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, 1997
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.
[ ]
As of February 27, 1998, there were issued 4,518,767 and outstanding
4,509,164 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 $22.75 closing price of such
stock as of February 27, 1998, was $70,783,417. (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 Annual Meeting
Officers of Registrant of Shareholders to be filed not
later than April 30, 1998.
11. Executive Compensation Proxy Statement for Annual Meeting
of Shareholders to be filed not
later than April 30, 1998.
12. Security Ownership of Proxy Statement for Annual Meeting
Certain Beneficial Owners of Shareholders to be filed not
and Management later than April 30, 1998.
13. Certain Relationships and Proxy Statement for Annual Meeting
Related Transactions of Shareholders to be filed not
later than April 30, 1998.
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 registered
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. Management of the Bank believed that establishing a
holding company structure in connection with the mutual to stock
conversion would facilitate certain operations of the Bank, including
acquisition of other financial institutions and provide additional
financial flexibility for the growth of the Bank. 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 borrowings and other 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 loan and
mortgage-backed securities portfolios 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 borrowings 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.
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. On December 11, 1997, the
Company entered into a Purchase and Assumption Agreement with Banco
Popular, F.S.B. pursuant to which it will sell its Passaic County
branch. Under the Agreement, Banco Popular, F.S.B. will assume all of
the deposit liabilities associated with this branch, assume the
Company's obligations under its lease of the branch location, and pay
the Company a premium based upon the amount of deposits assumed. It
is anticipated that this transaction will be consummated in the first
quarter of 1998.
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, 1997, the Company had a total of 173 full-time
employees and 50 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 and Insurance (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, not shareholders. 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") has 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
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the
"Deposit Act") became law. The primary purpose of the Deposit Act was
to recapitalize the SAIF by charging all SAIF member institutions a
one time special assessment of 65.7 basis points of the institution's
SAIF assessable deposits as of March 31, 1995. In addition, the
Deposit Act separates the FDIC assessment into two components: first,
deposit insurance premiums, and second, payment of interest and
principal due on certain bonds issued by the Federal Finance
Corporation ("FICO") in the mid-1980's to fund a portion of the thrift
bailout. The Deposit Act also calls for the Federal banking agencies
to study the various financial institution charters and propose a
single standard Federal charter, thereby doing away with the separate
bank and thrift charters. If a single charter is adopted, the Bank
Insurance Fund ("BIF") and SAIF will be merged on January 1, 1999. At
that time, all insured institutions will pay the same FDIC assessment.
At this time, management is unable to predict when or if a unified
Federal charter will be adopted and when and if the BIF and the SAIF
will be merged, or the effect, if any, of these events upon the
Company.
Prompt Corrective Action
Federal law establishes a system of prompt corrective action to
resolve the problems of undercapitalized institutions and requires 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 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, 1997, the
Bank's leverage ratio as calculated under the prompt corrective action
rule was 8.96%. The Bank is deemed "well-capitalized" for purposes of
Section 38 of the Federal Deposit Insurance Act ("FDI ACT") and the
regulations of the FDIC implementing that Section.
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.
Insurance premium assessment rates for SAIF insured institutions range
from no assessment for an institution in the highest category (i.e.,
well-capitalized and financially sound, with only a few minor
weaknesses) to 0.27% 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). In
addition, SAIF insured institutions like the Bank must pay an
additional assessment in connection with repayment of the FICO
obligations of 6.3 basis points per $100 of deposits.
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, plus a specified amount of purchased
mortgage servicing rights.
The leverage limit requires that the highest rated savings
associations maintain "core capital" in an amount equal to at least
3.0% of adjusted total assets. 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.
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 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, 1997, the
Bank's ratio of core capital to total adjusted assets was 8.96%.
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 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 risk, such as single-family mortgages and
mortgage servicing assets, and the "static discounted cash flow
analysis" for non-mortgage 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 averaging 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 FHLBNY which is one of the 12 regional
Federal Home Loan Banks ("FHLB"). As a member of the FHLBNY, the Bank
is required to purchase and maintain stock in the FHLBNY 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 FHLBNY from time to time) of outstanding FHLBNY
advances. At December 31, 1997, the Bank had $10.3 million of FHLBNY
stock, which was in compliance with this requirement. In past years
the Bank has received dividends on its FHLBNY stock. Over the past
five years such dividends have averaged 7.54%, and were 6.63% for the
year ended December 31, 1997. 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
FHLBNY advances to increase and could affect adversely the level of
FHLBNY dividends paid and the value of FHLBNY 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 on a rolling basis. 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 of the savings association's
total assets (20.0% under the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA")).
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 a 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 FHLB. A savings institution may re-
qualify as a qualified thrift lender if it thereafter complies with
the QTL test. As of December 31, 1997, the Bank was in compliance
with the QTL requirement. At December 31, 1997, 89.0% 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 of 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 should fall below its fully phased-in
requirement or the OTS should notify it that it is 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, the
Bank is 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
will be 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 is 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 Securities and Exchange Commission ("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,
at December 31, 1997:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
--------------------------------------------------------------------------------------------
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 $3,031 7.48% $6,028 6.89% - - $5,760 7.82% $14,819 7.37%
Other 209 1.41% - - - - 4,065 8.02% 4,274 7.70%
------ ------ ----- ------ -------
Total debt and
equity securities $3,240 $6,028 - $9,825 $19,093
====== ====== ===== ====== =======
Weighted average
yield 7.08% 6.89% - 7.89% 7.44%
==== ==== ==== ==== ====
</TABLE>
The following table shows the contractual maturity of the Company's
mortgage-backed securities at December 31, 1997. The table does not
include the effect of prepayments or scheduled principal amortization.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-------------------------------------------------------------------------------------------
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 $ - - % $ - - % $ - - % $ 91,643 7.19% $ 91,643 7.19%
FHLMC 2,516 7.60 14,525 6.86 21,889 7.60 72,944 7.13 111,874 7.20
FNMA 519 9.11 18,476 6.50 17,831 7.47 49,701 7.25 86,527 7.16
------ ------- ------- -------- --------
Total mortgage-
backed securities $3,035 7.86% $33,001 6.66% $39,720 7.54% $214,288 7.18% $290,044 7.18%
====== ==== ======= ==== ======= ==== ======== ==== ======== ====
</TABLE>
The following table shows the contractual maturity of the Company's
loans at December 31, 1997. The table does not include the effect
of prepayments or scheduled principal amortization.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
------------------------------------------------------------------------------
First Mortgage Loans Other Loans
-------------------------------------------- --------------------
One-to-Four Multi Non- Total Loans
Family Family Residential Construction Consumer Commercial Receivable
------ ------ ----------- ------------ -------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year $ 6,001 $ 752 $ - $3,757 $ 3,612 $ 5,785 $ 19,907
-------- ------- ------- ------ ------- ------- --------
After 1 year:
1 to 3 years 15,396 - 2,068 568 6,885 3,738 28,655
3 to 5 years 14,808 - 5,212 - 7,616 2,687 30,323
5 to 10 years 42,533 3,411 4,338 - 10,216 3,856 64,354
10 to 20 years 91,155 5,994 6,393 - 10,121 - 113,663
Over 20 years 74,471 2,033 1,208 - - - 77,712
-------- ------- ------- ------ ------- ------- --------
Total due after
1 year 238,363 11,438 19,219 568 34,838 10,281 314,707
------- ------- ------ ------ ------- ------ --------
Total loans $244,364 $12,190 $19,219 $4,325 $38,450 $16,066 $334,614
======== ======= ======= ====== ======= ======= ========
Less (Plus)
unearned dis-
counts (premiums)
and deferred
loan fees, net (728)
Less allowance
for loan losses 2,833
--------
Loans, net $332,509
========
</TABLE>
As of December 31, 1997, the dollar amount of all loans due after
December 31, 1998, and the composition of fixed interest rates and
adjustable interest rates were:
Due After December 31, 1998
-----------------------------
Fixed Adjustable Total
----- ---------- -----
(Dollars in thousands)
Real estate mortgages $58,355 $211,233 $269,588
Other loans 34,030 11,089 45,119
------- -------- --------
Total loans $92,385 $222,322 $314,707
======= ======== ========
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 the
Nine-Month At or For the
At or For the Year Period Ended Year Ended
Ended December 31, December 31, March 31,
---------------------- -------------- -------------
1997 1996 1995 1995 1994 1995 1994
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, beginning of period $2,613 $3,241 $3,062 $3,048 $2,818 $2,818 $2,854
Provisions charged to operations 500 500 389 315 468 542 1,069
Loans charged off:
One-to-four family residential 68 186 140 67 211 135 1,053
Non-residential - - - - - 151 -
Land and construction - 848 - - - - -
Commercial business 10 - - - - - -
Consumer 219 106 83 66 23 45 67
------ ------ ------ ------ ------ ------ ------
Total loans charged off 297 1,140 223 133 234 331 1,120
------ ------ ------ ------ ------ ------ ------
Recovery on loans:
One-to-four family residential 9 2 5 3 9 11 -
Consumer 8 10 8 8 1 8 15
------ ------ ------ ------ ------ ------ ------
Total recovery on loans 17 12 13 11 10 19 15
------ ------ ------ ------ ------ ------ ------
Net loans charged off 280 1,128 210 122 224 312 1,105
------ ------ ------ ------ ------ ------ ------
Balance, end of period $2,833 $2,613 $3,241 $3,241 $3,062 $3,048 $2,818
====== ====== ====== ====== ====== ====== ======
Ratio of net charge offs during the period
to average loans outstanding during the
period .09% .42% .12% .07% .13% .18% .52%
=== === === === === === ===
</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,
---------------------------------------------------- -----------------------------------
1997 1996 1995 1995 1994
----------------- ---------------- ----------------- ----------------- -----------------
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 $1,668 73.0% $2,156 81.2% $1,533 79.0% $1,338 79.0% $1,130 80.1%
Multi-family
residential 114 3.6 39 2.4 9 2.4 32 2.3 25 2.2
Non-residential 189 5.8 47 2.9 41 2.0 16 1.1 12 1.4
Land and construction 43 1.3 4 0.1 1,502 1.9 1,508 3.0 1,520 3.8
Commercial business 533 4.8 92 2.8 - - - - - -
Consumer 286 11.5 275 10.6 156 14.7 154 14.6 131 12.5
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Balance, end of period $2,833 100.0% $2,613 100.0% $3,241 100.0% $3,048 100.0% $2,818 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</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,
-----------------------------------------------------------------------------------
1997 1996 1995
--------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
Average of Total Effective Average of Total Effective Average of Total Effective
Balance Deposits Yield Balance Deposits Yield Balance Deposits Yield
------- -------- ----- ------- -------- ----- ------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand Deposit Accounts $ 20,033 4.4% - % $ 13,237 3.0% - % $ 9,208 2.2% - %
NOW Accounts 48,535 10.8 2.4 45,275 10.1 2.8 46,158 11.0 2.8
Money Market Accounts 44,405 9.9 3.1 44,516 9.9 3.1 41,661 10.0 2.7
Savings Accounts 139,964 31.0 2.9 131,368 29.4 2.8 112,416 26.8 2.6
-------- ----- -------- ----- -------- -----
Total Core Deposits 252,937 56.1 2.6 234,396 52.4 2.7 209,443 50.0 2.5
-------- ---- -------- ----- -------- -----
Certificate Accounts
31 Day 437 .1 4.4 2,239 .5 5.2 838 .2 5.8
2-4 Month 18,803 4.2 4.9 17,705 4.0 4.8 13,105 3.1 4.7
6 Month 22,790 5.0 3.8 24,706 5.5 3.7 34,227 8.2 3.2
7-9 Month 25,582 5.7 5.0 30,133 6.8 5.0 32,476 7.7 5.3
12 Month 19,238 4.3 4.5 15,438 3.5 3.7 24,008 5.7 3.5
18 Month 1,198 .3 4.7 1,163 .3 4.5 2,251 .5 4.2
24 Month 10,774 2.4 5.5 5,770 1.3 4.9 7,494 1.8 4.2
30 Month 3,847 .8 4.8 4,104 .9 4.4 5,118 1.2 4.3
48 Month 877 .2 4.8 1,431 .3 5.1 1,937 .5 5.6
60 Month 721 .2 5.7 441 .1 5.7 638 .2 6.4
13-120 Month 68,064 15.1 5.4 83,218 18.6 5.6 60,179 14.4 5.9
36-90 Month 1,851 .4 5.3 1,757 .4 4.9 2,919 .7 4.8
Fixed Rate IRA 16,737 3.7 5.4 17,634 3.9 5.4 17,886 4.2 5.6
Variable Rate IRA 5,160 1.1 5.4 5,012 1.1 5.2 5,037 1.2 5.7
Passbook Rate IRA 1,749 .4 2.5 1,834 .4 2.5 1,735 .4 2.5
-------- ----- -------- ----- -------- -----
Total Certificates 197,828 43.9 5.0 212,585 47.6 5.0 209,848 50.0 4.8
-------- ----- -------- ----- -------- -----
Total Deposits $450,765 100.0% 3.7% $446,981 100.0% 3.8% $419,291 100.0% 3.7%
======== ===== ======== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
For the Nine-Month Period
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>
Demand Deposit 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>
The following table shows rate information for the Company's
certificates of deposit at the dates indicated and maturity
information at December 31, 1997:
<TABLE>
<CAPTION>
At December 31, Period to Maturity from December 31, 1997
------------------ ----------------------------------------------
Two to Over
Within One to Three Three
1997 1996 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 $ 26,361 $ 33,347 $ 26,259 $ 102 $ - $ - $ 26,361
4.00% to 4.99% 21,407 34,418 16,221 2,342 1,493 1,351 21,407
5.00% to 5.99% 129,598 127,428 111,039 15,766 2,152 641 129,598
6.00% to 6.99% 5,377 7,495 2,470 992 374 1,541 5,377
7.00% to 7.99% 2,493 6,552 802 1,247 305 139 2,493
-------- -------- -------- ------- ------ ------ --------
Total $185,236 $209,240 $156,791 $20,449 $4,324 $3,672 $185,236
======== ======== ======== ======= ====== ====== ========
</TABLE>
The following table sets forth the maturity dates of the Company's
certificates of deposit of $100,000 or more at December 31, 1997:
Maturity Period Amount
--------------- ------
(Dollars in
thousands)
Three months or less $ 8,056
Three through six months 5,345
Six through twelve months 4,068
Over twelve months 1,836
-------
Total $19,305
=======
The following table sets forth the maximum month-end balance and
average balance of borrowed funds for the periods indicated:
For the Nine-
Month Period
For the Year Ended
Ended December 31, December 31,
---------------------------- -----------------
(Dollars in thousands)
1997 1996 1995 1995 1994
---- ---- ---- ---- ----
Maximum balance $196,512 $180,347 $50,992 $50,992 $48,492
Average balance $159,234 $124,087 $38,464 $37,814 $40,408
Weighted average
interest 5.59% 5.50% 7.45% 7.46% 7.41%
The following table sets forth certain information as to FHLBNY
advances at the dates indicated:
At December 31,
--------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
FHLBNY advances $14,150 $24,800 $19,100
Weighted average interest
rate of FHLBNY advances 6.63% 7.13% 5.88%
ITEM 2. PROPERTIES
At December 31, 1997, the Bank conducted its business through its 16
offices, including its home office at 70 Sip Avenue, Jersey City, New
Jersey.
