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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File # 0-26546.
STATEWIDE FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
New Jersey 22-3397900
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification
organization) Number)
70 Sip Avenue, Jersey City, New Jersey 07306
(Address of principal executive offices, including zip code)
(201) 795-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to the Form 10-K.
[ X ]
As of February 26, 1999, there were issued 4,053,509 and outstanding
4,049,963 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 $18.00 closing price of such
stock as of February 26, 1999, was $46,960,776. (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, 1999.
11. Executive Compensation Proxy Statement for Annual Meeting
of Shareholders to be filed not
later than April 30, 1999.
12. Security Ownership of Proxy Statement for Annual Meeting
Certain Beneficial Owners of Shareholders to be filed not
and Management later than April 30, 1999.
13. Certain Relationships and Proxy Statement for Annual Meeting
Related Transactions of Shareholders to be filed not
later than April 30, 1999.
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, through its branch offices, 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
as well as through the origination of commercial business, commercial
mortgage and consumer loans. In addition, the Company invests in U.S.
government and agency obligations and other permissible investments.
Over the past several years, the Company has sought to emphasize more
commercial lending and diversify its loan portfolio. As part of this
process, the Bank formed the Statewide Mortgage Funding division,
which provides wholesale lines of credit to mortgage bankers. 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, three in
Bergen County 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 April 10, 1998, the Company transferred
the lease of, and sold the deposits from, the Passaic in-store branch
to another financial institution. Under this sale, the acquirer
assumed all of the deposit liabilities associated with this branch,
and assumed the Company's obligations under its lease of the branch
location. The Company realized a pretax gain of $0.3 million on the
sale of these deposits. On May 9, 1998, the Company opened a retail
banking branch in North Arlington, New Jersey.
The Company faces significant competition both in originating 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 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. The
Company competes for loans and deposits principally on the basis of:
quality of service it provides to customers, rates charged on loans
and paid to depositors and extended business hours maintained in the
retail branches.
PERSONNEL
At December 31, 1998, the Company had a total of 166 full-time
employees and 45 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.
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.
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, 1998, the
Bank's leverage ratio as calculated under the prompt corrective action
rule was 7.95%. 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
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. As a result of the Deposit Act, insurance premiums for
thrifts were equalized with those of commercial banks, with premiums
ranging from 0% to 0.24% of assessed deposits. Since adoption of the
Deposit Act, various legislation modernizing the United States'
financial system has been proposed, although no legislation has yet
passed. Some of these proposals would eliminate the thrift charter or
restrict the activities of unitary thrift holding companies.
Management is currently unable to predict whether any of these
proposals will be adopted or what effect the adoption of any of these
proposals will have on the Company.
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.
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.
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, 1998, 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 7.14%, and were 7.25% for the
year ended December 31, 1998. 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.
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent
with safe and sound banking practices to help meet the credit needs of
its community, including low and moderate income neighborhoods. The
CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion
to develop the type of products and services that it believes are best
suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with the examination of the Bank, to
assess the institution's record of meeting the credit needs of its
community and to take such records into account in its evaluation of
certain applications, such as a merger or the establishment of a
branch, by the Bank. An unsatisfactory rating may be used as a basis
for the denial of an application by the OTS.
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, 1998, the Bank was in compliance
with the QTL requirement. At December 31, 1998, 92.0% 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%.
In January 1999, the OTS issued an amendment to its current
regulations with respect to capital distributions by savings
associations. The amended regulations will be effective April 1,
1999. Under the new regulation, savings associations that would
remain at least adequately capitalized following the capital
distribution, and that meet other specified requirements, would not be
required to file a notice or application for capital distributions
(such as cash dividends) declared below specified amounts. Under the
new regulation, saving associations which are eligible for expedited
treatment under current OTS regulations are not required to file an
application with the OTS if (i) the savings association would remain
at least adequately capitalized following the capital distribution,
(ii) the amount of capital distribution does not exceed an amount
equal to the savings association's net income for that year to date,
plus the savings association's retained net income for the previous
two years and (iii) the proposed capital distribution would not
violate any applicable law, regulation, agreement with or condition of
the OTS. Thus, under the new regulation, only undistributed net
income for the prior two years may be distributed in addition to the
current year's undistributed net income without the filing of an
application with the OTS. Savings associations which do not qualify
for expedited treatment or which desire to make a capital distribution
in excess of the specified amount, must file an application with, and
obtain the approval of, the OTS prior to making the capital
distribution. A savings association that is not required to file an
application is also not required to file a notice with the OTS prior
to making the capital distribution, unless (i) the savings association
would not be well capitalized following the distribution, or (ii) the
proposed distribution would reduce the amount of or retire any part of
the savings association's common stock, preferred stock or debt
instruments included in capital or (iii) the savings association is a
subsidiary of a savings and loan holding company. The new OTS
limitations on capital distributions are similar to the limitations
imposed upon national banks.
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.
(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 Company has changed its fiscal year end from March 31st
to a calendar year end, effective with the calendar year beginning
January 1, 1996 and, accordingly, has provided certain information at
or for the nine-month period ended December 31, 1995 and at or for the
year ended March 31, 1995.
The following table shows the carrying value, weighted average yield,
and maturities of the Company's debt and equity securities portfolio,
at December 31, 1998:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
--------------------------------------------------------------------------------------------
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. Treasury
securities and ob-
ligations of U.S.
Government corpor-
ations and agency
securities $2,006 6.18% $15,567 5.87% $ - - % $ - - % $17,573 5.91%
Corporate debt - - 8,761 5.99 - - 3,147 7.19 11,908 6.31
Trust preferred
securities - - - - - - 38,556 6.70 38,556 6.70
Equity securities 275 1.09 - - - - - - 275 1.09
------ ------ --- ------- -------
Total debt and
equity securities $2,281 5.75% $24,328 5.91% $ - - % $41,703 6.74% $68,312 6.40%
====== ==== ======= ==== ==== === ======= ==== ======= ====
</TABLE>
The following table shows the contractual maturity of the Company's
mortgage-backed securities at December 31, 1998. The table does not
include the effect of prepayments or scheduled principal amortization.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
-------------------------------------------------------------------------------------------
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 $ - - % $ - - % $ - - % $ 76,347 5.88% $76,347 5.88%
FHLMC 3,445 7.14 4,172 6.74 16,159 7.15 42,611 7.52 66,387 7.36
FNMA 3,555 7.40 6,574 6.96 4,247 7.60 34,308 7.43 48,684 7.38
Private label pass-
through certificates - - - - - - 10,013 6.25 10,013 6.25
Private label collat-
eralized mortgage
obligations - - - - - - 46,604 6.34 46,604 6.34
------ ------- ------- -------- --------
Total mortgage-
backed securities $7,000 7.27% $10,746 6.87% $20,406 7.24% $209,883 6.59% $248,035 6.67%
====== ==== ======= ==== ======= ==== ======== ==== ======== ====
</TABLE>
The following table shows the contractual maturity of the Company's
loans at December 31, 1998. The table does not include the effect
of prepayments or scheduled principal amortization.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
-------------------------------------------------------------------------------------------
First Mortgage Loans Other Loans
--------------------------------------------- --------------------------------
Warehouse
One-to-Four Multi Non- Mortgage Lines Commercial Total Loans
Family Family Residential Construction Consumer of Credit Business Receivable
------ ------ ----------- ------------ -------- ------------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year $ 5,860 $ 347 $ - $4,959 $ 4,033 $47,752 $ 9,388 $ 72,339
-------- ------- ------- ------ ------- ------- ------- --------
After 1 year:
1 to 3 years 14,548 - 4,824 5,395 7,525 - 2,946 35,238
3 to 5 years 13,757 201 6,338 - 8,194 - 891 29,381
5 to 10 years 37,132 12,783 10,025 - 10,533 - 5,910 76,383
10 to 20 years 72,330 7,812 5,562 - 10,619 - 1,850 98,173
Over 20 years 56,518 536 643 - - - - 57,697
-------- ------- ------- ------ ------- ------- ------- --------
Total due after
1 year 194,285 21,332 27,392 5,395 36,871 - 11,597 296,872
------- ------ ------ ------ ------- ------- ------- --------
-
Total loans $200,145 $21,679 $27,392 $10,354 $40,904 $47,752 $20,985 $369,211
======== ======= ======= ======= ======= ======= ======= ========
Less (Plus)
unearned dis-
counts (premiums)
and deferred
loan fees, net (303)
Less allowance
for loan losses 3,056
--------
Loans, net
$366,458
========
</TABLE>
As of December 31, 1998, the dollar amount of all loans due after
December 31, 1999, and the composition of fixed interest rates and
adjustable interest rates were:
Due After December 31, 1999
-----------------------------
Fixed Adjustable Total
----- ---------- -----
(Dollars in thousands)
Real estate mortgages $52,510 $195,894 $248,404
Other loans 37,852 10,616 48,468
------- -------- --------
Total loans $90,362 $206,510 $296,872
======= ======== ========
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 At or
Nine-Month For the
At or For the Year Period Ended Year Ended
Ended December 31, December 31, March 31,
--------------------- ------------ ----------
1998 1997 1996 1995 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $2,833 $2,613 $3,241 $3,048 $2,818
Provisions charged to operations 642 500 500 315 542
Loans charged off:
One-to-four family residential 154 68 186 67 135
Non-residential - - - - 151
Land and construction - - 848 - -
Commercial business - 10 - - -
Consumer 300 219 106 66 45
------ ------ ------ ------ ------
Total loans charged off 454 297 1,140 133 331
------ ------ ------ ------ ------
Recovery on loans:
One-to-four family residential 9 9 2 3 11
Consumer 26 8 10 8 8
------ ------ ------ ------ ------
Total recovery on loans 35 17 12 11 19
------ ------ ------ ------ ------
Net loans charged off 419 280 1,128 122 312
------ ------ ------ ------ ------
Balance, end of period $3,056 $2,833 $2,613 $3,241 $3,048
====== ====== ====== ====== ======
Ratio of net charge-offs during the
period to average net loans out-
standing during the period 0.12% 0.09% 0.42% 0.07% 0.18%
==== ==== ==== ==== ====
</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,
---------------------------------------------------------------------- ----------------
1998 1997 1996 1995 1995
----------------- ----------------- --------------- ---------------- ----------------
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 $1,579 51.7% $1,668 73.0% $2,156 81.2% $1,533 79.0% $1,338 79.0%
Multi-family 217 7.1 114 3.6 39 2.4 9 2.4 32 2.3
Non-residential 313 10.2 189 5.8 47 2.9 41 2.0 16 1.1
Land and construction 104 3.4 43 1.3 4 0.1 1,502 1.9 1,508 3.0
Consumer 329 10.8 286 11.5 275 10.6 156 14.7 154 14.6
Commercial business 418 13.7 533 4.8 92 2.8 - - - -
Warehouse mortgage lines
of credit 96 3.1 - - - - - - - -
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Balance, end of period $3,056 100.0% $2,833 100.0% $2,613 100.0% $3,241 100.0% $3,048 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</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,
-----------------------------------------------------------------------------------
1998 1997 1996
--------------------------- -------------------------- ---------------------------
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 $ 28,177 6.4% - % $ 20,033 4.4% - % $ 13,237 3.0% - %
NOW Accounts 45,307 10.2 1.5 48,535 10.8 2.4 45,275 10.1 2.8
Money Market Accounts 41,348 9.3 2.9 44,405 9.9 3.1 44,516 9.9 3.1
Savings Accounts 148,148 33.5 2.8 139,964 31.0 2.9 131,368 29.4 2.8
-------- ----- -------- ----- -------- -----
Total Core Deposits 262,980 59.4 2.3 252,937 56.1 2.6 234,396 52.4 2.7
-------- ---- -------- ---- -------- -----
Certificate Accounts
31 Day 520 0.1 4.8 437 0.1 4.4 2,239 0.5 5.2
2-4 Month 14,888 3.4 4.8 18,803 4.2 4.9 17,705 4.0 4.8
6 Month 12,612 2.8 3.2 22,790 5.0 3.8 24,706 5.5 3.7
7-9 Month 33,939 7.7 5.3 25,582 5.7 5.0 30,133 6.8 5.0
12 Month 9,835 2.2 3.8 19,238 4.3 4.5 15,438 3.5 3.7
18 Month 759 0.2 4.4 1,198 0.3 4.7 1,163 0.3 4.5
24 Month 9,013 2.0 5.4 10,774 2.4 5.5 5,770 1.3 4.9
30 Month 3,172 0.7 5.0 3,847 0.8 4.8 4,104 0.9 4.4
48 Month 530 0.1 4.6 877 0.2 4.8 1,431 0.3 5.1
60 Month 726 0.2 5.6 721 0.2 5.7 441 0.1 5.7
13-120 Month 68,989 15.6 5.3 68,064 15.1 5.4 83,218 18.6 5.6
36-90 Month 1,737 0.4 5.3 1,851 0.4 5.3 1,757 0.4 4.9
Fixed Rate IRA 16,593 3.7 5.4 16,737 3.7 5.4 17,634 3.9 5.4
Variable Rate IRA 5,120 1.2 4.9 5,160 1.1 5.4 5,012 1.1 5.2
Passbook Rate IRA 1,392 0.3 2.4 1,749 0.4 2.5 1,834 0.4 2.5
-------- ----- -------- ----- -------- -----
Total Certificates 179,825 40.6 5.0 197,828 43.9 5.0 212,585 47.6 5.0
-------- ----- -------- ----- -------- -----
Total Deposits $442,805 100.0% 3.4% $450,765 100.0% 3.7% $446,981 100.0% 3.8%
======== ===== ======== ===== ======== =====
</TABLE>
The following table shows rate information for the Company's
certificates of deposit at the dates indicated and maturity
information at December 31, 1998:
<TABLE>
<CAPTION>
At December 31, Period to Maturity from December 31, 1998
------------------ ----------------------------------------------
Two to Over
Within One to Three Three
1998 1997 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 $ 21,016 $ 26,361 $ 19,433 $ 1,219 $ 364 $ - $ 21,016
4.00% to 4.99% 51,138 21,407 37,612 11,256 1,408 862 51,138
5.00% to 5.99% 94,435 129,598 87,853 5,462 516 604 94,435
6.00% to 6.99% 2,785 5,377 930 242 714 899 2,785
7.00% to 7.99% 1,731 2,493 1,255 327 - 149 1,731
------- -------- ------ ------ ------ ----- --------
Total $171,105 $185,236 $147,083 $18,506 $3,002 $2,514 $171,105
======== ======== ======== ======= ====== ====== ========
</TABLE>
The following table sets forth the maturity dates of the Company's
certificates of deposit of $100,000 or more at December 31, 1998:
Maturity Period Amount
--------------- ------
(Dollars in
thousands)
Three months or less $ 9,839
Three through six months 5,705
Six through twelve months 5,604
Over twelve months 2,206
-------
Total $23,354
=======
The following table sets forth the maximum month-end balance and
average balance of borrowed funds for the periods indicated:
For the Year
Ended December 31,
---------------------------
(Dollars in thousands)
1998 1997 1996
---- ---- ----
Maximum balance $206,681 $196,512 $180,347
Average balance $148,120 $159,234 $124,087
Weighted average interest 5.56% 5.59% 5.50%
The following table sets forth certain information as to FHLBNY
advances at the dates indicated:
At December 31,
--------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
FHLBNY advances $25,300 $14,150 $24,800
Weighted average interest
rate of FHLBNY advances 5.13% 6.63% 7.13%
ITEM 2. PROPERTIES
At December 31, 1998, the Bank conducted its business through its 16
offices, including its home office at 70 Sip Avenue, Jersey City, New
Jersey.
