United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File # 0-26546.
STATEWIDE FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
New Jersey 22-3397900
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification
organization) Number)
70 Sip Avenue, Jersey City, New Jersey 07306
(Address of principal executive offices, including zip code)
(201) 795-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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-K or any amendment to the Form 10-K.
[ X ]
As of February 28, 1997, there were issued 4,866,264 and outstanding
4,865,125 shares of the registrant's Common Stock. The aggregate
market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the $17.50 closing price of such
stock as of February 28, 1997, was $55,024,848. (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.)
DOCUMENTS INCORPORATED BY REFERENCE
10-K Item Document Incorporated
10. Directors's and Executive Proxy Statement for 1997 Annual
Officers of Registrant Meeting of Shareholders to be
filed no later than April 30,
1997.
11. Executive Compensation Proxy Statement for 1997 Annual
Meeting of Shareholders to be
filed not later than April 30,
1997.
12. Security Ownership of Proxy Statement for 1997 Annual
Certain Beneficial Owners Meeting of Shareholders to be
and Management filed not later than April 30,
1997.
13. Certain Relationships and Proxy Statement for 1997 Annual
Related Transactions Meeting of Shareholders to be
filed not later than April 30,
1997.
STATEWIDE FINANCIAL CORP.
PART I
ITEM 1. BUSINESS
(a) and (c) General Development of the Business; Narrative
Description of Business.
Statewide Financial Corp. (the "Company") is a New Jersey business
corporation and unitary savings and loan holding company under the
Home Owner's Loan Act of 1933, as amended (the "HOLA"). The Company
was incorporated on May 31, 1995 for the purpose of acquiring
Statewide Savings Bank, S.L.A. (the "Bank") in connection with the
Bank's conversion from the mutual form of ownership to the stock form
of ownership. On September 29, 1995, the Bank converted from a mutual
to stock form and the Company acquired 100% of the outstanding stock
of the Bank. The principal activities of the Company are owning and
supervising the Bank.
The Bank was organized in 1943 as a New Jersey chartered savings and
loan association. The Bank's principal business is attracting retail
deposits from the general public and investing those deposits,
together with funds generated from operations and principal payments,
primarily in one- to four-family residential mortgage loans and
mortgage-backed securities and, to a lesser extent, commercial,
consumer and other loans and investment securities. The Bank's
revenues are derived principally from interest on its mortgage loan
and mortgage-backed securities portfolio and interest and dividends on
its debt and equity securities. The Bank's primary sources of funds
are deposits, principal and interest payments on loans and mortgage-
backed securities and advances from the Federal Home Loan Bank of New
York ("FHLBNY"). Through its wholly owned subsidiary, Statewide
Financial Services, Inc., the Bank also engages in the sale of annuity
products.
During 1995, the Company changed its fiscal year end to December 31
from March 31.
Market Area and Competition
The Company conducts business as a community-oriented savings bank,
offering a variety of financial services to meet the needs of the
communities it serves. The Company's primary market area for deposit
gathering includes the neighborhoods surrounding its sixteen offices.
Nine of the Company's offices are located in Hudson County, two in
Bergen County, one in Passaic and four are located in Union County,
New Jersey. The Company's primary market area for loan originations
is northern and central New Jersey, although the Company originates
loans throughout the State of New Jersey. During 1996, the Company
closed one branch office in Union County and opened two branch offices
in Hudson County.
The Company faces significant competition both in making loans and in
attracting deposits. Northern New Jersey has a high density of
financial institutions, many of which are branches of significantly
larger money center and regional banks which have resulted from the
recent consolidation of the banking industry in New Jersey and
surrounding states and which have greater financial resources than the
Company, and all of which are competitors of the Company to varying
degrees. The Company's competition for loans comes principally from
commercial banks, savings banks, savings and loan associations, credit
unions, mortgage banking companies and insurance companies. Its most
direct competition for deposits has historically come from commercial
banks, savings banks, savings and loan associations and credit unions.
The Company faces additional competition for deposits from short-term
money market funds and other corporate and government securities funds
and from other financial institutions such as brokerage firms and
insurance companies.
Personnel
At December 31, 1996, the Company had a total of 168 full-time
employees and 49 part-time employees. The employees are not
represented by a collective bargaining unit and the Company considers
its relationship with its employees to be good.
REGULATION AND SUPERVISION
General
The Bank is a New Jersey State chartered capital stock savings and
loan association and its deposit accounts are insured up to applicable
limits by the Federal Deposit Insurance Corporation ("FDIC") under the
Savings Association Insurance Fund ("SAIF"). The Bank is subject to
extensive regulation and supervision by the New Jersey Department of
Banking (the "Department"), as its chartering agency, the Office of
Thrift Supervision ("OTS"), as its primary federal regulator and by
the FDIC, as the deposit insurer. The Bank must file reports with the
Department, the OTS and the FDIC concerning its activities and
financial condition, in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other depository institutions. There are periodic
examinations by the Department, the OTS, and the FDIC to assess the
Bank's compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of
activities in which a savings and loan association can engage and is
intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory
authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including
policies with respect to the classification of assets and the
establishment of adequate loan loss reserves for regulatory purposes.
As a unitary savings and loan holding company, the Company is subject
to supervision and regulation by the OTS.
New Jersey Law
The Department regulates the corporate activities of the Bank as well
as its deposit taking, lending and investment activities. The
Department must approve changes to the Bank's Certificate of
Incorporation, establishment or relocation of offices, mergers and the
issuance of additional stock. In addition, the Department conducts
periodic examinations of the Bank. Certain of the areas regulated by
the Department are not subject to similar regulation by the OTS.
Recent federal and state legislative developments have reduced
distinctions between commercial banks and SAIF insured savings
institutions in New Jersey with respect to lending and investment
authority as well as interest rate limitations. As federal law has
expanded the authority of federally chartered savings institutions to
engage in activities previously reserved for commercial banks, New
Jersey legislation and regulations ("parity legislation") have given
New Jersey chartered savings institutions, such as the Bank, the
powers of federally chartered savings institutions.
New Jersey law provides that, upon satisfaction of certain triggering
conditions, as determined by the Department, insured institutions or
savings and loan holding companies located in a state which has
reciprocal legislation in effect on substantially the same terms and
conditions as under New Jersey law may acquire, or be acquired by, New
Jersey insured institutions or holding companies on either a regional
or national basis. New Jersey law explicitly prohibits interstate
branching.
Industry Recapitalization of SAIF
The Deposit Insurance Funds Act of 1996 (the "BIF/SAIF Act") was
enacted into law on September 30, 1996. The BIF/SAIF Act mitigated
the disparity between insurance premiums for deposits insured by
Savings Association Insurance Fund (SAIF) and deposits insured by the
Bank Insurance Fund (BIF).
The Deposit Insurance Funds Act of 1996 requires:
A one-time special assessment, equal to .657% of the SAIF
institution's March 31, 1995 deposits to capitalize SAIF. The
assessment was payable in the third quarter of 1996.
Full pro rate sharing of the Financing Corp. (FICO) debt service,
on the earlier to occur of January 1, 2000 or the date of the BIF
and SAIF are merged. Until full pro rata FICO sharing is in
place, FICO premiums for BIF and SAIF will be 1.3 and 6.4 basis
points, respectively, beginning January 1, 1997. Total FDIC
assessments will be the sum of the FICO premium and any regular
insurance assessment, which is currently zero for institutions in
the lowest risk category.
A merger of BIF and SAIF, creating the Deposit Insurance Fund, or
DIF, on January 1, 1999, provided that bank and savings
association charters are combined by that date. If this occurs,
pro rata FICO sharing will also begin on that date.
The preparation of a report on re-chartering by the Treasury
Department by March 31, 1997.
A temporary prohibition on deposit migration for the purpose of
evading the remaining 5.1 basis point premium differential. This
prohibition will terminate the sooner of January 1, 2000, or when
the bank and savings association charters are unified and the
separate funds merged, since any premium differential will be
eliminated on the earlier of these dates.
Effective January 1, 1997, SAIF members have the same risk-based
assessment schedule as BIF members - zero to 27 basis points. As
discussed above, FICO assessments of 6.4 and 1.3 basis points will be
added to the regular assessment. After pro rata FICO assessments
commence, about 2.4 basis points will be added to each FDIC insurance
assessment for all insured depositories.
Immediately preceding the enactment of the BIF/SAIF Act, the Company
was incurring deposit insurance expense at a rate of 23 cents per $100
of deposits. Effective January 1, 1997, the rate has been reduced to
6.4 cents per $100 of deposits. In addition, the Company incurred
$2,651,000 additional FDIC insurance expense, in satisfaction of the
one time special SAIF assessment. The effect to net income for 1996
as a result of the special assessment was a reduction of $1,697,000 or
$0.37 per share.
Prompt Corrective Action
Federal law establishes a system of prompt corrective action to
resolve the problems of undercapitalized institutions and permits the
federal banking agencies, including the OTS, to take certain
supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's capital level.
Generally, subject to a narrow exception, the appropriate federal
banking agency is required to appoint a receiver or conservator for an
institution that is critically undercapitalized (as defined within the
FDIC regulations implementing the Federal Deposit Insurance Act)
within 90 days after it becomes critically undercapitalized.
Under the rules implementing the prompt corrective action provisions,
an institution that has a total risk-based capital ratio of 10.0% or
greater, a Tier 1 risk-based capital ratio of 6.0% or greater and a
leverage ratio of 5.0% or greater, and is not subject to any written
agreement, order, capital directive or prompt corrective action
directive to meet and maintain a specific capital level for any
capital measure is deemed to be "well-capitalized." An institution
that has a total risk-based capital ratio of 8.0% or greater, a Tier l
risk-based capital ratio of 4.0% or greater and a leverage ratio of
4.0% or greater (or a leverage ratio of 3.0% or greater if the bank is
rated composite "1" under the FDIC financial institution grading
system ("CAMEL rating") and is not experiencing or anticipating
significant growth) and does not meet the definition of a
"well-capitalized" bank is considered to be "adequately capitalized."
An institution that has a total risk-based capital of less than 8.0%
or has a Tier 1 risk-based capital ratio that is less than 4.0% or has
a leverage ratio of less than 4.0% is considered "undercapitalized."
An institution that has a total risk-based capital ratio of less than
6.0%, or a Tier 1 risk-based capital ratio that is less than 3.0% or a
leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized," and a bank that has a ratio of
tangible equity to total assets (core capital, such as common equity
capital, and cumulative perpetual preferred stock minus all intangible
assets, except for limited amounts of purchased mortgage servicing
rights and of purchased credit card relationships) to assets equal to
or less than 2.0% is deemed to be "critically undercapitalized."
Under the rule, the appropriate federal banking agency may reclassify
a well-capitalized bank as adequately capitalized, and may require an
adequately capitalized bank or an undercapitalized bank to comply with
certain mandatory or discretionary supervisory actions as if the bank
were in the next lower capital category (except that the appropriate
federal banking agency may not reclassify a significantly
undercapitalized bank as critically undercapitalized), if the
appropriate federal banking agency determines the bank is in an unsafe
or unsound condition, or the bank has received and not corrected a
less than satisfactory rating for any of the categories of asset
quality, management, earnings or liquidity. At December 31, 1996, the
Bank's leverage ratio as calculated under the prompt corrective action
rule was 9.41%. The Bank is deemed "well capitalized" for purposes of
Section 38 of the Federal Deposit Insurance Act ("FDI Act") and the
FDIC regulations implemented thereunder.
Generally, a bank that is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized" becomes immediately
subject to certain regulatory restrictions, including, but not limited
to, restrictions on growth, investment activities, capital
distributions and affiliate transactions. In addition, an insured
depository institution cannot make a capital distribution (as broadly
defined to include, among other things, dividends, redemptions and
other repurchases of stock), or pay management fees to any person that
controls the institution, if thereafter it would be
"undercapitalized." An "undercapitalized" bank is required to submit
an acceptable capital restoration plan to its primary federal
regulator, which must be guaranteed by any parent holding company of
the bank.
Insurance of Deposit Accounts
The amount of insurance premiums paid by insured depository
institutions is determined by the FDIC pursuant to a risk based
system, whereby the FDIC assigns an institution to one of three
capital categories consisting of (1) well-capitalized, (2) adequately
capitalized, or (3) undercapitalized, and one of three supervisory
categories. An institution's assessment rate depends on the capital
category and supervisory category to which it is assigned. Under this
system, there are nine assessment risk classifications (i.e.,
combinations of capital categories and supervisory subgroups within
each capital group) to which differing assessment rates are applied.
Assessment rates for SAIF insured institutions for 1996 ranged from
.23% of deposits for an institution in the highest category (i.e.,
well-capitalized and financially sound, with only a few minor
weaknesses) to .31% of deposits for an institution in the lowest
category (i.e., undercapitalized and posing a substantial probability
of loss to the FDIC unless effective corrective action is taken).
Effective January 1, 1997, SAIF members will have the same risk-based
assessment schedule as BIF members - zero to 27 basis points. FICO
assessments of 6.4 and 1.3 basis points will be added to the regular
insurance assessment for the SAIF-assessable base and the BIF-
assessable base, respectively, until December 31, 1999. Thereafter,
about 2.4 basis points will be added to each regular assessment for
all insured depositories, achieving full pro rata FICO sharing.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that, among other things, the institution has engaged
in, or is engaging in, unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the
FDIC or written agreement entered into with the FDIC. The management
of the Bank does not know of any practice, condition or violation that
might lead to termination of deposit insurance.
Regulatory Capital
The OTS's capital requirements applicable to the Bank consist of a
"tangible capital requirement," a "leverage limit" and a "risk-based
capital requirement."
Under the tangible capital requirement, a savings association must
maintain tangible capital in an amount equal to at least 1.5% of
adjusted total assets. Tangible capital is defined as core capital
less all intangible assets (including supervisory goodwill), plus a
specified amount of purchased mortgage servicing rights.
The leverage limit requires that savings associations maintain "core
capital" in an amount equal to at least 3.0% of adjusted total assets,
although to be adequately capitalized for purposes of the OTS' Prompt
Corrective Action regulations, core capital generally must be at least
4.0%. The OTS, however, has proposed an amendment to this requirement
that would increase core capital requirements for nearly all savings
associations, as discussed below. Core capital is defined as common
stockholders' equity (including retained earnings), non-cumulative
perpetual preferred stock, and minority interests in the equity
accounts of consolidated subsidiaries, plus purchased mortgage
servicing rights valued at the lower of 90.0% of fair market value,
90.0% of original cost or the current amortized book value as
determined under generally accepted accounting principles ("GAAP"),
less non-qualifying intangible assets.
In addition, the OTS has proposed a rule that would limit the amount
of purchased mortgage servicing rights includable as core capital to
50.0% of such capital. No assurance can be given as to the final form
of such regulation, the date of its effectiveness, or whether it will
differ materially from the proposal. The proposal, if adopted as
proposed, is not anticipated to have any immediate effect on the Bank.
In April 1991, the OTS published a proposed amendment to the
regulatory capital requirements applicable to all savings associations
to conform to Office of the Comptroller of the Currency ("OCC")
capital regulations applicable to national banks. Under the OTS
proposal, those savings associations receiving a CAMEL rating of "1",
the best possible rating on a scale of 1 to 5, will be required to
maintain a ratio of core capital to adjusted total assets of 3.0%.
All other savings associations will be required to maintain minimum
core capital of 4.0% to 5.0% of total adjusted assets. In determining
the required minimum core capital ratio, the OTS will assess the
quality of risk management and the level of risk in each savings
association on a case-by-case basis. The OTS did not indicate in the
proposed regulation the standards it will use in establishing the
appropriate core capital requirement for savings associations not
rated "1" under the CAMEL rating system. At December 31, 1996, the
Bank's ratio of core capital to total adjusted assets was 9.41%.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and
supplementary capital) to risk weighted assets of 8.0%. In
determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet assets, are multiplied by a risk weight of
0-100% as assigned by the OTS capital regulation based on the risks
the OTS believes are inherent in the type of asset. The components of
core capital are equivalent to those discussed above under the
leverage capital standard. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual
preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and the allowance for loan and lease
losses. Allowances for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of total gross
risk weighted assets. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100.0% of core
capital.
The OTS has amended its risk-based capital requirements to require
institutions with an "above normal" level of interest rate risk to
maintain additional capital. A savings association is considered to
have a "normal" level of interest rate risk if the decline in the
market value of its portfolio equity after an immediate 200 basis
point increase or decrease in market interest rates (whichever leads
to the greater decline) is less than two percent of the current
estimated market value of its assets. The market value of portfolio
equity is defined as the net present value of expected cash inflows
and outflows from an association's assets, liabilities and off-balance
sheet items. The amount of additional capital that an institution
with an above normal interest rate risk is required to maintain (the
"interest rate risk component") equals one-half of the dollar amount
by which its measured interest rate risk exceeds the normal level of
interest rate risk. The interest rate risk component is in addition
to the capital otherwise required to satisfy the risk-based capital
requirement. Effectiveness of these risk-based capital requirements
has been waived by the OTS until the OTS publishes final guidelines
regarding implementation. Although no final determination may be made
until the regulations are implemented, management believes that the
Bank will be found to have an "above normal" level of interest rate
risk, but that the Bank's additional capital requirements will not
adversely impact the Bank or its operations.
Changes in the market value of a savings association's portfolio
equity are calculated from data submitted by the savings association
in a new schedule to its Quarterly Thrift Financial Report. Net
present values are calculated by using various methodologies depending
on the asset or liability being valued. The OTS methodologies include
an "option adjusted spread analysis" for assets and off-balance sheet
items with prepayment risks, such as single-family mortgages and
mortgage servicing assets, and the "static discounted cash flow
analysis" for non-mortgaged loans and for certain mortgage loans such
as commercial and multi-family mortgages, construction and consumer
loans, and second mortgages. The static discounted cash flow analysis
involves adding up the calculated present values of future payments
from an asset based on the current values of United States Treasury
securities due on the various payment dates. The option adjusted
spread analysis involves the averaging of the discounted predicted
cash flows from a loan or other asset over approximately 200 different
interest rate scenarios. The Bank has determined that it will
continue to meet its risk based capital requirements under the
interest rate risk component regulation.
The OTS and the FDIC generally are authorized to take enforcement
action against a savings association that fails to meet its capital
requirements, which action may include restrictions on operations and
banking activities, the imposition of a capital directive, a cease-
and-desist order, civil money penalties or harsher measures such as
the appointment of a receiver or conservator or a forced merger into
another institution. In addition, under current regulatory policy, an
association that fails to meet its capital requirements is prohibited
from paying any dividends.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank ("FHLB") of New
York, which is one of the 12 regional FHLB's. As a member of the
FHLB, the Bank is required to purchase and maintain stock in the FHLB
of New York in an amount equal to the greater of 1.0% of its aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year, or 1/20 (or such greater
fraction as established by the FHLB from time to time) of outstanding
FHLB advances. At December 31, 1996, the Bank had $7.8 million of
FHLB of New York stock, which was in compliance with this requirement.
In past years the Bank has received dividends on its FHLB stock. Over
the past five years such dividends have averaged 8.02%, and were 6.46%
for the year ended December 31, 1996. Certain provisions of the
Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") require all 12 FHLB's to provide financial assistance for
the resolution of troubled savings associations and to contribute to
affordable housing programs through direct loans or interest subsidies
on advances targeted for community investment and low and moderate-
income housing projects. These contributions could cause rates on the
FHLB advances to increase and could affect adversely the level of FHLB
dividends paid and the value of FHLB stock in the future.
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.
These policies and procedures are subject to the regulation and
oversight of the Federal Housing Finance Board (the "FHFB").
Qualified Thrift Lender Test
The Qualified Thrift Lender ("QTL") test requires that a savings
association maintain at least 65.0% of its total "portfolio assets" in
"qualified thrift investments" on an average basis in nine of every
twelve months. For purposes of the test, portfolio assets are defined
as the total assets of the savings association minus: goodwill and
other intangible assets; the value of property used by the savings
association to conduct its business; and liquid assets not to exceed a
certain percentage (20.0% under the Federal Deposit Insurance
Corporation Improvement Act of 1991) of the savings association's
total assets.
Under the QTL statutory and regulatory provisions, all forms of home
mortgages, home improvement loans, home equity loans, and loans on the
security of other residential real estate and mobile homes as well as
a designated percentage of consumer loans are "qualified thrift
investments," as are shares of stock of an FHLB, investments or
deposits in other insured institutions, securities issued by the
Federal National Mortgage Association ("FNMA"), the Federal Home Loan
Mortgage Corporation ("FHLMC"), the Government National Mortgage
Association ("GNMA"), or the RTC Financing Corporation and other
mortgage-related securities. Investments in non-subsidiary
corporations or partnerships whose activities include servicing
mortgages or real estate development are also considered qualified
thrift investments in proportion to the amount of primary revenue such
entities derive from housing-related activities. Also included in
qualified thrift investments are mortgage servicing rights, whether
such rights are purchased by the insured institution or created when
the institution sells loans and retains the right to service such
loans.
A savings institution that fails to become or maintain its status as a
qualified thrift lender must either become a commercial bank or be
subject to restrictions specified in FIRREA. A savings institution
that converts to a bank must pay the applicable exit and entrance fees
involved in converting from one insurance fund to another. A savings
institution that fails to meet the QTL test and does not convert to a
bank will be: (1) prohibited from making any investment or engaging in
activities that would not be permissible for national banks; (2)
prohibited from establishing any new branch office where a national
bank located in the savings institution's home state would not be able
to establish a branch office; (3) ineligible to obtain new advances
from any FHLB; and (4) subject to limitations on the payment of
dividends comparable to the statutory and regulatory dividend
restrictions applicable to national banks. Also, beginning three
years after the date on which the savings institution ceases to be a
qualified thrift lender, the savings institution would be prohibited
from retaining any investment or engaging in any activity not
permissible for a national bank and would be required to repay any
outstanding advances to any Federal Home Loan Bank. A savings
institution may re-qualify as a qualified thrift lender if it
thereafter complies with the QTL test. As of December 31, 1996, the
Bank was in compliance with the QTL requirement. At December 31,
1996, 97.2% of the Bank's "portfolio assets" were "qualified thrift
investments."
Limitations on Capital Distributions
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase
or otherwise acquire shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions,
which are based primarily on an institution's capital level. An
institution that exceeds all fully phased-in regulatory capital
requirements before and after a proposed capital distribution ("Tier 1
Association") and has not been advised by the OTS that it is in need
of more than normal supervision, could, after prior notice but without
the approval of the OTS, make capital distributions during a calendar
year equal to the greater of: (I) 100.0% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half
its "surplus capital ratio" (the excess capital over its fully phased-
in capital requirements) at the beginning of the calendar year; or
(ii) 75.0% of its net earnings for the previous four quarters. Any
additional capital distributions would require prior OTS approval. In
the event the Bank's capital fell below its fully phased-in
requirement or the OTS notified it that it was in need of more than
normal supervision, the Bank's ability to make capital distributions
could be restricted. In addition, the OTS could prohibit a proposed
capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
Furthermore, under the OTS prompt corrective action regulations, which
took effect on December 19, 1992, the Bank would be prohibited from
making any capital distribution if, after the distribution, the Bank
would have: (i) a total risk-based capital ratio of less than 8.0%;
(ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less that 4.0%.
Holding Company Regulation
The Company is registered with and is subject to OTS examination and
supervision and certain reporting requirements as a unitary savings
and loan holding company. In addition, the operations of the Company
are subject to regulations promulgated by the OTS from time to time,
as well as regulations promulgated by the Department. As a SAIF-
insured subsidiary of a savings and loan holding company, the Bank is
subject to certain restrictions in dealing with the Company and with
other persons affiliated with the Company, and will continue to be
subject to examination and supervision by the OTS and FDIC.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, from: (i) acquiring control (as defined) of another
insured institution (or holding company thereof) without prior OTS
approval; (ii) acquiring more than 5.0% of the voting shares of
another insured institution (or holding company thereof) which is not
a subsidiary, subject to certain exceptions; (iii) acquiring through
merger, consolidation or purchase of assets, another savings
association or holding company thereof, or acquiring all or
substantially all of the assets of such institution (or holding
company thereof) without prior OTS approval; or (iv) acquiring control
of a depository institution not insured by the FDIC (except through a
merger with and into the holding company's savings association
subsidiary that is approved by the OTS). A savings and loan holding
company may acquire up to 15.0% of the voting shares of an
undercapitalized savings association. A savings and loan holding
company may not acquire as a separate subsidiary, an insured
institution that has principal offices outside of the state where the
principal offices of its subsidiary institution are located, except:
(i) in the case of certain emergency acquisitions approved by the
FDIC; (ii) if the holding company controlled (as defined) such insured
institution as of May 5, 1987; or (iii) if the laws of the state in
which the insured institution to be acquired is located specifically
authorize a savings association chartered by that state to be acquired
by a savings association chartered by the state where the acquiring
savings association or savings and loan holding company is located, or
by a holding company that controls such a state chartered association.
No director or officer of a savings and loan holding company or person
owning or controlling more than 25.0% of such holding company's voting
shares may, except with the prior approval of the OTS, acquire control
of any FDIC-insured depository institution that is not a subsidiary of
such holding company. If the OTS approves such an acquisition, any
holding company controlled by such officer, director or person shall
be subject to the activities limitations that apply to multiple
savings and loan holding companies, unless certain supervisory
exceptions apply.
Transactions with Affiliates
Section 11 of HOLA provides that transactions between an insured
subsidiary of a holding company and an affiliate thereof will be
subject to the restrictions that apply to transactions between banks
that are members of the Federal Reserve System and their affiliates
pursuant to Sections 23A and 23B of the Federal Reserve Act.