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 12/02
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
Passaic, New Jersey 11/95 5/98
86 River Street Leased 1/96 12/01
Hoboken, NJ
Pursuant to a Purchase and Assumption Agreement dated December 11,
1997 between the Company and Banco Popular, F.S.B. the Company is
selling its Passaic branch to Banco Popular, F.S.B. and Banco Popular,
F.S.B. will assume all of the Company's obligations under this lease.
In addition, on February 27, 1998, the Bank entered into a 10-year
lease for a bank branch in North Arlington, New Jersey. The Bank
expects to open this branch during the second quarter of 1998.
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. The 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. 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 Stock Market. The
symbol for the Company's common stock is SFIN. As of December
31, 1997, there were 385 registered holders of the Company's common
stock.
The following table presents the high and low bid prices for the
common stock and dividends paid for the periods indicated below. The
high and low bid range prices reflect inter dealer quotations, without
commissions, and may not necessarily represent actual transactions.
High Low Dividend
---- --- --------
1997
----
Fourth Quarter 24 18 $ .11
Third Quarter 22 17 3/4 $ .11
Second Quarter 18 1/8 14 1/2 $ .10
First Quarter 17 7/8 14 1/8 $ .10
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 -
During the third quarter of 1996, the Company declared its first
quarterly dividend. The Company increased its quarterly dividend to
$0.11 per share during the third quarter of 1997. 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 upon 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 could also affect the
Company's ability to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA
At December 31, At March 31,
------------------------- ----------------
1997 1996 1995 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
SELECTED FINANCIAL
CONDITION DATA:
Total assets $675,316 $636,042 $559,049 $475,168 $473,613
Loans, net 332,509 325,470 195,773 169,909 185,377
Mortgage-backed
securities 290,044 240,974 260,107 203,677 195,734
Debt and equity
securities 19,093 40,243 80,126 80,987 66,070
Other real estate
owned, net 440 563 652 825 1,487
Total deposits 443,878 457,056 438,021 407,758 423,647
Borrowed funds 160,300 107,200 44,703 41,492 29,292
Shareholders' equity 64,907 66,935 72,315 22,022 17,678
REGULATORY CAPITAL
RATIOS (BANK):
Tangible capital ratio 8.96% 9.41% 10.28% 4.57% 3.66%
Core capital ratio 8.96% 9.41% 10.28% 4.57% 3.74%
Risk-based capital
ratio 22.93% 26.21% 32.88% 16.65% 13.14%
ASSET QUALITY RATIOS:
Non-performing loans
to total net loans .75% .84% 2.87% 3.87% 6.26%
Non-performing loans
to total assets .37% .43% 1.01% 1.38% 2.45%
Non-performing assets
to total assets .44% .52% 1.12% 1.56% 2.76%
Allowance for loan
losses to non-
performing loans 113.18% 95.43% 57.66% 46.37% 24.29%
Allowance for loan
losses to total net
loans .85% .80% 1.66% 1.79% 1.52%
OTHER DATA:
Number of deposit
accounts 54,677 53,695 50,062 46,767 48,238
Offices 16 16 15 13 13
<TABLE>
<CAPTION>
At or For the
At or For the Nine-Month At or For the
Years Ended Period Ended Years Ended
December 31, December 31, March 31,
---------------------- ------------- -------------
1997 1996 1995 1995 1994 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS:
Return on average assets (1) .82% .49% .50% .41% .94% .90% .90%
Return on average equity (1) 8.74 4.67 7.31 5.46 23.24 21.09 26.90
Dividend payout ratio 32.31 29.41 - - - - -
Equity to assets 9.61 10.52 12.94 12.94 4.44 4.63 3.73
Net interest rate spread (2) 3.31 2.99 3.23 3.12 3.67 3.66 3.67
Net interest margin (2) 3.77 3.45 3.52 3.45 3.79 3.78 3.74
Non-interest income to
average assets (4) .24 .37 .50 .43 .28 .32 .29
Non-interest expense to
average assets (1) 2.52 2.87 2.84 2.87 2.34 2.43 2.50
Efficiency ratio (1)(3) 65.91 81.65 77.47 80.87 61.49 63.31 68.67
Average interest-earning
assets to average
interest-bearing
liabilities 111.88% 112.32% 107.51% 108.45% 103.45% 103.52% 101.94%
</TABLE>
<TABLE>
<CAPTION>
For the Nine-
Month Period
For the Years Ended Ended For the Years
December 31, December 31, Ended March 31,
----------------------- -------------- ---------------
(Dollars in thousands, except per share amounts)
SELECTED OPERATING DATA:
1997 1996 1995 1995 1994 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $50,191 $45,278 $35,260 $26,853 $25,012 $33,419 $34,215
Interest expense 25,384 23,656 18,301 14,162 11,836 15,975 16,657
------- ------- ------- ------- ------- ------- -------
Net interest income 24,807 21,622 16,959 12,691 13,176 17,444 17,558
Provision for loan losses 500 500 389 315 468 542 1,069
------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses 24,307 21,122 16,570 12,376 12,708 16,902 16,489
Net (loss) gains on sales
of securities 69 (1,093) (340) (340) - - -
Other non-interest income 1,656 2,382 2,486 1,962 994 1,518 1,394
Foreclosed real estate
expense, net 71 105 161 10 (134) 17 140
FDIC SAIF assessment - 2,651 - - - - -
Other non-interest expense 17,041 15,687 13,942 10,858 8,560 11,644 12,084
------- ------- ------- ------ ------ ------ ------
Income before income
taxes, extraordinary
items and cumulative
effect of change in
accounting principles 8,920 3,968 4,613 3,130 5,276 6,759 5,659
Income taxes 3,333 796 1,712 1,152 1,906 2,466 1,938
------- ------- ------- ------ ------ ------ ------
Income before extra-
ordinary items and
cumulative effect of
change in accounting
principles 5,587 3,172 2,901 1,978 3,370 4,293 3,721
Extraordinary items:
Penalties for pre-payment
of debt, net of tax - - (412) (412) - - -
Cumulative effect of
change in accounting
principles - - - - - - 669
------- ------- ------- ------- ------- ------- -------
Net income $ 5,587 $ 3,172 $ 2,489 $ 1,566 $ 3,370 $ 4,293 $ 4,390
======= ======= ======= ======= ======= ======= =======
Per share data:
Basic earnings $1.34 $ .68 - - - - -
Diluted earnings $1.30 $ .68 - - - - -
Cash dividends declared $ .42 $ .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 Act. 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) Efficiency ratio represents 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 existing core deposit base;
it seeks, through enhanced marketing strategy, product cross
selling and branch expansions, to increase 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) floating rate commercial loans, (2)
consumer loans, (3) adjustable rate first mortgage loans ("ARM"), and
(4) fixed rate first mortgage loans with terms to maturity of no more
than fifteen years, 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, years ended
December 31, 1997, 1996 and 1995 are presented.
Selected Consolidated Statements of Income
Set forth on the next page are the consolidated statements of income
for the years ended December 31, 1997, 1996 and 1995. The information
for the year ended December 31, 1997 and 1996 should be read in
conjunction with the Company's audited consolidated financial
statements and the notes thereto, presented elsewhere herein. The
consolidated statement of income for the year ended December 31, 1995
is 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.
Year Ended December 31,
-----------------------
1997 1996 1995*
---- ---- ----
(Dollars in thousands)
INTEREST INCOME:
Interest and fees on loans $25,955 $21,206 $14,899
Interest on mortgage-backed securities 21,577 19,377 14,382
Interest and dividends on investment
securities 2,076 4,228 5,698
Dividends on FHLBNY stock 583 467 281
------- ------- -------
Total interest and dividend income 50,191 45,278 35,260
------- ------- -------
INTEREST EXPENSE:
Deposits 16,481 16,827 15,437
Borrowed funds 8,903 6,829 2,864
------- ------- -------
Total interest expense 25,384 23,656 18,301
------- ------- -------
NET INTEREST INCOME 24,807 21,622 16,959
Provision for loan losses 500 500 389
------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 24,307 21,122 16,570
NON-INTEREST INCOME:
Services charges 1,496 1,236 1,013
Net loss on sales of securities 69 (1,093) (340)
Other 160 1,146 1,473
------- ------- -------
Total other income 1,725 1,289 2,146
------- ------- -------
NON-INTEREST EXPENSE:
Salaries and employee benefits 9,605 8,511 7,209
Occupancy, net 2,278 2,140 1,735
Federal deposit insurance premiums 287 1,011 1,177
FDIC SAIF assessment - 2,651 -
Professional fees 594 645 608
Insurance premiums 180 273 292
Data processing 621 390 328
Foreclosed real estate expense, net 71 105 161
Other 3,476 2,717 2,593
------- ------- -------
Total operating expenses 17,112 18,443 14,103
------- ------- -------
Income before income taxes and
extraordinary item 8,920 3,968 4,613
Income taxes 3,333 796 1,712
------- ------ -------
Income before extraordinary item 5,587 3,172 2,901
Extraordinary item-penalties for pre-
payment of debt, net of tax - - 412
------- ------- -------
Net income $ 5,587 $ 3,172 $ 2,489
======= ======= =======
*unaudited
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
General. Net income for the for the year ended December 31, 1997
("1997") was $5.6 million, or $1.30, per share, assuming dilution, as
compared to $4.9 million, or $1.05, per share, assuming dilution, for
the year ended December 31, 1996 ("1996"). Earnings during 1996 were
affected by a one-time industry-wide assessment on thrift institutions
to recapitalize the SAIF. The impact of this charge has been added
back to the prior year results in order to normalize these
comparisons. Inclusive of the one time SAIF assessment, the Company
reported net income of $3.2 million, or $0.68, per share, assuming
dilution, for the year ended 1996. Basic earnings per share were
$1.34 for 1997 as compared to $1.05 for 1996 as adjusted, or $0.68 for
1996 inclusive of the SAIF assessment. Net income and earnings per
share, assuming dilution, for 1997 increased 14.7% and 23.8%,
respectively as compared to 1996. This increase is primarily the
result of increased net interest income from the growth in average
loans and investments at higher yields offset by an increase in
borrowing costs due to increased average borrowing levels. Partially
offsetting this net interest income growth was lower non-interest
income and increased non-interest expense. In addition, the Company s
average weighted shares outstanding during 1997 declined to 4,310,000
as compared to 4,662,000 during 1996, reflecting the Company's stock
repurchase programs.
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 incurred on deposits and
borrowed funds. Net interest income increased $3.2 million, or 14.7%,
to $24.8 million for 1997 as compared $21.6 million for 1996. This
increase resulted from a 5.3% growth in interest-earning assets and a
32 basis point increase in net interest margin. For 1997, net
interest margin was 3.77% as compared to 3.45% for 1996. Increase in
net interest income resulted primarily from higher yield on and growth
in interest-earning assets, partially offset by increases in the cost
of interest-bearing liabilities. Table 1 presents a summary of the
Company's average balances, yields earned on average assets and costs
incurred on average liabilities, and shareholders' equity for the
years ended December 31, 1997, 1996, and 1995.