Original
Date
Leased Date of
Leased or Lease
Location or 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
Elizabeth, NJ
Building Owned 1/75 --
Land Leased 4/74 3/99
One Statewide Court Owned 8/78 --
Secaucus, NJ
416 Anderson Avenue Owned 1/74 --
Cliffside Park, NJ
35 South Main Street
Lodi, NJ
Building Owned 1/76 --
Adjacent parcel of land Leased 1/74 12/00
19 Schuyler Avenue Leased 3/98 2/08
North Arlington, NJ
246 South Avenue Owned 10/79 --
Fanwood, NJ
345 South Avenue Owned 10/80 --
Garwood, NJ
400 Marin Boulevard Leased 6/95 6/10*
Jersey City, NJ
86 River Street Leased 1/96 12/02
Hoboken, NJ
*The Bank has the option to cancel the lease on the fifth and tenth
anniversary dates of the lease, with a six-month notice prior to that
anniversary date.
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 National Market. The
NASDAQ symbol for the Company's common stock is SFIN. As of December
31, 1998, there were 362 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
---- --- --------
1998
----
Fourth Quarter 19 1/4 15 1/2 $ 0.13
Third Quarter 21 1/2 15 1/4 $ 0.13
Second Quarter 26 11/16 20 5/8 $ 0.11
First Quarter 24 1/8 21 1/4 $ 0.11
1997
----
Fourth Quarter 24 18 $ 0.11
Third Quarter 22 17 3/4 $ 0.11
Second Quarter 18 1/8 14 1/2 $ 0.10
First Quarter 17 7/8 14 1/8 $ 0.10
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 and to $0.13 per
share during the third quarter of 1998. 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
At December 31, March 31,
---------------------------------- ---------
1998 1997 1996 1995 1995
---- ---- ---- ---- ----
(Dollars in thousands)
SELECTED FINANCIAL
CONDITION DATA:
Total assets $717,517 $675,316 $636,042 $559,049 $475,168
Loans receivable, net 366,458 332,509 325,470 195,773 169,909
Mortgage-backed
securities 248,035 290,044 240,974 260,107 203,677
Debt and equity
securities 68,312 19,093 40,243 80,126 80,987
Other real estate
owned, net 523 440 563 652 825
Total deposits 443,705 443,878 457,056 438,021 407,758
Borrowed funds 206,681 160,300 107,200 44,703 41,492
Shareholders' equity 60,499 64,907 66,935 72,315 22,022
REGULATORY CAPITAL
RATIOS (BANK):
Tangible capital ratio 7.95% 8.96% 9.41% 10.28% 4.57%
Core capital ratio 7.95% 8.96% 9.41% 10.28% 4.57%
Risk-based capital
ratio 13.72% 22.93% 26.21% 32.88% 16.65%
ASSET QUALITY RATIOS:
Non-performing loans
to total net loans 0.68% 0.75% 0.84% 2.87% 3.87%
Non-performing loans
to total assets 0.35% 0.37% 0.43% 1.01% 1.38%
Non-performing assets
to total assets 0.42% 0.44% 0.52% 1.12% 1.56%
Allowance for loan
losses to non-
performing loans 122.73% 113.18% 95.43% 57.66% 46.37%
Allowance for loan
losses to total net
loans 0.83% 0.85% 0.80% 1.66% 1.79%
OTHER DATA:
Number of deposit
accounts 52,272 54,677 53,695 50,062 46,767
Offices 16 16 16 15 13
<TABLE>
<CAPTION>
At or For the
At or For the Nine-Month At or For the
Years Ended Period Ended Year Ended
December 31, December 31, March 31,
---------------------- ------------- -------------
1998 1997 1996 1995 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS:
Return on average assets (1) 0.54% 0.82% 0.49% 0.41% 0.90%
Return on average equity (1) 5.65 8.74 4.67 5.46 21.09
Dividend payout ratio 55.81 32.31 29.41 - -
Equity to assets 8.43 9.61 10.52 12.94 4.63
Net interest rate spread (2) 2.97 3.31 2.99 3.12 3.66
Net interest margin (2) 3.46 3.77 3.45 3.45 3.78
Non-interest income to
average assets (4) 0.43 0.24 0.37 0.43 0.32
Non-interest expense to
average assets (1) 2.80 2.52 2.87 2.87 2.43
Efficiency ratio (1)(3) 77.32 65.91 81.65 80.87 63.31
Average interest-earning
assets to interest-bearing
liabilities 113.36% 111.88% 112.32% 108.45% 103.52%
</TABLE>
<TABLE>
<CAPTION>
For the
Nine-Month For the
For the Years Ended Period Ended Year Ended
December 31, December 31, March 31,
----------------------- ------------ ----------
(Dollars in thousands, except per share amounts)
SELECTED OPERATING DATA:
1998 1997 1996 1995 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income $45,261 $50,191 $45,278 $26,853 $33,419
Interest expense 23,223 25,384 23,656 14,162 15,975
------- ------- ------- ------- -------
Net interest income 22,038 24,807 21,622 12,691 17,444
Provision for loan losses 642 500 500 315 542
------- ------- ------- ------- -------
Net interest income after
provision for loan losses 21,396 24,307 21,122 12,376 16,902
Net (loss) gains on sales
of securities 4 69 (1,093) (340) -
Other non-interest income 2,848 1,656 2,382 1,962 1,518
Foreclosed real estate
expense, net 85 71 105 10 17
FDIC SAIF assessment - - 2,651 - -
Other non-interest expense 18,402 17,041 15,687 10,858 11,644
------- ------- ------- ------ ------
Income before income
taxes and extraordinary
item 5,761 8,920 3,968 3,130 6,759
Income taxes 2,231 3,333 796 1,152 2,466
------- ------- ------- ------ ------
Income before extra-
ordinary item 3,530 5,587 3,172 1,978 4,293
Extraordinary item:
Penalties for pre-payment
of debt, net of tax - - - (412) -
------- ------- ------- ------- -------
Net income $ 3,530 $ 5,587 $ 3,172 $ 1,566 $ 4,293
======= ======= ======= ======= =======
Per share data:
Basic earnings $ 0.90 $ 1.34 $ 0.68 - -
Diluted earnings $ 0.86 $ 1.30 $ 0.68 - -
Cash dividends declared $ 0.48 $ 0.42 $ 0.20 - -
(1) 1996 includes a one-time FDIC SAIF assessment of $2,651,000
pretax, $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 gain (loss) on sale of securities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
When used in this Form 10-K or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or
other public or shareholder communications, or in oral statements made
with the approval of an authorized executive officer, the words or
phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project", or similar expressions are
intended to identify "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. The Company
believes such statements to be reasonable and makes them in good
faith, however such forward-looking statements may vary from actual
results. Risks and uncertainties which may make actual results for
future periods differ materially from any opinions of statements
expressed with respect to future periods in any current statements,
include among other things, changes in economic conditions in the
Company's market area, changes in policies by regulators, change in
market interest rates, loan demand in the Company's market area and
unforeseen competition. Accordingly, the Company wishes to advise the
reader that the various factors including those listed above could
affect the Company's future financial performance and could cause the
Company's actual results for future periods to differ materially from
those anticipated or projected.
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
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
General. Net income for the for the year ended December 31, 1998
("1998") was $3.5 million, or $0.86, per share, assuming dilution, as
compared to $5.6 million, or $1.30, per share, assuming dilution, for
the year ended December 31, 1997 ("1997"). Earnings during 1998
include a pretax charge of $1.9 million incurred during the third
quarter to recognize additional amortization of premiums related to
estimated increases in prepayment speeds in the Company's mortgage-
backed investment securities portfolio. Basic earnings per share were
$0.90 for 1998 as compared to $1.34 for 1997.
Net income for 1998 decreased $2.1 million as compared to 1997
primarily from the $1.9 million pretax charge mentioned above. Other
factors affecting 1998 results versus 1997 were lower interest rates,
initiating secured wholesale lending to mortgage bankers through the
start-up of Statewide Mortgage Funding, commercial lending growth and
related staff support, and restructuring the Company's fee schedules.
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, debt
and equity securities, and other investments, and total interest
incurred on deposits and borrowed funds. Net interest income
decreased $2.8 million, or 11.2%, to $22.0 million for 1998 as
compared $24.8 million for 1997. The decline reflects contracting
spreads between short-term rates and long-term rates, accelerating
prepayments of principal from mortgage-backed securities and loans.
Resulting cash flows were used to reinvest into commercial and
consumer loans, bearing lower current market rates of interest,
including those originated by Statewide Mortgage Funding, and also to
pay off short-term borrowings and liquidate higher cost certificates
of deposit. The remainder was invested in short-term money market
instruments. These actions resulted in lower average interest-earning
balances and lower deposit costs in 1998 compared to 1997. Yields
were affected by reinvestment of cash flows into this lower interest
rate environment, and by additional premium amortization expense
incurred as a result of higher prepayment speeds from those initially
anticipated. Notably, in the third quarter of 1998 when applications
for mortgage refinancings reached record levels, the Company incurred
a $1.9 million pretax charge reflecting revised prepayment speed
assumptions. As a result of prepayments and lower current market
interest rates, the Company's average yield on its interest-earning
assets declined to 7.10% for the year ended December 31, 1998 from
7.61% for the year ended December 31, 1997.
Interest Income. Total interest and dividend income for 1998
decreased to $45.3 million from $50.2 million for 1997, a decrease of
$4.9 million, or 9.8%. The average balance of interest-earning assets
decreased $22.1 million, or 3.4%, to $637.9 million for 1998 compared
to $660.0 million for 1997. The related yields decreased between the
periods to 7.10% from 7.61%.
During 1998, the Company continued its efforts to change the mix of
its interest-earning assets toward higher-yielding, shorter duration
commercial and consumer lending, including the start-up of Statewide
Mortgage Funding in mid-year 1998, to provide short-term secured
funding to mortgage bankers. As a result, 1998 average balances for
the non-residential mortgage and commercial and consumer portfolios
increased $46.6 million, or 63.3%, yielding 8.76% on the combined
average balance of $120.3 million compared to the 1997 yield of 9.32%
on combined average balances of $73.7 million. These efforts more
than offset the $34.6 million decline in one-to-four family mortgage
loans.
With respect to securities investments, the Company sought to
emphasize short-term investments. The average balance of securities
investments during 1998 was $34.1 million less than in 1997, and the
average yield on these portfolios was 117 basis points less, 6.14% in
1998 versus 7.31% in 1997. The 1998 yield was substantially affected
by $2.7 million of additional premium expense recognized in 1998 over
that incurred in 1997 as a result of the significant increase in
actual and forecasted principal repayments. In addition, yields were
lower because the Company reinvested cash flows into shorter duration
instruments during 1998.
Interest Expense. Interest expense decreased $2.2 million, or 8.5%,
to $23.2 million for 1998 compared to $25.4 million for 1997.
Interest expense on deposits and borrowed funds decreased $1.5 million
and $0.7 million, respectively. The decrease in interest on deposits
was as a result of lower rates paid on interest-bearing deposits,
growth in non-interest-bearing demand deposits, and a decline in
certificates of deposit, partially offset by growth in the average
balance of core deposits. The decrease in borrowed funds resulted
from decreased average borrowing levels coupled with a three basis
point drop in average costs.