Generally, Sections 23A and 23B: (i) limit the extent to which a
financial institution or its subsidiaries may engage in "covered
transactions" with an "affiliate," to an amount equal to 10.0% of the
institution's capital and surplus, and limit all "covered
transactions" in the aggregate with all affiliates to an amount equal
to 20.0% of such capital and surplus; and (ii) require that all
transactions with an affiliate, whether or not "covered transactions,"
be on terms substantially the same, or at least as favorable to the
institution or subsidiary as those provided to a non-affiliate. The
term "covered transaction" includes the making of loans, purchase of
assets, issuance of a guarantee and similar types of transactions.
Management believes that the Bank is in compliance with the
requirements of Sections 23A and 23B. In addition to the restrictions
that apply to financial institutions generally under Sections 23A and
23B, Section 11 of the HOLA places three other restrictions on savings
associations, including those that are part of a holding company
organization. First, savings associations may not make any loan or
extension of credit to an affiliate unless that affiliate is engaged
only in activities permissible for bank holding companies. Second,
savings associations may not purchase or invest in affiliate
securities except for those of a subsidiary. Finally, the Director is
granted authority to impose more stringent restrictions when
justifiable for reasons of safety and soundness.
Extensions of credit by the Bank to executive officers, directors, and
principal stockholders and related interests of such persons are
subject to Sections 22(g) and 22(h) of the Federal Reserve Act and
Subpart A of the Federal Reserve Board's Regulation O. These rules
prohibit loans to any such individual where the aggregate amount
exceeds an amount equal to 15.0% of an institution's unimpaired
capital and surplus plus an additional 10.0% of unimpaired capital and
surplus in the case of loans that are fully secured by readily
marketable collateral, and/or when the aggregate amount outstanding to
all such individuals exceeds the institution's unimpaired capital and
unimpaired surplus. These rules also provide that no institution shall
make any loan or extension of credit in any manner to any of its
executive officers or directors, or to any person who directly or
indirectly, or acting through or in concert with one or more persons,
owns, controls, or has the power to vote more than 10.0% of any class
of voting securities of such institution ("Principal Stockholder"), or
to a related interest (i.e., any company controlled by such executive
officer, director, or Principal Stockholder), or to any political or
campaign committee the funds or services of which will benefit such
executive officer, director, or Principal Stockholder or which is
controlled by such executive officer, director, or Principal
Stockholder, unless such loan or extension of credit is made on
substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with other
persons, does not involve more than the normal risk of repayment or
present other unfavorable features, and the institution follows
underwriting procedures that are not less stringent than those
applicable to comparable transactions by the institution with persons
who are not executive officers, directors, Principal Stockholders, or
employees of the institution. A savings association is therefore
prohibited from making any new loans or extensions or credit to the
savings association's executive officers, directors, and 10.0%
stockholders at different rates or terms than those offered to the
general public. The rules identify limited circumstances in which an
institution is permitted to extend credit to executive officers.
Management believes that the Bank is in compliance with Sections 22(g)
and 22(h) of the Federal Reserve Act and Subpart A of the Federal
Reserve Board's Regulation O.
(b) Industry Segments - The Registrant has only one industry
segment, banking.
(d) Financial Information About Foreign and Domestic Operations
and Export Sales - Not Applicable
(e) Guide 3 Statistical Disclosure by Bank Holding Companies.
The following tables provide certain statistical information required
by SEC Guide 3. The remaining statistical disclosure required by SEC
Guide 3 is contained in Part II Item 7.
The following table shows the carrying value, weighted average yield,
and maturities of the Company's debt and equity securities portfolio,
for the periods indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
--------------------------------------------------------------------------------------------
Total Debt
Less Than 1 Year 1-5 Years 5-10 Years Over 10 Years Securities
---------------- --------- ---------- ------------- -----------
(Dollars in thousands)
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
and agency
securities $7,053 7.09% $33,050 6.71% - - - - $40,103 6.78%
Other 140 1.76 - - - - - - 140 1.76
------ ------- ----- ----- -------
Total debt and
equity securities $7,193 $33,050 - - $40,243
====== ======= ===== ===== =======
Weighted average
yield 6.99% 6.71% - - 6.76%
==== ==== ==== ==== ====
</TABLE>
The following table shows the contractual maturity of the Company's
mortgage-backed securities at December 31, 1996 The table does not
include the effect of prepayments or scheduled principal amortization.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-------------------------------------------------------------------------------------------
Total Mortgage-
Less Than 1 Year 1-5 Years 5-10 Years Over 10 Years Backed Securities
---------------- --------- ---------- ------------- -----------------
(Dollars in thousands)
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GNMA $ - - % $ - - % $ - - % $ 80,030 7.19% $ 80,030 7.19%
FHLMC 622 7.00 19,307 7.41 3,200 8.77 70,620 7.02 93,749 7.16
FNMA 175 9.00 24,785 7.29 1,460 8.89 40,775 6.13 67,195 6.61
---- ------- ------ -------- --------
Total mortgage-
backed securities $797 7.44% $44,092 7.34% $4,660 8.81% $191,425 6.86% $240,974 7.00%
==== ==== ======= ==== ====== ==== ======== ==== ======== ====
</TABLE>
The following table shows the contractual maturity of the Company's
loans at December 31, 1996 The table does not include the effect
of prepayments or scheduled principal amortization.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
------------------------------------------------------------------------------
First Mortgage Loans Other Loans
-------------------------------------------- --------------------
Total
One-to-Four Multi Non- Loans
Family Family Residential Construction Consumer Commercial Receivable
------ ------- -------- ----------- -------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year $ 5,950 $ - $ 3 $ - $ 6,024 $5,703 $ 17,680
-------- ------ ------ ---- ------- ------ --------
After 1 year:
1 to 3 years 13,300 27 32 404 6,468 1,216 21,447
3 to 5 years 18,243 - 6,591 - 5,369 1,539 31,742
5 to 10 years 42,811 2,215 148 - 9,344 752 55,270
10 to 20 years 94,002 4,333 1,209 - 7,499 - 107,043
Over 20 years 91,442 1,150 1,321 - 3 - 93,916
Total due
after 1 year 259,798 7,725 9,301 404 28,683 3,507 309,418
-------- ------ ------ ---- ------- ------ --------
Total loans $265,748 $7,725 $9,304 $404 $34,707 $9,210 $327,098
======== ====== ====== ==== ======= ====== ========
Less (Plus)
unearned dis-
counts(premiums)
and deferred
loan fees, net (985)
Less allowance
for loan losses 2,613
--------
Loans, net $325,470
========
</TABLE>
As of December 31, 1996, the dollar amount of all loans due after
December 31, 1997, and the composition of fixed interest rates and
adjustable interest rates were:
Due After December 31, 1997
---------------------------
Fixed Adjustable Total
----- ---------- -----
(Dollars in thousands)
Real estate mortgages $52,359 $224,869 $277,228
Other loans 28,127 4,063 32,190
------- -------- --------
Total loans $80,486 $228,932 $309,418
======= ======== ========
The following table sets forth the activity in the Company's
allowance for loan losses at or for the dates indicated:
<TABLE>
<CAPTION>
At or For
At or For the Nine Months At or For
the Year Ended Ended the Year Ended
December 31, December 31, March 31,
------------- -------------- -------------------
1996 1995 1995 1994 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, beginning of period $3,241 $3,062 $3,048 $2,818 $2,818 $2,854 $3,675
Provisions charged to operations 500 389 315 468 542 1,069 343
Loans charged off:
One-to-four family residential 186 140 67 211 135 1,053 942
Multi-family residential - - - - - - 75
Non-residential - - - - 151 - 122
Land and construction loans 848 - - - - - -
Other loans 106 83 66 23 45 67 44
------ ------ ------ ------ ------ ------ ------
Total loans charged off 1,140 223 133 234 331 1,120 1,183
------ ------ ------ ------ ------ ------ ------
Recovery on loans:
One-to-four family residential 2 5 3 9 11 - 19
Multi-family residential - - - - - - -
Non-residential - - - - - - -
Land and construction loans - - - - - - -
Other loans 10 8 8 1 8 15 -
------ ------ ------ ------ ------ ------ ------
Total recovery on loans 12 13 11 10 19 15 19
------ ------ ------ ------ ------ ------ ------
Net loans charged off 1,128 210 122 224 312 1,105 1,164
------ ------ ------ ------ ------ ------ ------
Balance, end of period $2,613 $3,241 $3,241 $3,062 $3,048 $2,818 $2,854
====== ====== ====== ====== ====== ====== ======
Ratio of net charge offs during the period
to average loans outstanding during the
period .42% .12% .07% .13% .18% .52% .45%
=== === === === === === ===
</TABLE>
The allocation of the Company's allowance for loan losses is set
forth below as indicated:
<TABLE>
<CAPTION>
At December 31, At March 31,
------------------------------------- -----------------------------------------------------
1996 1995 1995 1994 1993
----------------- ------------------ ----------------- ----------------- -----------------
Percentage Percentage Percentage Percentage Percentage
of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ --------- ------ --------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Allocation of allowance
for loan losses:
One-to-four family
residential $2,156 81.2% $1,533 79.0% $1,338 79.0% $1,130 80.1% $1,149 79.0%
Multi-family
residential 39 2.4 9 2.4 32 2.3 25 2.2 27 2.0
Non-residential 47 2.9 41 2.0 16 1.1 12 1.4 90 6.6
Land and construction
loans 4 0.1 1,502 1.9 1,508 3.0 1,520 3.8 1,462 3.8
Commercial business 92 2.8 - - - - - - - -
Other loans 275 10.6 156 14.7 154 14.6 131 12.5 126 8.6
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Balance, end of period $2,613 100.0% $3,241 100.0% $3,048 100.0% $2,818 100.0% $2,854 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
The following tables set forth the average dollar amount of deposits
in the various types of savings programs, along with the weighted
average effective rate paid for the periods indicated:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
-------------------------------------------------------
1996 1995
--------------------------- ----------------------------
Weighted Weighted
Percent Average Percent Average
Average of Total Effective Average of Total Effective
Balance Deposits Yield Balance Deposits Yield
------- -------- ----- ------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Checking Accounts $ 13,237 3.0% - % $ 9,208 2.2% - %
NOW Accounts 45,275 10.1 2.8 46,158 11.0 2.8
Money Market Accounts 44,516 9.9 3.1 41,661 10.0 2.7
Savings Accounts 131,368 29.4 2.8 112,416 26.8 2.6
-------- ---- -------- ---- ---
Total Core Deposits 234,396 52.4 2.7 209,443 50.0 2.5
-------- ---- -------- ---- ---
Certificate Accounts
31 Day 2,239 .5 5.2 838 .2 5.8
2-4 Month 17,705 4.0 4.8 13,105 3.1 4.7
6 Month 24,706 5.5 3.7 34,227 8.2 3.2
7-9 Month 30,133 6.8 5.0 32,476 7.7 5.3
12 Month 15,438 3.5 3.7 24,008 5.7 3.5
18 Month 1,163 .3 4.5 2,251 .5 4.2
24 Month 5,770 1.3 4.9 7,494 1.8 4.2
30 Month 4,104 .9 4.4 5,118 1.2 4.3
48 Month 1,431 .3 5.1 1,937 .5 5.6
60 Month 441 .1 5.7 638 .2 6.4
13-120 Month 83,218 18.6 5.6 60,179 14.4 5.9
36-90 Month 1,757 .4 4.9 2,919 .7 4.8
Fixed Rate IRA 17,634 3.9 5.4 17,886 4.2 5.6
Variable Rate IRA 5,012 1.1 5.2 5,037 1.2 5.7
Passbook Rate IRA 1,834 .4 2.5 1,735 .4 2.5
-------- ---- -------- ---- ---
Total Certificates 212,585 47.6 5.0 209,848 50.0 4.8
-------- ----- -------- ----- ---
Total Deposits $446,981 100.0% 3.8% $419,291 100.0% 3.7%
======== ===== ========= =====
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended
December 31,
--------------------------------------------------
1995 1994
--------------------------- ----------------------------
Weighted Weighted
Percent Average Percent Average
Average of Total Effective Average of Total Effective
Balance Deposits Yield Balance Deposits Yield
------- -------- ----- ------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Checking Accounts $ 9,378 2.2% - % $ 7,864 1.9% - %
NOW Accounts 44,317 10.4 2.8 67,172 16.1 2.9
Money Market Accounts 41,782 9.9 2.8 47,782 11.5 2.5
Savings Accounts 112,943 26.7 2.6 113,919 27.4 2.5
------- ---- ------- ----
Total Core Deposits 208,420 49.2 2.6 236,737 56.9 2.6
------- ---- ------- ----
Certificate Accounts
31 Day 1,063 .2 5.5 53 - 6.2
2-4 Month 12,995 3.1 4.8 6,785 1.6 3.2
6 Month 31,554 7.4 3.2 56,728 13.6 3.1
7-9 Month 35,581 8.4 3.6 10,940 2.6 3.5
12 Month 21,941 5.2 3.6 41,184 9.9 3.4
18 Month 2,132 .5 4.1 2,774 .7 3.9
24 Month 6,658 1.6 4.2 12,269 3.0 4.4
30 Month 4,891 1.2 4.2 6,010 1.4 4.5
48 Month 1,735 .4 5.3 2,828 .7 6.3
60 Month 634 .1 6.5 702 .2 6.5
13-120 Month 68,573 16.2 5.9 10,162 2.4 6.3
36-90 Month 2,769 .7 4.8 3,560 .9 5.2
Fixed Rate IRA 17,972 4.2 5.5 20,136 4.8 5.4
Variable Rate IRA 5,124 1.2 5.5 4,463 1.1 5.4
Passbook Rate IRA 1,680 .4 2.5 688 .2 2.5
------- ---- ------- ----
Total Certificates 215,302 50.8 5.0 179,282 43.1 3.8
------- ---- ------- ----
Total Deposits $423,722 100.0% 3.8% $416,019 100.0% 3.2%
======== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended
March 31,
--------------------------------------------------------
1995 1994
--------------------------- ----------------------------
Weighted Weighted
Percent Average Percent Average
Average of Total Effective Average of Total Effective
Balance Deposits Yield Balance Deposits Yield
------- -------- ----- ------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Checking Accounts $ 8,023 1.9% - % $ 7,625 1.8% - %
NOW Accounts 62,788 15.2 2.9 72,198 16.8 3.1
Money Market Accounts 46,063 11.2 2.5 52,633 12.2 2.7
Savings Accounts 112,787 27.4 2.5 110,394 25.6 2.7
------- ---- ------- ----
Total Core Deposits 229,661 55.7 2.6 242,850 56.4 2.7
------- ---- ------- ----
Certificate Accounts
31 Day 118 - 6.4 32 - 3.1
2-4 Month 8,754 2.1 3.6 7,201 1.7 3.0
6 Month 51,516 12.5 3.1 65,364 15.2 3.2
7-9 Month 14,234 3.4 3.8 9,097 2.1 3.2
12 Month 38,286 9.3 3.4 50,133 11.6 3.7
18 Month 2,743 .7 4.0 2,237 .5 3.9
24 Month 11,660 2.8 4.4 13,900 3.2 4.9
30 Month 5,958 1.4 4.5 6,661 1.6 5.2
48 Month 2,756 .7 6.3 2,839 .7 6.7
60 Month 687 .2 6.5 662 .2 6.8
13-120 Month 17,150 4.2 6.2 599 .1 8.4
36-90 Month 3,520 .9 5.2 3,188 .7 5.6
Fixed Rate IRA 20,005 4.8 5.4 20,725 4.8 5.5
Variable Rate IRA 4,561 1.1 5.9 4,353 1.0 3.6
Passbook Rate IRA 675 .2 2.5 855 .2 2.7
------- ---- ------- ----
Total Certificates 182,623 44.3 3.9 187,846 43.6 3.8
------- ---- ------- ----
Total Deposits $412,284 100.0% 3.2% $430,696 100.0% 3.2%
======== ===== ======== =====
</TABLE>
The following table shows rate information for the Company's
certificates of deposit at the dates indicated and maturity
information at December 31, 1996:
<TABLE>
<CAPTION>
At
December 31, Period to Maturity from December 31, 1996
------------------ -------------------------------------------------
Two to Over
Within One to Three Three
1996 1995 One Year Two Years Years Years Total
---- ---- -------- --------- ------ ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificates of Deposit
3.99% or less $ 33,347 $ 42,208 $ 33,169 $ 127 $ 51 $ - $ 33,347
4.00% to 4.99% 34,418 40,424 28,540 3,591 1,222 1,065 34,418
5.00% to 5.99% 127,428 87,084 105,998 16,884 3,458 1,088 127,428
6.00% to 6.99% 7,495 48,953 4,508 1,170 643 1,174 7,495
7.00% to 7.99% 6,552 2,147 4,194 755 1,189 414 6,552
-------- -------- -------- ------- ------ ------ --------
Total $209,240 $220,816 $176,409 $22,527 $6,563 $3,741 $209,240
======== ======== ======== ======= ====== ====== ========
</TABLE>
The following table sets forth the maturity dates of the Company's
certificates of deposit of $100,000 or more at December 31, 1996:
Maturity Period Amount
--------------- ------
(Dollars in thousands)
Three Months or less $14,681
Three through Six Months 3,939
Six through Twelve Months 5,018
Over Twelve Months 2,051
-------
Total $25,689
=======
The following table sets forth the maximum month-end balance and
average balance of borrowed funds for the periods indicated:
<TABLE>
<CAPTION>
For the Twelve For the Nine
Months Ended Months Ended For the Year
December 31, December 31, Ended March 31,
------------ ------------ ---------------
1996 1995 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Maximum balance $180,347 $50,992 $50,992 $48,492 $48,492 $48,967
Average balance 124,087 38,464 $37,814 $40,408 $41,762 $37,011
Weighted average
interest 5.50% 7.45% 7.46% 7.41% 7.40% 8.57%
</TABLE>
The following table sets forth certain information as to FHLBNY
advances as the dates indicated:
At
December 31, At March 31,
-------------- --------------
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in thousands)
FHLBNY Advances $24,800 $19,100 $41,492 $29,292
Weighted average interest
rate of FHLBNY Advances 7.13% 5.88% 7.56% 8.61%
ITEM 2. PROPERTIES
At December 31, 1996, the Bank conducted its business through its 16
offices, including its home office at 70 Sip Avenue, Jersey City, New
Jersey. During 1996, the Bank closed a branch in Elizabeth, New
Jersey and opened two new branches with locations at 12 Chapel Avenue,
Jersey City, New Jersey and 86 River Street, Hoboken, New Jersey which
brings total business offices to 16.
Original
Date
Leased Leased Date of
or or Lease
Location Owned Acquired Expiration
-------- ----- --------- ----------
70 Sip Avenue Owned 1/59 --
Jersey City, NJ
9 Path Plaza Leased 2/76 6/01
Jersey City, NJ
241 Central Avenue Owned 1/63 --
Jersey City, NJ
319 Martin Luther Leased 1/59 Monthly
King, Jr. Drive
Jersey City, NJ
214 Newark Avenue Owned 1/63 --
Jersey City, NJ
12 Chapel Avenue Leased 7/96 12/97
Jersey City, NJ
456 North Broad Street Owned 8/86 --
Elizabeth, NJ
314 Elizabeth Avenue Owned 1/75 --
Elizabeth, NJ
One Statewide Court Owned 8/78 --
Secaucus, NJ
416 Anderson Avenue Owned 1/74 --
Cliffside Park, NJ
35 South Main Street Owned 1/76 --
Lodi, NJ
246 South Avenue Owned 10/79 --
Fanwood, NJ
345 South Avenue Owned 10/80 --
Garwood, NJ
400 Marin Boulevard Leased 11/95 6/99
Jersey City, NJ
122 8th Street Leased 11/95 5/98
Passaic, NJ
86 River Street Leased 1/96 12/01
Hoboken, NJ
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time as a party to legal
proceedings occurring in the ordinary course of its business. The
Company believes that none of these proceedings would, if adversely
determined, have a material effect on the Company's consolidated
financial condition or results of operations.
On December 1, 1995, the Bank initiated a suit against the Federal
government alleging, among other things, breach of contract and
seeking restitution for harm caused to the Bank through changes in
Federal banking regulations regarding the treatment of goodwill in
calculating the capital of thrift institutions. The case relates to
goodwill created by the Bank's 1982 acquisition of Arch Federal
Savings and Loan Association. A 1989 change in Federal regulations
required a phase-out of goodwill from the calculation of a thrift
institution's capital ratios and required that by January 1, 1995, no
goodwill be counted as capital. At the time the regulations went into
effect, the Bank had $18.7 million in goodwill on its balance sheet.
The Bank's suit was initially subject to a stay pending a ruling by
the United States Supreme Court of the government's appeal of a
decision of the Federal District of Columbia Circuit Court in another
case which had upheld the right of three thrift institutions to
maintain such actions. In July 1996, the U.S. Supreme Court ruled in
"United States v. Winstar Corporation" upholding the Federal District
of Columbia Circuit Court's ruling in favor of the thrift institutions
involved in that suit. Subsequently, the stay in all goodwill related
cases was lifted. The federal government then filed a motion seeking
to dismiss all goodwill related claims filed six years after the date
of FIRREA's adoption, August 9, 1995. The Bank had filed its claim on
December 1, 1995. The Bank, along with the approximately 25 other
institutions subject to the motion, vigorously opposed the
government's dismissal motion. On January 7, 1997, the judge
appointed to hear the issue in the United States Court of Federal
Claims ruled against the federal government, holding that the statute
of limitations had not begun to run until OTS regulations implementing
FIRREA were adopted on December 7, 1989. Although the Company
believes that the judge's January 7, 1997 decision on the statute of
limitations was correct, it is unable to predict, in the event the
United States government appeals the judge's decision, whether it will
be successful on such appeal and whether, or for how long, such an
appeal will delay the Bank's suit. The case is currently in the
discovery phase, and no trial date has been set. Accordingly, for
these reasons and because of other facts affecting the predictability
of litigation, management cannot predict the eventual outcome, the
amount of damages, if any, or the timing of final disposition of the
Bank's case.
PART II
ITEM 5. MARKET INFORMATION
The Company's stock is quoted on the NASDAQ National Market. The
NASDAQ symbol for the Company's common stock is SFIN. The Company
commenced trading on October 2, 1995. As of December 31, 1996, there
were 368 registered holders of the Company's common stock.
The following table presents the high and low sales prices for the
common stock and the dividends paid for the periods indicated below.
High Low Dividend
---- --- --------
1996
Fourth quarter 14 5/8 12 5/8 $ .10
Third Quarter 13 1/8 11 1/4 $ .10
Second Quarter 13 1/8 11 3/4 -
First Quarter 13 1/8 12 1/2 -
1995
Fourth Quarter 13 1/2 12 1/2 -
During the third quarter of 1996, the Company declared its first
quarterly dividend. The Company expects to continue to pay dividends.
However, no assurance can be given that dividends will be paid in the
future since the payments of such dividends will be based on current
and prospective earnings, anticipated asset growth, and the capital
position of the Company. In addition, earnings and the financial
condition of the Bank and applicable governmental policies and
regulations would also effect the Company's ability to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
At
December 31, At March 31,
------------ ----------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL
CONDITION DATA:
Total assets $636,042 $559,049 $475,168 $473,613 $502,861
Loans, net 325,470 195,773 169,909 185,377 240,973
Mortgage-backed
securities 240,974 260,107 203,677 195,734 215,765
Debt and equity
securities 40,243 80,126 80,987 66,070 18,224
Other real estate owned,
net 563 652 825 1,487 1,495
Total deposits 457,056 438,021 407,758 423,647 440,034
Borrowed funds 107,200 44,703 41,492 29,292 45,092
Shareholders' equity 66,935 72,315 22,022 17,678 13,288
REGULATORY CAPITAL
RATIOS (BANK):
Tangible capital ratio 9.41% 10.28% 4.57% 3.66% 2.52%
Core capital ratio 9.41% 10.28% 4.57% 3.74% 2.65%
Risk-based capital ratio 26.21% 32.88% 16.65% 13.14% 8.12%
ASSET QUALITY RATIOS:
Non-performing loans to
total net loans .84% 2.87% 3.87% 6.26% 6.41%
Non-performing loans to
total assets .43% 1.01% 1.38% 2.45% 3.07%
Non-performing assets to
total assets .52% 1.12% 1.56% 2.76% 3.37%
Allowance for loan
losses to non-
performing loans 95.43% 57.66% 46.37% 24.29% 18.47%
Allowance for loan
losses to total net
loans .80% 1.66% 1.79% 1.52% 1.18%
OTHER DATA:
Number of deposit
accounts 53,695 50,062 46,767 48,238 50,807
Offices 16 15 13 13 13
</TABLE>
<TABLE>
<CAPTION>
At or For the
At or For the Nine Months At or For the
Years Ended Ended Years Ended
December 31, December 31, March 31,
--------------- --------------- ---------------------
1996 1995 1995 1994 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS:
Return on average assets (1) .49% .50% .41% .94% .90% .90% 1.15%
Return on average equity (1) 4.67 7.31 5.46 23.24 21.09 26.90 55.53
Dividend payout ratio 29.41 - - - - - -
Equity to assets 10.52 12.94 12.94 4.44 4.63 3.73 2.64
Net interest rate spread (2) 2.99 3.23 3.12 3.67 3.66 3.67 3.61
Net interest margin (2) 3.45 3.52 3.45 3.79 3.78 3.74 3.57
Non-interest income to
average assets (4) .37 .50 .43 .28 .32 .29 .39
Non-interest expense to
average assets (1) 2.87 2.84 2.87 2.34 2.43 2.50 2.20
Efficiency ratio (1)(3) 81.65 77.47 80.87 61.49 63.31 68.67 59.01
Average interest-earning
assets to average
interest-bearing
liabilities 112.32% 107.51% 108.45% 103.45% 103.52% 101.94% 100.52%
</TABLE>
<TABLE>
<CAPTION>
For the Years For the Nine
Ended Months Ended For the Years
December 31, December 31, Ended March 31,
---------------- ------------ -----------------------
1996 1995 1995 1994 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share amounts)
SELECTED OPERATING DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $45,278 $35,260 $26,853 $25,012 $33,419 $34,215 $39,822
Interest expense 23,656 18,301 14,162 11,836 15,975 16,657 21,829
------- ------- ------- ------- ------- ------- -------
Net interest income 21,622 16,959 12,691 13,176 17,444 17,558 17,993
Provision for loan
losses 500 389 315 468 542 1,069 343
------- ------- ------- ------- ------- ------- -------
Net interest income
after provision for
loan losses 21,122 16,570 12,376 12,708 16,902 16,489 17,650
Net (loss) gains on
sales of securities (1,093) (340) (340) - - - 530
Other non-interest
income 2,382 2,486 1,962 994 1,518 1,394 1,480
Foreclosed real estate
expense, net 105 161 10 (134) 17 140 736
FDIC SAIF assessment 2,651 - - - - - -
Other non-interest
expense 15,687 13,942 10,858 8,560 11,644 12,084 10,553
------- ------- ------ ------ ------ ------ ------
Income before income
taxes, extraordinary
items and cumulative
effect of change in
accounting principles 3,968 4,613 3,130 5,276 6,759 5,659 8,371
Income taxes 796 1,712 1,152 1,906 2,466 1,938 2,490
------- ------- ------ ------ ------ ------ ------
Income before extra-
ordinary items and
cumulative effect of
change in accounting
principles 3,172 2,901 1,978 3,370 4,293 3,721 5,881
Extraordinary items:
Penalties for pre-
payment of debt, net
of tax - (412) (412) - - - -
Cumulative effect of
change in accounting
principles - - - - - 669 -
------- ------- ------- ------- ------- ------- -------
Net income $ 3,172 $ 2,489 $ 1,566 $ 3,370 $ 4,293 $ 4,390 $ 5,881
======= ======= ======= ======= ======= ======= =======
Net income per common
share $ .68 - - - - - -
Cash dividends declared $ .20 - - - - - -
(1) 1996 includes a one-time FDIC SAIF assessment of $2,651,000
pre-tax, $1,697,000 after tax, incurred as a result of enactment
of the Deposit Insurance Funds Act of 1996. Excluding the
one-time FDIC SAIF assessment, selected financial ratio
calculation percentages are as follows: return on average assets,
0.76%; return on average equity, 7.17%; non-interest expense to
average assets, 2.45%; efficiency ratio, 69.92%.