Interest Income. Total interest and dividend income for 1997
increased to $50.2 million from $45.3 million for 1996, an increase of
$4.9 million, or 10.9%, over the prior year. The average balance of
interest-earning assets increased $33.5 million, or 5.3%, to $660.0
million for 1997 compared to $626.6 million for 1996. The related
yields increased between the two periods to 7.61% from 7.23%.
Throughout 1996, the Company changed its mix of interest-earning
assets by purchasing one-to-four family residential mortgages, and
selling lower yielding mortgage backed securities and debt securities.
In addition, the Company has focused its efforts on originating higher
yielding commercial and consumer loans reflecting increases in average
balances of 304.1% and 7.0%, respectively in these portfolios. As a
result, both the average balance and yield from interest-earning
assets is higher for 1997. The average balance of first mortgage
loans increased $47.7 million, or 20.7%, as a result of the prior year
purchases partially offset by current year repayments, net of
originations. However, yields on this portfolio decreased 10 basis
points from 7.70% for 1996 to 7.60% for 1997, because of prepayments
of higher yielding loans in the current low interest rate environment.
Also for 1997, the yields on mortgage-backed securities increased due
to sales of lower-yielding securities in 1996, and purchases during
the current year of securities with yields in excess of the average
yields in place for 1996. These factors combined to increase yields
on mortgage-backed securities 61 basis points to 7.37% for 1997
compared to 6.76% for 1996. The average balance of the Company's
mortgage-backed securities portfolio increased by 2.0%. Sales of
lower-yielding debt securities during the fourth quarter of 1996
coupled with calls and maturities during 1997 caused the current year
average balance to decline $32.9 million while increasing the average
yield on the remaining portfolio 34 basis points to 6.86%.
Interest Expense. Interest expense increased $1.7 million, or 7.3%,
to $25.4 million for 1997 compared to $23.7 million for 1996.
Interest expense on deposits decreased $0.3 million while interest
expense on borrowed funds increased $2.1 million. The increase in
borrowed funds was due to increased borrowing levels coupled with a 9
basis point rise in average costs. The decrease in interest expense
on total deposits was primarily caused by decreases in higher costing
certificates of deposit partially offset by growth in core deposits.
Average borrowed funds during 1997 increased $35.1 million, or 28.3%,
to $159.2 million as compared to $124.1 million for 1996. The
increase in the average balance of borrowed funds reflects the
Company's continued strategy to leverage its excess capital, and this
growth funded the increase in commercial mortgage and business loans,
consumer loans, and mortgage backed securities. In addition these
funds were also used in part to support the repurchase of the
Company's common stock and in part to liquidate certificates of
deposit for holders who sought rates higher than the Company's
alternate borrowing rates. The cost of borrowed funds increased 9
basis points to 5.59% for 1997 from 5.50% for 1996. The increase in
rates reflected the Company's decision to migrate a greater portion of
its short term borrowed funds into longer term instruments which
lessens the impact of changes in short-term borrowing rates. Of the
outstanding borrowed funds at December 31, 1997, $14.2 million mature
overnight and the balance has final maturity dates ranging from July
2000 to September 2002. All have earlier call options at the lender's
discretion. Borrowings of $86.0 million with interest rates ranging
from 5.43% to 5.54% are first callable in 1998, and borrowings of
$60.0 million with interest rates of 5.52% are first callable in
November 1999.
Total interest expense on deposits for 1997 totaled $16.5 million
compared to $16.8 million for 1996. The decrease in interest expense
on deposits resulted primarily from the decrease of higher costing
certificates of deposit and the change in mix of deposits during 1997.
Total average deposits increased $3.8 million during 1997 resulting
from decreases in certificates of deposit of $14.8 million, offset by
increases in savings, NOW and non-interest bearing deposits of $18.5
million. The weighted average cost of interest-bearing deposits
during 1997 decreased 5 basis points from 3.88% in 1996 to 3.83% in
1997. Although average deposits increased during the current year,
1997 period-end deposit balances decreased $13.2 million primarily due
to controlled runoff of certificates of deposit throughout the year.
The Company's strategy during 1997 was to not match the competition's
aggressive rates, unless management believes that relationships with
deposit holders who have other deposits or loan relationships are in
jeopardy. Core deposits partially offset this decrease with growth of
$10.8 million, or 4.4%, over 1996 period-end balances as customer
relationships were developed through continued marketing efforts.
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, 1997. 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 ended December 31, 1997, 1996 and
1995. The average loan balances include non-accrual loans. The
yields include loan fees which are considered adjustments to yields.
Table 1: Spread Analysis
At December 31, 1997
---------------------
Actual Average
Balance Yield/Cost
------- ----------
(Dollars in thousands)
Assets:
Interest-earning assets:
First mortgage loans $278,277 7.63%
Consumer and other loans 38,399 9.32
Commercial business loans 15,833 9.62
Mortgage-backed securities 290,044 7.18
Money market investment - -
Debt securities 19,093 7.44
FHLBNY stock 10,260 8.77
--------
Total interest earning assets 651,906 7.58%
Non-interest-earning assets 23,410 ----
--------
Total assets $675,316
========
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts $142,399 2.91%
NOW accounts 47,564 1.52
Money market accounts 44,239 3.00
Certificates of deposit 185,236 5.04
Borrowed funds 160,300 5.59
--------
Total interest-bearing liabilities 579,738 4.21%
-------- ----
Non-interest bearing liabilities:
Non-interest bearing deposits 24,440
Other non-interest bearing liabilities 6,231
--------
Total non-interest bearing
liabilities 30,671
--------
Total liabilities 610,409
Shareholders' equity 64,907
--------
Total liabilities and shareholders'
equity $675,316
========
Net interest income/net interest rate
spread 3.37%
====
Net interest margin 3.86%
====
Ratio of interest-earning assets to
interest-bearing liabilities 113.52%
======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------
1997 1996 1995
------------------------- -------------------------- ---------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- --------- ------- -------- --------- ------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
First mortgage loans $277,511 $21,101 7.60% $229,850 $17,698 7.70% $146,882 $12,199 8.31%
Consumer and other loans 36,312 3,500 9.64 33,950 3,176 9.35 26,711 2,700 10.11
Commercial business loans 14,383 1,354 9.41 3,559 332 9.33 - - -
Mortgage-backed securities 292,671 21,577 7.37 286,794 19,377 6.76 208,763 14,382 6.89
Money market investment 140 10 7.14 2,088 113 5.41 7,152 414 5.79
Debt securities 30,228 2,066 6.86 63,092 4,115 6.52 89,055 5,284 5.93
FHLBNY stock 8,800 583 6.63 7,224 467 6.46 3,649 281 7.70
-------- ------- -------- ------- -------- -------
Total interest earning assets 660,045 50,191 7.61% 626,557 45,278 7.23% 482,212 35,260 7.31%
Non-interest-earning assets 19,477 ------- ---- 17,153 ------- ---- 14,762 ------- ----
-------- -------- --------
Total assets $679,522 $643,710 $496,974
======== ======== ========
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts $139,964 4,082 2.92% $131,368 3,658 2.78% $112,416 2,895 2.58%
NOW accounts 48,535 1,166 2.40 45,275 1,285 2.84 46,158 1,296 2.81
Money market accounts 44,405 1,382 3.11 44,516 1,365 3.07 41,661 1,137 2.73
Certificates of deposit 197,828 9,851 4.98 212,585 10,519 4.95 209,848 10,109 4.82
Borrowed funds 159,234 8,903 5.59 124,087 6,829 5.50 38,464 2,864 7.45
-------- ------- -------- ------- -------- -------
Total interest-bearing liabilities 589,966 25,384 4.30% 557,831 23,656 4.24% 448,547 18,301 4.08%
-------- ------- ---- -------- ------- ---- ------- ------- ----
Non-interest bearing liabilities:
Non-interest bearing deposits 20,033 13,237 9,208
Other non-interest bearing liabilities 5,627 4,708 5,162
-------- -------- --------
Total non-interest bearing
liabilities 25,660 17,945 14,370
-------- -------- --------
Total liabilities 615,626 575,776 462,917
Shareholders' equity 63,896 67,934 34,057
-------- -------- --------
Total liabilities and shareholders'
equity $679,522 $643,710 $496,974
======== ======== ========
Net interest income/net interest rate
spread $24,807 3.31% $21,622 2.99% $16,959 3.23%
======= ==== ======= ==== ======= ====
Net interest margin 3.77% 3.45% 3.52%
==== ==== ====
Ratio of interest-earning assets to
interest-bearing liabilities 111.88% 112.32% 107.51%
====== ====== ======
</TABLE>
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 December 31, 1997 Year Ended December 31, 1996
Compared to Year Ended Compared to Year Ended
December 31, 1996 December 31, 1995
--------------------------------- ------------------------------
Increase (Decrease)In Net Increase (Decrease)In Net
Interest Income Due To 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 $3,670 $ (221) $ (46) $3,403 $6,891 $(889) $ (503) $5,499
Consumer and other loans 221 96 7 324 759 (202) (81) 476
Commercial business loans 1,010 3 9 1,022 332 - - 332
Mortgage-backed securities 397 1,769 34 2,200 5,376 (277) (104) 4,995
Money market investments (105) 36 (34) (103) (293) (27) 19 (301)
Debt securities (2,143) 216 (122) (2,049) (1,540) 524 (153) (1,169)
FHLBNY stock 102 12 2 116 275 (45) (44) 186
------- ------ ----- ------ ------ ----- ------ ------
Total 3,152 1,911 (150) 4,913 11,800 (916) (866) 10,018
------ ------ ----- ------ ------ ----- ------ ------
Interest-bearing liabilities:
Deposits (117) (231) 2 (346) 892 472 26 1,390
Borrowed funds 1,934 109 31 2,074 6,375 (747) (1,663) 3,965
------ ------ ----- ------ ------ ----- ------ ------
Total 1,817 (122) 33 1,728 7,267 (275) (1,637) 5,355
------ ------ ----- ------ ------ ----- ------ ------
Net change in net interest
income $1,335 $2,033 $(183) $3,185 $4,533 $(641) $ 771 $4,663
====== ====== ===== ====== ====== ===== ====== ======
</TABLE>
Provision for Loan Losses. The provision for loan losses for 1997 was
$500,000, equal to the amount recorded for 1996. The provision for
1997 was determined by management after review of, among other things,
the composition of the Company's loan portfolio, the risk inherent in
the Company's lending activities and the economy in the Company's
market areas. Further provisions for loan losses will continue to be
based upon management's assessment of the loan portfolio and its
underlying collateral, trends in non-performing loans, the current
economic condition and other factors which may warrant recognition in
order to maintain the allowance for loan losses at levels sufficient
to cover estimated losses. At December 31, 1997, allowance for loan
losses was $2.8 million compared to $2.6 million at December 31, 1996,
an increase of $0.2 million, or 8.4%. As of December 31, 1997, non-
performing loans, which consist of non-accrual loans and accruing
loans delinquent 90 days or more, decreased $0.2 million, or 8.6%, to
$2.5 million at December 31, 1997 from $2.7 million at December 31,
1996. The coverage ratio of allowance for loan losses to non-
performing loans and also to net loans at December 31, 1997 was
113.18% and 0.85%, respectively, as compared to 95.43% and 0.80%,
respectively at December 31, 1996.
Non-interest Income. Non-interest income, exclusive of gains and
losses on sales of investment securities, was $1.7 million for 1997,
$726,000 less than 1996. The prior year's non-interest income
includes $917,000 from the collection of unaccrued interest associated
with loans whose principal had been repaid in prior periods, with no
like events occurring during the current year. Excluding this item,
non-interest income increased $191,000, or 13.0%, for 1997 as compared
to the same period during 1996. This increase resulted primarily from
increased deposit account maintenance and service fees, surcharges,
and earnings related to annuity sales partially offset by fewer
mortgage late penalties.
During 1997, the Company realized a gain of $0.1 million from the
sales of securities compared to a loss of $1.1 million for 1996.
Proceeds from the sales of securities during 1997 approximated $42.6
million and were primarily used to repay short-term borrowings.
Proceeds from the 1996 sales approximated $110.8 million and were used
in conjunction with additional borrowings and deposits, to fund loan
growth and for redeployment into higher-yielding securities.
Non-interest Expense. Non-interest expense totaled $17.1 million for
1997, an increase of $1.3 million, or 8.4%, as compared to $15.8
million for 1996, exclusive of the one-time SAIF assessment.
Inclusive of the one-time SAIF assessment, total non-interest expense
decreased $1.3 million, or 7.2%, from $18.4 million for 1996 to $17.1
million for 1997.
Salaries and employee benefits expenses for 1997 increased $1.1
million, or 12.9%, compared to the prior year. Of this amount,
salaries expense increased $0.3 million and employee benefit expenses
increased $0.8 million. Salaries expense increased primarily as a
result of two new branches opened during 1996, whose operations are
fully reflected in the current year, and staffing costs for commercial
and institutional loan officers and support hired during 1996. There
is limited expense for these items in the prior year. In addition, the
current year also includes normal wage and salary increases. Employee
benefit expense for 1997 includes an increase of $221,000 related to
the Company's Employee Stock Ownership Plan ("ESOP") program over the
same period of the prior year due to increases in the market value of
the Company's stock for the current year period. ESOP expense is
included as compensation based on the market value of the shares
awarded. The current year also includes increased expense of $457,000
for the Recognition and Retention Plan for Executive Officers and
Employees ("Employee RRP"). Such plans was in effect for the full
year of 1997 versus one-half year in 1996.