Interest expense on deposits for 1998 totaled $15.0 million compared
to $16.5 million for 1997. The decline in total interest expense on
deposits reflects lower rates paid on deposits due to the lower
interest rate environment, an increase in demand deposits from the
Company's relationship-building efforts with its commercial customers,
and a decline in certificates of deposit balances. Interest expense
on core deposits decreased $0.7 million, reflecting a 35 basis point
decrease in cost for these funds partially offset by the increase in
average core deposits of $10.0 million, or 4.0%, during 1998 over
1997. Interest expense on certificates of deposits decreased $0.8
million from a decline of $18.0 million in the average balance of
certificates of deposit, partially offset by a four basis point
increase in average yield. During 1998, the Company continued with
its strategy of not matching the most aggressive rates for
certificates of deposit.
Average borrowed funds decreased $11.1 million during 1998 to $148.1
million over the $159.2 million during 1997. The cost of borrowed
funds declined three basis points to 5.56% for 1998 from 5.59% for
1997. The decrease in borrowed funds was a result of decreased
borrowing levels as the Company used cash flows from investing
activities to repay its short-term debt rather than reinvesting in
lower yielding investments.
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, 1998. 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, 1998, 1997 and
1996. 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, 1998
---------------------
Actual Average
Balance Yield/Cost
------- ----------
(Dollars in thousands)
Assets:
Interest-earning assets:
One-to-four family mortgage loans $198,794 7.29%
Consumer and other loans 40,739 8.82
Commercial business loans 20,477 8.81
Multi-family, non-residential and
construction mortgage loans 58,791 8.50
Warehouse mortgage lines of credit 47,657 8.17
--------
Total loans, net 366,458 7.85
Mortgage-backed securities 248,035 6.67
Debt and equity securities 68,312 6.40
Money market investment - -
FHLBNY stock 10,315 6.90
--------
Total interest earning assets 693,120 7.27%
----
Non-interest-earning assets 24,397
--------
Total assets $717,517
========
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts $156,872 2.46%
NOW accounts 44,764 1.29
Money market accounts 37,811 2.73
Certificates of deposit 171,105 4.85
Borrowed funds 206,681 5.49
--------
Total interest-bearing liabilities 617,233 4.07%
----
Non-interest-bearing liabilities:
Non-interest-bearing deposits 33,153
Other non-interest bearing liabilities 6,632
--------
Total non-interest-bearing
liabilities 39,785
--------
Total liabilities 657,018
Shareholders' equity 60,499
--------
Total liabilities and shareholders'
equity $717,517
========
Net interest income/net interest rate
spread 3.20%
====
Net interest margin 3.65%
====
Ratio of interest-earning assets to
interest-bearing liabilities 112.29%
======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------
1998 1997 1996
------------------------- -------------------------- ---------------------------
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:
One-to-four family mortgage loans $219,906 $16,481 7.49% $254,523 $19,085 7.50% $219,693 $16,971 7.72%
Consumer and other loans 39,674 3,652 9.21 36,312 3,500 9.64 33,950 3,176 9.35
Commercial business loans 17,462 1,550 8.88 14,383 1,354 9.41 3,559 332 9.33
Multi-family, non-residential and
construction mortgage loans 45,010 3,861 8.58 22,988 2,016 8.77 10,157 727 7.16
Warehouse mortgage lines of credit 18,153 1,472 8.11 - - - - - -
-------- ------- -------- ------- -------- -------
Total loans, net 340,205 27,016 7.94 328,206 25,955 7.91 267,359 21,206 7.93
Mortgage-backed securities 235,110 13,995 5.96 292,671 21,577 7.37 286,794 19,377 6.76
Debt and equity securities 41,544 2,910 7.03 30,228 2,066 6.86 63,092 4,115 6.52
Money market investment 10,809 596 5.51 140 10 7.14 2,088 113 5.41
FHLBNY stock 10,260 744 7.25 8,800 583 6.63 7,224 467 6.46
-------- ------- -------- ------- -------- -------
Total interest-earning assets 637,928 45,261 7.10% 660,045 50,191 7.61% 626,557 45,278 7.23%
------- ---- ------- ---- ------- ----
Non-interest-earning assets 21,172 19,477 17,153
-------- -------- --------
Total assets $659,100 $679,522 $643,710
======== ======== ========
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts $148,148 4,090 2.76% $139,964 4,082 2.92% $131,368 3,658 2.78%
NOW accounts 45,307 663 1.46 48,535 1,166 2.40 45,275 1,285 2.84
Money market accounts 41,348 1,207 2.92 44,405 1,382 3.11 44,516 1,365 3.07
Certificates of deposit 179,825 9,031 5.02 197,828 9,851 4.98 212,585 10,519 4.95
Borrowed funds 148,120 8,232 5.56 159,234 8,903 5.59 124,087 6,829 5.50
-------- ------- -------- ------- -------- -------
Total interest-bearing liabilities 562,748 23,223 4.13% 589,966 25,384 4.30% 557,831 23,656 4.24%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Non-interest-bearing liabilities:
Non-interest-bearing deposits 28,177 20,033 13,237
Other non-interest bearing liabilities 5,681 5,627 4,708
-------- -------- --------
Total non-interest-bearing
liabilities 33,858 25,660 17,945
-------- -------- --------
Total liabilities 596,606 615,626 575,776
Shareholders' equity 62,494 63,896 67,934
-------- -------- --------
Total liabilities and shareholders'
equity $659,100 $679,522 $643,710
======== ======== ========
Net interest income/net interest rate
spread $22,038 2.97% $24,807 3.31% $21,622 2.99%
======= ==== ======= ==== ======= ====
Net interest margin 3.46% 3.77% 3.45%
==== ==== ====
Ratio of interest-earning assets to
interest-bearing liabilities 113.36% 111.88% 112.32%
====== ====== ======
</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,
------------------------------------------------------------------
1998 vs 1997 1997 vs 1996
--------------------------------- ------------------------------
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:
One-to-four family mortgage
loans $(2,596) $ (10) $ 2 $(2,604) $2,691 $ (498) $ (79) $2,114
Consumer and other loans 324 (157) (15) 152 221 96 7 324
Commercial business loans 290 (77) (17) 196 1,010 3 9 1,022
Multi-family, non-residential
and construction mortgage
loans 1,931 (44) (42) 1,845 918 164 207 1,289
Warehouse mortgage lines of
credit 1,472 - - 1,472 - - - -
Mortgage-backed securities (4,244) (4,125) 787 (7,582) 397 1,769 34 2,200
Debt securities 777 50 17 844 (2,143) 216 (122) (2,049)
Money market investments 762 (2) (174) 586 (105) 36 (34) (103)
FHLBNY stock 97 55 9 161 102 12 2 116
-------- ------- ----- ------- ------- ------ ----- ------
Total (1,187) (4,310) 567 (4,930) 3,091 1,798 24 4,913
-------- ------- ----- ------- ------ ------ ----- ------
Interest-bearing liabilities:
Deposits (616) (908) 34 (1,490) (117) (231) 2 (346)
Borrowed funds (621) (53) 3 (671) 1,934 109 31 2,074
-------- ------- ----- ------- ------ ------ ----- ------
Total (1,237) (961) 37 (2,161) 1,817 (122) 33 1,728
-------- ------- ----- ------- ------ ------ ----- ------
Net change in net interest
income $ (50) $(3,349) $ 530 $(2,769) $1,274 $1,920 $ (9) $3,185
======= ======= ===== ======= ====== ====== ===== ======
</TABLE>
Provision for Loan Losses. Provision for loan losses for 1998
increased to $642,000 from $500,000 for 1997. The increase in
provision for loan losses in 1998 was determined by management after
review of, among other things, the composition and volume of the
Company's loan portfolio, the risk inherent in the Company's lending
activities, and the economy in the Company's market areas. The
increased provision in 1998 reflects both the increased average
balance of loans as well as the change in composition of the portfolio
toward more commercial loans. Commercial loans generally involve more
potential risk than do loans secured by one-to-four family residences.
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, 1998, allowance for loan losses was
$3.1 million compared to $2.8 million at December 31, 1997, an
increase of $223,000, or 7.9%. Non-performing loans, which consist of
non-accrual loans and accruing loans delinquent 90 days or more,
decreased slightly to $2,490,000 at December 31, 1998 from $2,503,000
at December 31, 1997. The coverage ratio of allowance for loan losses
to non-performing loans and also to net loans at December 31, 1998 was
122.73% and 0.83%, respectively, as compared to 113.18% and 0.85%,
respectively, at December 31, 1997.
Non-interest Income. Non-interest income for 1998 was $2.9 million
compared to $1.7 million for 1997. Recurring non-interest income,
exclusive of gains on sales of investment securities and the gain on
the sale of the Passaic branch, was $2.5 million for 1998, an increase
of $0.8 million or 53.8%, over 1997. Core deposit and commercial
lending growth, along with increases in the Company's fees schedule
during mid-second quarter 1998, were the principal reasons for the
increase in recurring non-interest income. Specifically, this rise
reflects increased deposit account fees for monthly maintenance on
checking and savings products, returned check assessment charges, ATM
surcharges for non-customer service usage, increased earned loan fees
and charges, and higher annuity sales generated through cross selling
efforts in our branch network.
During 1998, the Company realized a gain on the sale of the Passaic
branch of $0.3 million and a gain of $4,000 from the sale of
securities compared to a gain of $69,000 from the sale of securities
in 1997.
Non-interest Expense. Non-interest expense totaled $18.5 million for
1998, an increase of $1.4 million, or 8.0%, as compared to $17.1
million for 1997. The current year reflects increases in salaries and
benefits costs, professional fees, occupancy, postage, communications
and ATM and MAC service costs.
Salaries and employee benefits expense is the largest component within
non-interest expense, and increased $0.8 million, or 8.0%, during 1998
as compared to 1997. Of this amount, salary expense increased $0.4
million and employee benefit expense increased $0.4 million. The
increase in salary and benefits expense reflects current year staff
additions and annual wage increases, partially offset by the virtual
elimination of the 1998 executive incentive plan benefits. During
1998, staffing increased for the newly formed Statewide Mortgage
Funding division, expansion of the commercial lending division and for
the opening of the North Arlington N.J. branch, partially offset by
the sale of the Passaic branch during the second quarter of 1998.
Employee benefit expense for 1998 includes an increase of $96,000
related to the Company's Employee Stock Ownership Plan ("ESOP") over
the same period of the prior year because of an increase in the market
value of the Company's stock for the current period over 1997. ESOP
expense is included as compensation based upon the market value of the
shares awarded. The increase in employee benefit expense was also
caused by an unrealized market loss in the cash surrender value of
policies held in conjunction with Company life insurance programs,
higher employee recruitment costs, and a proportionate increase in
payroll related taxes.
Occupancy expense, which includes rent, leasehold improvements,
furniture, fixtures and equipment ("FF&E") and other occupancy related
maintenance, was $2.3 million in 1998, $70,000 more than the expense
incurred in 1997. The current year reflects the additional expense of
operating system improvements, start-up of Statewide Mortgage Funding,
increases in real estate taxes and utilities as well as ongoing
facility renovations throughout the Company. In addition, the change
in this expense reflects the closing of the Passaic, New Jersey and
the opening of the North Arlington, New Jersey branches.
Professional fees increased $0.2 million, or 41.8%, to $0.8 million
for 1998 as compared to $0.6 million in 1997 because of increased
legal activity in conjunction with the Company's pursuit of its FIRREA
litigation against the Federal government and review of its ESOP and
other Company benefit plans, and because of increases in fees paid to
other professionals for a study which resulted in a revision to the
Company's non-interest income fees schedule.
Data processing costs increased $0.1 million, or 11.9%, to $0.7
million for 1998 from $0.6 for 1997. The increase resulted from
higher transaction activity costs on loan and deposit products, and
costs related to expansion and enhancements of the Company's
application and network systems.
The remaining components of non-interest expense increased $0.2
million, or 5.4%, to $4.2 million for 1998 compared to $4.0 million
for 1997 principally as a result of the Company's expansion and
growth. Advertising and marketing expenses increased $218,000 over
1997 because of the opening of the North Arlington, New Jersey branch,
efforts to increase name recognition and specific financial products.
Transaction growth resulted in a 1998 expense increase of $122,000
from higher postage, communication and ATM expenses. These expense
increases were partially offset by $162,000 from reductions in
director benefits, bank correspondent fees and miscellaneous losses as
well as lower charges for printing.
Income Tax Expense. Income tax decreased $1.1 million to $2.2 million
for 1998 compared to $3.3 million for 1997. The reduction is
principally the result of the tax effect of the $3.2 million reduction
in pretax income for 1998 as compared to 1997.
FINANCIAL CONDITION
Total assets increased $42.2 million, or 6.2%, to $717.5 million at
December 31, 1998 from total assets of $675.3 million at December 31,
1997. Net loans at December 31, 1998 were $33.9 million more than a
year ago as originations of commercial mortgages, commercial business
and consumer loans and wholesale mortgage loans to mortgage bankers,
more than offset repayments in these portfolios and in the one-to-four
family mortgage loan portfolio during 1998. Debt and equity
securities at December 31, 1998 were $49.2 million more than the
outstanding balance at the prior year end, primarily reflecting the
purchase of corporate debt issues partially offset by maturities,
calls and sales of federal agency and corporate debt securities during
1998. At December 31, 1998 mortgage-backed securities were $42.0
million lower than the investment at the prior year-end reflecting
normal and accelerated principal payments in this portfolio, partially
offset by purchases of mortgage-backed securities during the fourth
quarter of 1998. Asset growth at December 31, 1998 over the prior
year-end was primarily funded through short-term FHLB borrowings and
an increase in core deposits, partially offset by a decrease in higher
yielding certificates of deposit.
