reasonable notice to the Employee and an opportunity for the Employee, together
with the Employee's counsel, to be heard before the Board), stating that in the
good faith opinion of the Board the Employee was guilty of conduct con stituting
"cause" as set forth above and specifying the particulars thereof in detail.
3. TERMINATION BENEFITS.
(a) Upon the occurrence of a change in control, followed by the
involuntary termination of the Employee's employment, other than for cause, the
Company shall pay to the Employee in a lump sum in cash within 25 business days
after the date of severance of employment an amount equal to 100 percent of the
Employee's "base amount" of compensation, as defined in Section 280G(b)(3) of
the Internal Revenue Code of 1986, as amended ("Code"). At the discretion of the
Employee, upon an election pursuant to Section 3(d) hereof, such payment may be
made, on a pro rata basis, semi-monthly during the twelve (12) months following
the Employee's termination.
(b) Upon the occurrence of a change in control of the Company or the
Holding Company followed by the involuntary termination of the Employee's
employment, other than for cause, the Company shall cause life and health
insurance coverage (substantially similar to the coverage maintained by the
Company for the Employee prior to his severance) to be maintained for a period
of 12 months or for the remaining term of the agreement, whichever is greater.
4. CERTAIN REDUCTION OF PAYMENTS BY THE COMPANY.
(a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or distribution by the Company to
or for the benefit of the Employee (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise) (a
"Payment") would be nondeductible (in whole or part) by the Company for Federal
income tax purposes because of Section 280G of the Code, then the aggregate
present value of amounts payable or distributable to or for the benefit of the
Employee pursuant to this Agreement (such amounts payable or distributable
pursuant to this Agreement are hereinafter referred to as "Agreement Payments")
shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount,
not less than zero, expressed in present value which maximizes the aggregate
present value of Agreement Payments without causing any Payment to be
nondeductible by the Company because of Section 280G of the Code. For purposes
of this Section 4, present value shall be determined in accordance with Section
280G(d)(4) of the Code.
(b) All determinations required to be made under this Section 4 shall
be made by the Company's independent auditors, or at the election of such
auditors by such other firm or individuals of recognized expertise as such
auditors may select (such auditors or, if applicable, such other firm or
individual, are hereinafter referred to as the "Advisory Firm"). The Advisory
Firm shall within ten business days of the Date of Termination, or at such
earlier time as is requested by the Company, provide to both the Company and the
Employee an opinion (and detailed supporting calculations) that the Company has
substantial authority to deduct for federal income tax purposes the full amount
of the Agreement Payments and that the Employee has substantial authority not to
report on his federal income tax return any excise tax imposed by Section 4999
of the Code with respect to the Agreement Payments. Any such determination and
opinion by the Advisory Firm shall be binding upon the Company and the Employee.
The Employee shall determine which and how much, if any, of the Agreement
Payments shall be eliminated or reduced consistent with the requirements of this
Section 4, provided that, if the Employee does not make such determination
within ten business days of the receipt of the calculations made by the Advisory
Firm, the Company shall elect which and how much, if any, of the Agreement
Payments shall be eliminated or reduced consistent with the requirements of this
Section 4 and shall notify the Employee promptly of such election. Within five
business days of the earlier of (i) the Company's receipt of the Employee's
determination pursuant to the immediately preceding sentence of this Agreement
or (ii) the Company's election in lieu of such determination, the Company shall
pay to or distribute to or for the benefit of the Employee such amounts as are
then due the Employee under this Agreement. The Company and the Employee shall
cooperate fully with the Advisory Firm, including without limitation providing
to the Advisory Firm all information and materials reasonably requested by it,
in connection with the making of the determinations required under this Section
4.
(c) As a result of uncertainty in application of Section 280G of the
Code at the time of the initial determination by the Advisory Firm hereunder, it
is possible that Agreement Payments will have been made by the Company which
should not have been made ("Overpayment") or that additional Agreement Payments
will not have been made by the Company which should have been made ("Underpay
ment"), in each case, consistent with the calculations required to be made
hereunder. In the event that the Advisory Firm, based upon the assertion by the
Internal Revenue Service against the Employee of a deficiency which the Advisory
Firm believes has a high probability of success determines that an Overpayment
has been made, any such Overpayment paid or distributed by the Company to or for
the benefit of Employee shall be treated for all purposes as a loan ab initio
which the Employee shall repay to the Company together with interest at the
applicable federal rate provided for in Section 7872(f)(2) of the Code;
provided, however, that no such loan shall be deemed to have been made and no
amount shall be payable by the Employee to the Company if and to the extent such
deemed loan and payment would not either reduce the amount on which the Employee
is subject to tax under Section 1 and Section 4999 of the Code or generate a
refund of such taxes. In the event that the Advisory Firm, based upon
controlling preceding or other sub stantial authority, determines that an
Underpayment has occurred, any such Underpayment shall be promptly paid by the
Company to or for the benefit of the Employee together with interest at the
applicable federal rate provided for in Section 7872(f)(2) of the Code.
5. REQUIRED REGULATORY PROVISIONS.
(a) The Company may terminate the Employee's employment at any time,
but any termination by the Company, other than a termination for cause, shall
not prejudice the Employee's right to compensation or other benefits under this
Agreement. The Employee shall not have the right to receive compensation or
other benefits for any period after a termination for cause as defined in
Section 2(d) hereinabove.
(b) If the Employee is suspended from office and/or temporarily
prohibited from participating in the conduct of the Company's affairs by a
notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance
Act ("FDIA"), 12 U.S.C. ss. 1818(e)(3) and (g)(1), the Company's obligations
under this Agreement shall be suspended as of the date of service, unless stayed
by appropriate proceedings. If the charges in the notice are dismissed, the
Company may in its discretion (i) pay the Employee all or part of the
compensation withheld while its obligations under this Agreement were suspended
and (ii) reinstate in whole or in part any of the obligations which were
suspended.
(c) If the Employee is removed from office and/or permanently
prohibited from participating in the conduct of the Company's affairs by an
order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. ss.
1818(e)(4) or (g)(1), all obligations of the Company under this Agreement shall
terminate, as of the effective date of the order, but vested rights of the
parties shall not be affected.
(d) If the Company becomes in default (as defined in Section 3(x)(1) of
the FDIA), all obligations under this Agreement shall terminate as of the date
of default, but this provision shall not affect any vested rights of the
parties.
(e) All obligations under this Agreement may be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Company: (i) by the Director or his or her designee,
at the time the Federal Deposit Insurance Corporation ("FDIC") or the Resolution
Trust Corporation ("RTC") at the time the FDIC or the RTC enters into an
agreement to provide assistance to or on behalf of the Company under the
authority contained in Section 13(c) of the FDIA, or (ii) by the Director of the
Office of Thrift Supervision ("OTS") or his or her designee at the time the
Director or his or her designee approves a supervisory merger to resolve
problems related to operation of the Company or when the Company is determined
by the Director to be in an unsafe or unsound condition. Any rights of the
parties that have already vested, however, shall not be affected by any such
action.
6. REINSTATEMENT OF BENEFITS UNDER SECTION 9(b).
In the event the Employee is suspended and/or temporarily prohibited
from participating in the conduct of the Company's affairs by a notice described
in Section 12 hereof (the "Notice") during the term of this Agreement and a
change in control occurs, the Company will assume its obligation to pay and the
Employee will be entitled to receive all of the termination benefits provided
for under Section 3 of this Agreement upon the Company's receipt of a dismissal
of charges in the Notice.
7. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior agreement between the Company and the Employee,
except that this Agreement shall not affect or operate to reduce any benefit or
compensation inuring to the Employee of a kind elsewhere provided. No provision
of this Agreement shall be interpreted to mean that the Employee is subject to
receiving fewer benefits than those available to him without reference to this
Agreement.
8. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
the Employee, the Company and their respective successors and assigns.
9. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
\
10. NO MITIGATION.
The amount of any payment or benefit provided for in this Agreement
shall not be reduced by any compensation earned by the Employee as the result of
employment by another employer, by retirement benefits after the date of
termination or otherwise.
11. NO ASSIGNMENTS.
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that the Company will require any successor or assign (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by an assumption
agreement in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession or
assignment had taken place. Failure of the Company to obtain such an assumption
agreement prior to the effectiveness of any such succession or assignment shall
be a breach of this Agreement and shall entitle the Employee to compensation
from the Company in the same amount and on the same terms as the compensation
pursuant to Section 3 hereof. For purposes of implementing the provisions of
this Section 11(a), the date on which any such succession becomes effective
shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder shall inure
to the benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Employee should die while any amounts would still
be payable to the Employee hereunder if the Employee had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Employee's devisee, legatee or other designee
or if there is no such designee, to the Employee's estate.
12. NOTICE.
For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the respective
addresses set forth on the first page of this Agreement (provided that all
notices to the Company shall be directed to the attention of the Board of
Directors of the Company with a copy to the Secretary of the Company), or to
such other address as either party may have fur nished to the other in writing
in accordance herewith.
13. AMENDMENTS.
No amendments or additions to this Agreement shall be binding unless in
writing and signed by both parties, except as herein otherwise provided.
14. PARAGRAPH HEADINGS.
The paragraph headings used in this Agreement are included solely for
convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
15. SEVERABILITY.
The provisions of this Agreement shall be deemed severable and the
invalidity or unenforceability of any provision shall not affect the validity or
enforceability of the other provisions hereof.
16. GOVERNING LAW.
This Agreement shall be governed by the laws of the United States to
the extent applicable and otherwise by the laws of the State of New York.
17. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction.