(2) Interest rate spread represents the difference between the weighted
average yield on average interest-earning assets and the weighted
average costs of average interest-bearing liabilities, and net
interest margin represents net interest income as a percent of
average interest-earning assets.
(3) Total non-interest expense divided by the sum of net interest
income after provision for loan losses, and recurring non-interest
income.
(4) Excludes loss on sale of securities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The Company's results of operations are dependent primarily on net
interest income, which is the difference between the income earned on
its loans, mortgage-backed and debt and equity securities and the
interest paid on its deposits and other borrowings. The Company's
results of operations are also affected by its provision for loan
losses, non-interest income and non-interest expense. In addition,
the Company's results of operations are significantly affected by
general economic and competitive conditions, particularly changes in
market interest rates, government policies and actions of regulatory
authorities. Future changes in applicable law, regulations or
government policies also may materially impact the Company.
Management Strategy
The Company's goal is to enhance shareholder value by being the
premier community bank in its market area. Management's objectives
toward accomplishing this goal are to: (1) aggressively market its
lending products while maintaining credit quality, (2) seek low cost
sources of funds, (3) deliver excellent customer service through an
efficient, low cost network and (4) provide a fair return on
investor's capital.
The Company employs the following principal strategies to accomplish
these objectives:
it seeks to originate or purchase with servicing rights (1) one-
to-four family residential mortgage loans, (2) consumer loans,
primarily secured by junior liens on residential real estate, and (3)
Federal Housing Administration ("FHA") Title 1 insured home
improvement loans; the Company seeks to invest funds in excess of loan
demand in mortgage-backed securities, classified as available for
sale, which have risks and yields similar to mortgages the Company
would have otherwise originated or purchased;
it seeks to originate securitized commercial loans for equipment,
inventory, working capital, real estate and other business purposes;
it seeks to utilize its strong capital position, by borrowing
funds to originate or purchase loans, or to invest in mortgage-backed
securities, which are classified as available for sale, and whose
average life, considering expected prepayments, is consistent with
five and ten year Treasury instruments;
it seeks to control its operating expenses by effectuating
productivity savings from new systems and procedures, as well as
through optimization of its retail delivery sites and systems;
it seeks to offer superior service and competitive rates to
maintain its core deposit base;
it seeks to manage its capital through analysis of current
alternatives for capital deployment; and
it seeks to reduce its exposure to interest rate risk by
purchasing and originating (1) adjustable rate first mortgage loans
("ARM"), (2) fixed rate first mortgage loans with terms to maturity of
no more than fifteen years, (3) floating rate commercial loans, and
(4) consumer loans, as well as by emphasizing retention and growth of
core deposits and investing in mortgage-backed securities, which it
classifies as available for sale, and whose expected lives are
comparable to five and ten year Treasury instruments.
In conjunction with its strategies, management expects that non-
residential mortgage and commercial loans will constitute a greater
percentage of the Company's loan portfolio in future periods. As a
consequence of management's lending strategy, the Company may, in
future periods, depending upon then current conditions, increase its
provision for loan losses as well as its provision for losses on real
estate owned over that experienced in the Company's most recent fiscal
period.
RESULTS OF OPERATIONS
As discussed more fully in the Notes to the Consolidated Financial
Statements, the Company changed from a fiscal year end of March 31st
to a calendar year end, effective with the calendar year commencing
January 1, 1996. For purposes of setting forth a meaningful
comparison for Management's Discussion and Analysis, the following
periods are presented: years ended December 31, 1996 and 1995 and nine
months ended December 31, 1995 and 1994.
Selected Consolidated Statements of Income
Set forth on the next page are the consolidated statements of income
for the years ended December 31, 1996 and 1995 and the nine months
ended December 31, 1995 and 1994. The information for the year ended
December 31, 1996 and the nine months ended December 31, 1995 should
be read in conjunction with the Company's audited consolidated
financial statements and the notes thereto, presented elsewhere
herein. The consolidated statements of income for the year ended
December 31, 1995 and the nine months ended December 31, 1994 are
unaudited, but in the opinion of management all adjustments
(consisting of only normal recurring adjustments) necessary for a fair
presentation of the results presented have been included.
</TABLE>
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, December 31,
-------------- -------------
1996 1995* 1995 1994*
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $21,206 $14,899 $11,287 $11,202
Interest on mortgage-backed securities 19,377 14,382 10,741 10,573
Interest and dividends on investment
securities 4,228 5,698 4,620 3,025
Dividends on FHLBNY stock 467 281 205 212
------- ------- ------- -------
Total interest and dividend income 45,278 35,260 26,853 25,012
------- ------- ------- -------
INTEREST EXPENSE:
Deposits 16,827 15,437 12,044 9,591
Borrowed funds 6,829 2,864 2,118 2,245
------- ------- ------- -------
Total interest expense 23,656 18,301 14,162 11,836
------- ------- ------- -------
NET INTEREST INCOME 21,622 16,959 12,691 13,176
Provision for loan losses 500 389 315 468
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 21,122 16,570 12,376 12,708
NON-INTEREST INCOME:
Services charges 1,236 1,013 760 781
Net loss on sales of securities (1,093) (340) (340) -
Other 1,146 1,473 1,202 213
------- ------- ------- -------
Total other income 1,289 2,146 1,622 994
------- ------- ------- -------
NON-INTEREST EXPENSE:
Salaries and employee benefits 8,511 7,209 5,712 4,148
Occupancy, net 2,140 1,735 1,337 1,124
Federal deposit insurance premiums 1,011 1,177 885 926
FDIC SAIF assessment 2,651 - - -
Professional fees 645 608 501 221
Insurance premiums 273 292 227 281
Data processing 390 328 243 222
Foreclosed real estate expense, net 105 161 10 (134)
Other 2,717 2,593 1,953 1,638
------- ------- ------- -------
Total operating expenses 18,443 14,103 10,868 8,426
------- ------- ------- -------
Income before income taxes and
extraordinary item 3,968 4,613 3,130 5,276
Income taxes 796 1,712 1,152 1,906
------ ------- ------- -------
Income before extraordinary item 3,172 2,901 1,978 3,370
Extraordinary item-penalties for pre-
payment of debt, net of tax - 412 412 -
------- ------- ------- -------
Net income $ 3,172 $ 2,489 $ 1,566 $ 3,370
======= ======= ======= =======
</TABLE>
*unaudited
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
General. Net income for the year ended December 31, 1996 ("1996"), was
$3.2 million, or $0.68 per share, as compared to $2.5 million for the
year December 31, 1995 ("1995"). 1996 includes a pre-tax charge of
$2,651,000, representing the Company's portion of a one-time industry-
wide assessment on thrift institutions to recapitalize the Savings
Association Insurance Fund ("SAIF"). The assessment reduced net
income by $1,697,000, or $0.37 per share. Exclusive of the SAIF
assessment, the net income of the Company for 1996 was $4.9 million,
or $1.05 per share, which is an increase of $2.4 million over 1995 net
income. This increase is primarily the result of increased loans and
investments, which the Company has made since September 1995, that has
lead to higher net interest income, partially offset by increased non-
interest expense incurred to position the Company for the growth which
it has experienced.
Net Interest Income. Net interest income is the principal source of
income for the Company and represents the difference between total
interest and fees earned on loans, mortgage-backed securities and
other investments and total interest paid on deposits and other
liabilities. Net interest income of $21.6 million for 1996 increased
$4.6 million, or 27.5%, from $17.0 million in 1995. This increase is
the result of an increase in interest income larger than the increase
in interest expense. Table 1 presents a summary of the Company's
average balances, the yields earned on average assets and the cost of
average liabilities and shareholders' equity for the years ended
December 31, 1996 and 1995, and the nine months ended December 31,
1995 and 1994.
Interest Income. Interest income of $45.3 million was up $10.0
million, or 28.4%, in 1996 over 1995 interest income of $35.3 million.
The increase reflects a 30% rise in average interest-earning assets
during 1996 compared to 1995, as a result of asset investments funded
by: (1) the proceeds of the Company's initial public offering at the
end of September 1995; (2) increased borrowing during 1996 from the
Federal Home Loan Bank of New York ("FHLBNY"); and (3) increased core
deposits during 1996.
The average balance of total interest-earning assets for 1996
increased $144.3 million to $626.6 million from $482.2 million during
1995, principally from growth in first mortgage lending and from
fourth quarter 1995 investments in mortgage-backed securities. During
1996, as part of its strategy, the Company increased its net loan
portfolio 66% including non-residential mortgages and commercial
loans, which increased to $18.5 million at December 31, 1996 compared
to $4.1 million at December 31, 1995. In addition, during 1996 a full
year's income was earned from investments made during the 1995 fourth
quarter.
The Company's mortgage lending in 1996 was at market rates which were
less than those imbedded in its prior year's average balances. This
was largely offset by redeployment of proceeds from sales of lower
yielding securities into higher yielding assets. The combined effect
of these factors upon average yields for 1996 was a reduction of 8
basis points to 7.23% from 7.31% in 1995.
The decrease in the actual balance of interest-earning assets at
December 31, 1996 as compared to the 1996 average balance reflects the
sale during the latter part of 1996 of mortgage-backed securities and
debt securities, which were all held as available for sale. The
proceeds were used to repay borrowings and to fund growth in the
Company's net loan portfolio. The increase in average yield on the
balance sheet for December, 1996 over the average yield for the full
year 1996 reflects the change in the mix of the interest-earning
assets which occurred during the latter part of 1996. This increased
the yield on interest-earning assets by 21 basis points to 7.44% at
December 31, 1996 as compared to 7.23% for the full year ending 1996.
Interest Expense. Interest expense increased by $5.4 million, or
29.3%, during 1996 compared to the previous year. Of this, interest
expense on borrowed funds increased $4.0 million and interest expense
on deposits increased $1.4 million. As Table 1 indicates, the
increase in interest expense on borrowed funds was due to a
significant increase in the average balance of outstanding borrowings
at average rates substantially lower than those of the prior year; and
the increase in interest expense on deposits results from more core
deposits in 1996 than 1995, at slightly higher rates.
The average balance of borrowed funds during 1996 increased $85.6
million, or 222.6%, to $124.1 million as compared to the same period
for 1995. This increase in borrowings reflects implementation of the
Company's strategy to leverage its excess capital. These borrowings,
along with increased deposits and the capital provided through the
Company's initial public offering, have funded the increase in assets
which has occurred since September 1995. The weighted average
borrowing cost decreased during 1996 by 195 basis points from 7.45% in
1995 to 5.50% in 1996. The decrease reflects the Company's decision
in December 1995 to repay $23.9 million of higher cost, longer term
borrowings and replace it with short-term, lower cost 30 to 90 day
borrowings. The Company maintained that duration with all of its
borrowings until December 1996 when it replaced $60 million of its
short-term borrowings with a five year, 5.52% borrowing from the
FHLBNY, which is callable after three years. At December 31, 1996,
the Company's remaining short-term borrowings were $47.2 million,
which mature within 90 days. Subsequent to year end, the Company
increased its short-term borrowings to purchase $51.9 million of
mortgage-backed securities which have weighted average lives
consistent with five year Treasury instruments. The Company may seek
to extend up to $40.0 million of its short-term borrowings to longer
maturities, depending upon interest rate market conditions. If such
borrowings are not extended, the Company anticipates renewing such
borrowings on a short-term basis.
The average balance of interest-bearing deposits increased $23.6
million, or 5.8%, to $433.7 million for 1996 from $410.1 million in
1995. Also, the average cost of interest on interest-bearing deposits
grew to 3.88% during 1996 as compared to 3.76% for the previous year.
This cost increase primarily reflects the full period's effect of
changes in the Company's costs of certificates of deposits made when
the Company began, in late 1994, to market CD's with competitive
rates, generally for terms of less than 18 months in conjunction with
advertising campaigns geared toward re-emphasizing the Company's
presence in its markets. Although these rates were not the highest in
the Company's market territory, they were higher than those it
traditionally offered. It continued with these rate offerings when
the Company opened new branches in June and December of 1995 and March
and October of 1996. In addition, interest rates on savings accounts
have increased as a result of paying bonuses on statement savings
accounts, on a limited basis, to customers of those new branches.
Also, during mid-third quarter of 1995, the Company started to market
its products, including deposits to affinity groups. Under this
program, the Company offers higher savings rates which are tied to the
three month U.S. Treasury rate. The Company believes that the higher
interest rate is economically feasible since service under this
program is principally electronic and has limited operational and
incremental costs. This program also has the advantage of soliciting
new customers with profiles to match loan products that the Company is
marketing.
Table 1 presents a summary of the Company's interest-earning assets
and their average yields, interest-bearing liabilities and their
average costs, and shareholders' equity at December 31, 1996. Table 1
also presents a summary of the Company's average balances, the yields
earned on average assets and the cost of average liabilities and
shareholders' equity for the years ending December 31, 1996 and 1995,
and for the nine months ended December 31, 1995 and 1994. The average
balance of loans includes non-accrual loans. The yields include loan
fees which are considered adjustments to yields.
Table 1: Spread Analysis
<TABLE>
<CAPTION>
At December 31, Year Ended December 31,
----------------- ---------------------------------------------------------
1996 1996 1995
------------------ --------------------------- ---------------------------
Actual Average Average Average Average Average
Balance Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- --------- ------- -------- --------- ------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
First mortgage loans $281,439 7.61% $229,850 $17,698 7.70% $146,882 $12,199 8.31%
Consumer and other loans 44,031 9.44 37,509 3,508 9.35 26,711 2,700 10.11
Mortgage-backed securities 240,974 7.00 286,794 19,377 6.76 208,763 14,382 6.89
Money market investment - - 2,088 113 5.41 7,152 414 5.79
Debt securities 40,243 6.76 63,092 4,115 6.52 89,055 5,284 5.93
FHLBNY stock 7,768 6.95 7,224 467 6.46 3,649 281 7.70
-------- -------- ------- -------- -------
Total interest earning assets 614,455 7.44% 626,557 45,278 7.23% 482,212 35,260 7.31%
Non-interest-earning assets 21,587 ---- 17,153 ------- ---- 14,762 ------- ----
-------- -------- --------
Total assets $636,042 $643,710 $496,974
======== ======== ========
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts $139,651 2.92% $131,368 3,658 2.78% $112,416 2,895 2.58%
NOW accounts 47,387 2.86 45,275 1,285 2.84 46,158 1,296 2.81
Money market accounts 44,404 3.24 44,516 1,365 3.07 41,661 1,137 2.73
Certificates of deposit 209,240 4.99 212,585 10,519 4.95 209,848 10,109 4.82
Borrowed funds 107,200 5.65 124,087 6,829 5.50 38,464 2,864 7.45
-------- -------- ------- -------- -------
Total interest-bearing liabilities 547,882 4.23% 557,831 23,656 4.24% 448,547 18,301 4.08%
-------- ---- -------- ------- ---- ------- ------- ----
Non-interest bearing liabilities:
Non-interest bearing deposits 16,374 13,237 9,208
Other non-interest bearing liabilities 4,851 4,708 5,162
-------- -------- --------
Total non-interest bearing
liabilities 21,225 17,945 14,370
-------- -------- --------
Total liabilities 569,107 575,776 462,917
Shareholders' equity 66,935 67,934 34,057
-------- -------- --------
Total liabilities and shareholders'
equity $636,042 $643,710 $496,974
======== ======== ========
Net interest income/net interest rate
spread 3.21% $21,622 2.99% $16,959 3.23%
==== ======= ==== ======= =====
Net interest margin 3.69% 3.45% 3.52%
==== ==== ====
Ratio of interest-earning assets to
interest-bearing liabilities 112.15% 112.32% 107.51%
====== ====== ======
</TABLE>
NOTE: Loan origination fees are considered an adjustment to interest
income. For the purposes of calculating loan yields, average
loan balances include non-accrual loans.
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
-------------------------------------------------------
1995 1994
--------------------------- --------------------------
Average Average* Average Average*
Balance Interest Yield/Cost BalanceInterest Yield/Cost
------- -------- --------- --------------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
First mortgage loans $147,394 $ 9,207 8.33% $154,067 $ 9,373 8.11%
Consumer and other loans 27,310 2,080 10.16 23,960 1,829 10.18
Mortgage-backed securities 209,521 10,741 6.84 207,805 10,573 6.78
Money market investment 8,491 370 5.81 3,795 123 4.32
Debt securities 94,007 4,250 6.03 70,594 2,902 5.48
FHLBNY stock 3,627 205 7.54 3,795 212 7.45
-------- ------- -------- -------
Total interest earning assets 490,350 26,853 7.30% 464,016 25,012 7.19%
Non-interest-earning assets 15,061 ------- ---- 15,263 ------- ----
-------- --------
Total assets $505,411 $479,279
======== ========
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts $112,943 2,196 2.59% $113,919 2,158 2.53%
NOW accounts 44,317 934 2.81 67,172 1,480 2.94
Money market accounts 41,782 883 2.82 47,782 905 2.53
Certificates of deposit 215,302 8,031 4.97 179,282 5,048 3.75
Borrowed funds 37,814 2,118 7.47 40,408 2,245 7.41
-------- ------- -------- -------
Total interest-bearing liabilities 452,158 14,162 4.18% 448,563 11,836 3.52%
-------- ------- ---- -------- ------- ----
Non-interest bearing liabilities:
Non-interest bearing deposits 9,378 7,864
Other non-interest bearing liabilities 5,641 3,519
-------- --------
Total non-interest bearing 15,019 11,383
liabilities
-------- --------
Total liabilities 467,177 459,946
Shareholders' equity 38,234 19,333
-------- --------
Total liabilities and shareholders'
equity $505,411 $479,279
======== ========
Net interest income/net interest rate
spread $12,691 3.12% $13,176 3.67%
======= ==== ======= ====
Net interest margin 3.45% 3.79%
==== ====
Ratio of interest-earning assets to
interest-bearing liabilities 108.45% 103.45%
====== ======
</TABLE>
NOTE: Loan origination fees are considered an adjustment to interest
income. For the purposes of calculating loan yields, average
loan balances include non-accrual loans.
*PERCENTAGES ARE ANNUALIZED
Table 2 presents the relative contribution of changes in the volume
of interest-earning assets and interest-bearing liabilities to changes
in net interest income for the periods indicated. Loan origination
fees are considered an adjustment to interest income. For the purpose
of calculating loan yields, average loan balances include non-accrual
loans.
Table 2: Rate/Volume Analysis
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, 1996 December 31, 1995
Compared to Compared to
Year Ended Nine Months Ended
December 31, 1995 December 31, 1994
-------------------- ------------------
Increase (Decrease) Increase (Decrease)
In Net Interest Income Due To In Net Interest Income Due To
----------------------------- -----------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
First mortgage loans $6,891 $ (889) $ (503) $5,499 $ (9) $ (157) $ 0 $ (166)
Consumer and other loans 1,091 (202) (81) 808 256 (4) (1) 251
Mortgage-backed securities 5,376 (277) (104) 4,995 87 80 1 168
Money market investments (293) (27) 19 (301) 153 42 52 247
Investment securities (1,540) 524 (153) (1,169) 962 290 96 1,348
FHLBNY stock 275 (45) (44) 186 (9) 2 0 (7)
------ ------ ------ ------ ------- ------- ---- ------
Total 11,800 (916) (866) 10,018 1,440 253 148 1,841
------ ------ ------ ------ ------ ------- ---- ------
Interest-bearing liabilities:
Deposits 892 472 26 1,390 146 2,273 34 2,453
Borrowed funds 6,375 (747) (1,663) 3,965 (144) 18 (1) (127)
------- ------ ------ ------ ------ ------- ---- ------
Total $ 7,267 (275) (1,637) 5,355 2 2,291 33 2,326
------- ------ ------ ------ ------- ------- ---- ------
Net change in net interest
income $ 4,533 $ (641) $ 771 $4,663 $1,438 $(2,038) $ 115 $ (485)
======= ====== ====== ====== ====== ======= ===== ======
</TABLE>
Provision for Loan Losses. The provision for loan losses increased
$111,000 to $500,000 for the year ended December 31, 1996 from
$389,000 for the prior year. The provision for 1996 was determined by
management after review of, among other things, the Company's loan
portfolio, the risks inherent in the Company's lending activities and
the local economy in the Company's market areas. As of December 31,
1996, non-performing loans, defined as non-accrual loans and accruing
loans delinquent 90 days or more, decreased $2.9 million, or 51.3%, to
$2.7 million at December 31, 1996 from $5.6 million at December 31,
1995. At December 31, 1996, the allowance for loan losses was $2.6
million, compared to $3.2 million at December 31, 1995, a decrease of
$0.6 million, or 19.4%. Despite this decrease, the percentage of the
allowance for loan losses to total non-performing loans increased to
95.4% at December 31, 1996 from 57.7% at December 31, 1995 because
$2.4 million of a $3.3 million non-performing construction loan was
repaid during 1996. The remaining balance on this loan of $848,000
was charged against a specific reserve of $1.5 million which had
previously been established for this loan. After the charge-off, the
remaining balance of the specific reserve was allocated within the
allowance for loan losses to other classes of loans.
Future provisions for loan losses will continue to be based on
management's assessment of the loan portfolio and its underlying
collateral, trends in non-performing loans, then current economic
conditions and other factors which warrant recognition in order to
maintain the allowance for loan losses at levels sufficient to provide
for estimated losses.
Non-interest Income. Non-interest income decreased $0.8 million to
$1.3 million for 1996 compared to $2.1 million for 1995. The
principal reason was the loss of $1.1 million on the sale of
securities during 1996 as compared to a loss of $340,000 on the sale
of securities for 1995. The securities sold in 1996 had an
approximate book value of $112.5 million. Proceeds from the 1996
sales, in conjunction with additional borrowings and deposits, were
used to fund loan growth and for redeployment into higher yielding
securities. The effect of this loss was to reduce 1996 earnings per
share by $0.15.
Aside from the effect of the above described securities transactions,
1996 includes $917 thousand from the collection of unaccrued interest
associated with loans, the principal of which has been repaid, as
compared to $932 thousand in collections for the same period of the
prior year. The interest on all of these loans has been completely
repaid. The effect of this non-recurring income to 1996 earnings per
share was $0.12. Absent the above mentioned losses and credits, non-
interest income decreased $89 thousand during the full year 1996 as
compared to the same period of the prior year. This decrease occurred
in the first quarter of 1996, primarily due to decreases in
commissions from annuity sales as the Company focused its resources on
developing its new branches and marketing its core products rather
than selling annuities.
Non-interest Expense. Non-interest expense totaled $18.4 million for
1996, an increase of $4.3 million, or 30.8%, as compared to $14.1
million incurred during the prior year. Exclusive of the SAIF
assessment, total non-interest expense increased $1.7 million, or
12.0%, to $15.8 million for 1996 from $14.1 million in 1995.
Salaries and employee benefits expenses for 1996 increased $1.3
million, or 18.1%, compared to the prior year. Of this amount,
approximately $0.5 million was related to increased staffing
requirements necessary to position the Company to achieve its
marketing and operational objectives, including increased executive
and loan administrative staff, and staffing and training for the
Company's three new branches opened during the period since December
1995. Other salary and benefit expenses, incurred for the same
reason, include provisions for additional incentive programs for
employees at all levels of the Company, including $0.7 million
associated with the Company's Employee Stock Ownership Plan ("ESOP")
established September 29, 1995 and $0.2 million the Recognition and
Retention Plan for Executive Officers and Employees ("Employee RRP")
adopted midway through 1996. Finally, salary and benefit expenses
also reflect normal salary increases from salary in place during the
same period of the prior year.