At December 31, 1998, shareholders' equity was $60.5 million, a
decrease of $4.4 million compared to $64.9 million at December 31,
1997. The ratios of shareholders' equity to total assets was 8.43% at
December 31, 1998 and 9.61% at December 31, 1997. The current year
decrease resulted primarily from the purchase on the open market and
retirement of 363,258 shares of common stock for $7.1 million at an
average price of $19.53 per share, the payment of four quarterly
dividends totaling $1.9 million and a net decrease of $0.4 million
(net of taxes) in the market value of the investment portfolio.
Partially offsetting these decreases were net income of $3.5 million,
a reduction of $1.4 million in the unallocated and unearned ESOP,
Employee RRP, and Director RRP shares.
LENDING ACTIVITIES
Loan Portfolio Composition. At December 31, 1998, the Company had
total loans of $369.2 million compared to $334.6 million at December
31, 1997. Total loans increased $34.6 million, or 10.3%, during 1998
over 1997 as the Company's efforts continue towards the origination of
commercial and multi-family mortgages, and commercial business and
consumer loans. The largest portion of the portfolio continues to be
one-to-four family first mortgage loans which totaled $200.1 million,
or 54.2%, of the loan portfolio as compared to 73.0% of the loan
portfolio at December 31, 1997. Other loan categories within the
portfolio consist of: commercial business and wholesale funding loans
of $68.7 million, or 18.6% of the loan portfolio; multi-family and
non-residential mortgage loans of $49.1 million, or 13.3% of the loan
portfolio; consumer loans primarily comprised of fixed rate second
mortgage loans and FHA Title One insured home improvement loans of
$40.9 million, or 11.1% of the loan portfolio; and acquisition, and
construction loans of $10.4 million, or 2.8% of the loan portfolio.
The types and amount of loans that the Company may originate or
purchase and hold in its portfolio 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 1998, as a result of the continued low interest rate
environment and increased rate competition, total one-to-four family
first mortgage loans decreased $44.3 million, or 18.1%, to $200.1
million at December 31, 1998 from $244.4 million at December 31, 1997.
This decrease reflected normal principal amortization and accelerated
prepayments, partially offset by originations of $10.4 million of
one-to-four family first mortgage loans. The Company did not
emphasize one-to-four family lending during 1998, as the spreads
between competitors' rates and the cost of funds 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, 74.9% were ARM loans and 25.1%
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, 1998, the weighted average adjustment period approximated 2.3
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 1.0%
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's commercial and multi-family real estate loan portfolio
is secured primarily by apartment buildings, mixed-use buildings,
small office buildings, strip shopping centers, 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 three or five years, with periodic adjustments
after three or 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, LIBOR 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.
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, 1998, second mortgage loans amounted to $17.9 million, or 4.9%, of
total loans, a decrease of $0.2 million, or 1.0%, from December 31,
1997.
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 $14.4 million, or 3.9%, of total loans at December 31,
1998.
Remaining other loans are home equity lines of credit, other home
improvement loans, secured and unsecured personal loans, and
automobile loans. As of December 31, 1998, these loans amounted to
$8.5 million, or 2.3%, of total loans, an increase of $3.3 million, or
63.1%, from December 31, 1997.
Warehouse Mortgage Lines of Credit. During 1998, the Company started
its Statewide Mortgage Funding division which originates revolving
lines of credit to small and medium-sized mortgage banking companies
at interest rates approximating prime. The lines are drawn upon by
these companies to fund the origination of mortgages, primarily one-
to-four family loans, where the amount of the draw is generally no
higher than 97% of the loan which, in turn, is no higher than 80% of
the appraised value of the property. The loans are repaid upon
completion of the sale of the mortgage loan to third parties which
usually occurs within 90 days. During the period that the loans are
outstanding, the Company maintains possession of the original
mortgage. The customers of Statewide Mortgage Funding are primarily
located in New Jersey and surrounding states. However, the Company is
seeking to expand this business line and may expand into other
geographic regions. This is the fastest growing segment of the
Company's loan portfolio, but these loans are short duration and made
to a customer base who have approximately 50% of their business from
mortgage refinancing. In the event of rising interest rates, the
Company expects that utilization of these lines of credit, made
through Statewide Mortgage Funding, would be substantially reduced and
replaced only to the extent of strength in the general housing
markets.
Commercial Business Loans. During 1998, 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.
Commercial Lending. At December 31, 1998, the Company's total loan
portfolio included $49.1 million, or 13.3%, of commercial and
multi-family mortgage loans and $68.7 million, or 18.6%, of commercial
business loans, including loans made through Statewide Mortgage
Funding. The combined total of $117.8 million at December 31, 1998
compares to $47.5 million of like loans at December 31, 1997.
Commercial business loans totaled $21.0 million, an increase of $4.9
million, or 30.6%, over the prior year-end and wholesale loans to
mortgage bankers totaled $47.8 million with no balance outstanding at
year-end 1997. In addition, at December 31, 1998, $10.4 million, or
2.8%, of the Company's total loan portfolio consisted of construction
loans, an increase of $6.1 million as compared to $4.3 million at
December 31, 1997. The growth in these product lines was the result
of management's strategy to develop higher yielding, variable rate
based, non-residential loans. Additionally, the growth in Statewide
Mortgage Funding was the result of management's strategy to find a
secure, short duration investment alternative to accommodate increased
cash flows from mortgage refinancing. Statewide Mortgage Funding
allows the Company to place its cash flows into higher-yielding loans
in the industry that is the driver for the accelerated prepayments.
Management's strategy is that when prepayments slow, and consequently
mortgage bankers' demand for wholesale funding slows, there will be
opportunities for higher yields and spreads through other commercial
lending and consumer lending as well as through investment in
securities. These strategies help to diversify the Company's loan
offerings and portfolio mix, and facilitate interest rate risk
management.
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,
--------------------------------------------------------------- ------------
1998 1997 1996 1995 1995
--------------- --------------- --------------- ------------ ---------
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 $200,145 54.2% $244,364 73.0% $265,748 81.2% $157,686 79.0% $137,317 79.0%
Multi-family 21,679 5.9 12,190 3.6 7,725 2.4 4,742 2.4 3,978 2.3
Non-residential 27,392 7.4 19,219 5.8 9,304 2.9 4,055 2.0 1,987 1.1
Construction 10,354 2.8 4,325 1.3 404 0.1 3,707 1.9 4,217 2.4
Land - - - - - - 40 - 1,017 0.6
-------- ---- -------- ----- -------- ----- -------- ----- -------- -----
Total first
mortgage loans 259,570 70.3 280,098 83.7 283,181 86.6 170,230 85.3 148,516 85.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Consumer loans:
Second mortgage 17,937 4.9 18,110 5.4 17,295 5.3 13,938 7.0 12,493 7.2
FHA insured home
improvement 14,447 3.9 15,115 4.5 13,613 4.2 12,527 6.3 10,611 6.1
Unsecured consumer 1,533 0.4 1,896 0.6 1,829 0.6 1,088 0.6 489 0.3
Home equity lines
of credit 3,737 1.0 1,485 0.4 1,147 0.4 1,263 0.6 1,344 0.8
Automobile loans 664 0.2 596 0.2 413 0.1 87 - - -
Home improvement 2,415 0.7 1,051 0.3 154 - 6 - - -
Other 171 - 197 0.1 256 - 422 0.2 397 0.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total consumer
loans 40,904 11.1 38,450 11.5 34,707 10.6 29,331 14.7 25,334 14.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Warehouse mortgage
lines of credit 47,752 12.9 - - - - - - - -
Commercial business 20,985 5.7 16,066 4.8 9,210 2.8 - - - -
-------- ----- -------- ----- -------- ---- -------- ----- -------- -----
Total loans 369,211 100.0% 334,614 100.0% 327,098 100.0% 199,561 100.0% 173,850 100.0%
===== ===== ===== ===== =====
Less (plus):
Unearned discounts/
(premiums) and
deferred loan fees,
net (303) (728) (985) 547 893
Allowance for loan
losses 3,056 2,833 2,613 3,241 3,048
-------- -------- -------- -------- --------
Total loans, net $366,458 $332,509 $325,470 $195,773 $169,909
======== ======== ======== ======== ========
</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 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 then 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 Bank 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 Bank 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, 1998, the Company had loans categorized as special
mention of $3.1 million, which consisted of $1.9 million in commercial
business loans, $1.0 million in commercial mortgage loans, and $0.2
million in first and second mortgage loans. Substandard assets
totaled $2.8 million and consisted of $0.5 million in real estate
owned ("REO"), $0.7 million in commercial loans, and $1.6 million in
first and second mortgage loans. In addition, at that date, the
Company had doubtful loans of $0.4 million consisting of first and
second mortgage loans and $38,000 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, 1998, 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,
------------------------ --------
1998 1997 1996 1995 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Mortgage loans delinquent 90
days more and still accruing $ 236 $ 255 $ 404 $ 647 $ 558
Non-accrual delinquent
mortgage loans 1,477 1,767 1,884 1,472 1,802
Non-accrual construction loans - - - 3,273 3,954
Non-accrual commercial loans 96 38 - - -
Other non-performing loans
delinquent 90 days or more 681 443 450 229 259
------ ------ ------ ------ ------
Total non-performing loans 2,490 2,503 2,738 5,621 6,573
Total REO 523 440 563 652 825
------ ------ ------ ------ ------
Total non-performing
assets $3,013 $2,943 $3,301 $6,273 $7,398
====== ====== ====== ====== ======
Non-performing loans to total
net loans 0.68% 0.75% 0.84% 2.87% 3.87%
==== ==== ==== ==== ====
Non-performing assets to
total net loans and REO 0.82% 0.88% 1.01% 3.19% 4.33%
==== ==== ==== ==== ====
Non-performing loans to total
assets 0.35% 0.37% 0.43% 1.01% 1.38%
==== ==== ==== ==== ====
Non-performing assets to total
assets 0.42% 0.44% 0.52% 1.12% 1.56%
==== ==== ==== ==== ====
Allowance for loan losses to
non-performing loans 122.73% 113.18% 95.43% 57.66% 46.37%
====== ====== ===== ===== =====
Allowance for loan losses to
total net loans 0.83% 0.85% 0.80% 1.66% 1.79%
==== ==== ==== ==== ====
</TABLE>
In addition to the loans included in the risk elements table above,
the Company has at December 31, 1998, 23 loans delinquent between 31
days and 90 days totaling $230,000. These loans also have been
considered in the analysis of the adequacy of the allowance for loan
losses.
For the years ended December 31, 1998, 1997, and 1996, the amounts of
interest income that would have been recorded on non-accrual loans,
had they been current, approximated $0.1 million, $0.1 million, and
$0.2 million, respectively. Also, for the years ended December 31,
1998, 1997, and 1996, the amount of interest income on non-accruing
loans that was included in income approximated $41,000, $80,000, and
$75,000, respectively.
The Company's REO before allowance for losses on REO, was $629,000 at
December 31, 1998 as compared to $638,000 at December 31, 1997.
During 1998, $642,000 of new REO was acquired which was offset by the
sale of $651,000 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 probable
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, including collateralized
mortgage obligations ("CMO's"), are issued, insured or guaranteed by
the GNMA, FNMA or FHLMC, or are investment grade private issues. Debt
and equity securities primarily consist of high grade corporate debt
investment and U.S. Government and agency securities. At December 31,
1998, investments increased $7.3 million, or 2.3%, to $326.7 million
compared to $319.4 million at December 31, 1997. During 1998, debt
securities increased $49.2 million, or 257.8%, primarily from the
purchase $77.0 million of corporate debt, including certain investment
grade trust preferred securities of other financial institutions,
offset by maturities, calls and sales of $24.9 million of federal
agency debt and $3.2 million of corporate debt during the period.
Offsetting the net increase in debt securities were reductions of
mortgage-backed securities of $42.0 million, or 14.5%, resulting from
$114.7 million of principal amortization and accelerated prepayments
due to the continued low interest rate environment, partially offset
by purchases of $77.0 million late in the fourth quarter of 1998.
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." At December 31, 1998,
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 debt and equity securities and FHLBNY stock at the dates
indicated:
Table 5: Debt and Equity Securities
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------
1998 1997 1996
-------------- ------------- -------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt and equity
securities:
U.S. Government and
agency securities $17,573 22.3% $14,819 50.5% $40,103 83.5%
Trust preferred
securities 38,556 49.0 - - - -
Corporate debt 11,908 15.2 4,065 13.8 - -
Equity securities 275 0.4 209 0.7 140 0.3
------- ----- ------- ----- ------- ----
Sub-total 68,312 86.9 19,093 65.0 40,243 83.8
FHLBNY stock 10,315 13.1 10,260 35.0 7,768 16.2
------- ----- ------- ----- ------- ----
Total debt and equity
securities and FHLBNY
stock $78,627 100.0% $29,353 100.0% $48,011 100.0%
======= ===== ======= ===== ======= =====
</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,
--------------------------------------------------
1998 1997 1996
-------------- -------------- ----------------
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 $74,294 30.5%$ 88,692 31.5% $ 77,717 33.0%
FHLMC 64,954 26.7 109,206 38.7 92,262 39.1
FNMA 47,472 19.5 84,111 29.8 65,706 27.9
Private label pass-
through certificates 10,013 4.1 - - - -
Private label CMO's 46,604 19.2 - - - -
------- ----- -------- ----- -------- -----
Total mortgage-
backed securities 243,337 100.0% 282,009 100.0% 235,685 100.0%
===== ===== =====
Unamortized
premiums, net 4,698 8,035 5,289
-------- -------- --------
Mortgage-backed
securities, net $248,035 $290,044 $240,974
======== ======== ========
</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, 1998 and
1997, the percentage of core deposits to total deposits was 61.4% and
58.3%, respectively.