18. REIMBURSEMENT.
In the event the Company purports to terminate the Employee for cause,
but it is determined by a court of competent jurisdiction or by an arbitrator
pursuant to Section 17 that cause did not exist for such termination, or if in
any event it is deter mined by any such court or arbitrator that the Company has
failed to make timely payment of any amounts owed to the Employee under this
Agreement, the Employee shall be entitled to reimbursement for all reasonable
costs, including attorneys' fees, incurred in challenging such termination or
collecting such amounts. Such reimbursement shall be in addition to all rights
to which the Em ployee is otherwise entitled under this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
ATTEST: SCHENECTADY FEDERAL SAVINGS BANK
By:
Richard D. Ammian, Secretary Joseph H. Giaquinto, President
WITNESS: EMPLOYEE
CHANGE OF CONTROL BENEFIT PLAN
Dated December 18, 1997
WHEREAS, SFS Bancorp, Inc. (the "Company") is a publicly held company
and, as such, is subject to the possibility of being acquired by another entity;
and
WHEREAS, the Company is interested in maintaining the services of its
employees and especially its key officers and key officers of its subsidiary,
Schenectady Federal Savings Bank (the "Bank") ("Executives"); and
WHEREAS, the Company further recognizes that uncertainties and
questions may be raised among the Executives with regard to an acquisition and
the Company and such questions and concerns may result in the departure or
distraction of management personnel to the detriment to the Company and its
stockholders; and
WHEREAS, the Executives are parties to either employment agreements or
change of control severance agreements (the "Agreements") with the Bank that
provide for reductions to payments to them in the event of a change of control,
in order to prevent payments from being nondeductible for federal income tax
purposes under Section 280G of the Internal Revenue Code (the "Code"); and
WHEREAS, the Company believes it is in its best interests and the best
interests of its stockholder to maximize benefits paid to Executives in the
event of a change of control, the Company hereby provides the following plan:
1. While it is not contemplated that any Executive who is subject to an
employment agreement or a change of control severance agreement by and between
the Bank and such Executive would receive any amounts or benefits under such
agreements that would constitute "excess parachute payments" under Section 280G
of the Code, nevertheless, in the event that any benefits provided or to be
provided to such Executive pursuant to such agreement when aggregated with
payments or benefits, if any, or other plans maintained by the Bank or any of
its consolidated subsidiaries constitute "excess parachute payments" under
Section 280G of the Code that are subject to excise tax under Section 4999 of
the Code, the Company shall do the following:
(i) Cause the Bank to waive any provision of any agreement
requiring a reduction in any payment in order to avoid non-deductibility of any
payment pursuant to Section 280G of the Code and shall simultaneously reimburse
the Bank for any amounts that it pays as a result of such waiver for the amount
of any tax benefit plus reimburse the Bank the amount of any tax benefit that
the Bank may have lost due such waiver and payment. It is the intention of this
provision to put the Bank in the same position that it would have been in had
such agreement been paid out in accordance with its terms; and
(ii) In the event that any payments or benefits provided or to
be provided to the such Executive pursuant to this Agreement, in combination
with payments or benefits, if any, from other plans or arrangements maintained
by the Company or any of the Consolidated Subsidiaries, constitute "excess
parachute payments" under Section 280G of the Code that are subject to excise
tax under Section 4999 of the Code, the Company shall pay to the Executive in
cash an additional amount equal to the amount of the Gross Up Payment (as
hereinafter defined). The "Gross Up Payment" shall be the amount needed to
ensure that the amount of such payments and the value of such benefits received
<PAGE>
by the Executive (net of such excise tax and any federal, state and local tax on
the Company's payment to him attributable to such excise tax) equals the amount
of such payments and value of such benefits as he would receive in the absence
of such excise tax and any federal, state and local tax on the Company's payment
to him attributable to such excise tax. The Company shall pay the Gross Up
Payment within 30 days after the date of termination of employment of the
Executive. For purposes of determining the amount of the Gross Up Payment, the
value of any non-cash benefits and deferred payments or benefits shall be
determined by the Company's independent auditors in accordance with the
principles of Section 280G(d)(3) and (4) of the Code. In the event that, after
the Gross Up Payment is made, the amount of the excise tax is determined to be
less than the amount calculated in the determination of the actual Gross Up
Payment made by the Company, the Executive shall repay to the Company, at the
time that such reduction in the amount of excise tax is finally determined, the
portion of the Gross Up Payment attributable to such reduction, plus interest on
the amount of such repayment at the applicable federal rate under Section 1274
of the Code from the date of the Gross Up Payment to the date of the repayment.
The amount of the reduction of the Gross Up Payment shall reflect any subsequent
reduction in excise taxes resulting from such repayment. In the event that,
after the Gross Up Payment is made, the amount of the excise tax is determined
to exceed the amount anticipated at the time the Gross Up Payment was made, the
Company shall pay to the Executive, in immediately available funds, at the time
that such additional amount of excise tax is finally determined, an additional
payment ("Additional Gross Up Payment") equal to such additional amount of
excise tax and any federal, state and local taxes thereon, plus all interest and
penalties, if any, owed by the Executive with respect to such additional amount
of excise and other tax. The Company shall have the right to challenge, on the
Executive's behalf, any excise tax assessment against him as to which the
Executive is entitled to (or would be entitled if such assessment is finally
determined to be proper) a Gross Up Payment or Additional Gross Up Payment,
provided that all costs and expenses incurred in such a challenge shall be borne
by the Company and the Company shall indemnify the Executive and hold him
harmless, on an after-tax basis, from any excise or other tax (including
interest and penalties with respect thereto) imposed as a result of such payment
of costs and expenses by the Company.
(iii) This plan shall not apply to any individual who has an
employment agreement with the Company. This plan shall apply to the individuals
listed on Exhibit A hereto.
<PAGE>
EXHIBIT A
Richard D. Ammian
David J. Jurczynski
Michael J. Krywinski
William Pezzula
1997 ANNUAL REPORT
[LOGO]
SFS BANCORP, INC.
Schenectady, New York
<PAGE>
TABLE OF CONTENTS
President's Message .............................................. 1
Selected Consolidated Financial Information ...................... 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 4
Independent Auditors' Report ..................................... 17
Consolidated Financial Statements ................................ 18
Corporate Information ............................................ 52
<PAGE>
- --------------------------------------------------------------------------------
PRESIDENT'S MESSAGE
- --------------------------------------------------------------------------------
Dear Fellow 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"), I am pleased to submit to you our 1997 Annual Report.
First and most importantly, the market value of our stock reached record
levels during 1997. When combined with an increase in the quarterly dividend
rate announced in April 1997, it resulted in an annualized equivalent total
return on the Company's stock of 41.6% since converting to a public company in
1995. During 1997, we repurchased over 77,000 shares of our outstanding common
stock which is consistent with our ongoing capital management strategy to
increase our earnings per share. As we go forward, it is our intention to
continue providing our shareholders with a generous dividend policy. These
strategies clearly highlight the continuing commitment of the Board of Directors
and management team towards enhancing shareholder value.
Another significant occurrence during the past year was the opening in
March of our new Union Street branch. This new location has strengthened our
branch network and has increased our market penetration. It has proven to be one
of the main reasons for the significant growth in our deposits last year. In the
lending area, our efforts have resulted in yet another year where we report
increases in loans. We attribute our success in this area to competent and
friendly customer service, competitive rates and products and prompt response.
During 1997, our efforts to grow the assets of the Company proved successful.
Total assets grew $9.5 million, or 5.8%. This was accomplished through deposit
growth from the expansion of our branch network and the expansion of our core
business in the residential mortgage and consumer lending areas. Net loans at
December 31, 1997 totaled $133.8 million, an increase of 13.0% over 1996 and
32.6% over 1995. By establishing a mortgage origination sales staff and
utilizing sales compensation initiatives, we expect to further enhance the core
relationship with our customers. We continue striving to build a strong
foundation from which to initiate future growth.
The Company reported net earnings of $1,068,000 or $0.96 basic earnings per
share for 1997. This represented an increase of $238,000, or 29% over 1996
earnings. We positively affected our operations in 1997 with net interest income
increasing primarily from our efforts in the lending area and noninterest income
increasing over 1996 without a dramatic increase in fees to our customers.
Finally, we have successfully managed to minimize increases in the noninterest
expense of the Company.
On behalf of the Board of Directors and management team of SFS Bancorp,
Inc., please be assured that maximizing shareholder value will continue to be
our primary strategic focus. I wish to express my sincere appreciation to you,
our stockholders, for your loyalty, support and confidence in our Company.
Sincerely,
/s/Joseph H. Giaquinto
----------------------
Joseph H. Giaquinto
Chairman of the Board, President
and Chief Executive Officer
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
December 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data
Total assets .............................. $174,428 $164,888 $166,529 $150,837 $146,260
Cash and cash equivalents ................. 2,176 2,896 10,453 6,468 3,481
Securities available for sale ............. 4,067 1,990 7,976 7,776 --
Investment securities:
Mortgage-backed securities .............. 16,966 20,434 24,418 21,991 25,397
Debt securities ........................... 12,013 15,746 18,658 16,902 20,842
FHLB stock ................................ 1,338 1,215 1,117 1,123 1,092
Loans receivable, net ..................... 133,786 118,455 100,921 93,703 92,601
Real estate owned ......................... 111 178 200 204 128
Deposits .................................. 150,469 140,616 139,671 138,299 134,653
Advance payments by borrowers
for taxes and insurance ................ 1,281 1,160 1,402 1,270 1,129
Stockholders' equity ...................... 21,431 21,671 24,261 10,046 9,642
<CAPTION>
December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data
Total interest income ..................... $ 12,368 $ 11,867 $ 11,523 $ 9,849 $ 9,774
Total interest expense .................... 6,623 6,187 6,236 5,077 5,275
-------- -------- -------- -------- --------
Net interest income ..................... 5,745 5,680 5,287 4,772 4,499
Provision for loan losses ................. 120 120 370 120 440
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses ............... 5,625 5,560 4,917 4,652 4,059
Noninterest income ........................ 504 403 321 170 599
Noninterest expense ....................... 4,369 5,239 4,027 4,096 4,239
-------- -------- -------- -------- --------
Income before taxes ....................... 1,760 724 1,211 726 419
Income tax expense (benefit) .............. 692 (106) 356 215 13
-------- -------- -------- -------- --------
Net income ................................ $ 1,068 $ 830 $ 855 $ 511 $ 406
======== ======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION, continued
Year Ended December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- ------- -------
<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) .............................. 0.63% 0.50% 0.53% 0.34% 0.28%
Net interest rate spread .............................. 2.96 2.95 2.93 3.06 2.96
Net interest margin ................................... 3.46 3.51 3.36 3.26 3.15
Ratio of noninterest expense to average total assets .. 2.56 3.17 2.51 2.74 2.90
Ratio of net interest income to noninterest expense ... 131.49 108.41 131.29 116.50 106.13
Return on equity (ratio of net income to average equity 5.04 3.73 5.07 5.31 4.33
Liquidity ratio at end of year ........................ 19.72 22.58 32.45 19.57 12.99
Efficiency ratio ...................................... 69.92 86.13 71.81 82.88 83.15
Asset Quality Ratios:
Non-performing assets to total assets, at end of year . 0.84 0.61 0.62 1.93 1.80
Allowance for loan losses to non-performing loans,
at year end ........................................ 57.78 77.07 68.18 31.79 32.02
Allowance for loan losses to total loans .............. 0.58 0.54 0.56 0.91 0.86
Capital Ratios:
Stockholders' equity to total assets at end of year ... 12.29 13.14 14.57 6.66 6.59
Average stockholders' equity to average total assets .. 12.43 13.48 10.50 6.43 6.40
Ratio of average interest-earning assets to average
interest-bearing liabilities ........................ 112.68 114.72 110.84 105.75 105.09
Number of full service offices ........................ 4 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.