Occupancy costs increased $0.4 million, or 23.3%, to $2.1 million for
1996 from $1.7 million for 1995. The increase is principally the
result of new lease costs for the three new branches the Company has
opened since the quarter ended December 1995, and the related
amortization of lease hold improvements to these branches as well as
refurbishment of existing facilities.
Data processing expense increased $0.1 million, or 18.9%, to $0.4
million for 1996 compared to $0.3 million for the prior year. This
increase reflects additional costs as the Company upgraded its
operating system and all of its applications to provide more
capability for services to its customers base.
Foreclosed real estate expense, net decreased $0.1 million, or 34.8%,
to $0.1 million from $0.2 million for 1995. The primary reason for
this decrease was lower real estate tax, insurance, maintenance and
repair expenses associated with foreclosed properties as compared to
the prior year.
Other non-interest expense increased $0.1 million, or 4.8%, to $2.7
million compared to $2.6 million for the prior year, principally due
to advertising and promotional expenses in conjunction with the growth
of core deposits and the promotions associated with loan growth and
new branches.
Income Tax Expense. Income taxes for 1996 reflects the tax effect of
the pre-tax income recognized for 1996, partially offset by a reversal
of a $702,000 tax liability, previously established, which expired
during 1996. The effect of this reversal was to increase earnings per
share $0.15 for 1996. Income tax expense for 1995 is solely the
result of the tax effect of the pre-tax income recognized in that
period.
FINANCIAL CONDITION
At December 31, 1996 shareholders' equity was $66.9 million compared
to $72.3 million at December 31, 1995. The ratios of shareholders'
equity to total assets were 10.52% at December 31, 1996 and 12.94% at
December 31, 1995. The $5.4 million decrease in shareholders' equity
at December 31, 1996 from December 31, 1995 resulted principally from:
1) purchase on the open market and retirement of 323,488 shares of
stock for $4.0 million at an average price of $12.29 per share; 2)
purchase of 211,600 shares on the open market to fund the Company s
Management Recognition and Retention plans, of which a) 176,869
shares, valued at $2.2 million, were awarded during 1996 and b) 34,731
shares, valued at $430,000, were retained as Treasury stock held for
reissuance under these plans; 3) a $1.9 million (net of tax) decrease
in the market value of the investment portfolio, all of which is
classified as available for sale; and 4) the third and fourth quarter
dividend of $912,000. Partially offsetting these decreases were 1996
net income of $3.2 million and the reduction of $858,000 in the
unallocated and unearned ESOP, Employee RRP, and Recognition and
Retention Plan for Outside Directors ("Director RRP") shares.
Total assets at December 31, 1996 were $636.0 million, an increase of
$77.0 million from the December 31, 1995 year end balance of $559.0
million. Lending activities was the principal reason for this growth.
The growth has been primarily funded with FHLBNY borrowings and by
increased deposits.
LENDING ACTIVITIES
Loan Portfolio Composition. At December 31, 1996, the Company had
total loans of $327.1 million, an increase of $127.5 million, or 63.9%
from December 31, 1995. The largest component of the portfolio,
$265.7 million, or 81.2%, were one-to-four family first mortgage
loans. The remainder of the Company's loans at December 31, 1996
consisted of consumer and other loans of $34.7 million, or 10.6%, of
total loans, primarily home equity credit lines, fixed-rate second
mortgage loans and FHA Title 1 insured home improvement loans.
Commercial business and mortgage loans, and multi-family mortgage
loans outstanding at December 31, 1996 totaled $18.5 million, or 5.7%,
of total loans and $7.7 million, or 2.4%, of total loans,
respectively.
The types of loans that the Company may originate or purchase are
subject to federal and state law regulations. Interest rates charged
by the Company on loans are affected principally by the demand for
such loans and the supply of money available for lending purposes and
the rates offered by its competitors. These factors are, in turn,
affected by general economic conditions, monetary policies of the
federal government, including the Federal Reserve Board, legislative
tax policies and governmental budgetary matters.
First Mortgage Lending. The Company offers first mortgage loans
secured by one-to-four family residences, including townhouse and
condominium units. Typically, such residences are single family homes
that serve as the primary residence of the owner. Loans may be
internally originated or purchased from other sources such as mortgage
bankers and other financial intermediaries. One-to-four family
residential mortgage loans are generally underwritten to Federal
National Mortgage Association ("FNMA") or Federal Home Loan Mortgage
Corporation ("FHLMC") guidelines, except that loans may exceed the
maximum loan limits for the FNMA or the FHLMC.
At December 31, 1996, one-to-four family first mortgage loans amounted
to $265.7 million, a $108.1 million, or 68.5% increase from December
31, 1995. The increase over the prior year resulted primarily from
the purchase and origination of $115.7 million and $18.0 million of
one-to-four family residential loans, respectively. Of the one-to-
four family first mortgage loans outstanding at the current year end,
81.0% were ARM loans and 19.0% were fixed-rate loans. The interest
rate adjustment period on ARM loans ranges between 1 and 10 years, and
as of December 31, 1996 the weighted average adjustment period
approximates 3 years. The Company periodically offers ARM loans on
which the interest rate for an initial period may be less than the
fully indexed rate, although to be eligible, the Company requires that
the borrower qualify for the maximum payment possible after the
initial interest rate adjustment. ARM and fixed rate loans are
originated for a term of up to 30 years. The Company generally
charges origination fees of up to 2.0% on one-to-four family
residential mortgage loans.
Generally, ARM loans pose credit risks different from the risks in
fixed-rate loans, primarily because as interest rates rise, the
underlying payments of the borrower rise, thereby increasing the
potential for default. At the same time, the marketability of the
underlying property may be adversely affected by higher interest
rates.
The Company also engages in commercial and multi-family real estate
lending in its market area. The Company's commercial and multi-family
real estate loan portfolio is secured primarily by apartment
buildings, mixed-use buildings, small office buildings and warehouses.
Commercial and multi-family real estate loans generally have terms
that do not exceed 15 years and have a variety of rate adjustment
features and other terms. The loans are usually made in amounts up to
75% of the appraised value of the property securing the loan.
Adjustable rate commercial and multi-family real estate loans provide
for a margin over either the U.S. Treasury security adjusted to a
constant maturity of five years, with periodic adjustments after five
years, or the Prime Rate as reported in the Wall Street Journal, or to
a lesser extent, the Company also offers commercial and multi-family
real estate loans with a margin over short-term U.S. Treasury
securities. In underwriting these loans, the Company analyzes the
current financial condition of the borrower, the borrower's credit
history, and the reliability and predictability of the cash flow
generated by the property securing the loan. The Company generally
requires personal guarantees of the borrowers. Appraisals on
properties securing commercial real estate loans originated by the
Company are performed by independent appraisers approved by the
Company's Board of Directors.
Multi-family and commercial real estate loans 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 effect 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, or a bankruptcy court modifies a lease term, or a major
tenant is unable to fulfill its lease obligations), the borrower's
ability to repay the loan may be impaired.
At December 31, 1996, $0.4 million, or 0.1%, of the Company's total
loan portfolio consisted of acquisition, development and construction
loans, as compared to $3.7 million at December 31, 1995. During 1996,
$2.4 million of a $3.3 million non-accruing construction loan was
repaid. The remaining balance of $848,000 was charged off against a
specific reserve which had previously been established for the loan.
After the charge-off, the remaining balance of the specific reserve
was allocated within the allowance for loan losses to other classes of
loans.
Other Loans. Among other loan types, the Company offers second
mortgages secured by owner-occupied residences wherein the property
may not be encumbered by other than a first mortgage loan. These
loans are generally subject to a 75% combined loan-to-value
limitation, including any other outstanding mortgage or lien on the
property. As of December 31, 1996, second mortgage loans amounted to
$17.3 million, or 5.3%, of total loans, an increase of $3.4 million,
or 24.1%, from December 31, 1995.
The Company also originates and purchases FHA Title 1 improvement
loans. It originates these loans both on a direct basis and through a
network of improvement contractors/dealers who are approved by the
Company under FHA guidelines. The Company purchases FHA Title 1
improvement loans from FHA approved lenders who have originated the
loans in accord with the Company's lending criteria and within FHA
underwriting guidelines. These guidelines provide for more liberal
equity and debt to income ratios than for non-FHA improvement loans.
In the event of default, the FHA insures 90% of the principal balance
plus accrued interest. The interest rates are normally higher than
the interest rates for one-to-four family mortgage loans due to the
more liberal underwriting standards. FHA Title 1 improvement loans
amounted to $13.6 million, or 4.2%, of total loans at December 31,
1996 compared to $12.5 million as of December 31, 1995, an increase of
$1.1 million, or 8.7%.
In accordance with its strategy, the Company began to originate
commercial business loans in 1996. These loans are secured by
business assets other than real estate such as equipment, inventory,
machinery, accounts receivable, and vehicles, and are generally
guaranteed by principals of the business. Commercial business loans
are in amounts which range from $50,000 to $2,500,000 at interest
rates which are indexed to the prime rate, and for durations which
coincide with the nature of the collateral, but not beyond ten years.
The Company's target market is enterprises with annual sales between
$1 million and $25 million. Commercial business loans present a
higher level of risk than do loans secured by one-to-four family
residences. The Company underwrites these loans by analyzing the
current financial condition of the borrower including current and
expected cash flows and historical and projected financial
performance. The Company also analyzes the value of the collateral
available as security, and the borrower's credit history. The Company
seeks to maintain an active relationship with its commercial business
borrowers in order to service their banking needs, and to keep current
with their financial and operational condition. As of December 31,
1996, the amount of commercial business loans was $9.2 million versus
zero at December 31, 1995.
Remaining other loans are home equity lines of credit and secured and
unsecured personal loans.
As of December 31, 1996, $7.7 million, or 2.4%, of the Company's total
loan portfolio, consisted of multi-family residential mortgage loans
reflecting an increase of $3.0 million, or 62.9% from year end
December 31, 1995. In addition, the Company's commercial business and
mortgage loan portfolio totaled $18.5 million, or 5.7%, of the total
loan portfolio at December 31, 1996, an increase of $14.4 million, or
351%, from December 31, 1995. The growth of these product lines
reflects management's emphasis and strategy of diversifying the
Company's loan offerings and portfolio mix, and the result of
increased marketing and support activities.
The following table sets forth the composition of the Company's loan
portfolio in dollar amounts and in percentages of the total portfolio
at the dates indicated:
Table 3: Composition of Loan Portfolio
<TABLE>
<CAPTION>
At December 31, At March 31,
-------------------------------- ------------------------------------------------
1996 1995 1995 1994 1993
--------------- --------------- -------------- ---------------- ---------------
Percent Percent Percent Percent Percent
of of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage
loans:
One-to-four
family $265,748 81.2% $157,686 79.0% $137,317 79.0%$151,683 80.1% $193,730 79.0%
Multi-family 7,725 2.4 4,742 2.4 3,978 2.3 4,217 2.2 4,805 2.0
Non-residential 9,304 2.9 4,055 2.0 1,987 1.1 2,600 1.4 16,324 6.6
Acquisition, devel-
opment, and
construction 404 .1 3,707 1.9 4,217 2.4 4,924 2.6 7,061 2.9
Land - - 40 - 1,017 .6 2,250 1.2 2,250 .9
-------- ---- ------- ----- ------- ----- ------- ----- ------- -----
Total first
mortgage loans 283,181 86.6 170,230 85.3 148,516 85.4 165,674 87.5 224,170 91.4
-------- ---- ------- ----- ------- ----- ------- ----- ------- -----
Other loans:
Second mortgage 17,295 5.3 13,938 7.0 12,493 7.2 11,543 6.1 8,394 3.4
FHA insured home
improvement 13,613 4.2 12,527 6.3 10,611 6.1 9,701 5.1 10,055 4.1
Commercial business 9,210 2.8 - - - - - - - -
Unsecured consumer 1,829 .6 1,088 .6 489 .3 382 .2 219 .1
Home equity lines
of credit 1,147 .4 1,263 .6 1,344 .8 1,544 .9 1,791 .7
Automobile loans 413 .1 87 - - - - - 3 -
Passbook 244 - 395 .2 355 .2 370 .2 451 .2
Secured consumer 154 - 6 - - - - - - -
Guaranteed student 12 - 27 - 42 - 80 - 146 .1
-------- ---- ------- ----- ------- ----- ------- ----- ------- -----
Total other loans 43,917 13.4 29,331 14.7 25,334 14.6 23,620 12.5 21,059 8.6
-------- ---- ------- ----- ------- ----- ------- ----- ------- -----
Total loans 327,098 100.0% 199,561 100.0% 173,850 100.0% 189,294 100.0% 245,229 100.0%
===== ===== ===== ===== =====
Less (plus):
Unearned discounts/
(premiums) and
deferred loan fees,
net (985) 547 893 1,099 1,402
Allowance for loan
losses 2,613 3,241 3,048 2,818 2,854
-------- ------- ------- ------- -------
Total loans, net $325,470 $195,773 $169,909 $185,377 $240,973
======== ======== ======== ======== ========
</TABLE>
Credit Quality. Maintenance of asset quality is one of management's
most important objectives. Management reviews delinquent loans on a
continuous basis and, through an Asset Classification Committee which
meets quarterly to review the Company's loan portfolio, makes changes
in the classification of assets which the Committee deems necessary.
The Committee reports its findings to the Board of Directors
quarterly. The Company hires outside counsel experienced in
collections and foreclosure to pursue collections and to institute
foreclosure and other procedures on the Company's delinquent loans.
Lending policies are reviewed and approved annually by the Board of
Directors of the Company. Credit approval limits have been
established for each of the Company's loan officers, however, the
Company's Loan Committee approves all credit extensions exceeding
$500,000. It is the Company's policy for loans secured by real estate
that an appraisal be obtained to ensure adequate value of the secured
property and that title insurance be obtained on all first mortgage
loans. The Company has engaged an independent consulting firm which
specializes in loan reviews to perform loan reviews and provide
independent reports to the Company's Board of Directors quarterly. In
addition, loan officers monitor the Company's loans outstanding to
identify potentially deteriorating loan situations which are reported
to the Asset Review Committee. This process allows management to
implement a strategy to address potential credit concerns. The
Company's internal Audit Department reviews loan documentation and
collateral as part of its regular audit procedures.
Delinquent Loans and Foreclosed Assets
Federal regulations provide for the classification of loans and other
assets such as debt and equity securities considered by the Office of
Thrift Supervision ("OTS") to be of lesser quality as "substandard",
"doubtful," or "loss" assets. An asset is considered "substandard" if
it is inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the distinct
possibility that the savings institution will sustain "some loss" if
the deficiencies are not corrected. Assets classified as "doubtful"
have all of the weakness inherent in those classified "substandard,"
with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently
existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as
assets without the establishment of a specific loss reserve is not
warranted. Assets that do not expose the savings institution to risk
sufficient to warrant classification in one of the aforementioned
categories, but which possess some weaknesses, are required to be
designated "special mention" by management. Loans designated as
special mention are generally loans that have exhibited some potential
weakness that, if not corrected, could increase the level of risk in
the future.
At December 31, 1996, the Company had special mention loans of $2.2
million. In addition, at that date the Company had substandard assets
of $4.1 million, which consisted of $0.6 million in real estate owned
("REO"), $3.0 million in first and second mortgage loans and $0.5
million in consumer loans. There were no assets categorized as
doubtful at that date and there were $0.4 million categorized as loss
which are fully reserved.
REO is transferred from the loan portfolio at the lower of cost or
estimated fair value. If the estimated fair value is lower than cost,
such difference is charged to the allowance for loan losses at the
time of transfer. The Company also maintains a loss allowance for
other real estate losses for subsequent declines in the estimated fair
value of REO and estimated costs to sell.
Interest is not accrued on FHA insured home improvement loans where
interest or principal is 120 days or more past due, and on all other
loans, where interest or principal is 90 days or more past due, unless
the loans are well secured and in the process of collection. Once the
loans reach non-accrual status, accrued but unpaid interest is
reversed and interest income is subsequently recognized only to the
extent that payments are received. Interest on loans that have been
restructured is accrued according to the renegotiated terms.
Table 4 below sets forth information regarding the Company's non-
performing assets. At December 31, 1996, the Company had no
restructured loans within the meaning of Statement of Financial
Accounting Standards ("SFAS") 15 and SFAS 114 issued by the Financial
Accounting Standards Board ("FASB"):
Table 4: Non-performing Assets
<TABLE>
At
December 31, At March 31,
------------ --------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Mortgage loans delinquent
90 days more and still
accruing $ 404 $ 647 $ 558 $ 714 $ 740
Non-accrual delinquent
mortgage loans 1,884 1,472 1,802 5,653 7,393
Non-accrual construction
loans - 3,273 3,954 4,924 6,812
Other non-accrual loans
delinquent 90 days or more 450 229 259 310 509
------ ------ ------ ------- -------
Total non-performing loans 2,738 5,621 6,573 11,601 15,454
Total REO 563 652 825 1,487 1,495
------ ------ ------ ------- -------
Total non-performing
assets $3,301 $6,273 $7,398 $13,088 $16,949
====== ====== ====== ======= =======
Non-performing loans to total
net loans .84% 2.87% 3.87% 6.26% 6.41%
=== ==== ==== ==== ====
Non-performing assets to
total net loans and REO 1.01% 3.19% 4.33% 7.00% 6.99%
==== ==== ==== ==== ====
Non-performing loans to total
assets .43% 1.01% 1.38% 2.45% 3.07%
=== ==== ==== ==== ====
Non-performing assets to
total assets .52% 1.12% 1.56% 2.76% 3.37%
=== ==== ==== ==== ====
Allowance for loan losses to
non-performing loans 95.43% 57.66% 46.37% 24.29% 18.47%
===== ===== ===== ===== =====
Allowance for loan losses to
total net loans .80% 1.66% 1.79% 1.52% 1.18%
=== ==== ==== ==== ====
</TABLE>
In addition to the loans included in the risk elements table above,
the Company has at December 31, 1996, 40 loans delinquent for 90 days
or less totaling $810 thousand, of which $382 thousand has been
classified as substandard. These loans, as well as the loans included
in the risk elements table above, have been considered in the analysis
of the adequacy of the allowance for loan losses.
For the year ended December 31, 1996 and 1995 and the nine months
ended December 31, 1995 and 1994, the amounts of interest income that
would have been recorded on non-accrual loans, had they been current,
approximated $0.2 million, $0.4 million, $0.3 million and $0.9
million, respectively. Also, during the twelve months ended December
31, 1996 and 1995 and the nine months ended December 1995 the amounts
of interest income on non-performing loans that was included in income
approximated $75 thousand, $21 thousand, $11 thousand and $14
thousand, respectively.
The Company's real estate owned, before allowance for losses on real
estate owned (REO), totaled $741 thousand at December 31, 1996 as
compared to $875 thousand at December 31, 1995. During 1996,
reductions in the fair market value of REO properties were $79
thousand. In addition, $324 thousand of new REO was acquired which
was offset by the sale of $379 thousand in existing REO properties.
The sales in real estate owned reflects the continued efforts of the
Company to reduce of REO outstanding in a timely manner.
Allowance for Loan Losses
The allowance for loan losses is established through charges
(provisions for loan losses) to earnings. Loan losses are charged
against the allowance for loan losses when management believes that
the recovery of principal is unlikely. If, as a result of loans
charged off or increases in the size or risk characteristics of the
loan portfolio, management considers the allowance to be below the
level necessary to absorb future loan losses on existing loans, an
additional provision for loan losses is made to increase the allowance
for loan losses to the level considered necessary to absorb possible
losses on existing loans that may become uncollectible. Management
considers such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans
and economic conditions that may affect the borrowers' ability to pay
and the realization of collateral in determining the adequacy of the
allowance.
Management believes that the allowance for losses on loans is
adequate. While management uses available information to recognize
losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions in the Company's market area.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for
losses on loans. Such agencies may require the Company to recognize
additions to the allowance based on their judgments about information
available to them at the time of their examinations.
INVESTMENT ACTIVITIES
The Company's earning assets, other than loans receivable, are its
debt and equity securities, which primarily consist of U.S. Government
and agency securities, federal funds sold, and mortgage-backed
securities, which are directly insured or guaranteed by the Government
National Mortgage Association ("GNMA"), the FNMA or the FHLMC. At
December 31, 1996, investments in these assets reflected a decrease of
$60.7 million when compared to investments at December 31, 1995. This
decrease principally resulted from decreases in debt securities of
$39.9 million, or 49.8%, and mortgage-backed securities of $19.1
million, or 7.4%, from December 31, 1995.
The investment policy of the Company, which is approved by the Board
of Directors and implemented by certain officers as authorized by the
Board, is designed to provide and maintain liquidity and to manage the
interest rate sensitivity of its overall assets and liabilities, and
to generate a favorable return without incurring undue interest rate
and credit risk. In establishing its investment strategies, the
Company considers its business and growth plans, the economic
environment, its interest rate sensitivity position, the types of
securities to be held, and other factors.
Current regulatory and accounting guidelines regarding investment
portfolio policy require securities to be classified as "held to
maturity", "available for sale" or "trading." In November 1995, the
FASB issued "Special Report, A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity
Securities" within which there was offered transition guidance
permitting an enterprise to reassess the appropriateness of the
classifications of all of its securities before December 31, 1995.
The Company reassessed its classifications and on December 5, 1995, it
transferred all of its securities previously classified as held to
maturity, with an amortized cost of $291.3 million, to the available
for sale classification. The related unrealized gain as of the date of
transfer was $1,548,000 which has been recognized and reported, net of
income tax of $557,000, as a separate component of shareholders'
equity. At December 31, 1996, all of the Company's securities were
classified as available for sale. Decisions to purchase or sell these
securities are made within the framework of the Company's investment
policy and are based on economic conditions including changes in
interest rates, liquidity, and asset liability management strategies.
Decreases in investments during 1996 were primarily the result of the
sales of $112.5 million of debt and equity securities, and mortgage-
backed securities during the third and fourth quarters of 1996.
Proceeds from the sale of securities were used in conjunction with
additional borrowings and deposits to fund loan growth and
redeployment into higher yielding securities.
The following table sets forth the composition of the Company's
investment in Federal funds sold, debt and equity securities and
FHLBNY stock at the dates indicated:
Table 5: Federal Funds Sold, Debt and Equity Securities
<TABLE>
<CAPTION>
At December 31, At March 31,
----------------------------- -------------
1996 1995 1995
-------------- ------------- -------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ - - % $ 1,650 1.9% $ 1,350 1.6%
Debt and equity
securities:
U.S. Government &
agency securities 40,103 83.5 80,017 93.7 80,934 94.1
Other 140 .3 109 .1 53 .1
------- ---- ------ ---- ------ ----
Sub-total 40,243 83.8 81,776 95.7 82,337 95.8
FHLBNY stock 7,768 16.2 3,627 4.3 3,627 4.2
------- ---- ------ ---- ------ ----
Total Federal funds
sold, debt and
equity securities
and FHLBNY stock $48,011 100.0% $85,403 100.0% $85,964 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
The following table sets forth the composition of the Company's
mortgage-backed securities portfolio in dollar amounts and in
percentages of its total portfolio at the dates indicated:
Table 6: Mortgage-backed Securities
<TABLE>
<CAPTION>
At December 31, At March 31,
------------------------------- ----------------
1996 1995 1995
------------- -------------- ----------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed
securities:
GNMA $77,717 33.0% $ 51,435 20.1% $ 44,058 21.8%
FHLMC 92,262 39.1 107,021 41.7 102,855 50.9
FNMA 65,706 27.9 97,919 38.2 55,307 27.3
-------- ---- ------- ---- ------- ----
Total mortgage-
backed securities 235,685 100.0% 256,375 100.0% 202,220 100.0%
===== ===== =====
Unamortized
premiums, net 5,289 3,732 1,457
-------- ------ ------
Mortgage-backed
securities, net $240,974 $260,107 $203,677
======== ======== ========
</TABLE>
Deposits
Deposit accounts have traditionally been the principal source of the
Company's funds for use in lending and for other general business
purposes. The Company does not actively solicit brokered deposits. In
addition to deposits, the Company's sources of funds are primarily
borrowings from the FHLBNY, loan and mortgage-backed security
repayments and cash flow generated from operations including interest
payments on loans and debt securities and fees. See "Liquidity and
Capital Resources."
The Company offers a variety of deposit accounts having a range of
interest rates and terms. The Company presently offers passbook
accounts, checking accounts, NOW accounts, money market accounts,
fixed interest rate certificates of deposit with varying maturities
and individual retirement accounts ("IRA's"). The Company emphasizes
retention of its core deposits, as management believes that these
deposits are a much more stable source of funds and are less sensitive
to changes in the market level of interest rates. However, depending
on its funding needs, interest rate risk management and other
considerations, the Company may from time to time emphasize the
origination of certificates of deposit, as it did during parts of 1994
and 1995. At December 31, 1996 and 1995, the percentage of core
deposits to total deposits was 54.2% and 49.6%, respectively.
Deposits grew $19.1 million from $438.0 million at December 31, 1995
to $457.1 million at December 31, 1996. This increase is principally
the result of increased marketing efforts by the Company and the
addition of three branches since December 1995. During this period
the mix in the deposits has changed toward lower yielding core
deposits. The mix was also affected by the Company's marketing
strategy. During 1996, interest rates paid to retail depositors have
been rising within the Company's market area. In response, the
Company developed products which placed emphasis on customer
relationships rather than matching the most aggressively priced
certificates of deposits offerings by its competition. As a result,
there has been runoff in certificates of deposits primarily from
depositors who do not have other accounts with the Company, while core
deposits have increased. Also during the third quarter of 1995 the
Company started to market its products, including deposits, to
affinity groups. Under this program, the Company offers a higher
statement savings rate which is tied to the three month U.S. Treasury
rate. The Company believes that the higher interest rate is
economically feasible since service under this program is principally
electronic, and has limited operational and incremental costs. This
program also has the advantage of soliciting new customers with
profiles to match loan products the Company is marketing.