Occupancy costs which include leasehold improvements, furniture,
fixtures and equipment ("FF&E"), rent and other occupancy related
maintenance costs increased $0.2 million, or 6.4%, to $2.3 million for
1997 as compared to $2.1 million for 1996. The current year increase
primarily resulted from higher leasehold and FF&E depreciation related
to the facilities refurbishment initiative started during 1996 along
with the installation of a new operating system which was installed
during the latter part of 1996. Partially offsetting this increase
were lower rent costs which resulted from a branch closing and lease
buyout during 1996, and lower utility and maintenance costs incurred
during 1997.
Federal deposit insurance premiums decreased $0.7 million, or 71.6%,
to $0.3 million for 1997 from $1.0 million for 1996. This decrease
was principally the result of lower assessment fees charged on
deposits during the full year 1997 due to the recapitalization of the
SAIF during the third quarter of 1996.
Data processing costs increased $0.2 million, or 59.2%, to $0.6
million for 1997 from $0.4 million for 1996. The increase resulted
from full year costs incurred during 1997 for a new upgraded operating
system and its applications, which became operational during the
second half of 1996.
Insurance premiums expense decreased $0.1 million, or 34.1%, to $0.2
million for 1997 compared to $0.3 million for the prior year. The
current year decrease resulted primarily from a net lower cost for
insurance coverage.
Other non-interest expense increased $0.8 million to $3.5 million for
1997 compared to $2.7 million for 1996. Advertising, marketing, and
related printing were increased during 1997 as part of the Company's
efforts to increase loan and core deposit growth. In addition, loan
and deposit operations costs increased during 1997 as a result of
greater transactional volumes from the prior year. Also, 1997
reflects this full year's cost for the Recognition and Retention Plan
for Outside Directors ("Director RRP"), whereas these costs are only
reflected in the second half of the prior year.
Income Tax Expense. Income tax increased $2.5 million to $3.3 million
for 1997 compared to $0.8 million for 1996. Income tax expense for
1997 reflects the tax effect of the pre-tax income recognized in
1997. Income taxes for 1996 reflect 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.
FINANCIAL CONDITION
Total assets increased $39.3 million, or 6.2%, to $675.3 million at
December 31, 1997 from total assets of $636.0 million at December 31,
1996. The increase was primarily attributable to increases in
mortgage-backed securities and loans outstanding. Partially
offsetting this growth were decreases in debt and equity securities.
The growth in assets was primarily funded through FHLBNY borrowings
and by increased core deposits. In addition, lower cost borrowed
funds were used to fund the liquidation of higher rate certificates of
deposit.
At December 31, 1997, shareholders' equity was $64.9 million, a
decrease of $2.0 million compared to $66.9 million at December 31,
1996. The ratios of shareholders' equity to total assets were 9.61%
at December 31, 1997 and 10.52% at December 31, 1996. The decrease
from December 31, 1996 resulted principally from the purchase on the
open market and retirement of 427,497 shares of common stock for $7.8
million at an average price of $18.20 per share, and the payment of
four quarterly dividends totaling $1.8 million. Partially offsetting
these decreases were net income of $5.6 million, a reduction of $1.3
million in the unallocated and unearned ESOP, Employee RRP, and
Director RRP shares, a net increase of $0.6 million (net of taxes) in
the in the market value of the investment portfolio, and a tax benefit
for RRP shares earned.
LENDING ACTIVITIES
Loan Portfolio Composition. At December 31, 1997, the Company had
total loans of $334.6 million compared to $327.1 million at December
31, 1996. The largest portion of the portfolio, $244.4 million, or
73.0%, was one-to-four family first mortgage loans. Other loan
categories within the portfolio consist of: consumer loans of $38.5
million, or 11.5% of the loan portfolio, and are primarily comprised
of fixed rate second mortgage loans and FHA Title One insured home
improvement loans; commercial mortgage and multi-family loans of $31.4
million, or 9.4% of the loan portfolio; commercial business loans of
$16.1 million, or 4.8% of the loan portfolio; and acquisition,
development, and construction loans of $4.3 million, or 1.3% of the
loan portfolio.
The types of loans that the Company may originate or purchase are
subject to Federal and state law and 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 the Company's 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.
During 1997, as a result of a tightened interest rate environment and
increased competition, total one-to-four family first mortgage loans
decreased $21.4 million, or 8.0%, to $244.4 million at December 31,
1997 from $265.7 million at December 31, 1996. This decrease
reflected normal principal amortization and accelerated prepayments,
partially offset by originations of $9.7 million of one-to-four family
first mortgage loans. The Company did not emphasize one-to-four
family lending during 1997, as the spreads between competitive rates
being offered and the cost of funding with consideration of credit and
duration risks, was not a sufficient incentive for new investment. Of
the one-to-four family first mortgage loans outstanding at the current
year end, 82.2% were ARM loans and 17.8% were fixed rate 15 and 30
year loans. The interest rate adjustment period on ARM loans ranges
between 1 and 10 years, and as of December 31, 1997, the weighted
average adjustment period approximated 3.0 years. The Company may
offer 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 mortgages 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 has emphasized and plans to continue to emphasize the
origination of commercial business, commercial mortgage, and multi-
family loans from in and around its market area. The current non-
residential loan portfolio consists of loans to businesses located in
and secured by properties in New Jersey. As a result of the Company's
emphasis, these loans continue to be the fastest growing segment of
the Company's loan portfolio.
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 or tied to other published
indices. 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. Updated financial statements are
generally obtained, reviewed and analyzed annually to assure the
strength of the borrower.
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.
Commercial Business Loans. During 1997, the Company continued with
its strategy of focusing its efforts on the origination of commercial
business loans. These loans are secured by business assets other than
real estate such as equipment, inventory, machinery, accounts
receivable, and vehicles, and are usually 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.
At December 31, 1997, the Company's total loan portfolio included
$31.4 million, or 9.4% of commercial and multi-family mortgage loans
and $16.1 million, or 4.8% of commercial business loans. The combined
total of $45.5 million at December 31, 1997 compares to $26.2 million
of like loans at December 31, 1996. In addition, at December 31,
1997, $4.3 million, or 1.3% of the Company's total loan portfolio
consisted of construction loans, an increase of $3.9 million as
compared to $0.4 million at December 31, 1996. The growth in these
product lines has been the consequence of management's strategy to
develop higher yielding, variable rate based, non-residential loans.
This strategy helps to diversify the Company's loan offerings and
portfolio mix.
Consumer Loans. 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,
1997, second mortgage loans amounted to $18.1 million, or 5.4% of
total loans, an increase of $0.8 million, or 4.7%, from December 31,
1996.
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 accordance 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 $15.1 million, or 4.5% of total loans at December 31, 1997
compared to $13.6 million as of December 31, 1996, an increase of $1.5
million, or 11.0%.
Remaining other loans are home equity lines of credit, other home
improvement loans, secured and unsecured personal loans, and
automobile loans.
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,
------------------------------------------------- -------------------------------
1997 1996 1995 1995 1994
---------------- --------------- --------------- -------------- --------------
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 $244,364 73.0% $265,748 81.2% $157,686 79.0% $137,317 79.0% $151,683 80.1%
Multi-family 12,190 3.6 7,725 2.4 4,742 2.4 3,978 2.3 4,217 2.2
Non-residential 19,219 5.8 9,304 2.9 4,055 2.0 1,987 1.1 2,600 1.4
Construction 4,325 1.3 404 .1 3,707 1.9 4,217 2.4 4,924 2.6
Land - - - - 40 - 1,017 .6 2,250 1.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total first
mortgage loans 280,098 83.7 283,181 86.6 170,230 85.3 148,516 85.4 165,674 87.5
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Commercial business 16,066 4.8 9,210 2.8 - - - - - -
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Consumer loans:
Second mortgage 18,110 5.4 17,295 5.3 13,938 7.0 12,493 7.2 11,543 6.1
FHA insured home
improvement 15,115 4.5 13,613 4.2 12,527 6.3 10,611 6.1 9,701 5.1
Unsecured consumer 1,896 .6 1,829 .6 1,088 .6 489 .3 382 .2
Home equity lines
of credit 1,485 .4 1,147 .4 1,263 .6 1,344 .8 1,544 .9
Automobile loans 596 .2 413 .1 87 - - - - -
Home improvement 1,051 .3 154 - 6 - - - - -
Other 197 .1 256 - 422 .2 397 .2 450 .2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total consumer
loans 38,450 11.5 34,707 10.6 29,331 14.7 25,334 14.6 23,620 12.5
-------- ----- -------- ---- -------- ----- -------- ----- -------- -----
Total loans 334,614 100.0% 327,098 100.0% 199,561 100.0% 173,850 100.0% 189,294 100.0%
===== ===== ===== ===== =====
Less (plus):
Unearned discounts/
(premiums) and
deferred loan fees,
net (728) (985) 547 893 1,099
Allowance for loan
losses 2,833 2,613 3,241 3,048 2,818
-------- -------- -------- -------- --------
Total loans, net $332,509 $325,470 $195,773 $169,909 $185,377
======== ======== ======== ======== ========
</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 Review Committee which meets
quarterly to review the Company's loan portfolio, makes changes in the
classification of assets which the Committee deems necessary. 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 on a timely
basis. 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 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, 1997, the Company had loans categorized as special
mention of $1.2 million, which consisted of $0.4 million in first and
second mortgage loans, and $0.8 in commercial mortgage loans.
Substandard assets totaled $4.7 million and consisted of $0.4 million
in real estate owned ("REO"), $2.2 million in commercial loans, $1.7
million in first and second mortgage loans, and $0.4 million in
consumer loans. In addition, at that date, the Company had doubtful
loans of $0.3 million consisting of first and second mortgage loans
and $0.1 million of loans classified 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 to reduce the
carrying book value to 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, 1997, the Company had no
restructured loans within the meaning of Statement of Financial
Accounting Standards ("SFAS") No. 15 and SFAS No. 114 issued by the
Financial Accounting Standards Board ("FASB"):
Table 4: Non-performing Assets
<TABLE>
At December 31, At March 31,
------------------------ ---------------
1997 1996 1995 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Mortgage loans delinquent 90
days more and still accruing $ 255 $ 404 $ 647 $ 558 $ 714
Non-accrual delinquent
mortgage loans 1,767 1,884 1,472 1,802 5,653
Non-accrual construction
loans - - 3,273 3,954 4,924
Non-accrual commercial loans 38 - - - -
Other non-performing loans
delinquent 90 days or more 443 450 229 259 310
------ ------ ------ ------ -------
Total non-performing loans 2,503 2,738 5,621 6,573 11,601
Total REO 440 563 652 825 1,487
------ ------ ------ ------ -------
Total non-performing
assets $2,943 $3,301 $6,273 $7,398 $13,088
====== ====== ====== ====== =======
Non-performing loans to total
net loans 0.75% 0.84% 2.87% 3.87% 6.26%
==== ==== ==== ==== ====
Non-performing assets to
total net loans and REO 0.88% 1.01% 3.19% 4.33% 7.00%
==== ==== ==== ==== ====
Non-performing loans to total
assets 0.37% 0.43% 1.01% 1.38% 2.45%
==== ==== ==== ==== ====
Non-performing assets to
total assets 0.44% 0.52% 1.12% 1.56% 2.76%
==== ==== ==== ==== ====
Allowance for loan losses to
non-performing loans 113.18% 95.43% 57.66% 46.37% 24.29%
====== ===== ===== ===== =====
Allowance for loan losses to
total net loans 0.85% 0.80% 1.66% 1.79% 1.52%
==== ==== ==== ==== ====
</TABLE>
In addition to the loans included in the risk elements table above,
the Company has at December 31, 1997, 48 loans delinquent between 31
days and 90 days totaling $729,000. These loans also have been
considered in the analysis of the adequacy of the allowance for loan
losses.
For the years ended December 31, 1997, 1996, and 1995, the amounts of
interest income that would have been recorded on non-accrual loans,
had they been current, approximated $0.1 million, $0.2 million, and
$0.4 million, respectively. Also, for the years ended December 31,
1997, 1996, and 1995, the amount of interest income on non-performing
loans that was included in income approximated $80,000, $75,000, and
$21,000, respectively.
The Company's REO before allowance for losses on REO, was $638,000 at
December 31, 1997 as compared to $741,000 at December 31, 1996.
During 1997, $275,000 of new REO was acquired which was offset by the
sale of $378,000 in existing REO properties. The sales of REO
reflects the continued efforts by the Company to dispose 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
mortgage-backed securities, debt and equity securities, and Federal
funds sold. Mortgage-backed securities are directly insured or
guaranteed by the GNMA, FNMA or FHLMC. Debt and equity securities
primarily consist of U.S. Government and agency securities, and
corporate debt. At December 31, 1997, investments increased $30.4
million, or 10.5%, to $319.4 million compared to $289.0 million at
December 31, 1996. During 1997, mortgage-backed securities increased
$49.1 million, or 20.4%, primarily from the purchase of $148.2 million
of these securities which replaced lower-yielding securities sold
during the third and fourth quarters of 1996. Partially offsetting
the purchases were mortgage-backed security sales of $42.6 million and
$56.5 million of principal amortization and accelerated prepayments
due to falling interest rates during the second half of the year.