<PAGE>
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:
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 77.9% and 76.5% of total loans at December 31,
1997 and 1996, 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 0.8% and 0.6% as of December 31, 1997
and 1996, respectively.
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 70.5% as of December 31, 1997.
Additionally, 23.6% 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 opened 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, 1997, 37.0%
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, 1997 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 $15,434 $(7,588) (33)%
+300 17,932 (5,090) (22)
+200 20,166 (2,856) (12)
+100 21,956 (1,067) (5)
0 23,022 -- --
-100 23,620 598 3
-200 24,227 1,024 5
-300 24,854 1,832 8
-400 26,008 2,986 13
</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 increased $9.5 million (5.8%) to $174.4 million at
December 31, 1997 from $164.9 million at December 31, 1996. This increase
consisted primarily of an increase in loans receivable, net of $15.3 million
(12.9%) to $133.8 million at December 31, 1997 and increases in securities
available for sale, at fair value, of $2.1 million (104.4%) to $4.1 million at
December 31, 1997. These increases were offset by decreases in investment
securities of $7.2 million (19.9%) to $29.0 million and federal funds sold of
$1.3 million (81.3%) to $300,000 at December 31, 1997.
<PAGE>
At December 31, 1997, total liabilities were $153.0 million
representing an increase of $9.8 million (6.8%) from December 31, 1996. The
increase was entirely attributable to increases in total deposits to $150.5
million as of December 31, 1997 from $140.6 million a year earlier.
Stockholders' equity decreased $240,000 to $21.4 million at December
31, 1997 as compared to $21.7 million at December 31, 1996 primarily due to the
Company's stock repurchase program. As a result of the repurchase program, the
Company purchased $1.5 million of treasury stock during 1997. Retained earnings
increased by $735,000 as a result of net income of the Company for the year
ended December 31, 1997 offset by the declaration and payment of dividends of
$333,000.
Nonperforming assets totaled $1.5 million and $1.0 million at December
31, 1997 and 1996, respectively. The increase in nonperforming assets resulted
from an increase in the number of loans comprising the balance combined with an
increase in the average balance of each loan. All loans classified as
nonperforming are secured by real estate with 45.0% secured by one-to-four
family residential property. Management of the Bank does not view this increase
as a significant adverse trend since subsequent to December 31, 1997, three of
the loans comprising the balance as of that date totaling $389,000 have either
paid off the entire outstanding balance or paid all past due amounts. The ratio
of nonperforming loans to loans receivable, net was 1.01% at December 31, 1997,
compared with .70% at December 31, 1996. The ratio of nonperforming assets to
total assets was .84% at December 31, 1997 compared with .61% at December 31,
1996.
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.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------
1997 1996
---------------------------------------- --------------------------------------
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) ............ $124,994 $ 9,757 7.81% $111,524 $ 8,758 7.85%
Mortgage-backed securities .......... 18,807 1,189 6.32 22,403 1,418 6.33
Securities available for sale ....... 4,368 286 6.55 5,169 307 5.94
Investment securities ............... 13,779 896 6.50 16,698 1,059 6.34
Other interest-earning assets
including cash equivalents ........ 2,845 153 5.38 4,698 247 5.26
FHLB stock .......................... 1,322 87 6.58 1,204 78 6.48
-------- -------- -------- --------
Total interest-earning assets ... $166,115 12,368 7.45 $161,696 11,867 7.34
======== -------- ======== --------
Interest-Bearing Liabilities:
Savings accounts .................... 36,982 1,113 3.01 38,857 1,173 3.02
Money market accounts ............... 7,197 251 3.49 5,195 161 3.10
Demand and NOW accounts(2) .......... 10,660 159 1.49 10,102 148 1.47
Certificate accounts ................ 91,420 5,075 5.55 85,642 4,680 5.46
Escrow .............................. 1,162 25 2.15 1,155 25 2.16
-------- -------- -------- --------
Total interest-bearing liabilities $147,421 6,623 4.49 $140,951 6,187 4.39
======== -------- ---- ======== -------- ----
Net interest income .................. $ 5,745 $ 5,680
Net interest rate spread ............. 2.96% 2.95%
==== ====
Net earning assets ................... $18,694 $ 20,745
======= ========
Net yield on average interest-
earning assets ..................... 3.46% 3.51%
==== ====
Average interest-earning assets to
average interest-bearing liabilities 1.13 1.15
======= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995
-----------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
-------- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-Earning Assets:
Loans receivable, net(1) ............... $ 97,120 $ 7,800 8.03%
Mortgage-backed securities ............. 23,199 1,464 6.31
Securities available for sale .......... 7,911 492 6.22
Investment securities .................. 17,227 1,041 6.04
Other interest-earning assets
including cash equivalents ........... 10,948 640 5.85
FHLB stock ............................. 1,118 86 7.69
-------- --------
Total interest-earning assets ...... $157,523 11,523 7.32
======== --------
Interest-Bearing Liabilities:
Savings accounts ....................... 44,054 1,325 3.01
Money market accounts .................. 4,809 129 2.68
Demand and NOW accounts(2) ............. 9,090 133 1.46
Certificate accounts ................... 82,893 4,620 5.57
Escrow ................................. 1,266 29 2.29
-------- --------
Total interest-bearing liabilities .. $142,112 6,236 4.39
======== --------
Net interest income ..................... $ 5,287
========
Net interest rate spread ................ 2.93%
====
Net earning assets ...................... $ 15,411
========
Net yield on average interest-
earning assets ........................ 3.36%
====
Average interest-earning assets to
average interest-bearing liabilities .. 1.11
</TABLE>
(1) Calculated net of deferred loan fees.
(2) Includes noninterest-bearing demand accounts.
<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,
-------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
------------------------------------- -------------------------------------
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 ............... $ 1,051 $ (52) $ 999 $ 1,127 $ (169) $ 958
Mortgage-backed securities .......... (227) (2) (229) (50) 4 (46)
Securities available for sale ....... (51) 30 (21) (165) (20) (185)
Investment securities ............... (190) 27 (163) (29) 47 18
Other interest-earning assets ...... (100) 6 (94) (334) (59) (393)
FHLB stock .......................... 8 1 9 8 (16) (8)
------- ------- ------- ------- ------- -------
Total interest-earning assets .... $ 491 $ 10 $ 501 $ 557 $ (213) $ 344
======= ======= ======= ======= ======= =======
Interest-bearing liabilities:
Savings accounts .................... $ (56) $ (4) $ (60) $ (157) $ 5 $ (152)
Money market accounts ............... 74 16 90 9 23 32
Demand and NOW accounts ............. 8 3 11 15 -- 15
Certificate accounts ................ 320 75 395 146 (86) 60
Escrow .............................. 0 0 0 (2) (2) (4)
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities $ 346 $ 90 $ 436 $ 11 $ (60) $ (49)
======= ======= ======= ======= ======= =======
Net interest income .................. $ 65 $ 393
======= =======
</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. 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, 1997 and 1996
Net Income. The Company reported net income of $1,068,000 for the year
ended December 31, 1997, as compared to $830,000 for the year ended December 31,
1996. As discussed below, the increase in net income of $238,000 or 28.7%, was
due to a decrease in noninterest expense of $870,000, an increase in noninterest
income of $101,000 and an increase in net interest income of $65,000. These
increases were partially offset by an increase in income tax expense of
$798,000.
Interest Income. Interest income increased by $501,000, or 4.2% from
$11.9 million in 1996 to $12.4 million in 1997. This increase was due to an
increase in both the balance of average interest-earning assets and the yield
earned. Average interest-earning assets increased from $161.7 million in 1996 to
$166.1 million in 1997. The yield on the Company's interest-earning assets
increased from 7.34% for the year ended December 31, 1996 to 7.45% for the year
ended December 31, 1997 as a result of the Company's ability to originate and
purchase loans and therefore affect the overall composition of interest earning
assets. The yield was also affected by the general increase in the market rates
of interest.
Interest Expense. Interest expense increased by $436,000, or 7.0% to
$6.6 million for the year ended December 31, 1997. The increase was a result of
an increase in the balance of average interest-bearing liabilities of $6.5
million, or 4.6% to $147.4 million. The average rate paid for the year ended
December 31, 1997 was 4.49% as compared to 4.39% in 1996. The mix within the
deposit structure changed as the average balance of certificate and money market
account balances grew a combined $7.8 million (8.6%) while savings accounts
declined $1.9 million (4.8%). The change in the deposit mix was due in part to
the opening of the new branch which had higher promotional certificate rates and
to a lesser extent the flow from savings accounts to higher paying certificate
accounts. The average rate paid was a reflection of the general interest rate
and competitive environment that prevailed during 1997 and 1996.
Net Interest Income. Net interest income increased $65,000, or 1.1% to
$5.7 million in 1997 due principally to the relative increase of the loans
receivable, net portfolio in relation to total interest earning assets from 1996
to 1997. The percentage of average loans receivable, net to total average
interest earning assets increased from 69.0% in 1996 to 75.2% in 1997.
<PAGE>
Provision For Loan Losses. The provision for loan losses amounted to
$120,000 for 1997 and 1996, respectively. When determining the level of
provision for loan losses, management considers historical charge off ratios as
well as the then current regulatory and the general economic environment. Net
charge-offs decreased from $50,000 in 1996 to a $16,000 net recovery in 1997 due
to the Company's ability to collect on numerous loans previously charged off
combined with a decrease in charge offs in 1997. 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 in the present portfolio, 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 $101,000, or
25.1% from $403,000 in 1996 to $504,000 in 1997. The increase was principally
attributable to an increase of $48,000 in net gain on security transactions
combined with increases in other loan charges and Bank fees and service charges.