During calendar year 1997, $176.4 million of the Company's
certificates of deposit will be maturing. These certificates
currently carry interest rates ranging from 2.50% to 7.60% and a
weighted average interest rate of 4.90%. As of December 31, 1996,
the Company's current interest rates offered, for certificates with
similar maturities, were between 2.90% and 5.69%. Management does not
believe that the maturity of these time deposits will have a material
impact to the Company's liquidity.
Liquidity and Capital Resources
The Company's liquidity is a measure of its ability to fund loans and
withdrawals of deposits in a cost effective manner. The Company's
primary financing sources are deposits obtained in its own market
area, advances from the FHLBNY and securities sold under repurchase
agreements. Other sources of funds include scheduled amortization and
prepayments of loan principal and mortgage-backed securities,
maturities of debt securities and funds provided by operations. At
December 31, 1996, the Company had total liquid assets (consisting of
cash due from banks, federal funds sold, debt and mortgage-backed
securities, having final maturities within one year, and accrued
interest from debt and mortgage-backed securities), which represented
1.6 % of total assets and 2.3% of total deposits at December 31, 1996.
At December 31, 1996 the Company had available to it $9.2 million
under a line of credit with the FHLBNY, expiring October 31, 1997 and,
approximately $9.1 million of excess collateral pledged with the
FHLBNY. In addition, the Company has approximately $136.9 million in
unpledged debt, equity and mortgage-backed securities which could be
used to collateralize additional borrowings. Finally, all of the
Company's securities are available for sale.
At December 31, 1996, capital resources were sufficient to meet
outstanding loan commitments of $24.9 million, commitments on unused
lines of credit of $4.3 million and commercial letters of credit of
$3.0 million. Certificates of deposit which are scheduled to mature
in one year or less from December 31, 1996 totaled $176.4 million.
Management is unable to predict the amount of such deposits that will
renew with the Company. As a result of the Company's liquidity
position, management does not believe the Company's operations will be
materially affected by a failure to renew these deposits. However,
experience indicates that a significant portion of such deposits
should remain with the Company.
During the year ended December 31, 1996, the principal requirement for
funds was for lending activities. Purchase and originations of loans
exceeded principal collections by $130.6 million. The principal
sources of funding for lending were increases in borrowings from the
FHLBNY, net of repayments of $62.5 million, an excess of principal
repayments, maturities, calls and sales of mortgage-backed securities
and debt and equity securities over purchases of mortgage-backed
securities of $53.1 million and an increase in deposits of $19.0
million.
During the nine months ended December 31, 1995, lending and investment
activities were the principal requirements for funding. Purchase and
originations of loans exceeded principal collections and repayments by
$27.2 million. Purchases of debt, equity and mortgage-backed
securities exceeded principal repayments, maturities and sales
proceeds by $53.0 million. The principal sources of funding for these
investments were an increase in deposits of $30.3 million, borrowings,
net of repayments, from the FHLBNY of $3.2 million and net proceeds
from the Company's initial public offering of $46.5 million.
Liquidity management of the Company is both a daily and long-term
component of management's strategy. Purchases of mortgage-backed
securities increased in the beginning of 1996, as the Company sought
to balance its investment portfolio with the addition of higher
yielding intermediate term instruments. These purchases were funded
through short-term borrowings from the FHLBNY. Concurrently, growth
in net loans occurred which also was funded through short-term FHLBNY
borrowings. Late in the third quarter and early in the fourth quarter
as interest rates began to fall, the Company sold lower yielding debt
and mortgage-backed securities and used the proceeds to reduce FHLBNY
borrowings which had spiked during the middle of 1996 to fund loan
growth. Late in the fourth quarter as interest rates dropped to the
lowest point since the beginning of the year, the Company extended the
maturity date of $60 million of its short-term borrowings to a five-
year term, callable at the option of the FHLBNY after three years, at
a rate of 5.52%. At December 31, 1996, the Company's remaining short-
term borrowings, which all mature within ninety days, were $47.2
million.
Consistent with its strategy of leveraging its excess capital, the
Company purchased $51.9 million of mortgage-backed securities,
subsequent to December 31, 1996. These subsequent purchases are
classified as available for sale and have weighted average lives
consistent with five year Treasury securities. The Company may seek
to extend up to $40.0 million of its short-term borrowings to longer
maturities, depending upon interest rate market conditions. If such
borrowings are not extended, the Company anticipates renewing such
borrowings on a short-term basis.
Interest Rate Sensitivity Analysis
The principal objective of the Company's asset and liability
management is to identify, evaluate, and manage a level of interest
rate risk appropriate to the Company's business focus, operating
environment, capital and liquidity requirements; and to attain a
stable net interest margin across a wide range of interest rate
environments. The Company monitors the levels of interest rates, the
relationships between the rates earned on assets and the rates paid on
liabilities, the absolute amount of assets and liabilities which
reprice or mature over similar periods, and the effect of these
factors on the estimated level of net interest income. The Company's
actions in this regard are taken under the guidance of the
Asset/Liability Committee (ALCO) comprised of management with
oversight provided by the Board of Directors. The ALCO's review
includes the sensitivity of the Company's assets and liabilities to
changes in interest rates, the book and market values of assets and
liabilities, unrealized gains and losses, market conditions and
interest rates, and cash flow needs with regard to investment activity
and deposit flow.
One of the monitoring tools used by the ALCO is an analysis of the
extent to which assets and liabilities are "interest rate sensitive"
and one that measures the Company's interest rate sensitivity "gap."
An asset or liability is said to be interest rate sensitive within a
specific time period if it will mature or reprice within that time
period. The interest rate sensitivity gap is defined as the
difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-
bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets.
Accordingly, during a period of rising interest rates, an institution
with a negative gap position would not be in as favorable a position,
as compared with an institution with a positive gap, to invest in
higher yielding assets. This may result in the yield on the
institution's assets increasing at a slower rate than the increase in
its cost of interest-bearing liabilities. Conversely, during a period
of falling interest rates, an institution with a negative gap would
experience a repricing of its assets at a slower rate than its
interest-bearing liabilities, which, consequently, may result in its
net interest income growing at a faster rate than an institution with
a positive gap position.
In addition to the gap analysis, the Company uses income simulation
modeling in measuring its interest rate risk and managing its interest
rate sensitivity. Income simulation considers not only the impact of
changing market interest rates on forecasted net interest income, but
also other factors such as yield curve relationships, the volume and
mix of assets and liabilities, customer preferences, and general
market conditions.
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at December 31, 1996 that
the Company anticipates, based upon certain assumptions, will reprice
or mature in each of the future time periods presented. Except as
noted, the amount of assets and liabilities which reprice or mature
during a particular period were determined in accordance with the
earlier of the term to repricing or the contractual terms of the asset
or liability. The Company's loan prepayment assumptions are 6.60% per
annum for ARM loans, and a range of 7% to 28% per annum (based upon
the underlying interest rate) for all other loans. Non-accrual loans,
deferred premiums, fees and unearned discounts have been excluded from
the table. The liability assumptions include annual decay rates of
1.52% for money market accounts, 1.71% for passbook accounts, and
23.54% for NOW accounts, based upon historical data. A decay rate is
the percentage of run-off or "decay" in the liability balance from one
earlier point in time to another point later in time. Based on these
assumptions, net interest-bearing liabilities maturing or repricing
within one year of December 31, 1996 exceeded net interest-earning
assets maturing or repricing within the same period by $77.7 million,
representing a negative cumulative one-year interest rate sensitivity
gap of 12.22% to total assets. Accordingly, an increase in market
interest rates would be expected to have an adverse impact on net
interest income. For information on the contractual maturities of the
Company's loans and investments, See - "Lending Activities" and "-
Investment Activities."
Table 7: Gap Analysis
<TABLE>
<CAPTION>
More Than More Than
Six More Than One Year Three Years More Than
Months Six Months to Three to Five Five
or Less to One Year Years Years Years Total
------- --------- -------- --------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning
assets:
First mortgage loans $ 58,419 $41,465 $ 59,268 $ 69,824 $ 51,985 $280,961
Consumer and other
loans 4,788 3,424 10,675 7,054 8,316 34,257
Commercial loans 2,152 2,249 4,809 - - 9,210
Mortgage-backed
securities 21,643 18,968 72,831 28,349 99,183 240,974
FHLBNY stock, at
cost - - - - 7,768 7,768
Investment
securities 5,009 2,013 8,987 23,998 236 40,243
------- ------- -------- -------- -------- -------
Total interest-
earning assets 92,011 68,119 156,570 129,225 167,488 613,413
------- ------- -------- -------- -------- --------
Interest-bearing
liabilities:
Savings accounts 1,204 1,184 4,654 4,417 128,192 139,651
NOW accounts 6,235 4,919 15,050 7,532 13,651 47,387
Money market
accounts 339 335 1,974 1,885 39,871 44,404
Certificates of
deposit 105,278 71,131 29,090 3,741 - 209,240
Borrowings 47,200 - - 60,000 - 107,200
-------- ------- -------- -------- ------- --------
Total interest-
bearing
liabilities 160,256 77,569 50,768 77,575 181,714 547,882
------- ------- -------- ------- ------- --------
Interest sensitivity
gap $(68,245) $( 9,450) $105,802 $ 51,650 $(14,226) $ 65,531
======== ======== ======== ======== ======== ========
Cumulative interest
sensitivity gap $(68,245) $(77,695) $ 28,107 $ 79,757 $ 65,531
======== ========= ======== ======== ========
Cumulative interest
sensitivity gap as a
percentage of total
assets (10.73%) (12.22%) 4.42% 12.54% 10.30%
===== ===== ==== ===== =====
Cumulative interest-
earning assets as a
percentage of
interest-bearing
liabilities 57.4% 67.3% 109.7% 121.8% 134.4%
==== ==== ===== ===== =====
</TABLE>
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 repricing, they
may react in different degrees to changes in market interest rates.
Interest rates on certain types of assets 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.
Certain assets, such as ARM loans, have features which limit changes
in interest rates on a short-term basis and over the life of the loan.
In the event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those
assumed in calculating the table. Finally, the ability of borrowers
to service their ARM loans may decrease in the event of an interest
rate increase.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED DECEMBER 31,
1995 AND 1994
General. Net income for the nine months ended December 31, 1995
("fiscal 1995") was $1.6 million, compared with $3.4 million for the
nine months ended December 31, 1994. This decrease of $1.8 million was
primarily the result of higher interest expense and non-interest
expenses associated with the efforts of the Company to position itself
for future growth, partially offset by increases in interest income
and collection of unaccrued interest income.
Net Interest Income. For fiscal 1995, net interest income decreased
$0.5 million, or 3.7%, to $12.7 million from $13.2 million for the
same period in the prior year. This decrease is the result of an
increase in interest expense larger than the increase in interest
income.
Interest Income. Interest income increased $1.8 million, or 7.4%, to
$26.9 million for fiscal 1995 from $25.0 million for the comparable
period in 1994. The growth in interest income is principally the
result of an increase in the average balance of total interest-earning
assets. The average balance of total interest-earning assets increased
$26.3 million during fiscal 1995 to $490.4 million from $464.0 million
for the nine months ended December 31, 1994, and the average yield on
total interest-earning assets increased to 7.30% for fiscal 1995 from
7.19% for the comparable period during 1994. The change in the average
balances of interest-earning assets between fiscal 1995 and the same
period in the prior year was principally affected by: (1) investment
of the proceeds from the Company's initial public offering at the end
of September 1995, and (2) investment of funds borrowed from the
FHLBNY during the last quarter of fiscal 1995, partially offset by (3)
mortgage loan and mortgage-backed securities principal amortization
and prepayments, as accelerated due to a decrease in long term
interest rates during fiscal 1995. Interest-earning assets most
affected by this net increase in average balances were first mortgage
loans, mortgage-backed securities and investment securities. Mortgage
loans had a small decrease, and mortgage-backed securities had a small
increase during fiscal 1995 from the nine months ended December 31,
1994, as the impact of the September 1995 funds infusion to the
respective average balance calculations was offset for mortgage loans,
and largely offset for mortgage-backed securities, by the amortization
and prepayments of principal. Growth in the average balance of
investment securities during fiscal 1995 over the comparable period in
1994 occurred throughout the nine-month period in 1995 as the cash
flow from amortization of mortgage and mortgage-backed securities
principal was reinvested into shorter term government and agency
obligations.
Interest Expense. Interest expense increased by $2.3 million, or
19.7%, during fiscal 1995 compared to the same period in the previous
year. This increase was primarily attributable to a $2.5 million, or
26.0%, increase in interest expense on deposits from $9.6 million
during the nine months ended December 31, 1994 to $12.0 million during
fiscal 1995. The increase was primarily attributable to: a change
between periods in the mix of deposits to higher cost time deposits,
and an increase in the average balance of interest-bearing deposits by
$6.2 million, or 1.5%, partially offset by a decline in the average
balance of borrowed funds during fiscal 1995 when compared to the same
period in the prior year.
The change in the mix of deposits began during 1994 when interest
rates increased. The Company responded by offering new deposit
products with market interest rates, rather than significantly
changing interest rates on existing products. The result was a
migration from NOW accounts into CD products whose terms were
generally less than 18 months. The mix was also affected by the
Company's marketing strategy. In December 1994 and into calendar 1995
when the Company was making its decision to commence with its initial
public offering, the Company started offering market competitive CD
rates, generally for terms of less than 18 months, in conjunction with
advertising campaigns geared toward reemphasizing the Company's
presence in its markets. Although these rates were not the highest in
the Company's market territory, they were higher than those it
traditionally offered. Subsequently, as the Company opened two new
supermarket branches, it continued with these rate offerings as well
as paying bonuses to statement savings rates, on a limited basis, to
customers of those new branches. Also during fiscal 1995 the Company
started to market its products, including deposits, to affinity
groups.
The average balance of borrowed funds decreased $2.6 million during
fiscal 1995 from the same period during the prior year, while the
weighted average borrowing cost rose 6 basis points to 7.47%. This
combined to result in a decrease in interest expense on borrowed funds
of $127,000 (5.7%), to $2.1 million during fiscal 1995 from $2.2
million during the nine months ended December 31, 1994. The increase
in the average cost of borrowings reflected higher cost advances taken
during calender 1994 when interest rates were rising. In December
1995, the Company prepaid $23.9 million, representing the then
outstanding amount of these advances, and incurred a prepayment
penalty fee of $643,000 reflected, net of tax, as an extraordinary
item in the consolidated statement of income.
Provision for Loan Losses. The provision for loan losses for fiscal
1995 decreased $153,000, or 32.7%, to $315,000 for the nine months
ended December 31, 1995 from $468,000 for the nine months ended
December 31, 1994. The provision for fiscal 1995 was determined by
management after review of, among other things, the Company's loan
portfolio, the risks inherent in the Company's lending activities and
the local economy in the Company's market areas. As of December 31,
1995, non-performing loans, defined as non-accrual loans and accruing
loans delinquent 90 days or more, decreased $1.0 million, or 14.5%, to
$5.6 million at December 31, 1995 from $6.6 million at March 31, 1995.
At December 31, 1995, the allowance for loan losses was $3.2 million,
compared to $3.0 million at March 31, 1995, an increase of $0.2
million, or 6.3%. The allowance for loan losses as a percentage of
total non-performing loans increased to 57.6% at December 31, 1995
from 46.4% at March 31, 1995 due primarily to the decrease in non-
performing loans.
Non-interest Income. Non-interest income increased $0.6 million to
$1.6 million for fiscal 1995 compared to $1.0 million for the same
period ended December 31, 1994. The principal reasons for this
increase were recognition of income from the collection of unaccrued
interest, partially offset by a loss from the sale of debt securities.
During fiscal 1995, in connection with the workout of a non-performing
loan, the Company received $1.9 million in accord with the terms of a
bankruptcy settlement, representing principal and unaccrued interest.
Initial payments under the plan were applied to principal which was
repaid in its entirety during fiscal 1995. Subsequent payments,
representing unaccrued interest, totaled $0.9 million during fiscal
1995 and were reflected in non-interest income. The loss on the sale
of debt securities occurred during the last quarter of calendar 1995
when the Company sold $30.9 million of such securities having an
average yield of 4.76%, incurring a loss of $340,000. There were no
sales of securities during the same time period in the preceding year.
The remaining components of non-interest income are service charges
and fees for checking accounts and loans, as well as commissions and
fees from annuity sales. These sources remained relatively consistent
for fiscal 1995 as compared to the same period in the prior year.
Non-interest Expense. Non-interest expense, at $10.9 million for the
nine months ended December 31, 1995, increased $2.4 million, or
29.0%, from the $8.4 million incurred during the same period in the
prior year.
Salaries and employee benefits expenses for fiscal 1995 increased $1.6
million, or 37.7%, compared to the same period during the prior year.
Of this amount, approximately $0.9 million was related to increased
staffing requirements necessary to position the Company to achieve its
marketing and operational objectives, including increased executive
and loan administrative staff, and staffing and training for the
Company's new supermarket branches. Other salary and benefit
expenses, incurred for the same reason, include provisions for
additional incentive programs for employees at all levels of the
Company, including $0.1 million associated with the Company's ESOP
established September 29, 1995. Finally, fiscal 1995 salary and
benefit expenses also reflect $0.1 million of normal salary increases
from salary in place during the same period of the prior year.
Occupancy costs increased $0.2 million, or 19.0%, to $1.3 million for
the nine months ended December 31, 1995 from $1.1 million for the nine
months ended December 31, 1994. The increase is principally the
result of refurbishment of existing facilities and the amortization of
leasehold improvements to the new supermarket branches. Professional
fees for fiscal 1995 increased $0.3 million, or 126.7%, compared to
the nine-month period a year ago. These increases primarily resulted
from various marketing, profitability and data processing studies
being performed during fiscal 1995, while no similar work had been
performed during the same period of the prior year.
Other non-interest expense, which increased $0.3 million, or 19.2%
for the nine months ended December 31, 1995, amounted to $2.0 million,
compared to $1.6 million for the nine months ended December 31, 1994.
An increase in Board of Directors' fees and expenses was a principal
component of this increase, reflecting both a change in compensation
to those members of the Board of Directors who are not officers of the
Company or the Bank and also reflecting that no expense was recognized
during the nine months ended December 31, 1994 for any portion of the
annual retainers, paid in January 1994 to Board members, for serving
on the Board and its Committees.
Income Tax Expense. Income tax expense decreased $0.7 million, or
39.6%, to $1.2 million for the nine months ended December 31, 1995
from $1.9 million for the similar period during the prior year,
principally as a result of the decrease in income before income taxes,
extraordinary item and cumulative effect of accounting change of $2.1
million, or 40.7%, for the nine months ended December 31, 1995 from
the nine months ended December 31, 1994.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented herein
have been prepared in accordance with GAAP, which requires the
measurement of financial position and operating results in terms of
historical dollars, without considering changes in relative purchasing
power over time due to inflation.
Unlike most industrial companies, virtually all of the Company's
assets and liabilities are monetary in nature. As a result, interest
rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation.
Recent Accounting Pronouncements
In June 1996, the FASB issued SFAS 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS 125). SFAS 125 amends portions of SFAS 115, amends and extends
to all servicing assets and liabilities the accounting standards for
mortgage servicing rights now in SFAS 65, and supersedes SFAS 122. The
statement provides consistent standards for distinguishing transfers
of financial assets which are sales from transfers that are secured
borrowings. Those standards are based upon consistent application of
a financial components approach that focuses on control. The
statement also defines accounting treatment for servicing assets and
other retained interest in the assets that are transferred. SFAS 125
is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996,
except for certain provisions which were deferred until January 1,
1998 by SFAS No. 127 "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125" issued in December 1996. The
adoption of the statement is to be applied prospectively and is not
expected to have a material effect on the Company's financial
condition or results of operations.
Unaudited Quarterly Financial Data
Table 8 presents selected quarterly consolidated financial data:
Table 8: Selected Consolidated Financial Quarterly Data (Unaudited)
<TABLE>
<CAPTION>
Dec. 31,Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1996 1996 1996 1996 1995 1995 1995 1995
---- ---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income $11,143 $11,853 $11,452 $10,830 $9,717 $8,569 $8,567 $8,407
Net interest income 5,520 5,488 5,413 5,201 4,715 3,872 4,104 4,268
Provision for loan
losses 125 125 125 125 125 125 65 74
Income before taxes 2,206 (1,923) 1,803 1,882 1,382 798 950 1,483
Extraordinary item - - - - (412) - - -
Net income 1,305 (492) 1,154 1,205 471 500 595 923
Net income per share $ 0.29 $(0.11) $ 0.24 $ 0.25 - - - -
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of the Company as of December 31,
1996 and 1995 and for the year ended December 31, 1996, the nine-month
period ended December 31, 1995 and the year ended March 31, 1995 and
the auditor's report thereon, are included herewith as indicated on
"Index to Consolidated Financial Statements".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The following table sets forth certain information about each
executive officer of the Registrant who is not also a director:
Principal Occupation
Name, Age and Position Officer Since During Past Five Years
---------------------- ------------- -----------------------
Michael J. Griffin, 47, 1997 Bank President and Chief
President and Chief Operating Officer of the
Operating Officer of the Bank since January 1997;
Bank Executive Vice President of
Summit Bank, Credit Services
Division from May 1992 to
January 1997; Executive Vice
President of Somerset Trust
from May 1990 to May 1992.
Robert H. Hunt, Jr., 49, 1995 Senior Vice President and
Senior Vice President of the Chief Lending Officer of the
Bank Bank since September 1995;
Senior Executive Vice
President of Bancorp New
Jersey for the preceding
years.
Augustine F. Jehle, 53, 1989 Vice President of the
Vice President and Secretary Company since May 1995;
Senior Vice President of the
Bank since December 1996;
Vice President of the Bank
from January 1989 to
December 1996.
Bernard F. Lenihan, 50, 1995 Senior Vice President and
Senior Vice President and Chief Financial Officer of
Chief Financial Officer the Company and Bank since
May 1995 and April 1995,
respectively. Executive
Officer of Elizabethtown Gas
Company, a public utility,
for the previous years, and
for the one year prior to
joining the Company, an
Executive Officer of NUI
Corp., its parent company.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is included in the
definitive Proxy Statement for the Company's Annual Meeting of
Shareholders, which is incorporated herein by reference. It is
expected that such Proxy Statement will be filed with the Securities
and Exchange Commission no later than April 30, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information concerning security ownership of certain beneficial owners
and management is included in the definitive Proxy Statement for the
Company's Annual Meeting of Shareholders, which is incorporated herein
by reference. It is expected that such Proxy Statement will be filed
with the Securities and Exchange Commission no later than April 30,
1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
is included in the definitive Proxy Statement for the Company's Annual
Meeting of Shareholders, which is incorporated herein by reference.
It is expected that such Proxy Statement will be filed with the
Securities and Exchange Commission no later than April 30, 1997.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM
8-K
(a) (1) Consolidated financial statements of the Company as of
December 31, 1996 and 1995 and for the year ended December 31, 1996,
the nine-month period ended December 31, 1995 and the year ended March
31, 1995 and the auditor's report thereon, are included herewith as
indicated on "Index to Consolidated Financial Statements".
(2) None
(3) Exhibits:
Exhibit No. Description
----------- -----------
3(i) Certificate of Incorporation
of the Company*
3(ii) Bylaws of the Company*
10.1 Second amended and restated
Employment Agreement by and
among Statewide Financial
Corp., Statewide Savings
Bank and Victor M. Richel*
10.2 Statewide Savings Bank,
S.L.A. Employee Stock Own-
ship Plan*
10.3 Employment Agreement by and
between Statewide Savings
Bank, S.L.A. and Michael J.
Griffin Filed herewith
10.4 Statewide Financial Corp.
1996 Incentive Stock Option
Plan**
10.5 Statewide Financial Corp.
1996 Stock Option Plan for
Outside Directors**
10.6 Statewide Financial Corp.
Recognition and Retention
Plan for Executive Officers
and Employees**
10.7 Statewide Financial Corp.
Recognition and Retention
Plan for Outside Directors**
21 Subsidiaries of the
Registrant Filed herewith
23 Consent of KPMG Peat Marwick
LLP Filed herewith
27 Financial Data Schedule Filed herewith
* Incorporated by reference from Exhibits 3.1, 3.2, 10.1
and 10.2 of the Registrant's Registration Statements on
Form S-1. 33-93380.
** Incorporated by reference from Exhibits A through D of
the Company's Definitive Proxy Statement for the 1996
Annual Meeting of Shareholders.
(b) Reports on Form 8-K.
The Registrant has filed the following reports on Form 8-K during the
quarter ended December 31, 1996.
Date Item Reported
---- -------------
October 28, 1996 Announcing Registrant's third
quarter earnings
November 15, 1996 Announcing Registrant's stock
repurchase program
November 21, 1996 Announcing Registrant's quarterly
dividend
December 5, 1996 Announcing resignation of Clifford
J. Adams, President of Statewide
Savings Bank, the principal
subsidiary of Statewide Financial
Corp.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report of KPMG Peat Marwick LLP
Consolidated Financial Statements:
Consolidated Statements of Financial Condition -
December 31, 1996 and 1995
Consolidated Statements of Income - Year Ended
December 31, 1996, Nine-Month Period Ended
December 31, 1995, and Year Ended March 31, 1995
Consolidated Statements of Shareholders' Equity -
Year Ended December 31, 1996, Nine-Month Period
Ended December 31, 1995, and Year Ended March 31,
1995
Consolidated Statements of Cash Flows - Year Ended
December 31, 1996, Nine-Month Period Ended
December 31, 1995, and Year Ended March 31, 1995
Notes to Consolidated Financial Statements -
December 31, 1996 and 1995 and March 31, 1995
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Statewide Financial Corp.