At December 31, 1998, deposits were $443.7 million compared to $443.9
million at December 31, 1997, a decrease of $0.2 million. During
1998, the Company's strategy was, and continues to be, to not match
the competitions' most aggressive interest rates unless the Company
believes that key relationships with deposit holders who have other
deposit and/or loan relationships are in jeopardy. As a result,
higher costing certificates of deposit, through controlled runoff,
decreased $14.1 million from $185.2 million at December 31, 1997 to
$171.1 million at December 31, 1998. During the second quarter of
1998, the Company transferred the lease and sold the deposits of the
Company's Passaic, New Jersey branch. Despite the branch sale,
through the Company's continuing cross selling efforts, marketing
strategy and development of new customer relationships, core deposits
grew $14.0 million, to $272.6 million at December 31, 1998 from $258.6
million at December 31, 1997. Within core deposits, growth in savings
accounts of $14.5 million coupled with a $5.9 million increase in non-
interest bearing demand and NOW accounts was partially offset by a
decrease in money market deposits of $6.4 million.
During calendar year 1999, $147.1 million of the Company's
certificates of deposit will be maturing. Certificates of deposit
currently carry interest rates ranging from 2.00% to 7.07% and a
weighted average interest rate of 4.85%. As of December 31, 1998, the
Company's current interest rates offered, for certificates with
similar maturities, were between 2.90% and 4.50%. Management does not
believe that the maturity of these time deposits will have a material
impact on 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 and calls of debt securities
and funds provided by operations. At December 31, 1998, 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 5.2% of total
assets and 8.3% of total deposits at December 31, 1998. At December
31, 1998, the Company had additional borrowing capacity to meet any
funding needs of $7.5 million under a line of credit with the FHLBNY,
expiring November 2, 1999. In addition, the Company has approximately
$119.8 million in unpledged debt, equity and mortgage-backed
securities which are classified as available for sale, and approximate
$200.0 million in loans which could be used to collateralize
additional borrowings or sold to provide liquidity.
At December 31, 1998, capital resources were sufficient to meet
outstanding loan commitments of $59.6 million, commitments on unused
lines of credit of $48.2 million and commercial letters of credit of
$2.9 million. An important source of the Company's funds is the
Bank's core deposits. Management believes that a substantial portion
of the Bank's $272.6 million of its core deposits are a dependable
source of funds due to long-term customer relationships. Certificates
of deposit which are scheduled to mature in one year or less from
December 31, 1998 totaled $147.1 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, the Company's experience
indicate that a significant portion of such deposits should remain
with the Company.
In addition to $10.7 million of funds provided from 1998 operating
activities, the Company's current year principal funding needs were
primarily provided by net increases on advances from the FHLBNY of
$46.4 million, net proceeds received on mortgage-backed securities of
$37.7 million and a net increase in deposits of $6.3 million. During
1998, cash provided was principally used for investing and financing
activities. Purchases of debt securities, net of repayments and
sales, totaled $48.9 million and origination and purchase of loans
exceeded principal collections by $35.5 million. In addition, funds
used for financing activities included the purchase and retirement of
the Company's common stock, payment for the transfer of deposits from
the sale of the Passaic branch, and for 1998 dividend payments.
During the year ended December 31, 1997, the Company's 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.
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 debt securities throughout 1998 and
mortgage-backed securities during the fourth quarter of 1998 continued
as the Company sought to further balance and replace accelerated
prepaying mortgage-backed securities during 1998 with higher yielding
debt securities and intermediate term mortgage-backed securities.
These purchases, along with loan growth during 1998, were funded with
borrowings from the FHLBNY and prepayments of mortgage-backed
securities. During the latter part of 1998, the Company increased its
short-term borrowings as leveraging again became a viable growth
strategy as the Company's borrowing rates declined with the decrease
in the Federal Funds target rate. Borrowed funds at December 31, 1998
were $206.7 million, an increase of $46.4 million, or 28.9%, compared
to $160.3 million for 1997. Of the outstanding borrowed funds at
December 31, 1998, $60.3 million matures within 30 days, $0.4 million
matures within 90 days, and the remaining $146.0 million have 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 callable
quarterly through maturity, and borrowed funds of $60.0 million, with
interest rates of 5.52%, are first callable in November 1999 and
quarterly thereafter.
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.
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.
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 sale
of securities compared to a loss of $1.1 million for 1996. Proceeds
from the sale 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, salary
expense increased $0.3 million and employee benefit expenses increased
$0.8 million. Salary 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
buy out 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 pretax income recognized in 1997.
Income taxes for 1996 reflect the tax effect of the pretax income
recognized for 1996, partially offset by a reversal of a $702,000 tax
liability previously established, which expired during 1996.
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, 1998, based upon an
immediate and sustained interest rate change from the interest rate
yield curve at December 31, 1998 of plus 100 and 200 basis points and
minus 100 and 200 basis points.
1998 Change
---- ----------------
Amount Amount Percent
------ ------ -------
(Dollars in thousands)
Change in rates:
+200 basis points $50,808 $(21,042) (29)%
+100 basis points $62,090 $ (9,760) (14)%
Estimated Net Portfolio Value
at December 31, 1998: $71,850 $ - - %
-100 basis points $82,150 $ 10,300 14 %
-200 basis points $94,362 $ 22,512 31 %
The table below sets forth the estimated change to the Company's
estimate of its net interest income based upon the December 31, 1998
balance sheet, assuming an interest rate change from the December 31,
1998 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.
1998 Percent Change
---- ---------------------------
Year 1 Year 2 Total
------ ------ -----
Change in rates:
+200 basis points 1.27% 6.20 % 3.72 %
-200 basis points 0.02% (6.10)% (3.02)%
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 READINESS
The Year 2000 technology issues pose potential problems to financial
institutions and other businesses who rely on computers to assist in
normal daily operations of their business. Many computer programs and
applications which use date fields may cease to function normally as a
result of the way date fields have been programmed historically. Date
sensitive software may recognize a date using 00 as the year 1900
rather than the year 2000. This could result in a system failure,
miscalculations or lost systems files, causing disruptions of
operations and could result in a temporary inability to process
transactions or conduct normal business activity.
The Company has implemented a Year 2000 compliance plan and the
execution of this plan is currently on target. The objective of this
plan is to ensure that the Company will be Year 2000 ready prior to
the turn of the century. To monitor and execute the Company's Year
2000 plan, the Company formed a Year 2000 Steering Committee and a
Year 2000 Action Committee. The Year 2000 Steering Committee consists
of senior executive officers of the Bank who review the progress of
the plan and approve the course of action taken by the Year 2000
Action Committee. The Year 2000 Action Committee consists of
department heads from various operating areas of the Company. This
action committee performs the necessary steps needed to assure the
Company is Year 2000 ready.
As recommended by the Federal Financial Institutions Examination
Council ("FFIEC")guide, the Year 2000 compliance plan includes the
following phases: awareness, assessment, renovation, validation
(testing), and implementation. Completing these phases will enable
the Company to assess the risks and effects of the Year 2000 issues,
develop a strategic plan and a systematic approach guide, perform
adequate testing, and implement corrective action necessary to be
adequately assured that the Company's processing and information
systems are Year 2000 ready. As of December 31, 1998, the Company has
substantially completed the awareness, assessment and renovation
phases of the Year 2000 compliance plan. The Company is currently in
the testing phase.
The Company's deposit and loan account application systems are
processed off site by a third party vendor. 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. The
Company has confirmed that this vendor has developed a Year 2000
action plan, that certain of its application modules are currently
Year 2000 ready, and that it is currently testing its remaining
systems and remedying as necessary. In addition, the Company and the
vendor are jointly testing the Company's applications which are
processed or affected by the vendor. This testing phase is on target
for completion in April 1999, and the implementation phase is targeted
for completion by the end of the second quarter 1999. The vendor also
expects to have all of its systems tested, remedied and Year 2000
ready by the end of the second quarter 1999. In the event that the
vendor does not meet acceptable target dates, the Company will proceed
with its contingency plan to convert to the vendor's client server-
based system, which is currently Year 2000 ready.
The Company is in the implementation phase for its hardware and other
software. Its ATM software upgrades will be installed by May 1999.
This software has been certified as Year 2000 ready. The Company's
wide area network and hardware along with its facilities, HVAC, alarm
systems and elevators are all Year 2000 ready.
The Company has initiated formal communication with all of its vendors
to determine the extent to which the Company is vulnerable to third
parties' failure to become Year 2000 ready. Replies received indicate
that vital vendors, including power and telephone companies, are in
various "in process" stages of the Year 2000 compliance issue.
Continued contact and follow up will be maintained.
The Company has analyzed and segregated its loan portfolio into two
categories for Year 2000 ready issues: loans collateralized by real
estate and loans not collateralized by real estate, in order to
determine and minimize the potential impact of its borrower's failure
to become Year 2000 ready. The underlying value of the real estate on
the loans secured by real estate minimizes the risk related to Year
2000 readiness. Of the remaining loans, which are not secured by real
estate, the Company has identified and initiated formal communication
with borrowers to determine who may experience a disruption in their
business, because of a failure to become Year 2000 ready. Replies
received indicate that the majority of these borrowers are in various
"in process" stages of the Year 2000 compliance issue and are expected
to be Year 2000 ready. A minimal number of borrowers have been
identified as having additional credit risk as a direct result of the
Year 2000 issue. Those risks have been estimated and incorporated in
the analysis of the adequacy of the loan loss allowance. Assessment
of Year 2000 readiness is part of the underwriting process for all new
loan customers and renewals of existing loans. Continued contact and
follow up will be maintained. However, there can be no guarantee that
the systems of external third party venders, of which the Company
relies, will become Year 2000 ready, or that the failure of the Bank's
loan customers to become Year 2000 ready would not have a material
adverse effect on the Company.
Currently, management believes that the cost incurred to become Year
2000 ready, both with regard to the Company's internal and outsourced
data processing operations, will not be material. The costs
identified directly with the Year 2000 contingency plan are not
expected to exceed $75,000. These costs are being funded through
operating cash flows and expensed as incurred. To date, costs
totaling $18,000 have been incurred. A significant amount of the
Company's hardware has been purchased since July 1996, and is Year
2000 ready. However, costs will also be incurred for replacement of
various personal computers, software upgrades, and upgraded server
software. The Company planned to upgrade and replace these items and
accordingly did not accelerate replacement due to Year 2000
compliance. These estimated costs are management's best estimates
based upon currently known information. There can be no guarantee that
actual costs incurred to become Year 2000 ready will not increase due
to additional issues which may arise internally in the future, and by
the failure of third parties to fail to become Year 2000 ready.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131 "Disclosure About Segments
of an Enterprise and Related Information". SFAS No. 131 establishes
standards for the way public business enterprises are to report
information about 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. Based upon the current
operations of the Company and established reporting mechanisms, the
Company does not have separate reportable operating segments and
therefore, the adoption of SFAS No. 131 did not have an impact on the
Company's financial disclosure.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes
accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 supersedes the disclosure
requirements in SFAS Nos. 80, 105 and 119. This statement is
effective for periods ending after June 15, 1999. The adoption of
SFAS No. 133 is not expected to have an impact on the financial
position or results of operations of the Company.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise". This
statement amends SFAS No. 65 Accounting for Certain Mortgage Banking
Activities , to require that after the securitization of mortgage
loans held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed securities or other retained
interests based on its ability and intent to sell or hold those
investments. This statement is effective for periods beginning after
December 15, 1998. The adoption of this statement is not expected to
have a material impact on the financial position or results of
operations of the Company.
UNAUDITED QUARTERLY FINANCIAL DATA
Table 8 presents selected quarterly consolidated financial data:
Table 8: Selected Consolidated Financial Quarterly Data (Unaudited)
<TABLE>
<CAPTION>
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1998 1998 1998 1998 1997 1997 1997 1997
---- ---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income $11,783 $9,738 $11,773 $11,967 $12,445 $12,569 $12,690 $12,487
Net interest income 6,141 3,928 5,907 6,062 6,177 6,122 6,255 6,253
Provision for loan
losses 171 171 150 150 125 125 125 125
Income (loss) before
taxes 2,100 (386) 1,965 2,082 2,241 2,225 2,243 2,211
Net income (loss) 1,353 (341) 1,214 1,304 1,430 1,382 1,391 1,384
Earnings (loss) per
common share:
Basic 0.36 (0.09) 0.30 0.32 0.36 0.33 0.33 0.32
Assuming dilution 0.35 (0.09) 0.29 0.31 0.34 0.32 0.32 0.31
</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,
1998 and 1997, and for the years ended December 31, 1998 and 1997 and
1996, 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, 1999.
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, 1999.
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, 1999.