Noninterest Expense. Noninterest expense decreased by $870,000, or
16.6% from $5.2 million in 1996 to $4.4 million in 1997. The decrease is
primarily attributable to the special one-time SAIF assessment in 1996 which
totaled $930,000 and an ongoing reduction in the FDIC insurance premiums
subsequent to the special assessment. Compensation and benefits increased
$198,000 (7.9%) from 1996 to 1997. The increase was a result of increased retail
staff due to the opening of a new branch in March 1997, annual merit increases,
and increased employee benefits partially due to the increases in the employee
stock ownership plan expense. Office occupancy and equipment expense increased
$98,000, or 18.8% as a result of increases in depreciation, property taxes and
utilities associated with the opening of the new branch. Advertising and
business promotion, professional service fees, data processing fees, and other
expense remained relatively stable during 1997 as compared with 1996. The ratio
of noninterest expense to average assets decreased from 3.17% for 1996 to 2.56%
for 1997.
Income Tax Expense. Income tax expense increased from a benefit of
$106,000 in 1996 to an expense of $692,000 in 1997. The effective tax rate for
1997 was 39.3%. The income tax benefit recognized in 1996 primarily reflects a
reduction of the deferred tax asset valuation reserve which reduced the tax
effect on pre-tax income. The reduction in the deferred valuation allowance
during 1996 was primarily the result of the expected realization of certain
deferred items which were previously considered uncertain. There were no
comparable reductions in the deferred tax asset valuation reserve during 1997.
<PAGE>
Comparison of Operating Results for the 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.
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 considers historical charge off ratios as well as 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.
<PAGE>
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.
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, 1997, cash and cash
equivalents totaled $2.2 million, or 1.2% 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, 1997, 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.
<PAGE>
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 4.0%.
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, 1997, 1996 and 1995, the Company's mortgage loan originations
and purchases totaled $35.4 million, $31.4 million, and $23.6 million,
respectively. The Company purchased securities available for sale of $6.1
million for the year ended December 31, 1997. 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, 1997, 1996 and 1995 of
$1.7 million, $6.0 million and $15.4 million, respectively.
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, 1997, 1996, and 1995, the Company
experienced a net increase in deposits of $9.9 million, $945,000, and $1.4
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, 1997, the Company repurchased 77,475 shares.
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 $19.68 totaling $1.5 million for 1997 and $12.68 totaling
$3.5 million for 1996. The average price paid was approximately 111.0% and 74.4%
of the Company's book value per share at December 31, 1997 and 1996,
respectively. 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, 1997, the Bank's capital exceeded each of the capital
requirements of the OTS. At December 31, 1997, the Bank's tangible and core
capital levels were both $19.0 million (10.88% of total adjusted assets) and its
risk-based capital level was $19.8 million (21.16% 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, 1997, the Company had commitments
to originate loans of $3.5 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, 1997 totaled $65.3
million. Management believes that a significant portion of these deposits will
remain with the Company.
<PAGE>
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 Recent Accounting Standards
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and
displaying of comprehensive income. SFAS No. 130 states that comprehensive
income includes the reported net income of a company adjusted for items that are
currently accounted for as direct entries to equity, such as the mark to market
adjustment on securities available for sale, foreign currency items and minimum
pension liability adjustments. This Statement is effective for fiscal years
beginning after December 15, 1997. Management will include the required
information in the Company's 1998 consolidated financial statements.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"), which establishes standards for reporting by
public companies about operating segments of their business. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This Statement is effective for periods
beginning after December 15, 1997. As required, the Company will adopt the
reporting requirements of this Statement in 1998.
Impact of the Year 2000
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium ("Year 2000") approaches. The
Year 2000 problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
<PAGE>
The Company is utilizing both internal and external resources to
identify, correct or reprogram, and test its systems for Year 2000 compliance.
It is anticipated that all reprogramming efforts will be completed by December
31, 1998, allowing adequate time for testing. To date, confirmations have been
received from the Company's primary processing vendors that plans are being
developed to address processing of transactions in the year 2000. Incremental
expenses related to this issue are not, at this time, expected to be material to
the performance of the Company.
The risks of this issue go beyond the Company's own ability to solve
the Year 2000 issues. Should suppliers of critical services fail in their
efforts to become Year 2000 compliant, or if significant third party interfaces
fail to be compatible with SFS Bancorp, Inc. or fail to be Year 2000 compliant,
it could have significant adverse affects on the operations and financial
results of the Company. Accordingly, the Company has begun a process of
assessing and monitoring the progress of all vendors of services and third party
interfaces for compatibility and Year 2000 compliance. Management intends to
develop contingency plans for all vendors and/or interfaces deemed to
inadequately address the problems of the Year 2000.
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Consolidated Financial Statements
As of December 31, 1997 and 1996
and for each of the years in the three-year period
ended December 31, 1997
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
SFS Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of SFS Bancorp,
Inc. and subsidiary (the Company) as of December 31, 1997 and 1996, 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,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SFS Bancorp, Inc.
and subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Albany, New York /s/ KPMG Peat Marwick LLP
January 23, 1998 -------------------------
KPMG Peat Marwick LLP
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
December 31, 1997 and 1996
Assets 1997 1996
------ ---- ----
(in thousands, except share data)
<S> <C> <C>
Cash and due from banks ............................................. $ 1,876 1,296
Federal funds sold .................................................. 300 1,600
--------- ---------
Total cash and cash equivalents ....................... 2,176 2,896
Securities available for sale, at fair value (note 5) ............... 4,067 1,990
Investment securities (estimated fair value of $29,095
and $35,964 at December 31, 1997 and 1996, respectively)(note 6) .. 28,979 36,180
Stock in Federal Home Loan Bank of New York, at cost ................ 1,338 1,215
Loans receivable, net (note 7) ...................................... 133,786 118,455
Accrued interest receivable (note 8) ................................ 1,130 1,137
Premises and equipment, net (note 9) ................................ 2,242 1,921
Real estate owned (note 10) ......................................... 111 178
Prepaid expenses and other assets ................................... 599 916
--------- ---------
Total assets .......................................... $ 174,428 164,888
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Due to depositors (note 11):
Non-interest bearing ....................................... 2,265 1,392
Interest bearing ........................................... 148,204 139,224
--------- ---------
Total deposits ........................................ 150,469 140,616
--------- ---------
Advance payments by borrowers for taxes and insurance .......... 1,281 1,160
Accrued expenses and other liabilities ......................... 1,247 1,441
--------- ---------
Total liabilities ..................................... 152,997 143,217
--------- ---------
Commitments and contingent liabilities (notes 12 and 16)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
December 31, 1997 and 1996
(continued)
1997 1996
---- ----
(in thousands, except share data)
<S> <C> <C>
Stockholders' Equity:
Preferred stock, $.01 par value, authorized 500,000 shares ..... -- --
Common stock, $.01 par value, authorized 2,500,000 shares;
1,495,000 shares issued at December 31, 1997 and 1996 ........ 15 15
Additional paid-in capital ..................................... 14,365 14,260
Retained earnings, substantially restricted .................... 12,422 11,687
Treasury stock, at cost (286,528 shares at December 31, 1997,
224,003 at December 31, 1996) ................................ (4,089) (2,840)
Common stock acquired by employee stock ownership plan (ESOP) .. (837) (957)
Unearned recognition and retention plan (RRP) .................. (455) (540)
Net unrealized gain on securities available for sale, net of tax 10 46
--------- ---------
Total stockholdersi equity ............................ 21,431 21,671
--------- ---------
Total liabilities and stockholders' equity ............ $ 174,428 164,888
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
For the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
(in thousands, except for per share amounts)
<S> <C> <C> <C>
Interest income:
Loans ...................................................... $ 9,757 8,758 7,800
Investment securities ...................................... 2,085 2,477 2,505
Securities available for sale .............................. 286 307 492
Federal funds sold and cash deposits ....................... 153 247 640
Stock in Federal Home Loan Bank of New York ................ 87 78 86
------- ------- -------
Total interest income ............................. 12,368 11,867 11,523
Interest expense:
Deposits (note 11) ......................................... 6,623 6,187 6,236
------- ------- -------
Net interest income ............................... 5,745 5,680 5,287
Provision for loan losses (note 7) .............................. 120 120 370
------- ------- -------
Net interest income after provision for loan losses 5,625 5,560 4,917
------- ------- -------
Noninterest income:
Other loan charges ......................................... 207 145 110
Bank fees and service charges .............................. 160 138 143
Net gain on security transactions .......................... 56 8 --
Other income ............................................... 81 112 68
------- ------- -------
Total noninterest income .......................... 504 403 321
------- ------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
For the years ended December 31, 1997, 1996 and 1995
(continued)
1997 1996 1995
---- ---- ----
(in thousands, except for per share amounts)
<S> <C> <C> <C>
Noninterest expense:
Compensation and benefits .................................. 2,710 2,512 2,250
Office occupancy and equipment expenses .................... 620 522 523
Professional service fees .................................. 270 242 189
Data processing fees ....................................... 175 166 157
Advertising and business promotion ......................... 86 108 106
Federal deposit insurance premiums ......................... 74 322 323
Federal deposit insurance special SAIF assessment .......... -- 930 --
Other expense .............................................. 434 437 479
------- ------- -------
Total noninterest expense ......................... 4,369 5,239 4,027
------- ------- -------
Income before taxes ............................... 1,760 724 1,211
Income tax expense (benefit) (note 12) .......................... 692 (106) 356
------- ------- -------
Net income ...................................................... $ 1,068 830 855
======= ======= =======
Basic earnings per share ........................................ $ .96 .68 .41
======= ======= =======
Diluted earnings per share ...................................... $ .93 .67 .41
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholdersi Equity
Years ended December 31, 1997, 1996 and 1995
Retained
Additional earnings, Treasury
Shares Common paid-in substantially stock,
Issued stock capital restricted at cost
------ ----- ------- ---------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
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) .... -- -- -- -- --
Allocation of ESOP stock (11,960 shares) ................ -- -- 36 -- --
--------- --------- --------- --------- ---------
Balance at December 31, 1995 ............................ 1,495,000 15 14,221 11,013 --
Net income .............................................. -- -- -- 830 --
Adjustment of securities available for sale to fair value -- -- -- -- --
Purchases of common stock (269,750 shares) .............. -- -- -- -- (3,418)
Grant of restricted stock under RRP (45,747 shares) ..... -- -- -- -- 578
Amortization of unearned RRP compensation ............... -- -- -- -- --
Cash dividends declared on common stock ................. -- -- -- (156) --
Allocation of ESOP stock (11,960 shares) ................ -- -- 39 -- --
--------- --------- --------- --------- ---------
Balance at December 31, 1996 ............................ 1,495,000 15 14,260 11,687 (2,840)
Net income .............................................. -- -- -- 1,068 --
Adjustment of securities available for sale to fair value -- -- -- -- --
Purchases of common stock (77,475 shares) ............... -- -- -- -- (1,486)
Grants of restricted stock under RRP (7,475 shares) ..... -- -- -- -- 143
Amortization of unearned RRP compensation ............... -- -- -- -- --
Cash dividends declared on common stock ................. -- -- -- (333) --
Exercise of stock options (7,475 shares) ................ -- -- -- -- 94
Allocation of ESOP stock (11,960 shares) ................ -- -- 105 -- --
--------- --------- --------- --------- ---------