We have audited the consolidated financial statements of Statewide
Financial Corp. and subsidiary as of December 31, 1996 and 1995, and
for the year ended December 31, 1996, the nine-month period ended
December 31, 1995 and the year ended March 31, 1995, as listed in the
accompanying index. 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 Statewide Financial Corp. and subsidiary as of December 31, 1996
and 1995, and the results of their operations and their cash flows for
the year ended December 31, 1996, the nine-month period ended December
31, 1995 and the year ended March 31, 1995 in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Short Hills, New Jersey
January 27, 1997
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
December 31,
-------------------
1996 1995
---- ----
(Dollars in thousands)
ASSETS
Cash and amounts due from depository
institutions $ 6,586 $ 6,553
Federal funds sold - 1,650
-------- --------
Total cash and cash equivalents 6,586 8,203
Mortgage-backed securities available for sale 240,974 260,107
Debt and equity securities, available for
sale 40,243 80,126
Loans receivable, net 325,470 195,773
Accrued interest receivable, net 4,296 4,410
Real estate, owned 563 652
Premises and equipment, net 6,296 4,819
FHLBNY stock, at cost 7,768 3,627
Excess of cost over fair value of net assets
acquired 137 214
Other assets 3,709 1,118
-------- --------
Total assets $636,042 $559,049
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $457,056 $438,021
Borrowed funds:
Securities sold under agreements to
repurchase 82,400 25,603
Federal Home Loan Bank of New York advances 24,800 19,100
-------- --------
Total borrowed funds 107,200 44,703
Advance payments by borrowers for taxes
and insurance 1,853 1,033
Accounts payable and other liabilities 2,998 2,977
-------- --------
Total liabilities 569,107 486,734
-------- --------
Shareholders' Equity
Preferred stock, no par value, 2,000,000
shares authorized; no shares issued or
outstanding - -
Common stock, no par value, 12,000,000
shares authorized; 4,946,264 shares issued
and 4,911,533 shares outstanding at
December 31, 1996, and 5,269,752 shares
issued and outstanding at December 31, 1995 - -
Paid in capital 46,807 50,770
Unallocated ESOP shares (3,703) (4,232)
Unearned Recognition and Retention Plan
shares (1,872) -
Retained earnings - substantially restricted 25,797 23,537
Treasury stock, 34,731 shares at December 31,
1996 (430) -
Net unrealized gain on securities available
for sale, net of income tax 336 2,240
-------- --------
Total shareholders' equity 66,935 72,315
-------- --------
Commitments and contingencies - -
-------- --------
Total liabilities and shareholders'
equity $636,042 $559,049
======== ========
See accompanying notes to consolidated financial statements.
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1996
NINE-MONTH PERIOD ENDED DECEMBER 31, 1995
AND YEAR ENDED MARCH 31, 1995
December 31, March 31,
--------------
1996 1995 1995
---- ---- ----
(Dollars in thousands,
except per share amounts)
INTEREST INCOME:
Interest and fees on loans $21,206 $11,287 $14,814
Interest on mortgage-backed securities 19,377 10,741 14,214
Interest and dividends on debt and
equity securities 4,228 4,620 4,103
Dividends on FHLBNY stock 467 205 288
------- ------- -------
Total interest and dividend income 45,278 26,853 33,419
------- ------- -------
INTEREST EXPENSE:
Deposits 16,827 12,044 12,984
Borrowed funds 6,829 2,118 2,991
------- ------- -------
Total interest expense 23,656 14,162 15,975
------- ------- -------
NET INTEREST INCOME 21,622 12,691 17,444
Provision for loan losses 500 315 542
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 21,122 12,376 16,902
NON-INTEREST INCOME:
Service charges 1,236 760 1,034
Net loss on sales of securities (1,093) (340) -
Other 1,146 1,202 484
------- ------- -------
Total other income 1,289 1,622 1,518
----- ------- -------
NON-INTEREST EXPENSE:
Salaries and employee benefits 8,511 5,712 5,645
Occupancy, net 2,140 1,337 1,522
Federal deposit insurance premiums 1,011 885 1,218
SAIF assessment 2,651 - -
Professional fees 645 501 328
Insurance premiums 273 227 346
Data processing fees 390 243 307
Foreclosed real estate expense, net 105 10 17
Other 2,717 1,953 2,278
------- ------- -------
Total operating expenses 18,443 10,868 11,661
------- ------- -------
Income before income taxes and
extraordinary item 3,968 3,130 6,759
Income taxes 796 1,152 2,466
------- ------- -------
Income before extraordinary item 3,172 1,978 4,293
Extraordinary item - penalty for prepay-
ment of debt, net of tax - 412 -
------- ------- -------
Net income $ 3,172 $ 1,566 $ 4,293
======= ======= =======
Per Common Share:
Net income $ 0.68 - -
Average common shares outstanding 4,654 - -
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996
NINE-MONTH PERIOD ENDED DECEMBER 31, 1995
AND YEAR ENDED MARCH 31, 1995
Net
Unearned unrealized
Recognition Retained gain (loss)
Un- and earnings on Total
allocated Retention (substan- securities share-
Common Paid in ESOP Plan tially Treasury available holders'
stock capital shares shares restricted) stock for sale equity
------ ------- ------ ------ ---------- ----- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994 $ - $ - $ - - $17,678 $ - $ - $17,678
Net income for the year - - - - 4,293 - - 4,293
Cumulative effect of
accounting change at April 1,
1994 - investments, net of
income tax of $49 - - - - - - 86 86
Change in net unrealized gain
on securities available for
sale during the year, net of
income tax of $(26) - - - - - - (45) (45)
------ ------- ------- -------- -------- ------ ------ -------
Balance at March 31, 1995 - - - - 21,971 - 41 22,012
Net proceeds from initial
public offering, net of
expenses of $1,927 - 50,770 (4,232) - - - - 46,538
Net income for the period - - - - 1,566 - - 1,566
Unrealized gain on securities
transferred on 12/5/95 from
held-to- maturity to
available-for-sale, net of
income tax of $557 - - - - - - 991 991
Change in net unrealized gain
on securities available for
sale during the period, net
of income tax of $679 - - - - - - 1,208 1,208
------- ------- ------- -------- -------- ------ ------ -------
Balance at December 31, 1995 - 50,770 (4,232) - 23,537 - 2,240 72,315
Net income for the year - - - - 3,172 - - 3,172
Acquisition of 211,600 shares
of common stock - - - - - (2,618) - (2,618)
Award of 176,869 shares of
common stock under
Recognition and Retention
plans - (133) - (2,055) - 2,188 - -
Amortization of Recognition
and Retention awards - - - 183 - - - 183
Allocation of ESOP shares - 146 529 - - - - 675
Purchase and Retirement of
323,488 shares of common
stock - (3,976) - - - - - (3,976)
Dividends paid ($0.20 per
share) - - - - (912) - - (912)
Change in net unrealized gain
on securities available-for-
sale during the year, net
of income tax of $(1,070) - - - - - - (1,904) (1,904)
------ ------- -------- -------- -------- ------- ------ ------
Balance at December 31, 1996 $ - $46,807 $ (3,703) $ (1,872) $25,797 $ (430) $ 336 $66,935
====== ======= ======== ======== ======= ====== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
NINE-MONTH PERIOD ENDED DECEMBER 31, 1995
AND YEAR ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
December 31,
----------------
1996 1995 March 31, 1995
---- ---- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,172 $ 1,566 $ 4,293
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 500 315 542
Provision for losses on foreclosed
real estate 34 2 123
Depreciation and amortization 785 436 509
Net amortization of deferred premiums
and unearned discounts 1,928 169 177
Net loss on sales of securities 1,093 340 -
Amortization of RRP awards and
allocation of ESOP shares 858 - -
Net loss (gain) on sale of real
estate owned 10 (78) (180)
Changes in assets and liabilities:
Decrease (increase) in accrued
interest receivable 114 (1,211) (107)
Increase (decrease) in accrued
interest payable 256 45 (7)
(Increase) decrease in other assets (2,591) 511 60
Increase (decrease) in accounts
payable and other liabilities 834 (1,089) 1,061
-------- -------- --------
Net cash provided by
operating activities 6,993 1,006 6,471
-------- -------- --------
Cash flows from investing activities:
Net (disbursements) receipts from
lending activities (14,900) 4,579 11,997
Purchase of loans (115,694) (31,782) -
Proceeds from mortgage-backed
securities principal repayments 54,119 22,143 32,681
Purchase of mortgage-backed
securities (130,385) (76,689) (40,907)
Purchase of debt and equity
securities - (40,986) (17,974)
Proceeds from sale of debt and
equity securities 20,704 30,543 -
Proceeds from the sale of mortgage-
backed securities 90,657 - -
Proceeds from maturities of debt
securities 18,000 12,000 3,000
(Purchase)redemption of FHLBNY
stock (4,141) - 167
Proceeds from sale of real estate
owned 369 1,618 3,876
Purchases and improvement of
premises and equipment (2,185) (1,339) (459)
-------- -------- --------
Net cash used in investing
activities (83,456) (79,913) (7,619)
-------- -------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits 19,035 30,263 (15,881)
Repayment of FHLBNY borrowings (745,240) (90,092) (81,400)
Borrowings from the FHLBNY 807,737 93,303 93,600
Increase (decrease) in advance
payments by borrowers for taxes
and insurance 820 (87) (152)
Cash dividends paid (912) - -
Proceeds from issuance of common
stock - 46,538 -
Purchase of common stock (6,594) - -
-------- -------- --------
Net cash provided by (used
in) financing activities 74,846 79,925 (3,833)
-------- -------- --------
Net (decrease) increase in
cash and cash equivalents (1,617) 1,018 (4,981)
Cash and cash equivalents at
beginning of period 8,203 7,185 12,166
-------- -------- --------
Cash and cash equivalents at end of
period $ 6,586 $ 8,203 $ 7,185
======== ======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Income taxes $ 1,776 $ 2,216 $ 2,174
======== ======== ========
Interest $ 23,400 $ 14,117 $ 15,982
======== ======== ========
Non-cash investing and financing
activities:
Transfer from loans receivable to
real estate owned, net $ 324 $ 396 $ 916
======== ======== ========
Loans to facilitate sale of property $ - $ - $ 492
======== ======== ========
Transfer of investment securities to
investment securities available for
sale $ - $110,913 $ -
======== ======== ========
Transfer of mortgage-backed
securities to mortgage-backed
securities available for sale $ - $180,400 $ -
======== ======== ========
Change in unrealized (loss) gain on
securities available for sale, net
of income tax $ (1,904)$ 2,199 $ 41
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995 AND MARCH 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
(a) Principles of Consolidation and Basis of Presentation
-----------------------------------------------------
As more fully described in Notes 2 and 3, Statewide Savings Bank,
S.L.A. (the "Bank") converted from a mutual to capital stock form of
ownership on September 29, 1995 and 100% of its outstanding common
stock shares were acquired by Statewide Financial Corp., (the
"Company") formed for that purpose. In addition, the Company has
changed its fiscal year from March 31st to a calendar year-end,
effective with the calendar year beginning January 1, 1996. The
adoption of this change facilitates comparisons of the Company's
annual results with those of other financial institutions, most of
whom report on a calendar year basis. Accordingly, consolidated
financial statements for the year ended December 31, 1996, the nine
months ended December 31, 1995 and the year ended March 31, 1995 have
been herein presented.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, the Bank, and its wholly
owned subsidiaries, Seventy Sip Corporation, Statewide Atlantic
Corporation and Statewide Financial Services Inc. All significant
intercompany balances and transactions have been eliminated in
consolidation. The Bank and Statewide Financial Services Inc. are the
only active subsidiaries at December 31, 1996. The Bank operates
sixteen banking offices in Hudson, Union, Bergen and Passaic counties;
and through its wholly owned subsidiary, Statewide Financial Services,
Inc., the Bank also engages in the sale of annuity products. Both the
Company and the Bank are subject to supervision and regulation by
various agencies including the New Jersey Department of Banking, the
Office of Thrift Supervision (OTS) and the Federal Deposit Insurance
Corporation (FDIC).
In preparing the consolidated financial statements, management is
required to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the
consolidated statements of financial condition, and income for the
periods presented. Actual results could differ from these estimates.
Estimates that are susceptible to change include the determination of
the allowances for losses on loans and the valuation of real estate
acquired through foreclosure.
(b) Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include cash on hand, amounts due from
depository institutions and Federal funds sold. Generally, Federal
funds sold are sold for a one day period.
(c) Debt, Equity and Mortgage-backed Securities
-------------------------------------------
On April 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS 115). Such adoption caused the
Company to classify its investment securities and mortgage-backed
securities among three categories: held to maturity, trading, and
available for sale. In November 1995, the Financial Accounting
Standards Board issued "Special Report, A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities" within which there was offered transition guidance
permitting an enterprise to reassess the appropriateness of the
classifications of all of its securities before December 31, 1995.
The Company reassessed its classifications and on December 5, 1995, it
transferred all of its securities previously classified as held to
maturity, with an amortized cost of $291.3 million, to the available
for sale classification. The related unrealized gain as of the date
of transfer was $1,548,000 which has been recognized and reported as a
separate component of shareholders' equity net of income tax of
$557,000.
At December 31, 1996 and 1995, the Company held all of its debt,
equity and mortgage-backed securities as available for sale. These
securities are reported at fair value with unrealized gains and losses
reported, net of income tax, as a separate component of shareholders'
equity. Premiums and discounts are recognized over the lives of the
securities using the level-yield method, as adjusted for prepayments
for mortgage-backed securities. Realized gains and losses are
determined using the specific identification method.
(d) Loans, Fees, Premiums and Discounts
-----------------------------------
Interest is not accrued on FHA insured home improvement loans where
interest or principal is 120 days or more past due and on all other
loans where interest or principal is 90 days or more past due, unless
the loans, including impaired loans, are well secured and in the
process of collection. Once the loans reach non-accrual status or are
considered impaired, accrued but unpaid interest is reversed and
interest income is subsequently recognized only to the extent that
payments are received and any remaining principal balance is deemed
fully collectable. Interest on loans that have been restructured is
accrued according to the renegotiated terms.
Non-refundable loan origination fees, net of certain direct loan
origination costs, are deferred. Net deferred fees, premiums and
discounts on loans purchased are amortized as an adjustment of the
yield over the life of the loan using the level-yield method over
either the initial reset period or life of the loan, as appropriate.
(e) Impairment of a Loan
--------------------
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 114. "Accounting by Creditors for Impairment
of a Loan" (SFAS 114), as amended by Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosure" (SFAS 118), on April 1, 1995.
These statements address the identification, valuation and disclosure
of impaired loans, and do not apply to smaller balance homogeneous
loans such as residential mortgages and consumer-type products.
Management, considering current information and events regarding the
borrowers' ability to repay their obligations, considers a loan to be
impaired when it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. When a loan is considered to be impaired, the amount of
the impairment is measured based on the fair value of the collateral.
Impairment losses are included in the allowance for loan losses
through provisions charged to operations.
(f) Allowance for Loan Losses
-------------------------
The allowance for loan losses is established through charges
(provision) to earnings. Loan losses (loans charged off, net of
recoveries) are charged against the allowance for loan losses when
management believes that the recovery of principal is unlikely. If,
as a result of loans charged off or increases in the size or risk
characteristics of the loan portfolio, the allowance is below the
level necessary to absorb loan losses on existing loans, an additional
provision for loan losses is made to increase the allowance for loan
losses to the level considered necessary to absorb losses on existing
loans that may become uncollectible. Management considers such
factors as changes in the nature and volume of the loan portfolio,
overall portfolio quality, review of specific problem loans and
economic conditions that may affect the borrowers' ability to pay and
the realization of collateral in determining the adequacy of the
allowance.
Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on
changes in economic conditions in the Company's market area. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for
losses on loans. Such agencies may require the Company to recognize
additions to the allowance based on their judgments about information
available to them at the time of their examination.
(g) Real Estate Owned
-----------------
Real estate owned is recorded at the lower of cost or estimated fair
value, with any initial write-down at date of transfer from the loan
portfolio charged to the allowance for loan losses. Fair value is
generally determined using outside appraisals. The Company maintains
an allowance for other real estate losses for subsequent declines in
the estimated fair value and estimated costs to sell. Routine holding
costs are charged to expense as incurred, and improvements to real
estate owned that enhance the value of real estate owned are
capitalized. Gains on the sale of real estate are recognized or
deferred upon disposition of the property based on the specific terms
of the transaction. Losses are charged to operations as incurred.
(h) Premises and Equipment
----------------------
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Provisions for depreciation of
premises and equipment are computed using the straight-line method
over three to ten years for furniture, fixtures and equipment and 40
years for buildings. Amortization of leasehold improvements is
provided using the straight-line method over the shorter of either the
respective lease or the estimated useful life of the improvement.
System conversion costs and related equipment have been capitalized
and is depreciated and amortized over the life of the systems services
contract.
(i) Income Taxes
------------
The Company and its subsidiary file a consolidated Federal income tax
return on a calendar year basis. Income taxes are allocated to the
Bank and its subsidiaries based on the use of their income or loss in
the consolidated return. Separate state income tax returns are filed
by the Bank and its subsidiaries.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carry-
forwards. 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. 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.
(j) Net Income per Share
--------------------
Net income per share is computed by dividing net income by the
weighted average number of shares outstanding. Stock options which
were dilutive have been considered in computing the weighted average
number of common shares outstanding, utilizing the Treasury stock
method. The Company's initial public offering was completed on
September 29, 1995. Accordingly, prior to 1996, net income per share
data is not meaningful and has not been presented.
(k) Stock Based Compensation
------------------------
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation is recorded on the date of
grant only if the current market price of the underlying stock exceeds
the exercise price. In 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123
also allows entities to continue to apply the provisions of APB No.
25 and provide pro forma earnings per share disclosures for employee
stock option grants made in 1995 and future years 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 disclosure provisions of SFAS No.
123.
2. CHARTER CONVERSION
------------------
On September 29, 1995, the Bank converted from a New Jersey State
chartered mutual savings and loan association to a New Jersey State
chartered capital stock savings and loan association. On this date,
the Bank, in connection with the Company's initial public offering
(See Note 3), issued all of its capital stock to the Company in
exchange for a capital contribution of $38.4 million.
3. INITIAL PUBLIC OFFERING
-----------------------
The Company was organized on May 31, 1995 for the purpose of acquiring
all of the capital stock of the Bank. On September 29, 1995, the
Company completed an initial public offering. The offering resulted
in the issuance of 5,269,752 shares of common stock including 423,200
shares to the Company's tax qualified Employee Stock Benefit Plan and
Trust (the "ESOP"). Proceeds of the offering, net of expenses, were
approximately $46.5 million.
At the time of the Offering, the Company was required to establish a
liquidation account in an amount equal to the Bank's capital as of
June 30, 1995. The liquidation account will be reduced to the extent
that eligible account holders reduce their qualifying deposits. In
the unlikely event of a complete liquidation of the Bank, each
eligible account holder will be entitled to receive a distribution
from the liquidation account. The Bank is not permitted to declare or
pay dividends on its capital stock, or repurchase any of its
outstanding stock, if the effect thereof would cause its shareholders'
equity to be reduced below the amount required for the liquidation
account or applicable regulatory capital requirements. The balance of
the liquidation account at December 31, 1996 was approximately $9.4
million.
4. DEBT AND EQUITY SECURITIES, AVAILABLE FOR SALE
----------------------------------------------
The amortized cost and estimated market values of debt and equity
securities available for sale at December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996
------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
(Dollars in thousands) cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies maturing:
Within one year $ 7,022 $ 31 $ - $ 7,053
After one year but within five
years 32,985 127 62 33,050
------- ---- --- -------
Debt securities available for sale 40,007 158 62 40,103
Equity securities available for sale 10 130 - 140
------- ---- --- -------
Debt and equity securities available
for sale $40,017 $ 288 $62 $40,243
======= ====== === =======
<CAPTION>
1995
----------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
(Dollars in thousands) cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies maturing:
Within one year $ 4,007 $ 18 $ - $ 4,025
After one year but within five
years 74,967 1,103 78 75,992
------- ----- ---- -------
Debt securities available for sale 78,974 1,121 78 80,017
Equity securities available for sale 10 99 - 109
------- ------ ---- -------
Debt and equity securities available
for sale $78,984 $1,220 $78 $80,126
======= ====== ====== =======
</TABLE>
Sales of debt and equity securities during the year ended December
31, 1996 and the nine-month period ended December 31, 1995, resulted
in proceeds of $20.7 million and $30.5 million and gross realized
losses of $251,000 and $340,000, respectively. There were no
sales of debt or equity securities during the year ended March 31,
1995.
5. MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE
----------------------------------------------
The amortized cost and estimated market values of mortgage-backed
securities available for sale at December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996
----------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
(Dollars in thousands) cost gains losses value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
GNMA guaranteed pass-through
certificates (net of deferred
premiums of $2,313) $80,368 $ 192 $530 $80,030
FHLMC pass-through certificates
(net of deferred premiums of
$1,487) 93,173 814 238 93,749
FNMA pass-through certificates
(net of deferred premiums of
$1,489) 67,134 148 87 67,195
------- ------ ---- -------
Mortgage-backed securities
available for sale $240,675 $1,154 $855 $240,974
======== ====== ==== ========
<CAPTION>
1995
----------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
(Dollars in thousands) cost gains losses value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
GNMA guaranteed pass-through
certificates (net of deferred
premiums of $465) $ 50,548 $1,397 $ 44 $ 51,901
FHLMC pass-through certificates
(net of deferred premiums of
$925) 106,965 1,296 314 107,947
FNMA pass-through certificates
(net of deferred premiums of
$2,341) 100,238 382 361 100,259
-------- -------- ------- --------
Mortgage-backed securities
available for sale $257,751 $3,075 $719 $260,107
======== ====== ==== ========
</TABLE>
Mortgage-backed securities were pledged to secure Federal Home Loan
Bank of New York ("FHLBNY") advances at December 31, 1996 and 1995.
The estimated market value of securities so pledged at December 31,
1996 and 1995 were $44.2 million and $56.9 million, respectively.
Mortgage-backed securities are also pledged to secure public deposits.
The estimated market value of securities pledged for public deposits
at December 31, 1996 and 1995 was $234,000 and $314,000, respectively.
Sales of mortgage-backed securities during the year ended December 31,
1996, resulted in proceeds of $90.7 million and gross realized losses
of $842,000. There were no sales of mortgage-backed securities during
the nine-month period ended December 31, 1995 or the year ended March
31, 1995.
The contractual maturities of mortgage-backed securities generally
exceed five years. However, the effective lives are expected to be
shorter due to prepayments of the underlying mortgages.
6. LOANS RECEIVABLE, NET
---------------------
A summary of loans receivable, net at December 31, 1996 and 1995 is as
follows:
December 31,
----------------------
1996 1995
---- ----
(Dollars in thousands)
First mortgage loans:
One-to-four family $265,748 $157,686
Multi-family 7,725 4,742
Non-residential 9,304 4,095
Construction 404 3,707
-------- --------
283,181 170,230
Other loans:
Second mortgage 17,295 13,938
FHA insured home improvement 13,613 12,527
Commercial business 9,210 -
Unsecured consumer 1,829 1,088
Home equity line of credit 1,147 1,263
Automobile 413 87
Passbook 244 395
Secured consumer 154 6
Student 12 27
-------- --------
43,917 29,331
-------- --------
Total loans 327,098 199,561
Less:
Deferred loan fees 404 279
Deferred (premiums), unearned
discounts, net (1,389) 268
Allowance for loan losses 2,613 3,241
-------- --------
1,628 3,788
-------- --------
Loans receivable, net $325,470 $195,773
======== ========
At December 31, 1996 and 1995, the Company serviced loans for others
amounting to $5.4 million and $6.4 million, respectively. Servicing
loans for others generally consists of collecting mortgage payments,
maintaining escrow accounts, disbursing payments to investors and
foreclosure processing. Loan servicing income is recorded on the
accrual basis and includes servicing fees from investors and certain
charges collected from borrowers, such as late payment fees.
At December 31, 1996 and 1995, loans in arrears three months or more
or in the process of foreclosure are as follows:
December 31,
(Dollars in thousands) 1996 1995
---- ----
Conventional first mortgage loans
(non-accrual) $ 1,884 $ 1,472
FHA insured and VA guaranteed (accruing) 404 647
Construction loans (non-accrual) - 3,273
Consumer loans (non-accrual) 450 229
------- -------
$ 2,738 $ 5,621
======= =======
Percent of net loans outstanding 0.84% 2.87%
==== ====
The amount of interest income on non-accrual loans which would have
been recorded for the year ended December 31, 1996 and the nine months
ended December 31, 1995 and year ended March 31, 1995 had these loans
continued to pay interest in accordance with their original terms or
since the date of origination if outstanding for only part of the
period, was approximately $0.2 million, $0.3 million and $1.0 million,
respectively. In addition, during the year ended December 31, 1996,
the nine-month period ended December 31, 1995 and the year ended March
31, 1995 the amounts of interest income on non-performing loans that
was included in interest income totaled $75,000, $11,000 and $24,000,
respectively.