Offsetting the net increase in mortgage-backed securities were
reductions of debt securities of $21.2 million, or 52.6%, resulting
from $31.0 million of calls and maturities, partially offset by
purchases of $9.6 million.
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, 1997 and 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.
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,
--------------------------------------------
1997 1996 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%
Debt and equity
securities:
U.S. Government and
agency securities 14,819 50.5 40,103 83.5 80,017 93.7
Corporate debt 4,065 13.8 - - - -
Other 209 .7 140 .3 109 .1
------- ----- ------- ---- ------ ----
Sub-total 19,093 65.0 40,243 83.8 81,776 95.7
FHLBNY stock 10,260 35.0 7,768 16.2 3,627 4.3
------- ----- ------- ---- ------ ----
Total Federal funds
sold, debt and
equity securities
and FHLBNY stock $29,353 100.0% $48,011 100.0% $85,403 100.0%
======= ===== ======= ===== ======= =====
</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,
--------------------------------------------------
1997 1996 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 $ 88,692 31.5% $ 77,717 33.0% $ 51,435 20.1%
FHLMC 109,206 38.7 92,262 39.1 107,021 41.7
FNMA 84,111 29.8 65,706 27.9 97,919 38.2
-------- ----- -------- ---- ------- ----
Total mortgage-
backed securities 282,009 100.0% 235,685 100.0% 256,375 100.0%
===== ===== =====
Unamortized
premiums, net 8,035 5,289 3,732
-------- -------- ------
Mortgage-backed
securities, net $290,044 $240,974 $260,107
======== ======== ========
</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 investment security repayments
and cash flow generated from operations including interest payments on
loans and investment 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, demand deposit 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. At December 31, 1997 and
1996, the percentage of core deposits to total deposits was 58.3% and
54.2%, respectively.
At December 31, 1997, deposits were $443.9 million compared to $457.1
million at December 31, 1996, a decrease of $13.2 million. During
1997, the Company's strategy was, and continues to be, to not match
the competitions' aggressive interest rates unless the Company
believes that relationships with deposit holders who have other
deposit or loan relationships are in jeopardy. As a result, higher
costing certificates of deposit, through controlled runoff, decreased
from $209.2 million at December 31 1996 to $185.2 million at December
31, 1997. Also during 1997, through the Company's continuing cross
selling efforts, marketing strategy and development of new customer
relationships, core deposits grew from $247.8 million at December 31,
1996 to $258.6 million at December 31, 1997. The majority of the core
deposit growth during 1997 was in non-interest-bearing deposit
accounts which increased $8.1 million, or 49.3%. This increase
resulted primarily from new commercial and municipality relationships.
During calendar year 1998, $156.8 million of the Company's
certificates of deposit will be maturing. Certificates currently
carry interest rates ranging from 2.50% to 7.07% and a weighted
average interest rate of 5.04%. As of December 31, 1997,
the Company's current interest rates offered, for certificates with
similar maturities, were between 2.90% and 5.50%. 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,
withdrawals of deposits and repay maturing borrowed funds 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, 1997, the Company had total
liquid assets (consisting of cash and amounts due from banks, Federal
funds sold, debt, equity and mortgage-backed securities, having final
maturities within one year, and accrued interest from debt and
mortgage-backed securities), which represented 0.9 % of total assets
and 1.4% of total deposits at December 31, 1997. At December 31, 1997
the Company had available to it $19.5 million under a line of credit
with the FHLBNY, expiring October 31, 1998 and approximately $21.5
million of excess collateral pledged with the FHLBNY. In addition,
the Company has approximately $52.0 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, 1997, capital resources were sufficient to meet
outstanding loan commitments of $26.7 million, commitments on unused
lines of credit of $8.6 million and commercial letters of credit of
$1.5 million. Certificates of deposit which are scheduled to mature
in one year or less from December 31, 1997 totaled $156.8 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.
In addition to $8.6 million of funds provided from 1997 operating
activities, the Company's current year principal funding needs were
primarily provided by net increases on advances from the FHLBNY of
$53.1 million, and net proceeds received on debt securities of $21.4
million. During 1997, cash provided was principally used for
investing and financing activities. Purchases of mortgage-backed
securities, net of repayments and sales, totaled $49.1 million and
origination and purchase of loans exceeded principal collections by
$8.0 million. In addition, funds used for financing activities
included decreases in deposits, principally to liquidate high costing
certificates of deposit, purchase and retirement of the Company's
common stock, and for 1997 dividend payments.
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.
Liquidity management is an important function and component of
managements strategy. It allows the Company to support asset growth
while satisfying the borrowing need and deposit withdrawal
requirements of customers. As interest rates increase or decrease
based on the economic environment, management determines the Company's
anticipated funding requirements and the best source and duration of
funding available. Interest rate market conditions determine the
duration and level of borrowed funds the Company will use to leverage
its excess capital. Purchases of mortgage-backed securities continued
to increase through 1997, as the Company sought to further balance and
replace lower-yielding mortgage-backed and debt securities sold during
the third and fourth quarter of 1996 with higher yielding intermediate
term mortgage-backed securities. These purchases along with loan
growth during 1997 were funded with borrowings from the FHLBNY.
During 1997, the Company increased and extended the term of its
borrowings. Of the outstanding borrowed funds at December 31, 1997,
$14.2 million mature overnight and the balance has final maturity
dates ranging from July 2000 to September 2002. All have earlier call
options at the lender's discretion. Borrowings of $86.0 million with
interest rates ranging from 5.43% to 5.54% are first callable in 1998,
and borrowings of $60.0 million with interest rates of 5.52% are first
callable in November 1999.
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 basic and diluted, 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 SAIF. The assessment reduced net income by
$1,697,000, or $0.37 per share, basic and assuming dilution.
Exclusive of the SAIF assessment, the net income of the Company for
1996 was $4.9 million, or $1.05 per share basic and assuming dilution,
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 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.
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
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 to grow and diversify its assets, 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 year ended 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. 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.
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-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 deposit 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.
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.
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, basic and assuming dilution.
Aside from the effect of the above described securities transactions,
1996 includes $917,000 from the collection of unaccrued interest
associated with loans, the principal of which has been repaid, as
compared to $932,000 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, basic and assuming dilution. Absent the above mentioned losses
and credits, non-interest income decreased $89,000 during 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 ESOP established September 29, 1995 and
$0.2 million associated with the 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 leasehold 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 reflect 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, basic and assuming dilution for 1996. Income tax expense
for 1995 is solely the result of the tax effect of the pre-tax income
recognized in that period.
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.
MARKET RISK
The Company's operations may be subject to a variety of market risks,
the most material of which is the risk of changing interest rates.
Most generally, interest rate risk ("IRR") is the volatility in
financial performance, attributable to changes in market interest
rates, which may result in either fluctuation of net interest income
or changes to the economic value of the equity of the Company.
The principal objective of the Company's IRR management activities is
to provide maximum levels of net interest income while maintaining
acceptable levels of interest rate and liquidity risk and facilitating
the funding needs of the Company.
Consistent with its definition of IRR, the Company measures earnings
at risk and value at risk. To measure earnings at risk, the Company
utilizes an income simulation model which starts with a detailed
inventory of balance sheet items and factors in the probability of the
maturity and repricing characteristics of assets and liabilities,
including assumed prepayment risks. Simulation of net interest income
takes into account the relative sensitivities of these balance sheet
items to dynamic rates and projects their behavior over an extended
period of time. Simulation analysis of net interest income reflects
both the possibility and probability of the behavior of balance sheet
items.
In addition to simulating net interest income to measure earnings at
risk, the Company also measures IRR from the perspective of value at
risk. Such analysis is the measurement and management of IRR from the
longer term perspective of the economic value of the equity of the
Company. This is performed through Net Portfolio Value (NPV) analysis
which is intended to address the changes in equity value arising from
movements in interest rates. The NPV analysis first reprices all of
the assets and liabilities under the current interest rate
environment, then compares this result to repricing under a changed
interest rate environment, thus evaluating the impact of immediate and
sustained interest rate shifts across the current interest rate yield
curve on the market value of the current balance sheet. A significant
limitation inherent in NPV analysis is that it is static.
Consequently, there is no recognition of the potential for strategy
adjustments in a volatile rate environment which would protect or
conserve equity values.
Changes in the estimates and assumptions made for IRR analysis could
have a significant impact on projected results and conclusions. These
analyses involve a variety of significant estimates and assumptions,
including, among others: (1) estimates concerning assets and
liabilities without definite maturities or repricing characteristics;
(2) how and when yields on interest-earning assets and costs of
interest-bearing liabilities will change in response to movement of
market interest rates; (3) prepayment speeds; (4) future cash flows;
and (5) discount rates. Therefore, these techniques may not
accurately reflect the impact of general market interest rate
movements on the Company's net interest income or the value of its
economic equity.
The table below sets forth the assumed change to the Company's
estimated net portfolio value at December 31, 1997, based upon an
immediate and sustained interest rate change from the interest rate
yield curve at December 31, 1997 of plus 100 and 200 basis points and
minus 100 and 200 basis points.
Change
----------------
Amount Amount Percent
------ ------ -------
(Dollars in thousands)
Change in rates:
+200 basis points $55,053 $(24,267) (31)%
+100 basis points $68,760 $(10,560) (13)%
Estimated Net Portfolio Value
at December 31, 1997: $79,320 $ - - %
-100 basis points $85,269 $ 5,949 8 %
-200 basis points $90,492 $ 11,172 14 %
The table below sets forth the estimated change to the Company's
estimate of its net interest income based upon the December 31, 1997
balance sheet, assuming an interest rate change from the December 31,
1997 interest rate yield curve of plus 200 basis points and minus 200
basis points. Such rate shift is assumed to occur linearly over the
first twelve months, and to be stable at the new levels over the
second twelve months.
Percent Change
---------------------------
Year 1 Year 2 Total
------ ------ -----
Change in rates:
+200 basis points (1.20)% 0.37 % (0.41)%
-200 basis points (0.10)% (9.95)% (5.07)%
The Company manages its IRR through use of the tools described above,
and its actions are taken under the guidance of the Asset Liability
Committee ("ALCO") comprised of management with oversight provided by
the Board of Directors. In addition to these tools, ALCO's review
includes the book and market value of assets and liabilities,
unrealized gains and losses, market conditions and interest rates, and
cash flow needs with regard to investment activity, including loans,
and deposit flow.
YEAR 2000
Management of the Company has reviewed the Company's status regarding
"Year 2000" computer issues. Failure of the Company to adequately
address any "Year 2000" deficiencies in the Company's computer
operations could have a material adverse effect on the Company's
results of operations in future periods. The Company's deposit and
loan account transactions and applications are processed offsite by a
third party. Based upon interface with these deposit and loan
application systems, the Company internally generates deposit and loan
transactions, and processes its general ledger and several other
systems on its resident hardware. A significant amount of the
Company's computer hardware has been purchased since July 1996 and is
"Year 2000" compliant. In addition, management believes that it is
taking all necessary steps to ensure "Year 2000" compliance, and its
vendor has committed to being "Year 2000" compliant prior to year-end
1998, thereby leaving sufficient time for testing all applications,
both internally and externally processed, prior to year-end 1999.
Management believes that the cost to be incurred for "Year 2000"
compliance, both with regard to the Company's internal and outsourced
data processing operations, will not be material. In addition,
management believes the Company to be in compliance with all bank
regulatory requirements regarding "Year 2000".
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 established standards for reporting and display
of comprehensive income and its components in a full set of general
purpose financial statements. Under SFAS No. 130, comprehensive
income is separated into net income and other comprehensive income.
Other comprehensive income includes items previously recorded directly
in equity, such as unrealized gains or losses on securities available
for sale. SFAS No. 130 is effective for interim and annual periods
beginning after December 15, 1997. Comparative financial statements
provided for earlier periods are required to be reclassified to
reflect application of the provisions of the Statement.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131
establishes reporting standards for operating segments in annual
financial statements and requires those enterprises to report selected
financial information about operating segments in interim financial
reports to shareholders. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997.
UNAUDITED QUARTERLY FINANCIAL DATA
Table 7 presents selected quarterly consolidated financial data:
Table 7: Selected Consolidated Financial Quarterly Data (Unaudited)
<TABLE>
<CAPTION>
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1997 1997 1997 1997 1996 1996 1996 1996
---- ---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $12,445 $12,569 $12,690 $12,487 $11,143 $11,853 $11,452 $10,830
Net interest income 6,177 6,122 6,255 6,253 5,520 5,488 5,413 5,201
Provision for loan
losses 125 125 125 125 125 125 125 125
Income (loss) before
taxes 2,241 2,225 2,243 2,211 2,206 (1,923) 1,803 1,882
Net income (loss) 1,430 1,382 1,391 1,384 1,305 (492) 1,154 1,205
Earnings (loss) per
common share:
Basic .36 .33 .33 .32 .29 (.09) .24 .25
Assuming dilution .34 .32 .32 .31 .29 (.09) .24 .25
</TABLE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7 - "Management Discussion and Analysis - Market Risk"
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of the Company as of December 31,
1997 and 1996, and for the years ended December 31, 1997 and 1996, and
the nine-month period ended December 31, 1995, and the auditors'
report thereon, are included herewith as indicated on "Index to
Financial Statements and Schedule" on page F-1.