Balance at December 31, 1997 ............................ 1,495,000 $ 15 14,365 12,422 (4,089)
========= ========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholdersi Equity
Years ended December 31, 1997, 1996 and 1995
Net unrealized
gain (loss) on
Common Unearned securities
stock recognition available
acquired and retention for sale,
by ESOP plan net of tax Total
------- ---- ---------- -----
<S> <C> <C> <C> <C>
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) -- -- (1,196)
Allocation of ESOP stock (11,960 shares) ................ 120 -- -- 156
--------- --------- --------- ---------
Balance at December 31, 1995 ............................ (1,076) -- 88 24,261
Net income .............................................. -- -- -- 830
Adjustment of securities available for sale to fair value -- -- (42) (42)
Purchases of common stock (269,750 shares) .............. -- -- -- (3,418)
Grant of restricted stock under RRP (45,747 shares) ..... -- (578) -- --
Amortization of unearned RRP compensation ............... -- 38 -- 38
Cash dividends declared on common stock ................. -- -- -- (156)
Allocation of ESOP stock (11,960 shares) ................ 119 -- -- 158
--------- --------- --------- ---------
Balance at December 31, 1996 ............................ (957) (540) 46 21,671
Net income .............................................. -- -- -- 1,068
Adjustment of securities available for sale to fair value -- -- (36) (36)
Purchases of common stock (77,475 shares) ............... -- -- -- (1,486)
Grants of restricted stock under RRP (7,475 shares) ..... -- (143) -- --
Amortization of unearned RRP compensation ............... -- 228 -- 228
Cash dividends declared on common stock ................. -- -- -- (333)
Exercise of stock options (7,475 shares) ................ -- -- -- 94
Allocation of ESOP stock (11,960 shares) ................ 120 -- -- 225
--------- --------- --------- ---------
Balance at December 31, 1997 ............................ (837) (455) 10 21,431
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
For the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
(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 ....................................................... $ 1,068 830 855
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation ................................................ 190 140 143
Net accretion on securities ................................. (75) (12) (30)
ESOP compensation expense ................................... 225 158 156
Amortization of RRP ......................................... 228 38 --
Provision for loan losses ................................... 120 120 370
Real estate owned writedown ................................. -- 7 --
Loss on sale of real estate owned ........................... 3 -- --
Gain on sales of securities available for sale .............. (56) (8) --
(Increase) decrease in accrued interest receivable .......... 7 24 (109)
(Increase) decrease in prepaid expenses and other assets .... 317 (705) (60)
(Decrease) increase in accrued expenses and other liabilities (200) 246 (27)
-------- -------- --------
Net cash provided by operating activities ............... 1,827 838 1,298
-------- -------- --------
Cash flows from investing activities:
Proceeds from maturities and paydowns of
investment securities .............................................. 8,976 12,908 11,223
Proceeds from the sales and calls of securities
available for sale ................................................. 4,000 5,952 --
Purchases of investment securities ................................... (1,700) (6,000) (15,376)
Purchases of securities available for sale ........................... (6,051) -- --
Redemptions (purchases) of FHLB Stock ................................ (123) (98) 6
Net increase in loans made to customers .............................. (11,923) (10,859) (2,717)
Capital expenditures, net of disposals ............................... (511) (647) (90)
Purchases of loans receivable ........................................ (3,550) (6,973) (5,245)
Proceeds from the sales of real estate owned ......................... 86 193 378
-------- -------- --------
Net cash used by investing activities ................... (10,796) (5,524) (11,821)
-------- -------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows, Continued
For the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits ............................................ $ 9,853 945 1,372
Net increase (decrease) in advance payments by
borrowers for property taxes and insurance ........................ 121 (242) 132
Purchases of common stock for treasury .............................. (1,486) (3,418) --
Cash dividends paid ................................................. (333) (156) --
Proceeds from exercise of stock options ............................. 94 -- --
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 ....... 8,249 (2,871) 14,508
------- ------- -------
Net increase (decrease) in cash and cash equivalents ..................... (720) (7,557) 3,985
Cash and cash equivalents at beginning of year ........................... 2,896 10,453 6,468
------- ------- -------
Cash and cash equivalents at end of year ................................. $ 2,176 2,896 10,453
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest paid ................................................... $ 6,623 6,187 6,264
======= ======= =======
Taxes paid ...................................................... $ 538 509 520
======= ======= =======
Supplemental schedule of noncash investing activities:
Transfer of loans to other real estate owned ........................ $ 22 178 367
======= ======= =======
Adjustment of securities available for sale to fair value,
net of increase in deferred tax liability of $6 in 1997 ................. $ (36) (42) 200
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<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 Bankis 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 "Parent Company Only" 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 Companyis 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
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies (continued)
substantial portion of the Bankis 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.
Management believes that the allowance for loan losses is adequate
and that real estate owned is properly valued. While management
uses available information to recognize losses on loans and real
estate owned, future additions to the allowance or writedowns on
real estate owned may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review
the Bankis allowance for loan losses. Such agencies may require
the Bank to recognize additions to the allowance or writedowns on
real estate owned based on their judgments about information
available to them at the time of their examination which may not
be currently available to management.
(c) Cash Equivalents
For purposes of the consolidated statements of cash flows, the
Company considers all cash and due from banks and federal funds
sold to be cash equivalents.
(d) Securities Available for Sale, Investment Securities and Federal
Home Loan Bank of New York Stock
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. All
other debt and marketable 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
stockholders' equity, net of estimated income taxes. The Company
does not maintain a trading portfolio.
Realized gains and losses on the sale of securities are based on
the net proceeds and the amortized cost of the securities sold,
using the specific identification method. The cost of securities
is adjusted for amortization of premium and accretion of discount,
which is calculated on an effective interest method.
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
Association ("FNMA"), represent participating interests in direct
pass-through pools of long-term first mortgage loans originated
and serviced by the issuers of the securities.
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies
Unrealized losses on securities are charged to earnings when the
decline in fair value of a security is judged to be other than
temporary.
Non-marketable equity securities, such as Federal Home Loan Bank
of New York stock, are stated at cost. The investment in Federal
Home Bank of New York stock is required for membership.
(e) 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 using the interest method of
amortization. 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
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 allowance for loan losses is maintained at a level deemed
appropriate by management based on an evaluation of the known and
inherent risks in the present portfolio, the level of
non-performing loans, past loan loss experience, estimated value
of underlying collateral, and current and prospective economic
conditions. The allowance is increased by provisions for loan
losses charged to operations.
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies
Impaired loans are identified and measured in accordance with
Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan," and SFAS No.
118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures." A loan is considered impaired when
it is probable that the borrower will be unable to repay the loan
according to the original contractual terms of the loan agreement,
or the loan is restructured in a troubled debt restructuring
subsequent to January 1, 1995. These standards are applicable
principally to commercial and commercial real estate loans,
however, certain provisions related to restructured loans are
applicable to all loan types. The adoption of these Statements did
not have a material effect on the Company's consolidated financial
statements.
Under these Statements 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 are
generally 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 these
costs are expected to reduce the cash flows available to repay or
otherwise satisfy the loans.
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. 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.
(f) 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,
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies
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. Costs
incurred to develop or improve properties are capitalized, while
holding costs are charged to expense.
(g) Premises and Equipment, Net
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.
(h) Pension Plan
The Company has a defined benefit pension plan covering all full
time employees meeting age and service requirements. This plan is
accounted for in accordance with SFAS No. 87, "Employers'
Accounting for Pensions."
(i) 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 SFAS No.
109, "Accounting for Income Taxes." 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 and liabilities of a change in tax
rates is recognized in income in the period that includes the
enactment date. The Company's 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.
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies
(j) Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities
In June, 1996, the Financial Accounting Standards Board (FASB)
issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," 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. The Company adopted SFAS No. 125 as of
January 1, 1997. Certain aspects of SFAS No. 125 were amended by
SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125." The adoption of SFAS No.
125 did not have a material impact on the Company's consolidated
financial statements.
(k) 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, 1997 totaling approximately $16.6
million. The interest rate may fluctuate based on existing market
conditions and customers' demands for credit. There were no
amounts outstanding under this line of credit at December 31,
1997.
(l) Stock Based Compensation Plans
Compensation expense in connection with the Company's Employee
Stock Ownership Plan (ESOP) is recorded in accordance with the
American Institute of Certified Public Accountants' Statement of
Position No. 93-6, "Employers' Accounting for Employee Stock
Ownership Plans."
The Company accounts for its stock option plans in accordance with
the provisions of Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees." Accordingly,
compensation expense is recognized only if the exercise price of
the option is less than the fair value of the underlying stock at
the grant date. SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages entities to recognize the fair value of
all stock-based awards on the date of grant as compensation
expense over the vesting period. Alternatively, SFAS No. 123
allows entities to continue to apply the provisions of APB Opinion
No. 25 and provide pro forma disclosures of net income and
earnings per share as if the fair-value-based method defined in
SFAS No. 123 had been applied. The Company has elected to continue
to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosures required by SFAS No. 123.
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies
The Company's Recognition and Retention Plan ("RRP") is also
accounted for in accordance with APB Opinion No. 25. The fair
value of the shares awarded, measured as of the grant date, is
recognized as unearned compensation (a deduction from
stockholders' equity) and amortized to compensation expense as the
shares become vested. Any excess of the cost to fund purchases of
RRP shares over the grant-date fair value is charged to
stockholders' equity.
(m) Earnings per Share
In February, 1997, the FASB issued SFAS No. 128, "Earnings per
Share," which establishes standards for computing and presenting
earnings per share. SFAS No. 128 requires dual presentation of
basic and diluted earnings per share on the face of the income
statement for all entities with a complex capital structure. Basic
earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
entity. The Company adopted SFAS No. 128 as of December 31, 1997.
All earnings per share data reflect the adoption of SFAS No. 128.
Unallocated ESOP shares are not included in the weighted average
number of common shares outstanding for either the basic or
diluted earnings per share calculations.
(n) Reclassifications
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
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies
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 Bankis
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 is 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 distributions 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 isurplus capital
ratioi (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, 1997, the maximum amount that could have
been paid by the Bank to the Holding Company was approximately
$7.3 million.