An analysis of the allowance for loan losses for the year ended
December 31, 1996, the nine months ended December 31, 1995 and the
year ended March 31, 1995 is as follows:
December 31, March 31,
(Dollars in thousands) 1996 1995 1995
---- ---- ----
Balance at beginning of period $ 3,241 $ 3,048 $ 2,818
Provision charged to operations 500 315 542
Charge-offs (1,140) (133) (331)
Recoveries 12 11 19
------- ------- -------
Balance at end of period $ 2,613 $ 3,241 $ 3,048
======= ======= =======
The Company adopted the provisions of the SFAS 114, "Accounting by
Creditors for Impairment of a Loan" as amended by SFAS 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures," effective April 1, 1995. All applicable loans
receivable have been evaluated for collectibility under the provisions
of these statements. Loans receivable includes $0 and $3,273,000 of
impaired loans at December 31, 1996 and 1995, respectively. The
allowance for loan losses, related to impaired loans, at December 31,
1996 and 1995 included $0 and $1,500,000, respectively. Related to
these, the average balance of impaired loans for the year ending
December 31, 1996 and nine months ending December 31, 1995 were
$2,781,000 and $3,443,000, respectively.
No cash-basis interest income was recognized on impaired loans for the
year ended December 31, 1996, and nine months ended December 31, 1995.
A substantial portion of the Company's loans is secured by real estate
in the New Jersey market area. Accordingly, as with most financial
institutions in the area, the ultimate collectibility of a portion of
the Company's loan portfolio is susceptible to change in market
conditions.
7. ACCRUED INTEREST RECEIVABLE, NET
--------------------------------
A summary of accrued interest receivable at December 31, 1996 and 1995
is as follows:
December 31,
-----------------
(Dollars in thousands) 1996 1995
---- ----
Loans $ 1,977 $ 1,325
Mortgage-backed securities 1,571 1,639
Debt securities 748 1,446
------- -------
$ 4,296 $ 4,410
======= =======
8. PREMISES AND EQUIPMENT, NET
---------------------------
A summary of premises and equipment at December 31, 1996 and 1995 is
as follows:
December 31,
(Dollars in thousands 1996 1995
---- ----
Land $ 1,056 $ 1,056
Buildings 5,066 4,756
Leasehold improvements 915 904
Furniture, fixtures and equipment 6,383 4,584
------- -------
Total $13,420 $11,300
------- --------
Less accumulated depreciation 7,124 6,481
------- --------
$ 6,296 $ 4,819
======= ========
Depreciation and amortization expense included in occupancy and other
expense in the consolidated statements of income amounted to $708,000,
$398,000 and $422,000 for the year ended December 31, 1996, the nine
months ended December 31, 1995 and the year ended March 31, 1995
respectively.
9. REAL ESTATE OWNED, NET
----------------------
Real estate owned, net at December 31, 1996 and 1995 is summarized as
follows:
December 31,
------------
(Dollars in thousands) 1996 1995
---- ----
Acquired by foreclosure or deed in
lieu of foreclosure $ 741 $ 875
Less allowance for losses on real
estate owned 178 223
------ ------
$ 563 $ 652
====== ======
An analysis of the allowance for losses on real estate owned for the
year ended December 31, 1996, the nine months ended December 31, 1995
and the year ended March 31, 1995 is as follows:
December 31, March 31,
--------------
(Dollars in thousands) 1996 1995 1995
---- ---- ----
Balance at beginning of period $ 223 $ 540 $ 533
Provision charged to operations 34 2 123
Charge-offs (79) (319) (116)
------ ------ ------
Balance at end of period $ 178 $ 223 $ 540
====== ====== ======
Results of real estate operations for the year ended December 31,
1996, nine months ended December 31, 1995 and the year ended March 31,
1995 were as follows:
December 31, March 31,
-------------
(Dollars in thousands) 1996 1995 1995
---- ---- ----
Acquired by foreclosure or deed in
lieu of foreclosure
Net loss (gain) on sales of real
estate $ 10 $(78) $(180)
Holding costs 61 86 424
Provision charged to operations 34 2 123
Recoveries - - (350)
---- ---- -----
Foreclosed real estate expense, net $105 $10 $ 17
==== === =====
10. DEPOSITS
--------
The weighted average cost of funds on deposits at December 31, 1996
and 1995 was 3.79% and 3.92%, respectively. A summary of deposits by
type of account is as follows:
December 31 December 31
(Dollars in thousands) 1996 1995
----------- -----------
Weighted Weighted
average average
interest interest
Amount rate Amount rate
------ ---- ------ ----
Savings accounts $139,651 2.92% $119,865 2.84%
Money market accounts 44,404 3.24 42,758 2.99
Non-interest bearing
deposits 16,374 - 10,434 -
NOW accounts 47,387 2.86 44,148 2.86
-------- --------
Core deposits 247,816 2.77 217,205 2.74
Certificates of deposit
maturing:
One year or less 176,409 4.90 186,291 5.00
One to three years 29,090 5.44 29,742 5.49
Three to five years 3,334 5.57 4,301 5.88
Five years and
thereafter 407 6.34 482 6.16
-------- --------
Total certificates 209,240 4.99% 220,816 5.08%
-------- --------
Total deposits $457,056 $438,021
======== ========
At December 31, 1996, the Company had approximately $25.7 million of
certificates of deposit of $100,000 or more. Interest rates on
certificates of deposit accounts ranged from 2.50% to 7.60 and 2.50%
to 7.97% at December 31, 1996 and 1995, respectively.
Interest expense on deposits for the year ended December 31, 1996,
nine months ended December 31, 1995 and year ended March 31, 1995 is
summarized as follows:
December 31, March 31,
---------- ---------
(Dollars in thousands) 1996 1995 1995
---- ---- ----
Passbook savings and club accounts $ 3,658 $ 2,218 $ 2,837
NOW and money market accounts 2,650 1,817 3,008
Certificates of deposit 10,519 8,009 7,139
------- ------- -------
$16,827 $12,044 $12,984
======= ======= =======
11. BORROWED FUNDS
--------------
The following table sets forth certain information as to securities
sold under agreements to repurchase for the periods ending December
31, 1996 and 1995. There were no such sales during the year ended
March 31, 1995.
Year ended Nine months ended
(Dollars in thousands) December 31,1996 December 31, 1995
---------------- ----------------
Maximum balance $163,047 $25,603
Average balance 108,434 1,777
Weighted average interest rate 5.50% 5.91%
At December 31, 1996, securities sold under an agreement to repurchase
with the FHLBNY consisted of FHLB bonds and mortgage pass-through
certificates with both an amortized cost and market value of $97.5
million. The securities sold are carried as assets, and the funds
received are shown as funds borrowed under security repurchase
agreements. All securities used as collateral for repurchase
agreements are held at, and are under the control of, the FHLBNY.
The scheduled maturities of securities sold under agreements to
repurchase are summarized as follows:
(Dollars in thousands) December 31,
----------------
1996 1995
---- ----
Maturity:
Maturing within 30 days $22,400 $25,603
Maturing December 2001 (callable
December 1999) 60,000 -
------- -------
$82,400 $25,603
======= =======
Advances from the FHLBNY are collateralized by pledged mortgage-backed
securities and debt securities. The estimated market value of
securities so pledged at December 31, 1996 and 1995 was $44.2 million
and $56.9 million, respectively.
At December 31, 1996, the Company had a line of credit with the FHLBNY
of $34.0 million which expires on October 31, 1997. At December 31,
1996, the Company had outstanding an overnight advance of $24.8
million against this line at an interest rate of 7.13%. At December
31, 1995, the Company's FHLBNY credit line was $28.4 million against
which it then had an outstanding overnight advance of $19.1 million at
an interest rate of 5.88%. In December 1995, the Company prepaid
$23.9 million of advances and incurred a penalty of $643,000.
The following table sets forth the maximum month-end balance and
average balance of FHLBNY advances for the periods indicated:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
(Dollars in thousands) December 31, 1996 December 31, 1995 March 31, 1995
----------------- ----------------- ---------------
<S> <C> <C> <C>
Maximum balance $26,300 $50,992 $48,492
Average balance $15,639 $37,814 41,762
Weighted average interest rate 5.52% 7.46% 7.40%
</TABLE>
12. INCOME TAXES
------------
Income tax expense for the year ended December 31, 1996, the nine-
month period ended December 31, 1995 and the year ended March 31, 1995
is made up of the following components:
December 31, March 31,
--------------
(Dollars in thousands) 1996 1995 1995
---- ---- ----
Current tax expense:
Federal $1,672 $1,051 $2,088
State 204 57 207
------ ------ ------
1,876 1,108 2,295
Deferred tax expense:
Federal (990) 42 161
State (90) 2 10
------ ------ ------
(1,080) 44 171
------ ------ ------
$ 796 $1,152 $2,466
====== ====== ======
A reconciliation between the effective income tax expense and the
amount calculated by multiplying the applicable statutory Federal
income tax rate of 34% for the twelve months ended December 31, 1996,
the nine months ended December 31, 1995 and the year ended March 31,
1995 is as follows:
December 31, March 31,
------------ ---------
1996 1995 1995
---- ---- ----
Computed "expected" Federal tax
expense 34.0% 34.0% 34.0%
State income tax, net of Federal
tax benefit 2.0 2.0 2.1
Tax benefit from closed tax years (17.7) - .4
Other 1.7 .8 -
---- ---- ----
20.0% 36.8% 36.5%
==== ==== ====
Under tax law that existed prior to 1996, the Bank was generally
allowed a special bad debt deduction in determining income for tax
purposes. The deduction was based on either a specified experience
formula or a percentage of taxable income before such deduction
("reserve method"). The reserve method was used in preparing the
income tax returns for 1995 and 1994. Legislation was enacted in
August 1996 which repealed the reserve method for tax purposes. As a
result, the Bank must instead use the direct charge-off method to
compute its bad debt deduction. The legislation also requires the
Bank to recapture its post-1987 net additions to its tax bad debt
reserves. The Bank has previously provided for this liability in the
financial statements.
Pursuant to SFAS 109, the Bank is generally not required to provide
deferred taxes for the difference between book and tax bad debt
expense taken in years prior to, or ending at, December 31, 1987. The
tax bad debt expense deducted in those years (net of charge-off and
recoveries) created an approximate $11.7 million tax loan loss reserve
which could be recognized as taxable income and create a current
and/or deferred tax liability of up to $4.2 million, under current
income tax rates, if one of the following occurs: (a) the Bank's
retained earnings represented by this reserve are used for purposes
other than to absorb losses from bad debts, including excess dividends
or distributions in liquidation; (b) the Bank redeems its stock; (c)
the Bank fails to meet the definition provided by the Code for a Bank;
or (d) there is a change in the Federal tax law.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995 are as follows:
December 31,
--------------
(Dollars in thousands) 1996 1995
---- ----
From operations:
Deferred tax assets:
Non-accrual loan interest $ 55 $ 50
Allowance for loan losses 882 571
Deferred loan fees 138 100
Purchase accounting discount on mortgage
loans 49 77
Employee benefit plans 304 124
Other 218 75
------ -----
Total gross deferred tax assets 1,646 997
Deferred tax liabilities:
Accelerated depreciation 93 35
Amortization of discounts on purchases
of securities 79 118
Other 10 48
Additions to post 1987 tax reserve 205 617
------ -----
Total gross deferred tax liabilities 387 818
------ -----
Net deferred tax asset from operations 1,259 179
Shareholders' equity - unrealized (gains)
on securities available for sale (189) (1,259)
------ ------
Total net deferred tax asset
(liability) $1,070 $(1,080)
====== =======
The Company believes, based upon current information, that it is more
likely than not there will be sufficient taxable income in future
periods to realize the net deferred tax asset. However, there can be
no assurance about the level of future earnings.
13. EMPLOYEE STOCK OWNERSHIP PLAN
-----------------------------
In connection with the conversion from a mutual to a stock form, the
Company established the ESOP for the benefit of employees of the
Company and the Bank. Full time employees of the Company and the Bank
who have been credited with at least 1,000 hours of service during a
twelve month period and who attained age 21 are eligible to
participate in the ESOP.
The Company funded the ESOP upon completion of the conversion, by
granting it 423,000 shares, valued at $4.2 million. When the ESOP was
funded, these shares were held in a suspense account within the ESOP,
as unallocated shares to the participants. These shares will be
released to participants as the Company recognizes related
compensation expense. Shares released are allocated among
participants on the basis of their compensation. Participants will
vest in 20% of their right to receive their account balances within
the ESOP after three years of service. Thereafter, vesting is an
additional 20% per year.
Compensation expense related to the ESOP includes dividends on
unallocated ESOP shares. It is anticipated that annual compensation
expense related to the ESOP will be an amount necessary to amortize
the initial value of these shares evenly over a ten year period, net
of dividends on unallocated ESOP shares, plus or minus a valuation
adjustment which is the difference between the fair value of the
unallocated shares during the periods in which they become committed
to be released and their initial value. This valuation adjustment
will also be adjusted to equity. The Company will receive a tax
deduction equal to the initial value of the shares released.
The compensation expense related to the ESOP totaled $569,000 for the
year ended December 31, 1996, and $106,000 for the nine months ended
December 31, 1995. Such expense for 1996 includes $146,000 for the
valuation adjustment to reflect the increase in the average fair value
of the allocated shares over their initial value and $84,640 for
dividends on unallocated shares. At December 31, 1996, the ESOP held
380,880 shares in suspense as unallocated shares, and 42,320 shares as
allocated to participants. The fair value of the unallocated ESOP
shares at December 31, 1996 was approximately $5.5 million, based upon
a $14.375 closing price per share. Unallocated ESOP shares are a
reduction of shareholders' equity and are excluded from the average
number of shares outstanding in computing net income per share.
14. EMPLOYEE BENEFIT PLAN
---------------------
The Bank currently offers a 401(k) profit sharing plan (the Plan)
covering all employees wherein employees can invest up to 18% of their
pre-tax base earnings. The Bank will contribute 50% of each
employee's contribution, up to 3% of his or her annual earnings. The
Bank made matching contributions of $110,000, $75,000 and $84,000 in
the year ended December 31, 1996, in the nine months ended December
31, 1995 and the year ended March 31, 1995, respectively.
The Company does not have a qualified defined benefit pension plan.
In lieu thereof, the Company seeks to provide primary retirement
benefits for executive officers of the Company and certain officers of
the Bank, and their beneficiaries through its non-qualified
Supplemental Executive Retirement Plans ("SERP's") established during
calendar 1995. Although currently unfunded, it is anticipated that
the SERP's will be funded through the purchase of the Company's common
stock which will be bought at a rate equivalent to the annual expense
of these plans. The projected benefit obligation of the SERP was $2.9
million as of December 31, 1996,$2.5 million as of December 31, 1995
and $1.5 million as of March 31, 1995, and the expense for the SERP
was approximately $501,000 for the year ended December 31, 1996,
$344,000 for the nine months ended December 31, 1995 and $0 for the
year ended March 31, 1995.
15. STOCK PLANS
-----------
During 1996, the Company established two non-qualified Recognition and
Retention Plans for executive officers and employees, and for outside
directors (the "RRP" and the "Directors' RRP") as a method of
providing executive officers and outside directors of the Company and
Bank and its affiliates with a proprietary interest in the Company as
an incentive designed to encourage such persons to promote the growth
and profitability of the Company and the Bank. The RRP and Directors'
RRP authorizes the granting of Plan share awards for up to 148,120
shares and 63,480 shares of common stock, respectively. As of
December 31, 1996, 176,869 plan share awards of common stock were
granted. The plan share awards of common stock vest in five equal
annual installments commencing one year from the date of grant. For
the year ended December 31, 1996, the Company recorded expense of
$183,000 related to the RRP and Directors' RRP.
At December 31, 1996, the Company has two fixed stock option plans
which are described below. The Company applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its
plans. Accordingly, no compensation costs has been recognized for its
fixed stock option plans. Had compensation cost for the Company's two
stock-based compensation plans been determined in accordance with
Financial Accounting Standards Board Statement No. 123, the Company's
net income and earnings per share for 1996 of $3.2 million, and $0.68,
respectively would have been reduced to the pro forma net income and
earnings per share amounts of $3.1 million and $0.67, respectively.
The fair value of each option grant for both plans is estimated on the
date of grant using the Black-Scholes option-pricing model. The
dividend yield, expected volatility and risk-free interest rate
weighted average assumptions used for the 1996 grants, the first year
of such grants were 3.28%, 25.0% and 6.81%, respectively.
The 1996 Incentive Stock Option Plan authorized the granting of
incentive stock options to all key employees of the Company and its
affiliates for the purchase of up to 370,300 shares of common stock.
The 1996 Stock Option Plan for Outside Directors authorizes the
granting of non-statutory options for the total of 158,700 shares of
common stock to certain members of the Board of Directors of the
Company and the Bank who are not also serving as employees of the
Company or its affiliates. The exercise price of the options, under
both plans, is equal to the fair market value of the underlying common
stock at the time of grant. Each plan has a 5 year vesting schedule
with options becoming exercisable on the anniversary date of the
grant, and has a maximum term of 10 years. The 1996 Incentive Stock
Option Plan has an expected life of five years and the 1996 Stock
Option Plan for Outside Directors has an expected life of five years.
A summary of the status and activity of the Company's two fixed stock
option plans for the year ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Weighted
Average Weighted Average
Number Exercise Remaining
of Shares Price Contractual Life
-------- ----- ----------------
<S> <C> <C> <C>
Outstanding at beginning of year -
Granted 389,980 $12.1875
Canceled 31,700 12.1875
Outstanding at the end of year 358,280 12.1875 9.5
=======
Weighted average fair value of
options granted during the year $3.01
=====
</TABLE>
At December 31, 1996, no options were exercisable under the two fixed
stock option plans.
16. COMMITMENTS AND CONTINGENCIES
-----------------------------
Leases and Service Contract
---------------------------
Certain premises are leased under operating leases with terms expiring
through the year 2001, exclusive of renewal options. The Bank has the
option to renew or extend certain of the leases on premises from two
years to 25 years beyond the original term. Some leases require the
Bank to pay for insurance, increases in property taxes and other
incidental costs. Future minimum rental payments due under
noncancellable operating leases are as follows:
Year ending December 31: (Dollars in thousands)
1997 $ 313
1998 292
1999 274
2000 248
2001 159
Thereafter -
------
Total $1,286
======
Net rental expense included in occupancy expense in the consolidated
statements of income amounted to $418,000, $165,000 and $179,000 for
the year ended December 31, 1996, the nine months ended December 31,
1995 and the year ended March 31, 1995, respectively.
The Company has entered into a contract to receive data processing
services through October 4, 2002. Future minimum payments under this
contract are $480,000 annually through its expiration.
Litigation
----------
On December 1, 1995, the Bank initiated suit against the federal
government alleging, among other things, breach of contract and
seeking restitution for harm caused to the Bank through changes in
federal banking regulations regarding the treatment of goodwill in
calculating the capital of thrift institutions. The case relates to
goodwill created by the Bank's 1982 acquisition of Arch Federal
Savings and Loan Association. A 1989 change in federal regulations
required a phase-out of goodwill from the calculation of a thrift
institution's capital ratios and required that by January 1, 1995, no
goodwill be counted as capital. At the time the regulations went into
effect, the Bank had $18.7 million in goodwill on its balance sheet.
The Bank's suit was initially subject to a stay pending a ruling by
the United States Supreme Court of the government's appeal of a
decision of the Federal District of Columbia Circuit Court in another
case which had upheld the right of three thrift institutions to
maintain such actions. In July 1996, the U.S. Supreme Court ruled in
"United States v. Winstar Corporation" upholding the Federal District
of Columbia Circuit Court's ruling in favor of the thrift institutions
involved in that suit. Subsequently, the stay in all goodwill related
cases was lifted. The federal government then filed a motion seeking
to dismiss all goodwill related claims filed six years after the date
of FIRREA's adoption, August 9, 1995. The Bank had filed its claim on
December 1, 1995. The Bank, along with the approximately 25 other
institutions subject to the motion, vigorously opposed the
government's dismissal motion. On January 7, 1997, the judge
appointed to hear the issue in the United States Court of Federal
Claims ruled against the federal government, holding that the statute
of limitations had not begun to run until OTS regulations implementing
FIRREA were adopted on December 7, 1989. Although the Company
believes that the judge's January 7, 1997 decision on the statute of
limitations was correct, it is unable to predict, in the event the
United States government appeals the judge's decision, whether it will
be successful on such appeal and whether, or for how long, such an
appeal will delay the Bank's suit. The case is currently in the
discovery phase, and no trial date has been set. Accordingly, for
these reasons and because of other facts affecting the predictability
of litigation, management cannot predict the eventual outcome, the
amount of damages, if any, or the timing of final disposition of the
Bank's case.
Financial Instruments with Off-balance-sheet Risk
-------------------------------------------------
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments
involve, to varying degrees, elements of credit risk in excess of the
amount recognized in the consolidated statements of financial
condition.
The Company's exposure to credit loss in the event of non-performance
by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the
contractual notional amount of these instruments. The Company uses
the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
(Dollars in thousands) December 31, 1996
-----------------
Financial instruments whose contract amounts
represent credit risk (contract or notional amount):
Commitments to extend fixed rate credit $10,827
Commitments to extend variable rate credit 10,427
Commitments to purchase variable rate mortgages 3,654
Commercial letters of credit 2,963
Standby letters of credit 145
Unused lines of credit 4,318
------
$32,334
=======
Commitments to extend credit are legally binding 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. The total commitment
amounts do not necessarily represent future cash requirements since
some of the commitments are expected to expire without being drawn
upon. The Company evaluates each borrower's creditworthiness. The
amount of collateral obtained by the Company upon extension of credit
is based on such evaluation of the borrower. Collateral held varies
but may include mortgages on commercial and residential real estate,
deposit accounts with the Company, and automobiles.
Standby letters of credit are conditional commitments issued by the
Company to ensure the performance of obligations to a third party.
These commitments are primarily issued to support performance bonds in
favor of local municipalities and private obligations of borrowers for
work performed by third parties. Most of the Company's standby
letters of credit extend for less than one year. The Company obtains
personal guarantees supporting these commitments.
Unused lines of credit are legally binding agreements to lend as long
as there is no violation of any condition established in the contract.
Lines of credit generally have fixed expiration dates or other
termination clauses. The amount of collateral obtained, if deemed
necessary by the Company, is based on credit evaluation of the
borrower.
17. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures
About Fair Value of Financial Instruments" ("SFAS 107"), requires that
the Company disclose estimated fair value for its financial
instruments. Fair value estimates are made at a specific point in
time, based on relevant market information and information about
financial instruments. These estimates do not reflect any premium or
discount that could result from offering for sale, at one time, the
Company's entire holdings of a particular financial instrument.
Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment, and therefore
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates. SFAS 107 excludes certain
financial instruments and all non-financial instruments from its
disclosure requirements. In addition, the tax ramifications related
to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been
considered in the estimates. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the
Company.
The carrying amounts and estimated fair values of the Company's
financial instruments at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1996 1995
-------------- --------------
Estimated Estimated
Carrying fair Carrying fair
amount value amount value
------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and amounts due from
depository institutions $ 6,586 $ 6,586 $ 6,553 $ 6,553
Federal funds sold - - 1,650 1,650
Debt and equity securities,
available for sale 40,243 40,243 80,126 80,126
Mortgage-backed securities,
available for sale 240,974 240,974 260,107 260,107
Net loans 325,470 327,264 195,773 199,148
FHLBNY stock 7,768 7,768 3,627 3,627
Financial liabilities:
Deposits $457,056 $455,337 $438,021 $438,855
Borrowed funds 107,200 106,622 44,703 44,726
</TABLE>
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate fair value:
Cash and Amounts Due From Depository Institutions, Federal Funds Sold,
----------------------------------------------------------------------
and Federal Home Loan Bank of New York Stock
--------------------------------------------
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Debt, Equity and Mortgage-backed Securities
-------------------------------------------
For debt, equity and mortgage-backed securities fair values are based
on quoted market prices.
Loans
-----
Fair values are estimated for portfolios of loans with similar
financial characteristics. The total loan portfolio is first divided
into performing and non-performing categories. Performing loans are
then segregated into adjustable and fixed rate interest terms. Fixed
rate loans are segmented by type, such as construction and land
development, other loans secured by real estate, commercial and
industrial loans, and loans to individuals. Certain types, such as
commercial loans and loans to individuals, are further segmented by
maturity and type of collateral.
For performing loans, the carrying amount is reduced by credit risk
adjustment based on internal loan classifications and the fair value
is calculated by discounting scheduled future cash flows through
estimated maturity using a discount rate equivalent to average loan
rates within the Company's market for loans which are similar with
regard to collateral, maturity and the type of borrower. Based on the
current composition of the Company's loan portfolio, as well as both
past experience and current economic conditions and trends, future
prepayments are not expected to materially impact scheduled future
maturities and, accordingly, have not been considered in calculating
fair value.
For non-performing loans, fair value is calculated by first reducing
the carrying value by a credit risk adjustment based on internal loan
classifications, and then discounting the estimated future cash flows
from the remaining carrying value at the rate at which the Company
would currently make similar loans to creditworthy borrowers.
Deposit Liabilities
-------------------
The fair value of deposits with no stated maturity, such as non-
interest-bearing demand deposits, money market accounts, interest
checking accounts, and savings accounts is equal to the amount payable
on demand. Time deposits are segregated by type, size and remaining
maturity. The fair value of time deposits is based on the discounted
value of contractual cash flows. The discount rate is equivalent to
the rate currently offered in the Company's market for deposits of
similar size, type and maturity.
Borrowed Funds
--------------
The fair value of the Company's borrowed funds is estimated based on
the discounted value of future contractual payments. The discount
rate is equivalent to the estimated rate at which the Company could
currently obtain similar financing.
Commitments to Extend Credit, Letters of Credit and Commitments to
------------------------------------------------------------------
Purchase Loans
--------------
The commitments to originate and purchase loans and extend credit have
terms that are consistent with current market terms. Accordingly, the
Company estimates that the fair value of these commitments
approximates carrying value.