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
Information concerning directors and executive officers 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 SEC no later
than April 30, 1998.
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 SEC no later
than April 30, 1998.
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 SEC no later than April 30, 1998.
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 SEC no
later than April 30, 1998.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM
8-K
(a) (1) Consolidated financial statements of the Company as of
December 31, 1997 and 1996, and for the years ended December 31, 1997
and 1996, and the nine-month period ended December 31, 1995, and the
auditors' report thereon, are included herewith as indicated on "Index
to Consolidated Financial Statements" in Item 8.
(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
Ownership Plan*
10.3 Employment Agreement by and among Statewide
Financial Corp., Statewide Savings Bank, S.L.A.
and Michael J. Griffin***
10.4 Statewide Financial Corp. 1996 Amended and
Restated Incentive Stock Option Plan**
10.5 Statewide Financial Corp. 1996 Amended and
Restated Incentive Stock Option Plan for Outside
Directors**
10.6 Statewide Financial Corp. Amended and Restated
Recognition and Retention Plan for Executive
Officers and Employees**
10.7 Statewide Financial Corp. Amended and Restated
Recognition and Retention Plan for Outside
Directors**
21 Subsidiaries of the Registrant
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
* 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 1997
Annual Meeting of Shareholders.
*** Incorporated by reference from Exhibit No. 3 of the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.
(b) Reports on Form 8-K.
The Registrant has filed the following reports on Form 8-K during the
quarter ended December 31, 1997.
Date Item Reported
---- -------------
November 3, 1997 Item 5 - Reporting on the Registrant's
quarterly earnings.
November 26, 1997 Item 5 - Reporting the Registrant's
quarterly dividend.
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report of KPMG Peat Marwick LLP
Consolidated Financial Statements:
Consolidated Statements of Financial Condition
December 31, 1997 and 1996
Consolidated Statements of Income
Years Ended December 31, 1997 and 1996
Nine-Month Period Ended December 31, 1995
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1997 and 1996
Nine-Month Period Ended December 31, 1995
Consolidated Statements of Cash Flows
Years Ended December 31, 1997 and 1996
Nine-Month Period Ended December 31, 1995
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 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, 1997 and 1996, and
for the years ended December 31, 1997 and 1996, and the nine-month
period ended December 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, 1997
and 1996, and the results of their operations and their cash flows for
the years ended December 31, 1997 and 1996, and the nine-month period
ended December 31, 1995 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Short Hills, New Jersey
January 26, 1998
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
December 31,
-------------------
1997 1996
---- ----
(Dollars in thousands)
ASSETS
Cash and amounts due from depository
institutions $ 6,767 $ 6,586
Mortgage-backed securities available for sale 290,044 240,974
Debt and equity securities available for sale 19,093 40,243
Loans receivable, net 332,509 325,470
Accrued interest receivable, net 3,969 4,296
Real estate, owned 440 563
Premises and equipment, net 6,064 6,296
FHLBNY stock, at cost 10,260 7,768
Excess of cost over fair value of net assets
acquired 106 137
Other assets 6,064 3,709
-------- --------
Total assets $675,316 $636,042
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $443,878 $457,056
Borrowed funds:
Securities sold under agreements to
repurchase 146,150 82,400
FHLBNY advances 14,150 24,800
-------- --------
Total borrowed funds 160,300 107,200
Advance payments by borrowers for taxes
and insurance 1,749 1,853
Accounts payable and other liabilities 4,482 2,998
-------- --------
Total liabilities 610,409 569,107
-------- --------
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; 4,518,767 shares issued
and 4,509,164 shares outstanding at
December 31, 1997, and 4,946,264 shares - -
issued and 4,911,533 shares outstanding at
December 31, 1996
Paid in capital 39,533 46,807
Unallocated ESOP shares (3,280) (3,703)
Unearned Recognition and Retention Plan
shares (1,755) (1,872)
Retained earnings - substantially restricted 29,580 25,797
Treasury stock, 9,603 and 34,731 shares at
December 31, 1997 and 1996 (119) (430)
Net unrealized gain on securities available
for sale, net of income tax 948 336
-------- --------
Total shareholders' equity 64,907 66,935
-------- --------
Commitments and contingencies - -
-------- --------
Total liabilities and shareholders'
equity $675,316 $636,042
======== ========
See accompanying notes to consolidated financial statements.
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
NINE-MONTH PERIOD ENDED DECEMBER 31, 1995
December 31,
-----------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands,
except per share amounts)
INTEREST INCOME:
Interest and fees on loans $25,955 $21,206 $11,287
Interest on mortgage-backed securities 21,577 19,377 10,741
Interest and dividends on debt and
equity securities 2,076 4,228 4,620
Dividends on FHLBNY stock 583 467 205
------- ------- -------
Total interest and dividend income 50,191 45,278 26,853
------- ------- -------
INTEREST EXPENSE:
Deposits 16,481 16,827 12,044
Borrowed funds 8,903 6,829 2,118
------- ------- -------
Total interest expense 25,384 23,656 14,162
------- ------- -------
NET INTEREST INCOME 24,807 21,622 12,691
Provision for loan losses 500 500 315
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 24,307 21,122 12,376
NON-INTEREST INCOME:
Service charges 1,496 1,236 760
Net gain (loss) on sales of securities 69 (1,093) (340)
Other 160 1,146 1,202
------- ------- -------
Total other income 1,725 1,289 1,622
------- ----- -------
NON-INTEREST EXPENSE:
Salaries and employee benefits 9,605 8,511 5,712
Occupancy, net 2,278 2,140 1,337
Federal deposit insurance premiums 287 1,011 885
SAIF assessment - 2,651 -
Professional fees 594 645 501
Insurance premiums 180 273 227
Data processing fees 621 390 243
Foreclosed real estate expense, net 71 105 10
Other 3,476 2,717 1,953
------- ------- -------
Total operating expenses 17,112 18,443 10,868
------- ------- -------
Income before income taxes and
extraordinary item 8,920 3,968 3,130
Income taxes 3,333 796 1,152
------- ------- -------
Income before extraordinary item 5,587 3,172 1,978
Extraordinary item - penalty for pre-
payment of debt, net of tax - - 412
------- ------- -------
Net income $ 5,587 $ 3,172 $ 1,566
======= ======= =======
Earnings per common share:
Basic $1.34 $ .68 -
Assuming dilution $1.30 $ .68 -
Weighted average number of shares:
Basic 4,165 4,648 -
Assuming dilution 4,310 4,662 -
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
NINE-MONTH PERIOD ENDED DECEMBER 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, 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
Net income for the year - - - - 5,587 - - 5,587
Award of 33,592 shares and
forfeiture of 8,464 shares
of common stock under
Recognition and Retention
Plans - 67 - (378) - 311 - -
Amortization of Recognition
and Retention awards,
inclusive of tax benefit - 91 - 495 - - - 586
Allocation of ESOP shares - 348 423 - - - - 771
Purchase and retirement of
427,497 shares of common
stock - (7,780) - - - - - (7,780)
Dividends paid ($0.42 per
share) - - - - (1,804) - - (1,804)
Change in net unrealized gain
on securities available for
sale during the year, net of
income tax of $343 - - - - - - 612 612
------ ------- ------- ------- ------- ------ ------ -------
Balance at December 31, 1997 $ - $39,533 $(3,280) $(1,755) $29,580 $ (119) $ 948 $64,907
====== ======= ======= ======= ======= ====== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 AND 1996 AND
NINE-MONTH PERIOD ENDED DECEMBER 31, 1995
December 31,
--------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 5,587 $ 3,172 $ 1,566
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 500 500 315
Provision for losses on foreclosed
real estate 35 34 2
Depreciation and amortization 1,024 785 436
Net amortization of deferred premiums
and unearned discounts 1,045 1,928 169
Net (gain) loss on sales of
securities (69) 1,093 340
Amortization of RRP awards and
allocation of ESOP shares 1,266 858 -
Net (gain) loss on sale of real
estate owned (12) 10 (78)
Changes in assets and liabilities:
Decrease (increase) in accrued
interest receivable 327 114 (1,211)
Increase in accrued interest
payable 265 256 45
(Increase) decrease in other assets (2,697) (2,591) 511
Increase (decrease) in accounts
payable and other liabilities 1,310 834 (1,089)
------- ------- --------
Net cash provided by
operating activities 8,581 6,993 1,006
------- ------- --------
Cash flows from investing activities:
Net (disbursements) receipts from
lending activities (4,859) (14,900) 4,579
Purchase of loans (3,181) (115,694) (31,782)
Proceeds from mortgage-backed
securities principal repayments 56,484 54,119 22,143
Purchase of mortgage-backed
securities (148,157) (130,385) (76,689)
Purchase of debt and equity
securities (9,602) - (40,986)
Proceeds from sale of debt and
equity securities - 20,704 30,543
Proceeds from the sale of mortgage-
backed securities 42,558 90,657 -
Proceeds from maturities and calls
of debt securities 31,000 18,000 12,000
Purchase of FHLBNY stock (2,492) (4,141) -
Proceeds from sale of real estate
owned 376 369 1,618
Purchases and improvement of
premises and equipment (761) (2,185) (1,339)
------- ------- --------
Net cash used in investing
activities (38,634) (83,456) (79,913)
------- ------- --------
Cash flows from financing activities:
Net (decrease) increase in deposits (13,178) 19,035 30,263
Repayment of borrowings (773,100) (745,240) (90,092)
Proceeds from borrowings 826,200 807,737 93,303
(Decrease) increase in advance
payments by borrowers for taxes
and insurance (104) 820 (87)
Cash dividends paid (1,804) (912) -
Proceeds from issuance of common
stock - - 46,538
Purchase of common stock (7,780) (6,594) -
------- ------- --------
Net cash provided by
financing activities 30,234 74,846 79,925
------- ------- --------
Net increase (decrease) in
cash and cash equivalents 181 (1,617) 1,018
Cash and cash equivalents at
beginning of period 6,586 8,203 7,185
------- ------- --------
Cash and cash equivalents at end of
period $ 6,767 $ 6,586 $ 8,203
======= ======= ========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Income taxes $ 2,850 $ 1,776 $ 2,216
======= ======= ========
Interest $25,226 $23,400 $ 14,117
======= ======= ========
Non-cash investing and financing
activities:
Transfer from loans receivable to
real estate owned, net $ 275 $ 324 $ 396
======= ======= ========
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 gain (loss) on
securities available for sale, net
of income tax $ 612 $(1,904) $ 2,199
======= ======= ========
See accompanying notes to consolidated financial statements.
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 years ended December 31, 1997 and 1996
and the nine-month period ended December 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, 1997. 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 and
Insurance, the OTS and the 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
-------------------------------------------
The Company classifies 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,
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, 1997 and 1996, the Company classified 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 collectible. Interest on loans that have been restructured,
under certain circumstances, 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.
A loan is considered 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. Impaired loans are measured
based upon the present value of expected future cash flows or the fair
value of the underlying collateral, if the loan is collateral
dependent. Conforming residential mortgage, consumer and all other
loans less than $100,000 are excluded from the definition of impaired
loans as they are characterized as smaller balance, homogeneous loans
and are collectively evaluated. Impairment losses are included in the
allowance for loan losses through provisions charged to operations.
(e) 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.
(f) 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.
(g) 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. If there is an event or change in circumstances
that indicates that the basis of premises and equipment may not be
recoverable, management assesses the possible impairment of value
through evaluation of the estimated future cash flow of the asset on
an undiscounted basis as compared to the current carrying value. An
asset's carrying value would be adjusted, if necessary, to its fair
market value. 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 system's
services contract.
(h) 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.
(i) Earnings Per Share
--------------------
The Company adopted the provisions of SFAS No. 128, "Earnings Per
Share", which became effective for periods ending after December 15,
1997. All prior-period earnings per share data have been restated in
accordance with SFAS No. 128. Basic earnings per share is computed by
dividing net income by the actual weighted average number of common
shares outstanding during the period. Earnings per share, assuming
dilution, is computed by dividing net income by the actual weighted
average number of common shares outstanding during the period plus the
weighted average number of net shares that would be issued upon
exercise of dilutive options and restricted stock awards issued,
assuming proceeds used to repurchase shares pursuant to the treasury
stock method. The computation of earnings per share, assuming
dilution, does not assume conversion of options that would have an
anti-dilutive effect on earnings per share. The Company's initial
public offering was completed on September 29, 1995. Accordingly,
prior to 1996, per share data is not meaningful and has not been
presented.
(j) Stock Based Compensation
------------------------
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", 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. As permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company provides within Footnote 15-
"Stock Plans", pro forma earnings and earnings per share disclosures
for employee stock option grants as if the fair-value-based method
defined in SFAS No. 123 had been applied.
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, 1997 and 1996 was
approximately $5.3 million and $9.4 million, respectively.