The Holding Company's ability to pay dividends to its stockholders
is dependent on the ability of the Bank to pay dividends to the
Holding Company.
(3) Earnings Per Share
The following is a reconciliation of the numerators and
denominators for the basic and diluted earnings per share (EPS)
calculations for the years ended December 31:
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
(in thousands except share and per share information)
1997
Weighted
Average
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS ................................. $1,068 1,108,094 $ .96
==========
Dilutive effect of potential common shares
related to stock based compensation plans -- 46,231
------ -----------
Diluted EPS ............................... $1,068 1,154,325 $ .93
====== =========== ==========
<CAPTION>
1996
Weighted
Average
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS ................................. $830 1,224,703 $ .68
======
Dilutive effect of potential common shares
related to stock based compensation plans -- 10,128
---- ---------
Diluted EPS ............................... $830 1,234,831 $ .67
==== ========= ======
</TABLE>
There were no potential common shares outstanding during 1995.
Earnings per share in 1995 were compiled on earnings and weighted
average shares from the date of the initial public offering
through December 31, 1995. Weighted average shares outstanding and
net income for this period were 1,495,000 and $613,000,
respectively.
(4) 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 $164,000 and $171,000 at December 31, 1997 and 1996,
respectively.
The Company is also required to maintain certain levels of stock
in the Federal Home Loan Bank of New York.
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
(5) Securities Available for Sale
The amortized cost and estimated fair value are as follows at
December 31:
<TABLE>
<CAPTION>
1997
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
U.S. Government securities and agencies $ 4,051 16 - 4,067
------- ----- ------ --------
Total securities available for sale $ 4,051 16 - 4,067
======= ===== ====== ========
<CAPTION>
1996
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands)
<S> <C> <C> <C> <C>
Mutual funds $ 1,944 46 - 1,990
------- ----- ------ --------
Total securities available for sale $ 1,944 46 - 1,990
======= ===== ====== ========
</TABLE>
The securities available for sale portfolio at December 31, 1996
consists of mutual funds representing investments in both
adjustable and fixed rate mortgage-related securities and U.S.
Government obligations.
Proceeds from the sale of securities available for sale were
approximately $2.0 million and $6.0 million during 1997 and 1996,
respectively. During 1997, sales of securities available for sale
resulted in gross realized gains of $56,000. During 1996, sales of
securities available for sale resulted in gross realized gains of
$44,000 and gross realized losses of $36,000. There were no sales
of securities available for sale during 1995.
All securities available for sale at December 31, 1997 are due to
contractually mature in approximately five years. Expected
maturities will differ from contractual maturities because certain
issuers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
(6) Investment Securities
The amortized cost and estimated fair values of investment
securities are as follows at December 31:
<TABLE>
<CAPTION>
1997
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
Mortgage backed
securities .................. $16,966 194 (84) 17,076
U.S. Government
securities and agencies ..... 11,937 24 (18) 11,943
States and political
subdivisions ................ 76 -- -- 76
------- ------- ------- -------
Total investment securities $28,979 218 (102) 29,095
======= ======= ======= =======
<CAPTION>
1996
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
Mortgage backed
securities ...................... $20,434 232 (344) 20,322
U.S. Government
securities and agencies ......... 13,461 1 (98) 13,364
States and political subdivisions ... 84 -- -- 84
Public utilities .................... 2,201 -- (7) 2,194
------- ------- ------- -------
Total investment securities$ .. 36,180 233 (449) 35,964
======= ======= ======= =======
</TABLE>
There were no sales of investment securities during 1997, 1996 or
1995.
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
The amortized cost and estimated fair value of investment
securities at December 31, 1997, by contractual maturity, are
shown below (mortgage backed securities are included by final
contractual maturity). 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 .......................... $ 4,118 4,114
Due one year to five years ................... 16,625 16,544
Due five years to ten years .................. 1,381 1,384
Due after ten years .......................... 6,855 7,053
------- -------
Total investment securities ............. $28,979 29,095
======= =======
</TABLE>
(7) Loans Receivable, Net
A summary of loans receivable is as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Loans secured by real estate:
Residential:
Conventional ................................ $100,277 84,840
Home equity ................................. 22,658 22,904
FHA insured ................................. 2,772 3,511
VA guaranteed ............................... 2,028 2,810
Commercial and multi family ..................... 6,130 4,532
-------- --------
133,865 118,597
------- --------
Other loans:
Loans on savings accounts ....................... 573 478
Personal ........................................ 143 34
Other ........................................... 5 11
-------- --------
721 523
-------- --------
Less:
Unearned discount and net deferred loan fees .... 22 23
Allowance for loan losses ....................... 778 642
-------- --------
800 665
-------- --------
Loans receivable, net ....................... $133,786 118,455
======== ========
</TABLE>
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Not included in the Company's loans receivable are real estate
mortgages serviced by the Bank for other institutions of
approximately $3.5 and $4.2 million at December 31, 1997 and 1996,
respectively.
At December 31, 1997 and 1996, the recorded investment in loans
that were considered to be impaired under SFAS No. 114 totaled
approximately $691,000 and $744,000, respectively. 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
years ended December 31, 1997, 1996 and 1995 was approximately
$718,000, $744,000 and $1,091,000, respectively.
For the years ended December 31, 1997, 1996 and 1995, the Company
recognized approximately $0, $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 at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Loans on a nonaccrual status ..................... $1,328 801
Loans contractually past due 90 days
or more and still accruing interest .......... 19 32
Restructured loans ............................... -- --
------ ------
Total non-performing loans .............. $1,347 833
====== ======
</TABLE>
Interest on nonaccrual loans of approximately $89,000, $81,000,
and $99,000 would have been earned in accordance with the original
contractual terms of the loans in 1997, 1996 and 1995,
respectively. Approximately $0, $74,000, and $38,000 of interest
was collected and recognized as income in 1997, 1996 and 1995,
respectively. There are no commitments to extend further credit on
the restructured loans.
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 Companyis normal credit
terms, including interest rate and collateralization. The
aggregate of such loans totaled approximately $127,000 and
$145,000 at December 31, 1997 and 1996, respectively. There were
no advances to the directors and executive officers during the
year ended December 31, 1997. Total payments made on these loans
were approximately $18,000 during 1997.
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Changes in the allowance for loan losses were as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year .................... $ 642 572 861
Provision charged to operations ............... 120 120 370
Loans charged off ............................. (26) (87) (718)
Recoveries on loans previously charged off .... 42 37 59
----- ----- -----
Balance, end of year .......................... $ 778 642 572
===== ===== =====
</TABLE>
(8) Accrued Interest Receivable
A summary of accrued interest receivable by type was as follows at
December 31:
<TABLE>
<CAPTION>
1997 1996
(in thousands)
<S> <C> <C>
Loans ............................................ $ 766 693
Securities available for sale .................... 68 --
Investment securities ............................ 296 444
------ ------
Total accrued interest receivable ............ $1,130 1,137
====== ======
</TABLE>
(9) Premises and Equipment, Net
Premises and equipment are summarized by major classification as
follows at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Land ................................................. $ 338 305
Leasehold improvements ............................... 241 240
Office buildings ..................................... 2,550 2,338
Furniture, fixtures and equipment .................... 1,135 889
------ ------
Total ........................................ 4,264 3,772
Less accumulated depreciation and amortization ....... 2,022 1,851
------ ------
Premises and equipment, net .................. $2,242 1,921
====== ======
</TABLE>
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Depreciation expense included in office occupancy and equipment
expense amounted to approximately $190,000, $140,000, and $143,000
for the years ended December 31, 1997, 1996 and 1995,
respectively.
(10) Real Estate Owned
A summary of real estate acquired through foreclosure by the
Company or classified as in-substance foreclosure is as follows at
December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Residential (1 - 4 family) ..................... $ 26 93
Commercial property ............................ 85 85
---- ----
Total real estate owned .................... $111 178
==== ====
</TABLE>
(11) Due to Depositors
Due to depositors account balances are summarized as follows at
December 31:
<TABLE>
<CAPTION>
Stated
rate 1997 1996
----------- -------- ---------
(in thousands)
<S> <C> <C> <C>
Savings deposit accounts:
Passbook and statement deposit accounts ........... 3.00% $ 36,681 37,152
Money market deposit accounts ..................... 2.60 - 4.30 7,619 6,074
-------- --------
44,300 43,226
Time deposit accounts:
4.00 - 4.99 801 23,244
5.00 - 5.99 84,451 50,815
6.00 - 6.99 9,489 12,835
-------- --------
94,741 86,894
NOW deposit accounts ................................... 1.75 9,163 9,104
Demand deposit accounts ................................ 0 2,265 1,392
-------- --------
Total deposits ................................ $150,469 140,616
======== ========
</TABLE>
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
The approximate amount of contractual maturities of time deposit
accounts at December 31, 1997 are as follows:
Year ended December 31, (in thousands)
----------------------- --------------
1998 $ 65,273
1999 22,314
2000 3,247
2001 1,508
2002 2,399
-----------
$ 94,741
At December 31, 1997 and 1996, the aggregate amount of time
deposit accounts with balances equal to or in excess of $100,000
was approximately $8.4 million and $6.2 million, respectively.