18. REGULATORY MATTERS
------------------
The Bank is required to maintain certain levels of capital in
accordance with the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and OTS regulations. Savings
associations must maintain tangible capital of 1.5% of adjusted assets
and investments in certain non-includable subsidiaries. Tangible
capital, as defined by FIRREA and OTS regulations, consists generally
of shareholders' equity less most intangible assets and investments in
certain non-includable subsidiaries. The OTS requires that savings
associations maintain core capital of 3% of adjusted tangible assets.
Core capital consists of tangible capital plus certain intangible
assets. There is also a risk-based capital requirement of 8% of risk-
weighted assets for savings associations.
The OTS has incorporated an interest rate risk component that may
require that an amount be added to an institution's risk-based capital
requirement. The OTS has postponed the date on which the component
will first be deducted from an institution's total capital until an
appeals process is developed for the measurement of an institution's
interest rate risk. In the opinion of management, the Bank would
continue to exceed its risk-based minimum capital requirements under
the new rule.
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA")
was signed into law on December 19, 1991. Regulations implementing
the prompt corrective action provisions of FDICIA became effective on
December 19, 1992. In addition to the prompt corrective action
requirements, FDICIA includes significant changes to the legal and
regulatory environment for insured depository institutions, including
reductions in insurance coverage for certain kinds of deposits,
increased supervision by the Federal regulatory agencies, increased
reporting requirements for insured institutions, and new regulations
concerning internal controls, accounting and operations.
The prompt corrective action regulations define specific capital
categories based on an institution's capital ratios. The capital
categories, in declining order, are "well capitalized," "adequately
capitalized," "undercapitalized", "significantly undercapitalized,"
and "critically undercapitalized." Institutions categorized as
"undercapitalized" or worse are subject to certain restrictions,
including the requirement to file a capital plan with the OTS,
prohibitions on the payment of dividends and management fees,
restrictions on executive compensation, and increased supervisory
monitoring, among other things. Other restrictions may be imposed on
the institution either by the OTS or by the Federal Deposit Insurance
Corporation, including requirements to raise additional capital, sell
assets, or sell the entire institution. Once an institution becomes
"critically undercapitalized," it is generally placed in receivership
or conservatorship within 90 days.
To be considered "adequately capitalized," an institution must
generally have a core ratio of at least 4%, a Tier 1 risk-based
capital ratio of at least 4%, and a total risk-based capital ratio of
at least 8%. Generally, an institution is 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.
Management believes that, as of December 31, 1996, the Bank meets all
capital adequacy requirements of the OTS. 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 actual capital amounts and
ratios as of December 31, 1996 and 1995, compared to the OTS minimum
capital adequacy requirements and the OTS requirements for
classification as a well-capitalized institution:
<TABLE>
<CAPTION>
OTS REQUIREMENTS
-------------------------------
FOR
CLASSIFICATION
MINIMUM CAPITAL AS WELL
THE BANK ADEQUACY CAPITALIZED
------------- --------------- --------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996
Tangible capital $59,794 9.41%$ 9,532 1.50%
Tier 1 (core) capital 59,794 9.41 25,419 4.00 $31,774 5.00%
Risk-based capital:
Tier 1 59,794 25.18 9,500 4.00 14,249 6.00
Total $62,235 26.21%$18,999 8.00% $23,749 10.00%
December 31, 1995
Tangible capital $57,386 10.28%$ 8,375 1.50%
Tier 1 (core) capital 57,386 10.28 22,333 4.00 $27,917 5.00%
Risk-based capital:
Tier 1 57,386 32.00 7,174 4.00 10,760 6.00
Total $58,964 32.88%$14,347 8.00% $17,934 10.00%
</TABLE>
The Deposit Insurance Funds Act of 1996 (the BIF/SAIF Act) was enacted
into law on September 30, 1996. The BIF/SAIF Act mitigated the
disparity between insurance premiums for deposits insured by Savings
Association Insurance Fund (SAIF) and deposits insured by the Bank
Insurance Fund (BIF).
Effective January 1, 1997, SAIF members have the same risk-based
assessment schedule as BIF members - zero to 27 basis points.
Financing Corp ("FICO") debt service assessments of 6.4 and 1.3 basis
points will be added to the regular assessment for the SAIF-assessable
base, and the BIF-assessment base, respectively, until December 31,
1999, unless the Federal thrift and bank charters have been
consolidated. Upon the earlier of January 1, 2001 or the date of such
consolidation, the BIF and SAIF will be merged and there will be full
pro rata FICO debt service sharing.
Immediately preceding the enactment of the BIF/SAIF Act, the Company
was incurring deposit insurance expense at a rate of 23 cents per $100
of deposits. Effective January 1, 1997, the rate is reduced to 6.4
cents per $100 of deposits. In addition, pursuant to the
recapitalization provision of the BIF/SAIF ACT, the Company incurred
$2,651,000 additional FDIC insurance expense, a one time assessment of
65.7 basis points on the amount of deposits held at March 31, 1995.
19. LOANS TO RELATED PARTIES
------------------------
The Company has had, and expects to have in the future, banking
transactions in the ordinary course of business with directors,
executive officers and their affiliates on the same terms as those
prevailing for comparable transactions with other borrowers. These
loans amounted to $347,000 and $224,000 at December 31, 1996 and 1995,
respectively, and do not involve more than normal risks of repayment.
At December 31, 1996 and 1995 these loans represented less than 1% of
retained earnings, respectively. During the twelve months ending
December 31, 1996, new loans of $352,000 were made to related parties
and repayments were $35,000, while other decreases of $194,000
resulted from loans to individuals who no longer meet the criteria to
be classified as an insider loan. During the nine months ended
December 31, 1995, new loans of $57,200 were made to related parties
and repayments were $24,200.
20. PARENT COMPANY FINANCIAL INFORMATION
------------------------------------
Statewide Financial Corp. (the parent company) was incorporated on May
31, 1995 and acquired all of the capital stock of the Bank on
September 29, 1995. The following are the parent only financial
statements as of December 31, 1996 and 1995 and for the year ended
December 31, 1996 and the period May 31, 1995 to December 31, 1995 and
should be read in conjunction with the Notes to the consolidated
financial statements.
PARENT COMPANY ONLY - STATEMENTS OF FINANCIAL CONDITION
December 31,
--------------
(Dollars in thousands) 1996 1995
---- ----
Assets:
Cash $ 245 $ -
Due from ESOP trust 106 -
Due from subsidiary 6,267 8,110
Investment in subsidiary 60,267 64,072
Other assets 85 207
------- ------
Total Assets $66,970 $72,389
======= =======
Liabilities:
Accrued taxes $ 35 $ 74
------- -------
Shareholders' equity:
Paid in capital 46,807 50,770
Unallocated ESOP shares (3,703) (4,232)
Unallocated RRP shares (1,872) -
Treasury stock (430) -
Retained earnings 26,133 25,777
------- -------
Total shareholders' equity 66,935 72,315
------- -------
Total liabilities and
shareholders' equity $66,970 $72,389
======= =======
PARENT COMPANY ONLY - STATEMENTS OF INCOME
For the year For the period
ended May 31, 1995 to
(Dollars in thousands) December 31, 1996 December 31, 1995
----------------------------------
Other income $ 396 $207
Expenses 9 -
------ ----
Income before taxes 387 207
------ ----
Income taxes 140 74
------ ----
Net income before equity in
earnings of subsidiary 247 133
Equity in earnings of subsidiary 2,925 338
------ ----
Net income $3,172 $471
====== ====
PARENT COMPANY ONLY - STATEMENTS OF CASH FLOWS
For the year For the period
ended May 31, 1995 to
(Dollars in thousands) December 31, 1996 December 31, 1995
----------------- -----------------
Cash flows from operating
activities:
Net income $ 3,172 $ 471
Adjustments to reconcile net income
to net cash provided from operating
activities:
Equity in earnings of subsidiary (2,925) (338)
Decrease (increase) in due from
subsidiary 1,843 (8,110)
(Increase) in due from ESOP trust (106) -
Decrease (increase) in other assets 122 (207)
(Decrease) increase in accrued
taxes (39) 74
------- -------
Net cash provided from (used in)
operating activities 2,067 (8,110)
------- -------
Cash flows from investing activities:
Return of investment from subsidiary 13,350 -
Investment in subsidiary (8,195) (38,428)
------- -------
Net cash provided from (used in)
investing activities 5,155 (38,428)
------- -------
Cash flows from financing activities:
(Repurchase) issuance of common
stock (6,594) 50,770
Dividends paid (912) -
Contribution of common stock to
ESOP trust - (4,232)
Allocation of ESOP shares 529 -
------- -------
Net cash (used in) provided from
financing activities (6,977) 46,538
------- -------
Net change in cash and cash
equivalents 245 -
Cash and cash equivalents at beginning
of period - -
------- -------
Cash and cash equivalents at end of
period $ 245 $ -
======= ========
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.
STATEWIDE FINANCIAL CORP.
Dated: March 26, 1997 By: BERNARD F. LENIHAN
------------------
Bernard F. Lenihan
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the Registrant and in the capacities indicated and on the dates
indicated.
Signature Title Date
--------- ----- ----
Chairman of the Board,
President and Chief
VICTOR M. RICHEL Executive Officer March 17, 1997
Victor M. Richel
Senior Vice President
and Chief Financial
BERNARD F. LENIHAN Officer March 26, 1997
Bernard F. Lenihan
MARIA F. RAMIREZ Director March 17, 1997
Maria F. Ramirez
WALTER G. SCOTT Director March 17, 1997
Walter G. Scott
THOMAS SHARKEY, SR. Director March 17, 1997
Thomas Sharkey, Sr.
STEPHEN R. TILTON Director March 17, 1997
Stephen R. Tilton
THOMAS V. WHELAN Director March 17, 1997
Thomas V. Whelan
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
10.3 Employment Agreement by and between
Statewide Savings Bank, S.L.A. and
Michael J. Griffin
21 Subsidiaries of the Registrant
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") made as of this 8th day of
January, 1997, by and between MICHAEL J. GRIFFIN, an individual
residing at 12 Spruce Run Road, Glen Gardner, New Jersey 08826 (the
"Employee") and STATEWIDE SAVINGS BANK, S.L.A., a New Jersey chartered
capital stock savings and loan association with its principal place of
business located at 70 Sip Avenue, Jersey City, New Jersey 07306
("Bank").
WHEREAS, the Bank wishes to hire Employee to serve in the capacity set
forth in this Agreement on the terms and conditions set forth in this
Agreement;
WHEREAS, the Employee agrees to be employed pursuant to the terms and
conditions of this Agreement;
NOW, THEREFORE, in consideration of the premises and covenants
contained herein, and with the intent to be legally bound hereby, the
parties hereto hereby agree as follows:
1. EMPLOYMENT. The Bank hereby agrees to employ the Employee,
and the Employee hereby accepts such employment, upon the terms and
conditions set forth herein. The parties acknowledge that Employee is
accepting this employment at the request of Statewide Financial Corp.,
the sole shareholder of the Bank.
1. POSITION AND DUTIES. The Employee shall be employed as the
President and Chief Operating Officer of the Bank, to perform such
services in that capacity as are usual and customary for comparable
institutions, under the direction and supervision of the Chief
Executive Officer of the Bank.
1. CASH COMPENSATION. The Bank shall pay to the Employee
compensation for his services as follows:
(a) Base Salary. The Employee shall be entitled to
receive, commencing upon the date of this Agreement, an annual base
salary (the "Base Salary") of $155,000, which shall be payable in
installments in accordance with Bank's usual payroll method. Annually
thereafter, on or prior to the anniversary date of this Agreement, the
Board of Directors of the Bank shall review the Employee's
performance, the status of Bank and such other factors as the Board of
Directors or a committee thereof shall deem appropriate, and shall
adjust the Base Salary accordingly.
(b) Discretionary Bonus. Prior to commencement of this
Agreement, the Employee and the Chief Executive Officer of the Bank
shall meet and establish performance criteria for the Employee in
writing. The Employee shall be entitled to receive annually (on or
before the anniversary date of this Agreement) a cash bonus, the
amount to be determined by the Board of Directors or a committee
thereof, in an amount up to 30% of the Base Salary; the actual amount
of the bonus will be based upon the Employee's partial or total
satisfaction of the agreed upon criteria as well as the Bank's overall
performance. The Employee and the Chief Executive Officer of Bank
shall meet annually on or prior to the anniversary date of the
Employment Agreement to review the Employee's performance and to
mutually agree upon new performance criteria for the upcoming year.
1. OTHER BENEFITS.
(a) Supplemental Retirement Plan. Bank shall immediately
establish a supplemental retirement plan (the "SRP") for the benefit
of the Employee in form and amount similar to SRPs provided to other
executive officers of Bank, other than the Chief Executive Officer of
Bank.
(b) Fringe Benefits. The Bank shall buy out Employee's
lease on that certain 1996 Buick Park Avenue currently used by
Employee. During the term of this Agreement, all carrying, gasoline,
repair and maintenance charges for such automobile shall be fully and
promptly paid by the Bank. The Employee shall be entitled to the
exclusive and unlimited use of an automobile of a type and style
commensurate with the Employee's status as President and Chief
Operating Officer of the Bank. In addition, the Employee shall be
entitled to receive hospital, health, disability, medical and life
insurance of a type currently provided to and enjoyed by other senior
officers of the Bank, and shall be entitled to participate in any
other employee benefit or retirement plans offered by the Bank to its
employees generally or to its senior management.
(c) Recognition and Retention Plan. The Employee shall be
entitled to participate in and receive grants under the Statewide
Financial Corp. Recognition and Retention Plan for Executive Officers
and Employees (the "RRP"). Employee shall receive a grant of 23,012
shares of Restricted Stock (as that term is defined in the RRP). Such
grant shall be subject to all of the terms and conditions, including
vesting, contained in the RRP, and Employee shall be bound by all of
the terms of the RRP with regard to the grant of such shares. This
grant of shares may be increased from time to time in the sole
discretion of Statewide Financial Corp.
(d) Stock Option Plan. The Employee shall be entitled to
participate in the Statewide Financial Corp. 1996 Incentive Stock
Option Plan (the "Option Plan"). Pursuant to the Option Plan,
Employee will receive options to purchase 31,700 shares of Statewide
Financial Corp. Common Stock. Such option grant shall be subject to
all of the terms and conditions of the Option Plan, including vesting,
and Employee shall be bound by all of such terms and conditions.
1. TERM. The initial term of this Agreement shall be two
years, commencing upon the date hereof and continuing until January 7,
1999.
1. TERMINATION.
(a) Cause. As used in this Agreement, the term "Cause"
shall mean the Employee's personal dishonesty, incompetence, willful
misconduct, breach of 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 a material breach of any
provision of this Agreement. Employee's death or "disability" (as
that term is defined in the Option Plan) shall not be considered
"Cause" hereunder. Notwithstanding the above, the Employee shall not
be deemed to have been terminated for Cause unless and until there
shall have been delivered to him a copy of a resolution duly adopted
by the affirmative vote of not less than three-fourths of the members
of the Board of Directors of the Bank at a meeting of its Board called
and held for that purpose (after reasonable notice to the Employee and
an opportunity for him, together with counsel, to be heard before such
Board of Directors), finding that in the good faith opinion of the
Board of Directors, the Employee was guilty of conduct justifying
termination for Cause and specifying the particulars thereof in
detail.
(b) Termination With Cause. The Bank shall have the right
to terminate the Employee for Cause, upon written notice to him of
such determination as described above, specifying the alleged Cause.
In the event of such termination, the Employee shall not be entitled
to any further benefits under this Agreement.
(c) Termination Without Cause. If the Bank terminates the
Employee's employment hereunder without Cause prior to the end of the
term of this Agreement, the Employee shall be entitled to receive his
then current Base Salary through the remaining term of this Agreement.
Such payment may be made over the remaining term of this Agreement in
periodic payments in the same manner in which the Employee's salary
was paid through the time of such termination, or by a lump sum
payment of the discounted present value of all Base Salary payments
through the remaining term of this Agreement (calculated using the
interest yield then applicable to a Treasury Note with a maturity
equal to the remaining term). The determination of the method of
payment shall be made mutually by the Bank and the Employee; provided,
however, that in the event the parties cannot agree on the method of
payment, Bank shall be entitled to choose. The Bank shall continue to
provide the Employee with hospital, health, medical and life
insurance, and any other benefits in effect at the time of such
termination through the end of the term of this Agreement. In
addition, the Bank shall provide Employee with outplacement
assistance, to include an office and a secretary at the premises of
the outplacement service provider, for a period of three (3) months
after such termination. The Employee shall have no duty to mitigate
damages in connection with his termination by the Bank without Cause.
However, if the Employee obtains new employment and such new
employment provides for hospital, health, medical and life insurance,
and other benefits, in a manner substantially similar to the benefits
payable by the Bank hereunder, the Bank may permanently terminate the
duplicative benefits it is obligated to provide hereunder.
Notwithstanding anything else above, in the event Employee is
terminated without cause, Employee shall receive his then current Base
Salary as provided for in the first two sentences of this Section.
(d) Suspension and Special Regulatory Rules.
(i) If the Employee is suspended and/or temporarily
prohibited from participating in the conduct of the affairs of the
Bank by a notice served under Section 8(e)(3) or Section 8(g)(1) of
the Federal Deposit Insurance Act ("FDI Act"), the Bank's obligations
under this Agreement shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If all charges in the
notice are dismissed, Bank shall pay Employee all compensation
withheld while Employer's contractual obligations were suspended.
(ii) If the Employee is removed and/or permanently
prohibited from participating in the conduct of the affairs of the
Bank by an order issued under Section 8(e)(4) or Section 8(g)(1) of
the FDI Act, all obligations of the Bank under this Agreement shall
terminate as of the effective date of the order and the Employee shall
not be entitled to receive the payments provided for under Paragraph
(c) above. All vested rights of Employee shall not be affected.
(iii) If Bank is in default, as defined in Section
3(x)(1) of the FDI Act, all obligations of the Bank under this
Agreement shall terminate as of the date of default. All vested
rights of Employee shall not be affected.
(iv) All obligations of the Bank under this Agreement
shall be terminated, except to the extent it is determined that
continuation of this Agreement is necessary for the continued
operation of Bank, (1) by the Director of the Office of Thrift
Supervision ("Director"), or his or her designee, at the time the
Federal Deposit Insurance 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 FDI Act, or (2) by the Director, at
the time the Director or his or her designee approves a supervisory
merger to resolve problems related to operation of Bank or when Bank
is determined to be in an unsafe or unsound condition. All vested
rights of Employee shall not be affected.
1. RESIGNATION FOR CAUSE.
During the term of this Agreement, the Employee shall be
entitled to resign from his employment with the Bank, and receive the
payments provided for below, in the event that the Employee is not in
breach of this Agreement and Bank (i) reassigns the Employee to a
position of lesser rank or status than Chief Operating Officer, (ii)
relocates the Employee's principal place of employment by more than
thirty miles from its location on the date hereof, (iii) reduces the
Employee's compensation or other benefits, unless such reduction is
part of an overall salary reduction program applicable to three (3) or
more executive employees of the Bank. Upon the occurrence of any of
these events, the Employee shall have thirty days to provide the Bank
notice of his intention to terminate this Agreement. In the event the
Employee elects to so terminate this Agreement, such termination shall
be treated as a termination without Cause by Bank under Section 6(c)
hereof, and the Employee shall be entitled to receive all payments and
other benefits called for under such Section 6(c).
1. CHANGE IN CONTROL.
(a) Upon the occurrence of a Change in Control (as herein
defined) 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 6(a) hereof, or, as provided below, upon
the voluntary termination of the Employee within eighteen months of
such Change in Control. Employee shall be entitled to receive a
payment equal to two times his then current Base Salary. At the
election of the Bank, such payment may be made either in a lump sum
payment equal to the discounted present value of such payment
(calculated using the interest rate then applicable to two year
Treasury Notes) or paid monthly in equal installments during the
twenty-four (24) months following such termination. During such
twenty-four (24) month period, the Bank shall continue to provide the
Employee with hospital, health, medical and life insurance, and any
other benefits in effect at the time of such termination. In
addition, the Bank shall provide Employee with outplacement
assistance, to include an office and a secretary at the premises of
the outplacement provider, for a period of three (3) months after such
termination. Upon the occurrence of a Change in Control, the Employee
shall have the right to elect to voluntarily terminate his employment
within eighteen months of such Change in Control following any
demotion, loss of title, office or significant authority, reduction in
his annual compensation or benefits, or relocation of his principal
place of employment by more than thirty miles from its location
immediately prior to the Change in Control.
(b) A "Change in Control" shall mean:
(1) a reorganization, merger, consolidation or sale of all
or substantially all of the assets of Statewide
Financial Corp. (the "Company"), or a similar
transaction in which the Company is not the surviving
entity; or
(2) individuals who constitute the Incumbent Board (as
herein defined) of the Company cease for any reason to
constitute a majority thereof; or
(3) a change in control within the meaning of 12 C.F.R.
574.4; or
(4) (a) an event of a nature that would be required to be
reported in response to Item I 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"), or results in a change in
control of Bank or the Company within the meaning of
the Home Owners' Loan Act of 1933 and the Rules and
Regulations promulgated by the Office of Thrift
Supervision or its predecessor agency, as in effect on
the date hereof; or
(5) Without limitation, a change in control shall be deemed
to have occurred at such time as (i) any "person" (as
the term is used in Section 13(d) and 14(d) of the
Exchange Act) other than the Company or the trustees of
a Bank sponsored employee stock ownership plan and
trust or any other employee benefit plan of the Bank
established from time to time is or becomes a
"beneficial owner" (as defined in Rule 13-d under the
Exchange Act) directly or indirectly, of securities of
the Company representing 25% or more of the Company's
outstanding securities ordinarily having the right to
vote at the election of directors; or
(6) A proxy statement soliciting proxies from stockholders
of the Company is disseminated by someone other than
the current management of the Company, seeking
stockholder approval of a plan of reorganization,
merger or consolidation of the Company or similar
transaction with one or more corporations as a result
of which the outstanding shares of the class of
securities then subject to the plan or transaction are
exchanged or converted into cash or property or
securities not issued by the Company;
(7) A tender offer is made for 25% or more of the voting
securities of the Company and the shareholders owning
beneficially or of record 25% or more of the
outstanding securities of the Company have tendered or
offered to sell their shares pursuant to such tender
offer and such tendered shares have been accepted by
the tender offeror.
For these purposes, "Incumbent Board" means the Board of
Directors of the Company on the date hereof, 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
members or stockholders was approved by the same nominating committee
serving under an Incumbent Board, shall be considered as though he
were a member of the Incumbent Board.
1. COVENANT NOT TO COMPETE.
Employee agrees that during the term of his employment
hereunder and for a period of six (6) months after the termination of
his employment for any reason other than pursuant to Section 8 above,
he will not in any way, directly or indirectly, manage, operate,
control, accept employment or a consulting position with or otherwise
advise or assist or be connected with or own or have any other
interest in or right with respect to (other than through ownership of
not more than five percent (5%) of the outstanding shares of a
corporation whose stock is listed on a national securities exchange or
on the National Association of Securities Dealers Automated Quotation
System) any enterprise which competes with Bank in any line of
business conducted by the Bank or the Company during such employment
or on the date of such termination in the market areas served by the
Bank's branches on the date of Employee's termination. In the event
that this covenant not to compete shall be found by a court of
competent jurisdiction to be invalid or unenforceable as against
public policy, such court shall exercise discretion in reforming such
covenant to the end that Employee shall be subject to a covenant not
to compete that is reasonable under the circumstances and enforceable
by Bank. Employee agrees to be bound by any such modified covenant
not to compete.
1. MISCELLANEOUS.
(a) Governing Law. This Agreement shall be governed by and
interpreted under the substantive law of the State of New Jersey.
(b) Severability. If any provision of this Agreement shall
be held to be invalid, void, or unenforceable, the remaining
provisions hereof shall in no way be affected or impaired, and such
remaining provisions shall remain in full force and effect.
(c) Entire Agreement; Amendment. This Agreement sets forth
the entire understanding of the parties with regarding to the subject
matter contained herein and supersedes any and all prior agreements,
arrangements or understandings relating to the subject matter hereof
and may only be amended by written agreement signed by both parties
hereto or their duly authorized representatives.
(d) Obligations Unconditional. Bank's obligation to pay
Employee his compensation and provide his benefits as described in
this Agreement shall be absolute and unconditional and shall not be
affected by any circumstance, including, without limitation, any set
off, counterclaim, recoupment, defense or other right which Bank may
have against Employee or anyone else.
(e) Continuing Obligations. Sections 6 through 9 of this
Agreement shall continue and survive the termination of Employee's
employment with Bank.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
STATEWIDE SAVINGS BANK, S.L.A.
By:
Victor M. Richel, Chairman and
Chief Executive Officer
EMPLOYEE:
MICHAEL J. GRIFFIN
EXHIBIT 21
SUBSIDIARY OF STATEWIDE FINANCIAL CORP.
Statewide Savings Bank, S.L.A., a New Jersey chartered savings and
loan association, is the only subsidiary of the Registrant.
EXHIBIT 23
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
Statewide Financial Corp.:
We consent to incorporation by reference in the Registration
Statements (No. 33-96844) on Form S-8 and (No. 33-09665) on Form S-8
of our report dated January 27, 1997, relating to the consolidated
statements of financial condition of Statewide Financial Corp. and
subsidiary as of December 31, 1996 and 1995 and the related
consolidated statements of income, shareholders' equity, and cash
flows for the year ended December 31, 1996, the nine-month period
ended December 31, 1995 and the year ended March 31, 1995, which
report appears in the December 31, 1996 Annual Report on Form 10-K of
Statewide Financial Corp.
KPMG Peat Marwick LLP
Short Hills, New Jersey
March 25, 1997
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