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, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997
------------------------------------------
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 $ 3,000 $ 31 $ - $ 3,031
After one year but within five
years 5,995 33 - 6,028
After ten years 5,759 1 - 5,760
Corporate debt maturing:
After ten years 3,991 74 - 4,065
------- ---- ----- -------
Debt securities available for sale 18,745 139 - 18,884
Equity securities available for sale 10 199 - 209
------- ---- ----- -------
Debt and equity securities available
for sale $18,755 $338 $ - $19,093
======= ==== ===== =======
<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
======= ==== === =======
</TABLE>
There were no sales of debt or equity securities during the year ended
December 31, 1997. 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 $251,000 and $340,000, respectively.
5. MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
---------------------------------------------
The amortized cost and estimated market values of mortgage-backed
securities available for sale at December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997
-----------------------------------------
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 $2,951) $ 91,631 $ 238 $226 $ 91,643
FHLMC pass-through certificates
(net of deferred premiums of
$2,668) 111,050 916 92 111,874
FNMA pass-through certificates
(net of deferred premiums of
$2,416) 86,221 414 108 86,527
-------- ------ ---- --------
Mortgage-backed securities
available for sale $288,902 $1,568 $426 $290,044
======== ====== ==== ========
<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
======== ====== ==== ========
</TABLE>
Mortgage-backed securities were pledged to secure FHLBNY advances and
securities sold under agreement to repurchase at December 31, 1997 and
1996. The estimated market value of securities so pledged at December
31, 1997 and 1996 were $255.3 million and $141.7 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, 1997 and 1996 were $186,000 and $234,000,
respectively.
Sales of mortgage-backed securities during the year ended December 31,
1997 resulted in proceeds of $42.6 million and gross realized gains of
$207,000, and gross realized losses of $138,000. 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.
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, 1997 and 1996 is as
follows:
December 31,
-----------------------
1997 1996
---- ----
(Dollars in thousands)
First mortgage loans:
One-to-four family $244,364 $265,748
Multi-family 12,190 7,725
Non-residential 19,219 9,304
Construction 4,325 404
-------- --------
280,098 283,181
Commercial business 16,066 9,210
Consumer loans:
Second mortgage 18,110 17,295
FHA insured home improvement 15,115 13,613
Unsecured consumer 1,896 1,829
Home equity line of credit 1,485 1,147
Home improvement 1,051 154
Automobile 596 413
Other 197 256
-------- --------
38,450 34,707
-------- --------
Total loans 334,614 327,098
Less:
Deferred loan fees 594 404
Deferred (premiums), unearned
discounts, net (1,322) (1,389)
Allowance for loan losses 2,833 2,613
-------- --------
2,105 1,628
-------- --------
Loans receivable, net $332,509 $325,470
======== ========
At December 31, 1997 and 1996, the Company serviced loans for others
amounting to $4.8 million and $5.4 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, 1997 and 1996, loans in arrears three months or more
or in the process of foreclosure are as follows:
December 31,
------------------
(Dollars in thousands) 1997 1996
---- ----
Conventional first mortgage loans
(non-accrual) $1,767 $1,884
FHA insured and VA guaranteed (accruing) 291 404
Commercial loans (non-accrual) 38 -
Consumer loans (non-accrual) 407 450
------ ------
$2,503 $2,738
====== ======
Percent of net loans outstanding 0.75% 0.84%
==== ====
The amount of interest income on non-accrual loans which would have
been recorded for the years ended December 31, 1997 and 1996, and the
nine-month period ended December 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 $0.1 million, $0.2 million and $0.3 million,
respectively. In addition, during the years ended December 31, 1997
and 1996 and the nine-month period ended December 31, 1995, the
amounts of interest income on non-performing loans that was included
in interest income totaled $80,000, $75,000, and $11,000,
respectively.
An analysis of the allowance for loan losses for the year ended
December 31, 1997 and 1996 and the nine-month period ended December
31, 1995 is as follows:
December 31,
---------------------
(Dollars in thousands) 1997 1996 1995
---- ---- ----
Balance at beginning of period $2,613 $3,241 $3,048
Provision charged to operations 500 500 315
Charge-offs (297) (1,140) (133)
Recoveries 17 12 11
------ ------ ------
Balance at end of period $2,833 $2,613 $3,241
====== ====== ======
At December 31, 1997 and 1996, no loans were designated as impaired.
The average balance of impaired loan for the years ended December 31,
1997 and 1996 and the nine-month period ended December 31, 1995 were
$0, $2,781,000 and $3,443,000, respectively.
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, 1997 and 1996
is as follows:
December 31,
-----------------
(Dollars in thousands) 1997 1996
---- ----
Loans $1,901 $1,977
Mortgage-backed securities 1,908 1,571
Debt securities 160 748
------ ------
$3,969 $4,296
====== ======
8. PREMISES AND EQUIPMENT, NET
---------------------------
A summary of premises and equipment at December 31, 1997 and 1996 is
as follows:
December 31,
-----------------
(Dollars in thousands) 1997 1996
---- ----
Land $ 1,056 $ 1,056
Buildings 5,157 5,066
Leasehold improvements 974 915
Furniture, fixtures and equipment 6,971 6,383
------ -------
Total $14,158 $13,420
------- -------
Less accumulated depreciation 8,094 7,124
------- -------
$ 6,064 $ 6,296
======= =======
Depreciation and amortization expense included in occupancy and other
expense in the consolidated statements of income amounted to $993,000,
$708,000 and $398,000 for the years ended December 31, 1997, 1996 and
the nine-month period ended December 31, 1995, respectively.
9. REAL ESTATE OWNED, NET
----------------------
Real estate owned, net at December 31, 1997 and 1996 is summarized as
follows:
December 31,
----------------
(Dollars in thousands) 1997 1996
---- ----
Acquired by foreclosure or deed in
lieu of foreclosure $638 $741
Less allowance for losses on real
estate owned 198 178
---- ----
$440 $563
==== ====
An analysis of the allowance for losses on real estate owned for the
years ended December 31, 1997 and 1996 and the nine-month period ended
December 31, 1995 is as follows:
December 31,
-----------------------
(Dollars in thousands) 1997 1996 1995
---- ---- ----
Balance at beginning of period $178 $223 $540
Provision charged to operations 35 34 2
Charge-offs (15) (79) (319)
---- ---- ----
Balance at end of period $198 $178 $223
==== ==== ====
Results of real estate operations for the years ended December 31,
1997 and 1996 and the nine-month period ended December 31, 1995 are as
follows:
December 31,
---------------------
(Dollars in thousands) 1997 1996 1995
---- ---- ----
Acquired by foreclosure or deed in
lieu of foreclosure:
Net (gain) loss on sales of real
estate $(12) $ 10 $(78)
Holding costs 48 61 86
Provision charged to operations 35 34 2
--- ---- ---
Foreclosed real estate expense, net $ 71 $105 $ 10
==== ==== ====
10. DEPOSITS
--------
The weighted average cost of funds on deposits at December 31, 1997
and 1996 was 3.47% and 3.79%, respectively. A summary of deposits by
type of account is as follows:
December 31,
-----------------------------------
1997 1996
---------------- ----------------
Weighted Weighted
Average Average
Interest Interest
(Dollars in thousands) Amount Rate Amount Rate
------ ---- ------ ----
Savings accounts $142,399 2.91% $139,651 2.92%
Money market accounts 44,239 3.00 44,404 3.24
Non-interest bearing
deposits 24,440 - 16,374 -
NOW accounts 47,564 1.52 47,387 2.86
-------- --------
Core deposits 258,642 2.36 247,816 2.77
Certificates of deposit
maturing:
One year or less 156,791 4.98 176,409 4.90
One to three years 24,773 5.49 29,090 5.44
Three to five years 3,120 5.36 3,334 5.57
Five years and
thereafter 552 6.12 407 6.34
-------- --------
Total certificates 185,236 5.04% 209,240 4.99%
-------- --------
Total deposits $443,878 $457,056
======== ========
Interest rates on certificates of deposit accounts ranged from 2.50%
to 7.07% and 2.50% to 7.60% at December 31, 1997 and 1996,
respectively. At December 31, 1997, the Company had approximately
$19.3 million of certificates of deposit of $100,000 or more.
Interest expense on deposits for the years ended December 31, 1997 and
1996 and the nine-month period ended December 31, 1995 is summarized
as follows:
December 31,
--------------------------
(Dollars in thousands) 1997 1996 1995
---- ---- ----
Passbook savings and club accounts $ 4,082 $ 3,658 $ 2,218
NOW and money market accounts 2,548 2,650 1,817
Certificates of deposit 9,851 10,519 8,009
------- ------- -------
$16,481 $16,827 $12,044
======= ======= =======
11. BORROWED FUNDS
--------------
The following table sets forth certain information as to securities
sold under agreements to repurchase for the years ended December 31,
1997 and 1996 and the nine-month period ended December 31, 1995.
Nine-month
Period Ended
(Dollars in thousands) December 31, December 31,
------------------ ------------
1997 1996 1995
---- ---- ----
Maximum balance $187,000 $163,047 $25,603
Average balance $146,245 $108,434 $ 1,777
Weighted average interest rate 5.59% 5.50% 5.91%
At December 31, 1997, securities sold under an agreement to repurchase
with the FHLBNY consisted of FHLB bonds and mortgage pass-through
certificates with an amortized cost and market value of $198.0 million
and $198.7 million, respectively. 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:
December 31,
(Dollars in thousands) -----------------
1997 1996
---- ----
Maturity:
Maturing within 30 days $ 150 $22,400
Maturing within 2-3 years 28,000 -
Maturing within 3-4 years 60,000 -
Maturing within 4-5 years 58,000 60,000
-------- -------
$146,150 $82,400
======== =======
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, 1997 and 1996 was $56.6 million
and $44.2 million, respectively.
At December 31, 1997, the Company had a line of credit with the FHLBNY
of $33.7 million which expires on October 31, 1998. At December 31,
1997, the Company had outstanding an overnight advance of $14.2
million against this line at an interest rate of 6.63%. At December
31, 1996, the Company's FHLBNY credit line was $34.0 million against
which it then had an outstanding overnight advance of $24.8 million at
an interest rate of 7.13%.
The following table sets forth the maximum month-end balance and
average balance of FHLBNY advances for the periods indicated:
Nine-Month
Years Ended Period Ended
(Dollars in thousands) December 31, December 31,
--------------- ------------
1997 1996 1995
----- ---- ----
Maximum balance $28,800 $26,300 $50,992
Average balance $12,990 $15,639 $37,814
Weighted average interest
rate 5.64% 5.52% 7.46%
12. INCOME TAXES
------------
Income tax expense for the years ended December 31, 1997 and 1996 and
the nine-month period ended December 31, 1995 is made up of the
following components:
December 31,
-------------------------
(Dollars in thousands) 1997 1996 1995
---- ---- ----
Current tax expense:
Federal $3,428 $1,672 $1,051
State 302 204 57
------ ------ ------
3,730 1,876 1,108
Deferred tax expense:
Federal (364) (990) 42
State (33) (90) 2
------ ------ ------
(397) (1,080) 44
------ ------ ------
$3,333 $ 796 $1,152
====== ====== ======
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 years ended December 31, 1997 and 1996
and the nine-month period ended December 31, 1995 is as follows:
December 31,
---------------------
1997 1996 1995
---- ---- ----
Computed "expected" Federal tax
expense 34.0% 34.0% 34.0%
State income tax, net of Federal
tax benefit 2.0 2.0 2.0
Tax benefit from closed tax years - (17.7) -
Other 1.4 1.7 .8
---- ---- ----
37.4% 20.0% 36.8%
==== ==== ====
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. 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.
The Bank does not 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, 1997 and 1996 are as follows:
December 31,
--------------
(Dollars in thousands) 1997 1996
---- ----
From operations:
Deferred tax assets:
Non-accrual loan interest $ 59 $ 55
Allowance for loan losses 964 882
Deferred loan fees 200 138
Purchase accounting discount on
mortgage loans 38 49
Employee benefit plans 624 304
Other 46 218
------ ------
Total gross deferred tax assets 1,931 1,646
Deferred tax liabilities:
Accelerated depreciation 70 93
Amortization of discounts on
purchases of securities 30 79
Other 11 10
Additions to post 1987 tax reserve 164 205
------ ------
Total gross deferred tax
liabilities 275 387
------ ------
Net deferred tax asset from
operations 1,656 1,259
Shareholders' equity - unrealized (gains)
on securities available for sale (533) (189)
------ ------
Total net deferred tax asset $1,123 $1,070
====== ======
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. For vesting purposes,
participants were credited for years of service prior to the adoption
of the ESOP. 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,
inclusive 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 receives a
tax deduction equal to the initial value of the shares released.
The compensation expense related to the ESOP totaled $771,000 and
$569,000 for the years ended December 31, 1997 and 1996, and $106,000
for the nine-month period ended December 31, 1995. Such expense for
1997 and 1996 includes $348,000 and $146,000, respectively for the
valuation adjustment to reflect the increase in the average fair value
of the allocated shares over their initial value and $160,000 and
$85,000, respectively for dividends on unallocated shares. At
December 31, 1997, the ESOP held 338,560 shares in suspense as
unallocated shares, and 84,640 shares as allocated to participants.
The fair value of the unallocated ESOP shares at December 31, 1997 was
approximately $8.1 million, based upon a $24.00 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 earnings 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 $115,000, $110,000, and $75,000 in
the years ended December 31, 1997 and 1996 and in the nine-month
period ended December 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, unfunded
Supplemental Executive Retirement Plans ("SERP's"). The projected
benefit obligation of the SERP's was $3.3 million as of December 31,
1997, $2.9 million as of December 31, 1996 and $2.5 million as of
December 31, 1995, and the expense for the SERP's was approximately
$570,000 and $501,000 for the years ended December 31, 1997 and 1996,
and $344,000 for the nine-month period ended December 31, 1995.