Interest expense on deposits and advance payments by borrowers for
property taxes and insurance is summarized as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Escrow balances ............................ $ 25 25 29
Passbook and statement savings ............. 1,113 1,173 1,325
Money market accounts ...................... 251 161 129
Time deposits .............................. 5,075 4,680 4,620
NOW accounts ............................... 159 148 133
------ ------ ------
Total interest on deposits and advance
payments by borrowers for property
taxes and insurance ................ $6,623 6,187 6,236
====== ====== ======
Weighted average interest rates ... 4.59% 4.37% 4.56%
====== ====== ======
</TABLE>
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
(12) Income Taxes
The following is a summary of the components of income tax expense
for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current tax expense:
Federal ........................... $ 583 372 306
State ............................. 121 76 50
Deferred benefit .................. (12) (554) --
----- ----- -----
Income tax expense (benefit) .......... $ 692 (106) 356
===== ===== =====
</TABLE>
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>
1997 1996 1995
------------------- ------------------- --------------------
% 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 ....... $ 598 34.0% $ 246 34.0% $ 412 34.0%
State income tax, net of
federal tax benefit ............. 105 5.9 45 6.2 33 2.7
Change in beginning of year
balance of the valuation
allowance for deferred tax assets -- -- (396) (54.7) (78) (6.4)
Other, net .......................... (11) (.6) (1) (.1) (11) (.9)
----- ---- ----- ---- ----- ----
$ 692 39.3% $(106) (14.6)% $ 356 29.4%
===== ==== ===== ==== ===== ====
</TABLE>
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
The tax effects of significant temporary differences that give
rise to the deferred tax assets and liabilities were as follows at
December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses .......................... $ 334 276
Deferred compensation and pension costs ............ 430 406
Recognition and retention plan expense ............. 52 62
Securities basis adjustment ........................ 22 46
----- -----
Total gross deferred tax assets ............... 838 790
Less valuation allowance ...................... (96) (96)
----- -----
Net deferred tax assets ....................... 742 694
----- -----
Deferred tax liabilities:
Depreciation differences ........................... 72 74
Accretion of discount on securities ................ 53 19
Other items ........................................ 51 47
----- -----
Total gross deferred tax liabilities .......... 176 140
----- -----
Net deferred tax asset at year-end ............ 566 554
Net deferred tax asset at beginning of year ... 554 --
----- -----
Deferred tax benefit for the years ended ...... $ 12 554
===== =====
</TABLE>
In addition to the deferred tax amounts described above, the
Company also had a deferred tax liability of approximately $6,000
at December 31, 1997, related to the net unrealized gains on
securities available for sale.
The valuation allowance for deferred tax assets as of December 31,
1997 and 1996 was $96,000. During the year ended December 31,
1996, the valuation allowance was reduced by $396,000. This
reduction was primarily the result of the expected realization of
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
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 Company's continuing evaluation of the
level of such allowance and the realizability of the temporary
differences creating the deferred tax asset. Based on recent
historical and anticipated future pre-tax earnings, management
believes it is more likely than not that the Company will realize
its net deferred tax assets.
As a thrift institution, the Bank is subject to special provisions
in the Federal and New York State tax laws regarding its allowable
tax bad debt deductions and related tax bad debt reserves. These
deductions historically have been determined using methods based
on loss experience or a percentage of taxable income. Tax bad debt
reserves are maintained equal to the excess of allowable
deductions over actual bad debt losses and other reserve
reductions. These reserves consist of a defined base-year amount,
plus additional amounts ("excess reserves") accumulated after the
base year. SFAS No. 109 requires recognition of deferred tax
liabilities with respect to such excess reserves, as well as any
portion of the base-year amount which is expected to become
taxable (or "recaptured") in the foreseeable future.
Certain amendments to the Federal and New York State tax laws
regarding bad debt deductions were enacted in July and August
1996. The Federal amendments include elimination of the percentage
of taxable income method for tax years beginning after December
31, 1995, and imposition of a requirement to recapture into
taxable income (over a period of approximately six years) the bad
debt reserves in excess of the base-year amounts. The Bank
previously established, and will continue to maintain, a deferred
tax liability with respect to such excess Federal reserves. The
New York State amendments redesignate the Bank's state bad debt
reserves at December 31, 1995 as the base-year amount and also
provide for future additions to the base-year reserve using the
percentage of taxable income method.
In accordance with SFAS No. 109, a deferred tax liability has not
been recognized at December 31, 1997 with respect to the base-year
reserve of $4.6 million, since the Bank does not expect that this
amount will become taxable in the foreseeable future. Under New
York State tax law, as amended, events that would result in
taxation of this reserve include the failure of the Bank to
maintain a specified qualifying assets ratio or meet other thrift
definition tests for tax purposes. The unrecognized deferred tax
liability at December 31, 1997 with respect to the base-year
reserve was approximately $1.6 million.
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
(13) Employee Benefit Plans
(a) Pension Plan
The Company's defined benefit, non-contributory, pension plan (the
"Plan") 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.
The following table sets forth the Plan's funded status and
amounts recognized in the Company is consolidated financial
statements at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of approximately $3,357,000
in 1997 and $2,828,000 in 1996 ........................ $(3,436) (2,927)
======= =======
Projected benefit obligation for service rendered to date (4,662) (3,936)
Plan assets at fair value ................................ 3,636 3,190
------- -------
Projected benefit obligations in excess of plan assets ... (1,026) (746)
Unrecognized net loss from past experience different
from that assumed of effects and changes in assumptions 704 359
Unrecognized prior service costs ......................... 2 2
Unrecognized net obligation at January 1, 1989 being
recognized over 19.66 years ........................... 246 269
------- -------
Accrued pension liability ................................ $ (74) (116)
======= =======
</TABLE>
Net pension cost for 1997, 1996 and 1995 included the
following components:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 171 171 139
Interest cost on projected benefit obligations . 288 265 237
Actual return on plan assets ................... (295) (171) (352)
Net amortization and deferral .................. 26 (67) 151
----- ----- -----
Net periodic pension cost ...................... $ 190 198 175
===== ===== =====
</TABLE>
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Significant assumptions used in determining pension expense of the
Plan are as follows for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate .............................. 7.0% 7.5% 7.5%
Expected long-term rate of return .......... 9.0% 9.0% 9.0%
Compensation increase rate ................. 6.0% 6.0% 6.0%
</TABLE>
(b) Executive Supplemental Retirement Plan
The Company maintains an Executive Supplemental Retirement Plan
for key management personnel. An expense of approximately $72,000,
$72,000, and $107,000 was recorded in 1997, 1996 and 1995,
respectively.
(c) 401(k) Savings Plan
The Company 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
employeeis salary. Total expense recorded during 1997, 1996 and
1995 was approximately $27,000, $23,000, and $24,000,
respectively.
(14) Stock-Based Compensation Plans
(a) 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 Holding
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 Bankis discretionary
contributions to the ESOP over a period of ten years. At December
31, 1997 and 1996, the loan had an outstanding balance of $837,200
and $956,800, 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.
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Unallocated ESOP shares are pledged as collateral on the loan and
are reported in stockholders' 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 $225,000 and $158,000 of
compensation expense under the ESOP in 1997 and 1996,
respectively.
The ESOP shares as of December 31, 1997 were as follows:
Allocated shares 23,920
Shares released for allocation 11,960
Unallocated shares 83,720
------------
119,600
============
Market value of unallocated shares at
December 31, 1997 $ 2,250,000
============
(b) Stock Option Plan
On January 16, 1996, the Company's stockholders approved the SFS
Bancorp, Inc. 1996 Stock Option and Incentive Plan (Stock Option
Plan). The primary objective of the Stock Option Plan is to
provide officers and directors with a proprietary interest in the
Company and as an incentive to encourage such persons to remain
with the Company.
Under the Stock Option Plan, 149,500 shares of authorized but
unissued stock are reserved for issuance upon option exercises.
The Company also has the alternative to fund the Stock Option Plan
with treasury stock. Options under the plan may be either
non-qualified stock options or incentive stock options. Each
option entitles the holder to purchase one share of common stock
at an exercise price equal to the fair market value on the date of
grant. Options expire no later than ten years following 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, "Accounting for Stock-Based
Compensation." 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.
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
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 1997 and
1996:
<TABLE>
<CAPTION>
October January January
1997 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividend yield ................. 1.3% 1.9% 1.7%
Expected volatility ............ 22.0% 22.0% 25.0%
Risk-free interest rate ........ 6.0% 6.5% 5.6%
Expected life .................. 7 years 7 years 7 years
</TABLE>
Had the Company recorded compensation cost based on the fair value
at grant date for its stock options under SFAS No. 123, the
company's consolidated net income and basic and diluted earnings
per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
(in thousands except per share data)
1997 1996
---- ----
<S> <C> <C>
Net income:
As reported .......................... $1,068 830
Pro forma ............................ 976 744
Basic earnings per share:
As reported .......................... .96 .68
Pro forma ............................ .88 .61
Diluted earnings per share:
As reported .......................... .93 .67
Pro forma ............................ .86 .62
</TABLE>
Because the Company's employee stock options have characteristics
significantly different from those of traded options for which the
Black-Scholes model was developed, and because changes in the
subjective input assumptions can materially affect the fair value
estimate, the existing models, in management's opinion, do not
necessarily provide a reliable single measure of the fair value of
its employee stock options.
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
A summary of the status of the Company's stock option plans as of
December 31, 1997 and 1996 and changes during the years ended on
those dates is presented below:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Options:
Outstanding at January 1 114,367 $ 12.63 - -
Granted 18,687 19.12 133,054 12.63
Exercised (7,475) 12.63 - -
Cancelled - - (18,687) 12.63
Outstanding at year-end 125,579 13.59 114,367 12.63
Exercisable at year-end 21,379 12.63 - -
Estimated weighted-average
fair value of options granted
during the year $ 6.29 $ 4.08
======= ========
</TABLE>
The following table summarizes information about the Company's
stock options at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- -------------------------
Weighted
Average Weighted- Weighted-
Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Price at 12/31/97 Life Price at 12/31/97 Price
----- ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$ 12.625 106,892 8 years $ 12.63 21,379 $ 12.63
14.75 7,475 9 years 14.75 - -
22.03 11,212 9.8 years 22.03 - -
</TABLE>
(c) Recognition and Retention Plan
On January 16, 1996, the Company's stockholders approved the SFS
Bancorp, Inc. Recognition and Retention Plan (RRP). The purpose of
the plan is to promote the long-term interests of the Company and
its shareholders by providing a stock based compensation program
to attract and retain officers and directors. Under the RRP,
59,800 shares of authorized but unissued shares are reserved for
issuance under the plan. The Company also has the alternative to
fund the RRP with treasury stock.
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
During 1997 and 1996, 7,475 shares and 53,222 shares,
respectively, were awarded under the RRP. During 1996, 7,475
shares were forfeited under the RRP. 2,990 shares and 8,691 shares
vested under the RRP during 1997 and 1996, respectively.
(15) Fair Value of Financial Instruments
SFAS No. 107, iDisclosures about Fair Value of Financial
Instrumentsi 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 Companyis
entire holdings of a particular financial instrument. Because no
ready market exists for a significant portion of the Companyis
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 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.