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, 1999.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM
8-K
(a) (1) Consolidated financial statements of the Company as of
December 31, 1998 and 1997, and for the years ended December 31, 1998,
1997 and 1996, 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 Statewide Financial Corp. 1996 Amended and
Restated Incentive Stock Option Plan**
10.4 Statewide Financial Corp. 1996 Amended and
Restated Incentive Stock Option Plan for Outside
Directors**
10.5 Statewide Financial Corp. Amended and Restated
Recognition and Retention Plan for Executive
Officers and Employees**
10.6 Statewide Financial Corp. Amended and Restated
Recognition and Retention Plan for Outside
Directors**
21 Subsidiaries of the Registrant
23 Consent of KPMG LLP
27 Financial Data Schedule
* Incorporated by reference from Exhibits 3.1, 3.2, 10.1
and 10.2 of the Registrant's Registration Statement 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.
(b) Reports on Form 8-K.
The Registrant has filed the following reports on Form 8-K during the
quarter ended December 31, 1998.
Date Item Reported
---- -------------
November 5, 1998 Item 5 - Reporting on the Registrant's
quarterly earnings and stock repurchase
program
November 19, 1998 Item 5 - Reporting the Registrant's
quarterly dividend.
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report of KPMG LLP
Consolidated Financial Statements:
Consolidated Statements of Financial Condition
December 31, 1998 and 1997
Consolidated Statements of Income
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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, 1998 and 1997 and
for the each of the years ended in the three-year period ended
December 31, 1998, 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, 1998
and 1997, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
KPMG LLP
Short Hills, New Jersey
January 26, 1999
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
-------------------
1998 1997
---- ----
(Dollars in thousands)
ASSETS
Cash and amounts due from depository
institutions $ 7,090 $ 6,767
Mortgage-backed securities available for sale 248,035 290,044
Debt and equity securities available for sale 68,312 19,093
Loans receivable, net 366,458 332,509
Accrued interest receivable, net 4,759 3,969
Real estate owned, net 523 440
Premises and equipment, net 6,547 6,064
FHLBNY stock, at cost 10,315 10,260
Excess of cost over fair value of net assets
acquired 70 106
Other assets 5,408 6,064
-------- --------
Total assets $717,517 $675,316
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $443,705 $443,878
Borrowed funds:
Securities sold under agreements to
repurchase 181,381 146,150
FHLBNY advances 25,300 14,150
-------- --------
Total borrowed funds 206,681 160,300
Advance payments by borrowers for taxes
and insurance 1,611 1,749
Accounts payable and other liabilities 5,021 4,482
-------- --------
Total liabilities 657,018 610,409
-------- --------
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; 4,155,509 shares issued
and 4,151,963 shares outstanding at
December 31, 1998, and 4,518,767 shares
issued and 4,509,531 shares outstanding at
December 31, 1997 - -
Paid in capital 32,904 39,533
Unallocated ESOP shares (2,856) (3,280)
Unearned Recognition and Retention Plan
shares (1,282) (1,755)
Retained earnings - substantially restricted 31,190 29,580
Treasury stock, 3,546 and 9,236 shares at
December 31, 1998 and 1997 (44) (119)
Accumulated other comprehensive income:
Net unrealized gain on securities available
for sale, net of income tax 587 948
-------- --------
Total shareholders' equity 60,499 64,907
-------- --------
Commitments and contingencies - -
-------- --------
Total liabilities and shareholders'
equity $717,517 $675,316
======== ========
See accompanying notes to consolidated financial statements.
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands,
except per share amounts)
INTEREST INCOME:
Interest and fees on loans $27,016 $25,955 $21,206
Interest on mortgage-backed securities 13,995 21,577 19,377
Interest and dividends on debt and
equity securities 3,506 2,076 4,228
Dividends on FHLBNY stock 744 583 467
------- ------- -------
Total interest and dividend income 45,261 50,191 45,278
------- ------- -------
INTEREST EXPENSE:
Deposits 14,991 16,481 16,827
Borrowed funds 8,232 8,903 6,829
------- ------- -------
Total interest expense 23,223 25,384 23,656
------- ------- -------
NET INTEREST INCOME 22,038 24,807 21,622
Provision for loan losses 642 500 500
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 21,396 24,307 21,122
NON-INTEREST INCOME:
Mortgage banking fees 54 - -
Service charges 1,326 879 771
Loan and other fees 912 617 465
Net gain (loss) on sales of securities 4 69 (1,093)
Other 556 160 1,146
------- ------- -------
Total non-interest income 2,852 1,725 1,289
------- ------- -----
NON-INTEREST EXPENSE:
Salaries and employee benefits 10,373 9,605 8,511
Occupancy, net 2,348 2,278 2,140
Federal deposit insurance premiums 268 287 1,011
SAIF assessment - - 2,651
Professional fees 842 594 645
Insurance premiums 178 180 273
Data processing fees 695 621 390
Foreclosed real estate expense, net 85 71 105
Other 3,698 3,476 2,717
------- ------- -------
Total non-interest expenses 18,487 17,112 18,443
------- ------- -------
Income before income taxes 5,761 8,920 3,968
Income taxes 2,231 3,333 796
------- ------- -------
Net income $ 3,530 $ 5,587 $ 3,172
======= ======= =======
Earnings per common share:
Basic $0.90 $1.34 $ 0.68
Assuming dilution $0.86 $1.30 $ 0.68
Weighted average number of shares
(in thousands):
Basic 3,937 4,165 4,648
Assuming dilution 4,099 4,310 4,662
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Total Paid in Retained Treasury Un- Unearned Comprehensive
Share- Capital Earnings Stock allocated Recognition Income
holders' (substan- ESOP and Retention --------------------
Equity tially Shares Plan Accumulated Current
restricted) Shares Other Period
------- ------- ---------- ----- ------ ------ ------ | ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> | <C>
|
Balance at December 31, 1995 $72,315 $50,770 $23,537 $ - $(4,232) $ - $2,240 |
------ |
Comprehensive Income: |
Net income for the year 3,172 - 3,172 - - - - |$ 3,172
Other comprehensive |
income, net of tax: |
Holding losses on |
securities available- |
for-sale, net of income |
tax of $1,463 (2,604) - - - - - (2,604) | -
Less: reclassification |
adjustment for losses |
realized in net income, |
net of tax of $393 700 - - - - - 700 | -
------ |
Change in net unrealized |
gain on securities |
available-for-sale, net |
of income tax of $1,070 - - - - - - (1,904) | (1,904)
------ |-------
Comprehensive income - - - - - - - |$ 1,268
|=======
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) - 2,188 - (2,055) - |
Amortization of Recognition |
and Retention Plan awards 183 - - - - 183 - |
Allocation of ESOP shares 675 146 - - 529 - - |
Purchase and Retirement of |
323,488 shares of common |
stock (3,976) (3,976) - - - - - |
Dividends declared on |
common stock (912) - (912) - - - - |
------ ------- ------- ---- ------- ------- ------ |
Balance at December 31, 1996 66,935 46,807 25,797 (430) (3,703) (1,872) 336 |
------ |
Comprehensive Income: |
Net income for the year 5,587 - 5,587 - - - - |$ 5,587
Other comprehensive |
income, net of tax: |
Holding gains on |
securities available- |
for-sale, net of income |
tax of $368 656 - - - - - 656 | -
Less: reclassification |
adjustment for gains |
realized in net income, |
net of tax of $25 (44) - - - - - (44) | -
------ |
Change in net unrealized |
gain on securities |
available-for-sale, net |
of income tax of $343 - - - - - - 612 | 612
------ |-------
Comprehensive income - - - - - - - |$ 6,199
|=======
Award of 33,592 shares and |
forfeiture of 8,464 shares |
of common stock under |
Recognition and Retention |
Plans - 67 - 311 - (378) - |
Amortization of Recognition |
and Retention Plan awards 586 91 - - - 495 - |
Allocation of ESOP shares 771 348 - - 423 - - |
Purchase and retirement of |
427,497 shares of common |
stock (7,780) (7,780) - - - - - |
Dividends declared on |
common stock (1,804) - (1,804) - - - - |
------- ------- ------- ---- ------- ------- ------ |
Balance at December 31, 1997 64,907 39,533 29,580 (119) (3,280) (1,755) 948 |
Comprehensive income: |
Net income for the year 3,530 - 3,530 - - - - |$ 3,530
Other comprehensive |
income, net of tax: |
Holding losses on |
securities available- |
for-sale, net of income |
tax of $202 (358) - - - - - (358) | -
Less: reclassification |
adjustment for gains |
realized in net income, |
net of tax of $1 (3) - - - - - (3) | -
------ |
Change in net unrealized |
gain on securities |
available-for-sale, net |
of income tax of $203 - - - - - - (361) | (361)
|-------
Comprehensive income - - - - - - - |$ 3,169
|=======
Award of 2,000 shares and |
forfeiture of 2,000 shares |
of common stock under |
Recognition and Retention |
Plans - 8 - - - (8) - |
Amortization of Recognition |
and Retention Plan awards 502 21 - - - 481 - |
Allocation of ESOP shares 868 439 - 5 424 - - |
Purchase and retirement of |
363,258 shares of common |
stock (7,096) (7,096) - - - - - |
Dividends declared on |
common stock (1,920) - (1,920) - - - - |
5,690 shares of common |
stock issued through |
exercise of stock options 69 (1) - 70 - - - |
------- ------- ------- ---- ------- ------- ------ |
Balance at December 31, 1998 $60,499 $32,904 $31,190 $(44) $(2,856) $(1,282) $ 587 |
======= ======= ======= ==== ======= ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 3,530 $ 5,587 $ 3,172
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 642 500 500
Provision for losses on foreclosed
real estate 85 35 34
Depreciation and amortization 1,155 1,024 785
Net amortization of deferred premiums
and unearned discounts 3,748 1,045 1,928
Net (gain) loss on sales of
securities (4) (69) 1,093
Amortization of RRP awards and
allocation of ESOP shares 1,349 1,266 858
Net (gain) loss on sale of real
estate owned (90) (12) 10
Net gain on sale of deposits (301) - -
Gain on sale of premises and
equipment (10) - -
Changes in assets and liabilities:
(Increase) decrease in accrued
interest receivable (790) 327 114
Increase in accrued interest
payable 17 265 256
Decrease (increase) in other assets 860 (2,697) (2,591)
Increase in accounts payable and
other liabilities 543 1,310 834
------- ------- -------
Net cash provided by
operating activities 10,734 8,581 6,993
------- ------- -------
Cash flows from investing activities:
Net disbursements from lending
activities (34,357) (4,859) (14,900)
Proceeds from the sale of loans 95 - -
Purchase of loans (1,224) (3,181) (115,694)
Proceeds from mortgage-backed
securities principal repayments 114,659 56,484 54,119
Proceeds from the sale of mortgage-
backed securities - 42,558 90,657
Purchase of mortgage-backed
securities (77,004)(148,157) (130,385)
Proceeds from debt securities
principal repayments 24,941 31,000 18,000
Proceeds from sale of debt securities 3,150 - 20,704
Purchase of debt and equity
securities (77,013) (9,602) -
Purchase of FHLBNY stock (55) (2,492) (4,141)
Proceeds from collection and sale
of real estate owned 565 376 369
Proceeds from the sale of premises
and equipment 221 - -
Purchases and improvement of
premises and equipment (1,813) (761) (2,185)
------- ------- -------
Net cash used in investing
activities (47,835) (38,634) (83,456)
------- ------- -------
Cash flows from financing activities:
Net increase (decrease)in deposits 6,336 (13,178) 19,035
Payment for sale of deposits (6,208) - -
Repayment of borrowings (58,350)(773,100) (745,240)
Proceeds from borrowings 104,731 826,200 807,737
(Decrease) increase in advance
payments by borrowers for taxes
and insurance (138) (104) 820
Cash dividends paid (1,920) (1,804) (912)
Proceeds from issuance of common
stock 69 - -
Purchase of common stock (7,096) (7,780) (6,594)
------- ------- -------
Net cash provided by
financing activities 37,424 30,234 74,846
------- ------- -------
Net increase (decrease) in
cash and cash equivalents 323 181 (1,617)
Cash and cash equivalents at
beginning of period 6,767 6,586 8,203
------- ------- -------
Cash and cash equivalents at end of
period $ 7,090 $ 6,767 $ 6,586
======= ======= =======
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Income taxes $ 1,569 $ 2,850 $ 1,776
======= ======= =======
Interest $23,177 $25,226 $23,400
======= ======= =======
Non-cash investing and financing
activities:
Transfer from loans receivable to
real estate owned, net $ 643 $ 275 $ 324
======= ======= =======
Change in unrealized (loss) gain on
securities available for sale, net
of income tax $ (361) $ 612 $(1,904)
======= ======= =======
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 Note 2, 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.
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, 1998. The Bank operates
sixteen banking offices in Hudson, Union and Bergen 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 at time of purchase among three categories: held to
maturity, trading, and available for sale based upon management's
intent and the Company's ability to hold such securities.
Currently, the Company classifies 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
charged against current income 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 estimate life of the loan using the level-yield method.
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, discounted
at the loan's effective interest rate 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 or due to
the deterioration of the financial conditions of the Company's
borrowers. 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
--------------------
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the
period. Earnings per share, assuming dilution, starts with the
calculation of basic earnings per share and adds to it the dilutive
effect of common stock equivalents. Such equivalents are the number
of shares which would be issued assuming exercise of in-the-money
options, and vesting of restricted awards, net of shares which could
be purchased in the open market with proceeds from the assumed
exercise of such options and from tax benefits and the future
amortization associated with vesting of restricted awards.