15. STOCK PLANS
-----------
During 1996, the Company established two non-qualified plans, the
Employee RRP and the Director RRP, as a method of providing executive
officers, employees 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 Employee RRP and
Director RRP authorizes the granting of plan share awards for up to
148,120 shares and 63,480 shares of common stock, respectively. Plan
share awards of common stock of 25,128 and 176,869, net of forfeitures
were granted during 1997 and 1996, respectively. The plan share
awards of common stock vest in five equal annual installments
commencing one year from the date of grant. Compensation expense is
based upon the fair market value of the stock at the date of grant.
For the years ended December 31, 1997 and 1996, the Company recorded
expense of $495,000 and $183,000, respectively, related to the
Employee RRP and Director RRP.
During 1996, the Company established two fixed stock option plans
which are described below. The Company applies APB No. 25 and related
interpretations in accounting for its plans. Accordingly, no
compensation costs have 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 FASB No. 123,
the Company's net income and earnings per share for 1997 and 1996
would have been reduced on a pro forma basis to $5.4 million, or $1.30
per share basic, and $1.28 per share, assuming dilution and $3.1
million, or $0.67 per share basic and assuming dilution, respectively.
The fair value of options for both plans granted in 1997 and 1996 was
estimated at the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions, respectively:
dividend yield of 2.28% and 3.28%; expected volatility of 21.5% and
25.0%; risk free interest rates of 6.05% and 6.81%; and expected lives
of 5 years.
The 1996 Incentive Stock Option Plan authorized the granting of 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 authorized the granting of non-
statutory options for the purchase of up to 158,700 shares of common
stock to 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.
A summary of the status and activity of the Company's two fixed stock
option plans for the years ended December 31, 1997 and 1996 is as
follows:
1997 1996
----------------- ----------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
------ ----- ------ -----
Outstanding at beginning of year 358,280 $12.1875 - $ -
Granted 163,150 19.2739 389,980 12.1875
Canceled 21,160 12.1875 31,700 12.1875
------- -------
Outstanding at end of year 500,270 $14.4985 358,280 $12.1875
======= =======
Weighted average fair value of
options granted during the year $ 4.69 $ 3.01
====== ======
At December 31, 1997, there were 67,424 options exercisable under the
two fixed stock option plans. At December 31, 1996, no options were
exercisable under the two fixed stock option plans.
A summary of the fixed stock options outstanding under the Company's
two fixed stock option plans at December 31, 1997 is as follows:
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/97 Life Price at 12/31/97 Price
------ ----------- ---- ----- ----------- -----
$12.19-$14.35 395,270 8.59 $12.50 67,424 $12.19
$18.93-$22.48 105,000 9.97 22.01 - -
------- ------
500,270 8.88 $14.50 67,424 $12.19
======= ======
16. EARNINGS PER SHARE COMPUTATION
------------------------------
The following tables set forth information as to the calculation of
basic and diluted earnings per share for the years ended December 31,
1997 and 1996. The Company's initial public offering was completed on
September 29, 1995. Accordingly, prior to 1996, per share data is not
meaningful and has not been presented.
For the Year Ended 1997
----------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
--------- ----------- ------
Basic Earnings Per Share:
Income available to common
stockholders $5,587,000 4,164,861 $1.34
=====
Effect of Dilutive Stock
Equivalents:
Unvested restricted stock - 50,009
Stock options - 95,162
---------- ---------
Earnings Per Share, Assuming
Dilution:
Income available to common
shareholders with assumed
conversion $5,587,000 4,310,032 $1.30
========== ========= =====
For the Year Ended 1996
----------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
--------- ----------- ------
Basic earnings per share:
Income available to common
stockholders $3,172,000 4,648,310 $0.68
=====
Effect of dilutive stock
equivalents:
Unvested restricted stock - 6,028
Stock options - 8,113
---------- ---------
Earnings per share, assuming
dilution:
Income available to common
shareholders with assumed
conversion $3,172,000 4,662,451 $0.68
========== ========= =====
17. COMMITMENTS AND CONTINGENCIES
-----------------------------
Leases and Service Contract
---------------------------
Certain premises are leased under operating leases with terms expiring
through the year 2002, 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 ended December 31: (Dollars in thousands)
1998 $ 318
1999 285
2000 256
2001 167
2002 8
Thereafter -
------
Total $1,034
======
Net rental expense included in occupancy expense in the consolidated
statements of income amounted to $342,000, $418,000 and $165,000 for
the years ended December 31, 1997 and 1996 and the nine-month period
ended December 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 expected to total $540,000 annually through its
expiration.
Litigation
----------
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 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. 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,
------------------
1997 1996
---- ----
Financial instruments whose contract
amounts represent credit risk
(contract or notional amount):
Commitments to extend fixed rate credit $ 1,530 $10,827
Commitments to extend variable rate
credit 25,153 10,427
Commitments to purchase variable rate
mortgages - 3,654
Commercial letters of credit 1,520 2,963
Standby letters of credit - 145
Unused lines of credit 8,615 4,318
------- ------
$36,818 $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.
18. DISCLOSURES ABOUT FAIR VALUE OF 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. The table below excludes all non-financial instruments.
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, 1997 and 1996 are as follows:
December 31,
-------------------------------------
1997 1996
----------------- -----------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(Dollars in thousands)
Financial assets:
Cash and amounts due from
depository institutions $ 6,767 $ 6,767 $ 6,586 $ 6,586
Debt and equity securities,
available for sale 19,093 19,093 40,243 40,243
Mortgage-backed securities,
available for sale 290,044 290,044 240,974 240,974
Net loans 332,509 337,539 325,470 327,264
FHLBNY stock 10,260 10,260 7,768 7,768
Financial liabilities:
Deposits $443,878 $443,671 $457,056 $455,337
Borrowed funds 160,300 159,913 107,200 106,622
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 and FHLBNY 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 remaining 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.
19. REGULATORY MATTERS
------------------
The Bank is required to maintain certain levels of capital in
accordance with 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 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 FDIC, 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, 1997, 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, 1997 and 1996, compared to the OTS minimum
capital adequacy requirements and the OTS requirements for
classification as a well-capitalized institution:
OTS REQUIREMENTS
-------------------------------
FOR
CLASSIFICATION
MINIMUM CAPITAL AS WELL-
THE BANK ADEQUACY CAPITALIZED
------------- --------------- --------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ ----
(Dollars in thousands)
December 31, 1997
Tangible capital $60,298 8.96% $10,095 1.50%
Tier 1 (core) capital 60,298 8.96 26,919 4.00 $33,649 5.00%
Risk-based capital:
Tier 1 60,298 21.97 10,981 4.00 16,471 6.00
Total $62,953 22.93% $21,961 8.00% $27,451 10.00%
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%
The Deposit Act (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 SAIF and deposits insured by the BIF.
Effective January 1, 1997, SAIF members have the same risk-based
assessment schedule as BIF members - zero to 27 basis points. FICO
debt service assessments of 6.3 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 Company was not required
to pay a deposit insurance assessment and is required to pay a FICO
assessment of 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.
20. 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 $3,584,000 and $347,000 at December 31, 1997 and
1996, respectively, and do not involve more than normal risks of
repayment. During the year ended December 31, 1997, new loans of
$3,296,000 were made to related parties and principal repayments of
$59,000 were received. During the year ended December 31, 1996, new
loans of $352,000 were made to related parties and repayments were
$35,000. Other decreases of $194,000 resulted from loans to
individuals who no longer meet the criteria to be classified as an
insider loan.
21. 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, 1997 and 1996, for the years ended
December 31, 1997 and 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) 1997 1996
---- ----
Assets:
Cash $ 3 $ 245
Due from ESOP trust 106 106
Due from subsidiary 3,612 6,267
Investment in subsidiary 61,352 60,267
Other assets - 85
------- -------
Total Assets $65,073 $66,970
======= =======
Liabilities:
Accrued taxes $ 166 $ 35
------- -------
Shareholders' equity:
Paid in capital 39,533 46,807
Unallocated ESOP shares (3,280) (3,703)
Unearned RRP shares (1,755) (1,872)
Treasury stock (119) (430)
Retained earnings 30,528 26,133
------- -------
Total shareholders' equity 64,907 66,935
------- -------
Total liabilities and
shareholders' equity $65,073 $66,970
======= =======
PARENT COMPANY ONLY - STATEMENTS OF INCOME
For the Years For the Period
Ended May 31, 1995 to
(Dollars in thousands) December 31, December 31, 1995
------------ -----------------
1997 1996
---- ----
Other income $ 326 $ 396 $207
Expenses - 9 -
------ ------ ----
Income before taxes 326 387 207
------ ------ ----
Income taxes 118 140 74
------ ------ ----
Net income before equity in
earnings of subsidiary 208 247 133
Equity in earnings of subsidiary 5,379 2,925 338
------ ------ ----
Net income $5,587 $3,172 $471
====== ====== ====
PARENT COMPANY ONLY - STATEMENTS OF CASH FLOWS
For the Years For the Period
Ended May 31, 1995 to
(Dollars in thousands) December 31, December 31, 1995
-------------- -----------------
1997 1996
---- ----
Cash flows from operating
activities:
Net income $5,587 $3,172 $ 471
Adjustments to reconcile net
income to net cash provided
from operating activities:
Equity in earnings of subsidiary (5,379) (2,925) (338)
Decrease (increase) in due from
subsidiary 2,655 1,843 (8,110)
(Increase) in due from ESOP
trust - (106) -
Decrease (increase) in other
assets 85 122 (207)
Increase (decrease) in accrued
taxes 131 (39) 74
------ ------ ------
Net cash provided from
(used in) operating
activities 3,079 2,067 (8,110)
------ ------ ------
Cash flows from investing
activities:
Return of investment from
subsidiary 6,000 13,350 -
Investment in subsidiary (160) (8,195) (38,428)
------ ------ ------
Net cash provided from
(used in) investing
activities 5,840 5,155 (38,428)
------ ------ ------
Cash flows from financing
activities:
(Repurchase) issuance of
common stock (7,780) (6,594) 50,770
Dividends paid (1,804) (912) -
Contribution of common stock
to ESOP trust - - (4,232)
Allocation of ESOP shares 423 529 -
------ ------ ------
Net cash (used in)
provided from financing
activities (9,161) (6,977) 46,538
------ ------ ------
Net change in cash and
cash equivalents (242) 245 -
Cash and cash equivalents at
beginning of period 245 - -
------ ------ ------
Cash and cash equivalents at
end of period $ 3 $ 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 30, 1998 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 16, 1998
Victor M. Richel
Senior Vice President
and Chief Financial
BERNARD F. LENIHAN Officer March 30, 1998
Bernard F. Lenihan
MARIA F. RAMIREZ Director March 16, 1998
Maria F. Ramirez
WALTER G. SCOTT Director March 16, 1998
Walter G. Scott
THOMAS SHARKEY, SR. Director March 16, 1998
Thomas Sharkey, Sr.
STEPHEN R. TILTON Director March 16, 1998
Stephen R. Tilton
THOMAS V. WHELAN Director March 16, 1998
Thomas V. Whelan
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
21 Subsidiaries of the Registrant
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
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, (No. 33-09665) on
Form S-8, (No. 333-46063) on Form S-8 and (No. 333-46065) on
Form S-8 of our report dated January 26, 1998, relating to
the consolidated statements of financial condition of
Statewide Financial Corp. and subsidiary as of December 31,
1997 and 1996 and the related consolidated statements of
income, shareholders' equity, and cash flows for the years
ended December 31, 1997 and 1996, and the nine-month period
ended December 31, 1995 which report appears in the December
31, 1997 Annual Report on Form 10-K of Statewide Financial
Corp.
KPMG Peat Marwick LLP
Short Hills, New Jersey
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,767
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 309,137
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 335,342
<ALLOWANCE> 2,833
<TOTAL-ASSETS> 675,316
<DEPOSITS> 443,878
<SHORT-TERM> 160,300
<LIABILITIES-OTHER> 6,231
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 64,907
<TOTAL-LIABILITIES-AND-EQUITY> 675,316
<INTEREST-LOAN> 25,955
<INTEREST-INVEST> 23,653
<INTEREST-OTHER> 583
<INTEREST-TOTAL> 50,191
<INTEREST-DEPOSIT> 16,481
<INTEREST-EXPENSE> 25,384
<INTEREST-INCOME-NET> 24,807
<LOAN-LOSSES> 500
<SECURITIES-GAINS> 69
<EXPENSE-OTHER> 17,112
<INCOME-PRETAX> 8,920
<INCOME-PRE-EXTRAORDINARY> 5,587
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,587
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.30
<YIELD-ACTUAL> 3.77
<LOANS-NON> 2,212
<LOANS-PAST> 291
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,197
<ALLOWANCE-OPEN> 2,613
<CHARGE-OFFS> 297
<RECOVERIES> 17
<ALLOWANCE-CLOSE> 2,833
<ALLOWANCE-DOMESTIC> 2,833
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