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
The following tables present the carrying amounts and estimated
fair values of the Company is financial instruments at December
31, 1997 and 1996:
<TABLE>
<CAPTION>
1997
-----------------------
(in thousands)
Carrying Estimated
Amount Fair Value
------ ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents ................................ $ 2,176 2,176
Securities available for sale ............................ 4,067 4,067
Investment securities .................................... 28,979 29,095
Loans .................................................... 134,586 135,886
Less: allowance for loan losses .................... 778 --
unearned discount, and deferred loan fees, net 22 --
-------- --------
Net loans ....................................... 133,786 135,886
Accrued interest receivable .............................. 1,130 1,130
Financial liabilities:
Savings, now, and demand deposit accounts ................ 55,728 55,728
Time deposit accounts .................................... 94,741 94,880
Advance payments by borrowers for property taxes
and insurance ....................................... 1,281 1,281
Accrued interest on depositors accounts .................. 7 7
<CAPTION>
1996
----------------------
(in thousands)
Carrying Estimated
Amount Fair Value
------ ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents ................................... $ 2,896 2,896
Securities available for sale ............................... 1,990 1,990
Investment securities ....................................... 36,180 35,964
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
Accrued interest receivable ................................. 1,137 1,137
Financial liabilities:
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
</TABLE>
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Financial Instruments with Carrying Amount Equal to Fair Value
The carrying amount of cash and due from banks and fed eral funds
sold (collectively defined as icash and cash equivalentsi),
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 and investment
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.
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, 1997 and 1996.
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.
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
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, 1997 and
1996.
(16) 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.
Contract amounts of financial instruments that represent credit
risk as of December 31, 1997 and 1996 at fixed and variable
interest rates are as follows:
<TABLE>
<CAPTION>
1997
----------------------------------
Fixed Variable Total
----- -------- -----
(in thousands)
<S> <C> <C> <C>
Financial instruments
whose contract amounts
represent credit risk:
Conventional mortgage loans ...... $ 921 2,296 3,217
Home equity ...................... -- 10,279 10,279
Commercial loans ................. 257 -- 257
Overdraft loans .................. 135 -- 135
------- ------- -------
$ 1,313 12,575 13,888
======= ======= =======
</TABLE>
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
<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
======= ======= =======
</TABLE>
The range of interest rates on fixed rate commitments was 7.13% to
18.00% at December 31, 1997 and 5.0% to 18.00% at December 31,
1996. 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, 1997 and 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, 1997 and 1996
was 6.00% above the initial rate. The Company also offers 3/1 and
5/1 ARM products 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, 1997 and 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.
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
(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, 1997, 1996 and 1995 were
approximately $53,000, $45,000, and $42,000, respectively. A
summary of the future minimum commitments required under the
noncancelable facility lease are as follows:
Years ending December 31: (in thousands)
1998 $ 52,000
1999 52,000
2000 52,000
2001 52,000
2002 52,000
Thereafter 203,000
----------
$ 463,000
==========
(17) Regulatory Capital Requirements
OTS regulations require savings institutions to maintain minimum
levels of regulatory capital. Under the regulations in effect at
December 31, 1997, 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 institution's 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%.
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.
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
Management believes that, as of December 31, 1997, 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 Bank's
capital classification.
The following is a summary of the Bank's and Company's actual
capital amounts and ratios, compared to the OTS minimum capital
adequacy requirements and the OTS requirements for classification
as a well capitalized institution, at December 31:
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------------
Minimum Capital Classification
Actual Adequacy as Well Capitalized
Amount Ratio Ratio Ratio
------ ----- ----- -----
<S> <C> <C> <C> <C>
Bank
Tangible capital $ 18,977 10.88% 1.50% -
Tier 1 (core) capital 18,977 10.88 3.00 5.00
Risk-based capital:
Tier 1 18,977 20.33 - 6.00
Total 19,755 21.16 8.00 10.00
<CAPTION>
Actual
Amount Ratio
------ -----
<S> <C> <C>
Consolidated
Tangible capital $ 21,421 12.28%
Tier 1 (core) capital 21,421 12.28
Risk-based capital:
Tier 1 21,421 22.95
Total 22,199 23.78
</TABLE>
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------------------
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 18,405 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>
(18) 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 Bankis mutual-to-stock conversion and the Holding
Company's initial public offering of its common stock.
<PAGE>
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
Balance Sheets
as of December 31, 1997 and 1996
Assets 1997 1996
(in thousands, except share data)
<S> <C> <C>
Cash and cash equivalents ........................................... $ 76 96
Loan receivable from subsidiary ..................................... 2,337 3,757
Equity in net assets of subsidiary .................................. 18,987 17,808
Other assets ........................................................ 60 58
-------- --------
Total assets ...................................... $ 21,460 21,719
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Other liabilities .............................................. $ 29 48
-------- --------
Stockholders' Equity:
Preferred stock, $.01 par value, authorized 500,000 shares ..... -- --
Common stock, $.01 par value, authorized 2,500,000 shares;
1,495,000 shares issued at December 31, 1997 and 1996 ...... 15 15
Additional paid-in capital ..................................... 14,365 14,260
Retained earnings, substantially restricted .................... 12,422 11,687
Treasury stock, at cost (286,528 shares at
December 31, 1997, 224,003 at December 31, 1996) .......... (4,089) (2,840)
Common stock acquired by employee stock ownership plan (ESOP) .. (837) (957)
Unearned recognition and retention plan (RRP) .................. (455) (540)
Net unrealized gain on securities available for sale, net of tax 10 46
-------- --------
Total stockholders' equity ........................ 21,431 21,671
-------- --------
Total liabilities and stockholders' equity ........ $ 21,460 21,719
======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of Income
For the years ended December 31, 1997 and 1996
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Interest income ............................................ $ 245 384
Interest expense ........................................... -- --
------ ------
Net interest income ................................... 245 384
Noninterest expense ........................................ 115 104
------ ------
Income before income taxes and equity in undistributed
earnings of subsidiary ................................ 130 280
------ ------
Income tax expense ......................................... 52 112
------ ------
Income before equity in undistributed earnings of subsidiary 78 168
Equity in undistributed earnings of subsidiary
(for the years ended December 31, 1997 and 1996) ...... 990 662
------ ------
Net income ................................................. $1,068 830
====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of Cash Flows
For the years ended December 31, 1997 and 1996
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income ......................................... $ 1,068 830
Adjustment to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiary (990) (662)
Increase in other assets ..................... (2) (17)
Increase (decrease) in liabilities ........... (19) 27
Amortization of RRP .......................... 228 38
------- -------
Net cash provided by operating activities . 285 216
------- -------
Cash flows from investing activities:
Net (increase) decrease in loans ................... 1,420 3,319
------- -------
Net cash provided in investing activities . 1,420 3,319
------- -------
Cash flows from financing activities:
Purchase of treasury stock ......................... (1,486) (3,418)
Cash dividends paid ................................ (333) (156)
Proceeds from exercise of stock option ............. 94 --
------- -------
Net cash used from financing activities ... (1,725) (3,574)
------- -------
Net decrease in cash and cash equivalents ............... (20) (39)
Cash and cash equivalents:
Beginning of period ................................ 96 135
------- -------
End of period ...................................... $ 76 96
======= =======
</TABLE>
These financial statements should be read in conjunction with the
Company is consolidated financial statements and notes thereto.
<PAGE>
CORPORATE INFORMATION
================================================================================
Annual Meeting
The annual meeting of SFS Bancorp, Inc. will be held on April 22, 1998
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 March 4, 1998 there were approximately 299
holders of record and approximately 422 additional beneficial shareholders of
SFS Bancorp, Inc. Common Stock and 1,495,000 shares of common stock issued and
1,208,472 shares outstanding.
PRICE RANGE OF COMMON STOCK
The table below shows the range of high and low bid prices for the
Company's Common Stock. 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.
1997 1996
- -------------------------------------- -----------------------------------
High Low High Low
First Quarter $18.125 $14.75 First Quarter $ 13.00 $ 11.50
Second Quarter $17.50 $16.00 Second Quarter $ 13.00 $ 11.75
Third Quarter $23.25 $16.875 Third Quarter $ 14.25 $ 12.00
Fourth Quarter $28.00 $21.50 Fourth Quarter $ 16.25 $ 13.50
During 1997, the Company declared dividends totaling $333,000 or $0.27
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.
<PAGE>
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, 1997 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
Transfer Agent and Registrar Independent Auditors
Registrar and Transfer Company KPMG Peat Marwick LLP
10 Commerce Drive 515 Broadway
Cranford, NJ 07016 Albany, NY 12207
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 Richard D. Ammian
President and Chief Executive Officer Senior Vice President and Secretary
David J. Jurczynski Michael Krywinski
Senior Vice President, Treasurer Vice President
and Chief Financial Officer
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>
(letterhead KPMG Peat Marwick LLP)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
SFS Bancorp, Inc.:
We consent to incorporation by reference in the following registration
statements of SFS Bancorp, Inc.:
No. 333-05789 on Form S-8, and
No. 333-05831 on Form S-8
of our report dated January 23, 1998, relating to the consolidated balance
sheets of SFS Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, 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,
1997, which report appears in the December 31, 1997 Annual Report on Form 10-KSB
of SFS Bancorp, Inc.
s/sKPMG Peat Marwick LLP
------------------------
KPMG Peat Marwick LLP
Albany, New York
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT OF FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 1,876 1,296
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 300 1,600
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 4,067 1,990
<INVESTMENTS-CARRYING> 28,979 36,180
<INVESTMENTS-MARKET> 29,095 35,964
<LOANS> 134,564 119,097
<ALLOWANCE> 778 642
<TOTAL-ASSETS> 174,428 164,888
<DEPOSITS> 150,469 140,616
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 2,528 2,601
<LONG-TERM> 0 0
15 15
0 0
<COMMON> 0 0
<OTHER-SE> 21,416 21,656
<TOTAL-LIABILITIES-AND-EQUITY> 174,428 164,888
<INTEREST-LOAN> 9,757 8,758
<INTEREST-INVEST> 2,371 2,784
<INTEREST-OTHER> 240 325
<INTEREST-TOTAL> 12,368 11,867
<INTEREST-DEPOSIT> 6,623 6,162
<INTEREST-EXPENSE> 6,623 6,187
<INTEREST-INCOME-NET> 5,745 5,680
<LOAN-LOSSES> 120 120
<SECURITIES-GAINS> 56 8
<EXPENSE-OTHER> 4,369 5,239
<INCOME-PRETAX> 1,760 724
<INCOME-PRE-EXTRAORDINARY> 1,760 724
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,068 830
<EPS-PRIMARY> .96 .68
<EPS-DILUTED> .93 .67
<YIELD-ACTUAL> 3.46 3.51
<LOANS-NON> 1,328 801
<LOANS-PAST> 19 32
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 642 572
<CHARGE-OFFS> 26 87
<RECOVERIES> 42 37
<ALLOWANCE-CLOSE> 778 642
<ALLOWANCE-DOMESTIC> 477 365
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 301 277
</TABLE>