(j) Comprehensive Income
--------------------
On January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income". SFAS No. 130 establishes
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 includes 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. Compensation income is
reported in the consolidated statements of shareholders' equity for
all periods presented.
(k) 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 14-
"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. LIQUIDATION ACCOUNT
-------------------
In connection with the Bank's conversion from the mutual to stock form
and its acquisition by the Company, 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, 1998 and 1997
was approximately $3.9 million and $5.3 million, respectively.
3. 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, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998
------------------------------------------
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 $ 1,999 $ 7 $ - $ 2,006
After one year but within five
years 15,500 67 - 15,567
Trust preferred securities maturing:
After ten years 38,483 783 710 38,556
Corporate debt maturing:
After one but within five years 8,779 - 18 8,761
After five years but within ten
years 3,103 44 - 3,147
------- ------ --- -------
Debt securities available for sale 67,864 901 728 68,037
Equity securities available for sale 37 238 - 275
------- ------ --- -------
Debt and equity securities available
for sale $67,901 $1,139 $728 $68,312
======= ====== ==== =======
<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
======= ==== ===== =======
</TABLE>
Sales of debt securities during the year ended December 31, 1998
resulted in proceeds of $3.2 million and a gross realized gain of
$4,000. 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 resulted in proceeds of $20.7
million and gross realized losses of $251,000.
4. MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
---------------------------------------------
The amortized cost and estimated market values of mortgage-backed
securities available for sale at December 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998
-----------------------------------------
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 $2,053) $76,474 $143 $270 $ 76,347
FHLMC pass-through certificates
(net of deferred premiums of
$1,433) 65,933 554 100 66,387
FNMA pass-through certificates
(net of deferred premiums of
$1,212) 48,478 238 32 48,684
Private label pass-through
certificates 10,000 13 - 10,013
Private label collateralized
mortgage obligations (CMO's) 46,664 - 40 46,604
-------- ---- ---- --------
Mortgage-backed securities
available for sale $247,529 $948 $442 $248,035
======== ==== ==== ========
<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
======== ====== ==== ========
</TABLE>
Mortgage-backed securities were pledged to secure FHLBNY advances and
securities sold under agreement to repurchase at December 31, 1998 and
1997. The estimated market value of securities so pledged at December
31, 1998 and 1997 were $210.9 million and $255.3 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, 1998 and 1997 were $129,457 and $186,000,
respectively.
There were no sales of mortgage-backed securities during the year
ended December 31, 1998. Sales of mortgage-backed securities during
the year ended December 31, 1997 resulted in proceeds of $42.6
million, 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.
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.
5. LOANS RECEIVABLE, NET
---------------------
A summary of loans receivable, net at December 31, 1998 and 1997
is as follows:
December 31,
-----------------------
(Dollars in thousands) 1998 1997
---- ----
First mortgage loans:
One-to-four family $200,145 $244,364
Multi-family 21,679 12,190
Non-residential 27,392 19,219
Construction 10,354 4,325
-------- --------
259,570 280,098
Consumer loans:
Second mortgage 17,937 18,110
FHA insured home improvement 14,447 15,115
Unsecured consumer 1,533 1,896
Home equity line of credit 3,737 1,485
Home improvement 2,415 1,051
Automobile 664 596
Other 171 197
-------- --------
40,904 38,450
-------- --------
Warehouse mortgage lines of
credit 47,752 -
Commercial business 20,985 16,066
-------- --------
Total loans 369,211 334,614
Less (plus):
Deferred loan fees 754 594
Deferred (premiums), unearned
discounts, net (1,057) (1,322)
Allowance for loan losses 3,056 2,833
-------- --------
2,753 2,105
-------- --------
Loans receivable, net $366,458 $332,509
======== ========
At December 31, 1998 and 1997, the Company serviced loans for others,
including loan participations to others, amounting to $10.0 million
and $4.8 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, 1998 and 1997, loans in arrears three months or more
or in the process of foreclosure are as follows:
December 31,
------------------
(Dollars in thousands) 1998 1997
---- ----
Conventional first mortgage loans
(non-accrual) $1,477 $1,767
FHA insured and VA guaranteed (accruing) 297 291
Commercial loans (non-accrual) 96 38
Consumer loans (non-accrual) 620 407
------ ------
$2,490 $2,503
====== ======
Percent of net loans outstanding 0.68% 0.75%
==== ====
The amount of interest income on non-accrual loans which would have
been recorded for the years ended December 31, 1998, 1997 and 1996 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, $0.1 million
and $0.2 million, respectively. In addition, during the years ended
December 31, 1998, 1997 and 1996 the amounts of interest income on
non-accruing loans that was included in interest income totaled
$41,000, $80,000 and $75,000, respectively.
An analysis of the allowance for loan losses for the years ended
December 31, 1998, 1997 and 1996 is as follows:
December 31,
---------------------
(Dollars in thousands) 1998 1997 1996
---- ---- ----
Balance at beginning of period $2,833 $2,613 $3,241
Provision charged to operations 642 500 500
Charge-offs (454) (297) (1,140)
Recoveries 35 17 12
------ ------ ------
Balance at end of period $3,056 $2,833 $2,613
====== ====== ======
At December 31, 1998, 1997 and 1996, no loans were designated as
impaired. The average balance of impaired loans for the years ended
December 31, 1998, 1997 and 1996 were $0, $0 and $2,781,000,
respectively.
A substantial portion of the Company's loans are 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.
6. ACCRUED INTEREST RECEIVABLE, NET
--------------------------------
A summary of accrued interest receivable at December 31, 1998 and 1997
is as follows:
December 31,
-----------------
(Dollars in thousands) 1998 1997
---- ----
Loans $2,137 $1,901
Mortgage-backed securities 1,288 1,908
Debt securities 1,334 160
------ ------
$4,759 $3,969
====== ======
7. PREMISES AND EQUIPMENT, NET
---------------------------
A summary of premises and equipment at December 31, 1998 and 1997 is
as follows:
December 31,
----------------
(Dollars in thousands) 1998 1997
---- ----
Land $ 1,056 $ 1,056
Buildings 5,614 5,157
Leasehold improvements 998 974
Furniture, fixtures and equipment 7,880 6,971
------- -------
Total $15,548 $14,158
------- -------
Less accumulated depreciation 9,001 8,094
------- -------
$ 6,547 $ 6,064
======= =======
Depreciation and amortization expense included in occupancy and other
expense in the consolidated statements of income amounted to
$1,119,000, $993,000, and $708,000 for the years ended December 31,
1998, 1997, 1996, respectively.
8. REAL ESTATE OWNED, NET
----------------------
Real estate owned, net at December 31, 1998 and 1997 is summarized as
follows:
December 31,
----------------
(Dollars in thousands) 1998 1997
---- ----
Acquired by foreclosure or deed in
lieu of foreclosure $629 $638
Less allowance for losses on real
estate owned 106 198
---- ----
$523 $440
==== ====
An analysis of the allowance for losses on real estate owned for the
years ended December 31, 1998, 1997 and 1996 is as follows:
December 31,
-----------------------
(Dollars in thousands) 1998 1997 1996
---- ---- ----
Balance at beginning of period $198 $178 $223
Provision charged to operations 85 35 34
Charge-offs (177) (15) (79)
---- ---- ----
Balance at end of period $106 $198 $178
==== ==== ====
Results of real estate operations for the years ended December 31,
1998, 1997 and 1996 are as follows:
December 31,
---------------------
(Dollars in thousands) 1998 1997 1996
---- ---- ----
Acquired by foreclosure or deed in
lieu of foreclosure:
Net (gain) loss on sales of real
estate (90) $(12) $ 10
Holding costs 90 48 61
Provision charged to operations 85 35 34
--- --- ----
Foreclosed real estate expense, net $85 $ 71 $105
==== ==== ====
9. DEPOSITS
--------
The weighted average cost of funds on deposit at December 31, 1998 and
1997 was 3.12% and 3.47%, respectively. A summary of deposits by type
of account is as follows:
December 31,
-----------------------------------
1998 1997
---------------- ----------------
Weighted Weighted
Average Average
Interest Interest
(Dollars in thousands) Amount Rate Amount Rate
------ ---- ------ ----
Savings accounts $156,872 2.46% $142,399 2.91%
Money market accounts 37,811 2.73 44,239 3.00
Non-interest bearing
deposits 33,153 - 24,440 -
NOW accounts 44,764 1.29 47,564 1.52
-------- --------
Core deposits 272,600 2.03 258,642 2.36
Certificates of deposit
maturing:
One year or less 147,083 4.85 156,791 4.98
One to three years 21,508 4.81 24,773 5.49
Three to five years 1,862 5.35 3,120 5.36
Five years and
thereafter 652 5.91 552 6.12
-------- --------
Total certificates 171,105 4.85% 185,236 5.04%
-------- --------
Total deposits $443,705 $443,878
======== ========
Interest rates on certificate of deposit accounts ranged from 2.00% to
7.07% and 2.50% to 7.07% at December 31, 1998, and 1997, respectively.
At December 31, 1998, the Company had approximately $23.4 million of
certificates of deposit of $100,000 or more.
Interest expense on deposits for the years ended December 31, 1998,
1997 and 1996 is summarized as follows:
December 31,
--------------------------
(Dollars in thousands) 1998 1997 1996
---- ---- ----
Savings and club accounts $ 4,090 $ 4,082 $ 3,658
NOW and money market accounts 1,870 2,548 2,650
Certificates of deposit 9,031 9,851 10,519
------- ------- -------
$14,991 $16,481 $16,827
======= ======= =======
10. BORROWED FUNDS
--------------
The following table sets forth certain information as to securities
sold under agreements to repurchase for the years ended December 31,
1998, 1997 and 1996.
December 31,
----------------------------
(Dollars in thousands) 1998 1997 1996
---- ---- ----
Maximum balance $181,381 $187,000 $163,047
Average balance 146,356 $146,245 $108,434
Weighted average interest rate 5.56% 5.59% 5.50%
At December 31, 1998, securities sold under agreements to repurchase
with the FHLBNY consisted of FHLB bonds and mortgage pass-through
certificates with an amortized cost and market value of $180.1 million
and $180.6 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) 1998 1997
---- ----
Maturity:
Maturing within 90 days $35,381 $ 150
Maturing within 1-2 years 28,000 -
Maturing within 2-3 years 60,000 28,000
Maturing within 3-4 years 58,000 60,000
Maturing within 4-5 years - 58,000
-------- --------
$181,381 $146,150
======== =======
Borrowed funds with final maturities greater than 1 year consist of
$86.0 million which are currently callable quarterly and $60.0 million
which are first callable in November 1999 by the FHLBNY.
At December 31, 1998, the Company had a line of credit with the FHLBNY
of $32.8 million which expires on November 2, 1999. At December 31,
1998, the Company had outstanding an overnight advance of $25.3
million against this line at an interest rate of 5.125%. At December
31, 1997, the Company's FHLBNY credit line was $33.7 million against
which it then had an outstanding overnight advance of $14.2 million at
an interest rate of 6.63%.
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, 1998 and 1997 was $30.3 million
and $56.6 million, respectively.
The following table sets forth the maximum month-end balance and
average balance of FHLBNY advances for the periods indicated:
Years Ended December 31,
------------------------
(Dollars in thousands) 1998 1997 1996
----- ---- ----
Maximum balance $25,300 $28,800 $26,300
Average balance 1,764 $12,990 $15,639
Weighted average interest rate 5.03% 5.64% 5.52%
11. INCOME TAXES
------------
Income tax expense for the years ended December 31, 1998, 1997 and
1996 is made up of the following components:
December 31,
-------------------------
(Dollars in thousands) 1998 1997 1996
---- ---- ----
Current tax expense:
Federal $2,313 $3,428 $1,672
State 193 302 204
------ ------ ------
2,506 3,730 1,876
Deferred tax expense:
Federal (252) (364) (990)
State (23) (33) (90)
------ ------ ------
(275) (397) (1,080)
------ ------ ------
$2,231 $3,333 $ 796
====== ====== ======
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, 1998, 1997
and 1996 is as follows:
December 31,
---------------------
1998 1997 1996
---- ---- ----
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 2.7 1.4 1.7
---- ---- ----
38.7% 37.4% 20.0%
==== ==== ====
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, 1998 and 1997 are as follows:
December 31,
--------------
(Dollars in thousands) 1998 1997
---- ----
From operations:
Deferred tax assets:
Non-accrual loan interest $ - $ 59
Allowance for loan losses 1,013 964
Deferred loan fees 145 200
Purchase accounting discount on
mortgage loans 25 38
Employee benefit plans 781 624
Other 172 46
------ ------
Total gross deferred tax assets 2,136 1,931
Deferred tax liabilities:
Accelerated depreciation 70 70
Amortization of discounts on
purchases of securities 11 30
Other 1 11
Additions to post 1987 tax reserve 123 164
------ ------
Total gross deferred tax
liabilities 205 275
------ ------
Net deferred tax asset from
operations 1,931 1,656
Shareholders' equity - unrealized gains
on securities available for sale (330) (533)
------ ------
Total net deferred tax asset $1,601 $1,123
====== ======
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.
12. 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 423,200 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 total 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. The annual compensation expense related to
the ESOP is the 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 $868,000,
$771,000 and $569,000 for the years ended December 31, 1998, 1997 and
1996. Such expense for 1998, 1997 and 1996 includes $444,000,
$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 $163,000, $160,000 and $85,000,
respectively for dividends on unallocated shares. At December 31,
1998, the ESOP held 296,240 shares in suspense as unallocated shares,
and 126,960 shares as allocated to participants. The fair value of
the unallocated ESOP shares at December 31, 1998 was approximately
$5.6 million, based upon a $19.00 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.
13. 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
pretax base earnings. The Bank currently contributes 50% of each
employee's contribution, up to 3% of his or her annual earnings. The
Bank made matching contributions of $112,000, $115,000 and $110,000 in
the years ended December 31, 1998, 1997 and 1996, 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 $4.0 million as of December 31,
1998, $3.3 million as of December 31, 1997, and $2.9 million as of
December 31, 1996, and the expense for the SERP's was approximately
$649,000, $570,000 and $501,000 for the years ended December 31, 1998,
1997 and 1996.
14. 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 2,000, 33,592 and 199,881 were granted
and forfeitures of plan share awards of common stock of 2,000, 0 and
23,012 were recorded during 1998, 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, 1998, 1997 and 1996, the
Company recorded expense of $481,000, $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 1998, 1997 and
1996 would have been reduced on a pro forma basis as follows:
(Dollars in thousands 1998 1997 1996
except per share amounts) ---- ---- ----
Net income:
As reported $3,530 $5,587 $3,172
Pro forma 3,227 5,420 3,103
Earnings per share:
Basic
As reported $0.90 $1.34 $0.68
Pro forma 0.82 1.30 0.67
Assuming dilution
As reported $0.86 $1.30 $0.68
Pro forma 0.80 1.28 0.67
The fair value of options for both plans granted in 1998, 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 2.98%, 2.28% and 3.28%; expected
volatility of 22.71%, 21.54% and 25.00%; risk free interest rates of
4.63%, 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, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- --------------- ----------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 498,270 $14.4665 358,280 $12.1875 - $ -
Granted 34,530 17.3429 161,150 19.2739 389,980 12.1875
Exercised 5,690 12.1875 - - - -
Canceled 1,560 12.1875 21,160 12.1875 31,700 12.1875
------- ------- -------
Outstanding at end
of year 525,550 $14.6870 498,270 $14.4665 358,280 $12.1875
======= ======= =======
Weighted average fair
value of options
granted during the year $ 3.55 $ 4.69 $ 3.01
====== ====== ======
</TABLE>
At December 31, 1998 and 1997, there were 164,562 and 67,424 options
exercisable under the two fixed stock option plans, respectively.
A summary of the fixed stock options outstanding under the Company's
two fixed stock option plans at December 31, 1998 is as follows:
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Outstanding Life Exercise Exercisable Exercise
Prices at 12/31/98 (in years) Price at 12/31/98 Price
------ ----------- ---- ----- ----------- -----
$12.19-$14.35 388,020 7.59 $12.51 143,962 $12.36
$18.93-$22.48 137,530 9.19 20.83 20,600 22.00
------- -------
525,550 8.01 $14.69 164,562 $13.57
======= =======
15. EARNINGS PER SHARE COMPUTATION
------------------------------
The following table sets forth information as to the calculation of
basic and diluted earnings per share for the years ended December 31,
1998, 1997 and 1996.
For the Years Ended December 31,
---------------------------------
1998 1997 1996
---- ---- ----
Net income available to common
shareholders $3,530,000 $5,587,000 $3,172,000
========== ========== ==========
Weighted average common shares
outstanding for computation of
basic earnings per share 3,936,527 4,164,861 4,648,310
Effective of dilutive stock
equivalent:
Unvested restricted stock 46,574 50,009 6,028
Stock options 116,242 95,162 8,113
--------- --------- ---------
Weighted average common shares
outstanding for computation of
earnings per share, assuming
dilution 4,099,343 4,310,032 4,662,451
========= ========= =========
Earnings per common share
Basic $0.90 $1.34 $0.68
===== ==== =====
Assuming dilution $0.86 $1.30 $0.68
===== ===== =====
16. COMMITMENTS AND CONTINGENCIES
-----------------------------
Leases and Service Contract
---------------------------
Certain premises are leased under operating leases with terms expiring
through the year 2003, 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)
1999 $ 329
2000 233
2001 159
2002 60
2003 57
Thereafter 244
------
Total $1,082
======
Net rental expense included in occupancy expense in the consolidated
statements of income amounted to $344,000, $342,000 and $418,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
The Company has entered into a contract to receive data processing
services through October 4, 2002. Future payments under this contract
are expected to total $624,000 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.
December 31,
------------------
(Dollars in thousands) 1998 1997
---- ----
Financial instruments whose contract
amounts represent credit risk
(contract or notional amount):
Commitments to extend fixed rate credit $ 7,493 $ 1,530
Commitments to extend variable rate
credit 52,116 25,153
Commercial letters of credit 2,899 1,520
Unused lines of credit 48,248 8,615
-------- -------
$110,756 $36,818
======== =======
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.
Unused lines of credit are legally binding agreements to lend as long
as there is no violation of any condition established in the contract.
Lines of credit generally have fixed expiration dates or other
termination clauses. The amount of collateral obtained, if deemed
necessary by the Company, is based on credit evaluation of the
borrower.
17. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------------------------
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, 1998 and 1997 are as follows:
December 31,
-------------------------------------
(Dollars in thousands) 1998 1997
----------------- -----------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets:
Cash and amounts due from
depository institutions $ 7,090 $ 7,090 $ 6,767 $ 6,767
Debt and equity securities,
available for sale 68,312 68,312 19,093 19,093
Mortgage-backed securities,
available for sale 248,035 248,035 290,044 290,044
Loans receivable, net 366,458 370,499 332,509 337,539
FHLBNY stock 10,315 10,315 10,260 10,260
Financial liabilities:
Deposits $443,705 443,692 $443,878 $443,671
Borrowed funds 206,681 208,639 160,300 159,913
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, multi-family and non-residential mortgage, commercial and
industrial loans, and consumer loans. 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 have 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-
bearing 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 rate currently offered for borrowings of
similar type and maturity.
Commitments to Extend Credit, Letters of Credit and Commitments to
------------------------------------------------------------------
Purchase Loans
--------------
The commitments to originate and purchase loans and extend credit have
terms that are consistent with current market terms. Accordingly, the
Company estimates that the fair value of these commitments
approximates carrying value.
18. REGULATORY MATTERS
------------------
The Bank is required to maintain reserve balances, which are in the
form of vault cash and non-interest-bearing balances with the Federal
Reserve Bank, based principally upon transaction-type deposits. The
average amount of required reserves for 1998 was $3.7 million compared
to $3.0 million for 1997.
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, 1998, 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, 1998 and 1997, 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
---------------------------- --------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ ----
December 31, 1998:
Tangible capital $56,927 7.95% $10,743 1.50%
Tier 1 (core) capital 56,927 7.95 28,648 4.00 $35,810 5.00%
Risk-based capital:
Tier 1 56,927 13.08 17,412 4.00 26,118 6.00
Total 59,706 13.72 34,824 8.00 43,530 10.00
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
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 a FICO
assessment of 6.4 cents per $100 of deposits. In addition, pursuant
to the recapitalization provision of the BIF/SAIF Act, during 1996,
the Company incurred $2,651,000 additional FDIC insurance expense, a
one-time assessment of 65.7 basis points on the amount of deposits
held at March 31, 1995.
19. LOANS TO RELATED PARTIES
------------------------
The Company has had, and expects to have in the future, banking
transactions in the ordinary course of business with directors,
executive officers and their affiliates on the same terms as those
prevailing for comparable transactions with other borrowers. These
loans amounted to $6,758,000 and $3,839,000 at December 31, 1998 and
1997, respectively, and do not involve more than normal risks of
repayment. During the year ended December 31, 1998, new loans of
$6,215,000 were made to related parties and principal repayments of
$3,296,000 were received.
20. PARENT COMPANY FINANCIAL INFORMATION
------------------------------------
The following are the financial statements for Statewide Financial
Corp., Parent Company Only, as of December 31, 1998 and 1997, and for
the years ended December 31, 1998, 1997 and 1996, 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) 1998 1997
---- ----
Assets:
Cash $ 553 $ 3
Due from ESOP trust 106 106
Due from subsidiary 2,098 3,612
Investment in subsidiary 57,583 61,352
Other assets 237 -
------- -------
Total Assets $60,577 $65,073
======= =======
Liabilities:
Accrued expenses $ 78 $ 166
------- -------
Shareholders' equity:
Paid in capital 32,904 39,533
Unallocated ESOP shares (2,856) (3,280)
Unearned RRP shares (1,282) (1,755)
Treasury stock (44) (119)
Retained earnings 31,777 30,528
------- -------
Total shareholders' equity 60,499 64,907
------- -------
Total liabilities and
shareholders' equity $60,577 $65,073
======= =======
PARENT COMPANY ONLY - STATEMENTS OF INCOME
For the Years Ended
December 31,
-------------------
(Dollars in thousands) 1998 1997 1996
---- ---- ----
Other income $ 287 $ 326 $ 396
Expenses 216 - 9
------ ------ ------
Income before taxes 71 326 387
------ ------ ------
Income taxes 25 118 140
------ ------ ------
Net income before equity in
earnings of subsidiary 46 208 247
Equity in earnings of subsidiary 3,484 5,379 2,925
------ ------ ------
Net income $3,530 $5,587 $3,172
====== ====== ======
PARENT COMPANY ONLY - STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
-------------------
(Dollars in thousands) 1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income $3,530 $5,587 $3,172
Adjustments to reconcile net income
to net cash provided from operating
activities:
Equity in earnings of subsidiary (3,484) (5,379) (2,925)
Allocation of ESOP shares 424 423 529
Changes in assets and liabilities:
Decrease in due from subsidiary 1,514 2,655 1,843
(Increase) in due from ESOP trust - - (106)
(Increase) decrease in other assets (237) 85 122
(Decrease) increase in accrued taxes (88) 131 (39)
------ ------ ------
Net cash provided from operating
activities 1,659 3,502 2,596
------ ------ ------
Cash flows from investing activities:
Return of investment from subsidiary 8,000 6,000 13,350
Investment in subsidiary (162) (160) (8,195)
------ ------ ------
Net cash provided from investing
activities 7,838 5,840 5,155
------ ------ ------
Cash flows from financing activities:
Proceeds from issuance of common stock 69 - -
Repurchase of common stock (7,096) (7,780) (6,594)
Dividends paid (1,920) (1,804) (912)
------ ------ ------
Net cash from financing activities (8,947) (9,584) (7,506)
------ ------ ------
Net change in cash and cash
equivalents 550 (242) 245
Cash and cash equivalents at beginning
of period 3 245 -
------ ------ ------
Cash and cash equivalents at end of
period $ 553 $ 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 24, 1999 By: /s/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
/s/VICTOR M. RICHEL Executive Officer March 15, 1999
-------------------
Victor M. Richel
Senior Vice President
/s/BERNARD F. LENIHAN and Chief Financial
--------------------- Officer March 15, 1999
Bernard F. Lenihan
/s/MARIA F. RAMIREZ Director March 15, 1999
-------------------
Maria F. Ramirez
/s/WALTER G. SCOTT Director March 15, 1999
------------------
Walter G. Scott
/s/THOMAS J. SHARKEY, SR. Director March 15, 1999
-------------------------
Thomas J. Sharkey, Sr.
/s/STEPHEN R. TILTON Director March 15, 1999
--------------------
Stephen R. Tilton
/s/THOMAS V. WHELAN Director March 15, 1999
-------------------
Thomas V. Whelan
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
21 Subsidiaries of the Registrant
23 Consent of KPMG 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.3 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, 1999, relating to
the consolidated statements of financial condition of
Statewide Financial Corp. and subsidiary as of December 31,
1998 and 1997 and the related consolidated statements of
income, shareholders' equity, and cash flows for each of
the years in the three-year period ended December 31, 1998,
which report appears in the December 31, 1998 Annual Report
on Form 10-K of Statewide Financial Corp.
KPMG LLP
Short Hills, New Jersey
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,090
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 316,347
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 369,514
<ALLOWANCE> 3,056
<TOTAL-ASSETS> 717,517
<DEPOSITS> 443,705
<SHORT-TERM> 206,681
<LIABILITIES-OTHER> 6,632
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 60,499
<TOTAL-LIABILITIES-AND-EQUITY> 717,517
<INTEREST-LOAN> 27,016
<INTEREST-INVEST> 17,501
<INTEREST-OTHER> 744
<INTEREST-TOTAL> 45,261
<INTEREST-DEPOSIT> 14,991
<INTEREST-EXPENSE> 23,223
<INTEREST-INCOME-NET> 22,038
<LOAN-LOSSES> 642
<SECURITIES-GAINS> 4
<EXPENSE-OTHER> 18,487
<INCOME-PRETAX> 5,761
<INCOME-PRE-EXTRAORDINARY> 3,530
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,530
<EPS-PRIMARY> .90
<EPS-DILUTED> .86
<YIELD-ACTUAL> 3.46
<LOANS-NON> 2,193
<LOANS-PAST> 297
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,080
<ALLOWANCE-OPEN> 2,833
<CHARGE-OFFS> 454
<RECOVERIES> 35
<ALLOWANCE-CLOSE> 3,056
<ALLOWANCE-DOMESTIC> 3,056
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
